Table ofContents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**x****      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**FOR THE QUARTER ENDED DECEMBER 31, 2009**

 

**o****         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**COMMISSION FILE NUMBER: 000-51233**

 

**GLADSTONEINVESTMENT 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 markwhether the registrant (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 x  No o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T during the preceding 12months (or for such shorter period that the registrant was required to submitand post such files). Yes o  No 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 markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes o  No x

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date. The number of shares of the issuer’sCommon Stock, $0.001 par value, outstanding as of February 8, 2010 was 22,080,133.

 

 

 

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Table ofContents

 

**GLADSTONE INVESTMENT CORPORATION**

**TABLE OFCONTENTS**

 
| PART I.  | FINANCIAL INFORMATION:                                                                                                | ** ** |
|---------------|-----------------------------------------------------------------------------------------------------------------------|------------|
|          |                                                                                                                  |       |
| Item  1.      | Financial  Statements (Unaudited)                                                                                     |       |
|          |                                                                                                                  |       |
|          | Condensed Consolidated  Statements of Assets and Liabilities as of December 31, 2009 and  March 31, 2009    | 1          |
|          | Condensed  Consolidated Schedules of Investments as of December 31, 2009 and  March 31, 2009                | 2          |
|          | Condensed Consolidated Statements of Operations for  the three and nine months ended December 31, 2009 and 2008  | 9          |
|          | Condensed Consolidated Statements of Changes in Net  Assets for the nine months ended December 31, 2009 and 2008 | 10         |
|          | Condensed Consolidated Statements of Cash Flows for  the nine months ended December 31, 2009 and 2008            | 11         |
|          | Financial  Highlights for the three and nine months ended December 31, 2009 and  2008                            | 12         |
|          | Notes to Condensed Consolidated Financial Statements                                                                  | 14         |
|          |                                                                                                                  |       |
| Item 2.       | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                           | 29         |
|          | Overview                                                                                                              | 29         |
|          | Results  of Operations                                                                                                | 33         |
|          | Liquidity and Capital Resources                                                                                       | 41         |
|          |                                                                                                                  |       |
| Item 3.       | Quantitative  and Qualitative Disclosures About Market Risk                                                           | 52         |
|          |                                                                                                                  |       |
| Item 4.       | Controls and  Procedures                                                                                              | 52         |
|          |                                                                                                                  |       |
| PART II. | OTHER INFORMATION:                                                                                                    |       |
|          |                                                                                                                  |       |
| Item 1.       | Legal Proceedings                                                                                                     | 53         |
|          |                                                                                                                  |       |
| Item 1A.      | Risk Factors                                                                                                          | 53         |
|          |                                                                                                                  |       |
| Item 2.       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                          | 53         |
|          |                                                                                                                  |       |
| Item 3.       | Defaults  Upon Senior Securities                                                                                      | 53         |
|          |                                                                                                                  |       |
| Item 4.       | Submission  of Matters to a Vote of Security Holders                                                                  | 53         |
|          |                                                                                                                  |       |
| Item 5.       | Other Information                                                                                                     | 53         |
|          |                                                                                                                  |       |
| Item 6.       | Exhibits                                                                                                              | 53         |
|          |                                                                                                                  |       |
| SIGNATURES    |                                                                                                                  | 54         |

 

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Table of Contents

 

**GLADSTONE INVESTMENT CORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES**

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

 
| ** **                                                                                                                                                  | ** ** | **December 31,** | ** **  | **March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|-------------|--------------------|------------|
| ** **                                                                                                                                                  | ** ** | **2009**              | ** **  | **2009**           | ** ** |
| ** **                                                                                                                                                  | ** ** | **(Unaudited)**       | ** **  | ** **         | ** ** |
| **ASSETS**                                                                                                                                                  | ** ** | ** **            | ** **  | ** **         | ** ** |
| Cash and cash equivalents                                                                                                                                   | ** ** | **$**                 | **87,872**  | ** **         | $          | 7,236 |   |
| Investments at fair value                                                                                                                                   |       |                  | ** **  |               |       |
| Non-Control/Non-Affiliate investments (Cost of **$22,902** and $134,836, respectively)                                                                      | ** ** | **19,404**            | ** **  | 94,740             |       |
| Control investments (Cost of **$150,107**  and $150,081, respectively)                                                                                      | ** ** | **130,955**           | ** **  | 166,163            |       |
| Affiliate investments (Cost of **$52,891** and $64,028, respectively)                                                                                       | ** ** | **37,027**            | ** **  | 53,027             |       |
| Total investments (Cost of **$225,900**  and $348,945, respectively)                                                                                        | ** ** | **187,386**           | ** **  | 313,930            |       |
| Interest receivable                                                                                                                                         | ** ** | **1,373**             | ** **  | 1,500              |       |
| Due from Custodian                                                                                                                                          | ** ** | **766**               | ** **  | 2,706              |       |
| Deferred financing fees                                                                                                                                     | ** ** | **512**               | ** **  | 1,167              |       |
| Prepaid assets                                                                                                                                              | ** ** | **300**               | ** **  | 172                |       |
| Other assets                                                                                                                                                | ** ** | **70**                | ** **  | 132                |       |
| **TOTAL ASSETS**                                                                                                                                            | ** ** | **$**                 | **278,279** | ** **         | $          | 326,843 |   |
|                                                                                                                                                        |       |                  | ** **  |               |       |
| **LIABILITIES**                                                                                                                                             | ** ** | ** **            | ** **  | ** **         | ** ** |
| Accounts payable and accrued expenses                                                                                                                       | ** ** | **$**                 | **200**     | ** **         | $          | 1,283 |   |
| Fee due to Administrator (Refer to Note 4)                                                                                                                  | ** ** | **156**               | ** **  | 179                |       |
| Fees due to Adviser (Refer to Note 4)                                                                                                                       | ** ** | **793**               | ** **  | 187                |       |
| Short-term loan                                                                                                                                             | ** ** | **75,000**            | ** **  | —             |       |
| Borrowings under line of credit at fair value  (Cost of **$26,750** and $110,265, respectively)                                                             | ** ** | **26,883**            | ** **  | 110,265            |       |
| Other liabilities                                                                                                                                           | ** ** | **246**               | ** **  | 127                |       |
| **TOTAL LIABILITIES**                                                                                                                                       | ** ** | **103,278**           | ** **  | 112,041            |       |
| **NET ASSETS**                                                                                                                                              | ** ** | **$**                 | **175,001** | ** **         | $          | 214,802 |   |
|                                                                                                                                                        |       |                  | ** **  |               |       |
| **ANALYSIS OF NET ASSETS:**                                                                                                                                 | ** ** | ** **            | ** **  | ** **         | ** ** |
| Common stock, $0.001 par value, 100,000,000 shares  authorized, 22,080,133 shares issued and outstanding at December 31,  2009 and March 31, 2009 | ** ** | **$**                 | **22**      | ** **         | $          | 22 |   |
| Capital in excess of par value                                                                                                                              | ** ** | **264,576**           | ** **  | 257,361            |       |
| Net unrealized depreciation of investment  portfolio                                                                                                        | ** ** | **(38,514**           | **)**       | (35,015            | )          |
| Net unrealized depreciation of derivative                                                                                                                   | ** ** | **(34**               | **)**       | (53                | )          |
| Net unrealized appreciation of borrowings under  line of credit                                                                                             | ** ** | **(133**              | **)**       | —             |       |
| Accumulated net investment loss                                                                                                                             | ** ** | **(50,916**           | **)**       | (7,513             | )          |
| **TOTAL NET ASSETS**                                                                                                                                        | ** ** | **$**                 | **175,001** | ** **         | $          | 214,802 |   |
| **NET ASSETS PER SHARE**                                                                                                                                    | ** ** | **$**                 | **7.93**    | ** **         | $          | 9.73 |   |

 

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

 

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**GLADSTONE INVESTMENT CORPORATION**

**CONDENSEDCONSOLIDATED SCHEDULES OF INVESTMENTS**

**AS OF DECEMBER 31, 2009**

**(DOLLAR AMOUNTS IN THOUSANDS)**

**(UNAUDITED)**

** **
| **Company  (1)**                                 | ** **   | **Industry**                                                           | ** **   | **Investment  (2)**                                               | ** **   | **Cost**     | ** **   | **Fair  Value** | ** **   |
|--------------------------------------------------|--------------|------------------------------------------------------------------------|--------------|-------------------------------------------------------------------|--------------|--------------|--------------|-----------------|--------------|
|                                             |         |                                                                   |         |                                                              |         |         |         |            |         |
| **NON-CONTROL/NON-AFFILIATE  INVESTMENTS:**      |
| ***Senior Syndicated Loans:***                   | *** *** | *** ***                                                           | *** *** | *** ***                                                      | *** *** | *** *** | *** *** | *** ***    | *** *** |
| Interstate  FiberNet, Inc.                  |         | Service  — provider of voice and data telecommunications services |         | Senior  Term Debt (4.3%, Due 7/2013) (3)                          |         | $            | 6,759        |            | $            | 5,085 |   |
| Survey  Sampling, LLC                            |         | Service  — telecommunications-based sampling                      |         | Senior  Term Debt (9.5%, Due 5/2011) (3)                          |         | 2,397        |         | 1,073           |         |
| *Subtotal - Syndicated Loans*                    |         |                                                                   |         |                                                              |         | $            | 9,156        |            | $            | 6,158 |   |
|                                             |         |                                                                   |         |                                                              |         |         |         |            |         |
| ***Non-syndicated Loans:***                      | *** *** | *** ***                                                           | *** *** | *** ***                                                      | *** *** | *** *** | *** *** | *** ***    | *** *** |
| American  Greetings Corporation                  |         | Manufacturing  and design — greeting cards                        |         | Senior  Notes (7.4%, Due 6/2016) (3)                              |         | $            | 3,043        |            | $            | 2,895 |   |
|                                             |         |                                                                   |         |                                                              |         |         |         |            |         |
| B-Dry,  LLC                                      |         | Service  — basement waterproofer                                  |         | Senior  Term Debt (11.0%, Due 5/2014) (5)                         |         | 6,613        |         | 6,580           |         |
|                                             |         |                                                                   |         | Senior  Term Debt (11.5%, Due 5/2014) (5)                         |         | 3,790        |         | 3,771           |         |
|                                             |         |                                                                   |         | Common Stock Warrants  (4)                                        |         | 300          |         | —          |         |
|                                             |         |                                                                   |         |                                                              |         | 10,703       |         | 10,351          |         |
|                                             |         |                                                                   |         |                                                              |         |         |         |            |         |
| **Total Non-Control/Non-Affiliate  Investments** | ** **   | ** **                                                             | ** **   | ** **                                                        | ** **   | **$**        | **22,902**   | ** **      | **$**        | **19,404** | ** ** |
| ** **                                       | ** **   | ** **                                                             | ** **   | ** **                                                        | ** **   | ** **   | ** **   | ** **      | ** **   |
| **CONTROL INVESTMENTS:**                         |
| A.  Stucki Holding Corp.                         |         | Manufacturing  — railroad freight car products                    |         | Senior  Term Debt (4.7%, 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                                                  |         | 4,387        |         | 4,448           |         |
|                                             |         |                                                                   |         | Common  Stock (4)                                                 |         | 130          |         | 1,566           |         |
|                                             |         |                                                                   |         |                                                              |         | 32,104       |         | 33,601          |         |
|                                             |         |                                                                   |         |                                                              |         |         |         |            |         |
| Acme Cryogenics, Inc.                       |         | Manufacturing — manifolds and pipes for  industrial gasses        |         | Senior  Subordinated Term Debt (11.5%, Due 3/2012)                |         | 14,500       |         | 14,479          |         |
|                                             |         |                                                                   |         | Preferred  Stock (4)                                              |         | 6,984        |         | —          |         |
|                                             |         |                                                                   |         | Common  Stock (4)                                                 |         | 1,045        |         | —          |         |
|                                             |         |                                                                   |         | Common  Stock Warrants (4)                                        |         | 24           |         | —          |         |
|                                             |         |                                                                   |         |                                                              |         | 22,553       |         | 14,479          |         |
|                                             |         |                                                                   |         |                                                              |         |         |         |            |         |
| ASH Holdings Corp.                               |         | Retail and Service — school buses and parts                       |         | Revolver,  $2,000 available (non-accrual, Due 3/2010) (5), (4)    |         | —       |         | —          |         |
|                                             |         |                                                                   |         | Senior  Subordinated Term Debt (non-accrual, Due 1/2012) (5), (4) |         | 6,250        |         | 1,719           |         |
|                                             |         |                                                                   |         | Preferred  Stock (4)                                              |         | 2,500        |         | —          |         |
|                                             |         |                                                                   |         | Common  Stock Warrants (4)                                        |         | 4            |         | —          |         |
|                                             |         |                                                                   |         | Guaranty  ($500)                                                  |         |         |         |            |         |
|                                             |         |                                                                   |         |                                                              |         | 8,754        |         | 1,719           |         |
|                                             |         |                                                                   |         |                                                              |         |         |         |            |         |
| 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        |         | 4,863           |         |
|                                             |         |                                                                   |         | Common  Stock (4)                                                 |         | 69           |         | 2,926           |         |
|                                             |         |                                                                   |         |                                                              |         | 14,425       |         | 18,035          |         |
|                                             |         |                                                                   |         |                                                              |         |         |         |            |         |
| Chase II Holdings Corp.                          |         | Manufacturing — traffic doors                                     |         | Senior  Term Debt (8.8%, Due 3/2011)                              |         | 7,975        |         | 7,975           |         |
|                                             |         |                                                                   |         | Senior  Term Debt (12.0%, Due 3/2011) (6)                         |         | 7,560        |         | 7,560           |         |
|                                             |         |                                                                   |         | Senior  Subordinated Term Debt (13.0%, Due 3/2013)                |         | 6,168        |         | 6,168           |         |
|                                             |         |                                                                   |         | Preferred  Stock (4)                                              |         | 6,961        |         | 7,214           |         |
|                                             |         |                                                                   |         | Common  Stock (4)                                                 |         | 61           |         | —          |         |
|                                             |         |                                                                   |         |                                                              |         | 28,725       |         | 28,917          |         |
|                                             |         |                                                                   |         |                                                              |         |         |         |            |         |
| Country  Club Enterprises, LLC                   |         | Service  — golf cart distribution                                 |         | Subordinated  Term Debt (14.0%, Due 11/2014) (5)                  |         | 7,000        |         | 6,851           |         |
|                                             |         |                                                                   |         | Preferred Stock (4)                                               |         | 3,725        |         | —          |         |
|                                             |         |                                                                   |         |                                                              |         | 10,725       |         | 6,851           |         |

 

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**GLADSTONE INVESTMENT CORPORATION**

**CONDENSED CONSOLIDATED SCHEDULES OF INVESTMENTS(Continued)**

**AS OF DECEMBER 31, 2009**

**(DOLLAR AMOUNTS IN THOUSANDS)**

**(UNAUDITED)**

 
| **Company  (1)**                       | ** ** | **Industry**                                                     | ** ** | **Investment  (2)**                                                   | ** ** | **Cost** | ** **  | **Fair  Value** | ** ** |
|----------------------------------------|------------|------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|----------|-------------|-----------------|------------|
|                                   |       |                                                             |       |                                                                  |       |     |        |            |       |
| **CONTROL INVESTMENTS *(Continued)*:** |
| Galaxy  Tool Holding Corp.             |       | Manufacturing  — aerospace and plastics                     |       | Senior  Subordinated Term Debt (13.5%, Due 8/2013) (5)                |       | $        | 17,250      |            | $          | 16,991 |   |
|                                   |       |                                                             |       | Preferred  Stock (4)                                                  |       | 4,112    |        | —          |       |
|                                   |       |                                                             |       | Common  Stock (4)                                                     |       | 48       |        | —          |       |
|                                   |       |                                                             |       |                                                                  |       | 21,410   |        | 16,991          |       |
|                                   |       |                                                             |       |                                                                  |       |     |        |            |       |
| Mathey  Investments, Inc. (7)     |       | Manufacturing  — pipe-cutting and pipe-fitting equipment    |       | Revolving  Credit Facility, $0 available (10.0%, Due 3/2011) (5), (8) |       | 1,032    |        | 1,015           |       |
|                                   |       |                                                             |       | Senior  Term Debt (10.0%, Due 3/2013) (5)                             |       | 2,375    |        | 2,337           |       |
|                                   |       |                                                             |       | Senior  Term Debt (17.0%, Due 3/2014) (5), (6)                        |       | 7,227    |        | 7,010           |       |
|                                   |       |                                                             |       | Common  Stock (4)                                                     |       | 500      |        | —          |       |
|                                   |       |                                                             |       | Common  Stock Warrants (4)                                            |       | 277      |        | —          |       |
|                                   |       |                                                             |       |                                                                  |       | 11,411   |        | 10,362          |       |
|                                   |       |                                                             |       |                                                                  |       |     |        |            |       |
| **Total Control Investments**          | ** ** | ** **                                                       | ** ** | ** **                                                            | ** ** | **$**    | **150,107** | ** **      | **$**      | **130,955** | ** ** |
|                                   |       |                                                             |       |                                                                  |       |     |        |            |       |
| **AFFILIATE INVESTMENTS:**             |
| Danco  Acquisition Corp.               |       | Manufacturing  — machining and sheet metal work             |       | Revolving  Credit Facility, $600 available (10.0%, Due 10/2010) (5)   |       | $        | 900         |            | $          | 885 |   |
|                                   |       |                                                             |       | Senior  Term Debt (10.0%, Due 10/2012) (5)                            |       | 4,313    |        | 4,243           |       |
|                                   |       |                                                             |       | Senior  Term Debt (12.5%, Due 4/2013) (5)                             |       | 9,067    |        | 8,840           |       |
|                                   |       |                                                             |       | Preferred  Stock (4)                                                  |       | 2,500    |        | —          |       |
|                                   |       |                                                             |       | Common  Stock Warrants (4)                                            |       | 2        |        | —          |       |
|                                   |       |                                                             |       |                                                                  |       | 16,782   |        | 13,968          |       |
|                                   |       |                                                             |       |                                                                  |       |     |        |            |       |
| Noble  Logistics, Inc.            |       | Service  — aftermarket auto parts delivery                  |       | Revolving  Credit Facility, $0 available (4.2%, Due 2/2010) (5), (9)  |       | 2,000    |        | 1,200           |       |
|                                   |       |                                                             |       | Senior  Term Debt (9.3%, Due 12/2011) (5)                             |       | 6,227    |        | 3,736           |       |
|                                   |       |                                                             |       | Senior  Term Debt (10.5%, Due 12/2011) (5) (6)                   |       | 7,300    |        | 4,380           |       |
|                                   |       |                                                             |       | Preferred  Stock (4)                                                  |       | 1,750    |        | —          |       |
|                                   |       |                                                             |       | Common  Stock (4)                                                     |       | 1,682    |        | —          |       |
|                                   |       |                                                             |       |                                                                  |       | 18,959   |        | 9,316           |       |
|                                   |       |                                                             |       |                                                                  |       |     |        |            |       |
| Quench  Holdings Corp.                 |       | Service  — sales, installation and service of water coolers |       | Senior  Subordinated Term Debt (10.0%, Due 8/2013) (5)                |       | 8,000    |        | 6,040           |       |
|                                   |       |                                                             |       | Preferred  Stock (4)                                                  |       | 2,950    |        | 2,728           |       |
|                                   |       |                                                             |       | Common  Stock (4)                                                     |       | 447      |        | —          |       |
|                                   |       |                                                             |       |                                                                  |       | 11,397   |        | 8,768           |       |
|                                   |       |                                                             |       |                                                                  |       |     |        |            |       |
| Tread  Corp.                           |       | Manufacturing  — storage and transport equipment            |       | Senior  Subordinated Term Debt (12.5%, Due 5/2013) (5)                |       | 5,000    |        | 4,975           |       |
|                                   |       |                                                             |       | Preferred  Stock (4)                                                  |       | 750      |        | —          |       |
|                                   |       |                                                             |       | Common  Stock & Debt Warrants (4)                            |       | 3        |        | —          |       |
|                                   |       |                                                             |       |                                                                  |       | 5,753    |        | 4,975           |       |
|                                   |       |                                                             |       |                                                                  |       |     |        |            |       |
| **Total Affiliate Investments**        | ** ** | ** **                                                       | ** ** | ** **                                                            | ** ** | **$**    | **52,891**  | ** **      | **$**      | **37,027** | ** ** |
|                                   |       |                                                             |       |                                                                  |       |     |        |            |       |
| **TOTAL INVESTMENTS**                  | ** ** | ** **                                                       | ** ** | ** **                                                            | ** ** | **$**    | **225,900** | ** **      | **$**      | **187,386** | ** ** |

 

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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 December 31,  2009, and due date represents the contractual maturity date.                                                                                                                        |
| (3) | Valued  based on the indicative bid price on or near December 31, 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 December 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) | Investment  was restructured in December 2009, resulting in the Company owning 100%  of Mathey Investments, Inc. and thus reclassifying it as a Control  Investment.                                                                                                 |
| (8) | Credit  facility had a limit of $1.0 million at December 31, 2009; the overdraft  of approximately $32 represented a protective disbursement of the Company’s  collateral. The credit facility was increased to $1.75 million subsequent to  December 31, 2009. |
| (9) | Revolving  credit facility was extended to May, 2010 subsequent to December 31,  2009.                                                                                                                                                                                    |

 

*THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OFTHESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.*

 

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**GLADSTONE INVESTMENT CORPORATION**

**CONDENSEDCONSOLIDATED SCHEDULES OF INVESTMENTS**

**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**          | ** **   |

 

5

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Table ofContents

 

**GLADSTONE INVESTMENT CORPORATION**

**CONDENSEDCONSOLIDATED SCHEDULES OF INVESTMENTS (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        |        | —              |       |
|                           |       |                                                       |       | Guaranty  ($500)                                                     |       |     |        |                |       |
|                           |       |                                                       |       |                                                                 |       | 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** | ** ** |

 

6

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Table ofContents

 

**GLADSTONE INVESTMENT CORPORATION**

**CONDENSEDCONSOLIDATED SCHEDULES OF INVESTMENTS (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  Subordinated 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** |   |

 

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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 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 AN INTEGRAL PART OFTHESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.*

 

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**GLADSTONE INVESTMENT CORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(UNAUDITED)**

 
| ** **                                                                           | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                           | ** ** | **December 31,**            | ** ** | **December 31,**           | ** ** |
| ** **                                                                           | ** ** | **2009**                         | ** ** | **2008**                        | ** ** | **2009** | ** ** | **2008** | ** ** |
| INVESTMENT INCOME                                                                    |       |                             |       |                            |       |   |   |   |   |
| Interest income                                                                      | ** ** | ** **                       |       |                            | ** ** | ** ** |   |   |   |
| Non-Control/Non-Affiliate investments                                                | ** ** | **$**                            | **489**    |                            | $          | 2,339 |   | $ | **1,840** |   | $ | 6,797 |   |
| Control investments                                                                  | ** ** | **2,856**                        |       | 3,068                           | ** ** | **8,593** |   | 8,372 |   |
| Affiliate investments                                                                | ** ** | **1,605**                        |       | 1,478                           | ** ** | **4,533** |   | 3,938 |   |
| Cash and cash equivalents                                                            | ** ** | **1**                            |       | 21                              | ** ** | **1** |   | 67 |   |
| Total interest income                                                                | ** ** | **4,951**                        |       | 6,906                           | ** ** | **14,967** |   | 19,174 |   |
| Other income                                                                         | ** ** | **970**                          |       | 96                              | ** ** | **1,066** |   | 682 |   |
| Total investment income                                                              | ** ** | **5,921**                        |       | 7,002                           | ** ** | **16,033** |   | 19,856 |   |
|                                                                                 | ** ** | ** **                       |       |                            | ** ** | ** ** |   |   |   |
| EXPENSES                                                                             | ** ** | ** **                       |       |                            | ** ** | ** ** |   |   |   |
| Loan servicing fee (Refer to Note 4)                                                 | ** ** | **886**                          |       | 1,258                           | ** ** | **2,892** |   | 3,769 |   |
| Base management fee (Refer to Note 4)                                                | ** ** | **113**                          |       | 442                             | ** ** | **588** |   | 1,303 |   |
| Incentive fee (Refer to Note 4)                                                      | ** ** | **588**                          |       | —                          | ** ** | **588** |   | — |   |
| Administration fee (Refer to Note 4)                                                 | ** ** | **156**                          |       | 195                             | ** ** | **527** |   | 642 |   |
| Interest expense                                                                     | ** ** | **385**                          |       | 1,823                           | ** ** | **1,640** |   | 4,009 |   |
| Amortization of deferred finance costs                                               | ** ** | **436**                          |       | 46                              | ** ** | **1,187** |   | 324 |   |
| Professional fees                                                                    | ** ** | **182**                          |       | 69                              | ** ** | **502** |   | 383 |   |
| Stockholder related costs                                                            | ** ** | **49**                           |       | 112                             | ** ** | **276** |   | 413 |   |
| Insurance expense                                                                    | ** ** | **71**                           |       | 57                              | ** ** | **190** |   | 165 |   |
| Directors’ fees                                                                 | ** ** | **48**                           |       | 50                              | ** ** | **147** |   | 145 |   |
| Other                                                                                | ** ** | **61**                           |       | 57                              | ** ** | **198** |   | 246 |   |
| Expenses before credit from Adviser                                                  | ** ** | **2,975**                        |       | 4,109                           | ** ** | **8,735** |   | 11,399 |   |
| Credit to base management fee (Refer to Note 4)                                      | ** ** | **(127**                         | **)**      | (694                            | )          | **(591** | **)** | (1,964 | ) |
| Total expenses net of credit to base management fee                                  | ** ** | **2,848**                        |       | 3,415                           | ** ** | **8,144** |   | 9,435 |   |
| NET INVESTMENT INCOME                                                                | ** ** | **3,073**                        |       | 3,587                           | ** ** | **7,889** |   | 10,421 |   |
|                                                                                 | ** ** | ** **                       |       |                            | ** ** | ** ** |   |   |   |
| REALIZED AND UNREALIZED (LOSS) GAIN ON:                                              | ** ** | ** **                       |       |                            | ** ** | ** ** |   |   |   |
| Realized loss on sale of Non-Control/Non-Affiliate  investments                      | ** ** | **(1,318**                       | **)**      | —                          | ** ** | **(35,922** | **)** | (4,215 | ) |
| Realized loss on termination of derivative                                           | ** ** | **—**                       |       | —                          | ** ** | **(53** | **)** | — |   |
| Net unrealized appreciation (depreciation) of  Non-Control/Non-Affiliate investments | ** ** | **1,383**                        |       | (6,988                          | )          | **36,597** |   | (7,714 | ) |
| Net unrealized (depreciation) appreciation of  Control investments                   | ** ** | **(8,853**                       | **)**      | 1,755                           | ** ** | **(35,234** | **)** | 7,728 |   |
| Net unrealized appreciation (depreciation) of  Affiliate investments                 | ** ** | **1,257**                        |       | (2,294                          | )          | **(4,862** | **)** | (13,687 | ) |
| Net unrealized (depreciation) appreciation of  derivative                            | ** ** | **(7**                           | **)**      | —                          | ** ** | **19** |   | — |   |
| Net unrealized depreciation (appreciation) of  borrowings under line of credit       | ** ** | **45**                           |       | —                          | ** ** | **(133** | **)** | — |   |
| Net loss on investments and borrowings under line  of credit                         | ** ** | **(7,493**                       | **)**      | (7,527                          | )          | **(39,588** | **)** | (17,888 | ) |
|                                                                                 | ** ** | ** **                       |       |                            | ** ** | ** ** |   |   |   |
| NET DECREASE IN NET ASSETS RESULTING FROM  OPERATIONS                                | ** ** | **$**                            | **(4,420** | **)**                           | $          | (3,940 | ) | $ | **(31,699** | **)** | $ | (7,467 | ) |
|                                                                                 | ** ** | ** **                       |       |                            | ** ** | ** ** |   |   |   |
| NET DECREASE IN NET ASSETS RESULTING FROM  OPERATIONS PER COMMON SHARE:              | ** ** | ** **                       |       |                            | ** ** | ** ** |   |   |   |
| Basic and Diluted                                                                    | ** ** | **$**                            | **(0.20**  | **)**                           | $          | (0.18 | ) | $ | **(1.44** | **)** | $ | (0.35 | ) |
|                                                                                 | ** ** | ** **                       |       |                            | ** ** | ** ** |   |   |   |
| SHARES OF COMMON STOCK OUTSTANDING:                                                  | ** ** | ** **                       |       |                            | ** ** | ** ** |   |   |   |
| Basic and diluted weighted average shares                                            | ** ** | **22,080,133**                   |       | 22,080,133                      | ** ** | **22,080,133** |   | 21,367,871 |   |

 

*THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OFTHESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.*

 

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**GLADSTONE INVESTMENT CORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS**

**(DOLLAR AMOUNTS IN THOUSANDS)**

**(UNAUDITED)**

 
| ** **                                                       | ** **   | **Nine  Months Ended December 31,** | ** **  |
|------------------------------------------------------------------|--------------|------------------------------------------|-------------|
| ** **                                                       | ** **   | **2009**                                 | ** **  | **2008** | ** ** |
| *Operations:*                                                    | *** *** | *** ***                             | * *    | * * | * * |
| Net investment income                                            | ** **   | **$**                                    | **7,889**   |   | $ | 10,421 |   |
| Realized loss on sale of investments                             | ** **   | **(35,922**                              | **)**       | (4,215 | ) |
| Realized loss on termination of derivative                       | ** **   | **(53**                                  | **)**       | — |   |
| Net unrealized depreciation of portfolio                         | ** **   | **(3,499**                               | **)**       | (13,673 | ) |
| Net unrealized appreciation of derivative                        | ** **   | **19**                                   |        | — |   |
| Net unrealized appreciation of borrowings under  line of credit  | ** **   | **(133**                                 | **)**       | — |   |
| Net decrease in net assets from operations                       | ** **   | **(31,699**                              | **)**       | (7,467 | ) |
|                                                             | ** **   | ** **                               |        |   |   |
| *Capital transactions:*                                          | *** *** | *** ***                             | * *    | * * | * * |
| Issuance of common stock                                         | ** **   | **—**                               |        | 41,290 |   |
| Shelf offering registration costs                                | ** **   | **(153**                                 | **)**       | (695 | ) |
| Distributions to stockholders                                    | ** **   | **(7,949**                               | **)**       | (15,456 | ) |
| Net (decrease) increase in net assets from capital  transactions | ** **   | **(8,102**                               | **)**       | 25,139 |   |
|                                                             | ** **   | ** **                               |        |   |   |
| Total (decrease) increase in net assets                          | ** **   | **(39,801**                              | **)**       | 17,672 |   |
| Net assets at beginning of period                                | ** **   | **214,802**                              |        | 206,445 |   |
|                                                             | ** **   | ** **                               |        |   |   |
| Net assets at end of period                                      | ** **   | **$**                                    | **175,001** |   | $ | 224,117 |   |

 

*THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OFTHESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.*

 

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**GLADSTONE INVESTMENT CORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(DOLLAR AMOUNTS IN THOUSANDS)**

**(UNAUDITED)**

 
| ** **                                                                                                                    | ** ** | **Nine  Months Ended December 31,** | ** **  |
|-------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|-------------|
| ** **                                                                                                                    | ** ** | **2009**                                 | ** **  | **2008** | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES**                                                                                     | ** ** | ** **                               | ** **  | ** ** | ** ** |
| Net decrease in net assets resulting from  operations                                                                         | ** ** | **$**                                    | **(31,699** | **)** | $ | (7,467 | ) |
| Adjustments to reconcile net decrease in net  assets resulting from operations to net cash provided by operating  activities: | ** ** | ** **                               |        |   |   |
| Purchase of investments                                                                                                       | ** ** | **(2,413**                               | **)**       | (47,655 | ) |
| Principal repayments of investments                                                                                           | ** ** | **14,828**                               |        | 26,753 |   |
| Proceeds from sales of investments                                                                                            | ** ** | **74,706**                               |        | 13,296 |   |
| Proceeds from short-term borrowings                                                                                           | ** ** | **75,000**                               |        | — |   |
| Net realized loss on sales of investments                                                                                     | ** ** | **35,922**                               |        | 4,215 |   |
| Net realized loss on termination of derivative                                                                                | ** ** | **53**                                   |        | — |   |
| Net unrealized depreciation of investment  portfolio                                                                          | ** ** | **3,499**                                |        | 13,673 |   |
| Net unrealized appreciation of derivative                                                                                     | ** ** | **(19**                                  | **)**       | — |   |
| Net unrealized appreciation of borrowings under  line of credit                                                               | ** ** | **133**                                  |        | — |   |
| Net amortization of premiums and discounts                                                                                    | ** ** | **2**                                    |        | 27 |   |
| Amortization of deferred financing costs                                                                                      | ** ** | **1,187**                                |        | 324 |   |
| Decrease in interest receivable                                                                                               | ** ** | **127**                                  |        | 46 |   |
| Decrease in due from custodian                                                                                                | ** ** | **1,940**                                |        | 1,969 |   |
| Increase in prepaid assets                                                                                                    | ** ** | **(128**                                 | **)**       | (63 | ) |
| Decrease in other assets                                                                                                      | ** ** | **67**                                   |        | 295 |   |
| (Decrease) increase in accounts payable and  accrued liabilities                                                              | ** ** | **(1,083**                               | **)**       | 1 |   |
| Decrease in administration fee payable to  Administrator (See Note 4)                                                         | ** ** | **(23**                                  | **)**       | (13 | ) |
| Increase in base management fee payable to Adviser  (See Note 4)                                                              | ** ** | **100**                                  |        | 137 |   |
| Increase in incentive fee payable to Adviser (See  Note 4)                                                                    | ** ** | **588**                                  |        | — |   |
| (Decrease) increase in loan servicing fee payable  to Adviser (See Note 4)                                                    | ** ** | **(82**                                  | **)**       | 7 |   |
| Increase in other liabilities                                                                                                 | ** ** | **119**                                  |        | 50 |   |
| Net cash provided by operating activities                                                                                     | ** ** | **172,824**                              |        | 5,595 |   |
|                                                                                                                          | ** ** | ** **                               |        |   |   |
| **CASH FLOWS FROM FINANCING  ACTIVITIES**                                                                                     | ** ** | ** **                               | ** **  | ** ** | ** ** |
| Net proceeds from the issuance of common stock                                                                                | ** ** | **(153**                                 | **)**       | 40,595 |   |
| Borrowings from line of credit                                                                                                | ** ** | **93,000**                               |        | 133,000 |   |
| Repayments of line of credit                                                                                                  | ** ** | **(176,515**                             | **)**       | (159,971 | ) |
| Purchase of derivative                                                                                                        | ** ** | **(39**                                  | **)**       | — |   |
| Deferred financing costs                                                                                                      | ** ** | **(532**                                 | **)**       | — |   |
| Distributions paid                                                                                                            | ** ** | **(7,949**                               | **)**       | (15,456 | ) |
| Net cash used in financing activities                                                                                         | ** ** | **(92,188**                              | **)**       | (1,832 | ) |
| ** **                                                                                                                    | ** ** | ** **                               |        |   |   |
| **NET INCREASE IN CASH AND CASH  EQUIVALENTS**                                                                                | ** ** | **80,636**                               |        | 3,763 |   |
| **CASH AND CASH EQUIVALENTS,  BEGINNING OF PERIOD**                                                                           | ** ** | **7,236**                                |        | 9,360 |   |
| ** **                                                                                                                    | ** ** | ** **                               |        |   |   |
| **CASH AND CASH EQUIVALENTS, END OF  PERIOD**                                                                                 | ** ** | **$**                                    | **87,872**  |   | $ | 13,123 |   |
| ** **                                                                                                                    | ** ** | ** **                               |        |   |   |
| **CASH PAID DURING PERIOD FOR  INTEREST**                                                                                     | ** ** | **$**                                    | **1,824**   |   | $ | 3,959 |   |
| ** **                                                                                                                    | ** ** | ** **                               |        |   |   |
| **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 AN INTEGRAL PART OFTHESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.*

 

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**GLADSTONE INVESTMENT CORPORATION**

**FINANCIALHIGHLIGHTS**

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

**(UNAUDITED)**

 
| ** **                                                             | ** ** | **Three Months Ended December 31,** | ** **  | **Nine Months Ended December 31,** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------------------------|-------------|--------------------------------------------------------|------------|
| ** **                                                             | ** ** | **2009**                                                | ** **  | **2008**                                               | ** ** | **2009** | ** ** | **2008** | ** ** |
| Per Share Data (1)                                                     |       |                                                    |        |                                                   |       |   |   |   |   |
| Net asset value at beginning of period                                 | ** ** | **$**                                                   | **8.24**    |                                                   | $          | 10.57 | ** ** | **$** | **9.73** |   | $ | 12.47 |   |
|                                                                   | ** ** | ** **                                              |        |                                                   | ** ** | ** ** |   |   |   |
| *Income from investment  operations:*                                  | ** ** | ** **                                              |        |                                                   | ** ** | ** ** |   |   |   |
| Net investment income (2)                                              | ** ** | **0.14**                                                |        | 0.16                                                   | ** ** | **0.36** |   | 0.49 |   |
| Realized loss on sale of investments (2)                               | ** ** | **(0.06**                                               | **)**       | —                                                 | ** ** | **(1.63** | **)** | (0.20 | ) |
| Net unrealized depreciation of investments (2)                         | ** ** | **(0.28**                                               | **)**       | (0.34                                                  | )          | **(0.16** | **)** | (0.64 | ) |
| Net unrealized appreciation of borrowings on line  of credit (2)  | ** ** | **—**                                              |        | —                                                 | ** ** | **(0.01** | **)** | — |   |
| Total from investment operations                                       | ** ** | **(0.20**                                               | **)**       | (0.18                                                  | )          | **(1.44** | **)** | (0.35 | ) |
|                                                                   | ** ** | ** **                                              |        |                                                   | ** ** | ** ** |   |   |   |
| *Distributions from:*                                                  | ** ** | ** **                                              |        |                                                   | ** ** | ** ** |   |   |   |
| Net investment income                                                  | ** ** | **(0.12**                                               | **)**       | (0.24                                                  | )          | **(0.36** | **)** | (0.72 | ) |
| Total distributions (3)                                                | ** ** | **(0.12**                                               | **)**       | (0.24                                                  | )          | **(0.36** | **)** | (0.72 | ) |
|                                                                   | ** ** | ** **                                              |        |                                                   | ** ** | ** ** |   |   |   |
| *Effect of shelf offering:*                                            | ** ** | ** **                                              |        |                                                   | ** ** | ** ** |   |   |   |
| Shelf registration offering costs                                      | ** ** | **0.01**                                                |        | —                                                 | ** ** | **—** |   | (0.03 | ) |
| Effect of distribution of stock rights offering  after record date (4) | ** ** | **—**                                              |        | —                                                 | ** ** | **—** |   | (1.22 | ) |
| Total effect of shelf offering                                         | ** ** | **0.01**                                                |        | —                                                 | ** ** | **—** |   | (1.25 | ) |
|                                                                   | ** ** | ** **                                              |        |                                                   | ** ** | ** ** |   |   |   |
| Net asset value at end of period                                       | ** ** | **$**                                                   | **7.93**    |                                                   | $          | 10.15 | ** ** | **$** | **7.93** |   | $ | 10.15 |   |
|                                                                   | ** ** | ** **                                              |        |                                                   | ** ** | ** ** |   |   |   |
| Per share market value at beginning of period                          | ** ** | **$**                                                   | **4.83**    |                                                   | $          | 6.81 | ** ** | **$** | **3.67** |   | $ | 9.32 |   |
| Per share market value at end of period                                | ** ** | **4.56**                                                |        | 4.91                                                   | ** ** | **4.56** |   | 4.91 |   |
| Total Return (5)                                                       | ** ** | **(3.18**                                               | **)%**      | (19.59                                                 | )%         | **34.06** | **%** | (41.23 | )% |
| 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                                            | ** ** | **$**                                                   | **175,001** |                                                   | $          | 224,117 | ** ** | **$** | **175,001** |   | $ | 224,117 |   |
| Average net assets (6)                                                 | ** ** | **179,155**                                             |        | 229,256                                                | ** ** | **194,783** |   | 232,053 |   |
|                                                                   | ** ** | ** **                                              |        |                                                   | ** ** | ** ** |   |   |   |
| Senior Securities Data:                                                | ** ** | ** **                                              |        |                                                   | ** ** | ** ** |   |   |   |
| Borrowings under line of credit and short-term loan                    | ** ** | **$**                                                   | **101,883** |                                                   | $          | 117,864 | ** ** | **$** | **101,883** |   | $ | 117,864 |   |
| Asset coverage ratio (7)                                               | ** ** | **270**                                                 | **%**       | 290                                                    | %          | **270** | **%** | 290 | % |
| Asset coverage per unit (8)                                            | ** ** | **$**                                                   | **2,704**   |                                                   | $          | 2,901 | ** ** | **$** | **2,704** |   | $ | 2,901 |   |
|                                                                   | ** ** | ** **                                              |        |                                                   | ** ** | ** ** |   |   |   |
| Ratios/Supplemental Data:                                              | ** ** | ** **                                              |        |                                                   | ** ** | ** ** |   |   |   |
| Ratio of expenses to average net assets (9), (10)                      | ** ** | **6.64**                                                | **%**       | 7.17                                                   | %          | **5.98** | **%** | 6.55 | % |
| Ratio of net expenses to average net assets (9),  (11)                 | ** ** | **6.36**                                                | **%**       | 5.96                                                   | %          | **5.57** | **%** | 5.42 | % |
| Ratio of net investment income to average net  assets (9)              | ** ** | **6.86**                                                | **%**       | 6.26                                                   | %          | **5.40** | **%** | 5.99 | % |

 

----

| (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.                                                                                                                         |

 

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| (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 thousand 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 AN INTEGRAL PART OFTHESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.*

 

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**GLADSTONE INVESTMENT CORPORATION**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

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

**DECEMBER 31, 2009**

**(UNAUDITED)**

 

**NOTE 1. ORGANIZATION**

 

GladstoneInvestment Corporation (the “Company”) was incorporated under the GeneralCorporation Laws of the State of Delaware on February 18, 2005 andcompleted an initial public offering on June 22, 2005. The Company is aclosed-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.

 

GladstoneBusiness Investment, LLC (“Business Investment”) a wholly-owned subsidiary ofthe Company, was established on August 11, 2006 for the sole purpose ofowning the Company’s portfolio of investments in connection with its line ofcredit. The financial statements of Business Investment are consolidated withthose of the Company.

 

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

 

**NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

*Unaudited Interim Financial Statements*

 

Interimfinancial statements of the Company are prepared in accordance with accountingprinciples generally accepted in the United States of America (“GAAP”) forinterim financial information and pursuant to the requirements for reporting onForm 10-Q and Article 10 of Regulation S-X. Accordingly, certaindisclosures accompanying annual financial statements prepared in accordancewith GAAP are omitted. In the opinion of the Company’s management, alladjustments, consisting solely of normal recurring accruals, necessary for thefair statement of financial statements for the interim periods have beenincluded. The current period’s results of operations are not necessarilyindicative of results that ultimately may be achieved for the year. The interimfinancial statements and notes thereto should be read in conjunction with thefinancial statements and notes thereto included in the Company’s Form 10-Kfor the fiscal year ended March 31, 2009, as filed with the Securities andExchange Commission (the “SEC”) on June 2, 2009.

 

Theyear-end balance sheet data was derived from audited financial statements butdoes not include all disclosures required by GAAP.

 

*Reclassifications*

 

Certainamounts in the prior year’s financial statements have been reclassified toconform to the current year presentation with no effect to net decrease in netassets resulting from operations.

 

*Cash andCash Equivalents*

 

TheCompany considers all short-term, highly liquid investments that are bothreadily convertible to cash and have a maturity of three months or less at thetime of purchase to be cash equivalents. Items classified as cash equivalentsinclude temporary investments in commercial paper, United States Treasurysecurities and money-market funds. Cash and cash equivalents are carried atcost, which approximates fair value.

 

*Investment Valuation Policy*

 

TheCompany carries its investments at market value to the extent that marketquotations are readily available and reliable, and otherwise at fair value, asdetermined in good faith by its Board of Directors.  In determining the fair value of the Company’sinvestments, the Adviser has 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.

 

TheCompany uses generally accepted valuation techniques to value its portfoliounless the Company has specific information about the value of an investment todetermine otherwise. From time to time the Company may accept an appraisal of abusiness in which the Company holds securities. These appraisals are expensiveand occur infrequently but provide a third-party valuation opinion that maydiffer in results, techniques and scopes used to value the Company’sinvestments.  When these specificthird-party appraisals are

 

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engagedor accepted, the Company uses estimates of value provided by such appraisalsand its own assumptions, including estimated remaining life, current marketyield and interest rate spreads of similar securities as of the measurementdate, to value the investment the Company has in that business.

 

ThePolicy, which is summarized below, applies to publicly-traded securities,securities for which a limited market exists, and securities for which nomarket exists.

 

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

 

**Securities for which a limited market exists:** The Companyvalues securities that are not traded on an established secondary securitiesmarket, but for which a limited market for the security exists, such as certainparticipations in, or assignments of, syndicated loans, at the quoted bidprice.  In valuing these assets, theCompany assesses trading activity in an asset class and evaluates variances inprices and other market insights to determine if any available quote prices arereliable.  If the Company concludes thatquotes based on active markets or trading activity may be relied upon, firm bidprices are requested; however, if a firm bid price is unavailable, the Companybases the value of the security upon the indicative bid price offered by therespective originating syndication agent’s trading desk, or secondary desk, onor near the valuation date. To the extent that the Company uses the indicativebid price as a basis for valuing the security, the Adviser may take furthersteps to consider additional information to validate that price in accordancewith the Policy.

 

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 the Financial Accounting Standards Board (“FASB”) AccountingStandards Codification (“ASC”) 820-10,“Fair Value Measurements and Disclosures,” which provides guidance onthe use of a reporting entity’s own assumptions about future cash flows and risk-adjusteddiscount rates when relevant observable inputs, such as quotes in activemarkets, are not available. When relevant observable market data does notexist, the alternative outlined in ASC820-10 is the use of valuing investments based on DCF.  For the purposes of using DCF to provide fairvalue estimates, the Company considers multiple inputs such as a risk-adjusteddiscount rate that incorporates adjustments that market participants would makeboth for nonperformance and liquidity risks. As such, the Company develops a modified discount rate approach thatincorporates risk premiums including, among others, increased probability ofdefault, or higher loss given default or increased liquidity risk. The DCFvaluations applied to the syndicated loans provide an estimate of what theCompany believes a market participant would pay to purchase a syndicated loanin an active market, thereby establishing a fair value.  The Company will apply the DCF methodology inilliquid markets until quoted prices are available or are deemed reliable basedon trading activity.

 

As of December 31, 2009, the Company assessedtrading activity in its syndicated loan assets and determined that therecontinued to be market liquidity and a secondary market for these assets.  Thus, firm bid prices or indicative bids wereused to fair value the Company’s remaining syndicated loans at December 31,2009.

 

**Securities for which no market exists:** The valuationmethodology for securities for which no market exists falls into three categories:(1) portfolio investments comprised solely of debt securities; (2) portfolioinvestments in controlled companies comprised of a bundle of securities, whichcan include debt and equity securities; and (3) portfolio investments innon-controlled companies comprised of a bundle of investments, which caninclude debt and equity securities.

 

**(1)****        ****Portfolio investmentscomprised solely of debt securities:** Debt securities that arenot publicly traded on an established securities market, or for which a limitedmarket does not exist (“Non-Public Debt Securities”), and that are issued byportfolio companies where the Company has no equity, or equity-like securities,are fair valued in accordance with the terms of the Policy, which utilizesopinions of value submitted to the Company by Standard & Poor’sSecurities Evaluations, Inc. (“SPSE”). The Company may also submit paid inkind (“PIK”) interest to SPSE for their evaluation when it is determined thatPIK interest is likely to be received.

 

**(2)****        ****Portfolioinvestments in controlled companies comprised of a bundle of investments, whichcan include debt and equity securities:** The fair value of theseinvestments is determined based on the total enterprise value of the portfoliocompany, or issuer, utilizing a liquidity waterfall approach under ASC 820-10for the Company’s Non-Public Debt Securities and equity or equity-likesecurities (e.g. preferred equity, equity, or other equity-like securities)that are purchased together as part of a package, where the Company has controlor could gain control through an option or warrant security, both the debt andequity securities of the portfolio investment would exit in the mergers andacquisition market as the principal market, generally through a sale orrecapitalization of the portfolio company. In accordance with ASC 820-10, theCompany applies the in-use premise of value which assumes the debt and equitysecurities are sold together. Under this liquidity waterfall approach, theCompany first calculates the total enterprise value of the issuer byincorporating some or all of the following factors to determine the totalenterprise value of the issuer:

 

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·**                 **the issuer’sability to make payments;

·**                 **the earnings ofthe issuer;

·**                 **recent sales tothird parties of similar securities;

·**                 **the comparisonto publicly traded securities; and

·**                 **DCF or otherpertinent factors.

 

Ingathering the sales to third parties of similar securities, the Company mayreference industry statistics and use outside experts. Once the Company hasestimated the total enterprise value of the issuer, the Company will subtractthe value of all the debt securities of the issuer, which are valued at thecontractual principal balance. Fair values of these debt securities arediscounted for any shortfall of total enterprise value over the total debtoutstanding for the issuer. Once the values for all outstanding senior securities(which include the debt securities) have been subtracted from the totalenterprise value of the issuer, the remaining amount, if any, is used todetermine 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 valuesNon-Public Debt Securities that are purchased together with equity orequity-like securities from the same portfolio company, or issuer, for whichthe Company does not control or cannot gain control as of the measurement date,using a hypothetical secondary market as the Company’s principal market. Inaccordance with ASC 820-10, the Company determines its fair value of these debtsecurities of non-control investments assuming the sale of an individual debtsecurity using the in-exchange premise of value. As such, the Company estimatesthe fair value of the debt component using estimates of value provided by SPSEand its own assumptions in the absence of observable market data, includingsynthetic credit ratings, estimated remaining life, current market yield andinterest rate spreads of similar securities as of the measurement date.Subsequent to June 30, 2009, for equity or equity-like securities ofinvestments for which the Company does not control or cannot gain control as ofthe measurement date, the Company estimates the fair value of the equity usingthe in-exchange premise of value based on factors such as the overall value ofthe issuer, the relative fair value of other units of account including debt,or other relative value approaches. Consideration is also given to capitalstructure and other contractual obligations that may impact the fair value ofthe equity. Further, the Company may utilize comparable values of similarcompanies, recent investments and indices with similar structures and riskcharacteristics or its own assumptions in the absence of other observablemarket data and may also employ DCF valuation techniques.

 

Dueto the uncertainty inherent in the valuation process, such estimates of fairvalue may differ significantly from the values that would have been obtainedhad a ready market for the securities existed, and the differences could bematerial. Additionally, changes in the market environment and other events thatmay occur over the life of the investments may cause the gains or lossesultimately realized on these investments to be different than the valuationscurrently assigned. There is no single standard for determining fair value ingood faith, as fair value depends upon circumstances of each individual case.In general, fair value is the amount that the Company might reasonably expectto receive upon the current sale of the security in an arms-length transactionin the security’s principal market.

 

Referto Note 3 for additional information regarding fair value measurements and theCompany’s adoption of ASC 820-10.

 

*Interest and Dividend Income Recognition*

 

Interestincome, 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 indicatesthat the debtor is unable to service its debt or other obligations, the Companywill place the loan on non-accrual status and cease recognizing interest incomeon that loan until the borrower has demonstrated the ability and intent to paycontractual amounts due.  However, theCompany remains contractually entitled to this interest.  At December 31, 2009, one Controlinvestment, ASH Holdings Corp., was on non-accrual with a fair value ofapproximately $1.7 million, or 0.9% of the fair value of all loans held in theCompany’s portfolio at December 31, 2009. At March 31, 2009, one Control investment, ASH Holdings Corp., wason non-accrual with a fair value of approximately $2.6 million, or 0.8% of thefair value of all loans held in the Company’s portfolio at 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 that suchamounts are expected to be collected and that the Company has the option tocollect such amounts in cash.  During thequarter ended December 31, 2009, the Company recorded and collectedapproximately $953 of cash dividends on preferred shares of A. Stucki HoldingCorp.  Otherwise, the Company has notaccrued for any other such dividend income**.**

 

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*RecentAccounting Pronouncements*

 

OnJuly 1, 2009, the FASB issued Accounting Standard Update (“ASU”) 2009-01, “The FASB Accounting Standards Codificationand the Hierarchy of Generally Accepted Accounting Principles,” which has been codified as ASC 105,“Generally Accepted AccountingPrinciples*”* (“ASC 105” orthe “Codification”).  ASC 105 establishesthe exclusive authoritative reference for U.S. GAAP for use in financialstatements, except for SEC rules and interpretive releases, which are alsoauthoritative GAAP for SEC registrants. The Codification does not changecurrent U.S. GAAP but is intended to simplify user access to all authoritativeU.S. GAAP by providing all the authoritative literature related to a particulartopic in one place.  All existing accounting standard documents havebeen superseded and all other accounting literature not included in theCodification is considered non-authoritative.   The Codification waseffective for the Company during its interim period ended December 31,2009 and did not have an impact on its financial condition or results ofoperations.  The Company has included the references to theCodification, as appropriate, in these condensed consolidated financialstatements.

 

InJune 2009, the FASB issued an amendment to the accounting and disclosurerequirements for the consolidation of variable interest entities (“VIEs”)within ASC 845, “Nonmonetary Transactions.” The elimination of the concept of a qualifying special-purpose entity (“QSPE”),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 is not expected to havea material impact on the Company’s financial position, results of operations orliquidity.

 

InJuly 2009, the FASB issued ASC 320, “Investments-Debt and EquitySecurities” to make the guidance on other-than-temporary impairment moreoperational and to improve the presentation and disclosure ofother-than-temporary impairments on debt and equity securities in the financialstatements.  ASC 320-10  requires significant additional disclosuresfor both annual and interim periods, including the amortized cost basis ofavailable-for-sale and held-to-maturity debt, the methodology and key importsused to measure the credit portion of other-than-temporary impairment, and aroll forward of amounts recognized in earnings for securities by major securitytype.  ASC 320-10 requires that entitiesidentify major security classes consistent with how the securities are managedbased on the nature and risks of the security, and also expands, for disclosurepurposes, the list of major security types identified in ASC 320. ASC 320-10 iseffective for interim and annual reporting periods ending after June 15,2009.  The Company’s adoption of thispronouncement did not have a material impact on the condensed consolidatedfinancial statements.

 

InJuly 2009, the FASB issued ASC 825, “Financial Instruments,” whichrequires disclosures about fair value of financial instruments for interimreporting periods of publicly traded companies as well as in annual financialstatements, whether recognized or not recognized in the statement of financialposition. The guidance in ASC 825 is effective for interim periods ending afterJune 15, 2009. The Company’s adoption of this pronouncement did not have amaterial impact on the condensed consolidated financial statements.

 

InJuly 2009, the FASB issued ASC 855-10-50, “Subsequent Events*”* which was initiated in an effort to incorporate accountingguidance that originated as auditing standards into the body of authoritativeliterature issued by the FASB.  Movingthe accounting requirements out of the auditing literature and into theaccounting literature is consistent with the FASB’s objective to codify allauthoritative U.S. accounting guidance related to a particular topic in oneplace.  It also provided an opportunityto consider international convergence issues. The FASB has established general standards of accounting for anddisclosure of events that occur after the balance sheet date but beforefinancial 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.

 

InJuly 2009, the FASB issued ASC 860, “Transfers and Servicing*”* which removes the concept of a 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.

 

InAugust 2009, the FASB issued ASU No. 2009-05, “Fair ValueMeasurements and Disclosures: Measuring Liabilities at Fair Value.”  The update provides clarification to ASC 820for the valuation techniques required to measure the fair value ofliabilities.  ASU No. 2009-05 alsoprovides clarification around required inputs to the fair value measurement ofa liability and definition of a Level 1 liability.  The ASU is effective for interim and annualperiods beginning after August 28, 2009. The Company adopted this 

 

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standardbeginning with its financing statements ending December 31, 2009.  The Company’s adoption of this standard didnot have a material effect on its financial position and results of operations.

 

In September 2009, theFASB issued ASU No. 2009-12, “Measuring Fair Value Measurements andDisclosures: Investments in Certain Entities That Calculate Net Asset Value perShare (or Its Equivalent),” that provides additional guidance on how companiesshould estimate the fair value of certain alternative investments, such ashedge funds, private equity funds and venture capital funds. The fair value ofsuch investments can now be determined using net asset value (“NAV”) as apractical expedient, unless it is probable that the investment will not be soldat a price equal to NAV. In those situations, the practical expedient cannot beused and disclosure of the remaining actions necessary to complete the salewill be required.  New disclosures of theattributes of all investments within the scope of the new guidance is required,regardless of whether an entity used the practical expedient to measure thefair value of any of its investments. ASU No. 2009-12 is effective for the first annual or interimreporting period ending after December 15, 2009, with early applicationpermitted. The Company’s adoption of this standard did not have a material effect onits financial position and results of operations.

 

InDecember 2009, the FASB issued ASU 2009-17, “Consolidations: Improvementsto Financial Reporting by Enterprises Involved with Variable Interest Entities,”that amends the FASB ASC for the issuance of FASB Statement No. 167, “Amendments to FASB Interpretation No. 46(R).”  The amendments in this ASU replace thequantitative-based risks and rewards calculation for determining whichreporting entity, if any, has a controlling financial interest in a variableinterest entity with an approach focused on identifying which reporting entityhas the power to direct the activities of a variable interest entity that mostsignificantly impact the entity’s economic performance and (1) theobligation to absorb losses of the entity or (2) the right to receivebenefits from the entity. An approach that is expected to be primarilyqualitative will be more effective for identifying which reporting entity has acontrolling financial interest in a variable interest entity. The amendments inASU No. 2009-17 also require additional disclosures about a reportingentity’s involvement in variable interest entities, which will enhance theinformation provided to users of financial statements.  The ASU is effective for annual periodsbeginning after November 15, 2009. The Company does not believe the adoption of this standard will have amaterial impact on its financial position and results of operations.

 

InJanuary 2010, the FASB issued ASU No. 2010-06, “Fair ValueMeasurements and Disclosures,” that requires reporting entities to make newdisclosures about recurring or nonrecurring fair-value measurements includingsignificant transfers into and out of Level 1 and Level 2 fair-valuemeasurements and information on purchases, sales, issuances, and settlements ona gross basis in the reconciliation of Level 3 fair-value measurements. The FASB also clarified existing fair-value measurement disclosure guidanceabout the level of disaggregation, inputs, and valuation techniques. The newand revised disclosures are required to be implemented in fiscal yearsbeginning after December 15, 2009 and December 15, 2010.  TheCompany is currently evaluating the impact of adopting this standard on itsfinancial position and results of operations.

 

**NOTE 3. INVESTMENTS**

 

TheCompany adopted guidance for fair value measurements, which defines fair value,establishes a framework for measuring fair value and expands disclosures aboutassets and liabilities measured at fair value. The guidance 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. Theguidance 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.

 

·                  *Level1* — inputs to the valuation methodology are quoted prices (unadjusted)for identical assets or liabilities in active markets;

 

·                  *Level2***— inputs to the valuationmethodology include quoted prices for similar assets and liabilities in activemarkets, and inputs that are observable for the asset or liability, eitherdirectly or indirectly, for substantially the full term of the financialinstrument. Level 2 inputs are in those markets for which there are fewtransactions, the prices are not current, little public information exists orinstances where prices vary substantially over time or among brokered marketmakers; and

 

·                  *Level3*— inputs to the valuation methodology are unobservable and significantto the fair value measurement. Unobservable inputs are those inputs thatreflect the Company’s own assumptions that market participants would use toprice the asset or liability based upon the best available information.

 

Asof December 31, 2009, all of the Company’s assets were valued using Level3 inputs.

 

Thefollowing table presents the financial instruments carried at fair value as of December 31,2009 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:

 

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| ** **                                       | ** ** | **As  of December 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**        | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Senior term debt                                 |       | $                                 | —     |   | $ | — |   | $ | 19,404 |   | $ | 19,404 |   |
| Senior subordinated term debt                    |       | —                            |       | — |   | — |   | — |   |
| Preferred equity                                 |       | —                            |       | — |   | — |   | — |   |
| Common equity/equivalents                        |       | —                            |       | — |   | — |   | — |   |
| **Total Non-Control/Non-Affiliate  investments** | ** ** | **—**                        | ** ** | **—** | ** ** | **19,404** | ** ** | **19,404** | ** ** |
|                                             | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Control investments**                          | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Senior term debt                                 |       | —                            |       | — |   | 50,473 |   | 50,473 |   |
| Senior subordinated term debt                    |       | —                            |       | — |   | 59,464 |   | 59,464 |   |
| Preferred equity                                 |       | —                            |       | — |   | 16,526 |   | 16,526 |   |
| Common equity/equivalents                        |       | —                            |       | — |   | 4,492 |   | 4,492 |   |
| **Total Control investments**                    | ** ** | **—**                        | ** ** | **—** | ** ** | **130,955** | ** ** | **130,955** | ** ** |
|                                             | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Affiliate investments**                        | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Senior term debt                                 |       | —                            |       | — |   | 23,284 |   | 23,284 |   |
| Senior subordinated term debt                    |       | —                            |       | — |   | 11,015 |   | 11,015 |   |
| Preferred equity                                 |       | —                            |       | — |   | 2,728 |   | 2,728 |   |
| Common equity/equivalents                        |       | —                            |       | — |   | — |   | — |   |
| **Total Affiliate investments**                  | ** ** | **—**                        | ** ** | **—** | ** ** | **37,027** | ** ** | **37,027** | ** ** |
| ** **                                       | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Total investments at fair value**              | ** ** | **$**                             | **—** | ** ** | **$** | **—** | ** ** | **$** | **187,386** | ** ** | **$** | **187,386** | ** ** |

 
| ** **                                       | ** ** | **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**       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Senior term debt                                 |       | $                              | —     |   | $ | — |   | $ | 94,740 |   | $ | 94,740 |   |
| Senior subordinated term debt                    |       | —                         |       | — |   | — |   | — |   |
| Preferred equity                                 |       | —                         |       | — |   | — |   | — |   |
| Common equity/equivalents                        |       | —                         |       | — |   | — |   | — |   |
| **Total Non-Control/Non-Affiliate  investments** | ** ** | **—**                     | ** ** | **—** | ** ** | **94,740** | ** ** | **94,740** | ** ** |
|                                             | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Control investments**                          | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Senior term debt                                 |       | —                         |       | — |   | 50,209 |   | 50,209 |   |
| Senior subordinated term debt                    |       | —                         |       | — |   | 60,812 |   | 60,812 |   |
| Preferred equity                                 |       | —                         |       | — |   | 34,150 |   | 34,150 |   |
| Common equity/equivalents                        |       | —                         |       | — |   | 20,992 |   | 20,992 |   |
| **Total Control investments**                    | ** ** | **—**                     | ** ** | **—** | ** ** | **166,163** | ** ** | **166,163** | ** ** |
|                                             | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Affiliate investments**                        | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Senior term debt                                 |       | —                         |       | — |   | 34,726 |   | 34,726 |   |
| Senior subordinated term debt                    |       | —                         |       | — |   | 11,249 |   | 11,249 |   |
| Preferred equity                                 |       | —                         |       | — |   | 5,893 |   | 5,893 |   |
| Common equity/equivalents                        |       | —                         |       | — |   | 1,159 |   | 1,159 |   |
| **Total Affiliate investments**                  | ** ** | **—**                     | ** ** | **—** | ** ** | **53,027** | ** ** | **53,027** | ** ** |
| ** **                                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Total investments at fair value**              | ** ** | **$**                          | **—** | ** ** | **$** | **—** | ** ** | **$** | **313,930** | ** ** | **$** | **313,930** | ** ** |

 

*Changes in Level 3 Fair Value Measurements of Investments*

 

Thefollowing tables provide a roll-forward in the changes in fair value during thethree and nine months ended December 31, 2009 and 2008 for all investmentsfor which the Company determines fair value using unobservable (Level 3)factors. When a determination is made to classify a financial instrument withinLevel 3 of the valuation hierarchy, the determination is based upon thesignificance of the unobservable factors to the overall fair value measurement.However, Level 3 financial instruments typically include, in addition to theunobservable or Level 3 components, observable components (that is, componentsthat are actively quoted and can be validated to external sources).Accordingly, the gains and losses in the table below include changes in fairvalue due in part to observable factors that are part of the valuationmethodology.  Two tables are provided foreach period, where the first table is broken out by Control, Affiliate andNon-Control/Non-Affiliate classification and the second table is broken out bymajor security type.

 

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**Fair value measurements using unobservable data inputs(Level 3)**

 

**Fiscal Year 2010:**

 
| ** **                                        | ** ** | **Non-Control/**  | ** ** | ** **      | ** ** | ** **      | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|-------------------|------------|-----------------|------------|-----------------|------------|------------|------------|
| ** **                                        | ** ** | **Non-Affiliate** | ** ** | **Control**     | ** ** | **Affiliate**   | ** ** | ** ** | ** ** |
| ** **                                        | ** ** | **Investments**   | ** ** | **Investments** | ** ** | **Investments** | ** ** | **Total**  | ** ** |
| **Three months ended  December 31, 2009:**   |       |              |       |            |       |            | ** ** | ** ** | ** ** |
| Fair value as of September 30, 2009          |       | $                 | 25,004     |            | $          | 132,399         |       | $          | 46,900     |   | $ | 204,303 |   |
| Total realized gains (losses)                     |       | (1,318            | )          | —          |       | —          |       | (1,318     | )          |
| Total unrealized gains (losses)                   |       | 1,383             |       | (8,853          | )          | 1,257           |       | (6,213     | )          |
| New investments, repayments, and settlements, net |       | (5,665            | )          | (2,841          | )          | (880            | )          | (9,386     | )          |
| Transfers                                         |       | —            |       | 10,250          |       | (10,250         | )          | —     |       |
| **Fair value as of  December 31, 2009**      | ** ** | **$**             | **19,404** | ** **      | **$**      | **130,955**     | ** ** | **$**      | **37,027** | ** ** | **$** | **187,386** | ** ** |
| ** **                                        |       |              |       |            |       |            | ** ** | ** ** | ** ** |
| **Nine months ended  December 31, 2009:**    |       |              |       |            |       |            | ** ** | ** ** | ** ** |
| Fair value as of March 31, 2009              |       | $                 | 94,740     |            | $          | 166,163         |       | $          | 53,027     |   | $ | 313,930 |   |
| Total realized gains (losses)                     |       | (35,922           | )          | —          |       | —          |       | (35,922    | )          |
| Total unrealized gains (losses)                   |       | 36,597            |       | (35,234         | )          | (4,862          | )          | (3,499     | )          |
| New investments, repayments, and settlements, net |       | (76,011           | )          | (10,224         | )          | (888            | )          | (87,123    | )          |
| Transfers                                         |       | —            |       | 10,250          |       | (10,250         | )          | —     |       |
| **Fair value as of  December 31, 2009**      | ** ** | **$**             | **19,404** | ** **      | **$**      | **130,955**     | ** ** | **$**      | **37,027** | ** ** | **$** | **187,386** | ** ** |

 
| ** **                                        | ** ** | ** **    | ** ** | **Senior**       | ** ** | ** **    | ** ** | **Common**      | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|---------------|------------|------------------|------------|---------------|------------|-----------------|------------|------------|------------|
| ** **                                        | ** ** | **Senior**    | ** ** | **Subordinated** | ** ** | **Preferred** | ** ** | **Equity/**     | ** ** | ** ** | ** ** |
| ** **                                        | ** ** | **Term Debt** | ** ** | **Term Debt**    | ** ** | **Equity**    | ** ** | **Equivalents** | ** ** | **Total**  | ** ** |
| **Three months ended  December 31, 2009:**   |       |          |       |             |       |          |       |            |       |       |       |
| Fair value as of September 30, 2009          |       | $             | 103,092    |             | $          | 70,466        |       | $               | 25,229     |       | $          | 5,516 |   | $ | 204,303 |   |
| Total realized gains (losses)                     |       | (1,318        | )          | —           |       | —        |       | —          |       | (1,318     | )          |
| Total unrealized gains (losses)                   |       | 585           |       | 201              |       | (5,975        | )          | (1,024          | )          | (6,213     | )          |
| New investments, repayments, and settlements, net |       | (9,198        | )          | (188             | )          | —        |       | —          |       | (9,386     | )          |
| Transfers                                         |       | —        |       | —           |       | —        |       | —          |       | —     |       |
| **Fair value as of December 31,  2009**      | ** ** | **$**         | **93,161** | ** **       | **$**      | **70,479**    | ** ** | **$**           | **19,254** | ** ** | **$**      | **4,492** | ** ** | **$** | **187,386** | ** ** |
| ** **                                        |       |          |       |             |       |          |       |            |       |       |       |
| **Nine months ended  December 31, 2009:**    |       |          |       |             |       |          |       |            |       |       |       |
| Fair value as of March 31, 2009              |       | $             | 179,676    |             | $          | 72,061        |       | $               | 40,043     |       | $          | 22,150 |   | $ | 313,930 |   |
| Total realized gains (losses)                     |       | (35,922       | )          | —           |       | —        |       | —          |       | (35,922    | )          |
| Total unrealized gains (losses)                   |       | 34,593        |       | 355              |       | (20,789       | )          | (17,658         | )          | (3,499     | )          |
| New investments, repayments, and settlements, net |       | (85,186       | )          | (1,937           | )          | —        |       | —          |       | (87,123    | )          |
| Transfers                                         |       | —        |       | —           |       | —        |       | —          |       | —     |       |
| **Fair value as of  December 31, 2009**      | ** ** | **$**         | **93,161** | ** **       | **$**      | **70,479**    | ** ** | **$**           | **19,254** | ** ** | **$**      | **4,492** | ** ** | **$** | **187,386** | ** ** |

 

**Fiscal Year 2009:**

 
| ** **                                        | ** ** | **Non-Control/**  | ** **  | ** **      | ** ** | ** **      | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|-------------------|-------------|-----------------|------------|-----------------|------------|------------|------------|
| ** **                                        | ** ** | **Non-Affiliate** | ** **  | **Control**     | ** ** | **Affiliate**   | ** ** | ** ** | ** ** |
| ** **                                        | ** ** | **Investments**   | ** **  | **Investments** | ** ** | **Investments** | ** ** | **Total**  | ** ** |
| **Three months ended  December 31, 2008:**   |       |              |        |            |       |            |       |       |       |
| Fair value as of September 30, 2008          |       | $                 | 115,133     |            | $          | 157,246         |       | $          | 53,877     |   | $ | 326,256 |   |
| Total realized gains (losses)                     |       | —            |        | —          |       | —          |       | —     |       |
| Total unrealized gains (losses)                   |       | (6,988            | )           | 1,755           |       | (2,294          | )          | (7,527     | )          |
| New investments, repayments, and settlements, net |       | (937              | )           | 8,174           |       | (671            | )          | 6,566      |       |
| Transfers                                         |       | —            |        | —          |       | —          |       | —     |       |
| **Fair value as of  December 31, 2008**      | ** ** | **$**             | **107,208** | ** **      | **$**      | **167,175**     | ** ** | **$**      | **50,912** | ** ** | **$** | **325,295** | ** ** |
| ** **                                        |       |              |        |            |       |            |       |       |       |
| **Nine months ended  December 31, 2008:**    |       |              |        |            |       |            |       |       |       |
| Fair value as of March 31, 2008              |       | $                 | 142,739     |            | $          | 145,407         |       | $          | 47,458     |   | $ | 335,604 |   |
| Total realized gains (losses)                     |       | (4,215            | )           | —          |       | —          |       | (4,215     | )          |
| Total unrealized gains (losses)                   |       | (7,714            | )           | 7,728           |       | (13,687         | )          | (13,673    | )          |
| New investments, repayments, and settlements, net |       | (23,602           | )           | 24,218          |       | 6,963           |       | 7,579      |       |
| Transfers                                         |       | —            |        | (10,178         | )          | 10,178          |       | —     |       |
| **Fair value as of  December 31, 2008**      | ** ** | **$**             | **107,208** | ** **      | **$**      | **167,175**     | ** ** | **$**      | **50,912** | ** ** | **$** | **325,295** | ** ** |

 

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| ** **                                         | ** ** | ** **    | ** **  | **Senior**       | ** ** | ** **    | ** ** | **Common**      | ** ** | ** ** | ** ** |
|----------------------------------------------------|------------|---------------|-------------|------------------|------------|---------------|------------|-----------------|------------|------------|------------|
| ** **                                         | ** ** | **Senior**    | ** **  | **Subordinated** | ** ** | **Preferred** | ** ** | **Equity/**     | ** ** | ** ** | ** ** |
| ** **                                         | ** ** | **Term Debt** | ** **  | **Term Debt**    | ** ** | **Equity**    | ** ** | **Equivalents** | ** ** | **Total**  | ** ** |
| **Three months ended  December 31, 2008:**    |       |          |        |             |       |          |       |            |       |       |       |
| Fair value as of September 30, 2008           |       | $             | 201,463     |             | $          | 66,889        |       | $               | 36,046     |       | $          | 21,858 |   | $ | 326,256 |   |
| Total realized gains (losses)                      |       | —        |        | —           |       | —        |       | —          |       | —     |       |
| Total unrealized gains (losses)                    |       | (9,322        | )           | 1,860            |       | (502          | )          | 437             |       | (7,527     | )          |
| New investments, repayments, and settlements, net  |       | 3,341         |        | (500             | )          | 3,725         |       | —          |       | 6,566      |       |
| Transfers                                          |       | —        |        | —           |       | (182          | )          | 182             |       | —     |       |
| **Fair value as of  December 31, 2008**       | ** ** | **$**         | **195,482** | ** **       | **$**      | **68,249**    | ** ** | **$**           | **39,087** | ** ** | **$**      | **22,477** | ** ** | **$** | **325,295** | ** ** |
| ** **                                         |       |          |        |             |       |          |       |            |       |       |       |
| **Nine months ended  December 31, 2008:**     |       |          |        |             |       |          |       |            |       |       |       |
| Fair value as of  March 31, 2008              |       | $             | 237,878     |             | $          | 46,733        |       | $               | 29,934     |       | $          | 21,059 |   | $ | 335,604 |   |
| Total realized gains (losses)                      |       | (4,215        | )           | —           |       | —        |       | —          |       | (4,215     | )          |
| Total unrealized gains (losses)                    |       | (11,699       | )           | (3,775           | )          | 616           |       | 1,185           |       | (13,673    | )          |
| New investments,  repayments, and settlements, net |       | (26,482       | )           | 25,291           |       | 8,537         |       | 233             |       | 7,579      |       |
| Transfers                                          |       | —        |        | —           |       | —        |       | —          |       | —     |       |
| **Fair value as of  December 31, 2008**       | ** ** | **$**         | **195,482** | ** **       | **$**      | **68,249**    | ** ** | **$**           | **39,087** | ** ** | **$**      | **22,477** | ** ** | **$** | **325,295** | ** ** |

 

*Non-Control/Non-Affiliate Investments*

 

AtDecember 31, 2009 and March 31, 2009, the Company held investments inNon-Control/Non-Affiliates of approximately $19.4 million and $94.7 million,respectively, at fair value. These investments were comprised primarily ofsyndicated loan participations of senior notes of private companies andnon-syndicated loan investments where the Company does not have a significantownership interest in the portfolio company. Included inNon-Control/Non-Affiliate investments, at both December 31, 2009 and March 31,2009, were common stock warrants of one Non-Control/Non-Affiliate company,which carried a nominal fair value.  At December 31,2009 and March 31, 2009, the Company’s investments, at fair value, inNon-Control/Non-Affiliates represented approximately 11% and 44%, respectively,of the Company’s net assets.

 

**Investment Activity**

 

DuringApril and May 2009, the Company sold 29 of its 32 senior syndicatedloans held at March 31, 2009 (collectively, the “Syndicated Loan Sales”)for an aggregate of approximately $69.2 million in cash proceeds and recorded arealized loss of approximately $34.6 million in connection with these sales.These loans were sold to pay down all unpaid principal and interest owed toDeutsche Bank AG (“Deutsche Bank”) under the Company’s prior credit agreementbecause Deutsche Bank did not renew the Company’s line of credit.

 

OnSeptember 29, 2009, the Company agreed to an early termination of itsrevolving line of credit to B-Dry, LLC, which had an original maturity date of October 16,2009.  The revolving line of credit wasfully repaid at such time.

 

DuringOctober 2009, the Company completed the sales of certain senior syndicatedloans (HMTBP Acquisition II Corp. and a portion of Interstate FiberNet, Inc.). These loans, in aggregate, had a cost value of approximately $6.8 million andan aggregate fair market value of approximately $5.5 million.  Upon thesettlement of these loans, the Company received approximately $5.5 million innet cash proceeds and recorded a realized loss of approximately $1.3 million.

 

*Control and Affiliate Investments*

 

AtDecember 31, 2009 and March 31, 2009, the Company had investments ofapproximately $144.2 million and $157.0 million, respectively, at fair value,in revolving credit facilities, senior debt and subordinated debt of 12portfolio companies. In addition, at December 31, 2009 and March 31,2009, the Company had invested approximately $23.8 million and $62.2 million,respectively, at fair value, in preferred and common equity of thosecompanies.  At December 31, 2009 andMarch 31, 2009, the Company’s investments in Control investments, at fairvalue, represented approximately 75% and 77%, respectively, of the Company’snet assets. Also, at December 31, 2009 and March 31, 2009, theCompany’s investments, at fair value, in Affiliate investments representedapproximately 21% and 25%, respectively, of the Company’s net assets.

 

**InvestmentActivity**

 

OnApril 9, 2009, A. Stucki Holding Corp. refinanced a portion of its seniorterm debt by making principal repayments of approximately $2.0 million, whichrepresented the next three quarterly payments due under normal amortization onboth their senior term A ($1.6 million) and senior term B ($412) loans.

 

OnApril 9, 2009, ASH Holdings Corp. made a repayment of approximately $1.1million on its revolving line of credit, which reduced the outstanding balanceto $500.

 

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OnApril 10, 2009, the Company entered into an agreement to reduce the availablecredit limit on Mathey Investment, Inc.’s revolving line of credit from$2.0 million to $1.0 million.  This was anon-cash transaction.

 

OnApril 10, 2009, the Company made an investment disbursement to Cavert IIHolding Corp. (“Cavert”) for approximately $850 on its revolving line ofcredit, and the proceeds were used to make the next four quarterly payments dueunder normal amortization for both its senior term A and senior term B loans ina non-cash transaction.  Subsequently, onApril 17, 2009, Cavert repaid the outstanding $850 in principal plusaccrued interest on its revolving line of credit.  The revolving line of credit was then sold toa third party for a nominal fee.

 

OnApril 13, 2009, the Company entered into an agreement to reduce the availablecredit limit on Chase II Holdings Corp.’s revolving line of credit from $4.5million to $3.5 million.  This was anon-cash transaction.

 

OnOctober 13, 2009, the Company refinanced its revolving line of credit withChase II Holdings Corp. to a third party, and the outstanding balance of $3.5million, plus accrued interest, was repaid in full.  The proceeds were used to make a repayment onthe outstanding amount under the Company’s credit facility.

 

DuringOctober 2009, one of the Company’s portfolio companies entered into anagreement with a third party to act as an advisor in looking at strategicinvestment alternatives.

 

DuringOctober 2009, A. Stucki Holding Corp. declared and, on November 3,2009, paid accrued cash dividends on its preferred stock, of which the Companyreceived approximately $953.

 

OnNovember 2, 2009, the Company entered into an agreement to reduce theavailable credit limit on Danco Acquisition Corp.’s revolving line of creditfrom $3.0 million to $1.5 million.  Thiswas a non-cash transaction.

 

On December 18,2009, the Company assumed 100% ownership of Mathey Investments, Inc. (“Mathey),previously an Affiliate investment, exercising its right after certain defaultson the part of Mathey and subsequent expiration of a forbearance period grantedby the Company.  The Company disbursedapproximately $282 to buy out the previous stockholders of Mathey and to payfor related legal expenses incurred in the process.  The Company’s investment in Mathey has beenreclassified from an Affiliate to a Control investment in the condensedconsolidated financial statements as of December 31, 2009**.**

 

*Investment Concentrations*

 

Approximately 50% of the aggregate fair value of the Company’sinvestment portfolio at December 31, 2009 was comprised of senior debt,approximately 37% was senior subordinated debt, and approximately 13% waspreferred and common equity securities. At December 31, 2009, the Companyhad investments in 16 portfolio companies with an aggregate fair value of$187.4 million, of which A. Stucki Holding Corp., Chase II Holdings Corp. andCavert II Holding Corp. collectively comprised approximately $80.6 million, or43% of the Company’s total investment portfolio, at fair value.  The following table outlines the Company’sinvestments by type at December 31, 2009 and March 31, 2009:

 
| ** **                    | ** ** | **December 31,  2009** | ** **  | **March 31,  2009** | ** ** |
|-------------------------------|------------|-----------------------------|-------------|--------------------------|------------|
| ** **                    | ** ** | **Cost**                    | ** **  | **Fair  Value**          | ** ** | **Cost** | ** ** | **Fair  Value** | ** ** |
| Senior Term Debt              | ** ** | **$**                       | **103,154** | ** **               | **$**      | **93,161** |   | $ | 224,261 |   | $ | 179,676 |   |
| Senior Subordinated Term Debt | ** ** | **77,424**                  | ** **  | **70,479**               |       | 79,362 |   | 72,061 |   |
| Preferred Equity              | ** ** | **40,728**                  | ** **  | **19,254**               |       | 40,728 |   | 40,043 |   |
| Common Equity/Equivalents     | ** ** | **4,594**                   | ** **  | **4,492**                |       | 4,594 |   | 22,150 |   |
| **Total Investments**         | ** ** | **$**                       | **225,900** | ** **               | **$**      | **187,386** |   | $ | 348,945 |   | $ | 313,930 |   |

 

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Investmentsat fair value consisted of the following industry classifications at December 31,2009 and March 31, 2009:

 
| ** **                                  | ** ** | **December 31,  2009** | ** **  | **March 31,  2009** | ** ** |
|---------------------------------------------|------------|-----------------------------|-------------|--------------------------|------------|
| ** **                                  | ** ** | ** **                  | ** **  | **Percentage  of**       | ** ** | ** ** | ** ** | **Percentage  of** | ** ** |
| ** **                                  | ** ** | **Fair  Value**             | ** **  | **Total  Investments**   | ** ** | **Net  Assets** | ** ** | **Fair  Value** | ** ** | **Total  Investments** | ** ** | **Net  Assets** | ** ** |
| Aerospace  and Defense                      | ** ** | **$**                       | **16,991**  | ** **               | **9.1**    | **%** | **9.7** | **%** | $ | 22,436 |   | 7.2 | % | 10.4 | % |
| Automobile                                  | ** ** | **8,570**                   | ** **  | **4.6**                  | ** ** | **4.9** |   | 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                  | ** ** | **10,351**                  | ** **  | **5.5**                  | ** ** | **5.9** |   | 10,709 |   | 3.4 |   | 5.0 |   |
| Cargo  Transport                            | ** ** | **9,316**                   | ** **  | **5.0**                  | ** ** | **5.3** |   | 13,324 |   | 4.3 |   | 6.2 |   |
| Chemicals,  Plastics and Rubber             | ** ** | **14,479**                  | ** **  | **7.7**                  | ** ** | **8.3** |   | 21,420 |   | 6.8 |   | 10.0 |   |
| Containers,  Packaging and Glass            | ** ** | **18,035**                  | ** **  | **9.6**                  | ** ** | **10.3** |   | 21,446 |   | 6.8 |   | 10.0 |   |
| Diversified/Conglomerate  Manufacturing     | ** ** | **42,885**                  | ** **  | **22.9**                 | ** ** | **24.5** |   | 56,944 |   | 18.1 |   | 26.5 |   |
| Diversified/Conglomerate  Service           | ** ** | **—**                  | ** **  | **—**               | ** ** | **—** |   | 23,585 |   | 7.5 |   | 11.0 |   |
| Electronics                                 | ** ** | **—**                  | ** **  | **—**               | ** ** | **—** |   | 6,594 |   | 2.1 |   | 3.1 |   |
| Healthcare,  Education and Childcare        | ** ** | **8,768**                   | ** **  | **4.7**                  | ** ** | **5.0** |   | 33,605 |   | 10.7 |   | 15.6 |   |
| Machinery                                   | ** ** | **43,963**                  | ** **  | **23.5**                 | ** ** | **25.1** |   | 63,907 |   | 20.4 |   | 29.8 |   |
| Oil  and Gas                                | ** ** | **4,975**                   | ** **  | **2.6**                  | ** ** | **2.8** |   | 6,171 |   | 2.0 |   | 2.9 |   |
| Personal,  Food, and Miscellaneous Services | ** ** | **—**                  | ** **  | **—**               | ** ** | **—** |   | 3,552 |   | 1.1 |   | 1.7 |   |
| Printing  and Publishing                    | ** ** | **2,895**                   | ** **  | **1.5**                  | ** ** | **1.7** |   | 3,158 |   | 1.0 |   | 1.5 |   |
| Telecommunications                          | ** ** | **6,158**                   | ** **  | **3.3**                  | ** ** | **3.5** |   | 9,139 |   | 2.9 |   | 4.3 |   |
| **Total Investments**                       | ** ** | **$**                       | **187,386** | ** **               | **100.0**  | **%** | ** ** |   | $ | 313,930 |   | 100.0 | % | ** ** |   |

 

Theinvestments at fair value were included in the following geographic regions ofthe United States at December 31, 2009 and March 31, 2009:

 
| ** **            | ** ** | **December 31,  2009** | ** **  | **March 31,  2009**   | ** ** |
|-----------------------|------------|-----------------------------|-------------|----------------------------|------------|
| ** **            | ** ** | ** **                  | ** **  | **Percentage  of**         | ** ** | ** ** | ** ** | **Percentage  of** | ** ** |
| ** **            | ** ** | **Fair  Value**             | ** **  | **Total Investments** | ** ** | **Net  Assets** | ** ** | **Fair  Value** | ** ** | **Total Investments** | ** ** | **Net  Assets** | ** ** |
| Mid-Atlantic          | ** ** | **$**                       | **72,174**  | ** **                 | **38.5**   | **%** | **41.2** | **%** | $ | 119,622 |   | 38.1 | % | 55.7 | % |
| Midwest               | ** ** | **68,481**                  | ** **  | **36.6**                   | ** ** | **39.1** |   | 105,945 |   | 33.7 |   | 49.3 |   |
| Northeast             | ** ** | **7,924**                   | ** **  | **4.2**                    | ** ** | **4.5** |   | 17,525 |   | 5.6 |   | 8.2 |   |
| Southeast             | ** ** | **23,120**                  | ** **  | **12.3**                   | ** ** | **13.2** |   | 40,512 |   | 12.9 |   | 18.9 |   |
| West                  | ** ** | **15,687**                  | ** **  | **8.4**                    | ** ** | **9.0** |   | 30,326 |   | 9.7 |   | 14.1 |   |
| **Total Investments** | ** ** | **$**                       | **187,386** | ** **                 | **100.0**  | **%** | ** ** |   | $ | 313,930 |   | 100.0 | % | ** ** |   |

 

Thegeographic region indicates the location of the headquarters for the Company’sportfolio companies. A portfolio company may have a number of other businesslocations in other geographic regions.

 

*Investment Principal Repayments*

 

Thefollowing table summarizes the contractual principal repayment and maturity ofthe Company’s investment portfolio by fiscal year, assuming no voluntaryprepayments:

 
| ** **                                            | ** ** | ** **                                            | ** ** | **Amount** | ** **  |
|-------------------------------------------------------|------------|-------------------------------------------------------|------------|------------|-------------|
| For the remaining three months ending  March 31: |       | 2010                                                  |       | $          | 2,506       |   |
| For the fiscal year ending March 31:             |       | 2011                                                  |       | 23,705     |        |
|                                                  |       | 2012                                                  |       | 55,148     |        |
|                                                  |       | 2013                                                  |       | 13,260     |        |
|                                                  |       | 2014                                                  |       | 61,282     |        |
|                                                  |       | 2015                                                  |       | 21,642     |        |
|                                                  |       | Thereafter                                            |       | 3,043      |        |
|                                                  | ** ** | **Total contractual repayments**                      | ** ** | **$**      | **180,586** | ** ** |
|                                                  |       | Investments  in equity securities                     |       | 45,322     |        |
|                                                  |       | Unamortized  premiums on debt securities              |       | (8         | )           |
|                                                  | ** ** | **Total investments held at December 31, 2009:** | ** ** | **$**      | **225,900** | ** ** |

 

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**NOTE 4. RELATED PARTY TRANSACTIONS**

 

*Investment Advisory and Management Agreement*

 

TheCompany is externally managed by the Adviser, which is controlled by itschairman and chief executive officer, under a contractual investment advisoryagreement (the “Advisory Agreement”).  Inaccordance with the Advisory Agreement, the Company pays the Adviser an annualbase management fee of 2% of its average gross assets, which is defined astotal assets less uninvested cash and cash equivalents resulting fromborrowings, calculated as of the end of the two most recently completed fiscalquarters.  The Advisory Agreement alsoincludes a two-part 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.

 

Thefollowing tables summarize the management fees, incentive fees and associatedcredits reflected in the accompanying condensed consolidated statements ofoperations:

 
| ** **                                                                                          | ** ** | **Three  months ended December 31,** | ** ** | **Nine  months ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                          | ** ** | **2009**                                  | ** ** | **2008**                                 | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Base management fee**                                                                             | ** ** | **$**                                     | **113**    |                                     | $          | 442 | ** ** | **$** | **588** |   | $ | 1,303 |   |
| *Credits to base management fee  from Adviser:*                                                     | ** ** | ** **                                |       |                                     | ** ** | ** ** |   |   |   |
| Fee reduction for the voluntary, irrevocable  waiver of 2.0% fee on senior syndicated loans to 0.5% | ** ** | **(34**                                   | **)**      | (413                                     | )          | **(265** | **)** | (1,220 | ) |
| Credit for fees received by Adviser from portfolio  companies                                       | ** ** | **(93**                                   | **)**      | (281                                     | )          | **(326** | **)** | (744 | ) |
| **Net base management fee**                                                                         | ** ** | **$**                                     | **(14**    | **)**                                    | $          | (252 | ) | **$** | **(3** | **)** | $ | (661 | ) |
| ** **                                                                                          | ** ** | ** **                                |       |                                     | ** ** | ** ** |   |   |   |
| **Incentive fee**                                                                                   | ** ** | **$**                                     | **588**    |                                     | $          | — | ** ** | **$** | **588** |   | $ | — |   |
| Credit from voluntary,  irrevocable waiver issued by Adviser’s board of directors              | ** ** | **—**                                |       | —                                   | ** ** | **—** |   | — |   |
| **Net incentive fee**                                                                               | ** ** | **$**                                     | **588**    |                                     | $          | — | ** ** | **$** | **588** |   | $ | — |   |
| ** **                                                                                          | ** ** | ** **                                |       |                                     | ** ** | ** ** |   |   |   |
| **Total credits to fees:**                                                                          | ** ** | ** **                                |       |                                     | ** ** | ** ** |   |   |   |
| Fee reduction for the voluntary, irrevocable  waiver of 2.0% fee on senior syndicated loans to 0.5% | ** ** | **$**                                     | **(34**    | **)**                                    | $          | (413 | ) | **$** | **(265** | **)** | $ | (1,220 | ) |
| Credit for fees received by Adviser from portfolio  companies                                       | ** ** | **(93**                                   | **)**      | (281                                     | )          | **(326** | **)** | (744 | ) |
| Incentive fee credit                                                                                | ** ** | **—**                                |       | —                                   | ** ** | **—** |   | — |   |
| **Credit to base management and  incentive fees from Adviser**                                      | ** ** | **$**                                     | **(127**   | **)**                                    | $          | (694 | ) | **$** | **(591** | **)** | $ | (1,964 | ) |

 

Overall, the base management fee due to theAdviser 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:

 
| ** **                                | ** ** | **December 31, 2009** | ** ** | **March 31, 2009** | ** ** |
|-------------------------------------------|------------|----------------------------|------------|-------------------------|------------|
| Unpaid base management fee due to Adviser | ** ** | **$**                      | **(14**    | **)**                   | $          | (114 | ) |
| Unpaid loan servicing fee due to Adviser  | ** ** | **219**                    |       | 301                     |       |
| Unpaid incentive fee due to Adviser       | ** ** | **588**                    |       | —                  |       |
| **Total Due to Adviser**                  | ** ** | **$**                      | **793**    |                    | $          | 187 |   |

 

*Loan Servicing and Portfolio Company Fees*

 

TheAdviser also services the loans held by Business Investment, in return forwhich it receives a 2.0% annual fee based on the monthly aggregate outstandingbalance of loans pledged under the Company’s line of credit. Since the Companyowns these loans, all loan servicing fees paid to the Adviser are treated asreductions directly against the 2.0% base management fee under the AdvisoryAgreement.  For the three and nine monthsended December 31, 2009, the Company recorded loan servicing fees due tothe Adviser of $886 and $2,892, respectively, as compared to $1,258 and $3,769for the three and nine months ended December 31, 2008, respectively, allof which were deducted against the 2.0% base management fee in order to derivethe Base management fee line item in the accompanying condensed consolidatedstatements of operations.

 

Underthe Advisory Agreement, the Adviser has also provided and continues to providemanagerial assistance and other services to the Company’s portfolio companiesand may receive fees for services other than managerial assistance.

 

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*Administration Agreement*

 

The Company has entered into an administration agreement (the “AdministrationAgreement”) with Gladstone Administration, LLC (the “Administrator”).  Under the Administration Agreement, theCompany pays separately for administrative services.  The Company recorded administration fees of$156 and $527 for the three and nine months ended December 31, 2009,respectively, as compared to administration fees of $195 and $642 for the threeand nine months ended December 31, 2008, respectively.  As of December 31, 2009 and March 31,2009, $156 and $179, respectively, was unpaid and included in Fee due toAdministrator in the accompanying condensed consolidated statements of assetsand liabilities.  On July 8, 2009,the Company’s Board of Directors approved the renewal of its AdministrationAgreement with the Administrator through August 31, 2010.

 

**NOTE 5. BORROWINGS**

 

*Line of Credit*

 

OnApril 14, 2009, the Company, through its wholly-owned subsidiary, BusinessInvestment, 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 Inc. also joined the Credit Facility as acommitted lender.  In connection withentering into the Credit Facility, the Company borrowed $43.8 million under theCredit Facility to make a final payment in satisfaction of all unpaid principaland interest owed 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 December 31,2009, the Company has approximately $26.8 million of principal outstanding withapproximately $22.6 million of availability under the line of credit.

 

Interestis payable 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.

 

TheCredit Facility contains covenants that require Business Investment to maintainits status as a separate entity; prohibit certain significant corporatetransactions (such as mergers, consolidations, liquidations or dissolutions);and restrict material changes to the Company’s credit and collection policieswithout lenders consent. The facility also limits payments on distributions tothe aggregate net investment income for the prior twelve months preceding April 2010.As of December 31, 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 aminimum net worth, and a minimum number of obligors required in the borrowingbase of the credit agreement.

 

Inconjunction with entering into the Credit Facility, the Company amended aperformance guaranty which remains substantially similar to the form under theprevious credit facility. The performance guaranty requires the Company tomaintain a minimum net worth of $169 million plus 50% of all equity andsubordinated debt raised after April 14, 2009, to maintain “asset coverage”with respect to “senior securities representing indebtedness” of at least 200%,in accordance with Section 18 of the 1940 Act, and to maintain its statusas a BDC under the 1940 Act and as a RIC under the Code. As of December 31,2009, the Company was in compliance with the covenants under the performanceguaranty.

 

*Short-Term Loan*

 

OnJune 30, 2009, the Company purchased $83.0 million of short-term UnitedStates Treasury securities 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.

 

OnSeptember 29, 2009, the Company purchased $85.0 million of short-termUnited States Treasury securities through 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 0.66%.  On October 2,2009, when the securities matured, the Company repaid the $75.0 million loanfrom Jefferies in full and repaid the $10.0 million drawn on the CreditFacility.

 

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On December 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 0.59%.  On January 7, 2010, when the securitiesmatured, the Company repaid the $75.0 million loan from Jefferies in full and,on January 8, 2010, repaid the $10.0 million drawn on the Credit Facility.

 

*FairValue*

 

TheCompany elected to apply ASC 825, “FinancialInstruments,” specifically for the Credit Facility and short-term loan,which was consistent with its application of ASC 820 to its investments.  The Company estimated the fair value of theCredit Facility using estimates of value provided by an independent third partyand its own assumptions in the absence of observable market data, includingestimated remaining life, credit party risk, current market yield and interestrate spreads of similar securities as of the measurement date.  Due to the nine day duration of theshort-term loan, cost approximated fair value. The following table presents the Credit Facility and short-term loancarried at fair value as of December 31, 2009, by caption on theaccompanying consolidated statements of assets and liabilities for each of thethree levels of hierarchy established by ASC 820-10:

** **
| ** **      | ** ** | **As of December 31, 2009** | ** ** |
|-----------------|------------|----------------------------------|------------|
| ** **      | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | **Total Fair Value** | ** ** |
| ** **      | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | **Reported in** | ** ** |
| ** **      | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | **Consolidated Statement of** | ** ** |
| ** **      | ** ** | **Level 1**                      | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Assets and Liabilities** | ** ** |
| Credit Facility |       | $                                | —     |   | $ | — |   | $ | 26,883 |   | $ | 26,883 |   |
| Short-Term Loan |       | —                           |       | — |   | 75,000 |   | 75,000 |   |
| Total           |       | $                                | —     |   | $ | — |   | $ | 101,883 |   | $ | 101,883 |   |

 
| ** **                                             | ** ** | **As of December 31, 2009** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                             | ** ** | ** **                       | ** ** | ** ** | ** ** | **Total Fair Value** | ** ** |
| ** **                                             | ** ** | ** **                       | ** ** | ** ** | ** ** | **Reported in Condensed** | ** ** |
| ** **                                             | ** ** | **Credit**                       | ** ** | **Short-Term** | ** ** | **Consolidated Statement of** | ** ** |
| ** **                                             | ** ** | **Facility**                     | ** ** | **Loan** | ** ** | **Assets and Liabilities** | ** ** |
| **Three months ended  December 31, 2009:**        | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fair value at  September 30, 2009                 |       | $                                | 36,278     |   | $ | 75,000 |   | $ | 111,278 |   |
| Net decrease in principal outstanding                  |       | (9,350                           | )          | — |   | (9,350 | ) |
| Net unrealized depreciation of Credit Facility **(a)** |       | (45                              | )          | — |   | (45 | ) |
| **Fair value at December 31,  2009**              | ** ** | **$**                            | **26,883** | ** ** | **$** | **75,000** | ** ** | **$** | **101,883** | ** ** |
|                                                   |       |                             |       |   |   |   |   |
| **Nine months ended  December 31, 2009:**         |       |                             |       |   |   |   |   |
| Fair value at  March 31, 2009 **(b)**             |       | $                                | 110,265    |   | $ | — |   | $ | 110,265 |   |
| Net (decrease) increase in principal outstanding       |       | (83,515                          | )          | 75,000 |   | (8,515 | ) |
| Net unrealized appreciation of Credit Facility **(a)** |       | 133                              |       | — |   | 133 |   |
| **Fair value at December 31,  2009**              | ** ** | **$**                            | **26,883** | ** ** | **$** | **75,000** | ** ** | **$** | **101,883** | ** ** |

 

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**(a)****  **Unrealizeddepreciation (appreciation) of $45 and ($133) is reported on the accompanyingcondensed consolidated statements of operations for the three and nine monthsended December 31, 2009, respectively.

**(b)****  **ASC 825 was notadopted until the second quarter of fiscal year 2010; therefore, the CreditFacility is shown at its principal balance outstanding at March 31, 2009in the table above.

 

The fair value of thecollateral under the Credit Facility was approximately $182.8 million and$309.1 million at December 31, 2009 and March 31, 2009, respectively.The fair value of the collateral under the short-term loan was approximately$85.0 million as of December 31, 2009.

 

**NOTE 6. INTEREST RATE CAP AGREEMENT**

 

InMay 2009, the Company cancelled its interest rate cap agreement withDeutsche Bank and entered into an interest rate cap agreement with BB&Tthat effectively limits the interest rate on a portion of the borrowings underthe line of credit pursuant to the terms of the Credit Facility. The interestrate cap has a notional amount of $45 million at a cost of approximately $39.At December 31, 2009, the interest rate cap agreement had a fair marketvalue of approximately $5. The Company records changes in the fair market valueof the interest rate cap agreement quarterly based on the current marketvaluation at quarter end as unrealized depreciation or appreciation onderivative on the Company’s condensed consolidated statements of operations.The interest rate cap agreement expires in April 2010. The agreementprovides that the Company’s floating interest rate or cost of funds on aportion of the portfolio’s borrowings will be capped at 9% when the LIBOR rateis in excess of 9%.

 

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Theuse of a cap involves risks that are different from those associated withordinary portfolio securities transactions. Cap agreements may be considered tobe illiquid. Although the Company will not enter into any such agreementsunless it believes that the other party to the transaction is creditworthy, theCompany does bear the risk of loss of the amount expected to be received undersuch agreements in the event of default or bankruptcy of the agreementcounterparty.

 

**NOTE 7. COMMON STOCK**

 

Asof both December 31, 2009 and March 31, 2009, 100,000,000 shares ofcommon stock, $0.001 par value per share, were authorized and 22,080,133 sharesof common stock were outstanding.

 

*Registration Statement*

 

OnJuly 21, 2009, the Company filed a registration statement on Form N-2(Registration No. 333-160720) that was amended on October 2, 2009.The SEC declared the registration statement effective on October 8, 2009and such registration statement will permit the Company to issue, through oneor more transactions, up to an aggregate of $300.0 million in securities,consisting of common stock, senior common stock, preferred stock, subscriptionrights, debt securities and warrants to purchase common stock, or a combinationof these securities**.**

 

**NOTE 8. NET DECREASE IN NET ASSETS PER SHARE RESULTING FROMOPERATIONS**

 

Thefollowing table sets forth the computation of basic and diluted net decrease innet assets per share resulting from operations:

** **
| ** **                                                                                      | ** ** | **Three months ended December 31,** | ** ** | **Nine months ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                      | ** ** | **2009**                                 | ** ** | **2008**                                | ** ** | **2009** | ** ** | **2008** | ** ** |
| Numerator for basic and diluted net decrease in  net assets resulting from operations per share | ** ** | **$**                                    | **(4,420** | **)**                                   | $          | (3,940 | ) | **$** | **(31,699** | **)** | $ | (7,467 | ) |
| Denominator for basic and diluted shares                                                        | ** ** | **22,080**                               |       | 22,080                                  | ** ** | **22,080** |   | 21,368 |   |
| **Basic and diluted net decrease  in net assets resulting from operations per share**           | ** ** | **$**                                    | **(0.20**  | **)**                                   | $          | (0.18 | ) | **$** | **(1.44** | **)** | $ | (0.35 | ) |

 

**NOTE 9. DISTRIBUTIONS**

 

Thefollowing table lists the per common share distributions paid for the ninemonths ended December 31, 2009 and 2008:

 

**FiscalYear 2010:**

 
| ** **           | ** ** | ** **               | ** ** | ** **               | ** ** | **Distribution** | ** ** |
|----------------------|------------|--------------------------|------------|--------------------------|------------|------------------|------------|
| **Declaration Date** | ** ** | **Record Date**          | ** ** | **Payment Date**         | ** ** | **Per Share**    | ** ** |
| April 16, 2009  |       | April 27,  2009     |       | May 8,  2009        | ** ** | **$**            | **0.04**   | ** ** |
| April 16, 2009  |       | May 20,  2009       |       | May 29,  2009       | ** ** | **0.04**         | ** ** |
| April 16, 2009  |       | June 22,  2009      |       | June 30,  2009      | ** ** | **0.04**         | ** ** |
| July 8, 2009    |       | July 23,  2009      |       | July 31,  2009      | ** ** | **0.04**         | ** ** |
| July 8, 2009    |       | August 21,  2009    |       | August 31,  2009    | ** ** | **0.04**         | ** ** |
| July 8, 2009    |       | September 22,  2009 |       | September 30,  2009 | ** ** | **0.04**         | ** ** |
| October 6, 2009 |       | October 22,  2009   |       | October 30,  2009   | ** ** | **0.04**         | ** ** |
| October 6, 2009 |       | November 19,  2009  |       | November 30,  2009  | ** ** | **0.04**         | ** ** |
| October 6, 2009 |       | December 22,  2009  |       | December 31,  2009  | ** ** | **0.04**         | ** ** |
|                 |       |                     | ** ** | **Total**                | ** ** | **$**            | **0.36**   | ** ** |

 

**FiscalYear 2009:**

 
| ** **            | ** ** | ** **               | ** ** | ** **               | ** ** | **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             |       |
| October 7, 2008  |       | October 23,  2008   |       | October 31,  2008   |       | 0.08             |       |
| October 7, 2008  |       | November 19,  2008  |       | November 28,  2008  |       | 0.08             |       |
| October 7, 2008  |       | December 22,  2008  |       | December 31,  2008  |       | 0.08             |       |
|                  |       |                     |       | Total                    |       | $                | 0.72       |   |

 

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Aggregatedistributions declared and paid for the three months ended December 31,2009 and 2008 were approximately $2.6 million and $5.3 million,respectively.  Aggregate distributionsdeclared for the nine months ended December 31, 2009 and 2008 wereapproximately $7.9 million and $15.5 million, respectively.  All distributions were declared based onestimates of net investment income for the respective fiscal year, and some ofthe distributions included a return of capital.

 

Thetiming and characterization of certain income and capital gains distributionsare determined annually in accordance with federal tax regulations which maydiffer from GAAP. These differences primarily relate to items recognized asincome for financial statement purposes and realized gains for tax purposes. Asa result, net investment income and net realized gain (loss) on investmenttransactions for a reporting period may differ significantly from distributionsduring such period. Accordingly, the Company may periodically makereclassifications among certain of its capital accounts without impacting thenet asset value of the Company.

 

**NOTE 10.  COMMITMENTSAND CONTINGENCIES**

 

AtDecember 31, 2009, the Company was not party to any signed term sheets forpotential investments.

 

InOctober 2008, the Company executed a guaranty of a vehicle financefacility agreement between Ford Motor Credit Company (“FMC”) and Auto SafetyHouse, LLC (“ASH”), one of its 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 separate parts supply contractwith Ford or upon our replacement as guarantor. The Finance Facility is secured by all of the assets of BusinessInvestment.  As of December 31,2009, the Company has not been required to make any payments on the guaranty ofthe Finance Facility, and the Company considers the credit risk to be remote.

 

**NOTE 11. SUBSEQUENT EVENTS**

 

The Company evaluated all events that have occurred subsequent to December 31,2009 through the date of the filing of this Form 10-Q on February 8,2010.

 

*Short-Term Loan Repayment*

 

OnJanuary 7, 2010, when the securities purchased on December 30, 2009through Jefferies matured, the Company repaid the $75.0 million loan fromJefferies in full, and, on January 8, 2010, repaid the $10.0 million drawnon the Credit Facility for the transaction.  Please refer to Note 5, *Borrowings* formore information.

 

*Distributions*

 

OnJanuary 12, 2010, the Company’s Board of Directors declared the followingmonthly cash distributions:

 
| ** **            | ** ** | ** **              | ** ** | ** **              | ** ** | **Distribution** | ** ** |
|-----------------------|------------|-------------------------|------------|-------------------------|------------|------------------|------------|
| **Declaration  Date** | ** ** | **Record  Date**        | ** ** | **Payment  Date**       | ** ** | **Per  Share**   | ** ** |
| January 12, 2010 |       | January 21,  2010  |       | January 29,  2010  |       | $                | 0.04       |   |
| January 12, 2010 |       | February 18,  2010 |       | February 26,  2010 |       | 0.04             |       |
| January 12, 2010 |       | March 23,  2010    |       | March 31,  2010    |       | 0.04             |       |
|                       |            |                         |            |                         |            |                  |            |  |

 

*Portfolio Company Investment Activity*

 

On January 22, 2010, the Company entered intoan agreement with Noble Logistics, Inc. to extend the maturity of theirrevolving credit facility to May 2010. This was a non-cash transaction.

 

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**ITEM 2. MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(dollar amounts in thousands, except per share data unless otherwiseindicated).**

 

**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,” “estimate” or the negative of suchterms or comparable terminology. These forward-looking statements involve knownand unknown 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**.

 

**The following analysis of our financial condition and resultsof operations should be read in conjunction with our condensed consolidatedfinancial statements and the notes thereto contained elsewhere in this reportand in our annual report on Form 10-K for the fiscal year ended March 31,2009.**

 

**OVERVIEW**

 

**General**

 

Wewere incorporated under the General Corporation Laws of the State of Delawareon February 18, 2005. We were primarily established for the purpose ofinvesting in subordinated loans, mezzanine debt, preferred stock and warrantsto purchase common stock of small and medium-sized companies in connection withbuyouts and other recapitalizations. We also invest in senior secured loans,common stock and, to a much lesser extent, senior and subordinated syndicatedloans. Our investment objective is to generate both current income and capitalgains through these debt and equity instruments. We operate as a closed-end,non-diversified management investment company and have elected to be treated asa business development company under the Investment Company Act of 1940, asamended (the “1940 Act”).  In addition,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”).

 

**Business Environment**

 

Thecurrent economic conditions generally, and the disruptions in the capitalmarkets in particular, have decreased liquidity and increased our cost of debtand equity capital, where available. The longer these conditions persist, thegreater the probability that these factors could continue to increase our costof and significantly limit our access to debt and equity capital and thus havean adverse effect on our operations and financial results. Many of thecompanies in which we have made or will make investments may also besusceptible to the economic downturn, which may affect the ability of one ormore of our portfolio companies to repay our loans or engage in a liquidityevent, such as a sale, recapitalization or initial public offering.  An economic downturn 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.

 

Therecession has affected the general availability of credit and, as a result,subsequent to our most recent fiscal year end, we sold 29 senior syndicatedloans that were held in our portfolio of investments at March 31, 2009 tovarious investors in the syndicated loan market (collectively, the “SyndicatedLoan Sales”) in order to repay amounts outstanding under our prior creditfacility from Deutsche Bank, which matured in April 2009 and was notextended by that bank. These loans, in aggregate, had a cost value ofapproximately $104.2 million, or 29.9% of the cost of our total investments,and an aggregate fair market value of approximately $69.8 million, or 22.2% ofthe fair market value of our total investments, at March 31, 2009.  We completed additional senior syndicatedloan sales in October 2009 (see —Recent Developments—Senior SyndicatedSales section below).  As a result of thesettlement of these loan sales, at December 31, 2009, we had two remainingsenior syndicated loans, which we plan to exit in the long-term future.  Collectively, these sales have changed ourasset composition in a manner that has affected our ability to satisfy certainelements of the Code’s rules for maintenance of our RIC status. In orderto maintain our status as a RIC, in addition to other requirements, as of theclose of each quarter of our taxable year, we must meet the assetdiversification test, which requires that at least 50% of the value of ourassets consist of cash, cash items, U.S. government securities or certain otherqualified securities. During the quarter ended December 31, 2009, we fellbelow the required 50% asset diversification threshold.

 

Failureto meet the asset diversification test alone will not result in our loss of RICstatus. 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 December 31, 2009, the third quarterly measurement datefollowing the Syndicated Loan Sales, we satisfied the 50% asset diversificationthreshold through the purchase of 

 

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short-termqualified securities, which was funded primarily through a short-term loanagreement. Subsequent to the December 31st measurementdate, these securities matured and we repaid the short-term loan, at which timewe again fell below the 50% threshold. See “—Recent 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 partialdivestitures of investments, such that we would once again exceed the 50%threshold.

 

Untilthe composition 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.

 

OnApril 14, 2009, through our wholly-owned subsidiary, Gladstone BusinessInvestment, LLC (“Business Investment”), we entered into a second amended andrestated credit agreement providing for a $50.0 million revolving line ofcredit (the “Credit Facility”) arranged by Branch Banking and Trust Company (“BB&T”)as administrative agent. Key Equipment Finance Company Inc. also joined theCredit Facility as a committed lender. Under the terms of the Credit Facility, committed funding was reducedfrom $125.0 million under our prior facility to $50.0 million. See “—Liquidityand Capital Resources” section below for further information. As of February 8,2010, approximately $15.0 million was outstanding under the Credit Facility and$33.7 million was available for borrowing due to certain limitations on ourborrowing base. As a result of this limited availability under our creditfacility, and the restraints upon our investing activities required in order tomaintain RIC status under the Code as described above, we are unsure when wewill once again be in a position to make any new investments. The CreditFacility also limits our distributions to stockholders and, as a result, wedecreased our monthly cash distribution rate in April 2009 by 50% ascompared to the prior year period. We do not know when market conditions willstabilize, if adverse conditions will intensify or the full extent to which thedisruptions will continue to affect us. If market instability persists orintensifies, we may experience increasing difficulty in raising capital. We arecurrently working with our two lending banks to extend our line of credit.

 

Challengesin the current market are intensified for us by certain regulatory limitationsunder the 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,we must have two dollars of assets.

 

Recentmarket conditions have also affected the trading price of our common stock andthus our ability to finance new investments through the issuance of equity. On February 8,2010, the closing market price of our common stock was $4.92 which pricerepresented a 38.0% discount to our December 31, 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.

 

Therecession may also continue to decrease the value of collateral securing someof our loans, as well as the value of our equity investments, which hasimpacted and may continue to impact our ability to borrow under our creditfacility. Additionally, our credit facility contains covenants regarding themaintenance of certain minimum loan concentrations and net worth covenantswhich are affected by the decrease in value of our portfolio. Failure to meetthese requirements would result in a default which, if we are unable to obtaina waiver from our lenders, would result in the acceleration of our repayment obligationsunder our credit facility.  As of December 31,2009, we were in compliance with all of the facility covenants.

 

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Weexpect that, given these regulatory and contractual constraints in combinationwith current market conditions, debt and equity capital may be costly ordifficult for us to access for some time. For so long as this is the case, wewill continue to focus our near-term strategy primarily on retaining capitaland building the value of our existing portfolio companies to increase thelikelihood of maintaining potential future returns. We will also, where prudentand possible, continue to consider the sale of lower-yielding investments. Thishas resulted, and may continue to result, in significantly reduced investmentactivity, as our ability to make new investments under these conditions islargely dependent on availability of proceeds from the sale or exit of existingportfolio investments, which events may be beyond our control.

 

**Senior Syndicated Loan Valuations**

 

Due to the illiquidity in the market for syndicatedloans during the three quarters prior to and including June 30, 2009, adiscounted cash flow (“DCF”) methodology was used to value these investmentsduring those periods, following guidance provided under ASC 820-10, “Fair Value Measurements andDisclosures.”  However, in monitoring the market activityduring the previous few quarters, we noted changing market conditionsindicating a return to liquidity and a better functioning secondary market forsyndicated loans.  Therefore, inaccordance with ASC 820-10, and following our valuation procedures,which specify the use of third-party indicative bid quotes for valuingsyndicated loans where there is a liquid public market for those loans andmarket pricing quotes are readily available, a third-party bid quote was usedto value the unsold senior syndicated loans at December 31, 2009.  Where syndicated loans are sold subsequent toquarter end, the loans are valued at their respective sales prices.  As of the date of this filing, there were nosyndicated loans sold subsequent to December 31, 2009.

 

**Recent Developments**

 

*RegistrationStatement*

 

OnJuly 21, 2009, we filed a registration statement on Form N-2(Registration No. 333-160720) that was amended on October 2, 2009.The SEC declared the registration statement effective on October 8, 2009and such registration statement will permit us to issue, through one or moretransactions, up to an aggregate of $300.0 million in securities, consisting ofcommon stock, senior common stock, preferred stock, subscription rights, debtsecurities and warrants to purchase common stock, or a combination of these securities.

 

*SeniorSyndicated Sales*

 

InOctober 2009, we completed the sales of certain senior syndicated loans(HMTBP Acquisition II Corp. and a portion of Interstate FiberNet, Inc.) andreceived approximately $5.5 million in net cash proceeds and recorded arealized loss of approximately $1.3 million.

 

*PortfolioCompany Investment Activity*

 

OnOctober 13, 2009, we refinanced our revolving line of credit with Chase IIHoldings Corp. to a third party, and the outstanding balance of $3.5 million,plus accrued interest, was repaid in full. The proceeds were used to make a repayment on the outstanding amountunder our Credit Facility.

 

DuringOctober 2009, one of our portfolio companies entered into an agreementwith a third party to act as an advisor in looking at strategic investmentalternatives.  It is still premature inthe process to speculate on what these strategic alternatives might be or whatimpact, if any, such activities may have on our investment in the subjectportfolio company.

 

DuringOctober 2009, A. Stucki Holding Corp. declared and, on November 3,2009, paid accrued cash dividends on its preferred stock, of which we receivedapproximately $953.

 

OnNovember 2, 2009, we entered into an agreement to reduce the availablecredit limit on Danco Acquisition Corp.’s revolving line of credit from $3.0million to $1.5 million.  This was anon-cash transaction.

 

On December 18,2009, we assumed 100% ownership of Mathey Investments, Inc. (“Mathey”),previously an Affiliate investment, exercising our right after certain defaultson the part of Mathey and subsequent expiration of a forbearance period grantedby us.  We disbursed approximately $282to buy out the previous stockholders of Mathey and to pay for related legalexpenses incurred in the process.  Ourinvestment in Mathey has been reclassified from an Affiliate to a Controlinvestment in the condensed consolidated financial statements at December 31,2009**.**

 

On January 26, 2010,we entered into an agreement with Noble Logistics, Inc. to extend the maturityof their revolving credit facility to May 2010.  This was a non-cash transaction.

 

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

### ** **

OnDecember 29, 2009, we purchased $85.0 million of short-term United StatesTreasury securities 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 0.59%.  On January 7,2010, when the securities matured, we repaid the $75.0 million loan fromJefferies in full, and, on January 8, 2010, repaid the $10.0 million drawnon the Credit Facility for the transaction.

 

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**RESULTS OF OPERATIONS**

 

***Comparison of the Three Months Ended December 31,2009 to the Three Months Ended December 31, 2008***

 

*A comparison of our operatingresults for the three months ended December 31, 2009 and 2008 is below:*

 
| ** **                                                                           | ** ** | **For the three months ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                           | ** ** | **2009**                                         | ** ** | **2008** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| INVESTMENT INCOME                                                                    | ** ** | ** **                                       |       |   |   |   |   |   |   |
| Interest income                                                                      | ** ** | ** **                                       |       |   |   |   |   |   |   |
| Non-Control/Non-Affiliate investments                                                | ** ** | **$**                                            | **489**    |   | $ | 2,339 |   | $ | (1,850 | ) | (79.1 | )% |
| Control investments                                                                  | ** ** | **2,856**                                        |       | 3,068 |   | (212 | ) | (6.9 | ) |
| Affiliate investments                                                                | ** ** | **1,605**                                        |       | 1,478 |   | 127 |   | 8.6 |   |
| Cash and cash equivalents                                                            | ** ** | **1**                                            |       | 21 |   | (20 | ) | (95.2 | ) |
| Total interest income                                                                | ** ** | **4,951**                                        |       | 6,906 |   | (1,955 | ) | (28.3 | ) |
| Other income                                                                         | ** ** | **970**                                          |       | 96 |   | 874 |   | 910.4 |   |
| Total investment income                                                              | ** ** | **5,921**                                        |       | 7,002 |   | (1,081 | ) | (15.4 | ) |
|                                                                                 | ** ** | ** **                                       |       |   |   |   |   |   |   |
| EXPENSES                                                                             | ** ** | ** **                                       |       |   |   |   |   |   |   |
| Loan servicing fee                                                                   | ** ** | **886**                                          |       | 1,258 |   | (372 | ) | (29.6 | ) |
| Base management fee                                                                  | ** ** | **113**                                          |       | 442 |   | (329 | ) | (74.4 | ) |
| Incentive fee                                                                        | ** ** | **588**                                          |       | — |   | 588 |   | NM |   |
| Administration fee                                                                   | ** ** | **156**                                          |       | 195 |   | (39 | ) | (20.0 | ) |
| Interest expense                                                                     | ** ** | **385**                                          |       | 1,823 |   | (1,438 | ) | (78.9 | ) |
| Amortization of deferred finance costs                                               | ** ** | **436**                                          |       | 46 |   | 390 |   | 847.8 |   |
| Professional fees                                                                    | ** ** | **182**                                          |       | 69 |   | 113 |   | 163.8 |   |
| Stockholder related costs                                                            | ** ** | **49**                                           |       | 112 |   | (63 | ) | (56.3 | ) |
| Insurance expense                                                                    | ** ** | **71**                                           |       | 57 |   | 14 |   | 24.6 |   |
| Directors’ fees                                                                 | ** ** | **48**                                           |       | 50 |   | (2 | ) | (4.0 | ) |
| Other                                                                                | ** ** | **61**                                           |       | 57 |   | 4 |   | 7.0 |   |
| Expenses before credit from Adviser                                                  | ** ** | **2,975**                                        |       | 4,109 |   | (1,134 | ) | (27.6 | ) |
| Credits to base management fee                                                       | ** ** | **(127**                                         | **)**      | (694 | ) | 567 |   | (81.7 | ) |
| Total expenses net of credit to base management fee                                  | ** ** | **2,848**                                        |       | 3,415 |   | (567 | ) | (16.6 | ) |
| NET INVESTMENT INCOME                                                                | ** ** | **3,073**                                        |       | 3,587 |   | (514 | ) | (14.3 | ) |
|                                                                                 | ** ** | ** **                                       |       |   |   |   |   |   |   |
| REALIZED AND UNREALIZED (LOSS) GAIN ON:                                              | ** ** | ** **                                       |       |   |   |   |   |   |   |
| Realized loss on sale of Non-Control/Non-Affiliate  investments                      | ** ** | **(1,318**                                       | **)**      | — |   | (1,318 | ) | NM |   |
| Realized loss on termination of derivative                                           | ** ** | **—**                                       |       | — |   | — |   |   |   |
| Net unrealized appreciation (depreciation) of  Non-Control/Non-Affiliate investments | ** ** | **1,383**                                        |       | (6,988 | ) | 8,371 |   | NM |   |
| Net unrealized (depreciation) appreciation of  Control investments                   | ** ** | **(8,853**                                       | **)**      | 1,755 |   | (10,608 | ) | NM |   |
| Net unrealized appreciation (depreciation) of  Affiliate investments                 | ** ** | **1,257**                                        |       | (2,294 | ) | 3,551 |   | NM |   |
| Net unrealized depreciation of derivative                                            | ** ** | **(7**                                           | **)**      | — |   | (7 | ) | NM |   |
| Net unrealized depreciation of borrowings under  line of credit                      | ** ** | **45**                                           |       | — |   | 45 |   | NM |   |
| Net loss on investments and borrowings under line  of credit                         | ** ** | **(7,493**                                       | **)**      | (7,527 | ) | 34 |   | NM |   |
|                                                                                 | ** ** | ** **                                       |       |   |   |   |   |   |   |
| NET DECREASE IN NET ASSETS RESULTING FROM  OPERATIONS                                | ** ** | **$**                                            | **(4,420** | **)** | $ | (3,940 | ) | $ | (480 | ) | 12.2 | % |

 

*NM = Not Meaningful*

 

**Investment Income**

 

Totalinvestment income decreased for the three months ended December 31, 2009as compared to the prior year period. This decrease was due mainly to adecrease in the size of our loan portfolio, specifically the senior syndicatedloans, as well as continuing decreases in LIBOR, as compared to the prior yearperiod.

 

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Interestincome from our investments in debt securities decreased for the three monthsended December 31, 2009, as compared to the prior year period for multiplereasons. The level of interest income from investments is directly related tothe balance, at cost, of the interest-bearing investment portfolio outstandingduring the period multiplied by the weighted average yield. 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 average cost basis of our interest-bearinginvestment portfolio during the three months ended December 31, 2009 wasapproximately $179.6 million, compared to approximately $296.0 million for theprior year period, due primarily to the aggregate senior syndicated loan salesthat occurred during the current year period. 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 0.24% for the three months ended December 31,2009, as compared to 2.17% for the prior year period.

 

Interestincome from Non-Control/Non-Affiliate investments decreased for the threemonths ended December 31, 2009 due to an overall reduction in the size andnumber of Non-Control/Non-Affiliate investments held at December 31, 2009,as compared to the prior year period.  AtDecember 31, 2008, we held positions in 35 Non-Control/Non-Affiliateinvestments; however, as a result of the Syndicated Loan Sales, only fourNon-Control/Non-Affiliate investments were held at December 31, 2009.  Also contributing to the decrease in interestincome from Non-Control/Non-Affiliate investments was a decrease in the averageLIBOR between the two periods.

 

Interestincome from Control investments decreased slightly for the three months ended December 31,2009, as compared to the prior year period, driven primarily by lower averageprincipal balances outstanding on loans to these companies during the currentquarter.  Decreases in LIBOR played aminimal role in the decline in interest income from Control investments, as themajority of these loans include interest rate floors.

 

Interestincome from Affiliate investments increased slightly for the three months endedDecember 31, 2009, as compared to the prior year period, mainly due tointerest rate increases that occurred on loans to certain Affiliate portfoliocompanies.

 

Thefollowing table lists the interest income from investments for the five largestportfolio company investments during the respective periods:

 

**Three months ended December 31, 2009**

 
| ** **                          | ** ** | **Interest** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|--------------|------------|------------|------------|
| **Company**                         | ** ** | **Income**   | ** ** | **%**      | ** ** |
| Chase II Holdings Corp.             |       | $            | 620        |       | 12.5       | % |
| Galaxy Tools Holding Corp.          |       | 595          |       | 12.0       |       |
| A. Stucki Holding Corp.             |       | 572          |       | 11.6       |       |
| Mathey Investments, Inc.       |       | 479          |       | 9.7        |       |
| Danco Acquisition Corp.             |       | 458          |       | 9.2        |       |
| **Subtotal**                        | ** ** | **$**        | **2,724**  | ** ** | **55.0**   | **%** |
| Other companies                     |       | 2,226        |       | 45.0       |       |
| **Total portfolio interest income** | ** ** | **$**        | **4,950**  | ** ** | **100.0**  | **%** |

 

**Three months ended December 31, 2008**

 
| ** **                          | ** ** | **Interest** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|--------------|------------|------------|------------|
| **Company**                         | ** ** | **Income**   | ** ** | **%**      | ** ** |
| A. Stucki Holding Corp.             |       | $            | 764        |       | 11.1       | % |
| Chase II Holdings Corp.             |       | 708          |       | 10.3       |       |
| Galaxy Tools Holdings Corp.         |       | 595          |       | 8.6        |       |
| Noble Logistics, Inc.          |       | 431          |       | 6.3        |       |
| Acme Cryogenics, Inc.          |       | 426          |       | 6.2        |       |
| **Subtotal**                        | ** ** | **$**        | **2,924**  | ** ** | **42.5**   | **%** |
| Other companies                     |       | 3,961        |       | 57.5       |       |
| **Total portfolio interest income** | ** ** | **$**        | **6,885**  | ** ** | **100.0**  | **%** |

 

Theannualized weighted average yield on our portfolio, excluding cash and cashequivalents, for the three months ended December 31, 2009 was 10.68%, comparedto 8.76% 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 resulted primarilyfrom our sale of lower interest-bearing senior syndicated loans subsequent to December 31,2008.

 

Interestincome from invested cash and cash equivalents decreased for the three monthsended December 31, 2009, as compared to the prior year period.  This decrease is a result of lower interestrates offered by banks, as this income is derived mainly from interest earnedon overnight sweeps of cash held at financial institutions, in addition to ususing the proceeds from repayments on outstanding loans during the year to paydown our line of credit.

 

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Otherincome increased for the three months ended December 31, 2009, as comparedthe prior year period, due to the receipt of approximately $953 of accrued cashdividends from A. Stucki Holding Corp. The remaining balance in other income is comprised mainly of loanamendment fees that are amortized over the remaining lives of the respectiveloans, as well as other miscellaneous income amounts.

 

**Operating Expenses**

 

Totaloperating expenses, excluding any voluntary and irrevocable credits to the basemanagement and incentive fees, decreased for the three months ended December 31,2009, primarily due to a reduction in interest expense associated with theCredit Facility, as well as an overall decrease in the amount of fees due toour Adviser, partially offset by an increase in deferred financing fees relatedto the Credit Facility entered into in April 2009, as compared to thethree months ended December 31, 2008.

 

Loanservicing fees decreased for the three months ended December 31, 2009, ascompared to the prior year period. These fees were incurred in connection witha loan servicing agreement between Business Investment and our Adviser, whichis based on the value of the aggregate outstanding balance of eligible loans inour portfolio, and were directly credited against the amount of the base managementfee due to our Adviser. The decrease in fees is a result of the reduced size ofour pledged loan portfolio, caused primarily by the Syndicated Loan Sales.

 

Thebase management fee decreased for the three months ended December 31,2009, as compared to the prior year period, which is reflective of fewer totalassets held during the quarter ended December 31, 2009 when compared tothe prior year quarter. Likewise, 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 December 31,** | ** ** |
|----------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                 | ** ** | **2009**                                  | ** ** | **2008** | ** ** |
| **Base management fee**                                                    | ** ** | **$**                                     | **113**    |   | $ | 442 |   |
|                                                                       | ** ** | ** **                                |       |   |   |
| *Credits to base management fee  from Adviser:*                            | ** ** | ** **                                |       |   |   |
| Fee reduction for the waiver of 2% fee on senior  syndicated loans to 0.5% | ** ** | **(34**                                   | **)**      | (413 | ) |
| Credit for fees received by Adviser from the  portfolio companies          | ** ** | **(93**                                   | **)**      | (281 | ) |
| **Credit to base management fee  from Adviser**                            | ** ** | **(127**                                  | **)**      | (694 | ) |
|                                                                       | ** ** | ** **                                |       |   |   |
| **Net base management fee**                                                | ** ** | **$**                                     | **(14**    | **)** | **$** | (252 | ) |

 

Anincentive fee was earned by the Adviser during the current quarter, due in partto a one-time dividend received from A. Stucki Holding Corp.  The incentive fee and any associated creditsare summarized in the table below:

 
| ** **                                                                                               | ** ** | **Three  months ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                               | ** ** | **2009**                                  | ** ** | **2008** | ** ** |
| **Incentive fee**                                                                                        | ** ** | **$**                                     | **588**    |   | $ | — |   |
| Credit from voluntary, irrevocable and unconditional  waiver issued by Adviser’s board of directors | ** ** | **—**                                |       | — |   |
| **Net incentive fee**                                                                                    | ** ** | **$**                                     | **588**    |   | $ | — |   |

 

Theadministration fee decreased slightly for the three months ended December 31,2009, as compared the prior year period. This decrease is also a result of fewer total assets held during thequarter ended December 31, 2009 in relation to the other fundsadministered by Gladstone Administration, LLC, as compared to the prior yearperiod.  The calculation of theadministration fee is described in detail above under *“Investment Advisory and Management Agreement”*in Note 4 of the notes to the consolidated financial statements in our AnnualReport on Form 10-K as filed with the SEC on June 2, 2009.

 

Interestexpense decreased for the three months ended December 31, 2009, ascompared to the prior year period as a direct result of decreased borrowingsunder the Credit Facility during the current quarter.  The weighted average balance outstanding onour line of credit during the quarter ended December 31, 2009 was approximately$16.9 million, as compared to $117.9 million in the comparable prior yearperiod.

 

Otheroperating expenses (including amortization of deferred financing fees,professional fees, stockholder related costs, insurance expense, directors’fees and other direct expenses) increased over the comparable prior yearperiod, driven primarily by increases in deferred financing fees related to theCredit Facility entered into in April 2009 and an increase in professionalfees, mainly in additional auditing and accounting fees accrued in the currentquarter.

 

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**Realized and Unrealized (Loss) Gain on Investments**

 

*Realized Losses*

 

Duringthe three months ended December 31, 2009, we completed the sales ofcertain syndicated loans for aggregate proceeds of $5.5 million and recorded arealized loss of $1.3 million.  Noinvestments were sold or written off during the three months ended December 31,2008.  We sold the majority of our seniorsyndicated loans during the quarter ended June 30, 2009, and we expect tosell the remaining two senior syndicated loans in the long-term future as weattempt to exit the senior syndicated loan market.

 

*Unrealized Appreciation and Depreciation*

 

Netunrealized appreciation (depreciation) of investments is the net change in thefair value of our investment portfolio during the reporting period, includingthe reversal of previously recorded unrealized appreciation or depreciationwhen gains and losses are actually realized. During the three months ended December 31,2009, we recorded net unrealized depreciation of investments in the aggregateamount of $6.2 million, compared to $7.5 million in the prior year period.  The unrealized appreciation (depreciation)across our investment classes for the three months ended December 31, 2009was as follows:

 
| **Investment Category**   | ** ** | **Net Unrealized Appreciation (Depreciation)** | ** ** |
|---------------------------|------------|------------------------------------------------|------------|
| Non-Control/Non-Affiliate |       | $                                              | 1,383      |   |
| Control                   |       | (8,853                                         | )          |
| Affiliate                 |       | 1,257                                          |       |
| **Total**                 | ** ** | **$**                                          | **(6,213** | **)** |

 

Werecorded approximately $1.4 million of net unrealized appreciation on ourNon-Control/Non-Affiliate investments for the quarter ended December 31,2009, driven primarily by the reversal of previously unrealized lossesassociated with the HMTBP sale, as well as a modest appreciation in the valueof American Greetings Corp.  For thethree months ended December 31, 2008, we recorded approximately $7.0million of unrealized depreciation on our Non-Control/Non-Affiliateinvestments.

 

OurControl investments experienced the most significant net unrealizeddepreciation in our total portfolio, particularly our equity holdings, whichalone depreciated in value by an aggregate of $9.0 million during the quarterended December 31, 2009.  Thisdepreciation in equity securities primarily related to depreciation of ourequity positions in A. Stucki Holding Corp., Acme Cryogenics, Inc. and Chase IIHoldings Corp., as well as the inclusion of approximately $0.8 million ofunrealized depreciation on our equity position in Mathey, as a result of thereclassification of Mathey as a Control investment during the quarter,partially offset by an increase in the value of our equity position in CavertII Holdings Corp.  The debt portion ofour Control investments appreciated in value by an aggregate of approximately$0.1 million during the current quarter, which includes approximately $0.2million of unrealized depreciation on our debt investments in Mathey, resultingfrom the reclassification of Mathey as a Control investment during thequarter.  For the three months ended December 31,2008, we recorded approximately $1.8 million of unrealized appreciation on ourControl investments.

 

Werecorded approximately $1.3 million of net unrealized appreciation on ourAffiliate investments during the quarter ended December 31, 2009, consisting ofapproximately $2.0 million of net unrealized appreciation in equity positions,partially offset by approximately $0.7 million of unrealized depreciationrelated to the debt positions.  Thisincrease was primarily a result of an increase in the value of our equityposition in Quench Holdings Corp. and the impact of the reversal of theunrealized depreciation on our debt and equity investments in Mathey as aresult of the reclassification of Mathey to a Control investment.  Partially offsetting this increase was adecline in the value of our debt investment in Noble Logistics, Inc.  For the three months ended December 31,2008, we recorded approximately $2.3 million of unrealized depreciation on ourAffiliate investments.

 

Overour entire investment portfolio, we recorded an aggregate of approximately $0.8million of net unrealized appreciation on our debt positions for the quarterended December 31, 2009, while our equity holdings experienced anaggregate of approximately $7.0 million of net unrealized depreciation.  At December 31, 2009, the fair value ofour investment portfolio was less than the cost basis of our portfolio byapproximately $38.5 million, as compared to $32.3 million at September 30,2009, representing an increase in net unrealized depreciation of $6.2 millionfor the quarter.  We believe that ouraggregate investment portfolio was valued at a depreciated value due primarilyto the general instability of the loan markets even though we saw some returnof market liquidity within the senior syndicated loan markets, a generaldecrease in multiples paid for companies and the general downturn in economicconditions negatively affecting the performance of some of our portfoliocompanies.  Due to continued depreciationin our investments, our entire portfolio was fair valued at 83.0% of cost as ofDecember 31, 2009,compared to 90% of cost as of March 31, 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.

 

**Net Unrealized Depreciation of Borrowings Under Lineof Credit**

 

Duringthe quarter ended December 31, 2009, we recorded unrealized depreciationof $45 for the line of credit that was fair valued in accordance with ASC 825by an independent third party.  ASC 825was not applicable for the three months ended December 31, 2008.

 

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**Derivatives**

 

Duringthe quarter ended June 30, 2009, we cancelled our prior interest rate capagreements and entered into a new interest rate cap agreement with BB&T fora notional amount of $45.0 million that will effectively limit the interestrate on a portion of the borrowings under the Credit Facility.  We incurred a premium fee of approximately$39 in conjunction with this agreement. As of December 31, 2009, thederivative had a fair value of approximately $5, and unrealized depreciation of$7 was recorded for the three months ended December 31, 2009.  For the comparable prior year period, thefair market value of our prior interest rate cap agreements remained flat.

 

**Net Decrease in Net Assets Resulting from Operations**

 

Forthe three months ended December 31, 2009, werecorded a net decrease in net assets resulting from operations of $4.4 millionas a result of the factors discussed above. For the three months ended December 31, 2008, werecorded a net decrease in net assets resulting from operations of $3.9million.  Our net decrease in net assets resultingfrom operations per basic and diluted weighted average common share for thequarters ended December 31, 2009 and 2008were $0.20 and $0.18, respectively.

 

***Comparison of the Nine Months Ended December 31,2009 to the Nine Months Ended December 31, 2008***

 

*A comparison of our operatingresults for the nine months ended December 31, 2009 and 2008 is below:*

 
| ** **                                                                           | ** ** | **For the nine months ended December 31,** | ** **  |
|--------------------------------------------------------------------------------------|------------|-------------------------------------------------|-------------|
| ** **                                                                           | ** ** | **2009**                                        | ** **  | **2008** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| INVESTMENT INCOME                                                                    | ** ** | ** **                                      |        |   |   |   |   |   |   |
| Interest income                                                                      | ** ** | ** **                                      |        |   |   |   |   |   |   |
| Non-Control/Non-Affiliate investments                                                | ** ** | **$**                                           | **1,840**   |   | $ | 6,797 |   | $ | (4,957 | ) | (72.9 | )% |
| Control investments                                                                  | ** ** | **8,593**                                       |        | 8,372 |   | 221 |   | 2.6 |   |
| Affiliate investments                                                                | ** ** | **4,533**                                       |        | 3,938 |   | 595 |   | 15.1 |   |
| Cash and cash equivalents                                                            | ** ** | **1**                                           |        | 67 |   | (66 | ) | (98.5 | ) |
| Total interest income                                                                | ** ** | **14,967**                                      |        | 19,174 |   | (4,207 | ) | (21.9 | ) |
| Other income                                                                         | ** ** | **1,066**                                       |        | 682 |   | 384 |   | 56.3 |   |
| Total investment income                                                              | ** ** | **16,033**                                      |        | 19,856 |   | (3,823 | ) | (19.3 | ) |
|                                                                                 | ** ** | ** **                                      |        |   |   |   |   |   |   |
| EXPENSES                                                                             | ** ** | ** **                                      |        |   |   |   |   |   |   |
| Loan servicing fee                                                                   | ** ** | **2,892**                                       |        | 3,769 |   | (877 | ) | (23.3 | ) |
| Base management fee                                                                  | ** ** | **588**                                         |        | 1,303 |   | (715 | ) | (54.9 | ) |
| Incentive fee                                                                        | ** ** | **588**                                         |        | — |   | 588 |   | — |   |
| Administration fee                                                                   | ** ** | **527**                                         |        | 642 |   | (115 | ) | (17.9 | ) |
| Interest expense                                                                     | ** ** | **1,640**                                       |        | 4,009 |   | (2,369 | ) | (59.1 | ) |
| Amortization of deferred finance costs                                               | ** ** | **1,187**                                       |        | 324 |   | 863 |   | 266.4 |   |
| Professional fees                                                                    | ** ** | **502**                                         |        | 383 |   | 119 |   | 31.1 |   |
| Stockholder related costs                                                            | ** ** | **276**                                         |        | 413 |   | (137 | ) | (33.2 | ) |
| Insurance expense                                                                    | ** ** | **190**                                         |        | 165 |   | 25 |   | 15.2 |   |
| Directors’ fees                                                                 | ** ** | **147**                                         |        | 145 |   | 2 |   | 1.4 |   |
| Other                                                                                | ** ** | **198**                                         |        | 246 |   | (48 | ) | (19.5 | ) |
| Expenses before credit from Adviser                                                  | ** ** | **8,735**                                       |        | 11,399 |   | (2,664 | ) | (23.4 | ) |
| Credits to base management fee                                                       | ** ** | **(591**                                        | **)**       | (1,964 | ) | 1,373 |   | (69.9 | ) |
| Total expenses net of credit to base management fee                                  | ** ** | **8,144**                                       |        | 9,435 |   | (1,291 | ) | (13.7 | ) |
| NET INVESTMENT INCOME                                                                | ** ** | **7,889**                                       |        | 10,421 |   | (2,532 | ) | (24.3 | ) |
|                                                                                 | ** ** | ** **                                      |        |   |   |   |   |   |   |
| REALIZED AND UNREALIZED (LOSS) GAIN ON:                                              | ** ** | ** **                                      |        |   |   |   |   |   |   |
| Realized loss on sale of Non-Control/Non-Affiliate  investments                      | ** ** | **(35,922**                                     | **)**       | (4,215 | ) | (31,707 | ) | 752.2 |   |
| Realized loss on termination of derivative                                           | ** ** | **(53**                                         | **)**       | — |   | (53 | ) | NM |   |
| Net unrealized appreciation (depreciation) of  Non-Control/Non-Affiliate investments | ** ** | **36,597**                                      |        | (7,714 | ) | 44,311 |   | NM |   |
| Net unrealized (depreciation) appreciation of  Control investments                   | ** ** | **(35,234**                                     | **)**       | 7,728 |   | (42,962 | ) | NM |   |
| Net unrealized depreciation of Affiliate  investments                                | ** ** | **(4,862**                                      | **)**       | (13,687 | ) | 8,825 |   | (64.5 | ) |
| Net unrealized appreciation of derivative                                            | ** ** | **19**                                          |        | — |   | 19 |   | NM |   |
| Net unrealized appreciation of borrowings under  line of credit                      | ** ** | **(133**                                        | **)**       | — |   | (133 | ) | NM |   |
| Net loss on investments and borrowings under line  of credit                         | ** ** | **(39,588**                                     | **)**       | (17,888 | ) | (21,700 | ) | 121.3 |   |
|                                                                                 | ** ** | ** **                                      |        |   |   |   |   |   |   |
| NET DECREASE IN NET ASSETS RESULTING FROM  OPERATIONS                                | ** ** | **$**                                           | **(31,699** | **)** | $ | (7,467 | ) | $ | (24,232 | ) | 324.5 | % |

 

*NM = NotMeaningful*

 

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**Investment Income**

 

Investmentincome decreased for the nine months ended December 31, 2009, as comparedto the nine months ended December 31, 2008, due mainly to a reduction inthe size of our loan portfolio, as well as decreases in LIBOR over therespective periods.

 

Interestincome from our investments in debt securities decreased for the nine monthsended December 31, 2009, as compared to the prior year period for severalreasons. The level of interest income from investments is directly related tothe balance, at cost, of the interest-bearing investment portfolio outstandingduring the period multiplied by the weighted average yield. 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 average cost basis of our interest-bearinginvestment portfolio during the nine months ended December 31, 2009 wasapproximately $210.6 million, compared to approximately $297.9 million for theprior year period.  This decrease wasprimarily due to the Syndicated Loan Sales that occurred during the currentyear period, as well as scheduled and unscheduled principal repayments.  Also contributing to the decrease in ourinterest income from investments in debt securities was a decrease in theaverage LIBOR between the two periods, which was approximately 0.29% for thenine months ended December 31, 2009, as compared to 2.46% for the prioryear period.

 

Interestincome from Non-Control/Non-Affiliate investments decreased for the nine monthsended December 31, 2009, as compared to the prior year period, due to anoverall reduction in the size and number of Non-Control/Non-Affiliateinvestments held at December 31, 2009, as compared to the prior yearperiod. At December 31, 2008, we held positions in 35Non-Control/Non-Affiliate investments; however, as a result of the SyndicatedLoan Sales, only four Non-Control/Non-Affiliate investments were held at December 31,2009. Also contributing to the decrease in interest income fromNon-Control/Non-Affiliate investments was a decrease in the average LIBORbetween the two periods.

 

Interestincome from Control investments increased slightly for the nine months ended December 31,2009, as compared to the prior year period. The increase is attributable to two additional Control investments, GalaxyTool Holding Corp., which was acquired during the second quarter of the priorfiscal year, and Country Club Enterprises, LLC, which was purchased in thethird quarter of the prior fiscal year, being held for the full nine monthsended December 31, 2009, as opposed to a partial period in the prior year.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 Control investments during thecurrent year period, as the majority of these loans include interest ratefloors.

 

Interestincome from Affiliate investments also increased for the nine months ended December 31,2009, as compared to the prior year period. This increase was due mainly to thereclassification of Quench Holdings Corp. as an Affiliate investment, as notedabove, and the additional interest income accrued under the Affiliateinvestments classification as a result.

 

Thefollowing table lists the interest income from investments for the five largestportfolio company investments during the respective periods:

 

**Nine months ended December 31, 2009**

 
| ** **                          | ** ** | **Interest** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|--------------|------------|------------|------------|
| **Company**                         | ** ** | **Income**   | ** ** | **%**      | ** ** |
| Chase II Holdings Corp.             |       | $            | 1,942      |       | 13.0       | % |
| Galaxy Tools Holding Corp.          |       | 1,779        |       | 11.9       |       |
| A. Stucki Holding Corp.             |       | 1,723        |       | 11.5       |       |
| Acme Cryogenics, Inc.          |       | 1,274        |       | 8.5        |       |
| Danco Acquisition Corp.             |       | 1,244        |       | 8.3        |       |
| **Subtotal**                        | ** ** | **$**        | **7,962**  | ** ** | **53.2**   | **%** |
| Other companies                     |       | 7,004        |       | 46.8       |       |
| **Total portfolio interest income** | ** ** | **$**        | **14,966** | ** ** | **100.0**  | **%** |

 

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**Nine months ended December 31, 2008**

 
| ** **                          | ** ** | **Interest** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|--------------|------------|------------|------------|
| **Company**                         | ** ** | **Income**   | ** ** | **%**      | ** ** |
| Chase II Holdings Corp.             |       | $            | 2,138      |       | 11.2       | % |
| A. Stucki Holding Corp.             |       | 2,110        |       | 11.0       |       |
| Acme Cryogenics, Inc.          |       | 1,274        |       | 6.7        |       |
| Cavert II Holding Corp.             |       | 1,230        |       | 6.4        |       |
| Noble Logistics, Inc.          |       | 1,218        |       | 6.4        |       |
| **Subtotal**                        | ** ** | **$**        | **7,970**  | ** ** | **41.7**   | **%** |
| Other companies                     |       | 11,137       |       | 58.3       |       |
| **Total portfolio interest income** | ** ** | **$**        | **19,107** | ** ** | **100.0**  | **%** |

 

Theannualized weighted average yield on our portfolio, excluding cash and cashequivalents, for the nine months ended December 31, 2009 was 10.16%, comparedto 8.12% 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 year period resultedprimarily from our sale of lower interest-bearing senior syndicated loanssubsequent to December 31, 2008.

 

Interestincome from invested cash and cash equivalents decreased for the nine monthsended December 31, 2009, as compared to the prior year period.  This decrease is a result of lower interestrates offered by banks, as this income is derived mainly from interest earnedon overnight sweeps of cash held at financial institutions, in addition to ususing the proceeds from repayments on outstanding loans during the year to paydown our line of credit.

 

Otherincome increased for the nine months ended December 31, 2009, as comparedto the prior year period, due to the receipt of approximately $953 of accruedcash dividends from A. Stucki Holding Corp. The remaining balance in other income is comprised mainly of loanamendment fees that are amortized over the remaining lives of the respectiveloans or recognized into income once the investment is disposed of, as well asother miscellaneous income amounts.

 

**Operating Expenses**

 

Totaloperating expenses, excluding any voluntary and irrevocable credits to the basemanagement fee and incentive fees, decreased for the nine months ended December 31,2009, primarily due to a reduction in interest expense associated with theCredit Facility, as well as an overall decrease in the amount of fees due toour Adviser, partially offset by an increase in deferred financing fees relatedto the Credit Facility entered into in April 2009, as compared to the ninemonths ended December 31, 2008.

 

Loanservicing fees decreased for the nine months ended December 31, 2009, ascompared to the prior year period. These fees were incurred in connection witha loan servicing agreement between Business Investment and our Adviser, whichis based on the value of the aggregate outstanding portfolio pledged againstthe Credit Facility. These fees were directly credited against the amount ofthe base management fee due to our Adviser. The decrease in fees is a directresult of the reduced size of our pledged loan portfolio, caused primarily bythe Syndicated Loan Sales that occurred during the current year period.

 

Thebase management fee decreased for the nine months ended December 31, 2009,as compared to the prior year period, which is reflective of fewer total assetsheld during the nine months ended December 31, 2009 when compared to theprior year period. Likewise, 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 our Annual Report on Form 10-K asfiled on June 2, 2009, and is summarized in the table below:

 
| ** **                                                                 | ** ** | **Nine  months ended December 31,** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                 | ** ** | **2009**                                 | ** ** | **2008** | ** ** |
| **Base management fee**                                                    | ** ** | **$**                                    | **588**    |   | $ | 1,303 |   |
|                                                                       | ** ** | ** **                               |       |   |   |
| Credits to base  management fee from Adviser:                              | ** ** | ** **                               |       |   |   |
| Fee reduction for the waiver of 2% fee on senior  syndicated loans to 0.5% | ** ** | **(265**                                 | **)**      | (1,220 | ) |
| Credit for fees received by Adviser from the  portfolio companies          | ** ** | **(326**                                 | **)**      | (744 | ) |
| **Credit to base management fee  from Adviser**                            | ** ** | **(591**                                 | **)**      | (1,964 | ) |
|                                                                       | ** ** | ** **                               |       |   |   |
| **Net base management fee**                                                | ** ** | **$**                                    | **(3**     | **)** | $ | (661 | ) |

 

Anincentive fee was earned by the Adviser during the nine months ended December 31,2009, primarily due to a one-time dividend received from A. Stucki HoldingCorp.  The incentive fee and anyassociated credits for the nine months ended December 31, 2009 and 2008are summarized in the table below:

 

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| ** **                                                                                               | ** ** | **Nine  months ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                               | ** ** | **2009**                                 | ** ** | **2008** | ** ** |
| **Incentive fee**                                                                                        | ** ** | **$**                                    | **588**    |   | $ | — |   |
| Credit from voluntary, irrevocable and  unconditional waiver issued by Adviser’s board of directors | ** ** | **—**                               |       | — |   |
| **Net incentive fee**                                                                                    | ** ** | **$**                                    | **588**    |   | $ | — |   |

 

Theadministration fee decreased for the nine months ended December 31, 2009,as compared to the prior year period. The decrease in the current year period was due to an overall reductionof administration staff and related expenses incurred by our Administrator and,further, is a result of fewer total assets held during the quarter ended December 31,2009 in relation to the other funds administered by Gladstone Administration,LLC, as compared to the prior year period. The calculation of the administration fee is described in detail under *“Investment Advisory and Management Agreement”*in Note 4 of the notes to the consolidated financial statements in our AnnualReport on Form 10-K as filed on June 2, 2009.

 

Interestexpense decreased for the nine months ended December 31, 2009, as comparedto the prior year period, a direct result of decreased borrowings under theCredit Facility during the current period. The weighted average balance outstanding on our line of credit duringthe nine months ended December 31, 2009 was approximately $29.0 million,as compared to $106.3 million in the prior year period.

 

Otheroperating expenses (including amortization of deferred financing fees,professional fees, stockholder related costs, insurance expense, directors’fees and other direct expenses) increased over the comparable prior yearperiod, driven primarily by increases in deferred financing fees related to theCredit Facility entered into in April 2009 and an increase in professionalfees.  Partially offsetting this increasewere decreases in stockholder related costs, such as lower annual meetingcosts, and other direct expenses, including decreased backup servicer fees andfewer travel expenses incurred during the current year period.

 

**Realized and Unrealized (Loss) Gain on Investments**

 

*Realized Losses*

 

Duringthe nine months ended December 31, 2009, we exited 30 senior syndicatedloans and a portion of another senior syndicated loan for aggregate proceeds ofapproximately $74.7 million in cash and recorded a realized loss ofapproximately $35.9 million. For the nine months ended December 31, 2008,we received approximately $13.3 million in cash proceeds and recognized a netloss 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 the Senior Syndicated Loan Sales, whichresulted from the liquidity needs associated with the repayment of amountsoutstanding under our prior credit facility with Deutsche Bank, which maturedin April 2009.

 

*Unrealized Appreciation and Depreciation*

 

Netunrealized appreciation (depreciation) of investments is the net change in thefair value of our investment portfolio during the reporting period, includingthe reversal of previously recorded unrealized appreciation or depreciationwhen gains and losses are actually realized. During the nine months ended December 31,2009, we recorded net unrealized depreciation of investments in the aggregateamount of $3.5 million, compared to net unrealized depreciation of investmentsin the aggregate amount of $13.7 million for the prior year period.  The unrealized appreciation (depreciation)across our investment classes for the nine months ended December 31, 2009was as follows:

 
| **Investment Category**   | ** ** | **Net Unrealized Appreciation (Depreciation)** | ** ** |
|---------------------------|------------|------------------------------------------------|------------|
| Non-Control/Non-Affiliate |       | $                                              | 36,597     | * |
| Control                   |       | (35,234                                        | )          |
| Affiliate                 |       | (4,862                                         | )          |
| **Total**                 | ** ** | **$**                                          | **(3,499** | **)** |

 

----

*            Includes the reversal of approximately $35.7 millionof previously recorded unrealized depreciation related to the sale ofsyndicated loans, which resulted in a $35.9 million of realized loss for thecurrent period.

 

Werecorded approximately $36.6 million of net unrealized appreciation of ourNon-Control/Non-Affiliate investments for the nine months ended December 31,2009, due primarily to the reversal of $35.7 million of previously recordedunrealized depreciation noted in the table above, and appreciation in value inthe aggregate amount of approximately $0.9 million on our remainingNon-Control/Non-Affiliate investments. Survey Sampling, LLC, experienced themost significant devaluation; however, this was partially offset by increasesin the values of Interstate FiberNet, Inc. and American GreetingsCorp.  For the nine months ended December 31,2008, we recorded approximately $7.7 million of unrealized depreciation on ourNon-Control/Non-Affiliate investments.

 

OurControl investments experienced the most significant net unrealizeddepreciation in our total portfolio, particularly our equity holdings, whichalone depreciated in value by an aggregate of approximately $34.9 million duringthe nine months ended December

 

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31,2009.  This depreciation in equitysecurities primarily related to depreciation of our equity positions in A.Stucki Holding Corp., Acme Cryogenics, Inc., Chase II Holdings Corp.,Country Club Enterprises, LLC and Galaxy Tool Holding Corp., as well as theinclusion of approximately $0.8 million of unrealized depreciation on ourequity position in Mathey, as a result of the reclassification of Mathey as aControl investment during the nine months ended December 31, 2009,partially offset by an increase in the value of our equity position in CavertII Holdings Corp.  The debt portion ofour Control investments depreciated in value by an aggregate of approximately$0.3 million during the nine months ended December 31, 2009, includingapproximately $0.2 million of unrealized depreciation on our debt investmentsin Mathey as a result of the reclassification of Mathey as a Control investmentduring the nine months ended December 31, 2009.  For the nine months ended December 31,2008, we recorded approximately $7.7 million of unrealized appreciation on ourControl investments.

 

Werecorded approximately $4.9 million of net unrealized depreciation on ourAffiliate investments during the nine month period ended December 31,2009, consisting of approximately $3.6 million of net unrealized depreciationin equity positions and $1.3 million of unrealized depreciation related to debtpositions.  This decrease was primarilydue to decreases in the value of our equity positions in Danco AcquisitionCorp. and Tread Corp. and in our debt investments in Noble Logistics, Inc.  Partially offsetting the net decrease wereincreases in the value of our debt investments in Danco Acquisition Corp., aswell as an appreciation in the value of our overall investment in QuenchHoldings Corp.  For the nine months endedDecember 31, 2008, we recorded approximately $13.7 million of unrealizeddepreciation on our Affiliate investments.

 

Overour entire investment portfolio, we recorded an aggregate of approximately$34.9 million of net unrealized appreciation on our debt positions for the ninemonths ended December 31, 2009, while our equity holdings experienced anaggregate of approximately $38.4 million of net unrealized depreciation.  At December 31, 2009, the fair value ofour investment portfolio was less than the cost basis of our portfolio byapproximately $38.5 million, as compared to $35.0 million at March 31,2009, representing net unrealized appreciation of $3.5 million for theperiod.  We believe that our aggregateinvestment portfolio was valued at a depreciated value due primarily to thegeneral instability of the loan markets even though we saw some return ofmarket liquidity within the senior syndicated loan markets.  Although our investment portfolio hasdepreciated, our entire portfolio was fair valued at 83.0% of cost as of December 31,2009.  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.

 

**Net Unrealized Appreciation of Borrowings Under Lineof Credit**

 

Duringthe nine months ended December 31, 2009, we recorded unrealizedappreciation of $133 for the line of credit that was fair valued in accordancewith ASC 825 by an independent third party. We adopted ASC 825 during June 2009 and the Credit Facility wasvalued as its cost basis for that period. ASC 825 was not applicable for thenine months ended December 31, 2008.

 

**Derivatives**

 

Duringthe nine months ended December 31, 2009, we cancelled our prior interestrate cap agreements, recorded a realized loss of $53, and entered into a newinterest rate cap agreement with BB&T for a notional amount of $45.0million 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 December 31, 2009,the derivative had a fair value of approximately $5, representing an unrealizeddepreciation of $34 for the nine months ended December 31, 2009 on ourcurrent interest rate cap agreement.  Forthe prior year period, the fair market value of our prior interest rate capagreements remained flat.

 

**Net Decrease in Net Assets Resulting from Operations**

 

Forthe nine months ended December 31, 2009, we recorded a net decrease in netassets resulting from operations of $31.7 million as a result of the factorsdiscussed above. For the nine months ended December 31, 2008, we recordeda net decrease in net assets resulting from operations of $7.5 million.  Our net decrease in net assets resulting fromoperations per basic and diluted weighted average common share for the ninemonths ended December 31, 2009 and 2008 were $1.44 and $0.35,respectively.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

**Operating Activities**

 

Net cash provided by operating activities for the nine months ended December 31,2009 was approximately $172.8 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 loss realized on those sales, and principal payments receivedfrom existing investments. For the nine months ended December 31, 2008,net cash provided by operating activities was approximately $5.6 million andconsisted primarily of principal loan repayments, proceeds from the sale ofexisting portfolio investments, and net unrealized depreciation of ourinvestments, partially offset by the purchase of three new investments andadd-ons to existing investments.

 

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AtDecember 31, 2009, we had investments in equity of, loans to, orsyndicated participations in 16 private companies with a cost basis totalingapproximately $225.9 million.  At December 31,2008, we had investments in equity of, loans to, or syndicated participationsin 47 private companies with an aggregate cost basis of approximately $354.2million.  A summary of our investmentactivity for the nine months ended December 31, 2009 and 2008 is asfollows:

 
| **Quarter Ended**       | ** ** | **Investment  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     |   | $ | (34,604 | ) |
| September 30, 2009 |       | 318                               |       | 2,757                         |       | —                             |       | —                        |       |
| December 31, 2009  |       | 595                               |       | 4,496                         |       | 5,484                              |       | (1,318                        | )          |
| **Total**               | ** ** | **$**                             | **2,413**  | ** **                    | **$**      | **14,828**                         | ** ** | **$**                         | **74,706** | ** ** | **$** | **(35,922** | **)** |

 
| **Quarter  Ended**      | ** ** | **Investment  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                         | )          |
| December 31, 2008  |       | 11,043                            |       | 4,469                         |       | —                              |       | —                         |       |
| Total                   |       | $                                 | 47,655     |                          | $          | 26,753                              |       | $                              | 13,296     |   | $ | (4,215 | ) |

 

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(a)         Includes a non-cash transaction whereby a portfoliocompany, Cavert II Holdings Corp., drew $850 on its revolving line of creditand immediately used the proceeds to pay down its senior term A and senior termB loans.  No cash was disbursed in thistransaction, as it was simply a transfer of balance.  The $850 drawn on the credit line wassubsequently paid off in full, and the line of credit was sold to a third partyfor a nominal fee.

 

**(1) Investment Disbursements:**

 
| ** **              | ** ** | **New  Investments** | ** ** | **Disbursements  to Existing** | ** ** | **Total**                | ** ** |
|-------------------------|------------|----------------------|------------|--------------------------------|------------|--------------------------|------------|
| **Quarter  Ended**      | ** ** | **Companies**        | ** ** | **Investments**                | ** ** | **Portfolio  Companies** | ** ** | **Disbursements** | ** ** |
| June 30, 2009      |       | 0                    |       | $                              | —     |                     | $          | 1,500 | (a) | $ | 1,500 | (a) |
| September 30, 2009 |       | 0                    |       | —                         |       | 318                      |       | 318 |   |
| December 31, 2009  |       | 0                    |       | —                         |       | 595                      |       | 595 |   |
| **Total**               | ** ** | **0**                | ** ** | **$**                          | **—** | ** **               | **$**      | **2,413** | ** ** | **$** | **2,413** | ** ** |

 
| ** **              | ** ** | **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 |   |
| December 31, 2008  |       | 1                    | (d)        | 10,725                         |       | 318                      |       | 11,043 |   |
| Total                   |       | 4                    |       | $                              | 41,688     |                     | $          | 5,967 |   | $ | 47,655 |   |

 

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(a)         See note (a) above.

(b)         Tread Corporation.

(c)          Consists of aggregate investments in the amount of$21.4 million in Galaxy Tool Corp. and an add-on investment of $3.8 million inA. Stucki Holding Corp. to finance its acquisition of AlcoSprings.

(d)         Country Club Enterprises, LLC.

 

**(2) Principal Repayments:**

** **
| **Quarter Ended**  | ** ** | **Scheduled Principal  Repayments** | ** ** | **Unscheduled Principal  Repayments (a)** | ** ** | **Total Principal  Repayments** | ** ** |
|-------------------------|------------|------------------------------------------|------------|-----------------------------------------------------|------------|--------------------------------------|------------|
| June 30, 2009      |       | $                                        | 2,004      |                                                | $          | 5,571                                | (b)        | $ | 7,575 |   |
| September 30, 2009 |       | 387                                      |       | 2,370                                               | (c)        | 2,757                                |       |
| December 31, 2009  |       | 396                                      |       | 4,100                                               | (d)        | 4,496                                |       |
| **Total**               | ** ** | **$**                                    | **2,787**  | ** **                                          | **$**      | **12,041**                           | ** ** | **$** | **14,828** | ** ** |

 
| **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                                    | (e)        | 18,791                          |       |
| December 31, 2008  |       | 2,018                               |       | 2,451                                     |       | 4,469                           |       |
| Total                   |       | $                                   | 7,828      |                                      | $          | 18,925                          |       | $ | 26,753 |   |

 

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(a)         Includes principal repayments due to excess cashflows, covenant trips, exits, refinancings, etc.

 

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(b)         Includes principal payments received in connectionwith the refinancings of A. Stucki Holding Corp. and Cavert II Holdings Corp.

(c)          Includes $2.0 million voluntary prepayment fromCavert II Holdings Corp. on its Senior Term Debt.

(d)         Includes full repayment of Chase II Holdings Corp.line of credit in the amount of $3.5 million.

(e)          Includes early payoff of Hudson in the amount of$6.0 million and principal proceeds of $7.0 million received in connection withthe Quench Holdings Corp. restructuring.

 

**(3) Investment Sales / Exits:**

 
| **Quarter Ended**       | ** ** | **Number of  Investments Exited**           | ** ** | **Proceeds  Received** | ** ** | **Position  Exited** | ** ** | **Unamortized  Loan Costs (a)**           | ** ** | **Net Loss on  Exit**           | ** ** |
|-------------------------|------------|---------------------------------------------|------------|------------------------|------------|----------------------|------------|-------------------------------------------|------------|---------------------------------|------------|
| June 30, 2009      |       | 29                                          | (b)        | $                      | 69,222     |                 | $          | 103,772                                   |       | $                               | 55         |   | $ | (34,604 | ) |
| September 30, 2009 |       | 0                                           |       | —                 |       | —               |       | —                                    |       | —                          |       |
| December 31, 2009  |       | 2                                           | (c)        | 5,484                  |       | 6,810                |       | (8                                        | )          | (1,318                          | )          |
| **Total**               | ** ** | **31**                                      | ** ** | **$**                  | **74,706** | ** **           | **$**      | **110,582**                               | ** ** | **$**                           | **47**     | ** ** | **$** | **(35,922** | **)** |
| ** **              | ** ** | ** **                                  | ** ** | ** **             | ** ** | ** **           | ** ** | ** **                                | ** ** | ** **                      | ** ** |
| **Quarter Ended**  | ** ** | **Number of  Investments Exited** | ** ** | **Proceeds  Received** | ** ** | **Position  Exited** | ** ** | **Unamortized  Loan Costs (#)** | ** ** | **Net Loss on  Exit** | ** ** |
| June 30, 2008      |       | 9                                           | (d)        | $                      | 13,246     |                 | $          | 14,926                                    |       | $                               | 37         |   | $ | (1,717 | ) |
| September 30, 2008 |       | 2                                           | (e)        | 50                     | (f)        | 2,530                |       | 18                                        |       | (2,498                          | )          |
| December 31, 2008  |       | 0                                           |       | —                 |       | —               |       | —                                    |       | —                          |       |
| Total                   |       | 11                                          |       | $                      | 13,296     |                 | $          | 17,456                                    |       | $                               | 55         |   | $ | (4,215 | ) |

 

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

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

(c)   Includes the partial sale ofInterstate FiberNet, Inc.

(d)         Includes the partial sale of three syndicated loansstill held subsequent to June 30, 2008 (CRC Health Group, Graham Packagingand Pinnacle Foods).  One syndicated loan(NPC International) was sold in two separate installments.

(e)          Includes the write-off of Lexicon and early payoffof Hudson.

(f)           Dividends received in excess of the gain realized onthe restructuring of Quench Holdings Corp., which reduced our equity basis inthe investment.

 

*Investment Activity*

 

### **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. Additionally, in October 2009, we completed the sales of certainsenior syndicated loans (HMTBP Acquisition II Corp. and a portion of InterstateFiberNet, Inc.) to various investors in the syndicated loan market andreceived approximately $5.5 million in net cash proceeds and recorded arealized loss of approximately $1.3 million.**

### ** **

InApril 2009, we received cash payments in the aggregate of approximately$2.9 million from A. Stucki Holding Corp. and Cavert II Holdings Corp.,representing prepayments on their respective principal amounts due.  Furthermore, in October 2009, ourrevolving line of credit with Chase II Holdings Corp. was refinanced, and theoutstanding balance of $3.5 million was repaid in full.  See Note 3, *Investments*in our notes to the condensed consolidated financial statements for additionalinformation on these activities.

 

During October 2009, one of our portfolio companies entered into an agreement with an investmentbanker to act as an advisor in assessing strategic investmentalternatives.  It is premature inthe process to speculate on what these strategic alternatives might be or whatimpact, if any, such activities may have on our investment in the subjectportfolio company.

 

DuringOctober 2009, A. Stucki Holding Corp. declared and paid accrued cashdividends on its preferred stock, of which we received approximately $953.

 

*Short-term Loan Agreement*

 

OnDecember 29, 2009, we purchased $85.0 million of short-term United StatesTreasury securities through Jefferies. The securities were purchased with $10.0 million in funds drawn on theCredit Facility and the proceeds from a $75.0 million short-term loan fromJefferies with an effective annual interest rate of approximately 0.59%.  On January 7, 2010, the securitiesmatured, and we repaid the $75.0 million loan from Jefferies in full and, on January 8,2010, repaid the $10.0 million drawn on the Credit Facility for purposes ofthis transaction.  If necessary andavailable to us, we may use a similar form of loan agreement in future quartersas a financing option in order to satisfy certain quarterly assetdiversification requirements and maintain our status as a RIC under SubchapterM of the Code.

 

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Ourmost recent investment in a new portfolio company occurred in November 2008.  In light of current economic conditions,limited borrowings available under the Credit Facility, constraints on ourability to access the capital markets and the restraints upon our investingactivities required 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 strategy hasresulted, and may continue to result, in significantly reduced investmentactivity, as our ability to make new investments under these conditions islargely dependent 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 assetdiversification improve, we intend to continue our strategy of makingconservative investments in businesses that we believe will weather the currenteconomic condition and that are likely to produce attractive long-term returnsfor our stockholders.

 

**Financing Activities**

 

Netcash used in financing activities during the nine months ended December 31,2009 was approximately $92.2 million, which consisted primarily of netrepayments made on the line of credit, in connection with the termination ofour prior credit facility, and distributions paid to our stockholders.  During the nine months ended December 31,2008, net cash used in financing activities was approximately $1.8 million, duemainly to net repayments made on the credit facility in excess of borrowingsand distributions paid, partially offset by the Rights Offering (as definedbelow).

 

*Distributions*

 

Inorder to qualify as a RIC and to avoid corporate level tax on the income wedistribute to our stockholders, we are required, under Subchapter M of theCode, to distribute at least 90% of our ordinary income and short-term capitalgains to our stockholders on an annual basis. In accordance with theserequirements, we declared and paid monthly cash distributions of $0.04 percommon share during each month of the quarter ended December 31, 2009.  Generally we seek to distribute 100% of ourordinary income in order to avoid taxes on our income.  For the nine months ended December 31,2009, our distributions to stockholders of approximately $7.9 million exceededour net investment income by approximately $60. We declared these distributionsbased on our estimates of net investment income for the fiscal year. During thefirst quarter of fiscal year 2010, we reduced our monthly distribution from$0.08 to $0.04 per common share.

 

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

 

OurBoard of Directors estimates the source of the distributions at the time oftheir declaration as required by Section 19(a) of the 1940 Act. On amonthly basis, if required under Section 19(a), we post a Section 19(a) noticethrough the Depository Trust Company’s Legal Notice System (“LENS”) and alsosends to its registered stockholders a written Section 19(a) noticealong with the payment of distributions for any payment which includes adistribution estimated to be paid from any other source other than netinvestment income. The estimates of the source of the distribution are interimestimates based on GAAP that are subject to revision, and the exact characterof the distributions for tax purposes cannot be determined until our finalbooks and records are finalized for the calendar year. Following the calendar yearend, after definitive information has been determined by us, if we have madedistributions of taxable income (or return of capital), we will deliver a Form 1099-DIVto our stockholders specifying such amount and the tax characterization of suchamount. Therefore, these estimates are made solely in order to comply with therequirements of Section 19(a) of the 1940 Act and should not berelied upon for tax reporting or any other purposes and could differsignificantly from the actual character of distributions for tax purposes.

 

Thefollowing GAAP estimates were made by the Board of Directors during the quarterended December 31, 2009:

 
| **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                       |       |
|                        |            |                          |            |                                 |            |                             |            |  |  |  |

 

Becausethe Board of Directors declares distributions at the beginning of a quarter, itis difficult to estimate how much of our monthly distributions, based on GAAP,will come from ordinary income, capital gains and returns of capital.Subsequent to the quarter ended December 31, 2009, the followingcorrections were made to the above listed estimates for that quarter:

 
| **Payment Date**  | ** ** | **Ordinary Income** | ** ** | **Return of Capital** | ** ** | **Total Distribution** | ** ** |
|------------------------|------------|--------------------------|------------|---------------------------------|------------|-----------------------------|------------|
| October 30, 2009  |       | $                        | 0.042      |                            | $          | (0.002                      | )          | $ | 0.040 |   |
| November 30, 2009 |       | 0.081                    |       | (0.041                          | )          | 0.040                       |       |
| December 31, 2009 |       | 0.016                    |       | 0.024                           |       | 0.040                       |       |
|                        |            |                          |            |                                 |            |                             |            |  |  |  |

 

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Fordistributions declared subsequent to quarter end, the following estimates,based on GAAP, have been made pursuant to Section 19(a) of the 1940Act:

 
| **Payment Date**  | ** ** | **Ordinary Income** | ** ** | **Return of Capital** | ** ** | **Total Distribution** | ** ** |
|------------------------|------------|--------------------------|------------|---------------------------------|------------|-----------------------------|------------|
| January 29, 2010  |       | $                        | 0.042      |                            | $          | (0.002                      | )          | $ | 0.040 |   |
| February 26, 2010 |       | 0.035                    |       | 0.005                           |       | 0.040                       |       |
| March 31, 2010    |       | 0.045                    |       | (0.005                          | )          | 0.040                       |       |
|                        |            |                          |            |                                 |            |                             |            |  |  |  |

 

*Issuance of Equity*

 

OnJuly 21, 2009, we filed a registration statement (the “RegistrationStatement”) with the SEC that was amended on October 2, 2009.  The Registration Statement was declaredeffective on October 8, 2009, and it will permit us to issue, through oneor more transactions, up to an aggregate of $300.0 million in securities,consisting of common stock, senior common stock, preferred stock, subscriptionrights, debt securities and warrants to purchase common stock, or a combinationof these securities. To date, we have incurred approximately $64 of costs inconnection with the Registration Statement.

 

Weanticipate issuing equity securities to obtain additional capital in thefuture. However, we cannot determine the terms of any future equity issuancesor whether we will be able to issue equity on terms favorable to us, or at all.Additionally, when our common stock is trading below net asset value, we willhave regulatory constraints under the 1940 Act on our ability to obtainadditional capital in this manner. At December 31, 2009, our stock closedtrading at $4.56, representing a 42.5% discount to our net asset value of $7.93per share. Generally, the 1940 Act provides that we may not issue stock for aprice below net asset value per share, without first obtaining the approval ofour stockholders and our independent directors or through a rights offering.

 

Weraised additional 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 $40.4 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.

 

*Future Capital Resources*

 

Atour 2009 annual stockholders meeting, our stockholders approved a proposal thatallows us to issue long-term rights, including warrants to purchase shares ofour common 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, currently scheduledfor August 2010, at which time we currently expect that we will ask ourstockholders to vote in favor of renewing this proposal for another year.

 

*Revolving Credit Facility*

 

OnApril 14, 2009, we entered into the Credit Facility, which provides for a$50.0 million revolving line of credit arranged by BB&T as administrativeagent, replacing Deutsche Bank who served as administrative agent under ourprior credit 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 amounts outstandingunder the prior credit agreement.  TheCredit Facility may be expanded up to $125.0 million through the addition ofother committed lenders to the facility. The Credit Facility matures on April 14, 2010 and, if the facilityis not renewed or extended by this date, all unpaid principal and interest willbe due and payable within one year of maturity. Advances under the Credit Facility will generally bear interest at the30 day LIBOR rate (subject to a minimum rate of 2%), plus 5% per annum, with acommitment fee of 0.75% per annum on undrawn amounts.

 

Interestis payable 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.

 

TheCredit Facility contains covenants that require Business Investment to maintainits status as a separate entity, prohibit certain significant transactions(such as mergers, consolidations, liquidations or dissolutions) and restrictmaterial changes to our credit and collection policies without lenders consent.The Credit Facility also limits the borrower and industry concentrations ofloans that 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 December 31, 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,

 

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maintaincertain financial ratios, including asset and interest coverage a minimum networth, and a minimum number of obligors required in the borrowing base of thecredit agreement.

 

Asof February 8, 2010, there was approximately $15.0 million of borrowingsoutstanding on the Credit Facility at an interest rate of approximately 7.0%,and the remaining borrowing capacity under the Credit Facility wasapproximately $33.7 million.

 

DuringMay 2009, we cancelled our interest rate cap agreement with Deutsche Bankand 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 December 31, 2009, the interest rate cap agreement haddepreciated by approximately $34 and had a fair value of $5.

 

Inconjunction with entering into the Credit Facility, we amended a performanceguaranty which remains substantially similar to the form under the previouscredit facility. The performance guaranty requires us to maintain a minimum networth of $169.0 million plus 50% of all equity and subordinated debt raisedafter 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 our status as a BDC under the 1940 Act and asa RIC under the Code. As of December 31, 2009, we were in compliance withthe covenants under the performance guaranty.

 

Ourcontinued compliance with these covenants, however, depends on many factors,some of which are beyond our control. In particular, depreciation in thevaluation of our assets, which valuation is subject to changing marketconditions that are presently very volatile, affects our ability to comply withthese covenants. During the nine months ended December 31, 2009, netunrealized depreciation on our investments was approximately $3.5 million,primarily brought about by continuing devaluations in our equity holdings ofvarious portfolio companies, partially offset by the reversal of $35.7 millionof previously unrealized depreciation on syndicated loans that were sold duringthe period, compared to an unrealized depreciation of approximately $13.7million during the prior year period. Given the continued deterioration in thecapital markets, net unrealized depreciation in our portfolio may continue tothreaten our ability to comply with the covenants under the Credit Facility.Accordingly, there are no assurances that we will continue to comply with thesecovenants. Failure to comply with these covenants would result in a default,which, if we were unable to obtain a waiver from the lenders, could accelerateour repayment obligations under the Credit Facility and thereby have a materialadverse impact on our liquidity, financial condition, results of operations andability to pay distributions, as more fully described below.

 

TheCredit Facility matures on April 14, 2010, and, if the facility is notrenewed or extended by this date, all unpaid principal and interest will be dueand payable within one year of maturity (April 14, 2011) and allcollections of principal from our loans will be required to be used to payoutstanding principal under the Credit Facility. There can be no guarantee thatwe will be able to renew, extend or replace the Credit Facility on terms thatare favorable to us, or at all.  Ourability to obtain replacement financing will be constrained by current economicconditions affecting the credit markets, which have significantly deterioratedover the last several quarters and may decline further.  Consequently, any renewal, extension orrefinancing of the Credit Facility may result in significantly higher interestrates and related charges and may impose significant restrictions on the use ofborrowed funds with regard to our ability to fund investments or maintaindistributions.  For instance, inconnection with the establishment of the Credit Facility, the size of the linewas reduced from $125.0 million under our prior facility to $50.0 million underthe Credit Facility, as Deutsche Bank, who was a committed lender of our priorcredit facility, elected not to participate in the new facility and withdrewits commitment.  If we are not able torenew, extend or refinance the Credit Facility, this would likely have amaterial adverse effect on our liquidity and ability to fund new investments orpay 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 thoserecorded in connection with the Syndicated Loan Sales, which resulted in arealized loss of approximately $34.6 million for the first quarter of fiscalyear 2010.  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.

 

**Contractual Obligations and Off-Balance Sheet Arrangements**

 

Wewere not a party to any signed term sheets for potential investments as of December 31,2009.

 

InOctober 2008, we executed a guaranty of a vehicle finance facilityagreement between Ford Motor Credit Company (“FMC”) and Auto Safety House, LLC(“ASH”), one of our Control investments (the “Finance Facility”).  The Finance Facility provides ASH with a lineof credit of up to $0.5 million for component Ford parts used by ASH to buildtruck bodies under a separate contract. Title and ownership of the parts is retained by Ford. The guaranty ofthe Finance Facility will expire upon termination of the separate parts supplycontract with Ford or upon our replacement as guarantor.  The Finance Facility is secured by all of theassets of Business Investment.  As of December 31,2009, we have not been required to make any payments on the guaranty of theFinance Facility, and we consider the credit risk to be remote.

 

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**Critical Accounting Policies**

 

Thepreparation of financial statements and related disclosures in conformity withaccounting principles generally accepted in the United States (“GAAP”) requiresmanagement to make estimates and assumptions that affect the reportedconsolidated amounts of assets and liabilities, including disclosure ofcontingent assets and liabilities at the date of the financial statements, andrevenues and expenses during the period reported. Actual results could differmaterially from those estimates. We have identified our investment valuationprocess, which was modified during the quarter ended September 30, 2009,as our most critical accounting policy.

 

**Investment Valuation**

 

Themost significant estimate inherent in the preparation of our condensedconsolidated financial statements is the valuation of investments and therelated amounts of unrealized appreciation and depreciation of investmentsrecorded.

 

*General Valuation 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.

 

Weadopted ASC 820-10 on April 1, 2008. In part, ASC 820-10 defines fairvalue and establishes a framework for measuring fair value and expandsdisclosures about assets and liabilities measured at fair value. The newguidance provides a consistent definition of fair value that focuses on exitprice in the principal, or most advantageous, market and prioritizes, within ameasurement of fair value, the use of market-based inputs over entity-specificinputs. The guidance also establishes the following three-level hierarchy forfair value measurements based upon the transparency of inputs to the valuationof an asset or liability as of the measurement date.

 

·                  *Level 1*—inputs to thevaluation methodology are quoted prices (unadjusted) for identical assets orliabilities in active markets;

 

·                  *Level 2*—inputs to thevaluation methodology include quoted prices for similar assets and liabilitiesin active markets, and inputs that are observable for the asset or liability,either directly or indirectly, for substantially the full term of the financialinstrument. Level 2 inputs are in those markets for which there are fewtransactions, the prices are not current, little public information exists orinstances where prices vary substantially over time or among brokered marketmakers; and

 

·                  *Level 3*—inputs to thevaluation methodology are unobservable and significant to the fair valuemeasurement. Unobservable inputs are those inputs that reflect our ownassumptions that market participants would use to price the asset or liabilitybased upon the best available information.

 

SeeNote 3, *Investments* in the accompanying notes tothe condensed consolidated financial statements for additional informationregarding fair value measurements and our adoption of ASC 820-10.

 

Weuse generally accepted valuation techniques to value our portfolio unless wehave specific information about the value of an investment to determineotherwise. From time to time we may accept an appraisal of a business in whichwe hold securities. These appraisals are expensive and occur infrequently butprovide a third-party valuation opinion that may differ in results, techniquesand scopes used to value our investments. When these specific third-party appraisals are engaged or accepted, wewould use estimates of value provided by such appraisals and our ownassumptions, including estimated remaining life, current market yield andinterest rate spreads of similar securities as of the measurement date, tovalue the investment we have in that business.

 

Indetermining the value of our investments, our Adviser has established aninvestment valuation policy (the “Policy”). The Policy has been approved by our Board of Directors, and each quarterthe Board of Directors reviews whether our Adviser has applied the Policyconsistently and votes whether or not to accept the recommended valuation ofour investment portfolio.

 

ThePolicy, which is summarized below, applies to the following categories ofsecurities:

 

·                  Publicly-tradedsecurities;

·                  Securities forwhich a limited market exists; and

·                  Securities forwhich no market exists.

 

*Valuation Methods:*

 

**Publicly-traded securities:** We determine the value ofpublicly-traded securities based on the closing price for the security on theexchange or securities market on which it is listed and primarily traded on thevaluation date. To the extent that we own restricted securities that are notfreely tradable, but for which a public market otherwise exists, we will use themarket value of that security adjusted for any decrease in value resulting fromthe restrictive feature.

 

**Securities for which a limited market exists:**We valuesecurities that are not traded on an established secondary securities market,but for which a limited market for the security exists, such as certainparticipations in, or assignments of, syndicated loans, at the

 

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quotedbid price.  In valuing these assets, weassess trading activity in an asset class, evaluate variances in prices andother market insights to determine if any available quote prices are reliable.  If we conclude that quotes based on active marketsor trading activity may be relied upon, firm bid prices are requested; however,if a firm bid price is unavailable, we base the value of the security upon theindicative bid price offered by the respective originating syndication agent’strading desk, or secondary desk, on or near the valuation date.  To the extent that we use the indicative bidprice as a basis for valuing the security, our Adviser may take further stepsto consider 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, 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, which provides guidance on the use of a reporting entity’s ownassumptions about future cash flows and risk-adjusted discount rates whenrelevant observable inputs, such as quotes in active markets, are notavailable. When relevant observable market data does not exist, the alternativeoutlined in ASC 820-10 is the use of valuing investments based on DCF.  For the purposes of using DCF to provide fairvalue estimates, we consider multiple inputs such as a risk-adjusted discountrate that incorporates adjustments that market participants would make both fornonperformance and liquidity risks.  Assuch, we developed a modified discount rate approach that incorporates riskpremiums including, among others, increased probability of default, or higherloss given default, or increased liquidity risk. The DCF valuations applied tothe syndicated loans provide an estimate of what we believe a marketparticipant would pay to purchase a syndicated loan in an active market,thereby establishing a fair value.  Weapply the DCF methodology in illiquid markets until quoted prices are availableor are deemed reliable based on trading activity.

 

Through December 31, 2009, we assessed tradingactivity in syndicated loan assets and determined that there continued to bemarket liquidity and a secondary market for these assets.  Thus, firm bid prices or indicative bids wereused to fair value our remaining syndicated loans at December 31, 2009.

 

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

 

(1)        **Portfolio investments comprised solely of debt securities:** Debt securitiesthat are not publicly traded on an established securities market, or for whicha limited market does not exist (“Non-Public Debt Securities”), and that areissued by portfolio companies where we have no equity, or equity-likesecurities, are fair valued in accordance with the terms of the policy, whichutilizes opinions of value submitted to us by Standard & Poor’sSecurities Evaluations, Inc. (“SPSE”). We may also submit paid PIKinterest to SPSE for their evaluation when it is determined that PIK interestis likely to be received.

 

Inthe case of Non-Public Debt Securities, we have engaged SPSE to submit opinionsof value for our debt securities that are issued by portfolio companies inwhich 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 there is a reasonable probability of receiving a successfee on a given loan. SPSE will only evaluate the debt portion of ourinvestments for which we specifically request evaluation, and may decline tomake requested evaluations for any reason at its sole discretion. Uponcompleting our collection of data with respect to the investments (which mayinclude the information described below under “—Credit Information,” the riskratings of the loans described below under “—Loan Grading and Risk Rating” andthe factors described hereunder), this valuation data is forwarded to SPSE forreview and analysis. SPSE makes its independent assessment of the data that wehave assembled and assesses its independent data to form an opinion as to whatthey consider to be the market values for the securities. With regard to itswork, SPSE has issued the following paragraph:

 

SPSEprovides evaluated price opinions which are reflective of what SPSE believesthe bid side of the market would be for each loan after careful review andanalysis of descriptive, market and credit information. Each price reflectsSPSE’s best judgment based upon careful examination of a variety of marketfactors. Because of fluctuation in the market and in other factors beyond itscontrol, SPSE cannot guarantee these evaluations. The evaluations reflect themarket prices, or estimates thereof, on the date specified. The prices arebased on comparable market prices for similar securities. Market informationhas been obtained from reputable secondary market sources. Although thesesources are considered reliable, SPSE cannot guarantee their accuracy.

 

SPSEopinions of value of our debt securities that are issued by portfolio companieswhere we have no equity, or equity-like securities are submitted to our Boardof Directors along with our Adviser’s supplemental assessment andrecommendation regarding valuation of each of these investments. Our Advisergenerally accepts the opinion of value given by SPSE; however, in certainlimited circumstances, such as when our Adviser may learn new informationregarding an investment between the time of submission to SPSE and the date ofour Board of Directors’ assessment, our Adviser’s conclusions as to value maydiffer from the opinion of value delivered by SPSE. Our Board of Directors thenreviews whether our Adviser has followed its established procedures fordeterminations of fair value, and votes to accept or reject the recommendedvaluation of our investment portfolio. Our Adviser and our managementrecommended, and the Board of Directors voted to accept, the opinions of valuedelivered by 

 

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SPSEon the loans in our portfolio as denoted on the Schedule of Investmentsincluded in our accompanying condensed consolidated financial statements.

 

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

 

(2)        **Portfolio investments in controlled companies comprised of a bundle ofinvestments, which can include debt and equity securities:** The fair valueof these investments is determined based on the total enterprise value of theportfolio company, or issuer, utilizing a liquidity waterfall approach underASC 820-10.  For Non-Public DebtSecurities and equity or equity-like securities (e.g. preferred equity, equity,or other equity-like securities) that are purchased together as part of apackage, where we have control or could gain control through an option orwarrant security, both the debt and equity securities of the portfolioinvestment would exit in the mergers and acquisitions market as the principalmarket, generally through a sale or recapitalization of the portfolio company.In accordance with ASC 820-10, we apply the in-use premise of value whichassumes the debt and equity securities are sold together. Under this liquiditywaterfall approach, we continue to use the enterprise value methodologyutilizing a liquidity waterfall approach to determine the fair value of theseinvestments under ASC 820-10 if we have the ability to initiate a sale of aportfolio company as of the measurement date. Under this approach, we firstcalculate the total enterprise value of the issuer by incorporating some or allof the following factors:

 

·                  the issuer’sability to make payments;

·                  the earnings ofthe issuer;

·                  recent sales tothird parties of similar securities;

·                  the comparisonto publicly traded securities; and

·                  DCF or otherpertinent factors.

 

Ingathering the sales to third parties of similar securities, we may referenceindustry statistics and use outside experts. Once we have estimated the totalenterprise value of the issuer, we subtract the value of all the debtsecurities of the issuer; which are valued at the contractual principal balance.Fair values of these debt securities are discounted for any shortfall of totalenterprise value over the total debt outstanding for the issuer. Once thevalues 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 accuratelyreflect the value of the debt component, our Adviser may recommend that we usea valuation by SPSE, or if that is unavailable, a DCF valuation technique.

 

(3)        **Portfolio investments in non-controlled companies comprised of a bundleof investments, which can include debt and equity securities:**We valueNon-Public Debt Securities that are purchased together with equity orequity-like securities from the same portfolio company, or issuer, for which wedo not control or cannot gain control as of the measurement date, using ahypothetical secondary market as our principal market. In accordance with ASC820-10, we determine the fair value of these debt securities of non-controlinvestments assuming the sale of an individual debt security using thein-exchange premise of value (as defined in ASC 820-10). As such, we estimatethe fair value of the debt component using estimates of value provided by SPSEand our own assumptions in the absence of observable market data, includingsynthetic credit ratings, estimated remaining life, current market yield andinterest rate spreads of similar securities as of the measurement date.Subsequent to June 30, 2009, for equity or equity-like securities ofinvestments for which we do not control or cannot gain control as of themeasurement date, we estimate the fair value of the equity using thein-exchange premise of value based on factors such as the overall value of theissuer, the relative fair value of other units of account, including debt, orother relative value approaches. Consideration also is given to capitalstructure and other contractual obligations that may impact the fair value ofthe equity. Further, we may utilize comparable values of similar companies,recent investments and indices with similar structures and risk characteristicsor our own assumptions in the absence of other observable market data and mayalso employ DCF valuation techniques.

 

Dueto the uncertainty inherent in the valuation process, such estimates of fairvalue may differ significantly from the values that would have been obtainedhad a ready market for the securities existed, and the differences could bematerial. Additionally, changes in the market environment and other events thatmay occur over the life of the investments may cause the gains or lossesultimately realized on these investments to be different than the valuationscurrently assigned. There is no single standard for determining fair value ingood faith, as fair value depends upon circumstances of each individual case.In general, fair value is the amount that we might reasonably expect to receiveupon the current sale of the security in an arms-length transaction in thesecurity’s principal market.

 

*Valuation Considerations: *From time to time, depending on certain circumstances, the Adviser mayuse 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;

 

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·                  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.

 

*Credit Information:*  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.

 

*Loan Grading and Risk Rating:*  As part of our valuation procedures above, werisk rate all of our investments in debt securities. For syndicated loans thathave been rated by an NRSRO (as defined in Rule 2a-7 under the 1940 Act),we use the NRSRO’s risk rating for such security. For all other debtsecurities, we use a proprietary risk rating system. Our risk rating systemuses a scale of 0 to 10, with 10 being the lowest probability of default. Thissystem is used to estimate the probability of default on debt securities andthe probability of loss if there is a default. These types of systems are referredto as risk rating systems and are used by banks and rating agencies. The riskrating system covers both qualitative and quantitative aspects of the businessand the securities we hold.

 

Forthe debt securities for which we do not use a third-party NRSRO risk rating, weseek to have our risk rating system mirror the risk rating systems of majorrisk rating organizations, such as those provided by an NRSRO. While we seek tomirror the NRSRO systems, we cannot provide any assurance that our risk ratingsystem will provide the same risk rating as an NRSRO for these securities. Thefollowing chart is an estimate of the relationship of our risk rating system tothe designations used by two NRSROs as they risk rate debt securities of majorcompanies. Because our system rates debt securities of companies that areunrated by any NRSRO, there can be no assurance that the correlation to theNRSRO set out below is accurate. We believe our risk rating would besignificantly higher than a typical NRSRO risk rating because the risk ratingof the typical NRSRO is designed for larger businesses. However, our riskrating has been designed to risk rate the securities of smaller businesses thatare not rated by a typical NRSRO. Therefore, when we use our risk rating onlarger business securities, the risk rating is higher than a typical NRSROrating. The primary difference between our risk rating and the rating of atypical NRSRO is that our risk rating uses more quantitative determinants andincludes qualitative determinants that we believe are not used in the NRSROrating. It is our understanding that most debt securities of medium-sizedcompanies do not exceed the grade of BBB on an NRSRO scale, so there would beno debt securities in the middle market that would meet the definition of AAA,AA or A. Therefore, our scale begins with the designation 10 as the best riskrating which may be equivalent to a BBB from an NRSRO, however, no assurancecan be given that a 10 on our scale is equal to a BBB 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)                    *Thedefault rates set forth are for a ten year term debt security. If a debtsecurity is less than ten years, then the probability of default is adjusted toa lower percentage for the shorter period, which may move the security higheron our risk rating scale*

 

Theabove scale gives an indication of the probability of default and the magnitudeof the loss if there is a default. Our policy is to stop accruing interest onan investment if we determine that interest is no longer collectible.  At December 31, 2009, one investment,ASH Holdings Corp., was on non-accrual for approximately $1.7 million at fairvalue, or 0.9% of the aggregate fair value of our investment portfolio.  Additionally, we do not risk rate our equitysecurities.

 

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Thefollowing table lists the risk ratings for all non-syndicated loans in ourportfolio at December 31, 2009 and March 31, 2009, representingapproximately 93% and 59%, respectively, of all loans in our portfolio at theend of each period:

 
| **Rating**       | ** ** | **December 31,  2009** | ** ** | **March 31,  2009** | ** ** |
|------------------|------------|-----------------------------|------------|--------------------------|------------|
| Highest          | ** ** | **8.0**                     |       | 7.0                      |       |
| Average          | ** ** | **5.8**                     |       | 5.5                      |       |
| Weighted Average | ** ** | **5.5**                     |       | 5.1                      |       |
| Lowest           | ** ** | **3.0**                     |       | 2.0                      |       |

 

Thefollowing table lists the risk ratings for syndicated loans in our portfoliothat were not rated by an NRSRO at December 31, 2009 and March 31,2009, representing approximately 1% and 12%, respectively, of all loans in ourportfolio at the end of each period:

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

 

Forsyndicated loans that are currently rated by an NRSRO, we risk rate such loansin accordance 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 December 31,2009 and March 31, 2009, representing approximately 6% and 29%,respectively, of all loans in our portfolio at the end of each period:

 
| **Rating**        | ** ** | **December 31,  2009** | ** ** | **March 31,  2009** | ** ** |
|-------------------|------------|-----------------------------|------------|--------------------------|------------|
| Highest           | ** ** | **B+/Ba3**                  |       | BB/Ba2                   |       |
| Average           | ** ** | **B/B2**                    |       | B/B2                     |       |
| Weighted  Average | ** ** | **B/B2**                    |       | B/B2                     |       |
| Lowest            | ** ** | **-/B2**                    |       | CCC+/B3                  |       |

 

**Tax Status**

 

*Federal Income Taxes*

 

We intend to continue toqualify for treatment as a RIC under Subtitle A, Chapter 1 of Subchapter M ofthe Code. As a RIC, we are not subject to federal income tax on the portion ofour taxable income and gains distributed to stockholders. To qualify as a RIC,we must meet certain source-of-income, asset diversification and annualdistribution requirements.  Under theannual distribution requirements, we are required to distribute to stockholdersat least 90% of our investment company taxable income, as defined by theCode.  Our policy is to pay out asdistributions up to 100% of that amount.

 

Inan effort to avoid certain excise taxes imposed on RICs, we currently intend todistribute during each calendar year, an amount at least equal to the sum of (1) 98%of our ordinary income for the calendar year, (2) 98% of our capital 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 Income Recognition*

 

Interestincome, 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 December 31,2009, one Control investment, ASH Holdings Corp., was on non-accrual with afair value of approximately $1.7 million, or 0.9% of the fair value of allloans held in our portfolio at December 31, 2009.  At March 31, 2009, one Controlinvestment, ASH Holdings Corp., was on non-accrual with a fair value ofapproximately $2.6 million, or 0.8% of the fair value of all loans held in ourportfolio at March 31, 2009. Conditional interest, or a success fee, isrecorded when earned upon full repayment of a loan investment. To date we havenot recorded any conditional interest. Dividend income on preferred equitysecurities is accrued to the extent that such amounts are expected to becollected and that we have the option to collect such amounts in cash. Duringthe quarter ended December 31, 2009, we recorded and collectedapproximately $953 of cash dividends on preferred shares of A. Stucki HoldingCorp; otherwise, we have not accrued for any other such dividend income**.**

 

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*Services Provided to Portfolio Companies*

 

Asa business development company under the 1940 Act, we are required to makeavailable significant managerial assistance to our portfolio companies. Weprovide these services through our Adviser, who provides these services on ourbehalf through its officers who are also our officers. Currently, neither wenor our Adviser charges a fee for managerial assistance; however, if ourAdviser does receive fees for such managerial assistance, our Adviser willcredit the managerial assistance fees to the base management fee due from us toour Adviser.

 

OurAdviser receives fees for the other services it provides to our portfoliocompanies. These other fees are typically non-recurring, are recognized asrevenue when earned and are generally paid directly to our Adviser by theborrower or potential borrower upon the closing of the investment. The servicesour Adviser provides to our portfolio companies vary by investment, butgenerally include a broad array of services such as investment bankingservices, arranging bank and equity financing, structuring financing frommultiple lenders and investors, reviewing existing credit facilities,restructuring existing investments, raising equity and debt capital, turnaroundmanagement, merger and acquisition services and recruiting new managementpersonnel. When our Adviser receives fees for these services, 50% of certain ofthose fees are voluntarily and irrevocably credited against the base managementfee that we pay to our Adviser. Any services of this nature subsequent to theclosing would typically generate a separate fee at the time of completion.

 

OurAdviser also receives fees for monitoring and reviewing portfolio companyinvestments. These fees are recurring and are generally paid annually orquarterly in advance to our Adviser throughout the life of the investment. Feesof this nature are recorded as revenue by our Adviser when earned and are notcredited against the base management fee.

 

Wemay receive fees for the origination and closing services we provide toportfolio companies through our Adviser. These fees are paid directly to us andare recognized as revenue upon closing of the originated investment and arereported as fee income in the accompanying condensed consolidated statements ofoperations.

 

**Recent Accounting Pronouncements**

 

Refer to Note 2 *Summary of SignificantAccounting Policies* in the accompanying notes to our condensedconsolidated financial statements for a summary of recently issued accountingpronouncements.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK.**

 

Weare subject to financial market risks, including changes in interestrates.  We estimate that ultimately approximately20% of the loans in our portfolio will be made at fixed rates and approximately80% will be made at variable rates.   Asof December 31, 2009, our portfolio consisted of the following breakdownin relation to all outstanding debt:

 
| 17      | %      | variable rates              |       |
|---------|--------|-----------------------------|------------|
| 48      |   | variable rates with a floor |       |
| 35      |   | fixed rates                 |       |
| **100** | **%**  | **Total**                   | ** ** |

 

Therehave been no material changes in the quantitative and qualitative market riskdisclosures for the three months ended December 31, 2009 from thosedisclosed in our Annual Report on Form 10-K for the fiscal year ended March 31,2009, as filed with the SEC on June 2, 2009.

 

**ITEM 4. CONTROLS AND PROCEDURES.**

 

a)  Evaluation of Disclosure Controls andProcedures

 

Asof December 31, 2009, we, including our Chief Executive Officer and ChiefFinancial Officer, evaluated the effectiveness of the design and operation ofour disclosure controls 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 ofachieving the desired control objectives, and management necessarily wasrequired to apply its judgment in evaluating the cost-benefit relationship ofpossible controls and procedures.

 

b)Changes in Internal Control over Financial Reporting

 

Therehave been no changes in our internal control over financial reporting thatoccurred during the quarter ended December 31, 2009, that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

 

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**PART II—OTHER INFORMATION**

 

**ITEM 1.  LEGALPROCEEDINGS.**

 

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.**

 

Ourbusiness is subject to certain risks and events that, if they occur, couldadversely affect our financial condition and results of operations and thetrading price of our common stock. For a discussion of these risks, pleaserefer to the “Risk Factors” section in our final prospectus dated October 8,2009, as filed with the SEC on October 14, 2009 (the “Final Prospectus”).  In connection with our preparation of thisquarterly report, management has reviewed and considered these risk factors andhas determined that the following risk factor should be read in connection withthe existing risk factors disclosed in our Final Prospectus.

 

*Any inability to renew, extend orreplace our credit facility**on terms favorable to us, or at all,**could adversely impact ourliquidity and ability to fund new investments or maintain distributions to ourstockholders.*

 

Availability under theCredit Facility will terminate on April 14, 2010 and if the facility isnot renewed or extended by such date, all principal and interest will be dueand payable within one year of maturity. Between thematurity date and April 14, 2011, our lenders have the right to apply allinterest income to amounts outstanding under the Credit Facility.  As of February 8, 2010,there was approximately $15.0 million of borrowings outstanding on the CreditFacility.  There can be no guarantee that we will be able torenew, extend or replace the Credit Facility on terms that are favorable to us,or at all. Our ability to obtain replacement financing will be constrained bycurrent economic conditions affecting the credit markets. Consequently, anyrenewal, extension or refinancing of the Credit Facility will likely result insignificantly higher interest rates and related charges and may imposesignificant restrictions on the use of borrowed funds with regard to ourability to fund investments or maintain distributions to stockholders. Forinstance, in connection with our most recent renewal, the size of our creditfacility was reduced from $125 million to $50 million. If we are not able torenew, extend or refinance the Credit Facility, this would likely have amaterial adverse effect on our liquidity and ability to fund new investments ormaintain our distributions to stockholders. If we are unable to securereplacement financing, we may be forced to sell certain assets ondisadvantageous terms, which may result in realized losses and such realizedlosses could materially exceed the amount of any unrealized depreciation onthese assets as of our most recent balance sheet date, which would have amaterial adverse effect on our results of operations. In addition to sellingassets, or as an alternative, we may issue equity in order to repay amountsoutstanding under the credit facility. Based on the recent trading prices ofour stock, such an equity offering may have a substantial dilutive impact onour existing stockholders’ interest in our earnings and assets and votinginterest in us.

 

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

 

Notapplicable.

 

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

 

Notapplicable.

 

**ITEM 4.  SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS.**

 

Notapplicable.

 

**ITEM 5.  OTHERINFORMATION.**

 

Notapplicable.

 

**ITEM 6. EXHIBITS**

 

Seethe exhibit index.

 

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**SIGNATURE**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
| ** **                        | **GLADSTONE INVESTMENT CORPORATION** |
|-----------------------------------|--------------------------------------|
|                              |                                 |   |
|                              | By:                                  | /s/  David Watson |
|                              |                                 | David  Watson |
| * *                          | * *                             | *Chief Financial Officer* |
| * *                          | * *                             | * * |
| Date:  February 8, 2010 | * *                             | * * |

 

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**EXHIBIT INDEX**

 
| **Exhibit** | ** ** | **Description**                                                                                                                                                                                                                                |
|-------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1         |       | Amended  and Restated Certificate of Incorporation, incorporated by reference to  Exhibit a.2 to Pre-Effective Amendment No. 1 to the Registration  Statement on Form N-2 (File No. 333-123699), filed May 13,  2005. |
| 3.2         |       | Amended  and Restated Bylaws, incorporated by reference to Exhibit b.2 to  Pre-Effective Amendment No. 3 to the Registration Statement on  Form N-2 (File No. 333-123699), filed June 21, 2005.                       |
| 3.3         |       | First  Amendment to Amended and Restated Bylaws, incorporated by reference to  Exhibit 99.1 to the Company’s Current Report on Form 8-K (File  No. 814-00704), filed on July 10, 2007.                                |
| 4.1         |       | Specimen  Stock Certificate, incorporated by reference to Exhibit 99.1 to  Pre-Effective Amendment No. 3 to the Registration Statement on  Form N-2 (File No. 333-123699), filed June 21, 2005.                       |
| 11          |       | Computation  of Per Share Earnings (included in the notes to the unaudited condensed  consolidated financial statements contained in this report).                                                                                             |
| 31.1        |       | Certification  of Chief Executive Officer pursuant to section 302 of The Sarbanes-Oxley Act  of 2002.                                                                                                                                          |
| 31.2        |       | Certification  of Chief Financial Officer pursuant to section 302 of The Sarbanes-Oxley Act  of 2002.                                                                                                                                          |
| 32.1        |       | Certification  of Chief Executive Officer pursuant to section 906 of The Sarbanes-Oxley Act  of 2002.                                                                                                                                          |
| 32.2        |       | Certification  of Chief Financial Officer pursuant to section 906 of The Sarbanes-Oxley Act  of 2002.                                                                                                                                          |

 

Allother exhibits for which provision is made in the applicable regulations of theSecurities and Exchange Commission are not required under the relatedinstruction or are inapplicable and therefore have been omitted.

 

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