COMMENTARY

April 7, 2014

Dear Investors,

After a roller coaster start to the year, we again find ourselves in the midst of another period of market weakness. The brunt of this selloff has been mainly in the highest growth areas of the markets, with the broader indices holding up for the most part. Geopolitical worries have added to these risks, but concerns regarding the Fed have abated for now, and the broader economic numbers have continued to show improvement. With valuations still at elevated levels, it is not terribly surprising that we would experience more choppiness in stock prices. Our belief has been (and still is) that while business activity overall should pick up a bit as the year progresses, the market will likely take a more discriminating view and judge each company and sector based on its individual performance.

Jacob Internet Fund

The Internet fund added two new holdings in the quarter: Applied Optoelectronics and Numerex. Applied Optoelectronics is a manufacturer of optical devices mainly for the cable and telecommunications industries. With the acceleration of fiber-to-the-home-services being offered, we are expecting a significant increase in demand for the company's highly specialized products. This is in addition to the already sizable growth in large data centers, which has been driving Applied's strong growth to date. Considering the growth potential over the next several years, and the fact the company is already profitable, Applied's valuation seems very reasonable.

Numerex operates in one of the most exciting growth opportunities in technology today: machine-to-machine (MTM) software and services. More and more devices will have to be Internet enabled in order to take advantage of an increasingly connected world, and Numerex is one of the leading companies offering solutions for this market today.

Jacob Small Cap Fund

In addition to the above-mentioned names, the Small Cap fund also added three more new positions: Array BioPharma, Foundation Medicine and E-House. Array's small molecule drug discovery platform has been responsible for the clinical development of more than a dozen compounds, including a couple of targeted cancer drugs which are currently in pivotal Phase III trials. We expect this to be a crucial year in terms of new clinical data for Array, which has generated more than $600 million in payments from its various partners throughout the years.

Foundation Medicine's pan-cancer diagnostic tests are helping oncologists guide this kind of personalized treatment, and will likely be an increasingly important tool as more targeted cancer-fighting drugs get approved by the FDA. Foundation is facing some meaningful hurdles - most notably, a difficult reimbursement model - but even at this early stage, they have established a leading brand name in cancer diagnostics and demonstrated impressive growth in the number of test results delivered.

E-House, a Chinese real estate company and prior holding of the Internet fund, has built out a significant e-commerce business to offer home buyers direct discounts and help developers sell more properties. This model's popularity has taken off, reinvigorating E-House's growth in a period where the Chinese real estate market has been somewhat weak. We expect this business momentum will likely result in E-House continuing to grow near-term revenue and earnings well ahead of expectations.

Jacob Micro Cap Growth Fund

In addition to Array BioPharma, Applied Optoelectronics and Numerex, the Micro Cap fund added new positions in Vringo, Netlist, Lantronix and Cancer Genetics.

Vringo has accumulated a number of foundational patents within the fields of online search and mobile telecommunications, and is pursuing a comprehensive legal strategy in order to receive monetary recognition of those innovations. The impressive team has already settled with Microsoft and won a key case against Google, which if the appeal is upheld could potentially lead to several hundred million dollars in revenue or more by the time the patent expires.

Netlist provides high-performance memory technologies to leading computer and chip manufacturers. The company has begun to generate momentum with its new HyperCloud and Vault storage technologies, seeing revenue growth at the end of last year for the first time in almost two years, while also working to defend and potentially license some very interesting intellectual property in this space.

Lantronix was a pioneer in the surging machine-to-machine market we discussed earlier in this letter, and has begun to see momentum with a couple of its newer wireless products, such as a print server for Apple's mobile devices. With a renewed focus on the so-called Internet of Things, as evidenced in part by Google's multibillion dollar acquisition of Nest, we believe Lantronix's product line and technology would be very attractive to a larger equipment provider.

Cancer Genetics, meanwhile, operates a small, but well-regarded cancer diagnostic laboratory, taking advantage of the same targeted therapy trends we discussed earlier with Foundation Medicine. The company already has an array of proprietary genomic tests focused on specific cancers, such as one of its newest offerings in cervical cancer, and continues to work on developing broader diagnostic tests through a joint venture with the Mayo Clinic.

Jacob Wisdom Fund

The Wisdom fund had a busy quarter as well, adding five new positions: Eli Lilly, Union Pacific, DaVita Healthcare, Viacom and Directv. Eli Lilly is a global pharmaceutical company that has been diligently building its pipeline of new drugs through acquisitions, licensing deals and in-house research and development in anticipation of two significant drugs losing their U.S. patent protection in 2013. Thanks to these efforts, the company currently has a wide range of late stage new drug candidates that should not only offset the impact of these losses, but may put them back on a strong growth trajectory.

Union Pacific is the largest North American railroad offering freight transportation services to a wide variety of customers. Management's push to increase operating efficiency during the last decade has led to levels of cash flow growth, return on invested capital and operating margins that are above all of its peers.

DaVita Healthcare provides kidney dialysis services and related lab work primarily in outpatient dialysis centers and contracted hospitals. As the U.S. population ages, the need for kidney dialysis and end-stage renal services has grown, providing a significant tailwind to what has been a consistently high-return, strong cash flow business.

Viacom is a leading entertainment content company that has thrived over the past five years due to an improving economy and the careful nurturing of its very popular entertainment brands. Additionally, management has been aggressively increasing the dividend and buying back stock (about 25% of outstanding shares) over the last three years.

DirecTV is the second largest multi-channel video distributor in the United States with more than twenty million subscribers. In a relatively saturated U.S. market, the company has been able to consistently grow its operating cash flow by upgrading the average credit quality of its subscriber base, holding the line on costs, and constantly improving its content offerings.

Ryan Jacob
Portfolio Manager
Jacob Internet Fund
Jacob Small Cap Growth Fund

Darren Chervitz
Portfolio Manager
Jacob Micro Cap Growth Fund

Frank Alexander
Portfolio Manager
Jacob Wisdom Fund

www.jacobmutualfunds.com

Mutual fund investing involves risk. Principal loss is possible. There are specific risks inherent in investing in the Internet area, particularly with respect to smaller capitalized companies and the high volatility of internet stocks. All four funds may invest in foreign securities, which involve greater volatility and political, economic and currency risks, and differences in accounting methods. These risks are greater in emerging markets. The Small Cap Fund, Internet Fund and Wisdom Fund will invest in smaller companies, which involve additional risks, such as limited liquidity and greater volatility. The Wisdom Fund may invest in Real Estate Investment Trusts (REITs) which may be affected by economic, legal, cultural, environmental or technological factors that affect property values, rents or occupancies of real estate related to the Fund's holdings. Investments in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities. The market value of convertible securities tends to decline as interest rates increase and, conversely, to increase as interest rates decline. In addition, convertible securities generally offer lower interest or dividend yields than non-convertible securities of similar quality.

Investments in micro capitalization companies may involve greater risks, as these companies tend to have limited product lines, markets and financial or managerial resources. Micro cap stocks often also have a more limited trading market, such that the Adviser may not be able to sell stocks at an optimal time or price. In addition, less frequently-traded securities may be subject to more abrupt price movements than securities of larger capitalized companies.

Any tax or legal information provided is merely a summary of our understanding and interpretation of some of the current income tax regulations and is not exhaustive. Investors must consult their tax advisor or legal counsel for advice and information concerning their particular situation. Neither the Fund nor any of its representatives may give legal or tax advice.

The information provided herein represents the opinion of Jacob Mutual Funds and is not intended to be a forecast of future events, a guarantee of future results, nor investment advice.

Please refer to the prospectus located at www.jacobmutualfunds.com/pdfs/Prospectus_All.pdf for more complete information including risks, fees and expenses.

Click here to view the holdings for the Jacob Internet Fund, as of February 28, 2014.
Click here to view the holdings for the Jacob Small Cap Growth Fund, as of February 28, 2014.
Click here to view the holdings for the Jacob Micro Cap Growth Fund, as of February 28, 2014.
Click here to view the holdings for the Jacob Wisdom Fund, as of February 28, 2014.

Please note that these holdings are subject to change and should not be considered a recommendation to buy or sell any security.

Must be preceded or accompanied by a prospectus.

Quasar Distributors, LLC, Distributor 4/14