**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**x**      **QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**FOR THE QUARTER ENDED SEPTEMBER 30,2009**

** **

**o**         **TRANSITION REPORT PURSUANT TO SECTION 13 OR15(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 theregistrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes xNo o.

 

Indicate by check mark whether theregistrant has submitted electronically and posted on its corporate Web site,if any, every Interactive Data File required to be submitted and postedpursuant to Rule 405 of Regulation S-T during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files).  Yes oNo o

 

Indicate by check mark whether theregistrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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

 

Indicate by check mark whether theregistrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct).  Yes oNo x .

 

Indicate the number of shares outstanding of each of the issuer’s classesof common stock, as of the latest practicable date. The number of shares of theissuer’s Common Stock, $0.001 par value, outstanding as of November 2,2009 was 22,080,133.

 

 

 

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**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,  2009 and March 31, 2009   | 3      |
|          | Condensed  Consolidated Schedules of Investments as of September 30, 2009 and  March 31, 2009               | 4      |
|          | Condensed Consolidated Statements of Operations for  the three and six months ended September 30, 2009 and 2008  | 10     |
|          | Condensed Consolidated Statements of Changes in Net  Assets for the six months ended September 30, 2009 and 2008 | 11     |
|          | Condensed Consolidated Statements of Cash Flows for  the six months ended September 30, 2009 and 2008            | 12     |
|          | Financial  Highlights for the three and six months ended September 30, 2009 and  2008                            | 13     |
|          | Notes to Condensed Consolidated Financial Statements                                                                  | 14     |
|          |                                                                                                                  |   |
| Item 2.       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                           | 26     |
|          | Overview                                                                                                              | 26     |
|          | Results  of Operations                                                                                                | 29     |
|          | Liquidity and Capital Resources                                                                                       | 36     |
|          |                                                                                                                  |   |
| Item 3.       | Quantitative  and Qualitative Disclosures About Market Risk                                                           | 46     |
|          |                                                                                                                  |   |
| Item 4.       | Controls and  Procedures                                                                                              | 47     |
|          |                                                                                                                  |   |
| PART II. | OTHER INFORMATION:                                                                                                    |   |
|          |                                                                                                                  |   |
| Item 1.       | Legal Proceedings                                                                                                     | 48     |
|          |                                                                                                                  |   |
| Item 1A.      | Risk Factors                                                                                                          | 48     |
|          |                                                                                                                  |   |
| Item 2.       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                          | 48     |
|          |                                                                                                                  |   |
| Item 3.       | Defaults Upon  Senior Securities                                                                                      | 48     |
|          |                                                                                                                  |   |
| Item 4.       | Submission of  Matters to a Vote of Security Holders                                                                  | 48     |
|          |                                                                                                                  |   |
| Item 5.       | Other Information                                                                                                     | 49     |
|          |                                                                                                                  |   |
| Item 6.       | Exhibits                                                                                                              | 49     |
|          |                                                                                                                  |   |
| SIGNATURES    | 50                                                                                                                    |

 

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**GLADSTONE INVESTMENT CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OFASSETS AND LIABILITIES**

**(DOLLAR AMOUNTS IN THOUSANDS, EXCEPTPER SHARE AMOUNTS)**

**(UNAUDITED)**

** **
| ** **                                                                                                                                                   | ** ** | **September 30,** | ** ** | **March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|--------------------|------------|
| ** **                                                                                                                                                   | ** ** | **2009**               | ** ** | **2009**           | ** ** |
| **ASSETS**                                                                                                                                                   | ** ** | ** **             | ** ** | ** **         | ** ** |
| Non-Control/Non-Affiliate investments (Cost 9/30/09:  $29,886; Cost 3/31/09: $134,836)                                                                       |       | $                      | 25,004     |               | $          | 94,740 |   |
| Control investments (Cost 9/30/09: $142,698; Cost  3/31/09: $150,081)                                                                                        |       | 132,399                |       | 166,163            |       |
| Affiliate investments (Cost 9/30/09: $64,019; Cost  3/31/09: $64,028)                                                                                        |       | 46,900                 |       | 53,027             |       |
| Total investments at fair value (Cost 9/30/09:  $236,603; Cost 3/31/09: $348,945)                                                                            |       | 204,303                |       | 313,930            |       |
| Cash and cash equivalents                                                                                                                                    |       | 86,311                 |       | 7,236              |       |
| Interest receivable                                                                                                                                          |       | 1,212                  |       | 1,500              |       |
| Due from Custodian                                                                                                                                           |       | 932                    |       | 2,706              |       |
| Deferred financing fees                                                                                                                                      |       | 963                    |       | 1,167              |       |
| Prepaid assets                                                                                                                                               |       | 445                    |       | 172                |       |
| Other assets                                                                                                                                                 |       | 184                    |       | 132                |       |
| **TOTAL ASSETS**                                                                                                                                             |       | $                      | 294,350    |               | $          | 326,843 |   |
|                                                                                                                                                         |       |                   |       |               |       |
| **LIABILITIES**                                                                                                                                              | ** ** | ** **             | ** ** | ** **         | ** ** |
| Accounts payable and accrued expenses                                                                                                                        |       | $                      | 460        |               | $          | 1,283 |   |
| Fee due to Administrator (Refer to Note 4)                                                                                                                   |       | 198                    |       | 179                |       |
| Fee due to Adviser (Refer to Note 4)                                                                                                                         |       | 221                    |       | 187                |       |
| Short-term loan                                                                                                                                              |       | 75,000                 |       | —             |       |
| Borrowings under line of credit (Cost 9/30/09: $36,100;  Cost 3/31/09: $110,265)                                                                             |       | 36,278                 |       | 110,265            |       |
| Other liabilities                                                                                                                                            |       | 148                    |       | 127                |       |
| **TOTAL LIABILITIES**                                                                                                                                        |       | 112,305                |       | 112,041            |       |
| **NET ASSETS**                                                                                                                                               |       | $                      | 182,045    |               | $          | 214,802 |   |
|                                                                                                                                                         |       |                   |       |               |       |
| **ANALYSIS OF NET ASSETS:**                                                                                                                                  | ** ** | ** **             | ** ** | ** **         | ** ** |
| Common stock, $0.001 par value, 100,000,000 shares  authorized, 22,080,133 shares issued and outstanding at September 30,  2009 and March 31, 2009 |       | $                      | 22         |               | $          | 22 |   |
| Capital in excess of par value                                                                                                                               |       | 264,551                |       | 257,361            |       |
| Net unrealized depreciation of investment portfolio                                                                                                          |       | (32,301                | )          | (35,015            | )          |
| Net unrealized depreciation of derivative                                                                                                                    |       | (27                    | )          | (53                | )          |
| Net unrealized appreciation of borrowings under line  of credit                                                                                              |       | (178                   | )          | —             |       |
| Accumulated net investment loss                                                                                                                              |       | (50,022                | )          | (7,513             | )          |
| **TOTAL NET ASSETS**                                                                                                                                         |       | $                      | 182,045    |               | $          | 214,802 |   |
| **NET ASSETS PER SHARE**                                                                                                                                     |       | $                      | 8.24       |               | $          | 9.73 |   |

 

*THEACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS*

 

3

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**GLADSTONE INVESTMENT CORPORATION**

**CONDENSED CONSOLIDATED SCHEDULES OFINVESTMENTS**

**AS OF SEPTEMBER 30, 2009**

**(DOLLAR AMOUNTS IN THOUSANDS)**

**(UNAUDITED)**

** **
| **Company (1)**                                  | ** **   | **Industry**                                                           | ** **   | **Investment (2)**                                               | ** **   | **Cost**     | ** **   | **Fair Value** | ** **   |
|--------------------------------------------------|--------------|------------------------------------------------------------------------|--------------|------------------------------------------------------------------|--------------|--------------|--------------|----------------|--------------|
|                                             |         |                                                                   |         |                                                             |         |         |         |           |         |
| **NON-CONTROL/NON-AFFILIATE  INVESTMENTS:**      | ** **   | ** **                                                             | ** **   | ** **                                                       | ** **   | ** **   | ** **   |
| ***Senior Syndicated  Loans:***                  | *** *** | *** ***                                                           | *** *** | *** ***                                                     | *** *** | *** *** | *** *** | *** ***   | *** *** |
| HMTBP Acquisition II Corp.                       |         | Service — aboveground storage tanks                               |         | Senior Term Debt (2.6%, Due 5/2014) (7), (8)                     |         | $            | 3,819        |           | $            | 3,064 |   |
| Interstate Fibernet, Inc.                   |         | Service — provider of voice and data  telecommunications services |         | Senior Term Debt (4.3%, Due 7/2013) (7), (9)                     |         | 9,758        |         | 7,929          |         |
| Survey Sampling, LLC                             |         | Service — telecommunications-based sampling                       |         | Senior Term Debt (9.5%, Due 5/2011) (3)                          |         | 2,409        |         | 958            |         |
| *Subtotal - Syndicated Loans*                    |         |                                                                   |         |                                                             |         | $            | 15,986       |           | $            | 11,951 |   |
|                                             |         |                                                                   |         |                                                             |         |         |         |           |         |
| ***Non-syndicated  Loans:***                     | *** *** | *** ***                                                           | *** *** | *** ***                                                     | *** *** | *** *** | *** *** | *** ***   | *** *** |
| American Greetings Corporation                   |         | Manufacturing and design — greeting cards                         |         | Senior Notes (7.4%, Due 6/2016) (3)                              |         | $            | 3,043        |           | $            | 2,588 |   |
|                                             |         |                                                                   |         |                                                             |         |         |         |           |         |
| B-Dry, LLC                                       |         | Service — basement waterproofer                                   |         | Senior Term Debt (13.0%, Due 5/2014) (5)                         |         | 6,647        |         | 6,589          |         |
|                                             |         |                                                                   |         | Senior Term Debt (13.0%, Due 5/2014) (5)                         |         | 3,910        |         | 3,876          |         |
|                                             |         |                                                                   |         | Common Stock Warrants (4)                                        |         | 300          |         | —         |         |
|                                             |         |                                                                   |         |                                                             |         | 10,857       |         | 10,465         |         |
|                                             |         |                                                                   |         |                                                             |         |         |         |           |         |
| **Total  Non-Control/Non-Affiliate Investments** | ** **   | ** **                                                             | ** **   | **$**                                                            | **29,886**   | ** **   | **$**        | **25,004**     | ** **   |
| ** **                                       | ** **   | ** **                                                             | ** **   | ** **                                                       | ** **   | ** **   | ** **   | ** **     | ** **   |
| **CONTROL  INVESTMENTS:**                        | ** **   | ** **                                                             | ** **   | ** **                                                       | ** **   | ** **   | ** **   | ** **     | ** **   |
| A. Stucki Holding Corp.                          |         | Manufacturing — railroad freight car products                     |         | Senior Term Debt (4.8%, Due 3/2012)                              |         | $            | 9,101        |           | $            | 9,101 |   |
|                                             |         |                                                                   |         | Senior Term Debt (7.0%, Due 3/2012) (6)                          |         | 9,900        |         | 9,900          |         |
|                                             |         |                                                                   |         | Senior Subordinated Term Debt (13.0%, Due 3/2014)                |         | 8,586        |         | 8,586          |         |
|                                             |         |                                                                   |         | Preferred Stock (4)                                              |         | 4,387        |         | 5,333          |         |
|                                             |         |                                                                   |         | Common Stock (4)                                                 |         | 130          |         | 3,511          |         |
|                                             |         |                                                                   |         |                                                             |         | 32,104       |         | 36,431         |         |
|                                             |         |                                                                   |         |                                                             |         |         |         |           |         |
| Acme  Cryogenics, Inc.                      |         | Manufacturing —  manifolds and pipes for industrial gasses        |         | Senior Subordinated Term Debt (11.5%, Due 3/2012)                |         | 14,500       |         | 14,500         |         |
|                                             |         |                                                                   |         | Preferred Stock (4)                                              |         | 6,984        |         | 3,828          |         |
|                                             |         |                                                                   |         | Common Stock (4)                                                 |         | 1,045        |         | —         |         |
|                                             |         |                                                                   |         | Common Stock Warrants (4)                                        |         | 24           |         | —         |         |
|                                             |         |                                                                   |         |                                                             |         | 22,553       |         | 18,328         |         |
|                                             |         |                                                                   |         |                                                             |         |         |         |           |         |
| ASH Holdings Corp.                               |         | Retail and Service —  school buses and parts                      |         | Revolver, $1,500 available (non-accrual, Due 3/2010)  (5)        |         | 500          |         | 150            |         |
|                                             |         |                                                                   |         | Senior Subordinated Term Debt (non-accrual, Due  1/2012) (5)     |         | 5,937        |         | 1,484          |         |
|                                             |         |                                                                   |         | Preferred Stock (4)                                              |         | 2,500        |         | —         |         |
|                                             |         |                                                                   |         | Common Stock Warrants (4)                                        |         | 4            |         | —         |         |
|                                             |         |                                                                   |         |                                                             |         | 8,941        |         | 1,634          |         |
|                                             |         |                                                                   |         |                                                             |         |         |         |           |         |
| Cavert II Holdings Corp.                         |         | Manufacturing — bailing  wire                                     |         | Senior Term Debt (8.3%, Due 10/2012)                             |         | 2,875        |         | 2,875          |         |
|                                             |         |                                                                   |         | Senior Term Debt (10.0%, Due 10/2012) (6)                        |         | 2,700        |         | 2,700          |         |
|                                             |         |                                                                   |         | Senior Subordinated Term Debt (13.0%, Due 10/2014)               |         | 4,671        |         | 4,671          |         |
|                                             |         |                                                                   |         | Preferred Stock (4)                                              |         | 4,110        |         | 4,769          |         |
|                                             |         |                                                                   |         | Common Stock (4)                                                 |         | 69           |         | 1,334          |         |
|                                             |         |                                                                   |         |                                                             |         | 14,425       |         | 16,349         |         |
|                                             |         |                                                                   |         |                                                             |         |         |         |           |         |
| Chase II Holdings Corp.                          |         | Manufacturing — traffic  doors                                    |         | Revolving Credit Facility, $0 available (4.3%, Due  7/2010) (10) |         | 3,500        |         | 3,500          |         |
|                                             |         |                                                                   |         | Senior Term Debt (8.8%, Due 3/2011)                              |         | 8,250        |         | 8,250          |         |
|                                             |         |                                                                   |         | Senior Term Debt (12.0%, Due 3/2011) (6)                         |         | 7,600        |         | 7,600          |         |
|                                             |         |                                                                   |         | Senior Subordinated Term Debt (13.0%, Due 3/2013)                |         | 6,168        |         | 6,168          |         |
|                                             |         |                                                                   |         | Preferred Stock (4)                                              |         | 6,961        |         | 9,765          |         |
|                                             |         |                                                                   |         | Common Stock (4)                                                 |         | 61           |         | 670            |         |
|                                             |         |                                                                   |         |                                                             |         | 32,540       |         | 35,953         |         |

 

4

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**GLADSTONE INVESTMENT CORPORATION**

**CONDENSED CONSOLIDATED SCHEDULES OFINVESTMENTS (Continued)**

**AS OF SEPTEMBER 30, 2009**

**(DOLLAR AMOUNTS IN THOUSANDS)**

**(UNAUDITED)**

 
| **Company (1)**                         | ** ** | **Industry**                                                     | ** ** | **Investment (2)**                                                   | ** ** | **Cost**   | ** **  | **Fair Value** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|------------|-------------|----------------|------------|
|                                    |       |                                                             |       |                                                                 |       |       |        |           |       |
| **CONTROL  INVESTMENTS *(Continued)*:** | ** ** | ** **                                                       | ** ** | ** **                                                           | ** ** | ** ** | ** **  |
| Country Club Enterprises, LLC           |       | Service — golf cart distribution                            |       | Subordinated Term Debt (14.0%, Due 11/2014) (5)                      |       | $          | 7,000       |           | $          | 6,842 |   |
|                                    |       |                                                             |       | Preferred Stock (4)                                                  |       | 3,725      |        | —         |       |
|                                    |       |                                                             |       |                                                                 |       | 10,725     |        | 6,842          |       |
|                                    |       |                                                             |       |                                                                 |       |       |        |           |       |
| Galaxy Tool Holding Corp.               |       | Manufacturing — aerospace and plastics                      |       | Senior Subordinated Term Debt (13.5%, Due 8/2013) (5)                |       | 17,250     |        | 16,862         |       |
|                                    |       |                                                             |       | Preferred Stock (4)                                                  |       | 4,112      |        | —         |       |
|                                    |       |                                                             |       | Common Stock (4)                                                     |       | 48         |        | —         |       |
|                                    |       |                                                             |       |                                                                 |       | 21,410     |        | 16,862         |       |
|                                    |       |                                                             |       |                                                                 |       |       |        |           |       |
| **Total Control Investments**           | ** ** | ** **                                                       | ** ** | ** **                                                           | ** ** | **$**      | **142,698** | ** **     | **$**      | **132,399** | ** ** |
|                                    |       |                                                             |       |                                                                 |       |       |        |           |       |
| **AFFILIATE  INVESTMENTS:**             |       |                                                             |       |                                                                 |       |       |        |           |       |
| Danco Acquisition Corp.                 |       | Manufacturing — machining and sheet metal work              |       | Revolving Credit Facility, $2,100 available (9.3%,  Due 10/2010) (5) |       | $          | 900         |           | $          | 878 |   |
|                                    |       |                                                             |       | Senior Term Debt (9.3%, Due 10/2012) (5)                             |       | 4,312      |        | 4,215          |       |
|                                    |       |                                                             |       | Senior Term Debt (11.5%, Due 4/2013) (5)                             |       | 9,067      |        | 8,727          |       |
|                                    |       |                                                             |       | Preferred Stock (4)                                                  |       | 2,500      |        | —         |       |
|                                    |       |                                                             |       | Common Stock Warrants (4)                                            |       | 2          |        | —         |       |
|                                    |       |                                                             |       |                                                                 |       | 16,781     |        | 13,820         |       |
|                                    |       |                                                             |       |                                                                 |       |       |        |           |       |
| Mathey Investments, Inc.           |       | Manufacturing — pipe-cutting and pipe-fitting  equipment    |       | Revolving Credit Facility, $250 available (10.0%, Due  3/2011) (5)   |       | 750        |        | 747            |       |
|                                    |       |                                                             |       | Senior Term Debt (10.0%, Due 3/2013) (5)                             |       | 2,375      |        | 2,366          |       |
|                                    |       |                                                             |       | Senior Term Debt (13.5%, Due 3/2014) (5), (6)                        |       | 7,227      |        | 7,137          |       |
|                                    |       |                                                             |       | Common Stock (4)                                                     |       | 500        |        | —         |       |
|                                    |       |                                                             |       | Common Stock Warrants (4)                                            |       | 277        |        | —         |       |
|                                    |       |                                                             |       |                                                                 |       | 11,129     |        | 10,250         |       |
|                                    |       |                                                             |       |                                                                 |       |       |        |           |       |
| Noble Logistics, Inc.              |       | Service — aftermarket auto parts delivery                   |       | Revolving Credit Facility, $0 available (4.3%, Due  12/2009) (5)     |       | 2,000      |        | 1,300          |       |
|                                    |       |                                                             |       | Senior Term Debt (9.3%, Due 12/2011) (5)                             |       | 6,227      |        | 4,048          |       |
|                                    |       |                                                             |       | Senior Term Debt (10.5%, Due 12/2011) (5) (6)                   |       | 7,300      |        | 4,745          |       |
|                                    |       |                                                             |       | Preferred Stock (4)                                                  |       | 1,750      |        | —         |       |
|                                    |       |                                                             |       | Common Stock (4)                                                     |       | 1,682      |        | —         |       |
|                                    |       |                                                             |       |                                                                 |       | 18,959     |        | 10,093         |       |
|                                    |       |                                                             |       |                                                                 |       |       |        |           |       |
| Quench Holdings Corp.                   |       | Service — sales, installation and service of water  coolers |       | Senior Subordinated Term Debt (10.0%, Due 8/2013) (5)                |       | 8,000      |        | 6,240          |       |
|                                    |       |                                                             |       | Preferred Stock (4)                                                  |       | 2,950      |        | 1,378          |       |
|                                    |       |                                                             |       | Common Stock (4)                                                     |       | 447        |        | —         |       |
|                                    |       |                                                             |       |                                                                 |       | 11,397     |        | 7,618          |       |
|                                    |       |                                                             |       |                                                                 |       |       |        |           |       |
| Tread Corp.                             |       | Manufacturing — storage and transport equipment             |       | Senior Term Debt (12.5%, Due 5/2013) (5)                             |       | 5,000      |        | 4,962          |       |
|                                    |       |                                                             |       | Preferred Stock (4)                                                  |       | 750        |        | 157            |       |
|                                    |       |                                                             |       | Common Stock & Debt Warrants (4)                            |       | 3          |        | —         |       |
|                                    |       |                                                             |       |                                                                 |       | 5,753      |        | 5,119          |       |
|                                    |       |                                                             |       |                                                                 |       |       |        |           |       |
| **Total Affiliate Investments**         | ** ** | ** **                                                       | ** ** | ** **                                                           | ** ** | **$**      | **64,019**  | ** **     | **$**      | **46,900** | ** ** |
|                                    |       |                                                             |       |                                                                 |       |       |        |           |       |
| **TOTAL INVESTMENTS**                   | ** ** | ** **                                                       | ** ** | ** **                                                           | ** ** | **$**      | **236,603** | ** **     | **$**      | **204,303** | ** ** |

 

5

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| (1)  | Certain of the listed securities are issued by affiliate(s) of  the indicated portfolio company.                                                                                                          |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)  | Percentage represents the weighted average interest rates in effect at  September 30, 2009, and due date represents the contractual maturity  date.                                                       |
| (3)  | Valued based on the indicative bid price on or near September 30,  2009, offered by the respective syndication agent’s trading desk or secondary  desk.                                              |
| (4)  | Security is non-income producing.                                                                                                                                                                              |
| (5)  | Fair value based on opinions of value submitted by Standard &  Poor’s Securities Evaluations, Inc. at September 30, 2009.                                                              |
| (6)  | Last Out Tranche of senior debt, meaning if the portfolio company is  liquidated, the holder of the Last Out Tranche is paid after the senior debt.                                                            |
| (7)  | Security valued based on the sale price obtained at or subsequent to  September 30, 2009, as the security, or a portion of it, was sold.                                                                  |
| (8)  | Security was sold subsequent to quarter-end; approximately $3.1  million of cash proceeds was received, and a realized loss of $757 was  recorded.                                                             |
| (9)  | A portion of this security, approximately $3.0 million in principal,  was sold subsequent to quarter-end. Approximately $2.4 million of cash  proceeds was received, and a realized loss of $561 was recorded. |
| (10) | Revolving credit facility was repaid in full and sold to a third party  subsequent to quarter-end.                                                                                                             |

 

*THE ACCOMPANYING NOTES ARE ANINTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS*

 

6

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**GLADSTONE INVESTMENT CORPORATION**

**CONDENSED CONSOLIDATED SCHEDULES OFINVESTMENTS**

**AS OF MARCH 31, 2009**

**(DOLLAR AMOUNTS IN THOUSANDS)**

** **
| **Company (1)**                                  | ** **   | **Industry**                                                      | ** **   | **Investment (2)**                                                  | ** **   | **Cost**     | ** **   | **Fair Value** | ** **   |
|--------------------------------------------------|--------------|-------------------------------------------------------------------|--------------|---------------------------------------------------------------------|--------------|--------------|--------------|----------------|--------------|
|                                             |         |                                                              |         |                                                                |         |         |         |           |         |
| **NON-CONTROL/NON-AFFILIATE  INVESTMENTS:**      | ** **   | ** **                                                        | ** **   | ** **                                                          | ** **   | ** **   | ** **   |
| ***Senior Syndicated  Loans:***                  | *** *** | *** ***                                                      | *** *** | *** ***                                                        | *** *** | *** *** | *** *** | *** ***   | *** *** |
| Activant Solutions, Inc.                    |         | Service - enterprise software and services                        |         | Senior Term Debt (3.4%, Due 5/2013) (7)                             |         | $            | 1,658        |           | $            | 904 |   |
| Advanced Homecare Holdings, Inc.            |         | Service - home health nursing services                            |         | Senior Term Debt (4.3%, Due 8/2014) (7)                             |         | 2,947        |         | 2,019          |         |
| Aeroflex, Inc.                              |         | Service - provider of highly specialized electronic  equipment    |         | Senior Term Debt (4.5%, Due 8/2014) (7)                             |         | 1,892        |         | 1,083          |         |
| Compsych Investments Corp.                       |         | Service - employee assistance programs                            |         | Senior Term Debt (3.8%, Due 2/2012) (7)                             |         | 3,083        |         | 2,405          |         |
| CRC Health Group, Inc.                      |         | Service - substance abuse treatment                               |         | Senior Term Debt (3.5%, Due 2/2012) (7)                             |         | 7,772        |         | 5,026          |         |
| Critical Homecare Solutions, Inc.           |         | Service - home therapy and respiratory treatment                  |         | Senior Term Debt (3.8%, Due 1/2012) (7)                             |         | 4,359        |         | 3,632          |         |
| Generac Acquisition Corp.                        |         | Manufacturing - standby power products                            |         | Senior Term Debt (3.0%, Due 11/2013) (7)                            |         | 6,799        |         | 3,820          |         |
| Graham Packaging Holdings Company                |         | Manufacturing - plastic containers                                |         | Senior Term Debt (3.6%, Due 10/2011) (7)                            |         | 3,348        |         | 2,813          |         |
| HMTBP Acquisition II Corp.                       |         | Service - aboveground storage tanks                               |         | Senior Term Debt (3.5%, Due 5/2014) (3)                             |         | 3,838        |         | 2,942          |         |
| Huish Detergents, Inc.                      |         | Manufacturing - household cleaning products                       |         | Senior Term Debt (2.3%, Due 4/2014) (7)                             |         | 1,966        |         | 1,690          |         |
| Hyland Software, Inc.                       |         | Service - provider of enterprise content management  software     |         | Senior Term Debt (3.6%, Due 7/2013) (7)                             |         | 3,912        |         | 2,990          |         |
| Interstate Fibernet, Inc.                   |         | Service - provider of voice and data  telecommunications services |         | Senior Term Debt (5.2%, Due 7/2013) (3)                             |         | 9,804        |         | 6,698          |         |
| KIK Custom Products, Inc.                   |         | Manufacturing - consumer products                                 |         | Senior Term Debt (2.8%, Due 5/2014) (7)                             |         | 3,941        |         | 1,862          |         |
| Kronos, Inc.                                |         | Service - workforce management solutions                          |         | Senior Term Debt (3.5%, Due 6/2014) (7)                             |         | 1,899        |         | 1,291          |         |
| Local TV Finance, LLC                            |         | Service - television station operator                             |         | Senior Term Debt (2.5%, Due 5/2013) (7)                             |         | 985          |         | 359            |         |
| LVI Services, Inc.                          |         | Service - asbestos and mold remediation                           |         | Senior Term Debt (4.5%, Due 11/2010) (7)                            |         | 5,916        |         | 2,673          |         |
| MedAssets, Inc.                             |         | Service - pharmaceuticals and healthcare GPO                      |         | Senior Term Debt (5.1%, Due 10/2013) (7)                            |         | 3,517        |         | 3,129          |         |
| Network Solutions, LLC                           |         | Service - internet domain solutions                               |         | Senior Term Debt (3.2%, Due 3/2014) (7)                             |         | 8,672        |         | 5,506          |         |
| Open Solutions, Inc.                        |         | Service - software outsourcing for financial  institutions        |         | Senior Term Debt (3.3%, Due 1/2014) (7)                             |         | 2,648        |         | 1,206          |         |
| Ozburn-Hessey Holding Co. LLC                    |         | Service — third party logistics                              |         | Senior Term Debt (4.4%, Due 8/2012) (7)                             |         | 7,523        |         | 5,975          |         |
| Pinnacle Foods Finance, LLC                      |         | Manufacturing - branded food products                             |         | Senior Term Debt (3.2%, Due 4/2014) (7)                             |         | 1,950        |         | 1,570          |         |
| PTS Acquisition Corp.                            |         | Manufacturing - drug delivery and packaging  technologies         |         | Senior Term Debt (2.8%, Due 4/2014) (7)                             |         | 6,877        |         | 4,264          |         |
| QTC Acquisition, Inc.                       |         | Service - outsourced disability evaluations                       |         | Senior Term Debt (2.8%, Due 11/2012) (7)                            |         | 1,763        |         | 1,356          |         |
| Radio Systems Corporation                        |         | Service - design electronic pet containment products              |         | Senior Term Debt (3.3%, Due 9/2013) (7)                             |         | 1,644        |         | 1,308          |         |
| Rally Parts, Inc.                           |         | Manufacturing - aftermarket motorcycle parts and  accessories     |         | Senior Term Debt (3.5%, Due 11/2013) (7)                            |         | 2,458        |         | 1,073          |         |
| SafeNet, Inc.                               |         | Service — chip encryption products                           |         | Senior Term Debt (4.2%, Due 4/2014) (7)                             |         | 2,949        |         | 2,008          |         |
| SGS International, Inc.                     |         | Service - digital imaging and graphics                            |         | Senior Term Debt (4.0%, Due 12/2011) (7)                            |         | 1,475        |         | 978            |         |
| Survey Sampling, LLC                             |         | Service - telecommunications-based sampling                       |         | Senior Term Debt (9.5%, Due 5/2011) (3)                             |         | 2,596        |         | 2,441          |         |
| Triad Laboratory Alliance, LLC                   |         | Service - regional medical laboratories                           |         | Senior Term Debt (4.5%, Due 12/2011) (7)                            |         | 4,120        |         | 3,432          |         |
| Wastequip, Inc.                             |         | Service - process and transport waste materials                   |         | Senior Term Debt (2.8%, Due 2/2013) (7)                             |         | 2,893        |         | 1,530          |         |
| WaveDivision Holdings, LLC                       |         | Service - cable                                                   |         | Senior Term Debt (3.5%, Due 6/2014) (7)                             |         | 1,905        |         | 1,575          |         |
| West Corporation                                 |         | Service - business process outsourcing                            |         | Senior Term Debt (2.9%, Due 10/2013) (7)                            |         | 3,323        |         | 2,293          |         |
| ***Subtotal - Senior  Syndicated Loans***        |         |                                                              |         |                                                                |         | $            | 120,432      |           | $            | 81,851 |   |
| * *                                         | * *     | * *                                                          | * *     | * *                                                            | * *     | * *     | * *     | * *       | * *     |
| ***Non-Syndicated  Loans***                      | * *     | * *                                                          | * *     | * *                                                            | * *     | * *     | * *     | * *       | * *     |
| American Greetings Corporation                   |         | Manufacturing and design - greeting cards                         |         | Senior Notes (7.4%, Due 6/2016) (3) (10)                       |         | $            | 3,043        |           | $            | 2,180 |   |
|                                             |         |                                                              |         |                                                                |         |         |         |           |         |
| B-Dry, LLC                                       |         | Service - basement waterproofer                                   |         | Revolving Credit Facility, $300 available (10.5%, Due  10/2009) (5) |         | 450          |         | 443            |         |
|                                             |         |                                                              |         | Senior Term Debt (10.0%, Due 5/2014) (5)                            |         | 6,681        |         | 6,464          |         |
|                                             |         |                                                              |         | Senior Term Debt (10.0%, Due 5/2014) (5)                            |         | 3,930        |         | 3,802          |         |
|                                             |         |                                                              |         | Common Stock Warrants (4)                                           |         | 300          |         | —         |         |
|                                             |         |                                                              |         |                                                                |         | 11,361       |         | 10,709         |         |
|                                             |         |                                                              |         |                                                                |         |         |         |           |         |
| **Total Non-Control/Non-Affiliate  Investments** | ** **   | ** **                                                        | ** **   | **$**                                                               | **134,836**  | ** **   | **$**        | **94,740**     | ** **   |

 

7

----

 

**GLADSTONE INVESTMENT CORPORATION**

**CONDENSED CONSOLIDATED SCHEDULES OFINVESTMENTS (Continued)**

**AS OF MARCH 31, 2009**

**(DOLLAR AMOUNTS IN THOUSANDS)**

** **
| **Company (1)**               | ** ** | **Industry**                                               | ** ** | **Investment (2)**                                                   | ** ** | **Cost** | ** **  | **Fair Value** |   |
|-------------------------------|------------|------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|----------|-------------|----------------|--------|
| ** **                    |       |                                                       |       |                                                                 |       |     |        |           |   |
| **CONTROL INVESTMENTS:**      |       |                                                       |       |                                                                 |       |     |        |           |   |
| A. Stucki Holding Corp.       |       | Manufacturing - railroad freight car products              |       | Senior Term Debt (5.0%, Due 3/2012)                                  |       | $        | 11,246      |           | $      | 11,246 |   |
|                          |       |                                                       |       | Senior Term Debt (7.2%, Due 3/2012) (6)                              |       | 10,450   |        | 10,450         |   |
|                          |       |                                                       |       | Senior Subordinated Term Debt (13%, Due 3/2014)                      |       | 8,586    |        | 8,586          |   |
|                          |       |                                                       |       | Preferred Stock (4)                                                  |       | 4,387    |        | 5,128          |   |
|                          |       |                                                       |       | Common Stock (4)                                                     |       | 130      |        | 14,021         |   |
|                          |       |                                                       |       |                                                                 |       | 34,799   |        | 49,431         |   |
|                          |       |                                                       |       |                                                                 |       |     |        |           |   |
| Acme Cryogenics, Inc.    |       | Manufacturing - manifolds and pipes for industrial  gasses |       | Senior Subordinated Term Debt (11.5%, Due 3/2012)                    |       | 14,500   |        | 14,500         |   |
|                          |       |                                                       |       | Redeemable Preferred Stock (4)                                       |       | 6,984    |        | 6,920          |   |
|                          |       |                                                       |       | Common Stock (4)                                                     |       | 1,045    |        | —         |   |
|                          |       |                                                       |       | Common Stock Warrants (4)                                            |       | 25       |        | —         |   |
|                          |       |                                                       |       |                                                                 |       | 22,554   |        | 21,420         |   |
|                          |       |                                                       |       |                                                                 |       |     |        |           |   |
| ASH Holdings Corp.            |       | Retail and Service - school buses and parts                |       | Revolver, $400 available (non—accrual, Due 3/2010)  (5)         |       | 1,600    |        | 560            |   |
|                          |       |                                                       |       | Senior Subordinated Term Debt (non—accrual, Due  1/2012) (5)    |       | 5,937    |        | 2,078          |   |
|                          |       |                                                       |       | Preferred Stock (4)                                                  |       | 2,500    |        | —         |   |
|                          |       |                                                       |       | Common Stock Warrants (4)                                            |       | 4        |        | —         |   |
|                          |       |                                                       |       |                                                                 |       | 10,041   |        | 2,638          |   |
|                          |       |                                                       |       |                                                                 |       |     |        |           |   |
| Cavert II Holding Corp.       |       | Manufacturing - bailing wire                               |       | Revolving Credit Facility, $3,000 available (8.0%,  Due 10/2010) (8) |       | —   |        | —         |   |
|                          |       |                                                       |       | Senior Term Debt (8.3%, Due 10/2012)                                 |       | 5,687    |        | 5,687          |   |
|                          |       |                                                       |       | Senior Term Debt (10.0%, Due 10/2012) (6)                            |       | 2,950    |        | 2,950          |   |
|                          |       |                                                       |       | Senior Subordinated Term Debt (13.0%, Due 10/2014)                   |       | 4,671    |        | 4,671          |   |
|                          |       |                                                       |       | Preferred Stock (4)                                                  |       | 4,110    |        | 4,591          |   |
|                          |       |                                                       |       | Common Stock (4)                                                     |       | 69       |        | 733            |   |
|                          |       |                                                       |       |                                                                 |       | 17,487   |        | 18,632         |   |
|                          |       |                                                       |       |                                                                 |       |     |        |           |   |
| Chase II Holdings Corp.       |       | Manufacturing - traffic doors                              |       | Revolving Credit Facility, $1,105 available (4.5%,  Due 7/2010)      |       | 3,395    |        | 3,395          |   |
|                          |       |                                                       |       | Senior Term Debt (8.8%, Due 3/2011)                                  |       | 8,800    |        | 8,800          |   |
|                          |       |                                                       |       | Senior Term Debt (12.0%, Due 3/2011) (6)                             |       | 7,680    |        | 7,680          |   |
|                          |       |                                                       |       | Senior Subordinated Term Debt (13.0%, Due 3/2013)                    |       | 6,168    |        | 6,168          |   |
|                          |       |                                                       |       | Redeemable Preferred Stock (4)                                       |       | 6,961    |        | 9,300          |   |
|                          |       |                                                       |       | Common Stock (4)                                                     |       | 61       |        | 5,537          |   |
|                          |       |                                                       |       |                                                                 |       | 33,065   |        | 40,880         |   |
|                          |       |                                                       |       |                                                                 |       |     |        |           |   |
| Country Club Enterprises, LLC |       | Service - golf cart distribution                           |       | Subordinated Term Debt (14.0% Due 11/2014)                           |       | 7,000    |        | 7,000          |   |
|                          |       |                                                       |       | Preferred Stock (4)                                                  |       | 3,725    |        | 3,725          |   |
|                          |       |                                                       |       |                                                                 |       | 10,725   |        | 10,725         |   |
|                          |       |                                                       |       |                                                                 |       |     |        |           |   |
| Galaxy Tool Holding Corp.     |       | Manufacturing - aerospace and plastics                     |       | Senior Subordinated Term Debt (13.5%, Due 8/2013)                    |       | 17,250   |        | 17,250         |   |
|                          |       |                                                       |       | Preferred Stock (4)                                                  |       | 4,112    |        | 4,486          |   |
|                          |       |                                                       |       | Common Stock (4)                                                     |       | 48       |        | 701            |   |
|                          |       |                                                       |       |                                                                 |       | 21,410   |        | 22,437         |   |
|                          |       |                                                       |       |                                                                 |       |     |        |           |   |
| **Total Control Investments** | ** ** | ** **                                                 | ** ** | ** **                                                           | ** ** | **$**    | **150,081** | ** **     | **$**  | **166,163** | ** ** |

 

8

----

 

**GLADSTONE INVESTMENT CORPORATION**

**CONDENSED CONSOLIDATED SCHEDULES OFINVESTMENTS (Continued)**

**AS OF MARCH 31, 2009**

**(DOLLAR AMOUNTS IN THOUSANDS)**

** **
| **Company (1)**                 | ** ** | **Industry**                                                | ** ** | **Investment (2)**                                                            | ** ** | **Cost** | ** **  | **Fair Value** | ** ** |
|---------------------------------|------------|-------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|----------|-------------|----------------|------------|
|                            |       |                                                        |       |                                                                          |       |     |        |           |       |
| **AFFILIATE INVESTMENTS:**      |       |                                                        |       |                                                                          |       |     |        |           |       |
| Danco Acquisition Corp.         |       | Manufacturing - machining and sheet metal work              |       | Revolving Credit Facility, $2,600 available (9.3%,  Due 10/2010) (5) (9) |       | $        | 400         |           | $          | 378 |   |
|                            |       |                                                        |       | Senior Term Debt (9.3%, Due 10/2012) (5)                                      |       | 4,837    |        | 4,584          |       |
|                            |       |                                                        |       | Senior Term Debt (11.5%, Due 4/2013) (5)                                      |       | 9,113    |        | 8,544          |       |
|                            |       |                                                        |       | Redeemable Preferred Stock (4)                                                |       | 2,500    |        | 2,558          |       |
|                            |       |                                                        |       | Common Stock Warrants (4)                                                     |       | 3        |        | —         |       |
|                            |       |                                                        |       |                                                                          |       | 16,853   |        | 16,064         |       |
|                            |       |                                                        |       |                                                                          |       |     |        |           |       |
| Mathey Investments, Inc.   |       | Manufacturing - pipe-cutting and pipe-fitting  equipment    |       | Revolving Credit Facility, $1,463 available (9.0%,  Due 3/2011) (5) (9)  |       | 537      |        | 529            |       |
|                            |       |                                                        |       | Senior Term Debt (9.0%, Due 3/2013) (5)                                       |       | 2,375    |        | 2,339          |       |
|                            |       |                                                        |       | Senior Term Debt (12.0%, Due 3/2014) (5)(6)                                   |       | 7,227    |        | 7,082          |       |
|                            |       |                                                        |       | Common Stock (4)                                                              |       | 500      |        | 446            |       |
|                            |       |                                                        |       | Common Stock Warrants (4)                                                     |       | 277      |        | 260            |       |
|                            |       |                                                        |       |                                                                          |       | 10,916   |        | 10,656         |       |
|                            |       |                                                        |       |                                                                          |       |     |        |           |       |
| Noble Logistics, Inc.      |       | Service - aftermarket auto parts delivery                   |       | Revolving Credit Facility, $-0- available (6.5%, Due  12/2009) (5)            |       | 2,000    |        | 1,500          |       |
|                            |       |                                                        |       | Senior Term Debt (10.5%, Due 12/2011) (5)                                     |       | 5,727    |        | 4,295          |       |
|                            |       |                                                        |       | Senior Term Debt (12.5%, Due 12/2011) (5)(6)                                  |       | 7,300    |        | 5,475          |       |
|                            |       |                                                        |       | Senior Subordinated Term Debt (18.0%, Due 12/2011)                            |       | 500      |        | 375            |       |
|                            |       |                                                        |       | Senior Subordinated Term Debt (14.0%, Due 5/2009)                             |       | 150      |        | 149            |       |
|                            |       |                                                        |       | Preferred Stock (4)                                                           |       | 1,750    |        | —         |       |
|                            |       |                                                        |       | Common Stock (4)                                                              |       | 1,682    |        | —         |       |
|                            |       |                                                        |       |                                                                          |       | 19,109   |        | 11,794         |       |
|                            |       |                                                        |       |                                                                          |       |     |        |           |       |
| Quench Holdings Corp.           |       | Service - sales, installation and service of water  coolers |       | Senior Subordinated Term Debt (10.0%, Due 8/2013) (5)                         |       | 8,000    |        | 5,800          |       |
|                            |       |                                                        |       | Preferred Stock (4)                                                           |       | 2,950    |        | 2,542          |       |
|                            |       |                                                        |       | Common Stock Warrants (4)                                                     |       | 447      |        | —         |       |
|                            |       |                                                        |       |                                                                          |       | 11,397   |        | 8,342          |       |
|                            |       |                                                        |       |                                                                          |       |     |        |           |       |
| Tread Corp.                     |       | Manufacturing - storage and transport equipment             |       | Senior Term Debt (12.5%, Due 5/2013) (5)                                      |       | 5,000    |        | 4,925          |       |
|                            |       |                                                        |       | Preferred Stock (4)                                                           |       | 750      |        | 793            |       |
|                            |       |                                                        |       | Common Stock Warrants (4)                                                     |       | 3        |        | 453            |       |
|                            |       |                                                        |       |                                                                          |       | 5,753    |        | 6,171          |       |
|                            |       |                                                        |       |                                                                          |       |     |        |           |       |
| **Total Affiliate Investments** | ** ** | ** **                                                  | ** ** |                                                                          |       | **$**    | **64,028**  | ** **     | **$**      | **53,027** |   |
|                            |       |                                                        |       |                                                                          |       |     |        |           |       |
| **Total Investments**           | ** ** | ** **                                                  | ** ** |                                                                          |       | **$**    | **348,945** | ** **     | **$**      | **313,930** |   |

 

----

| (1)  | Certain of the listed securities are issued by affiliate(s) of  the indicated portfolio company.                                                                                                                                                                                                                              |
|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)  | Percentage represents the weighted average interest rates in effect at  March 31, 2009, and due date represents the contractual maturity date.                                                                                                                                                                                |
| (3)  | Security valued using internally-developed, risk-adjusted discounted  cash flow methodologies as of March 31, 2009.                                                                                                                                                                                                           |
| (4)  | Security is non-income producing.                                                                                                                                                                                                                                                                                                  |
| (5)  | Fair value based on opinions of value submitted by Standard &  Poor’s Securities Evaluations, Inc. at March 31, 2009.                                                                                                                                                                                      |
| (6)  | Last Out Tranche of senior debt, meaning if the portfolio company is  liquidated, the holder of the Last Out Tranche is paid after the senior debt.                                                                                                                                                                                |
| (7)  | Security valued based on the sale price obtained at or subsequent to  March 31, 2009, since the security was sold.                                                                                                                                                                                                            |
| (8)  | Revolver was sold to third party subsequent to March 31, 2009.                                                                                                                                                                                                                                                                |
| (9)  | Terms of agreement were refinanced and revolver limit was reduced.                                                                                                                                                                                                                                                                 |
| (10) | The Company received non-cash assumption of $3,043 worth of senior  notes received from American Greetings Corporation for the Company’s  agreement to the RPG bankruptcy settlement in which the Company received the  aforementioned notes and $909 in cash and recognized a loss on the settlement  of approximately $601. |

 

*THE ACCOMPANYING NOTES ARE ANINTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.*

 

9

----

 

**GLADSTONE INVESTMENT CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

**(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)**

**(UNAUDITED)**

 
| ** **                                                                           | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                           | ** ** | **September 30,**           | ** ** | **September 30,**         | ** ** |
| ** **                                                                           | ** ** | **2009**                         | ** ** | **2008**                       | ** ** | **2009** | ** ** | **2008** | ** ** |
| INVESTMENT INCOME                                                                    |       |                             |       |                           |       |   |   |   |   |
| Interest income                                                                      |       |                             |       |                           |       |   |   |   |   |
| Non-Control/Non-Affiliate investments                                                |       | $                                | 615        |                           | $          | 2,134 |   | $ | 1,351 |   | $ | 4,458 |   |
| Control investments                                                                  |       | 2,868                            |       | 2,735                          |       | 5,736 |   | 5,304 |   |
| Affiliate investments                                                                |       | 1,448                            |       | 1,349                          |       | 2,928 |   | 2,460 |   |
| Cash and cash equivalents                                                            |       | 1                                |       | 22                             |       | 1 |   | 46 |   |
| Total interest income                                                                |       | 4,932                            |       | 6,240                          |       | 10,016 |   | 12,268 |   |
| Other income                                                                         |       | 11                               |       | 576                            |       | 96 |   | 586 |   |
| Total investment income                                                              |       | 4,943                            |       | 6,816                          |       | 10,112 |   | 12,854 |   |
|                                                                                 |       |                             |       |                           |       |   |   |   |   |
| EXPENSES                                                                             |       |                             |       |                           |       |   |   |   |   |
| Loan servicing fee (Refer to Note 4)                                                 |       | 938                              |       | 1,258                          |       | 2,006 |   | 2,511 |   |
| Base management fee (Refer to Note 4)                                                |       | 164                              |       | 435                            |       | 477 |   | 861 |   |
| Administration fee (Refer to Note 4)                                                 |       | 198                              |       | 212                            |       | 371 |   | 447 |   |
| Interest expense                                                                     |       | 552                              |       | 1,084                          |       | 1,255 |   | 2,186 |   |
| Amortization of deferred finance costs                                               |       | 438                              |       | 140                            |       | 751 |   | 278 |   |
| Professional fees                                                                    |       | 118                              |       | 183                            |       | 320 |   | 314 |   |
| Stockholder related costs                                                            |       | 146                              |       | 200                            |       | 227 |   | 301 |   |
| Insurance expense                                                                    |       | 62                               |       | 55                             |       | 119 |   | 108 |   |
| Directors’ fees                                                                 |       | 48                               |       | 48                             |       | 99 |   | 95 |   |
| Other                                                                                |       | 73                               |       | 114                            |       | 137 |   | 189 |   |
| Expenses before credit from Adviser                                                  |       | 2,737                            |       | 3,729                          |       | 5,762 |   | 7,290 |   |
| Credits to base management fee (Refer to Note 4)                                     |       | (165                             | )          | (696                           | )          | (466 | ) | (1,270 | ) |
| Total expenses net of credit to base management fee                                  |       | 2,572                            |       | 3,033                          |       | 5,296 |   | 6,020 |   |
| NET INVESTMENT INCOME                                                                |       | 2,371                            |       | 3,783                          |       | 4,816 |   | 6,834 |   |
|                                                                                 |       |                             |       |                           |       |   |   |   |   |
| REALIZED AND UNREALIZED (LOSS) GAIN ON:                                              |       |                             |       |                           |       |   |   |   |   |
| Realized loss on sale of Non-Control/Non-Affiliate  investments                      |       | —                           |       | (2,498                         | )          | (34,605 | ) | (4,215 | ) |
| Realized loss on termination of derivative                                           |       | —                           |       | —                         |       | (53 | ) | — |   |
| Net unrealized (depreciation) appreciation of  Non-Control/Non-Affiliate investments |       | (1,514                           | )          | (5,191                         | )          | 35,214 |   | (726 | ) |
| Net unrealized (depreciation) appreciation of Control  investments                   |       | (14,900                          | )          | 10,840                         |       | (26,381 | ) | 5,973 |   |
| Net unrealized depreciation of Affiliate  investments                                |       | (3,853                           | )          | (5,978                         | )          | (6,119 | ) | (11,393 | ) |
| Net unrealized (depreciation) appreciation of  derivative                            |       | (16                              | )          | —                         |       | 26 |   | — |   |
| Net unrealized appreciation of borrowings under  line of credit                      |       | (178                             | )          | —                         |       | (178 | ) | — |   |
| Net loss on investments and borrowings under line  of credit                         |       | (20,461                          | )          | (2,827                         | )          | (32,096 | ) | (10,361 | ) |
|                                                                                 |       |                             |       |                           |       |   |   |   |   |
| NET (DECREASE) INCREASE IN NET ASSETS RESULTING  FROM OPERATIONS                     |       | $                                | (18,090    | )                              | $          | 956 |   | $ | (27,280 | ) | $ | (3,527 | ) |
|                                                                                 |       |                             |       |                           |       |   |   |   |   |
| NET (DECREASE) INCREASE IN NET ASSETS RESULTING  FROM OPERATIONS PER COMMON SHARE:   |       |                             |       |                           |       |   |   |   |   |
| Basic and Diluted                                                                    |       | $                                | (0.82      | )                              | $          | 0.04 |   | $ | (1.24 | ) | $ | (0.17 | ) |
|                                                                                 |       |                             |       |                           |       |   |   |   |   |
| SHARES OF COMMON STOCK OUTSTANDING:                                                  |       |                             |       |                           |       |   |   |   |   |
| Basic and diluted weighted average shares                                            |       | 22,080,133                       |       | 22,080,133                     |       | 22,080,133 |   | 21,011,740 |   |

 

*THE ACCOMPANYING NOTES ARE ANINTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.*

 

10

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**GLADSTONE INVESTMENT CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OFCHANGES IN NET ASSETS**

**(DOLLAR AMOUNTS IN THOUSANDS)**

**(UNAUDITED)**

** **
| ** **                                                       | ** ** | **Six Months Ended September 30,** | ** ** |
|------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                       | ** ** | **2009**                                | ** ** | **2008** | ** ** |
| *Operations:*                                                    | * *   | * *                                | * *   | * * | * * |
| Net investment income                                            |       | $                                       | 4,816      |   | $ | 6,834 |   |
| Realized loss on sale of investments                             |       | (34,605                                 | )          | (4,215 | ) |
| Realized loss on termination of derivative                       |       | (53                                     | )          | — |   |
| Net unrealized appreciation (depreciation) of  portfolio         |       | 2,714                                   |       | (6,146 | ) |
| Net unrealized appreciation of derivative                        |       | 26                                      |       | — |   |
| Net unrealized appreciation of borrowings under line  of credit  |       | (178                                    | )          | — |   |
| Net decrease in net assets from operations                       |       | (27,280                                 | )          | (3,527 | ) |
|                                                             |       |                                    |       |   |   |
| *Capital transactions:*                                          | * *   | * *                                | * *   | * * | * * |
| Issuance of common stock                                         |       | —                                  |       | 41,290 |   |
| Shelf offering registration costs                                |       | (178                                    | )          | (643 | ) |
| Distributions to stockholders                                    |       | (5,299                                  | )          | (10,157 | ) |
| Net (decrease) increase in net assets from capital  transactions |       | (5,477                                  | )          | 30,490 |   |
|                                                             |       |                                    |       |   |   |
| Total (decrease) increase in net assets                          |       | (32,757                                 | )          | 26,963 |   |
| Net assets at beginning of period                                |       | 214,802                                 |       | 206,445 |   |
|                                                             |       |                                    |       |   |   |
| Net assets at end of period                                      |       | $                                       | 182,045    |   | $ | 233,408 |   |

 

*THE ACCOMPANYING NOTES ARE ANINTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.*

 

11

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**GLADSTONE INVESTMENT CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

**(DOLLAR AMOUNTS IN THOUSANDS)**

**(UNAUDITED)**

** **
| ** **                                                                                                                   | ** ** | **Six Months Ended September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                                                   | ** ** | **2009**                                | ** ** | **2008** | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES**                                                                                    | ** ** | ** **                              | ** ** | ** ** | ** ** |
| Net decrease in net assets resulting from operations                                                                         |       | $                                       | (27,280    | ) | $ | (3,527 | ) |
| Adjustments to reconcile net decrease in net assets  resulting from operations to net cash provided by operating activities: |       |                                    |       |   |   |
| Purchase of investments                                                                                                      |       | (968                                    | )          | (36,612 | ) |
| Principal repayments of investments                                                                                          |       | 9,482                                   |       | 22,284 |   |
| Proceeds from sales of investments                                                                                           |       | 69,222                                  |       | 13,296 |   |
| Proceeds from short-term borrowings                                                                                          |       | 75,000                                  |       | — |   |
| Net realized loss on sales of investments                                                                                    |       | 34,605                                  |       | 4,215 |   |
| Net realized loss on termination of derivative                                                                               |       | 53                                      |       | — |   |
| Net unrealized (appreciation) depreciation of  investment portfolio                                                          |       | (2,714                                  | )          | 6,146 |   |
| Net unrealized appreciation of derivative                                                                                    |       | (26                                     | )          | — |   |
| Net unrealized appreciation of borrowings under line  of credit                                                              |       | 178                                     |       | — |   |
| Net amortization of premiums and discounts                                                                                   |       | —                                  |       | 19 |   |
| Amortization of deferred financing costs                                                                                     |       | 751                                     |       | 278 |   |
| Decrease in interest receivable                                                                                              |       | 288                                     |       | 309 |   |
| Decrease in due from custodian                                                                                               |       | 1,774                                   |       | 1,351 |   |
| Increase in prepaid assets                                                                                                   |       | (273                                    | )          | (114 | ) |
| (Increase) decrease in other assets                                                                                          |       | (40                                     | )          | 309 |   |
| Decrease in accounts payable and accrued liabilities                                                                         |       | (823                                    | )          | (167 | ) |
| Increase in administration fee payable to  Administrator (See Note 4)                                                        |       | 19                                      |       | 4 |   |
| Increase in base management fee payable to Adviser  (See Note 4)                                                             |       | 113                                     |       | 123 |   |
| Decrease in loan servicing fee payable to Adviser  (See Note 4)                                                              |       | (79                                     | )          | (7 | ) |
| Increase in other liabilities                                                                                                |       | 21                                      |       | 13 |   |
| Net cash provided by operating activities                                                                                    |       | 159,303                                 |       | 7,920 |   |
|                                                                                                                         |       |                                    |       |   |   |
| **CASH FLOWS FROM FINANCING  ACTIVITIES**                                                                                    | ** ** | ** **                              | ** ** | ** ** | ** ** |
| Net proceeds from the issuance of common stock                                                                               |       | (178                                    | )          | 40,647 |   |
| Borrowings from line of credit                                                                                               |       | 79,000                                  |       | 129,000 |   |
| Repayments of line of credit                                                                                                 |       | (153,165                                | )          | (142,870 | ) |
| Purchase of derivative                                                                                                       |       | (39                                     | )          | — |   |
| Deferred financing costs                                                                                                     |       | (547                                    | )          | — |   |
| Distributions paid                                                                                                           |       | (5,299                                  | )          | (10,157 | ) |
| Net cash (used in) provided by financing activities                                                                          |       | (80,228                                 | )          | 16,620 |   |
| ** **                                                                                                                   |       |                                    |       |   |   |
| **NET INCREASE IN CASH AND CASH  EQUIVALENTS**                                                                               |       | 79,075                                  |       | 24,540 |   |
| **CASH AND CASH EQUIVALENTS,  BEGINNING OF PERIOD**                                                                          |       | 7,236                                   |       | 9,360 |   |
| ** **                                                                                                                   |       |                                    |       |   |   |
| **CASH AND CASH EQUIVALENTS, END OF  PERIOD**                                                                                |       | $                                       | 86,311     |   | $ | 33,900 |   |
| ** **                                                                                                                   |       |                                    |       |   |   |
| **CASH PAID DURING PERIOD FOR  INTEREST**                                                                                    |       | $                                       | 1,418      |   | $ | 2,134 |   |
| ** **                                                                                                                   |       |                                    |       |   |   |
| **NON-CASH ACTIVITIES**(1)                                                                                                   |       | $                                       | 850        |   | — |   |

 

----

| (1) |   | On April 10, 2009, the Company made an investment disbursement to  Cavert II Holding Corp. for approximately $850 on their revolving line of  credit, and the proceeds were used to make the next four quarterly payments  due under normal amortization for both their senior term A and senior term B  loans in a non-cash transaction. |
|-----|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

*THE ACCOMPANYING NOTES ARE ANINTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.*

 

12

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**GLADSTONE INVESTMENT CORPORATION**

**FINANCIAL HIGHLIGHTS**

**(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)**

**(UNAUDITED)**

** **
| ** **                                                             | ** ** | **Three Months Ended September 30,** | ** ** | **Six Months Ended September 30,** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                             | ** ** | **2009**                                                 | ** ** | **2008**                                               | ** ** | **2009** | ** ** | **2008** | ** ** |
| Per Share Data (1)                                                     |       |                                                     |       |                                                   |       |   |   |   |   |
| Net asset value at beginning of period                                 |       | $                                                        | 9.19       |                                                   | $          | 10.77 |   | $ | 9.73 |   | $ | 12.47 |   |
|                                                                   |       |                                                     |       |                                                   |       |   |   |   |   |
| *Income from investment  operations:*                                  |       |                                                     |       |                                                   |       |   |   |   |   |
| Net investment income (2)                                              |       | 0.11                                                     |       | 0.17                                                   |       | 0.22 |   | 0.33 |   |
| Realized loss on sale of investments (2)                               |       | —                                                   |       | (0.11                                                  | )          | (1.57 | ) | (0.20 | ) |
| Net unrealized depreciation of investments (2)                         |       | (0.92                                                    | )          | (0.02                                                  | )          | 0.12 |   | (0.30 | ) |
| Net unrealized appreciation of borrowings on line  of credit (2)       |       | (0.01                                                    | )          | —                                                 |       | (0.01 | ) | — |   |
| Total from investment operations                                       |       | (0.82                                                    | )          | 0.04                                                   |       | (1.24 | ) | (0.17 | ) |
|                                                                   |       |                                                     |       |                                                   |       |   |   |   |   |
| *Distributions from:*                                                  |       |                                                     |       |                                                   |       |   |   |   |   |
| Net investment income                                                  |       | (0.12                                                    | )          | (0.24                                                  | )          | (0.24 | ) | (0.48 | ) |
| Total distributions (3)                                                |       | (0.12                                                    | )          | (0.24                                                  | )          | (0.24 | ) | (0.48 | ) |
|                                                                   |       |                                                     |       |                                                   |       |   |   |   |   |
| *Effect of shelf offering:*                                            |       |                                                     |       |                                                   |       |   |   |   |   |
| Shelf registration offering costs                                      |       | (0.01                                                    | )          | —                                                 |       | (0.01 | ) | (0.03 | ) |
| Effect of distribution of stock rights offering  after record date (4) |       | —                                                   |       | —                                                 |       | — |   | (1.22 | ) |
| Total effect of shelf offering                                         |       | (0.01                                                    | )          | —                                                 |       | (0.01 | ) | (1.25 | ) |
|                                                                   |       |                                                     |       |                                                   |       |   |   |   |   |
| Net asset value at end of period                                       |       | $                                                        | 8.24       |                                                   | $          | 10.57 |   | $ | 8.24 |   | $ | 10.57 |   |
|                                                                   |       |                                                     |       |                                                   |       |   |   |   |   |
| Per share market value at beginning of period                          |       | $                                                        | 4.88       |                                                   | $          | 6.38 |   | $ | 3.67 |   | $ | 9.32 |   |
| Per share market value at end of period                                |       | 4.85                                                     |       | 6.88                                                   |       | 4.85 |   | 6.88 |   |
| Total Return (5)                                                       |       | 1.75                                                     | %          | 14.79                                                  | %          | 39.03 | % | (21.39 | )% |
| 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                                            |       | $                                                        | 182,045    |                                                   | $          | 233,408 |   | $ | 182,045 |   | $ | 233,408 |   |
| Average net assets (6)                                                 |       | 195,005                                                  |       | 234,165                                                |       | 202,596 |   | 238,410 |   |
|                                                                   |       |                                                     |       |                                                   |       |   |   |   |   |
| Senior Securities Data:                                                |       |                                                     |       |                                                   |       |   |   |   |   |
| Borrowings under line of credit                                        |       | $                                                        | 36,278     |                                                   | $          | 130,965 |   | $ | 36,278 |   | $ | 130,965 |   |
| Asset coverage ratio (7)                                               |       | 602                                                      | %          | 278                                                    | %          | 602 | % | 278 | % |
| Asset coverage per unit (8)                                            |       | $                                                        | 6,018      |                                                   | $          | 2,782 |   | $ | 6,018 |   | $ | 2,782 |   |
|                                                                   |       |                                                     |       |                                                   |       |   |   |   |   |
| Ratios/Supplemental Data:                                              |       |                                                     |       |                                                   |       |   |   |   |   |
| Ratio of expenses to average net assets (9), (10)                      |       | 5.61                                                     | %          | 6.37                                                   | %          | 5.69 | % | 6.11 | % |
| Ratio of net expenses to average net assets (9),  (11)                 |       | 5.28                                                     | %          | 5.18                                                   | %          | 5.23 | % | 5.05 | % |
| Ratio of net investment income to average net  assets (9)              |       | 4.86                                                     | %          | 6.46                                                   | %          | 4.75 | % | 5.73 | % |

 

----

| (1)  |   | Based on actual shares outstanding at the end of the corresponding  period.                                                                                                                                                                                                                                                                                     |
|------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)  |   | Based on weighted average basic per share data.                                                                                                                                                                                                                                                                                                                 |
| (3)  |   | Distributions are determined based on taxable income calculated in  accordance with income tax regulations which may differ from amounts  determined under accounting principles generally accepted in the United States  of America.                                                                                                                           |
| (4)  |   | The effect of distributions from the stock rights offering after the  record date represents the effect on net asset value of issuing additional  shares after the record date of a distribution.                                                                                                                                                               |
| (5)  |   | 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 our dividend reinvestment plan.                                                                                                                              |
| (6)  |   | Calculated using the average of the balance of net assets at the end  of each month of the reporting period.                                                                                                                                                                                                                                                    |
| (7)  |   | As a business development company, the Company is generally required  to maintain a ratio of at least 200% of total assets, less all liabilities  and indebtedness not represented by senior securities, to total borrowings.                                                                                                                                   |
| (8)  |   | Asset coverage per unit 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. Asset coverage per unit is expressed in  terms of dollar amounts per $1,000 of indebtedness. |
| (9)  |   | Amounts are annualized.                                                                                                                                                                                                                                                                                                                                         |
| (10) |   | Ratio of expenses to average net assets is computed using expenses  before credits from the Adviser.                                                                                                                                                                                                                                                            |
| (11) |   | Ratio of net expenses to average net assets is computed using total  expenses net of credits to the management fee.                                                                                                                                                                                                                                             |

 

*THE ACCOMPANYING NOTES ARE ANINTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.*

 

13

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**GLADSTONE INVESTMENT CORPORATION**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA AND ASOTHERWISE INDICATED)**

**SEPTEMBER 30, 2009**

**(UNAUDITED)**

 

**NOTE1. ORGANIZATION**

 

Gladstone Investment Corporation (the “Company”) was incorporated underthe General Corporation Laws of the State of Delaware on February 18, 2005and completed an initial public offering on June 22, 2005. The Company isa closed-end, non-diversified management investment company that has elected tobe treated as a business development company (“BDC”) under the InvestmentCompany Act of 1940, as amended (the “1940 Act”). In addition, the Company haselected 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’sinvestment objectives are to achieve a high level of current income and capitalgains by investing in debt and equity securities of established privatebusinesses.

 

Gladstone Business Investment, LLC (“Business Investment”) awholly-owned subsidiary of the Company, was established on August 11, 2006for the sole purpose of owning the Company’s portfolio of investments inconnection with its line of credit. The financial statements of BusinessInvestment are consolidated with those of the Company.

 

The Company is externally managed by Gladstone Management Corporation(the “Adviser”), an unconsolidated affiliate of the Company.

 

**NOTE2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

*UnauditedInterim Financial Statements*

 

Interim financialstatements of the Company are prepared in accordance with accounting principlesgenerally accepted in the United States of America (“GAAP”) for interimfinancial information and pursuant to the requirements for reporting on Form 10-Qand Article 10 of Regulation S-X. Accordingly, certain disclosuresaccompanying annual financial statements prepared in accordance with GAAP areomitted. In the opinion of management, all adjustments, consisting solely ofnormal recurring accruals, necessary for the fair statement of financialstatements for the interim periods have been included. The current period’sresults of operations are not necessarily indicative of results that ultimatelymay be achieved for the year. The interim financial statements and notesthereto should be read in conjunction with the financial statements and notesthereto included in the Company’s Form 10-K for the fiscal year ended March 31,2009, as filed with the Securities and Exchange Commission (the “SEC”) on June 2,2009.

 

The year-endcondensed consolidated balance sheet data was derived from audited financialstatements, but does not include all of the disclosures required by GAAP.

 

*Reclassifications*

 

Certain amounts inthe prior year’s financial statements have been reclassified to conform to thecurrent year presentation with no effect to net increase (decrease) in netassets resulting from operations.

 

*Cashand Cash Equivalents*

 

The Company considers all short-term, highly liquid investments thatare both readily convertible to cash and have a maturity of three months orless at the time of purchase to be cash equivalents. Items classified as cashequivalents include temporary investments in commercial paper, United StatesTreasury securities and money-market funds. Cash and cash equivalents arecarried at cost, which approximates fair value.

 

*RecentAccounting Pronouncements*

 

On July 1,2009, the Financial Accounting Standards Board (the “FASB”) issued FASBStatement “The FASB Accounting StandardsCodification and the Hierarchy of Generally Accepted Accounting Principles,” also known as FASB AccountingStandards Codification (“ASC”) 105-10, “GenerallyAccepted Accounting Principles*”*or (the “Codification”). ASC 105-10 establishes the exclusive authoritativereference for U.S. GAAP for use in financial statements, except for SEC rules andinterpretive releases, which are also authoritative GAAP for SEC registrants.The Codification does not change current U.S. GAAP but is intended to simplifyuser access to all authoritative U.S. GAAP by providing all the authoritativeliterature related to a particular topic in one place.  All existingaccounting standard documents have been superseded and all other accountingliterature not included in the Codification is considerednon-authoritative.   The Codification was effective for the Companyduring its interim period ended September 30, 2009 and did not havean impact on its financial condition or results ofoperations.  The Company has included the references to theCodification, as appropriate, in these condensed consolidated financialstatements.

 

14

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InJune 2009, the FASB issued an amendment to the accounting and disclosurerequirements for the consolidation of variable interest entities (VIEs) withinASC 845, “Variable Interest Entities.” The elimination of the concept of aQSPE, as discussed below, removes the exception from applying the consolidationguidance within this amendment. This amendment requires an enterprise toperform a qualitative analysis when determining whether or not it mustconsolidate a VIE. The amendment also requires an enterprise to continuouslyreassess whether it must consolidate a VIE. Additionally, the amendmentrequires enhanced disclosures about an enterprise’s involvement with VIEs andany significant change in risk exposure due to that involvement, as well as howits involvement with VIEs impacts the enterprise’s financial statements.Finally, an enterprise will be required to disclose significant judgments andassumptions used to determine whether or not to consolidate a VIE. Thisamendment is effective for financial statements issued for fiscal yearsbeginning after November 15, 2009. This amendment will not have a materialimpact on the Company’s financial position, results of operations or liquidity.

 

ASC860, “Transfers and Servicing*”* removes theconcept of a qualifying special-purpose entity (“QSPE”) from ASC 860-10 andremoves the exception from ASC 810, “Consolidation.” This statement alsoclarifies the requirements for isolation and limitations on portions offinancial assets that are eligible for sale accounting. This statement iseffective for fiscal years beginning after November 15, 2009.  ASC 860 is effective for the Company’s fiscalyear beginning April 1, 2010. The Company is currently evaluating theimpact of adopting this standard on the condensed consolidated financialstatements.

 

ASC855-10-50, “Subsequent Events*”* was initiatedin an effort to incorporate accounting guidance that originated as auditingstandards into the body of authoritative literature issued by the FASB.  Moving the accounting requirements out of theauditing literature and into the accounting literature is consistent with theFASB’s objective to codify all authoritative U.S. accounting guidance relatedto a particular topic in one place.  Italso provided an opportunity to consider international convergence issues.  The FASB has established general standards ofaccounting for and disclosure of events that occur after the balance sheet datebut before financial statements are issued or are available to be issued.  Although there is new terminology, thestandard is based on the same principles as those that previously existed inthe auditing standards.  The newstandard, which includes a required disclosure of the date through which anentity has evaluated subsequent events, is effective for interim or annualperiods ending after June 15, 2009. The Company’s adoption of this pronouncement did not have a materialimpact on the condensed consolidated financial statements.

 

ASC320, “Investments-Debt and Equity Securities” was issued to make the guidanceon other-than-temporary impairment more operational and to improve thepresentation and disclosure of other-than-temporary impairments on debt andequity securities in the financial statements. ASC 320-10  requires significantadditional disclosures for both annual and interim periods, including theamortized cost basis of available-for-sale and held-to-maturity debt, themethodology and key imports used to measure the credit portion ofother-than-temporary impairment, and a roll forward of amounts recognized inearnings for securities by major security type. ASC 320-10 requires that entities identify major security classesconsistent with how the securities are managed based on the nature and risks ofthe security, and also expands, for disclosure purposes, the list of majorsecurity types identified in ASC 320. ASC 320-10 is effective for interim andannual reporting periods ending after June 15, 2009.  The Company’s adoption of this pronouncementdid not have a material impact on the condensed consolidated financialstatements.

 

ASC820-10-35, “Determining the Fair Value When the Volume and Level of Activityfor the Asset or Liability Have Significantly Decreased and IdentifyingTransactions That Are Not Orderly*”* providesadditional guidance for estimating fair value in accordance with ASC 820-10, “FairValue Measurements and Disclosures*”* when thevolume and level of activity for an asset or liability has significantlydecreased and also provides guidance on identifying circumstances that indicatea transaction is not orderly.  ASC820-10-35 amends ASC 820-10 to require entities to disclose in interim andannual periods the inputs and valuation techniques used to measure fair valuetogether with any changes in valuation techniques and related inputs during theperiod.  ASC 820-10-35 also requiresreporting entities to define major categories**for both debt and equity securities to be major security types asdescribed in paragraph 19 of ASC 320. This requires entities to provide disclosures on a more disaggregatedbasis than previously had been required under ASC 820-10.  ASC 820-10-35 is effective for interim andannual reporting periods ending after September 15, 2009, and shall beapplied prospectively.  The Company’sadoption of this pronouncement did not have a material impact on its condensedconsolidated financial statements.

 

*InvestmentValuation Policy*

 

The Companycarries its investments at market value to the extent that market quotationsare readily available and reliable, and otherwise at fair value, as determinedin good faith by its Board of Directors. In determining the fair value of the Company’s investments, the Adviserhas established an investment valuation policy (the “Policy”).  The Policy is approved by the Company’s Boardof Directors and each quarter the Board of Directors reviews whether theAdviser has applied the Policy consistently and votes whether or not to acceptthe recommended valuation of the Company’s investment portfolio.

 

The Company uses generally accepted valuation techniques to value itsportfolio unless the Company has specific information about the value of an investmentto determine otherwise. From time to time the Company may accept an appraisalof a business in which the Company holds securities. These appraisals areexpensive and occur infrequently but provide a third-party valuation opinionthat may 

 

15

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differ in results, techniques and scopes used to value the Company’sinvestments.  When these specificthird-party appraisals are engaged or accepted, the Company uses suchappraisals to value the investment the Company has in that business if it isdetermined that the appraisals are the best estimate of fair value.

 

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

 

**Publicly-tradedsecurities:** TheCompany determines the value of publicly-traded securities based on the closingprice for the security on the exchange or securities market on which it islisted and primarily traded on the valuation date.  To the extent that the Company ownsrestricted securities that are not freely tradable, but for which a publicmarket otherwise exists, the Company will use the market value of that securityadjusted for any decrease in value resulting from the restrictive feature.

 

**Securitiesfor which a limited market exists:** The Company values securities that are not traded onan established secondary securities market, but for which a limited market forthe security exists, such as certain participations in, or assignments of,syndicated loans, at the quoted price. In valuing these assets, the Company assesses trading activity in anasset class and evaluates variances in prices and other market insights todetermine if any available quote prices are reliable.  If the Company concludes that quotes based onactive markets or trading activity may be relied upon, firm bid prices arerequested; however, if a firm bid price is unavailable, the Company bases thevalue of the security upon the indicative bid price offered by the respectiveoriginating syndication agent’s trading desk, or secondary desk, on or near thevaluation date. To the extent that the Company uses the indicative bid price asa basis for valuing the security, the Adviser may take further steps toconsider additional information to validate that price in accordance with thePolicy.

 

In the event these limited markets become illiquidsuch that market prices are no longer readily available, the Company will valueits syndicated loans using estimated net present values of the future cashflows or discounted cash flows (“DCF”). The use of a DCF methodology followsthat prescribed by ASC 820-10-35-15A, “Determiningthe Fair Value of a Financial Asset When the Market for That Asset Is NotActive,*”* which provides guidanceon the use of a reporting entity’s own assumptions about future cash flows andrisk-adjusted discount rates when relevant observable inputs, such as quotes inactive markets, are not available. When relevant observable market data doesnot exist, the alternative outlined in the ASC 820-10-35-15A is the use of valuing investments based onDCF.  For the purposes of using DCF toprovide fair value estimates, the Company considers multiple inputs such as arisk-adjusted discount rate that incorporates adjustments that marketparticipants would make both for nonperformance and liquidity risks.  As such, the Company develops a modifieddiscount rate approach that incorporates risk premiums including, among others,increased probability of default, or higher loss given default, or increasedliquidity risk. The DCF valuations are applied to the syndicated loans toprovide an estimate of what the Company believes a market participant would payto purchase a syndicated loan in an active market, thereby establishing a fairvalue.  The Company will apply the DCFmethodology in illiquid markets until quoted prices are available or are deemedreliable based on trading activity.

 

As of September 30, 2009, the Company assessedtrading activity in its syndicated loan assets and determined that there hadbeen a return to market liquidity and a better functioning secondary market forthese assets.  Thus, firm bid prices orindicative bids were used to fair value the Company’s remaining syndicatedloans at September 30, 2009.  However, for those syndicated loans which were sold but not yet settledas of September 30, 2009, the Company used the respective sales prices tovalue those syndicated loans.

 

**Securitiesfor which no market exists:** The valuation methodology for securities for which nomarket exists falls into three categories: (1) portfolio investmentscomprised solely of debt securities; (2) portfolio investments incontrolled companies comprised of a bundle of securities, which can includedebt and equity securities; and (3) portfolio investments innon-controlled companies comprised of a bundle of securities, which can includedebt and equity securities.

 

**(1)****        ****Portfolio investmentscomprised solely of debt securities:** Debt securities that are not publicly traded on anestablished securities market, or for which a limited market does not exist (“Non-PublicDebt Securities”), and that are issued by portfolio companies where the Companyhas no equity, or equity-like securities, are fair valued in accordance withthe terms of the Policy, which utilizes opinions of value submitted to theCompany by Standard & Poor’s Securities Evaluations, Inc. (“SPSE”).The Company may also submit paid in kind (“PIK”) interest to SPSE for theirevaluation when it is determined that PIK interest is likely to be received.

 

**(2)****        ****Portfolio investments in controlledcompanies comprised of a bundle of investments, which can include debt andequity securities:**The fair value of these investments is determined based on the total enterprisevalue of the portfolio company, or issuer, utilizing a liquidity waterfallapproach under ASC 820-10, “Fair Value Measurements and Disclosures*”* for the Company’s Non-Public Debt Securities and equity orequity-like securities (e.g. preferred equity, equity, or other equity-likesecurities) that are purchased together as part of a package, where the Companyhas control or could gain control through an option or warrant security, boththe debt and equity securities of the portfolio investment would exit in themergers and acquisition market as the principal market, generally through asale or recapitalization of the portfolio company. In accordance with ASC820-10, the Company applies the in-use premise of value which assumes the debtand equity securities are sold 

 

16

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together. Under this liquidity waterfall approach, the Company firstcalculates the total enterprise value of the issuer by incorporating some orall of the following factors to determine the total enterprise value of theissuer:

 

·**                 **the issuer’s ability to make payments;

·**                 **the earnings of the issuer;

·**                 **recent sales to third parties of similarsecurities;

·**                 **the comparison to publicly tradedsecurities; and

·**                 **DCF or other pertinent factors.

 

In gathering the sales to third parties of similar securities, theCompany may reference industry statistics and use outside experts. Once theCompany has estimated the total enterprise value of the issuer, the Companywill subtract the value of all the debt securities of the issuer; which arevalued at the contractual principal balance. Fair values of these debtsecurities are discounted for any shortfall of total enterprise value over thetotal debt outstanding for the issuer. Once the values for all outstandingsenior securities (which include the debt securities) have been subtracted fromthe total enterprise value of the issuer, the remaining amount, if any, is usedto determine the value of the issuer’s equity or equity like securities.  If, in the Adviser’s judgment, the liquiditywaterfall 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 thatis unavailable, a DCF valuation technique.

 

**(3)****        ****Portfolio investments innon-controlled companies comprised of a bundle of investments, which caninclude debt and equity securities:**The Company values Non-Public Debt Securities that arepurchased together with equity or equity-like securities from the sameportfolio company, or issuer, for which the Company does not control or cannotgain control as of the measurement date, using a hypothetical secondary marketas the Company’s principal market. In accordance with ASC 820-10, the Companydetermines its fair value of these debt securities of non-control investmentsassuming the sale of an individual debt security using the in-exchange premiseof value (as defined in ASC 820-10). As such, the Company estimates the fairvalue of the debt component using estimates of value provided by SPSE and itsown assumptions in the absence of observable market data, including syntheticcredit ratings, estimated remaining life, current market yield and interestrate spreads of similar securities as of the measurement date. Subsequent to June 30,2009, for equity or equity-like securities of investments for which the Companydoes not control or cannot gain control as of the measurement date, the Companyestimates the fair value of the equity using the in-exchange premise of valuebased on factors such as the overall value of the issuer, the relative fairvalue of other units of account including debt, or other relative valueapproaches. Consideration also is given to capital structure and othercontractual obligations that may impact the fair value of the equity. Further,the Company may utilize comparable values of similar companies, recentinvestments and indices with similar structures and risk characteristics or itsown assumptions in the absence of other observable market data and may alsoemploy DCF valuation techniques.

 

Due to the uncertainty inherent in the valuation process, suchestimates of fair value may differ significantly from the values that wouldhave been obtained had a ready market for the securities existed, and thedifferences could be material. Additionally, changes in the market environmentand other events that may occur over the life of the investments may cause thegains or losses ultimately realized on these investments to be different thanthe valuations currently assigned. There is no single standard for determiningfair value in good faith, as fair value depends upon circumstances of eachindividual case. In general, fair value is the amount that the Company mightreasonably expect to receive upon the current sale of the security in anarms-length transaction in the security’s principal market.

 

Refer to Note 3for additional information regarding fair value measurements and the Company’sadoption of ASC 820-10.

 

*Interestand Dividend Income Recognition*

 

Interest income,adjusted for amortization of premiums and acquisition costs and for theaccretion of discounts, is recorded on the accrual basis to the extent thatsuch amounts are expected to be collected. Generally, when a loan becomes 90days or more past due or if the Company’s qualitative assessment indicates thatthe debtor is unable to service its debt or other obligations, the Company willplace the loan on non-accrual status and cease recognizing interest income onthat loan until the borrower has demonstrated the ability and intent to paycontractual amounts due.  However, theCompany remains contractually entitled to this interest.  At September 30, 2009, one Controlinvestment was on non-accrual with a fair value of approximately $1.6 million,or 0.8% of the fair value of all loans held in the Company’s portfolio at September 30,2009.  At March 31, 2009, oneControl investment was on non-accrual with a fair value of approximately $2.6million, or 0.8% of the fair value of all loans held in the Company’s portfolioat March 31, 2009.

 

Conditionalinterest, or a success fee, is recorded upon full repayment of a loaninvestment. To date, the Company has not recorded any conditional interest.Dividend income on preferred equity securities is accrued to the extent thatsuch amounts are expected to be collected and that the Company has the optionto collect such amounts in cash. To date, the Company has not accrued anydividend income.

 

17

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**NOTE3. INVESTMENTS**

 

The Companyadopted ASC 820-10 on April 1, 2008. In part, ASC 820-10 defines fairvalue, establishes a framework for measuring fair value and expands disclosuresabout assets and liabilities measured at fair value. The new standard providesa consistent definition of fair value that focuses on exit price in theprincipal, or most advantageous, market and prioritizes, within a measurementof fair value, the use of market-based inputs over entity-specific inputs. Thestandard also establishes the following three-level hierarchy for fair valuemeasurements based upon the transparency of inputs to the valuation of an assetor liability as of the measurement date.

 

·                  *Level 1* — inputs to the valuation methodologyare quoted prices (unadjusted) for identical assets or liabilities in activemarkets;

 

·                  *Level 2***— inputs to the valuation methodologyinclude quoted prices for similar assets and liabilities in active markets, andinputs that are observable for the asset or liability, either directly orindirectly, for substantially the full term of the financial instrument. Level2 inputs are in those markets for which there are few transactions, the pricesare not current, little public information exists or instances where pricesvary substantially over time or among brokered market makers; and

 

·                  *Level 3*— inputs to the valuation methodology areunobservable and significant to the fair value measurement. Unobservable inputsare those inputs that reflect the Company’s own assumptions that marketparticipants would use to price the asset or liability based upon the bestavailable information.

 

As of September 30,2009, all of the Company’s assets were valued using Level 3 inputs.

 

The followingtable presents the financial instruments carried at fair value as of September 30,2009 and March 31, 2009, by caption on the accompanying condensedconsolidated statements of assets and liabilities for each of the three levelsof hierarchy established by ASC 820-10:

 
| ** **                            | ** ** | **As of September 30, 2009** | ** ** |
|---------------------------------------|------------|-----------------------------------|------------|
| ** **                            | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | **Total Fair Value** | ** ** |
| ** **                            | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | **Reported in Condensed** | ** ** |
| ** **                            | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | **Consolidated Statement of** | ** ** |
| ** **                            | ** ** | **Level 1**                       | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Assets and Liabilities** | ** ** |
| Non-Control/Non-Affiliate investments |       | $                                 | —     |   | $ | — |   | $ | 25,004 |   | $ | 25,004 |   |
| Control investments                   |       | —                            |       | — |   | 132,399 |   | 132,399 |   |
| Affiliate investments                 |       | —                            |       | — |   | 46,900 |   | 46,900 |   |
| Total investments at fair value       |       | $                                 | —     |   | $ | — |   | $ | 204,303 |   | $ | 204,303 |   |

 
| ** **                             | ** ** | **As of March  31, 2009** | ** ** |
|----------------------------------------|------------|------------------------------------------|------------|
| ** **                             | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | **Total Fair Value** | ** ** |
| ** **                             | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | **Reported in Condensed** | ** ** |
| ** **                             | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | **Consolidated Statement of** | ** ** |
| ** **                             | ** ** | **Level 1**                         | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Assets and Liabilities** | ** ** |
| Non-Control/Non-Affiliate  investments |       | $                                        | —     |   | $ | — |   | $ | 94,740 |   | $ | 94,740 |   |
| Control  investments                   |       | —                                   |       | — |   | 166,163 |   | 166,163 |   |
| Affiliate  investments                 |       | —                                   |       | — |   | 53,027 |   | 53,027 |   |
| Total  investments at fair value       |       | $                                        | —     |   | $ | — |   | $ | 313,930 |   | $ | 313,930 |   |

 

*Changesin Level 3 Fair Value Measurements of Investments*

 

The followingtables provide a roll-forward in the changes in fair value during the three andsix months ended September 30, 2009 and 2008 for all investments for whichthe Company determines fair value using unobservable (Level 3) factors. When adetermination is made to classify a financial instrument within Level 3 of thevaluation hierarchy, the determination is based upon the significance of theunobservable factors to the overall fair value measurement. However, Level 3financial instruments typically include, in addition to the unobservable orLevel 3 components, observable components (that is, components that areactively quoted and can be validated to external sources). Accordingly, thegains and losses in the table below include changes in fair value due in partto observable factors that are part of the valuation methodology.

 

**Fair value measurements usingunobservable data inputs (Level 3)**

** **
| ** **                                        | ** ** | **Non-Control/**  | ** ** | ** **      | ** ** | ** **      | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|-------------------|------------|-----------------|------------|-----------------|------------|------------|------------|
| ** **                                        | ** ** | **Non-Affiliate** | ** ** | **Control**     | ** ** | **Affiliate**   | ** ** | ** ** | ** ** |
| ** **                                        | ** ** | **Investments**   | ** ** | **Investments** | ** ** | **Investments** | ** ** | **Total**  | ** ** |
| **Six months ended September 30, 2009:**     |       |              |       |            |       |            |       |       |       |
| Fair value as of March 31, 2009              |       | $                 | 94,740     |            | $          | 166,163         |       | $          | 53,027     |   | $ | 313,930 |   |
| Total realized/unrealized gains (losses) (a)      |       | 609               |       | (26,381         | )          | (6,119          | )          | (31,891    | )          |
| New investments, repayments, and settlements, net |       | (70,345           | )          | (7,383          | )          | (8              | )          | (77,736    | )          |
| Transfers in (out) of Level 3                     |       | —            |       | —          |       | —          |       | —     |       |
| Fair value as of September 30, 2009          |       | $                 | 25,004     |            | $          | 132,399         |       | $          | 46,900     |   | $ | 204,303 |   |
| ** **                                        |       |              |       |            |       |            |       |       |       |
| **Three months ended September 30, 2009:**   |       |              |       |            |       |            |       |       |       |
| Fair value as of June 30, 2009               |       | $                 | 26,961     |            | $          | 149,509         |       | $          | 50,539     |   | $ | 227,009 |   |
| Total realized/unrealized (losses) gains (a)      |       | (1,514            | )          | (14,900         | )          | (3,853          | )          | (20,267    | )          |
| New investments, repayments, and settlements, net |       | (443              | )          | (2,210          | )          | 214             |       | (2,439     | )          |
| Transfers in (out) of Level 3                     |       | —            |       | —          |       | —          |       | —     |       |
| Fair value as of September 30, 2009          |       | $                 | 25,004     |            | $          | 132,399         |       | $          | 46,900     |   | $ | 204,303 |   |

 

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(a)          Realized/unrealized gains and losses are reported onthe accompanying condensed consolidated statements of operations for the threeand six months ended September 30, 2009.

 

**Fair value measurements usingunobservable data inputs (Level 3)**

 
| ** **                                        | ** ** | **Non-Control/**  | ** ** | ** **      | ** ** | ** **      | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|-------------------|------------|-----------------|------------|-----------------|------------|------------|------------|
| ** **                                        | ** ** | **Non-Affiliate** | ** ** | **Control**     | ** ** | **Affiliate**   | ** ** | ** ** | ** ** |
| ** **                                        | ** ** | **Investments**   | ** ** | **Investments** | ** ** | **Investments** | ** ** | **Total**  | ** ** |
| **Six months ended September 30, 2008:**     |       |              |       |            |       |            |       |       |       |
| Fair value at March 31, 2008                 |       | $                 | 142,739    |            | $          | 145,407         |       | $          | 47,458     |   | $ | 335,604 |   |
| Total realized/unrealized (losses) gains (a)      |       | (4,941            | )          | 5,973           |       | (11,393         | )          | (10,361    | )          |
| New investments, repayments, and settlements, net |       | (22,665           | )          | 5,866           |       | 17,812          |       | 1,013      |       |
| Transfers in (out) of Level 3                     |       | —            |       | —          |       | —          |       | —     |       |
| Fair value as of September 30, 2008          |       | $                 | 115,133    |            | $          | 157,246         |       | $          | 53,877     |   | $ | 326,256 |   |
|                                              |       |              |       |            |       |            |       |       |       |
| **Three months ended  September 30, 2008:**  |       |              |       |            |       |            |       |       |       |
| Fair value at June 30, 2008                  |       | $                 | 130,764    |            | $          | 141,042         |       | $          | 48,493     |   | $ | 320,299 |   |
| Total realized/unrealized (losses) gains (a)      |       | (7,689            | )          | 10,840          |       | (5,978          | )          | (2,827     | )          |
| New investments, repayments, and settlements, net |       | (7,942            | )          | 5,364           |       | 11,362          |       | 8,784      |       |
| Transfers in (out) of Level 3                     |       | —            |       | —          |       | —          |       | —     |       |
| Fair value as of September 30, 2008          |       | $                 | 115,133    |            | $          | 157,246         |       | $          | 53,877     |   | $ | 326,256 |   |

 

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(a) Realized/unrealized gains and losses are reported on theaccompanying condensed consolidated statements of operations for the three andsix months ended September 30, 2008.

 

18

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*Non-Control/Non-AffiliateInvestments*

 

At September 30,2009 and March 31, 2009, the Company held investments inNon-Control/Non-Affiliates of approximately $25.0 million and $94.7 million,respectively, at fair value. These investments were comprised primarily ofsyndicated loan participations of senior notes of private companies and anon-syndicated loan investment where the Company does not have a significantownership interest in the portfolio company. Included inNon-Control/Non-Affiliate investments, at both September 30, 2009 and March 31,2009, were common stock warrants of one Non-Control/Non-Affiliate company,which carried a nominal fair value.  At September 30,2009 and March 31, 2009, the Company’s investments, at fair value, inNon-Control/Non-Affiliates represented approximately 14% and 44%, respectively,of the Company’s net assets.

 

During April andMay 2009, the Company sold 29 of its 32 senior syndicated loans held at March 31,2009 (collectively, the “Syndicated Loan Sales”) for an aggregate ofapproximately $69.2 million in cash proceeds and recorded a realized loss ofapproximately $34.6 million in connection with these sales. These loans weresold to pay down all unpaid principal and interest owed to Deutsche Bank AG (“DeutscheBank”) under the Company’s prior credit agreement.

 

On September 29,2009, the Company agreed to an early termination of its revolving line ofcredit to B-Dry, LLC, which had an original maturity date of October 16,2009.  The revolving line of credit wasfully repaid at the time of the agreement.

 

During September 2009,the Company finalized its sale of certain senior syndicated loans (HMTBPAcquisition II Corp. and a portion of Interstate Fibernet, Inc.) that wereheld in its portfolio of investments to various investors in the syndicatedloan market.  These loans, in aggregate, had a cost value of approximately$6.8 million, or 2.9% of the cost value of the Company’s total investments, andan aggregate fair market value of approximately $5.5 million, or 2.7% of thefair market value of the Company’s total investments, at September 30,2009.  The Company settled these loans in October 2009 and receivedapproximately $5.5 million in net cash proceeds and recorded a realized loss ofapproximately $1.3 million which will be reflected in the results of operationsfor the three months ended December 31, 2009. (See Note 12, *Subsequent Events*).   These loans are included inthe Company’s condensed consolidated assets as of September 30, 2009 andwere valued at their respective sale prices.

 

*Controland Affiliate Investments*

 

At September 30, 2009 and March 31, 2009, the Company hadinvestments of approximately $148.6 million and $157.0 million, respectively,at fair value, in revolving credit facilities, senior debt and subordinateddebt of 12 portfolio companies. In addition, at September 30 and March 31,2009, the Company had invested approximately $30.7 million and $62.2 million,respectively, at fair value, in preferred and common equity of thosecompanies.  At September 30, 2009and March 31, 2009, the Company’s investments in Control investments, atfair value, represented approximately 73% and 77%, respectively, of the Company’snet assets. Also, at both September 30, 2009 and March 31, 2009, theCompany’s investments, at fair value, in Affiliate investments representedapproximately 26% and 25%, respectively, of the Company’s net assets.

 

On April 9, 2009, A. Stucki Holding Corp. refinanced a portion ofits senior term debt by making principal repayments of approximately $2.0million, which represented the next three quarterly payments due under normalamortization on both their senior term A ($1.6 million) and senior term B($412) loans.  Normal amortization isexpected to resume on April 1, 2010.

 

On April 9, 2009, ASH Holdings Corp. made a repayment ofapproximately $1.1 million on its revolving line of credit, which reduced theoutstanding balance to $500.

 

On April 10, 2009, the Company entered into an agreement to reducethe available credit limit on Mathey Investment, Inc.’s revolving line ofcredit from $2.0 million to $1.0 million. This was a non-cash transaction.

 

On April 10, 2009, the Company made an investment disbursement toCavert II Holding Corp. (“Cavert”) for approximately $850 on its revolving lineof credit, and the proceeds were used to make the next four quarterly paymentsdue under normal amortization for both its senior term A and senior term Bloans in a non-cash transaction.  Normalamortization on both of these loans is expected to resume on July 1,2010.  Subsequently, on April 17,2009, Cavert repaid the outstanding $850 in principal plus accrued interest onits revolving line of credit.  Therevolving line of credit was then sold to a third party for a nominal fee.

 

On April 13, 2009, the Company entered into an agreement to reducethe available credit limit on Chase II Holdings Corp.’s revolving line ofcredit from $4.5 million to $3.5 million. This was a non-cash transaction.

 

*InvestmentConcentrations*

 

Approximately 53%of the aggregate fair value of the Company’s investment portfolio at September 30,2009 was comprised of senior debt, approximately 32% was senior subordinateddebt, and approximately 15% was preferred and common equity securities. At September 30,2009, the Company had investments in 17 portfolio companies with an aggregatefair value of $204.3 million, of which A. Stucki Holding Corp., Chase IIHoldings Corp. and Acme Cryogenics, Inc. collectively comprisedapproximately $90.7 million, or 44% of the Company’s total investmentportfolio, at fair value.  The followingtable outlines the Company’s investments by type at September 30, 2009 andMarch 31, 2009:

 

19

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| ** **                                    | ** ** | **September 30, 2009** | ** **  | **March 31, 2009** | ** ** |
|-----------------------------------------------|------------|-----------------------------|-------------|-------------------------|------------|
| ** **                                    | ** ** | **Cost**                    | ** **  | **Fair Value**          | ** ** | **Cost** | ** ** | **Fair Value** | ** ** |
| Senior Term Debt                              |       | $                           | 119,170     |                    | $          | 108,205 |   | $ | 230,861 |   | $ | 185,161 |   |
| Senior Subordinated Term Debt                 |       | 72,111                      |        | 65,353                  |       | 72,762 |   | 66,576 |   |
| Preferred & Common Equity Securities |       | 45,322                      |        | 30,745                  |       | 45,322 |   | 62,193 |   |
| **Total Investments**                         | ** ** | **$**                       | **236,603** | ** **              | **$**      | **204,303** | ** ** | **$** | **348,945** | ** ** | **$** | **313,930** | ** ** |

 

Investments atfair value consisted of the following industry classifications at September 30,2009 and March 31, 2009:

 
| ** **                                 | ** ** | **September 30, 2009** | ** **  | **March 31, 2009** | ** ** |
|--------------------------------------------|------------|-----------------------------|-------------|-------------------------|------------|
| ** **                                 | ** ** | ** **                  | ** **  | **Percentage of**       | ** ** | ** ** | ** ** | **Percentage of** | ** ** |
| ** **                                 | ** ** | **Fair Value**              | ** **  | **Total Investments**   | ** ** | **Net Assets** | ** ** | **Fair Value** | ** ** | **Total Investments** | ** ** | **Net Assets** | ** ** |
| Aerospace and Defense                      |       | $                           | 16,862      |                    | 8.3        | % | 9.3 | % | $ | 22,436 |   | 7.2 | % | 10.4 | % |
| Automobile                                 |       | 8,476                       |        | 4.1                     | %          | 4.7 | % | 14,436 |   | 4.6 | % | 6.7 | % |
| Beverage, Food and Tobacco                 |       | —                      |        | —                  |       | — |   | 1,570 |   | 0.5 | % | 0.7 | % |
| Broadcasting and Entertainment             |       | —                      |        | —                  |       | — |   | 1,934 |   | 0.6 | % | 0.9 | % |
| Buildings and Real Estate                  |       | 10,465                      |        | 5.1                     | %          | 5.7 | % | 10,709 |   | 3.4 | % | 5.0 | % |
| Cargo Transport                            |       | 10,093                      |        | 4.9                     | %          | 5.5 | % | 13,324 |   | 4.3 | % | 6.2 | % |
| Chemicals, Plastics and Rubber             |       | 18,328                      |        | 9.0                     | %          | 10.1 | % | 21,420 |   | 6.8 | % | 10.0 | % |
| Containers, Packaging and Glass            |       | 16,349                      |        | 8.0                     | %          | 9.0 | % | 21,446 |   | 6.8 | % | 10.0 | % |
| Diversified/Conglomerate Manufacturing     |       | 49,773                      |        | 24.4                    | %          | 27.3 | % | 56,944 |   | 18.1 | % | 26.5 | % |
| Diversified/Conglomerate Service           |       | 3,064                       |        | 1.5                     | %          | 1.7 | % | 23,585 |   | 7.5 | % | 11.0 | % |
| Electronics                                |       | —                      |        | —                  |       | — |   | 6,594 |   | 2.1 | % | 3.1 | % |
| Healthcare, Education and Childcare        |       | 7,618                       |        | 3.7                     | %          | 4.2 | % | 33,605 |   | 10.7 | % | 15.6 | % |
| Machinery                                  |       | 46,681                      |        | 22.8                    | %          | 25.6 | % | 63,907 |   | 20.4 | % | 29.8 | % |
| Oil and Gas                                |       | 5,119                       |        | 2.5                     | %          | 2.8 | % | 6,171 |   | 2.0 | % | 2.9 | % |
| Personal, Food, and Miscellaneous Services |       | —                      |        | —                  |       | — |   | 3,552 |   | 1.1 | % | 1.7 | % |
| Printing and Publishing                    |       | 2,588                       |        | 1.3                     | %          | 1.4 | % | 3,158 |   | 1.0 | % | 1.5 | % |
| Telecommunications                         |       | 8,887                       |        | 4.4                     | %          | 4.9 | % | 9,139 |   | 2.9 | % | 4.3 | % |
| **Total Investments**                      | ** ** | **$**                       | **204,303** | ** **              | **100.0**  | **%** | ** ** | ** ** | **$** | **313,930** | ** ** | **100.0** | **%** | ** ** | ** ** |

 

The investments atfair value were included in the following geographic regions of the UnitedStates at September 30, 2009 and March 31, 2009:

 
| ** **            | ** ** | **September 30, 2009** | ** **  | **March 31, 2009** | ** ** |
|-----------------------|------------|-----------------------------|-------------|-------------------------|------------|
| ** **            | ** ** | ** **                  | ** **  | **Percentage of**       | ** ** | ** ** | ** ** | **Percentage of** | ** ** |
| ** **            | ** ** | **Fair Value**              | ** **  | **Total Investments**   | ** ** | **Net Assets** | ** ** | **Fair Value** | ** ** | **Total Investments** | ** ** | **Net Assets** | ** ** |
| Mid-Atlantic          |       | $                           | 77,961      |                    | 38.1       | % | 42.8 | % | $ | 119,622 |   | 38.1 | % | 55.7 | % |
| Midwest               |       | 78,810                      |        | 38.6                    | %          | 43.3 | % | 105,945 |   | 33.7 | % | 49.3 | % |
| Northeast             |       | 7,800                       |        | 3.8                     | %          | 4.3 | % | 17,525 |   | 5.6 | % | 8.2 | % |
| Southeast             |       | 24,278                      |        | 11.9                    | %          | 13.3 | % | 40,512 |   | 12.9 | % | 18.9 | % |
| West                  |       | 15,454                      |        | 7.6                     | %          | 8.5 | % | 30,326 |   | 9.7 | % | 14.1 | % |
| **Total Investments** | ** ** | **$**                       | **204,303** | ** **              | **100.0**  | **%** | ** ** | ** ** | **$** | **313,930** | ** ** | **100.0** | **%** | ** ** | ** ** |

 

The geographicregion indicates the location of the headquarters for the Company’s portfoliocompanies. A portfolio company may have a number of other business locations inother geographic regions.

 

*InvestmentPrincipal Repayments*

 

The followingtable summarizes the contractual principal repayment and maturity of theCompany’s investment portfolio by fiscal year, assuming no voluntaryprepayments:

 
| ** **                                         | ** ** | ** **                                              | ** ** | **Amount** | ** **  |
|----------------------------------------------------|------------|---------------------------------------------------------|------------|------------|-------------|
| For the remaining six months ending March 31: |       | 2010                                                    |       | $          | 13,710      |   |
| For the fiscal year ending March 31:          |       | 2011                                                    |       | 23,421     |        |
|                                               |       | 2012                                                    |       | 54,833     |        |
|                                               |       | 2013                                                    |       | 13,256     |        |
|                                               |       | 2014                                                    |       | 61,293     |        |
|                                               |       | 2015                                                    |       | 21,742     |        |
|                                               |       | Thereafter                                              |       | 3,043      |        |
|                                               | ** ** | **Total  contractual repayments**                       | ** ** | **$**      | **191,298** | ** ** |
|                                               |       | Investments in  equity securities                       |       | 45,322     |        |
|                                               |       | Unamortized  premiums on debt securities                |       | (17        | )           |
|                                               | ** ** | **Total  investments held at September 30, 2009:** | ** ** | **$**      | **236,603** | ** ** |

 

20

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**NOTE4. RELATED PARTY TRANSACTIONS**

 

**InvestmentAdvisory and Management Agreement**

 

The Company has entered into an investment advisory and managementagreement with the Adviser (the “Advisory Agreement”), which is controlled bythe Company’s chairman and chief executive officer. In accordance with theAdvisory Agreement, the Company pays the Adviser fees as compensation for itsservices, consisting of a base management fee and an incentive fee. On July 8,2009, the Company’s Board of Directors approved the renewal of its AdvisoryAgreement with the Adviser through August 31, 2010.

 

The Company pays the Adviser an annual base management fee of 2% of itsaverage gross assets, which is defined as total assets less uninvested cash andcash equivalents resulting from borrowings calculated as of the end of the twomost recently completed quarters.

 

Thefollowing tables summarize the management fees and associated credits reflectedin the accompanying condensed consolidated statements of operations:

 
| ** **                                                                     | ** ** | **Three months ended  September 30,** | ** ** | **Six months ended September 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                     | ** ** | **2009**                                   | ** ** | **2008**                                | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Base management fee**                                                        |       | $                                          | 164        |                                    | $          | 435 |   | $ | 477 |   | $ | 861 |   |
|                                                                           |       |                                       |       |                                    |       |   |   |   |   |
| Credits to base  management fee from Adviser:                                  |       |                                       |       |                                    |       |   |   |   |   |
| Fee reduction for the waiver of 2% fee on senior  syndicated loans to 0.5% (1) |       | (48                                        | )          | (383                                    | )          | (231 | ) | (807 | ) |
| Credit for fees received by Adviser from the  portfolio companies              |       | (117                                       | )          | (313                                    | )          | (235 | ) | (463 | ) |
| **Credit to base management fee from  Adviser**                                |       | (165                                       | )          | (696                                    | )          | (466 | ) | (1,270 | ) |
|                                                                           |       |                                       |       |                                    |       |   |   |   |   |
| **Net base management fee**                                                    | ** ** | **$**                                      | **(1**     | **)**                                   | **$**      | **(261** | **)** | **$** | **11** | ** ** | **$** | **(409** | **)** |

 

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(1)          TheAdviser voluntarily and irrevocably waived the annual 2.0% base management feeto 0.5% for senior syndicated loan participations on a quarterly basis to theextent that proceeds resulting from borrowings were used to purchase suchsyndicated loan participation. Fees waived cannot be recouped by the Adviser inthe future.

 

Overall, the base management fee due tothe Adviser cannot exceed 2.0% of total assets (as reduced by cash and cashequivalents pledged to creditors) during any given fiscal year. Amountsincluded in Fee due to Adviser in the accompanying condensed consolidatedstatements of assets and liabilities were as follows:

 
| ** **                                 | ** ** | **September 30,  2009** | ** ** | **March 31,  2009** | ** ** |
|--------------------------------------------|------------|------------------------------|------------|--------------------------|------------|
| Unpaid base management fee  due to Adviser |       | $                            | (1         | )                        | $          | (114 | ) |
| Unpaid loan servicing fee  due to Adviser  |       | 222                          |       | 301                      |       |
| Total Fee due to Adviser                   |       | $                            | 221        |                     | $          | 187 |   |

 

Frominception through September 30, 2009, the Company has not recorded anyincome-based incentive fee.

 

**LoanServicing and Portfolio Company Fees**

 

The Adviser alsoservices the loans held by Business Investment, in return for which it receivesa 2.0% annual fee based on the monthly aggregate outstanding balance of loanspledged 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 againstthe 2.0% base management fee under the Advisory Agreement.  For the three and six months ended September 30,2009, the Company recorded loan servicing fees due to the Adviser of $938 and$2,006, respectively, as compared to $1,258 and $2,511 for the three and sixmonths ended September 30, 2008, respectively, all of which were deductedagainst the 2.0% base management fee in order to derive the Base management feeline item in the accompanying condensed consolidated statements ofoperations.  Under the Advisory Agreement,the Adviser has also provided and continues to provide managerial assistanceand other services to the Company’s portfolio companies and may receive feesfor services other than managerial assistance.

 

**AdministrationAgreement**

 

The Company has enteredinto an administration agreement (the “Administration Agreement”) withGladstone Administration, LLC (the “Administrator”), a wholly-owned subsidiaryof the Adviser.  Under the AdministrationAgreement, the Company pays separately for administrative services. TheAdministration Agreement provides for payments equal to the Company’s allocableportion of its Administrator’s overhead expenses in performing its obligationsunder the Administration Agreement including, but not limited to, rent foremployees of the Administrator, and its allocable portion of the salaries andbenefits expenses of the Company’s chief financial officer, chief complianceofficer, treasurer and their respective staffs. The Company’s allocable portionof expenses is derived by multiplying the Administrator’s total allocableexpenses by the percentage of the Company’s average total assets (the totalassets at the beginning of each quarter) in comparison to the average totalassets of all companies managed by the Adviser under similar agreements. On July 8,2009, the Company’s Board of Directors approved the renewal of itsAdministration Agreement with the Administrator through August 31, 2010.

 

21

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The Company recorded fees to the Administrator on the condensedconsolidated statements of operations of $198 and $371 for the three and sixmonths ended September 30, 2009, respectively, as compared toadministration fees of $212 and $447 for the three and six months ended September 30,2008, respectively.  As of September 30,2009 and March 31, 2009, $198 and $179, respectively, was unpaid andincluded in Fee due to Administrator in the accompanying condensed consolidatedstatements of assets and liabilities.

 

**NOTE5. 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 byBranch Banking and Trust Company (“BB&T”) as administrative agent. KeyEquipment Finance Inc. also joined the Credit Facility as a committedlender.  In connection with entering intothe Credit Facility, the Company borrowed $43.8 million under the Credit Facilityto make a final payment in satisfaction of all unpaid principal and interestowed to Deutsche Bank under the prior credit agreement.  The Credit Facility may be expanded up to$125.0 million through the addition of other committed lenders to thefacility.  The Credit Facility matures onApril 14, 2010, and, if the facility is not renewed or extended by thisdate, all unpaid principal and interest will be due and payable within one yearof the maturity date.  Advances under theCredit Facility generally bear interest at the 30-day LIBOR rate (subject to aminimum rate of 2%), plus 5% per annum, with a commitment fee of 0.75% perannum on undrawn amounts.  As of September 30,2009, the Company has approximately $36.1 million of principal outstanding withapproximately $11.6 million of availability under the line of credit.

 

Interest ispayable monthly during the term of the Credit Facility. After April 14,2010, if the Credit Facility is not renewed, all principal collections from theCompany’s loans are required to be used to pay outstanding principal under theCredit Facility. Available borrowings are subject to various constraintsimposed under the Credit Facility, based on the aggregate loan balance pledgedby Business Investment.

 

The CreditFacility contains covenants that require Business Investment to maintain itsstatus as a separate entity; prohibit certain significant transactions (such asmergers, consolidations, liquidations or dissolutions); and restrict materialchanges to the Company’s credit and collection policies without lendersconsent. The facility also limits payments on distributions to the aggregatenet investment income for the prior twelve months preceding April 2010. Asof September 30, 2009, Business Investment was in compliance with all ofthe facility covenants.  The Company isalso subject to certain limitations on the type of loan investments it canmake, including restrictions on geographic concentrations, sectorconcentrations, loan size, dividend payout, payment frequency and status,average life and lien property.  TheCredit Facility also requires the Company to comply with other financial andoperational covenants, which require the Company to, among other things,maintain certain financial ratios, including asset and interest coverage a minimumnet worth, and a minimum number of obligors required in the borrowing base ofthe credit agreement.

 

In conjunctionwith entering into the Credit Facility, the Company amended a performanceguaranty which remains substantially similar to the form under the previouscredit facility. The performance guaranty requires the Company to maintain aminimum net worth of $169 million plus 50% of all equity and subordinated debtraised after April 14, 2009, to maintain “asset coverage” with respect to “seniorsecurities representing indebtedness” of at least 200%, in accordance with Section 18of the 1940 Act, and to maintain its status as a BDC under the 1940 Act and asa RIC under the Code. As of September 30, 2009, the Company was incompliance with the covenants under the performance guaranty.

 

The Company hasadopted ASC 825,*“*Financial Instruments*”*specifically for the CreditFacility.  ASC 825 requires that the Company apply a fair value methodologyto the Credit Facility. The Credit Facility has been fair valued by anindependent third party. The following table presents the Credit Facilitycarried at fair value as of September 30, 2009, by caption on theaccompanying condensed consolidated statement of assets and liabilities foreach of the three levels of hierarchy established by ASC 820-10:

** **
| ** **                         | ** ** | **As of September 30, 2009** | ** ** |
|------------------------------------|------------|-----------------------------------|------------|
| ** **                         | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | **Total Fair Value** | ** ** |
| ** **                         | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | **Reported in Condensed** | ** ** |
| ** **                         | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | **Consolidated Statement of** | ** ** |
| ** **                         | ** ** | **Level 1**                       | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Assets and Liabilities** | ** ** |
| Borrowings under line of credit(a) |       | $                                 | —     |   | $ | — |   | $ | 36,278 |   | $ | 36,278 |   |
| Total                              |       | $                                 | —     |   | $ | — |   | $ | 36,278 |   | $ | 36,278 |   |

 

----

(a)  Unrealized appreciation of $178 is reported onthe accompanying condensed consolidated statement of operations for the threemonths ended September 30, 2009.

 

**NOTE6. INTEREST RATE CAP AGREEMENT**

 

In May 2009, the Company cancelled its interest rate cap agreementwith Deutsche Bank and entered into an interest rate cap agreement withBB&T that effectively limits the interest rate on a portion of theborrowings under the line of credit pursuant to the terms of the CreditFacility. The interest rate cap has a notional amount of $45 million at a costof approximately $39. At September

 

22

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30, 2009, the interest rate cap agreement had a fair market value ofapproximately $12. The Company records changes in the fair market value of theinterest rate cap agreement quarterly based on the current market valuation atquarter end as unrealized depreciation or appreciation on derivative on theCompany’s consolidated statement of operations. The interest rate cap agreementexpires in April 2010. The agreement provides that the Company’s floatinginterest rate or cost of funds on a portion of the portfolio’s borrowings willbe capped at 9% when the LIBOR rate is in excess of 9%.

 

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

 

**NOTE7.  SHORT-TERM LOAN**

 

On June 30,2009, the Company purchased $83.0 million of short-term United States Treasurysecurities through Jefferies & Company, Inc. (“Jefferies”).  The securities were purchased with $18.0million in funds drawn on the Credit Facility and the proceeds from a $65.0million short-term loan from Jefferies, with an effective annual interest rateof approximately 2.5%.  On July 2,2009, when the securities matured, the Company repaid the $65.0 million loanfrom Jefferies in full, and repaid all but $1.0 million of the amount drawn onthe Credit Facility for the transaction, which was retained for working capitalpurposes.

 

On September 29,2009, the Company purchased $85.0 million of short-term United States Treasurysecurities through Jefferies.  Thesecurities were purchased with $10.0 million in funds drawn on the CreditFacility and the proceeds from a $75.0 million short-term loan from Jefferies,with an effective annual interest rate of approximately 0.65%.  On October 2, 2009, when the securitiesmatured, the Company repaid the $75.0 million loan from Jefferies in full andrepaid the $10.0 million drawn on the Credit Facility.

 

**NOTE8. COMMON STOCK**

 

As of both September 30,2009 and March 31, 2009, 100,000,000 shares of common stock, $0.001 parvalue per share, were authorized and 22,080,133 shares of common stock wereoutstanding.

 

**NOTE9. NET (DECREASE) INCREASE IN NET ASSETS PER SHARE RESULTING FROM OPERATIONS**

 

The followingtable sets forth the computation of basic and diluted net (decrease) increasein net assets per share resulting from operations:

** **
| ** **                                                                                                  | ** ** | **Three months ended September 30,** | ** ** | **Six months ended September 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                                  | ** ** | **2009**                                  | ** ** | **2008**                                | ** ** | **2009** | ** ** | **2008** | ** ** |
| Numerator  for basic and diluted net (decrease) increase in net assets resulting from  operations per share |       | $                                         | (18,090    | )                                       | $          | 956 |   | $ | (27,280 | ) | $ | (3,527 | ) |
| Denominator  for basic and diluted shares                                                                   |       | 22,080                                    |       | 22,080                                  |       | 22,080 |   | 21,012 |   |
| Basic  and diluted net (decrease) increase in net assets resulting from operations  per share               |       | $                                         | (0.82      | )                                       | $          | 0.04 |   | $ | (1.24 | ) | $ | (0.17 | ) |

 

**NOTE10. DISTRIBUTIONS**

 

Thefollowing table lists the per common share distributions paid for the sixmonths ended September 30, 2009 and 2008:

 
| ** **            | ** ** | ** **               | ** ** | ** **               | ** ** | **Distribution** | ** ** |
|-----------------------|------------|--------------------------|------------|--------------------------|------------|------------------|------------|
| **Declaration  Date** | ** ** | **Record  Date**         | ** ** | **Payment  Date**        | ** ** | **Per Share**    | ** ** |
| April 16, 2009   |       | April 27,  2009     |       | May 8, 2009         |       | $                | 0.04       |   |
| April 16, 2009   |       | May 20,  2009       |       | May 29,  2009       |       | 0.04             |       |
| April 16, 2009   |       | June 22,  2009      |       | June 30,  2009      |       | 0.04             |       |
| July 8, 2009     |       | July 23,  2009      |       | July 31,  2009      |       | 0.04             |       |
| July 8, 2009     |       | August 21,  2009    |       | August 31,  2009    |       | 0.04             |       |
| July 8, 2009     |       | September 22,  2009 |       | September 30,  2009 |       | 0.04             |       |
|                  |       |                     | ** ** | **Total**                | ** ** | **$**            | **0.24**   | ** ** |

 
| ** **           | ** ** | ** **               | ** ** | ** **               | ** ** | **Distribution** |     |
|----------------------|------------|--------------------------|------------|--------------------------|------------|------------------|----------|
| **Declaration Date** | ** ** | **Record Date**          | ** ** | **Payment Date**         | ** ** | **Per Share**    |     |
| April 8, 2008   |       | April 22,  2008     |       | April 30,  2008     |       | $                | 0.08     |   |
| April 8, 2008   |       | May 21,  2008       |       | May 30,  2008       |       | 0.08             |     |
| April 8, 2008   |       | June 20,  2008      |       | June 30,  2008      |       | 0.08             |     |
| July 9, 2008    |       | July 23,  2008      |       | July 31,  2008      |       | 0.08             |     |
| July 9, 2008    |       | August 21,  2008    |       | August 29,  2008    |       | 0.08             |     |
| July 9, 2008    |       | September 22,  2008 |       | September 30,  2008 |       | 0.08             |     |
|                 |       |                     | ** ** | **Total**                | ** ** | **$**            | **0.48** |   |

 

23

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Aggregate distributions declared and paid for the three months ended September 30,2009 and 2008 were approximately $2.6 million and $5.3 million,respectively.  Aggregate distributionsdeclared for the six months ended September 30, 2009 and 2008 wereapproximately $5.3 million and $10.2 million, respectively.  All distributions were declared based onestimates of net investment income, and some of the distributions included areturn of capital.

 

The timing and characterization of certain income and capital gainsdistributions are determined annually in accordance with federal taxregulations which may differ from GAAP. These differences primarily relate toitems recognized as income for financial statement purposes and realized gainsfor tax purposes. As a result, net investment income and net realized gain(loss) on investment transactions for a reporting period may differsignificantly from distributions during such period. Accordingly, the Companymay periodically make reclassifications among certain of its capital accountswithout impacting the net asset value of the Company.

 

***Section 19(a) Disclosure***

 

The Company’s Board of Directors estimates the source of thedistributions at the time of their declaration as required by Section 19(a) ofthe 1940 Act. On a monthly basis, if required under Section 19(a), theCompany posts a Section 19(a) notice through the Depository TrustCompany’s Legal Notice System (“LENS”) and also sends to its registeredstockholders a written Section 19(a) notice along with the payment ofdistributions for any payment which includes a distribution estimated to bepaid from any other source other than net investment income. The estimates ofthe source of the distribution are interim estimates based on GAAP that aresubject to revision, and the exact character of the distributions for taxpurposes cannot be determined until the final books and records of the Companyare finalized for the calendar year. Following the calendar year end, afterdefinitive information has been determined by the Company, if the Company hasmade distributions of taxable income (or return of capital), the Company willdeliver a Form 1099-DIV to its stockholders specifying such amount and thetax characterization of such amount. Therefore, these estimates are made solelyin order to comply with the requirements of Section 19(a) of the 1940Act and should not be relied upon for tax reporting or any other purposes andcould differ significantly from the actual character of distributions for taxpurposes.

 

The following GAAP estimates were made by the Board of Directors duringthe quarter ended September 30, 2009:

 
| **Payment Date**        | ** ** | **Ordinary Income** | ** ** | **Return of Capital** | ** ** | **Total Distribution** | ** ** |
|-------------------------|------------|---------------------|------------|-----------------------|------------|------------------------|------------|
| July 31, 2009      |       | $                   | 0.042      |                  | $          | (0.002                 | )          | $ | 0.040 |   |
| August 31, 2009    |       | 0.039               |       | 0.001                 |       | 0.040                  |       |
| September 30, 2009 |       | 0.039               |       | 0.001                 |       | 0.040                  |       |
|                         |            |                     |            |                       |            |                        |            |  |  |  |

 

Because the Board of Directors declares distributions at the beginningof a quarter, it is difficult to estimate how much of the Company’s monthlydistributions, based on GAAP, will come from ordinary income, capital gains andreturns of capital. Subsequent to the quarter ended September 30, 2009,the following corrections were made to the above listed estimates for thatquarter:

 
| **Payment Date**        | ** ** | **Ordinary Income** | ** ** | **Return of Capital** | ** ** | **Total Distribution** | ** ** |
|-------------------------|------------|---------------------|------------|-----------------------|------------|------------------------|------------|
| July 31, 2009      |       | $                   | 0.038      |                  | $          | 0.002                  |       | $ | 0.040 |   |
| August 31, 2009    |       | 0.034               |       | 0.006                 |       | 0.040                  |       |
| September 30, 2009 |       | 0.036               |       | 0.004                 |       | 0.040                  |       |
|                         |            |                     |            |                       |            |                        |            |  |  |  |

 

For distributions declared subsequent to quarter end, the followingestimates, based on GAAP, have been made pursuant to Section 19(a) ofthe 1940 Act:

 
| **Payment Date**       | ** ** | **Ordinary Income** | ** ** | **Return of Capital** | ** ** | **Total Distribution** | ** ** |
|------------------------|------------|---------------------|------------|-----------------------|------------|------------------------|------------|
| October 30, 2009  |       | $                   | 0.037      |                  | $          | 0.003                  |       | $ | 0.040 |   |
| November 30, 2009 |       | 0.040               |       | —                |       | 0.040                  |       |
| December 31, 2009 |       | 0.042               |       | (0.002                | )          | 0.040                  |       |
|                        |            |                     |            |                       |            |                        |            |  |  |  |

 

**NOTE11.  COMMITMENTS AND CONTINGENCIES**

 

AtSeptember 30, 2009, the Company was not party to any signed term sheetsfor potential investments.

 

In October 2008,the Company executed a guaranty of a vehicle finance facility agreement betweenFord Motor Credit Company (“FMC”) and Auto Safety House, LLC (“ASH”), one ofits Control investments (the “Finance Facility”).  The Finance Facility provides ASH with a lineof credit of up to $500 for component Ford parts used by ASH to build truckbodies under a separate contract.  Titleand ownership of the parts is retained by Ford. The guaranty of the FinanceFacility will expire upon termination of the 

 

24

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separate partssupply contract with Ford or upon our replacement as guarantor.  The Finance Facility is secured by all of theassets of Business Investment.  As of September 30,2009, the Company has not been required to make any payments on the guaranty ofthe Finance Facility.

 

**NOTE12. SUBSEQUENT EVENTS**

 

The Companyevaluated all events that have occurred subsequent to September 30, 2009through the date of the filing of this Form 10-Q on November 3, 2009.

 

*Short-TermLoan Repayment*

 

On October 2,2009, when the securities purchased on September 29, 2009 throughJefferies matured, the Company repaid the $75.0 million loan from Jefferies infull, and repaid the $10.0 million drawn on the Credit Facility for thetransaction.   Please refer to Note 7, *Short-Term Loan* for more information.

 

*SeniorSyndicated Loan Sales*

 

The Company settledcertain senior syndicated loans (HMTBP Acquisition II Corp. and a portion ofInterstate Fibernet, Inc.) in October 2009 which were sold in September 2009.  Upon the settlement of these seniorsyndicated loans, the Company received approximately $5.5 million in net cashproceeds and recorded a realized loss of approximately $1.3 million whichwill be reflected in the results of operations for the three months endedDecember 31, 2009. These loans are included in the Company’s condensedconsolidated assets as of September 30, 2009 and were valued at theirrespective sale prices.  See Note 3, *Investments*, for more information.

 

*Distributions*

 

On October 6,2009, the Company’s Board of Directors declared the following monthly cashdistributions:

 
| ** **           | ** ** | ** **              | ** ** | ** **              | ** ** | **Distribution** |   |
|----------------------|------------|-------------------------|------------|-------------------------|------------|------------------|--------|
| **Declaration Date** | ** ** | **Record Date**         | ** ** | **Payment Date**        | ** ** | **Per Share**    |   |
| October 6, 2009 |       | October 22,  2009  |       | October 30,  2009  |       | $                | 0.040  |   |
| October 6, 2009 |       | November 19,  2009 |       | November 30,  2009 |       | 0.040            |   |
| October 6, 2009 |       | December 22,  2009 |       | December 31,  2009 |       | 0.040            |   |
|                      |            |                         |            |                         |            |                  |        |  |

 

*RegistrationStatement*

 

On July 21,2009, the Company filed a registration statement on Form N-2 (RegistrationNo. 333-160720) that was amended on October 2, 2009. The SEC declaredthe registration statement effective on October 8, 2009 and such registrationstatement will permit the Company to issue, through one or more transactions,up to an aggregate of $300.0 million in securities, consisting of common stock,senior common stock, preferred stock, subscription rights, debt securities andwarrants to purchase common stock, or a combination of these securities.

 

*Saleof Chase II Holdings Corp. Revolving Line of Credit*

 

On October 13, 2009, the Company refinanced its revolving line ofcredit with Chase II Holdings Corp. to a third party, and the outstandingbalance of $3.5 million, plus accrued interest, was repaid in full.  The proceeds were used to make a repayment onthe outstanding amount under the Company’s Credit Facility.

 

*PortfolioCompany Investment Activity*

 

During October 2009, one of the Company’s portfolio companiesentered into an agreement with a third party to act as an advisor in looking atstrategic investment alternatives. It is premature in the process to speculate on whatthese strategic alternatives might be or what impact, if any, such activitiesmay have on the Company's investment in the subject portfolio company.

 

During October 2009,  A. Stucki Holding Corp. declared and paid accruedcash dividends on its preferred stock of which the Company receivedapproximately $953,000.

 

25

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**ITEM 2. MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (dollar amountsin thousands, except per share data or 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 financialcondition. In some cases, you can identify forward-looking statements byterminology such as “may,” “might,” “believe,” “will,” “provided,” “anticipate,”“future,” “could,” “growth,” “plan,” “intend,” “expect,” “should,” “would,” “if,”“seek,” “possible,” “potential,” “likely” or the negative of such terms orcomparable terminology. These forward-looking statements involve known andunknown risks, uncertainties and other factors that may cause our actualresults, levels of activity, performance or achievements to be materiallydifferent from any future results, levels of activity, performance orachievements expressed or implied by such forward-looking statements. Wecaution readers not to place undue reliance on any such forward-lookingstatements. We undertake no obligation to publicly update or revise anyforward-looking statements, whether as a result of new information, futureevents or otherwise, after the date of this Form 10-Q**.

 

**Thefollowing analysis of our financial condition and results of operations shouldbe read in conjunction with our condensed consolidated financial statements andthe notes thereto contained elsewhere in this report and our annual report on Form 10-Kfor the fiscal year ended March 31, 2009.**

 

**OVERVIEW**

 

We were incorporated under the General Corporation Laws of the State ofDelaware on February 18, 2005. We were primarily established for thepurpose of investing in subordinated loans, mezzanine debt, preferred stock andwarrants to purchase common stock of small and medium-sized companies inconnection with buyouts and other recapitalizations. We also invest in seniorsecured loans, common stock and, to a much lesser extent, senior andsubordinated syndicated loans. Our investment objective is to generate bothcurrent income and capital gains through these debt and equity instruments. Weoperate as a closed-end, non-diversified management investment company and haveelected to be treated as a business development company under the InvestmentCompany Act of 1940 (the “1940 Act”).  Inaddition, for tax purposes, we have elected to be treated as a regulated investmentcompany (“RIC”) under the Internal Revenue Code of 1986, as amended (the “Code”).

 

**BusinessEnvironment**

 

The currenteconomic conditions generally and the disruptions in the capital markets inparticular have decreased liquidity and increased our cost of debt and equitycapital, where available. The longer these conditions persist, the greater theprobability that these factors could continue to increase our cost of andsignificantly limit our access to debt and equity capital, and thus have anadverse effect on our operations and financial results. Many of the companiesin which we have made or will make investments are also susceptible to theeconomic downturn, which may affect the ability of one or more of our portfoliocompanies to repay our loans or engage in a liquidity event, such as a sale,recapitalization or initial public offering. The recession could alsodisproportionately impact some of the industries in which we invest, causing usto be more vulnerable to losses in our portfolio. Therefore, the fair marketvalue of our aggregate portfolio is likely to continue to decrease during theseperiods.

 

The recession hasaffected the availability of credit generally and, as a result, subsequent toour fiscal year end, we sold 29 senior syndicated loans that were held in ourportfolio of investments at March 31, 2009 to various investors in thesyndicated loan market (collectively, the “Syndicated Loan Sales”) in order torepay amounts outstanding under our prior credit facility, which matured in April 2009.These loans, in aggregate, had a cost value of approximately $104.2 million, or29.9% of the cost value of our total investments, and an aggregate fair marketvalue of approximately $69.8 million, or 22.2% of the fair market value of ourtotal investments, at March 31, 2009.  Additionally, during September 2009, we sold certain seniorsyndicated loans (see —Recent Developments—Senior Syndicated Sales” sectionbelow) to various investors in the syndicated loan market. Upon the settlementof these loans in October 2009, we have two remaining senior syndicatedloans which we plan to exit in the long-term future. These sales, in aggregate,have changed our asset composition in a manner that has affected our ability tosatisfy certain elements of the Code’s rules for maintenance of our RICstatus. In order to maintain our status as a RIC, in addition to otherrequirements, as of the close of each quarter of our taxable year, we must meetthe asset diversification test, which requires that at least 50% of the valueof our assets consist of cash, cash items, U.S. government securities orcertain other qualified securities. During the quarter ended September 30,2009, we fell below the required 50% asset diversification threshold.

 

Failure to meetthe asset diversification test alone will not result in our loss of RIC status.In circumstances where the failure to meet the quarterly 50% assetdiversification 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 under theCode’s rules to satisfy the asset diversification test and, therefore,maintain our RIC status, as long as we have not made any new investments,including additional investments in our portfolio companies (such as advancesunder outstanding lines of credit), since the time that we fell below the 50%threshold. At September 30, 2009, the second quarterly measurement datefollowing the sales, we satisfied the 50% asset diversification thresholdthrough the purchase of short-term qualified securities, which was fundedprimarily through a short-term loan agreement. Subsequent to the September 30thmeasurement date, these securities matured and we repaid the short-term loan,at which time we again fell below the 50% threshold. See “—Recent 

 

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Developments—Short-TermLoan” for more information regarding this transaction. As of the date of thisfiling, we remain below the 50% threshold. Thus, although we currently qualifyas a RIC despite our current, and potential future, inability to meet the 50%asset diversification requirement, if we make any additional investments beforeregaining compliance with the asset diversification test, our RIC status willbe threatened. If we make a new or additional investment and fail to regaincompliance with the 50% threshold on the next quarterly measurement datefollowing such investment, we will be in non-compliance with the RIC rules andwill have thirty days to “cure” our failure of the asset diversification testto avoid our loss of RIC status. Potential cures for failure of the assetdiversification test include raising additional equity or debt capital, orchanging the composition of our assets, which could include full or partial divestituresof investments, such that we would once again exceed the 50% threshold.

 

Until thecomposition of our assets is above the required 50% asset diversificationthreshold, we will continue to seek to deploy similar purchases of qualifiedsecurities using short-term loans that would allow us to satisfy the assetdiversification test, thereby allowing us to make additional investments. Therecan be no assurance, however, that we will be able to enter into such atransaction on reasonable terms, if at all. We also continue to explore anumber of other strategies, including changing the composition of our assets,which could include full or partial divestitures of investments, and raisingadditional equity or debt capital, such that we would once again exceed the 50%threshold. Our ability to implement any of these strategies will be subject tomarket conditions and a number of risks and uncertainties that are, in part,beyond our control.

 

On April 14,2009, through our wholly-owned subsidiary, Gladstone Business Investment, LLC (“BusinessInvestment”), we entered into a second amended and restated credit agreementproviding for a $50.0 million revolving line of credit (the “Credit Facility”)arranged by Branch Banking and Trust Company (“BB&T”) as administrativeagent. Key Equipment Finance Company Inc. also joined the Credit Facility as acommitted lender.  Under the terms of theCredit Facility, committed funding was reduced from $125.0 million under ourprior facility to $50.0 million. See “—Liquidity and Capital Resources” sectionbelow for further information. As of the date of this filing, approximately $16.1million was outstanding under the Credit Facility and $32.1 million wasavailable for borrowing due to certain limitations on our borrowing base. As aresult of this limited availability under our credit facility, and therestraints upon our investing activities required in order to maintain RICstatus under the Code as described above, we are unsure when we will once againbe in a position to make any new investments. The Credit Facility also limitsour distributions to stockholders and, as a result, we recently decreased ourmonthly cash distribution rate by 50% as compared to the prior year period. Wedo not know when market conditions will stabilize, if adverse conditions willintensify or the full extent to which the disruptions will continue to affectus. If market instability persists or intensifies, we may experience increasingdifficulty in raising capital.

 

Challenges in thecurrent market are intensified for us by certain regulatory limitations underthe Code and the 1940 Act, as well as contractual restrictions under theagreement governing the Credit Facility that further constrain our ability toaccess the capital markets. To maintain our qualification as a RIC, we mustsatisfy, among other requirements, an annual distribution requirement to payout at least 90% of our ordinary income and short-term capital gains to ourstockholders on an annual basis. Because we are required to distribute ourincome in this manner, and because the illiquidity of many of our investmentsmakes it difficult for us to finance new investments through the sale ofcurrent investments, our ability to make new investments is highly dependentupon external financing. Our external financing sources include the issuance ofequity securities, debt securities or other leverage such as borrowings underour line of credit. Our ability to seek external debt financing, to the extentthat it is available under current market conditions, is further subject to theasset coverage limitations of the 1940 Act, which require us to have at least a200% asset coverage ratio, meaning generally that for every dollar of debt, wemust have two dollars of assets.

 

Recent marketconditions have also affected the trading price of our common stock and thusour ability to finance new investments through the issuance of equity. On November 2,2009, the closing market price of our common stock was $5.04 which pricerepresented a 38.8% discount to our September 30, 2009 net asset value, orNAV, per share. When our stock is trading below NAV, as it has consistentlytraded subsequent to September 30, 2008, our ability to issue equity isconstrained by provisions of the 1940 Act which generally prohibit the issuanceand sale of our common stock below NAV per share without stockholder approvalother than through sales to our then-existing stockholders pursuant to a rightsoffering. At our annual meeting of stockholders held on August 13, 2009,our stockholders approved a proposal which authorizes us to sell shares of ourcommon stock at a price below our then current NAV per share for a period ofone year from the date of approval, provided that our Board of Directors makescertain determinations prior to any such sale.

 

The recession mayalso continue to decrease the value of collateral securing some of our loans,as well as the value of our equity investments, which has impacted and maycontinue to impact our ability to borrow under the Credit Facility. Additionally,the Credit Facility contains covenants regarding the maintenance of certainminimum loan concentrations which are affected by the decrease in value of ourportfolio. 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 theacceleration of our repayment obligations under the Credit Facility.

 

We expect that,given these regulatory and contractual constraints in combination with currentmarket conditions, debt and equity capital may be costly or difficult for us toaccess for some time. For so long as this is the case, our near-term strategydepends on retaining capital and building the value of our existing portfoliocompanies to increase the likelihood of maintaining potential future returns.We will also, where prudent and possible, consider the sale of lower-yieldinginvestments. This has resulted, and may 

 

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continue toresult, in significantly reduced investment activity, as our ability to makenew investments under these conditions is largely dependent on availability ofproceeds from the sale or exit of existing portfolio investments, which eventsmay be beyond our control. As capital constraints improve, we intend tocontinue our strategy of making conservative investments in businesses that webelieve will weather the economy and that are likely to produce attractivelong-term returns for our stockholders.

 

**SeniorSyndicated Loan Valuations**

 

Due to the illiquidity in the market for syndicated loans during thethree quarters prior to and including June 30, 2009, a discounted cashflow (“DCF”) methodology was used to value these investments during thoseperiods, following guidance provided under ASC 820-10-35-15A,“Determining the Fair Value of a Financial Asset When the Market for That Assetis Not Active.”  However, in monitoring the market activityduring the quarter ended September 30, 2009, we noted changing marketconditions indicating a return to liquidity and a better functioning secondarymarket for syndicated loans.  Therefore,in accordance with ASC 820-10-35-15A, and following our valuationprocedures, which specify the use of third-party indicative bid quotes forvaluing syndicated loans where there is a liquid public market for those loansand market pricing quotes are readily available, a third-party bid quote wasused to value the remaining senior syndicated loan not sold during the quarterended September 30, 2009.  Wesettled certain senior syndicated loans (HMTBP Acquisition II Corp. and aportion of Interstate Fibernet, Inc.) in October 2009 which saleswere finalized in September 2009 as previously described elsewhere in thisfiling.  Those loans are included in ourcondensed consolidated assets as of September 30, 2009 and were valued attheir respective sale prices.

 

**RecentDevelopments**

 

### ***Short-TermLoan***

### ** **

On September 29,2009, we purchased $85.0 million of short-term United States Treasurysecurities through Jefferies & Company, Inc. (“Jefferies”).  The securities were purchased with $10.0million in funds drawn on the Credit Facility and the proceeds from a $75.0million short-term loan from Jefferies with an effective annual interest rateof approximately 0.65%.  On October 2,2009, when the securities matured, we repaid the $75.0 million loan fromJefferies in full, and repaid the $10.0 million drawn on the Credit Facilityfor the transaction.

 

*SeniorSyndicated Sales*

 

During September 2009,we finalized the sale of certain senior syndicated loans (HMTBP Acquisition IICorp. and a portion of Interstate Fibernet, Inc.) to various investors inthe syndicated loan market.  These loans, in aggregate, had a cost valueof approximately $6.8 million, or 2.9% of the cost value of our total investments,and an aggregate fair market value of approximately $5.5 million, or 2.7% ofthe fair market value of our total investments, at September 30,2009.  Upon the settlement of these loans in October 2009, wereceived approximately $5.5 million in net cash proceeds and recorded arealized loss of approximately $1.3 million (See Note 12, *SubsequentEvents*).   These loans are included in our condensedconsolidated assets as of September 30, 2009 and were valued at theirrespective sale prices.

 

*RegistrationStatement*

 

On July 21,2009, we filed a registration statement on From N-2 (Registration No. 333-160720)that was amended on October 2, 2009. The SEC declared the registrationstatement effective on October 8, 2009 and such registration statementwill permit us to issue, through one or more transactions, up to an aggregateof $300.0 million in securities, consisting of common stock, senior commonstock, preferred stock, subscription rights, debt securities and warrants topurchase common stock, or a combination of these securities.

 

*Saleof Chase II Holdings Corp. Revolving Line of Credit*

 

On October 13, 2009, we refinanced our revolving line of creditwith Chase II Holdings Corp. to a third party, and the outstanding balance of$3.5 million, plus accrued interest, was repaid in full. The proceeds were usedto make a repayment on the outstanding amount under our Credit Facility.

 

*PortfolioCompany Investment Activity*

 

During October 2009,one of our portfolio companies enteredinto an agreement with an investment banker to act as an advisor in assessingstrategic investment alternatives.  Itis premature in the process to speculate on what these strategic alternativesmight be or what impact, if any, such activities may have on our investment inthe subject portfolio company.

 

During October 2009,A. Stucki Holding Corp. declared and paid accrued cash dividends on itspreferred stock of which we received approximately $953,000.

 

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**RESULTS OF OPERATIONS**

 

***Comparison of the Three Months Ended September 30,2009 to the Three Months Ended September 30, 2008***

 

*A comparison of our operatingresults for the three months ended September 30, 2009 and 2008 is below:*

 
| ** **                                                                           | ** ** | **For the three months ended September 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                           | ** ** | **2009**                                          | ** ** | **2008** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| INVESTMENT INCOME                                                                    |       |                                              |       |   |   |   |   |   |   |
| Interest income                                                                      |       |                                              |       |   |   |   |   |   |   |
| Non-Control/Non-Affiliate investments                                                |       | $                                                 | 615        |   | $ | 2,134 |   | $ | (1,519 | ) | (71.2 | )% |
| Control investments                                                                  |       | 2,868                                             |       | 2,735 |   | 133 |   | 4.9 | % |
| Affiliate investments                                                                |       | 1,448                                             |       | 1,349 |   | 99 |   | 7.3 | % |
| Cash and cash equivalents                                                            |       | 1                                                 |       | 22 |   | (21 | ) | (95.5 | )% |
| Total interest income                                                                |       | 4,932                                             |       | 6,240 |   | (1,308 | ) | (21.0 | )% |
| Other income                                                                         |       | 11                                                |       | 576 |   | (565 | ) | (98.1 | )% |
| Total investment income                                                              |       | 4,943                                             |       | 6,816 |   | (1,873 | ) | (27.5 | )% |
|                                                                                 |       |                                              |       |   |   |   |   |   |   |
| EXPENSES                                                                             |       |                                              |       |   |   |   |   |   |   |
| Loan servicing fee                                                                   |       | 938                                               |       | 1,258 |   | 320 |   | 25.4 | % |
| Base management fee                                                                  |       | 164                                               |       | 435 |   | 271 |   | (2.3 | % |
| Administration fee                                                                   |       | 198                                               |       | 212 |   | 14 |   | 6.6 | % |
| Interest expense                                                                     |       | 552                                               |       | 1,084 |   | 532 |   | 49.1 | % |
| Amortization of deferred finance costs                                               |       | 438                                               |       | 140 |   | (298 | ) | (212.9 | )% |
| Professional fees                                                                    |       | 118                                               |       | 183 |   | 65 |   | 35.5 | % |
| Stockholder related costs                                                            |       | 146                                               |       | 200 |   | 54 |   | 27.0 | % |
| Insurance expense                                                                    |       | 62                                                |       | 55 |   | (7 | ) | (12.7 | )% |
| Directors’ fees                                                                 |       | 48                                                |       | 48 |   | — |   | — |   |
| Other                                                                                |       | 73                                                |       | 114 |   | 41 |   | 36.0 | % |
| Expenses before credit from Adviser                                                  |       | 2,737                                             |       | 3,729 |   | 992 |   | 26.6 | % |
| Credits to base management fee                                                       |       | (165                                              | )          | (696 | ) | (531 | ) | (76.3 | )% |
| Total expenses net of credit to base management fee                                  |       | 2,572                                             |       | 3,033 |   | 461 |   | 15.2 | % |
| NET INVESTMENT INCOME                                                                |       | 2,371                                             |       | 3,783 |   | (1,412 | ) | (37.3 | )% |
|                                                                                 |       |                                              |       |   |   |   |   |   |   |
| REALIZED AND UNREALIZED (LOSS) GAIN ON:                                              |       |                                              |       |   |   |   |   |   |   |
| Realized loss on sale of Non-Control/Non-Affiliate  investments                      |       | —                                            |       | (2,498 | ) | 2,498 |   | 100.0 | % |
| Realized loss on termination of derivative                                           |       | —                                            |       | — |   | — |   | — |   |
| Net unrealized (depreciation) appreciation of  Non-Control/Non-Affiliate investments |       | (1,514                                            | )          | (5,191 | ) | 3,677 |   | 70.8 | % |
| Net unrealized (depreciation) appreciation of  Control investments                   |       | (14,900                                           | )          | 10,840 |   | (25,740 | ) | (237.5 | )% |
| Net unrealized depreciation of Affiliate  investments                                |       | (3,853                                            | )          | (5,978 | ) | 2,125 |   | 35.5 | % |
| Net unrealized (depreciation) appreciation of  derivative                            |       | (16                                               | )          | — |   | (16 | ) | — |   |
| Net unrealized appreciation of borrowings under  line of credit                      |       | (178                                              | )          | — |   | (178 | ) | — |   |
| Net loss on investments and borrowings under line  of credit                         |       | (20,461                                           | )          | (2,827 | ) | (17,634 | ) | (623.8 | )% |
|                                                                                 |       |                                              |       |   |   |   |   |   |   |
| NET (DECREASE) INCREASE IN NET ASSETS RESULTING  FROM OPERATIONS                     |       | $                                                 | (18,090    | ) | $ | 956 |   | $ | (19,046 | ) | (1992.3 | )% |

 

**Investment Income**

 

Total investmentincome decreased for the three months ended September 30, 2009 as comparedto the prior year period. This decrease was due mainly to a decrease in thesize of our loan portfolio, specifically the senior syndicated loans, as wellas continuing decreases in LIBOR, as compared to the prior year period.

 

Interest incomefrom our investments in debt securities of private companies decreased for thethree months ended September 30, 2009, as compared to the prior yearperiod for multiple reasons. The level of interest income from investments isdirectly related to the balance, at cost, of the interest-bearing investmentportfolio outstanding during the period multiplied by the weighted averageyield. The weighted average yield varies from period to period based on thecurrent stated interest rate on interest-bearing investments and the amounts ofloans for which interest is not accruing. The average cost basis of ourinterest-bearing investment portfolio during the three months ended September 30,2009 was approximately $186.1 million, compared to approximately $294.4 millionfor the prior year period, due primarily to the aggregate senior syndicatedloan sales.  Also contributing to thedecrease in our interest income from 

 

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investments indebt securities was a decrease in the average LIBOR between periods, which wasapproximately 0.27% for the three months ended September 30, 2009, ascompared to 2.62% for the prior year period.

 

Interest incomefrom Non-Control/Non-Affiliate investments decreased for the three months endedSeptember 30, 2009 due to an overall decrease in the size and number ofNon-Control/Non-Affiliate investments held at September 30, 2009, ascompared to the prior year period.  At September 30,2008, we held investments in 35 different Non-Control/Non-Affiliateinvestments; however, as a result of the Syndicated Loan Sales, only fivedifferent Non-Control/Non-Affiliate investments were held at September 30,2009.  The decrease in interest incomefrom Non-Control/Non-Affiliate investments was further accentuated by thecontinued drops in LIBOR between the two periods, due to the instability and continuedtightening of the credit markets.

 

Interest incomefrom Control investments increased slightly for the three months ended September 30,2009, as compared to the prior year period. The increase was attributable totwo additional Control investments, Galaxy Tool, which was acquired mid-quarterin the prior year period, and Country Club Enterprises, which was purchased inthe third quarter of fiscal year 2009, being held for the full quarter ended September 30,2009 as compared to the prior year period. Decreases in LIBOR played a minimal role in interest income from ourproprietary deals during the current quarter, as the majority of them includeinterest rate floors to protect against such circumstances.

 

Interest incomefrom Affiliate investments increased slightly for the three months ended September 30,2009, as compared to the prior year period. This increase was due mainly to thereclassification of Quench from a Control investment to an Affiliateinvestment, which took place during the prior year quarter, as opposed to thecurrent quarter, where it was accruing income for the full quarter.

 

The followingtable lists the interest income from investments for the five largest portfoliocompany investments during the respective periods:

 

| **Three months  ended September 30, 2009** |
|-------------------------------------------------|
| ** **                                      | ** ** | **Interest** | ** ** | ** ** | ** ** |
| **Company**                                     | ** ** | **Income** | ** ** | **%** | ** ** |
| Chase II Holdings Corp.                         |   | $ | 661 |   | 13.4 | % |
| Galaxy Tools Holding Corp.                      |   | 595 |   | 12.1 | % |
| A. Stucki Holding Corp.                         |   | 575 |   | 11.7 | % |
| Acme Cryogenics, Inc.                      |   | 426 |   | 8.6 | % |
| Danco Acquisition Corp.                         |   | 392 |   | 7.9 | % |
| **Subtotal**                                    |   | $ | 2,649 |   | 53.7 | % |
| Other companies                                 |   | 2,282 |   | 46.3 | % |
| **Total  portfolio interest income**            |   | $ | 4,931 |   | 100.0 | % |

 

| **Three  months ended September 30, 2008** |
|-------------------------------------------------|
| ** **                                      | ** ** | **Interest** | ** ** | ** ** | ** ** |
| **Company**                                     | ** ** | **Income** | ** ** | **%** | ** ** |
| Chase II Holdings Corp.                         |   | $ | 719 |   | 11.6 | % |
| A. Stucki Holding Corp.                         |   | 677 |   | 10.9 | % |
| Noble Logistics, Inc.                      |   | 435 |   | 7.0 | % |
| Acme Cryogenics, Inc.                      |   | 426 |   | 6.8 | % |
| Cavert II Holding Corp.                         |   | 414 |   | 6.7 | % |
| **Subtotal**                                    |   | $ | 2,671 |   | 43.0 | % |
| Other companies                                 |   | 3,547 |   | 57.0 | % |
| **Total portfolio interest income**             |   | $ | 6,218 |   | 100.0 | % |

 

The annualizedweighted average yield on our portfolio, excluding cash and cash equivalents,for the three months ended September 30, 2009 was 10.01%, compared to7.98% for the prior year period.  Theweighted average yield varies from period to period based on the current statedinterest rate on interest-bearing investments and the amounts of loans forwhich interest is not accruing.  Theincrease in the weighted average yield for the current quarter resultedprimarily from our sale of lower interest-bearing senior syndicated loans subsequentto September 30, 2008.

 

Interest incomefrom invested cash and cash equivalents decreased for the three months ended September 30,2009, as compared to the prior year period. This decrease is a result of lower interest rates offered by banks, asthis income is derived mainly from interest earned on overnight sweeps of cashheld at financial institutions, in addition to us using the proceeds fromrepayments on outstanding loans during the year to pay down our line of credit.

 

Other incomedecreased for the three months ended September 30, 2009, as compared theprior year period, due to the recognition of dividends received on therestructuring of one of our Affiliate investments (Quench) as income during theprior year quarter.  The current periodbalance in other income is comprised mainly of loan amendment fees that areamortized over the remaining lives of the respective loans, as well as othermiscellaneous income amounts.

 

**Operating Expenses**

 

Total operatingexpenses, excluding any voluntary and irrevocable credits to the basemanagement fee, decreased for the three months ended September 30,2009,  primarily due to a decrease ininterest expense associated with the Credit Facility, as well as decreases inthe amount of fees due to our Adviser, as compared to the three months ended September 30,2008.

 

Loan servicingfees decreased for the three months ended September 30, 2009, as comparedto the prior year period. These fees were incurred in connection with a loanservicing agreement between Business Investment and our Adviser, which is basedon the value of the aggregate outstanding balance of eligible loans in ourportfolio. These fees were directly credited against the amount of the base 

 

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management fee dueto our Adviser. The decrease in fees is a result of the reduced size of ourpledged loan portfolio, caused by the Syndicated Loan Sales.

 

The basemanagement fee decreased for the three months ended September 30, 2009, ascompared to the prior year period, which is reflective of fewer total assetsheld during the quarter ended September 30, 2009 when compared to theprior year quarter. Furthermore, due to the liquidation of the majority of oursyndicated loans, the credit received against the gross base management fee forinvestments in syndicated loans has also been reduced. The base management feeis computed quarterly as described under *“*Investment Advisory and Management Agreement*”* in Note 4 of the notes to theconsolidated financial statements in our Annual Report on Form 10-K asfiled with the SEC on June 2, 2009 and is summarized in the table below:

 
| ** **                                                                     | ** ** | **Three months ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                     | ** ** | **2009**                                   | ** ** | **2008** | ** ** |
| **Base management fee**                                                        |       | $                                          | 164        |   | $ | 435 |   |
|                                                                           |       |                                       |       |   |   |
| *Credits to base management fee  from Adviser:*                                |       |                                       |       |   |   |
| Fee reduction for the waiver of 2% fee on senior  syndicated loans to 0.5% (1) |       | (48                                        | )          | (383 | ) |
| Credit for fees received by Adviser from the  portfolio companies              |       | (117                                       | )          | (313 | ) |
| **Credit to base management fee from  Adviser**                                |       | (165                                       | )          | (696 | ) |
|                                                                           |       |                                       |       |   |   |
| **Net base management fee**                                                    | ** ** | **$**                                      | **(1**     | **)** | **$** | **(261** | **)** |

 

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(1)                 Our Adviser voluntarily and irrevocablywaived the annual 2.0% base management fee to 0.5% for senior syndicated loanparticipations on a quarterly basis to the extent that proceeds resulting fromborrowings were used to purchase such syndicated loan participations. Feeswaived cannot be recouped by the Adviser in the future.

 

The administrationfee remained relatively constant for the three months ended September 30,2009, as compared the prior year period. The calculation of the administrativefee is described in detail above under *“InvestmentAdvisory and Management Agreement”* in Note 4 of the notes to theconsolidated financial statements in our Annual Report on Form 10-K asfiled with the SEC on June 2, 2009.

 

Interest expensedecreased for the three months ended September 30, 2009, as compared tothe prior year period as a direct result of decreased borrowings under theCredit Facility during the current quarter. The weighted average balance outstanding on our line of credit duringthe quarter ended September 30, 2009 was approximately $28.3 million, ascompared to $101.3 million in the comparable prior year period.

 

Other operatingexpenses (including amortization of deferred financing fees, professional fees,stockholder related costs, insurance expense, directors’ fees and other directexpenses) increased over the comparable prior year period, driven primarily byincreases in deferred financing fees related to the Credit Facility enteredinto in April 2009.  Slightlyoffsetting the overall increase were decreases in professional fees, such asaudit and general legal costs, and stockholder related costs, from lower annualmeeting solicitation fees.

 

**Realized and Unrealized (Loss) Gainon Investments**

 

*RealizedLosses*

 

During the threemonths ended September 30, 2009, no investments were sold or written off.However, subsequent to September 30, 2009, we entered into agreements tosell one senior syndicated loan and a portion of another, both of which settledin October 2009 for aggregate proceeds of $5.5 million, and recorded arealized loss of $1.3 million, which will be reflected in the results ofoperations for the three months ending December 31, 2009. For the threemonths ended September 30, 2008, we exited two senior syndicated loans andrealized a net loss of $2.5 million, which was mostly attributable to thesettlement of Lexicon.  We sold themajority of our senior syndicated loans during the quarter ended June 30,2009, and we expect to sell the remaining two senior syndicated loans in thelong-term future as we attempt to remove ourselves from the senior syndicatedloan market.

 

*UnrealizedGains and Losses*

 

Net unrealizedappreciation (depreciation) of investments is the net change in the fair valueof our investment portfolio during the reporting period, including the reversalof previously recorded unrealized appreciation or depreciation when gains andlosses are actually realized. During the three months ended September 30,2009, we recorded net unrealized depreciation of investments in the aggregateamount of $20.3 million, compared to $300 in the prior year period.  The unrealized appreciation (depreciation)across our investment classes for the three months ended September 30,2009 was as follows:

 
| **Investment  Category**  | ** ** | **Net  Unrealized Loss** | ** ** |
|---------------------------|------------|--------------------------|------------|
| Non-Control/Non-Affiliate |       | $                        | (1,514     | ) |
| Control                   |       | (14,900                  | )          |
| Affiliate                 |       | (3,853                   | )          |
| Total                     |       | $                        | (20,267    | ) |

 

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We recordedapproximately $1.5 million of unrealized depreciation on ourNon-Control/Non-Affiliate investments for the quarter ended September 30, 2009,driven primarily by a $1.4 million unrealized loss on Survey Sampling.  For the three months ended September 30,2008, we recorded approximately $5.2 million of unrealized depreciation on ourNon-Control/Non-Affiliate investments.

 

Our Controlinvestments experienced the most significant devaluation in our totalportfolio, particularly in our equity holdings, which alone depreciated invalue by an aggregate of $14.0 million during the quarter ended September 30,2009, mainly in A. Stucki, Acme, Chase, and Galaxy Tools, offset by a modestincrease in Cavert’s equity holdings. The debt portion of our Control investments depreciated in value by anaggregate of approximately $900 during the current quarter.  For the three months ended September 30,2008, we recorded approximately $10.8 million of unrealized appreciation on ourControl investments.

 

Our Affiliateinvestments also experienced unrealized depreciation during the currentquarter, particularly in our equity holdings of Danco and Tread, as well as inthe debt portion of Noble. Overall, our Affiliate investments experiencedapproximately $1.5 million of depreciation related to the debt and $2.4 millionof depreciation in the equity of these companies. For the three months ended September 30,2008, we recorded approximately $6.0 million of unrealized depreciation on ourAffiliate investments.

 

Over our entireinvestment portfolio, we recorded an aggregate of approximately $3.9 million ofunrealized depreciation on our debt positions for the quarter ended September 30,2009, while our equity holdings experienced an aggregate devaluation ofapproximately $16.4 million.  At September 30,2009, the fair value of our investment portfolio was less than the cost basisof our portfolio by approximately $32.3 million, as compared to $12.0 millionat June 30, 2009, representing an increase in net unrealized depreciationof $20.3 million for the quarter.  Webelieve that our aggregate investment portfolio was valued at a depreciatedvalue due primarily to the general instability of the loan markets even thoughwe saw some return of market liquidity within the senior syndicated loanmarkets.  Although our investmentportfolio has depreciated, our entire portfolio was fair valued at 86.3% ofcost as of September 30, 2009.  Theunrealized depreciation of our investments does not have an impact on ourcurrent ability to pay distributions to stockholders; however, it may be anindication of future realized losses, which could ultimately reduce our incomeavailable for distribution.  During thefirst quarter of fiscal year 2010, we reduced our monthly distribution from$0.08 to $0.04 per common share.

 

**Net Unrealized Appreciation ofBorrowings Under Line of Credit**

 

Duringthe quarter ended September 30, 2009, we recorded unrealized appreciationof $178 for the line of credit that was fair valued by an independent thirdparty in accordance with ASC 825.  ASC825 was not applicable for the three months ended September 30,  2008.

 

**Derivatives**

 

During the quarterended June 30, 2009, we cancelled our prior interest rate cap agreementsand entered into a new interest rate cap agreement with BB&T for a notionalamount of $45.0 million that will effectively limit the interest rate on aportion of the borrowings under the Credit Facility.  We incurred a premium fee of approximately$39 in conjunction with this agreement. As of September 30, 2009, the derivative had a fair value ofapproximately $12, and unrealized depreciation of $16 was recorded for thethree months ended September 30, 2009. For the comparable prior year period, the fair market value of our priorinterest rate cap agreements remained flat.

 

**Net (Decrease) Increase in Net AssetsResulting from Operations**

 

For the threemonths ended September 30, 2009, we recorded a net decrease in net assetsresulting from operations of $18.1 million as a result of the factors discussedabove. For the three months ended September 30, 2008, we recorded a netincrease in net assets resulting from operations of $956.  Our net (decrease) increase in net assetsresulting from operations per basic and diluted weighted average common sharefor the quarters ended September 30, 2009 and 2008 were $(0.82) and $0.04,respectively.

 

***Comparison of the Six Months Ended September 30,2009 to the Six Months Ended September 30, 2008***

 

*A comparison of our operatingresults for the six months ended September 30, 2009 and 2008 is below:*

 

32

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| ** **                                                                           | ** ** | **For the six months ended September 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                           | ** ** | **2009**                                        | ** ** | **2008** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| INVESTMENT INCOME                                                                    |       |                                            |       |   |   |   |   |   |   |
| Interest income                                                                      |       |                                            |       |   |   |   |   |   |   |
| Non-Control/Non-Affiliate investments                                                |       | $                                               | 1,351      |   | $ | 4,458 |   | $ | (3,107 | ) | (69.7 | )% |
| Control investments                                                                  |       | 5,736                                           |       | 5,304 |   | 432 |   | 8.1 | % |
| Affiliate investments                                                                |       | 2,928                                           |       | 2,460 |   | 468 |   | 19.0 | % |
| Cash and cash equivalents                                                            |       | 1                                               |       | 46 |   | (45 | ) | (97.8 | )% |
| Total interest income                                                                |       | 10,016                                          |       | 12,268 |   | (2,252 | ) | (18.4 | )% |
| Other income                                                                         |       | 96                                              |       | 586 |   | (490 | ) | (83.6 | )% |
| Total investment income                                                              |       | 10,112                                          |       | 12,854 |   | (2,742 | ) | (21.3 | )% |
|                                                                                 |       |                                            |       |   |   |   |   |   |   |
| EXPENSES                                                                             |       |                                            |       |   |   |   |   |   |   |
| Loan servicing fee                                                                   |       | 2,006                                           |       | 2,511 |   | 505 |   | 20.1 | % |
| Base management fee                                                                  |       | 477                                             |       | 861 |   | 384 |   | 44.6 | % |
| Administration fee                                                                   |       | 371                                             |       | 447 |   | 76 |   | 17.0 | % |
| Interest expense                                                                     |       | 1,255                                           |       | 2,186 |   | 931 |   | 42.6 | % |
| Amortization of deferred finance costs                                               |       | 751                                             |       | 278 |   | (473 | ) | (170.1 | )% |
| Professional fees                                                                    |       | 320                                             |       | 314 |   | (6 | ) | (1.9 | )% |
| Stockholder related costs                                                            |       | 227                                             |       | 301 |   | 74 |   | 24.6 | % |
| Insurance expense                                                                    |       | 119                                             |       | 108 |   | (11 | ) | (10.2 | )% |
| Directors’ fees                                                                 |       | 99                                              |       | 95 |   | (4 | ) | (4.2 | )% |
| Other                                                                                |       | 137                                             |       | 189 |   | 52 |   | 27.5 | % |
| Expenses before credit from Adviser                                                  |       | 5,762                                           |       | 7,290 |   | 1,528 |   | 21.0 | % |
| Credits to base management fee                                                       |       | (466                                            | )          | (1,270 | ) | (804 | ) | (63.3 | )% |
| Total expenses net of credit to base management fee                                  |       | 5,296                                           |       | 6,020 |   | 724 |   | 12.0 | % |
| NET INVESTMENT INCOME                                                                |       | 4,816                                           |       | 6,834 |   | (2,018 | ) | (29.5 | )% |
|                                                                                 |       |                                            |       |   |   |   |   |   |   |
| REALIZED AND UNREALIZED (LOSS) GAIN ON:                                              |       |                                            |       |   |   |   |   |   |   |
| Realized loss on sale of Non-Control/Non-Affiliate  investments                      |       | (34,605                                         | )          | (4,215 | ) | (30,390 | ) | (721.0 | )% |
| Realized loss on termination of derivative                                           |       | (53                                             | )          | — |   | (53 | ) | — |   |
| Net unrealized (depreciation) appreciation of  Non-Control/Non-Affiliate investments |       | 35,214                                          |       | (726 | ) | 35,940 |   | 4,950.4 | % |
| Net unrealized (depreciation) appreciation of  Control investments                   |       | (26,381                                         | )          | 5,973 |   | (32,354 | ) | (541.7 | )% |
| Net unrealized depreciation of Affiliate  investments                                |       | (6,119                                          | )          | (11,393 | ) | 5,274 |   | 46.3 | % |
| Net unrealized (depreciation) appreciation of  derivative                            |       | 26                                              |       | — |   | 26 |   | — |   |
| Net unrealized appreciation of borrowings under  line of credit                      |       | (178                                            | )          | — |   | (178 | ) | — |   |
| Net loss on investments and borrowings under line  of credit                         |       | (32,096                                         | )          | (10,361 | ) | (21,735 | ) | (209.8 | )% |
|                                                                                 |       |                                            |       |   |   |   |   |   |   |
| NET (DECREASE) INCREASE IN NET ASSETS RESULTING  FROM OPERATIONS                     |       | $                                               | (27,280    | ) | $ | (3,527 | ) | $ | (23,753 | ) | (673.5 | )% |

 

**Investment Income**

 

Investment incomedecreased for the six months ended September 30, 2009, as compared to thesix months ended September 30, 2008, due mainly to a decrease in the sizeof our loan portfolio, as well as decreases in LIBOR over the respectiveperiods.

 

Interest incomefrom our investments in debt securities of private companies decreased for thesix months ended September 30, 2009, as compared to the prior year periodfor several reasons. The level of interest income from investments is directlyrelated to the balance, at cost, of the interest-bearing investment portfoliooutstanding during the period multiplied by the weighted average yield. Theweighted average yield varies from period to period based on the current statedinterest rate on interest-bearing investments and the amounts of loans forwhich interest is not accruing. The average cost basis of our interest-bearinginvestment portfolio during the six months ended September 30, 2009 wasapproximately $222.7 million, compared to approximately $298.0 million for theprior year period.  This decrease wasprimarily due to the Syndicated Loan Sales. Also contributing to the decrease in our interest income frominvestments in debt securities was a decrease in the average LIBOR between thetwo periods, which was approximately 0.32% for the six months ended September 30,2009, as compared to 2.60% for the prior year period.

 

Interest incomefrom Non-Control/Non-Affiliate investments decreased for the six months ended September 30,2009, as compared to the prior year period, due to an overall decrease in thesize and number of Non-Control/Non-Affiliate investments held between the twoperiods. At September 30, 2008, we held investments in 35 differentNon-Control/Non-Affiliate investments; however, as a result of the SyndicatedLoan Sales, only five different Non-Control/Non-Affiliate investments were heldat September 30, 2009. The decrease in interest income fromNon-Control/Non-Affiliate investments was further accentuated by the continueddrops in LIBOR between the two periods, due to the instability and tighteningof the credit markets.

 

Interest incomefrom Control investments increased slightly for the six months ended September 30,2009, as compared to the prior year period. The increase is attributable to twoadditional Control investments, Galaxy Tool, which was acquired during thesecond quarter of the prior fiscal year, and Country Club Enterprises, whichwas purchased in the third quarter of the prior fiscal year, being 

 

33

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held for the fullsix months ended September 30, 2009, as opposed to the prior year period.However, this increase was partially offset by the reclassification of Quenchfrom a Control investment to an Affiliate investment, which took place duringthe second quarter of the prior fiscal year. Continuing decreases in LIBORplayed a minimal role in interest income from our proprietary deals during thecurrent year period, as the majority of them include interest rate floors toprotect against such circumstances.

 

Interest incomefrom Affiliate investments also increased for the six months ended September 30,2009, as compared to the prior year period. This increase was due mainly to thereclassification of Quench as an Affiliate investment, as noted above, and theadditional interest income accrued under the Affiliate investmentsclassification as a result.

 

The followingtable lists the interest income from investments for the five largest portfoliocompany investments during the respective periods:

 
| **Six  months ended September 30, 2009** |
|-----------------------------------------------|
| ** **                                    | ** ** | **Interest** | ** ** | ** ** | ** ** |
| **Company**                                   | ** ** | **Income** | ** ** | **%** | ** ** |
| Chase II Holdings Corp.                       |   | $ | 1,321 |   | 13.2 | % |
| Galaxy Tools Holding Corp.                    |   | 1,184 |   | 11.8 | % |
| A. Stucki Holding Corp.                       |   | 1,151 |   | 11.5 | % |
| Acme Cryogenics, Inc.                    |   | 848 |   | 8.5 | % |
| Danco Acquisition Corp.                       |   | 787 |   | 7.8 | % |
| **Subtotal**                                  |   | $ | 5,291 |   | 52.8 | % |
| Other companies                               |   | 4,724 |   | 47.2 | % |
| **Total  portfolio interest income**          |   | $ | 10,015 |   | 100.0 | % |

 
| **Six months ended September 30,  2008** |
|-----------------------------------------------|
| ** **                                    | ** ** | **Interest** |   |   |   |
| **Company**                                   | ** ** | **Income** | ** ** | **%** | ** ** |
| Chase II Holdings Corp.                       |   | $ | 1,429 |   | 11.7 | % |
| A. Stucki Holding Corp.                       |   | 1,346 |   | 11.0 | % |
| Acme Cryogenics, Inc.                    |   | 848 |   | 6.9 | % |
| Cavert II Holding Corp.                       |   | 825 |   | 6.8 | % |
| Danco Acquisition Corp.                       |   | 809 |   | 6.6 | % |
| **Subtotal**                                  |   | $ | 5,257 |   | 43.0 | % |
| Other companies                               |   | 6,965 |   | 57.0 | % |
| **Total portfolio interest income**           |   | $ | 12,222 |   | 100.0 | % |

 

The annualizedweighted average yield on our portfolio, excluding cash and cash equivalents,for the six months ended September 30, 2009 was 9.93%, compared to 7.81%for the prior year period.  The weightedaverage yield varies from period to period based on the current stated interestrate on interest-bearing investments and the amounts of loans for whichinterest is not accruing.  The increasein the weighted average yield for the current period results primarily from oursale of lower interest-bearing senior syndicated loans subsequent to September 30,2008.

 

Interest incomefrom invested cash and cash equivalents decreased for the six months ended September 30,2009, as compared to the prior year period. This decrease is a result of lower interest rates offered by banks, asthis income is derived mainly from interest earned on overnight sweeps of cashheld at financial institutions, in addition to us using the proceeds fromrepayments on outstanding loans during the year to pay down our line of credit.

 

Other incomedecreased for the six months ended September 30, 2009, as compared to theprior year period.  The decrease from theprior year is due to the recognition of dividends received on the restructuringof one of our Affiliate investments (Quench) as income in the prior yearperiod.  The current year balance ofother income is comprised of loan amendment fees that are amortized over theremaining lives of the respective loans or recognized into income once theinvestment is disposed of, as well as other miscellaneous income amounts.

 

**Operating Expenses**

 

Total operatingexpenses, excluding any voluntary and irrevocable credits to the basemanagement fee, decreased for the six months ended September 30, 2009,primarily due to a decrease in interest expense associated with the CreditFacility, offset by increased amortization of deferred financing costs, as wellas decreases in the amount of fees to our Adviser, as compared to the sixmonths ended September 30, 2008.

 

Loan servicingfees decreased for the six months ended September 30, 2009, as compared tothe prior year period. These fees were incurred in connection with a loanservicing agreement between Business Investment and our Adviser, which is basedon the value of the aggregate outstanding portfolio pledged against the CreditFacility. These fees were directly credited against the amount of the basemanagement fee due to our Adviser. The decrease in fees is a direct result ofthe reduced size of our pledged loan portfolio, caused by the Syndicated LoanSales.

 

The basemanagement fee decreased for the six months ended September 30, 2009, ascompared to the prior year period, which is reflective of fewer total assetsheld during the six months ended September 30, 2009 when compared to theprior year period. Furthermore, due to the liquidation of the majority of oursyndicated loans, the credit received against the gross base management fee forinvestments in syndicated loans has also been reduced. The base management feeis computed quarterly as described under *“InvestmentAdvisory and Management Agreement”* in Note 4 of the notes to theconsolidated financial statements in the Company’s Annual Report on Form 10-Kas filed on June 2, 2009, and is summarized in the table below:

 

34

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| ** **                                                                     | ** ** | **Six months ended September 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                     | ** ** | **2009**                                | ** ** | **2008** | ** ** |
| **Base management fee**                                                        |       | $                                       | 477        |   | $ | 861 |   |
|                                                                           |       |                                    |       |   |   |
| Credits to base  management fee from Adviser:                                  |       |                                    |       |   |   |
| Fee reduction for the waiver of 2% fee on senior  syndicated loans to 0.5% (1) |       | (231                                    | )          | (807 | ) |
| Credit for fees received by Adviser from the  portfolio companies              |       | (235                                    | )          | (463 | ) |
| **Credit to base management fee from  Adviser**                                |       | (466                                    | )          | (1,270 | ) |
|                                                                           |       |                                    |       |   |   |
| **Net base management fee**                                                    | ** ** | **$**                                   | **11**     | ** ** | **$** | **(409** | **)** |

 

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(1)                 Our Adviser voluntarily and irrevocablywaived the annual 2.0% base management fee to 0.5% for senior syndicated loanparticipations on a quarterly basis to the extent that proceeds resulting fromborrowings were used to purchase such syndicated loan participations. Feeswaived cannot be recouped by the Adviser in the future.

 

The administrationfee decreased for the six months ended September 30, 2009, as compared tothe prior year period. The decrease in the current year period was due to anoverall reduction of administration staff and related expenses incurred by ourAdministrator, while our total assets in comparison to the total assets of allcompanies managed by our Adviser under similar agreements remained relativelyconstant. The calculation of the administrative fee is described in detailabove under *“Investment Advisory andManagement Agreement”* in Note 4 of the notes to the consolidatedfinancial statements in the Company’s Annual Report on Form 10-K as filedon June 2, 2009.

 

Interest expensedecreased for the six months ended September 30, 2009, as compared to theprior year period, a direct result of decreased borrowings under the CreditFacility during the current period.  Theweighted average balance outstanding on our line of credit during the sixmonths ended September 30, 2009 was approximately $35.1 million, ascompared to $100.5 million in the prior year period.

 

Other operatingexpenses (including amortization of deferred financing fees, professional fees,stockholder related costs, insurance expense, directors’ fees and other directexpenses) increased over the comparable prior year period, driven primarily byincreases in deferred financing fees related to the Credit Facility enteredinto in April 2009.  Partiallyoffsetting this increase were decreases in stockholder related costs, such aslower annual meeting costs, and other direct expenses, including decreasedbackup servicer fees and fewer travel expenses incurred during the prior yearperiod.

 

**Realized and Unrealized (Loss) Gainon Investments**

 

*RealizedLosses*

 

During the sixmonths ended September 30, 2009, we exited 29 senior syndicated loans foraggregate proceeds of approximately $69.2 million in cash and recorded arealized loss of approximately $34.6 million. For the six months ended September 30,2008, we received approximately $13.2 million in cash proceeds and recognized anet loss on the sale of nine syndicated loans and the write-off of anothersyndicated loan in the aggregate amount of $4.2 million. The increase inrealized losses is attributable to liquidity needs from the Senior SyndicatedLoan sales associated with the repayment of amounts outstanding under our priorcredit facility with Deutsche Bank, which matured in April 2009.

 

*UnrealizedGains and Losses*

 

Net unrealizedappreciation (depreciation) of investments is the net change in the fair valueof our investment portfolio during the reporting period, including the reversalof previously recorded unrealized appreciation or depreciation when gains andlosses are actually realized. During the six months ended September 30,2009, we recorded net unrealized appreciation of investments in the aggregate amountof $2.7 million, compared to net unrealized depreciation of investments in theaggregate amount of $6.1 million for the prior year period.  The unrealized appreciation (depreciation)across our investment classes for the six months ended September 30, 2009was as follows:

 
| **Investment  Category**  | ** ** | **Net  Unrealized Gain (Loss)** | ** ** |
|---------------------------|------------|---------------------------------|------------|
| Non-Control/Non-Affiliate |       | $                               | 35,214     | * |
| Control                   |       | (26,381                         | )          |
| Affiliate                 |       | (6,119                          | )          |
| Total                     |       | $                               | 2,714      |   |

 

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*     Includes the reversal of approximately$34.4 million of previously recorded unrealized depreciation related to thesale of syndicated loans, which resulted in a $34.6 million of realized lossfor the current period.

 

35

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We recordedapproximately $35.2 million of unrealized appreciation of ourNon-Control/Non-Affiliate investments for the six months ended September 30,2009, due primarily to the reversal of $34.4 million of previously recordedunrealized depreciation noted in the table above, and appreciation in value inthe aggregate amount of approximately $800 on our remainingNon-Control/Non-Affiliate investments. Survey Sampling experienced the mostsignificant devaluation; however, this was partially offset by an increase invalue of ITC DeltaCom.  AmericanGreetings Corp., B-Dry and HMT also experienced modest increases in value. Forthe six months ended September 30, 2008, we recorded approximately $700 ofunrealized depreciation on our Non-Control/Non-Affiliate investments.

 

Our Controlinvestments experienced the most significant devaluation in our totalportfolio, most notably in our equity holdings, which alone depreciated invalue by an aggregate of approximately $25.9 million during the six monthsended September 30, 2009, particularly in A. Stucki, Galaxy Tools, ChaseIndustries, Country Club Enterprises and Acme Cryogenics.  Cavert Wire and Auto Safety House bothexperienced moderate increases in value over the current six months.  The debt portion of our Control investmentsdepreciated in value by an aggregate of approximately $500 during the currentperiod. For the six months ended September 30, 2008, we recordedapproximately $6.0 of unrealized appreciation on our Control investments.

 

Our Affiliateinvestments also experienced unrealized depreciation during the six month periodended September 30, 2009, particularly in the equity components of Danco,Quench, and Tread, as well as in the debt portion of Noble.  Partially offsetting the net decrease wereincreases in value in the debt components of both Danco and Quench.  Overall, our Affiliate investmentsexperienced approximately $600 of depreciation in the debt and $5.5 million ofdepreciation in the equity of these companies. For the six months ended September 30,2008, we recorded approximately $11.4 million of unrealized depreciation on ourAffiliate investments.

 

Over our entireinvestment portfolio, we recorded an aggregate of approximately $34.2 millionof unrealized appreciation on our debt positions for the six months ended September 30,2009, while our equity holdings experienced an aggregate devaluation ofapproximately $31.4 million.  At September 30,2009, the fair value of our investment portfolio was less than the cost basisof our portfolio by approximately $32.3 million, as compared to $35.0 millionat March 31, 2009, representing net unrealized appreciation of $2.7million for the period.  We believe thatour aggregate investment portfolio was valued at a depreciated value dueprimarily to the general instability of the loan markets even though we sawsome return of market liquidity within the senior syndicated loan markets.  Although our investment portfolio hasdepreciated, our entire portfolio was fair valued at 86.3% of cost as of September 30,2009.  The unrealized depreciation of ourinvestments does not have an impact on our current ability to pay distributionsto stockholders; however, it may be an indication of future realized losses,which could ultimately reduce our income available for distribution. During thefirst quarter of fiscal year 2010, we reduced our monthly distribution from$0.08 to $0.04 per common share.

 

**Net Unrealized Appreciation ofBorrowings Under Line of Credit**

 

Duringthe six months ended September 30, 2009, we recorded unrealizedappreciation of $178 for the line of credit that was fair valued by anindependent third party in accordance with ASC 825.  We adopted ASC 825 during June 2009 andthe Credit Facility was valued as its cost basis for that period. ASC 825 wasnot applicable for the six months ended September 30,  2008.

 

**Derivatives**

 

During the sixmonths ended September 30, 2009, we cancelled our prior interest rate capagreements, recorded a realized loss of $53, and entered into a new interestrate cap agreement with BB&T for a notional amount of $45.0 million thatwill effectively limit the interest rate on a portion of the borrowings underthe Credit Facility.  We incurred apremium fee of approximately $39 in conjunction with this agreement.  As of September 30, 2009, the derivativehad a fair value of approximately $12, representing an unrealized depreciationof $27 for the six months ended September 30, 2009 on our current interestrate cap agreement.  For the prior yearperiod, the fair market value of our prior interest rate cap agreementsremained flat.

 

**Net Decrease in Net Assets Resultingfrom Operations**

 

For the six monthsended September 30, 2009, we recorded a net decrease in net assetsresulting from operations of $27.3 million as a result of the factors discussedabove. For the six months ended September 30, 2008, we recorded a netdecrease in net assets resulting from operations of $3.5 million.  Our net decrease in net assets resulting fromoperations per basic and diluted weighted average common share for the sixmonths ended September 30, 2009 and 2008 were $1.24 and $0.17,respectively.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

**OperatingActivities**

 

Net cash providedby operating activities for the six months ended September 30, 2009 wasapproximately $159.3 million and consisted primarily of proceeds fromborrowings under the short-term loan, as discussed in Note 7, *Short-Term Loan*, in the accompanying notes to the condensedconsolidated financial statements, proceeds received from the syndicated loansales and the net

 

36

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loss realized onthose sales, and principal payments received from existing investments. For thesix months ended September 30, 2008, net cash provided by operatingactivities was approximately $7.9 million and consisted primarily of principalloan repayments, proceeds from the sale of existing portfolio investments, andnet unrealized depreciation of our investments, partially offset by thepurchase of one new Control investment and one new Affiliate investment.

 

At September 30,2009, we had investments in equity of, loans to, or syndicated participationsin 17 private companies with a cost basis totaling approximately $236.6million.  At September 30, 2008, wehad investments in equity of, loans to, or syndicated participations in 46private companies with an aggregate cost basis of approximately $347.6million.  A summary of our investmentactivity for the six months ended September 30, 2009 and 2008 is asfollows:

 
| **Quarter  Ended**      | ** ** | **Loan  Disbursements (1)** | ** ** | **Principal  Repayments (2)** | ** ** | **Proceeds  from  Sales/Exits (3)** | ** ** | **Net Loss  on  Disposal (3)** | ** ** |
|-------------------------|------------|-----------------------------|------------|-------------------------------|------------|-------------------------------------|------------|--------------------------------|------------|
| June 30, 2009      |       | $                           | 1,500      | (a)                           | $          | 7,575                               | (a)        | $                              | 69,222     | ** ** | $ | (34,605 | ) |
| September 30, 2009 |       | 318                         |       | 2,757                         |       | —                              |       | —                         |       |
| **Total**               |       | $                           | 1,818      |                          | $          | 10,332                              |       | $                              | 69,222     |   | $ | (34,605 | ) |

 
| **Quarter Ended**       | ** ** | **Loan  Disbursements (1)** | ** ** | **Principal  Repayments (2)** | ** ** | **Proceeds from  Sales/Exits (3)** | ** ** | **Net Loss on  Disposal (3)** |   |
|-------------------------|------------|-----------------------------|------------|-------------------------------|------------|------------------------------------|------------|-------------------------------|--------|
| June 30, 2008      |       | $                           | 8,980      |                          | $          | 3,493                              |       | $                             | 13,246 |   | $ | (1,717 | ) |
| September 30, 2008 |       | 27,632                      |       | 18,791                        |       | 50                                 |       | (2,498                        | )      |
| **Total**               |       | $                           | 36,612     |                          | $          | 22,284                             |       | $                             | 13,296 |   | $ | (4,215 | ) |

 

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(a)   Includes an $850non-cash transaction whereby a portfolio company, Cavert Wire, drew $850 on itsrevolving line of credit and immediately used the proceeds to pay down itssenior term A and senior term B loans. No cash was disbursed in this transaction, as it was simply a transferof balance.  The $850 drawn on the creditline was subsequently paid off in full, and the line of credit was sold to athird party for a nominal fee.

 

**(1) LoanDisbursements:**

** **
| ** **              | ** ** | **New Investments** | ** ** | **Disbursements to Existing** | ** ** | **Total**               | ** ** |
|-------------------------|------------|---------------------|------------|-------------------------------|------------|-------------------------|------------|
| **Quarter Ended**       | ** ** | **Companies**       | ** ** | **Investments**               | ** ** | **Portfolio Companies** | ** ** | **Disbursements** | ** ** |
| June 30, 2009      |       | 0                   |       | $                             | 0          |                    | $          | 1,500 | (a) | $ | 1,500 | (a) |
| September 30, 2009 |       | 0                   |       | 0                             |       | 318                     |       | 318 |   |
| **Total**               |       | 0                   |       | $                             | 0          |                    | $          | 1,818 | (a) | $ | 1,818 | (a) |

 
| ** **              | ** ** | **New Investments** |       | **Disbursements to Existing** |       | **Total**               |       |
|-------------------------|------------|---------------------|------------|-------------------------------|------------|-------------------------|------------|
| **Quarter Ended**       | ** ** | **Companies**       | ** ** | **Investments**               | ** ** | **Portfolio Companies** | ** ** | **Disbursements** | ** ** |
| June 30, 2008      |       | 1                   | (b)        | $                             | 5,753      |                    | $          | 3,227 |   | $ | 8,980 |   |
| September 30, 2008 |       | 2                   | (c)        | 25,210                        |       | 2,422                   |       | 27,632 |   |
| **Total**               |       | 3                   |       | $                             | 30,963     |                    | $          | 5,649 |   | $ | 36,612 |   |

** **

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(a)   See note (a) above

(b)   Tread Corporation

(c)   Galaxy Tool Corp. ($21.4million) and A. Stucki add-on for AlcoSprings acquisition ($3.8 million)

 

**(2) PrincipalRepayments:**

** **
| **Quarter  Ended**      | ** ** | **Scheduled  Principal  Repayments** | ** ** | **Unscheduled  Principal  Repayments (*)** | ** ** | **Total  Principal Repayments** | ** ** |
|-------------------------|------------|--------------------------------------|------------|--------------------------------------------|------------|---------------------------------|------------|
| June 30, 2009      |       | $                                    | 2,004      |                                       | $          | 5,571                           | (a)        | $ | 7,575 |   |
| September 30, 2009 |       | 387                                  |       | 2,370                                      | (b)        | 2,757                           |       |
| **Total**               |       | $                                    | 2,391      |                                       | $          | 7,941                           |       | $ | 10,332 |   |

 
| **Quarter  Ended**      | ** ** | **Scheduled  Principal  Repayments** | ** ** | **Unscheduled  Principal  Repayments (*)** | ** ** | **Total  Principal  Repayments** | ** ** |
|-------------------------|------------|--------------------------------------|------------|--------------------------------------------|------------|----------------------------------|------------|
| June 30, 2008      |       | $                                    | 2,516      |                                       | $          | 977                              |       | $ | 3,493 |   |
| September 30, 2008 |       | 3,294                                |       | 15,497                                     | (c)        | 18,791                           |       |
| **Total**               |       | $                                    | 5,810      |                                       | $          | 16,474                           |       | $ | 22,284 |   |

 

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(*)   Includes principalrepayments due to excess cash flows, covenant trips, exits, refinancings, etc.

 

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(a)   Includes principalpayments received in connection with the refinancings of A. Stucki and Cavert

(b)         Includes $2.0million voluntary prepaymentfrom Cavert on their Senior Term Debt

(c)          Includes early payoff of Hudson ($6.0million) and principal proceeds received with the Quench restructuring ($7.0million)

 

**(3) LoanSales / Exits:**

 
| **Quarter  Ended**      | ** ** | **Number of  Loans Exited** | ** ** | **Proceeds  Received** | ** ** | **Position  (Principal) Exited** | ** ** | **Unamortized    Loan Costs (#)** | ** ** | **Net Loss  on  Exit** | ** ** |
|-------------------------|------------|-----------------------------|------------|------------------------|------------|----------------------------------|------------|-----------------------------------|------------|------------------------|------------|
| June 30, 2009      |       | 29                          | (a)        | $                      | 69,222     |                             | $          | 103,772                           |       | $                      | 55         |   | $ | (34,605 | ) |
| September 30, 2009 |       | 0                           |       | —                 |       | —                           |       | —                            |       | —                 |       |
| **Total**               |       | 29                          |       | $                      | 69,222     |                             | $          | 103,772                           |       | $                      | 55         |   | $ | (34,605 | ) |

 
| **Quarter Ended**       | ** ** | **Number of  Loans Exited** | ** ** | **Proceeds  Received** | ** ** | **Position  (Principal) Exited** | ** ** | **Unamortized   Loan Costs (#)** | ** ** | **Net Loss on   Exit** |   |
|-------------------------|------------|-----------------------------|------------|------------------------|------------|----------------------------------|------------|----------------------------------|------------|------------------------|--------|
| June 30, 2008      |       | 9                           | (b)        | $                      | 13,246     |                             | $          | 14,926                           |       | $                      | 37     |   | $ | (1,717 | ) |
| September 30, 2008 |       | 2                           | (c)        | 50                     | (d)        | 2,530                            |       | 18                               |       | (2,498                 | )      |
| **Total**               |       | 11                          |       | $                      | 13,296     |                             | $          | 17,456                           |       | $                      | 55     |   | $ | (4,215 | ) |

 

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(#)   Includes balance ofpremiums, discounts, acquisition costs, and deferred compensation unamortizedat time of exit.

(a)   One syndicated loan(Critical Homecare Solutions) was sold in two separate installments.

(b)  Includes the partial sale of three syndicated loans still heldsubsequent to September 30, 2008 (CRC Health Group, Graham Packaging andPinnacle Foods).  One syndicated loan(NPC International) was sold in two separate installments.

(c)          Includes write-off of Lexicon and earlypayoff of Hudson.

(d)         Dividends received in excess of gainrealized on restructuring of Quench, which reduced our equity basis in theinvestment.

 

### **As discussed elsewhere inthis report, during April and May of 2009, we sold 29 of our seniorsyndicated loans held at March 31, 2009 for an aggregate of approximately$69.2 million in cash proceeds and recorded a realized loss of approximately$34.6 million in connection with these sales. These loans were sold to pay downall unpaid principal and interest owed to Deutsche Bank under our prior creditfacility. During September 2009, we finalized the sale of certain seniorsyndicated loans (HMTBP Acquisition II Corp. and a portion of InterstateFibernet, Inc.) that were held in our portfolio of investments to variousinvestors in the syndicated loan market.  We settled these loans in October 2009and received approximately $5.5 million in net cash proceeds and recorded arealized loss of approximately $1.3 million, which will be reflected in theresults of operations for the three and nine months ending December 31,2009.   These loans are included in our condensed consolidated assetsas of September 30, 2009 and were valued at their respective sale prices.**

### ** **

Our lastinvestment in a new portfolio company was in November 2008.  In light of current economic conditions,limited borrowings available under the Credit Facility, constraints on our abilityto access the capital markets and the restraints upon our investing activitiesrequired in order to maintain our RIC status, our near-term strategy will befocused on retaining capital and building the value of our existing portfoliocompanies.  We will also, where prudentand possible, consider the sale of lower-yielding investments. This strategyhas resulted, and may continue to result, in significantly reduced investmentactivity, as our ability to make new investments under these conditions is largelydependent on availability of proceeds from the sale or exit of existingportfolio investments, events which may be beyond our control, and our abilityto satisfy the asset diversification test under the Code.  As our capital constraints and asset diversificationimprove, we intend to continue our strategy of making conservative investmentsin businesses that we believe will weather the current economic condition andthat are likely to produce attractive long-term returns for our stockholders.

 

*Short-termLoan Agreement*

 

On September 29,2009, we purchased $85.0 million of short-term United States Treasurysecurities through Jefferies.  Thesecurities were purchased with $10.0 million in funds drawn on the CreditFacility and the proceeds from a $75.0 million short-term loan from Jefferieswith an effective annual interest rate of approximately 0.65%.  On October 2, 2009, the securitiesmatured, and we repaid the $75.0 million loan from Jefferies in full and repaidthe $10.0 million drawn on the Credit Facility for purposes of thistransaction.  If necessary and availableto us, we may use a similar form of loan agreement in future quarters as afinancing option in order to satisfy certain quarterly asset diversificationrequirements and maintain our status as a RIC under Subchapter M of the Code.

 

*PortfolioCompany Investment Activity*

 

During October 2009,one of our portfolio companies enteredinto an agreement with an investment banker to act as an advisor in assessingstrategic investment alternatives.  Itis premature in the process to speculate on what these strategic alternatives mightbe or what impact, if any, such activities may have on our investment in thesubject portfolio company.

 

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During October 2009,A. Stucki Holding Corp. declared and paid accrued cash dividends on itspreferred stock of which the Company received approximately $953,000.

 

**FinancingActivities**

 

Net cash used infinancing activities during the six months ended September 30, 2009 wasapproximately $80.2 million, which consisted primarily of net repayments madeon the line of credit, in connection with the termination of our prior creditfacility, and distributions paid to our stockholders.  During the six months ended September 30,2008, net cash provided by financing activities was approximately $16.6million, due mainly to the Rights Offering (as defined below), which accountedfor cash proceeds of $40.6 million.  Themajority of the cash outflows consisted of net repayments made on the creditfacility and distributions paid.

 

**Distributions**

 

In order toqualify as a RIC and to avoid corporate level tax on the income we distributeto our stockholders, we are required, under Subchapter M of the Code, todistribute at least 90% of our ordinary income and short-term capital gains toour stockholders on an annual basis. In accordance with these requirements, wedeclared and paid monthly cash distributions of $0.04 per common share duringeach month of the quarter ended September 30, 2009.  For the six months ended September 30,2009, our distribution payments of approximately $5.3 million exceeded our netinvestment income by approximately $0.5 million. We declared thesedistributions based on our estimates of net investment income for the fiscalyear. Our investment pace continued to be slower than expected in our fourthfull year of operations and, consequently, our net investment income was lowerthan our original estimates.  During thefirst quarter of fiscal year 2010, we reduced our monthly distribution from$0.08 to $0.04.

 

**Issuanceof Equity**

 

On July 21,2009, we filed a registration statement (the “Registration Statement”) with theSEC that was amended on October 2, 2009. The Registration Statement was declared effective on October 8,2009, and it will permit us to issue, through one or more transactions, up toan aggregate of $300.0 million in securities, consisting of common stock,senior common stock, preferred stock, subscription rights, debt securities andwarrants to purchase common stock, or a combination of these securities. Todate, we have incurred approximately $60 of costs in connection with theRegistration Statement.

 

We anticipateissuing equity securities to obtain additional capital in the future. However,we cannot determine the terms of any future equity issuances or whether we willbe able to issue equity on terms favorable to us, or at all. Additionally, whenour common stock is trading below net asset value, we will have regulatoryconstraints under the 1940 Act on our ability to obtain additional capital inthis manner. At September 30, 2009, our stock closed trading at $4.85,representing a 41.1% discount to our net asset value of $8.24 per share.Generally, the 1940 Act provides that we may not issue stock for a price belownet asset value per share, without first obtaining the approval of ourstockholders and our independent directors or through a rights offering.

 

We raisedadditional capital within these regulatory constraints in April 2008through an offering of transferable subscription rights to purchase additionalshares of common stock (the “Rights Offering”). Pursuant to the RightsOffering, we sold 5,520,033 shares of our common stock at a subscription priceof $7.48 per share, which represented a purchase price equal to 93% of theweighted average closing price of our stock in the last five trading days ofthe subscription period. Net proceeds of the offering, after offering expensesborne by us, were approximately $40.5 million and were used to repayoutstanding borrowings under our line of credit. Should our common stockcontinue to trade below its net asset value per share, we may seek to conductsimilar offerings in the future in order to raise additional capital, althoughthere can be no assurance that we will be successful in our efforts to raisecapital.

 

**FutureCapital Resources**

 

During our 2009annual stockholders meeting, our stockholders approved a proposal that allowsus to issue long-term rights, including warrants to purchase shares of ourcommon stock at an exercise price per share that will not be less than thegreater of the market value or net asset value of our common stock at a timesuch rights may be issued.  This proposalis in effect until our next annual stockholders meeting, which is currentlyscheduled for August 2010, when our stockholders will again be asked tovote in favor of renewing this proposal for another year.

 

**RevolvingCredit Facility**

 

On April 14,2009, we entered into the Credit Facility, which provides for a $50.0 millionrevolving line of credit arranged by BB&T as administrative agent,replacing Deutsche Bank who served as administrative agent under our priorcredit facility. Key Equipment Finance, Inc. also joined the CreditFacility as a committed lender.  Inconnection with our entry into the Credit Facility, we borrowed $43.8 millionunder the Credit Facility to repay Deutsche Bank in full all amountsoutstanding under the prior credit agreement. The Credit Facility may be expanded up to $125.0 million through theaddition of other committed lenders to the facility.  The Credit Facility matures on April 14,2010 and, if the facility is not renewed or extended by this date, all unpaidprincipal and interest will be 

 

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due and payablewithin one year of maturity.  Advancesunder the Credit Facility will generally bear interest at the 30 day LIBOR rate(subject to a minimum rate of 2%), plus 5% per annum, with a commitment fee of0.75% per annum on undrawn amounts.

 

Interest ispayable monthly during the term of the Credit Facility.  After April 14, 2010, if the CreditFacility is not renewed, all collections of principal from our loans arerequired to be used to pay outstanding principal under the Credit Facility.Available borrowings are subject to various constraints imposed under theCredit Facility, based on the aggregate loan balance pledged by BusinessInvestment.

 

The CreditFacility contains covenants that require Business Investment to maintain itsstatus as a separate entity, prohibit certain significant transactions (such asmergers, consolidations, liquidations or dissolutions) and restrict materialchanges to our credit and collection policies without lenders consent. TheCredit Facility also limits the borrower and industry concentrations of loansthat are eligible to secure advances as well as limits on payments ofdistributions limited to the aggregate net investment income for the priortwelve months preceding April 2010. As of September 30, 2009, BusinessInvestment was in compliance with all of the facility covenants. We are alsosubject to certain limitations on the type of loan investments we make,including restrictions on geographic concentrations, sector concentrations,loan size, dividend payout, payment frequency and status, average life and lienproperty.  The Credit Facility alsorequires us to comply with other financial and operational covenants, whichrequire us to, among other things, maintain certain financial ratios, includingasset and interest coverage a minimum net worth, and a minimum number ofobligors required in the borrowing base of the credit agreement.

 

We adopted ASC 825*“*FinancialInstruments” specifically for the Credit Facility.  ASC825 requires that we apply a fair value methodology to the CreditFacility. The Credit Facility has been fair valued by an independent thirdparty. The following table presents the Credit Facility carried at fair valueas of September 30, 2009, by caption on the accompanying condensed consolidatedstatement of assets and liabilities for each of the three levels of hierarchyestablished by ASC 820-10:

 
| ** **                         | ** ** | **As of September 30, 2009** | ** ** |
|------------------------------------|------------|-----------------------------------|------------|
| ** **                         | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | **Total Fair Value** | ** ** |
| ** **                         | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | **Reported in Condensed** | ** ** |
| ** **                         | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | **Consolidated Statement of** | ** ** |
| ** **                         | ** ** | **Level 1**                       | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Assets and Liabilities** | ** ** |
| Borrowings under line of credit(a) |       | $                                 | —     |   | $ | — |   | $ | 36,278 |   | $ | 36,278 |   |
| Total                              |       | $                                 | —     |   | $ | — |   | $ | 36,278 |   | $ | 36,278 |   |

 

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(a)         An unrealized appreciation of $178 isreported on the accompanying condensed consolidated statement of operations forthe three months ended September 30, 2009.

 

As of October 31,2009, there was $16.1 million of borrowings outstanding on the Credit Facilityat an interest rate of approximately 7.0%, and the remaining borrowing capacityunder the Credit Facility was approximately $32.1 million.

 

During May 2009,we cancelled our interest rate cap agreement with Deutsche Bank and enteredinto a new interest rate cap agreement with BB&T for a notional amount of$45 million that will effectively limit the interest rate on a portion of theborrowings under the Credit Facility.  Weincurred a premium fee of approximately $39 in conjunction with thisagreement.  As of September 30,2009, the interest rate cap agreement had depreciated by approximately $27 andhad a fair value of $12.

 

In conjunctionwith entering into the Credit Facility, we amended a performance guaranty whichremains substantially similar to the form under the previous credit facility.The performance guaranty requires us to maintain a minimum net worth of $169million plus 50% of all equity and subordinated debt raised after April 14,2009, to maintain “asset coverage” with respect to “senior securitiesrepresenting indebtedness” of at least 200%, in accordance with Section 18of the 1940 Act, and to maintain our status as a BDC under the 1940 Act and asa RIC under the Code. As of September 30, 2009, we were in compliance withthe covenants under the performance guaranty.

 

Our continuedcompliance with these covenants, however, depends on many factors, some ofwhich are beyond our control. In particular, depreciation in the valuation ofour assets, which valuation is subject to changing market conditions that arepresently very volatile, affects our ability to comply with these covenants.During the six months ended September 30, 2009, net unrealizedappreciation on our investments was approximately $2.7 million, primarilybrought about by the reversal of $34.4 million of previously unrealizeddepreciation on our syndicated loans that were sold during the period, comparedto an unrealized depreciation of approximately $6.1 million during the prioryear period. Given the continued deterioration in the capital markets, netunrealized depreciation in our portfolio may continue to threaten our abilityto comply with the covenants under the Credit Facility. Accordingly, there areno assurances that we will continue to comply with these covenants. Failure tocomply with these covenants would result in a default, which, if we were unableto obtain a waiver from the lenders, could accelerate our repayment obligationsunder the Credit Facility and thereby have a material adverse impact on ourliquidity, financial condition, results of operations and ability to paydistributions as more fully described below.

 

The CreditFacility matures on April 14, 2010, and, if the facility is not renewed orextended by this date, all unpaid principal and interest will be due andpayable within one year of maturity and all collections of principal from ourloans will be required to be used 

 

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to pay outstandingprincipal under the Credit Facility. There can be no guarantee that we will beable to renew, extend or replace the Credit Facility on terms that arefavorable to us, or at all.  Our abilityto obtain replacement financing will be constrained by current economicconditions affecting the credit markets, which have significantly deterioratedover the last several months and may decline further.  Consequently, any renewal, extension orrefinancing of the Credit Facility will likely result in significantly higherinterest rates and related charges and may impose significant restrictions onthe use of borrowed funds with regard to our ability to fund investments ormaintain distributions.  For instance, inconnection with the recent establishment of the Credit Facility, the size ofthe line was reduced from $125.0 million under our prior facility to $50.0million under the Credit Facility and Deutsche Bank, who was a committed lenderour prior credit facility elected not to participate in the new facility andwithdrew its commitment.  If we are notable to renew, extend or refinance the Credit Facility, this would likely havea material adverse effect on our liquidity and ability to fund new investmentsor pay distributions to our stockholders. Our inability to pay distributions could result in us failing to qualifyas a RIC.  Consequently, any income orgains could become taxable at corporate rates. If we are unable to securereplacement financing, we may be forced to sell certain assets ondisadvantageous terms, which may result in realized losses such as thoserecently recorded in connection with the Syndicated Loan Sales, which resultedin a realized loss of approximately $34.6 million during the six months ended September 30,2009.  Such realized losses couldmaterially exceed the amount of any unrealized depreciation on these assets asof our most recent balance sheet date, which would have a material adverseeffect on our results of operations.  Inaddition to selling assets, or as an alternative, we may issue equity in orderto repay amounts outstanding under the Credit Facility.  Based on the recent trading prices of ourstock, such an equity offering may have a substantial dilutive impact on ourexisting stockholders’ interest in our earnings and assets and voting interestin us.

 

**ContractualObligations and Off-Balance Sheet Arrangements**

 

We were not aparty to any signed term sheets for potential investments as of September 30,2009.  In October 2008, we executeda guaranty of a vehicle finance facility agreement between Ford Motor CreditCompany (“FMC”) and Auto Safety House, LLC (“ASH”), one of our Controlinvestments (the “Finance Facility”). The Finance Facility provides ASH with a line of credit of up to $500for component Ford parts used by ASH to build truck bodies under a separatecontract.  Title and ownership of theparts is retained by Ford. The guaranty of the Finance Facility will expireupon termination of the separate parts supply contract with Ford or upon ourreplacement as guarantor.  The FinanceFacility is secured by all of the assets of Business Investment.  As of September 30, 2009, we have notbeen required to make any payments on the guaranty of the Finance Facility.

 

**CriticalAccounting Policies**

 

The preparation offinancial statements and related disclosures in conformity with accountingprinciples generally accepted in the United States (“GAAP”) requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities, and disclosure of contingent assets and liabilities at thedate of the financial statements, and revenues and expenses during the periodreported. Actual results could differ materially from those estimates. We haveidentified our investment valuation process, which was modified during thequarter ended September 30, 2009, as our most critical accounting policy.

 

**Investment Valuation**

 

The mostsignificant estimate inherent in the preparation of our condensed consolidatedfinancial statements is the valuation of investments and the related amounts ofunrealized appreciation and depreciation of investments recorded.

 

*GeneralValuation Policy:*  We value our investments in accordance withthe requirements of the 1940 Act.  Asdiscussed more fully below, we value securities for which market quotations arereadily available and reliable at their market value.  We value all other securities and assets atfair value as determined in good faith by our Board of Directors.

 

We adopted ASC820-10 on April 1, 2008. In part, ASC 820-10 defines fair value andestablishes a framework for measuring fair value, and expands disclosures aboutassets and liabilities measured at fair value. The new standard provides aconsistent definition of fair value that focuses on exit price in theprincipal, or most advantageous, market and prioritizes, within a measurementof fair value, the use of market-based inputs over entity-specific inputs. Thestandard also establishes the following three-level hierarchy for fair valuemeasurements based upon the transparency of inputs to the valuation of an assetor liability as of the measurement date.

 

·                  *Level 1*—inputs to the valuation methodology arequoted prices (unadjusted) for identical assets or liabilities in activemarkets;

 

·                  *Level 2*—inputs to the valuation methodologyinclude quoted prices for similar assets and liabilities in active markets, andinputs that are observable for the asset or liability, either directly orindirectly, for substantially the full term of the financial instrument. Level2 inputs are in those markets for which there are few transactions, the pricesare not current, little public information exists or instances where pricesvary substantially over time or among brokered market makers; and

 

·                  *Level 3*—inputs to the valuation methodology areunobservable and significant to the fair value measurement. Unobservable inputsare those inputs that reflect our own assumptions that market participantswould use to price the asset or liability based upon the best availableinformation.

 

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See Note 3, *Investments* in our notes to the condensed consolidatedfinancial statements for additional information regarding fair valuemeasurements and our adoption of ASC 820-10.

 

We use generallyaccepted valuation techniques to value our portfolio unless we have specificinformation about the value of an investment to determine otherwise. From timeto 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-partyvaluation opinion that may differ in results, techniques and scopes used tovalue our investments.  When thesespecific third-party appraisals are engaged or accepted, we would use suchappraisals to value the investment we have in that business if we determinethat the appraisals are the best estimate of fair value.

 

In determining thevalue of our investments, our Adviser has established an investment valuationpolicy (the “Policy”).  The Policy hasbeen approved by our Board of Directors, and each quarter the Board ofDirectors reviews whether our Adviser has applied the Policy consistently, andvotes whether or not to accept the recommended valuation of our investmentportfolio.

 

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

 

·                  Publicly-traded securities;

·                  Securities for which a limited marketexists; and

·                  Securities for which no market exists.

 

*ValuationMethods:*

 

**Publicly-tradedsecurities:** Wedetermine the value of publicly-traded securities based on the closing pricefor the security on the exchange or securities market on which it is listed andprimarily traded on the valuation date. To the extent that we own restrictedsecurities that are not freely tradable, but for which a public marketotherwise exists, we will use the market value of that security adjusted forany decrease in value resulting from the restrictive feature.

 

**Securitiesfor which a limited market exists:**We value securities that are not traded on anestablished secondary securities market, but for which a limited market for thesecurity 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 anyavailable quote prices are reliable.  Ifwe conclude that quotes based on active markets or trading activity may berelied upon, firm bid prices are requested; however, if a firm bid price isunavailable, we base the value of the security upon the indicative bid priceoffered by the respective originating syndication agent’s trading desk, orsecondary desk, on or near the valuation date. To the extent that we use the indicative bid price as a basis forvaluing the security, our Adviser may take further steps to consider additionalinformation to validate that price in accordance with the Policy.

 

In the event these limited markets become illiquidsuch that market prices are no longer readily available, we will value oursyndicated loans using estimated net present values of the future cash flows ordiscounted cash flows. The use of a DCF methodology follows that prescribed byASC 820-10-35-15A, “Determining the Fair Value of a Financial Asset When the Marketfor The Asset Is Not Active”, which provides guidance on the use of a reportingentity’s own assumptions about future cash flows and risk-adjusted discountrates when relevant observable inputs, such as quotes in active markets, arenot available. When relevant observable market data does not exist, thealternative outlined in ASC 820-10-35-15A is the use of valuing investmentsbased on DCF.  For the purposes of usingDCF to provide fair value estimates, we consider multiple inputs such as arisk-adjusted discount rate that incorporates adjustments that marketparticipants would make both for nonperformance and liquidity risks.  As such, we developed a modified discountrate approach that incorporates risk premiums including, among others,increased probability of default, or higher loss given default, or increasedliquidity risk. The DCF valuations applied to the syndicated loans provide anestimate of what we believe a market participant would pay to purchase asyndicated loan in an active market, thereby establishing a fair value.  We apply the DCF methodology in illiquidmarkets until quoted prices are available or are deemed reliable based ontrading activity.

 

As of September 30, 2009, we assessed tradingactivity in syndicated loan assets and determined that there had been a returnto market liquidity and a better functioning secondary market for theseassets.  Thus, firm bid prices orindicative bids were used to fair value our remaining syndicated loans at September 30,2009.   However, for those syndicatedloans which were sold but not yet settled as of September 30, 2009, weused the respective sales prices to value those syndicated loans.

 

**Securitiesfor which no market exists:** The valuation methodology for securities for which nomarket exists falls into three categories: (1) portfolio investmentscomprised solely of debt securities; (2) portfolio investments incontrolled companies comprised of a bundle of securities, which can includedebt and equity securities; and (3) portfolio investments innon-controlled companies comprised of a bundle of securities, which can includedebt and equity securities.

 

(1)         **Portfolio investmentscomprised solely of debt securities:** Debt securities that are not publicly traded on anestablished securities market, or for which a limited market does not exist (“Non-PublicDebt Securities”), and that are issued by portfolio companies where we have noequity, or equity-like securities, and are fair valued in accordance with theterms of the policy, 

 

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which utilizes opinions of value submitted to us by Standard &Poor’s Securities Evaluations, Inc. (“SPSE”). We may also submit paid inkind (“PIK”) interest to SPSE for their evaluation when it is determined thatPIK interest is likely to be received.

 

In the case of Non-Public Debt Securities, we have engaged SPSE tosubmit opinions of value for our debt securities that are issued by portfoliocompanies in which we own no equity, or equity-like securities.  SPSE’s opinions of value are based on thevaluations prepared by our portfolio management team as described below.  We request that SPSE also evaluate and assignvalues to success fees (conditional interest included in some loan securities)when we determine that the probability of receiving a success fee on a givenloan is above 6-8%, a threshold of significance. SPSE will only evaluate thedebt 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 (whichmay include the information described below under “—Credit Information,” therisk ratings of the loans described below under “—Loan Grading and Risk Rating”and the factors described hereunder), this valuation data is forwarded to SPSEfor review and analysis. SPSE makes its independent assessment of the data thatwe have assembled and assesses its independent data to form an opinion as towhat they consider to be the market values for the securities. With regard toits work, SPSE has issued the following paragraph:

 

SPSE provides evaluated price opinions which are reflective of whatSPSE believes the bid side of the market would be for each loan after carefulreview and analysis of descriptive, market and credit information. Each pricereflects SPSE’s best judgment based upon careful examination of a variety ofmarket factors. Because of fluctuation in the market and in other factorsbeyond its control, SPSE cannot guarantee these evaluations. The evaluationsreflect the market prices, or estimates thereof, on the date specified. Theprices are based on comparable market prices for similar securities. Marketinformation has been obtained from reputable secondary market sources. Althoughthese sources are considered reliable, SPSE cannot guarantee their accuracy.

 

SPSE opinions of value of our debt securities that are issued byportfolio companies where we have no equity, or equity-like securities aresubmitted to our Board of Directors along with our Adviser’s supplementalassessment and recommendation regarding valuation of each of these investments.Our Adviser generally accepts the opinion of value given by SPSE, however, incertain limited circumstances, such as when our Adviser may learn newinformation regarding an investment between the time of submission to SPSE andthe date of the assessment by our Board of Directors, our Adviser’s conclusionsas to value may differ from the opinion of value delivered by SPSE. Our Board ofDirectors then reviews whether our Adviser has followed its establishedprocedures for determinations of fair value, and votes to accept or reject therecommended valuation of our investment portfolio. Our Adviser and ourmanagement recommended, and our Board of Directors voted to accept, theopinions of value delivered by SPSE on the loans in our portfolio as denoted onthe Schedule of Investments included in our accompanying condensed consolidatedfinancial statements.

 

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

 

(2)         **Portfolio investments incontrolled companies comprised of a bundle of investments, which can includedebt and equity securities:** The fair value of these investments is determinedbased on the total enterprise value of the portfolio company, or issuer,utilizing a liquidity waterfall approach under ASC 820-10.  For Non-Public Debt Securities and equity orequity-like securities (e.g. preferred equity, equity, or other equity-likesecurities) that are purchased together as part of a package, where we havecontrol or could gain control through an option or warrant security, both thedebt and equity securities of the portfolio investment would exit in themergers and acquisitions market as the principal market, generally through asale or recapitalization of the portfolio company. In accordance with ASC820-10, we apply the in-use premise of value which assumes the debt and equitysecurities are sold together. Under this liquidity waterfall approach, wecontinue to use the enterprise value methodology utilizing a liquiditywaterfall approach to determine the fair value of these investments under ASC820-10 if we have the ability to initiate a sale of a portfolio company as ofthe measurement date. Under this approach, we first calculate the totalenterprise value of the issuer by incorporating some or all of the followingfactors:

 

·                  the issuer’s ability to make payments;

·                  the earnings of the issuer;

·                  recent sales to third parties of similarsecurities;

·                  the comparison to publicly tradedsecurities; and

·                  DCF or other pertinent factors.

 

In gathering the sales to third parties of similar securities, we mayreference industry statistics and use outside experts. Once we have estimatedthe total enterprise value of the issuer, we subtract the value of all the debtsecurities of the issuer; which are valued at the contractual principalbalance. Fair values of these debt securities are discounted for any shortfallof total enterprise value over the total debt outstanding for the issuer. Oncethe values for all outstanding senior securities (which include the debtsecurities) have been subtracted from the total enterprise value of the issuer,the remaining amount, if any, is used to determine the value of the issuer’sequity or equity like securities.  If, inour Adviser’s judgment, the liquidity waterfall approach does not 

 

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accurately reflect the value of the debt component, the Adviser mayrecommend that we use a valuation by SPSE, or if that is unavailable, a DCFvaluation technique.

 

(3)         **Portfolio investments innon-controlled companies comprised of a bundle of investments, which caninclude debt and equity securities:**We value Non-Public Debt Securities that are purchasedtogether 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 themeasurement date, using a hypothetical secondary market as our principalmarket. In accordance with ASC 820-10, we determine the fair value of thesedebt securities of non-control investments assuming the sale of an individualdebt security using the in-exchange premise of value (as defined in ASC820-10). As such, we estimate the fair value of the debt component usingestimates of value provided by SPSE and our own assumptions in the absence ofobservable market data, including synthetic credit ratings, estimated remaininglife, current market yield and interest rate spreads of similar securities asof the measurement date. Subsequent to June 30, 2009, for equity orequity-like securities of investments for which we do not control or cannotgain control as of the measurement date, we estimate the fair value of theequity using the in-exchange premise of value based on factors such as theoverall value of the issuer, the relative fair value of other units of accountincluding debt, or other relative value approaches. Consideration also is givento capital structure and other contractual obligations that may impact the fairvalue of the equity. Further, we may utilize comparable values of similarcompanies, recent investments and indices with similar structures and riskcharacteristics or our own assumptions in the absence of other observablemarket data and may also employ DCF valuation techniques.

 

Due to the uncertainty inherent in the valuation process, suchestimates of fair value may differ significantly from the values that wouldhave been obtained had a ready market for the securities existed, and thedifferences could be material. Additionally, changes in the market environmentand other events that may occur over the life of the investments may cause thegains or losses ultimately realized on these investments to be different thanthe valuations currently assigned. There is no single standard for determiningfair value in good faith, as fair value depends upon circumstances of eachindividual case. In general, fair value is the amount that we might reasonablyexpect to receive upon the current sale of the security in an arms-lengthtransaction in the security’s principal market.

 

*ValuationConsiderations: *From time to time, depending on certaincircumstances, 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 andits ability to make payments on its obligations;

·                  the markets in which the portfolio company doesbusiness;

·                  the comparison to publicly traded companies; and

·                  DCF and other relevant factors.

 

Because such valuations,particularly valuations of private securities and private companies, are notsusceptible to precise determination, may fluctuate over short periods of time,and may be based on estimates, our determinations of fair value may differ fromthe values that might have actually resulted had a readily available market forthese securities been available.

 

*CreditInformation:*  Our Adviser monitors a wide variety of keycredit statistics that provide information regarding our portfolio companies tohelp us assess credit quality and portfolio performance. We and our Adviserparticipate in the periodic board meetings of our portfolio companies in whichwe hold Control and Affiliate investments and also require them to provideannual audited and monthly unaudited financial statements. Using thesestatements or comparable information and board discussions, our Advisercalculates and evaluates the credit statistics.

 

*LoanGrading and Risk Rating:*  As part of our valuationprocedures above, we risk rate all of our investments in debt securities. Forsyndicated loans that have been rated by an NRSRO (as defined in Rule 2a-7under the 1940 Act), we use the NRSRO’s risk rating for such security. For allother debt securities, we use a proprietary risk rating system. Our risk ratingsystem uses a scale of 0 to 10, with 10 being the lowest probability ofdefault. This system is used to estimate the probability of default on debtsecurities and the probability of loss if there is a default. These types ofsystems are referred to as risk rating systems and are used by banks and ratingagencies. The risk rating system covers both qualitative and quantitativeaspects of the business and the securities we hold.

 

For the debtsecurities for which we do not use a third-party NRSRO risk rating, we seek tohave our risk rating system mirror the risk rating systems of major risk ratingorganizations, such as those provided by an NRSRO. While we seek to mirror theNRSRO systems, we cannot provide any assurance that our risk rating system willprovide the same risk rating as an NRSRO for these securities. The followingchart is an estimate of the relationship of our risk rating system to thedesignations used by two NRSROs as they risk rate debt securities of majorcompanies. Because our system rates debt securities of companies that are unratedby any NRSRO, there can be no assurance that the correlation to the NRSRO setout below is accurate. We believe our risk rating would be significantly higherthan a typical NRSRO risk rating because the risk rating of the typical NRSROis designed for larger businesses. However, our risk rating has been designedto risk rate the securities of smaller businesses that are not rated by atypical NRSRO. Therefore, when we use our risk rating on larger businesssecurities, the risk rating is higher than a typical NRSRO rating. The primarydifference between

 

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our risk ratingand the rating of a typical NRSRO is that our risk rating uses morequantitative determinants and includes qualitative determinants that we believeare not used in the NRSRO rating. It is our understanding that most debtsecurities of medium-sized companies do not exceed the grade of BBB on an NRSROscale, so there would be no debt securities in the middle market that wouldmeet the definition of AAA, AA or A. Therefore, our scale begins with thedesignation 10 as the best risk rating which may be equivalent to a BBB from anNRSRO, however, no assurance can be given that a 10 on our scale is equal to aBBB 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 ten years is 4% and the Expected Loss (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 of default and the EL is greater than 20%                             |

 

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(a)                    *The default rates setforth are for a ten year term debt security. If a debt security is less thanten years, then the PD is adjusted to a lower percentage for the shorter period,which may move the security higher on our risk rating scale*

 

The above scalegives an indication of the probability of default and the magnitude of the lossif there is a default. Our policy is to stop accruing interest on an investmentif we determine that interest is no longer collectible.  At September 30, 2009, one investmentwas on non-accrual for approximately $1.6 million at fair value, or 0.8% of theaggregate fair value of our investment portfolio.  Additionally, we do not risk rate our equitysecurities.

 

The followingtable lists the risk ratings for all non-syndicated loans in our portfolio at September 30,2009 and March 31, 2009, representing approximately 90% and 59%,respectively, of all loans in our portfolio at the end of each period:

 
| **Rating**       | ** ** | **September 30, 2009** | ** ** | **March 31, 2009** | ** ** |
|------------------|------------|-----------------------------|------------|-------------------------|------------|
| Highest          |       | 8.0                         |       | 7.0                     |       |
| Average          |       | 5.6                         |       | 5.5                     |       |
| Weighted Average |       | 5.5                         |       | 5.1                     |       |
| Lowest           |       | 3.0                         |       | 2.0                     |       |

 

The followingtable lists the risk ratings for syndicated loans in our portfolio that werenot rated by an NRSRO at September 30, 2009 and March 31, 2009,representing approximately 3% and 12%, respectively, of all loans in ourportfolio at the end of each period:

 
| **Rating**       | ** ** | **September 30, 2009** | ** ** | **March 31, 2009** | ** ** |
|------------------|------------|-----------------------------|------------|-------------------------|------------|
| Highest          |       | 8.0                         |       | 9.0                     |       |
| Average          |       | 7.0                         |       | 8.0                     |       |
| Weighted Average |       | 7.2                         |       | 8.0                     |       |
| Lowest           |       | 6.0                         |       | 7.0                     |       |

 

For syndicatedloans that are currently rated by an NRSRO, we risk rate such loans inaccordance with the risk rating systems of major risk rating organizations,such as those provided by an NRSRO. The following table lists the risk ratingsfor all syndicated loans in our portfolio that were rated by an NRSRO at September 30,2009 and March 31, 2009, representing approximately 7% and 29%,respectively, of all loans in our portfolio at the end of each period:

 
| **Rating**       | ** ** | **September 30, 2009** | ** ** | **March 31, 2009** | ** ** |
|------------------|------------|-----------------------------|------------|-------------------------|------------|
| Highest          |       | B+/B1                       |       | BB/Ba2                  |       |
| Average          |       | B/B2                        |       | B/B2                    |       |
| Weighted Average |       | B-/B3                       |       | B/B2                    |       |
| Lowest           |       | CCC+/B2                     |       | CCC+/B3                 |       |

 

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**TaxStatus**

 

*FederalIncome Taxes*

 

We intend to continue to qualify for treatment as aRIC under Subtitle A, Chapter 1 of Subchapter M of the Code. As a RIC, we arenot subject to federal income tax on the portion of our taxable income andgains distributed to stockholders. To qualify as a RIC, we are required todistribute to stockholders at least 90% of investment company taxable income,as defined by the Code. It is our policy to pay out as a distribution up to100% of those amounts.

 

In an effort toavoid certain excise taxes imposed on RICs, we currently intend to distributeduring 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 gainsin excess of capital losses for the one-year period ending on October 31of the calendar year, and (3) any ordinary income and net capital gainsfor preceding years that were not distributed during such years.

 

**Revenue Recognition**

 

*Interest and Dividend IncomeRecognition*

 

Interest income,adjusted for amortization of premiums and acquisition costs and for theaccretion of discounts, is recorded on the accrual basis to the extent thatsuch amounts are expected to be collected. Generally, when a loan becomes 90 days or more past due or if ourqualitative assessment indicates that the debtor is unable to service its debtor other obligations, we will place the loan on non-accrual status and ceaserecognizing interest income on that loan until the borrower has demonstratedthe ability and intent to pay contractual amounts due.  However, we remain contractually entitled tothis interest.  At September 30,2009, one Control investment was on non-accrual with a fair value ofapproximately $1.6 million, or 0.8% of the fair value of all loans held in ourportfolio at September 30, 2009.  AtMarch 31, 2009, one Control investment was on non-accrual with a fairvalue of approximately $2.6 million, or 0.8% of the fair value of all loansheld in our portfolio at March 31, 2009. Conditional interest, or asuccess fee, is recorded when earned upon full repayment of a loan investment.To date we have not recorded any conditional interest. Dividend income onpreferred equity securities is accrued to the extent that such amounts areexpected to be collected and that we have the option to collect such amounts incash. To date, we have not accrued any dividend income.

 

*Services Provided to PortfolioCompanies*

 

As a businessdevelopment company under the 1940 Act, we are required to make availablesignificant managerial assistance to our portfolio companies. We provide theseservices through our Adviser, who provides these services on our behalf throughits officers who are also our officers. Currently, neither we nor our Advisercharges a fee for managerial assistance, however, if our Adviser does receivefees for such managerial assistance, our Adviser will credit the managerialassistance fees to the base management fee due from us to our Adviser.

 

Our Adviserreceives fees for the other services it provides to our portfolio companies.These other fees are typically non-recurring, are recognized as revenue whenearned and are generally paid directly to our Adviser by the borrower orpotential borrower upon the closing of the investment. The services our Adviserprovides to our portfolio companies vary by investment, but generally include abroad array of services such as investment banking services, arranging bank andequity financing, structuring financing from multiple lenders and investors,reviewing existing credit facilities, restructuring existing investments,raising equity and debt capital, turnaround management, merger and acquisitionservices and recruiting new management personnel. When our Adviser receivesfees for these services, 50% of certain of those fees are voluntarily creditedagainst the base management fee that we pay to our Adviser. Any services ofthis nature subsequent to the closing would typically generate a separate feeat the time of completion.

 

Our Adviser alsoreceives fees for monitoring and reviewing portfolio company investments. Thesefees are recurring and are generally paid annually or quarterly in advance toour Adviser throughout the life of the investment. Fees of this nature arerecorded as revenue by our Adviser when earned and are not credited against thebase management fee.

 

We may receivefees for the origination and closing services we provide to portfolio companiesthrough our Adviser. These fees are paid directly to us and are recognized asrevenue upon closing of the originated investment and are reported as Feeincome in the accompanying condensed consolidated statements of operations.

 

**RecentAccounting Pronouncements**

 

Refer to Note 2 *Summary of Significant Accounting Policies* in the notes toour condensed consolidated financial statements included elsewhere in thisreport.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK.**

 

We are subject tofinancial market risks, including changes in interest rates.  We estimate that ultimately approximately 20%of the loans in our portfolio will be made at fixed rates and approximately 80%will be made at variable rates.   As of September 30,2009, our portfolio consisted of the following breakdown in relation to alloutstanding debt:

 

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| 23  | % | variable rates               |
|-----|---|------------------------------|
| 46  | % | variable rates  with a floor |
| 31  | % | fixed rates                  |
| 100 | % | Total                        |

 

There have been no material changes in the quantitative and qualitativemarket risk disclosures for the three months ended September 30, 2009 fromthose disclosed in our Annual Report on Form 10-K for the fiscal yearended March 31, 2009, as filed with the SEC on June 2, 2009.

 

**ITEM 4. CONTROLS AND PROCEDURES.**

 

As of September 30,2009, we, including our Chief Executive Officer and Chief Financial Officer,evaluated the effectiveness of the design and operation of our disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-15(e) and15d-15(e)). Based on that evaluation, our management, including the ChiefExecutive Officer and Chief Financial Officer, concluded that our disclosurecontrols and procedures were effective in timely alerting management, includingthe Chief Executive Officer and Chief Financial Officer, of materialinformation about us required to be included in periodic Securities andExchange Commission filings. However, in evaluating the disclosure controls andprocedures, management recognized that any controls and procedures, no matterhow well designed and operated, can provide only reasonable assurance of achievingthe desired control objectives, and management necessarily was required toapply its judgment in evaluating the cost-benefit relationship of possiblecontrols and procedures.

 

There have been nochanges in our internal control over financial reporting that occurred duringthe quarter ended September 30, 2009 that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

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**PART II—OTHER INFORMATION**

 

**ITEM 1.  LEGAL PROCEEDINGS.**

 

Neitherwe, nor any of our subsidiaries, are currently subject to any material legalproceeding, nor, to our knowledge, is any material legal proceeding threatenedagainst us or any of our subsidiaries.

 

**ITEM 1A. RISK FACTORS.**

 

Our business issubject to certain risks and events that, if they occur, could adversely affectour financial condition and results of operations and the trading price of ourcommon stock. In connection with our preparation of this quarterly report,management has reviewed and considered this modified risk factor and hasdetermined that the following modified risk factor should be read in connectionwith the existing risk factors in our final prospectus as filed with the SEC onOctober 14, 2009.

 

*Our credit facility imposes certain restrictions on uswhich, if not complied with, could accelerate our repayment obligations underthe facility, thereby materially and adversely affecting our liquidity,financial condition, results of operations and ability to pay distributions.*

 

Wewill have a continuing need for capital to finance our loans. In order tomaintain RIC status, we will be required to distribute to our stockholders atleast 90% of our ordinary income and short-term capital gains on an annual basis.Accordingly, such earnings will not be available to fund additional loans.Therefore, we are party to the Credit Facility, which provides us with arevolving credit line facility of $50.0 million, of which approximately $32.1million was available for borrowings as of October 31, 2009. The CreditFacility permits us to fund additional loans and investments as long as we arewithin the conditions set out in the credit agreement. Current marketconditions have forced us to write down the value of a portion of our assets asrequired by fair value accounting rules. These are not realized losses, butconstitute adjustment in asset values for purposes of financial reporting andfor collateral value for the Credit Facility. As assets are marked down invalue, the amount we can borrow on the Credit Facility decreases.

 

As a result of the CreditFacility, we are subject to certain limitations on the type of loan investmentswe make, including restrictions on geographic concentrations, sectorconcentrations, loan size, dividend payout, payment frequency and status, andaverage life.  The Credit Facility alsorequires us to comply with other financial and operational covenants, whichrequire us to, among other things, maintain certain financial ratios, includingasset and interest coverage a minimum net worth, and a minimum number ofobligors required in the borrowing base of the credit agreement. As of September 30,2009, we were in compliance with these covenants; however, our continuedcompliance with these covenants depends on many factors, some of which arebeyond our control. In particular, depreciation in the valuation of our assets,which valuation is subject to changing market conditions that remain veryvolatile, affects our ability to comply with these covenants. Given thecontinued deterioration in the capital markets, net unrealized depreciation inour portfolio may continue to increase in future periods and threaten ourability to comply with the covenants under the Credit Facility.  Accordingly, there are no assurances that wewill continue to comply with these covenants. Under the Credit Facility, we are also required to maintain our statusas a BDC under the 1940 Act and as a RIC under the Code.  Becauseof recent changes in our asset portfolio, due to significant sales ofNon-Control/Non-Affiliate investments over the last six months, there is asignificant possibility that we may not meet the asset diversificationthreshold under the Code’s rules applicable to a RIC as of our nextquarterly testing date, December 31, 2009. Although this failure alone, in our current situation, will not cause usto lose our RIC status, if we make any new investments, including additionalinvestments in our portfolio companies (such as advances under our outstandinglines of credit) our RIC status will be jeopardized.  Our failure to satisfy these covenantscould result in foreclosure by our lenders, which would accelerate ourrepayment obligations under the facility and thereby have a material adverseeffect on our business, liquidity, financial condition, results of operationsand ability to pay distributions to our stockholders.

 

**ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES ANDUSE OF PROCEEDS.**

 

Not applicable.

 

**ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.**

 

Not applicable.

 

**ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.**

 

On August 13, 2009,we held our Annual Meeting of Stockholders in Mclean, Virginia. Stockholdersvoted and approved the following matters:

 

1.    Election of Directors: Stockholders electeddirectors, each of whom will serve for a three year term expiring at the 2012Annual Meeting of Stockholders, or until his successor is elected andqualified. Votes were cast as follows:

 

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| ** **          | ** ** | **FOR**    | ** ** | **WITHHELD** | ** ** |
|---------------------|------------|------------|------------|--------------|------------|
| Maurice  W. Colon   |       | 20,656,105 |       | 561,256      |       |
| Terry  Lee Brubaker |       | 19,300,322 |       | 1,917,039    |       |
| David  A.R. Dullum  |       | 20,710,283 |       | 507,079      |       |

 

The following directorsare continuing directors of the Company for their respective terms — Michela A.English, Anthony W. Parker, Gerard Mead, Paul W. Adelgren, John H. Outland,George Stelljes III and David Gladstone.

 

2.Approval to authorize us to sell shares of our common stock at a price belowour then current net asset value per share for a period of one year. Votes werecast as follows:

 
| **FOR**    | ** ** | **AGAINST** | ** ** | **ABSTAIN** | ** ** | **BROKER NON-VOTES** | ** ** |
|------------|------------|-------------|------------|-------------|------------|---------------------------|------------|
| 11,917,041 |       | 3,389,824   |       | 254,795     |       | 5,655,701                 |       |

 

3.Ratification of the selection of PricewaterhouseCoopers LLP to serve as ourindependent registered public accounting firm for the fiscal year ending March 31,2010. Votes were cast as follows:

 
| **FOR**    | ** ** | **AGAINST** | ** ** | **ABSTAIN** | ** ** |
|------------|------------|-------------|------------|-------------|------------|
| 20,867,514 |       | 114,356     |       | 235,491     |       |

 

**ITEM 5.  OTHER INFORMATION.**

 

Not applicable.

 

**ITEM 6.  EXHIBITS**

 

See the exhibit index.

 

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** **

**SIGNATURE**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
| ** ** | **GLADSTONE  INVESTMENT CORPORATION** |
|------------|---------------------------------------|
|       |                                  |   |
|       | By:                                   | /s/ Mark Perrigo |
|       |                                  | Mark Perrigo |
| * *   | * *                              | *Chief  Financial Officer* |

 

Date: November 3,2009

 

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**EXHIBITINDEX**

 
| **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.                                                                                  |
| 10.1        |       | Investment  Advisory and Management Agreement between the Company and Gladstone  Management Corporation, dated June 22, 2005 and incorporated by  reference to Exhibit 10.1 to the Company’s Annual Report on  Form 10-K, filed on June 14, 2006 (renewed on July 8, 2009). |
| 10.2        |       | Administration  Agreement between the Company and Gladstone Administration, LLC, dated  June 22, 2005 and incorporated by reference to Exhibit 10.2 to the  Company’s Annual Report on Form 10-K, filed June 14, 2006 (renewed  on July 8, 2009).                           |
| 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 exhibitsfor which provision is made in the applicable regulations of the Securities andExchange Commission are not required under the related instruction or areinapplicable and therefore have been omitted.

 

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