##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q







|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

FOR THE QUARTER ENDED SEPTEMBER 30, 2011



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

COMMISSION FILE NUMBER: 000-51233





GLADSTONE
INVESTMENT CORPORATION

(Exact name of registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|DELAWARE                                                       |  | 83-0423116                          
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer Identification No.)

1521 WESTBRANCH DRIVE, SUITE 200

MCLEAN, VIRGINIA 22102

(Address of principal executive office)

(703) 287-5800

(Registrants telephone number, including area code)





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  x    No   ̈

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    No   ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company. See the definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12 b-2 of the Exchange Act.



|                        |  |   |  |                           |  |   
|----------------------- |  | - |  | ------------------------- |  | --
|Large accelerated filer |  |  ̈ |  | Accelerated filer         |  | x 
|                        |  |   | 
|Non-accelerated filer   |  |  ̈ |  | Smaller reporting company |  |  ̈.

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

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date. The
number of shares of the issuers Common Stock, $0.001 par value per share, outstanding as of October 31, 2011, was 22,080,133.









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##### Table of Contents

GLADSTONE INVESTMENT CORPORATION

TABLE OF CONTENTS



|           |  |                                                                                                                 |    |  |    | 
|---------- |  | --------------------------------------------------------------------------------------------------------------- | -- |  | -- | 
|PART I.    |  | FINANCIAL INFORMATION:                                                                                          |    |  |    | 
|           |  |                                                                                                                
|Item 1.    |  | Financial Statements (Unaudited)                                                                                |    |  |    | 
|           |  |                                                                                                                
|           |  | Condensed Consolidated Statements of Assets and Liabilities as of September 30, 2011 and March 
31, 2011        |    |  | 3  | 
|           |  | Condensed Consolidated Statements of Operations for the three and six months ended September 30, 2011 and 2010  |    |  | 4  | 
|           |  | Condensed Consolidated Statements of Changes in Net Assets for the six months ended September 30, 2011 and 2010 |    |  | 5  | 
|           |  | Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2011 and
2010            |    |  | 6  | 
|           |  | Condensed Consolidated Schedules of Investments as of September 30, 2011 and March 31,
2011                     |    |  | 7  | 
|           |  | Notes to Condensed Consolidated Financial Statements                                                            |    |  | 11 | 
|           |  |                                                                                                                
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of
Operations                           |    |  | 28 | 
|           |  | Overview                                                                                                        |    |  | 28 | 
|           |  | Results of Operations                                                                                           |    |  | 32 | 
|           |  | Liquidity and Capital Resources                                                                                 |    |  | 42 | 
|           |  |                                                                                                                
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                                                      |    |  | 51 | 
|           |  |                                                                                                                
|Item 4.    |  | Controls and Procedures                                                                                         |    |  | 51 | 
|           |  |                                                                                                                
|PART II.   |  | OTHER INFORMATION:                                                                                              |    |  |    | 
|           |  |                                                                                                                
|Item 1.    |  | Legal Proceedings                                                                                               |    |  | 52 | 
|           |  |                                                                                                                
|Item 1A.   |  | Risk Factors                                                                                                    |    |  | 52 | 
|           |  |                                                                                                                
|Item 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                     |    |  | 52 | 
|           |  |                                                                                                                
|Item 3.    |  | Defaults Upon Senior Securities                                                                                 |    |  | 52 | 
|           |  |                                                                                                                
|Item 4.    |  | Removed and Reserved                                                                                            |    |  | 52 | 
|           |  |                                                                                                                
|Item 5.    |  | Other Information                                                                                               |    |  | 52 | 
|           |  |                                                                                                                
|Item 6.    |  | Exhibits                                                                                                        |    |  | 52 | 
|           | 
|SIGNATURES |  |                                                                                                                 | 53 | 



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##### Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)



|                                                                                                                                                           |  |               |         |   |           |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | --------- | - | ------- | -
|                                                                                                                                                           |  | September 30, |         |   | March 31, |  
|                                                                                                                                                           |  | 2011          |         |   | 2011      |  
|                                                                                                                                                           |  |              
|ASSETS                                                                                                                                                     |  |               |         |   |           |   |         |  
|Investments at fair value                                                                                                                                  |  |               |         |   |           |   |         |  
|Control investments (Cost of $184,831 and $136,306, respectively)                                                                                          |  | $             | 153,521 |   |           | $ | 104,062 |  
|Affiliate investments (Cost of $59,013 and $45,145, respectively)                                                                                          |  |               | 52,165  |   |           |   | 34,556  |  
|Non-Control/Non-Affiliate investments (Cost of $12,834 and $15,741, respectively)                                                                          |  |               | 12,370  |   |           |   | 14,667  |  
|                                                                                                                                                           |  |               |         |   |           |   |         |  
|Total investments (Cost of $256,678 and $197,192, respectively)                                                                                            |  |               | 218,056 |   |           |   | 153,285 |  
|Cash and cash equivalents                                                                                                                                  |  |               | 72,704  |   |           |   | 80,580  |  
|Restricted cash                                                                                                                                            |  |               | 1,386   |   |           |   | 4,499   |  
|Interest receivable                                                                                                                                        |  |               | 1,365   |   |           |   | 737     |  
|Due from custodian                                                                                                                                         |  |               | 725     |   |           |   | 859     |  
|Deferred financing fees                                                                                                                                    |  |               | 265     |   |           |   | 373     |  
|Prepaid assets                                                                                                                                             |  |               | 436     |   |           |   | 224     |  
|Other assets                                                                                                                                               |  |               | 424     |   |           |   | 552     |  
|                                                                                                                                                           |  |               |         |   |           |   |         |  
|TOTAL ASSETS                                                                                                                                               |  | $             | 295,361 |   |           | $ | 241,109 |  
|                                                                                                                                                           |  |               |         |   |           |   |         |  
|                                                                                                                                                           |  |              
|LIABILITIES                                                                                                                                                |  |               |         |   |           |   |         |  
|Borrowings at fair value                                                                                                                                   |  |               |         |   |           |   |         |  
|Short-term loan (Cost of $62,501and $40,000, respectively)                                                                                                 |  | $             | 62,501  |   |           | $ | 40,000  |  
|Credit Facility (Cost of $21,000and $0, respectively)                                                                                                      |  |               | 21,405  |   |           |   |        |  
|                                                                                                                                                           |  |               |         |   |           |   |         |  
|Total borrowings (Cost of $83,501and $40,000, respectively)                                                                                                |  |               | 83,906  |   |           |   | 40,000  |  
|Accounts payable and accrued expenses                                                                                                                      |  |               | 876     |   |           |   | 201     |  
|Fees due to Adviser(A)                                                                                                                                     |  |               | 41      |   |           |   | 499     |  
|Fee due to Administrator(A)                                                                                                                                |  |               | 135     |   |           |   | 171     |  
|Other liabilities                                                                                                                                          |  |               | 984     |   |           |   | 1,409   |  
|                                                                                                                                                           |  |               |         |   |           |   |         |  
|TOTAL LIABILITIES                                                                                                                                          |  |               | 85,942  |   |           |   | 42,280  |  
|                                                                                                                                                           |  |               |         |   |           |   |         |  
|                                                                                                                                                           |  |              
|NET ASSETS                                                                                                                                                 |  | $             | 209,419 |   |           | $ | 198,829 |  
|                                                                                                                                                           |  |               |         |   |           |   |         |  
|                                                                                                                                                           |  |              
|ANALYSIS OF NET ASSETS                                                                                                                                     |  |               |         |   |           |   |         |  
|Common stock, $0.001 par value per share, 100,000,000 shares authorized, 22,080,133 shares issued and outstanding at
September 30, 2011 and March 31, 2011 |  | $             | 22      |   |           | $ | 22      |  
|Capital in excess of par value                                                                                                                             |  |               | 257,190 |   |           |   | 257,192 |  
|Net unrealized depreciation of investment portfolio                                                                                                        |  |               | (38,622 | ) |           |   | (43,907 | )
|Net unrealized depreciation of other                                                                                                                       |  |               | (444    | ) |           |   | (76     | )
|Undistributed net investment income                                                                                                                        |  |               | 682     |   |           |   | 165     |  
|Accumulated net realized losses                                                                                                                            |  |               | (9,409  | ) |           |   | (14,567 | )
|                                                                                                                                                           |  |               |         |   |           |   |         |  
|TOTAL NET ASSETS                                                                                                                                           |  | $             | 209,419 |   |           | $ | 198,829 |  
|                                                                                                                                                           |  |               |         |   |           |   |         |  
|                                                                                                                                                           |  |              
|NET ASSETS PER SHARE                                                                                                                                       |  | $             | 9.48    |   |           | $ | 9.00    |  
|                                                                                                                                                           |  |               |         |   |           |   |         |  



|(A) | Refer to Note 4Related Party Transactions for additional information.
|--- | ----------------------------------------------------------------------

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.



3



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##### Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLAR AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)

(UNAUDITED)



|                                                                                 |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|-------------------------------------------------------------------------------- |  | ------------------------------- | ---------- | - | ----------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                                 |  | Three Months EndedSeptember 30, |            |   | Six Months EndedSeptember 30, |  
|                                                                                 |  | 2011                            |            |   | 2010                          |   |            | 2011 |  |   | 2010       |  
|INVESTMENT INCOME                                                                |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Interest income                                                                  |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Control investments                                                              |  | $                               | 2,926      |   |                               | $ | 2,124      |      |  | $ | 5,560      |   |  | $ | 5,144      |  
|Affiliate investments                                                            |  |                                 | 1,363      |   |                               |   | 978        |      |  |   | 2,732      |   |  |   | 2,061      |  
|Non-Control/Non-Affiliate investments                                            |  |                                 | 401        |   |                               |   | 380        |      |  |   | 806        |   |  |   | 784        |  
|Cash and cash equivalents                                                        |  |                                 | 2          |   |                               |   | 14         |      |  |   | 6          |   |  |   | 15         |  
|                                                                                 |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Total interest income                                                            |  |                                 | 4,692      |   |                               |   | 3,496      |      |  |   | 9,104      |   |  |   | 8,004      |  
|Other income                                                                     |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Control investments                                                              |  |                                 | 341        |   |                               |   | 805        |      |  |   | 1,176      |   |  |   | 3,546      |  
|Non-Control/Non-Affiliate investments                                            |  |                                 | 1          |   |                               |   |           |      |  |   | 17         |   |  |   |           |  
|                                                                                 |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Total other income                                                               |  |                                 | 342        |   |                               |   | 805        |      |  |   | 1,193      |   |  |   | 3,546      |  
|                                                                                 |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Total investment income                                                          |  |                                 | 5,034      |   |                               |   | 4,301      |      |  |   | 10,297     |   |  |   | 11,550     |  
|                                                                                 |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|                                                                                 |  |                                 |            |  
|EXPENSES                                                                         |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Loan servicing fee(A)                                                            |  |                                 | 715        |   |                               |   | 666        |      |  |   | 1,392      |   |  |   | 1,490      |  
|Base management fee(A)                                                           |  |                                 | 348        |   |                               |   | 303        |      |  |   | 679        |   |  |   | 503        |  
|Incentive fee(A)                                                                 |  |                                 |           |   |                               |   |           |      |  |   | 19         |   |  |   | 1,052      |  
|Administration fee(A)                                                            |  |                                 | 135        |   |                               |   | 261        |      |  |   | 286        |   |  |   | 439        |  
|Interest expense                                                                 |  |                                 | 233        |   |                               |   | 149        |      |  |   | 365        |   |  |   | 423        |  
|Amortization of deferred financing fees                                          |  |                                 | 108        |   |                               |   | 103        |      |  |   | 215        |   |  |   | 267        |  
|Professional fees                                                                |  |                                 | 105        |   |                               |   | 98         |      |  |   | 315        |   |  |   | 222        |  
|Stockholder related costs                                                        |  |                                 | 246        |   |                               |   | 115        |      |  |   | 372        |   |  |   | 220        |  
|Other expenses                                                                   |  |                                 | 346        |   |                               |   | 226        |      |  |   | 570        |   |  |   | 467        |  
|                                                                                 |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Expenses before credits from Adviser                                             |  |                                 | 2,236      |   |                               |   | 1,921      |      |  |   | 4,213      |   |  |   | 5,083      |  
|Credits to fees from Adviser(A)                                                  |  |                                 | (511       | ) |                               |   | (61        | )    |  |   | (726       | ) |  |   | (180       | )
|                                                                                 |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Total expenses net of credits to fees                                            |  |                                 | 1,725      |   |                               |   | 1,860      |      |  |   | 3,487      |   |  |   | 4,903      |  
|                                                                                 |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|                                                                                 |  |                                 |            |  
|NET INVESTMENT INCOME                                                            |  |                                 | 3,309      |   |                               |   | 2,441      |      |  |   | 6,810      |   |  |   | 6,647      |  
|                                                                                 |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|                                                                                 |  |                                 |            |  
|REALIZED AND UNREALIZED GAIN (LOSS)                                              |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Net realized (loss) gain on sale of investments                                  |  |                                 | (544       | ) |                               |   |           |      |  |   | 5,196      |   |  |   | 16,976     |  
|Net realized loss on other                                                       |  |                                 |           |   |                               |   |           |      |  |   | (39        | ) |  |   |           |  
|Net unrealized appreciation (depreciation) of investment portfolio               |  |                                 | 10,337     |   |                               |   | (9,291     | )    |  |   | 5,284      |   |  |   | (25,089    | )
|Net unrealized depreciation of other                                             |  |                                 | (407       | ) |                               |   | (9         | )    |  |   | (368       | ) |  |   | (26        | )
|                                                                                 |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Net gain (loss) on investments and other                                         |  |                                 | 9,386      |   |                               |   | (9,300     | )    |  |   | 10,073     |   |  |   | (8,139     | )
|                                                                                 |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|                                                                                 |  |                                 |            |  
|NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS                  |  | $                               | 12,695     |   |                               | $ | (6,859     | )    |  | $ | 16,883     |   |  | $ | (1,492     | )
|                                                                                 |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|                                                                                 |  |                                 |            |  
|NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS PER COMMON SHARE |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Basic and diluted                                                                |  | $                               | 0.57       |   |                               | $ | (0.31      | )    |  | $ | 0.76       |   |  | $ | (0.07      | )
|                                                                                 |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|                                                                                 |  |                                 |            |  
|WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING                              |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Basic and diluted                                                                |  |                                 | 22,080,133 |   |                               |   | 22,080,133 |      |  |   | 22,080,133 |   |  |   | 22,080,133 |  



|(A) | Refer to Note 4Related Party Transactions for additional information.
|--- | ----------------------------------------------------------------------

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.



4



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##### Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)



|                                                                   |  |                                |         |   |      |   |         |  
|------------------------------------------------------------------ |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                                   |  | Six Months Ended September 30, |        
|                                                                   |  | 2011                           |         |   | 2010 |  
|Operations:                                                        |  |                                |         |   |      |   |         |  
|Net investment income                                              |  | $                              | 6,810   |   |      | $ | 6,647   |  
|Net realized gain on sale of investments                           |  |                                | 5,196   |   |      |   | 16,976  |  
|Net realized loss on other                                         |  |                                | (39     | ) |      |   |        |  
|Net unrealized appreciation (depreciation) of investment portfolio |  |                                | 5,284   |   |      |   | (25,089 | )
|Net unrealized depreciation of other                               |  |                                | (368    | ) |      |   | (26     | )
|                                                                   |  |                                |         |   |      |   |         |  
|Net increase (decrease) in net assets from operations              |  |                                | 16,883  |   |      |   | (1,492  | )
|                                                                   |  |                                |         |   |      |   |         |  
|                                                                   |  |                               
|Capital transactions:                                              |  |                                |         |   |      |   |         |  
|Shelf offering registration costs, net                             |  |                                |        |   |      |   | 10      |  
|                                                                   |  |                                |         |   |      |   |         |  
|                                                                   |  |                               
|Distributions:                                                     |  |                                |         |   |      |   |         |  
|Distributions to stockholders                                      |  |                                | (6,293  | ) |      |   | (5,299  | )
|                                                                   |  |                                |         |   |      |   |         |  
|                                                                   |  |                               
|Total increase (decrease) in net assets                            |  |                                | 10,590  |   |      |   | (6,781  | )
|Net assets at beginning of period                                  |  |                                | 198,829 |   |      |   | 192,978 |  
|                                                                   |  |                                |         |   |      |   |         |  
|                                                                   |  |                               
|Net assets at end of period                                        |  | $                              | 209,419 |   |      | $ | 186,197 |  
|                                                                   |  |                                |         |   |      |   |         |  

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.



5



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##### Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)



|                                                                                                                                                 |  |                                |         |   |      |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------ | ------- | - | ---- | - | -------- | -
|                                                                                                                                                 |  | Six Months Ended September 30, |        
|                                                                                                                                                 |  | 2011                           |         |   | 2010 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                                                                                             |  |                                |         |   |      |   |          |  
|Net increase (decrease) in net assets resulting from operations                                                                                  |  | $                              | 16,883  |   |      | $ | (1,492   | )
|Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash (used in) provided by
operating activities: |  |                                |         |   |      |   |          |  
|Purchase of investments                                                                                                                          |  |                                | (67,378 | ) |      |   | (4,994   | )
|Principal repayments of investments                                                                                                              |  |                                | 5,560   |   |      |   | 40,646   |  
|Proceeds from sales of investments                                                                                                               |  |                                | 7,527   |   |      |   | 21,474   |  
|Net realized gain on sales of investments                                                                                                        |  |                                | (5,196  | ) |      |   | (16,976  | )
|Net realized loss on other                                                                                                                       |  |                                | 39      |   |      |   |         |  
|Net unrealized (appreciation) depreciation of investment portfolio                                                                               |  |                                | (5,284  | ) |      |   | 25,089   |  
|Net unrealized depreciation of other                                                                                                             |  |                                | 368     |   |      |   | 26       |  
|Net amortization of premiums and discounts                                                                                                       |  |                                |        |   |      |   | 5        |  
|Amortization of deferred financing fees                                                                                                          |  |                                | 215     |   |      |   | 267      |  
|Decrease in restricted cash                                                                                                                      |  |                                | 3,113   |   |      |   |         |  
|(Increase) decrease in interest receivable                                                                                                       |  |                                | (628    | ) |      |   | 265      |  
|Decrease (increase) in due from custodian                                                                                                        |  |                                | 134     |   |      |   | (388     | )
|Increase in prepaid assets                                                                                                                       |  |                                | (212    | ) |      |   | (236     | )
|Decrease (increase) in other assets                                                                                                              |  |                                | 126     |   |      |   | (3,972   | )
|Increase in accounts payable and accrued expenses                                                                                                |  |                                | 675     |   |      |   |         |  
|Decrease in fees due to Adviser(A)                                                                                                               |  |                                | (458    | ) |      |   | (326     | )
|(Decrease) increase in administration fee payable to Administrator(A)                                                                            |  |                                | (36     | ) |      |   | 112      |  
|(Decrease) increase in other liabilities                                                                                                         |  |                                | (425    | ) |      |   | 958      |  
|                                                                                                                                                 |  |                                |         |   |      |   |          |  
|Net cash (used in) provided by operating activities                                                                                              |  |                                | (44,977 | ) |      |   | 60,458   |  
|                                                                                                                                                 |  |                               
|CASH FLOWS FROM FINANCING ACTIVITIES                                                                                                             |  |                                |         |   |      |   |          |  
|Shelf offering registration proceeds                                                                                                             |  |                                |        |   |      |   | 10       |  
|Proceeds from short-term borrowings                                                                                                              |  |                                | 102,501 |   |      |   | 100,000  |  
|Repayments on short-term borrowings                                                                                                              |  |                                | (80,000 | ) |      |   | (150,000 | )
|Borrowings from Credit Facility                                                                                                                  |  |                                | 21,500  |   |      |   | 16,000   |  
|Repayments on Credit Facility                                                                                                                    |  |                                | (500    | ) |      |   | (43,800  | )
|Purchase of derivatives                                                                                                                          |  |                                |        |   |      |   | (41      | )
|Deferred financing fees                                                                                                                          |  |                                | (107    | ) |      |   | (746     | )
|Distributions paid                                                                                                                               |  |                                | (6,293  | ) |      |   | (5,299   | )
|                                                                                                                                                 |  |                                |         |   |      |   |          |  
|Net cash provided by (used in) financing activities                                                                                              |  |                                | 37,101  |   |      |   | (83,876  | )
|                                                                                                                                                 |  |                                |         |   |      |   |          |  
|                                                                                                                                                 |  |                               
|NET DECREASE IN CASH AND CASH EQUIVALENTS                                                                                                        |  |                                | (7,876  | ) |      |   | (23,418  | )
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                                                                                   |  |                                | 80,580  |   |      |   | 87,717   |  
|                                                                                                                                                 |  |                                |         |   |      |   |          |  
|                                                                                                                                                 |  |                               
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                                                                                         |  | $                              | 72,704  |   |      | $ | 64,299   |  
|                                                                                                                                                 |  |                                |         |   |      |   |          |  
|                                                                                                                                                 |  |                               
|NON-CASH ACTIVITIES(B)                                                                                                                           |  | $                              |        |   |      | $ | 515      |  
|                                                                                                                                                 |  |                                |         |   |      |   |          |  



|(A) | Refer to Note
4Related Party Transactions for additional information.
|--- | ----------------------------------------------------------------------

|(B) | Non-cash activities for the six months ended September 30, 2010, represent real property distributed to shareholders of A. Stucki Holding Corp.
prior to its sale in June 2010. This property is included in the Companys Schedule of Investments under Neville Limited at September 30 and March 31, 2011.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.



6



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##### Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED SCHEDULES OF INVESTMENTS

SEPTEMBER 30, 2011

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)



|                               |  |                                                                 |  |                                                                  |  |           |        |  |      |   |        |            |  |   |        | 
|------------------------------ |  | --------------------------------------------------------------- |  | ---------------------------------------------------------------- |  | --------- | ------ |  | ---- | - | ------ | ---------- |  | - | ------ | 
|Company(A)                     |  | Industry                                                        |  | Investment(B)                                                    |  | Principal |        |  | Cost |   |        | Fair Value | 
|CONTROL INVESTMENTS:           |  |                                                                 |  |                                                                  |  |           |        |  |      |   |        |            |  |  
|Acme Cryogenics, Inc.          |  | Manufacturing  manifolds and pipes for industrial gasses       |  | Senior Subordinated Term Debt (11.5%, Due 3/2012)                |  | $         | 14,500 |  |      | $ | 14,500 |            |  | $ | 14,500 | 
|                               |  |                                                                 |  | Preferred Stock (898,814 shares)(D)(G)                           |  |           |        |  |      |   | 6,984  |            |  |   | 10,529 | 
|                               |  |                                                                 |  | Common Stock (418,072 shares)(D)(G)                              |  |           |        |  |      |   | 1,045  |            |  |   | 978    | 
|                               |  |                                                                 |  | Common Stock Warrants (452,683 shares)(D)(G)                     |  |           |        |  |      |   | 25     |            |  |   | 297    | 
|                               |  |                                                                 |  |                                                                  |  |           |        |  |      |   |        |            |  |   |        | 
|                               |  |                                                                 |  |                                                                  |  |           |        |  |      |   | 22,554 |            |  |   | 26,304 | 
|                               |  |                                                                 |  |                                                                  | 
|ASH Holdings Corp.             |  | Retail and Service  school buses and parts                     |  | Revolving Credit Facility, $342 available (5.0%, Due 3/2013)(H)  |  |           | 3,658  |  |      |   | 3,616  |            |  |   |       | 
|                               |  |                                                                 |  | Senior Subordinated Term Debt (4.0%, Due 3/2013)(H)              |  |           | 6,250  |  |      |   | 6,060  |            |  |   |       | 
|                               |  |                                                                 |  | Preferred Stock (2,500 shares)(D)(G)                             |  |           |        |  |      |   | 2,500  |            |  |   |       | 
|                               |  |                                                                 |  | Common Stock (1 share)(D)(G)                                     |  |           |        |  |      |   |       |            |  |   |       | 
|                               |  |                                                                 |  | Common Stock Warrants (73,599 shares)(D)(G)                      |  |           |        |  |      |   | 4      |            |  |   |       | 
|                               |  |                                                                 |  | Guaranty ($750)                                                  |  |           |        |  |      |   |        |            |  |   |        | 
|                               |  |                                                                 |  |                                                                  |  |           |        |  |      |   |        |            |  |   |        | 
|                               |  |                                                                 |  |                                                                  |  |           |        |  |      |   | 12,180 |            |  |   |       | 
|                               |  |                                                                 |  |                                                                  | 
|Country Club Enterprises, LLC  |  | Service  golf cart distribution                                |  | Senior Subordinated Term Debt (16.3%, Due 11/2014)(H)            |  |           | 8,000  |  |      |   | 8,000  |            |  |   | 1,600  | 
|                               |  |                                                                 |  | Preferred Stock (2,380,000 shares)(D)(G)                         |  |           |        |  |      |   | 3,725  |            |  |   |       | 
|                               |  |                                                                 |  | Guaranty ($3,914)                                                |  |           |        |  |      |   |        |            |  |   |        | 
|                               |  |                                                                 |  |                                                                  |  |           |        |  |      |   |        |            |  |   |        | 
|                               |  |                                                                 |  |                                                                  |  |           |        |  |      |   | 11,725 |            |  |   | 1,600  | 
|                               |  |                                                                 |  |                                                                  | 
|Galaxy Tool Holding Corp.      |  | Manufacturing  aerospace and plastics                          |  | Senior Subordinated Term Debt (13.5%, Due 8/2013)                |  |           | 5,220  |  |      |   | 5,220  |            |  |   | 5,220  | 
|                               |  |                                                                 |  | Preferred Stock (4,111,907 shares)(D)(G)                         |  |           |        |  |      |   | 19,658 |            |  |   | 4,906  | 
|                               |  |                                                                 |  | Common Stock (48,093 shares)(D)(G)                               |  |           |        |  |      |   | 48     |            |  |   |       | 
|                               |  |                                                                 |  |                                                                  |  |           |        |  |      |   |        |            |  |   |        | 
|                               |  |                                                                 |  |                                                                  |  |           |        |  |      |   | 24,926 |            |  |   | 10,126 | 
|                               |  |                                                                 |  |                                                                  | 
|Mathey Investments, Inc.       |  | Manufacturing  pipe-cutting and pipe-fitting equipment         |  | Revolving Credit Facility, $1,750 available (10.0%, Due 3/2012)  |  |           |       |  |      |   |       |            |  |   |       | 
|                               |  |                                                                 |  | Senior Term Debt (10.0%, Due 3/2013)(E)                          |  |           | 2,375  |  |      |   | 2,375  |            |  |   | 2,357  | 
|                               |  |                                                                 |  | Senior Term Debt (12.0%, Due 3/2014)(E)                          |  |           | 3,727  |  |      |   | 3,727  |            |  |   | 3,662  | 
|                               |  |                                                                 |  | Senior Term Debt (2.5%, Due 3/2014)(E)(F)                        |  |           | 3,500  |  |      |   | 3,500  |            |  |   | 3,439  | 
|                               |  |                                                                 |  | Common Stock (37 shares)(D)(G)                                   |  |           |        |  |      |   | 500    |            |  |   |       | 
|                               |  |                                                                 |  | Common Stock Warrants (21 shares)(D)(G)                          |  |           |        |  |      |   | 277    |            |  |   |       | 
|                               |  |                                                                 |  |                                                                  |  |           |        |  |      |   |        |            |  |   |        | 
|                               |  |                                                                 |  |                                                                  |  |           |        |  |      |   | 10,379 |            |  |   | 9,458  | 
|                               |  |                                                                 |  |                                                                  | 
|Mitchell Rubber Products, Inc. |  | Manufacturing  rubber compounds                                |  | Subordinated Term Debt (13.0%, Due 10/2016)(E)                   |  |           | 13,560 |  |      |   | 13,560 |            |  |   | 13,594 | 
|                               |  |                                                                 |  | Preferred Stock (27,900 shares)(D)(G)                            |  |           |        |  |      |   | 2,790  |            |  |   | 2,871  | 
|                               |  |                                                                 |  | Common Stock (27,900 shares)(D)(G)                               |  |           |        |  |      |   | 28     |            |  |   | 153    | 
|                               |  |                                                                 |  |                                                                  |  |           |        |  |      |   |        |            |  |   |        | 
|                               |  |                                                                 |  |                                                                  |  |           |        |  |      |   | 16,378 |            |  |   | 16,618 | 
|                               |  |                                                                 |  |                                                                  | 
|Neville Limited                |  | Real Estate  investments                                       |  | Common Stock (100 shares)(D)(G)                                  |  |           |        |  |      |   | 610    |            |  |   | 549    | 
|                               |  |                                                                 |  |                                                                  | 
|Precision Southeast, Inc.      |  | Manufacturing  injection molding and plastics                  |  | Revolving Credit Facility, $251 available (7.5%, Due 12/2011)    |  |           | 749    |  |      |   | 749    |            |  |   | 749    | 
|                               |  |                                                                 |  | Senior Term Debt (14.0%, Due 12/2015)                            |  |           | 7,775  |  |      |   | 7,775  |            |  |   | 7,775  | 
|                               |  |                                                                 |  | Preferred Stock (19,091 shares)(D)(G)                            |  |           |        |  |      |   | 1,909  |            |  |   | 1,749  | 
|                               |  |                                                                 |  | Common Stock (90,909 shares)(D)(G)                               |  |           |        |  |      |   | 91     |            |  |   |       | 
|                               |  |                                                                 |  |                                                                  |  |           |        |  |      |   |        |            |  |   |        | 
|                               |  |                                                                 |  |                                                                  |  |           |        |  |      |   | 10,524 |            |  |   | 10,273 | 
|                               |  |                                                                 |  |                                                                  | 
|SBS, Industries, LLC           |  | Manufacturing  specialty fasteners and threaded screw products |  | Revolving Credit Facility, $250 available (10.0%, Due 8/2013)(J) |  |           | 250    |  |      |   | 250    |            |  |   | 250    | 
|                               |  |                                                                 |  | Senior Term Debt (14.0%, Due 8/2016)(J)                          |  |           | 11,355 |  |      |   | 11,355 |            |  |   | 11,355 | 
|                               |  |                                                                 |  | Preferred Stock (19,935 shares)(D)(G)(J)                         |  |           |        |  |      |   | 1,994  |            |  |   | 1,994  | 
|                               |  |                                                                 |  | Common Stock (221,500 shares)(D)(G)(J)                           |  |           |        |  |      |   | 221    |            |  |   | 221    | 
|                               |  |                                                                 |  |                                                                  |  |           |        |  |      |   |        |            |  |   |        | 
|                               |  |                                                                 |  |                                                                  |  |           |        |  |      |   | 13,820 |            |  |   | 13,820 | 
|                               |  |                                                                 |  |                                                                  | 
|SOG Specialty K&T, LLC         |  | Manufacturing  specialty knives and tools                      |  | Senior Term Debt (13.3%, Due 8/2016)(J)                          |  |           | 6,200  |  |      |   | 6,200  |            |  |   | 6,200  | 
|                               |  |                                                                 |  | Senior Term Debt (14.8%, Due 8/2016)(J)                          |  |           | 12,199 |  |      |   | 12,199 |            |  |   | 12,199 | 
|                               |  |                                                                 |  | Preferred Stock (9,749 shares)(D)(G)(J)                          |  |           |        |  |      |   | 9,749  |            |  |   | 9,749  | 
|                               |  |                                                                 |  |                                                                  |  |           |        |  |      |   |        |            |  |   |        | 
|                               |  |                                                                 |  |                                                                  |  |           |        |  |      |   | 28,148 |            |  |   | 28,148 | 
|                               |  |                                                                 |  |                                                                  | 
|Tread Corp.                    |  | Manufacturing  storage and transport equipment                 |  | Senior Subordinated Term Debt (12.5%, Due 5/2013)                |  |           | 7,750  |  |      |   | 7,750  |            |  |   | 7,750  | 
|                               |  |                                                                 |  | Preferred Stock (832,765 shares)(D)(G)                           |  |           |        |  |      |   | 833    |            |  |   | 1,046  | 
|                               |  |                                                                 |  | Common Stock (129,067 shares)(D)(G)                              |  |           |        |  |      |   | 1      |            |  |   | 253    | 
|                               |  |                                                                 |  | Common Stock Warrants (1,247,727 shares)(D)(G)                   |  |           |        |  |      |   | 3      |            |  |   | 2,271  | 
|                               |  |                                                                 |  |                                                                  |  |           |        |  |      |   |        |            |  |   |        | 
|                               |  |                                                                 |  |                                                                  |  |           |        |  |      |   | 8,587  |            |  |   | 11,320 | 



7



---

##### Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED SCHEDULES OF INVESTMENTS (Continued)

SEPTEMBER 30, 2011

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)



|                                                                                                  |  |                                                            |  |                                                                   |  |           |         |  |      |   |         |            |  |   |        | 
|------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------- |  | ----------------------------------------------------------------- |  | --------- | ------- |  | ---- | - | ------- | ---------- |  | - | ------ | 
|Company(A)                                                                                        |  | Industry                                                   |  | Investment(B)                                                     |  | Principal |         |  | Cost |   |         | Fair Value | 
|                                                                                                  |  |                                                            | 
|CONTROL INVESTMENTS (Continued):                                                                  |  |                                                            |  |                                                                   |  |           |         |  |      |   |         |           
|Venyu Solutions, Inc.                                                                             |  | Service  online servicing suite                           |  | Senior Subordinated Term Debt (11.3%, Due 10/2015)                |  | $         | 7,000   |  |      | $ | 7,000   |            |  | $ | 7,000  | 
|                                                                                                  |  |                                                            |  | Senior Subordinated Term Debt (14.0%, Due 10/2015)                |  |           | 12,000  |  |      |   | 12,000  |            |  |   | 12,000 | 
|                                                                                                  |  |                                                            |  | Preferred Stock (5,400 shares)(D)(G)                              |  |           |         |  |      |   | 6,000   |            |  |   | 6,305  | 
|                                                                                                  |  |                                                            |  |                                                                   |  |           |         |  |      |   |         |            |  |   |        | 
|                                                                                                  |  |                                                            |  |                                                                   |  |           |         |  |      |   | 25,000  |            |  |   | 25,305 | 
|                                                                                                  |  |                                                            |  |                                                                   |  |           |         |  |      |   |         |            |  |   |        | 
|                                                                                                  |  |                                                            | 
|Total Control Investments (represented 70.4% of total investments at fair value)                  |  |                                                            |  |                                                                   |  | $         | 184,831 |  |      | $ | 153,521 |           
|                                                                                                  |  |                                                            |  |                                                                   |  |           |         |  |      |   |         |            |  |   |        | 
|                                                                                                  |  |                                                            | 
|AFFILIATE INVESTMENTS:                                                                            |  |                                                            |  |                                                                   |  |           |         |  |      |   |         |           
|Cavert II Holding Corp.(I)                                                                        |  | Manufacturing  bailing wire                               |  | Senior Term Debt (10.0%, Due 4/2016)(E)(F)                        |  | $         | 2,150   |  |      | $ | 2,150   |            |  | $ | 2,169  | 
|                                                                                                  |  |                                                            |  | Senior Subordinated Term Debt (13.0%, Due 4/2016)(E)              |  |           | 4,671   |  |      |   | 4,671   |            |  |   | 4,700  | 
|                                                                                                  |  |                                                            |  | Subordinated Term Debt (11.8%, Due 4/2016)(E)                     |  |           |         |  |      |   | 5,700   |            |  |   | 5,721  | 
|                                                                                                  |  |                                                            |  | Preferred Stock (18,446 shares)(G)                                |  |           |         |  |      |   | 1,844   |            |  |   | 2,499  | 
|                                                                                                  |  |                                                            |  |                                                                   |  |           |         |  |      |   |         |            |  |   |        | 
|                                                                                                  |  |                                                            |  |                                                                   |  |           |         |  |      |   | 14,365  |            |  |   | 15,089 | 
|                                                                                                  |  |                                                            |  |                                                                   | 
|Danco Acquisition Corp.                                                                           |  | Manufacturing  machining and sheet metal work             |  | Revolving Credit Facility, $400 available (10.0%, Due 10/2012)(E) |  |           | 1,100   |  |      |   | 1,100   |            |  |   | 1,034  | 
|                                                                                                  |  |                                                            |  | Senior Term Debt (10.0%, Due 10/2012)(E)                          |  |           | 2,775   |  |      |   | 2,775   |            |  |   | 2,609  | 
|                                                                                                  |  |                                                            |  | Senior Term Debt (12.5%, Due 4/2013)(E)(F)                        |  |           | 8,915   |  |      |   | 8,915   |            |  |   | 8,335  | 
|                                                                                                  |  |                                                            |  | Preferred Stock (25 shares)(D)(G)                                 |  |           |         |  |      |   | 2,500   |            |  |   |       | 
|                                                                                                  |  |                                                            |  | Common Stock Warrants (420 shares)(D)(G)                          |  |           |         |  |      |   | 2       |            |  |   |       | 
|                                                                                                  |  |                                                            |  |                                                                   |  |           |         |  |      |   |         |            |  |   |        | 
|                                                                                                  |  |                                                            |  |                                                                   |  |           |         |  |      |   | 15,292  |            |  |   | 11,978 | 
|                                                                                                  |  |                                                            |  |                                                                   | 
|Noble Logistics, Inc.                                                                             |  | Service  aftermarket auto parts delivery                  |  | Senior Term Debt (9.2%, Due 12/2012)(E)                           |  |           | 7,227   |  |      |   | 7,227   |            |  |   | 5,276  | 
|                                                                                                  |  |                                                            |  | Senior Term Debt (10.5%, Due 12/2012)(E)                          |  |           | 3,650   |  |      |   | 3,650   |            |  |   | 2,665  | 
|                                                                                                  |  |                                                            |  | Senior Term Debt (10.5%, Due 12/2012)(E)(F)                       |  |           | 3,650   |  |      |   | 3,650   |            |  |   | 2,664  | 
|                                                                                                  |  |                                                            |  | Preferred Stock (1,075,000 shares)(D)(G)                          |  |           |         |  |      |   | 1,750   |            |  |   | 3,616  | 
|                                                                                                  |  |                                                            |  | Common Stock (1,682,444 shares)(D)(G)                             |  |           |         |  |      |   | 1,682   |            |  |   | 689    | 
|                                                                                                  |  |                                                            |  |                                                                   |  |           |         |  |      |   |         |            |  |   |        | 
|                                                                                                  |  |                                                            |  |                                                                   |  |           |         |  |      |   | 17,959  |            |  |   | 14,910 | 
|                                                                                                  |  |                                                            |  |                                                                   | 
|Quench Holdings Corp.                                                                             |  | Service  sales, installation and service of water coolers |  | Senior Subordinated Term Debt (10.0%, Due 8/2013)(K)              |  |           | 8,000   |  |      |   | 8,000   |            |  |   | 8,000  | 
|                                                                                                  |  |                                                            |  | Preferred Stock (388 shares)(D)(G)                                |  |           |         |  |      |   | 2,950   |            |  |   | 2,188  | 
|                                                                                                  |  |                                                            |  | Common Stock (35,242 shares)(D)(G)                                |  |           |         |  |      |   | 447     |            |  |   |       | 
|                                                                                                  |  |                                                            |  |                                                                   |  |           |         |  |      |   |         |            |  |   |        | 
|                                                                                                  |  |                                                            |  |                                                                   |  |           |         |  |      |   | 11,397  |            |  |   | 10,188 | 
|                                                                                                  |  |                                                            |  |                                                                   |  |           |         |  |      |   |         |            |  |   |        | 
|                                                                                                  |  |                                                            | 
|Total Affiliate Investments (represented 23.9% of total investments at fair value)                |  |                                                            |  |                                                                   |  | $         | 59,013  |  |      | $ | 52,165  |           
|                                                                                                  |  |                                                            |  |                                                                   |  |           |         |  |      |   |         |            |  |   |        | 
|                                                                                                  |  |                                                            | 
|NON-CONTROL/NON-AFFILIATE INVESTMENTS:                                                            |  |                                                            |  |                                                                   |  |           |         |  |      |   |         |           
|American Greetings Corporation                                                                    |  | Manufacturing and design  greeting Cards                  |  | Senior Notes (7.4%, Due 6/2016)(C)                                |  | $         | 3,043   |  |      | $ | 3,043   |            |  | $ | 3,013  | 
|                                                                                                  |  |                                                            |  |                                                                   | 
|B-Dry, LLC                                                                                        |  | Service  basement waterproofer                            |  | Senior Term Debt (11.5%, Due 5/2014)(E)                           |  |           | 6,511   |  |      |   | 6,511   |            |  |   | 6,397  | 
|                                                                                                  |  |                                                            |  | Senior Term Debt (11.5%, Due 5/2014)(E)                           |  |           | 2,980   |  |      |   | 2,980   |            |  |   | 2,928  | 
|                                                                                                  |  |                                                            |  | Common Stock Warrants (55 shares)(D)(G)                           |  |           |         |  |      |   | 300     |            |  |   | 32     | 
|                                                                                                  |  |                                                            |  |                                                                   |  |           |         |  |      |   |         |            |  |   |        | 
|                                                                                                  |  |                                                            |  |                                                                   |  |           |         |  |      |   | 9,791   |            |  |   | 9,357  | 
|                                                                                                  |  |                                                            |  |                                                                   |  |           |         |  |      |   |         |            |  |   |        | 
|                                                                                                  |  |                                                            | 
|Total Non-Control/Non-Affiliate Investments (represented 5.7% of total investments at fair
value) |  |                                                            |  |                                                                   |  | $         | 12,834  |  |      | $ | 12,370  |           
|                                                                                                  |  |                                                            |  |                                                                   |  |           |         |  |      |   |         |            |  |   |        | 
|                                                                                                  |  |                                                            | 
|TOTAL INVESTMENTS                                                                                 |  |                                                            |  |                                                                   |  | $         | 256,678 |  |      | $ | 218,056 |           
|                                                                                                  |  |                                                            |  |                                                                   |  |           |         |  |      |   |         |            |  |   |        | 



|(A) | Certain of the listed securities are issued by affiliate(s) of the indicated portfolio company.
|--- | -----------------------------------------------------------------------------------------------

|(B) | Percentages represent the weighted average interest rates in effect at September 30, 2011, and due dates represent the contractual maturity date.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------

|(C) | Valued based on the indicative bid price on or near September 30, 2011, offered by the respective syndication agents trading desk or
secondary desk.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------

|(D) | Security is non-income producing.
|--- | ---------------------------------

|(E) | Fair value based primarily on opinions of value submitted by Standard & Poors Securities Evaluations, Inc. at September 30,
2011.
|--- | ----------------------------------------------------------------------------------------------------------------------------------

|(F) | Last Out Tranche (LOT) of senior debt, meaning if the portfolio company is liquidated, the holder of the LOT is paid after the other senior
debt and before the senior subordinated debt.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(G) | Aggregates all shares of such class of stock owned by the Company without regard to specific series owned within such class, some series of which may
or may not be voting shares or aggregates all warrants to purchase shares of such class of stock owned by the Company without regard to specific series of such class of stock such warrants allow the Company to purchase.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(H) | Debt security is on non-accrual status.
|--- | ---------------------------------------

|(I) | In April 2011, the Company sold its common equity investment, received partial redemption of its preferred stock and invested new subordinated debt in
Cavert as part of a recapitalization. As a result of the recapitalization, Cavert was reclassified as an Affiliate investment during the three months ended June 30, 2011.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(J) | New proprietary portfolio investment valued at cost, as it was determined that the price paid by the Company through an orderly transaction during the
three months ended September 30, 2011, best represents fair value as of September 30, 2011.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(K) | Security was paid off, at par, subsequent to September 30, 2011, and was valued based on the payoff.
|--- | ----------------------------------------------------------------------------------------------------

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.



8



---

##### Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED SCHEDULES OF INVESTMENTS

MARCH 31, 2011

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)



|                                                                                 |  |                                                           |  |                                                                  |  |           |         |  |      |   |         |            |  |   |        | 
|-------------------------------------------------------------------------------- |  | --------------------------------------------------------- |  | ---------------------------------------------------------------- |  | --------- | ------- |  | ---- | - | ------- | ---------- |  | - | ------ | 
|Company(A)                                                                       |  | Industry                                                  |  | Investment(B)                                                    |  | Principal |         |  | Cost |   |         | Fair Value | 
|                                                                                 |  |                                                           |  |                                                                 
|CONTROL INVESTMENTS:                                                             |  |                                                           |  |                                                                  |  |           |         |  |      |   |         |            |  |  
|Acme Cryogenics, Inc.                                                            |  | Manufacturing  manifolds and pipes for industrial gasses |  | Senior Subordinated Term Debt (11.5%, Due 3/2012)                |  | $         | 14,500  |  |      | $ | 14,500  |            |  | $ | 14,500 | 
|                                                                                 |  |                                                           |  | Senior Subordinated Term Debt (12.5%, Due 12/2011)               |  |           | 415     |  |      |   | 415     |            |  |   | 415    | 
|                                                                                 |  |                                                           |  | Preferred Stock (898,814 shares)(D)(G)                           |  |           |         |  |      |   | 6,984   |            |  |   | 4,991  | 
|                                                                                 |  |                                                           |  | Common Stock (418,072 shares)(D)(G)                              |  |           |         |  |      |   | 1,045   |            |  |   |       | 
|                                                                                 |  |                                                           |  | Common Stock Warrants (452,683 shares)(D)(G)                     |  |           |         |  |      |   | 24      |            |  |   |       | 
|                                                                                 |  |                                                           |  |                                                                  |  |           |         |  |      |   |         |            |  |   |        | 
|                                                                                 |  |                                                           |  |                                                                  |  |           |         |  |      |   | 22,968  |            |  |   | 19,906 | 
|                                                                                 |  |                                                           |  |                                                                  | 
|ASH Holdings Corp.                                                               |  | Retail and Service  school buses and parts               |  | Revolving Credit Facility, $717 available (3.0%, Due 3/2013)(J)  |  |           | 3,283   |  |      |   | 3,241   |            |  |   |       | 
|                                                                                 |  |                                                           |  | Senior Subordinated Term Debt (2.0%, Due 3/2013)(J)              |  |           | 6,250   |  |      |   | 6,060   |            |  |   |       | 
|                                                                                 |  |                                                           |  | Preferred Stock (2,500 shares)(D)(G)                             |  |           |         |  |      |   | 2,500   |            |  |   |       | 
|                                                                                 |  |                                                           |  | Common Stock (1 share)(D)(G)                                     |  |           |         |  |      |   |        |            |  |   |       | 
|                                                                                 |  |                                                           |  | Common Stock Warrants (73,599 shares)(D)(G)                      |  |           |         |  |      |   | 4       |            |  |   |       | 
|                                                                                 |  |                                                           |  | Guaranty ($750)                                                  |  |           |         |  |      |   |         |            |  |   |        | 
|                                                                                 |  |                                                           |  |                                                                  |  |           |         |  |      |   |         |            |  |   |        | 
|                                                                                 |  |                                                           |  |                                                                  |  |           |         |  |      |   | 11,805  |            |  |   |       | 
|                                                                                 |  |                                                           |  |                                                                  | 
|Cavert II Holding Corp.(H)                                                       |  | Manufacturing  bailing wire                              |  | Senior Term Debt (10.0%, Due 10/2012)(F)                         |  |           | 2,650   |  |      |   | 2,650   |            |  |   | 2,650  | 
|                                                                                 |  |                                                           |  | Senior Subordinated Term Debt (13.0%, Due 10/2014)               |  |           | 4,671   |  |      |   | 4,671   |            |  |   | 4,671  | 
|                                                                                 |  |                                                           |  | Preferred Stock (41,102 shares)(D)(G)                            |  |           |         |  |      |   | 4,110   |            |  |   | 5,354  | 
|                                                                                 |  |                                                           |  | Common Stock (69,126 shares)(D)(G)                               |  |           |         |  |      |   | 69      |            |  |   | 5,577  | 
|                                                                                 |  |                                                           |  |                                                                  |  |           |         |  |      |   |         |            |  |   |        | 
|                                                                                 |  |                                                           |  |                                                                  |  |           |         |  |      |   | 11,500  |            |  |   | 18,252 | 
|                                                                                 |  |                                                           |  |                                                                  | 
|Country Club Enterprises, LLC                                                    |  | Service  golf cart distribution                          |  | Senior Subordinated Term Debt (16.3%, Due 11/2014)(E)            |  |           | 8,000   |  |      |   | 8,000   |            |  |   | 7,560  | 
|                                                                                 |  |                                                           |  | Preferred Stock (2,380,000 shares)(D)(G)                         |  |           |         |  |      |   | 3,725   |            |  |   |       | 
|                                                                                 |  |                                                           |  | Guaranty ($3,914)                                                |  |           |         |  |      |   |         |            |  |   |        | 
|                                                                                 |  |                                                           |  |                                                                  |  |           |         |  |      |   |         |            |  |   |        | 
|                                                                                 |  |                                                           |  |                                                                  |  |           |         |  |      |   | 11,725  |            |  |   | 7,560  | 
|                                                                                 |  |                                                           |  |                                                                  | 
|Galaxy Tool Holding Corp.                                                        |  | Manufacturing  aerospace and plastics                    |  | Senior Subordinated Term Debt (13.5%, Due 8/2013)                |  |           | 5,220   |  |      |   | 5,220   |            |  |   | 5,220  | 
|                                                                                 |  |                                                           |  | Preferred Stock (4,111,907 shares)(D)(G)                         |  |           |         |  |      |   | 19,658  |            |  |   | 1,439  | 
|                                                                                 |  |                                                           |  | Common Stock (48,093 shares)(D)(G)                               |  |           |         |  |      |   | 48      |            |  |   |       | 
|                                                                                 |  |                                                           |  |                                                                  |  |           |         |  |      |   |         |            |  |   |        | 
|                                                                                 |  |                                                           |  |                                                                  |  |           |         |  |      |   | 24,926  |            |  |   | 6,659  | 
|                                                                                 |  |                                                           |  |                                                                  | 
|Mathey Investments, Inc.                                                         |  | Manufacturing  pipe-cutting and pipe-fitting equipment   |  | Revolving Credit Facility, $718 available (10.0%, Due 3/2012)(E) |  |           | 1,032   |  |      |   | 1,032   |            |  |   | 1,022  | 
|                                                                                 |  |                                                           |  | Senior Term Debt (10.0%, Due 3/2013)(E)                          |  |           | 2,375   |  |      |   | 2,375   |            |  |   | 2,345  | 
|                                                                                 |  |                                                           |  | Senior Term Debt (12.0%, Due 3/2014)(E)                          |  |           | 3,727   |  |      |   | 3,727   |            |  |   | 3,643  | 
|                                                                                 |  |                                                           |  | Senior Term Debt (2.5%, Due 3/2014)(E)(F)                        |  |           | 3,500   |  |      |   | 3,500   |            |  |   | 3,421  | 
|                                                                                 |  |                                                           |  | Common Stock (37 shares)(D)(G)                                   |  |           |         |  |      |   | 500     |            |  |   |       | 
|                                                                                 |  |                                                           |  | Common Stock Warrants (21 shares)(D)(G)                          |  |           |         |  |      |   | 277     |            |  |   |       | 
|                                                                                 |  |                                                           |  |                                                                  |  |           |         |  |      |   |         |            |  |   |        | 
|                                                                                 |  |                                                           |  |                                                                  |  |           |         |  |      |   | 11,411  |            |  |   | 10,431 | 
|                                                                                 |  |                                                           |  |                                                                  | 
|Neville Limited                                                                  |  | Real Estate  investments                                 |  | Common Stock (100 shares)(D)(G)                                  |  |           |         |  |      |   | 610     |            |  |   | 534    | 
|                                                                                 |  |                                                           |  |                                                                  | 
|Precision Southeast, Inc.                                                        |  | Manufacturing  injection molding and plastics            |  | Revolving Credit Facility, $251 available (7.5%, Due 12/2011)    |  |           | 749     |  |      |   | 749     |            |  |   | 749    | 
|                                                                                 |  |                                                           |  | Senior Term Debt (14.0%, Due 12/2015)                            |  |           | 7,775   |  |      |   | 7,775   |            |  |   | 7,775  | 
|                                                                                 |  |                                                           |  | Preferred Stock (19,091 shares)(D)(G)                            |  |           |         |  |      |   | 1,909   |            |  |   | 1,948  | 
|                                                                                 |  |                                                           |  | Common Stock (90,909 shares)(D)(G)                               |  |           |         |  |      |   | 91      |            |  |   | 305    | 
|                                                                                 |  |                                                           |  |                                                                  |  |           |         |  |      |   |         |            |  |   |        | 
|                                                                                 |  |                                                           |  |                                                                  |  |           |         |  |      |   | 10,524  |            |  |   | 10,777 | 
|                                                                                 |  |                                                           |  |                                                                  | 
|Tread Corp.                                                                      |  | Manufacturing  storage and transport equipment           |  | Senior Subordinated Term Debt (12.5%, Due 5/2013)(E)             |  |           | 5,000   |  |      |   | 5,000   |            |  |   | 4,931  | 
|                                                                                 |  |                                                           |  | Preferred Stock (832,765 shares)(D)(G)                           |  |           |         |  |      |   | 833     |            |  |   |       | 
|                                                                                 |  |                                                           |  | Common Stock (129,067 shares)(D)(G)                              |  |           |         |  |      |   | 1       |            |  |   |       | 
|                                                                                 |  |                                                           |  | Common Stock Warrants (1,022,727 shares)(D)(G)                   |  |           |         |  |      |   | 3       |            |  |   |       | 
|                                                                                 |  |                                                           |  |                                                                  |  |           |         |  |      |   |         |            |  |   |        | 
|                                                                                 |  |                                                           |  |                                                                  |  |           |         |  |      |   | 5,837   |            |  |   | 4,931  | 
|                                                                                 |  |                                                           |  |                                                                  | 
|Venyu Solutions, Inc.                                                            |  | Service  online servicing suite                          |  | Senior Subordinated Term Debt (11.3%, Due 10/2015)               |  |           | 7,000   |  |      |   | 7,000   |            |  |   | 7,000  | 
|                                                                                 |  |                                                           |  | Senior Subordinated Term Debt (14.0%, Due 10/2015)               |  |           | 12,000  |  |      |   | 12,000  |            |  |   | 12,000 | 
|                                                                                 |  |                                                           |  | Preferred Stock (5,400 shares)(D)(G)                             |  |           |         |  |      |   | 6,000   |            |  |   | 6,012  | 
|                                                                                 |  |                                                           |  |                                                                  |  |           |         |  |      |   |         |            |  |   |        | 
|                                                                                 |  |                                                           |  |                                                                  |  |           |         |  |      |   | 25,000  |            |  |   | 25,012 | 
|                                                                                 |  |                                                           |  |                                                                  |  |           |         |  |      |   |         |            |  |   |        | 
|                                                                                 |  |                                                           | 
|Total Control Investments (represented 67.9% of total investments at fair value) |  |                                                           |  |                                                                  |  | $         | 136,306 |  |      | $ | 104,062 |           
|                                                                                 |  |                                                           |  |                                                                  |  |           |         |  |      |   |         |            |  |   |        | 



9



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##### Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED SCHEDULES OF INVESTMENTS (Continued)

MARCH 31, 2011

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)



|                                                                                                  |  |                                                            |  |                                                                   |  |           |         |  |      |   |         |            |  |   |        | 
|------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------- |  | ----------------------------------------------------------------- |  | --------- | ------- |  | ---- | - | ------- | ---------- |  | - | ------ | 
|Company(A)                                                                                        |  | Industry                                                   |  | Investment(B)                                                     |  | Principal |         |  | Cost |   |         | Fair Value | 
|                                                                                                  |  |                                                            | 
|AFFILIATE INVESTMENTS:                                                                            |  |                                                            |  |                                                                   |  |           |         |  |      |   |         |           
|Danco Acquisition Corp.                                                                           |  | Manufacturing  machining and sheet metal work             |  | Revolving Credit Facility, $400 available (10.0%, Due 10/2011)(E) |  | $         | 1,100   |  |      | $ | 1,100   |            |  | $ | 1,084  | 
|                                                                                                  |  |                                                            |  | Senior Term Debt (10.0%, Due 10/2012)(E)                          |  |           | 2,925   |  |      |   | 2,925   |            |  |   | 2,881  | 
|                                                                                                  |  |                                                            |  | Senior Term Debt (12.5%, Due 4/2013)(E)                           |  |           | 8,961   |  |      |   | 8,961   |            |  |   | 8,781  | 
|                                                                                                  |  |                                                            |  | Preferred Stock (25 shares)(D)(G)                                 |  |           |         |  |      |   | 2,500   |            |  |   |       | 
|                                                                                                  |  |                                                            |  | Common Stock Warrants (420 shares)(D)(G)                          |  |           |         |  |      |   | 2       |            |  |   |       | 
|                                                                                                  |  |                                                            |  |                                                                   |  |           |         |  |      |   |         |            |  |   |        | 
|                                                                                                  |  |                                                            |  |                                                                   |  |           |         |  |      |   | 15,488  |            |  |   | 12,746 | 
|                                                                                                  |  |                                                            |  |                                                                   | 
|Noble Logistics, Inc.                                                                             |  | Service  aftermarket auto parts delivery                  |  | Revolving Credit Facility, $300 available (4.3%, Due 6/2011)(E)   |  |           | 300     |  |      |   | 300     |            |  |   | 206    | 
|                                                                                                  |  |                                                            |  | Senior Term Debt (9.2%, Due 12/2012)(E)                           |  |           | 7,227   |  |      |   | 7,227   |            |  |   | 4,951  | 
|                                                                                                  |  |                                                            |  | Senior Term Debt (10.5%, Due 12/2012)(E)                          |  |           | 3,650   |  |      |   | 3,650   |            |  |   | 2,500  | 
|                                                                                                  |  |                                                            |  | Senior Term Debt (10.5%, Due 12/2012)(E)(F)                       |  |           | 3,650   |  |      |   | 3,650   |            |  |   | 2,500  | 
|                                                                                                  |  |                                                            |  | Preferred Stock (1,075,000 shares)(D)(G)                          |  |           |         |  |      |   | 1,750   |            |  |   | 3,026  | 
|                                                                                                  |  |                                                            |  | Common Stock (1,682,444 shares)(D)(G)                             |  |           |         |  |      |   | 1,683   |            |  |   |       | 
|                                                                                                  |  |                                                            |  |                                                                   |  |           |         |  |      |   |         |            |  |   |        | 
|                                                                                                  |  |                                                            |  |                                                                   |  |           |         |  |      |   | 18,260  |            |  |   | 13,183 | 
|                                                                                                  |  |                                                            |  |                                                                   | 
|Quench Holdings Corp.                                                                             |  | Service  sales, installation and service of water coolers |  | Senior Subordinated Term Debt (10.0%, Due 8/2013)(E)              |  |           | 8,000   |  |      |   | 8,000   |            |  |   | 6,000  | 
|                                                                                                  |  |                                                            |  | Preferred Stock (388 shares)(D)(G)                                |  |           |         |  |      |   | 2,950   |            |  |   | 2,627  | 
|                                                                                                  |  |                                                            |  | Common Stock (35,242 shares)(D)(G)                                |  |           |         |  |      |   | 447     |            |  |   |       | 
|                                                                                                  |  |                                                            |  |                                                                   |  |           |         |  |      |   |         |            |  |   |        | 
|                                                                                                  |  |                                                            |  |                                                                   |  |           |         |  |      |   | 11,397  |            |  |   | 8,627  | 
|                                                                                                  |  |                                                            |  |                                                                   |  |           |         |  |      |   |         |            |  |   |        | 
|                                                                                                  |  |                                                            | 
|Total Affiliate Investments (represented 22.5% of total investments at fair value)                |  |                                                            |  |                                                                   |  | $         | 45,145  |  |      | $ | 34,556  |           
|                                                                                                  |  |                                                            |  |                                                                   |  |           |         |  |      |   |         |            |  |   |        | 
|                                                                                                  |  |                                                            | 
|NON-CONTROL/NON-AFFILIATE INVESTMENTS:                                                            |  |                                                            |  |                                                                   |  |           |         |  |      |   |         |           
|American Greetings Corporation                                                                    |  | Manufacturing and design  greeting Cards                  |  | Senior Notes (7.4%, Due 6/2016)(C)                                |  | $         | 3,043   |  |      | $ | 3,043   |            |  | $ | 3,073  | 
|                                                                                                  |  |                                                            |  |                                                                   | 
|B-Dry, LLC                                                                                        |  | Service  basement waterproofer                            |  | Senior Term Debt (11.0%, Due 5/2014)(E)                           |  |           | 6,545   |  |      |   | 6,545   |            |  |   | 6,512  | 
|                                                                                                  |  |                                                            |  | Senior Term Debt (11.5%, Due 5/2014)(E)                           |  |           | 3,050   |  |      |   | 3,050   |            |  |   | 3,035  | 
|                                                                                                  |  |                                                            |  | Common Stock Warrants (55 shares)(D)(G)                           |  |           |         |  |      |   | 300     |            |  |   | 39     | 
|                                                                                                  |  |                                                            |  |                                                                   |  |           |         |  |      |   |         |            |  |   |        | 
|                                                                                                  |  |                                                            |  |                                                                   |  |           |         |  |      |   | 9,895   |            |  |   | 9,586  | 
|                                                                                                  |  |                                                            |  |                                                                   | 
|Fifth Third Processing Solutions, LLC(I)                                                          |  | Service  electronic payment processing                    |  | Senior Subordinated Term Debt (8.3%, Due 11/2017)(C)              |  |           | 500     |  |      |   | 495     |            |  |   | 509    | 
|                                                                                                  |  |                                                            |  |                                                                   | 
|Survey Sampling, LLC                                                                              |  | Service  telecommunications-based sampling                |  | Senior Term Debt (10.7%, Due 12/2012)(C)                          |  |           | 2,306   |  |      |   | 2,308   |            |  |   | 1,499  | 
|                                                                                                  |  |                                                            |  |                                                                   |  |           |         |  |      |   |         |            |  |   |        | 
|                                                                                                  |  |                                                            | 
|Total Non-Control/Non-Affiliate Investments (represented 9.6% of total investments at fair
value) |  |                                                            |  |                                                                   |  | $         | 15,741  |  |      | $ | 14,667  |           
|                                                                                                  |  |                                                            |  |                                                                   |  |           |         |  |      |   |         |            |  |   |        | 
|                                                                                                  |  |                                                            | 
|TOTAL INVESTMENTS                                                                                 |  |                                                            |  |                                                                   |  | $         | 197,192 |  |      | $ | 153,285 |           
|                                                                                                  |  |                                                            |  |                                                                   |  |           |         |  |      |   |         |            |  |   |        | 



|(A) | Certain of the listed securities are issued by affiliate(s) of the indicated portfolio company.
|--- | -----------------------------------------------------------------------------------------------

|(B) | Percentages represent the weighted average interest rates in effect at March 31, 2011, and due dates represent the contractual maturity date.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------

|(C) | Valued based on the indicative bid price on or near March 31, 2011, offered by the respective syndication agents trading desk or secondary
desk.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------

|(D) | Security is non-income producing.
|--- | ---------------------------------

|(E) | Fair value based primarily on opinions of value submitted by Standard & Poors Securities Evaluations, Inc. at March 31, 2011.
|--- | ------------------------------------------------------------------------------------------------------------------------------

|(F) | Last Out Tranche (LOT) of senior debt, meaning if the portfolio company is liquidated, the holder of the LOT is paid after the other senior
debt and before the senior subordinated debt.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(G) | Aggregates all shares of such class of stock owned by the Company without regard to specific series owned within such class, some series of which may
or may not be voting shares or aggregates all warrants to purchase shares of such class of stock owned by the Company without regard to specific series of such class of stock such warrants allow the Company to purchase.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(H) | In April 2011, the Company sold its common equity investment, received partial redemption of its preferred stock and invested new subordinated debt in
Cavert II Holding Corp. as part of a recapitalization.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(I) | In May 2011, the Company received full repayment of its senior subordinated term debt investment in Fifth Third Processing Solutions, LLC.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------

|(J) | Debt security is on non-accrual status.
|--- | ---------------------------------------

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.



10



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##### Table of Contents

GLADSTONE INVESTMENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBER 30, 2011

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA AND AS OTHERWISE INDICATED)

NOTE 1. ORGANIZATION

Gladstone Investment Corporation (the Company) was incorporated under the General Corporation Laws of the State of Delaware
on February 18, 2005, and completed an initial public offering on June 22, 2005. The Company is a closed-end, non-diversified management investment company that has elected to be treated as a business development company (BDC)
under the Investment Company Act of 1940, as amended (the 1940 Act). In addition, the Company has elected to be treated for tax purposes as a regulated investment company (RIC) under the Internal Revenue Code of 1986, as
amended (the Code). The Companys investment objective is to achieve a high level of current income and capital gains by investing in debt and equity securities of established private businesses.

Gladstone Business Investment, LLC (Business Investment), a wholly-owned subsidiary of the Company, was established on August 11, 2006
for the sole purpose of owning the Companys portfolio of investments in connection with its line of credit. The financial statements of Business Investment are consolidated with those of the Company.

The Company is externally managed by Gladstone Management Corporation (the Adviser), an affiliate of the Company.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Unaudited Interim Financial Statements and Basis of Presentation

Interim financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information
and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X under the Securities Act of 1933, as amended (the Securities Act). Accordingly, certain disclosures accompanying annual financial
statements prepared in accordance with GAAP are omitted. The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have
been eliminated. Under Article 6 of Regulation S-X under the Securities Act, and the authoritative accounting guidance provided by the AICPA Audit and Accounting Guide for Investment Companies, the Company is not permitted to consolidate
any portfolio company investments, including those in which the Company has a controlling interest. In the opinion of the Companys management, all adjustments, consisting solely of normal recurring accruals, necessary for the fair statement of
financial statements for the interim periods have been included. The results of operations for the three and six months ended September 30, 2011 are not necessarily indicative of results that ultimately may be achieved for the year. The interim
financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in the Companys annual report on Form 10-K for the fiscal year ended March 31, 2011, as filed with the
Securities and Exchange Commission (the SEC) on May 23, 2011.

The fiscal year-end Condensed Consolidated Statement of
Assets and Liabilities was derived from audited financial statements but does not include all disclosures required by GAAP.

Investment
Valuation Policy

The Company carries its investments at fair value to the extent that market quotations are readily available and reliable
and otherwise at fair value as determined in good faith by the Companys board of directors (the Board of Directors). In determining the fair value of the Companys investments, the Adviser has established an investment
valuation policy (the Policy). The Policy has been approved by the Board of Directors, and each quarter the Board of Directors reviews whether the Adviser has applied the Policy consistently and votes whether to accept the recommended
valuation of the Companys investment portfolio.

The Company uses generally accepted valuation techniques to value its portfolio unless
the Company has specific information about the value of an investment to determine otherwise. From time to time, the Company may accept an appraisal of a business in which the Company holds securities. These appraisals are expensive and occur
infrequently but provide a third-party valuation opinion that may differ in results, techniques and scope used to value the Companys investments. When these specific third-party appraisals are sought, the Company uses estimates of value
delineated in such appraisals and its own assumptions, including estimated remaining life, current market yield and interest rate spreads of similar securities as of the measurement date, to value the investment the Company has in that business.



11



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##### Table of Contents

The Policy, summarized below, applies to publicly-traded securities, securities for which a limited market
exists and securities for which no market exists.

Publicly-traded securities: The Company determines the value of publicly-traded
securities based on the closing price for the security on the exchange or securities market on which it is listed and primarily traded on the valuation date. To the extent that the Company owns restricted securities that are not freely tradable, but
for which a public market otherwise exists, the Company will use the market value of that security adjusted for any decrease in value resulting from the restrictive feature.

Securities for which a limited market exists: The Company values securities that are not traded on an established secondary securities market, but for which a limited market for the security
exists, such as certain participations in, or assignments of, syndicated loans, at the quoted bid price. In valuing these assets, the Company assesses trading activity in an asset class and evaluates variances in prices and other market insights to
determine if any available quote prices are reliable. If the Company concludes that quotes based on active markets or trading activity may be relied upon, firm bid prices are requested; however, if a firm bid price is unavailable, the Company bases
the value of the security upon the indicative bid price (IBP) offered by the respective originating syndication agents trading desk, or secondary desk, on or near the valuation date. To the extent that the Company uses the IBP as a
basis for valuing the security, the Adviser may take further steps to consider additional information to validate that price in accordance with the Policy.

In the event these limited markets become illiquid to a degree that market prices are no longer readily available, the Company will value its syndicated loans using alternative methods, such as estimated
net present values of the future cash flows, or discounted cash flows (DCF). The use of a DCF methodology follows that prescribed by the Financial Accounting Standards Board (FASB) Accounting Standards Codification
(ASC) 820, Fair Value Measurements and Disclosures, which provides guidance on the use of a reporting entitys own assumptions about future cash flows and risk-adjusted discount rates when relevant observable inputs,
such as quotes in active markets, are not available. When relevant observable market data does not exist, an alternative outlined in ASC 820 is the valuation of investments based on DCF. For the purposes of using DCF to provide fair value estimates,
the Company considers multiple inputs, such as a risk-adjusted discount rate that incorporates adjustments that market participants would make both for nonperformance and liquidity risks. As such, the Company develops a modified discount rate
approach that incorporates risk premiums including, among other things, increased probability of default, or higher loss given default or increased liquidity risk. The DCF valuations applied to the syndicated loans provide an estimate of what the
Company believes a market participant would pay to purchase a syndicated loan in an active market, thereby establishing a fair value. The Company will apply the DCF methodology in illiquid markets until quoted prices are available or are deemed
reliable based on trading activity.

As of September 30, 2011, the Company believes that the indicative bid prices are reliable
indicators of fair value. However, because of the private nature of this marketplace (meaning actual transactions are not publicly reported), the Company believes that these valuation inputs are classified as Level 3 within the fair value hierarchy.

Securities for which no market exists: The valuation methodology for securities for which no market exists falls into three
categories: (A) portfolio investments comprised solely of debt securities; (B) portfolio investments in controlled companies comprised of a bundle of securities, which can include debt and equity securities and (C) portfolio
investments in non-controlled companies comprised of a bundle of investments, which can include debt and equity securities.



|(A) | Portfolio investments comprised solely of debt securities: Debt securities that are not publicly traded on an established securities market, or for which a
limited market does not exist (Non-Public Debt Securities), and that are issued by portfolio companies in which the Company has no equity, or equity-like securities, are fair valued utilizing opinions of value submitted to the Company by
Standard & Poors Securities Evaluations, Inc. (SPSE). The Company may also submit paid in-kind (PIK) interest to SPSE for its evaluation when it is determined that PIK interest is likely to be received.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(B) | Portfolio investments in controlled companies comprised of a bundle of investments, which can include debt and equity securities: The fair value of these
investments is determined based on the total enterprise value (TEV) of the portfolio company, or issuer, utilizing a liquidity waterfall approach under ASC 820 for the Companys Non-Public Debt Securities and equity or equity-like
securities (e.g., preferred equity, common equity or other equity-like securities) that are purchased together as part of a package, where the Company has control or could gain control through an option or warrant security, both the debt and equity
securities of the portfolio investment would exit in the mergers and acquisitions market as the principal market, generally through a sale or recapitalization of the portfolio company. In accordance with ASC 820, the Company applies the in-use
premise of value, which assumes the debt and equity securities are sold together. Under this liquidity waterfall approach, the Company first calculates the TEV of the issuer by incorporating some or all of the following factors:
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the issuers ability to make payments;
| | - |  | --------------------------------------



| |  |  | the earnings of the issuer;
| | - |  | ---------------------------



| |  |  | recent sales to third parties of similar securities;
| | - |  | ----------------------------------------------------



| |  |  | the comparison to publicly traded securities; and
| | - |  | -------------------------------------------------



| |  |  | DCF or other pertinent factors.
| | - |  | -------------------------------



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In gathering the sales to third parties of similar securities, the Company may reference
industry statistics and use outside experts. Once the Company has estimated the TEV of the issuer, the Company will subtract the value of all the debt securities of the issuer, which are valued at the contractual principal balance. Fair values of
these debt securities are discounted for any shortfall of TEV over the total debt outstanding for the issuer. Once the values for all outstanding senior securities (which includes all the debt securities) have been subtracted from the TEV of the
issuer, the remaining amount, if any, is used to determine the value of the issuers equity or equity-like securities. If, in the Advisers judgment, the liquidity waterfall approach does not accurately reflect the value of the debt
component, the Adviser may recommend that the Company use a valuation by SPSE, or, if that is unavailable, a DCF valuation technique.



|(C) | Portfolio investments in non-controlled companies comprised of a bundle of investments, which can include debt and equity securities:The Company values
Non-Public Debt Securities that are purchased together with equity or equity-like securities from the same portfolio company, or issuer, for which the Company does not control or cannot gain control as of the measurement date, using a hypothetical
secondary market as the Companys principal market. In accordance with ASC 820, the Company determines its fair value of these debt securities of non-control investments assuming the sale of an individual debt security using the in-exchange
premise of value. As such, the Company estimates the fair value of the debt component using estimates of value provided by SPSE and its own assumptions in the absence of observable market data, including synthetic credit ratings, estimated remaining
life, current market yield and interest rate spreads of similar securities as of the measurement date. For equity or equity-like securities of investments for which the Company does not control or cannot gain control as of the measurement date, the
Company estimates the fair value of the equity using the in-exchange premise of value based on factors such as the overall value of the issuer, the relative fair value of other units of account including debt, or other relative value approaches.
Consideration is also given to capital structure and other contractual obligations that may impact the fair value of the equity. Further, the Company may utilize comparable values of similar companies, recent investments and indices with similar
structures and risk characteristics or its own assumptions in the absence of other observable market data and may also employ DCF valuation techniques.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.
Furthermore, such 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. There is no single standard for determining fair value in good faith, as fair value depends upon circumstances of each individual case. In general, fair value is the amount that the Company might reasonably
expect to receive upon the current sale of the security in an orderly transaction between market participants at the measurement date.

Refer
to Note 3 below for additional information regarding fair value measurements and the Companys adoption of ASC 820.

Investment Income
Recognition

Interest income, adjusted for amortization of premiums and acquisition costs, the accretion of discounts and the amortization
of amendment fees, is recorded on the accrual basis to the extent that such amounts are expected to be collected. Generally, when a loan becomes 90 days or more past due, or if the Companys qualitative assessment indicates that the debtor is
unable to service its debt or other obligations, the Company will place the loan on non-accrual status and cease recognizing interest income on that loan until the borrower has demonstrated the ability and intent to pay contractual amounts due.
However, the Company remains contractually entitled to this interest. Interest payments received on non-accrual loans may be recognized as income or applied to the cost basis, depending upon managements judgment. Non-accrual loans are restored
to accrual status when past due principal and interest are paid and, in managements judgment, are likely to remain current, or due to a restructuring such that the interest income is deemed to be collectible. At September 30, 2011, two
Control investments, ASH Holdings Corp. (ASH) and Country Club Enterprises, LLC (CCE) were on non-accrual with an aggregate fair value of $1.6 million, or 0.7% of the fair value of all loans held in the Companys
portfolio at September 30, 2011. At March 31, 2011, one Control investment, ASH, was on non-accrual with a fair value of $0.

During
the three months ended September 30, 2011, the Company had one loan in its portfolio that contained a PIK provision. The PIK interest, computed at the contractual rate specified in the 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 distributions, even though the Company has not yet collected the cash. During the three and
six months ended September 30, 2011, the Company recorded PIK income of $1 and $6, respectively. No PIK income was recorded during the six months ended September 30, 2010. The sole loan which had a PIK provision was paid off, at par,
during the quarter ended September 30, 2011, and the Company has no other loans which contain a PIK provision as of September 30, 2011.

The Company records success fees upon receipt. Success fees are contractually due upon a change of control in a portfolio company and are recorded in Other income in the accompanying Condensed
Consolidated Statements of Operations. During the three and six months ended September, 30, 2011, the Company recorded success fees of $0.3 million and $0.4 million, respectively, representing prepayments received from Mathey Investments, Inc.
(Mathey) and Cavert II Holding Corp. (Cavert). During the three and six



13



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months ended September 30, 2010, the Company recorded success fees of $0.8 million and $2.7 million, respectively, due to a prepayment received from Cavert and the income recognized as a
result of the exit and payoff of A. Stucki Holding Corp. (A. Stucki).

Dividend income on preferred equity securities is accrued
to the extent that such amounts are expected to be collected and if the Company has the option to collect such amounts in cash, and it is recorded in Other income in the accompanying Condensed Consolidated Statements of Operations. The
Company did not record any dividend income during the three months ended September 30, 2011; however, during the six months ended September 30, 2011, the Company recorded and collected $0.7 million of dividends on accrued preferred shares
in connection with the recapitalization of Cavert. The Company did not record any dividend income during the three months ended September 30, 1010; however, during the six months ended September 30, 2010, the Company recorded and collected
$0.3 million of dividends on preferred shares of A. Stucki and accrued and received a special dividend of property valued at $0.5 million at the time of distribution in connection with the A. Stucki sale.

Recent Accounting Pronouncements

In May
2011, the FASB issued Accounting Standards Update No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, (ASU 2011-04)
which results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between GAAP and IFRS. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011.
The Company is currently assessing the potential impact that the adoption of ASU 2011-04 may have on the Companys financial position and results of operations.

NOTE 3. INVESTMENTS

ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about assets and liabilities
measured at fair value. ASC 820 provides a consistent definition of fair value that focuses on exit price in the principal, or most advantageous, market and prioritizes, within a measurement of fair value, the use of market-based inputs over
entity-specific inputs. ASC 820 also establishes the following three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.



| |  | Level 1  inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets;
|- |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  | Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets and inputs
that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 2 inputs are in those markets for which there are few transactions, the prices are not current, little
public information exists or instances where prices vary substantially over time or among brokered market makers; and
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs are
those inputs that reflect the Companys own assumptions that market participants would use to price the asset or liability based upon the best available information.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As of September 30 and March 31, 2011, all of the Companys investments were valued using Level 3 inputs. The Company recognizes transfers between levels as of the beginning of each
reporting period based on changes in the use of observable and unobservable inputs utilized to perform the valuation for the period. During the six months ended September 30, 2011 and 2010, there were no transfers in or out of Level 3.



14



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##### Table of Contents

The following table presents the financial assets carried at fair value as of September 30, 2011, by
caption on the accompanying Condensed Consolidated Statements of Assets and Liabilitiesfor each of the three levels of hierarchy established by ASC 820 that was used to value the Companys assets:



|                                            |  |                          | 00000000 |  |         |   | 00000000 |                                                                                       |  |   | 00000000 | 
|------------------------------------------- |  | ------------------------ | -------- |  | ------- | - | -------- | ------------------------------------------------------------------------------------- |  | - | -------- | 
|                                            |  | As of September 30, 2011 |         
|                                            |  | Level 1                  |          |  | Level 3 |   |          | Total Fair ValueReported in CondensedConsolidated Statement 
ofAssets and Liabilities | 
|Control Investments                         |  |                          |          |  |         |   |          |                                                                                       |  |   |          | 
|Senior term debt                            |  | $                        |         |  |         | $ | 47,986   |                                                                                       |  | $ | 47,986   | 
|Senior subordinated term debt               |  |                          |         |  |         |   | 61,664   |                                                                                       |  |   | 61,664   | 
|Preferred equity                            |  |                          |         |  |         |   | 39,148   |                                                                                       |  |   | 39,148   | 
|Common equity/equivalents                   |  |                          |         |  |         |   | 4,723    |                                                                                       |  |   | 4,723    | 
|                                            |  |                          |          |  |         |   |          |                                                                                       |  |   |          | 
|Total Control investments                   |  |                          |         |  |         |   | 153,521  |                                                                                       |  |   | 153,521  | 
|                                            |  |                          |         
|Affiliate Investments                       |  |                          |          |  |         |   |          |                                                                                       |  |   |          | 
|Senior term debt                            |  |                          |         |  |         |   | 24,751   |                                                                                       |  |   | 24,751   | 
|Senior subordinated term debt               |  |                          |         |  |         |   | 18,421   |                                                                                       |  |   | 18,421   | 
|Preferred equity                            |  |                          |         |  |         |   | 8,304    |                                                                                       |  |   | 8,304    | 
|Common equity/equivalents                   |  |                          |         |  |         |   | 689      |                                                                                       |  |   | 689      | 
|                                            |  |                          |          |  |         |   |          |                                                                                       |  |   |          | 
|Total Affiliate investments                 |  |                          |         |  |         |   | 52,165   |                                                                                       |  |   | 52,165   | 
|                                            |  |                          |         
|Non-Control/Non-Affiliate Investments       |  |                          |          |  |         |   |          |                                                                                       |  |   |          | 
|Senior term debt                            |  |                          |         |  |         |   | 12,338   |                                                                                       |  |   | 12,338   | 
|Common equity/equivalents                   |  |                          |         |  |         |   | 32       |                                                                                       |  |   | 32       | 
|                                            |  |                          |          |  |         |   |          |                                                                                       |  |   |          | 
|Total Non-Control/Non-Affiliate Investments |  |                          |         |  |         |   | 12,370   |                                                                                       |  |   | 12,370   | 
|                                            |  |                          |          |  |         |   |          |                                                                                       |  |   |          | 
|                                            |  |                          |         
|Total Investments at fair value             |  | $                        |         |  |         | $ | 218,056  |                                                                                       |  | $ | 218,056  | 
|                                            |  |                          |         
|Cash Equivalents                            |  |                          | 70,001   |  |         |   |         |                                                                                       |  |   | 70,001   | 
|                                            |  |                          |          |  |         |   |          |                                                                                       |  |   |          | 
|                                            |  |                          |         
|Total Investments and Cash Equivalents      |  | $                        | 70,001   |  |         | $ | 218,056  |                                                                                       |  | $ | 288,057  | 
|                                            |  |                          |          |  |         |   |          |                                                                                       |  |   |          | 

The following table presents the financial assets carried at fair value as of March 31, 2011, by caption on the
accompanying Condensed Consolidated Statements of Assets and Liabilitiesfor each of the three levels of hierarchy established by ASC 820 that was used to value the Companys assets:



|                                            |  |                      | 00000000 |  |         |   | 00000000 |                                                                                       |  |   | 00000000 | 
|------------------------------------------- |  | -------------------- | -------- |  | ------- | - | -------- | ------------------------------------------------------------------------------------- |  | - | -------- | 
|                                            |  | As of March 31, 2011 |         
|                                            |  | Level 1              |          |  | Level 3 |   |          | Total Fair ValueReported in CondensedConsolidated Statement 
ofAssets and Liabilities | 
|Control Investments                         |  |                      |          |  |         |   |          |                                                                                       |  |   |          | 
|Senior term debt                            |  | $                    |         |  |         | $ | 21,605   |                                                                                       |  | $ | 21,605   | 
|Senior subordinated term debt               |  |                      |         |  |         |   | 56,297   |                                                                                       |  |   | 56,297   | 
|Preferred equity                            |  |                      |         |  |         |   | 19,745   |                                                                                       |  |   | 19,745   | 
|Common equity/equivalents                   |  |                      |         |  |         |   | 6,415    |                                                                                       |  |   | 6,415    | 
|                                            |  |                      |          |  |         |   |          |                                                                                       |  |   |          | 
|Total Control investments                   |  |                      |         |  |         |   | 104,062  |                                                                                       |  |   | 104,062  | 
|                                            |  |                      |         
|Affiliate Investments                       |  |                      |          |  |         |   |          |                                                                                       |  |   |          | 
|Senior term debt                            |  |                      |         |  |         |   | 22,903   |                                                                                       |  |   | 22,903   | 
|Senior subordinated term debt               |  |                      |         |  |         |   | 6,000    |                                                                                       |  |   | 6,000    | 
|Preferred equity                            |  |                      |         |  |         |   | 5,653    |                                                                                       |  |   | 5,653    | 
|                                            |  |                      |          |  |         |   |          |                                                                                       |  |   |          | 
|Total Affiliate investments                 |  |                      |         |  |         |   | 34,556   |                                                                                       |  |   | 34,556   | 
|                                            |  |                      |         
|Non-Control/Non-Affiliate Investments       |  |                      |          |  |         |   |          |                                                                                       |  |   |          | 
|Senior term debt                            |  |                      |         |  |         |   | 14,119   |                                                                                       |  |   | 14,119   | 
|Senior subordinated term debt               |  |                      |         |  |         |   | 509      |                                                                                       |  |   | 509      | 
|Common equity/equivalents                   |  |                      |         |  |         |   | 39       |                                                                                       |  |   | 39       | 
|                                            |  |                      |          |  |         |   |          |                                                                                       |  |   |          | 
|Total Non-Control/Non-Affiliate Investments |  |                      |         |  |         |   | 14,667   |                                                                                       |  |   | 14,667   | 
|                                            |  |                      |          |  |         |   |          |                                                                                       |  |   |          | 
|                                            |  |                      |         
|Total Investments at fair value             |  | $                    |         |  |         | $ | 153,285  |                                                                                       |  | $ | 153,285  | 
|                                            |  |                      |         
|Cash Equivalents                            |  |                      | 60,000   |  |         |   |         |                                                                                       |  |   | 60,000   | 
|                                            |  |                      |          |  |         |   |          |                                                                                       |  |   |          | 
|                                            |  |                      |         
|Total Investments and Cash Equivalents      |  | $                    | 60,000   |  |         | $ | 153,285  |                                                                                       |  | $ | 213,285  | 
|                                            |  |                      |          |  |         |   |          |                                                                                       |  |   |          | 

Changes in Level 3 Fair Value Measurements of Investments

The following tables provide a roll-forward in the changes in fair value during the three and six months ended September 30, 2011 and 2010 for all investments for which the Company determines fair
value using unobservable (Level 3) factors. When a determination is



15



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##### Table of Contents

made to classify a financial instrument within Level 3 of the valuation hierarchy, the determination is based upon the significance of the unobservable factors to the overall fair value
measurement. However, Level 3 financial instruments typically include, in addition to the unobservable or Level 3 components, observable components (that is, components that are actively quoted and can be validated to external sources). Accordingly,
the gains and losses in the tables below include changes in fair value due in part to observable factors that are part of the valuation methodology. Two tables are provided for each period. The first table is broken out by Control, Affiliate and
Non-Control/Non-Affiliate investment classification. The second table is broken out by major security type.

Fair value
measurements using significant unobservable inputs (Level 3)

Periods ended September 30, 2011:



|                                                                                |  |             |         |   |             |   |        |               |  |   |        |   |  |   |         |  
|------------------------------------------------------------------------------- |  | ----------- | ------- | - | ----------- | - | ------ | ------------- |  | - | ------ | - |  | - | ------- | -
|                                                                                |  |             |         |   |             |   |        | Non-Control/  |  |   |        |  
|                                                                                |  | Control     |         |   | Affiliate   |   |        | Non-Affiliate |  |   |        |  
|                                                                                |  | Investments |         |   | Investments |   |        | Investments   |  |   | Total  |  
|Three months ended September 30, 2011:                                          |  |             |         |   |             |   |        |               |  |   |        |   |  |   |         |  
|Fair value as of June 30, 2011                                                  |  | $           | 99,717  |   |             | $ | 50,676 |               |  | $ | 14,902 |   |  | $ | 165,295 |  
|Net realized losses(A)(H)                                                       |  |             | (543    | ) |             |   |       |               |  |   | (1     | ) |  |   | (544    | )
|Net unrealized appreciation (depreciation)(B)                                   |  |             | 8,886   |   |             |   | 1,662  |               |  |   | (212   | ) |  |   | 10,336  |  
|Reversal of previously-recorded depreciation upon realization(B)                |  |             |        |   |             |   |       |               |  |   | 1      |   |  |   | 1       |  
|Issuances / Originations(C)                                                     |  |             | 44,919  |   |             |   |       |               |  |   |       |   |  |   | 44,919  |  
|Sales(H)                                                                        |  |             | 542     |   |             |   |       |               |  |   |       |   |  |   | 542     |  
|Settlements / Repayments(D)                                                     |  |             |        |   |             |   | (173   | )             |  |   | (2,320 | ) |  |   | (2,493  | )
|                                                                                |  |             |         |   |             |   |        |               |  |   |        |   |  |   |         |  
|Fair value as of September 30, 2011                                             |  | $           | 153,521 |   |             | $ | 52,165 |               |  | $ | 12,370 |   |  | $ | 218,056 |  
|                                                                                |  |             |         |   |             |   |        |               |  |   |        |   |  |   |         |  
|                                                                                |  |             |         |  
|Six months ended September 30, 2011:                                            |  |             |         |   |             |   |        |               |  |   |        |   |  |   |         |  
|Fair value as of March 31, 2011                                                 |  | $           | 104,062 |   |             | $ | 34,556 |               |  | $ | 14,667 |   |  | $ | 153,285 |  
|Net realized gains(A)(H)                                                        |  |             | 5,192   |   |             |   |       |               |  |   | 4      |   |  |   | 5,196   |  
|Net unrealized appreciation(B)                                                  |  |             | 7,129   |   |             |   | 3,646  |               |  |   | 622    |   |  |   | 11,397  |  
|Reversal of previously-recorded (appreciation) depreciation upon realization(B) |  |             | (6,194  | ) |             |   | 94     |               |  |   | (13    | ) |  |   | (6,113  | )
|Issuances / Originations(C)                                                     |  |             | 61,671  |   |             |   | 5,700  |               |  |   | 7      |   |  |   | 67,378  |  
|Sales(H)                                                                        |  |             | (7,527  | ) |             |   |       |               |  |   |       |   |  |   | (7,527  | )
|Settlements / Repayments(D)                                                     |  |             | (1,647  | ) |             |   | (996   | )             |  |   | (2,917 | ) |  |   | (5,560  | )
|Transfers(E)                                                                    |  |             | (9,165  | ) |             |   | 9,165  |               |  |   |       |   |  |   |        |  
|                                                                                |  |             |         |   |             |   |        |               |  |   |        |   |  |   |         |  
|Fair value as of September 30, 2011                                             |  | $           | 153,521 |   |             | $ | 52,165 |               |  | $ | 12,370 |   |  | $ | 218,056 |  
|                                                                                |  |             |         |   |             |   |        |               |  |   |        |   |  |   |         |  



|                                                                 |  |           |        |   |              |   |        |           |  |   |             |   |  |       |        |   |  |   |         |  
|---------------------------------------------------------------- |  | --------- | ------ | - | ------------ | - | ------ | --------- |  | - | ----------- | - |  | ----- | ------ | - |  | - | ------- | -
|                                                                 |  |           |        |   | Senior       |   |        |           |  |   | Common      |   |  |       |       
|                                                                 |  | Senior    |        |   | Subordinated |   |        | Preferred |  |   | Equity/     |   |  |       |       
|                                                                 |  | Term Debt |        |   | Term Debt    |   |        | Equity    |  |   | Equivalents |   |  | Total |       
|Three months ended September 30, 2011:                           |  |           |        |   |              |   |        |           |  |   |             |   |  |       |        |   |  |   |         |  
|Fair value as of June 30, 2011                                   |  | $         | 57,932 |   |              | $ | 75,862 |           |  | $ | 30,068      |   |  | $     | 1,433  |   |  | $ | 165,295 |  
|Net realized losses(A)(H)                                        |  |           | (1     | ) |              |   |       |           |  |   |            |   |  |       | (543   | ) |  |   | (544    | )
|Net unrealized (depreciation) appreciation(B)                    |  |           | (569   | ) |              |   | 1,473  |           |  |   | 5,642       |   |  |       | 3,790  |   |  |   | 10,336  |  
|Reversal of previously-recorded depreciation upon realization(B) |  |           | 1      |   |              |   |       |           |  |   |            |   |  |       |       |   |  |   | 1       |  
|Issuances / Originations(C)                                      |  |           | 30,205 |   |              |   | 2,750  |           |  |   | 11,742      |   |  |       | 222    |   |  |   | 44,919  |  
|Sales(H)                                                         |  |           |       |   |              |   |       |           |  |   |            |   |  |       | 542    |   |  |   | 542     |  
|Settlements / Repayments(D)                                      |  |           | (2,493 | ) |              |   |       |           |  |   |            |   |  |       |       |   |  |   | (2,493  | )
|                                                                 |  |           |        |   |              |   |        |           |  |   |             |   |  |       |        |   |  |   |         |  
|Fair value as of September 30, 2011                              |  | $         | 85,075 |   |              | $ | 80,085 |           |  | $ | 47,452      |   |  | $     | 5,444  |   |  | $ | 218,056 |  
|                                                                 |  |           |        |   |              |   |        |           |  |   |             |   |  |       |        |   |  |   |         |  
|                                                                 |  |           |        |   |             
|Six months ended September 30, 2011:                             |  |           |        |   |              |   |        |           |  |   |             |   |  |       |        |   |  |   |         |  
|Fair value as of March 31, 2011                                  |  | $         | 58,627 |   |              | $ | 62,806 |           |  | $ | 25,398      |   |  | $     | 6,454  |   |  | $ | 153,285 |  
|Net realized gains(A)(H)                                         |  |           | (1     | ) |              |   | 5      |           |  |   |            |   |  |       | 5,192  |   |  |   | 5,196   |  
|Net unrealized appreciation (depreciation)(B)                    |  |           | 788    |   |              |   | (4,182 | )         |  |   | 10,474      |   |  |       | 4,317  |   |  |   | 11,397  |  
|Reversal of previously-recorded appreciation upon realization(B) |  |           | 95     |   |              |   | (14    | )         |  |   | (686        | ) |  |       | (5,508 | ) |  |   | (6,113  | )
|Issuances / Originations(C)                                      |  |           | 30,211 |   |              |   | 22,385 |           |  |   | 14,532      |   |  |       | 250    |   |  |   | 67,378  |  
|Sales(H)                                                         |  |           |       |   |              |   |       |           |  |   | (2,266      | ) |  |       | (5,261 | ) |  |   | (7,527  | )
|Settlements / Repayments(D)                                      |  |           | (4,645 | ) |              |   | (915   | )         |  |   |            |   |  |       |       |   |  |   | (5,560  | )
|                                                                 |  |           |        |   |              |   |        |           |  |   |             |   |  |       |        |   |  |   |         |  
|Fair value as of September 30, 2011                              |  | $         | 85,075 |   |              | $ | 80,085 |           |  | $ | 47,452      |   |  | $     | 5,444  |   |  | $ | 218,056 |  
|                                                                 |  |           |        |   |              |   |        |           |  |   |             |   |  |       |        |   |  |   |         |  



16



---

##### Table of Contents

Periods ended September 30, 2010:



|                                                                 |  |             |         |   |             |   |        |               |  |   |        |   |  |   |         |  
|---------------------------------------------------------------- |  | ----------- | ------- | - | ----------- | - | ------ | ------------- |  | - | ------ | - |  | - | ------- | -
|                                                                 |  |             |         |   |             |   |        | Non-Control/  |  |   |        |  
|                                                                 |  | Control     |         |   | Affiliate   |   |        | Non-Affiliate |  |   |        |  
|                                                                 |  | Investments |         |   | Investments |   |        | Investments   |  |   | Total  |  
|Three months ended September 30, 2010:                           |  |             |         |   |             |   |        |               |  |   |        |   |  |   |         |  
|Fair value as of June 30, 2010                                   |  | $           | 101,574 |   |             | $ | 32,676 |               |  | $ | 14,079 |   |  | $ | 148,329 |  
|Net unrealized (depreciation) appreciation(B)                    |  |             | (9,723  | ) |             |   | 401    |               |  |   | 31     |   |  |   | (9,291  | )
|Issuances / Originations(C)                                      |  |             | 3,640   |   |             |   |       |               |  |   |       |   |  |   | 3,640   |  
|Settlements / Repayments(D)                                      |  |             | (441    | ) |             |   | (573   | )             |  |   | (50    | ) |  |   | (1,064  | )
|                                                                 |  |             |         |   |             |   |        |               |  |   |        |   |  |   |         |  
|Fair value as of September 30, 2010                              |  | $           | 95,050  |   |             | $ | 32,504 |               |  | $ | 14,060 |   |  | $ | 141,614 |  
|                                                                 |  |             |         |   |             |   |        |               |  |   |        |   |  |   |         |  
|                                                                 |  |             |         |  
|Six months ended September 30, 2010:                             |  |             |         |   |             |   |        |               |  |   |        |   |  |   |         |  
|Fair value as of March 31, 2010                                  |  | $           | 148,248 |   |             | $ | 37,664 |               |  | $ | 20,946 |   |  | $ | 206,858 |  
|Net realized gains(A)                                            |  |             | 16,957  |   |             |   |       |               |  |   | 19     |   |  |   | 16,976  |  
|Net unrealized (depreciation) appreciation(B)                    |  |             | (9,779  | ) |             |   | 1,639  |               |  |   | 475    |   |  |   | (7,665  | )
|Reversal of previously-recorded appreciation upon realization(B) |  |             | (17,405 | ) |             |   |       |               |  |   | (19    | ) |  |   | (17,424 | )
|Issuances / Originations(C)                                      |  |             | 4,994   |   |             |   |       |               |  |   |       |   |  |   | 4,994   |  
|Sales                                                            |  |             | (21,474 | ) |             |   |       |               |  |   |       |   |  |   | (21,474 | )
|Settlements / Repayments(D)                                      |  |             | (32,244 | ) |             |   | (1,046 | )             |  |   | (7,361 | ) |  |   | (40,651 | )
|Transfers(F)                                                     |  |             | 5,753   |   |             |   | (5,753 | )             |  |   |       |   |  |   |        |  
|                                                                 |  |             |         |   |             |   |        |               |  |   |        |   |  |   |         |  
|Fair value as of September 30, 2010                              |  | $           | 95,050  |   |             | $ | 32,504 |               |  | $ | 14,060 |   |  | $ | 141,614 |  
|                                                                 |  |             |         |   |             |   |        |               |  |   |        |   |  |   |         |  



|                                                                 |  |           |         |   |              |   |         |           |  |   |             |   |  |       |         |   |  |   |         |  
|---------------------------------------------------------------- |  | --------- | ------- | - | ------------ | - | ------- | --------- |  | - | ----------- | - |  | ----- | ------- | - |  | - | ------- | -
|                                                                 |  |           |         |   | Senior       |   |         |           |  |   | Common      |   |  |       |        
|                                                                 |  | Senior    |         |   | Subordinated |   |         | Preferred |  |   | Equity/     |   |  |       |        
|                                                                 |  | Term Debt |         |   | Term Debt    |   |         | Equity    |  |   | Equivalents |   |  | Total |        
|Three months ended September 30, 2010:                           |  |           |         |   |              |   |         |           |  |   |             |   |  |       |         |   |  |   |         |  
|Fair value as of June 30, 2010                                   |  | $         | 64,893  |   |              | $ | 62,018  |           |  | $ | 16,510      |   |  | $     | 4,908   |   |  | $ | 148,329 |  
|Net unrealized appreciation (depreciation)(B)                    |  |           | 921     |   |              |   | 470     |           |  |   | (12,725     | ) |  |       | 2,043   |   |  |   | (9,291  | )
|Issuances / Originations(C)                                      |  |           |        |   |              |   | 369     |           |  |   | 3,271       |   |  |       |        |   |  |   | 3,640   |  
|Settlements / Repayments(D)                                      |  |           | (988    | ) |              |   | (76     | )         |  |   |            |   |  |       |        |   |  |   | (1,064  | )
|Transfers(G)                                                     |  |           |        |   |              |   | (12,300 | )         |  |   | 12,300      |   |  |       |        |   |  |   |        |  
|                                                                 |  |           |         |   |              |   |         |           |  |   |             |   |  |       |         |   |  |   |         |  
|Fair value as of September 30, 2010                              |  | $         | 64,826  |   |              | $ | 50,481  |           |  | $ | 19,356      |   |  | $     | 6,951   |   |  | $ | 141,614 |  
|                                                                 |  |           |         |   |              |   |         |           |  |   |             |   |  |       |         |   |  |   |         |  
|                                                                 |  |           |         |   |             
|Six months ended September 30, 2010:                             |  |           |         |   |              |   |         |           |  |   |             |   |  |       |         |   |  |   |         |  
|Fair value as of March 31, 2010                                  |  | $         | 94,359  |   |              | $ | 71,112  |           |  | $ | 20,425      |   |  | $     | 20,962  |   |  | $ | 206,858 |  
|Net realized gains(A)                                            |  |           | 19      |   |              |   |        |           |  |   |            |   |  |       | 16,957  |   |  |   | 16,976  |  
|Net unrealized appreciation (depreciation)(B)                    |  |           | 1,431   |   |              |   | 302     |           |  |   | (12,169     | ) |  |       | 2,771   |   |  |   | (7,665  | )
|Reversal of previously-recorded appreciation upon realization(B) |  |           | (19     | ) |              |   |        |           |  |   | (142        | ) |  |       | (17,263 | ) |  |   | (17,424 | )
|Issuances / Originations(C)                                      |  |           |        |   |              |   | 1,054   |           |  |   | 3,329       |   |  |       | 611     |   |  |   | 4,994   |  
|Sales                                                            |  |           |        |   |              |   |        |           |  |   | (4,387      | ) |  |       | (17,087 | ) |  |   | (21,474 | )
|Settlements / Repayments(D)                                      |  |           | (30,964 | ) |              |   | (9,687  | )         |  |   |            |   |  |       |        |   |  |   | (40,651 | )
|Transfers(G)                                                     |  |           |        |   |              |   | (12,300 | )         |  |   | 12,300      |   |  |       |        |   |  |   |        |  
|                                                                 |  |           |         |   |              |   |         |           |  |   |             |   |  |       |         |   |  |   |         |  
|Fair value as of September 30, 2010                              |  | $         | 64,826  |   |              | $ | 50,481  |           |  | $ | 19,356      |   |  | $     | 6,951   |   |  | $ | 141,614 |  
|                                                                 |  |           |         |   |              |   |         |           |  |   |             |   |  |       |         |   |  |   |         |  



|(A) | Included in the realized and unrealized gain (loss) section on the accompanying Condensed Consolidated Statement of Operations for the periods
ended September 30, 2011 and 2010.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(B) | Included in Net unrealized appreciation (depreciation) of investment portfolio on the accompanying Condensed Consolidated Statement of
Operations for the periods ended September 30, 2011 and 2010.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(C) | Includes PIK and
other non-cash disbursements to portfolio companies.
|--- | ---------------------------------------------------------------------

|(D) | Includes
amortization of premiums and discounts and other cost-basis adjustments.
|--- | ---------------------------------------------------------------------------------

|(E) | Transfer represents the cost basis of Cavert immediately after its recapitalization in April 2011, which was reclassified from a Control to an
Affiliate investment during the three months ended June 30, 2011.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(F) | Transfer represents the cost basis as of March 31, 2010 of Tread Corporation, which was reclassified from an Affiliate to a Control investment
during the three months ended June 30, 2010.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(G) | Transfer represents $12.3 million of senior subordinated term debt of Galaxy Tool Holding Corp., at cost as of June 30, 2010, that was converted
to preferred and common equity during the quarter ended September 30, 2010.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(H) | Included in Net realized Gains (losses) and Sales are post-closing adjustments recorded in the current period related to exits from prior periods.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------

Non-Proprietary Investment Activity

Non-proprietary investments are investments that were not originated by the Company. During the six months ended September 30, 2011, the Company received full repayment of its syndicated loans to
Fifth Third Processing Solutions, LLC, and Survey Sampling, LLC, resulting in aggregate gross proceeds of approximately $2.8 million. At September 30, 2011, the Company held one remaining non-proprietary loan in its portfolio, American
Greetings Corporation, which had a fair value of approximately $3.0 million, or 1.4% of its total investments at September 30, 2011.



17



---

##### Table of Contents

Proprietary Investment Activity

During the six months ended September 30, 2011, the following significant transactions occurred:



| |  |  | In April 2011, the Company recapitalized its investment in Cavert, from which the Company received gross cash proceeds of $5.6 million from the sale of
its common equity, resulting in a realized gain of $5.5 million, $2.3 million in a partial redemption of its preferred stock and $0.7 million in preferred dividends. At the same time, the Company invested $5.7 million in new subordinated debt in
Cavert. Cavert was reclassified from a Control investment to an Affiliate investment during the three months ended June 30, 2011.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In April 2011, the Company invested $16.4 million in a new Control investment, Mitchell Rubber Products, Inc. (Mitchell), consisting of
subordinated debt and preferred and common equity. Mitchell, headquartered in Mira Loma, California, develops, mixes and molds rubber compounds for specialized applications in the non-tire rubber market.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In August 2011, the Company invested $28.1 million in a new Control investment, SOG Specialty Knives and Tools, LLC (SOG), consisting of
senior debt and preferred equity. SOG, headquartered in Lynnwood, WA, designs and produces specialty knives and tools for the hunting/outdoors, military/law enforcement and industrial markets.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In September 2011, the Company invested $13.8 million in a new Control investment, SBS Industries, Inc. (SBS), consisting of senior debt
and preferred and common equity. SBS, headquartered in Tulsa, OK, is a manufacturer and value-added distributor of special fasteners and threaded screw products.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Refer to Note 12, Subsequent Events, for investment activity occurring subsequent to September 30, 2011.

Investment Concentrations

Approximately 39.0% of the aggregate fair value of the
Companys investment portfolio at September 30, 2011, was comprised of senior term debt, 36.7% was comprised of senior subordinated term debt and 24.3% was comprised of preferred and common equity securities or their equivalents. At
September 30, 2011, the Company had investments in 18 portfolio companies with an aggregate fair value of $218.1 million, of which SOG, Acme Cryogenics, Inc. (Acme) and Venyu Solutions, Inc. (Venyu), collectively,
comprised approximately $79.8 million, or 36.6% of the Companys total investment portfolio, at fair value. The following table outlines the Companys investments by security type at September 30 and March 31, 2011:



|                              |  |                    |         |  |                |   |         |      |  |   |            |  |  |   |         | 
|----------------------------- |  | ------------------ | ------- |  | -------------- | - | ------- | ---- |  | - | ---------- |  |  | - | ------- | 
|                              |  | September 30, 2011 |         |  | March 31, 2011 |  
|                              |  | Cost               |         |  | Fair Value     |   |         | Cost |  |   | Fair Value | 
|Senior term debt              |  | $                  | 90,131  |  |                | $ | 85,075  |      |  | $ | 64,566     |  |  | $ | 58,627  | 
|Senior subordinated term debt |  |                    | 96,077  |  |                |   | 80,085  |      |  |   | 74,602     |  |  |   | 62,806  | 
|Preferred equity              |  |                    | 65,186  |  |                |   | 47,452  |      |  |   | 52,922     |  |  |   | 25,398  | 
|Common equity/Equivalents     |  |                    | 5,284   |  |                |   | 5,444   |      |  |   | 5,102      |  |  |   | 6,454   | 
|                              |  |                    |         |  |                |   |         |      |  |   |            |  |  |   |         | 
|Total Investments             |  | $                  | 256,678 |  |                | $ | 218,056 |      |  | $ | 197,192    |  |  | $ | 153,285 | 
|                              |  |                    |         |  |                |   |         |      |  |   |            |  |  |   |         | 

Investments at fair value consisted of the following industry classifications at September 30 and March 31,
2011:



|                                                   |  |                    |         |  |                                |  |       |            |  |   |                                |  |  |  |       |  
|-------------------------------------------------- |  | ------------------ | ------- |  | ------------------------------ |  | ----- | ---------- |  | - | ------------------------------ |  |  |  | ----- | -
|                                                   |  | September 30, 2011 |         |  | March 31, 2011                 | 
|                                                   |  | Fair Value         |         |  | Percentage ofTotal Investments |  |       | Fair Value |  |   | Percentage ofTotal Investments | 
|Chemicals, plastics and rubber                     |  | $                  | 42,922  |  |                                |  | 19.7  | %          |  | $ | 19,906                         |  |  |  | 13.0  | %
|Leisure, amusement, motion pictures, entertainment |  |                    | 28,148  |  |                                |  | 12.9  |            |  |   |                               |  |  |  |      |  
|Containers, packaging and glass                    |  |                    | 25,362  |  |                                |  | 11.6  |            |  |   | 29,029                         |  |  |  | 19.0  |  
|Electronics                                        |  |                    | 25,305  |  |                                |  | 11.6  |            |  |   | 25,012                         |  |  |  | 16.3  |  
|Machinery                                          |  |                    | 23,278  |  |                                |  | 10.7  |            |  |   | 10,431                         |  |  |  | 6.8   |  
|Cargo transport                                    |  |                    | 14,910  |  |                                |  | 6.8   |            |  |   | 13,183                         |  |  |  | 8.6   |  
|Diversified/Conglomerate manufacturing             |  |                    | 11,978  |  |                                |  | 5.5   |            |  |   | 12,746                         |  |  |  | 8.3   |  
|Oil and gas                                        |  |                    | 11,320  |  |                                |  | 5.2   |            |  |   | 4,931                          |  |  |  | 3.2   |  
|Home and office furnishings/Consumer products      |  |                    | 10,188  |  |                                |  | 4.7   |            |  |   | 8,627                          |  |  |  | 5.6   |  
|Aerospace and defense                              |  |                    | 10,126  |  |                                |  | 4.7   |            |  |   | 6,659                          |  |  |  | 4.4   |  
|Buildings and real estate                          |  |                    | 9,906   |  |                                |  | 4.5   |            |  |   | 10,120                         |  |  |  | 6.6   |  
|Printing and publishing                            |  |                    | 3,013   |  |                                |  | 1.4   |            |  |   | 3,073                          |  |  |  | 2.0   |  
|Automobile                                         |  |                    | 1,600   |  |                                |  | 0.7   |            |  |   | 7,560                          |  |  |  | 4.9   |  
|Telecommunications                                 |  |                    |        |  |                                |  |      |            |  |   | 1,499                          |  |  |  | 1.0   |  
|Diversified/Conglomerate service                   |  |                    |        |  |                                |  |      |            |  |   | 509                            |  |  |  | 0.3   |  
|                                                   |  |                    |         |  |                                |  |       |            |  |   |                                |  |  |  |       |  
|Total Investments                                  |  | $                  | 218,056 |  |                                |  | 100.0 | %          |  | $ | 153,285                        |  |  |  | 100.0 | %
|                                                   |  |                    |         |  |                                |  |       |            |  |   |                                |  |  |  |       |  



18



---

##### Table of Contents

The investments, at fair value, were included in the following geographic regions of the United States at
September 30 and March 31, 2011:



|                  |  |                    |         |  |                                |  |       |            |  |   |                                |  |  |  |       |  
|----------------- |  | ------------------ | ------- |  | ------------------------------ |  | ----- | ---------- |  | - | ------------------------------ |  |  |  | ----- | -
|                  |  | September 30, 2011 |         |  | March 31, 2011                 | 
|                  |  | Fair Value         |         |  | Percentage ofTotal Investments |  |       | Fair Value |  |   | Percentage ofTotal Investments | 
|South             |  | $                  | 109,532 |  |                                |  | 50.3  | %          |  | $ | 92,172                         |  |  |  | 60.1  | %
|West              |  |                    | 56,744  |  |                                |  | 26.0  |            |  |   | 12,746                         |  |  |  | 8.3   |  
|Northeast         |  |                    | 38,641  |  |                                |  | 17.7  |            |  |   | 38,126                         |  |  |  | 24.9  |  
|Midwest           |  |                    | 13,139  |  |                                |  | 6.0   |            |  |   | 10,241                         |  |  |  | 6.7   |  
|                  |  |                    |         |  |                                |  |       |            |  |   |                                |  |  |  |       |  
|Total Investments |  | $                  | 218,056 |  |                                |  | 100.0 | %          |  | $ | 153,285                        |  |  |  | 100.0 | %
|                  |  |                    |         |  |                                |  |       |            |  |   |                                |  |  |  |       |  

The geographic region indicates the location of the headquarters for the Companys portfolio companies. A portfolio
company may have a number of other business locations in other geographic regions.

Investment Principal Repayments

The following table summarizes the contractual principal repayments and maturity of the Companys investment portfolio by fiscal year, assuming no
voluntary prepayments, at September 30, 2011:



|                                              |  |                                                             |  |        |         |  
|--------------------------------------------- |  | ----------------------------------------------------------- |  | ------ | ------- | -
|                                              |  |                                                             |  | Amount |        
|For the remaining six months ending March 31: |  | 2012                                                        |  | $      | 15,849  |  
|For the fiscal year ending March 31:          |  | 2013                                                        |  |        | 30,385  |  
|                                              |  | 2014                                                        |  |        | 37,331  |  
|                                              |  | 2015                                                        |  |        | 17,221  |  
|                                              |  | 2016                                                        |  |        | 26,775  |  
|                                              |  | 2017                                                        |  |        | 58,878  |  
|                                              |  | Thereafter                                                  |  |        |        |  
|                                              |  |                                                             |  |        |         |  
|                                              |  | Total contractual repayments                                |  | $      | 186,439 |  
|                                              |  | Investments in equity securities                            |  |        | 70,470  |  
|                                              |  | Adjustments to cost basis on debt securities                |  |        | (231    | )
|                                              |  |                                                             |  |        |         |  
|                                              |  | Total cost basis of investments held at September 30, 2011: |  | $      | 256,678 |  
|                                              |  |                                                             |  |        |         |  

Receivables from Portfolio Companies

Receivables from portfolio companies represent non-recurring costs incurred on behalf of portfolio companies and are included in Other assets on the accompanying Condensed Consolidated Statement of
Assets and Liabilities as of September 30 and March 31, 2011. The Company maintains an allowance for uncollectible receivables from portfolio companies, which is determined based on historical experience and managements
expectations of future losses. The Company charges the accounts receivable to the established provision when collection efforts have been exhausted and the receivables are deemed uncollectible. As of September 30 and March 31, 2011, the
Company had gross receivables from portfolio companies of $0.5 million. The allowance for uncollectible receivables was $0.1 million at September 30 and March 31, 2011. In addition, the Company recorded an allowance for uncollectible
interest receivable of $0.1 million and $0 as of September 30 and March 31, 2011, respectively.

NOTE 4. RELATED PARTY TRANSACTIONS

Investment Advisory and Management Agreement

The Company has entered into an investment advisory and management agreement with the Adviser (the Advisory Agreement), which is controlled by the Companys chairman and chief executive
officer. In accordance with the Advisory Agreement, the Company pays the Adviser certain fees as compensation for its services, such fees consisting of a base management fee and an incentive fee. On July 12, 2011, the Board of Directors
approved the renewal of the Advisory Agreement through August 31, 2012.



19



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##### Table of Contents

The following table summarizes the management fees, incentive fees and associated credits reflected in the
accompanying Condensed Consolidated Statements of Operations:



|                                                                            |  |                                 |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|--------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ----------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                            |  | Three Months EndedSeptember 30, |         |   | Six Months EndedSeptember 30, |  
|                                                                            |  | 2011                            |         |   | 2010                          |   |         | 2011 |  |   | 2010    |  
|Average total assets subject to base management fee(A)                      |  | $                               | 212,600 |   |                               | $ | 193,800 |      |  | $ | 207,100 |   |  | $ | 199,300 |  
|Multiplied by pro-rata annual base management fee of 2%                     |  |                                 | 0.5     | % |                               |   | 0.5     | %    |  |   | 1.0     | % |  |   | 1.0     | %
|                                                                            |  |                                 |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Unadjusted base management fee                                              |  |                                 | 1,063   |   |                               |   | 969     |      |  |   | 2,071   |   |  |   | 1,993   |  
|                                                                            |  |                                 |         |  
|Reduction for loan servicing fees(B)                                        |  |                                 | (715    | ) |                               |   | (666    | )    |  |   | (1,392  | ) |  |   | (1,490  | )
|                                                                            |  |                                 |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Base management fee(B)                                                      |  | $                               | 348     |   |                               | $ | 303     |      |  | $ | 679     |   |  | $ | 503     |  
|                                                                            |  |                                 |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|                                                                            |  |                                 |         |  
|Credits to base management fee from Adviser:                                |  |                                 |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Fee reduction for the waiver of 2.0% fee on senior syndicated loans to 0.5% |  | $                               |        |   |                               | $ |        |      |  | $ |        |   |  | $ | (15     | )
|Credit for fees received by Adviser from the portfolio companies            |  |                                 | (511    | ) |                               |   | (61     | )    |  |   | (726    | ) |  |   | (165    | )
|                                                                            |  |                                 |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Credit to base management fee from Adviser(B)                               |  |                                 | (511    | ) |                               |   | (61     | )    |  |   | (726    | ) |  |   | (180    | )
|                                                                            |  |                                 |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|                                                                            |  |                                 |         |  
|Net base management fee                                                     |  | $                               | (163    | ) |                               | $ | 242     |      |  | $ | (47     | ) |  | $ | 323     |  
|                                                                            |  |                                 |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|                                                                            |  |                                 |         |  
|Net incentive fee(B)                                                        |  | $                               |        |   |                               | $ |        |      |  | $ | 19      |   |  | $ | 1,052   |  
|                                                                            |  |                                 |         |   |                               |   |         |      |  |   |         |   |  |   |         |  



|(A) | Average total assets subject to the base management fee is defined as total assets, including investments made with proceeds of borrowings, less any
uninvested cash or cash equivalents resulting from borrowings, valued at the end of the applicable quarters within the respective periods and adjusted appropriately for any share issuances or repurchases during the periods.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(B) | Reflected, in total, as a line item on the Condensed Consolidated Statement of Operations.
|--- | ------------------------------------------------------------------------------------------

Base Management Fee

The base management fee is payable quarterly and assessed at an annual rate of 2.0%, computed on the basis of the value of the Companys average gross assets at the end of the two most recently
completed quarters, which are total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings. In addition, the following three items are adjustments to the base management
fee calculation.



| |  |  | Loan Servicing Fees
| | - |  | -------------------

The Adviser also services the loans held by Business Investment, in return for which it receives a 2.0% annual fee based on the monthly aggregate outstanding balance of loans pledged under the
Companys line of credit. Since the Company owns these loans, all loan servicing fees paid to the Adviser are treated as reductions directly against the 2.0% base management fee under the Advisory Agreement.



| |  |  | Senior Syndicated Loan Fee Waiver
| | - |  | ---------------------------------

The Board of Directors accepted an unconditional and irrevocable voluntary waiver from the Adviser to reduce the annual 2.0% base management fee on senior syndicated loan participations to 0.5%, to the
extent that proceeds resulting from borrowings were used to purchase such senior syndicated loan participations, for the six months ended September 30, 2011 and 2010, to the extent applicable.



| |  |  | Portfolio Company Fees
| | - |  | ----------------------

Under the Advisory Agreement, the Adviser has also provided, and continues to provide, managerial assistance and other services to the Companys portfolio companies and may receive fees for services
other than managerial assistance. 50% of certain of these fees and 100% of other fees are credited against the base management fee that the Company would otherwise be required to pay to the Adviser.

Incentive Fee

The incentive fee consists of two parts: an income-based incentive fee and a capital gains-based incentive fee. The income-based incentive fee rewards the Adviser if the Companys quarterly net
investment income (before giving effect to any incentive fee) exceeds 1.75% of the Companys net assets (the hurdle rate). The Company will pay the Adviser an income-based incentive fee with respect to the Companys
pre-incentive fee net investment income in each calendar quarter as follows:



| |  |  | no incentive fee in any calendar quarter in which the Companys pre-incentive fee net investment income does not exceed the hurdle rate (7.0%
annualized);
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 100% of the Companys pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if
any, that exceeds the hurdle rate but is less than 2.1875% in any calendar quarter (8.75% annualized); and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 20% of the amount of the Companys pre-incentive fee net investment income, if any, that exceeds 2.1875% in any calendar quarter (8.75%
annualized).
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



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The second part of the incentive fee is a capital gains-based incentive fee that will be
determined and payable in arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement, as of the termination date), and equals 20% of the Companys realized capital gains as of the end of the fiscal year. In
determining the capital gains-based incentive fee payable to the Adviser, the Company will calculate the cumulative aggregate realized capital gains and cumulative aggregate realized capital losses since the Companys inception, and the
aggregate unrealized capital depreciation as of the date of the calculation, as applicable, with respect to each of the investments in the Companys portfolio. For this purpose, cumulative aggregate realized capital gains, if any, equals the
sum of the differences between the net sales price of each investment, when sold, and the original cost of such investment since the Companys inception. Cumulative aggregate realized capital losses equals the sum of the amounts by which the
net sales price of each investment, when sold, is less than the original cost of such investment since the Companys inception. Aggregate unrealized capital depreciation equals the sum of the difference, if negative, between the valuation of
each investment as of the applicable calculation date and the original cost of such investment. At the end of the applicable year, the amount of capital gains that serves as the basis for the Companys calculation of the capital gains-based
incentive fee equals the cumulative aggregate realized capital gains less cumulative aggregate realized capital losses, less aggregate unrealized capital depreciation, with respect to the Companys portfolio of investments. If this number is
positive at the end of such year, then the capital gains-based incentive fee for such year equals 20% of such amount, less the aggregate amount of any capital gains-based incentive fees paid in respect of the Companys portfolio in all prior
years. No capital gains-based incentive fee has been recorded for the Company from its inception through September 30, 2011, as cumulative unrealized capital depreciation has exceeded cumulative realized capital gains net of cumulative realized
capital losses.

Additionally, in accordance with GAAP, the Company did not accrue a capital gains-based incentive fee during
the six months ended September 30, 2011. This GAAP accrual is calculated using the aggregate cumulative realized capital gains and losses and aggregate cumulative unrealized capital depreciation included in the calculation of the capital
gains-based incentive fee plus the aggregate cumulative unrealized capital appreciation. If such amount is positive at the end of a period, then GAAP require the Company to record a capital gains-based incentive fee equal to 20% of such amount, less
the aggregate amount of actual capital gains-based incentive fees paid in all prior years. If such amount is negative, then there is no accrual for such year. GAAP requires that the capital gains-based incentive fee accrual consider the cumulative
aggregate unrealized capital appreciation in the calculation, as a capital gains-based incentive fee would be payable if such unrealized capital appreciation were realized. There can be no assurance that such unrealized capital appreciation will be
realized in the future. No GAAP accrual for a capital gains-based incentive fee has been recorded for the Company from its inception through September 30, 2011.

As a BDC, the Company makes available significant managerial assistance to its portfolio companies and provides other services to such portfolio companies. Although neither the Company nor its Adviser
currently receive fees in connection with managerial assistance, the Adviser provides other services to the Companys portfolio companies and receives fees for these services.

Administration Agreement

The Company has entered into an administration agreement (the
Administration Agreement) with Gladstone Administration, LLC (the Administrator), an affiliate of the Adviser, whereby it pays separately for administrative services. The Administration Agreement provides for payments equal
to the Companys allocable portion of its Administrators overhead expenses in performing its obligations under the Administration Agreement, including, but not limited to, rent and the salaries and benefits expenses of the Companys
chief financial officer, chief compliance officer, treasurer, internal counsel and their respective staffs. The Companys allocable portion of administrative expenses is generally derived by multiplying the Administrators total allocable
expenses by the percentage of the Companys total assets at the beginning of the quarter in comparison to the total assets at the beginning of the quarter of all companies managed by the Adviser under similar agreements. On July 12, 2011,
the Board of Directors approved the renewal of the Administration Agreement through August 31, 2012.

Related Party Fees Due

Amounts due to related parties on the accompanying Condensed Consolidated Statements of Assets and Liabilities were as follows:



|                                          |  |                         |      |   |                     |   |     | 
|----------------------------------------- |  | ----------------------- | ---- | - | ------------------- | - | --- | 
|                                          |  | As of September 30,2011 |      |   | As of March 31,2011 |  
|Base management fee due (from) to Adviser |  | $                       | (163 | ) |                     | $ | 341 | 
|Loan servicing fee due to Adviser         |  |                         | 194  |   |                     |   | 157 | 
|Incentive fee due to Adviser              |  |                         |     |   |                     |   |    | 
|Other                                     |  |                         | 10   |   |                     |   | 1   | 
|                                          |  |                         |      |   |                     |   |     | 
|Total Fees due to Adviser                 |  |                         | 41   |   |                     |   | 499 | 
|                                          |  |                        
|Fee due to Administrator                  |  |                         | 135  |   |                     |   | 171 | 
|                                          |  |                         |      |   |                     |   |     | 
|                                          |  |                        
|Total related party fees due              |  | $                       | 176  |   |                     | $ | 670 | 
|                                          |  |                         |      |   |                     |   |     | 



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NOTE 5. BORROWINGS

Line of Credit

On
April 14, 2009, the Company, through its wholly-owned subsidiary, Business Investment, entered into a second amended and restated credit agreement providing for a $50.0 million revolving line of credit (the Credit Facility) arranged
by Branch Banking and Trust Company (BB&T) as administrative agent. Key Equipment Finance Inc. also joined the Credit Facility as a committed lender. In connection with entering into the Credit Facility, the Company borrowed $43.8
million under the Credit Facility to make a final payment in satisfaction of all unpaid principal and interest owed to Deutsche Bank AG under a prior line of credit. On April 13, 2010, the Company, through Business Investment, entered into a
third amended and restated credit agreement providing for a $50.0 million, two year revolving line of credit, which extended the maturity date of the Credit Facility to April 13, 2012. If the Credit Facility is not renewed or extended by
April 13, 2012, all unpaid principal and interest will be due and payable within one year of the maturity date. Advances under the Credit Facility generally bear interest at the 30-day London Interbank Offered Rate (LIBOR) (subject
to a minimum rate of 2.0%), plus 4.5% per annum, with a commitment fee of 0.50% per annum on undrawn amounts when advances outstanding are above 50.0% of the commitment and 1.0% on undrawn amounts if the advances outstanding are below
50.0% of the commitment. The following tables summarize noteworthy information related to our Credit Facility:



|                       |  |                         |        |  |                     |   |        | 
|---------------------- |  | ----------------------- | ------ |  | ------------------- | - | ------ | 
|                       |  | As ofSeptember 30, 2011 |        |  | As ofMarch 31, 2011 |  
|Commitment amount      |  | $                       | 50,000 |  |                     | $ | 50,000 | 
|Borrowings outstanding |  |                         | 21,000 |  |                     |   |       | 
|Availability           |  |                         | 26,349 |  |                     |   | 33,866 | 



|                                        |  |                                         |       |   |                                       |   |       |      |  |   |       |   |  |   |       |  
|--------------------------------------- |  | --------------------------------------- | ----- | - | ------------------------------------- | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                        |  | For the Three MonthsEnded September 30, |       |   | For the Six MonthsEnded September 30, |  
|                                        |  | 2011                                    |       |   | 2010                                  |   |       | 2011 |  |   | 2010  |  
|Weighted average borrowings outstanding |  | $                                       | 6,913 |   |                                       | $ | 179   |      |  | $ | 3,475 |   |  | $ | 5,567 |  
|Effective interest rate(A)              |  |                                         | 13.0  | % |                                       |   | 305.7 | %    |  |   | 20.2  | % |  |   | 13.9  | %
|Commitment (unused) fees incurred       |  | $                                       | 110   |   |                                       | $ | 126   |      |  | $ | 237   |   |  | $ | 223   |  



|(A) | Excludes the impact of deferred financing fees.
|--- | -----------------------------------------------

Interest is payable monthly during the term of the Credit Facility. Available borrowings are subject to various constraints imposed under the Credit
Facility, based on the aggregate loan balance pledged by Business Investment, which varies as loans are added and repaid, regardless of whether such repayments are prepayments or made as contractually required.

The administrative agent also requires that any interest or principal payments on pledged loans be remitted directly by the borrower into a lockbox
account with The Bank of New York Mellon Trust Company, N.A as custodian. BB&T is also the trustee of the account and once a month remits the collected funds to the Company.

The Credit Facility contains covenants that require Business Investment to maintain its status as a separate legal entity; prohibit certain significant corporate transactions (such as mergers,
consolidations, liquidations or dissolutions) and restrict certain material changes to the Companys credit and collection policies without the lenders consent. The Credit Facility also limits payments on distributions to the aggregate
net investment income for each of the twelve month periods ending March 31, 2011 and 2012. Business Investment is also subject to certain limitations on the type of loan investments it can apply toward availability credit in the borrowing base,
including restrictions on geographic concentrations, sector concentrations, loan size, dividend payout, payment frequency and status, average life and lien property. The Credit Facility further requires Business Investment to comply with other
financial and operational covenants, which obligate Business Investment to, among other things, maintain certain financial ratios, including asset and interest coverage and a minimum number of obligors required in the borrowing base of the credit
agreement. Additionally, the Company is subject to a performance guaranty that requires the Company to maintain (i) a minimum net worth of $155.0 million plus 50.0% of all equity and subordinated debt raised after April 13, 2010,
(ii) asset coverage with respect to senior securities representing indebtedness of at least 200%, in accordance with Section 18 of the 1940 Act and (iii) its status as a BDC under the 1940 Act and as a RIC
under the Code. As of September 30, 2011, the Company was in compliance with all covenants.

Refer to Note 12, Subsequent Events, for
subsequent renewal of the Credit Facility in October 2011.

Short-Term Loan

Similar to what has been done at the close of several of the prior quarters to maintain the Companys status as a RIC, the Company purchased $70.0 million of short-term United States Treasury Bills
(T-Bills) through Jefferies & Company, Inc. (Jefferies) on September 28, 2011. As these T-Bills have a maturity of less than three months, the Company considers them to be cash equivalents and includes them in
Cash and cash equivalents on the accompanying Condensed Consolidated Statement of Assets and Liabilities as of September 30, 2011. The T-Bills were purchased using $7.5 million in funds drawn on the Credit Facility and the proceeds from
a $62.5 million short-term loan from Jefferies, with an effective annual interest rate of approximately 0.64%. On October 6, 2011, when the T-Bills matured, the Company repaid the $62.5 million loan from Jefferies, and on October 11, 2011,
the Company repaid the $7.5 million drawn on the Credit Facility for the transaction.



22



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##### Table of Contents

Fair Value

The Company elected to apply ASC 825, Financial Instruments, specifically for the Credit Facility and short-term loan, which was consistent with its application of ASC 820 to its investments.
The Company estimates the fair value of the Credit Facility using estimates of value provided by an independent third party and its own assumptions in the absence of observable market data, including estimated remaining life, credit party risk,
current market yield and interest rate spreads of similar securities as of the measurement date. Due to the eight-day duration of the short-term loan, cost was deemed to approximate fair value. At both September 30 and March 31, 2011, all
of the Companys borrowings were valued using Level 3 inputs. The following tables present the Credit Facility and short-term loan carried at fair value as of September 30 and March 31, 2011, by caption on the accompanying
Condensed Consolidated Statements of Assets and Liabilities for level three of the hierarchy established by ASC 820 and a roll-forward in the changes in fair value during the three and six months ended September 30, 2011 and 2010:



|                |  |                                                   |        |  |                |   |        | 
|--------------- |  | ------------------------------------------------- | ------ |  | -------------- | - | ------ | 
|                |  | Level 3  Borrowings                              |       
|                |  | Total Fair Value Reported in Condensed            |       
|                |  | Consolidated Statements of Assets and Liabilities |       
|                |  | September 30, 2011                                |        |  | March 31, 2011 |  
|Short-Term Loan |  | $                                                 | 62,501 |  |                | $ | 40,000 | 
|Credit Facility |  |                                                   | 21,405 |  |                |   |       | 
|                |  |                                                   |        |  |                |   |        | 
|Total           |  | $                                                 | 83,906 |  |                | $ | 40,000 | 
|                |  |                                                   |        |  |                |   |        | 



|                                       |  |            | 000000000 |   |          |   | 000000000 |                           |  |   | 000000000 |  
|-------------------------------------- |  | ---------- | --------- | - | -------- | - | --------- | ------------------------- |  | - | --------- | -
|                                       |  |            |           |   |          |   |           | Total Fair Value          | 
|                                       |  |            |           |   |          |   |           | Reported in Condensed     | 
|                                       |  | Short-Term |           |   | Credit   |   |           | Consolidated Statements   | 
|                                       |  | Loan       |           |   | Facility |   |           | of Assets and Liabilities | 
|Three months ended September 30, 2011: |  |            |           |   |          |   |           |                           |  |   |           |  
|Fair value at June 30, 2011            |  | $          | 40,000    |   |          | $ |          |                           |  | $ | 40,000    |  
|Borrowings                             |  |            | 62,501    |   |          |   | 21,500    |                           |  |   | 84,001    |  
|Repayments                             |  |            | (40,000   | ) |          |   | (500      | )                         |  |   | (40,500   | )
|Net unrealized appreciation(A)         |  |            |          |   |          |   | 405       |                           |  |   | 405       |  
|                                       |  |            |           |   |          |   |           |                           |  |   |           |  
|Fair value at September 30, 2011       |  | $          | 62,501    |   |          | $ | 21,405    |                           |  | $ | 83,906    |  
|                                       |  |            |           |   |          |   |           |                           |  |   |           |  
|                                       |  |            |          
|Six months ended September 30, 2011:   |  |            |           |   |          |   |           |                           |  |   |           |  
|Fair value at March 31, 2011           |  | $          | 40,000    |   |          | $ |          |                           |  | $ | 40,000    |  
|Borrowings                             |  |            | 102,501   |   |          |   | 21,500    |                           |  |   | 124,001   |  
|Repayments                             |  |            | (80,000   | ) |          |   | (500      | )                         |  |   | (80,500   | )
|Net unrealized appreciation(A)         |  |            |          |   |          |   | 405       |                           |  |   | 405       |  
|                                       |  |            |           |   |          |   |           |                           |  |   |           |  
|Fair value at September 30, 2011       |  | $          | 62,501    |   |          | $ | 21,405    |                           |  | $ | 83,906    |  
|                                       |  |            |           |   |          |   |           |                           |  |   |           |  



|                                       |  |            | 000000000 |   |          |   | 000000000 |                           |  |   | 000000000 |  
|-------------------------------------- |  | ---------- | --------- | - | -------- | - | --------- | ------------------------- |  | - | --------- | -
|                                       |  |            |           |   |          |   |           | Total Fair Value          | 
|                                       |  |            |           |   |          |   |           | Reported in Condensed     | 
|                                       |  | Short-Term |           |   | Credit   |   |           | Consolidated Statements   | 
|                                       |  | Loan       |           |   | Facility |   |           | of Assets and Liabilities | 
|Three months ended September 30, 2010: |  |            |           |   |          |   |           |                           |  |   |           |  
|Fair value at June 30, 2010            |  | $          | 75,000    |   |          | $ | 16,500    |                           |  | $ | 91,500    |  
|Borrowings                             |  |            | 25,000    |   |          |   |          |                           |  |   | 25,000    |  
|Repayments                             |  |            | (75,000   | ) |          |   | (16,500   | )                         |  |   | (91,500   | )
|                                       |  |            |           |   |          |   |           |                           |  |   |           |  
|Fair value at September 30, 2010       |  | $          | 25,000    |   |          | $ |          |                           |  | $ | 25,000    |  
|                                       |  |            |           |   |          |   |           |                           |  |   |           |  
|                                       |  |            |          
|Six months ended September 30, 2010:   |  |            |           |   |          |   |           |                           |  |   |           |  
|Fair value at March 31, 2010           |  | $          | 75,000    |   |          | $ | 27,812    |                           |  | $ | 102,812   |  
|Borrowings                             |  |            | 100,000   |   |          |   | 16,000    |                           |  |   | 116,000   |  
|Repayments                             |  |            | (150,000  | ) |          |   | (43,800   | )                         |  |   | (193,800  | )
|Net unrealized depreciation(A)         |  |            |          |   |          |   | (12       | )                         |  |   | (12       | )
|                                       |  |            |           |   |          |   |           |                           |  |   |           |  
|Fair value at September 30, 2010       |  | $          | 25,000    |   |          | $ |          |                           |  | $ | 25,000    |  
|                                       |  |            |           |   |          |   |           |                           |  |   |           |  



|(A) | Included in Net unrealized
depreciation of other on the accompanying Condensed Consolidated Statements of Operations for the periods ended September 30, 2011 and 2010.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



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The fair value of the collateral under the Credit Facility was approximately $209.5 million and $146.3
million at September 30 and March 31, 2011, respectively. The fair value of the collateral under the short-term loan was approximately $70.0 million and $44.0 million at September 30 and March 31, 2011, respectively.

NOTE 6. INTEREST RATE CAP AGREEMENTS

In May 2009, the Company entered into an interest rate cap agreement with BB&T that effectively limited the interest rate on a
portion of the borrowings under the line of credit pursuant to the terms of the Credit Facility. The interest rate cap had a notional amount of $45.0 million at a cost of approximately $39. The agreement provided that the Companys interest
rate or cost of funds on a portion of its borrowings was capped at 6.5% when LIBOR was in excess of 6.5%. The interest rate cap agreement expired in May 2011, and a realized loss of $39 was recorded during the three months ended June 30,
2011.

In April 2010, the Company entered into an interest rate cap agreement, effective May 2011 and expiring in May 2012, with BB&T
for a notional amount of $45.0 million that effectively limits the interest rate on a portion of the borrowings under the line of credit pursuant to the terms of the Credit Facility. In conjunction with this agreement, the Company incurred a premium
fee of approximately $41. The agreement provides that the Companys interest rate or cost of funds on a portion of its borrowings will be capped at 6.0% when the LIBOR is in excess of 6.0%. The Company records changes in the fair value of the
interest rate cap agreement quarterly based on the current market valuation at quarter end as unrealized depreciation or appreciation of other on the accompanying Condensed Consolidated Statements of Operations. At September 30, 2011,
the interest rate cap agreement had a fair value of $2.

The use of a cap agreement involves risks that are different from those associated
with ordinary portfolio securities transactions. Cap agreements may be considered to be illiquid. Although the Company will not enter into any such agreements unless it believes that the other party to the transaction is creditworthy, the Company
does bear the risk of loss of the amount expected to be received under such agreements in the event of default or bankruptcy of the agreement counterparty.

NOTE 7. COMMON STOCK

Registration Statement

On July 21, 2009, the Company filed a registration statement on Form N-2 (Registration No. 333-160720) that was amended on
October 2, 2009 and which the SEC declared effective on October 8, 2009. The Company filed post-effective amendments to such registration statement on August 24, 2010, and November 22, 2010, which the SEC declared effective on
December 23, 2010. The Company also filed post-effective amendments to the registration statement on June 17, 2011, and August 17, 2011, which the SEC declared effective on September 9, 2011. This registration statement permits
the Company to issue, through one or more transactions, up to an aggregate of $300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities and warrants to purchase common stock, including through a
combined offering of these securities.

NOTE 8. NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS PER SHARE

The following table sets forth the computation of basic and diluted net increase in net assets resulting from operations per share for
the three and six months ended September 30, 2011 and 2010:



|                                                                                                          |  |                                  |            |  |                                |   |            |      |  |   |            |  |  |   |            |  
|--------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ---------- |  | ------------------------------ | - | ---------- | ---- |  | - | ---------- |  |  | - | ---------- | -
|                                                                                                          |  | Three Months Ended September 30, |            |  | Six Months Ended September 30, |  
|                                                                                                          |  | 2011                             |            |  | 2010                           |   |            | 2011 |  |   | 2010       | 
|Numerator for basic and diluted net increase (decrease) in net assets resulting from operations per share |  | $                                | 12,695     |  |                                | $ | (6,859     | )    |  | $ | 16,883     |  |  | $ | (1,492     | )
|Denominator for basic and diluted weighted average shares                                                 |  |                                  | 22,080,133 |  |                                |   | 22,080,133 |      |  |   | 22,080,133 |  |  |   | 22,080,133 |  
|                                                                                                          |  |                                  |            |  |                                |   |            |      |  |   |            |  |  |   |            |  
|Basic and diluted net increase (decrease) in net assets resulting from operations per share               |  | $                                | 0.57       |  |                                | $ | (0.31      | )    |  | $ | 0.76       |  |  | $ | (0.07      | )
|                                                                                                          |  |                                  |            |  |                                |   |            |      |  |   |            |  |  |   |            |  



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NOTE 9. DISTRIBUTIONS

The Board of Directors declared the following monthly distributions to stockholders for the six months ended September 30, 2011
and 2010:



|                                     |  |                  |       |                    |  |                    |  |                       |       | 
|------------------------------------ |  | ---------------- | ----- | ------------------ |  | ------------------ |  | --------------------- | ----- | 
|Fiscal Year                          |  | Declaration Date |       | Record Date        |  | Payment Date       |  | Distributionper Share |      
|2012                                 |  | April 12, 2011   |       | April 22, 2011     |  | April 29, 2011     |  | $                     | 0.045 | 
|                                     |  | April 12, 2011   |       | May 20, 2011       |  | May 31, 2011       |  |                       | 0.045 | 
|                                     |  | April 12, 2011   |       | June 20, 2011      |  | June 30, 2011      |  |                       | 0.045 | 
|                                     |  | July 12, 2011    |       | July 22, 2011      |  | July 29, 2011      |  |                       | 0.050 | 
|                                     |  | July 12, 2011    |       | August 19, 2011    |  | August 31, 2011    |  |                       | 0.050 | 
|                                     |  | July 12, 2011    |       | September 22, 2011 |  | September 30, 2011 |  |                       | 0.050 | 
|                                     |  |                  |       |                    |  |                    |  |                       |       | 
|Six months ended September 30, 2011: |  | $                | 0.285 |                   
|                                     |  |                  |       |                    |  |                    |  |                       |       | 
|                                     |  |                  |       |                   
|2011                                 |  | April 7, 2010    |       | April 22, 2010     |  | April 30, 2010     |  | $                     | 0.040 | 
|                                     |  | April 7, 2010    |       | May 20, 2010       |  | May 28, 2010       |  |                       | 0.040 | 
|                                     |  | April 7, 2010    |       | June 22, 2010      |  | June 30, 2010      |  |                       | 0.040 | 
|                                     |  | July 7, 2010     |       | July 22, 2010      |  | July 30, 2010      |  |                       | 0.040 | 
|                                     |  | July 7, 2010     |       | August 23, 2010    |  | August 31, 2010    |  |                       | 0.040 | 
|                                     |  | July 7, 2010     |       | September 22, 2010 |  | September 30, 2010 |  |                       | 0.040 | 
|                                     |  |                  |       |                    |  |                    |  |                       |       | 
|Six months ended September 30, 2010: |  | $                | 0.240 |                   
|                                     |  |                  |       |                    |  |                    |  |                       |       | 

Aggregate distributions declared and paid for the six months ended September 30, 2011 and 2010 were approximately
$6.3 million and $5.3 million, respectively, which were declared based on estimates of net investment income for the respective fiscal years. The characterization of the distributions declared and paid for the fiscal year ended March 31, 2012
will be determined at year end and cannot be determined at this time. For the fiscal year ended March 31, 2011, taxable income available for distributions exceeded distributions declared and paid, and, in accordance with Section 855(a) of
the Code, the Company elected to treat a portion of the first distribution paid in fiscal year 2012 as having been paid in the prior year.

NOTE 10. COMMITMENTS AND CONTINGENCIES

At September 30, 2011, the Company was not party to any signed commitments for potential investments. However, the Company has
certain lines of credit with its portfolio companies that have not been fully drawn. Since these lines of credit have expiration dates and the Company expects many will never be fully drawn, the total line of credit commitment amounts do not
necessarily represent future cash requirements. The Company estimated the fair value of these unused line of credit commitments as of September 30, 2011 and March 31, 2011 to be minimal, and thus the unused portions of these commitments
are not recorded on the accompanying Condensed Consolidated Statements of Assets and Liabilities.

In addition to the lines of credit
with portfolio companies, the Company has also extended certain guaranties on behalf of some of its portfolio companies. As of September 30, 2011, the Company has not been required to make any payments on the guaranties stated below, and the
Company considers the credit risks to be remote and the fair values of the guaranties to be minimal.

In October 2008, the Company
executed a guaranty of a vehicle finance facility agreement (the Finance Facility) between Ford Motor Credit Company and ASH. The Finance Facility provides ASH with a line of credit of up to $0.8 million for component Ford parts used by
ASH to build truck bodies under a separate contract. Ford retains title and ownership of the parts. The guaranty of the Finance Facility will expire upon termination of the separate parts supply contract with Ford or upon replacement of the Company
as guarantor.

In February 2010, the Company executed a guaranty of a wholesale financing facility agreement (the Floor Plan
Facility) between Agricredit Acceptance, LLC (Agricredit) and CCE. The Floor Plan Facility provides CCE with financing of up to $2.0 million to bridge the time and cash flow gap between the order and delivery of golf carts to
customers. The guaranty was renewed in February 2011 and expires in February 2012, unless it is renewed again by the Company, CCE and Agricredit. In connection with this guaranty and its subsequent renewal, the Company recorded aggregate premiums of
$0.2 million from CCE.

In April 2010, the Company executed a guaranty of vendor recourse for up to $2.0 million in individual customer
transactions (the Recourse Facility) between Wells Fargo Financial Leasing, Inc. and CCE. The Recourse Facility provides CCE with the ability to provide vendor recourse up to a limit of $2.0 million on transactions with long-time
customers who lack the financial history to qualify for third-party financing. The aggregate weighted-average term-to-maturity of these individual transactions is approximately three years from September 30, 2011. In connection with this
guaranty, the Company received a premium of $0.1 million from CCE.



25



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The following table summarizes the dollar balance of unused line of credit commitments and guaranties as of
September 30, 2011 and March 31, 2011:



|                                  |  |                     |       |  |                 |   |       | 
|--------------------------------- |  | ------------------- | ----- |  | --------------- | - | ----- | 
|                                  |  | As of September 30, |       |  | As of March 31, |  
|                                  |  | 2011                |       |  | 2011            |  
|Unused line of credit commitments |  | $                   | 2,993 |  |                 | $ | 2,386 | 
|Guaranties                        |  |                     | 4,664 |  |                 |   | 4,664 | 
|                                  |  |                     |       |  |                 |   |       | 
|Total                             |  | $                   | 7,657 |  |                 | $ | 7,050 | 
|                                  |  |                     |       |  |                 |   |       | 

The following table shows our contractual obligations as of September 30, 2011:



|                           |  |                        |        |  |           |   |        |           |  |   |              |  |  |       |   |  |  |   |        | 
|-------------------------- |  | ---------------------- | ------ |  | --------- | - | ------ | --------- |  | - | ------------ |  |  | ----- | - |  |  | - | ------ | 
|                           |  | Payments Due by Period |       
|Contractual
Obligations(A) |  | Less than1 Year        |        |  | 1-3 Years |   |        | 4-5 Years |  |   | After 5Years |  |  | Total |  
|Borrowings:                |  |                        |        |  |           |   |        |           |  |   |              |  |  |       |   |  |  |   |        | 
|Short-term loan(B)         |  | $                      | 62,501 |  |           | $ |       |           |  | $ |             |  |  | $     |  |  |  | $ | 62,501 | 
|Credit Facility            |  |                        |       |  |           |   | 21,000 |           |  |   |             |  |  |       |  |  |  |   | 21,000 | 
|                           |  |                        |        |  |           |   |        |           |  |   |              |  |  |       |   |  |  |   |        | 
|Total borrowings           |  | $                      | 62,501 |  |           | $ | 21,000 |           |  | $ |             |  |  | $     |  |  |  | $ | 83,501 | 
|                           |  |                        |        |  |           |   |        |           |  |   |              |  |  |       |   |  |  |   |        | 



|(A) | Excludes the unused commitments to
extend credit to our portfolio companies of $3.0 million and guaranties of $4.7 million, as discussed above.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------

|(B) | On October 6, 2011, we repaid
the short-term loan in full.
|--- | ----------------------------------------------------------

NOTE 11. FINANCIAL HIGHLIGHTS



|                                                                       |  |                                  |            |     |                                |   |            |      |  |   |            |     |  |   |            |  
|---------------------------------------------------------------------- |  | -------------------------------- | ---------- | --- | ------------------------------ | - | ---------- | ---- |  | - | ---------- | --- |  | - | ---------- | -
|                                                                       |  | Three Months Ended September 30, |            |     | Six Months Ended September 30, |  
|                                                                       |  | 2011                             |            |     | 2010                           |   |            | 2011 |  |   | 2010       |    
|Per Share Data(A)                                                      |  |                                  |            |     |                                |   |            |      |  |   |            |     |  |   |            |  
|Net asset value at beginning of period                                 |  | $                                | 9.06       |     |                                | $ | 8.86       |      |  | $ | 9.00       |     |  | $ | 8.74       |  
|                                                                       |  |                                  |            |    
|Income from investment operations:                                     |  |                                  |            |     |                                |   |            |      |  |   |            |     |  |   |            |  
|Net investment income(B)                                               |  |                                  | 0.15       |     |                                |   | 0.11       |      |  |   | 0.31       |     |  |   | 0.30       |  
|Realized (loss) gain on sale of investments and other(B)               |  |                                  | (0.03      | )   |                                |   |           |      |  |   | 0.23       |     |  |   | 0.77       |  
|Net unrealized appreciation (depreciation) of investments and other(B) |  |                                  | 0.45       |     |                                |   | (0.42      | )    |  |   | 0.22       |     |  |   | (1.14      | )
|                                                                       |  |                                  |            |     |                                |   |            |      |  |   |            |     |  |   |            |  
|Total from investment operations                                       |  |                                  | 0.57       |     |                                |   | (0.31      | )    |  |   | 0.76       |     |  |   | (0.07      | )
|                                                                       |  |                                  |            |     |                                |   |            |      |  |   |            |     |  |   |            |  
|                                                                       |  |                                  |            |    
|Distributions from:                                                    |  |                                  |            |     |                                |   |            |      |  |   |            |     |  |   |            |  
|Net investment income                                                  |  |                                  | (0.15      | )   |                                |   | (0.12      | )    |  |   | (0.28      | )   |  |   | (0.24      | )
|                                                                       |  |                                  |            |     |                                |   |            |      |  |   |            |     |  |   |            |  
|Total distributions(C)                                                 |  |                                  | (0.15      | )   |                                |   | (0.12      | )    |  |   | (0.28      | )   |  |   | (0.24      | )
|                                                                       |  |                                  |            |     |                                |   |            |      |  |   |            |     |  |   |            |  
|                                                                       |  |                                  |            |    
|Net asset value at end of period                                       |  | $                                | 9.48       |     |                                | $ | 8.43       |      |  | $ | 9.48       |     |  | $ | 8.43       |  
|                                                                       |  |                                  |            |     |                                |   |            |      |  |   |            |     |  |   |            |  
|                                                                       |  |                                  |            |    
|Per share market value at beginning of period                          |  | $                                | 7.18       |     |                                | $ | 5.62       |      |  | $ | 7.79       |     |  | $ | 6.01       |  
|Per share market value at end of period                                |  |                                  | 6.80       |     |                                |   | 6.70       |      |  |   | 6.80       |     |  |   | 6.70       |  
|Total return(D)                                                        |  |                                  | (3.21      | ) % |                                |   | 21.47      | %    |  |   | (9.16      | ) % |  |   | 15.93      | %
|Shares outstanding at end of period                                    |  |                                  | 22,080,133 |     |                                |   | 22,080,133 |      |  |   | 22,080,133 |     |  |   | 22,080,133 |  
|                                                                       |  |                                  |            |    
|Statement of Assets and Liabilities Data:                              |  |                                  |            |     |                                |   |            |      |  |   |            |     |  |   |            |  
|Net assets at end of period                                            |  | $                                | 209,419    |     |                                | $ | 186,197    |      |  | $ | 209,419    |     |  | $ | 186,197    |  
|Average net assets(E)                                                  |  |                                  | 202,101    |     |                                |   | 191,384    |      |  |   | 200,213    |     |  |   | 192,239    |  
|                                                                       |  |                                  |            |    
|Senior Securities Data:                                                |  |                                  |            |     |                                |   |            |      |  |   |            |     |  |   |            |  
|Total borrowings                                                       |  | $                                | 83,906     |     |                                | $ | 25,000     |      |  | $ | 83,906     |     |  | $ | 25,000     |  
|Asset coverage ratio(F)                                                |  |                                  | 333        | %   |                                |   | 715        | %    |  |   | 333        | %   |  |   | 715        | %
|Average coverage per unit(G)                                           |  | $                                | 3,325      |     |                                | $ | 7,153      |      |  | $ | 3,325      |     |  | $ | 7,153      |  
|                                                                       |  |                                  |            |    
|Ratios/Supplemental Data:                                              |  |                                  |            |     |                                |   |            |      |  |   |            |     |  |   |            |  
|Ratio of expenses to average net assets(H)(I)                          |  |                                  | 4.43       | %   |                                |   | 4.01       | %    |  |   | 4.21       | %   |  |   | 5.29       | %
|Ratio of net expenses to average net assets(H)(J)                      |  |                                  | 3.41       |     |                                |   | 3.89       |      |  |   | 3.48       |     |  |   | 5.10       |  
|Ratio of net investment income to average net assets(H)                |  |                                  | 6.55       |     |                                |   | 5.10       |      |  |   | 6.80       |     |  |   | 6.92       |  



|(A) | Based on actual shares outstanding at the end of the corresponding period.
|--- | --------------------------------------------------------------------------

|(B) | Based on weighted average basic per share data.
|--- | -----------------------------------------------

|(C) | Distributions are determined based on taxable income calculated in accordance with income tax regulations, which may differ from amounts determined
under GAAP.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(D) | Total return equals the change in the market value of the Companys common stock from the beginning of the period, taking into account dividends
reinvested in accordance with the terms of the Companys dividend reinvestment plan.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(E) | Calculated using the average of the balance of net assets at the end of each month of the reporting period.
|--- | -----------------------------------------------------------------------------------------------------------

|(F) | As a BDC, the Company is generally required to maintain an asset coverage ratio of at least 200% of total consolidated assets, less all liabilities and
indebtedness not represented by senior securities, to total borrowings and guaranty commitments. Asset coverage ratio is the ratio of the carrying value of the Companys total consolidated assets, less all liabilities and indebtedness not
represented by senior securities, to the aggregate amount of senior securities representing indebtedness.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(G) | Asset coverage per unit is the asset coverage ratio expressed in terms of dollar amounts per one thousand dollars of indebtedness.
|--- | ----------------------------------------------------------------------------------------------------------------------------------

|(H) | Amounts are annualized.
|--- | -----------------------

|(I) | Ratio of expenses to average net assets is computed using expenses before credits from the Adviser.
|--- | ---------------------------------------------------------------------------------------------------

|(J) | Ratio of net expenses to average net assets is computed using total expenses net of credits to the management fee.
|--- | ------------------------------------------------------------------------------------------------------------------

NOTE 12. SUBSEQUENT EVENTS

Portfolio Activity

In October 2011, the Company received full repayment of its senior subordinated term loan to Quench Holdings Corp. (Quench). At September 30, 2011, both fair value and cost approximated
net proceeds received of $8.0 million. The Companys remaining investment in Quench consists of preferred and common equity with an aggregate cost basis and fair value of $3.4 million and $2.2 million, respectively, as of September 30,
2011.

Renewal of Credit Facility

On October 26, 2011, the Company entered into a fourth amended and restated credit agreement through its wholly-owned subsidiary, Gladstone Business Investment, LLC, to increase the commitment amount
of its revolving line of credit (the Renewed Credit Facility) to $60 million. The Renewed Credit Facility was arranged by BB&T as administrative agent, with Key Equipment Finance, Inc. also joining the Renewed Credit Facility as a
committed lender. Subject to certain terms and conditions, the Renewed Credit Facility may be expanded up to $175 million through the addition of other committed lenders to the facility. The Renewed Credit Facility matures on October 25, 2014
(the Maturity Date), and, if not renewed or extended by the Maturity Date, all principal and interest will be due and payable on or before October 25, 2015 (one year after the Maturity Date). Advances under the Renewed Credit
Facility will generally bear interest at 30-day LIBOR plus 3.75% per annum, with an unused fee of 0.50% on undrawn amounts. There are two one-year extension options, to be agreed upon by all parties, which may be exercised on or before
October 26, 2012 and October 26, 2013, as applicable. The Company incurred fees of $0.7 million in connection with this amendment.

Short-Term Loan

On
September 28, 2011, the Company purchased $70.0 million of T-Bills through Jefferies. The T-Bills were purchased using $7.5 million in funds drawn on the Credit Facility and the proceeds from a $62.5 million short-term loan from Jefferies, with
an effective annual interest rate of approximately 0.64%. On October 6, 2011, when the T-Bills matured, the Company repaid the $62.5 million loan from Jefferies, and on October 11, 2011, the Company repaid the $7.5 million drawn on the
Credit Facility for the transaction.

Distributions

On October 11, 2011, the Board of Directors declared the following monthly distributions to stockholders:



|                  |  |                   |  |                       |      | 
|----------------- |  | ----------------- |  | --------------------- | ---- | 
|Record Date       |  | Payment Date      |  | Distribution perShare |     
|October 21, 2011  |  | October 31, 2011  |  | $                     | 0.05 | 
|November 17, 2011 |  | November 30, 2011 |  |                       | 0.05 | 
|December 21, 2011 |  | December 30, 2011 |  |                       | 0.05 | 



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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (dollar amounts in thousands, except per share data and as otherwise indicated).

All statements contained
herein, other than historical facts, may constitute forward-looking statements. 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, likely, estimate 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. We caution readers not to place undue reliance on any such forward-looking statements. 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-Q.

The following analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial
statements and the notes thereto contained elsewhere in this report and in our Annual Report on Form 10-K for the fiscal year ended March 31, 2011.

OVERVIEW

General

We were incorporated under the General Corporation Laws of the State of Delaware on February 18, 2005. We were primarily established for the purpose
of investing in subordinated loans, mezzanine debt, preferred stock and warrants to purchase common stock of small and medium-sized companies in connection with buyouts and other recapitalizations. We also invest in senior secured loans, common
stock and, to a much lesser extent, senior and subordinated syndicated loans. Our investment objective is to generate both current income and capital gains through these debt and equity instruments. We operate as a closed-end, non-diversified
management investment company and have elected to be treated as a business development company (BDC) under the Investment Company Act of 1940, as amended (the 1940 Act). In addition, for tax purposes, we have elected to be
treated as a regulated investment company (RIC) under the Internal Revenue Code of 1986, as amended (the Code).

Business Environment

We remain cautious
about a long-term recovery of economic conditions. The recent recession in general, and the disruptions in the capital markets in particular, have impacted our liquidity options and increased the cost of capital. Many of our portfolio companies, as
well as those that we evaluate for possible investment, are impacted by these economic conditions, and if these conditions persist, it may affect their ability to repay our loans or engage in a liquidity event, such as a sale, recapitalization or
initial public offering. While these conditions are challenging, we are seeing an increase in the number of new investment opportunities consistent with our investing strategy of providing subordinated debt with equity enhancement features and
direct equity in support of management and sponsor-led buyouts of small and medium-sized companies. These new investment opportunities have translated into five new proprietary deals over the past 12 months, in which we invested an aggregate of
$93.6 million.

The increased investing opportunities in the marketplace have also presented opportunities for us to achieve realized gains
and other income. We achieved a significant amount of liquidity and realized gains with the sales of A. Stucki Holding Corp. (A. Stucki) and Chase II Holding Corp. (Chase) in June and December 2010, respectively, and the
recapitalization of Cavert II Holding Corporation (Cavert) in April 2011. The sale of our equity in A. Stucki resulted in net cash proceeds to us of $21.4 million and a realized gain of $16.9 million. The net cash proceeds to us from the
sale of our equity in Chase were $13.3 million, resulting in a realized gain of $6.3 million. In connection with the equity sale, we accrued and received cash dividend proceeds of $4.0 million from our preferred stock investment. At the same time,
we received $22.9 million in repayment of our principal, accrued interest and success fees on the loans to Chase. In April 2011, we sold our common equity investment in and received partial redemption of our preferred stock, while investing new
subordinated debt, in Cavert as part of a recapitalization. The gross cash proceeds we received from the sale of our common equity in Cavert were $5.6 million, resulting in a realized gain of $5.5 million. At the same time, we received $2.3 million
in a partial redemption of our preferred stock, received $0.7 million in preferred dividends and invested $5.7 million in new subordinated debt of Cavert.

The A. Stucki, Chase, and Cavert transactions were our first management-supported buyout liquidity events, and each was an equity investment success, highlighting our investment strategy of striving to
achieve returns through current income from debt investments and capital gains from equity investments. We will strive to utilize the borrowing availability under our Credit Facility with Branch Banking and Trust Company (BB&T) as
administrative agent and Key Equipment Finance Inc. as a committed lender the (Credit Facility), to make new investments to potentially increase our net investment income and generate capital gains to enhance our ability to pay dividends
to our stockholders.



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Due to losses realized during the fiscal year ended March 31, 2010, which occurred in connection with
the Syndicated Loan Sales described below, which were available to offset future realized gains, we were not required to distribute the realized gains from the A. Stucki and Chase sales to stockholders during the fiscal year ended March 31,
2011, nor is it expected that we will be required to distribute the realized gains from the Cavert recapitalization during the fiscal year ending March 31, 2012. However, our recent successful exits have largely, but not entirely, offset prior
periods realized losses, and should we have additional realized gains in the future, we may be required to distribute them out to our stockholders. The economic conditions in 2008 and 2009 affected the general availability of credit, and, as a
result, during the quarter ended June 30, 2009, we sold 29 senior syndicated loans that were held in our portfolio of investments at March 31, 2009, to various investors in the syndicated loan market (the Syndicated Loan Sales)
to repay amounts outstanding under our prior line of credit with Deutsche Bank AG, which matured in April 2009. These loans, in aggregate, had a cost of approximately $104.2 million, or 29.9% of the cost of our total investments, and an
aggregate fair value of approximately $69.8 million, or 22.2% of the fair value of our total investments, at March 31, 2009. As a result of the settlement of the Syndicated Loan Sales and other exits, we had one remaining syndicated loan at
June 30, 2011, although this loan was repaid at par during the quarter ended September 30, 2011. Collectively, these sales have changed our asset composition in a manner that has affected our ability to satisfy certain elements of the
Codes rules for maintenance of our RIC status. To maintain our status as a RIC, in addition to other requirements, as of the close of each quarter of our taxable year, we must meet the asset diversification test, which requires that at
least 50% of the value of our assets consist of cash, cash items, U.S. government securities or certain other qualified securities (the 50% threshold). During the quarter ended September 30, 2011, we again fell below the required
50% threshold.

Failure to meet the 50% threshold alone will not result in our loss of RIC status. In circumstances where the failure to meet
the 50% threshold is the result of fluctuations in the value of assets, including as a result of the sale of assets, we will still be deemed to have satisfied the 50% threshold and, therefore, maintain our RIC status, provided that we have not
made any new investments, including additional investments in our existing portfolio companies (such as advances under outstanding lines of credit), since the time that we fell below the 50% threshold. At September 30, 2011, we satisfied the
50% threshold primarily through the purchase of short-term qualified securities, which was funded through borrowings from our Credit Facility and a short-term loan agreement. Subsequent to the September 30, 2011, measurement date, the
short-term qualified securities matured and we repaid the short-term loan. See Recent DevelopmentsShort-Term Loan for more information regarding this transaction. As of the date of this filing, we remain below the 50%
threshold.

Thus, while we currently qualify as a RIC despite our recent inability to meet the 50% threshold and potential inability to do so
in the future, if we make any new or additional investments before regaining compliance with the asset diversification test, our RIC status will be threatened. If we make a new or additional investment and fail to regain compliance with the 50%
threshold on the next quarterly measurement date following such investment, we will be in non-compliance with the RIC rules and will have thirty days to cure our failure to meet the 50% threshold to avoid the loss of our RIC status.
Potential cures for failure of the asset diversification test include raising additional equity or debt capital or changing the composition of our assets, which could include full or partial divestitures of investments, such that we would once again
exceed the 50% threshold on a consistent basis.

Until the composition of our assets is above the required 50% threshold on a consistent
basis, we will continue to seek to employ similar purchases of qualified securities using short-term loans that would allow us to satisfy the 50% threshold, thereby allowing us to make additional investments. There can be no assurance, however, that
we will be able to enter into such a transaction on reasonable terms, if at all. We also continue to explore a number of other strategies, including changing the composition of our assets, which could include full or partial divestitures of
investments, and raising additional equity or debt capital, such that we would once again exceed the 50% threshold on a consistent basis. Our ability to implement any of these strategies will be subject to market conditions and a number of risks and
uncertainties that are, in part, beyond our control.

On October 26, 2011, we entered into a fourth amended and restated credit agreement
through our wholly-owned subsidiary, Gladstone Business Investment, LLC, to increase the commitment amount of our revolving line of credit (the Renewed Credit Facility) to $60 million. The Renewed Credit Facility was arranged by Branch
Banking and Trust Company as administrative agent, with Key Equipment Finance, Inc. also joining the Renewed Credit Facility as a committed lender. Subject to certain terms and conditions, the Renewed Credit Facility may be expanded up to $175
million through the addition of other committed lenders to the facility. The Renewed Credit Facility matures on October 25, 2014 (the Maturity Date), and, if not renewed or extended by the Maturity Date, all principal and interest
will be due and payable on or before October 25, 2015 (one year after the Maturity Date). Advances under the Renewed Credit Facility will generally bear interest at 30-day LIBOR plus 3.75% per annum, with an unused fee of 0.50% on undrawn
amounts. There are two one-year extension options, to be agreed upon by all parties, which may be exercised on or before October 26, 2012 and October 26, 2013, as applicable. We incurred fees of $0.7 million in connection with this
amendment.

The Renewed Credit Facility limits payments on distributions to the aggregate net investment income for each of the twelve month
periods ended March 31, 2012, 2013 and 2014. Other covenants included in the Renewed Credit Facility include a minimum net worth covenant of $155.0 million plus 50.0% of all equity and subordinated debt raised after October 26, 2011 and to
maintain asset coverage with respect to senior securities representing indebtedness of at least 200%, in accordance with Section 18 of the 1940 Act. As of October 31, 2011, there were $4.9 million outstanding under
the Renewed Credit Facility, and $52.7 million was available for borrowing due to certain limitations on our borrowing base.



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Challenges in the current market are intensified for us by certain regulatory limitations under the Code and
the 1940 Act, as well as contractual restrictions under the agreement governing our Renewed Credit Facility that further constrain our ability to access the capital markets. To maintain our qualification as a RIC, we must satisfy, among other
requirements, an annual distribution requirement to pay out at least 90% of our ordinary income and short-term capital gains to our stockholders. Because we are required to distribute our income in this manner, and because the illiquidity of many of
our investments makes it difficult for us to finance new investments through the sale of current investments, our ability to make new investments is highly dependent upon external financing. Our external financing sources include the issuance of
equity securities, debt securities or other leverage, such as borrowings under our line of credit. Our ability to seek external debt financing, to the extent that it is available under current market conditions, is further subject to the asset
coverage limitations of the 1940 Act, which require us to have at least a 200% asset coverage ratio, meaning, generally, that for every dollar of debt, we must have two dollars of assets.

Market conditions have also affected the trading price of our common stock and thus our ability to finance new investments through the issuance of equity. On October 31, 2011, the closing market
price of our common stock was $7.49, which represented a 21.0% discount to our September 30, 2011, net asset value (NAV) per share of $9.48. When our stock trades below NAV, as it has consistently since September 30, 2008, our
ability to issue equity is constrained by provisions of the 1940 Act, which generally prohibits the issuance and sale of our common stock at an issuance price below NAV per share without stockholder approval other than through sales to our
then-existing stockholders pursuant to a rights offering. At our annual meeting of stockholders held on August 4, 2011, our stockholders approved a proposal which authorizes us to sell shares of our common stock at a price below our then
current NAV per share, subject to certain limitations, including that the cumulative number of shares issued and sold pursuant to such authority does not exceed 25% of our then outstanding common stock immediately prior to each such sale, for a
period of one year from the date of approval, provided that our Board of Directors makes certain determinations prior to any such sale. This proposal is in effect until our 2012 annual stockholders meeting, at which time we may ask our stockholders
to vote in favor of this proposal for another year.

The unsteady economic recovery may also continue to cause the value of the collateral
securing some of our loans to fluctuate, as well as the value of our equity investments, which has impacted and may continue to impact our ability to borrow under our Renewed Credit Facility. Additionally, our Renewed Credit Facility contains
covenants regarding the maintenance of certain minimum loan concentrations and net worth covenants, which are affected by the decrease in value of our portfolio. Failure to meet these requirements would result in a default which, if we are unable to
obtain a waiver from our lenders, would result in the acceleration of our repayment obligations under our Renewed Credit Facility. As of October 31, 2011, we were in compliance with all of our Renewed Credit Facilitys covenants.

We expect that, given these regulatory and contractual constraints in combination with current market conditions, debt and equity capital may
be costly or difficult for us to access in the near term. However, in light of the A. Stucki, Chase and Cavert transactions and resulting liquidity, the general stabilization of our portfolio valuations over the past year and increased investing
opportunities that we see in our target markets, as demonstrated by our five new investments totaling $93.6 million, we are cautiously optimistic about the long-term prospects for the U.S. economy and have shifted our near-term strategy to include
making conservative investments in businesses that we believe will weather the current economic conditions and that are likely to produce attractive long-term returns for our stockholders. We will also, where prudent and possible, consider the sale
of lower-yielding investments. This should result in increased investment activity when compared to our activity over the past year, but our access to capital may be limited or challenged and other events beyond our control may still encumber our
ability to make new investments in the future.

Investment Highlights

During the three months ended September 30, 2011, we disbursed $42.0 million in new debt and equity investments and extended $2.9 million of investments to existing portfolio companies through
revolver draws or additions to term notes. Since our initial public offering in June 2005 through September 30, 2011, we have made 164 investments in 94 companies for a total of $693.9 million, before giving effect to principal repayments
on investments and divestitures.

Recent Developments

Portfolio Activity

During the six months ended September 30, 2011, the
following significant transactions occurred:



| |  |  | In April 2011, we recapitalized our investment in Cavert in which we received gross cash proceeds of $5.6 million from the sale of our common equity,
resulting in a realized gain of $5.5 million, $2.3 million in a partial redemption of our preferred stock and $0.7 million in preferred dividends. At the same time, we invested $5.7 million in new subordinated debt in Cavert. Due to the
recapitalization, Cavert was reclassified from a Control investment to an Affiliate investment during the three months ended June 30, 2011.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| |  |  | In April 2011, we invested $16.4 million in a new Control investment, Mitchell, consisting of subordinated debt and preferred and common equity.
Mitchell, headquartered in Mira Loma, California, develops, mixes and molds rubber compounds for specialized applications in the non-tire rubber market.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In May 2011, we received full repayment of our syndicated loan to Fifth Third Processing Solutions, LLC, resulting in net cash proceeds received of
$0.5 million.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In July 2011, we received full repayment of our last remaining syndicated loan, to Survey Sampling, LLC, resulting in net cash proceeds received of
$2.3 million.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In August 2011, we invested $28.1 million in a new Control investment, SOG Specialty Knives and Tools, LLC (SOG), consisting of senior debt
and preferred equity. SOG, headquartered in Lynnwood, WA, designs and produces specialty knives and tools for the hunting/outdoors, military/law enforcement and industrial markets.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In September 2011, we invested $13.8 million in a new Control investment, SBS Industries, Inc. (SBS), consisting of senior debt and
preferred and common equity. SBS, headquartered in Tulsa, OK, is a manufacturer and value-added distributor of special fasteners and threaded screw products.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Refer to Note 12, Subsequent Events, in the Condensed Consolidated Financial Statements, included elsewhere in this Form 10-Q for investment activity occurring subsequent to
September 30, 2011.

Renewal of Credit Facility

On October 26, 2011, we entered into a fourth amended and restated credit agreement through Business Investment to increase the commitment amount of our revolving line of credit to $60 million. The
Renewed Credit Facility was arranged by BB&T as administrative agent, with Key Equipment Finance, Inc. also joining the Renewed Credit Facility as a committed lender. Subject to certain terms and conditions, the Renewed Credit Facility may be
expanded up to $175 million through the addition of other committed lenders to the facility. The Renewed Credit Facility matures on October 25, 2014 (the Maturity Date), and, if not renewed or extended by the Maturity Date, all
principal and interest will be due and payable on or before October 25, 2015 (one year after the Maturity Date). Advances under the Renewed Credit Facility will generally bear interest at 30-day LIBOR plus 3.75% per annum, with an unused
fee of 0.50% on undrawn amounts. There are two one-year extension options, to be agreed upon by all parties, which may be exercised on or before October 26, 2012 and October 26, 2013, as applicable. We incurred fees of $0.7 million in
connection with this amendment.

Short-Term Loan

Similar to previous quarter-ends, to maintain our RIC status, on September 28, 2011, we purchased $70.0 million short-term United States Treasury Bills (T-Bills) through
Jefferies & Company, Inc. (Jefferies). The T-Bills were purchased using $7.5 million in funds drawn on the Credit Facility and the proceeds from a $62.5 million short-term loan from Jefferies, with an effective annual interest
rate of approximately 0.64%. On October 6, 2011, when the T-Bills matured, we repaid the $62.5 million loan from Jefferies, and on October 11, 2011, we repaid the $7.5 million drawn on the Credit Facility for the transaction.



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##### Table of Contents

RESULTS OF OPERATIONS

Comparison of the Three Months Ended September 30, 2011, to the Three Months Ended September 30, 2010



|                                                                |  |                                  |        |   |      |   |        |          |  |   |          |   |  |  |          |  
|--------------------------------------------------------------- |  | -------------------------------- | ------ | - | ---- | - | ------ | -------- |  | - | -------- | - |  |  | -------- | -
|                                                                |  | Three Months Ended September 30, |        |   |      |   |        |          | 
|                                                                |  | 2011                             |        |   | 2010 |   |        | $ Change |  |   | % Change |  
|INVESTMENT INCOME                                               |  |                                  |        |   |      |   |        |          |  |   |          |   |  |  |          |  
|Interest income                                                 |  | $                                | 4,692  |   |      | $ | 3,496  |          |  | $ | 1,196    |   |  |  | 34.2     | %
|Other income                                                    |  |                                  | 342    |   |      |   | 805    |          |  |   | (463     | ) |  |  | (57.5    | )
|                                                                |  |                                  |        |   |      |   |        |          |  |   |          |   |  |  |          |  
|Total investment income                                         |  |                                  | 5,034  |   |      |   | 4,301  |          |  |   | 733      |   |  |  | 17.0     |  
|                                                                |  |                                  |        |   |      |   |        |          |  |   |          |   |  |  |          |  
|                                                                |  |                                  |        |  
|EXPENSES                                                        |  |                                  |        |   |      |   |        |          |  |   |          |   |  |  |          |  
|Loan servicing fee                                              |  |                                  | 715    |   |      |   | 666    |          |  |   | 49       |   |  |  | 7.4      |  
|Base management fee                                             |  |                                  | 348    |   |      |   | 303    |          |  |   | 45       |   |  |  | 14.9     |  
|Administration fee                                              |  |                                  | 135    |   |      |   | 261    |          |  |   | (126     | ) |  |  | (48.3    | )
|Interest expense                                                |  |                                  | 233    |   |      |   | 149    |          |  |   | 84       |   |  |  | 56.4     |  
|Amortization of deferred financing fees                         |  |                                  | 108    |   |      |   | 103    |          |  |   | 5        |   |  |  | 4.9      |  
|Other                                                           |  |                                  | 697    |   |      |   | 439    |          |  |   | 258      |   |  |  | 58.8     |  
|                                                                |  |                                  |        |   |      |   |        |          |  |   |          |   |  |  |          |  
|Expenses before credits from Adviser                            |  |                                  | 2,236  |   |      |   | 1,921  |          |  |   | 315      |   |  |  | 16.4     |  
|Credits to fees from Adviser                                    |  |                                  | (511   | ) |      |   | (61    | )        |  |   | (450     | ) |  |  | 737.7    |  
|                                                                |  |                                  |        |   |      |   |        |          |  |   |          |   |  |  |          |  
|Total expenses net of credits to fee                            |  |                                  | 1,725  |   |      |   | 1,860  |          |  |   | (135     | ) |  |  | (7.3     | )
|                                                                |  |                                  |        |   |      |   |        |          |  |   |          |   |  |  |          |  
|                                                                |  |                                  |        |  
|NET INVESTMENT INCOME                                           |  |                                  | 3,309  |   |      |   | 2,441  |          |  |   | 868      |   |  |  | 35.6     |  
|                                                                |  |                                  |        |   |      |   |        |          |  |   |          |   |  |  |          |  
|                                                                |  |                                  |        |  
|REALIZED AND UNREALIZED GAIN (LOSS) ON:                         |  |                                  |        |   |      |   |        |          |  |   |          |   |  |  |          |  
|Net realized loss on sale of investments                        |  |                                  | (544   | ) |      |   |       |          |  |   | (544     | ) |  |  | NM       |  
|Net realized loss on other                                      |  |                                  |       |   |      |   |       |          |  |   |         |   |  |  | NM       |  
|Net unrealized appreciation (depreciation) on investments       |  |                                  | 10,337 |   |      |   | (9,291 | )        |  |   | 19,628   |   |  |  | NM       |  
|Net unrealized depreciation on other                            |  |                                  | (407   | ) |      |   | (9     | )        |  |   | (398     | ) |  |  | (4,422.2 | )
|                                                                |  |                                  |        |   |      |   |        |          |  |   |          |   |  |  |          |  
|Net gain (loss) on investments and other                        |  |                                  | 9,386  |   |      |   | (9,300 | )        |  |   | 18,686   |   |  |  | NM       |  
|                                                                |  |                                  |        |   |      |   |        |          |  |   |          |   |  |  |          |  
|NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS |  | $                                | 12,695 |   |      | $ | (6,859 | )        |  | $ | 19,554   |   |  |  | NM       |  
|                                                                |  |                                  |        |   |      |   |        |          |  |   |          |   |  |  |          |  

NM = Not Meaningful

Investment Income

Total investment income increased by 17.0% for the three months ended
September 30, 2011, as compared to the prior year period. This increase was primarily due to a larger interest-bearing portfolio and increased yield, partially offset by additional success fee income generated from our investment in Cavert
during the prior year period.

Interest income from our investments in debt securities increased 34.2% for the three months ended
September 30, 2011, as compared to the prior year period. The level of interest income from investments is directly related to the principal balance of our interest-bearing investment portfolio outstanding during the period multiplied by the
weighted average yield. The weighted average principal balance of our interest-bearing investment portfolio during the three months ended September 30, 2011, was approximately $152.5 million, compared to $122.7 million for the prior year
period, due primarily to the new investments in Venyu, Precision, Mitchell, SOG and SBS, partially offset by the exit from Chase and the restructuring of Galaxy. At September 30, 2011, two loans, ASH Holdings Corp. (ASH) and Country
Club Enterprises, LLC (CCE), were on non-accrual, with an aggregate weighted average principal balance of $18.0 million. CCE was put on non-accrual during the three months ended September 30, 2011. At September 30, 2010, one
loan, ASH, was on non-accrual, with a weighted average principal balance of $7.9 million.

The weighted average yield on our interest-bearing
investments, excluding cash and cash equivalents, for the three months ended September 30, 2011, was 12.2%, compared to 11.3% for the prior year period. The weighted average yield varies from period to period, based on the current stated
interest rate on interest-bearing investments. The increase in the weighted average yield for the three months ended September 30, 2011, resulted primarily from the sales of lower interest-bearing debt investments, such as A. Stucki and Chase,
and the addition of higher-yielding debt investments in Venyu, Precision, Mitchell, SOG and SBS, which, in the aggregate, had a weighted average interest rate of 13.7% as of September 30, 2011.



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##### Table of Contents

The following table lists the interest income from investments for our five largest portfolio company
investments at fair value during the respective periods:



|                                    |  |                          |         |  |                                       |  |       |                  |  |   |                             |  |  |  |       |  
|----------------------------------- |  | ------------------------ | ------- |  | ------------------------------------- |  | ----- | ---------------- |  | - | --------------------------- |  |  |  | ----- | -
|                                    |  | As of September 30, 2011 |         |  | Three Months Ended September 30, 2011 | 
|Company                             |  | Fair Value               |         |  | % of Portfolio                        |  |       | InvestmentIncome |  |   | % of TotalInvestment Income | 
|SOG Specialty Knives and Tools, LLC |  | $                        | 28,148  |  |                                       |  | 12.9  | %                |  | $ | 393                         |  |  |  | 7.8   | %
|Acme Cryogenics, Inc.               |  |                          | 26,304  |  |                                       |  | 12.1  |                  |  |   | 426                         |  |  |  | 8.5   |  
|Venyu Solutions, Inc.               |  |                          | 25,305  |  |                                       |  | 11.6  |                  |  |   | 631                         |  |  |  | 12.5  |  
|Mitchell Rubber Products, Inc.      |  |                          | 16,618  |  |                                       |  | 7.6   |                  |  |   | 450                         |  |  |  | 8.9   |  
|Cavert II Holding Corp.             |  |                          | 15,089  |  |                                       |  | 6.9   |                  |  |   | 698                         |  |  |  | 13.9  |  
|                                    |  |                          |         |  |                                       |  |       |                  |  |   |                             |  |  |  |       |  
|Subtotalfive largest investments   |  |                          | 111,464 |  |                                       |  | 51.1  |                  |  |   | 2,598                       |  |  |  | 51.6  |  
|Other portfolio companies           |  |                          | 106,592 |  |                                       |  | 48.9  |                  |  |   | 2,436                       |  |  |  | 48.4  |  
|                                    |  |                          |         |  |                                       |  |       |                  |  |   |                             |  |  |  |       |  
|Total investment portfolio          |  | $                        | 218,056 |  |                                       |  | 100.0 | %                |  | $ | 5,034                       |  |  |  | 100.0 | %
|                                    |  |                          |         |  |                                       |  |       |                  |  |   |                             |  |  |  |       |  



|                                  |  |                          |         |  |                                       |  |       |                  |  |   |                             |  |  |  |       |  
|--------------------------------- |  | ------------------------ | ------- |  | ------------------------------------- |  | ----- | ---------------- |  | - | --------------------------- |  |  |  | ----- | -
|                                  |  | As of September 30, 2010 |         |  | Three Months Ended September 30, 2010 | 
|Company                           |  | Fair Value               |         |  | % of Portfolio                        |  |       | InvestmentIncome |  |   | % of TotalInvestment Income | 
|Chase II Holding Corp.            |  | $                        | 32,223  |  |                                       |  | 22.7  | %                |  | $ | 595                         |  |  |  | 13.8  | %
|Cavert II Holding Corp.           |  |                          | 18,068  |  |                                       |  | 12.8  |                  |  |   | 989                         |  |  |  | 23.0  |  
|Acme Cryogenics, Inc.             |  |                          | 15,094  |  |                                       |  | 10.7  |                  |  |   | 440                         |  |  |  | 10.2  |  
|Danco Acquisition Corp.           |  |                          | 13,556  |  |                                       |  | 9.6   |                  |  |   | 406                         |  |  |  | 9.4   |  
|Mathey Investments, Inc.          |  |                          | 10,360  |  |                                       |  | 7.3   |                  |  |   | 230                         |  |  |  | 5.4   |  
|                                  |  |                          |         |  |                                       |  |       |                  |  |   |                             |  |  |  |       |  
|Subtotalfive largest investments |  |                          | 89,301  |  |                                       |  | 63.1  |                  |  |   | 2,660                       |  |  |  | 61.8  |  
|Other portfolio companies         |  |                          | 52,313  |  |                                       |  | 36.9  |                  |  |   | 1,641                       |  |  |  | 38.2  |  
|                                  |  |                          |         |  |                                       |  |       |                  |  |   |                             |  |  |  |       |  
|Total investment portfolio        |  | $                        | 141,614 |  |                                       |  | 100.0 | %                |  | $ | 4,301                       |  |  |  | 100.0 | %
|                                  |  |                          |         |  |                                       |  |       |                  |  |   |                             |  |  |  |       |  

Other income decreased from the prior year period, primarily due to Caverts election to prepay $0.8 million of its
success fee on our senior term debt and senior subordinated term debt during the quarter ended September 30, 2010, partially offset by $0.3 million in prepaid success fees received from Cavert during the three months ended September 30,
2011.

Operating Expenses

Total operating expenses, excluding any voluntary and irrevocable credits to the base management and incentive fees, increased for the three months ended
September 30, 2011, driven by increased other expenses, as compared to the prior year period.

Loan servicing fees increased for the
three months ended September 30, 2011, as compared to the prior year period. These fees were incurred in connection with a loan servicing agreement between Business Investment and our Adviser, which is based on the value of the aggregate
outstanding balance of eligible loans in our portfolio and were directly credited against the amount of the base management fee due to our Adviser. The increase in fees is reflective of the increased size of our loan portfolio over the respective
periods.



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The net base management fee decreased for the three months ended September 30, 2011, as compared to the
prior year period. This decrease was a result of the increase in the credit we received for fees paid to our Adviser from our portfolio companies during the three months ended September 30, 2011, due to fees earned related to the closings of
SOG and SBS, partially offset by an increased gross base management fee resulting from maintaining a larger investment portfolio. No incentive fee was earned by the Adviser during the three months ended September 30, 2011 and 2010. The base
management and incentive fees are computed quarterly, as described under Investment Advisory and Management Agreement in Note 4 of the notes to the accompanying Condensed Consolidated Financial Statements and are summarized in the
following table:



|                                                                 |  |                                  |         |   |      |   |         |  
|---------------------------------------------------------------- |  | -------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                 |  | Three Months Ended September 30, |        
|                                                                 |  | 2011                             |         |   | 2010 |  
|Average total assets subject to base management fee(A)           |  | $                                | 212,600 |   |      | $ | 193,800 |  
|Multiplied by pro-rata annual base management fee of 2%          |  |                                  | 0.5     | % |      |   | 0.5     | %
|                                                                 |  |                                  |         |   |      |   |         |  
|Unadjusted base management fee                                   |  | $                                | 1,063   |   |      | $ | 969     |  
|                                                                 |  |                                 
|Reduction for loan servicing fees(B)                             |  |                                  | (715    | ) |      |   | (666    | )
|                                                                 |  |                                  |         |   |      |   |         |  
|Base management fee(B)                                           |  | $                                | 348     |   |      | $ | 303     |  
|                                                                 |  |                                  |         |   |      |   |         |  
|                                                                 |  |                                 
|Credits to base management fee from Adviser:                     |  |                                  |         |   |      |   |         |  
|Credit for fees received by Adviser from the portfolio companies |  |                                  | (511    | ) |      |   | (61     | )
|                                                                 |  |                                  |         |   |      |   |         |  
|Credit to base management fee from Adviser(B)                    |  |                                  | (511    | ) |      |   | (61     | )
|                                                                 |  |                                  |         |   |      |   |         |  
|                                                                 |  |                                 
|Net base management fee                                          |  | $                                | (163    | ) |      | $ | 242     |  
|                                                                 |  |                                  |         |   |      |   |         |  
|                                                                 |  |                                 
|Net incentive fee(B)                                             |  | $                                |        |   |      | $ |        |  
|                                                                 |  |                                  |         |   |      |   |         |  



|(A) | Average total assets subject to the
base management fee is defined as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued at the end of the applicable quarters within the respective
periods and adjusted appropriately for any share issuances or repurchases during the periods.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(B) | Reflected, in total, as a line item
on the Condensed Consolidated Statement of Operations.
|--- | ------------------------------------------------------------------------------------------

Interest expense increased for the three months ended
September 30, 2011, as compared to the prior year period, due to increased borrowings under the Credit Facility. The weighted average balance outstanding on our Credit Facility during the quarter ended September 30, 2011 was
approximately $6.9 million, as compared to $0.2 million in the prior year period. The effective interest rate charged on our borrowings during the three months ended September 30, 2011, excluding the impact of deferred financing fees, was
13.0%. This figure is not meaningful for the three months ended September 30, 2010, as we had minimal borrowings outstanding under the Credit Facility during the period.

Other expenses increased 58.8% for the three months ended September 30, 2011, as compared to the prior year period, primarily due to increases in stockholder-related costs and bad debt
expense. Because we did not raise equity capital over a specified period of time, we were required to write off certain deferred offering costs in connection with our registration statement during the three months ended September 30, 2011. The
increase in bad debt expense is in connection with CCE, which we placed on non-accrual during the three months ended September 30, 2011.

Realized and Unrealized Gain (Loss) on Investments

Realized Gain

During the three months ended September 30, 2011, we received full
repayment of our syndicated loan to Survey Sampling, LLC, for total proceeds of $2.3 million, which resulted in a realized loss of $1. Additionally, we incurred a $0.5 million post-closing adjustment loss related to the Chase exit in December 2010,
which we realized during the three months ended September 30, 2011. There were no realized gains or losses for the three months ended September 30, 2010.



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Unrealized Appreciation and Depreciation

Net unrealized appreciation (depreciation) of investments is the net change in the fair value of our investment portfolio during the reporting period, including the reversal of previously-recorded
unrealized appreciation or depreciation when gains and losses are actually realized. During the three months ended September 30, 2011, we recorded net unrealized appreciation on investments in the aggregate amount of $10.3 million. The realized
gains (losses) and unrealized appreciation (depreciation) across our investments for the three months ended September 30, 2011 was as follows:



|                               |  |                           |  |                                       |      |   |                                      |   |        |                                                 |  |   |                |  |  |   |       |  
|------------------------------ |  | ------------------------- |  | ------------------------------------- | ---- | - | ------------------------------------ | - | ------ | ----------------------------------------------- |  | - | -------------- |  |  | - | ----- | -
|                               |  |                           |  | Three Months Ended September 30, 2011 |     
|Portfolio Company              |  | Investment
Classification |  | RealizedGain (Loss)                   |      |   | UnrealizedAppreciation(Depreciation) |   |        | Reversal ofUnrealized(Appreciation)Depreciation |  |   | Net Gain(Loss) | 
|Acme Cryogenics, Inc.          |  | Control                   |  | $                                     |     |   |                                      | $ | 3,785  |                                                 |  | $ |               |  |  | $ | 3,785 |  
|Galaxy Tool Holding Corp.      |  | Control                   |  |                                       |     |   |                                      |   | 3,711  |                                                 |  |   |               |  |  |   | 3,711 |  
|Tread Corp.                    |  | Control                   |  |                                       |     |   |                                      |   | 1,974  |                                                 |  |   |               |  |  |   | 1,974 |  
|Quench Holdings Corp.          |  | Affiliate                 |  |                                       |     |   |                                      |   | 1,336  |                                                 |  |   |               |  |  |   | 1,336 |  
|Noble Logistics, Inc.          |  | Affiliate                 |  |                                       |     |   |                                      |   | 745    |                                                 |  |   |               |  |  |   | 745   |  
|Mitchell Rubber Products, Inc. |  | Control                   |  |                                       |     |   |                                      |   | 291    |                                                 |  |   |               |  |  |   | 291   |  
|American Greetings Corporation |  | Non-Control/Non-Affiliate |  |                                       |     |   |                                      |   | (142   | )                                               |  |   |               |  |  |   | (142  | )
|Precision Southeast, Inc.      |  | Control                   |  |                                       |     |   |                                      |   | (152   | )                                               |  |   |               |  |  |   | (152  | )
|Danco Acquisition Corp.        |  | Affiliate                 |  |                                       |     |   |                                      |   | (508   | )                                               |  |   |               |  |  |   | (508  | )
|Chase II Holding Corp.(A)      |  | Control                   |  |                                       | (543 | ) |                                      |   |       |                                                 |  |   |               |  |  |   | (543  | )
|Country Club Enterprises, LLC  |  | Control                   |  |                                       |     |   |                                      |   | (800   | )                                               |  |   |               |  |  |   | (800  | )
|Other, net (<$100 Net)         |  | Various                   |  |                                       | (1   | ) |                                      |   | 96     |                                                 |  |   | 1              |  |  |   | 96    |  
|                               |  |                           |  |                                       |      |   |                                      |   |        |                                                 |  |   |                |  |  |   |       |  
|Total                          |  |                           |  | $                                     | (544 | ) |                                      | $ | 10,336 |                                                 |  | $ | 1              |  |  | $ | 9,793 |  
|                               |  |                           |  |                                       |      |   |                                      |   |        |                                                 |  |   |                |  |  |   |       |  



|(A) | Chase II Holding Corp. was sold in December 2010.
|--- | -------------------------------------------------

The primary changes in our net unrealized appreciation for the three months ended September 30, 2011, were notable appreciation in our equity
investments in Acme Cryogenics, Inc. (Acme), Galaxy Tool Holding Corp. (Galaxy) and Tread Corp. (Tread), which were primarily due to increased performance, and appreciation in our debt investment of Quench
Holdings Corp. (Quench), which paid off at par subsequent to September 30, 2011. This appreciation was partially offset by increased depreciation in CCE, which was placed on non-accrual during the three months ended
September 30, 2011, for decreased performance and being past-due on its obligations to us. Excluding the impact of Acme, Galaxy, Tread, Quench and CCE, the net unrealized appreciation of $0.3 million recognized on our portfolio investments was
primarily due to an increase in certain comparable multiples, partially offset by decreases in the performance of some of our portfolio companies used to estimate the fair value of our investments.

During the quarter ended September 30, 2010, we recorded net unrealized depreciation of investments in the aggregate amount of $9.3 million. The
unrealized appreciation (depreciation) across our investments for the three months ended September 30, 2010 was as follows:



|                          |  |                           |  |                                       |   |  |                                      |   |         |                                                 |  |   |                |  |  |   |         |  
|------------------------- |  | ------------------------- |  | ------------------------------------- | - |  | ------------------------------------ | - | ------- | ----------------------------------------------- |  | - | -------------- |  |  | - | ------- | -
|                          |  |                           |  | Three Months Ended September 30, 2010 |  
|Portfolio Company         |  | Investment
Classification |  | RealizedGain (Loss)                   |   |  | UnrealizedAppreciation(Depreciation) |   |         | Reversal ofUnrealized(Appreciation)Depreciation |  |   | Net Gain(Loss) | 
|Chase II Holding Corp.    |  | Control                   |  | $                                     |  |  |                                      | $ | 3,466   |                                                 |  | $ |               |  |  | $ | 3,466   |  
|Cavert II Holding Corp.   |  | Control                   |  |                                       |  |  |                                      |   | 1,617   |                                                 |  |   |               |  |  |   | 1,617   |  
|Acme Cryogenics, Inc.     |  | Control                   |  |                                       |  |  |                                      |   | 1,074   |                                                 |  |   |               |  |  |   | 1,074   |  
|Noble Logistics, Inc.     |  | Affiliate                 |  |                                       |  |  |                                      |   | 741     |                                                 |  |   |               |  |  |   | 741     |  
|Danco Acquisition Corp.   |  | Affiliate                 |  |                                       |  |  |                                      |   | 195     |                                                 |  |   |               |  |  |   | 195     |  
|Survey Sampling, LLC      |  | Non-Control/Non-Affiliate |  |                                       |  |  |                                      |   | 104     |                                                 |  |   |               |  |  |   | 104     |  
|Quench Holdings Corp.     |  | Affiliate                 |  |                                       |  |  |                                      |   | (535    | )                                               |  |   |               |  |  |   | (535    | )
|ASH Holdings Corp.        |  | Control                   |  |                                       |  |  |                                      |   | (762    | )                                               |  |   |               |  |  |   | (762    | )
|Galaxy Tool Holding Corp. |  | Control                   |  |                                       |  |  |                                      |   | (15,093 | )                                               |  |   |               |  |  |   | (15,093 | )
|Other, net (<$100 Net)    |  | Various                   |  |                                       |  |  |                                      |   | (98     | )                                               |  |   |               |  |  |   | (98     | )
|                          |  |                           |  |                                       |   |  |                                      |   |         |                                                 |  |   |                |  |  |   |         |  
|Total                     |  |                           |  | $                                     |  |  |                                      | $ | (9,291  | )                                               |  | $ |               |  |  | $ | (9,291  | )
|                          |  |                           |  |                                       |   |  |                                      |   |         |                                                 |  |   |                |  |  |   |         |  

The primary changes in our net unrealized depreciation for the quarter ended September 30, 2010 were due to the
Galaxy restructuring, which resulted in the conversion of $12.1 million of debt at fair value as of June 30, 2010 into preferred and common equity, and the subsequent application of the total enterprise value (TEV) methodology
resulting in a minimal fair value as of September 30, 2010. We experienced noteworthy appreciation in our equity holdings of Cavert and Chase, as well as in our debt investment to Acme. Certain depreciation occurred in our debt holdings, most
notably in ASH. Excluding the impact of Galaxy, the net unrealized appreciation of $5.8 million recognized on our portfolio investments was primarily due to an increase in certain comparable multiples and, to a lesser extent, the performance of some
of our portfolio companies used to estimate the fair value of our investments.

Over our entire investment portfolio, we recorded, in
aggregate, approximately $9.4 million and $0.9 million of net unrealized appreciation on our equity holdings and debt positions, respectively, for the three months ended September 30, 2011. At September 30, 2011, the fair value of our
investment portfolio was less than our cost basis by approximately $38.6 million, as compared to $48.9 million at June 30, 2011, representing net unrealized appreciation of $10.3 million for the period. We believe that our aggregate



35



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##### Table of Contents

investment portfolio was valued at a depreciated value due primarily to the general instability of the loan markets and resulting decrease in market multiples relative to where multiples were
when we originated certain of the investments in our portfolio. Even though valuations have generally stabilized over the past year, our entire portfolio was fair valued at 85.0% of cost as of September 30, 2011. The cumulative net unrealized
depreciation of our investments does not have an impact on our current ability to pay distributions to stockholders; however, it may be an indication of future realized losses, which could ultimately reduce our income available for distribution.

Net Unrealized Depreciation on Other

Net unrealized depreciation on other is the net aggregate change in the fair value of our line of credit borrowings and our interest rate cap agreement during the reporting period, including the reversal
of previously recorded unrealized appreciation or depreciation when gains and losses are realized. We elected to apply ASC 825, Financial Instruments, which requires us to apply a fair value methodology to the Credit Facility. We
estimated the fair value of the Credit Facility using a combination of estimates of value provided by an independent third party and our own assumptions in the absence of observable market data, including estimated remaining life, credit party risk,
current market yield and interest rate spreads of similar securities as of the measurement date. For the three months ended September 30, 2011, we recorded net unrealized depreciation of $0.4 million due to the increase in fair value of our
line of credit borrowings. For the three months ended September 30, 2010, we recorded a minimal amount of unrealized depreciation due to the decrease in fair value of our interest rate cap agreement.

Net Increase in Net Assets Resulting from Operations

For the three months ended September 30, 2011, we recorded a net increase in net assets resulting from operations of $12.7 million as a result of the factors discussed above. For the three months
ended September 30, 2010, we recorded a net decrease in net assets resulting from operations of $6.9 million. Our net increase (decrease) in net assets resulting from operations per basic and diluted weighted average common share for the three
months ended September 30, 2011 and 2010 was $0.57 and $(0.31), respectively.



36



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##### Table of Contents

Comparison of the Six Months Ended September 30, 2011, to the Six Months Ended September 30,
2010



|                                                                |  |                                |        |   |      |   |         |          |  |   |          |   |  |  |       |  
|--------------------------------------------------------------- |  | ------------------------------ | ------ | - | ---- | - | ------- | -------- |  | - | -------- | - |  |  | ----- | -
|                                                                |  | Six Months Ended September 30, |        |   |      |   |         |          | 
|                                                                |  | 2011                           |        |   | 2010 |   |         | $ Change |  |   | % Change |  
|INVESTMENT INCOME                                               |  |                                |        |   |      |   |         |          |  |   |          |   |  |  |       |  
|Interest income                                                 |  | $                              | 9,104  |   |      | $ | 8,004   |          |  | $ | 1,100    |   |  |  | 13.7  | %
|Other income                                                    |  |                                | 1,193  |   |      |   | 3,546   |          |  |   | (2,353   | ) |  |  | (66.4 | )
|                                                                |  |                                |        |   |      |   |         |          |  |   |          |   |  |  |       |  
|Total investment income                                         |  |                                | 10,297 |   |      |   | 11,550  |          |  |   | (1,253   | ) |  |  | (10.8 | )
|                                                                |  |                                |        |   |      |   |         |          |  |   |          |   |  |  |       |  
|                                                                |  |                                |        |  
|EXPENSES                                                        |  |                                |        |   |      |   |         |          |  |   |          |   |  |  |       |  
|Loan servicing fee                                              |  |                                | 1,392  |   |      |   | 1,490   |          |  |   | (98      | ) |  |  | (6.6  | )
|Base management fee                                             |  |                                | 679    |   |      |   | 503     |          |  |   | 176      |   |  |  | 35.0  |  
|Incentive fee                                                   |  |                                | 19     |   |      |   | 1,052   |          |  |   | (1,033   | ) |  |  | (98.2 | )
|Administration fee                                              |  |                                | 286    |   |      |   | 439     |          |  |   | (153     | ) |  |  | (34.9 | )
|Interest expense                                                |  |                                | 365    |   |      |   | 423     |          |  |   | (58      | ) |  |  | (13.7 | )
|Amortization of deferred financing fees                         |  |                                | 215    |   |      |   | 267     |          |  |   | (52      | ) |  |  | (19.5 | )
|Other                                                           |  |                                | 1,257  |   |      |   | 909     |          |  |   | 348      |   |  |  | 38.3  |  
|                                                                |  |                                |        |   |      |   |         |          |  |   |          |   |  |  |       |  
|Expenses before credits from Adviser                            |  |                                | 4,213  |   |      |   | 5,083   |          |  |   | (870     | ) |  |  | (17.1 | )
|Credits to fees                                                 |  |                                | (726   | ) |      |   | (180    | )        |  |   | (546     | ) |  |  | 303.3 |  
|                                                                |  |                                |        |   |      |   |         |          |  |   |          |   |  |  |       |  
|Total expenses net of credits to fee                            |  |                                | 3,487  |   |      |   | 4,903   |          |  |   | (1,416   | ) |  |  | (28.9 | )
|                                                                |  |                                |        |   |      |   |         |          |  |   |          |   |  |  |       |  
|                                                                |  |                                |        |  
|NET INVESTMENT INCOME                                           |  |                                | 6,810  |   |      |   | 6,647   |          |  |   | 163      |   |  |  | 2.5   |  
|                                                                |  |                                |        |   |      |   |         |          |  |   |          |   |  |  |       |  
|                                                                |  |                                |        |  
|REALIZED AND UNREALIZED GAIN (LOSS) ON:                         |  |                                |        |   |      |   |         |          |  |   |          |   |  |  |       |  
|Net realized gain on sale of investments                        |  |                                | 5,196  |   |      |   | 16,976  |          |  |   | (11,780  | ) |  |  | (69.4 | )
|Net realized loss on other                                      |  |                                | (39    | ) |      |   |        |          |  |   | (39      | ) |  |  | NM    |  
|Net unrealized appreciation (depreciation) on investments       |  |                                | 5,284  |   |      |   | (25,089 | )        |  |   | 30,373   |   |  |  | NM    |  
|Net unrealized depreciation on other                            |  |                                | (368   | ) |      |   | (26     | )        |  |   | (342     | ) |  |  | NM    |  
|                                                                |  |                                |        |   |      |   |         |          |  |   |          |   |  |  |       |  
|Net gain (loss) on investments and other                        |  |                                | 10,073 |   |      |   | (8,139  | )        |  |   | 18,212   |   |  |  | NM    |  
|                                                                |  |                                |        |   |      |   |         |          |  |   |          |   |  |  |       |  
|                                                                |  |                                |        |  
|NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS |  | $                              | 16,883 |   |      | $ | (1,492  | )        |  | $ | 18,375   |   |  |  | NM    |  
|                                                                |  |                                |        |   |      |   |         |          |  |   |          |   |  |  |       |  

NM = Not Meaningful

Investment Income

Total investment income decreased by 10.8% for the six months ended
September 30, 2011, as compared to the prior year period. This decrease was primarily due to a significant amount of other income, including success fee and dividend income, that we recorded in the prior year period as part of the A. Stucki
exit in June 2010, partially offset by holding higher-yielding debt investments in our portfolio during the current period.

Interest income
from our investments in debt securities increased 13.7% for the six months ended September 30, 2011, as compared to the prior year period. The level of interest income from investments is directly related to the principal balance of our
interest-bearing investment portfolio outstanding during the period multiplied by the weighted average yield. The weighted average principal balance of our interest-bearing investment portfolio during the six months ended September 30, 2011,
was approximately $149.9 million, compared to approximately $143.9 million for the prior year period. This increase was due primarily to new investments in Venyu, Precision, Mitchell, SOG and SBS, partially offset by the exits from A. Stucki and
Chase and the restructuring of Galaxy. At September 30, 2011, two loans, ASH and CCE, were on non-accrual with an aggregate weighted average principal balance of $13.9 million during the six months ended September 30, 2011. CCE was put on
non-accrual during the three months ended September 30, 2011. At September 30, 2010, one loan, ASH, was on non-accrual, with a weighted average principal balance of $7.8 million during the six months ended September 30, 2010.

The weighted average yield on our interest-bearing investments, excluding cash and cash equivalents, for the six months ended
September 30, 2011, was 12.1%, compared to 11.1% for the prior year period. The weighted average yield varies from period to period, based on the current stated interest rate on interest-bearing investments. The increase in the weighted average
yield for the six months ended September 30, 2011, is a result of the sales of lower interest-bearing debt investments, such as A. Stucki and Chase, and the addition of higher-yielding debt investments in SOG, SBS, Venyu, Precision and
Mitchell, which, in the aggregate, had a weighted average interest rate of 13.7% as of September 30, 2011.



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The following table lists the interest income from investments for our five largest portfolio company
investments at fair value during the respective periods:



|                                    |  |                          |         |  |                                     |  |       |                  |  |   |                             |  |  |  |       |  
|----------------------------------- |  | ------------------------ | ------- |  | ----------------------------------- |  | ----- | ---------------- |  | - | --------------------------- |  |  |  | ----- | -
|                                    |  | As of September 30, 2011 |         |  | Six Months Ended September 30, 2011 | 
|Company                             |  | Fair Value               |         |  | % of Portfolio                      |  |       | InvestmentIncome |  |   | % of TotalInvestment Income | 
|SOG Specialty Knives and Tools, LLC |  | $                        | 28,148  |  |                                     |  | 12.9  | %                |  | $ | 393                         |  |  |  | 3.8   | %
|Acme Cryogenics, Inc.               |  |                          | 26,304  |  |                                     |  | 12.1  |                  |  |   | 857                         |  |  |  | 8.3   |  
|Venyu Solutions, Inc.               |  |                          | 25,305  |  |                                     |  | 11.6  |                  |  |   | 1,254                       |  |  |  | 12.2  |  
|Mitchell Rubber Products, Inc.      |  |                          | 16,618  |  |                                     |  | 7.6   |                  |  |   | 862                         |  |  |  | 8.4   |  
|Cavert II Holding Corp.             |  |                          | 15,089  |  |                                     |  | 6.9   |                  |  |   | 1,773                       |  |  |  | 17.2  |  
|                                    |  |                          |         |  |                                     |  |       |                  |  |   |                             |  |  |  |       |  
|Subtotalfive largest investments   |  |                          | 111,464 |  |                                     |  | 51.1  |                  |  |   | 5,139                       |  |  |  | 49.9  |  
|Other portfolio companies           |  |                          | 106,592 |  |                                     |  | 48.9  |                  |  |   | 5,158                       |  |  |  | 50.1  |  
|                                    |  |                          |         |  |                                     |  |       |                  |  |   |                             |  |  |  |       |  
|Total investment portfolio          |  | $                        | 218,056 |  |                                     |  | 100.0 | %                |  | $ | 10,297                      |  |  |  | 100.0 | %
|                                    |  |                          |         |  |                                     |  |       |                  |  |   |                             |  |  |  |       |  



|                                  |  |                          |         |  |                                     |  |       |                  |  |   |                             |  |  |  |       |  
|--------------------------------- |  | ------------------------ | ------- |  | ----------------------------------- |  | ----- | ---------------- |  | - | --------------------------- |  |  |  | ----- | -
|                                  |  | As of September 30, 2010 |         |  | Six Months Ended September 30, 2010 | 
|Company                           |  | Fair Value               |         |  | % of Portfolio                      |  |       | InvestmentIncome |  |   | % of TotalInvestment Income | 
|A. Stucki Holding Corp.(A)        |  | $                        |        |  |                                     |  |      | %                |  | $ | 3,287                       |  |  |  | 28.5  | %
|Chase II Holding Corp.            |  |                          | 32,223  |  |                                     |  | 22.7  |                  |  |   | 1,191                       |  |  |  | 10.3  |  
|Cavert II Holding Corp.           |  |                          | 18,068  |  |                                     |  | 12.8  |                  |  |   | 1,234                       |  |  |  | 10.7  |  
|Acme Cryogenics, Inc.             |  |                          | 15,094  |  |                                     |  | 10.7  |                  |  |   | 868                         |  |  |  | 7.5   |  
|Danco Acquisition Corp.           |  |                          | 13,556  |  |                                     |  | 9.6   |                  |  |   | 816                         |  |  |  | 7.0   |  
|                                  |  |                          |         |  |                                     |  |       |                  |  |   |                             |  |  |  |       |  
|Subtotalfive largest investments |  |                          | 78,941  |  |                                     |  | 55.8  |                  |  |   | 7,396                       |  |  |  | 64.0  |  
|Other portfolio companies         |  |                          | 62,673  |  |                                     |  | 44.2  |                  |  |   | 4,154                       |  |  |  | 36.0  |  
|                                  |  |                          |         |  |                                     |  |       |                  |  |   |                             |  |  |  |       |  
|Total investment portfolio        |  | $                        | 141,614 |  |                                     |  | 100.0 | %                |  | $ | 11,550                      |  |  |  | 100.0 | %
|                                  |  |                          |         |  |                                     |  |       |                  |  |   |                             |  |  |  |       |  



|(A) | A. Stucki was sold in June 2010.
|--- | --------------------------------

Other income decreased from the prior year period, primarily due to $2.7 million of other income, including success
fee and dividend income, that we recorded as a result of our exit from A. Stucki in June 2010 and Caverts election to prepay $0.8 million of success fees during the prior year period. This was partially offset during current year period by
$0.7 million of cash dividends received on preferred shares of Cavert, in connection with its recapitalization in April 2011, as well as Caverts election to prepay $0.3 million of success fees during the current year period.

Operating Expenses

Total operating
expenses, excluding any voluntary and irrevocable credits to the base management and incentive fees, decreased for the six months ended September 30, 2011, driven primarily by a decrease in incentive fees paid, as compared to the prior year
period.



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The net base management fee decreased for the six months ended September 30, 2011, as compared to the
prior year period, which is a result of the increase in the credit we received for fees paid to our Adviser from our portfolio companies during the six months ended September 30, 2011, due to fees earned related to the closings of Mitchell, SOG
and SBS, partially offset by an increased gross base management fee resulting from maintaining a larger investment portfolio. An incentive fee of $19 was earned by the Adviser during the three months ended June 30, 2011, as net investment
income for the quarter was above the hurdle rate. The incentive fee earned during the prior year period was due primarily to other income recorded in connection with the sale of A. Stucki. The base management and incentive fees are computed
quarterly, as described under Investment Advisory and Management Agreement in Note 4 of the notes to the accompanying Condensed Consolidated Financial Statements and are summarized in the following table:



|                                                                            |  |                                |         |   |      |   |         |  
|--------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                                            |  | Six Months Ended September 30, |        
|                                                                            |  | 2011                           |         |   | 2010 |  
|Average total assets subject to base management fee(A)                      |  | $                              | 207,100 |   |      | $ | 199,300 |  
|Multiplied by pro-rata annual base management fee of 2%                     |  |                                | 1.0     | % |      |   | 1.0     | %
|                                                                            |  |                                |         |   |      |   |         |  
|Unadjusted base management fee                                              |  | $                              | 2,071   |   |      | $ | 1,993   |  
|                                                                            |  |                               
|Reduction for loan servicing fees(B)                                        |  |                                | (1,392  | ) |      |   | (1,490  | )
|                                                                            |  |                                |         |   |      |   |         |  
|Base management fee(B)                                                      |  | $                              | 679     |   |      | $ | 503     |  
|                                                                            |  |                                |         |   |      |   |         |  
|                                                                            |  |                               
|Credits to base management fee from Adviser:                                |  |                                |         |   |      |   |         |  
|Fee reduction for the waiver of 2.0% fee on senior syndicated loans to 0.5% |  |                                |        |   |      |   | (15     | )
|Credit for fees received by Adviser from the portfolio companies            |  |                                | (726    | ) |      |   | (165    | )
|                                                                            |  |                                |         |   |      |   |         |  
|Credit to base management fee from Adviser(B)                               |  |                                | (726    | ) |      |   | (180    | )
|                                                                            |  |                                |         |   |      |   |         |  
|                                                                            |  |                               
|Net base management fee                                                     |  | $                              | (47     | ) |      | $ | 323     |  
|                                                                            |  |                                |         |   |      |   |         |  
|                                                                            |  |                               
|Net incentive fee(B)                                                        |  | $                              | 19      |   |      | $ | 1,052   |  
|                                                                            |  |                                |         |   |      |   |         |  



|(A) | Average total assets subject to the
base management fee is defined as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued at the end of the applicable quarters within the respective
periods and adjusted appropriately for any share issuances or repurchases during the periods.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(B) | Reflected, in total, as a line item
on the Condensed Consolidated Statement of Operations.
|--- | ------------------------------------------------------------------------------------------

Interest expense decreased for the six months ended
September 30, 2011, as compared to the prior year period, primarily due to decreased borrowings under the Credit Facility. The weighted average balance outstanding on our Credit Facility during the six months ended September 30,
2011, was approximately $3.5 million, as compared to $5.6 million during the prior year period. For the six months ended September 30, 2011 and 2010, the effective interest rate charged on our borrowings, excluding the impact of deferred
financing fees, was 20.2% and 14.6%, respectively.

Other expenses increased 38.3% for the six months ended September 30, 2011, as
compared to the prior year period, primarily due to increases in stockholder-related costs and bad debt expense. Because we did not raise equity capital over a specified period of time, we were required to write off certain deferred offering
costs in connection with our registration statement during the current period. The increase in bad debt expense was in connection with CCE, which we placed on non-accrual during the three months ended September 30, 2011.

Realized and Unrealized Gain (Loss) on Investments

Realized Gain

In April 2011, we recapitalized our investment in Cavert, receiving $8.5
million in proceeds and realizing a gain of $5.5 million. During the six months ended September 30, 2011, we also received full repayment of our syndicated loans to Fifth Third Processing Solutions, LLC and Survey Sampling, LLC, for aggregate
proceeds of $2.8 million and a minimal realized gain. Additionally, we recorded post-closing adjustments related to the A. Stucki exit in June 2010 and the Chase exit in December 2010, which we realized as a net loss of $0.3 million during the six
months ended September 30, 2011. During the six months ended September 30, 2010, we exited one proprietary investment, A. Stucki, for $52.3 million in total proceeds and a realized gain of $17.0 million.



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Unrealized Appreciation and Depreciation

During the six months ended September 30, 2011, we recorded net unrealized appreciation on investments in the aggregate amount of $5.3 million, which included the reversal of $6.1 million in
aggregate unrealized appreciation, primarily related to the Cavert recapitalization. Excluding reversals, we had $11.4 million in net unrealized appreciation for the six months ended September 30, 2011. The realized gains (losses) and
unrealized appreciation (depreciation) across our investments for the six months ended September 30, 2011 were as follows:



|                               |  |                           |  |                                     |       |   |                                      |   |        |                                                 |  |   |                |   |  |   |        |  
|------------------------------ |  | ------------------------- |  | ----------------------------------- | ----- | - | ------------------------------------ | - | ------ | ----------------------------------------------- |  | - | -------------- | - |  | - | ------ | -
|                               |  |                           |  | Six Months Ended September 30, 2011 |      
|Portfolio Company              |  | InvestmentClassification  |  | RealizedGain (Loss)                 |       |   | UnrealizedAppreciation(Depreciation) |   |        | Reversal ofUnrealized(Appreciation)Depreciation |  |   | Net Gain(Loss) |  
|Acme Cryogenics, Inc.          |  | Control                   |  | $                                   |      |   |                                      | $ | 6,813  |                                                 |  | $ |               |   |  | $ | 6,813  |  
|Tread Corp.                    |  | Control                   |  |                                     |      |   |                                      |   | 3,639  |                                                 |  |   |               |   |  |   | 3,639  |  
|Galaxy Tool Holding Corp.      |  | Control                   |  |                                     |      |   |                                      |   | 3,466  |                                                 |  |   |               |   |  |   | 3,466  |  
|Noble Logistics, Inc.          |  | Affiliate                 |  |                                     |      |   |                                      |   | 1,933  |                                                 |  |   | 94             |   |  |   | 2,027  |  
|Quench Holdings Corp.          |  | Affiliate                 |  |                                     |      |   |                                      |   | 1,562  |                                                 |  |   |               |   |  |   | 1,562  |  
|Survey Sampling, LLC           |  | Non-Control/Non-Affiliate |  |                                     | (1    | ) |                                      |   | 807    |                                                 |  |   | 1              |   |  |   | 807    |  
|Venyu Solutions, Inc.          |  | Control                   |  |                                     |      |   |                                      |   | 293    |                                                 |  |   |               |   |  |   | 293    |  
|A. Stucki Corp.(A)             |  | Control                   |  |                                     | 247   |   |                                      |   |       |                                                 |  |   |               |   |  |   | 247    |  
|Mitchell Rubber Products, Inc. |  | Control                   |  |                                     |      |   |                                      |   | 240    |                                                 |  |   |               |   |  |   | 240    |  
|B-Dry, LLC                     |  | Non-Control/Non-Affiliate |  |                                     |      |   |                                      |   | (125   | )                                               |  |   |               |   |  |   | (125   | )
|ASH Holdings Corp.             |  | Control                   |  |                                     |      |   |                                      |   | (375   | )                                               |  |   |               |   |  |   | (375   | )
|Precision Southeast, Inc.      |  | Control                   |  |                                     |      |   |                                      |   | (503   | )                                               |  |   |               |   |  |   | (503   | )
|Cavert II Holding Corp.        |  | Affiliate                 |  |                                     | 5,508 |   |                                      |   | 166    |                                                 |  |   | (6,194         | ) |  |   | (520   | )
|Chase II Holding Corp.(B)      |  | Control                   |  |                                     | (563  | ) |                                      |   |       |                                                 |  |   |               |   |  |   | (563   | )
|Danco Acquisition Corp.        |  | Affiliate                 |  |                                     |      |   |                                      |   | (572   | )                                               |  |   |               |   |  |   | (572   | )
|Country Club Enterprises, LLC  |  | Control                   |  |                                     |      |   |                                      |   | (5,960 | )                                               |  |   |               |   |  |   | (5,960 | )
|Other, net (<$100 Net)         |  | Various                   |  |                                     | 5     |   |                                      |   | 13     |                                                 |  |   | (14            | ) |  |   | 4      |  
|                               |  |                           |  |                                     |       |   |                                      |   |        |                                                 |  |   |                |   |  |   |        |  
|Total                          |  |                           |  | $                                   | 5,196 |   |                                      | $ | 11,397 |                                                 |  | $ | (6,113         | ) |  | $ | 10,480 |  
|                               |  |                           |  |                                     |       |   |                                      |   |        |                                                 |  |   |                |   |  |   |        |  



|(A) | A. Stucki Corp. was sold in June 2010.
|--- | --------------------------------------

|(B) | Chase II Holding Corp. was sold in December 2010.
|--- | -------------------------------------------------

The primary changes in our net unrealized appreciation for the six months ended September 30, 2011, were notable appreciation in our equity
investments in Acme, Tread, Galaxy and Noble Logistics, Inc. (Noble), primarily due to increased performance, and appreciation of our debt investment to Quench, which was paid off at par subsequent to September 30, 2011. This
appreciation was partially offset by increased depreciation in CCE, which was placed on non-accrual during the three months ended September 30, 2011, for decreased performance and being past-due on its obligations to us, as well as the reversal
of previously-recorded unrealized appreciation on the Cavert recapitalization. Excluding the impact of the aforementioned portfolio companies, the net unrealized depreciation of $0.2 million recognized on our investments was primarily due to
decreases in the performance of some of our portfolio companies, partially offset by an increase in certain comparable multiples used to estimate the fair value of our investments.

During the six months ended September 30, 2010, we had net unrealized depreciation of investments in the aggregate amount of $25.1 million, which included the reversal of $17.4 million in unrealized
appreciation related to the A. Stucki sale. Excluding reversals, we had $7.7 million in net unrealized depreciation for the six months ended September 30, 2010. The realized gains (losses) and unrealized appreciation (depreciation) across our
investments for the six months ended September 30, 2010 were as follows:



|                          |  |                           |  |                                     |        |  |                                      |   |         |                                                 |  |   |                |   |  |   |         |  
|------------------------- |  | ------------------------- |  | ----------------------------------- | ------ |  | ------------------------------------ | - | ------- | ----------------------------------------------- |  | - | -------------- | - |  | - | ------- | -
|                          |  |                           |  | Six Months Ended September 30, 2010 |       
|Portfolio Company         |  | InvestmentClassification  |  | RealizedGain (Loss)                 |        |  | UnrealizedAppreciation(Depreciation) |   |         | Reversal ofUnrealized(Appreciation)Depreciation |  |   | Net Gain(Loss) |  
|Chase II Holding Corp.    |  | Control                   |  | $                                   |       |  |                                      | $ | 3,753   |                                                 |  | $ |               |   |  | $ | 3,753   |  
|Cavert II Holding Corp.   |  | Control                   |  |                                     |       |  |                                      |   | 2,262   |                                                 |  |   |               |   |  |   | 2,262   |  
|Acme Cryogenics, Inc.     |  | Control                   |  |                                     |       |  |                                      |   | 1,095   |                                                 |  |   |               |   |  |   | 1,095   |  
|Noble Logistics, Inc.     |  | Affiliate                 |  |                                     |       |  |                                      |   | 839     |                                                 |  |   |               |   |  |   | 839     |  
|Survey Sampling, LLC      |  | Non-Control/Non-Affiliate |  |                                     |       |  |                                      |   | 470     |                                                 |  |   |               |   |  |   | 470     |  
|Danco Acquisition Corp.   |  | Affiliate                 |  |                                     |       |  |                                      |   | 249     |                                                 |  |   |               |   |  |   | 249     |  
|Quench Holdings Corp.     |  | Affiliate                 |  |                                     |       |  |                                      |   | (259    | )                                               |  |   |               |   |  |   | (259    | )
|A. Stucki Corp.           |  | Control                   |  |                                     | 16,957 |  |                                      |   |        |                                                 |  |   | (17,405        | ) |  |   | (448    | )
|ASH Holdings Corp.        |  | Control                   |  |                                     |       |  |                                      |   | (684    | )                                               |  |   |               |   |  |   | (684    | )
|Galaxy Tool Holding Corp. |  | Control                   |  |                                     |       |  |                                      |   | (15,248 | )                                               |  |   |               |   |  |   | (15,248 | )
|Other, net (<$100 Net)    |  | Various                   |  |                                     | 19     |  |                                      |   | (142    | )                                               |  |   | (19            | ) |  |   | (142    | )
|                          |  |                           |  |                                     |        |  |                                      |   |         |                                                 |  |   |                |   |  |   |         |  
|Total                     |  |                           |  | $                                   | 16,976 |  |                                      | $ | (7,665  | )                                               |  | $ | (17,424        | ) |  | $ | (8,113  | )
|                          |  |                           |  |                                     |        |  |                                      |   |         |                                                 |  |   |                |   |  |   |         |  

The primary changes in our net unrealized depreciation for the six months ended September 30, 2010 were the reversal
of previously-recorded unrealized appreciation on our A. Stucki sale and the unrealized depreciation recorded on Galaxy, which underwent a restructuring that resulted in the conversion of $12.1 million of debt at fair value as of June 30, 2010
into preferred and common equity and the subsequent application of the TEV methodology resulting in a minimal fair value as of September 30, 2010. We



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experienced noteworthy appreciation in our equity holdings of Cavert and Chase, as well as in our debt investment to Acme. Excluding the impact of Galaxy and A. Stucki, the net unrealized
appreciation recognized on our portfolio investments was primarily due to an increase in certain comparable multiples and, to a lesser extent, the performance of some of our portfolio companies used to estimate the fair value of our investments.

Over our entire investment portfolio, we recorded, in aggregate, approximately $8.6 million of net unrealized appreciation and $3.3 million
of net unrealized depreciation on our equity positions and debt positions, respectively, for the six months ended September 30, 2011. At September 30, 2011, the fair value of our investment portfolio was less than our cost basis by
approximately $38.6 million, as compared to $43.9 million at March 31, 2011, representing net unrealized appreciation of $5.3 million for the period. We believe that our aggregate investment portfolio was valued at a depreciated value due
primarily to the general instability of the loan markets and resulting decrease in market multiples relative to where multiples were when we originated certain of the investments in our portfolio. Even though valuations have generally stabilized
over the past year, our entire portfolio was fair valued at 85.0% of cost as of September 30, 2011. The unrealized depreciation of our investments does not have an impact on our current ability to pay distributions to stockholders; however, it
may be an indication of future realized losses, which could ultimately reduce our income available for distribution.

Realized and
Unrealized Loss on Other

Realized Loss

For the six months ended September 30, 2011, we recorded a net realized loss of $39 due to the expiration of one of our interest rate cap agreements. There were no non-investment realized gains or
losses during the six months ended September 30, 2010.

Unrealized Depreciation

For the six months ended September 30, 2011, we recorded net unrealized depreciation of $0.4 million due to the increase in fair value of our line of
credit borrowings. For the six months ended September 30, 2011, we recorded a minimal amount of unrealized depreciation due to the decrease in fair value of our interest rate cap agreement.

Net Increase (Decrease) in Net Assets Resulting from Operations

For the six months ended September 30, 2011, we recorded a net increase in net assets resulting from operations of $16.9 million as a result of the factors discussed above. For the six months ended
September 30, 2010, we recorded a net decrease in net assets resulting from operations of $1.5 million. Our net increase (decrease) in net assets resulting from operations per basic and diluted weighted average common share for the six months
ended September 30, 2011 and 2010 was $0.76 and $(0.07), respectively.



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LIQUIDITY AND CAPITAL RESOURCES

Operating Activities

Net cash used in
operating activities for the six months ended September 30, 2011, was approximately $45.0 million, driven by $67.4 million of cash disbursed for the purchase of new investments. Net cash provided by operating activities for the six months ended
September 30, 2010, was approximately $60.5 million and consisted primarily of proceeds received from the A. Stucki sale and principal payments received from existing investments.

At September 30, 2011, we had investments in equity of, loans to or syndicated participations in 18 private companies with an aggregate cost basis of approximately $256.7 million. At
September 30, 2010, we had investments in equity of, loans to or syndicated participations in 15 private companies with an aggregate cost basis of approximately $187.4 million. The following table summarizes our total portfolio investment
activity during the six months ended September 30, 2011 and 2010:



|                                              |  |                                |         |   |      |   |         |  
|--------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                              |  | Six Months Ended September 30, |        
|                                              |  | 2011                           |         |   | 2010 |  
|Beginning investment portfolio, at fair value |  | $                              | 153,285 |   |      | $ | 206,858 |  
|New investments                               |  |                                | 58,346  |   |      |   | 95      |  
|Disbursements to existing investments         |  |                                | 9,032   |   |      |   | 4,384   |  
|Scheduled principal repayments                |  |                                | (570    | ) |      |   | (1,821  | )
|Unscheduled principal repayments              |  |                                | (4,990  | ) |      |   | (38,594 | )
|Amortization of premiums and discounts        |  |                                |        |   |      |   | (5      | )
|Proceeds from sales                           |  |                                | (7,527  | ) |      |   | (21,474 | )
|Net realized gain                             |  |                                | 5,196   |   |      |   | 16,976  |  
|Net unrealized appreciation                   |  |                                | 11,397  |   |      |   | (7,665  | )
|Reversal of net unrealized appreciation       |  |                                | (6,113  | ) |      |   | (17,424 | )
|Other cash activity, net                      |  |                                |        |   |      |   | (231    | )
|Other non-cash activity, net                  |  |                                |        |   |      |   | 515     |  
|                                              |  |                                |         |   |      |   |         |  
|Ending investment portfolio, at fair value    |  | $                              | 218,056 |   |      | $ | 141,614 |  
|                                              |  |                                |         |   |      |   |         |  

The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal
year, assuming no voluntary prepayments, at September 30, 2011.



|                                              |  |                                                             |  |        |         |  
|--------------------------------------------- |  | ----------------------------------------------------------- |  | ------ | ------- | -
|                                              |  |                                                             |  | Amount |        
|For the remaining six months ending March 31: |  | 2012                                                        |  | $      | 15,849  |  
|For the fiscal year ending March 31:          |  | 2013                                                        |  |        | 30,385  |  
|                                              |  | 2014                                                        |  |        | 37,331  |  
|                                              |  | 2015                                                        |  |        | 17,221  |  
|                                              |  | 2016                                                        |  |        | 26,775  |  
|                                              |  | 2017                                                        |  |        | 58,878  |  
|                                              |  | Thereafter                                                  |  |        |        |  
|                                              |  |                                                             |  |        |         |  
|                                              |  | Total contractual repayments                                |  | $      | 186,439 |  
|                                              |  | Investments in equity securities                            |  |        | 70,470  |  
|                                              |  | Adjustments to cost basis on debt securities                |  |        | (231    | )
|                                              |  |                                                             |  |        |         |  
|                                              |  | Total cost basis of investments held at September 30, 2011: |  | $      | 256,678 |  
|                                              |  |                                                             |  |        |         |  

In light of the liquidity resulting from our sale of our investments in A. Stucki and Chase and the recapitalization of
Cavert, the general stabilization of our portfolio valuations over the past year and the increased investing opportunities that we see in our target markets, as demonstrated by our investments in five new proprietary investments over the last twelve
months totaling $93.6 million, we are cautiously optimistic about our long-term investment prospects. As a result, we have shifted our investment activity from being focused primarily on retaining capital and building the value of our existing
portfolio companies to a strategy that includes making new conservative investments in businesses that we believe will weather the current economic conditions and that are likely to produce attractive long-term returns for our stockholders.
Increasing new investment activity over the long run will require accessing capital markets, which continues to be challenging in these unstable economic conditions, while ensuring that we can maintain our RIC status.

Financing Activities

Net cash provided
by financing activities for the six months ended September 30, 2011, was approximately $37.1 million, consisting primarily of net borrowings on the short-term loan and our Credit Facility in excess of repayments by approximately $43.5 million.
Net cash used in financing activities for the six months ended September 30, 2010 was approximately $83.9 million, which was primarily a result of net repayments on the short-term loan and our Credit Facility in excess of borrowings by
approximately $77.8 million.



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Distributions

To qualify as a RIC and, therefore, avoid corporate level tax on the income we distribute to our stockholders, we are required, under Subchapter M of the 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 cash distributions of $0.240 per common share during the six months ended September 30, 2010, and $0.285 per
common share during the six months ended September 30, 2011. In October 2011, our Board of Directors declared a monthly distribution of $0.050 per common share for each of October, November and December 2011. We declared these distributions
based on our estimates of net taxable income for the fiscal year.

For the six months ended September 30, 2011, please refer to
Section 19(a) Notices below for estimated tax characterization. For the fiscal year ended March 31, 2011, which includes the six months ended September 30, 2010, our distributions to stockholders of approximately
$10.6 million were less than our taxable income over the same period. At year-end, we elected to treat a portion of the first distribution paid after year-end as having been paid in the prior year, in accordance with Section 855(a) of the Code.
Additionally, the covenants in our Renewed Credit Facility restrict the amount of distributions that we can pay out to be no greater than our net investment income.

Section 19(a) Notices

Our Board of Directors estimates the source of the
distributions at the time of their declaration, as required by Section 19(a) of the 1940 Act. On a monthly basis, if required under Section 19(a), we post a Section 19(a) notice through the Depository Trust Companys
Legal Notice System and also send to our registered stockholders a written Section 19(a) notice along with the payment of distributions for any payment which includes a distribution estimated to be paid from any source other than
accumulative net investment income during the fiscal year. The estimates of the source of the distribution are interim estimates based on accounting principles generally accepted in the United States (GAAP) that are subject to revision,
and the exact character of the distributions for tax purposes cannot be determined until our books and records are finalized for the calendar year. Following the calendar year-end, after we have determined definitive information, if we have made
distributions of taxable income (or return of capital), we will deliver a Form 1099-DIV to our stockholders specifying such amount and the tax characterization of such amount. Therefore, these estimates are made solely to comply with the
requirements of Section 19(a) of the 1940 Act and should not be relied upon for tax reporting or any other purposes and could differ significantly from the actual character of distributions for tax purposes.

Equity

On July 21, 2009, we filed
a registration statement (the Registration Statement) with the SEC that was amended on October 2, 2009 and which the SEC declared effective on October 8, 2009. We filed post-effective amendments to the Registration Statement on
August 24, 2010, and November 22, 2010, which the SEC declared effective on December 23, 2010. We also filed post-effective amendments to the registration statement on June 17, 2011, and August 17, 2011, which the SEC
declared effective on September 9, 2011. This Registration Statement will permit us to issue, through one or more transactions, up to an aggregate of $300.0 million in securities, consisting of common stock, preferred stock, subscription
rights, debt securities and warrants to purchase common stock, including through a combined offering of these securities.

We anticipate
issuing equity securities to obtain additional capital in the future. However, we cannot determine the terms of any future equity issuances or whether we will be able to issue equity on terms favorable to us, or at all. Additionally, when our common
stock is trading below NAV per share, as it has consistently traded for the last two years, we will have regulatory constraints under the 1940 Act on our ability to obtain additional capital in this manner. On September 30, 2011, our stock
closed trading at $6.80, representing a 28.3% discount to our NAV of $9.48 per share. Generally, the 1940 Act provides that we may not issue stock for a price below NAV per share without first obtaining the approval of our stockholders and our
independent directors or through a rights offering.

Future Capital Resources

At our 2011 annual stockholders meeting, held on August 4, 2011, our stockholders approved a proposal that allows us to sell shares of our common stock at a price below our then current NAV per
share, subject to certain limitations (including, but not limited to, that the cumulative number of shares issued and sold pursuant to such authority does not exceed 25% of our then outstanding common stock immediately prior to each such sale),
should we choose to do so. This proposal is in effect until our next annual stockholders meeting in 2012, at which time we may ask our stockholders to vote in favor of this proposal for another period of one year.

Revolving Credit Facility

On
April 14, 2009, we entered into the Credit Facility, providing for a $50.0 million revolving line of credit arranged by BB&T as administrative agent. Key Equipment Finance Company Inc. also joined the Credit Facility as a committed
lender. In connection with our entry into the Credit Facility, we borrowed $43.8 million under the Credit Facility to repay in full all amounts outstanding under the prior credit facility.



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On April 13, 2010, we renewed the Credit Facility through Business Investment, by entering into a third
amended and restated credit agreement providing for a $50.0 million, two-year revolving line of credit, which may be expanded up to $125.0 million through the addition of other committed lenders to the facility. The Credit Facilitys maturity
date is April 13, 2012, and if it is not renewed or extended by then, all unpaid principal and interest will be due and payable on or before April 13, 2013. Advances under the Credit Facility generally bear interest at the 30-day LIBOR
(subject to a minimum rate of 2.0%), plus 4.5% per annum, with a commitment fee of 0.50% per annum on undrawn amounts when advances outstanding are above 50.0% of the commitment and 1.0% on undrawn amounts if the advances outstanding are
below 50.0% of the commitment. In connection with the Credit Facility renewal, we paid an upfront fee of 1.0%. As of September 30, 2011, we had borrowings of $21.0 million outstanding with approximately $26.3 million of availability under the
Credit Facility.

On October 26, 2011, we entered into a fourth amended and restated credit agreement through Business Investment to
increase the commitment amount of our revolving line of credit (the Renewed Credit Facility) to $60 million. The Renewed Credit Facility was arranged by BB&T as administrative agent, with Key Equipment Finance, Inc. also joining the
Renewed Credit Facility as a committed lender. Subject to certain terms and conditions, the Renewed Credit Facility may be expanded up to $175 million through the addition of other committed lenders to the facility. The Renewed Credit Facility
matures on October 25, 2014 (the Maturity Date), and, if not renewed or extended by the Maturity Date, all principal and interest will be due and payable on or before October 25, 2015 (one year after the Maturity Date).
Advances under the Renewed Credit Facility will generally bear interest at 30-day LIBOR plus 3.75% per annum, with an unused fee of 0.50% on undrawn amounts. There are two one-year extension options, to be agreed upon by all parties, which may
be exercised on or before October 26, 2012 and October 26, 2013, as applicable. We incurred fees of $0.7 million in connection with this amendment.

The Renewed Credit Facility contains covenants that require Business Investment to maintain its status as a separate legal entity; prohibit certain significant corporate transactions (such as mergers,
consolidations, liquidations or dissolutions) and restrict material changes to our credit and collection policies without lenders consent. The facility also limits payments as distributions to the aggregate net investment income for each of
the twelve month periods ending March 31, 2011, 2012, 2013 and 2014. We are also subject to certain limitations on the type of loan investments we can make, including restrictions on geographic concentrations, sector concentrations, loan size,
dividend payout, payment frequency and status, average life and lien property. The Renewed Credit Facility also requires us to comply with other financial and operational covenants, which obligate us to, among other things, maintain certain
financial ratios, including asset and interest coverage, a minimum net worth and a minimum number of obligors required in the borrowing base of the credit agreement. Additionally, we are subject to a performance guaranty that requires us to maintain
(i) a minimum net worth of $155.0 million plus 50% of all equity and subordinated debt raised after October 26, 2011, (ii) asset coverage with respect to senior securities representing indebtedness of at least
200%, in accordance with Section 18 of the 1940 Act and (iii) our status as a BDC under the 1940 Act and as a RIC under the Code. As of October 26, 2011, we were in compliance with all covenants.

During May 2009, we entered into a new interest rate cap agreement for a notional amount of $45.0 million that effectively limited the interest rate
on a portion of the borrowings under the Credit Facility. During the three months ended June 30, 2011, we recorded a realized loss of $39 upon the expiration of this agreement in May 2011.

In April 2010, we entered into a forward interest rate cap agreement, effective May 2011 and expiring in May 2012, for a notional amount of $45.0
million that effectively limits the interest rate on a portion of the borrowings under the line of credit pursuant to the terms of the Credit Facility. We incurred a premium fee of approximately $41 in conjunction with this agreement.

The administrative agent also requires that any interest or principal payments on pledged loans be remitted directly by the borrower into a lockbox
account, with The Bank of New York Mellon Trust Company, N.A. as custodian. BB&T is also the trustee of the account, generally remits the collected funds to us once a month. At October 31, 2011, the amount due from the custodian was
approximately $0.5 million.

The Adviser services the loans pledged under the Renewed Credit Facility. As a condition to this servicing
arrangement, we executed a performance guaranty whereby the Adviser guaranteed it would comply with all of its obligations under the Renewed Credit Facility. As of October 26, 2011, we were in compliance with the covenants under the performance
guaranty.

Our continued compliance with these covenants, however, depends on many factors, some of which are beyond our control. In
particular, depreciation in the valuation of our assets, which is subject to changing market conditions that are presently very volatile, affects our ability to comply with these covenants. Our entire portfolio was fair valued at 85.0% of cost as of
September 30, 2011. Given the unstable capital markets, net unrealized depreciation in our portfolio may return in future periods and threaten our ability to comply with the covenants under our Renewed Credit Facility. Accordingly, there are no
assurances that we will be able to continue to comply with these covenants. Failure to comply with these covenants would result in a default, which, if we are unable to obtain a waiver from the lenders, could accelerate our repayment obligations
under the Renewed Credit Facility and thereby have a material adverse impact on our liquidity, financial condition, results of operations and ability to pay distributions to our stockholders, as more fully described below.



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The Renewed Credit Facility matures on October 25, 2014, and, if the facility is not renewed or
extended by this date, all unpaid principal and interest will be due and payable on or before October 25, 2015. There can be no guarantee that we will be able to renew, extend or replace the Renewed Credit Facility on terms that are favorable
to us, or at all. Our ability to obtain replacement financing will be constrained by then current economic conditions affecting the credit markets. If we are not able to renew, extend or refinance the Renewed Credit Facility, this would likely have
a material adverse effect on our liquidity and ability to fund new investments or pay distributions to our stockholders. Our inability to pay distributions could result in our failure to qualify as a RIC. Consequently, any income or gains could
become taxable at corporate rates. If we are unable to secure replacement financing, we may be forced to sell certain assets on disadvantageous terms, which may result in realized losses, such as those recorded in connection with the Syndicated Loan
Sales, which resulted in a realized loss of approximately $34.6 million during the quarter ended June 30, 2009. Such realized losses could materially exceed the amount of any unrealized depreciation on these assets as of our most recent balance
sheet date, which would have a material adverse effect on our results of operations. In addition to selling assets, or as an alternative, we may issue equity in order to repay amounts outstanding under the Renewed Credit Facility. Based on the
recent trading prices of our stock, such an equity offering may have a substantial dilutive impact on our existing stockholders interest in our earnings and assets and voting interest in us.

Short-Term Note

For every quarter end
since June 30, 2009 (the measurement dates), we satisfied the 50% threshold, primarily through the purchase of short-term qualified securities, which was funded primarily through a short-term loan agreement. Subsequent to the
measurement dates, the short-term qualified securities matured and we repaid the short-term loan, at which time we again fell below the 50% threshold. Therefore, for quarter-end, on September 28, 2011, we purchased $70.0 million of T-Bills
through Jefferies. The T-Bills were purchased using $7.5 million in funds drawn on the Credit Facility and the proceeds from a $62.5 million short-term loan from Jefferies, with an effective annual interest rate of approximately 0.64%. On
October 6, 2011, when the T-Bills matured, we repaid the $62.5 million loan from Jefferies, and on October 11, 2011, we repaid the $7.5 million drawn on the Credit Facility for the transaction.

Contractual Obligations and Off-Balance Sheet Arrangements

We were not a party to any signed term sheets for potential investments as of September 30, 2011. However, we have certain lines of credit with our portfolio companies that have not been fully drawn.
Since these lines of credit have expiration dates and we expect many will never be fully drawn, the total line of credit commitment amounts do not necessarily represent future cash requirements. We estimate the fair value of these unused line of
credit commitments as of September 30, 2011 and March 31, 2011 to be minimal.

In addition to the lines of credit with our portfolio
companies, we have also extended certain guaranties on behalf of some our portfolio companies. As of September 30, 2011, we have not been required to make any payments on any of the guaranties and we consider the credit risks to be remote and
the fair value of the guaranties to be minimal.

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported consolidated amounts of assets and
liabilities, including 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 materially from those estimates. We have identified our
investment valuation process as our most critical accounting policy.

Investment Valuation

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

General Valuation Policy: We value our
investments in accordance with the requirements of the 1940 Act. As discussed more fully below, we value securities for which market quotations are readily available and reliable at their market value. We value all other securities and assets at
fair value, as determined in good faith by our Board of Directors.

ASC 820 defines fair value, establishes a framework for measuring fair
value and expands disclosures about assets and liabilities measured at fair value. ASC 820 provides a consistent definition of fair value that focuses on exit price in the principal, or most advantageous, market and prioritizes, within a measurement
of fair value, the use of market-based inputs over entity-specific inputs. ASC 820 also establishes the following three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of
the measurement date.



| |  |  | Level 1inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 2inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets and inputs
that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 2 inputs are in those markets for which there are few transactions, the prices are not current, little
public information exists or instances where prices vary substantially over time or among brokered market makers; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Level 3inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs are
those inputs that reflect our own assumptions that market participants would use to price the asset or liability based upon the best available information.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

See Note 3, Investments in the accompanying notes to our Condensed Consolidated Financial Statements included elsewhere in this report for additional information regarding fair
value measurements and our adoption of ASC 820.

We use generally accepted valuation techniques to value our portfolio unless we have specific
information about the value of an investment to determine otherwise. From time to time we may accept an appraisal of a business in which we hold securities. These appraisals are expensive and occur infrequently but provide a third-party valuation
opinion that may differ in results, techniques and scope used to value our investments. When these specific third-party appraisals are sought, we would use estimates of value delineated in such appraisals and our own assumptions, including estimated
remaining life, current market yield and interest rate spreads of similar securities, as of the measurement date, to value the investment we have in that business.

In determining the value of our investments, our Adviser has established an investment valuation policy (the Policy). The Policy has been approved by our Board of Directors, and each quarter
our Board of Directors reviews whether our Adviser has applied the Policy consistently and votes whether or not to accept the recommended valuation of our investment portfolio.

The Policy, which is summarized below, applies to the following categories of securities:



| |  |  | Publicly-traded securities;
| | - |  | ---------------------------



| |  |  | Securities for which a limited market exists; and
| | - |  | -------------------------------------------------



| |  |  | Securities for which no market exists.
| | - |  | --------------------------------------

Valuation Methods:

Publicly-traded securities: We determine the value of
publicly-traded securities based on the closing price for the security on the exchange or securities market on which it is listed and primarily traded on the valuation date. To the extent that we own restricted securities that are not freely
tradable, but for which a public market otherwise exists, we will use the market value of that security adjusted for any decrease in value resulting from the restrictive feature.

Securities for which a limited market exists:We value securities that are not traded on an established secondary securities market, but for which a limited market for the security exists, such as
certain participations in, or assignments of, syndicated loans, at the quoted bid price. In valuing these assets, we assess trading activity in an asset class, evaluate variances in prices and other market insights to determine if any available
quote prices are reliable. If we conclude that quotes based on active markets or trading activity may be relied upon, firm bid prices are requested; however, if a firm bid price is unavailable, we base the value of the security upon the indicative
bid price (IBP) offered by the respective originating syndication agents trading desk, or secondary desk, on or near the valuation date. To the extent that we use the IBP as a basis for valuing the security, our Adviser may take
further steps to consider additional information to validate that price in accordance with the Policy.

In the event these limited markets
become illiquid to a degree that market prices are no longer readily available, we will value our syndicated loans using alternative methods, such as estimated net present values of the future cash flows or discounted cash flows (DCF).
The use of a DCF methodology follows that prescribed by ASC 820, which provides guidance on the use of a reporting entitys own assumptions about future cash flows and risk-adjusted discount rates when relevant observable inputs, such as quotes
in active markets, are not available. When relevant observable market data does not exist, the alternative outlined in ASC 820 is the valuation of investments based on DCF. For the purposes of using DCF to provide fair value estimates, we consider
multiple inputs, such as a risk-adjusted discount rate that incorporates adjustments that market participants would make both for nonperformance and liquidity risks. As such, we developed a modified discount rate approach that incorporates risk
premiums including, among other things, increased probability of default, or higher loss given default, or increased liquidity risk. The DCF valuations applied to the syndicated loans provide an estimate of what we believe a market participant would
pay to purchase a syndicated loan in an active market, thereby establishing a fair value. We apply the DCF methodology in illiquid markets until quoted prices are available or are deemed reliable based on trading activity.

As of September 30, 2011, the Company believes that the indicative bid prices are reliable indicators of fair value. However, because of the private
nature of this marketplace (meaning actual transactions are not publicly reported), the Company believes that these valuation inputs are classified as Level 3 within the fair value hierarchy.

Securities for which no market exists: The valuation methodology for securities for which no market exists falls into three categories: (1) portfolio investments comprised solely of debt
securities; (2) portfolio investments in controlled companies comprised of a bundle of securities, which can include debt and equity securities and (3) portfolio investments in non-controlled companies comprised of a bundle of investments,
which can include debt and equity securities.



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|(1) | Portfolio investments comprised solely of debt securities: Debt securities that are not publicly traded on an established securities market, or for which a
limited market does not exist (Non-Public Debt Securities), and that are issued by portfolio companies in which we have no equity, or equity-like securities, are fair valued in accordance with the terms of the policy, which utilizes
opinions of value submitted to us by Standard & Poors Securities Evaluations, Inc (SPSE). We may also submit paid in kind (PIK) interest to SPSE for its evaluation when it is determined that PIK interest is
likely to be received.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In the case of Non-Public Debt Securities, we have engaged SPSE to submit opinions of
value for our debt securities that are issued by portfolio companies in which we own no equity, or equity-like securities. SPSEs opinions of value are based on the valuations prepared by our portfolio management team, as described below. We
request that SPSE also evaluate and assign values to success fees when we determine that there is a reasonable probability of receiving a success fee on a given loan. SPSE will only evaluate the debt portion of our investments for which we
specifically request evaluation and may decline to make requested evaluations for any reason, at its sole discretion. Upon completing our collection of data with respect to the investments (which may include the information described below under
Credit Information, the risk ratings of the loans described below under Loan Grading and Risk Rating and the factors described hereunder), this valuation data is forwarded to SPSE for review and analysis. SPSE
makes its independent assessment of the data that we have assembled and assesses its independent data to form an opinion as to what they consider to be the market values for the securities. With regard to its work, SPSE has issued the following
paragraph:

SPSE provides evaluated price opinions which are reflective of what SPSE believes the bid side of the market would
be for each loan after careful review and analysis of descriptive, market and credit information. Each price reflects SPSEs best judgment based upon careful examination of a variety of market factors. Because of fluctuation in the market and
in other factors beyond its control, SPSE cannot guarantee these evaluations. The evaluations reflect the market prices, or estimates thereof, on the date specified. The prices are based on comparable market prices for similar securities. Market
information has been obtained from reputable secondary market sources. Although these sources are considered reliable, SPSE cannot guarantee their accuracy.

SPSE opinions of the value of our debt securities that are issued by portfolio companies in which we do not own equity, or equity-like securities, are submitted to our Board of Directors along with our
Advisers supplemental assessment and recommendation regarding valuation of each of these investments. Our Adviser generally accepts the opinion of value given by SPSE; however, in certain limited circumstances, such as when our Adviser may
learn new information regarding an investment between the time of submission to SPSE and the date of our Board of Directors assessment, our Advisers conclusions as to value may differ from the opinion of value delivered by SPSE. Our
Board of Directors then reviews whether our Adviser has followed its established procedures for determinations of fair value and votes to accept or reject the recommended valuation of our investment portfolio. Our Adviser and our management
recommended, and our Board of Directors voted to accept, the opinions of value delivered by SPSE on the loans in our portfolio as denoted on the Schedule of Investments included in our accompanying Condensed Consolidated Financial Statements.

Because there is a delay between when we close an investment and when the investment can be evaluated by SPSE, new loans are
not valued immediately by SPSE; rather, management makes its own determination about the value of these investments in accordance with our valuation policy using the methods described herein.



|(2) | Portfolio investments in controlled companies comprised of a bundle of investments, which can include debt and equity securities: The fair value of these
investments is determined based on the total enterprise value (TEV) of the portfolio company, or issuer, utilizing a liquidity waterfall approach under ASC 820. For Non-Public Debt Securities and equity or equity-like securities (e.g.,
preferred equity, common equity or other equity-like securities) that are purchased together as part of a package, where we have control or could gain control through an option or warrant security, both the debt and equity securities of the
portfolio investment would exit in the mergers and acquisitions market as the principal market, generally through a sale or recapitalization of the portfolio company. In accordance with ASC 820, we apply the in-use premise of value, which assumes
the debt and equity securities are sold together. Under this liquidity waterfall approach, we first calculate the TEV of the issuer by incorporating some or all of the following factors:
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the issuers ability to make payments;
| | - |  | --------------------------------------



| |  |  | the earnings of the issuer;
| | - |  | ---------------------------



| |  |  | recent sales to third parties of similar securities;
| | - |  | ----------------------------------------------------



| |  |  | the comparison to publicly traded securities; and
| | - |  | -------------------------------------------------



| |  |  | DCF or other pertinent factors.
| | - |  | -------------------------------

In gathering the sales to third parties of similar securities, we may gather and analyze industry statistics and use outside experts. Once we have estimated the TEV of the issuer, we subtract the value of
all the debt securities of the issuer, which are valued at the contractual principal balance. Fair values of these debt securities are discounted for any shortfall of TEV over the total debt outstanding for the issuer. Once the values for all
outstanding senior securities (which include the debt securities) have been



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subtracted from the TEV of the issuer, the remaining amount, if any, is used to determine the value of the issuers equity or equity like securities. If, in our Advisers judgment, the
liquidity waterfall approach does not accurately reflect the value of the debt component, our Adviser may recommend that we use a valuation by SPSE, or if that is unavailable, a DCF valuation technique.



|(3) | Portfolio investments in non-controlled companies comprised of a bundle of investments, which can include debt and equity securities:We value Non-Public Debt
Securities that are purchased together with equity or equity-like securities from the same portfolio company, or issuer, for which we do not control or cannot gain control as of the measurement date, using a hypothetical secondary market as our
principal market. In accordance with ASC 820, we determine the fair value of these debt securities of non-control investments assuming the sale of an individual debt security using the in-exchange premise of value (as defined in ASC 820). As such,
we estimate the fair value of the debt component using estimates of value provided by SPSE and our own assumptions in the absence of observable market data, including synthetic credit ratings, estimated remaining life, current market yield and
interest rate spreads of similar securities as of the measurement date. For equity or equity-like securities of investments that we do not control or cannot gain control as of the measurement date, we estimate the fair value of the equity using the
in-exchange premise of value based on factors such as the overall value of the issuer, the relative fair value of other units of account, including debt, or other relative value approaches. Consideration also is given to capital structure and other
contractual obligations that may impact the fair value of the equity. Further, we may utilize comparable values of similar companies, recent investments and indices with similar structures and risk characteristics or our own assumptions in the
absence of other observable market data and may also employ DCF valuation techniques.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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. Furthermore, such 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. There is no single standard for
determining fair value in good faith, as fair value depends upon circumstances of each individual case. In general, fair value is the amount that we might reasonably expect to receive upon the current sale of the security in an arms-length
transaction in the securitys principal market.

Valuation Considerations:From time to time, depending on certain circumstances,
the Adviser may use the following valuation considerations, including, but not limited to:



| |  |  | the nature and realizable value of the collateral;
| | - |  | --------------------------------------------------



| |  |  | the portfolio companys earnings and cash flows and its ability to make payments on its obligations;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | the markets in which the portfolio company does business;
| | - |  | ---------------------------------------------------------



| |  |  | the comparison to publicly traded companies; and
| | - |  | ------------------------------------------------



| |  |  | DCF and other relevant factors.
| | - |  | -------------------------------

Because such valuations, particularly valuations of private securities and private companies, are not susceptible to precise determination, may fluctuate over short periods of time and may be based on
estimates, our determinations of fair value may differ from the values that might have actually resulted had a readily available market for these securities been available.

Credit Information: Our Adviser monitors a wide variety of key credit statistics that provide information regarding our portfolio companies to help us assess credit quality and portfolio
performance. We and our Adviser participate in the periodic board meetings of our portfolio companies in which we hold Control and Affiliate investments and also require them to provide annual audited and monthly unaudited financial statements.
Using these statements or comparable information and board discussions, our Adviser calculates and evaluates the credit statistics.

Loan
Grading and Risk Rating: As part of our valuation procedures above, we risk rate all of our investments in debt securities. For syndicated loans that have been rated by a Nationally Recognized Statistical Rating Organization (NRSRO),
we use the NRSROs risk rating for such security. For all other debt securities, we use a proprietary risk rating system. Our risk rating system uses a scale of 0 to 10, with 10 being the lowest probability of default. This system is used to
estimate the probability of default on debt securities and the probability of loss if there is a default. These types of systems are referred to as risk rating systems and are used by banks and rating agencies. The risk rating system covers both
qualitative and quantitative aspects of the business and the securities we hold. During the three months ended March 31, 2010, we modified our risk rating model to incorporate additional factors in our qualitative and quantitative analysis.
While the overall process did not change, we believe the additional factors enhance the quality of the risk ratings of our investments. No adjustments were made to prior periods as a result of this modification.

For the debt securities for which we do not use a third-party NRSRO risk rating, we seek to have our risk rating system mirror the risk rating systems of
major risk rating organizations, such as those provided by an NRSRO. While we seek to mirror the NRSRO systems, we cannot provide any assurance that our risk rating system will provide the same risk rating as an NRSRO for these securities. The
following chart is an estimate of the relationship of our risk rating system to the designations used by two NRSROs as they risk rate debt securities of major companies. Because our system rates debt securities of companies that are unrated by any
NRSRO, there can



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be no assurance that the correlation to the NRSRO set out below is accurate. We believe our risk rating would be significantly higher than a typical NRSRO risk rating because the risk rating of
the typical NRSRO is designed for larger businesses. However, our risk rating has been designed to risk rate the securities of smaller businesses that are not rated by a typical NRSRO. Therefore, when we use our risk rating on larger business
securities, the risk rating is higher than a typical NRSRO rating. The primary difference between our risk rating and the rating of a typical NRSRO is that our risk rating uses more quantitative determinants and includes qualitative determinants
that we believe are not used in the NRSRO rating. It is our understanding that most debt securities of medium-sized companies do not exceed the grade of BBB on an NRSRO scale, so there would be no debt securities in the middle market that would meet
the definition of AAA, AA or A. Therefore, our scale begins with the designation 10 as the best risk rating which may be equivalent to a BBB- or Baa3 from an NRSRO, however, no assurance can be given that a 10 on our scale is equal to a BBB- or Baa3
on an NRSRO scale.



|                 |  |             |  |              |  |                                                                                                                 
|---------------- |  | ----------- |  | ------------ |  | ----------------------------------------------------------------------------------------------------------------
|Companys System |  | First
NRSRO |  | Second
NRSRO |  | Gladstone Investments Description(a)                                                                           
|>10              |  | Baa2        |  | BBB          |  | Probability of Default (PD) during the next 10 years is 4% and the Expected Loss upon Default (EL) is 1% or
less
|10               |  | Baa3        |  | BBB-         |  | PD is 5% and the EL is 1% to 2%                                                                                 
|9                |  | Ba1         |  | BB+          |  | PD is 10% and the EL is 2% to 3%                                                                                
|8                |  | Ba2         |  | BB           |  | PD is 16% and the EL is 3% to 4%                                                                                
|7                |  | Ba3         |  | BB-          |  | PD is 17.8% and the EL is 4% to 5%                                                                              
|6                |  | B1          |  | B+           |  | PD is 22% and the EL is 5% to 6.5%                                                                              
|5                |  | B2          |  | B            |  | PD is 25% and the EL is 6.5% to 8%                                                                              
|4                |  | B3          |  | B-           |  | PD is 27% and the EL is 8% to 10%                                                                               
|3                |  | Caa1        |  | CCC+         |  | PD is 30% and the EL is 10% to 13.3%                                                                            
|2                |  | Caa2        |  | CCC          |  | PD is 35% and the EL is 13.3% to 16.7%                                                                          
|1                |  | Caa3        |  | CC           |  | PD is 65% and the EL is 16.7% to 20%                                                                            
|0                |  | N/A         |  | D            |  | PD is 85% or there is a payment default and the EL is greater than 20%                                          



|(a) | The default rates set forth are for a 10-year term debt security. If a debt security is less than 10 years, then the probability of default is adjusted
to a lower percentage for the shorter period, which may move the security higher on our risk rating scale
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The above scale
gives an indication of the probability of default and the magnitude of the loss if there is a default. Our policy is to stop accruing interest on an investment if we determine that interest is no longer collectible. As of September 30, 2011,
two control investments, CCE and ASH, were on non-accrual with an aggregate fair value of $1.6 million. At March 31, 2011, one Control investment, ASH, was on non-accrual with a fair value of zero. Additionally, we do not risk rate our equity
securities.

The following table lists the risk ratings for all proprietary loans in our portfolio as of September 30 and March 31,
2011, representing approximately 98.2% and 95.8%, respectively, of all loans in our portfolio at fair value at the end of each period:



|                 |  |                         |     |  |                     |  |     | 
|---------------- |  | ----------------------- | --- |  | ------------------- |  | --- | 
|Rating           |  | As of September 30,2011 |     |  | As of March 31,2011 | 
|Highest          |  |                         | 9.0 |  |                     |  | 9.0 | 
|Average          |  |                         | 5.8 |  |                     |  | 5.6 | 
|Weighted Average |  |                         | 5.9 |  |                     |  | 5.9 | 
|Lowest           |  |                         | 2.0 |  |                     |  | 3.0 | 

As of September 30, 2011, we did not have any syndicated loans that were not rated by an NRSRO. At March 31,
2011, the risk rating for our syndicated loan that was not rated by an NRSRO, Survey Sampling, was 7.0, representing approximately 1.2% of all loans in our portfolio at fair value at the end of the period. Survey Sampling was repaid at par in July
2011. For loans that are currently rated by an NRSRO, we risk rate such loans in accordance with the risk rating systems of major risk rating organizations, such as those provided by an NRSRO. As of both September 30 and March 31, 2011,
the weighted average risk ratings for all loans in our portfolio that were rated by an NRSRO were BB+/Ba2, representing approximately 1.8% and 3.0%, respectively, of all loans in our portfolio at fair value at the end of each period.

Tax Status

Federal Income Taxes

We intend to continue to qualify for treatment as a RIC under Subtitle A, Chapter 1 of Subchapter M of the Code. As a RIC, we are not
subject to federal income tax on the portion of our taxable income and gains distributed to stockholders. To qualify as a RIC, we must meet certain source-of-income, asset diversification and annual distribution requirements. For more information
regarding the requirements we must meet as a RIC, see Business Environment. Under the annual distribution requirements, we are required to distribute to stockholders at least 90% of our investment company taxable income, as defined
by the Code. Our policy is to pay out as distributions up to 100% of that amount.



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In an effort to avoid certain excise taxes imposed on RICs, we currently intend to distribute during each
calendar year, an amount at least equal to the sum of (1) 98% of our ordinary income for the calendar year, (2) 98% of our capital gains in excess of capital losses for the one-year period ending on October 31 of the calendar year and
(3) any ordinary income and net capital gains for preceding years that were not distributed during such years. However, we did pay an excise tax of $24 for the calendar year ended December 31, 2010. Under the RIC Modernization Act (the
RIC Act), for excise tax years beginning January 1, 2011, the minimum distribution requirement for capital gains income has been raised to 98.2%. Additionally, under the RIC Act, the Company will be permitted to carry forward
capital losses incurred in taxable years beginning after March 31, 2011, for an unlimited period. However, any losses incurred during those future taxable years will be required to be utilized prior to the losses incurred in pre-enactment
taxable years, which carry an expiration date. As a result of this ordering rule, pre-enactment capital loss carryforwards may be more likely to expire unused. Additionally, post-enactment capital loss carryforwards will retain their character as
either short-term or long-term capital losses rather than being considered all short-term as permitted under previous regulation.

We sought
and received approval for a change in accounting method from the Internal Revenue Service (IRS) related to our tax treatment for success fees. In the ruling, executed by our consent on January 3, 2011, we, in effect, will continue
to account for the recognition of income from the success fees upon receipt, or when the amount becomes fixed. However, starting January 1, 2011, the tax characterization of the success fee amount was and will be treated as ordinary income.
Prior to January 1, 2011, we had treated the success fee amount as a capital gain for tax characterization purposes. The approved change in accounting method does not require us to retroactively change the capital gains treatment of the success
fees received prior to January 1, 2011.

Revenue Recognition

Investment Income Recognition

Interest income, adjusted for amortization of premiums and
acquisition costs and for the accretion of discounts, is recorded on the accrual basis to the extent that such amounts are expected to be collected. Generally, when a loan becomes 90 days or more past due, or if our qualitative assessment indicates
that the debtor is unable to service its debt or other obligations, we will place the loan on non-accrual status and cease recognizing interest income on that loan until the borrower has demonstrated the ability and intent to pay contractual amounts
due. However, we remain contractually entitled to this interest. Interest payments received on non-accrual loans may be recognized as income or applied to the cost basis depending upon managements judgment. Non-accrual loans are restored to
accrual status when past due principal and interest are paid and, in managements judgment, are likely to remain current, or due to a restructuring such that the interest income is deemed to be collectible. At September 30, 2011, two
Control investments, ASH and CCE, were on non-accrual with an aggregate fair value of $1.6 million. At March 31, 2011, one Control investment, ASH, was on non-accrual with a fair value of $0.

During the three months ended September 30, 2011, we had one loan in our portfolio that contained a PIK provision. The PIK interest, computed at the
contractual rate specified in the loan agreement, is added to the principal balance of the loan and recorded as income. To maintain our status as a RIC, this non-cash source of income must be paid out to stockholders in the form of distributions,
even though we have not yet collected the cash. During the three and six months ended September 30, 2011, we recorded PIK income of $1 and $6, respectively. No PIK income was recorded during the six months ended September 30, 2010. The
sole loan which had a PIK provision paid off, at par, during the quarter ended September 30, 2011, and we have no other loans which contain a PIK provision as of September 30, 2011.

Success fees are recorded upon receipt. Success fees are contractually due upon a change of control in a portfolio company and are recorded in Other income in the accompanying Condensed Consolidated
Statements of Operations. During the three and six months ended September, 30, 2011, we recorded success fees of $0.3 million and $0.4 million, respectively, representing prepayments received from Mathey and Cavert. During the three and six
months ended September 30, 2010, we recorded success fees of $0.8 million and $2.7 million, respectively, due to a prepayment received from Cavert and the income recognized as a result of the exit and payoff of A. Stucki.

Dividend income on preferred equity securities is accrued to the extent that such amounts are expected to be collected and if we have the option to
collect such amounts in cash, and it is recorded in Other income in the accompanying Condensed Consolidated Statements of Operations. We did not record any dividend income during the quarter ended September 30, 2011; however, during the
six months ended September 30, 2011, $0.7 million of dividends on accrued preferred shares was recorded and collected in connection with the recapitalization of Cavert. During the six months ended September 30, 2010, we recorded and
collected $0.3 million of dividends on preferred shares of A. Stucki and accrued and received a special dividend of property valued at $0.5 million in connection with the A. Stucki sale.



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Recent Accounting Pronouncements

See Note 2, Summary of Significant Accounting Policies in the accompanying notes to our Condensed Consolidated Financial Statements included elsewhere in this report for a description
and our application of recent accounting pronouncements. Our adoption of these recent accounting pronouncements did not have a material effect on our financial position and results of operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market
changes that affect market sensitive instruments. The primary risk we believe we are exposed to is interest rate risk. While we expect that ultimately approximately 20% of the loans in our portfolio will be made at fixed rates, with approximately
80% made at variable rates or variables rates with a floor mechanism, all of our variable-rate loans have rates associated with either the current LIBOR or Prime Rate. At September 30, 2011, our portfolio, at cost, consisted of the following
breakdown in relation to all outstanding debt investments:



| |       |   |  |                                           
| | ----- | - |  | ------------------------------------------
| | 70.5  | % |  | Variable rates with a floor and no ceiling
| | 29.5  |   |  | Fixed rates                               
| |       |   |  |                                           
| | 100.0 | % |  | Total                                     
| |       |   |  |                                           

There have been no material changes in the quantitative and qualitative market risk disclosures for the three months
ended September 30, 2011, from those disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2011, as filed with the SEC on May 23, 2011.

In May 2009, we entered into an interest rate cap agreement with BB&T that effectively limited the interest rate on a portion of the borrowings under the line of credit pursuant to the terms of
the Credit Facility. The interest rate cap had a notional amount of $45.0 million at a cost of approximately $39. The interest rate cap agreement expired in May 2011, and a realized loss of $39 was recorded during the three months ended
June 30, 2011.

In April 2010, we entered into a forward interest rate cap agreement, effective May 2011 and expiring in May 2012,
for a notional amount of $45.0 million that effectively limits the interest rate on a portion of the borrowings under the line of credit pursuant to the terms of the Credit Facility. We incurred a premium fee of approximately $41 in conjunction with
this agreement.

ITEM 4. CONTROLS AND PROCEDURES.

a) Evaluation of Disclosure Controls and Procedures

As of September 30, 2011 (the end of the period covered by this report), we, including our chief executive officer and chief financial officer, evaluated the effectiveness and design and operation of
our disclosure controls and procedures. Based on that evaluation, our management, including the chief executive officer and chief financial officer, concluded that our disclosure controls and procedures were effective at a reasonable assurance level
in timely alerting management, including the chief executive officer and chief financial officer, of material information about us required to be included in periodic SEC filings. However, in evaluation of the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.

b) Changes in Internal Control over Financial Reporting

There were no changes in internal controls for the three months ended September 30, 2011 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.



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PART IIOTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

Neither we, nor any of our subsidiaries, are currently subject to any material legal proceeding, nor, to our knowledge, is any material legal proceeding threatened against us or any of our subsidiaries.

ITEM 1A. RISK FACTORS.

Our business is subject to certain risks and events that, if they occur, could adversely affect our financial condition and results of operations and the trading price of our common stock. For a
discussion of these risks, please refer to the Risk Factors section in our Post-Effective Amendment No. 4 to the Registration Statement on Form N-2 (No. 333-160720) as filed with the Securities and Exchange Commission on
August 17, 2011 (the Prospectus). In connection with our preparation of this quarterly report, management has reviewed and considered these risk factors and has determined that the following risk factor should be read in connection
with the existing risk factors disclosed in our Prospectus.

The recent downgrade of the United States (the U.S.) credit rating
and the economic crisis in Europe could negatively impact our liquidity, financial condition and earnings.

Recent U.S. debt ceiling and
budget deficit concerns, together with signs of deteriorating sovereign debt conditions in Europe, have increased the possibility of additional credit-rating downgrades and economic slowdowns. Although U.S. lawmakers passed legislation to raise the
federal debt ceiling, Standard & Poors Ratings Services lowered its long-term sovereign credit rating on the U.S. from AAA to AA+ in August 2011. The impact of this or any further downgrades to the U.S.
governments sovereign credit rating, or its perceived creditworthiness, and the impact of the current crisis in Europe with respect to the ability of certain European Union countries to continue to service their sovereign debt obligations is
inherently unpredictable and could adversely affect the U.S. and global financial markets and economic conditions. There can be no assurance that governmental or other measures to aid economic recovery will be effective. These developments, and the
governments credit concerns in general, could cause interest rates and borrowing costs to rise, which may negatively impact our ability to access the debt markets on favorable terms. In addition, the decreased credit rating could create
broader financial turmoil and uncertainty, which may weigh heavily on our stock price. Continued adverse economic conditions could have a material adverse effect on our business, financial condition and results of operations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

Not applicable.

ITEM 4. REMOVED AND RESERVED.

ITEM 5. OTHER INFORMATION.

Not applicable.

ITEM 6. EXHIBITS

See the exhibit index.



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SIGNATURE

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



GLADSTONE INVESTMENT CORPORATIONBy:

/s/ David WatsonDavid WatsonChief Financial Officer


Date: November 2, 2011



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EXHIBIT INDEX



|        |  |                                                                                                                                                                                                                  
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  | Description                                                                                                                                                                                                      
|        | 
|3.1     |  | Amended and Restated Certificate 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. 333-123699), filed May 13, 2005.
|        | 
|3.2     |  | Amended and Restated Bylaws, incorporated by reference to Exhibit b.2 to Pre-Effective Amendment No. 3 to the Registration Statement on Form N-2 (File
No. 333-123699), filed June 21, 2005.                     
|        | 
|3.3     |  | First Amendment to Amended and Restated Bylaws, incorporated by reference to Exhibit 99.1 to the Companys Current Report on Form 8-K (File No. 814-00704), filed
on July 10, 2007.                              
|        | 
|4.1     |  | Specimen Stock Certificate, incorporated by reference to Exhibit 99.1 to Pre-Effective Amendment No. 3 to the Registration Statement on Form N-2 (File
No. 333-123699), filed June 21, 2005.                     
|        | 
|11      |  | Computation of Per Share Earnings (included in the notes to the unaudited Condensed Consolidated Financial Statements contained in this report).                                                                 
|        | 
|31.1    |  | Certification of Chief Executive Officer pursuant to section 302 of The Sarbanes-Oxley Act of 2002.                                                                                                              
|        | 
|31.2    |  | Certification of Chief Financial Officer pursuant to section 302 of The Sarbanes-Oxley Act of 2002.                                                                                                              
|        | 
|32.1    |  | Certification of Chief Executive Officer pursuant to section 906 of The Sarbanes-Oxley Act of 2002.                                                                                                              
|        | 
|32.2    |  | Certification of Chief Financial Officer pursuant to section 906 of The Sarbanes-Oxley Act of 2002.                                                                                                              

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



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