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SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 20549

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FORM 10-K

(Mark One)

|ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------
|  | for the fiscal year ended September 30, 2002                                        

OR

|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------
|  | for the transition period from  to                                                      

Commission file number 814-00237

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GLADSTONE CAPITAL CORPORATION(Exact name of registrant as specified in its charter)

Maryland

54-2040781(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)1616 Anderson Road, Suite 208
McLean, Virginia(Address of principal executive offices)

22102(Zip Code)


(703) 286-7000(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities
registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value per share

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    ý    NO    o

The
aggregate market value of the voting stock held by non-affiliates of the Registrant on December 10, 2002, based on the closing price on that date of $16.08 on the
Nasdaq National Market, was $150,247,548. For the purposes of calculating this amount only, all directors and executive officers of the Registrant have been treated as affiliates.

There
were 10,071,844 shares of the Registrant's Common Stock, $0.001 par value, outstanding as of December 10, 2002.

Documents Incorporated by Reference.Portions of the Registrant's Proxy Statement relating to the Registrant's 2003 Annual
Meeting of Stockholders are incorporated by reference into Part III of this Report.

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

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GLADSTONE CAPITAL CORPORATION  FORM 10-K FOR THE FISCAL YEAR  ENDED SEPTEMBER 30, 2002        TABLE OF CONTENTS

|PART I     |  | Item 1  |  | Business                                                                              |  | 1 
|---------- |  | ------- |  | ------------------------------------------------------------------------------------- |  | --
|           |  | Item 2  |  | Properties                                                                            |  | 20
|           |  | Item 3  |  | Legal Proceedings                                                                     |  | 20
|           |  | Item 4  |  | Submission of Matters to a Vote of Security Holders                                   |  | 20
|PART II    |  | Item 5  |  | Market for Registrant's Common Equity and Related Stockholder Matters                 |  | 20
|           |  | Item 6  |  | Selected Financial Data                                                               |  | 21
|           |  | Item 7  |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 23
|           |  | Item 8  |  | Financial Statements and Supplementary Data                                           |  | 32
|           |  | Item 9  |  | Changes and Disagreements with Accountants on Accounting and Financial Disclosure     |  | 48
|PART III   |  | Item 10 |  | Directors and Executive Officers of the Registrant                                    |  | 49
|           |  | Item 11 |  | Executive Compensation                                                                |  | 49
|           |  | Item 12 |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 49
|           |  | Item 13 |  | Certain Relationships and Related Transactions                                        |  | 49
|           |  | Item 14 |  | Controls and Procedures                                                               |  | 49
|PART IV    |  | Item 15 |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                      |  | 50
|SIGNATURES |  | 52     

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PART I

Item 1. Business

Gladstone Capital Corporation is a specialty finance company that was incorporated under the General Corporation Laws of the State of Maryland on May 30,
2001 and that commenced its initial public offering on August 24, 2001. We seek to achieve a high level of current income by investing in debt securities, consisting primarily of senior notes,
senior subordinated notes and junior subordinated notes, of established private businesses that are backed by leveraged buyout funds, venture capital funds or others. We also seek to provide our
stockholders with long-term capital growth through the appreciation in the value of warrants or other equity instruments that we may receive when we make loans. Our headquarters are in
McLean, Virginia, a suburb of Washington, DC and we have offices in New York, New York and Pittsburgh, Pennsylvania. We have elected to be treated as a business development company under the
Investment Company Act of 1940, as amended (the "1940 Act").

David
Gladstone, our chairman and chief executive officer, has over 25 years of experience in making loans to, and investing in, small and medium-sized companies at Gladstone
Capital Corporation, Allied Capital Corporation and American Capital Strategies Ltd. Allied Capital Corporation is a publicly traded subordinated debt lender and American Capital Strategies is
a publicly traded buyout and subordinated debt lender.

Terry
Lee Brubaker, our president and chief operating officer, has over 25 years of experience in acquisitions and managing companies after an acquisition. Prior to joining
Gladstone Capital Corporation, he was a member of the management team that designed and implemented the acquisition strategy of James River Corporation.

Our
chief financial officer, Harry Brill, brings significant experience from his role as the chief accounting officer of Allied Capital where he was responsible for the public filings of
a family of five public companies and oversaw the preparation of the operating reports and financial statements of these companies and of three private funds.

In
addition to Messrs. Gladstone and Brubaker, we currently have a chief investment officer and five principals who are involved in structuring and arranging financing for small
and medium-sized businesses. As our business expands, we plan to hire additional principals with business lending experience. We believe that the expertise of our investing principals will help us to
be successful in lending to small and medium-sized businesses.

We
typically make loans to companies that are substantially owned by leveraged buyout or venture capital funds. Messrs. Gladstone and Brubaker have an extensive referral network
of venture capitalists, leveraged buyout funds, investment bankers, attorneys, commercial bankers and business and financial brokers. We believe that these entities have been, and will continue to be,
an important source of loan opportunities. We intend to enter into additional informal relationships with other leveraged buyout funds and venture capital funds, but we can not assure you that we will
be able to do so or that any such relationships will lead to the origination of loans.

We
have a wholly owned subsidiary, Gladstone Advisers, Inc., through which we conduct our day-to-day administrative functions and provide managerial
assistance to our portfolio companies.

STRATEGY

Our strategy is to make loans at favorable interest rates to small and medium-sized businesses that we believe have traditionally been underserved by conventional
lenders. We use the loan referral networks of Messrs. Gladstone and Brubaker and of our principals to identify and make senior and subordinated loans to selected businesses that we believe do
not have sufficient access to traditional sources of lending. We make loans to borrowers that need funds to finance growth, restructure their

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balance sheets or effect a change of control, all of which we believe are typically underserved by banks and other traditional institutional lenders. Our business strategy contemplates that we will
achieve a high level of current income by investing in debt securities, consisting primarily of senior notes, senior subordinated notes and junior subordinated notes, of established private businesses
that are backed by leveraged buyout funds, venture capital funds or others. In addition, from time to time we might acquire existing loans that meet this profile from leveraged buyout funds, venture
capital funds and others. We also seek to provide our stockholders with long-term capital growth through the appreciation in the value of warrants or other equity instruments that we might
receive when we make loans. Our financial plan presumes that (1) the net capital gains from the sale of the warrants (as well as other profit enhancements) we receive in connection with our
lending activities will exceed any losses we may experience from loans that are not repaid, and (2) the managerial assistance fee income we derive from assisting our portfolio companies will
provide us with a source of revenue that approximates our operating expenses (excluding interest expense). We cannot assure you that we will be able to achieve our investment objectives or that our
business strategy will be successful.

We
believe that we are well-positioned to provide financing to small and medium-sized businesses that are undergoing a change of ownership, including
management-led and third party leveraged buyouts, and to those businesses that have good growth characteristics. We are not burdened with the capital and other regulatory requirements of
the banking and savings and loan industries and we have relatively low overhead and administrative expenses. Moreover, our strategy of accepting warrants to purchase stock of our borrowers is intended
to closely align our interests with those of our portfolio companies, thereby reducing transaction costs, conveying our commitment to the borrowers and enhancing our attractiveness as a financing
source. Perhaps most importantly, we believe that we have the experience and expertise to satisfy the financing needs of such businesses. In particular, we believe that we benefit from
Mr. Gladstone's 25 years of experience in financing small to medium-sized private businesses and Mr. Brubaker's extensive experience in acquisitions and operations to realize a
competitive advantage. We believe that our established network of loan referral sources, consisting of relationships established over many years by Messrs. Gladstone and Brubaker and our
principals will generate opportunities to identify and make senior and subordinated loans to selected businesses that satisfy our investment criteria. We intend to enter into additional informal
relationships with leveraged buyout funds and venture capital funds, but we can not give any assurance that we will be able to do so. We target small and medium-sized private businesses that meet
certain criteria, including the potential for growth, adequate assets for loan collateral, experienced management teams with significant ownership interest in the business, adequate capitalization,
profitable operations based on cash flow and potential opportunities for us to realize appreciation and gain liquidity in our various equity positions. We may achieve liquidity in an equity position
through a merger or acquisition of the borrower, a public offering of the borrower's stock or by exercising our right to require the borrower to buy back our warrants, although we can not assure you
that we will always have these rights.

As
a business development company, we make available significant managerial assistance to our portfolio companies. Such assistance will typically involve closely monitoring the
operations of each borrower, participating in its board and management meetings, being available for consultation with its officers and providing organizational and financial guidance.

We
typically invest in senior, senior subordinated and junior subordinated notes. Our loans typically range from $5 million to $15 million, mature in no more than seven
years and accrue interest at a fixed or variable rate that exceeds the prime rate. A number of our loans have a provision that calls for some portion of the interest payments to be deferred and added
to the principal balance so that the interest is paid, together with the principal, at maturity. This form of deferred interest is often called "paid in kind" (or "PIK") interest, and, when earned, we
record PIK income as interest income and add the PIK interest to the principal balance of the loans.

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Because
our loans will generally consist of subordinated debt of private companies who typically cannot or will not expend the resources to have their debt securities rated by a credit
rating agency, we expect that most, if not all, of the debt securities we acquire will be unrated. We cannot accurately predict what ratings these loans might receive if they were in fact rated, and
therefore we cannot determine whether or not they could be considered to be "investment grade" quality.

To
the extent possible, our loans generally are collateralized by a security interest in the borrower's assets though we may not have the first claim on these assets. Interest payments
on loans we make will generally be made monthly or quarterly (except to the extent of any PIK interest) with amortization of principal generally being deferred for several years. The principal amount
of the loans and any accrued but unpaid interest will generally become due at maturity at five to seven years. We will focus on making loans accompanied by warrants to purchase stock in the borrowers.
These warrants will typically have an exercise price equal to the fair value of the portfolio company's common stock at the time of the loan and entitle us to purchase a modest percentage of the
borrower's stock.

From
time to time, a portfolio company may request additional financing, providing us with additional lending opportunities. We will consider such requests for additional financing under
the criteria we have established for initial investments and we anticipate that any debt securities we acquire in a follow-on financing will have characteristics comparable to those issued
in the original financing. In some situations, our failure, inability or decision not to make a follow-on investment may be detrimental to the operations or survival of a portfolio company
and thus jeopardize our investment in that borrower.

As
noted above, we expect to receive warrants to purchase stock in many of our borrowers. If a financing is successful, not only will our debt securities have been repaid with interest,
but we will be in a position to realize a gain on the accompanying equity interests. The opportunity to realize such gain may occur if the borrower is sold to new owners or if it makes a public
offering of its stock. In most cases, we will not have the right to require that a borrower undergo an initial public offering by registering securities under the Securities Act of 1933, to which we
refer as the Securities Act, but we generally will have the right to sell our equity interests in any subsequent public offering by the borrower. Even when we have the right to participate in a
borrower's public offering, the underwriters might insist, particularly if we own a large amount of equity securities, that we retain all or a substantial portion of our shares for a specified period
of time. Moreover, we may decide not to sell an equity position even when we have the right and the opportunity to do so. Thus, although we expect to dispose of an equity interest after a certain
time, situations may arise in which we hold equity securities for a longer period.

In
certain cases, we may receive the right, to which we refer as a put right, to require the borrower to repurchase the warrants from us. When no public offering is available, we may
exercise our put rights to dispose of our equity interest in the borrower, although our ability to exercise put rights may be limited or nonexistent if a business does not have the money to repurchase
our warrants. Similarly, we anticipate that we may obtain the right, to which we refer as an unlocking right, to require that the borrower purchase our warrants or stock if it rejects a bona fide
third party acquisition offer. The unlocking rights may allow us to sell our equity interests back to the borrower at the price offered by the potential acquirer.

In
addition to the put rights and unlocking rights described above, when one of our portfolio companies does go public, we may undertake hedging strategies with regard to our equity
interests in it. We may mitigate risks associated with the volatility of publicly traded securities by, for instance, selling securities short or writing or buying call or put options. Hedging against
a decline in the value of such investments in public companies would not eliminate fluctuations in the values of such investments or
prevent losses if the values of such investments decline, but would establish other investments designed to gain from those same developments. Therefore, by engaging in hedging transactions we can

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moderate the decline in the value of our hedged investments in public companies. However, such hedging transactions would also limit our opportunity to gain from an increase in the value of our
investment in the public company. While we currently hold no securities of any publicly-traded companies, and therefore have no immediate plans to undertake any such hedging activities, it may be
prudent for us to do so in the future. Hedging strategies do pose risks to us and our stockholders, however we believe that such activities, because they will be limited to only a portion of our
portfolio, are manageable.

Moreover,
Section 12(a)(3) of the 1940 Act prohibits us "in contravention of such rules and regulations or orders as [the SEC] may prescribe as necessary
or appropriate in the public interest or for the protection of investors . . . to effect a short sale of any security . . . ." However, to date, the SEC has not promulgated regulations under this
statute. It is possible that such regulations could be promulgated in the future in a way that would require us to change any hedging strategies that we may adopt. We will only engage in any hedging
activities in compliance with applicable law and regulations.

SELECTION OF LOAN OPPORTUNITIES

We have identified certain characteristics that we believe are important to profitably lend to small and medium-sized businesses. The criteria listed below
provide a general guidepost for our lending and investment decisions, although not all of these criteria may be followed in each instance.



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Loan Origination Process

To originate loans, our lending officers use an extensive referral network comprised of venture capitalists, leveraged buyout funds, investment bankers,
attorneys, accountants, commercial bankers and business brokers. We intend to enter into additional informal relationships with leveraged buyout funds and venture capital funds, but we can give no
assurance that we will be able to do so.

Approval Process

Our lending professionals review informational packages in search of potential financing opportunities and conduct a due diligence investigation of each applicant
that passes an initial screening process. This due diligence investigation generally includes one or more on-site visits, a review of the potential borrower's historical and projected
financial information, interviews with management, employees, customers and vendors of the applicant and background checks and research on the applicant's product, service or particular industry. Upon
completion of the due diligence investigation, our financial professional creates a borrower profile summarizing the prospective borrower's historical financial statements, industry and management
team and analyzing its conformity to our general investment criteria. Our lending professional then presents this profile to our credit committee, which is comprised of Messrs. Gladstone and
Brubaker. Our credit committee must unanimously approve each loan, and each member of our board of directors must review each financing.

TEMPORARY INVESTMENTS

Pending investment in other types of "qualifying assets," we invest our otherwise uninvested cash primarily in cash, cash items, government securities or
high-quality debt securities maturing in one year or less from the time of investment, to which we refer collectively as temporary investments, so that 70% of our assets are qualifying
assets. For information regarding regulations to which we are subject and the definition of "qualifying assets," see "Regulation." Typically, we invest in US Treasury bills or in repurchase
obligations of a "primary dealer" in government securities, as designated by the Federal Reserve Bank of New York, or of any other dealer whose credit has been established to the satisfaction of our
board of directors. There is no percentage restriction on the proportion of our assets that may be invested in such repurchase agreements. A repurchase agreement involves the purchase by an investor,
such as us, of a specified security and the simultaneous agreement by the seller to repurchase it at an agreed-upon future date and at a price which is greater than the purchase price by
an amount that reflects an agreed-upon interest rate. Such interest rate is effective for the period of time during which the investor's money is invested in the arrangement and is related
to current market interest rates rather than the coupon rate on the purchased security. Our custodian, or the correspondent in its account with the Federal Reserve/Treasury Book Entry System, will be
required to constantly maintain underlying securities in an amount at least equal to the repurchase price. If the seller were to default on its repurchase obligation, we might suffer a loss to the
extent that the proceeds from the sale of the underlying security were less than the repurchase price. A seller's bankruptcy could delay or prevent a sale of the underlying securities. Our board of
directors has established procedures, which it will review periodically, requiring us to monitor the creditworthiness of the dealers with which we enter into repurchase agreement transactions.

COMPETITION

A large number of entities compete with us and make the types of investments that we seek to make in small and medium-sized privately-owned businesses. Such
competitors include private equity funds, leveraged buyout funds and venture capital funds, investment banks and other equity and non-equity based investment funds, and other financing
sources, including traditional financial services companies such as commercial banks. Many of our competitors are substantially larger than we are and

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have considerably greater financial, technical and marketing resources than we do. For example, some competitors may have a lower cost of funds and access to funding sources that are not available to
us. In addition, certain of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments, establish more
relationships and build their market shares. Furthermore, many of these competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a business development company. We
cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations.

EMPLOYEES

We currently have thirteen employees. We believe that our relations with our employees are excellent. We intend to hire additional professionals with business
lending experience as our business grows and to maintain a relatively low level of overhead by outsourcing most job functions not directly related to marketing, underwriting our investments or
executive management.

LEVERAGE

For the purpose of making investments other than temporary investments and to take advantage of favorable interest rates, we intend to issue senior debt
securities, up to the maximum amount permitted by the 1940 Act. The 1940 Act currently permits us to issue senior debt securities and preferred stock, to which we refer collectively as senior
securities, in amounts such that our asset coverage, as defined in the 1940 Act, is at least 200% after each issuance of senior securities. We may also incur such indebtedness to repurchase our common
stock. As a result of issuing senior securities, we would become exposed to the risks of leverage. Although borrowing money for investments increases the potential for gain, it also increases the risk
of a loss. A decrease in the value of our investments will have a greater impact on the value of our common stock if we borrow money to make investments. There is a possibility that the costs of
borrowing could exceed the income we receive on the investments we make with such borrowed funds. In addition, our ability to pay dividends or incur additional indebtedness would be restricted if
asset coverage is less than twice our indebtedness. If the value of our assets declines, we might be unable to satisfy that test. If this happens, we may be required to liquidate a portion of our loan
portfolio and repay a portion of our indebtedness at a time when a sale may be disadvantageous. Furthermore, any amounts that we use to service our indebtedness will not be available for distributions
to our stockholders. Our board of directors is authorized to provide for the issuance of preferred stock with such preferences, powers, rights and privileges as it deems appropriate, except that such
an issuance must adhere to the requirements of the 1940 Act. See "RegulationBusiness Development CompanyAsset Coverage" for a discussion of leveraging constraints. We do not
intend to leverage ourselves so long as we hold cash or temporary investments in an amount sufficient to fund the investments, other than temporary investments, we plan to make in the next nine
months.

SECURITIZATION

In an effort to increase our returns and the number of loans that we can make, we anticipate that we may seek to securitize our loans. To securitize loans, we
would create a wholly-owned subsidiary and contribute a pool of loans to it. Then we would seek to have the pool of loans in the subsidiary rated by rating agencies. Once the pool of loans is rated,
we would sell interests in the pool of loans to purchasers who we would expect to be willing to accept a lower interest rate to invest in investment-grade loan pools. We would use the proceeds of such
sales to pay down bank debt or to make or purchase new loans. There are risks associated with this strategy since we intend to retain the non-investment grade portion of the subsidiary,
rather than to securitize it, and the unrated portion of

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the subsidiary is the one most likely to generate losses. We do not intend to securitize any warrants we receive in connection with any loans we make.

INVESTMENT OBJECTIVES AND POLICIES

We seek to achieve a high level of current income by investing in debt securities, consisting primarily of senior notes, senior subordinated notes and junior
subordinated notes, of established private businesses that are backed by leveraged buyout funds, venture capital funds or others, with a particular emphasis on senior subordinated notes. We also seek
to provide our stockholders with long-term capital growth through the appreciation in the value of warrants or other equity instruments that we may receive when we make loans. The
following restrictions, along with these investment objectives, are our only fundamental policies, which are policies that may not be changed without the approval of the holders of the majority of our
outstanding voting securities, as defined in the 1940 Act. For a fuller explanation of the regulatory framework in which we operate, see "Regulation." The percentage restrictions set forth below,
other than the restriction pertaining to the issuance of senior securities, as well as those contained elsewhere in this Form 10-K, apply at the time we effect a transaction, and a
subsequent change in a percentage resulting from market fluctuations or any cause other than an action by us will not require us to dispose of portfolio securities or to take other action to satisfy
the percentage restriction. We will at all times conduct our business so as to retain our status as a business development company. In order to retain that status, we may not acquire any assets (other
than non-investment assets necessary and appropriate to our operations as a business development company) if, after giving effect to such acquisition, the value of our "qualifying assets"
is less than 70% of the value of our total assets. We anticipate that the securities we seek to acquire (provided that we control or, through our officers or other participants in the financing
transaction, make significant managerial assistance available to the issuers of these securities), as well as temporary investments, will generally be qualifying assets.

We
may invest up to 100% of our assets in securities acquired directly from issuers in privately negotiated transactions. With respect to such securities, we may, for the purpose of
public resale, be deemed an "underwriter" as that term is defined in the Securities Act. We may invest up to 20% of our assets in securities of a particular issuer. We may exceed this limitation in
connection with bridge financings, although these bridge investments will never exceed 25% of our total assets at any time. We do not intend to concentrate our investments in any particular industry
or group of industries. However, it is possible that, as the values of our portfolio companies change, one industry or a group of industries may comprise in excess of 25% of the value of our total
assets.

We
will at all times endeavor to conduct our business so as to retain our status as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986 (the "Code").
In order to do so, we must meet income source, asset diversification and annual distribution requirements. We may issue senior securities, such as debt or preferred stock, to the extent permitted by
the 1940 Act for the purpose of making investments, to fund share repurchases, or for temporary emergency or other purposes. For a discussion of the risks associated with the resulting leverage, see
"BusinessLeverage"
and "Risk FactorsOur business is dependent upon external financing which may expose us to the risks associated with leverage."

We
will not (1) act as an underwriter of securities of other issuers (except to the extent that we may be deemed an "underwriter" of securities we purchase that must be registered
under the Securities Act before they may be offered or sold to the public); (2) purchase or sell real estate or interests in real estate or real estate investment trusts (except that we may
(a) purchase and sell real estate or interests in real estate in connection with the orderly liquidation of investments, (b) own the securities of companies or participate in a
partnership or partnerships that are in the business of buying, selling or developing real estate, or (c) finance the purchase of real estate by our portfolio companies); (3) sell
securities short (except with regard to managing the risks associated with publicly-traded securities

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issued by our portfolio companies); (4) purchase securities on margin (except to the extent that we may purchase securities with borrowed money); (5) write or buy put or call options
(except (i) to the extent of warrants or conversion privileges in connection with our acquisition financing or other investments and rights to require the issuers of such investments or their
affiliates to repurchase them under certain circumstances, (ii) with regard to managing risks associated with publicly-traded securities issued by our portfolio companies, or (iii) with
regard to managing the risks associated with interest rate fluctuations); (6) engage in the purchase or sale of commodities or commodity contracts, including futures contracts (except where
necessary in working out distressed loan or investment situations or in managing the risks associated with interest rate fluctuations); or (7) acquire more than 3% of the voting stock of, or
invest more than 5% of our total assets in, any securities issued by any other investment company (except as they may be acquired as part of a merger, consolidation or acquisition of assets). That
portion of our investments that is in securities issued by other investment companies may subject our stockholders to additional expenses.

INVESTMENT ADVISOR

We have no investment advisor and are internally managed by our executive officers under the supervision of our board of directors.

REGULATION

We are a closed-end, non-diversified, management investment company that has elected to be regulated as a business development company
under Section 54 of the 1940 Act. As such, we are subject to regulation under the 1940 Act. The 1940 Act contains prohibitions and restrictions relating to transactions between business
development companies and their affiliates, principal underwriters and affiliates of those affiliates or underwriters and requires that a majority of the directors be persons other than "interested
persons," as defined in the 1940 Act. In addition, the 1940 Act provides that we may not change the nature of our business so as to cease to be, or to withdraw our election as, a business development
company unless approved by a majority of our outstanding voting securities.

Regulated Investment Company

In order to maintain the qualification for treatment as a regulated investment company, or RIC, under Subchapter M of the Code, we must distribute to our
stockholders, for each taxable year, at least 90% of our investment company taxable income, which is generally our ordinary income plus short-term capital gains. We refer to this as the
annual distribution requirement. We must also meet several additional requirements, including:



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If
we are unable to qualify for treatment as a RIC, we will be subject to tax on all of our taxable income at regular corporate rates. We would not be able to deduct distributions to
stockholders, nor would we be required to make such distributions. Distributions would be taxable to our stockholders as ordinary dividend income to the extent of our current and accumulated earnings
and profits. Subject to certain limitations under the Code, corporate distributees would be eligible for the dividends received deduction.

Distributions
in excess of our current and accumulated earnings and profits would be treated first as a return of capital to the extent of the stockholder's tax basis, and then as a gain
realized from the sale or exchange of property. If we fail to meet the RIC requirements in our first taxable year or, with respect to later years, for more than two consecutive years and then seek to
requalify as a RIC, we would be required to recognize gain to the extent of any unrealized appreciation on our assets unless we make a special election to pay corporate-level tax on any such
unrealized appreciation recognized during the succeeding 10-year period. Absent such special election, any gain we recognized would be deemed distributed to our stockholders as a taxable
distribution. If we qualify as a RIC and distribute to stockholders each year in a timely manner at least 90% of our investment company taxable income, we will not be subject to federal income tax on
the portion of our taxable income and gains we
distribute to stockholders. We would, however, be subject to a 4% nondeductible federal excise tax if we do not distribute, actually or on a deemed basis, 98% of our income, including both ordinary
income and capital gains. The excise tax would apply only to the amount by which 98% of our income exceeds the amount of income we distribute, actually or on a deemed basis, to stockholders.

We
will be subject to regular corporate income tax, currently at rates up to 35%, on any undistributed income, including both ordinary income and capital gains. We intend to retain some
or all of our capital gains, but to designate the retained amount as a deemed distribution. In that case, among other consequences, we will pay tax on the retained amount, each stockholder will be
required to include its share of the deemed distribution in income as if it had been actually distributed to the stockholder and the stockholder will be entitled to claim a credit or refund equal to
its allocable share of the tax we pay on the retained capital gain. The amount of the deemed distribution net of such tax will be added to the stockholder's cost basis for its common stock. Since we
expect to pay tax on any retained capital gains at our regular corporate capital gain tax rate, and since that rate is in excess of the maximum rate currently payable by individuals on
long-term capital gains, the amount of tax that individual stockholders will be treated as having paid will exceed the tax they owe on the capital gain dividend and such excess may be
claimed as a credit or refund against the stockholder's other tax obligations. A stockholder that is not subject to US federal income tax or tax on long-term capital gains would be
required to file a US federal income tax return on the appropriate form in order to claim a refund for the taxes we paid. In order to utilize the deemed distribution approach, we must provide
written notice to the stockholders prior to the expiration of 60 days after the close of the relevant tax year. We will also be subject to alternative minimum tax, but any tax preference items
would be apportioned between us and our stockholders in the same proportion that dividends, other than capital gain dividends, paid to each stockholder bear to our taxable income determined without
regard to the dividends paid deduction.

If
we acquire debt obligations that were originally issued at a discount, which would generally include loans we make that are accompanied by warrants, that bear interest at rates that
are not either fixed rates or certain qualified variable rates or that are not unconditionally payable at least annually over the life of the obligation, we will be required to include in taxable
income each year a portion of the "original issue discount" that accrues over the life of the obligation. Such original issue discount will be included in our investment company taxable income even
though we receive no cash corresponding to such discount amount. As a result, we may be required to make additional distributions corresponding to such original issue discount amounts in order to
satisfy the annual distribution requirement and to continue to qualify as a RIC or to avoid the 4% excise tax. In this

9

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event, we may be required to sell temporary investments or other assets to meet the RIC distribution requirements.

For
any period during which we qualify for treatment as a RIC for federal income tax purposes, distributions to our stockholders attributable to our investment company taxable income
generally will be taxable as ordinary income to stockholders to the extent of our current or accumulated earnings and profits. Any distributions in excess of our earnings and profits will first be
treated as a return of capital to the extent of the stockholder's adjusted basis in his or her shares of common stock and thereafter as gain from the sale of shares of our common stock. Distributions
of our long-term capital gains, designated by us as such, will be taxable to stockholders as long-term capital gains regardless of the
stockholder's holding period for its common stock and whether the distributions are paid in cash or invested in additional common stock. Corporate stockholders are generally eligible for the 70%
dividends received deduction with respect to ordinary income, but not to capital gains dividends to the extent such amount designated by us does not exceed the dividends received by us from domestic
corporations. Any dividend declared by us in October, November or December of any calendar year, payable to stockholders of record on a specified date in such a month and actually paid during January
of the following year, will be treated as if it were paid by us and received by the stockholders on December 31 of the previous year. In addition, we may elect to relate a dividend back to the
prior taxable year if we (1) declare such dividend prior to the due date for filing our return for that taxable year, (2) make the election in that return, and (3) distribute the
amount in the 12-month period following the close of the taxable year but not later than the first regular dividend payment following the declaration. Any such election will not alter the
general rule that a stockholder will be treated as receiving a dividend in the taxable year in which the distribution is made, subject to the October, November, December rule described above.

Business Development Company

We intend to conduct our business so as to retain our status as a business development company. In general, a business development company must have been
organized and have its principal place of business in the United States and must be operated for the purpose of making investments in the types of securities described in (1) or
(2) below.

Qualifying Assets.Under the 1940 Act, a business development company may not acquire any asset other than assets of the type
listed in Section 55(a) of the 1940 Act, which are referred to as qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company's total
assets. The principal categories of qualifying assets relevant to our business are the following:



10

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Securities of public companies are generally not qualifying assets unless they were acquired in a distribution or in exchange for, or upon the exercise of, a right relating to securities
that were qualifying assets.

Asset Coverage.We are permitted, under specified conditions, to issue multiple classes of indebtedness and one class of
stock senior to our common stock if our asset coverage, as defined in the 1940 Act, is at least 200% immediately after each such issuance. In addition, while senior securities are outstanding, we must
make provisions to prohibit any distribution to our stockholders or the repurchase of such securities or shares unless we meet the applicable asset coverage ratios at the time of the distribution or
repurchase. We may also borrow amounts up to 5% of the value of our total assets for temporary purposes. The 1940 Act requires, among other things, that (1) immediately after issuance and
before any dividend or distribution is made with respect to our common stock or before any purchase of common stock is made, the preferred stock, together with all other senior securities, must not
exceed an amount equal to 50% of our total assets after deducting the amount of such dividend, distribution or purchase price, as the case may be, and (2) the holders of shares of preferred
stock, if any are issued, must be entitled as a class to elect two directors at all times and to elect a majority of the directors if dividends on the preferred stock are in arrears by two years or
more.

Significant Managerial Assistance.For portfolio securities to be qualifying assets for the 70% test described above, the
business development company must either exercise a controlling influence over the issuer of the securities or must make available to the issuer of the securities significant managerial assistance.
However, with respect to certain but not all such securities, where the business development company purchases such securities in conjunction with one or more other persons acting together, one of the
other persons in the group may make available such managerial assistance, or the business development company may exercise such control jointly. Making available significant managerial assistance
means, among other things, any arrangement whereby the business development company, through its directors, officers or employees, offers to provide, and, if accepted, does so provide, significant
guidance and counsel concerning the management, operations or business objectives and policies of a portfolio company.

Determination of Net Asset Value

The net asset value per share of our outstanding shares is determined quarterly, as soon as practicable after and as of the end of each calendar quarter, by
dividing the value of total assets minus liabilities by the total number of shares outstanding at the date as of which the determination is made.

In
calculating the value of our total assets, securities that are traded in the over-the-counter market or on a stock exchange are valued at the prevailing bid
price on the valuation date, unless the investment is subject to a restriction that requires a discount from such price, which is determined by our board of directors. All other securities are valued
at fair market value as determined in good faith by our board of directors. In making such determination, our board of directors will value loans and non-convertible debt securities for
which there exists no public trading market at cost plus amortized original issue discount, if any, unless adverse factors lead to a determination of a lesser value. In valuing convertible debt
securities, equity or other types of securities for which there exists no public trading market, our board of directors will determine fair market value on the basis of collateral, the issuer's
ability to make payments, its earnings and other pertinent factors.

A
substantial portion of our assets will consist of securities carried at fair market value, as determined by our board of directors. Determination of fair market values involves
subjective judgment not susceptible to substantiation by auditing procedures. Accordingly, under current auditing standards, the notes to our consolidated financial statements will refer to the
uncertainty with respect to the possible effect of such valuations on our financial statements.

11

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Code of Ethics

As required by the 1940 Act, we have adopted a code of ethics that establishes procedures for personal investments and restricts certain transactions by our
personnel. Our code of ethics has been previously filed with the Securities and Exchange Commission.

RISK FACTORS

An investment in our securities involves a number of significant risks and other factors relating to our structure and investment
objectives. As a result, we cannot assure you that we will achieve our investment objectives. You should consider carefully the following information before making an investment in our
securities.

We are a new company with a limited operating history.

We were incorporated in May 2001 and, to date, have only made investments in eight companies. Thus far, we have conducted only limited operations as a
lender to small and medium sized companies. In
addition, we are subject to all of the business risks and uncertainties associated with any new business enterprise. We may not meet our investment objectives and the value of your investment in us
may decline substantially or be reduced to zero.

We are dependent upon our key management personnel for our future success, particularly David Gladstone, George Stelljes and Terry Lee Brubaker.

We
are dependent on the diligence, skill and network of business contacts of our senior management and other management members for the final selection, structuring, closing and
monitoring of our investments. Our future success depends to a significant extent on the continued service and coordination of our senior management team, particularly David Gladstone, our chairman
and chief executive officer, George Stelljes, our chief investment officer, and Terry Lee Brubaker, our president and chief operating officer. The departure of any of our executive officers or key
employees could have a material adverse effect on our ability to implement our business strategy and to achieve our investment objectives.

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

Our
ability to achieve our investment objectives will depend on our ability to sustain continued growth, which will depend on our ability to identify, evaluate, finance and invest in
suitable companies that meet our investment criteria. Accomplishing this result on a cost-effective basis is largely a function of our marketing capabilities, our management of the
investment process, our ability to provide competent, attentive and efficient services and our access to financing sources on acceptable terms. As we grow, we will also be required to hire, train,
supervise and manage new employees. Failure to effectively manage our future growth could have a material adverse effect on our business, financial condition and results of operations.

We operate in a highly competitive market for investment opportunities.

A large number of entities compete with us and make the types of investments that we seek to make in small and medium sized privately owned businesses. We compete
with a large number of private equity funds, leveraged buyout funds and venture capital funds, investment banks and other equity and non-equity based investment funds, and other sources of
financing, including traditional financial services companies such as commercial banks. Many of our competitors are substantially larger and have considerably greater financial, technical and
marketing resources than we do. For example, some competitors may have a lower cost of funds and access to funding sources that are not

12

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available to us. In addition, certain of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish
more
relationships and build their market shares. Furthermore, many of our potential competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a business development
company. We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations. Also, as a result of this
competition, we may not be able to take advantage of attractive investment opportunities from time to time and there can be no assurance that we will be able to identify and make investments that
satisfy our investment objectives or that we will be able to fully invest our available capital.

Our business model is dependent upon the development of strong referral relationships with leveraged buyout funds and venture capital funds.

We
are dependent upon informal relationships with leveraged buyout funds and venture capital funds to provide us with deal flow. The investment we made in Finn Corporation and a number
of the loans we are currently considering are with portfolio companies of Three Cities Fund II, L.P. and Three Cities Fund III, L.P., leveraged buyout funds that are managed by Three Cities
Research Inc. Moreover, we have a mutual referral relationship with American Capital Strategies Ltd. The relationship with American Capital led to our mutual investment in Marcal Paper
Mills, Inc. If we fail to maintain our relationship with funds such as Three Cities and American Capital, or if we fail to establish strong referral relationships with other funds, we will not
be able to grow our portfolio of loans and fully execute our business plan.

Our loans to small and medium sized borrowers are extremely risky and you could lose your entire investment.

Loans
to small and medium sized borrowers are subject to a number of significant risks including the following:



13

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We may not realize gains from our equity investments.

When we make a subordinated loan, we generally expect to receive warrants to purchase stock issued by the borrower. Our goal is to ultimately dispose of these
equity interests and realize gains upon our disposition of such interests. We expect that, over time, the gains we realize on these warrants will offset any losses we experience on loan defaults.
However, the warrants we receive may not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from our equity interests and any gains we do
recognize on the disposition of equity interests may not be sufficient to offset losses we experience on our loan portfolio.

Because the loans we make and equity securities we receive when we make loans are not publicly traded, there will be uncertainty regarding the value of our privately held
securities that could adversely affect our determination of our net asset value.

None
of our portfolio loans or equity securities, at least initially, will be publicly traded or have a readily determinable market value. We value these securities based on a
determination of their fair value made in good faith by management and approved by our board of directors. Due to the uncertainty inherent in valuing these securities, our determinations of fair value
may differ materially from the values that would exist if a ready market for these securities existed. Our net asset value could be materially affected if our determinations regarding the fair value
of our investments are materially different from the values that we ultimately realize on our disposal of such securities.

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The lack of liquidity of our privately held securities may adversely affect our business.

Most
of our investments presently consist of, and will continue to consist of, loans and warrants acquired in private transactions directly from borrowers or from the originators of
loans to such borrowers. Substantially all of the securities we presently hold are, and the securities we expect to acquire in the future will be, subject to restrictions on resale, including, in some
instances, legal restrictions, or will otherwise be less liquid than publicly traded securities. The illiquidity of our investments may make it difficult for us to obtain cash equal to the value at
which we record our investments if the need arises. This could cause us to miss important business opportunities. In addition, if we are required to quickly liquidate all or a portion of our
portfolio, we may realize significantly less than the value at which we have previously recorded our investments.

Our portfolio will be concentrated in a limited number of companies and industries, which subjects us to an increased risk of significant loss if any one of these companies
does not repay us or if the industries experience downturns.

We
intend to have outstanding loans to approximately 20 to 40 companies at any given time. A consequence of a limited number of investments is that the aggregate returns we realize may
be substantially adversely affected by the unfavorable performance of a small number of such loans or a substantial writedown of any one investment. Beyond our regulatory and income tax
diversification requirements, we do not have fixed guidelines for industry concentration and our investments could potentially be concentrated in relatively few industries. In addition, while we do
not intend to invest 25% or more of our total assets in a particular industry or group of industries at the time of investment, it is possible that as the values of our portfolio companies change, one
industry or a group of industries may comprise in excess of 25% of the value of our total assets. As a result, a downturn in an industry in which we have made multiple loans could have a materially
adverse effect on us.

Our business plan is dependent upon external financing which may expose us to risks associated with leverage.

Our
business will require a substantial amount of cash to operate and grow. We may acquire such additional capital from the following sources:



15

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A change in interest rates may adversely affect our profitability and our hedging strategy may expose us to additional risks.

We
anticipate using a combination of equity and long-term and short-term borrowings to finance our lending activities. As a result, a portion of our income will
depend upon the difference between the rate at which we borrow funds and the rate at which we loan these funds. Certain of our borrowings may be at fixed rates and others at variable rates. Currently,
we expect approximately 50% of the loans in our portfolio to be at fixed rates and approximately 50% to be at variable rates determined on the basis of a benchmark prime rate. We will typically seek
to hedge against the risk of adverse movement in interest rates on our borrowings relative to our portfolio of assets. We expect to hedge against interest rate fluctuations by using standard hedging
instruments such as futures, options and forward contracts. While hedging activities may insulate us against adverse fluctuations in interest rates, they may also limit our ability to participate in
the benefits of lower interest rates with respect to the hedged portfolio. Adverse developments resulting from changes in interest rates or hedging transactions could have a material adverse effect on
our business, financial condition and results of operations.

We may be unable to obtain a credit facility on terms that are acceptable to us.

We
will have a continuing need for capital to finance our loans. In order to maintain RIC status, we will be required to distribute to our stockholders at least 90% of our ordinary
income and short-term capital gains on an annual basis. Accordingly, such earnings will not be available to fund additional loans. Therefore, we will need to raise additional capital which
we expect to finance through a credit facility. A credit facility is an agreement with a bank or other traditional lending institution that would allow us to borrow funds, either through a term loan
or a line of credit, to make investments. We can not assure you that we will be able to obtain a credit facility on terms that we find acceptable, if at all. The unavailability of funds from
commercial banks or other sources on favorable terms could inhibit the growth of our business and have a material adverse effect on us.

Our expected credit facility will likely impose certain limitations on us.

While there can be no assurance that we will be able to borrow from banks and other financial institutions, we expect that we will at some time in the future
obtain a credit facility. The lender or lenders under this credit facility will have fixed dollar claims on our assets that are senior to the claims of our stockholders and, thus, will have a
preference over our stockholders with respect to our assets. We also expect our credit facility to contain customary default provisions such as a minimum net worth amount, a profitability test, a
restriction on changing our business and loan quality standards. An event of default under our expected credit facility would likely result, among other things, in termination of further funds
available under that facility and an accelerated maturity date for all amounts outstanding under the facility. This would likely disrupt the portfolio companies whose loans we financed through the
facility, could reduce our revenues and, by delaying any cash payment allowed to us under our facility until the lender has been paid in full, could reduce our liquidity and cash flow.

16

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Our investments will typically be long term and it may require several years to realize liquidation events.

Since
we generally intend to make five to seven year term loans and to hold our loans and related warrants until the loans mature, you should not expect realization events, if any, to
occur over the near term. In addition, we expect that any warrants that we receive when we make loans may require several years to appreciate in value and we cannot give any assurance that such
appreciation will occur.

We will be subject to corporate level tax if we are unable to satisfy Internal Revenue Code requirements for RIC qualification.

To
maintain our qualification as a RIC, we must meet income source, asset diversification and annual distribution requirements. The annual distribution requirement is satisfied if we
distribute at least 90% of our ordinary income and short-term capital gains to our stockholders on an annual basis. Because we intend to use leverage, we are subject to certain asset
coverage ratio requirements under the 1940 Act and could, under certain circumstances, be restricted from making distributions necessary to qualify as a RIC. Warrants we receive with respect to debt
investments will create "original issue discount," which we must recognize as ordinary income, increasing the amounts we are required to distribute to maintain RIC status. Because such warrants will
not produce distributable cash for us at the same time as we are required to make distributions in respect of the related original issue discount, we will need to use cash from other sources to
satisfy such distribution requirements. The asset diversification requirements must be met at the end of each calendar quarter. If we fail to meet these tests, we may need to quickly dispose of
certain investments to prevent the loss of RIC status. Since most of our investments will be illiquid, such dispositions, if even possible, may not be made at prices advantageous to us and, in fact,
may result in substantial losses. If we fail to qualify as a RIC for any reason and become fully subject to corporate income tax, the resulting corporate taxes could substantially reduce
our net assets, the amount of income available for distribution, and the actual amount distributed. Such a failure would have a material adverse effect on us and our shares. For additional information
regarding asset coverage ratio and RIC requirements, see "BusinessLeverage," and "Regulation."

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

Our
executive officers and directors may serve as officers and directors of entities that operate in the same or similar lines of business as we do. Accordingly, they may have
obligations to investors in those entities, the fulfillment of which might not be in the best interests of us or our stockholders. It is possible that new investment opportunities that meet our
investment objectives may come to the attention of one of our executive officers or directors, such as Mr. Gladstone, in his role as an officer or director of another entity, and, if so, such
opportunity might not be offered, or otherwise made available, to us.

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

We
and our portfolio companies will be subject to regulation by laws at the local, state and federal level. These laws and regulations, as well as their interpretation, may be changed
from time to time. Accordingly, any change in these laws or regulations could have a material adverse impact on our business. For additional information regarding the regulations to which we are
subject, see "Regulation."

We may experience fluctuation in our quarterly results.

We could experience fluctuations in our quarterly operating results due to a number of factors including, among others, variations in and the timing of the
recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our markets and general economic

17

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

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

Our
current intention is to distribute at least 90% of our ordinary income and short-term capital gains to our stockholders on a quarterly basis. We expect to retain net
realized long-term capital gains to supplement our equity capital and support the growth of our portfolio, although our board of directors
may determine in certain cases to distribute these gains. We cannot assure you that we will achieve investment results or maintain a tax status that will allow or require any specified level of cash
distributions or year-to-year increases in cash distributions.

Failure to deploy capital may reduce our return on equity.

In the past, we have experienced delays in investing the proceeds of our initial public offering as compared to the original timetable that we expected at the
time of our initial public offering. As of December 10, 2002, we have invested approximately $89 million (including the maximum aggregate amount outstanding under an $8 million line of
credit in favor of one of our portfolio companies, that has subsequently been retired) of the approximately $131 million raised in our initial public offering, which closed on August 29,
2001. If we fail to invest our capital effectively, our return on equity may be negatively impacted, which could result in a decline in the market price of our common stock.

Prepayments by our portfolio companies could adversely impact our results of operations and reduce our return on equity.

In
addition to risks associated with delays in investing our capital, we are also subject to the risk that investments that we make in our portfolio companies may be repaid prior to
maturity. When this occurs, we will generally reinvest these proceeds in government securities, pending their future investment in new debt securities. These government securities will typically have
substantially lower yields than the debt securities being prepaid and we could experience significant delays in reinvesting these amounts. As a result, our results of operations could be materially
adversely affected if one or more of our portfolio companies elects to prepay amounts owed to us. Additionally, prepayments could negatively impact our return on equity, which could result in a
decline in the market price of our common stock.

Provisions of our articles of incorporation and bylaws could deter takeover attempts and adversely impact the price of our shares.

Our
articles of incorporation and bylaws and the Maryland General Corporation Law contain provisions that may have the effect of discouraging, delaying or making more difficult a change
in control and preventing the removal of incumbent directors. The existence of these provisions may negatively impact the price of our shares and may discourage third-party bids. These provisions may
reduce any premiums paid to you for our shares. Furthermore, we are subject to Section 3-602 of the Maryland General Corporation Law which governs business combinations with
interested stockholders and could delay or prevent a change in control. In addition, our board of directors is elected in staggered terms which makes it more difficult for a hostile bidder to acquire
control of us.

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The market price of our shares may fluctuate significantly.

The market price and marketability of our shares may from time to time be significantly affected by numerous factors, including many over which we have no control
and that may not be directly related to us. These factors include the following:



Fluctuations
in the trading prices of our shares may adversely affect the liquidity of the trading market for our shares and, if we seek to raise capital through future equity
financings, our ability to raise such equity capital.

Shares of closed-end investment companies frequently trade at a discount from net asset value.

Shares
of closed-end investment companies frequently trade at a discount from net asset value. This characteristic of shares of closed-end investment companies is
separate and distinct from the risk that our net asset value per share will decline. It is not possible to predict whether our common stock will trade at, above, or below net asset value.

Sales of substantial amounts of our common stock in the public market may have an adverse effect on the market price of our common stock.

As
of December 10, 2002 we have 10,071,844 shares of common stock outstanding, of which 9,218,085 are freely tradable without restriction. The remaining 853,759 shares are held by
employees, officers and directors, most of which were purchased upon exercise of stock options. Of these, 842,093 may currently be resold publicly in compliance with the volume limitations and other
restrictions of Rule 144 of the Securities Act. In the future, we intend to file a registration statement to register for public resale up to 1,500,000 shares under our Amended and
Restated 2001 Equity Incentive Plan (including the shares that have already been issued upon option exercises). Following the filing of such registration statement, all of these shares will be freely
tradable without restriction, although certain of the options have not yet been granted and a portion of the options that have been granted are not yet vested and the shares underlying such options
will, accordingly, not be eligible for resale until vested.

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Sales of substantial amounts of our common stock in the public market, pursuant to such registration, under Rule 144 or otherwise, or the availability of such shares for sale, could adversely
affect the prevailing market prices for our common stock. If this occurs, it could impair our ability to raise additional capital through the sale of equity securities should we desire to do so.

Item 2. Properties

We do not own any real estate or other physical properties materially important to our operation. Our headquarters are located in McLean, Virginia where we occupy
our office space pursuant to a license agreement that expires on November 1, 2003.

Item 3. Legal Proceedings

We are not currently subject to any material legal proceeding, nor, to our knowledge, is any material legal proceeding threatened against us.

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

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended September 30, 2002.

PART II

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

Our common stock is traded on the Nasdaq National Market under the symbol "GLAD." We completed our initial public offering of our common stock in
August 2001 at a price of $15 per share. Prior to such date there was no public market for our common stock.

The
following table reflects, by quarter, the high and low closing prices per share of our common stock on the Nasdaq National Market for each fiscal quarter since we completed our
initial public offering.

Quarter
Ended

High

LowFY 2001

09/30/01
*
$
17.48

$
15.98FY 2002

12/31/01


19.10


15.9003/31/02


18.05


16.6006/30/02


19.52


17.1009/30/02


18.74


16.00


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As
of December 10, 2002, there were approximately 5,198 beneficial owners of our Common Stock.

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Dividends

We currently intend to distribute in the form of cash dividends a minimum of 90% of our ordinary income and short-term capital gains, if any, on a
quarterly basis to our stockholders. The following table reflects, by quarter, the dividends per share that we have declared on our common stock for each quarter of the last two fiscal years:

Quarter
Ended

Cash Dividend
Per ShareFY 2001

06/30/01

NONE09/30/01

NONEFY 2002

12/31/01

$0.1803/31/02

0.2106/30/02

0.2109/30/02

0.21


Recent Sales of Unregistered Securities

During the fiscal year ended September 30, 2002, we issued and sold an aggregate of 11,666 shares of common stock to two of our employees upon the exercise
of options granted under our Amended and Restated 2001 Equity Incentive Plan. Each of the employees exercised their options by delivering a promissory note for the full purchase price. The total
principal amount of all of the promissory notes was $185,890. We issued these shares in reliance upon the exemption from registration provided by Section 4(2) under the Securities Act.

Item 6. Selected Financial Data

The following selected financial data for the fiscal year ended September 30, 2002 and the period ended September 30, 2001 are derived from our
consolidated financial statements which have been audited by Ernst & Young LLP, independent accountants. The data should be read in conjunction with our consolidated financial statements and
notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this report.

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GLADSTONE CAPITAL CORPORATION        SELECTED FINANCIAL DATA

|                                                                          |                                                                            | Year Ended
September 30, 2002 |              | Period
May 30, 2001(Inception)
Through
September 30, 2001 |             
|------------------------------------------------------------------------- | -------------------------------------------------------------------------- | ----------------------------- | ------------ | --------------------------------------------------------- | ------------
|Total Operating Income                                                    |                                                                            | $10,455,703                   |              | $394,855                                                  |             
|Total Operating Expenses                                                  |                                                                            | $2,839,102                    |              | $487,499                                                  |             
|Net Operating Income (Loss)                                               |                                                                            | $7,616,601                    |              | $(92,644                                                  | )           
|Net Increase (Decrease) in Stockholders' Equity Resulting from Operations |                                                                            | $7,616,601                    |              | $(92,644                                                  | )           
|Per Share Data:                                                           |                                                                            |                               |              |                                                           |             
|                                                                          | Net Increase (Decrease) in Stockholders' Equity Resulting from Operations: |                               |              |                                                           |             
|                                                                          |                                                                            | Basic                         |              | $0.76                                                     |             
|                                                                          |                                                                            | Diluted                       |              | $0.75                                                     |             
|Cash Distributions Declared per Share                                     |                                                                            | $0.81                         |              | $0.00                                                     |             
|Balance Sheet Data:                                                       |                                                                            |                               |              |                                                           |             
|                                                                          | Total Assets                                                               |                               | $172,922,039 |                                                           | $132,205,486
|                                                                          | Total Shareholders' Equity                                                 |                               | $130,663,273 |                                                           | $131,249,144
|Other Data:                                                               |                                                                            |                               |              |                                                           |             
|                                                                          | Number of Portfolio Companies at Period End                                |                               | 7            |                                                           | NONE        
|                                                                          | Principal Amount of Loan Originations (1)                                  |                               | $97,705,054  |                                                           | NONE        
|                                                                          | Principal Amount of Loan Repayments (1)                                    |                               | $18,387,191  |                                                           | NONE        
|                                                                          | Total Return (2)                                                           |                               | 9.60%        |                                                           | 7.60        
|                                                                          | Weighted Average Yield on Investments (3):                                 |                               |              |                                                           |             
|                                                                          |                                                                            | With PIK Interest (4)         |              | 14.79%                                                    |             
|                                                                          |                                                                            | Without PIK Interest (4)      |              | 13.82%                                                    |             

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

The following analysis of our financial condition and results of operations should be read in conjunction with our financial statements
and the notes thereto contained elsewhere in this Form 10-K.

FORWARD-LOOKING STATEMENTS

All statements contained herein, other than historical facts, may constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements may relate to, among other things, future
events or our future performance or financial condition. In some cases, you can identify forward-looking statements by terminology such as "may," "might," "believe," "will," "provided," "anticipate,"
"future," "could," "growth," "plan," "intend," "expect," "should," "would," "if," "seek," "possible," "potential" or the negative of such terms or comparable terminology. These forward-looking
statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any
future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others: (1) adverse changes in interest
rates; (2) our failure or inability to establish or maintain referral arrangements with leveraged buyout funds and venture capital funds to generate loan opportunities; (3) the loss of
one or more of our executive officers, in particular David Gladstone or Terry Lee Brubaker; (4) our inability to establish or maintain a credit facility on terms reasonably acceptable to us, if
at all; (5) our inability to successfully securitize our loan portfolio on terms reasonably acceptable to us, if at all; (6) the decision of our competitors to aggressively seek to make
senior and subordinated loans to small and medium-sized businesses on terms more favorable than we intend to provide; and (7) those factors described in the "Risk Factors" section of this
Form 10-K. We caution readers not to place undue reliance on any such forward-looking statements, which are made pursuant to the Private Securities Litigation Reform Act on 1995
and, as such, speak only as of the date made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or
otherwise, after the date of this Form 10-K.

OVERVIEW

We were incorporated under the General Corporation Laws of the State of Maryland on May 30, 2001. Our investment objectives are to achieve a high level of
current income by investing in debt securities, consisting primarily of senior notes, senior subordinated notes and junior subordinated notes, of
established private businesses that are backed by leveraged buyout funds, venture capital funds or others, with a particular emphasis on senior subordinated notes. In addition, we may acquire existing
loans that meet this profile from leveraged buyout funds, venture capital funds and others. We also seek to provide our stockholders with long-term capital growth through the appreciation
in the value of warrants or other equity instruments that we may receive when we make loans. We operate as a closed-end, non-diversified management investment company, and have
elected to be treated as a business development company under the 1940 Act.

We
seek out small and medium-sized businesses that meet certain criteria, including (1) the potential for growth in cash flow, (2) adequate assets for loan collateral,
(3) experienced management teams with a significant ownership interest in the borrower, (4) profitable operations based on the borrower's cash flow, (5) reasonable capitalization
of the borrower (usually by leveraged buyout funds or venture capital funds) and (6) the potential to realize appreciation and gain liquidity in our equity position, if any. We anticipate that
liquidity in our equity position will be achieved through a merger or acquisition of the borrower, a public offering by the borrower or by exercise of our right to require the borrower to buy back its
warrants. We lend to borrowers that need funds to finance growth, restructure their balance sheets or effect a change of control.

Our
loans typically range from $5 million to $15 million, mature in no more than seven years and accrue interest at a fixed or variable rate that exceeds the prime rate. A
number of our loans have a

23

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provision that calls for some portion of the interest payments to be deferred and added to the principal balance so that the interest is paid, together with the principal, at maturity. This form of
deferred interest is often called "paid-in-kind" (or "PIK") interest, and, when earned, we record PIK interest as interest income and add the PIK interest to the principal
balance of the loans.

Because
our loans will generally be subordinated debt of private companies who typically cannot or will not expend the resources to have their debt securities rated by a credit rating
agency, we expect that most, if not all, of the debt securities we acquire will be unrated. We cannot accurately predict what ratings these loans might receive if they were in fact rated, and
therefore we cannot determine whether or not they could be considered to be "investment grade" quality.

To
the extent possible, our loans generally are collateralized by a security interest in the borrower's assets. Interest payments are generally made monthly or quarterly (except to the
extent of any PIK interest) with amortization of principal generally being deferred for several years. The principal amount of the loans and any accrued but unpaid interest generally become due at
maturity at five to seven years. When we receive a warrant to purchase stock in a borrower in connection with a loan, the warrant will typically have an exercise price equal to the fair value of the
portfolio company's common stock at the time of the loan and entitle us to purchase a modest percentage of the borrower's stock.

In
addition, as a business development company under the 1940 Act, we are required to make available significant managerial assistance to our portfolio companies. We provide these
services, for which we receive fees, through our wholly-owned subsidiary, Gladstone Advisers, Inc. Such fees are typically paid
in part at the time a prospective portfolio company signs a non-binding term sheet with us, with the remainder paid at the closing of the investments. These fees are generally
non-recurring, however in some instances they may have a recurring component. The specific services we provide vary by portfolio company, but generally consist of reviewing existing credit
facilities, arranging bank financing, arranging equity financing, structuring financing from multiple lenders, structuring financing from equity investors, restructuring existing loans, raising equity
and debt capital and providing general financial advice. We record these fees as managerial assistance fee revenue in the period in which the fees are earned.

Our
business plan calls for managerial assistance fee revenue to equal or exceed our operating expenses (excluding interest expense). However, during the fiscal year ended
September 30, 2002, operating expenses (excluding interest expense) exceeded managerial assistance fee revenue by approximately $1.2 million. Because we typically generate managerial
assistance fee revenue only when we make new loans, our relatively slow pace of loans during the 2002 fiscal year led to this shortfall. In the future, we will need to make loans at a faster pace in
order to meet this objective. However, we believe that, as the economic environment improves, we will be able to make sufficient new investments so that over time our managerial assistance fee revenue
will equal or exceed our operating expenses (excluding interest expense), although there can be no guarantee that we will be able to do so.

Prior
to making an investment, we ordinarily enter into a non-binding term sheet with the potential borrower. These non-binding term sheets are generally subject
to a number of conditions, including but not limited to the satisfactory completion of our due diligence investigations of the potential borrower's business and reaching agreement on the legal
documentation for the loan. Typically, upon execution of the non-binding term sheet, the potential borrower pays us a non-refundable fee for our services rendered through the
date of the non-binding term sheet. We recognize this fee as revenue upon execution of the non-binding term sheet.

In
the event that we expend significant effort in considering and negotiating a potential investment that ultimately is not consummated, we generally will seek reimbursement from the
proposed borrower for our reasonable expenses incurred in connection with the proposed transaction. Any amounts collected are recognized as "other income" in the quarter in which such reimbursement is
received. Also, in the event that we have incurred significant legal fees in connection with the transaction, we

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will typically also seek reimbursement for these expenses from the proposed borrower. However, there can be no guarantee that we will be successful in collecting any such reimbursements.

The
only significant continuing revenue associated with the investments we have already closed is interest paid and, potentially, capital gains received in connection with the
liquidation of any associated equity interest (e.g., warrants). While in some instances we may also receive on-going managerial assistance fee revenue in connection with a consummated
investment, any such amounts are insignificant.

The
general economic climate during the fiscal year ended September 30, 2002 was unfavorable. Many businesses saw their sales and business prospects decline during the year.
Consequently, many of these
companies were forced to lay off employees and engage in other cost cutting measures. As a result of the difficult business climate, we determined it prudent to proceed cautiously in making loans
during the 2002 fiscal year. Since our initial public offering in August 2001, we have made eleven different loans to, or investments in, eight companies for a total of approximately
$89 million (including the maximum aggregate amount outstanding under an $8 million line of credit in favor of one of our portfolio companies, that has subsequently been retired). This
was below our objective set at the beginning of the 2002 fiscal year. In the fourth quarter of the 2002 fiscal year, one of our investments, including all amounts outstanding under a $7 million
senior term loan and an $8 million senior line of credit, was repaid in full.

In
spite of the economic environment, we are earnestly working toward the consummation of more investments. These prospective loans are subject to, among other things, the satisfactory
completion of our due diligence investigation of each borrower, acceptance of terms and structure and necessary consents. With respect to each prospective loan, we will only agree to provide the loan
if, among other things, the results of our due diligence investigations are satisfactory, the terms and conditions of the loan are acceptable and all necessary consents are received. Our management
has initiated its due diligence investigations of the potential borrowers, however we can not assure you that we will not discover facts in the course of completing our due diligence that would render
a particular investment imprudent or that any of these loans will actually be made.

Critical Accounting Policies

Our accounting policies are more fully described in the footnotes to our consolidated financial statements contained elsewhere in this report. As disclosed in the
footnotes to our consolidated financial statements, the preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and
expenses during the period reported. Actual results could differ from those estimates.

Investment Valuation

The most significant estimate inherent in the preparation of our consolidated financial statements is the valuation of investments and the related amounts of
unrealized appreciation and depreciation of investments recorded.

We
value our investment portfolio each quarter. Members of our senior management prepare the portfolio company valuations using the most recent portfolio company financial statements and
forecasts. These individuals also consult with the respective principal who is managing the portfolio investment relationship to obtain further updates on the portfolio company's performance,
including information such as industry trends, new product development, and other operational issues. The valuations are presented to our board of directors, which reviews and approves the portfolio
valuations in accordance with the following valuation policy.

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We
carry our investments at fair value, as determined by our board of directors. Securities that are publicly traded, if any, are valued at the closing price on the valuation date. Debt
and equity securities that are not publicly traded (which, to date, constitutes all of our investments), or for which we have various degrees of trading restrictions, are valued at fair value as
determined in good faith by our board of directors. In making such determination, our board of directors will value non-convertible debt securities at cost plus amortized original issue
discount and PIK interest, if any, unless adverse factors lead to a determination of a lesser valuation. In valuing convertible debt, equity or other securities, our board of directors determines the
fair value based on the collateral, the issuer's ability to make payments, the current and forecasted earnings of the issuer, sales to third parties of similar securities, the comparison to publicly
traded securities and other pertinent factors. Due to the uncertainty inherent in the valuation process, such estimates of fair value may differ significantly from the values that would have been
obtained had a ready market for the securities existed, and the differences could be material. Additionally, changes in the market environment and other events that may occur over the life of the
investments may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned.

Managerial Assistance Fees

The 1940 Act requires that a business development company make available managerial assistance to its portfolio companies. We provide managerial assistance to our
portfolio companies in connection with our investments through our wholly-owned subsidiary, Gladstone Advisers, Inc. and receive fees for our managerial assistance services. These fees are
normally paid at the closing of our investments in our portfolio companies, are generally non-recurring and are recognized as revenue when earned. The managerial assistance services we
provide vary by investment, but generally consist of reviewing existing credit facilities, arranging bank financing, arranging equity financing, structuring financing from multiple lenders,
structuring financing from equity investors, restructuring existing loans, raising equity and debt capital, and providing general financial advice. From time to time, we are invited to participate as
a co-lender in a transaction. In the event that we do not provide significant managerial assistance services in connection with our investment, loan fees paid to us in such situations are deferred and
amortized over the life of the loan.

Loan Grading and Performance

We grade all of our loans on a scale from 1 to 4. This system is intended to reflect the performance of the borrower's business, the collateral coverage of the
loans and other factors we consider relevant.

|Loan Grade |  |                                                                                                                                                                                                                                                                                                                                                                                                                                  
|---------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4          |  | Loans with a grade of 4 involve the least amount of risk in our portfolio. The borrower is performing above expectations and the trends and risk factors are generally favorable.                                                                                                                                                                                                                                                
|3          |  | Loans graded 3 involve a level of risk that is similar to the risk that existed at the time of our investment. The borrower is performing as we expected and the risk factors are favorable. All new loans are initially graded 3.                                                                                                                                                                                               
|2          |  | Loans graded 2 involve a borrower performing below our expectations and indicates that the loan's risk has increased since our investment. The borrower may be out of compliance with debt covenants; however, loan payments are not more than 120 days
past due. For loans graded 2, our management will increase procedures to monitor the borrower and the fair value generally will be lowered.                              
|1          |  | A loan grade of 1 indicates that the borrower is performing materially below our expectations and that the loan risk has substantially increased since our investment. The borrower is out of compliance with some or all of the debt covenants and
payments are delinquent. Loans graded 1 are not anticipated to be repaid in full and we will reduce the fair value of the loan to the amount we anticipate will be recovered.

26

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To
date, all portfolio investments are grade 3 and have been since our initial investments. We will stop accruing interest on an investment when we determine that interest is no longer collectible.
Our valuation analysis described above serves as a critical piece of data in this determination. To date we have not placed any investments on non-accrual. At September 30, 2002, no
payments were past due on any of our outstanding loans.

Credit Statistics

We monitor a wide variety of key credit statistics that provide information regarding our portfolio companies to help us assess credit quality and portfolio
performance. These key statistics include:



We
require portfolio companies to provide annual audited and monthly unaudited financial statements. Using these statements, we calculate the statistics described above. For purposes of analyzing the
financial performance of our portfolio companies, we may make certain adjustments to EBITDA to reflect the pro forma results of a company consistent with a change of control transaction, to reflect
anticipated cost savings resulting from a merger or restructuring, costs related to new product development, compensation to previous owners, and other acquisition or restructuring related items.

RESULTS OF OPERATIONS

Comparison of the fiscal year ended September 30, 2002 to the period from inception (May 30, 2001) through September 30, 2001

Operating Income

Operating income for the fiscal year ended September 30, 2002 was approximately $10.5 million as compared to $395,000 for the period from inception
(May 30, 2001) through September 30, 2001. This increase was primarily a result of the inclusion of a full year of operations in the results for the 2002 fiscal year as contrasted to our
limited operations during the prior period. In addition, during the 2002 fiscal year, we began investing the proceeds of our initial public offering in debt securities of private companies. These debt
securities provide a higher yield than the short-term investment grade securities that represented substantially all of our assets as of September 30, 2001.

Interest
income from our investments in debt securities of private companies was approximately $6.6 million for the fiscal year ended September 30, 2002, including $462,000
of PIK interest. Because we
did not make any such investments prior to November 2001, we did not record interest income from debt securities of private companies for the period from inception through September 30,
2001.

The
weighted average yield on our portfolio for the fiscal year ended September 30, 2002 was 13.82% (without giving effect to PIK interest) and 14.79% (after giving effect to PIK
interest).

Interest
income from invested cash and cash equivalents for the fiscal year ended September 30, 2002 was approximately $1.6 million, as compared to approximately $350,000
for the period from inception through September 30, 2001. This increase was primarily a result of our investment of the net

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proceeds of our initial public offering for the full year. By comparison, the results for the period from inception through September 30, 2001 include interest income earned on the investment
of the net proceeds of our initial public offering from August 29, 2001 (the date of the closing of our initial public offering) through September 30, 2001. As we continue to acquire
debt securities of private companies, which we anticipate will be at interest rates significantly greater than the rates that we are currently receiving on our deposited cash and cash equivalents, we
expect that income from invested cash and cash equivalents will decline as a percentage of total revenue and that interest income from debt securities will increase and become our predominant source
of revenue.

For
the fiscal year ended September 30, 2002, we recorded approximately $433,000 in interest income from loans to our employees in connection with the exercise of employee stock
options, as compared to approximately $45,000 in interest income from such loans for the period from inception through September 30, 2001. The increase is primarily the result of the inclusion
in the results of operations for the year ended September 30, 2002 of a full year of interest income on the majority of such employee loans (which were made at the time of our initial public
offering) and, to a lesser extent, the inclusion of interest income on employee loans entered into during the 2002 fiscal year. By comparison, the results for the period from inception through
September 30, 2001 include interest earned on such employee loans from the time of exercise of such options (August 23, 2001) through September 30, 2001.

Managerial
assistance fees were approximately $1.7 million for the fiscal year ended September 30, 2002. Fee income for the fiscal year ended September 30, 2002
consists primarily of managerial assistance fees received in connection with investments we closed during the fiscal year. It also includes approximately $47,000 in fees associated with a line of
credit we extended to one of our portfolio companies that is no longer outstanding. Because we did not make any investments in debt securities of private companies prior to November 2001, we
did not record any managerial assistance fee income for the period from inception through September 30, 2001.

Other
income was approximately $131,000 for the fiscal year ended September 30, 2002. This amount was comprised of approximately $81,000 in up-front fees received in
connection with five proposed investments that ultimately were not consummated and approximately $50,000 in other fees. Because we did not experience the termination of any such negotiations during
the period from inception through September 30, 2001, we did not record any other income for such period.

Operating Expenses

Operating expenses for the fiscal year ended September 30, 2002 were approximately $2.8 million, compared to approximately $487,000 for the period
from inception through September 30, 2001. This increase was primarily a result of the inclusion of a full year of operations in the results for the 2002 fiscal year, as contrasted to our
limited operations during the period from inception through September 30, 2001. However, this increase was partially offset by substantial nonrecurring costs associated with the organization of
the company and our commencement of operations incurred during the period from inception through September 30, 2001.

Salaries
and benefits for the fiscal year ended September 30, 2002 were approximately $1.4 million, as compared to approximately $229,000 for the period from inception
through September 30, 2001. This increase was primarily a result of the inclusion of a full year of operations in the results for the 2002 fiscal year, as contrasted to our limited operations
during the period from inception through September 30, 2001. Salaries and benefits also increased as a result of our hiring additional employees during the year. We expect salaries and benefits
to continue to increase as we hire additional personnel.

General
and administrative expenses, consisting primarily of insurance, office operations, travel and stockholder related expenses, for the fiscal year ended September 30, 2002
were approximately $775,000, as compared to approximately $145,000 during the period from inception through

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September 30, 2001. This increase was primarily a result of the inclusion of a full year of operations in the results for the 2002 fiscal year, as contrasted to our limited operations during
the period from inception through September 30, 2001. General and administrative expense also increased as a result of the general expansion of our operations during the year.

Professional
fees, consisting primarily of legal and audit fees, for the fiscal year ended September 30, 2002 were approximately $550,000, as compared to approximately $72,000
during the period from inception through September 30, 2001. This increase was primarily a result of the inclusion of a full year of operations in the results for the 2002 fiscal year, as
contrasted to our limited operations during the period from inception through September 30, 2001.

Rent
expense for the fiscal year ended September 30, 2002 was approximately $125,000, as compared to approximately $3,000 during the period from inception through
September 30, 2001. This increase was primarily a result of the inclusion of a full year of operations in the results for the 2002 fiscal year, as contrasted to our limited operations during
the period from inception through September 30, 2001. This amount also increased as a result of our relocation of our principal executive offices following the completion of our initial public
offering.

Directors
fees for the fiscal year ended September 30, 2002 were approximately $22,000, as compared to approximately $38,000 during the period from inception through
September 30, 2001. We anticipate that annual directors fees will approximate $18,000 per non-employee director over time.

We
believe that our current level of operating expenses is not necessarily indicative of our future operating expenses. We estimate that over time, as we continue to more fully deploy
the proceeds of our initial public offering, our operating expenses will be approximately two percent of our net assets.

Net Operating Income

As a result of the operating income and operating expenses described above, we had net operating income of approximately $7.6 million for the fiscal year
ended September 30, 2002. Based on a weighted-average of 10,064,900 (basic) and 10,166,752 (diluted) shares outstanding, our net operating income per common share for the fiscal year ended
September 30, 2002 was $0.76 (basic) and $0.75 (diluted).

For
the period from inception through September 30, 2001, we incurred a net operating loss of approximately $93,000. Based on a weighted-average of 3,219,525 shares outstanding,
our net operating loss per common share for the period from inception through September 30, 2001 was $(0.03), basic and diluted.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2002, we had investments in debt securities of, or loans to, seven private companies, totaling approximately $79.7 million of total
investment assets. This number includes approximately $400,000 in accrued PIK interest, which as described in "Overview," is added to our carrying value of our investments.

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The
following table summarizes the contractual principal amortization and maturity of our investment portfolio by fiscal year:

Year

Amount2003

$
1,475,0002004

$
10,390,8032005

$
11,515,8332006

$
16,050,7452007

$
23,165,991Thereafter

$
17,119,982Total

$
79,718,354


Cash
provided by operating activities for the fiscal year ended September 30, 2002, consisting primarily of the items described in "Results of Operations," was approximately
$7.0 million. Net cash used in investing activities was approximately $40.2 million for the fiscal year ended September 30, 2002. The net cash used consisted of investments in our
portfolio companies, partially offset by a net increase in cash of approximately $39.2 million in connection with repurchase agreements and the repayment, by our portfolio companies, of
investments in principal amount of approximately $18.4 million. Net cash used in financing activities was approximately $6.7 million for the fiscal year ended September 30, 2002
and consisted primarily of the payment of dividends of approximately $6.0 million and the repayment of accrued costs of approximately $641,000 associated with our initial public offering.

During
the fiscal year ended September 30, 2002, cash and cash equivalents decreased from approximately $131.8 million at the beginning of the year to approximately
$91.9 million at the end of the year. This decrease of approximately $39.9 million was largely the result of our investing activities, partially offset by an increase in cash and cash
equivalents in connection with the repurchase agreement described below.

On
September 30, 2002, we entered into a repurchase agreement with UBS Paine Webber for approximately $39.2 million. The repurchase agreement was fully collateralized by a
United States treasury bill with a fair value of approximately $40.0 million that matured on October 3, 2002. The interest rate on the repurchase agreement was 1.85%. This repurchase
agreement was reflected on our balance sheet as of September 30, 2002 as an increase in cash and cash equivalents pledged to creditors of $39.2 million, along with a corresponding
liability for the same amount. The repurchase agreement was settled on October 1, 2002. In the future, we plan to use a similar form of repurchase agreement as an investment option or in order
to satisfy certain asset diversification requirements and maintain our status as a RIC under Subchapter M of the Internal Revenue Code.

In
order to qualify as a regulated investment company and to avoid corporate level tax on the income we distribute to our stockholders, we are required, under Subchapter M of the
Internal Revenue Code, to distribute at least 90% of our ordinary income and short-term capital gains to our stockholders on an annual basis. In accordance with these requirements, we
declared and paid quarterly cash dividends of $0.18, $0.21, $0.21 and $0.21 per share on our common stock for the first, second, third and fourth quarters, respectively, of the fiscal year ended
September 30, 2002.

Aggregate
dividends declared and paid for the 2002 fiscal year were approximately $8.2 million. We declared these dividends based upon our estimate of net operating income for the
year. Because of the difficult economic climate during the year, our investment pace was slower than we had originally anticipated, and consequently, our net operating income was lower than we had
originally projected. This resulted in our dividends related to our 2002 fiscal year exceeding our net operating income for the year by approximately $0.5 million. Additionally, dividends
related to our 2002 fiscal year exceeded

30

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our current and accumulated earnings and profits and, as a result, a portion of our dividends will be treated as a return of capital to our stockholders.

We
anticipate borrowing funds and issuing additional equity securities to obtain additional capital once the proceeds of our initial public offering have been fully invested. To this
end, we have filed with the SEC a registration statement that would permit us to issue, through one or more transactions, up to an aggregate of $75 million in securities, consisting of common
stock, preferred stock and/or debt securities. We may not issue any such securities until the registration statement has been declared effective by the SEC and we currently have no immediate plans to
issue any securities under the registration statement.

In
addition to borrowing funds and issuing additional equity securities, we also intend to pursue a strategy of securitizing our loan portfolio in approximately one to two years. We
would use the cash we receive upon the sale of interests in our loans to repay bank borrowings and make additional loans. We can not assure you that this securitization strategy will be successful.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

We are subject to financial market risks, including changes in interest rates. We expect that ultimately approximately 50% of the loans in our portfolio will be
made at fixed rates, with approximately 50% made at variable rates, however, to date all of our loans have been made at fixed rates.

We
expect to borrow funds to finance future lending activities after we have substantially fully invested the proceeds of our initial public offering. These future borrowings may be at
fixed rates or variable rates. To date, we have not yet borrowed any funds.

We
expect to hedge against interest rate fluctuations in the future by using standard hedging instruments such as futures, options and forward contracts. While hedging activities may
insulate us against adverse fluctuations in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to our portfolio of investments.

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Item 8. Financial Statements and Supplementary Data

Index to Consolidated Financial Statements

|                                                                                                                                                             |  | Page
|------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----
|Report of Independent Auditors                                                                                                                               |  | 33  
|Consolidated Balance Sheets as of September 30, 2002 and September 30, 2001                                                                                  |  | 34  
|Consolidated Schedule of Investments as of September 30, 2002                                                                                                |  | 35  
|Consolidated Statements of Operations for the year ended September 30, 2002 and the period from May 30, 2001 (inception) through September 30, 2001          |  | 36  
|Consolidated Statements of Stockholders Equity for the year ended September 30, 2002 and the period from May 30, 2001 (inception) through September 30, 2001 |  | 37  
|Consolidated Statements of Cash Flows for the year ended September 30, 2002 and the period from May 30, 2001 (inception) through September 30, 2001          |  | 38  
|Notes to Financial Statements                                                                                                                                |  | 39  

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Report of Independent Auditors

To
the Board of Directors and Stockholders of
Gladstone Capital Corporation

We
have audited the accompanying consolidated balance sheets of Gladstone Capital Corporation (the Company) as of September 30, 2002 and 2001, including the consolidated schedule of investments
as of September 30, 2002, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year ended September 30, 2002 and the period from
May 30, 2001 (inception) through September 30, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Gladstone Capital Corporation at September 30, 2002
and 2001, and the consolidated results of its operations and its cash flows for the year ended September 30, 2002 and the period from May 30, 2001 (inception) through
September 30, 2001, in conformity with accounting principles generally accepted in the United States.

McLean,
Virginia
November 1, 2002

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GLADSTONE CAPITAL CORPORATION        CONSOLIDATED BALANCE SHEETS

|                                     |                                                                                                                                 | September 30,
2002         |                                            | September 30,
2001 |            
|------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------------ | ------------------ | -----------
|ASSETS                               |                                                                                                                                 |                            |                                            |                    |            
|                                     | Investments at fair value (Cost 9/30/2002:$79,718,354;9/30/2001:$0)                                                             |                            | $                                          | 79,718,354         |            
|                                     | Cash and cash equivalents                                                                                                       |                            |                                            | 51,930,529         |            
|                                     | Cash and cash equivalents pledged to creditors                                                                                  |                            |                                            | 39,998,799         |            
|                                     | Interest receivableinvestments in debt securities                                                                              |                            |                                            | 685,274            |            
|                                     | Interest receivablecash and cash equivalents                                                                                   |                            |                                            | 4,389              |            
|                                     | Interest receivableofficers                                                                                                    |                            |                                            | 109,874            |            
|                                     | Prepaid assets                                                                                                                  |                            |                                            | 357,955            |            
|                                     | Other assets                                                                                                                    |                            |                                            | 116,865            |            
|                                     |                                                                                                                                 |                            |                                            |                    |            
|                                     |                                                                                                                                 |                            | TOTAL ASSETS                               |                    | $          
|                                     |                                                                                                                                 |                            |                                            |                    |            
|LIABILITIES AND STOCKHOLDERS' EQUITY |                                                                                                                                
|Liabilities                          |                                                                                                                                 |                            |                                            |                    |            
|                                     | Dividends payable                                                                                                               |                            | $                                          | 2,115,087          |            
|                                     | Accrued offering costs                                                                                                          |                            |                                            |                   |            
|                                     | Accrued expenses and deferred liabilities                                                                                       |                            |                                            | 944,960            |            
|                                     | Repurchase agreement                                                                                                            |                            |                                            | 39,198,719         |            
|                                     |                                                                                                                                 |                            |                                            |                    |            
|                                     |                                                                                                                                 | Total Liabilities          |                                            |                    | 42,258,766 
|                                     |                                                                                                                                 |                            |                                            |                    |            
|Stockholders' Equity                 |                                                                                                                                 |                            |                                            |                    |            
|                                     | Common stock, $0.001 par value, 50,000,000 shares authorized and 10,071,844 and 10,060,178 issued and outstanding, respectively |                            |                                            | 10,072             |            
|                                     | Capital in excess of par value                                                                                                  |                            |                                            | 140,266,684        |            
|                                     | Notes receivableofficers                                                                                                       |                            |                                            | (8,983,796         | )          
|                                     | Declared distributions in excess of undistributed net realized earnings                                                         |                            |                                            | (629,687           | )          
|                                     |                                                                                                                                 |                            |                                            |                    |            
|                                     |                                                                                                                                 | Total Stockholders' Equity |                                            |                    | 130,663,273
|                                     |                                                                                                                                 |                            |                                            |                    |            
|                                     |                                                                                                                                 |                            | TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY |                    | $          
|                                     |                                                                                                                                 |                            |                                            |                    |            

See accompanying notes.

34

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GLADSTONE CAPITAL CORPORATION        SCHEDULE OF INVESTMENTS        SEPTEMBER 30, 2002

|Company                         |  | Industry                               |  | Investment                                                   |  | Cost |                     | Fair Value
|------------------------------- |  | -------------------------------------- |  | ------------------------------------------------------------ |  | ---- | ------------------- | ----------
|ARI Holdings, Inc.              |  | Manufacturing-auto parts               |  | Sr. Subordinated Debt                                        |  | $    | 8,250,803           |           
|Coyne International Enterprises |  | Industrial services                    |  | Term Loan                                                    |  |      | 16,054,268          |           
|Finn Corporation                |  | Manufacturing-landscape equipment      |  | Sr. Subordinated Debt
Common Stock Warrants for 2% ownership |  |      | 10,500,000
37,000   |           
|Home Care Supply, Inc.          |  | Medical equipment rental               |  | Sr. Subordinated Debt                                        |  |      | 18,000,000          |           
|Inca Metal Products Corporation |  | Material handling and storage products |  | Term Loan                                                    |  |      | 6,000,000           |           
|Kozy Shack Enterprises,Inc.     |  | Food preparations                      |  | Subordinated Debt                                            |  |      | 4,300,000           |           
|Marcal Paper Mills, Inc.        |  | Manufacturing-paper products           |  | Sr. Subordinated Debt
First Mortgage Facility                |  |      | 7,500,000
9,076,283 |           
|                                |  |                                        |  |                                                              |  |      |                     |           
|Totals                          |  |                                        |  |                                                              |  | $    | 79,718,354          |           
|                                |  |                                        |  |                                                              |  |      |                     |           

See accompanying notes.

35

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GLADSTONE CAPITAL CORPORATION        CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                                            |                                                | Year Ended
Sept. 30, 2002 |            | Period
May 30, 2001 (Inception)
Through
September 30, 2001 |          
|------------------------------------------------------------------------------------------- | ---------------------------------------------- | ------------------------- | ---------- | ---------------------------------------------------------- | ---------
|OPERATING INCOME                                                                            |                                                |                           |            |                                                            |          
|                                                                                            | Interest income-investments                    |                           | $6,641,144 |                                                            |         
|                                                                                            | Interest income-cash and cash equivalents      |                           | 1,576,304  |                                                            | $349,500 
|                                                                                            | Interest income-notes receivable from officers |                           | 433,391    |                                                            | 45,355   
|                                                                                            | Managerial assistance fees                     |                           | 1,673,614  |                                                            |         
|                                                                                            | Other income                                   |                           | 131,250    |                                                            |         
|                                                                                            |                                                |                           |            |                                                            |          
|                                                                                            |                                                | Total Operating Income    |            | $10,455,703                                                |          
|                                                                                            |                                                |                           |            |                                                            |          
|OPERATING EXPENSES                                                                          |                                                |                           |            |                                                            |          
|                                                                                            | Salaries and benefits                          |                           | $1,367,180 |                                                            | $229,379 
|                                                                                            | Rent                                           |                           | 125,128    |                                                            | 3,306    
|                                                                                            | Professional fees                              |                           | 549,781    |                                                            | 72,088   
|                                                                                            | Directors fees                                 |                           | 22,000     |                                                            | 38,000   
|                                                                                            | General and administrative                     |                           | 775,013    |                                                            | 144,726  
|                                                                                            |                                                |                           |            |                                                            |          
|                                                                                            |                                                | Total Operating Expenses  |            | $2,839,102                                                 |          
|                                                                                            |                                                |                           |            |                                                            |          
|NET OPERATING INCOME (LOSS)                                                                 |                                                | $7,616,601                |            | $(92,644                                                   | )        
|                                                                                            |                                                |                           |            |                                                            |          
|NET INCREASE (DECREASE) IN STOCKHOLDERS' EQUITY RESULTING FROM OPERATIONS                   |                                                | $7,616,601                |            | $(92,644                                                   | )        
|                                                                                            |                                                |                           |            |                                                            |          
|                                                                                            |                                               
|NET INCREASE (DECREASE) IN STOCKHOLDERS' EQUITY RESULTING FROM OPERATIONS PER COMMON SHARE: |                                                |                           |            |                                                            |          
|                                                                                            | Basic                                          |                           | $0.76      |                                                            | $(0.03   
|                                                                                            | Diluted                                        |                           | $0.75      |                                                            | $(0.03   
|WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:                                        |                                                |                           |            |                                                            |          
|                                                                                            | Basic                                          |                           | 10,064,900 |                                                            | 3,219,525
|                                                                                            | Diluted                                        |                           | 10,166,752 |                                                            | 3,219,525

See accompanying notes.

36

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GLADSTONE CAPITAL CORPORATION        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

|                                                                                                              |                         |            |         |         |     |              |           |             |            | Declared
Distributions
in Excess of
Undistributed
Net Realized
Earnings |   |              |  
|------------------------------------------------------------------------------------------------------------- | ----------------------- | ---------- | ------- | ------- | --- | ------------ | --------- | ----------- | ---------- | ----------------------------------------------------------------------- | - | ------------ | -
|
|
|
|Balance at May 30, 2001 (Inception)                                                                           |                         | 43,508     |         | $44     |     | $652,587     |           | $          |            | $                                                                      |   | $652,631     |  
|Issuance of Common Stock In Public Offering (net of underwritting discount and offering costs of $10,760,843) |                         | 9,430,000  |         | 9,430   |     | 130,679,727  |           |            |            |                                                                        |   | 130,689,157  |  
|Issuance of Common Stock                                                                                      |                         |            |         |         |     |              |           |             |            |                                                                         |   |              |  
|                                                                                                              | Under Stock Option Plan |            | 586,670 |         | 586 |              | 8,799,464 |             | (8,800,050 | )                                                                       |  |              | 
|Net Decrease in Stockholders' Equity Resulting from Operations                                                |                         |           |         |        |     |             |           |            |            | (92,644                                                                 | ) | (92,644      | )
|                                                                                                              |                         |            |         |         |     |              |           |             |            |                                                                         |   |              |  
|Balance at September 30, 2001                                                                                 |                         | 10,060,178 |         | $10,060 |     | $140,131,778 |           | $(8,800,050 | )          | $(92,644                                                                | ) | $131,249,144 |  
|                                                                                                              |                         |            |         |         |     |              |           |             |            |                                                                         |   |              |  
|Issuance of Common Stock                                                                                      |                         |            |         |         |     |              |           |             |            |                                                                         |   |              |  
|                                                                                                              | Under Stock Option Plan |            | 11,666  |         | 12  |              | 185,878   |             | (185,890   | )                                                                       |   |              | 
|Offering Costs                                                                                                |                         |            |         |         |     | (50,972      | )         |             |            |                                                                         |   | (50,972      | )
|Repayment of Principal on Notes Receivable                                                                    |                         |            |         |         |     |              |           | 2,144       |            |                                                                         |   | 2,144        |  
|Net Increase in Stockholders' Equity Resulting from Operations                                                |                         |            |         |         |     |              |           |             |            | 7,616,601                                                               |   | 7,616,601    |  
|Distributions Declared ($0.81 per common share)                                                               |                         |           |         |        |     |             |           |            |            | (8,153,644                                                              | ) | (8,153,644   | )
|                                                                                                              |                         |            |         |         |     |              |           |             |            |                                                                         |   |              |  
|Balance at September 30, 2002                                                                                 |                         | 10,071,844 |         | $10,072 |     | $140,266,684 |           | $(8,983,796 | )          | $(629,687                                                               | ) | $130,663,273 |  
|                                                                                                              |                         |            |         |         |     |              |           |             |            |                                                                         |   |              |  

See accompanying notes.

37

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GLADSTONE CAPITAL CORPORATION        CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                     |                                                                                                                                                            | Year Ended
September 30, 2002 |                                                                | Period
May 30, 2001 (Inception)
Through September 30, 2001 |            
|---------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------- | -------------------------------------------------------------- | ---------------------------------------------------------- | -----------
|CASH FLOWS FROM OPERATING ACTIVITIES                 |                                                                                                                                                            |                               |                                                                |                                                            |            
|                                                     | Net increase (decrease) in stockholders' equity resulting from operations                                                                                  |                               | $7,616,601                                                     |                                                            | $(92,644   
|                                                     | Adjustments to reconcile net increase (decrease) in stockholders' equity resulting from operations to net cash provided by (used in) operating activities: |                               |                                                                |                                                            |            
|                                                     |                                                                                                                                                            |                               | Depreciation                                                   |                                                            | 13,822     
|                                                     |                                                                                                                                                            |                               | Increase in interest receivable                                |                                                            | (719,638   
|                                                     |                                                                                                                                                            |                               | Decrease (increase) in other assets                            |                                                            | 75,546     
|                                                     |                                                                                                                                                            |                               | Increase in accrued expenses and deferred liabilities          |                                                            | 579,000    
|                                                     |                                                                                                                                                            |                               | Increase in prepaid assets                                     |                                                            | (191,705   
|                                                     |                                                                                                                                                            |                               | Increase in investment balance due to payment in kind interest |                                                            | (400,491   
|                                                     |                                                                                                                                                            |                               |                                                                |                                                            |            
|                                                     |                                                                                                                                                            |                               |                                                                | Net Cash Provided by (Used in) Operating Activities        |            
|                                                     |                                                                                                                                                            |                               |                                                                |                                                            |            
|CASH FLOWS FROM INVESTING ACTIVITIES                 |                                                                                                                                                            |                               |                                                                |                                                            |            
|                                                     | Purchase of furniture and equipment                                                                                                                        |                               | (70,976                                                        | )                                                          | (31,794    
|                                                     | Purchase of investments                                                                                                                                    |                               | (97,705,054                                                    | )                                                          |           
|                                                     | Principal repayments on investments                                                                                                                        |                               | 18,387,191                                                     |                                                            |           
|                                                     | Proceeds from repurchase agreements                                                                                                                        |                               | 44,098,719                                                     |                                                            |           
|                                                     | Repayment of repurchase agreements                                                                                                                         |                               | (4,900,000                                                     | )                                                          |           
|                                                     | Receipt of principal on notes receivable-officers                                                                                                          |                               | 2,144                                                          |                                                            |           
|                                                     |                                                                                                                                                            |                               |                                                                |                                                            |            
|                                                     |                                                                                                                                                            |                               |                                                                | Net Cash Used in Investing Activities                      |            
|                                                     |                                                                                                                                                            |                               |                                                                |                                                            |            
|CASH FLOWS FROM FINANCING ACTIVITIES                 |                                                                                                                                                            |                               |                                                                |                                                            |            
|                                                     | Net proceeds from the issuance of common stock                                                                                                             |                               |                                                               |                                                            | 131,341,788
|                                                     | Offering costs                                                                                                                                             |                               | (50,972                                                        | )                                                          |            
|                                                     | (Decrease) increase in accrued offering costs                                                                                                              |                               | (590,382                                                       | )                                                          | 590,382    
|                                                     | Distributions paid                                                                                                                                         |                               | (6,038,557                                                     | )                                                          |           
|                                                     |                                                                                                                                                            |                               |                                                                |                                                            |            
|                                                     |                                                                                                                                                            |                               |                                                                | Net Cash (Used in) Provided by Financing Activities        |            
|                                                     |                                                                                                                                                            |                               |                                                                |                                                            |            
|NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |                                                                                                                                                            | (39,894,752                   | )                                                              | 131,824,080                                                |            
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD       |                                                                                                                                                            | 131,824,080                   |                                                                |                                                           |            
|                                                     |                                                                                                                                                            |                               |                                                                |                                                            |            
|CASH AND CASH EQUIVALENTS, END OF PERIOD             |                                                                                                                                                            | $91,929,328                   |                                                                | $131,824,080                                               |            
|                                                     |                                                                                                                                                            |                               |                                                                |                                                            |            
|NON-CASH FINANCING ACTIVITIES                        |                                                                                                                                                            |                               |                                                                |                                                            |            
|                                                     | Notes receivable issued in exchange for common stock associated with the exercise of employee stock options                                                |                               | $185,890                                                       |                                                            | $8,800,050 
|                                                     |                                                                                                                                                            |                               |                                                                |                                                            |            

See accompanying notes.

38

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GLADSTONE CAPITAL CORPORATION        NOTES TO FINANCIAL STATEMENTS        SEPTEMBER 30, 2002

Note 1. Organization

Gladstone Capital Corporation (the Company) was incorporated under the General Corporation Laws of the State of Maryland on May 30, 2001 as a
closed-end investment company. The Company has elected to be treated as a business development company under the Investment Company Act of 1940, as amended. In addition, the Company has
elected to be treated for tax purposes as a regulated investment company, or RIC, under the Internal Revenue Code of 1986, as amended (the Code). The Company's investment objectives are to achieve a
high level of current income by investing in debt and equity securities of established private businesses.

Gladstone
Advisers, Inc. (Advisers), a wholly-owned subsidiary, conducts the daily administrative operations of the Company and provides managerial assistance to the Company's
portfolio companies.

On
August 29, 2001, the Company closed its initial public offering and sold 9,430,000 shares of its common stock at $15.00 per share less an underwriting discount of $1.05 per
share and offering expenses of $859,343 for total net proceeds to the Company of $130,689,157.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany balances and
transactions have been eliminated.

Use of Estimates

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States that require management
to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents consist of demand deposits and highly liquid investments with original maturities of three months or less. Cash and cash equivalents are
carried at cost which approximates fair value as of September 30, 2002. Cash and cash equivalents pledged to creditors as of September 30, 2002 consists of the United States Treasury
Bill that collateralizes the Company's Repurchase Agreement.

Concentration of Credit Risk

The Company places its cash and cash equivalents with financial institutions and, at times, cash held in checking accounts may exceed the Federal Deposit
Insurance Corporation insured limit.

Investment Valuation

The Company carries its investments at fair value, as determined by its Board of Directors. Securities that are publicly traded, if any, are valued at the closing
price on the valuation date. Debt and equity securities that are not publicly traded (which, to date, constitutes all of the Company's investments), or for which the Company has various degrees of
trading restrictions, are valued at fair value as determined in good faith by the Company's Board of Directors. In making such determination, the Company's Board of Directors will value
non-convertible debt securities at cost plus amortized original issue discount and PIK interest, if any, unless adverse factors lead to a determination of a

39

---

lesser valuation. In valuing convertible debt, equity or other securities, the Company's Board of Directors determines the fair value based on the collateral, the issuer's ability to make payments,
the current and forecasted earnings of the issuer, sales to third parties of similar securities, the comparison to publicly traded securities and other pertinent factors. Due to the uncertainty
inherent in the valuation process, such estimates of fair value may differ significantly from the values that would have been obtained had a ready market for the securities existed, and the
differences could be material. Additionally, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on
these investments to be different than the valuations currently assigned.

Property and Equipment

Property and equipment are carried at cost and are depreciated using the straight-line method over the estimated useful lives of the related assets
ranging from three to seven years.

Interest Income Recognition

Interest income is recorded on the accrual basis to the extent that such amounts are expected to be collected. The Company stops accruing interest on its
investments when it is determined that interest is no longer collectible.

Payment in Kind Interest

The Company has loans in its portfolio which contain a payment in kind ("PIK") provision. The PIK interest, computed at the contractual rate specified in each
loan agreement, is added to the principal balance of the loan and recorded as income. To maintain the Company's status as a RIC, this non-cash source of income must be paid out to
stockholders in the form of dividends, even though the Company has not yet collected the cash. For the year ended September 30, 2002, the Company recorded PIK income of $461,627. The Company
did not record any PIK income for the period from inception (May 30, 2001) through September 30, 2001.

Stock Options

The Company applies APB No. 25, "Accounting for Stock Issued to Employees" (APB 25), and related interpretations in accounting for its stock-based
compensation plan. In accordance with SFAS 123, "Accounting for Stock-Based Compensation" (SFAS 123), the Company has elected to apply the provisions of APB 25 and provide pro forma
disclosure (see Note 3) of the Company's net operating income calculated as if the grants of stock options had been recorded as compensation costs in accordance with SFAS 123.

Management Fees

The Company is self-managed and therefore does not incur management fees payable to third parties.

40

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Federal Income Taxes

The Company intends to qualify for treatment as a RIC under Subchapter M of the Code. As a RIC, the Company will not be subject to federal income tax on the
portion of its taxable income and gains distributed to stockholders. To qualify as a RIC, the Company is required to distribute to its stockholders at least 90% of investment company taxable income,
as defined by the Code.

Dividends

Distributions to stockholders are recorded on the ex-dividend date. The Company is required to pay out at least 90% of its ordinary income and
short-term capital gains for each taxable year as a dividend to its stockholders in order to maintain its status as a RIC under Subtitle A, Chapter 1 of Subchapter M of the Code. It is the
policy of the Company to pay out as a dividend up to 100% of those amounts. The amount to be paid out as a dividend is determined by the Board of Directors each quarter and is based on the annual
earnings estimated by the management of the Company. Based on that estimate, a dividend is declared each quarter. At year-end the Company may pay a bonus dividend, in addition to the
quarterly dividends, to ensure that it has paid out at least 90% of its ordinary income and short-term capital gains for the year. The Company has a policy of retaining
long-term capital gains, if any, and not paying them out as dividends.

Note 3. Stock Option Plan

Effective July 23, 2001, the Company adopted the Amended and Restated 2001 Equity Incentive Plan (the 2001 Plan). The Company has authorized 1,500,000
shares of capital stock for the issuance of options under the 2001 Plan to employees and directors. Options granted under the 2001 Plan may be exercised during a term not to exceed ten years from the
date of grant. Unless sooner terminated by the Company's Board of Directors, the 2001 Plan will terminate on June 1, 2011 and no additional awards may be made under the 2001 Plan after that
date. Only employees of the Company and its subsidiaries are eligible to receive incentive stock options and both employees and non-employee directors are eligible to receive nonstatutory
stock options under the 2001 Plan.

Options
granted under the 2001 Plan may be either incentive stock options or nonstatutory stock options. A portion of the options granted during the fiscal year ended
September 30, 2002 and each option granted during the period from inception through September 30, 2001 vest as follows: one-half of the number of shares issuable upon
exercise of the option vested immediately on the grant date and the remaining shares vest on the date that is one year after the grant date. The remaining options granted during the fiscal year ended
September 30, 2002 vest as follows: 60% of the shares issuable upon exercise of the options vested immediately on the grant date and the remaining shares vest on the date that is one year after
the grant date.

Had
the Company not elected to account for its stock-based compensation in accordance with APB 25, and had instead elected to record the cost of granting stock options under the 2001
Plan as compensation expense in accordance with the provisions of SFAS 123, the Company's net increase

41

---

(decrease) in stockholders' equity resulting from operations for the fiscal year ended September 30, 2002 and for the period from inception through September 30, 2001 would have been as
follows:

|                                                                                    |                     | Year Ended
September 30, 2002 |            | Period
May 30, 2001
(Inception) Through
September 30, 2001 |            
|----------------------------------------------------------------------------------- | ------------------- | ----------------------------- | ---------- | ---------------------------------------------------------- | -----------
|Net increase (decrease) in stockholders' equity resulting from operations           |                     |                               |            |                                                            |            
|                                                                                    | As reported         |                               | $7,616,601 |                                                            | $(92,644   
|                                                                                    | Pro forma           |                               | $6,061,502 |                                                            | $(1,826,984
|Net increase (decrease) in stockholders' equity resulting from operations per share |                     |                               |            |                                                            |            
|                                                                                    | As reported-basic   |                               | $0.76      |                                                            | $(0.03     
|                                                                                    | As reported-diluted |                               | $0.75      |                                                            | $(0.03     
|                                                                                    | Pro forma-basic     |                               | $0.60      |                                                            | $(0.57     
|                                                                                    | Pro forma-diluted   |                               | $0.60      |                                                            | $(0.57     

The
pro forma effects of applying SFAS 123 on reported net increase (decrease) in stockholders' equity resulting from operations for the year ended September 30, 2002 and
the period from inception through September 30, 2001 are not likely to be representative of the effects on reported net (decrease) increase in stockholders' equity resulting from operations for
future years.

For
options granted during the fiscal year ended September 30, 2002, the Company estimated a fair value per option on the date of grant of $1.40 using a Black-Scholes
option-pricing model and the following assumptions: dividend yield of 8.17%, risk-free interest rate of 2.02%, expected volatility factor of 0.258, and expected lives of the options of
three years. For options granted during the period from inception through September 30, 2001, the Company estimated a fair value per option on the date of grant of $2.51 using a Black-Scholes
option-pricing model and the following assumptions: dividend yield of 6.00%, risk-free interest rate of 4.60%, expected volatility factor of 0.324, and expected lives of the options of
three years.

A
summary of the status of the Company's 2001 Plan for the period from inception through September 30, 2002 is as follows:

Shares

Weighted Average
Exercise PriceOptions outstanding at May 30, 2001

Granted

1,250,000

$15.00Exercised

(586,670
)
$15.00Options outstanding at September 30, 2001, of which 63,330 shares were exercisable

663,330

$15.00Granted

160,000

$17.14Exercised

(11,666
)
$15.93Options outstanding at September 30, 2002, of which 741,664 shares are exercisable

811,664

$15.40


42

---

A
detailed summary of the stock options outstanding at September 30, 2002 is presented in the following table:

|              |  |         |  |     
|------------- |  | ------- |  | ----
|
|$15.00$17.18 |  | 811,664 |  | 9.08

During
the fiscal year ended September 30, 2002, the Company issued 11,666 shares of common stock to employees of the Company pursuant to stock option exercises, in exchange for
full recourse notes receivable totaling $185,890. During the period from inception through September 30, 2001, the Company issued 586,670 shares of common stock to employees of the Company
pursuant to stock option exercises, in exchange for full recourse notes receivable totaling $8,800,050. These transactions were effected pursuant to the 2001 Plan, which allows the Company to lend its
employees funds to pay for the exercise of stock options. All loans made under this arrangement are fully secured by the value of the common stock purchased. Interest is charged and paid on such loans
at the market rate as determined based on individual financial positions.

Note 4. Commitments and Contingencies

The Company occupies its office space pursuant to a license agreement. The license was effective beginning November 1, 2001 and was initially scheduled to
expire on October 31, 2002. The Company has elected to extend the license agreement until October 31, 2003. The future payments under this license total $188,530.

Note 5. Earnings (Loss) Per Share

The following table sets forth the computation of basic and diluted earnings (loss) per share for the fiscal year ended September 30, 2002 and the period
from inception through September 30, 2001:

|                                                          |  | Year Ended
September 30, 2002 |  | Period
May 30, 2001
(Inception) Through
September 30, 2001 |  
|--------------------------------------------------------- |  | ----------------------------- |  | ---------------------------------------------------------- | -
|Numerator for basic and diluted earnings (loss) per share |  | $7,616,601                    |  | $(92,644                                                   | )
|                                                          |  |                               |  |                                                            |  
|Denominator for basic weighted average shares             |  | 10,064,900                    |  | 3,219,525                                                  |  
|Dilutive effect of stock options                          |  | 101,852                       |  | 0                                                          |  
|                                                          |  |                               |  |                                                            |  
|Denominator for diluted weighted average shares           |  | 10,166,752                    |  | 3,219,525                                                  |  
|                                                          |  |                               |  |                                                            |  
|Basic earnings (loss) per share                           |  | $0.76                         |  | $(0.03                                                     | )
|                                                          |  |                               |  |                                                            |  
|Diluted earnings (loss) per share                         |  | $0.75                         |  | $(0.03                                                     | )
|                                                          |  |                               |  |                                                            |  

Note 6. Related Party Transactions

The
Company has provided loans to employees for the exercise of options under the 2001 Plan. The loans require the quarterly payment of interest at the market rate of interest in effect
at the date

43

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of issue, have varying terms not exceeding nine years and have been recorded as a reduction of stockholders' equity. The loans are evidenced by full recourse notes that are due upon maturity or
60 days following termination of employment, and the shares of common stock purchased with the proceeds of the loan are posted as collateral. During the fiscal year ended September 30,
2002, the
Company issued $185,890 in loans to two employees for the exercise of options. During the period from inception through September 30, 2001, the Company issued $8,800,050 in loans to seven
employees for the exercise of options. The Company recognized interest income from all employee stock option loans of $433,391 and $45,355 during the fiscal year ended September 30, 2002 and
the period from inception through September 30, 2001, respectively. The outstanding principal balances due on all employee stock option loans at September 30, 2002 and
September 30, 2001 were $8,983,796 and $8,800,050, respectively.

During
the fiscal year ended September 30, 2002, the Company paid personnel recruiting fees totaling $31,750 to Medical Funding Corporation. Anthony W. Parker, a director of the
Company, is the founder, Chairman and President of Medical Funding Corporation.

Note 7. Repurchase Agreement

On September 30, 2002, the Company entered into a repurchase agreement (the Repurchase Agreement) with UBS PaineWebber for $39,198,719, which agreement was
settled on October 1, 2002. The Repurchase Agreement was recorded at cost and was fully collateralized by a United States Treasury Bill with a fair value of $40,004,000 and a carrying value of
$39,998,799 that matured on October 3, 2002. The interest rate on the Repurchase Agreement was 1.85%.

A
repurchase agreement involves the purchase by an investor, such as the Company, of a specified security and the simultaneous agreement by the seller to repurchase it at an agreed-upon
future date and at a price which is greater than the purchase price by an amount that reflects an agreed-upon interest rate. Such interest rate is effective for the period of time during
which the investor's money is invested in the arrangement and is related to current market interest rates rather than the coupon rate on the purchased security. The Company requires the continual
maintenance by its custodian or the correspondent in its account with the Federal Reserve/Treasury Book Entry System of underlying securities. In the future the Company plans to use a similar form of
repurchase agreement as an investment option or in order to satisfy certain asset diversification requirements and maintain the Company's status as a RIC under Subchapter M of the Code.

Note 8. Deferred Compensation Plan

The Company has adopted a deferred compensation plan (the 401(k) Plan) effective January 1, 2002. The 401(k) Plan permits an employee to defer the lesser
of 75% of his or her total annual compensation or the applicable Internal Revenue Service (IRS) annual limit. Employees of the Company are eligible to participate in the 401(k) Plan upon completion of
1,000 hours of service within the first six months of employment or after one year of service. The service requirement has been waived for those employees who were employed by the Company as of
January 1, 2002. As of September 30, 2002, the Company has not funded any contributions to the 401(k) Plan. The Company has received a determination letter from the IRS concurring that
the deferred compensation plan satisfies the qualification requirements of the Code. For the fiscal year ended September 30, 2002, the

44

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Company recorded $23,569 in expenses related to the 401(k) Plan. There were no expenses related to the 401(k) Plan incurred during the period from inception through September 30, 2001.

Note 9. Dividends

On January 15, 2002, the Company paid a dividend of $0.18 per share on its common stock to its stockholders of record as of December 31, 2001. On
April 8, 2002, the Company paid a dividend of $0.21 per share on its common stock to its stockholders of record as of March 28, 2002. On July 8, 2002, the Company paid a dividend
of $0.21 per share on its common stock to its stockholders of record as of June 28, 2002. On October 7, 2002, the Company paid a dividend of $0.21 per share on its common stock to its
stockholders of record as of September 30, 2002. Aggregate dividends declared and paid for the 2002 fiscal year were approximately $8.2 million. The Company declared these dividends
based upon an estimate of net operating income for the year. Because of the difficult economic climate during the year, the Company's investment pace was slower than originally anticipated, and
consequently, net operating income was lower than originally projected. This resulted in dividends related to the 2002 fiscal year exceeding net operating income for the year by approximately
$0.5 million. Additionally, dividends related to the 2002 fiscal year exceeded current and accumulated earnings and profits and, as a result, a portion of the Company's dividends will be
treated as a return of capital to the Company's stockholders.

Note 10. Managerial Assistance Fees

The 1940 Act requires that a business development company make available managerial assistance to its portfolio companies. The company provides managerial
assistance to its portfolio companies in connection with its investments through its wholly-owned subsidiary, Advisers, and receives fees for its managerial assistance services. Such fees are normally
paid at the closing of the Company's investments in its portfolio companies, are generally non-recurring and are recognized as revenue when earned. The managerial assistance services
provided by the Company vary by investment, but generally consist of reviewing existing credit facilities, arranging bank financing, arranging equity financing, structuring financing from multiple
lenders, structuring financing from equity investors, restructuring existing loans, raising equity and debt capital, and providing general financial advice. For the fiscal year ended
September 30, 2002, these fees totaled $1,673,614. For the period from inception through September 30, 2001, the Company did not receive any managerial assistance fees.

From
time to time, the Company is invited to participate as a co-lender in a transaction. In the event that the Company does not provide significant managerial assistance
services in connection with its investment, loan fees paid to the Company in such situations are deferred and amortized over the life of the loan. The Company did not receive any such loan fees during
the fiscal year ended September 30, 2002 or for the period from inception through September 30, 2001.

Note 11. Subsequent Event

Subsequent to September 30, 2002, the Company filed a registration statement with the SEC that would permit the Company to issue, through one or more
transactions, up to an aggregate of $75 million in securities, consisting of common stock, preferred stock and/or debt securities. The Company may not issue any such securities until the
registration statement has been declared effective

45

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by the SEC. The Company has no immediate plans to issue any securities under the registration statement.

Note 12. Financial Highlights

|                                                           |  | Year Ended
September 30, 2002 |   | Period
May 30, 2001 (Inception)
Through
September 30, 2001 |      
|---------------------------------------------------------- |  | ----------------------------- | - | ---------------------------------------------------------- | -----
|Per Share Data (1)                                         |  |                               |   |                                                            |      
|Net asset value at beginning of period                     |  | $13.05                        |   | $15.00                                                     |      
|Net operating income (loss)                                |  | 0.76                          |   | (0.03                                                      | )    
|Issuance of common stock                                   |  | (0.02                         | ) | (0.80                                                      | )    
|Offering costs and underwriting discount                   |  | (0.01                         | ) | (1.12                                                      | )    
|Distributions from net investment income                   |  | (0.76                         | ) |                                                           |      
|Distributions in excess of net investment income           |  | (0.05                         | ) |                                                           |      
|                                                           |  |                               |   |                                                            |      
|Net asset value at end of period                           |  | $12.97                        |   | $13.05                                                     |      
|Per share market value at beginning of period              |  | $16.14                        |   | $15.00                                                     | (4)  
|Per share market value at end of period                    |  | 16.88                         |   | 16.14                                                      |      
|Total Return (2)                                           |  | 9.60                          | % | 7.60                                                       | %(3) 
|Shares outstanding at end of period                        |  | 10,071,844                    |   | 10,060,178                                                 |      
|Ratios/Supplemental Data                                   |  |                               |   |                                                            |      
|Net assets at end of period                                |  | $130,663,273                  |   | $131,249,144                                               |      
|Average net assets                                         |  | 130,984,674                   |   | 52,937,390                                                 |      
|Ratio of operating expenses to average net assets          |  | 2.17                          | % | 0.92                                                       | %(3) 
|Ratio of net operating income (loss) to average net assets |  | 5.81                          | % | (0.18                                                      | )%(3)

---

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Note 13. Selected Quarterly Data (Unaudited)

|                                                               |  | Year Ended September 30, 2002
|-------------------------------------------------------------- |  | -----------------------------
|
|Total Operating Income                                         |  | $1,689,399                   
|Net Operating Income                                           |  | 1,196,980                    
|Net Increase in Stockholders' Equity Resulting From Operations |  | 1,196,980                    
|Basic Earnings per Common Share                                |  | $0.12                        
|Diluted Earnings per Common Share                              |  | $0.12                        

|                                                               |  | Period May 30, 2001 (Inception)
Through September 30, 2001 |  
|-------------------------------------------------------------- |  | ---------------------------------------------------------- | -
|
|Total Operating Income                                         |  | $0                                                         |  
|Net Operating Loss                                             |  | (39,400                                                    | )
|Net Decrease in Stockholders' Equity Resulting From Operations |  | (39,400                                                    | )
|Basic Loss per Common Share                                    |  | $(0.91                                                     | )
|Diluted Loss per Common Share                                  |  | $(0.91                                                     | )

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

None.

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PART III

We will file a definitive Proxy Statement for our 2003 Annual Meeting of Stockholders (the "2003 Proxy Statement") with the SEC, pursuant to
Regulation 14A, not later than 120 days after the end of our fiscal year. Accordingly, certain information required by Part III has been omitted under General Instruction G(3) to
Form 10-K. Only those sections of the 2003 Proxy Statement that specifically address the items set forth herein are incorporated by reference.

Item 10. Directors and Executive Officers of the Registrant

The information required by Item 10 is hereby incorporated by reference from our 2003 Proxy Statement under the captions "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance."

Item 11. Executive Compensation

The information required by Item 11 is hereby incorporated by reference from our 2003 Proxy Statement under the caption "Compensation of Directors and Executive
Officers."

Item 12. Security Ownership of Certain Beneficial Owners and Management

The information required by Item 12 is hereby incorporated by reference from our 2003 Proxy Statement under the caption "Security Ownership of Certain Beneficial
Owners and Management."

Item 13. Certain Relationships and Related Transactions

The information required by Item 13 is hereby incorporated by reference from our 2003 Proxy Statement under the caption "Certain Transactions."

Item 14. Controls and Procedures.

Within the 90-day period prior to the date of this report, our chief executive officer and chief financial officer evaluated the effectiveness of the
design and operation of our disclosure controls and procedures and concluded that such disclosure controls and procedures are effective. There have been no significant changes in our internal controls
or in other factors, which could significantly affect internal controls subsequent to the date that our chief executive officer and chief financial officer carried out their evaluations.

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PART IV

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

a.    DOCUMENTS FILED AS PART OF THIS REPORT

|                                                                                                                                                            |  | Page
|----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|Report of Independent Auditors                                                                                                                              |  | 33  
|Consolidated Balance Sheets as of September 30, 2002 and September 30, 2001                                                                                 |  | 34  
|Consolidated Schedule of Investments as of September 30, 2002                                                                                               |  | 35  
|Consolidated Statement of Operations for the year ended September 30, 2002 and the period from May 30, 2001 (inception) through September 30, 2001          |  | 36  
|Consolidated Statement of Stockholders Equity for the year ended September 30, 2002 and the period from May 30, 2001 (inception) through September 30, 2001 |  | 37  
|Consolidated Statement of Cash Flows for the year ended September 30, 2002 and the period from May 30, 2001 (inception) through September 30, 2001          |  | 38  
|Notes to Financial Statements                                                                                                                               |  | 39  

No
financial statement schedules are filed herewith because (1) such schedules are not required or (2) the information has been presented in the aforementioned financial
statements.

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

|3.1*  |  | Articles of Amendment and Restatement of the Articles of Incorporation, incorporated by reference to Exhibit a.2 to Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File
No. 333-63700), filed July 27, 2001.                                                                                                     
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.2*  |  | By-laws, incorporated by reference to Exhibit b to Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-63700), filed July 27, 2001.                                                                                                                                                                      
|4.1*  |  | Form of Direct Registration Transaction Advice for the Company's common stock, par value $0.001 per share, the rights of holders of which are defined in exhibits 3.1 and 3.2, incorporated by reference to Exhibit d to
Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-63700), filed July 27, 2001.
|4.2*  |  | Specimen Stock Certificate, incorporated by reference to Exhibit d.2 to Pre-Effective Amendment No. 3 to the Registration Statement on Form N-2 (File No. 333-63700), filed August 23,
2001.                                                                                                                                               
|10.1* |  | Employment Agreement, dated June 25, 2001, between the Company and David Gladstone, incorporated by reference to Exhibit k.2 to Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2
(File No. 333-63700), filed July 27, 2001.                                                                                         
|10.2* |  | Employment Agreement, dated July 23, 2001, between the Company and Terry Lee Brubaker, incorporated by reference to Exhibit k.3 to Pre-Effective Amendment No. 1 to the Registration Statement on
Form N-2 (File No. 333-63700), filed July 27, 2001.                                                                                      
|10.3* |  | Amendment to Employment Agreement, dated August 8, 2001, between the Company and David Gladstone, incorporated by reference to Exhibit k.4 to Pre-Effective Amendment No. 2 to the Registration Statement on
Form N-2 (File No. 333-63700), filed August 10, 2001.                                                                         
|10.4* |  | Employment Agreement, dated September 12, 2002, between the Company and George Stelljes III, incorporated by reference to Exhibit k.5 to Registration Statement on Form N-2 (File No. 333-100385), filed
October 7, 2002.                                                                                                                  

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|10.5*  |  | Promissory Note of David Gladstone in favor of the Company, dated August 23, 2001, incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the period ended June 30,
2001, filed October 4, 2001.                                    
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.6*  |  | Promissory Note of Terry Brubaker in favor of the Company, dated August 23, 2001, incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the period ended June 30,
2001, filed October 4, 2001.                                     
|10.7*  |  | Promissory Note of Harry Brill in favor of the Company, dated August 23, 2001, incorporated by reference to Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for the period ended June 30,
2001, filed October 4, 2001.                                        
|10.8*  |  | Subscription Agreement dated May 30, 2001, incorporated by reference to Exhibit p to the Registration Statement on Form N-2 (File No. 333-63700), filed June 22, 2001.                                                                                                    
|10.9*  |  | Facility Service License, dated November 1, 2001,between the Company and Teqcorner, LLC, incorporated by reference to Exhibit 10.8 to the Company's Annual Report
on Form 10-K for the fiscal year ended September 30, 2001 (File No. 814-00237), filed December 21, 2001.
|10.10* |  | Amended and Restated 2001 Equity Incentive Plan, incorporated by reference to Exhibit i.1 to Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-63700), filed
July 27, 2001.                                                           
|10.11* |  | First Amendment to Amended and Restated 2001 Equity Incentive Plan, incorporated by reference to Exhibit i.3 to Pre-Effective Amendment No. 2 to the Registration Statement on Form N-2
(File No. 333-63700), filed August 10, 2001.                                      
|10.12* |  | Form of Stock Option Agreement, incorporated by reference to Exhibit i.2 to Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-63700), filed July 27,
2001.                                                                            
|10.13* |  | Form of Early Exercise Stock Purchase Agreement, incorporated by reference to Exhibit i.4 to Pre-Effective Amendment No. 3 to the Registration Statement on Form N-2 (File No. 333-63700), filed
August 23, 2001.                                                         
|10.14* |  | Second Amendment to Amended and Restated 2001 Equity Incentive Plan, incorporated by reference to Exhibit i.5 to the Registration Statement on Form N-2 (File No. 333-100385), filed October 7,
2002.                                                                     
|11+    |  | Computation of Per Share Earnings (included in the notes to the audited financial statements contained in this report).                                                                                                                                                   
|21*    |  | Subsidiaries of the Registrant, incorporated by reference to Exhibit 21 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2001 (File No. 814-00237), filed
December 21, 2001.                                                           
|99.1+  |  | Certification.                                                                                                                                                                                                                                                            

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All
other exhibits for which provision is made in the applicable regulations of the SEC are not required under the related instruction or are inapplicable and therefore
have been omitted.

b.    REPORTS ON FORM 8-K

During the last fiscal quarter of the fiscal year ended September 30, 2002, we did not file any reports on Form 8-K.

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SIGNATURES

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

|                        |  | GLADSTONE CAPITAL CORPORATION
|----------------------- |  | -----------------------------
|Date: December 11, 2002 |  | By:                          

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 registrant and in the capacity and on the
dates indicated.

|Date: December 11, 2002 |  | By: | /s/DAVID GLADSTONEDavid Gladstone
Chief Executive Officer and Chairman of the Board of Directors
(principal executive officer)
|----------------------- |  | --- | ------------------------------------------------------------------------------------------------------------------------------
|Date: December 11, 2002 |  | By: | /s/TERRY L. BRUBAKERTerry Lee Brubaker
President, Chief Operating Officer and Director                                        
|Date: December 11, 2002 |  | By: | /s/HARRY BRILLHarry Brill
Chief Financial Officer
(principal financial and accounting officer)                                
|Date: December 11, 2002 |  | By: | /s/DAVID A.R. DULLUMDavid A.R. Dullum
Director                                                                                
|Date: December 11, 2002 |  | By: | /s/ANTHONY W. PARKERAnthony W. Parker
Director                                                                                
|Date: December 11, 2002 |  | By: | /s/MICHELA A. ENGLISHMichela A. English
Director                                                                              

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Certifications:

I,
David Gladstone, certify that:





Date:
December 11, 2002

|/s/DAVID GLADSTONEDavid Gladstone
Chief Executive Officer and
Chairman of the Board of Directors |  | 
|------------------------------------------------------------------------------------------------ |  | 

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I, Harry Brill, certify that:





Date:
December 11, 2002

|/s/HARRY BRILLHarry Brill
Chief Financial Officer |  | 
|------------------------------------------------- |  | 

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Exhibit List

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