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<TEXT>

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

                                    FORM 8-K

                                 CURRENT REPORT

     PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

         DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): JUNE 18, 2004

                        ------------------------------

                          COMMISSION FILE NO. 33-75758

               RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
             ------------------------------------------------------
             (Exact Name of Registrant as Specified in Its Charter)


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


  SUITE 210, LB 59, 8080 NORTH CENTRAL EXPRESSWAY, DALLAS, TEXAS       75206
             (Address of principal executive offices)                (Zip Code)

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

<PAGE>

Item 5.  Other

                            INTRODUCTION AND SUMMARY

     Renaissance  Capital  Growth & Income Fund III (the  "Fund") is filing this
report  on Form 8-K to  announce  that the  Fund's  auditor,  Ernst & Young  LLP
("E&Y"),  has  declined  to  issue  an  audit  report  on the  Fund's  financial
statements  for the fiscal year ending  December  31, 2003 that would permit the
Fund to file its Form 10-K with the  Securities  and  Exchange  Commission  (the
"SEC").(1)

     As discussed  more fully below,  E&Y's  reasons for  declining to issue the
audit report  relate to an oral comment from the staff of the SEC (the  "Staff")
suggesting  that the  Fund's  investment  advisory  agreement  (the  "Investment
Advisory  Agreement") with the Fund's investment  adviser,  Renaissance  Capital
Group,  Inc.  (the  "Investment  Adviser"),  might be invalid.  The Fund and the
Investment  Adviser strongly believe that the Investment  Advisory  Agreement is
valid,  and have taken steps to minimize or eliminate any  financial  effects to
the Fund and the Adviser even if the Investment  Advisory  Agreement were deemed
to be invalid.  Moreover,  the Fund and the Investment  Adviser are not aware of
any litigation or contemplated litigation by the SEC or any other party relating
to the validity of the Investment Advisory Agreement.

     E&Y  has  not  identified  or  suggested  any  changes  to the  information
presented in the Fund's financial statements. Nonetheless, E&Y has expressed the
concern that, if the Investment Advisory Agreement is deemed to be invalid,  and
if the  Investment  Adviser is  required to pay money to the Fund as a result of
that  invalidation,  the  Fund's  prior  financial  statements  might have to be
restated  to reflect  that  payment  (that is, to reflect the fact that the Fund
would receive money from the Investment Adviser).

     E&Y has advised the Fund and the Investment Adviser that it would not issue
an audit opinion unless Fund counsel  provides E&Y with an opinion to the effect
that the  possibility  of a material  adverse  effect to the Fund as a result of
this  issue is  "remote,"  as defined in an  accounting  pronouncement  that all
parties -- including E&Y -- appear to agree is not  applicable in this instance.
In  addition,  such an  opinion  is not  required,  or even  recognized,  by any
auditing or accounting  standards of which the Fund or the Investment Adviser is
aware.

----------
(1)  E&Y has  advised the Fund that it would be willing to issue what it terms a
"qualified  opinion"  that would  provide,  in  relevant  part:  "Because of the
possible material effects on the financial statements [relating to any potential
restatement  of financial  statements  to reflect a payment from the  Investment
Adviser to the Fund in connection with the issues  concerning the calculation of
the incentive fee and the validity of the Investment Advisory Agreement], we are
unable to, and do not, express an opinion on the Fund's  financial  statements."
The Fund and the  Investment  Adviser view this as a  disclaimer  of an opinion,
rather  than a  qualified  opinion.  In any event,  the Fund and the  Investment
Adviser  believe that this  "opinion"  would not permit the Fund to, among other
things,  successfully  file its Form  10-K,  retain its  listing on Nasdaq,  and
access  the public  markets.  E&Y has not  offered to provide  the Fund with any
other audit opinion.

                                       2
<PAGE>

     The Fund's counsel offered to opine to E&Y, among other things,  that it is
unlikely that a court would invalidate the Investment  Advisory  Agreement,  and
that even if a court did invalidate that Agreement,  the invalidation  ought not
to have a material effect on the financial condition or results of operations of
the Fund.  In the  absence of court cases or other  authority  directly on point
(among  other  reasons),  the  Fund's  counsel  was  unable to use the  "remote"
standard.

     Despite  the fact  that the Fund and the  Investment  Adviser  have  worked
diligently  to attempt  to provide  E&Y with  information,  documents  and other
materials that would permit E&Y to issue an audit report, E&Y has declined to do
so.

     E&Y has not resigned, and the Fund has not dismissed E&Y as its independent
auditor.  Nonetheless,  the Fund is in the process of  interviewing  other audit
firms, and hopes to select a new independent  auditor  shortly.  E&Y has advised
the Fund and the  Investment  Adviser  that it will work with the new audit firm
and that it is not  currently  withdrawing,  qualifying  or modifying  its audit
reports for any of the Fund's prior financial statements.

                                   BACKGROUND

     In October 2003, the Fund filed with the SEC a registration statement for a
proposed  rights  offering  (that   registration   statement  was   subsequently
withdrawn).  In connection with its review of that registration  statement,  the
Staff of the SEC orally informed the Fund's counsel of two significant potential
regulatory issues relating to the Investment  Advisory  Agreement.  These issues
are that:  (1) the formula that has been used to  calculate  the  incentive  fee
payable  by the  Fund to the  Investment  Adviser,  and  which  has  been in the
Investment Advisory Agreement since 1998, is, in the Staff's view,  inconsistent
with the  requirements  of the Investment  Advisers Act of 1940, as amended (the
"Advisers Act"); and (2) the current Investment  Advisory  Agreement,  which has
been in effect since 1998, may, in the Staff's view, not be valid because of (i)
the inclusion of the incorrect  formula for calculating the incentive fee (which
the Staff suggests may invalidate the entire  Agreement  because  Section 215 of
the  Advisers Act provides  that any contract is void if its  performance  would
violate  a  provision  of the  Advisers  Act),  and (ii) the  failure  to file a
preliminary  proxy  statement  with  the SEC  prior  to  sending  to the  Fund's
shareholders a final proxy statement  seeking  shareholder  approval for certain
amendments to that Agreement.

     The Fund and the Investment Adviser,  with the advice of counsel,  disagree
with the Staff on each of these issues. Nonetheless, the Fund and the Investment
Adviser  have taken steps to address the issues  raised by the Staff,  including
steps which they believe have largely resolved any financial impact to the Fund.
In addition,  the  independent  directors  of the Fund have engaged  independent
counsel to advise them on these matters.

     INCENTIVE  FEE ISSUE.  With respect to the formula to  calculate  incentive
fees, the Staff contends that the formula  contained in the Investment  Advisory
Agreement is  inconsistent  with Section  205(b)(3) of the Advisers  Act,  which
provides that a BDC may charge an incentive fee that does not exceed 20 % of the
"realized  capital  gains upon the [assets] of the  [BDC]...computed  net of all
realized capital losses and unrealized capital depreciation." The formula

                                       3
<PAGE>

contained in the Investment  Advisory  Agreement follows this  formulation,  but
specifies that unrealized capital  depreciation is to be computed as "unrealized
capital  losses" net of "unrealized  capital gains." Other than the Staff's oral
comments,  the Fund and the  Investment  Adviser  are not aware of any prior SEC
interpretations,  statutes,  court cases or other authority  suggesting that the
Fund's formula is improper.

     The Fund and the Investment  Adviser,  with the advice of counsel,  believe
that the formula  contained in the Investment  Advisory  Agreement is consistent
with  Section  205(b)(3).  Nonetheless,  the Fund has  provided  to the  Staff a
recalculation  of the amount of incentive  compensation it would have paid since
inception,  had the formula in the Investment Advisory Agreement been consistent
with  what  the  Fund  believes  to be the  Staff's  interpretation  of  Section
205(b)(3). Under that recalculation,  the Fund has paid incentive allocations to
the  Investment   Adviser  of  $149,555.51  more  than  it  believes  the  Staff
interpretation  would permit. The Investment Adviser has reimbursed the Fund for
this amount, plus interest, for a total reimbursement of $254,244.37.  The Staff
has not addressed  whether it agrees or disagrees with this  recalculation.  The
Fund's  board of  directors,  which for this  purpose is  comprised  only of the
independent  directors,  has unanimously  determined to accept this amount as an
appropriate recalculation of the incentive fee.

     The Fund also intends to seek shareholder  approval to amend the Investment
Advisory Agreement to conform the incentive fee formula in that Agreement to the
relevant  language of the Advisers  Act, and the Fund will in the future use the
Staff's  interpretation,  as the Fund understands that  interpretation,  for the
calculation of the incentive fee.

     VALIDITY OF INVESTMENT ADVISORY AGREEMENT.  With respect to the validity of
the  Investment  Advisory  Agreement,  the Staff has  informed  the Fund and the
Investment Adviser that the Agreement may be deemed not valid as a result of the
inclusion of the  purportedly  incorrect  incentive fee formula (which the Staff
suggests may invalidate the entire Agreement because Section 215 of the Advisers
Act  provides  that any  contract  is void if its  performance  would  violate a
provision of the Advisers  Act),  and as a result of the failure in 1998 to file
with the SEC a preliminary proxy statement in connection with a shareholder vote
principally  relating to an amendment to the Investment Advisory Agreement.  The
amendment was intended to reflect more  accurately  the manner in which the Fund
was calculating the fee and to change the period used to calculate that fee from
an annual to a  quarterly  basis in an effort to more  clearly  account  for the
liability, and to facilitate more timely distributions to shareholders.

     The Fund, with the advice of counsel, does not believe that either of these
purported  reasons serves as a basis for  invalidating  the Investment  Advisory
Agreement.  As  discussed  above,  the Fund  believes  that the  formula  in the
Investment  Advisory  Agreement for  calculating the incentive fee is consistent
with the Advisers Act, and in any case the Investment Adviser has reimbursed the
Fund for the amount by which the incentive  payments it actually received exceed
the amount  that would have been paid under what it  believes  to be the Staff's
formula, plus interest. The Fund, with the advice of counsel, also believes that
the Investment  Advisory Agreement should not be invalidated even if the formula
for calculating the incentive fee is inconsistent with the Advisers Act.

                                       4
<PAGE>

     The Fund,  with the advice of counsel,  also  disagrees with the Staff that
the  failure  to  file  a  preliminary  proxy  statement  should  result  in the
Investment Advisory Agreement being deemed invalid, particularly where, as here,
a  final  proxy  statement   describing  the  proposed  amendment  was  sent  to
shareholders, the shareholders and the Fund's independent directors approved the
amendments  to the  Investment  Advisory  Agreement  in  1998,  the  independent
directors  have approved the amended  Agreement  every year since 1998,  and the
Fund has performed well since 1998.  Fund counsel also has advised the Fund that
courts  have held that,  by itself,  the  failure  to file a  preliminary  proxy
statement is a technical  violation  for which no sanction  generally  should be
applied.

     The Staff has  advised the Fund that it believes  that,  if the  Investment
Advisory  Agreement is not valid,  then under the  Advisers  Act the  Investment
Adviser is entitled  only to the lesser of: (a) the amount it actually  received
from the Fund under that  Agreement,  and (b) its actual  expenses  incurred  in
performing the services under that Agreement.

     Nonetheless,  the Fund and the  Investment  Adviser,  with  the  advice  of
counsel,  believe that even if the Investment Advisory Agreement were considered
to be not valid,  under  state law and other  legal  principles  the  Investment
Adviser  would be entitled to  reasonable  compensation  for the services it has
performed for the Fund. The Fund's board of directors, which for this purpose is
comprised only of the  independent  directors,  has determined  that,  under the
circumstances,  a reasonable level of compensation is the amount of compensation
that  was  provided  for  in  the  Investment  Advisory   Agreement,   less  the
reimbursement  from the  Investment  Adviser of $254,244.37 to resolve the issue
identified by the Staff  concerning the appropriate  formula for calculating the
incentive fee.

     The independent directors'  determination was based on, among other things,
the  shareholders'  approval of the Investment  Advisory  Agreement in 1998; the
independent  directors'  approval  of that  Agreement  in every  year  since and
including 1998; the fact that the Investment Adviser has in fact performed under
the Investment  Advisory  Agreement in the manner expected by the board, and has
achieved  strong  results for Fund  shareholders;  the  technical  nature of the
issues asserted by the Staff,  which do not affect the fundamental nature of the
relationship  between the Fund and the Investment Adviser; the board's desire to
avoid the substantial  costs and  difficulties of litigating with the Investment
Adviser  in order to  determine  a  reasonable  level of  compensation;  and the
possibility  that, if the  Investment  Adviser was forced to repay a substantial
portion  of the  fees  that it had  received  from  the  Fund  since  1998,  the
relationship  between the Investment Adviser and the Fund might be discontinued,
creating  a  significant  issue  for the Fund in  trying  to find an  acceptable
replacement  investment adviser that could successfully  manage the existing and
future portfolio of the Fund.

                     E&Y'S REFUSAL TO ISSUE AN AUDIT OPINION

     The Fund does not  believe  that E&Y has  identified  any  issues  with the
Fund's financial statements, other than the calculation of the incentive fee and
the potential invalidity of the Investment Advisory Agreement,  which would have
prevented  E&Y from  issuing an  unqualified  audit  opinion on those  financial
statements.

                                       5
<PAGE>

     From  the  time  that  the SEC  Staff  advised  the  Fund of the  potential
invalidity of the  Investment  Advisory  Agreement,  the Fund and the Investment
Adviser  worked  closely with E&Y to try to provide  information,  documents and
other  materials  that would permit E&Y to issue an audit  opinion.  Among other
things,  the Fund:  prepared  draft  language  to  insert  into its Form 10-K to
disclose  this  issue;  prepared a draft  footnote to its  financial  statements
disclosing  this  issue;  and  offered to E&Y an  opinion of the Fund's  outside
counsel to the effect  that,  among other  things,  it is unlikely  that a court
would invalidate the Investment Advisory Agreement, and that even if a court did
invalidate that Agreement,  the invalidation ought not to have a material effect
on the financial condition or results of operations of the Fund.

     On several occasions the Fund and the Investment  Advisor believed that E&Y
had decided to issue an audit opinion, but ultimately E&Y declined to do so. E&Y
eventually  requested  that the Fund's  outside  counsel issue an opinion to the
effect that the likelihood of any material, adverse effect to the Fund from this
issue would be  "remote,"  as defined in an  accounting  pronouncement  that all
parties -- including E&Y -- appear to agree is not  applicable in this instance.
In  addition,  such an  opinion  is not  required,  or even  recognized,  by any
auditing or accounting  standards of which the Fund or the Investment Adviser is
aware.

     Fund  counsel  remained  willing  to issue  the  opinion  described  above.
However,  in the  absence of court  cases or other  authority  directly on point
(among  other  reasons),  the  Fund's  counsel  was  unable to use the  "remote"
standard.


                           EFFECT OF NO AUDIT OPINION

     As a result of the  Fund's  inability  to obtain  an audit  opinion  on its
financial  statements for the fiscal year ending December 31, 2003, the Fund has
been  unable to file with the SEC its annual  report on Form 10-K for that year,
and was unable to send its annual report to shareholders. The Fund also has been
unable to file its quarterly report for the quarter ending March 31, 2004.

     The Fund's failure to file with the SEC the Form 10-K and 10-Q, and to send
its annual report to  shareholders,  has caused it to fail to meet its reporting
obligations  under the  federal  securities  laws and the rules and  regulations
thereunder.  In  addition,  until the Fund is able to send its annual  report to
shareholders, the Fund cannot conduct a proxy solicitation to elect directors.

     The Fund  intends to engage a new  independent  audit firm as  promptly  as
possible  and,  assuming  that firm  provides  an audit  opinion  on the  Fund's
financial  statements,  the Fund  will file its Form 10-K and Form 10-Q with the
SEC promptly  thereafter,  will promptly send its annual report to shareholders,
and will conduct a proxy solicitation to elect directors.  The Fund is attaching
as an  exhibit to this  report on Form 8-K a draft of its annual  report on Form
10-K  for the  fiscal  year  ending  December  31,  2003,  containing  unaudited
financial statements.

     The Fund's failure to file the Form 10-K has also caused it to fail to meet
the requirements for continued  listing on Nasdaq,  and the Fund's shares may be

                                       6
<PAGE>

removed from trading on Nasdaq. In such a case, the Fund's shares would trade in
the "pink  sheets,"  and the Fund would,  upon  receiving an audit report on its
financial statements, seek relisting on Nasdaq as promptly as possible under the
rules of Nasdaq. There is no assurance,  however,  that if the Fund's shares are
removed  from  trading  on  Nasdaq,  the  Fund's  shares  subsequently  will  be
readmitted for trading on Nasdaq.

     The Fund's inability to obtain an audit report on its financial  statements
has also caused it to be unable to pursue a  registration  statement to effect a
rights offer or other public offer to raise additional money. This has prevented
the Fund from raising money that it had intended to use to make  additional Fund
investments, so as to further diversify the Fund's portfolio.

     In addition,  if the Fund's inability to obtain an audit report  interferes
with its  ability to raise  capital by  borrowing  and making an offering of its
securities, it will need to find other means to make sufficient distributions to
shareholders by the end of 2004 in order to preserve its advantageous tax status
as a regulated  investment  company under  Subchapter M of the Internal  Revenue
Code.

                          OTHER MATTERS RELATING TO E&Y

     E&Y has been the Fund's auditor since 1999, and has never issued an adverse
opinion,  disclaimer  of opinion,  or a qualified  opinion  with  respect to the
Fund's financial statements.  E&Y also has not withdrawn,  qualified or modified
its audit report for any of the Fund's prior financial statements.

     Prior to the issues  relating to the  calculation  of the incentive fee and
the potential invalidity of the Investment Advisory Agreement,  the Fund has not
had any  disagreements  with  E&Y on any  matter  of  accounting  principles  or
practices, financial statement disclosure, or auditing scope or procedure which,
if not  resolved  to the  satisfaction  of E&Y,  would  have  caused E&Y to make
reference to the subject matter of the disagreement in connection with its audit
report.

     In  addition,  prior  to the  issues  relating  to the  calculation  of the
incentive fee and the potential invalidity of the Investment Advisory Agreement:

1.   E&Y has never advised the Fund that the Fund's internal controls  necessary
for the Fund to develop reliable financial statements do not exist;

2.   E&Y has never advised the Fund that information had come to E&Y's attention
that led it to no longer  be able to rely on  management's  representations,  or
that had made E&Y  unwilling  to be  associated  with the  financial  statements
prepared by the Fund's management;

3.   E&Y has never advised the Fund that E&Y needed to expand  significantly the
scope of its audit or that  information  had come to E&Y's  attention  that,  if
further  investigated,  might have:  (a)  materially  impacted  the  fairness or
reliability of any prior audit reports or underlying financial statements or the
financial statements for the fiscal year ending December 31, 2003, or (b) caused

                                       7
<PAGE>

E&Y to be unwilling to rely on  management's  representations  or be  associated
with the Fund's financial statements; or

4.   E&Y has never advised the Fund that information had come to E&Y's attention
that it concluded  materially  impacted the fairness or  reliability of either a
previously  issued audit report or the  underlying  financial  statements of the
Fund,  or the  financial  statements  of the Fund  for the  fiscal  year  ending
December  31,  2003  (including   information   that,  unless  resolved  to  the
accountant's   satisfaction,   would  have   prevented  E&Y  from  rendering  an
unqualified audit report on those financial statements).

     Concurrently  with filing  with the SEC this  report on Form 8-K,  the Fund
also is  providing  a copy of the  report  to E&Y,  and has  requested  that E&Y
furnish the Fund with a letter  addressed to the SEC stating  whether E&Y agrees
with the statements  made by the Fund in this Form 8-K and, if not,  stating the
respects in which E&Y does not agree. The Fund intends to file E&Y's letter with
the SEC, as an exhibit to this report, within ten business days from the date of
this report,  and in any event within two business  days of receiving the letter
from E&Y. In this regard,  the Fund has  requested  E&Y to provide the letter as
promptly  as  possible  so that the Fund can file the letter with the SEC within
ten business days from the date of this report.

     E&Y was provided with, reviewed,  and commented upon a draft of this report
on Form 8-K, and E&Y's  comments are  reflected in this report to the extent the
Fund determined them to be appropriate.



Item 7.  Financial Statements and Exhibits

         (c) Exhibits.

             99.1  Unaudited  Draft Annual  Report of Form 10-K for  Renaissance
                   Capital  Growth & Income  Fund III,  Inc.  for the year ended
                   December 31, 2003.

                                       8
<PAGE>

SIGNATURE

     Pursuant to the  requirements  of the Securities  Exchange Act of 1934, the
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned hereunto duly authorized.

Date: June 18, 2004           Renaissance Capital Growth & Income Fund III, Inc.
                               (Registrant)


                              By:   /s/ Russell Cleveland
                                 _______________________________________________
                                 Russell Cleveland, President

                                       9
<PAGE>

                                INDEX TO EXHIBITS

Exhibit
NUMBER                  DESCRIPTION
------                  -----------

99.1                    Unaudited   Draft   Annual   Report  of  Form  10-K  for
                        Renaissance  Capital  Growth & Income Fund III, Inc. for
                        the year ended December 31, 2003.








</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99
<SEQUENCE>2
<FILENAME>exhibit-99.txt
<TEXT>
                       Securities and Exchange Commission
                             Washington, D. C. 20549

                                    Form 10-K
Mark One

(X)  ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934 for the Fiscal Year Ended December 31, 2003 or

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

                          Commission File No. 33-75758

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

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

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

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

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

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

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

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

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

                                 Yes ( )     No (X)

     Indicate by check mark if disclosure by delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's  knowledge,  in definitive proxy or information  statements

<PAGE>

incorporated by reference in Part III of this Form 10-K or any statement to this
Form 10-K. ( )

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

                                 Yes ( )     No (X)

     As of June 15,  2004,  there were  4,351,718 of  Registrant's  Common Stock
outstanding.  The  aggregate  market value of the stock held by  non-affiliates,
based on the closing price of such stock as of June 15, 2004, was $62,671,585.

                                       2
<PAGE>

                                TABLE OF CONTENTS

                                     PART I

Item 1.  Business                                                              4
--------------------------------------------------------------------------------
Item 2.  Properties                                                           27
--------------------------------------------------------------------------------
Item 3.  Legal Proceedings                                                    27
--------------------------------------------------------------------------------
Item 4.  Submission of Matters to a Vote of Security Holders                  27
--------------------------------------------------------------------------------

                                     PART II
--------------------------------------------------------------------------------
Item 5.  Market for Registrant's Common Equity and Related Stockholder        28
         Matters
--------------------------------------------------------------------------------
Item 6.  Selected Financial Data                                              30
--------------------------------------------------------------------------------
Item 7.  Management's Discussion and Analysis of Financial
              Condition and Results of Operations                             31
--------------------------------------------------------------------------------
Item 7A. Quantitative and Qualitative Disclosure About Market Risk            34
--------------------------------------------------------------------------------
Item 8.  Financial Statements and Supplementary Data                          34
--------------------------------------------------------------------------------
Item 9.  Changes in and Disagreements with Accountants on Accounting and
              Financial Disclosure                                            34
--------------------------------------------------------------------------------
Item 9A. Controls and Procedures                                              35
--------------------------------------------------------------------------------

                                    PART III
--------------------------------------------------------------------------------
Item 10. Directors and Executive Officers of Registrant                       36
--------------------------------------------------------------------------------
Item 11. Executive Compensation                                               42
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Item 12. Security Ownership of Certain Beneficial Owners                      43
         and Management
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Item 13. Certain Relationships and Related Transactions                       43
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Item 14. Principal Accountant Fees and Services                               44
--------------------------------------------------------------------------------

                                     PART IV
--------------------------------------------------------------------------------
Item 15. Exhibits, Financial Statement Schedules and Reports on               46
         Form 8 K
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Index to Financial Statements                                                F-1
--------------------------------------------------------------------------------
Financial Statements                                                 F-2 TO F-26
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Signatures
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Index of Exhibits
--------------------------------------------------------------------------------

                                       3
<PAGE>

                                     Part I

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

Item 1. Business.

GENERAL

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

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

     The Fund seeks to provide returns to shareholders through cash dividends of
net  investment  income  and  through  distributions  of  realized  gains  or of
securities that have appreciated in value.  Pursuant to its annual  distribution
policy,   the  Fund  currently  pays  to  its   shareholders  a  minimum  annual
distribution of $0.40 per share,  payable quarterly.  Through December 31, 2003,
the Fund has paid a total of $8.91 per share in cash to its  shareholders  since
inception in 1994.

     RENN Capital Group,  Inc.  ("RENN Group" or the  "Investment  Adviser"),  a
Texas  corporation,  serves  as the  investment  adviser  to the  Fund.  In this
capacity,  RENN Group is primarily  responsible  for the selection,  evaluation,
structure,  valuation,  and  administration of the Fund's investment  portfolio.
RENN Group is a registered  investment adviser under the Investment Advisers Act
of 1940, as amended (the "Advisers Act").

     Generally, investments are, and will continue to be, in companies that have
their common stock  registered for public trading under the Securities  Exchange
Act of 1934,  as amended (the "1934 Act"),  or companies  that in the opinion of
the Investment Adviser have the ability to effect a public offering within three


                                       4
<PAGE>

to five years. The Fund generally invests in privately placed preferred stock or
debentures of a company the Fund holds in its portfolio  ("Portfolio  Company"),
which securities typically are convertible into or exchangeable for common stock
of the Portfolio  Company.  While such common stock of the Portfolio Company may
be publicly traded, the common stock acquired by the Fund is often unregistered.
Therefore,  such  securities are  restricted  from  distribution  or sale to the
public except in compliance with certain  holding  periods and exemptions  under
the Securities Act of 1933, as amended (the "1933 Act"),  or after  registration
pursuant to the 1933 Act. The Fund also purchases  shares of small and micro cap
issuers in the secondary  markets.  These shares are freely tradable and have no
restrictions on resale.

     From inception  through December 31, 2003, the Fund had made investments in
fifty-five  (55)  different  Portfolio  Companies  having an  aggregate  cost of
$80,249,824.  The Fund had active investments in thirty (30) Portfolio Companies
at December 31, 2003. The Fund does not focus on particular  industry  segments.
Instead,  the Fund makes investment  decisions using a bottom-up analysis of the
potential Portfolio Company, with no predetermined industry bias.

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

     Pending investment in securities of eligible  Portfolio  Companies or other
Portfolio  Companies,  the  Registrant's  assets  are  invested  in  "Short-term
Investments"  consisting  primarily  of  cash  or  U.S.  Government  and  agency
obligations.

                                       5
<PAGE>

     At December 31,  2003,  the Fund's  investment  assets were  classified  by
amount as follows:

                                                                      Percentage
                Classification                       Value             Of Assets

     Eligible Portfolio Investments               $85,701,112             89.08%
      (including cash and cash equivalents)
     Other Portfolio Investments                   10,500,640             10.92%
                                                  -----------            -------

                                                  $96,201,752            100.00%
                                                  ===========            =======

INVESTMENT OBJECTIVE

     The investment  objective of the Fund is to provide its  shareholders  with
current  income and long-term  capital  appreciation  by investing  primarily in
privately placed convertible securities and equity securities of emerging growth
public companies. The Fund seeks to provide returns to shareholders through cash
dividends of net investment income and through distributions of realized gains.

     The Fund has  elected  the  special  income tax  treatment  available  to a
regulated  investment company ("RIC") under Subchapter M of the Code in order to
be relieved of federal income tax on that part of its net investment  income and
realized capital gains that it pays out to shareholders.  If a RIC meets certain
diversification  and distribution  requirements under the Code, it qualifies for
pass-through tax treatment. The Fund would be unable to qualify for pass-through
tax  treatment if it were unable to comply with these  requirements.  Failure to
qualify as a RIC would  subject  the Fund to  federal  income tax as if the Fund
were an ordinary  corporation,  which could result in a substantial reduction in
both the Fund's net assets and the amount of income  available for  distribution
to shareholders.

GENERAL INVESTMENT POLICIES

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

                                       6
<PAGE>

     With  respect  to  investments  in  emerging  growth  companies,  the  Fund
emphasizes investing in convertible debentures or convertible preferred stock of
publicly held companies that the Fund  anticipates will be converted into common
stock and  registered  for public  sale  within  three to five  years  after the
private placement.  In addition, the Fund will invest in privately placed common
stock of publicly traded issuers that are initially  restricted from trading. To
a lesser extent,  the Fund may  participate in bridge  financings in the form of
loans or other preferred  securities  which are convertible into common stock of
the issuer or issued together with equity participation,  or both, for companies
which the Fund  anticipates  will complete a stock  offering or other  financing
within one or more years from the date of the investment. The Fund may also make
bridge loans,  either secured or unsecured,  intended to carry the borrower to a
private placement or an initial public offering, or to a merger, acquisition, or
other strategic transaction.

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

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

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

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

REGULATION UNDER THE INVESTMENT COMPANY ACT OF 1940

     The 1940 Act was enacted to regulate  investment  companies.  In 1980,  the
1940 Act was amended by the adoption of the Small Business Investment  Incentive
Act.  The  purpose  of  the  amendment  was  to  remove  regulatory  burdens  on
professionally  managed  investment  companies  engaged in providing  capital to
smaller companies. The Small Business Investment Incentive Act established a new
type of investment  company  specifically  identified as a Business  Development


                                       7
<PAGE>

Company as a way to encourage  financial  institutions and other major investors
to provide a new source of capital for small developing businesses.



BUSINESS DEVELOPMENT COMPANY

     A  Business  Development  Company  is a  closed-end  management  investment
company  that  generally  makes  70% or more  of its  investments  in  "Eligible
Portfolio  Companies" and "cash items" pending other investment.  Under the 1940
Act, only certain companies may qualify as "Eligible Portfolio Companies." To be
an "Eligible Portfolio Company," the Company must satisfy the following:

       o  it must be organized under the laws of, and has its principal place of
          business in, any state or states of the United States of America;

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

       o  satisfies one of the following:


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

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

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

                                       8
<PAGE>

                 >  it meets such other criteria as the Commission may, by rule,
                    establish  as  consistent  with  the  public  interest,  the
                    protection of investors, and the purposes fairly intended by
                    the policy and provisions of this title.

     Therefore,   the  Investment  Adviser  believes  that  "Eligible  Portfolio
Companies" are, generally,  those companies that, while being publicly held, may
not  have or do not have a broad  based  market  for  their  securities,  or the
securities  that they wish to offer are  restricted  from public  trading  until
registered.  Further,  while the 1940 Act allows a BDC to  "control" a Portfolio
Company,  it is not the  general  policy of the Fund to  acquire  a  controlling
position  in  its  portfolio  companies.   The  Fund  only  provides  managerial
assistance,  and in certain  circumstances seeks to limit its "control" position
by  contracting  for the right to have a designee  of the Fund be elected to the
board  of  directors  of the  Portfolio  Company,  or be  selected  an  advisory
director.  While these are the Fund's general policies, the application of these
policies, of necessity, vary with each investment situation.

1940 ACT REQUIREMENTS

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


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

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

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

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

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

  o  requirement  that the  shareholders  ratify  the  selection  of the  Fund's
     independent  public  accountants and the approval of the Advisory Agreement
     or similar contracts and amendments thereto.

CO-INVESTMENTS WITH ADVISOR AFFILIATED FUNDS

     In accordance  with the conditions of an exemptive  order of the Commission
permitting  co-investments  (the  "Co-investment  Order"),  many  of the  Fund's
acquisitions and dispositions of investments are made in participation  with two
funds that are advised or managed by RENN Group ("Advisor Affiliated Funds").

                                       9
<PAGE>

     The  Co-investment  Order  provides  that the Adviser  will review  private
placement investment  opportunities on behalf of the Fund, including investments
being  considered  on behalf of its  Advisor  Affiliated  Funds.  If the Adviser
determines  that any such investment is an eligible  co-investment  opportunity,
the Fund must be offered  the  opportunity  to invest in such  investment  in an
amount  recommended  by the  Adviser.  Securities  purchased  by the  Fund  in a
co-investment transaction with Advisor Affiliated Funds will consist of the same
class of securities and will have the same rights,  price, terms and conditions.
Any such  co-investment  transaction  must be  approved  by the Fund's  Board of
Directors,  including a majority of its independent directors. The Fund will not
make any direct investment in the securities of any issuers in which the Advisor
Affiliated  Funds,  but not the Fund, has previously  made a private  placement,
except for follow-on investments that meet the same requirements.  To the extent
that the amount of a follow-on investment opportunity is not based on the amount
of the  Fund's  and the  Advisor  Affiliated  Funds'  initial  investments,  the
relative amount of investment by the Advisor  Affiliated Funds and the Fund will
be based on the ratio of the Fund's  remaining funds available for investment to
the aggregate of the Fund's and the Advisor  Affiliated  Funds'  remaining funds
available for investment.  The  Co-investment  Order also provides that the Fund
will have the opportunity to dispose of any securities in which the Fund and the
Advisor  Affiliated Funds have invested at the same price, terms and conditions.
The Fund will  participate in any such disposition to the extent that a majority
of its independent  directors believe it is in its best interest.  The Fund will
bear no more than its own transaction costs.


INVESTMENT ADVISERS ACT OF 1940 AND THE ADVISORY AGREEMENT

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

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

PENDING SEC REGULATORY ISSUES

     In October 2003, the Fund filed with the SEC a registration statement for a
proposed  rights  offering  (that   registration   statement  was   subsequently
withdrawn).  In connection with its review of that registration  statement,  the
Staff of the SEC orally informed the Fund's counsel of two significant potential
regulatory issues relating to the Investment  Advisory  Agreement.  These issues


                                       10
<PAGE>

are that:  (1) the formula that has been used to  calculate  the  incentive  fee
payable  by the  Fund to the  Investment  Adviser,  and  which  has  been in the
Investment Advisory Agreement since 1998, is, in the Staff's view,  inconsistent
with the  requirements  of the Investment  Advisers Act of 1940, as amended (the
"Advisers Act"); and (2) the current Investment  Advisory  Agreement,  which has
been in effect since 1998, may, in the Staff's view, not be valid because of (i)
the inclusion of the incorrect  formula for calculating the incentive fee (which
the Staff suggests may invalidate the entire  Agreement  because  Section 215 of
the  Advisers Act provides  that any contract is void if its  performance  would
violate  a  provision  of the  Advisers  Act),  and (ii) the  failure  to file a
preliminary  proxy  statement  with  the SEC  prior  to  sending  to the  Fund's
shareholders a final proxy statement  seeking  shareholder  approval for certain
amendments to that Agreement.

     The Fund and the Investment Adviser,  with the advice of counsel,  disagree
with the Staff on each of these issues. Nonetheless, the Fund and the Investment
Adviser  have taken steps to address the issues  raised by the Staff,  including
steps which they believe have largely resolved any financial impact to the Fund.
In addition,  the  independent  directors  of the Fund have engaged  independent
counsel to advise them on these matters.

     Incentive  Fee Issue.  With respect to the formula to  calculate  incentive
fees, the Staff contends that the formula  contained in the Investment  Advisory
Agreement is  inconsistent  with Section  205(b)(3) of the Advisers  Act,  which
provides that a BDC may charge an incentive fee that does not exceed 20 % of the
"realized  capital  gains upon the [assets] of the  [BDC]...computed  net of all
realized  capital  losses and  unrealized  capital  depreciation."  The  formula
contained in the Investment  Advisory  Agreement follows this  formulation,  but
specifies that unrealized capital  depreciation is to be computed as "unrealized
capital  losses" net of "unrealized  capital gains." Other than the Staff's oral
comments,  the Fund and the  Investment  Adviser  are not aware of any prior SEC
interpretations,  statutes,  court cases or other authority  suggesting that the
Fund's formula is improper.

     The Fund and the Investment  Adviser,  with the advice of counsel,  believe
that the formula  contained in the Investment  Advisory  Agreement is consistent
with  Section  205(b)(3).  Nonetheless,  the Fund has  provided  to the  Staff a
recalculation  of the amount of incentive  compensation it would have paid since
inception,  had the formula in the Investment Advisory Agreement been consistent
with  what  the  Fund  believes  to be the  Staff's  interpretation  of  Section
205(b)(3). Under that recalculation,  the Fund has paid incentive allocations to
the  Investment   Adviser  of  $149,555.51  more  than  it  believes  the  Staff
interpretation  would permit. The Investment Adviser has reimbursed the Fund for
this amount, plus interest, for a total reimbursement of $254,244.37.  The Staff
has not addressed  whether it agrees or disagrees with this  recalculation.  The
Fund's  board of  directors,  which for this  purpose is  comprised  only of the
independent  directors,  has unanimously  determined to accept this amount as an
appropriate recalculation of the incentive fee.

     The Fund also intends to seek shareholder  approval to amend the Investment
Advisory Agreement to conform the incentive fee formula in that Agreement to the
relevant  language of the Advisers  Act, and the Fund will in the future use the


                                       11
<PAGE>

Staff's  interpretation,  as the Fund understands that  interpretation,  for the
calculation of the incentive fee.

     Validity of Investment Advisory Agreement.  With respect to the validity of
the  Investment  Advisory  Agreement,  the Staff has  informed  the Fund and the
Investment Adviser that the Agreement may be deemed not valid as a result of the
inclusion of the  purportedly  incorrect  incentive fee formula (which the Staff
suggests may invalidate the entire Agreement because Section 215 of the Advisers
Act  provides  that any  contract  is void if its  performance  would  violate a
provision of the Advisers  Act),  and as a result of the failure in 1998 to file
with the SEC a preliminary proxy statement in connection with a shareholder vote
principally  relating to an amendment to the Investment Advisory Agreement.  The
amendment was intended to reflect more  accurately  the manner in which the Fund
was calculating the fee and to change the period used to calculate that fee from
an annual to a  quarterly  basis in an effort to more  clearly  account  for the
liability, and to facilitate more timely distributions to shareholders.

     The Fund, with the advice of counsel, does not believe that either of these
purported  reasons serves as a basis for  invalidating  the Investment  Advisory
Agreement.  As  discussed  above,  the Fund  believes  that the  formula  in the
Investment  Advisory  Agreement for  calculating the incentive fee is consistent
with the Advisers Act, and in any case the Investment Adviser has reimbursed the
Fund for the amount by which the incentive  payments it actually received exceed
the amount  that would have been paid under what it  believes  to be the Staff's
formula, plus interest. The Fund, with the advice of counsel, also believes that
the Investment  Advisory Agreement should not be invalidated even if the formula
for calculating the incentive fee is inconsistent with the Advisers Act.

     The Fund,  with the advice of counsel,  also  disagrees with the Staff that
the  failure  to  file  a  preliminary  proxy  statement  should  result  in the
Investment Advisory Agreement being deemed invalid, particularly where, as here,
a  final  proxy  statement   describing  the  proposed  amendment  was  sent  to
shareholders, the shareholders and the Fund's independent directors approved the
amendments  to the  Investment  Advisory  Agreement  in  1998,  the  independent
directors  have approved the amended  Agreement  every year since 1998,  and the
Fund has performed well since 1998.  Fund counsel also has advised the Fund that
courts  have held that,  by itself,  the  failure  to file a  preliminary  proxy
statement is a technical  violation  for which no sanction  generally  should be
applied.

     The Staff has  advised the Fund that it believes  that,  if the  Investment
Advisory  Agreement is not valid,  then under the  Advisers  Act the  Investment
Adviser is entitled  only to the lesser of: (a) the amount it actually  received
from the Fund under that  Agreement,  and (b) its actual  expenses  incurred  in
performing the services under that Agreement.

     Nonetheless,  the Fund and the  Investment  Adviser,  with  the  advice  of
counsel,  believe that even if the Investment Advisory Agreement were considered
to be not valid,  under  state law and other  legal  principles  the  Investment
Adviser  would be entitled to  reasonable  compensation  for the services it has
performed for the Fund. The Fund's board of directors, which for this purpose is
comprised only of the  independent  directors,  has determined  that,  under the


                                       12
<PAGE>

circumstances,  a reasonable level of compensation is the amount of compensation
that  was  provided  for  in  the  Investment  Advisory   Agreement,   less  the
reimbursement  from the  Investment  Adviser of $254,244.37 to resolve the issue
identified by the Staff  concerning the appropriate  formula for calculating the
incentive fee.

     The independent directors'  determination was based on, among other things,
the  shareholders'  approval of the Investment  Advisory  Agreement in 1998; the
independent  directors'  approval  of that  Agreement  in every  year  since and
including 1998; the fact that the Investment Adviser has in fact performed under
the Investment  Advisory  Agreement in the manner expected by the board, and has
achieved  strong  results for Fund  shareholders;  the  technical  nature of the
issues asserted by the Staff,  which do not affect the fundamental nature of the
relationship  between the Fund and the Investment Adviser; the board's desire to
avoid the substantial  costs and  difficulties of litigating with the Investment
Adviser  in order to  determine  a  reasonable  level of  compensation;  and the
possibility  that, if the  Investment  Adviser was forced to repay a substantial
portion  of the  fees  that it had  received  from  the  Fund  since  1998,  the
relationship  between the Investment Adviser and the Fund might be discontinued,
creating  a  significant  issue  for the Fund in  trying  to find an  acceptable
replacement  investment adviser that could successfully  manage the existing and
future portfolio of the Fund.

     The Fund, with the advice of counsel, believes that:

     1.   While the Staff has not  definitively  advised  the Fund as to whether
          the manner in which the Fund has recalculated the incentive fee is, in
          the Staff's view,  consistent with the Advisers Act, the Fund believes
          that: (a) the recalculated  amount,  which the Investment  Adviser has
          paid to the Fund, is consistent  with the Advisers Act; and (b) in the
          event that the SEC or the Staff determine that the recalculated amount
          is not consistent with the Advisers Act and take action to require the
          Investment  Adviser  to  make an  additional  payment  to the  Fund to
          resolve the incentive fee issue, the amount of that additional payment
          ought not to be material to the Fund

     2.   The most likely legal actions the SEC could take that would affect the
          financial  condition of the Fund are to seek an order:  (a)  requiring
          the Investment  Adviser to pay to the Fund the difference  between the
          amount of the incentive fee that actually was paid by the Fund and the
          maximum amount that the SEC believes should have been paid by the Fund
          under the Advisers Act, plus  interest;  and (b) seeking to invalidate
          the  Investment  Advisory  Agreement  and  permitting  the  Investment
          Adviser to retain the lesser of the amount it actually  received under
          the Investment  Advisory  Agreement and its actual  expenses under the
          Investment Advisory Agreement; and

     3.   For the reasons  discussed above: (a) the Fund believes it is unlikely
          that a court would invalidate the Investment  Advisory Agreement under
          the Advisers Act; and (b) in the event that a court did invalidate the
          Investment  Advisory  Agreement  under  the  Advisers  Act,  the  Fund
          believes  that it is probable that the  invalidation  would not have a
          material effect on the financial  condition or results of operation of
          the Fund,  because  the Fund's  Board has agreed  that the  Investment
          Adviser  nonetheless  would be entitled to the amount  provided for in


                                       13
<PAGE>

          the Investment Advisory Agreement, less the amount paid to the Fund by
          the Investment  Adviser to resolve the incentive fee issue,  as a fair
          settlement  to resolve  potential  litigation  between the  Investment
          Adviser  and the Fund  seeking to  determine  the amount that would be
          owed  to  the  Investment   Adviser  under  State  law  and  equitable
          principles.

In the absence of definitive  authority,  there are no absolute  assurances that
can be given with respect to these issues.


FUND PORTFOLIO INVESTMENTS

     At December  31, 2003,  the Fund had active  investments  in the  following
companies (each referred to as "Portfolio Company"):

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

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

     In the fourth quarter of 2003,  the Fund made a private  placement into the
Company by investing $350,000 to purchase 269,231 shares of the Company's common
stock  in a  private  placement,  at a rate of $1.30  per  share.  The  stock is
restricted from resale pursuant to Rule 144 of the 33 Act.

     At December 31, 2003,  the Fund owned 269,231 shares of common stock in the
Company, having a cost basis of $350,000

Bentley Pharmaceuticals, Inc. (AMEX:BNT)
2 Holland Way, Exeter, NH 03833

     Bentley  Pharmaceuticals,  Inc. is an international  pharmaceutical company
focused  on  improving  drugs  through  new  drug  delivery   technologies   and
commercializing  such drugs in the U.S.  and other major  markets.  Bentley also
manufactures and markets  pharmaceutical  products in Spain for the treatment of
cardiovascular, gastrointestinal, neurological, infectious and other diseases.

     Throughout  2003,  the Fund sold most of its  shares of Bentley in the open
market. In total, the Fund sold 596,529 shares realizing  proceeds of $7,267,183
representing a gain of $6,311,327.

     At December 31, 2003, the Fund owned 63,450 shares of common stock having a
cost of $79,313, or $1.25 per share.

                                       14
<PAGE>

Blue Rhino Corporation (NASDAQ:RINO)
104 Cambridge Plaza Drive, Winston-Salem, NC 27104

     Blue Rhino  Corporation is a leading national  provider of branded cylinder
exchange and  complimentary  propane-fuel  products to  consumers.  Blue Rhino's
cylinder  exchange  is  offered  at  leading  home  improvement  centers,   mass
merchants,  hardware,  grocery,  and convenience  stores,  with branded cylinder
displays at more than 28,000 retail locations in 49 states plus Puerto Rico.

     In the fourth  quarter of 2003,  the Fund  purchased  40,000  shares of the
Company's  common  stock in the open market for  $476,999,  a rate of $11.93 per
share.

     At December 31, 2003,  the Fund owned 40,000 shares common having a cost of
$476,999.

Business Process Outsourcing (Private)
11150 Santa Monica Boulevard, Suite 350, Los Angeles, CA  90025

     Business   Process   Outsourcing  is  a  privately  held  business  process
outsourcing  firm that  specializes  in finance and accounting  services,  other
administrative  functions,  and high volume transaction processing services. The
Company's services are designed to empower clients with a competitive  advantage
by enabling them to focus on their core activities.

     At December 31, 2003,  the Fund owned a one-year  warrant to purchase 4,587
shares of the Company's common stock at a rate of $4.36 per share.

CaminoSoft Corporation  (OTC:CMSF)
600 North Hampshire Road, Suite 105, West Lake Village, CA  91361

     CaminoSoft  Corporation  creates  intelligent  data storage and  management
infrastructures  by  facilitating  data  storage,  retrieval,   protection,  and
performance measurement and management.

     In the fourth quarter of 2003, the Fund invested  $400,000 into the Company
in a private  placement,  and received  1,081,081 shares of the Company's common
stock, a rate of $0.37 per share.

     At December 31, 2003,  the Fund owned  3,539,414  shares of common stock in
the Company, having a basis of $5,275,000. Additionally, the Fund owned warrants
to purchase  1,581,080  shares common at exercise  prices ranging from $0.74 per
share to $1.11 per share,  with  varying  terms  dates,  and options to purchase
53,300 shares common with a strike price of $3.63 per share.

                                       15
<PAGE>

Capital Senior Living Corporation (NYSE:CSU)
14160 Dallas Parkway, Suite 300, Dallas, TX  75254

     Capital  Senior  Living  Corporation  develops and operates  senior  living
communities  in the  United  States.  The  Company  provides  services  such  as
independent living,  assisted living, skilled nursing, and home care services to
the elderly at its communities.

     In the first  quarter of 2003,  the Fund  purchased  an  additional  12,600
shares of common stock in the open market.

     At December 31, 2003, the Fund owned 57,100 shares of the Company's  common
stock having a cost basis of $146,335, or $2.56 per share.

CNE Group, Inc.  (AMEX:CNE)
200 West 57th Street, Suite 507, New York, NY  10019

     CNE Group, Inc.,  through its subsidiaries,  is a provider of solar-powered
wireless communication solutions for the intelligent traffic systems market.

     During the third quarter of 2003,  the Company  exchanged  its  outstanding
debentures for 125,000 shares of the Company's common stock.

     At December 31, 2003, the Fund owned 125,000 shares of the Company's common
stock  with a basis of  $250,000  or $2.00 per share and  warrants  to  purchase
62,500 shares of the Company's  common stock with an exercise price of $6.00 per
share.

Dave & Busters, Inc. (NYSE:DAB)
2481 Manana Drive, Dallas, TX  75220

     Dave & Busters,  Inc. owns and operates concept  restaurants  through 30 US
locations. The Company also has international license agreements for the Pacific
Rim, Canada, the Middle East, Mexico, and South Korea.

     At December 31, 2003, the Fund owned 100,000 shares of the Company's common
stock having a cost basis of $653,259.

Dexterity Surgical, Inc.  (OTC:DEXT)
12961 Park Central, Suite 1300, San Antonio, TX  78216

     Dexterity Surgical,  Inc. is engaged in the development,  manufacture,  and
distribution of instruments,  equipment and surgical  supplies used in minimally
invasive surgery.

     In the  third  quarter  of 2003,  the  Fund  sold 500  shares  of  Series A
Preferred  Stock,  500 shares of Series B Preferred Stock, and 260,000 shares of
the  Company's  common  stock  for a  total  of  $0.50,  representing  a loss of
$1,635,000.  In the fourth quarter of 2003, the Fund took an additional  reserve
on the debentures, reducing their value from $1,066,282 to $375,000.

                                       16
<PAGE>

     At  December  31,  2003,  the Fund owned  $1,316,282  of the  Company's  9%
Convertible Debentures.

EDT Learning, Inc.  (AMEX:EDT)
2999 North 44th Street, Suite 650, Phoenix, AZ  85018

     EDT  Learning,  Inc.  is  a  leading  provider  of  custom,   comprehensive
e-Learning   business   solutions  for  corporate   clients   seeking  to  train
non-technical users.

     At December  31,  2003,  the Fund owned a total of 48,266  shares of common
stock  having a basis of $27,033.  In  addition,  the Fund owned a $500,000  12%
Convertible Subordinated Note Convertible into EDT common at a rate of $1.00 per
share and three-year warrants to purchase 500,000 shares of the Company's common
stock at an exercise price of $3.00.

     Subsequent  to December  31,  2003,  the Company  changed its name to iLinc
Communications,  Inc. It remains traded on the American Stock Exchange under the
new symbol of "ILC".

eOriginal, Inc.  (Private)
351 West Camden Street, Suite 800, Baltimore, MD  21201

     eOriginal, Inc. has a patented process for creating, executing, storing and
retrieving legal documents in a electronic format.

     In the first  quarter of 2003,  eOriginal,  Inc.,  went  through a tax-free
reorganization  (the  "reorganization")  in which all the  assets of  eOriginal,
Inc., were transferred to eOriginal Holdings, Inc. (the "Company").  As a result
of the  reorganization,  the Fund  exchanged  all of its positions in eOriginal,
Inc.,  for  the  following  securities  of  the  Company:  10,680  of  Series  A
Convertible  Preferred  Stock;  25,646 of Series B Convertible  Preferred Stock;
28,929 shares of Series C Convertible  Preferred  Stock;  and 2,302  Warrants to
purchase shares of common stock of the Company.  Each series of Preferred of the
Company is convertible one for one into common stock of eOriginal Holdings,  and
the Warrants have an exercise price of $0.01 per share. The implied value of the
Company  for  purposes  of the  reorganization  is $72.13 per share,  giving the
Company an enterprise value of $64.9 million. As a result of the reorganization,
the Fund's cost basis of its entire investment in the Company was increased from
$5,139,713  to  $6,012,435  due to the  capitalization  of accrued  interest and
dividends.

     During  the third and  fourth  quarters  of 2003,  the Fund made  follow-on
investments in eOriginal by purchasing  22,319 shares of the Company's  Series C
Convertible  Preferred  Stock for  $360,000.  In  addition to these  shares,  at
December 31, 2003,  the Fund owned 10,680 shares Series A Convertible  Preferred
stock having a cost basis of  $4,692,207;  25,646  shares  Series B  Convertible
Preferred  Stock  with  a  cost  basis  of  $620,329;  28,929  shares  Series  C
Convertible Preferred Stock with a cost basis of $699,734; and 2,302 warrants to
purchase shares of common stock of the Company having a cost basis of $165. Each
series of Preferred of the Company is convertible  one for one into common stock
of  eOriginal  Holdings,  and the warrants  have an exercise  price of $0.01 per
share.

                                       17
<PAGE>

Flamel Technologies, S.A. (Nasdaq:FLML)
33 Avenue du Docteur Georges, Venissieux, France

     Flamel  Technologies,  S.A.  is  a  biopharmaceutical  company  principally
engaged in the development of two unique polymer-based delivery technologies for
medical  applications.  Flamel's  Medusa(R)  technology  is  designed to deliver
therapeutic  proteins.  Micropump(R) is a controlled  release and  taste-masking
technology for the oral administration of small molecule drugs.

     In the first two quarters of 2003, the Fund purchased 100,000 shares of the
Company's  common  stock in the open  market for  $832,267,  a cost of $8.32 per
share.  In the fourth  quarter of 2003,  the Fund sold 50,000 shares in the open
market for $1,446,628, representing a gain of $974,504.

     At December  31, 2003,  the Fund owned  50,000  shares of FLML common stock
having a basis of $360,143, or $7.20 per share.

Fortune Natural Resources Corporation (OTC:FPXA)
515 West Greens Road, Suite 720, Houston, TX  77067

     Fortune Natural Resources  Corporation is an independent public oil and gas
company whose primary focus is exploration  and  development of domestic oil and
gas properties  located primarily in onshore and offshore areas of Louisiana and
Texas.

     At December  31, 2003,  the Fund owned  1,262,394  shares of the  Company's
common stock,  and warrants to purchase  36,000  shares of the Company's  common
stock at $0.25 on or before May 19, 2005.

Franklin Covey Co. (NYSE:FC)
2200 West Parkway Blvd., Salt Lake City, UT 84119

     Franklin  Covey  Co.  is  a  global  leader  in   effectiveness   training,
productivity tools, and assessment services for organizations and individuals.

     During 2003,  the Fund purchased a total of 207,876 shares of the Company's
common stock in the open market for  $293,251 or $1.41 per share.  This is a new
investment for the Fund.

Gasco Energy, Inc. (OTC:GASE)
14 Iverness Drive East, Suite H-236, Englewood, CO  80112

     Gasco Energy, Inc. is an oil and gas company whose focus is exploration and
development  of domestic  natural gas  properties  located in the Rocky Mountain
regions of Utah and Wyoming.

     Throughout 2003, the Fund purchased  750,000 shares of the Company's common
stock in the open market for $639,105,  a cost of $0.86 per share. In the fourth


                                       18
<PAGE>

quarter of 2003, the Fund  participated in a private placement in which $625,000
was  invested  into 8%  Secured  Debentures  convertible  at $0.60 per share and
having a 5 year term.

     At December 31, 2003, the Fund owned 1,000,000  shares common having a cost
of $889,105, and $625,000 of Debentures convertible into 1,041,667 shares.

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

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

     In the fourth quarter of 2003,  the Fund made a private  placement into the
Company by  investing  $350,000 to purchase  1,400,000  shares of the  Company's
common stock, a rate of $0.25 per share. Additionally,  as consideration for the
Fund's  investment,  the Company issued 700,000 warrants to purchase GLXS common
stock to the Fund at a rate of $0.35 per share.

     At December  31,  2003,  the Fund owned  1,400,000  shares of common  stock
having a cost basis of $350,000,  and 700,000  warrants to purchase common stock
at $0.35 per share.

I-Flow Corporation (Nasdaq:IFLO)
20202 Windrow Drive, Lake Forest, CA  92630

     I-Flow Corporation designs, develops, and markets technically advanced drug
delivery systems that provide life enhancing,  cost-effective solutions for pain
management and infusion  therapy.  The Company's  products are used primarily in
the home, hospital, and physician office.

     In the fourth  quarter of 2003, the Fund sold 50,000 shares of common stock
in the open market for $650,500, representing a gain of $513,505.

     At December 31, 2003,  the Fund owned 50,000  shares of common stock with a
cost basis of $117,043, or $2.34 per share.

Inet Technologies (Nasdaq:INTI)
1500 North Greenville Avenue, Richardson, TX 75081

     Inet Technologies is a global provider of communications software solutions
that enable carriers to more effectively design, deploy, diagnose,  monitor, and
manage communications  networks that carry signaling information used to control
and deliver  communications  sessions and services.  The solutions  also address
certain fundamental business needs of communications  carriers, such as improved
billing, targeted sales and marketing, fraud prevention, and enhanced routing.

                                       19
<PAGE>

     In the first  quarter of 2003,  the Fund  purchased  an  additional  21,600
shares of the  Company's  common  stock in the open  market  bringing  the total
investment to 96,600 shares of the Company's common stock having a cost basis of
$530,338,  or $5.49 per  share.  In the fourth  quarter  of 2003,  the Fund sold
50,000 shares in the open market for $648,461, representing a gain of $355,398.

     At December 31, 2003, the Fund owned 46,600 shares of the Company's  common
stock having a cost basis of $237,275, or $5.09 per share.

Integrated Security Systems, Inc. (OTC:IZZI)
8200 Springwood Drive, Suite 230, Irving, TX  75063

     Integrated  Security  Systems,  Inc. is a holding  company  which  designs,
develops,  manufactures,  sells and  services  commercial  security  and traffic
control  devices.  In  addition,  the  Company  sells fully  integrated  turnkey
security systems that control and monitor access to governmental, commercial and
industrial sites.

     In the first quarter of 2003, the Fund received common stock of the Company
as payment in kind for interest on 8% Promissory Notes owned by the Fund as well
as dividends on Series D Preferred  Stock owned by the Fund. In total,  the Fund
received  89,920  shares of IZZI having an imputed  cost of  $18,859,  a rate of
$0.21 per share,  as payment in kind for interest on the notes and  dividends on
the Series D Preferred.

     In the  second  quarter  of 2003,  the Fund  received  common  stock of the
Company as payment in kind for  interest  on 8%  Promissory  Notes  owned by the
Fund. In total,  the Fund received  13,297 shares of IZZI having an imputed cost
of $1,994,  a rate of $0.15 per share,  as payment in kind for  interest  on the
notes.  Also during the second quarter of 2003, the Fund purchased two $100,000,
8% promissory  notes due July 1, 2004, and as additional  consideration  for the
loans received five-year warrants to purchase a total of 1,000,000 shares of the
Company's common stock at $0.20. In conjunction  with these purchases,  the Fund
agreed to extend the due date of the  previously  existing  promissory  notes to
July 1, 2004.

     In the third quarter of 2003, the Fund received common stock of the Company
as payment in kind for  interest on 8%  Promissory  Notes owned by the Fund.  In
total,  the Fund  received  74,844  shares  of IZZI  having an  imputed  cost of
$10,466,  a rate of $0.14 per  share,  as payment  in kind for  interest  on the
notes. The Fund also received 2,438,445 shares of common stock of the Company as
payment in kind for dividends on the Series F and G preferred  stock, an imputed
cost of $487,689, a rate of $0.20 per share. In addition, the Fund converted its
Series F and G preferred  stock into 21,049,750  shares of the Company's  common
stock, an imputed cost of $4,209,940, a rate of $0.20 per share.

     In the fourth quarter of 2003, the Fund advanced $200,000 to the Company in
exchange for a 7% Secured Promissory Note of the Company due in 120 days.

     At December  31,  2003,  the Fund owned  $200,000 in 7%  Promissory  Notes,
$525,000 in 8% Secured  Promissory  Notes,  24,164,301 shares of common having a
cost of  $4,973,166,  Series D Preferred  Stock  having a cost of  $150,000  and
convertible at $0.80 per share, options to purchase 41,034 shares common with an


                                       20
<PAGE>

average strike price of $0.35 per share,  2,625,000  warrants to purchase common
stock at $0.20 per share,  and  739,299  warrants to  purchase  common  stock at
exercise prices ranging from $0.55 per share to $1.00 per share.


Interpool, Inc. (NYSE:IPX)
211 College Road, East, Princeton, NJ  08540

     Interpool,  Inc. is one of the world's  leading  suppliers of equipment and
services to the transportation  industry. It is the largest lessor of intermodal
container  chassis  and a  world-leading  lessor  of  cargo  containers  used in
international trade.  Interpool operates from more than 240 locations throughout
the world.

     At December 31, 2003, the Fund owned $375,000 9.25% Convertible Redeemable,
Subordinated  Debentures.  The Debentures  are  convertible at $25 per share and
mature December 27, 2022.

Inyx, Inc. (OTCBB:IYXI)
801 Brickell, 9th Floor, Miami, FL  33131

     Inyx,  Inc. is a developer and  manufacturer  of specialized  drug delivery
pharmaceutical products.

     In the fourth  quarter of 2003,  the Fund made a private  placement  in the
Company by investing $300,000 to purchase 300,000 shares of the Company's common
stock,  a rate of $1.00  per  share.  In  addition,  the Fund  received  150,000
warrants to purchase  IYXI common stock,  of which half the warrant  coverage is
exercisable at $1.00 per share,  with the other half being  exercisable at $1.35
per share.

     At December 31, 2003, the Fund owned 300,000 shares of the Company's common
stock having a cost basis of $300,000,  and owned  150,000  warrants to purchase
common stock,  with half being  exercisable  at $1.00 per share,  and half being
exercisable at $1.35 per share.

Laserscope (Nasdaq:LSCP)
3070 Orchard Drive, San Jose, CA  95134

     Laserscope designs, manufactures,  sells, and services on a worldwide basis
an advanced line of medical laser systems and related  energy  delivery  devices
for the office, outpatient surgical center, and hospital markets.

     In 2003, the Fund converted  $1,500,000 of its convertible  debentures into
1,200,000 shares of the Company's common stock, at a rate of $1.25 per share.

     At December  31,  2003,  the Fund owned  1,200,000  shares of common  stock
having a cost basis of  $1,500,000,  and  options to purchase  30,000  shares at
$4.19 per share,  which were received by  assignment  from Robert  Pearson,  who
earned the options as a member of the Company's Board of Directors.

                                       21
<PAGE>

Medical Action Industries, Inc. (Nasdaq:MDCI)
800 Prime Place, Hauppauge, NY  11788

     Medical  Action  Industries,  Inc.  develops,  manufactures,   markets  and
distributes a variety of disposable surgical related products.

     In 2003,  the Fund made a new  investment  into the common stock of Medical
Action  Industries,  Inc.,  by  purchasing  25,000 shares in the open market for
$292,329, at a rate of $11.69 per share.

     At  December  31,  2003,  the Fund  owned a total of 25,000  shares of MDCI
common stock having a cost basis of $292,329, or $11.69 per share.

Poore Brothers, Inc.  (Nasdaq:SNAK)
3500 South La Cometa Drive, Goodyear, AZ  85338

     With facilities in Indiana and Arizona, Poore Brothers,  Inc. is a marketer
and manufacturer of "Intensely  Different"(TM)salted snack foods under a variety
of owned or licensed brands, including T.G.I.  Friday's(TM),  Poore Brothers(R),
Bob's Texas Style(R), Boulder Potato Company(TM), and Tato Skins(R).

     During  the third  quarter  of 2003,  the Fund sold  330,000  shares of the
Company's common stock realizing proceeds of $1,392,534,  representing a gain of
$1,062,534.

     At December  31,  2003,  the Fund owned  1,686,357  shares of common  stock
having a cost basis of $1,748,170,  and options on 20,210 shares of common stock
exercisable  at prices  ranging  from  $1.31 per share to $3.60 per  share.  The
options were obtained by assignment from Robert Pearson,  who earned the options
as a member of the Company's Board of Directors.

Precis, Inc. (Nasdaq:PCIS)
2040 North Highway 360, Grand Prairie, TX  75050

     Precis,  Inc. is a national  membership  marketing  company  that  provides
membership programs to a variety of industries  including:  healthcare,  retail,
banking,  consumer finance and member based  associations.  Its leading program,
Care Entree(R),  is marketed as a membership  based  healthcare  savings program
designed to significantly  reduce  out-of-pocket  medical expenses at affordable
rates to the consumer while helping the medical  community  receive  accelerated
payment for their services.

     At  December  31,  2003,  the Fund owned a total of  200,700  shares of the
Company's common stock having a cost basis of $1,372,416 or $6.84 per share.

Simtek Corporation (OTC:SRAM)
4250 Buckingham Drive, Suite 100, Colorado Springs, CO  80907

     Simtek Corporation is a fabless semiconductor company, supplying innovative
products to a worldwide  marketplace.  The Company has design and  manufacturing


                                       22
<PAGE>

expertise in a variety of technologies,  including high performance non-volatile
memory, application specific integrated circuits, and data communications.

     In the second quarter of 2003, the Fund acquired  options to purchase 5,288
shares of the  Company's  common stock at $0.165 per share.  These  options were
obtained by assignment from Robert  Pearson,  who earned the options as a member
of the Company's  Board of Directors.  In the fourth  quarter of 2003,  the Fund
invested  $500,000 in a private placement by the Company in exchange for 550,661
shares common stock, at a rate of $0.91 per share and also received, warrants to
purchase  125,000  shares at $1.25 per share over a 5 year term and  warrants to
purchase 125,000 shares at $.50 per share over a 5 year term.

     At  December  31,  2003,  the Fund  owned  $1,000,000  in 7.5%  convertible
debentures having a conversion rate of $0.31 per share,  1,550,661 shares common
having a basis of $695,000,  warrants to purchase 250,000 shares,  half of which
are  convertible at $1.25 per share and half at $1.50 per share,  and options to
purchase 5,288 shares at $0.17 per share.

Stonepath Group, Inc.  (AMEX:STG)
1600 Market Street, Philadelphia, PA  19103

     Stonepath  Group,  Inc.  is  a  non-asset  based  provider  of  third-party
logistics  services,  offering a full range of time-definite  transportation and
distribution  solutions.  The Company manages and arranges the domestic movement
of raw materials,  supplies,  components and finished goods, and also provides a
broad range of value-added supply chain management services.

     In the first quarter of 2003,  the Fund made a new investment by purchasing
200,000 shares of the Company's common stock in a private placement at a rate of
$1.35 per share for a total  investment  of $270,000.  In the fourth  quarter of
2003,  the Fund made a follow-on  investment by purchasing  75,000 shares of the
Company's  common stock in a private  placement at $2.20 per share. In addition,
the Fund  received  6,240 shares  common stock having a cost basis of $13,500 as
consideration for the Company's failure to timely file a registration  statement
concerning Fund shares.

     At December 31, 2003,  the Fund owned  281,240  shares of Stonepath  common
stock having a cost basis of $448,500, or $1.59 per share.

ThermoView Industries, Inc.  (AMEX:THV)
5611 Fern Valley Road, Louisville, KY  40228

     ThermoView   Industries,   Inc.  is  a  national   company  that   designs,
manufactures,  markets, and installs high-quality  replacement windows and doors
as part of a full-service array of home improvements for residential homeowners.

     During  the  quarter  ended  December  31,  2003,  the  Fund  purchased  an
additional  100,000 shares of the Company's  common stock in the open market for
$65,228 or $0.65 per share.

                                       23
<PAGE>

     At  December  31,  2003,  the  Fund  owned a total  of  234,951  shares  of
ThermoView common stock having a cost basis of $563,060 or $2.40 per share.

US Home Systems (Nasdaq:USHS)
750 State Highway 121 Bypass, Suite 170, Lewisville, TX  75067

     US  Home  Systems  is  engaged  in  the  manufacture,   design,  sale,  and
installation  of quality  specialty  home  improvement  products  with  specific
emphasis on kitchen and bath improvements,  and also provides consumer financing
services to the home  improvement  and remodeling  industry.  The Company's home
improvement product lines include replacement kitchen cabinetry, kitchen cabinet
refacing  and counter top  products  utilized  in kitchen  remodeling,  bathroom
refacing and related products utilized in bathroom  remodeling,  and replacement
windows.  The  Company  provides  through  its wholly  owned  subsidiary,  First
Consumer Credit, Inc., consumer financing to the home improvement and remodeling
industry.

     At December 31, 2003, the Fund owned 110,000 shares of the Company's common
stock having a cost basis of $535,587 or $4.87 per share.

Vaso Active Pharmaceuticals, Inc. (NASDAQ:VAPH)
99 Rosewood Drive, Suite 260, Danvers, MA 01923

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

     In the fourth quarter of 2003,  the Fund made a private  placement into the
Company by investing  $250,000 to purchase 50,000 shares of the Company's common
stock.

     At December 31, 2003, the Fund owned 50,000 shares of the Company's  common
stock having a cost basis of $250,000.

VALUATION OF INVESTMENTS

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

     Generally,  the guiding principle for valuation is application of objective
standards.  The objective  standards for determining  market prices and applying
valuation methodologies govern in all situations,  except where a debt issuer is
in default.

     Generally,  the fair  value of debt  securities  and  preferred  securities
convertible  into  common  stock is the sum of (a) the value of such  securities
without  regard to the  conversion  feature,  and (b) the value,  if any, of the
conversion  feature.  The  fair  value  of debt  securities  without  regard  to
conversion  features  is  determined  on the  basis  of the  terms  of the  debt
security, the interest yield and the financial condition of the issuer. The fair
value  of  preferred   securities  without  regard  to  conversion  features  is

                                       24
<PAGE>

determined  on the basis of the terms of the preferred  security,  its dividend,
and its liquidation and redemption rights and absent special  circumstances will
typically  be equal to the lower of cost or 120% of the value of the  underlying
common stock. The fair value of the conversion  features of a security,  if any,
are  based  on  fair  values  as of the  relevant  date  less an  allowance,  as
appropriate, for costs of registration, if any, and selling expenses.

     Portfolio investments for which market quotations are readily available and
which are freely transferable are valued as follows:  (i) securities traded on a
securities exchange or the Nasdaq or in the  over-the-counter  market are valued
at the closing price on, or the last trading day prior to, the date of valuation
and (ii)  securities  traded in the  over-the-counter  market that do not have a
closing  price on, or the last trading day prior to, the date of  valuation  are
valued at the average of the closing bid and ask price for the last  trading day
on, or prior to, 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 value
for the last  trading day on, or prior to, the date of  valuation to reflect the
liquidity  caused  by  such  restriction,  but  taking  into  consideration  the
existence,  or lack thereof,  of any  contractual  right to have the  securities
registered and freed from such trading restrictions.

     Because there is no independent  and objective  pricing  authority  (i.e. a
public market) for  investments  in privately held entities,  the latest sale of
equity  securities  governs the value of the enterprise.  This valuation  method
causes the Fund's initial investment in the private entity to be valued at cost.
Thereafter,  new issuances of equity or equity-linked  securities by a Portfolio
Company will be used to determine enterprise value as they will provide the most
objective and independent basis for determining the worth of the issuer.

     Where a Portfolio  Company is in default on a debt  instrument  held by the
Fund,  and no  market  exists  for  that  instrument,  the  fair  value  for the
investment  is determined on the basis of appraisal  procedures  established  in
good faith by the Investment  Adviser.  This type of fair value determination is
based upon  numerous  factors such as the Portfolio  Company's  earnings and net
worth,  market prices for  comparative  investments  (similar  securities in the
market place), the terms of the Fund's investment,  and a detailed assessment of
the Portfolio Company's future financial prospects. In the event of unsuccessful
operations by a Portfolio Company,  the appraisal may be based upon an estimated
net realizable value when that investment is liquidated.

COMPETITION FOR INVESTMENTS

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

                                       25

<PAGE>

PERSONNEL

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

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

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

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

CODE OF ETHICS

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

                                       26

<PAGE>

Item 2.  Properties

     The Fund's  business  activities  are  conducted  from the  offices of RENN
Group,  which offices are currently  leased until July 31, 2004 in a multi-story
general office  building in Dallas,  Texas.  The use of such office  facilities,
including office furniture,  phone services,  computer equipment,  and files are
provided by RENN Group at its expense pursuant to the Advisory Agreement.

Item 3.  Legal Proceedings

     There are no legal proceedings currently pending against the Fund.

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

     None.

                                       27

<PAGE>

                                     Part II

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

TRADING

     The Fund's  common  stock is traded on the Nasdaq  National  Market  System
("NMS") under the trading symbol RENN and reported on Bloomberg. As discussed in
the section entitled  "Pending SEC Regulatory  Issues",  it is possible that the
Fund's  common  stock  will  lose  its NMS  listing  as a result  of the  Fund's
inability to obtain an audit opinion on its financial  statements for the fiscal
year ended December 31, 2004.

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

                                               High            Low
Year ended December 31, 2003
       First quarter                          $ 8.36          $ 6.75
       Second quarter                         $ 9.35          $ 6.80
       Third quarter                          $12.02          $ 9.15
       Fourth quarter                         $13.70          $11.51

Year ended December 31, 2002
       First quarter                          $10.93          $10.25
       Second quarter                         $11.95          $ 9.96
       Third quarter                          $10.00          $ 8.94
       Fourth quarter                         $ 8.59          $ 6.75

NUMBER OF HOLDERS

     As of December 31, 2003,  there were  approximately  847 record  holders of
common stock.  This total does not include  shareholders  with shares held under
beneficial  ownership  in  nominee  name or within  clearinghouse  positions  of
brokerage firms or banks.

DIVIDENDS AND DIVIDEND REINVESTMENT PLAN

     DIVIDENDS.  The Fund seeks to provide returns to shareholders  through cash
dividends of net investment income and through  distributions of realized gains.
On November 5, 2002, the Fund announced a minimum annual  distribution policy of
$0.40 per share,  with an initial quarterly cash distribution of $0.10 per share
that was paid  December  12,  2002.  The intent of the Policy is for the Fund to
make distributions of $0.10 per share in each of the first three quarters of the
year with a final distribution in the fourth quarter equal to $0.10 per share or
a greater  amount  sufficient to satisfy the  distribution  requirements  of the
Subchapter M of the Internal  Revenue  Code.  The Policy is subject to quarterly
review and approval by the Fund's Board of  Directors.  According to the Policy,
the distributions could be paid from interest or dividend income, capital gains,
or a return of  capital  in the event  there is  insufficient  income or capital
gains to satisfy the Policy.

                                       28

<PAGE>

     The Fund has paid a total of $8.91  per  share in cash to its  shareholders
since  inception in 1994.  There is no assurance  that the Fund will continue to
make the distributions or cash payments  described herein.  Because the Fund may
not earn the same return of capital in the future,  the Fund may not continue to
make distributions and cash payments as described herein.

     DIVIDEND REINVESTMENT PLAN. Pursuant to the Dividend Reinvestment Plan (the
"Reinvestment  Plan") any shareholders  whose shares are registered in their own
names will be deemed to have  elected to have all  dividends  and  distributions
automatically reinvested in Fund shares pursuant to the Reinvestment Plan (each,
a  "Participant")  unless and except for each such  shareholder who individually
elects to receive such on a current basis in lieu of  reinvestment.  In the case
of shareholders  such as banks,  brokers or nominees that hold shares for others
who are beneficial  owners ("Nominee  Shareholders"),  the Plan Agent,  American
Stock Transfer & Trust Co. (the "Plan Agent") will  administer the  Reinvestment
Plan on the basis of the number of shares certified by such Nominee Shareholders
as registered for  shareholders  that have not elected to receive  dividends and
distributions in cash.

     Investors that own shares  registered in the name of a Nominee  Shareholder
should  consult with such nominee as to  participation  or withdrawal  from such
plan.

     When the Fund  declares a dividend  or  distribution  payable in cash,  the
non-participants  will receive cash,  and the  Participants  will receive Common
Stock to be issued by the Fund or purchased  in the open  market.  If the market
value per share on the valuation  date equals or exceeds the net asset value per
share on that date, or if such open market purchases cause the price to increase
to the net asset  value,  the Fund will issue new shares at the net asset value.
If the net asset value exceeds the market  price,  the Plan Agent will, as agent
for  the  Participants,  buy  Fund  shares  in the  open  market  or in  private
transactions  as soon as  practicable  after such date. If before the Plan Agent
has completed  the  purchases the market price exceeds the net asset value,  the
Plan  Agent may  suspend  purchasing  in the  market and the Fund will issue new
shares at net asset value to fulfill the purchase requirements.  The Fund has no
current  intention to register more shares in connection  with the  Reinvestment
Plan; instead, the Fund will buy the shares in the open market.

     Participants also have the option, commencing on January 1 of each year, of
making additional annual cash payments to the Reinvestment Plan in any amount of
$1,000 or more up to $10,000.  Larger  amounts  may be  accepted  with the prior
approval of the Fund. The Plan Agent,  American Stock Transfer & Trust Co., will
typically use all funds  received from  Participants  to purchase Fund shares in
the open market, so long as Fund shares are trading at a discount. Any voluntary
funds  must be  received  no later than 10 days prior to such date and any prior
deposit may be withdrawn if written  request for  withdrawal  is received by the
Fund no later than 10 days prior to such date.

     The Plan Agent will maintain all shareholder  accounts in the  Reinvestment
Plan and furnish written confirmation of all transactions in an account.  Shares
in the  Reinvestment  Plan will be held in the name of the  participant and each
shareholder's proxy will include any Reinvestment Plan holdings.

                                       29

<PAGE>

     There is no  charge  to the  participants  for  reinvesting  dividends  and
distributions  or for voluntary  cash payments.  There are no brokerage  charges
with  respect to shares  issued  directly  by the Fund for  participants  in the
Reinvestment Plan. However,  each participant pays a pro rata share of brokerage
charges for shares purchased in the market.

     The Fund reserves the right to terminate the  Reinvestment  Plan.  Further,
the  Reinvestment  Plan  may be  amended  by the  Fund  upon 30 days  notice  to
participants. A participant may withdraw from the Reinvestment Plan upon written
request to the Plan Agent,  in which event, no further Fund share purchases will
be made for such withdrawing  participant and all shares and funds held for such
participant  will be forwarded to the  participant  or to their order upon their
request.  All communications  regarding the Reinvestment Plan should be directed
to the Plan Agent.



Item 6.  Selected Financial Data.

     The following  selected financial data for the period from January 1, 1999,
through  December  31,  2002,  is  derived  from the  Fund's  audited  Financial
Statements  and  should  be  read  in  conjunction  with  the  Fund's  Financial
Statements  and Notes  thereto  and  "Management's  Discussion  and  Analysis of
Financial Condition and Results of Operations" included in Item 7 of this Annual
Report on Form 10-K.  The selected  financial data for the period ended December
31, 2003 is unaudited.

<TABLE>
<CAPTION>

----------------------------------------------------------------------------------------------------------------------
                                               Selected Financial Data
----------------------------------------------------------------------------------------------------------------------
                                           2003            2002             2001            2000            1999
                                           ----            ----             ----            ----            ----
----------------------------------------------------------------------------------------------------------------------
<S>                                       <C>             <C>              <C>            <C>              <C>
Gross income (loss), including
realized gain (loss)                      11,779,953      (3,051,938)       2,676,702       9,750,577      12,768,575
----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation
(depreciation) on investments             20,279,455      (8,205,633)       9,365,167     (1,507,015)       4,465,591
----------------------------------------------------------------------------------------------------------------------
Net income (loss)                         28,540,666     (12,773,524)       9,546,715       5,032,203      13,535,928
----------------------------------------------------------------------------------------------------------------------
Net income (loss) per share                     6.56           (2.93)            2.19            1.18            2.37
----------------------------------------------------------------------------------------------------------------------
Total assets                              96,201,752       50,495,721      77,016,668      64,077,600      46,725,122
----------------------------------------------------------------------------------------------------------------------
Net assets                                64,360,085       41,259,066      54,537,508      47,346,067      45,934,306
----------------------------------------------------------------------------------------------------------------------
Net assets per share                           14.79             9.48           12.50           10.86           11.09
----------------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------------
                                               Selected Per Share Data
----------------------------------------------------------------------------------------------------------------------
                                           2003            2002             2001            2000            1999
                                           ----            ----             ----            ----            ----
----------------------------------------------------------------------------------------------------------------------
Investment income                               0.48             0.09            0.14            0.40            0.42
----------------------------------------------------------------------------------------------------------------------
Operation expenses                            (0.79)           (0.33)          (0.54)          (0.75)          (0.89)
----------------------------------------------------------------------------------------------------------------------
Interest expense                              (0.01)           (0.01)          (0.03)            0.00            0.00
----------------------------------------------------------------------------------------------------------------------
Net investment income (loss)                  (0.32)           (0.26)          (0.43)          (0.36)          (0.48)
----------------------------------------------------------------------------------------------------------------------
Tax return of capital                           0.00           (0.10)            0.00          (0.03)          (0.08)
----------------------------------------------------------------------------------------------------------------------
                                         Selected Per Share Data (Continued)
----------------------------------------------------------------------------------------------------------------------
                                           2003            2002             2001            2000            1999
                                           ----            ----             ----            ----            ----
----------------------------------------------------------------------------------------------------------------------
</TABLE>
                                       30
<PAGE>

<TABLE>
<S>                                       <C>             <C>              <C>            <C>              <C>
----------------------------------------------------------------------------------------------------------------------
Distributions from net capital gains
                                              (1.25)             0.00          (0.54)          (1.47)          (2.11)
----------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on
investments                                     2.22           (0.79)            0.47            1.89            2.67
----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in
unrealized appreciation of
investments                                     4.66           (1.89)            2.14          (0.35)            1.08
----------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net asset
value                                           5.31           (3.05)            1.64          (0.32)            1.08
----------------------------------------------------------------------------------------------------------------------
Capital stock transactions                      0.00           (0.01)            0.00            0.09            0.00
----------------------------------------------------------------------------------------------------------------------
Net Asset Value:
----------------------------------------------------------------------------------------------------------------------
Beginning of year                               9.48            12.50           10.86           11.09           10.01
----------------------------------------------------------------------------------------------------------------------
End of year                                    14.79             9.48           12.50           10.86           11.09
----------------------------------------------------------------------------------------------------------------------
</TABLE>


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

GENERAL

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

SOURCES OF OPERATING INCOME

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

LIQUIDITY AND CAPITAL RESOURCES

     During the year ended  December 31, 2003,  the Fund invested  $3,993,971 in
ten (10) new  portfolio  investments  and invested an  additional  $5,068,828 in
follow-on  investments to ten (10) portfolio  companies.  Distributions  made to
investors in 2003 amounted to $5,439,647 or $1.25 per share, which was long-term
capital  gain.  During 2003,  gains were realized from the sale of securities of
Bentley Pharmaceuticals,  Inc., Creative Host Services, Inc., Dwyer Group, Inc.,
Flamel Technologies, Inc., I-Flow Corp., INET Technologies, Inc., JAKKS Pacific,

                                       31
<PAGE>

Inc., and Poore Brothers, Inc., and from bankruptcy distributions from Packaging
Research Corp., and Voice It Worldwide,  Inc. offset by realized losses taken on
investments in ActiveLink Communications, Inc., Airnet Systems, Inc., Canterbury
Consulting Group,  Inc.,  Daisytek Intl. Corp.,  Dexterity  Surgical,  Inc., and
Nautilus  Group,  Inc. Net income for 2003 was $28,540,666 due to net unrealized
appreciation on portfolio investments. The net cash used in operating activities
was  $26,028,373.  The Fund issued no new shares for the  dividend  reinvestment
plan,  as dividend  reinvestment  shares were  purchased in the open market.  At
December  31,  2003,  the Fund had  approximately  $3.1 million in cash and cash
equivalents net of all liabilities. RENN Group believes that current cash levels
are sufficient to pay expenses as they come due and to make investments.

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

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

RESULTS OF OPERATIONS

2003 Compared to 2002
---------------------

     During the year ended December 31, 2003, the Fund made additional portfolio
investments  aggregating  $9,062,799  compared to $6,851,707  in 2002.  The Fund
realized  proceeds  from the sale of  investments  in the amount of  $17,794,507
compared to $4,911,282 in 2002. The Fund's realized net income of $28,540,666 is
due to a combination of a net investment  loss of  ($1,419,813),  net unrealized
appreciation on investments of $20,279,455, and net realized gain on investments
of $9,681,024.

     Interest  income  increased  134.10%  for the year in  comparison  to 2002,
primarily  due to the payment in kind of interest,  upon the  reorganization  of
eOriginal,  Inc.,  and interest  accrued upon  recalculation  of fees.  Dividend
income  increased  1,634.34%  to  $1,225,139  in 2003 from  $70,640  in 2002 due
primarily to dividends paid upon the reorganization of investments in eOriginal,
Inc. and  Integrated  Security  Systems,  Inc.  Commitment  and other fee income
increased to $221,645 in 2003 from  $28,442 in 2002  primarily as a result of an
increase in investment activities, and a refund of prior year fees.

     General and administrative  expenses,  including interest expense and legal
fees, but excluding incentive and management fees,  decreased 10.75% to $584,691
in 2003 from $655,119 in 2002. No incentive fee was incurred in 2002 compared to

                                       32
<PAGE>

an  incentive  fee  expense  of  $1,936,205  in 2003  because  there were no net
realized  capital gains achieved on  investments  during 2002.  Management  fees
increased to $997,846 in 2003 from  $860,834 in 2002,  an increase of 15.92% due
to higher  portfolio values during 2003. Net investment loss increased 24.73% to
($1,419,813)  in 2003 up from  ($1,138,298) in 2002 due primarily to the accrual
of an  incentive  fee in 2003,  combined  with an increase in  management  fees,
partially offset by the increase in interest and dividend income.

     Net  income   increased  to   $28,540,666  in  2003  from  a  net  loss  of
($12,773,524)  in 2002.In 2003,  the Fund had a net realized gain on investments
of  $9,681,024,  compared  to a net  realized  loss  of  ($3,429,593)  in  2002.
Likewise, the Fund experienced net unrealized appreciation on investments in the
amount of $20,279,455 in 2003,  compared to the net unrealized  depreciation  on
investments in 2002 of ($8,205,633).

2002 Compared to 2001
---------------------

     During the year ended December 31, 2002, the Fund made additional portfolio
investments  aggregating  $6,851,707  compared to $3,509,674  in 2001.  The Fund
realized  proceeds  from the sale of  investments  in the  amount of  $4,911,282
compared to $10,364,052 in 2001. The Fund's  realized net loss of  ($12,773,524)
is due to a combination of a net investment loss of ($1,138,298), net unrealized
depreciation  on  investments  of   ($8,205,633),   and  net  realized  loss  on
investments of ($3,429,593).

     Interest  income  decreased  34.14%  for  the  year in  comparison  to 2001
primarily due to the  conversion  of debt  positions  into equity.  In addition,
reserves  were taken on interest  accruals  for some of the Fund's  investments.
Dividend  income  decreased  63.86% from $195,453 in 2001 to $70,640 in 2002 due
primarily to smaller  custodial  cash balances  earning  dividends and decreased
dividends declared and paid by portfolio  investments.  Commitment and other fee
income increased from $3,100 in 2001 to $28,442 in 2002 primarily as a result of
increased loan closing fees.

     General and administrative  expenses,  including interest expense and legal
fees, but excluding incentive and management fees, decreased 1.17% from $662,872
in 2001 to  $655,119.  No  incentive  fee was  incurred  in 2002  compared to an
incentive  fee expense of $919,429 in 2001  because  there were no net  realized
capital gains achieved on  investments  during 2002.  Management  fees decreased
from  $912,544  in 2001 to  $860,834  in 2002,  a decrease of 5.67% due to lower
portfolio   values  during  2002.  Net  investment  loss  decreased   39.24%  to
($1,138,298) in 2002 down from ($1,873,288) in 2001 due primarily to the absence
of an incentive  fee in 2002,  combined  with the decrease in interest  expense,
legal fees, and management fees, partially offset by the increase in general and
administrative expenses.

                                       33
<PAGE>

         Net income decreased from $9,546,715 in 2001 to a net loss of
($12,773,524) in 2002. In 2001, the Fund had realized gains of $2,054,836
compared to a net realized loss on investments of ($3,429,593) in 2002.
Likewise, the Fund experienced net unrealized appreciation on investments in
2001 of $9,365,167 compared to the 2002 net unrealized depreciation on
investments in the amount of ($8,205,633).


Item 7A.  Quantitative and Qualitative Disclosure About Market Risk

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

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

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

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

Item 8.  Financial Statements and Supplementary Data.

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

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

         None.

                                       34
<PAGE>

Item 9A.  Controls and Procedures.

     The  Fund  has  in  place  systems  relating  to  disclosure  controls  and
procedures  (as defined in Rules  13a-15(e) and 15d-15(e) of the 1934 Act).  Our
principal  executive  officer and  principal  financial  officer  evaluated  the
effectiveness of these  disclosure  controls and procedures as of the end of our
fiscal year ended December 31, 2003 in connection  with the  preparation of this
report.  They  concluded  that the controls and  procedures  were  effective and
adequate at that time. There were no significant  changes in the Fund's internal
control over financial  reporting  during the fourth quarter of fiscal 2003 that
have  materially  affected,  or are reasonably  likely to materially  affect the
Fund's control over financial reporting.

                                       35
<PAGE>

                                    Part III

Item 10.  Directors and Executive Officers of Registrant.

Directors

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

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

     Class One Director - Term Expires at 2004 Annual Meeting

     Peter Collins,  age 58, has been a financial and  management  consultant to
closely-held  businesses  for the past ten years in the USA, the UK, and Europe,
in areas of finance, start-ups, joint ventures, and mergers and acquisitions. He
has advised  companies in every  segment of industry  (including  manufacturing,
distribution,  service,  agriculture,  construction,  and multimedia) and in all
stages of development (from start-up to bankruptcy). Mr. Collins was educated in
England,  where  he  received  a  B.Sc.  in  Civil  Engineering  from  Liverpool
University  and an M.Sc. in Business  Administration  from The City  University,
London. He has served as a Class One Director since 1994.

     Class Two Directors - Term Expires at 2005 Annual Meeting

     Edward O.  Boshell,  Jr., age 69, is the retired  Chairman of the Board and
CEO of Columbia General Corporation and is a private investor.

     Charles  C.  Pierce,  Jr.,  age 69, is the  retired  Vice-Chairman  of Dain
Rauscher, Inc., and is a private investor.

                                       36
<PAGE>

     Class Three Directors - Term Expires at 2006 Annual Meeting
     -----------------------------------------------------------

     Russell Cleveland,  age 65, is the President,  Chief Executive Officer, and
Director of the Fund since 1994. He is a Chartered  Financial  Analyst with more
than  35  years   experience   as  a  specialist  in   investments   in  smaller
capitalization  companies.  A graduate of the Wharton  School of  Business,  Mr.
Cleveland  has served as  President  of the  Dallas  Association  of  Investment
Analysts.  Mr. Cleveland is also the President,  Chief Executive  Officer,  sole
Director,  and the majority shareholder of RENN Group, the investment adviser to
the Fund.  RENN Group is also the  investment  manager of  Renaissance US Growth
Investment  Trust PLC ("RUSGIT")  and the  investment  adviser to BFS US Special
Opportunities Trust PLC ("BFS US"), investment trusts listed on the London Stock
Exchange.  Mr.  Cleveland also serves on the Boards of Directors of RUSGIT,  BFS
US, Tutogen Medical,  Inc., Cover-All  Technologies,  Inc.,  Integrated Security
Systems, Inc., and Digital Recorders, Inc.

     Ernest C. Hill, age 64, has a broad  background in  convertible  securities
analysis  with  major  NYSE  brokerage  firms and  institutional  investors.  He
specializes in computer-aided investment analysis and administrative procedures.
Mr. Hill was awarded a Ford Fellowship to the Stanford School of Business, where
he received an MBA,  with honors,  in Investment  and Finance.  Mr. Hill's prior
experience  included  service  as  Assistant  Professor  of  Finance,   Southern
Methodist University and Associate Director of the Southwestern  Graduate School
of Banking.

     The Board of Directors  has  determined  that all of the Fund's  directors,
other than Russell  Cleveland,  the President and Chief Executive Officer of the
Fund,  are  independent  directors.  Certain  information  concerning the Fund's
directors is set forth below:

<TABLE>
<CAPTION>

                                              Director's             Principal          Number of
                                                Term of            Occupation(s)      Portfolios in       Other
                            Position(s)        Office and             During            Fund Complex    Director-
      Name, Address*          Held             Length of              Past 5           Overseen by     ships Held by
         and Age            with Fund         Time Served              Years             Director        Director
-------------------------------------------------------------------------------------------------------------------------
<S>                         <C>               <C>                  <C>                      <C>           <C>
                                              Class One Director
Peter Collins               Director          since 1994.  Term    Consultant               1             None
Age 58                                        expires 2004.

Edward O. Boshell, Jr.      Director          Class Two Director   Retired Chairman of      1             None
Age 69                                        since 1998.  Term    the Board and CEO of
                                              expires 2005.        Columbia General and
                                                                   private investor
</TABLE>
                                       37
<PAGE>
<TABLE>
<CAPTION>
                                              Director's             Principal          Number of
                                                Term of            Occupation(s)      Portfolios in       Other
                            Position(s)        Office and             During            Fund Complex    Director-
      Name, Address*          Held             Length of              Past 5           Overseen by     ships Held by
         and Age            with Fund         Time Served              Years             Director        Director
-------------------------------------------------------------------------------------------------------------------------
<S>                         <C>               <C>                  <C>                      <C>           <C>
Charles C. Pierce, Jr.      Director          Class Two Director   Retired                  1             None
Age 69                                        since 2002.  Term    Vice-Chairman of
                                              expires 2005.        Dain Rauscher and
                                                                   private investor
                                              Class Three
Ernest C. Hill              Director          Director since       Consultant               1             None
Age 64                                        1994.  Term
                                              expires 2003.

Interested Director:
                                              Class Three
Russell Cleveland(1)        President,        Director since       President & Chief        3             RUSGIT, BFSUS, Tutogen
Age 64                      Chief             1994.  Term          Executive Officer of                   Medical, Inc.,
                            Executive         expires 2006         RENN Group                             Cover-All
                            Officer,                                                                      Technologies, Inc.,
                            and Director                                                                  Integrated Security
                                                                                                          Systems, Inc., and
                                                                                                          Digital Recorders,
                                                                                                          Inc.

</TABLE>
------------------------

*    The address of all such persons is c/o Renaissance Capital Group, Inc.,
     8080 North Central Expressway, Suite 210, LB-59, Dallas, Texas 75206.

(1)  Mr. Cleveland is also President and CEO of RENN Capital Group, Inc. See
     "Information About the Fund's Officers and the Investment Advisor".

                                       38
<PAGE>

<TABLE>
<CAPTION>
                                                                                      Aggregate Dollar Range
                                                  Dollar Range*                      of Equity Securities in
                Name of                          of Equity Securities                        Funds in
               Director                              in the Fund                          Fund Complex*
--------------------------------------------------------------------------------------------------------------------
<S>                                               <C>                                   <C>
Edward O. Boshell, Jr.                              over $100,000                         over $100,000

Charles C. Pierce, Jr.                            $10,001 to $50,000                    $10,001 to $50,000

Ernest C. Hill                                            $0                                    $0

Peter Collins                                     $10,001 to $50,000                    $10,001 to $50,000

Russell Cleveland                                   over $100,000                         over $100,000
</TABLE>

------------------------
     *   As of June 15, 2004

Committees and Meetings

     The Board of  Directors  held  twenty (20)  meetings  or  executed  consent
actions in lieu of meetings during 2003, and each director  attended or executed
at least seventy-five per cent (75%) of these meetings and consent actions.

     The Audit Committee

     The Audit  Committee  consists  of Ernest C. Hill,  Chair,  Peter  Collins,
Charles C. Pierce, Jr. and Edward O. Boshell, Jr., and held four (4) meetings in
2003.  Edward O. Boshell,  Jr. has been  designated by the Board of Directors as
the Audit Committee  financial expert. The Audit Committee is comprised entirely
of  independent  directors.  The Audit  Committee  is  appointed by the Board of
Directors to assist the Board in fulfilling its oversight responsibilities.  The
Audit Committee's primary duties and responsibilities are to:

     o  Appoint and approve the compensation of the Fund's independent auditors,
        including  those to be retained  for the purpose of preparing or issuing
        an audit report or performing  other audit review or attest services for
        the Fund;

     o  Review the scope of their audit services and the annual results of their
        audits;

     o  Monitor  the  independence  and  performance  of the Fund's  independent
        auditors;

     o  Oversee  generally the accounting and financial  reporting  processes of
        the Fund and the audits of its financial statements, generally;

     o  Review  the  reports  and  recommendations  of  the  Fund's  independent
        auditors;

                                       39
<PAGE>

     o  Provide  an avenue of  communication  among  the  independent  auditors,
        management and the Board of Directors; and

     o  Address  any  matters  between  the  Fund and its  independent  auditors
        regarding financial reporting.

     The  Fund's  independent   auditors  must  report  directly  to  the  Audit
Committee.

     The Nominating and Corporate Governance Committee

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

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

Officers

     Certain information regarding the officers of the Fund is set forth below.

     Russell  Cleveland,  age 65,  has  served  as  President,  Chief  Executive
Officer,  and a Class Three  director of the Fund since 1994. He has also served
as the President,  Chief  Executive  Officer,  sole  Director,  and the majority
shareholder  of RENN Group  since 1994.  He is also He is a Chartered  Financial
Analyst with more than 35 years  experience as a specialist in  investments  for
smaller capitalization  companies. A graduate of the Wharton School of Business,
Mr.  Cleveland has served as President of the Dallas  Association  of Investment
Analysts.  Mr.  Cleveland  serves on the Boards of Directors of  Renaissance  US
Growth Investment Trust PLC, BFS US Special Opportunities Trust PLC, CaminoSoft,
Integrated  Security Systems,  Inc.,  Tutogen Medical,  Inc., Digital Recorders,
Inc., and Cover-All Technologies, Inc.

     Barbe  Butschek,  age 49, has served as Secretary and Treasurer of the Fund
since  1994.  She has also served as Senior  Vice-President  and  Secretary  and
Treasurer of RENN Group since 1977.

                                       40
<PAGE>

     Robert C. Pearson,  age 68, has served as Vice  President of the Fund since
April 1997.  He joined RENN Group in April 1997 and is Senior  Vice-President  -
Investments.  Mr.  Pearson  brought more than thirty years of experience to RENN
Group's corporate  finance function.  From May 1994 to May 1997, Mr. Pearson was
an independent  financial management  consultant.  From May 1990 to May 1994, he
served as Chief Financial Officer and Executive  Vice-President of Thomas Group,
Inc., a management  consulting firm, where he was instrumental in moving a small
privately  held company  from a start-up to a public  company with more than $40
million  in  revenues.  Prior to  1990,  Mr.  Pearson  was  responsible  for all
administrative  activities for the Superconducting Super Collider Laboratory. In
addition,  from 1960 to 1985,  Mr.  Pearson  served in a variety of positions at
Texas Instruments in financial planning and analysis,  holding such positions as
Vice-President - Controller and Vice-President - Finance. Mr. Pearson holds a BS
in Business from the University of Maryland and was a W.A. Paton Scholar with an
MBA from the  University  of  Michigan.  He is a director  of  Digital  Learning
Management  Corp.,  eOriginal,  Inc., Poore Brothers,  Inc.,  CaminoSoft  Corp.,
Laserscope, Simtek Corporation, and Advanced Power Technologies, Inc.

     John A. Schmit, age 36, has served as Vice President of the Fund since July
2000. He joined RENN Group in 1997, and is  Vice-President  - Investments.  From
September 1992 to September  1994, he practiced law with the law firm of Gibson,
Ochsner  &  Adkins,  Amarillo,  Texas.  He  holds a BBA in  Finance  from  Texas
Christian University, a JD from the University of Oklahoma College of Law and an
LLM in  International  and  Comparative  Law from The Georgetown  University Law
Center.  He is a director of Gasco Energy,  Inc.,  CaminoSoft Corp. and Obsidian
Enterprises, Inc.

             SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Fund;s officers and directors and persons who own more than 10% of a
registered class of the Fund's equity securities to file reports of ownership
and changes in ownership with the SEC. Officers, directors, and greater than 10%
beneficial owners are required by SEC regulations to furnish the Fund with
copies of all Section 16(a) forms they file. The Fund believes that during the
fiscal year ended December 31, 2002, all Section 16(a) filings relating to the
Fund's Common Stock applicable to its officers, directors, and greater than 10%
beneficial owners were timely filed.

                                       41
<PAGE>

Item 11.  Executive Compensation.

     Directors  who are not employees of either the Fund or RENN Group receive a
monthly fee of $1,500,  plus $750 and out-of-pocket  expenses for each quarterly
valuation  meeting  attended.  The Fund does not pay any fees to,  or  reimburse
expenses of, its directors who are considered  "interested persons" of the Fund.
The aggregate  compensation  for the period from January 1 to December 31, 2003,
that the Fund paid each director,  and the aggregate  compensation  paid to each
director  for the most  recently  completed  fiscal year by other funds to which
RENN Group provided investment advisory services is set forth below:

<TABLE>
<CAPTION>

                                                            Pension or          Estimated           Total 2003
                                       Aggregate            Retirement           Annual            Compensation
                                          2003               Benefits           Benefits            from Fund
        Name of Director              Compensation          Accrued as            upon               and Fund
                                       from Fund           Part of Fund        Retirement            Complex
                                                             Expenses
--------------------------------------------------------------------------------------------------------------------
<S>                                       <C>                   <C>                <C>                <C>


Russell Cleveland (1)                     $     0               $0                 $0                  $8,993(2)

Peter Collins                             $21,000               $0                 $0                  $  21,000

Ernest C. Hill                            $21,000               $0                 $0                  $  21,000

Edward O. Boshell, Jr.                    $21,000               $0                 $0                  $  21,000

Charles C. Pierce, Jr.                    $17,250               $0                 $0                  $  17,250
</TABLE>

------------------------

(1)  Mr. Cleveland is President and Chief Executive Officer of RENN Group. See
     "Information about the Fund's Principal Officers and Investment Adviser -
     RENN Group."

(2)  Mr. Cleveland receives no compensation from the Fund.

     Officers of the Fund receive no compensation from the Fund. The Fund has
never issued options or warrants to officers or directors of the Fund.

                                       42
<PAGE>

Item 12.  Security Ownership of Certain Beneficial Owners and Management.

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

                                            Number of Shares
                                            Beneficially Owned         Percent
Name of Beneficial Owner                  Directly or Indirectly       of Class
--------------------------------------------------------------------------------

Edward O. Boshell, Jr., Director                   29,896(1)           0.68%

Ernest C. Hill, Director                                0               0.0%

Peter Collins, Director                             2,480(2)           0.06%

Charles C. Pierce, Jr., Director                    2,026              0.05%

Russell Cleveland, President, Chief                                    6.21%
Executive Officer, and Director(3)                270,393(4)

All directors and officers of the                                      7.33%
Fund as a group (8 persons)                       318,797

------------------------

(1)  Shares owned indirectly through Columbia General Investments, L.P.
(2)  Includes 130 shares owned by Hilary Collins, Mr. Collins' spouse.
(3)  "Interested person," as defined by the 1940 Act.
(4)  Consists of 23,845 shares owned by the Cleveland Family Limited Partnership
     and 246,548 shares owned by Renn Investment Limited Partnership.

Item 13.  Certain Relationships and Related Transactions.

     RENN Group provides  investment  advisory  services to the Fund pursuant to
the  Advisory  Agreement,  as  amended,  between  the Fund and RENN  Group.  The
Advisory  Agreement  is reviewed  and  approved  annually by the Fund's Board of
Directors,  including  its  independent  directors.  RENN Group is a  registered
investment  adviser under the Advisers Act. Pursuant to the Advisory  Agreement,
RENN Group received a management fee equal to a quarterly rate of 0.4375% of the
Fund's net  assets,  as  determined  at the end of such  quarter  with each such
payment to be due on the last day of the calendar  quarter.  In addition,  under
the Advisory Agreement,  RENN Group received an incentive fee in an amount equal
to 20% of the Fund's realized capital gains in excess of realized capital losses
of the Fund  after  allowance  for any  unrealized  capital  losses in excess of
unrealized capital gains on the portfolio investments of the Fund. The incentive
fee is calculated and paid on a quarterly  basis.  In 2003, the Fund incurred to
RENN Group  $997,846 as its  management  fee of which  $866,106.32  was paid and
$1,936,205  as its incentive fee of which  $991,179.40  was paid.  The Fund also
received   director's  fees  from  portfolio   companies  with  respect  to  Mr.

                                       43
<PAGE>

Cleveland's  and Mr.  Pearson's  services as a director.  Russell  Cleveland and
Barbe Butschek own 80% and 20%, respectively, of the Common Stock of RENN Group.
The sole director of RENN Group is Russell Cleveland. The Board of Directors has
determined  that  the  Advisers   Agreement  be  construed  in  compliance  with
applicable provisions of the Advisers Act and the 1940 Act.

     Pursuant to the Advisory Agreement, RENN Group serves as investment adviser
to the Fund,  subject  to the  supervision  of the  Fund's  Board of  Directors,
including its independent  directors.  Services provided to the Fund include but
are not necessarily  limited to assisting the Fund in the  determination  of the
net assets of the Fund and  recommending  the valuation of assets of the Fund to
the Board of  Directors.  The  valuation  of assets is  subject  to the Board of
Directors'  determination  and is used in the  computation of the management fee
and incentive fee paid to RENN Group. The valuations of portfolio securities are
performed in accordance  with valuation  procedures  and policies  formulated by
RENN Group and approved by the Board of  Directors,  including  its  independent
directors. These valuation policies are described in detail in the Fund's public
filings.

     RENN  Group  also  serves  as the  Investment  Adviser  to  BFSUS  and  the
Investment Manager to RUSGIT,  both of which are public companies  registered in
the United Kingdom and listed on the London Stock  Exchange.  In addition,  RENN
Group may advise other funds, from time to time, or provide investment  advisory
services,  management  consulting  services and investment  banking  services to
other funds that make  investments  in  companies  similar to those in which the
Fund  invests.  Neither  RENN Group,  nor its  affiliates  are  prohibited  from
engaging in activities outside the Fund's business. The determination  regarding
the existence of conflicts of interest  between any such funds and the Fund, and
the  resolution of any such  conflict,  vests in the  discretion of the Board of
Directors, subject to the requirements of the 1940 Act.



Item 14.  Principal Accountant Fees and Services.

     The  following  table  presents  fees  paid by the  Fund  for  professional
services  rendered by Ernst & Young LLP for the fiscal years ended  December 31,
2002 and 2003.

<TABLE>
<CAPTION>
        Fee Category                                      Fiscal 2003 Fees           Fiscal 2002 Fees
        ------------                                      ----------------           ----------------
                                                                         (In thousands)
<S>                                                            <C>                              <C>
Audit Fee                                                      $67,000                          $81,706
Audit-Related Fees                                                   0                                0
Tax Fees                                                             0                                0
All Other Fees                                                  22,000                            4,500
                                                                ------                          -------

                                       44
<PAGE>

Total Fees                                                     $89,000                          $86,206
                                                               =======                          =======
</TABLE>

     Audit Fees were for  professional  services  rendered  for the audit of the
Fund's  financial  statements  and review of the  interim  financial  statements
included in quarterly reports and services that are normally provided by Ernst &
Young LLP in connection with statutory and regulatory filings or engagements.

     No  Audit-Related  Fees or Tax Fees  were paid by the Fund to Ernst & Young
LLP for the fiscal years ended December 31, 2002 or 2003.

     All Other Fees were for services other than the services reported above. In
fiscal 2002 and 2003, these services included accounting  consultations relating
to a proposed rights offering.

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

                                       45
<PAGE>



Part IV

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

DOCUMENTS FILED AS PART OF THIS FORM 10K

     Financial Statements:
     --------------------

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

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

REPORTS ON FORM 8K

     None.

EXHIBITS
--------


3.1               Restated Articles of Incorporation(1)

3.2               Bylaws(2)

10.1              Dividend Reinvestment Plan(3)

10.2              Amendment No. 1 to Dividend Reinvestment Plan(4)

10.3              Investment Advisory Agreement(5)

10.4              Amendment No. 1 to Investment Advisory Agreement(6)

10.5              Custodial Agreement with The Frost National Bank(7)

14                Code of Ethics(8)

                                       46
<PAGE>

(1)  Incorporated  by reference  from Form N-2 as filed with the  Securities and
Exchange  Commission  February 25, 1994 (Registration No. 33-75758) and refilled
herewith.

(2)  Incorporated  by reference  from Form N-2 as filed with the  Securities and
Exchange  Commission  February 25, 1994 (Registration No. 33-75758) and refilled
herewith.

(3)  Incorporated  by reference  from Form N-2 as filed with the  Securities and
Exchange  Commission  February 25, 1994 (Registration No. 33-75758) and refilled
herewith.

(4)  Incorporated  by reference  from Form N-2 as filed with the  Securities and
Exchange  Commission  February 25, 1994 (Registration No. 33-75758) and refilled
herewith.

(5)  Incorporated  by reference  from Form N-2 as filed with the  Securities and
Exchange  Commission  February 25, 1994 (Registration No. 33-75758) and refilled
herewith.

(6)  Incorporated  by reference  from Form 10-K for the year ended  December 31,
1999 as filed with the Securities and Exchange Commission.

(7)  Incorporated  by reference  from Form 10-K for the year ended  December 31,
2000 as filed with the Securities and Exchange Commission.

(8) Incorporated by reference from Form 10-Q for the quarter ended June 30, 2002
as filed with the Securities and Exchange Commission.

                                       47
<PAGE>

                          INDEX TO FINANCIAL STATEMENTS


                                                                            Page
                                                                            ----

Statements of Assets and Liabilities
December 31, 2003 and 2002                                                   F-2

Schedules of Investments
December 31, 2003 and 2002                                      F-3 through F-14

Statements of Operations
Years ended December 31, 2003, 2002, and 2001                               F-15

Statements of Changes in Net Assets
Years ended December 31, 2003, 2002, and 2001                               F-16

Statements of Cash Flows
Years ended December 31, 2003, 2002, and 2001                  F-17 through F-18

Notes to Financial Statements                                  F-19 through F-27

                                      F-1

<PAGE>
<TABLE>
<CAPTION>
                         Renaissance Capital Growth & Income Fund III, Inc.
                                Statements of Assets and Liabilities
                                     December 31, 2003 and 2002
                                             (Unaudited)
          Assets                                                 2003                      2002
<S>                                                           <C>                       <C>
Cash and cash equivalents                                     $35,255,687               $10,968,001
Investments at fair value, cost of $33,747,202 and
   $32,918,344 in 2003 and 2002, respectively (Note 5)         60,567,557                39,459,243
Accounts receivable-settlement                                      1,010                         0
Interest and dividend receivables, net of reserves                233,201                    28,409
Offering costs                                                     97,439                         0
Prepaid expenses                                                   46,858                    40,069
                                                              -----------               -----------
                                                              $96,201,752               $50,495,721
                                                              ===========               ===========

          Liabilities and Net Assets

Liabilities:
   Due to broker  (Note 3)                                     27,000,416                 9,001,163
   Accounts payable                                                57,273                    12,106
   Accounts payable - dividends                                 3,698,960                         0
   Accounts payable - affiliate (Note 4)                        1,085,018                   223,386
                                                              -----------               -----------
                                                               31,841,667                 9,236,655
Commitments and contingencies

Net assets:
Common stock, $1 par value; authorized 20,000,000 shares;
   4,561,618 issued; 4,351,718 shares outstanding at
   December 31, 2003, and at December 31, 2002                  4,561,618                 4,561,618
Additional paid-in-capital                                     34,105,947                35,642,954
Treasury stock at cost, 209,900 shares at
   December 31, 2003, and at December 31,
   2002                                                       ( 1,734,966)              ( 1,734,966)
Distributable earnings                                            607,131               ( 3,751,440)
                                                              -----------               -----------
Net unrealized appreciation of investments                     26,820,355                 6,540,900
         Net assets, equivalent to $14.79 and $9.48
            per share at December 31, 2003
            and 2002, respectively                             64,360,085                41,259,066
                                                              -----------               -----------
                                                              $96,201,752               $50,495,721
                                                              ===========               ===========

See accompanying notes.
</TABLE>

                                                F-2

<PAGE>
<TABLE>
<CAPTION>
                               Renaissance Capital Growth & Income Fund III, Inc.
                                            Schedules of Investments
                                           December 31, 2003 and 2002
                                                   (Unaudited)
                                                                         2003
                                         ----------------------------------------------------------------------
                                         Interest         Due                            Fair          % of Net
                                           Rate          Date            Cost           Value           Assets
<S>                                        <C>          <C>            <C>            <C>                <C>
Eligible Portfolio Investments -
  Convertible Debentures and
   Promissory Notes

Dexterity Surgical, Inc. -
 Convertible debenture (2)                  9.00        12/19/04       $1,316,282       $375,000          0.58

EDT Learning, Inc. -
 Convertible redeemable note (2)           12.00        03/29/12          500,000        500,000          0.78

Gasco Energy, Inc. -
  Convertible debenture (2)                 8.00        10/15/08          625,000      1,203,334          1.87

Integrated Security Systems, Inc. -
      Promissory notes (4)                  8.00        09/30/04          525,000        525,000          0.82
      Promissory notes (4)                  7.00        10/01/04          200,000        200,000          0.31

Simtek Corporation -
 Convertible debenture                      7.50        06/28/09        1,000,000      3,807,692          5.92
                                                                       ----------     ----------         -----

                                                                       $4,166,282     $6,611,026         10.27%
                                                                       ----------     ----------         -----
</TABLE>
                                                      F-3

<PAGE>
<TABLE>
<CAPTION>
                               Renaissance Capital Growth & Income Fund III, Inc.
                                      Schedules of Investments (continued)
                                           December 31, 2003 and 2002
                                                   (Unaudited)
                                                                         2003
                                         ----------------------------------------------------------------------
                                         Interest         Due                            Fair          % of Net
                                           Rate          Date            Cost           Value           Assets
<S>                                        <C>          <C>            <C>            <C>                <C>
Other Portfolio Investments -
 Convertible Debentures and
   Promissory Notes

Interpool, Inc. -
 Convertible debenture (2)                  9.25        12/27/22          375,000        375,000          0.58
                                                                       ----------     ----------          ----

                                                                       $  375,000     $  375,000          0.58%
                                                                       ----------     ----------          ----
</TABLE>

(1)  Valued at fair value as determined by the Investment Adviser (Note 6).
(2)  Restricted securities - securities that are not fully registered and freely
     tradable.
(3)  Securities in a privately owned company.
(4)  Securities that have no provision  allowing  conversion into a security for
     which there is a public market.
(5)  Included Miscellaneous Securities, securities of privately owned companies,
     securities with no conversion feature, and securities for which there is no
     market.

                                      F-4

<PAGE>
<TABLE>
<CAPTION>
               Renaissance Capital Growth & Income Fund III, Inc.
                      Schedules of Investments (continued)
                           December 31, 2003 and 2002
                                   (Unaudited)

                                                                    2003
                                             -----------------------------------------------------
                                                                          Fair            % of Net
                                               Shares       Cost         Value             Assets
<S>                                          <C>          <C>          <C>                 <C>
Eligible Portfolio Investments -
 Common Stock, Preferred Stock,
  and Miscellaneous Securities

Bentley Pharmaceuticals, Inc. -
  Common stock                                  63,450    $   79,313   $  840,471            1.31

CaminoSoft Corp. -
  Common stock                               1,750,000     4,000,000      641,025            1.00
  Common stock (2)                           1,539,414     1,150,000      535,408            0.83
  Common stock (2)                             250,000       125,000       36,950            0.06

eOriginal, Inc. -
  Series A, preferred stock (3)                 10,680     4,692,207      770,383            1.20
  Series B, preferred stock (3)                 25,646       620,329    1,849,928            2.87
  Series C, preferred stock (3)                 28,929       699,734    2,085,893            3.24
  Series New C, preferred stock (3)             22,319       360,000      360,000            0.56

Fortune Natural Resources Corp. -
  Common stock                               1,262,394       500,500      137,475            0.21

Gasco Energy, Inc. -
  Common stock                                 250,000       250,000      316,800            0.49

Global Axcess, Inc. -
  Common stock (2)                           1,400,000       350,000      423,760            0.66

Integrated Security Systems, Inc. -
  Common stock (2)                          24,164,301     4,973,166    8,354,344           12.98
  Series D, preferred stock (2)                187,500       150,000       83,250            0.13

</TABLE>

                                                F-5

<PAGE>
<TABLE>
<CAPTION>
                         Renaissance Capital Growth & Income Fund III, Inc.
                                Schedules of Investments (continued)
                                     December 31, 2003 and 2002
                                            (Unaudited)
                                                                   2003
                                             -----------------------------------------------------
                                                                           Fair           % of Net
                                               Shares       Cost          Value            Assets
<S>                                          <C>        <C>          <C>                  <C>
Eligible Portfolio Investments -
 Common Stock, Preferred Stock,
  and Miscellaneous Securities

Inyx, Inc. -
  Common stock (2)                             300,000  $   300,000   $   339,160            0.53

Laserscope -
  Common stock                               1,200,000    1,500,000    18,520,920           28.78

Poore Brothers, Inc. -
  Common stock (2)                           1,686,357    1,748,170     5,323,745            8.27

Simtek Corp. -
  Common stock                               1,000,000      195,000     1,188,000            1.85
  Common stock - pvt placement (2)             550,661      500,000       571,146            0.89

ThermoView Industries, Inc. -
  Common stock                                 234,951      563,060       146,539            0.23

Miscellaneous Securities                                        165       930,694            1.45
                                                        -----------   -----------           -----

                                                        $22,756,644   $43,455,891           67.52%
                                                        ===========   ===========           ======
</TABLE>

(1)  Valued at fair value as determined by the Investment Adviser (Note 6).
(2)  Restricted securities - securities that are not fully registered and freely
     tradable.
(3)  Securities in a privately owned company.
(4)  Securities that have no provision  allowing  conversion into a security for
     which there is a public market.
(5)  Included Miscellaneous Securities, securities of privately owned companies,
     securities with no conversion feature, and securities for which there is no
     market.

                                      F-6

<PAGE>
<TABLE>
<CAPTION>
                         Renaissance Capital Growth & Income Fund III, Inc.
                                Schedules of Investments (continued)
                                     December 31, 2003 and 2002
                                            (Unaudited)
                                                                   2003
                                             -----------------------------------------------------
                                                                           Fair           % of Net
                                               Shares       Cost          Value            Assets
<S>                                          <C>          <C>          <C>                  <C>
Other Portfolio Investments -
 Common Stock, Preferred Stock,
  and Miscellaneous Securities
AdStar, Inc. -
  Common stock (2)                             269,231     $350,000    $  456,154            0.71

Blue Rhino Corp. -
  Common stock                                  40,000      476,999       550,440            0.86

Capital Senior Living Corp -
  Common stock                                  57,100      146,335       332,391            0.52

CareerEngine Network, Inc. -
 Common stock (2)                              125,000      250,000        12,275            0.02

Dave & Busters, Inc. -
  Common stock                                 100,000      653,259     1,254,330            1.95

EDT Learning, Inc. -
  Common stock                                  48,266       27,033        43,005            0.07

Flamel Technologies, Inc. -
  Common stock                                  50,000      360,143     1,326,105            2.06

Franklin Covey -
  Common stock                                 207,876      293,251       576,232            0.90

Gasco Energy, Inc. -
  Common stock                                 750,000      639,105       950,400            1.48

I-Flow Corporation -
  Common stock                                  50,000      117,043       689,040            1.07

Inet Technologies, Inc. -
  Common stock                                  46,600      237,275       553,608            0.86

Medical Action Industries, Inc. -
  Common stock                                  25,000      292,329       463,073            0.72
</TABLE>

                                      F-7

<PAGE>
<TABLE>
<CAPTION>
                         Renaissance Capital Growth & Income Fund III, Inc.
                                Schedules of Investments (continued)
                                     December 31, 2003 and 2002
                                            (Unaudited)
                                                                   2003
                                             ------------------------------------------------------
                                                                           Fair           % of Net
                                              Shares         Cost         Value            Assets
<S>                                            <C>      <C>           <C>                   <C>
Other Portfolio Investments -
 Common Stock, Preferred Stock,
  and Miscellaneous Securities

Precis, Inc. -
  Common stock                                 200,700  $ 1,372,417     $ 770,929            1.20

Stonepath Group, Inc. -
  Common stock                                 281,240      448,500       640,383            1.00

US Home Systems, Inc. -
  Common stock                                 110,000      535,587     1,208,790            1.88

Vaso Active Pharmaceuticals, Inc. -
  Common stock                                  50,000      250,000       298,485            0.46

Miscellaneous Securities                                          0             0            0.00
                                                        -----------   -----------           ------

                                                        $ 6,449,276   $10,125,640           15.73%
                                                        -----------   -----------           ------

                                                        $33,747,202   $60,567,557           94.11%
                                                        ===========   ===========           =====

Allocation of Investments -
  Restricted Shares, Unrestricted Shares,
  and Other Securities

Restricted Securities  (2)                              $12,712,618   $18,589,526           28.88%
Unrestricted Securities                                 $13,937,149   $35,256,133           54.78%
Other Securities  (5)                                   $ 7,097,435   $ 6,721,898           10.44%
</TABLE>

(1)  Valued at fair value as determined by the Investment Adviser (Note 6).
(2)  Restricted securities - securities that are not fully registered and freely
     tradable.
(3)  Securities in a privately owned company.
(4)  Securities that have no provision  allowing  conversion into a security for
     which there is a public market.
(5)  Includes Miscellaneous Securities, securities of privately owned companies,
     securities with no conversion feature, and securities for which there is no
     market.

                                      F-8

<PAGE>
<TABLE>
<CAPTION>
                                   Renaissance Capital Growth & Income Fund III, Inc.
                                                Schedules of Investments
                                               December 31, 2003 and 2002
                                                      (Unaudited)
                                                                            2002
                                         -----------------------------------------------------------------------------
                                         Interest              Due                            Fair            % of Net
                                           Rate               Date          Cost             Value             Assets
<S>                                        <C>              <C>       <C>              <C>                       <C>
Eligible Portfolio Investments -
  Convertible Debentures and
   Promissory Notes

Active Link Communications, Inc. -
 Convertible bridge note (2)               12.00            09/30/03  $      41,480    $      41,789             0.10
 Convertible note (2)                       8.00            09/30/03        125,000          126,000             0.31
 Convertible note (2)                       8.00            09/30/03        250,000          252,000             0.61

Business Process Outsourcing -
 Convertible debenture (1)(3)              12.00            08/31/03         98,000          100,000             0.24

Dexterity Surgical, Inc. -
 Convertible debenture (2)                  9.00            12/19/04      1,316,282        1,066,282             2.58

EDT Learning, Inc. -
 Convertible redeemable note (2)           12.00            03/29/12        500,000          500,000             1.21

eOriginal, Inc. -
 Promissory note (3)                       12.00            12/31/02      1,139,683        1,139,683             2.76

Integrated Security Systems, Inc. -
 Promissory notes (4)                       8.00            09/05/03        325,000          325,000             0.79

Laserscope -
 Convertible debenture (2)                  8.00            02/11/07      1,500,000        5,026,000            12.18

Simtek Corporation -
 Convertible debenture (2)                  7.50            06/28/09      1,000,000        1,000,000             2.42
                                                                      -------------    -------------            ------

                                                                      $   6,295,445    $   9,576,754            23.21%
                                                                      -------------    -------------            ------

</TABLE>
                                      F-9

<PAGE>
<TABLE>
<CAPTION>
                          Renaissance Capital Growth & Income Fund III, Inc.
                                 Schedules of Investments (continued)
                                      December 31, 2003 and 2002
                                             (Unaudited)
                                                               2002
                                  ------------------------------------------------------------------
                                  Interest        Due                          Fair         % of Net
                                    Rate         Date          Cost           Value          Assets
<S>                                 <C>        <C>          <C>             <C>               <C>
Other Portfolio Investments -
 Convertible Debentures and
   Promissory Notes

CareerEngine Network, Inc. -
 Convertible debenture (2)           12.00     03/31/10     $ 250,000       $ 250,000          0.61

Interpool, Inc. -
 Convertible debenture (2)            9.25     12/27/22       375,000         375,000          0.91
                                                            ---------       ---------          -----

                                                            $ 625,000       $ 625,000          1.51%
                                                            ---------       ---------          -----
</TABLE>

(1)  Valued at fair value as determined by the Investment Adviser (Note 6).
(2)  Restricted securities - securities that are not fully registered and freely
     tradable.
(3)  Securities in a privately owned company.
(4)  Securities that have no provision  allowing  conversion into a security for
     which there is a public market.
(5)  Included Miscellaneous Securities, securities of privately owned companies,
     securities with no conversion feature, and securities for which there is no
     market.

                                                F-10

<PAGE>
<TABLE>
<CAPTION>
                         Renaissance Capital Growth & Income Fund III, Inc.
                                Schedules of Investments (continued)
                                     December 31, 2003 and 2002
                                            (Unaudited)
                                                                   2002
                                            ------------------------------------------------------
                                                                           Fair           % of Net
                                               Shares       Cost          Value            Assets
<S>                                         <C>           <C>           <C>                  <C>
Eligible Portfolio Investments -
 Common Stock, Preferred Stock,
  and Miscellaneous Securities

Bentley Pharmaceuticals, Inc. -
  Common stock                                 400,000   $  500,000    $3,187,800            7.73

CaminoSoft Corp. -
  Common stock                               1,750,000    4,000,000     1,559,250            3.78
  Common stock (2)                             708,333      875,000       549,250            1.33

Dexterity Surgical, Inc. -
  Preferred stock - A (2)                          500      500,000             0            0.00
  Preferred stock - B (2)                          500      500,000             0            0.00
  Common stock (2)                             260,000      635,000             0            0.00

eOriginal, Inc. -
  Series A, preferred stock (1)                  6,000    1,500,000       794,000            1.92
  Series B-1, preferred stock (1)                1,785      392,700     1,426,215            3.46
  Series B-3, preferred stock (1)                  447      107,280        357,153           0.87
  Series C-1, preferred stock (1)                2,353    2,000,050      2,000,050           4.85

Fortune Natural Resources Corp. -
  Common stock                               1,262,394      500,500        81,235            0.20

Gasco Energy, Inc. -
  Common stock                                 250,000      250,000       112,150            0.27

Integrated Security Systems, Inc. -
  Common stock                                 393,259      215,899        93,438            0.23
  Common stock - PIK (2)                       104,787       28,319        23,640            0.06
  Series D, preferred stock (2)                187,500      150,000        54,000            0.13
  Series F, preferred stock (2)              2,714,945      542,989       612,492            1.48
  Series G, preferred stock (2)             18,334,755    3,666,951     4,086,321            9.90

</TABLE>

                                      F-11

<PAGE>
<TABLE>
<CAPTION>
                         Renaissance Capital Growth & Income Fund III, Inc.
                                Schedules of Investments (continued)
                                     December 31, 2003 and 2002
                                            (Unaudited)
                                                                   2002
                                            ------------------------------------------------------
                                                                           Fair           % of Net
                                               Shares        Cost         Value            Assets
<S>                                          <C>        <C>           <C>                   <C>
Eligible Portfolio Investments -
 Common Stock, Preferred Stock,
  and Miscellaneous Securities

JAKKS Pacific, Inc. -
  Common stock                                  59,847    $ 357,088     $ 798,078            1.93

Poore Brothers, Inc. -
  Common stock (2)                           2,016,357    2,078,170     4,669,485           11.32

Simtek Corp. -
  Common stock (2)                           1,000,000      195,000       150,400            0.36

ThermoView Industries, Inc. -
  Common stock                                 134,951      497,832       120,241            0.29

Miscellaneous Securities                                      2,165       462,349            1.12
                                                        -----------   -----------           ------

                                                        $19,494,943   $21,137,547           51.23%
                                                        -----------   -----------           ------

</TABLE>

(1)  Valued at fair value as determined by the Investment Adviser (Note 6).
(2)  Restricted securities - securities that are not fully registered and freely
     tradable.
(3)  Securities in a privately owned company.
(4)  Securities that have no provision  allowing  conversion into a security for
     which there is a public market.
(5)  Included Miscellaneous Securities, securities of privately owned companies,
     securities with no conversion feature, and securities for which there is no
     market.

                                      F-12

<PAGE>
<TABLE>
<CAPTION>
                         Renaissance Capital Growth & Income Fund III, Inc.
                                Schedules of Investments (continued)
                                     December 31, 2003 and 2002
                                            (Unaudited)
                                                                   2002
                                            ------------------------------------------------------
                                                                           Fair           % of Net
                                               Shares        Cost         Value            Assets
<S>                                            <C>          <C>         <C>                  <C>
Other Portfolio Investments -
 Common Stock, Preferred Stock,
  and Miscellaneous Securities

AirNet Systems, Inc. -
  Common stock                                  75,000   $  318,750    $  296,860            0.72

Bentley Pharmaceuticals, Inc. -
  Common stock                                 259,979      535,168     2,071,902            5.02

Canterbury Consulting Group, Inc. -
  Common stock                                 200,000      193,473        51,480            0.12

Capital Senior Living Corp -
  Common stock                                  44,500      110,975       112,340            0.27

Creative Host Services, Inc. -
  Common stock                                   4,830        7,921         9,085            0.02

Daisytek International, Inc. -
  Common stock                                  49,600      507,639       389,395            0.94

Dave & Busters, Inc. -
  Common stock                                 100,000      653,259       856,350            2.08

Dwyer Group, Inc. -
  Common stock                                 675,000    1,966,632     2,559,397            6.20

EDT Learning, Inc. -
  Common stock                                  48,266       27,033        14,335            0.03

I-Flow Corporation -
  Common stock                                 100,000      254,038       154,440            0.37

</TABLE>

                                      F-13

<PAGE>
<TABLE>
<CAPTION>
                         Renaissance Capital Growth & Income Fund III, Inc.
                                Schedules of Investments (continued)
                                     December 31, 2003 and 2002
                                            (Unaudited)
                                                                   2002
                                            ------------------------------------------------------
                                                                           Fair           % of Net
                                              Shares         Cost         Value            Assets
<S>                                            <C>     <C>           <C>                   <C>
Other Portfolio Investments -
 Common Stock, Preferred Stock,
  and Miscellaneous Securities

Inet Technologies, Inc. -
  Common stock                                  75,000    $ 367,434     $ 452,925            1.10

Precis, Inc. -
  Common stock                                 100,700    1,025,047       550,305            1.33

US Home Systems, Inc. -
  Common stock                                 110,000      535,587       601,128            1.46

Miscellaneous Securities                                          0             0            0.00
                                                        -----------   -----------           -----

                                                        $ 6,502,956   $ 8,119,942           19.68%
                                                        -----------   -----------           -----

                                                        $32,918,344   $39,459,243           95.64%
                                                        ===========   ===========           =====

Allocation of Investments -
  Restricted Shares, Unrestricted Shares,
  and Other Securities

Restricted Securities (2)                               $15,097,941   $19,191,669          46.52%
Unrestricted Securities                                 $12,255,525   $13,663,124          33.12%
Other Securities (5)                                    $ 5,564,878   $ 6,604,450          16.01%
</TABLE>

(1)  Valued at fair value as determined by the Investment Adviser (Note 6).
(2)  Restricted securities - securities that are not fully registered and freely
     tradable.
(3)  Securities in a privately owned company.
(4)  Securities that have no provision  allowing  conversion into a security for
     which there is a public market.
(5)  Includes Miscellaneous Securities, securities of privately owned companies,
     securities with no conversion feature, and securities for which there is no
     market.

                                      F-14

<PAGE>
<TABLE>
<CAPTION>
                   Renaissance Capital Growth & Income Fund III, Inc.
                                Statements of Operations
                     Years ended December 31, 2003, 2002, and 2001
                                      (Unaudited)
<S>                                          <C>            <C>            <C>
                                                  2003           2002           2001
Income:
   Interest                                  $   652,145   $    278,573    $   423,002
   Dividends                                   1,225,139         70,640        195,453
   Commitment and other fees                     221,645         28,442          3,100
                                             -----------   ------------    -----------
                                               2,098,929        377,655        621,555
                                             -----------   ------------    -----------

Expenses (Note 4):
   General and administrative                    338,419        484,121        411,348
   Incentive fee                               1,936,205              -        919,429
   Interest expense                               64,852         61,071        123,199
   Legal expense                                 181,420        109,927        128,323
   Management fees                               997,846        860,834        912,544
                                             -----------   ------------    -----------
                                               3,518,742      1,515,953      2,494,843
                                             -----------   ------------    -----------

         Net investment loss                 ( 1,419,813)  (  1,138,298)   ( 1,873,288)
                                             -----------   ------------    -----------

Realized and unrealized gain (loss) on
   investments:
   Net change in unrealized appreciation
      (depreciation) on investments           20,279,455   (  8,205,633)     9,365,167
   Net realized gain (loss) on investments     9,681,024   (  3,429,593)     2,054,836

         Net gain (loss) on investments       29,960,479   ( 11,635,226)    11,420,003
                                             -----------   ------------    -----------

         Net income (loss)                   $28,540,666   ($12,773,524)   $ 9,546,715
                                             ===========   ============    ===========

Net income (loss) per share (Note 2(e))      $      6.56   ($      2.93)   $      2.19
                                             ===========   ============    ===========

See accompanying notes
</TABLE>

                                      F-15

<PAGE>
<TABLE>
<CAPTION>
                          Renaissance Capital Growth & Income Fund III, Inc.
                                 Statements of Changes in Net Assets
                            Years ended December 31, 2003, 2002, and 2001
                                             (Unaudited)
                                                             2003            2002             2001
<S>                                                     <C>             <C>             <C>
From operations:
   Net investment loss                                  $( 1,419,813)   $( 1,138,298)   $( 1,873,288)
   Net realized gain (loss) on investments                 9,681,024     ( 3,429,593)      2,054,836
   Increase (decrease) in unrealized appreciation
     on investments                                       20,279,455     ( 8,205,633)      9,365,167
                                                        ------------    ------------    ------------
         Net increase (decrease) in net assets
         resulting from operations                        28,540,666     (12,773,524)      9,546,715
                                                        ------------    ------------    ------------

From distributions to stockholders:
   Common dividends from net investment income                     -               -               -
   Common dividends from realized gains                  ( 5,439,647)              -     ( 2,355,274)
                                                        ------------    ------------    ------------
   Tax return of capital                                           -     (   435,172)              -
                                                        ------------    ------------    ------------
         Net decrease in net assets resulting from
            distributions                                ( 5,439,647)    (   435,172)    ( 2,355,274)
                                                        ------------    ------------    ------------

From capital transactions:
   Shares issued                                                   -               -               -
   Purchase of treasury stock                                      -     (    69,746)              -
                                                        ------------    ------------    ------------
      Net increase (decrease) in net assets resulting
         from capital transactions                                 -     (    69,746)              -
                                                        ------------    ------------    ------------

         Total increase (decrease) in net assets          23,101,019     (13,278,442)      7,191,441

Net assets:
   Beginning of year                                      41,259,066      54,537,508      47,346,067
                                                        ------------    ------------    ------------
   End of year                                          $ 64,360,085    $ 41,259,066    $ 54,537,508
                                                        ============    ============    ============
</TABLE>

See accompanying notes


                                         F-16

<PAGE>
<TABLE>
<CAPTION>
                          Renaissance Capital Growth & Income Fund III, Inc.
                                       Statements of Cash Flows
                            Years ended December 31, 2003, 2002, and 2001
                                             (Unaudited)
                                                              2003            2002            2001
<S>                                                     <C>             <C>             <C>
Cash flows from operating activities:
   Net income (loss)                                    $ 28,540,666    ($12,773,524)   $  9,546,715
   Adjustments to reconcile net income (loss) to
      net cash provided by (used in) operating
      activities:
         Net change in unrealized (appreciation)
            depreciation on investments                  (20,279,455)      8,205,633     ( 9,365,167)
         Net realized gain (loss) on investments          (9,681,024)      3,429,593     ( 2,054,836)
         (Increase) decrease in interest and
             dividend receivables                        (   204,792)         61,177         349,571
         (Increase) decrease in other receivable         (     1,010)              0               0
         (Increase) decrease in other assets             (   104,228)   (     26,206)         25,949
         Increase (decrease) in accounts payable              45,166    (      1,366)    (       610)
         Increase (decrease) in accounts payable -
            affiliate                                        861,632    (     45,156)         33,115
         Increase (decrease) in due to broker             17,999,253    ( 13,195,983)      5,715,122
         Purchase of investments                         ( 9,062,799)   (  6,851,707)    ( 3,509,674)
         Proceeds from sale of investments                17,794,507       4,911,282      10,364,052
         Repayment of debentures                             120,457         633,250         170,423
                                                        ------------    ------------    ------------

            Net cash provided by (used in) operating
                 activities                               26,028,373    ( 15,653,007)     11,274,660
                                                        ------------    ------------    ------------

Cash flows from financing activities:
   Net proceeds from issuance of shares                            -               -               -
   Purchase of treasury shares                                     -    (     69,746)              -
   Cash distributions                                    ( 1,740,687)   (    435,172)    ( 2,355,274)
                                                        ------------    ------------    ------------
         Net cash used in financing activities           ( 1,740,687)   (    504,918)    ( 2,355,274)
                                                        ------------    ------------    ------------
Net increase (decrease) in cash and cash equivalents      24,287,686    ( 16,157,925)      8,919,386
Cash and cash equivalents at beginning of the year        10,968,001      27,125,926      18,206,540
                                                        ------------    ------------    ------------
Cash and cash equivalents at end of the year            $ 35,255,687    $ 10,968,001    $ 27,125,926
                                                        ============    ============    ============

Cash paid during the year for interest                  $     64,852    $     61,071    $    123,199
Cash paid during the year for income/excise taxes       $      2,019    $      1,671    $     23,068

</TABLE>

                                      F-17

<PAGE>


<PAGE>
               Renaissance Capital Growth & Income Fund III, Inc.
                      Statements of Cash Flows (continued)
                  Years ended December 31, 2003, 2002 and 2001
                                   (Unaudited)

Noncash investing and financing activities:

     During 2003,  the Fund  received  common stock in settlement of amounts due
          from  interest   totaling   $201,602  and  from   dividends   totaling
          $1,189,963.

     During 2002,  the Fund  received  common stock in settlement of amounts due
          from interest totaling $18,148 and from dividends totaling $6,805.

     During 2001,  the Fund  received  common stock in settlement of amounts due
          from dividends totaling $3,366.





See accompanying notes.

                                      F-18

<PAGE>

               RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
                          Notes to Financial Statements
                          December 2003, 2002 and 2001
                                   (Unaudited)

(1)  Organization and Business Purpose

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

(2)  Summary of Significant Accounting Policies

     (a)  Valuation of Investments

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

     (b)  Other

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

     (c)  Cash and Cash Equivalents

          The Fund  considers all highly liquid debt  instruments  with original
          maturities of three months or less to be cash equivalents.

     (d)  Federal Income Taxes

          The Fund has elected the special  income tax  treatment  available  to
          "regulated  investment  companies"  ("RIC") under  Subchapter M of the
          Internal  Revenue Code (IRC) in order to be relieved of federal income
          tax on that part of its net  investment  income and  realized  capital
          gains that it pays out to its  shareholders.  The Fund's  policy is to
          comply  with  the  requirements  of the IRC  that  are  applicable  to
          regulated investment companies. Such requirements include, but are not
          limited to certain  qualifying  income  tests,  asset  diversification
          tests and  distribution  of  substantially  all of the Fund's  taxable
          investment income to its shareholders.  It is the intent of management


                                      F-19
<PAGE>
               RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
                    Notes to Financial Statements (Continued)
                        December 31, 2003, 2002 and 2001
                                   (Unaudited)

          to comply with all IRC  requirements  as they  pertain to a RIC and to
          distribute all of the Fund's taxable  investment  income and long-term
          capital gains within the defined  period under the IRC to qualify as a
          RIC.  Failure to qualify  as a RIC would  subject  the Fund to federal
          income tax as if the Fund were an  ordinary  corporation,  which could
          result in a substantial  reduction in the Fund's net assets as well as
          the amount of income available for distribution to shareholders.

     (e)  Net income per share

          Net income per share is based on the weighted average number of shares
          outstanding  of 4,351,718  during  2003,  4,359,748  during 2002,  and
          4,361,618 during 2001.

     (f)  Use of Estimates

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

(3)  Due to Broker

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

(4)  Management and Incentive Fees and Reimbursement

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

                                      F-20
<PAGE>
               RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
                    Notes to Financial Statements (Continued)
                        December 31, 2003, 2002 and 2001
                                   (Unaudited)

          o    The  Investment  Adviser  receives  a  management  fee equal to a
               quarterly rate of 0.4375% of the Fund's Net Assets, as determined
               at the end of such quarter with each such payment to be due as of
               the last day of the calendar quarter. The Fund incurred $997,846,
               $860,834,  and $912,544 for 2003,  2002, and 2001,  respectively,
               for such  management  fees.  Amounts  payable  for  such  fees at
               December 31, 2003, 2002 were $284,881 and $191,651, respectively.

          o    The  Investment  Adviser  receives an incentive  fee in an amount
               equal to 20% of the Fund's  realized  capital  gains in excess of
               realized  capital  losses  of the Fund  after  allowance  for any
               unrealized  capital losses in excess of unrealized  capital gains
               on the portfolio  investments  of the Fund.  The incentive fee is
               calculated,  accrued,  and paid on a  quarterly  basis.  The Fund
               incurred $1,936,205, $0 and $919,429 during the years ended 2003,
               2002, and 2001, respectively, for such incentive fees.

          o    The  Investment  Adviser was  reimbursed by the Fund for directly
               allocable  administrative expenses paid by the Investment Adviser
               on  behalf  of  the  Fund.  Such  reimbursements  were  $125,400,
               $83,443,  and $117,894,  for 2003, 2002, and 2001,  respectively,
               and are  included in general and  administrative  expenses in the
               accompanying statements of operations.

(5)  Eligible Portfolio Companies and Investments

     (a)  Eligible Portfolio Companies.

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

     (b)  Investments.

          Investments are carried in the statements of assets and liabilities as
          of December  31,  2003,  and  December  31,  2002,  at fair value,  as
          determined  in good faith by the  Investment  Adviser,  subject to the
          approval  of the  Fund's  Board of  Directors.  The  convertible  debt
          securities held by the Fund generally have maturities between five and
          seven years and are convertible into the common stock of the issuer at
          a set conversion price at the discretion of the Fund. The common stock
          underlying  these  securities is generally  unregistered and thinly to


                                      F-21
<PAGE>

               RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
                    Notes to Financial Statements (Continued)
                        December 31, 2003, 2002 and 2001
                                   (Unaudited)

          moderately  traded  but is not  otherwise  restricted.  The  Fund  may
          register and sell such securities at any time with the Fund paying the
          costs of  registration.  Interest  on the  convertible  securities  is
          generally payable monthly.  The convertible debt securities  generally
          contain  embedded call options giving the issuer the right to call the
          underlying  issue.  In these  instances,  the  Fund  has the  right of
          redemption or conversion.  The embedded call option will generally not
          vest  until  certain  conditions  are  achieved  by the  issuer.  Such
          conditions  may require  that  minimum  thresholds  be met relating to
          underlying market prices, liquidity, and other factors.

(6)  Valuation of Investments

     On a quarterly  basis,  the Investment  Adviser prepares a valuation of the
     assets  of  the  Fund  subject  to the  approval  of the  Fund's  Board  of
     Directors. The valuation principles are as follows:


     o    Generally,  the guiding  principle  for  valuation is  application  of
          objective  standards.  The objective  standards for determining market
          prices and applying valuation  methodologies  govern in all situations
          except where a debt issuer is in default.

     o    Generally,  the fair value of debt securities and preferred securities
          convertible  into  common  stock  is the sum of (a) the  value of such
          securities  without  regard  to the  conversion  feature,  and (b) the
          value,  if any,  of the  conversion  feature.  The fair  value of debt
          securities without regard to conversion  features is determined on the
          basis of the terms of the debt security,  the interest yield,  and the
          financial  condition  of the  issuer.  The  fair  value  of  preferred
          securities without regard to conversion  features is determined on the
          basis of the terms of the preferred  security,  its dividend,  and its
          liquidation  and redemption  rights and absent  special  circumstances
          will  typically  be equal to the lower of cost or 120% of the value of
          the underlying common stock. The fair value of the conversion features
          of a  security,  if any,  are based on fair  values of the  derivative
          securities as of the relevant date less an allowance,  as appropriate,
          for costs of registration, if any, and selling expenses.

     o    Portfolio   investments  for  which  market   quotations  are  readily
          available and which are freely transferable are valued as follows: (i)
          securities  traded on a  securities  exchange  or the Nasdaq or in the
          over-the-counter  market  are valued at the  closing  price on, or the
          last trading day prior to, the date of valuation,  and (ii) securities
          traded in the over-the-counter market that do not have a closing price
          on, or the last trading day prior to, the date of valuation are valued
          at the average of the  closing bid and ask price for the last  trading
          day on,  or prior  to,  the date of  valuation.  Securities  for which


                                      F-22
<PAGE>
               RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
                    Notes to Financial Statements (Continued)
                        December 31, 2003, 2002 and 2001
                                   (Unaudited)


          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 value for the last trading day on, or prior
          to, the date of  valuation  to reflect  the  liquidity  caused by such
          restriction,  but taking into  consideration  the  existence,  or lack
          thereof,  of any contractual  right to have the securities  registered
          and freed from such trading restrictions.

     o    Because there is no independent and objective  pricing authority (i.e.
          a public  market) for  investments  in privately  held  entities,  the
          latest sale of equity  securities  by the entity  governs the value of
          the  enterprise.  This  valuation  method  causes the  Fund's  initial
          investment in the private entity to be valued at cost. Thereafter, new
          issuances of equity or equity-linked securities by a Portfolio Company
          will be used to  determine  enterprise  value as they will provide the
          most objective and independent  basis for determining the worth of the
          issuer.

          Therecan be no assurance  that stated market rates for private  equity
          valuations will stay constant, or that future equity raises will value
          the  Portfolio  Company at levels  equal to or greater  than the prior
          equity financing for the issuer. As a result,  the Fund's valuation of
          a  privately  held  Portfolio  Company  may  be  subject  to  downward
          adjustment  that would directly  impact the Fund's net asset value and
          which  could  result in a  substantial  reduction  in the  fund's  net
          assets.

     o    Where a Portfolio  Company is in default on a debt  instrument held by
          the Fund, and no market exists for that instrument, the fair value for
          the  investment  is  determined  on the basis of appraisal  procedures
          established in good faith by the Investment Adviser. This type of fair
          value  determination  is  based  upon  numerous  factors  such  as the
          Portfolio   Company's  earnings  and  net  worth,  market  prices  for
          comparative  investments (similar securities in the market place), the
          terms of the  Fund's  investment,  and a  detailed  assessment  of the
          Portfolio  Company's  future  financial  prospects.  In the  event  of
          unsuccessful  operations by a Portfolio Company,  the appraisal may be
          based upon an estimated net realizable  value when that  investment is
          liquidated.

     As of  December  31,  2003,  and  December  31,  2002,  the net  unrealized
     appreciation  associated with investments held by the Fund was $26,820,355,
     and $6,540,900 respectively.  For 2003, the Fund had gross unrealized gains
     of $37,430,589 and gross unrealized  losses of  ($10,610,234)  for book and
     federal income tax purposes.  For 2002, the Fund had gross unrealized gains
     of $13,970,011 and gross  unrealized  losses of  ($7,429,111)  for book and
     federal income tax purposes.

(7)  Restricted Securities

     As indicated on the schedule of  investments  as of December 31, 2003,  and
     December 31, 2002,  the Fund holds  investments  in shares of common stock,
     the sale of which is restricted.  These  securities have been valued by the
     Investment Adviser after considering  certain pertinent factors relevant to
     the individual securities (Note 6).

                                      F-23
<PAGE>
               RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
                    Notes to Financial Statements (Continued)
                        December 31, 2003, 2002 and 2001
                                   (Unaudited)

(8)  Purchase of Additional Shares

     The Fund issued no shares in 2003 or 2002 under the  dividend  reinvestment
     plan.


(9)  Distributions to Shareholders

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

          2003 -- Capital gain                        $5,439,647

          2002 -- Tax return of capital               $  435,172

     There were no  undistributed  earnings on a federal tax basis at the end of
     both 2003 and 2002.  The capital loss  carryover of $3,429,593  which would
     expire in 2010,  will be fully utilized in 2003. The tax cost of securities
     is identical to the book cost.

(10) Pending SEC Regulatory Issues


     The staff  ("Staff")  of the  Securities  and Exchange  Commission  ("SEC")
     orally informed the Fund's counsel of two significant  potential regulatory
     issues in connection  with the Staff's review of a  registration  statement
     for a proposed rights offering. According to the Fund, the issues are that:
     (1) the formula,  which has been in the Investment Advisory Agreement since
     1998,  that is used to calculate  the  incentive fee payable by the Fund to
     the  Investment  Adviser is, in the  Staff's  view,  inconsistent  with the
     requirements of the Advisers Act; and (2) the current  Investment  Advisory
     Agreement,  which has been in effect since 1998, may be invalid, because of
     (i) the inclusion of the incorrect  formula for  calculating  the incentive
     fee and (ii) the failure to file a preliminary proxy statement with the SEC
     prior to sending to the Fund's shareholders a final proxy statement seeking
     shareholder  approval for certain  amendments to that Agreement.  The Staff
     has  advised  the Fund that  these  issues  may  result  in the  Investment
     Advisory Agreement in effect since 1998 being deemed invalid.

     The Fund and the Investment Adviser,  with the advice of counsel,  disagree
     with  the  Staff  on each of these  issues.  Nonetheless,  the Fund and the
     Investment  Adviser  have taken and are taking  steps to address the issues
     raised  by  the  Staff.  These  include  the  payment  to the  Fund  by the
     Investment Adviser of $254,244.37,  in order to address the Staff's concern
     about the  formula  used to  calculate  the  incentive  fee (as well as the
     payment by the Investment  Adviser to the Fund of an additional  $52,479.19
     to address  certain other issues raised by the Staff).  The total amount of
     $306,723.56  is reflected in the Statement of Operations in commitment  and
     other fees income, as well as interest income. We believe,  with the advice
     of counsel,  that it is  probable  that the  invalidation  would not have a
     material  effect on the financial  condition or results of operation of the
     Fund, because even if the Investment Advisory Agreement is not valid, under


                                      F-24
<PAGE>

     state  law and other  legal  principles  the  Investment  Adviser  would be
     entitled to reasonable  compensation  for the services it has performed for
     the  Fund.  The  Fund's  board of  directors,  which  for this  purpose  is
     comprised solely of the independent  directors,  has determined that, under
     the  circumstances,  a reasonable  level of  compensation  is the amount of
     compensation  that was provided for in the Investment  Advisory  Agreement,
     less the  reimbursement  from the  Investment  Adviser  of  $254,244.37  to
     resolve  the issue  identified  by the  Staff  concerning  the  appropriate
     formula for calculating the incentive fee.

     The Fund,  with the advice of counsel,  also  disagrees with the Staff that
     the failure to file a  preliminary  proxy  statement  should  result in the
     Investment Advisory Agreement being deemed to be invalid.

     The Fund has been advised by counsel as follows:


     1.   While the Staff has not  definitively  advised  the Fund as to whether
          the manner in which the Fund has recalculated the incentive fee is, in
          the Staff's view,  consistent with the Advisers Act, the Fund believes
          that: (a) the recalculated  amount,  which the Investment  Adviser has
          paid to the Fund, is consistent  with the Advisers Act; and (b) in the
          event that the SEC or the Staff determine that the recalculated amount
          is not consistent with the Advisers Act and take action to require the
          Investment  Adviser  to  make an  additional  payment  to the  Fund to
          resolve the incentive fee issue, the amount of that additional payment
          ought not to be material to the Fund

     2.   The most likely legal actions the SEC could take that would affect the
          financial  condition of the Fund are to seek an order:  (a)  requiring
          the Investment  Adviser to pay to the Fund the difference  between the
          amount of the incentive fee that actually was paid by the Fund and the
          maximum amount that the SEC believes should have been paid by the Fund
          under the Advisers Act, plus  interest;  and (b) seeking to invalidate
          the  Investment  Advisory  Agreement  and  permitting  the  Investment
          Adviser to retain the lesser of the amount it actually  received under
          the Investment  Advisory  Agreement and its actual  expenses under the
          Investment Advisory Agreement; and

     3.   For the reasons  discussed above: (a) the Fund believes it is unlikely
          that a court would invalidate the Investment  Advisory Agreement under
          the Advisers Act; and (b) in the event that a court did invalidate the
          Investment  Advisory  Agreement  under  the  Advisers  Act,  the  Fund
          believes  that it is probable that the  invalidation  would not have a
          material effect on the financial  condition or results of operation of
          the Fund,  because  the Fund's  Board has agreed  that the  Investment
          Adviser  nonetheless  would be entitled to the amount  provided for in
          the Investment Advisory Agreement, less the amount paid to the Fund by
          the Investment  Adviser to resolve the incentive fee issue,  as a fair
          settlement  to resolve  potential  litigation  between the  Investment
          Adviser  and the Fund  seeking to  determine  the amount that would be
          owed  to  the  Investment   Adviser  under  State  law  and  equitable
          principles.

                                      F-25
<PAGE>
               RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
                    Notes to Financial Statements (Continued)
                        December 31, 2003, 2002 and 2001
                                   (Unaudited)

The Fund has also been  advised by counsel  that,  in the absence of  definitive
authority,  there are no absolute  assurances  that can be given with respect to
these issues.

(11) Financial Highlights

     Selected  per  share  data and  ratios  for  each  share  of  common  stock
     outstanding  throughout  the year ended December 31, 2003, and December 31,
     2002 are as follows:

                                                               2003       2002
                                                             -------    -------

     Net asset value, beginning of year                      $ 9.48    $ 12.50

     Net investment loss                                       (.32)      (.26)
     Net realized and unrealized gain (loss) on investments    6.88      (2.66)
                                                              -----    -------
              Total return from investment operations          6.56      (2.92)

     Distributions:
     From net capital gains                                   (1.25)         0
     Tax return of capital                                        0       (.10)
                                                             ------    -------
     Net asset value, end of year                            $14.79    $  9.48
                                                             ======    =======
     Per share market value, end of year                     $13.39    $  7.86

     Portfolio turnover rate                                  18.67%     12.13%

     Annual return (a)                                        70.36%    (23.76%)

     Ratio to average net assets (b):
     Net investment loss                                      (2.76%)    (2.31%)
     Expenses, excluding incentive fees                        3.08%      3.07%
     Expenses, including incentive fees                        6.85%      3.07%

     (a)  Annual  return was  calculated  by comparing the common stock price on
          the first day of the year to the common stock price on the last day of
          the year.

     (b)  Average net assets have been computed based on quarterly valuations.

                                      F-26
<PAGE>


Signatures

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

Date:
                        Renaissance Capital Growth & Income Fund III, Inc.
                                           (Registrant)

                        By: ____________________________________________
                            Russell Cleveland, Chairman and President

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been  signed  below by the  following  persons  on behalf of the Fund in the
capacities and on the date indicated Signatures.

Signature                     Capacity in Which Signed               Date
---------                     ------------------------               ----

____________________________
Russell Cleveland             Chairman, President and Director    ________, 2004


____________________________  Secretary and Treasurer             ________, 2004
Barbe Butschek


____________________________                                      ________, 2004
Ernest C. Hill                Director


____________________________                                      ________, 2004
Peter Collins                 Director


____________________________                                      ________, 2004
Edward O. Boshell, Jr.        Director



____________________________                                      ________, 2004
Charles C. Pierce, Jr.        Director


<PAGE>

                                INDEX OF EXHIBITS

3.1      Restated Articles of Incorporation(1)

3.2      Bylaws(2)

10.1     Dividend Reinvestment Plan(3)

10.2     Amendment No. 1 to Dividend Reinvestment Plan(4)

10.3     Investment Advisory Agreement(5)

10.4     Amendment No. 1 to Investment Advisory Agreement(6)

10.5     Custodial Agreement with The Frost National Bank(7)

14       Code of Ethics(8)


----------------------------
(1)  Incorporated  by reference  from Form N-2 as filed with the  Securities and
Exchange Commission February 25, 1994 (Registration No. 33-75758).

(2)  Incorporated  by reference  from Form N-2 as filed with the  Securities and
Exchange Commission February 25, 1994 (Registration No. 33-75758).

(3)  Incorporated  by reference  from Form N-2 as filed with the  Securities and
Exchange Commission February 25, 1994 (Registration No. 33-75758).

(4)  Incorporated  by reference  from Form N-2 as filed with the  Securities and
Exchange Commission February 25, 1994 (Registration No. 33-75758).

(5)  Incorporated  by reference  from Form N-2 as filed with the  Securities and
Exchange Commission February 25, 1994 (Registration No. 33-75758).

(6)  Incorporated  by reference  from Form 10-K for the year ended  December 31,
1999 as filed with the Securities and Exchange Commission.

(7)  Incorporated  by reference  from Form 10-K for the year ended  December 31,
2000 as filed with the Securities and Exchange Commission.

(8) Incorporated by reference from Form 10-Q for the quarter ended June 30, 2002
as filed with the Securities and Exchange Commission.

</TEXT>
</DOCUMENT>
</SUBMISSION>
