##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q







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

FOR THE QUARTER ENDED MARCH 31, 2012



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

COMMISSION FILE NUMBER: 814-00237





GLADSTONE
CAPITAL CORPORATION

(Exact name of registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|MARYLAND                                                       |  | 54-2040781                          
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer Identification No.)

1521 WESTBRANCH DRIVE, SUITE 200

MCLEAN, VIRGINIA 22102

(Address of principal executive office)

(703) 287-5800

(Registrants telephone number, including area code)





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.    Yes  x    No   ̈.

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

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



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

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

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date. The number of shares of the issuers common stock, $0.001 par value
per share, outstanding as of April 30, 2012 was 21,000,160.









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##### Table of Contents

GLADSTONE CAPITAL CORPORATION

TABLE OF CONTENTS



|           |  |                                                                                                             |    |  |    | 
|---------- |  | ----------------------------------------------------------------------------------------------------------- | -- |  | -- | 
|PART I.    |  | FINANCIAL INFORMATION                                                                                       |    |  |    | 
|           |  |                                                                                                            
|Item 1.    |  | Financial Statements (Unaudited)                                                                            |    |  |    | 
|           |  |                                                                                                            
|           |  | Condensed Consolidated Statements of Assets and Liabilities as of March 31, 2012 and September 30,
2011     |    |  | 3  | 
|           |  | Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2012 and
2011  |    |  | 4  | 
|           |  | Condensed Consolidated Statements of Changes in Net Assets for the six months ended March 31, 2012 and
2011 |    |  | 5  | 
|           |  | Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2012 and
2011            |    |  | 6  | 
|           |  | Condensed Consolidated Schedules of Investments as of March 31, 2012 and September 30,
2011                 |    |  | 7  | 
|           |  | Notes to Condensed Consolidated Financial Statements                                                        |    |  | 15 | 
|           |  |                                                                                                            
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of
Operations                       |    |  | 34 | 
|           |  | Overview                                                                                                    |    |  | 34 | 
|           |  | Results of Operations                                                                                       |    |  | 37 | 
|           |  | Liquidity and Capital Resources                                                                             |    |  | 46 | 
|           |  |                                                                                                            
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                                                  |    |  | 56 | 
|           |  |                                                                                                            
|Item 4.    |  | Controls and Procedures                                                                                     |    |  | 57 | 
|           |  |                                                                                                            
|PART II.   |  | OTHER INFORMATION                                                                                           |    |  |    | 
|           |  |                                                                                                            
|Item 1.    |  | Legal Proceedings                                                                                           |    |  | 57 | 
|           |  |                                                                                                            
|Item 1A.   |  | Risk Factors                                                                                                |    |  | 57 | 
|           |  |                                                                                                            
|Item 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                 |    |  | 57 | 
|           |  |                                                                                                            
|Item 3.    |  | Defaults Upon Senior Securities                                                                             |    |  | 58 | 
|           |  |                                                                                                            
|Item 4.    |  | Mine Safety Disclosures                                                                                     |    |  | 58 | 
|           |  |                                                                                                            
|Item 5.    |  | Other Information                                                                                           |    |  | 58 | 
|           |  |                                                                                                            
|Item 6.    |  | Exhibits                                                                                                    |    |  | 58 | 
|           | 
|SIGNATURES |  |                                                                                                             | 59 | 



2



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##### Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

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

(UNAUDITED)



|                                                                                                                                                                                                                                                    |  |           |         |   |               |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------- | ------- | - | ------------- | - | ------- | -
|                                                                                                                                                                                                                                                    |  | March 31, |         |   | September 30, |  
|                                                                                                                                                                                                                                                    |  | 2012      |         |   | 2011          |  
|ASSETS                                                                                                                                                                                                                                              |  |           |         |   |               |   |         |  
|Investments at fair value                                                                                                                                                                                                                           |  |           |         |   |               |   |         |  
|Non-Control/Non-Affiliate investments (Cost of $273,931and $288,266, respectively)                                                                                                                                                                  |  | $         | 246,235 |   |               | $ | 257,302 |  
|Control investments (Cost of $99,029 and $94,549, respectively)                                                                                                                                                                                     |  |           | 41,932  |   |               |   | 45,645  |  
|                                                                                                                                                                                                                                                    |  |           |         |   |               |   |         |  
|Total investments at fair value (Cost of $372,960 and $382,815, respectively)                                                                                                                                                                       |  |           | 288,167 |   |               |   | 302,947 |  
|Cash                                                                                                                                                                                                                                                |  |           | 7,693   |   |               |   | 6,732   |  
|Restricted cash                                                                                                                                                                                                                                     |  |           | 1,225   |   |               |   |        |  
|Interest receivable  investments in debt securities                                                                                                                                                                                                |  |           | 3,055   |   |               |   | 3,066   |  
|Interest receivable  employees(A)                                                                                                                                                                                                                  |  |           | 62      |   |               |   |        |  
|Due from custodian                                                                                                                                                                                                                                  |  |           | 6,530   |   |               |   | 2,547   |  
|Deferred financing fees                                                                                                                                                                                                                             |  |           | 3,476   |   |               |   | 650     |  
|Other assets                                                                                                                                                                                                                                        |  |           | 1,103   |   |               |   | 1,682   |  
|                                                                                                                                                                                                                                                    |  |           |         |   |               |   |         |  
|TOTAL ASSETS                                                                                                                                                                                                                                        |  | $         | 311,311 |   |               | $ | 317,624 |  
|                                                                                                                                                                                                                                                    |  |           |         |   |               |   |         |  
|                                                                                                                                                                                                                                                    |  |          
|LIABILITIES                                                                                                                                                                                                                                         |  |           |         |   |               |   |         |  
|Borrowings at fair value (Cost of $65,800 and $99,400, respectively)                                                                                                                                                                                |  | $         | 65,800  |   |               | $ | 100,012 |  
|Mandatorily redeemable preferred stock, $0.001 par value per share, $25 liquidation preference per share; 4,000,000 and no
shares authorized; 1,539,882 and no shares issued and outstanding at March 31, 2012 and September 30, 2011, respectively |  |           | 38,497  |   |               |   |        |  
|Accounts payable and accrued expenses                                                                                                                                                                                                               |  |           | 495     |   |               |   | 513     |  
|Interest payable                                                                                                                                                                                                                                    |  |           | 226     |   |               |   | 289     |  
|Fees due to Adviser(A)                                                                                                                                                                                                                              |  |           | 2,063   |   |               |   | 1,760   |  
|Fee due to Administrator(A)                                                                                                                                                                                                                         |  |           | 211     |   |               |   | 194     |  
|Other liabilities                                                                                                                                                                                                                                   |  |           | 2,017   |   |               |   | 1,135   |  
|                                                                                                                                                                                                                                                    |  |           |         |   |               |   |         |  
|TOTAL LIABILITIES                                                                                                                                                                                                                                   |  | $         | 109,309 |   |               | $ | 103,903 |  
|                                                                                                                                                                                                                                                    |  |           |         |   |               |   |         |  
|Commitments and contingencies(B)                                                                                                                                                                                                                    |  |           |         |   |               |   |         |  
|NET ASSETS                                                                                                                                                                                                                                          |  | $         | 202,002 |   |               | $ | 213,721 |  
|                                                                                                                                                                                                                                                    |  |           |         |   |               |   |         |  
|                                                                                                                                                                                                                                                    |  |          
|ANALYSIS OF NET ASSETS                                                                                                                                                                                                                              |  |           |         |   |               |   |         |  
|Common stock, $0.001 par value per share, 46,000,000 and 50,000,000 shares authorized; 21,000,160 and 21,039,242
shares issued and outstanding at March 31, 2012 and September 30, 2011, respectively                                               |  | $         | 21      |   |               | $ | 21      |  
|Capital in excess of par value                                                                                                                                                                                                                      |  |           | 326,578 |   |               |   | 326,913 |  
|Notes receivable from employees(A)                                                                                                                                                                                                                  |  |           | (3,522  | ) |               |   | (3,858  | )
|Cumulative net unrealized depreciation of investments                                                                                                                                                                                               |  |           | (84,793 | ) |               |   | (79,867 | )
|Cumulative net unrealized appreciation of borrowings                                                                                                                                                                                                |  |           |        |   |               |   | (612    | )
|Net investment income in excess of distributions                                                                                                                                                                                                    |  |           | 108     |   |               |   | 108     |  
|Accumulated net realized losses                                                                                                                                                                                                                     |  |           | (36,390 | ) |               |   | (28,984 | )
|                                                                                                                                                                                                                                                    |  |           |         |   |               |   |         |  
|TOTAL NET ASSETS                                                                                                                                                                                                                                    |  | $         | 202,002 |   |               | $ | 213,721 |  
|                                                                                                                                                                                                                                                    |  |           |         |   |               |   |         |  
|NET ASSET VALUE PER COMMON SHARE AT END OF PERIOD                                                                                                                                                                                                   |  | $         | 9.62    |   |               | $ | 10.16   |  
|                                                                                                                                                                                                                                                    |  |           |         |   |               |   |         |  



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

|(B) | Refer to Note
10Commitments and Contingencies for additional information.
|--- | --------------------------------------------------------------------------

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



3



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##### Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

(UNAUDITED)



|                                                                       |  |                              |            |   |                            |   |            |      |  |   |            |   |  |   |            |  
|---------------------------------------------------------------------- |  | ---------------------------- | ---------- | - | -------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                       |  | Three Months Ended March 31, |            |   | Six Months Ended March 31, |  
|                                                                       |  | 2012                         |            |   | 2011                       |   |            | 2012 |  |   | 2011       |  
|INVESTMENT INCOME                                                      |  |                              |            |   |                            |   |            |      |  |   |            |   |  |   |            |  
|Interest income                                                        |  |                              |            |   |                            |   |            |      |  |   |            |   |  |   |            |  
|Non-Control/Non-Affiliate investments                                  |  | $                            | 7,840      |   |                            | $ | 5,754      |      |  | $ | 15,729     |   |  | $ | 12,680     |  
|Control investments                                                    |  |                              | 1,051      |   |                            |   | 1,414      |      |  |   | 2,410      |   |  |   | 2,211      |  
|Cash                                                                   |  |                              |           |   |                            |   |           |      |  |   | 6          |   |  |   |           |  
|Notes receivable from employees(A)                                     |  |                              | 63         |   |                            |   | 122        |      |  |   | 130        |   |  |   | 244        |  
|                                                                       |  |                              |            |   |                            |   |            |      |  |   |            |   |  |   |            |  
|Total interest income                                                  |  |                              | 8,954      |   |                            |   | 7,290      |      |  |   | 18,275     |   |  |   | 15,135     |  
|Other income                                                           |  |                              |            |   |                            |   |            |      |  |   |            |   |  |   |            |  
|Non-Control/Non-Affiliate investments                                  |  |                              | 2,042      |   |                            |   | 483        |      |  |   | 2,042      |   |  |   | 645        |  
|Control investments                                                    |  |                              |           |   |                            |   | 625        |      |  |   |           |   |  |   | 625        |  
|                                                                       |  |                              |            |   |                            |   |            |      |  |   |            |   |  |   |            |  
|Total other income                                                     |  |                              | 2,042      |   |                            |   | 1,108      |      |  |   | 2,042      |   |  |   | 1,270      |  
|                                                                       |  |                              |            |   |                            |   |            |      |  |   |            |   |  |   |            |  
|Total investment income                                                |  |                              | 10,996     |   |                            |   | 8,398      |      |  |   | 20,317     |   |  |   | 16,405     |  
|                                                                       |  |                              |            |   |                            |   |            |      |  |   |            |   |  |   |            |  
|                                                                       |  |                              |            |  
|EXPENSES                                                               |  |                              |            |   |                            |   |            |      |  |   |            |   |  |   |            |  
|Base management fee(A)                                                 |  |                              | 1,538      |   |                            |   | 1,365      |      |  |   | 3,094      |   |  |   | 2,712      |  
|Incentive fee(A)                                                       |  |                              | 1,304      |   |                            |   | 1,102      |      |  |   | 2,339      |   |  |   | 2,261      |  
|Administration fee(A)                                                  |  |                              | 209        |   |                            |   | 175        |      |  |   | 404        |   |  |   | 361        |  
|Interest expense on borrowings                                         |  |                              | 999        |   |                            |   | 478        |      |  |   | 2,138      |   |  |   | 358        |  
|Dividend expense on mandatorily redeemable preferred stock             |  |                              | 686        |   |                            |   |           |      |  |   | 1,120      |   |  |   |           |  
|Amortization of deferred financing fees                                |  |                              | 277        |   |                            |   | 368        |      |  |   | 734        |   |  |   | 664        |  
|Professional fees                                                      |  |                              | 362        |   |                            |   | 201        |      |  |   | 655        |   |  |   | 534        |  
|Other general and administrative expenses                              |  |                              | 528        |   |                            |   | 383        |      |  |   | 773        |   |  |   | 603        |  
|                                                                       |  |                              |            |   |                            |   |            |      |  |   |            |   |  |   |            |  
|Expenses before credits from Adviser                                   |  |                              | 5,903      |   |                            |   | 4,072      |      |  |   | 11,257     |   |  |   | 7,493      |  
|Credits to fees from Adviser(A)                                        |  |                              | (123       | ) |                            |   | (102       | )    |  |   | (574       | ) |  |   | (154       | )
|                                                                       |  |                              |            |   |                            |   |            |      |  |   |            |   |  |   |            |  
|Total expenses net of credits                                          |  |                              | 5,780      |   |                            |   | 3,970      |      |  |   | 10,683     |   |  |   | 7,339      |  
|                                                                       |  |                              |            |   |                            |   |            |      |  |   |            |   |  |   |            |  
|                                                                       |  |                              |            |  
|NET INVESTMENT INCOME                                                  |  |                              | 5,216      |   |                            |   | 4,428      |      |  |   | 9,634      |   |  |   | 9,066      |  
|                                                                       |  |                              |            |   |                            |   |            |      |  |   |            |   |  |   |            |  
|                                                                       |  |                              |            |  
|REALIZED AND UNREALIZED GAIN (LOSS)                                    |  |                              |            |   |                            |   |            |      |  |   |            |   |  |   |            |  
|Net realized gain (loss):                                              |  |                              |            |   |                            |   |            |      |  |   |            |   |  |   |            |  
|Non-Control/Non-Affiliate investments                                  |  |                              | 37         |   |                            |   | 161        |      |  |   | (8,212     | ) |  |   | 161        |  
|Control investments                                                    |  |                              |           |   |                            |   | (156       | )    |  |   |           |   |  |   | (156       | )
|                                                                       |  |                              |            |   |                            |   |            |      |  |   |            |   |  |   |            |  
|Total net realized gain (loss)                                         |  |                              | 37         |   |                            |   | 5          |      |  |   | (8,212     | ) |  |   | 5          |  
|Net unrealized (depreciation) appreciation:                            |  |                              |            |   |                            |   |            |      |  |   |            |   |  |   |            |  
|Non-Control/Non-Affiliate investments                                  |  |                              | (3,351     | ) |                            |   | (3,020     | )    |  |   | 3,267      |   |  |   | (8,062     | )
|Control investments                                                    |  |                              | (3,818     | ) |                            |   | (10,049    | )    |  |   | (8,193     | ) |  |   | (7,952     | )
|Borrowings                                                             |  |                              | 313        |   |                            |   | 255        |      |  |   | 612        |   |  |   | 693        |  
|                                                                       |  |                              |            |   |                            |   |            |      |  |   |            |   |  |   |            |  
|Net unrealized depreciation                                            |  |                              | (6,856     | ) |                            |   | (12,814    | )    |  |   | (4,314     | ) |  |   | (15,321    | )
|                                                                       |  |                              |            |   |                            |   |            |      |  |   |            |   |  |   |            |  
|Net realized and unrealized loss                                       |  |                              | (6,819     | ) |                            |   | (12,809    | )    |  |   | (12,526    | ) |  |   | (15,316    | )
|                                                                       |  |                              |            |   |                            |   |            |      |  |   |            |   |  |   |            |  
|                                                                       |  |                              |            |  
|NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS                   |  | $                            | (1,603     | ) |                            | $ | (8,381     | )    |  | $ | (2,892     | ) |  | $ | (6,250     | )
|                                                                       |  |                              |            |   |                            |   |            |      |  |   |            |   |  |   |            |  
|NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS PER COMMON SHARE: |  |                              |            |   |                            |   |            |      |  |   |            |   |  |   |            |  
|Basic and Diluted                                                      |  | $                            | (0.08      | ) |                            | $ | (0.40      | )    |  | $ | (0.14      | ) |  | $ | (0.30      | )
|                                                                       |  |                              |            |   |                            |   |            |      |  |   |            |   |  |   |            |  
|WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:                   |  |                              |            |   |                            |   |            |      |  |   |            |   |  |   |            |  
|Basic and Diluted                                                      |  |                              | 21,005,402 |   |                            |   | 21,039,242 |      |  |   | 21,022,087 |   |  |   | 21,039,242 |  



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

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



4



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##### Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)



|                                                                 |  |                            |         |   |      |   |         |  
|---------------------------------------------------------------- |  | -------------------------- | ------- | - | ---- | - | ------- | -
|                                                                 |  | Six Months Ended March 31, |        
|                                                                 |  | 2012                       |         |   | 2011 |  
|Operations:                                                      |  |                            |         |   |      |   |         |  
|Net investment income                                            |  | $                          | 9,634   |   |      | $ | 9,066   |  
|Net realized (loss) gain on investments                          |  |                            | (8,212  | ) |      |   | 5       |  
|Net unrealized depreciation of investments                       |  |                            | (4,926  | ) |      |   | (16,014 | )
|Net unrealized depreciation of borrowings                        |  |                            | 612     |   |      |   | 693     |  
|                                                                 |  |                            |         |   |      |   |         |  
|Net decrease in net assets resulting from operations             |  |                            | (2,892  | ) |      |   | (6,250  | )
|                                                                 |  |                            |         |   |      |   |         |  
|                                                                 |  |                           
|Distributions:                                                   |  |                            |         |   |      |   |         |  
|Distributions to common stockholders                             |  |                            | (8,830  | ) |      |   | (8,836  | )
|                                                                 |  |                            |         |   |      |   |         |  
|                                                                 |  |                           
|Capital transactions:                                            |  |                            |         |   |      |   |         |  
|Stock redemption for repayment of principal on employee notes(A) |  |                            | (332    | ) |      |   |        |  
|Repayment of principal on employee notes(A)                      |  |                            | 335     |   |      |   | 1,055   |  
|                                                                 |  |                            |         |   |      |   |         |  
|Net increase in net assets from capital transactions             |  |                            | 3       |   |      |   | 1,055   |  
|                                                                 |  |                            |         |   |      |   |         |  
|                                                                 |  |                           
|Total decrease in net assets                                     |  |                            | (11,719 | ) |      |   | (14,031 | )
|Net assets at beginning of period                                |  |                            | 213,721 |   |      |   | 249,246 |  
|                                                                 |  |                            |         |   |      |   |         |  
|Net assets at end of period                                      |  | $                          | 202,002 |   |      | $ | 235,215 |  
|                                                                 |  |                            |         |   |      |   |         |  



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

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



5



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##### Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

(UNAUDITED)



|                                                                                                                                      |  |                            |         |   |      |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                                                      |  | Six Months Ended March 31, |        
|                                                                                                                                      |  | 2012                       |         |   | 2011 |  
|                                                                                                                                      |  |                           
|CASH FLOWS FROM OPERATING ACTIVITIES                                                                                                  |  |                            |         |   |      |   |         |  
|Net decrease in net assets resulting from operations                                                                                  |  | $                          | (2,892  | ) |      | $ | (6,250  | )
|Adjustments to reconcile net decrease in net assets resulting from operations to net cash provided by (used in) operating
activities: |  |                            |         |   |      |   |         |  
|Purchase of investments                                                                                                               |  |                            | (29,609 | ) |      |   | (52,424 | )
|Principal repayments on investments                                                                                                   |  |                            | 24,760  |   |      |   | 35,227  |  
|Proceeds from sale of investments                                                                                                     |  |                            | 6,459   |   |      |   | 777     |  
|Increase in investment balance due to paid-in-kind interest                                                                           |  |                            |        |   |      |   | (8      | )
|Increase in investment balance due to transferred interest                                                                            |  |                            |        |   |      |   | (204    | )
|Net change in premiums, discounts and amortization                                                                                    |  |                            | (119    | ) |      |   | 776     |  
|Net realized loss (gain) on investments                                                                                               |  |                            | 8,363   |   |      |   | (163    | )
|Net unrealized depreciation of investments                                                                                            |  |                            | 4,926   |   |      |   | 16,014  |  
|Net unrealized depreciation of borrowings                                                                                             |  |                            | (612    | ) |      |   | (693    | )
|Increase in restricted cash                                                                                                           |  |                            | (1,225  | ) |      |   |        |  
|Amortization of deferred financing fees                                                                                               |  |                            | 734     |   |      |   | 664     |  
|(Increase) decrease in interest receivable                                                                                            |  |                            | (51     | ) |      |   | 251     |  
|Increase in due from custodian                                                                                                        |  |                            | (3,983  | ) |      |   | (1,024  | )
|Decrease (increase) in other assets                                                                                                   |  |                            | 579     |   |      |   | (9      | )
|Decrease in accounts payable and accrued expenses                                                                                     |  |                            | (18     | ) |      |   | (296    | )
|Decrease in interest payable                                                                                                          |  |                            | (63     | ) |      |   | (573    | )
|Increase in fees due to Adviser(A)                                                                                                    |  |                            | 303     |   |      |   | 1,118   |  
|Increase (decrease) in fee due to Administrator(A)                                                                                    |  |                            | 17      |   |      |   | (92     | )
|Increase in other liabilities                                                                                                         |  |                            | 882     |   |      |   | 186     |  
|                                                                                                                                      |  |                            |         |   |      |   |         |  
|Net cash provided by (used in) operating activities                                                                                   |  |                            | 8,451   |   |      |   | (6,723  | )
|                                                                                                                                      |  |                            |         |   |      |   |         |  
|                                                                                                                                      |  |                           
|CASH FLOWS FROM FINANCING ACTIVITIES                                                                                                  |  |                            |         |   |      |   |         |  
|Proceeds from borrowings                                                                                                              |  |                            | 32,900  |   |      |   | 50,800  |  
|Repayments on borrowings                                                                                                              |  |                            | (66,500 | ) |      |   | (34,400 | )
|Proceeds from issuance of mandatorily redeemable preferred stock                                                                      |  |                            | 38,497  |   |      |   |        |  
|Deferred financing fees                                                                                                               |  |                            | (3,560  | ) |      |   | (759    | )
|Distributions paid to common stockholders                                                                                             |  |                            | (8,830  | ) |      |   | (8,836  | )
|Receipt of principal on employee notes                                                                                                |  |                            | 3       |   |      |   | 1,055   |  
|                                                                                                                                      |  |                            |         |   |      |   |         |  
|Net cash (used in) provided by financing activities                                                                                   |  |                            | (7,490  | ) |      |   | 7,860   |  
|                                                                                                                                      |  |                            |         |   |      |   |         |  
|                                                                                                                                      |  |                           
|NET INCREASE IN CASH                                                                                                                  |  |                            | 961     |   |      |   | 1,137   |  
|                                                                                                                                      |  |                           
|CASH, BEGINNING OF PERIOD                                                                                                             |  |                            | 6,732   |   |      |   | 7,734   |  
|                                                                                                                                      |  |                            |         |   |      |   |         |  
|CASH, END OF PERIOD                                                                                                                   |  | $                          | 7,693   |   |      | $ | 8,871   |  
|                                                                                                                                      |  |                            |         |   |      |   |         |  
|                                                                                                                                      |  |                           
|NON-CASH ACTIVITIES(B)                                                                                                                |  | $                          | 332     |   |      | $ |        |  
|                                                                                                                                      |  |                            |         |   |      |   |         |  



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

|(B) | Redemption of 39,082 shares of common stock to reduce the principal balance of an employee loan by $332. Refer to Note 7Common Stock for
additional information.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

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



6



---

##### Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS

AS OF MARCH 31, 2012

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)



|                                                       |  |                                                                      |  |                                                         |  |           |        |  |      |   |        |            |  |   |        | 
|------------------------------------------------------ |  | -------------------------------------------------------------------- |  | ------------------------------------------------------- |  | --------- | ------ |  | ---- | - | ------ | ---------- |  | - | ------ | 
|Company(A)                                             |  | Industry                                                             |  | Investment(B)                                           |  | Principal |        |  | Cost |   |        | Fair Value | 
|                                                       |  |                                                                      | 
|NON-CONTROL/NON-AFFILIATE INVESTMENTS:                 |  |                                                                      |  |                                                         |  |           |        |  |      |   |        |           
|                                                       |  |                                                                      |  |                                                        
|Non-syndicated Loans:                                  |  |                                                                      |  |                                                         |  |           |        |  |      |   |        |            |  |  
|                                                       |  |                                                                      |  |                                                         | 
|Access Television Network, Inc.                        |  | Service-cable airtime (infomercials)                                 |  | Senior Term Debt (14.0%, Due 2/2011)(D)(H)              |  | $         | 903    |  |      | $ | 903    |            |  | $ |       | 
|                                                       |  |                                                                      |  |                                                         | 
|Allison Publications, LLC                              |  | Service-publisher of consumer oriented Magazines                     |  | Senior Term Debt (10.5%, Due 9/2012)(D)                 |  |           | 8,164  |  |      |   | 8,171  |            |  |   | 7,674  | 
|                                                       |  |                                                                      |  |                                                         | 
|BAS Broadcasting                                       |  | Service-radio station operator                                       |  | Senior Term Debt (11.5%, Due 7/2013)(D)                 |  |           | 7,465  |  |      |   | 7,465  |            |  |   | 4,106  | 
|                                                       |  |                                                                      |  |                                                         | 
|Chinese Yellow Pages Company                           |  | Service-publisher of Chinese language directories                    |  | Line of Credit, $0 available (7.3%, Due 11/2012)(D)     |  |           | 450    |  |      |   | 450    |            |  |   | 270    | 
|                                                       |  |                                                                      |  | Senior Term Debt (7.3%, Due 11/2012)(D)                 |  |           | 78     |  |      |   | 78     |            |  |   | 47     | 
|                                                       |  |                                                                      |  |                                                         |  |           |        |  |      |   |        |            |  |   |        | 
|                                                       |  |                                                                      |  |                                                         |  |           |        |  |      |   | 528    |            |  |   | 317    | 
|                                                       |  |                                                                      |  |                                                         | 
|CMI Acquisition, LLC                                   |  | Service-recycling                                                    |  | Senior Subordinated Term Debt (14.0%, Due 12/2016)(D)   |  |           | 14,265 |  |      |   | 14,265 |            |  |   | 14,194 | 
|                                                       |  |                                                                      |  |                                                         | 
|FedCap Partners, LLC                                   |  | Private equity fund                                                  |  | Class A Membership Units (80 units)(G)                  |  |           |        |  |      |   | 1,200  |            |  |   | 1,153  | 
|                                                       |  |                                                                      |  | Uncalled Capital Commitment ($800)                      |  |           |        |  |      |   |        |            |  |   |        | 
|                                                       |  |                                                                      |  |                                                         | 
|GFRC Holdings, LLC                                     |  | Manufacturing-glass-fiber reinforced concrete                        |  | Senior Term Debt (11.5%, Due 12/2013)(D)                |  |           | 5,324  |  |      |   | 5,324  |            |  |   | 2,928  | 
|                                                       |  |                                                                      |  | Senior Subordinated Term Debt (14.0%, Due 12/2013)(D)   |  |           | 6,598  |  |      |   | 6,598  |            |  |   | 3,629  | 
|                                                       |  |                                                                      |  |                                                         |  |           |        |  |      |   |        |            |  |   |        | 
|                                                       |  |                                                                      |  |                                                         |  |           |        |  |      |   | 11,922 |            |  |   | 6,557  | 
|                                                       |  |                                                                      |  |                                                         | 
|Heartland Communications Group                         |  | Service-radio station operator                                       |  | Line of Credit, $0 available (5.0%, Due 3/2013)(D)      |  |           | 100    |  |      |   | 100    |            |  |   | 35     | 
|                                                       |  |                                                                      |  | Line of Credit, $55 available (10.0%, Due 3/2013)(D)    |  |           | 45     |  |      |   | 45     |            |  |   | 16     | 
|                                                       |  |                                                                      |  | Senior Term Debt (5.0%, Due 3/2013)(D)                  |  |           | 4,342  |  |      |   | 4,325  |            |  |   | 1,520  | 
|                                                       |  |                                                                      |  | Common Stock Warrants (8.8% ownership)(F) (G)           |  |           |        |  |      |   | 66     |            |  |   |       | 
|                                                       |  |                                                                      |  |                                                         |  |           |        |  |      |   |        |            |  |   |        | 
|                                                       |  |                                                                      |  |                                                         |  |           |        |  |      |   | 4,536  |            |  |   | 1,571  | 
|                                                       |  |                                                                      |  |                                                         | 
|International Junior Golf Training Acquisition Company |  | Service-golf training                                                |  | Line of Credit, $125 available (11.0%, Due 5/2014)(D)   |  |           | 2,125  |  |      |   | 2,125  |            |  |   | 1,424  | 
|                                                       |  |                                                                      |  | Senior Term Debt (10.5%, Due 5/2014)(D)                 |  |           | 661    |  |      |   | 661    |            |  |   | 443    | 
|                                                       |  |                                                                      |  | Senior Term Debt (12.5%, Due 5/2014)(C)(D)              |  |           | 2,500  |  |      |   | 2,500  |            |  |   | 1,675  | 
|                                                       |  |                                                                      |  |                                                         |  |           |        |  |      |   |        |            |  |   |        | 
|                                                       |  |                                                                      |  |                                                         |  |           |        |  |      |   | 5,286  |            |  |   | 3,542  | 
|                                                       |  |                                                                      |  |                                                         | 
|Legend Communications of Wyoming, LLC                  |  | Service-operator of radio stations                                   |  | Senior Term Debt (12.0%, Due 6/2013)(D)                 |  |           | 9,203  |  |      |   | 9,203  |            |  |   | 4,785  | 
|                                                       |  |                                                                      |  |                                                         | 
|North American Aircraft Services, LLC                  |  | Service - repairs and maintains aircraft fuel tanks and fuel systems |  | Line of Credit, $750 available (6.5%, Due 8/2012)(D)    |  |           | 1,250  |  |      |   | 1,250  |            |  |   | 1,238  | 
|                                                       |  |                                                                      |  | Senior Term Debt (7.5%, Due 8/2016)(D)                  |  |           | 4,767  |  |      |   | 4,767  |            |  |   | 4,719  | 
|                                                       |  |                                                                      |  | Senior Subordinated Term Debt (11.8%, Due 8/2016)(D)    |  |           | 4,750  |  |      |   | 4,750  |            |  |   | 4,703  | 
|                                                       |  |                                                                      |  | Senior Subordinated Term Debt (12.5%, Due 8/2016)(D)    |  |           | 2,820  |  |      |   | 2,820  |            |  |   | 2,792  | 
|                                                       |  |                                                                      |  | Common Stock Warrants (5.8% ownership)(F) (G)           |  |           |        |  |      |   | 350    |            |  |   | 608    | 
|                                                       |  |                                                                      |  |                                                         |  |           |        |  |      |   |        |            |  |   |        | 
|                                                       |  |                                                                      |  |                                                         |  |           |        |  |      |   | 13,937 |            |  |   | 14,060 | 
|                                                       |  |                                                                      |  |                                                         | 
|Northstar Broadband, LLC                               |  | Service-cable TV franchise owner                                     |  | Senior Term Debt (0.7%, Due 12/2012)(D)                 |  |           | 50     |  |      |   | 44     |            |  |   | 42     | 
|                                                       |  |                                                                      |  |                                                         | 
|Ohana Media Group                                      |  | Service  AM/FM radio broadcast                                      |  | Senor Term Debt (10.0%, Due 10/2016)(D)                 |  |           | 1,590  |  |      |   | 1,590  |            |  |   | 1,447  | 
|                                                       |  |                                                                      |  |                                                         | 
|Precision Acquisition Group Holdings, Inc.             |  | Manufacturing-consumable components for the Aluminum industry        |  | Equipment Note (13.0%, Due 3/2013)(D)                   |  |           | 1,000  |  |      |   | 1,000  |            |  |   | 835    | 
|                                                       |  |                                                                      |  | Senior Term Debt (13.0%, Due 3/2013)(D)                 |  |           | 4,125  |  |      |   | 4,125  |            |  |   | 3,444  | 
|                                                       |  |                                                                      |  | Senior Term Debt (13.0%, Due 3/2013)(C) (D)             |  |           | 4,053  |  |      |   | 4,053  |            |  |   | 3,384  | 
|                                                       |  |                                                                      |  |                                                         |  |           |        |  |      |   |        |            |  |   |        | 
|                                                       |  |                                                                      |  |                                                         |  |           |        |  |      |   | 9,178  |            |  |   | 7,663  | 
|                                                       |  |                                                                      |  |                                                         | 
|PROFIT Systems Acquisition Co.                         |  | Service-design and develop ERP Software                              |  | Line of Credit, $350 available (11.3%, Due 7/2012)(D)   |  |           |       |  |      |   |       |            |  |   |       | 
|                                                       |  |                                                                      |  | Senior Term Debt (10.5%, Due 7/2014)(C) (D)             |  |           | 2,850  |  |      |   | 2,850  |            |  |   | 2,708  | 
|                                                       |  |                                                                      |  |                                                         |  |           |        |  |      |   |        |            |  |   |        | 
|                                                       |  |                                                                      |  |                                                         |  |           |        |  |      |   | 2,850  |            |  |   | 2,708  | 
|                                                       |  |                                                                      |  |                                                         | 
|Reliable Biopharmaceutical Holdings, Inc.              |  | Manufacturing-pharmaceutical and biochemical intermediates           |  | Line of Credit, $500 available (9.0%, Due 1/2013)(D)    |  |           | 3,500  |  |      |   | 3,500  |            |  |   | 3,316  | 
|                                                       |  |                                                                      |  | Mortgage Note (9.5%, Due 12/2014)(D)                    |  |           | 7,121  |  |      |   | 7,121  |            |  |   | 6,747  | 
|                                                       |  |                                                                      |  | Senior Term Debt (12.0%, Due 12/2014)(C)(D)             |  |           | 11,513 |  |      |   | 11,513 |            |  |   | 10,908 | 
|                                                       |  |                                                                      |  | Senior Subordinated Term Debt (12.5%, Due 12/2014)(D)   |  |           | 6,000  |  |      |   | 6,000  |            |  |   | 5,685  | 
|                                                       |  |                                                                      |  | Common Stock Warrants (764 shares)(F) (G)               |  |           |        |  |      |   | 209    |            |  |   | 736    | 
|                                                       |  |                                                                      |  |                                                         |  |           |        |  |      |   |        |            |  |   |        | 
|                                                       |  |                                                                      |  |                                                         |  |           |        |  |      |   | 28,343 |            |  |   | 27,392 | 
|                                                       |  |                                                                      |  |                                                         | 
|Saunders & Associates                                  |  | Manufacturing-equipment provider for frequency control devices       |  | Line of Credit, $2,500 available (11.3%, Due 5/2013)(D) |  |           |       |  |      |   |       |            |  |   |       | 
|                                                       |  |                                                                      |  | Senior Term Debt (11.3%, Due 5/2013)(D)                 |  |           | 8,947  |  |      |   | 8,947  |            |  |   | 8,052  | 
|                                                       |  |                                                                      |  |                                                         |  |           |        |  |      |   |        |            |  |   |        | 
|                                                       |  |                                                                      |  |                                                         |  |           |        |  |      |   | 8,947  |            |  |   | 8,052  | 
|                                                       |  |                                                                      |  |                                                         | 
|Sunburst Media - Louisiana, LLC                        |  | Service-radio station operator                                       |  | Senior Term Debt (10.5%, Due 1/2012)(D)                 |  |           | 6,000  |  |      |   | 6,000  |            |  |   | 2,400  | 
|                                                       |  |                                                                      |  |                                                         | 
|Thibaut Acquisition Co.                                |  | Service-design and distribute wall Covering                          |  | Line of Credit, $250 available (9.0%, Due 1/2014)(D)    |  |           | 750    |  |      |   | 750    |            |  |   | 737    | 
|                                                       |  |                                                                      |  | Senior Term Debt (8.5%, Due 1/2014)(D)                  |  |           | 287    |  |      |   | 287    |            |  |   | 282    | 
|                                                       |  |                                                                      |  | Senior Term Debt (12.0%, Due 1/2014)(C) (D)             |  |           | 3,000  |  |      |   | 3,000  |            |  |   | 2,933  | 
|                                                       |  |                                                                      |  |                                                         |  |           |        |  |      |   |        |            |  |   |        | 
|                                                       |  |                                                                      |  |                                                         |  |           |        |  |      |   | 4,037  |            |  |   | 3,952  | 



7



---

##### Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

AS OF MARCH 31, 2012

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)



|                                                   |  |                                                                                 |  |                                                        |  |           |        |   |         |   |        |            |         |   |        | 
|-------------------------------------------------- |  | ------------------------------------------------------------------------------- |  | ------------------------------------------------------ |  | --------- | ------ | - | ------- | - | ------ | ---------- | ------- | - | ------ | 
|Company(A)                                         |  | Industry                                                                        |  | Investment(B)                                          |  | Principal |        |   | Cost    |   |        | Fair Value |        
|                                                   |  |                                                                                 | 
|NON-CONTROL/NON-AFFILIATE INVESTMENTS (Continued): |  |                                                                                 |  |                                                        |  |           |        |   |         |   |        |           
|                                                   |  |                                                                                 |  |                                                        | 
|Westlake Hardware, Inc.                            |  | Retail-hardware and variety                                                     |  | Senior Subordinated Term Debt (12.3%, Due 1/2014)(D)   |  | $         | 12,000 |   |         | $ | 12,000 |            |         | $ | 11,640 | 
|                                                   |  |                                                                                 |  | Senior Subordinated Term Debt (13.5%, Due 1/2014)(D)   |  |           | 8,000  |   |         |   | 8,000  |            |         |   | 7,700  | 
|                                                   |  |                                                                                 |  |                                                        |  |           |        |   |         |   |        |            |         |   |        | 
|                                                   |  |                                                                                 |  |                                                        |  |           |        |   |         |   | 20,000 |            |         |   | 19,340 | 
|                                                   |  |                                                                                 |  |                                                        | 
|Westland Technologies, Inc.                        |  | Service-diversified conglomerate                                                |  | Line of Credit, $1,000 available (6.5%, Due 4/2012)(D) |  |           |       |   |         |   |       |            |         |   |       | 
|                                                   |  |                                                                                 |  | Senior Term Debt (7.5%, Due 4/2016)(D)                 |  |           | 1,850  |   |         |   | 1,850  |            |         |   | 1,804  | 
|                                                   |  |                                                                                 |  | Senior Term Debt (12.5%, Due 4/2016)(D)                |  |           | 4,000  |   |         |   | 4,000  |            |         |   | 3,900  | 
|                                                   |  |                                                                                 |  | Common Stock Warrants (77,287 shares)(F) (G)           |  |           |        |   |         |   | 350    |            |         |   | 279    | 
|                                                   |  |                                                                                 |  |                                                        |  |           |        |   |         |   |        |            |         |   |        | 
|                                                   |  |                                                                                 |  |                                                        |  |           |        |   |         |   | 6,200  |            |         |   | 5,983  | 
|                                                   |  |                                                                                 |  |                                                        | 
|Winchester Electronics                             |  | Manufacturing-high bandwidth connectors and cables                              |  | Senior Term Debt (6.5%, Due 5/2013)(D)                 |  |           | 1,250  |   |         |   | 1,250  |            |         |   | 1,244  | 
|                                                   |  |                                                                                 |  | Senior Term Debt (7.0%, Due 5/2013)(D)                 |  |           | 1,669  |   |         |   | 1,669  |            |         |   | 1,656  | 
|                                                   |  |                                                                                 |  | Senior Subordinated Term Debt (13.5%, Due 6/2013)(D)   |  |           | 9,750  |   |         |   | 9,750  |            |         |   | 9,628  | 
|                                                   |  |                                                                                 |  |                                                        |  |           |        |   |         |   |        |            |         |   |        | 
|                                                   |  |                                                                                 |  |                                                        |  |           |        |   |         |   | 12,669 |            |         |   | 12,528 | 
|                                                   |  |                                                                                 |  |                                                        |  |           |        |   |         |   |        |            |         |   |        | 
|                                                   |  |                                                                                 |  |                                                       
|Subtotal  Non-syndicated loans                    |  |                                                                                 |  |                                                        |  |           |        | $ | 177,274 |   |        | $          | 149,466 |  
|                                                   |  |                                                                                 |  |                                                        |  |           |        |   |         |   |        |            |         |   |        | 
|                                                   |  |                                                                                 |  |                                                        | 
|Syndicated Loans:                                  |  |                                                                                 |  |                                                        |  |           |        |   |         |   |        |            |         |   |        | 
|                                                   |  |                                                                                 |  |                                                        | 
|Airvana Network Solutions, Inc.                    |  | Service-telecommunications                                                      |  | Senior Term Debt (10.0%, Due 3/2015)(E)                |  | $         | 3,928  |   |         | $ | 3,827  |            |         | $ | 3,732  | 
|                                                   |  |                                                                                 |  |                                                        | 
|Allied Security Holdings, LLC                      |  | Service-contract security officer providers                                     |  | Senior Subordinated Term Debt (8.5%, Due 2/2018)(E)    |  |           | 1,000  |   |         |   | 991    |            |         |   | 1,003  | 
|                                                   |  |                                                                                 |  |                                                        | 
|Allied Specialty Vehicles, Inc.                    |  | Manufacturing-specialty vehicles                                                |  | Senior Term Debt (9.5%, Due 2/2016)(E)                 |  |           | 9,900  |   |         |   | 9,735  |            |         |   | 9,702  | 
|                                                   |  |                                                                                 |  |                                                        | 
|Ameriqual Group, LLC                               |  | Manufacturing-production and distribution of food products                      |  | Senior Term Debt (9.0%, Due 3/2016)(E)                 |  |           | 7,444  |   |         |   | 7,319  |            |         |   | 7,295  | 
|                                                   |  |                                                                                 |  |                                                        | 
|Applied Systems, Inc.                              |  | Software for property & casualty insurance industry                             |  | Senior Subordinated Term Debt (9.3%, Due 6/2017)(E)    |  |           | 1,000  |   |         |   | 992    |            |         |   | 998    | 
|                                                   |  |                                                                                 |  |                                                        | 
|Ascend Learning, LLC                               |  | Service-technology-based learning solutions                                     |  | Senior Subordinated Term Debt (11.5%, Due 12/2017)(E)  |  |           | 1,000  |   |         |   | 974    |            |         |   | 1,010  | 
|                                                   |  |                                                                                 |  |                                                        | 
|Attachmate Corporate                               |  | Service-develops, implements and supports software                              |  | Senior Subordinated Term Debt (9.5%, Due 2/2017)(E)    |  |           | 4,000  |   |         |   | 3,965  |            |         |   | 3,990  | 
|                                                   |  |                                                                                 |  |                                                        | 
|Autoparts Holdings Limited                         |  | Supplier to the light and heavy-duty vehicle after market for replacement parts |  | Senior Term Debt (10.5%, Due 1/2018)(E)                |  |           | 1,000  |   |         |   | 995    |            |         |   | 983    | 
|                                                   |  |                                                                                 |  |                                                        | 
|Blue Coat Systems, Inc.                            |  | Provider of internet security and network acceleration appliances               |  | Senior Subordinated Term Debt (11.5%, Due 8/2018)(E)   |  |           | 8,500  |   |         |   | 8,497  |            |         |   | 8,542  | 
|                                                   |  |                                                                                 |  |                                                        | 
|Covad Communications
Group, Inc.                   |  | Service-telecommunications                                                      |  | Senior Term Debt (12.0%,
Due 11/2015)(E)               |  |           | 1,750  |   |         |   | 1,722  |            |         |   | 1,741  | 
|                                                   |  |                                                                                 |  |                                                        | 
|Global Brass and Copper, Inc.                      |  | Manufacturing - steel wool products and metal fibers                            |  | Senior Term Debt (10.3%, Due 8/2015)(E)                |  |           | 2,953  |   |         |   | 2,886  |            |         |   | 2,993  | 
|                                                   |  |                                                                                 |  |                                                        | 
|HGI Holding, Inc                                   |  | Service - distributor of disposable medical products                            |  | Senior Term Debt (6.8%, Due 10/2016)(E)                |  |           | 1,757  |   |         |   | 1,725  |            |         |   | 1,757  | 
|                                                   |  |                                                                                 |  |                                                        | 
|Hubbard Radio, LLC                                 |  | Service-radio station operator                                                  |  | Senior Subordinated Term Debt (8.8%, Due 4/2018)(E)    |  |           | 500    |   |         |   | 495    |            |         |   | 506    | 
|                                                   |  |                                                                                 |  |                                                        | 
|Keypoint Government Solutions, Inc.                |  | Service-security consulting services                                            |  | Senior Term Debt (10.0%, Due 12/2015)(E)               |  |           | 6,912  |   |         |   | 6,884  |            |         |   | 6,912  | 
|                                                   |  |                                                                                 |  |                                                        | 
|Mood Media Corporation                             |  | Service-media and marketing solutions                                           |  | Senior Term Debt (10.3%, Due 11/2018)(E)               |  |           | 8,000  |   |         |   | 7,926  |            |         |   | 7,480  | 
|                                                   |  |                                                                                 |  |                                                        | 
|National Surgical Hospitals, Inc.                  |  | Service-physician-partnered surgical facilities                                 |  | Senior Term Debt (8.3%, Due 2/2017)(E)                 |  |           | 1,686  |   |         |   | 1,652  |            |         |   | 1,631  | 
|                                                   |  |                                                                                 |  |                                                        | 
|Sensus USA, Inc.                                   |  | Service-provider of utility communication Services                              |  | Senior Term Debt (8.5%, Due 5/2018)(E)                 |  |           | 500    |   |         |   | 495    |            |         |   | 496    | 
|                                                   |  |                                                                                 |  |                                                        | 
|Springs Window Fashions, LLC                       |  | Manufacturing-window coverings                                                  |  | Senior Term Debt (11.3%, Due 11/2017)(E)               |  |           | 7,000  |   |         |   | 6,843  |            |         |   | 6,825  | 
|                                                   |  |                                                                                 |  |                                                        | 
|SRAM, LLC                                          |  | Manufacturing-premium bicycle components                                        |  | Senior Term Debt (8.5%, Due 12/2018)(E)                |  |           | 2,500  |   |         |   | 2,477  |            |         |   | 2,512  | 
|                                                   |  |                                                                                 |  |                                                        | 
|Targus Group International, Inc.                   |  | Manufacturing-carrying cases and accessories for notebook computers             |  | Senior Term Debt (11.0%, Due 5/2016)(E)                |  |           | 9,925  |   |         |   | 9,752  |            |         |   | 9,801  | 
|                                                   |  |                                                                                 |  |                                                        | 
|Ulterra Drilling Technologies, LP                  |  | Manufacturing-oil field drill bits and slick-slip reduction tools               |  | Senior Term Debt (9.5%, Due 6/2016)(E)                 |  |           | 1,925  |   |         |   | 1,891  |            |         |   | 1,915  | 



8



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##### Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

AS OF MARCH 31, 2012

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)



|                                                                                                   |  |                                                       |  |                                                              |  |           |         |   |         |   |         |            |         |   |        | 
|-------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------- |  | ------------------------------------------------------------ |  | --------- | ------- | - | ------- | - | ------- | ---------- | ------- | - | ------ | 
|Company(A)                                                                                         |  | Industry                                              |  | Investment(B)                                                |  | Principal |         |   | Cost    |   |         | Fair Value |        
|                                                                                                   |  |                                                       | 
|NON-CONTROL/NON-AFFILIATE INVESTMENTS (Continued):                                                 |  |                                                       |  |                                                              |  |           |         |   |         |   |         |           
|                                                                                                   |  |                                                       |  |                                                              | 
|Vision Solutions, Inc.                                                                             |  | Service-provider of information availability software |  | Senior Term Debt (9.5%, Due 7/2017)(E)                       |  | $         | 11,000  |   |         | $ | 10,921  |            |         | $ | 10,670 | 
|                                                                                                   |  |                                                       |  |                                                              | 
|Wall Street Systems Holdings, Inc.                                                                 |  | Service-software provider                             |  | Senior Term Debt (9.0%, Due 6/2018)(E)                       |  |           | 3,000   |   |         |   | 2,972   |            |         |   | 3,007  | 
|                                                                                                   |  |                                                       |  |                                                              | 
|WP Evenflo Group Holdings, Inc.                                                                    |  | Manufacturing-infant and juvenile Products            |  | Senior Term Debt (8.0%, Due 2/2013)(E)                       |  |           | 277     |   |         |   | 277     |            |         |   | 270    | 
|                                                                                                   |  |                                                       |  | Senior Preferred Equity (333 shares)(F) (G)                  |  |           |         |   |         |   | 333     |            |         |   | 440    | 
|                                                                                                   |  |                                                       |  | Junior Preferred Equity (111 shares)(F) (G)                  |  |           |         |   |         |   | 111     |            |         |   | 155    | 
|                                                                                                   |  |                                                       |  | Common Stock (1,874 shares)(F) (G)                           |  |           |         |   |         |   |        |            |         |   | 403    | 
|                                                                                                   |  |                                                       |  |                                                              |  |           |         |   |         |   |         |            |         |   |        | 
|                                                                                                   |  |                                                       |  |                                                              |  |           |         |   |         |   | 721     |            |         |   | 1,268  | 
|                                                                                                   |  |                                                       |  |                                                              |  |           |         |   |         |   |         |            |         |   |        | 
|Subtotal - Syndicated loans                                                                        |  |                                                       |  |                                                              |  |           |         |   |         | $ | 96,657  |            |         | $ | 96,769 | 
|                                                                                                   |  |                                                       |  |                                                              |  |           |         |   |         |   |         |            |         |   |        | 
|Total Non-Control/Non-Affiliate Investments (represented 85.4% of total investments at fair
value) |  |                                                       |  |                                                              |  | $         | 273,931 |   |         | $ | 246,235 |           
|                                                                                                   |  |                                                       |  |                                                              |  |           |         |   |         |   |         |            |         |   |        | 
|                                                                                                   |  |                                                       | 
|CONTROL INVESTMENTS:                                                                               |  |                                                       |  |                                                              |  |           |         |   |         |   |         |           
|                                                                                                   |  |                                                       |  |                                                              | 
|BERTL, Inc.                                                                                        |  | Service-web-based evaluator of imaging products       |  | Line of Credit, $69 available (6.5%, Due 4/2012)(F)(H)(I)    |  | $         | 1,358   |   |         | $ | 1,358   |            |         | $ |       | 
|                                                                                                   |  |                                                       |  | Common Stock (100 shares)(F) (G)                             |  |           |         |   |         |   | 424     |            |         |   |       | 
|                                                                                                   |  |                                                       |  |                                                              |  |           |         |   |         |   |         |            |         |   |        | 
|                                                                                                   |  |                                                       |  |                                                              |  |           |         |   |         |   | 1,782   |            |         |   |       | 
|Defiance Integrated Technologies, Inc.                                                             |  | Manufacturing-trucking parts                          |  | Senior Term Debt (11.0%, Due 4/2013)(C) (F)                  |  |           | 7,345   |   |         |   | 7,345   |            |         |   | 7,345  | 
|                                                                                                   |  |                                                       |  | Common Stock (15,500 shares)(F) (G)                          |  |           |         |   |         |   | 1       |            |         |   | 8,696  | 
|                                                                                                   |  |                                                       |  |                                                              |  |           |         |   |         |   |         |            |         |   |        | 
|                                                                                                   |  |                                                       |  |                                                              |  |           |         |   |         |   | 7,346   |            |         |   | 16,041 | 
|Kansas Cable Holdings, Inc.                                                                        |  | Service - cable, internet, voice provider             |  | Line of Credit, $153 available (10.0%, Due 10/2012)(D)(H)    |  |           | 672     |   |         |   | 662     |            |         |   | 5      | 
|                                                                                                   |  |                                                       |  | Senior Term Debt (10.0%, Due 10/2012)(D)(H)                  |  |           | 1,500   |   |         |   | 1,444   |            |         |   | 11     | 
|                                                                                                   |  |                                                       |  | Senior Term Debt (10.0%, Due 10/2012)(D)(H)                  |  |           | 1,039   |   |         |   | 1,000   |            |         |   | 8      | 
|                                                                                                   |  |                                                       |  | Common Stock (100 shares)(F) (G)                             |  |           |         |   |         |   |        |            |         |   |       | 
|                                                                                                   |  |                                                       |  |                                                              |  |           |         |   |         |   |         |            |         |   |        | 
|                                                                                                   |  |                                                       |  |                                                              |  |           |         |   |         |   | 3,106   |            |         |   | 24     | 
|Lindmark Acquisition, LLC                                                                          |  | Service-advertising                                   |  | Senior Subordinated Term Debt (11.0%, Due 10/2012)(D)(H)     |  |           | 10,000  |   |         |   | 10,000  |            |         |   | 1,300  | 
|                                                                                                   |  |                                                       |  | Senior Subordinated Term Debt (13.0%, Due 10/2012)(D)(H)     |  |           | 2,000   |   |         |   | 2,000   |            |         |   | 260    | 
|                                                                                                   |  |                                                       |  | Senior Subordinated Term Debt (13.0%, Due Upon Demand)(D)(H) |  |           | 1,909   |   |         |   | 1,909   |            |         |   | 248    | 
|                                                                                                   |  |                                                       |  | Common Stock (100 shares)(F) (G)                             |  |           |         |   |         |   | 317     |            |         |   |       | 
|                                                                                                   |  |                                                       |  |                                                              |  |           |         |   |         |   |         |            |         |   |        | 
|                                                                                                   |  |                                                       |  |                                                              |  |           |         |   |         |   | 14,226  |            |         |   | 1,808  | 
|LocalTel, LLC                                                                                      |  | Service-yellow pages publishing                       |  | Line of credit, $132 available (10.0%, Due 6/2012)(F)(H)     |  |           | 2,218   |   |         |   | 2,218   |            |         |   | 559    | 
|                                                                                                   |  |                                                       |  | Line of Credit, $1,830
available (4.7%, Due 6/2012)(F)(H)    |  |           | 1,170   |   |         |   | 1,170   |            |         |   |       | 
|                                                                                                   |  |                                                       |  | Senior Term Debt (12.5%, Due 2/2012)(F)(H)                   |  |           | 325     |   |         |   | 325     |            |         |   |       | 
|                                                                                                   |  |                                                       |  | Senior Term Debt (8.5%, Due 6/2012)(F)(H)                    |  |           | 2,688   |   |         |   | 2,688   |            |         |   |       | 
|                                                                                                   |  |                                                       |  | Senior Term Debt (10.5%, Due 6/2012)(C) (F)(H)               |  |           | 2,750   |   |         |   | 2,750   |            |         |   |       | 
|                                                                                                   |  |                                                       |  | Common Stock Warrants (4,000 shares)(F) (G)                  |  |           |         |   |         |   |        |            |         |   |       | 
|                                                                                                   |  |                                                       |  |                                                              |  |           |         |   |         |   |         |            |         |   |        | 
|                                                                                                   |  |                                                       |  |                                                              |  |           |         |   |         |   | 9,151   |            |         |   | 559    | 
|Midwest Metal Distribution, Inc.                                                                   |  | Distribution-aluminum sheets and stainless steel      |  | Senior Subordinated Term Debt (12.0%, Due 7/2013)(D)         |  |           | 18,281  |   |         |   | 18,267  |            |         |   | 17,870 | 
|                                                                                                   |  |                                                       |  | Common Stock (501 shares)(F) (G)                             |  |           |         |   |         |   | 138     |            |         |   |       | 
|                                                                                                   |  |                                                       |  |                                                              |  |           |         |   |         |   |         |            |         |   |        | 
|                                                                                                   |  |                                                       |  |                                                              |  |           |         |   |         |   | 18,405  |            |         |   | 17,870 | 
|Sunshine Media Holdings                                                                            |  | Service-publisher regional B2B trade magazines        |  | Line of credit, $498 available (4.8%, Due 8/2014)(D)         |  |           | 1,502   |   |         |   | 1,502   |            |         |   | 225    | 
|                                                                                                   |  |                                                       |  | Senior Term Debt (4.8%, Due 5/2016)(D)                       |  |           | 16,948  |   |         |   | 16,948  |            |         |   | 2,542  | 
|                                                                                                   |  |                                                       |  | Senior Term Debt (5.5%, Due 5/2016)(C) (D)(H)                |  |           | 10,700  |   |         |   | 10,700  |            |         |   | 1,605  | 
|                                                                                                   |  |                                                       |  | Junior Preferred Equity (11,013 shares)(F) (G)               |  |           |         |   |         |   | 4,075   |            |         |   |       | 
|                                                                                                   |  |                                                       |  | Common Stock (934 shares)(F) (G)                             |  |           |         |   |         |   | 740     |            |         |   |       | 
|                                                                                                   |  |                                                       |  |                                                              |  |           |         |   |         |   |         |            |         |   |        | 
|                                                                                                   |  |                                                       |  |                                                              |  |           |         |   |         |   | 33,965  |            |         |   | 4,372  | 
|U.S. Healthcare Communications, Inc.                                                               |  | Service-magazine publisher/operator                   |  | Line of credit, $131 available (6.0%, Due 12/2010)(F)(H)     |  |           | 269     |   |         |   | 269     |            |         |   |       | 
|                                                                                                   |  |                                                       |  | Line of credit, $0 available (6.0%, Due 12/2010)(F)(H)       |  |           | 450     |   |         |   | 450     |            |         |   |       | 
|                                                                                                   |  |                                                       |  | Common Stock (100 shares)(F) (G)                             |  |           |         |   |         |   | 2,470   |            |         |   |       | 
|                                                                                                   |  |                                                       |  |                                                              |  |           |         |   |         |   |         |            |         |   |        | 
|                                                                                                   |  |                                                       |  |                                                              |  |           |         |   |         |   | 3,189   |            |         |   |       | 
|Viapack, Inc.                                                                                      |  | Manufacturing-polyethylene film                       |  | Line of Credit, $466 available (6.5%, Due 3/2013)(D)         |  |           | 3,334   |   |         |   | 3,334   |            |         |   | 534    | 
|                                                                                                   |  |                                                       |  | Senior Real Estate Term Debt (5.0%, Due 3/2014)(D)           |  |           | 600     |   |         |   | 600     |            |         |   | 96     | 
|                                                                                                   |  |                                                       |  | Senior Term Debt (6.2%, Due 3/2014)(C) (D)(H)                |  |           | 3,925   |   |         |   | 3,925   |            |         |   | 628    | 
|                                                                                                   |  |                                                       |  | Preferred Equity (100 shares)(F) (G)                         |  |           |         |   |         |   |        |            |         |   |       | 
|                                                                                                   |  |                                                       |  | Guarantee ($600)                                             |  |           |         |   |         |   |         |            |         |   |        | 
|                                                                                                   |  |                                                       |  |                                                              |  |           |         |   |         |   |         |            |         |   |        | 
|                                                                                                   |  |                                                       |  |                                                              |  |           |         |   |         |   | 7,859   |            |         |   | 1,258  | 
|                                                                                                   |  |                                                       |  |                                                              |  |           |         |   |         |   |         |            |         |   |        | 
|                                                                                                   |  |                                                       | 
|Total Control Investments (represented 14.6% of total investments at fair value)                   |  |                                                       |  |                                                              |  | $         | 99,029  |   |         | $ | 41,932  |           
|                                                                                                   |  |                                                       |  |                                                              |  |           |         |   |         |   |         |            |         |   |        | 
|Total Investments                                                                                  |  |                                                       |  |                                                              |  |           |         | $ | 372,960 |   |         | $          | 288,167 |  
|                                                                                                   |  |                                                       |  |                                                              |  |           |         |   |         |   |         |            |         |   |        | 



9



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##### Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

AS OF MARCH 31, 2012

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)





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

|(B) | Percentage represents interest rates in effect at March 31, 2012, and due date represents the contractual maturity date.
|--- | ------------------------------------------------------------------------------------------------------------------------

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

|(D) | Fair value was primarily based on opinions of value submitted by Standard & Poors Securities Evaluations, Inc.
|--- | ---------------------------------------------------------------------------------------------------------------

|(E) | Security valued based on the indicative bid price on or near March 31, 2012, offered by the respective syndication agents trading desk or
secondary desk.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(F) | Fair value was primarily based on the total enterprise value of the portfolio company using a liquidity waterfall approach. We also considered
discounted cash flow methodologies.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

|(I) | In April 2012, we amended the terms of the security extending the maturity date.
|--- | --------------------------------------------------------------------------------

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



10



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##### Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2011

(DOLLAR AMOUNTS IN THOUSANDS)



|                                                       |  |                                                                      |  |                                                         |  |           |        |  |      |   |        |           |  |   |        | 
|------------------------------------------------------ |  | -------------------------------------------------------------------- |  | ------------------------------------------------------- |  | --------- | ------ |  | ---- | - | ------ | --------- |  | - | ------ | 
|Company(A)                                             |  | Industry                                                             |  | Investment(B)                                           |  | Principal |        |  | Cost |   |        | FairValue | 
|                                                       |  |                                                                      |  |                                                        
|NON-CONTROL/NON-AFFILIATE INVESTMENTS:                 |  |                                                                      |  |                                                         |  |           |        |  |      |   |        |           |  |  
|                                                       |  |                                                                      |  |                                                         | 
|Non-syndicated Loans:                                  |  |                                                                      |  |                                                         |  |           |        |  |      |   |        |           |  |   |        | 
|                                                       |  |                                                                      |  |                                                         | 
|Access Television Network, Inc.                        |  | Service-cable airtime (infomercials)                                 |  | Senior Term Debt (14.0%, Due 2/2011)(D)(H)              |  | $         | 903    |  |      | $ | 903    |           |  | $ | 45     | 
|                                                       |  |                                                                      |  |                                                         | 
|Allison Publications, LLC                              |  | Service-publisher of consumer oriented magazines                     |  | Senior Term Debt (10.5%, Due 9/2012)(D)                 |  |           | 8,463  |  |      |   | 8,478  |           |  |   | 7,861  | 
|                                                       |  |                                                                      |  |                                                         | 
|BAS Broadcasting                                       |  | Service-radio station operator                                       |  | Senior Term Debt (11.5%, Due 7/2013)(D)                 |  |           | 7,465  |  |      |   | 7,465  |           |  |   | 6,233  | 
|                                                       |  |                                                                      |  |                                                         | 
|Chinese Yellow Pages Company                           |  | Service-publisher of Chinese language directories                    |  | Line of Credit, $250 available (7.3%, Due 11/2011)(D)   |  |           | 450    |  |      |   | 450    |           |  |   | 338    | 
|                                                       |  |                                                                      |  | Senior Term Debt (7.3%, Due 11/2011)(D)                 |  |           | 168    |  |      |   | 168    |           |  |   | 126    | 
|                                                       |  |                                                                      |  |                                                         |  |           |        |  |      |   |        |           |  |   |        | 
|                                                       |  |                                                                      |  |                                                         |  |           |        |  |      |   | 618    |           |  |   | 464    | 
|                                                       |  |                                                                      |  |                                                         | 
|CMI Acquisition, LLC                                   |  | Service-recycling                                                    |  | Senior Subordinated Term Debt (13.0%, Due 12/2016)(D)   |  |           | 14,265 |  |      |   | 14,265 |           |  |   | 14,336 | 
|                                                       |  |                                                                      |  |                                                         | 
|FedCap Partners, LLC                                   |  | Private equity fund                                                  |  | Class A Membership Units (80 units)(G)                  |  |           |        |  |      |   | 1,200  |           |  |   | 1,153  | 
|                                                       |  |                                                                      |  | Uncalled Capital Commitment ($800)                      |  |           |        |  |      |   |        |           |  |   |        | 
|                                                       |  |                                                                      |  |                                                         | 
|GFRC Holdings, LLC                                     |  | Manufacturing-glass-fiber reinforced concrete                        |  | Senior Term Debt (11.5%, Due 12/2012)(D)                |  |           | 5,617  |  |      |   | 5,617  |           |  |   | 4,719  | 
|                                                       |  |                                                                      |  | Senior Subordinated Term Debt (14.0%, Due 12/2012)(D)   |  |           | 6,615  |  |      |   | 6,615  |           |  |   | 5,557  | 
|                                                       |  |                                                                      |  |                                                         |  |           |        |  |      |   |        |           |  |   |        | 
|                                                       |  |                                                                      |  |                                                         |  |           |        |  |      |   | 12,232 |           |  |   | 10,276 | 
|                                                       |  |                                                                      |  |                                                         | 
|Global Materials Technologies, Inc.                    |  | Manufacturing-steel wool products and metal fibers                   |  | Senior Term Debt (13.0%, Due 6/2012)(C) (D)             |  |           | 2,635  |  |      |   | 2,635  |           |  |   | 2,212  | 
|                                                       |  |                                                                      |  |                                                         | 
|Heartland Communications Group                         |  | Service-radio station operator                                       |  | Line of Credit, $0 available (5.0%, Due 3/2013)(D)      |  |           | 100    |  |      |   | 100    |           |  |   | 41     | 
|                                                       |  |                                                                      |  | Line of Credit, $0 available (10.0%, Due 3/2013)(D)     |  |           | 100    |  |      |   | 100    |           |  |   | 41     | 
|                                                       |  |                                                                      |  | Senior Term Debt (5.0%, Due 3/2013)(D)                  |  |           | 4,342  |  |      |   | 4,316  |           |  |   | 1,780  | 
|                                                       |  |                                                                      |  | Common Stock Warrants (8.8% ownership)(F) (G)           |  |           |        |  |      |   | 66     |           |  |   |       | 
|                                                       |  |                                                                      |  |                                                         |  |           |        |  |      |   |        |           |  |   |        | 
|                                                       |  |                                                                      |  |                                                         |  |           |        |  |      |   | 4,582  |           |  |   | 1,862  | 
|                                                       |  |                                                                      |  |                                                         | 
|International Junior Golf Training Acquisition Company |  | Service-golf training                                                |  | Line of Credit, $0 available (11.0%, Due 5/2012)(D)     |  |           | 1,500  |  |      |   | 1,500  |           |  |   | 1,275  | 
|                                                       |  |                                                                      |  | Senior Term Debt (10.5%, Due 5/2012)(D)                 |  |           | 861    |  |      |   | 861    |           |  |   | 732    | 
|                                                       |  |                                                                      |  | Senior Term Debt (12.5%, Due 5/2012)(C)(D)              |  |           | 2,500  |  |      |   | 2,500  |           |  |   | 2,125  | 
|                                                       |  |                                                                      |  |                                                         |  |           |        |  |      |   |        |           |  |   |        | 
|                                                       |  |                                                                      |  |                                                         |  |           |        |  |      |   | 4,861  |           |  |   | 4,132  | 
|                                                       |  |                                                                      |  |                                                         | 
|KMBQ Corporation                                       |  | Service-AM/FM radio broadcaster                                      |  | Line of Credit, $42 available (12.3%, Due 7/2010)(D)(H) |  |           | 162    |  |      |   | 158    |           |  |   | 76     | 
|                                                       |  |                                                                      |  | Senior Term Debt (12.3%, Due 7/2010)(D)(H)              |  |           | 2,081  |  |      |   | 2,038  |           |  |   | 984    | 
|                                                       |  |                                                                      |  |                                                         |  |           |        |  |      |   |        |           |  |   |        | 
|                                                       |  |                                                                      |  |                                                         |  |           |        |  |      |   | 2,196  |           |  |   | 1,060  | 
|                                                       |  |                                                                      |  |                                                         | 
|Legend Communications of Wyoming, LLC                  |  | Service-operator of radio stations                                   |  | Senior Term Debt (12.0%, Due 6/2013)(D)                 |  |           | 9,745  |  |      |   | 9,745  |           |  |   | 5,408  | 
|                                                       |  |                                                                      |  | Senior Term Debt (16.0%, Due 7/2011)(D)                 |  |           | 220    |  |      |   | 220    |           |  |   | 123    | 
|                                                       |  |                                                                      |  |                                                         |  |           |        |  |      |   |        |           |  |   |        | 
|                                                       |  |                                                                      |  |                                                         |  |           |        |  |      |   | 9,965  |           |  |   | 5,531  | 
|                                                       |  |                                                                      |  |                                                         | 
|Newhall Holdings, Inc.                                 |  | Service-distributor of personal care products and supplements        |  | Line of Credit, $0 available (8.0%, Due 12/2012)(D)(H)  |  |           | 1,985  |  |      |   | 1,985  |           |  |   | 98     | 
|                                                       |  |                                                                      |  | Senior Term Debt (8.5%, Due 12/2012)(D)(H)              |  |           | 1,870  |  |      |   | 1,870  |           |  |   | 94     | 
|                                                       |  |                                                                      |  | Senior Term Debt (3.5%, Due 12/2012)(C)(D)(H)           |  |           | 2,000  |  |      |   | 2,000  |           |  |   | 100    | 
|                                                       |  |                                                                      |  | Senior Term Debt (3.5%, Due 12/2012)(C) (D)(H)          |  |           | 4,648  |  |      |   | 4,648  |           |  |   | 232    | 
|                                                       |  |                                                                      |  | Preferred Equity (1,000,000 shares)(F) (G)(H)           |  |           |        |  |      |   |       |           |  |   |       | 
|                                                       |  |                                                                      |  | Common Stock (688,500 shares)(F) (G)                    |  |           |        |  |      |   |       |           |  |   |       | 
|                                                       |  |                                                                      |  |                                                         |  |           |        |  |      |   |        |           |  |   |        | 
|                                                       |  |                                                                      |  |                                                         |  |           |        |  |      |   | 10,503 |           |  |   | 524    | 
|                                                       |  |                                                                      |  |                                                         | 
|North American Aircraft Services LLC                   |  | Service - repairs and maintains aircraft fuel tanks and fuel systems |  | Line of Credit, $1,500 available (6.5%, Due 8/2012)(D)  |  |           | 500    |  |      |   | 500    |           |  |   | 500    | 
|                                                       |  |                                                                      |  | Senior Term Debt (7.5%, Due 8/2016)(D)                  |  |           | 3,250  |  |      |   | 3,250  |           |  |   | 3,250  | 
|                                                       |  |                                                                      |  | Senior Subordinated Term Debt (11.8%, Due 8/2016)(D)    |  |           | 4,750  |  |      |   | 4,750  |           |  |   | 4,750  | 
|                                                       |  |                                                                      |  | Common Stock Warrants (4.8% ownership)(F) (G)           |  |           |        |  |      |   | 350    |           |  |   | 350    | 
|                                                       |  |                                                                      |  |                                                         |  |           |        |  |      |   |        |           |  |   |        | 
|                                                       |  |                                                                      |  |                                                         |  |           |        |  |      |   | 8,850  |           |  |   | 8,850  | 
|                                                       |  |                                                                      |  |                                                         | 
|Northern Contours, Inc.                                |  | Manufacturing-veneer and laminate components                         |  | Senior Subordinated Term Debt (13.0%, Due 9/2012)(D)    |  |           | 6,128  |  |      |   | 6,128  |           |  |   | 5,684  | 
|                                                       |  |                                                                      |  |                                                         | 
|Northstar Broadband, LLC                               |  | Service-cable TV franchise owner                                     |  | Senior Term Debt (0.7%, Due 12/2012)(D)                 |  |           | 80     |  |      |   | 70     |           |  |   | 64     | 
|                                                       |  |                                                                      |  |                                                         | 
|Precision Acquisition Group Holdings, Inc.             |  | Manufacturing-consumable components for the aluminum industry        |  | Equipment Note (13.0%, Due 11/2011)(D)                  |  |           | 1,000  |  |      |   | 1,000  |           |  |   | 948    | 
|                                                       |  |                                                                      |  | Senior Term Debt (13.0%, Due 11/2011)(D)                |  |           | 4,125  |  |      |   | 4,125  |           |  |   | 3,908  | 
|                                                       |  |                                                                      |  | Senior Term Debt (13.0%, Due 11/2011)(C) (D)            |  |           | 4,053  |  |      |   | 4,053  |           |  |   | 3,840  | 
|                                                       |  |                                                                      |  |                                                         |  |           |        |  |      |   |        |           |  |   |        | 
|                                                       |  |                                                                      |  |                                                         |  |           |        |  |      |   | 9,178  |           |  |   | 8,696  | 
|                                                       |  |                                                                      |  |                                                         | 
|PROFIT Systems Acquisition Co.                         |  | Service-design and develop ERP software                              |  | Line of Credit, $350 available (11.25%, Due 7/2012)(D)  |  |           |       |  |      |   |       |           |  |   |       | 
|                                                       |  |                                                                      |  | Senior Term Debt (10.5%, Due 7/2014)(C) (D)             |  |           | 3,150  |  |      |   | 3,150  |           |  |   | 3,024  | 
|                                                       |  |                                                                      |  |                                                         |  |           |        |  |      |   |        |           |  |   |        | 
|                                                       |  |                                                                      |  |                                                         |  |           |        |  |      |   | 3,150  |           |  |   | 3,024  | 



11



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##### Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

AS OF SEPTEMBER 30, 2011

(DOLLAR AMOUNTS IN THOUSANDS)



|                                                   |  |                                                                                 |  |                                                         |  |           |        |   |         |   |        |            |         |   |        | 
|-------------------------------------------------- |  | ------------------------------------------------------------------------------- |  | ------------------------------------------------------- |  | --------- | ------ | - | ------- | - | ------ | ---------- | ------- | - | ------ | 
|Company(A)                                         |  | Industry                                                                        |  | Investment(B)                                           |  | Principal |        |   | Cost    |   |        | Fair Value |        
|                                                   |  |                                                                                 | 
|NON-CONTROL/NON-AFFILIATE INVESTMENTS (Continued): |  |                                                                                 |  |                                                         |  |           |        |   |         |   |        |           
|                                                   |  |                                                                                 |  |                                                         | 
|RCS Management Holding Co.                         |  | Service-healthcare supplies                                                     |  | Senior Term Debt (9.5%, Due 1/2013)(D)                  |  | $         | 1,438  |   |         | $ | 1,438  |            |         | $ | 1,367  | 
|                                                   |  |                                                                                 |  | Senior Term Debt (11.5%, Due 1/2013)(C) (D)             |  |           | 3,060  |   |         |   | 3,060  |            |         |   | 2,907  | 
|                                                   |  |                                                                                 |  |                                                         |  |           |        |   |         |   |        |            |         |   |        | 
|                                                   |  |                                                                                 |  |                                                         |  |           |        |   |         |   | 4,498  |            |         |   | 4,274  | 
|                                                   |  |                                                                                 |  |                                                         | 
|Reliable Biopharmaceutical Holdings, Inc.          |  | Manufacturing-pharmaceutical and biochemical intermediates                      |  | Line of Credit, $2,800 available (9.0%, Due 1/2013)(D)  |  |           | 1,200  |   |         |   | 1,200  |            |         |   | 1,176  | 
|                                                   |  |                                                                                 |  | Mortgage Note (9.5%, Due 12/2014)(D)                    |  |           | 7,168  |   |         |   | 7,168  |            |         |   | 7,025  | 
|                                                   |  |                                                                                 |  | Senior Term Debt (12.0%, Due 12/2014)(C)(D)             |  |           | 11,573 |   |         |   | 11,573 |            |         |   | 10,906 | 
|                                                   |  |                                                                                 |  | Senior Subordinated Term Debt (12.5%, Due 12/2014)(D)   |  |           | 6,000  |   |         |   | 6,000  |            |         |   | 5,655  | 
|                                                   |  |                                                                                 |  | Common Stock Warrants (764 shares)(F) (G)               |  |           |        |   |         |   | 209    |            |         |   | 534    | 
|                                                   |  |                                                                                 |  |                                                         |  |           |        |   |         |   |        |            |         |   |        | 
|                                                   |  |                                                                                 |  |                                                         |  |           |        |   |         |   | 26,150 |            |         |   | 25,296 | 
|                                                   |  |                                                                                 |  |                                                         | 
|Saunders & Associates                              |  | Manufacturing-equipment provider for frequency control devices                  |  | Line of Credit, $2,500 available (11.3%, Due 5/2013)(D) |  |           |       |   |         |   |       |            |         |   |       | 
|                                                   |  |                                                                                 |  | Senior Term Debt (11.3%, Due 5/2013)(D)                 |  |           | 8,947  |   |         |   | 8,947  |            |         |   | 8,913  | 
|                                                   |  |                                                                                 |  |                                                         |  |           |        |   |         |   |        |            |         |   |        | 
|                                                   |  |                                                                                 |  |                                                         |  |           |        |   |         |   | 8,947  |            |         |   | 8,913  | 
|                                                   |  |                                                                                 |  |                                                         | 
|Sunburst Media - Louisiana, LLC                    |  | Service-radio station operator                                                  |  | Senior Term Debt (10.5%, Due 12/2011)(D)                |  |           | 6,100  |   |         |   | 6,103  |            |         |   | 3,964  | 
|                                                   |  |                                                                                 |  |                                                         | 
|Thibaut Acquisition Co.                            |  | Service-design and distribute wall covering                                     |  | Line of Credit, $400 available (9.0%, Due 1/2014)(D)    |  |           | 600    |   |         |   | 600    |            |         |   | 585    | 
|                                                   |  |                                                                                 |  | Senior Term Debt (8.5%, Due 1/2014)(D)                  |  |           | 550    |   |         |   | 550    |            |         |   | 536    | 
|                                                   |  |                                                                                 |  | Senior Term Debt (12.0%, Due 1/2014)(C) (D)             |  |           | 3,000  |   |         |   | 3,000  |            |         |   | 2,910  | 
|                                                   |  |                                                                                 |  |                                                         |  |           |        |   |         |   |        |            |         |   |        | 
|                                                   |  |                                                                                 |  |                                                         |  |           |        |   |         |   | 4,150  |            |         |   | 4,031  | 
|                                                   |  |                                                                                 |  |                                                         | 
|Westlake Hardware, Inc.                            |  | Retail-hardware and variety                                                     |  | Senior Subordinated Term Debt (12.3%, Due 1/2014)(D)    |  |           | 12,000 |   |         |   | 12,000 |            |         |   | 11,640 | 
|                                                   |  |                                                                                 |  | Senior Subordinated Term Debt (13.5%, Due 1/2014)(D)    |  |           | 8,000  |   |         |   | 8,000  |            |         |   | 7,700  | 
|                                                   |  |                                                                                 |  |                                                         |  |           |        |   |         |   |        |            |         |   |        | 
|                                                   |  |                                                                                 |  |                                                         |  |           |        |   |         |   | 20,000 |            |         |   | 19,340 | 
|                                                   |  |                                                                                 |  |                                                         | 
|Westland Technologies, Inc.                        |  | Service-diversified conglomerate                                                |  | Line of Credit, $1,000 available (6.5%, Due 4/2012)(D)  |  |           |       |   |         |   |       |            |         |   |       | 
|                                                   |  |                                                                                 |  | Senior Term Debt (7.5%, Due 4/2016)(D)                  |  |           | 2,000  |   |         |   | 2,000  |            |         |   | 1,995  | 
|                                                   |  |                                                                                 |  | Senior Term Debt (12.5%, Due 4/2016)(D)                 |  |           | 4,000  |   |         |   | 4,000  |            |         |   | 3,990  | 
|                                                   |  |                                                                                 |  | Common Stock Warrants (77,287 shares)(F) (G)            |  |           |        |   |         |   | 350    |            |         |   | 307    | 
|                                                   |  |                                                                                 |  |                                                         |  |           |        |   |         |   |        |            |         |   |        | 
|                                                   |  |                                                                                 |  |                                                         |  |           |        |   |         |   | 6,350  |            |         |   | 6,292  | 
|                                                   |  |                                                                                 |  |                                                         | 
|Winchester
Electronics                             |  | Manufacturing-high
bandwidth connectors and cables                              |  | Senior Term Debt (5.2%,
Due 5/2012)(D)                  |  |           | 1,250  |   |         |   | 1,250  |            |         |   | 1,238  | 
|                                                   |  |                                                                                 |  | Senior Term Debt (5.7%, Due 5/2013)(D)                  |  |           | 1,677  |   |         |   | 1,677  |            |         |   | 1,656  | 
|                                                   |  |                                                                                 |  | Senior Subordinated Term Debt (14.0%, Due 6/2013)(D)    |  |           | 9,800  |   |         |   | 9,800  |            |         |   | 9,628  | 
|                                                   |  |                                                                                 |  |                                                         |  |           |        |   |         |   |        |            |         |   |        | 
|                                                   |  |                                                                                 |  |                                                         |  |           |        |   |         |   | 12,727 |            |         |   | 12,522 | 
|                                                   |  |                                                                                 |  |                                                         |  |           |        |   |         |   |        |            |         |   |        | 
|                                                   |  |                                                                                 |  |                                                        
|Subtotal  Non-syndicated loans                    |  |                                                                                 |  |                                                         |  |           |        | $ | 196,204 |   |        | $          | 166,639 |  
|                                                   |  |                                                                                 |  |                                                         |  |           |        |   |         |   |        |            |         |   |        | 
|Syndicated Loans:                                  |  |                                                                                 |  |                                                         |  |           |        |   |         |   |        |            |         |   |        | 
|                                                   |  |                                                                                 |  |                                                         | 
|Airvana Network Solutions, Inc.                    |  | Service-telecommunications                                                      |  | Senior Term Debt (10.0%, Due 3/2015)(E)                 |  | $         | 6,048  |   |         | $ | 5,912  |            |         | $ | 6,048  | 
|                                                   |  |                                                                                 |  |                                                         | 
|Allied Security Holdings, LLC                      |  | Service-contract security officer providers                                     |  | Senior Subordinated Term Debt (8.5%, Due 2/2018)(E)     |  |           | 1,000  |   |         |   | 991    |            |         |   | 965    | 
|                                                   |  |                                                                                 |  |                                                         | 
|Allied Specialty Vehicles, Inc.                    |  | Manufacturing-specialty vehicles                                                |  | Senior Term Debt (9.5%, Due 2/2016)(E)                  |  |           | 9,950  |   |         |   | 9,767  |            |         |   | 9,751  | 
|                                                   |  |                                                                                 |  |                                                         | 
|Ameriqual Group, LLC                               |  | Manufacturing-production and distribution of food products                      |  | Senior Term Debt (9.0%, Due 3/2016)(E)                  |  |           | 7,481  |   |         |   | 7,344  |            |         |   | 7,332  | 
|                                                   |  |                                                                                 |  |                                                         | 
|Applied Systems, Inc.                              |  | Software for property & casualty insurance industry                             |  | Senior Subordinated Term Debt (9.3%, Due 6/2017)(E)     |  |           | 1,000  |   |         |   | 991    |            |         |   | 990    | 
|                                                   |  |                                                                                 |  |                                                         | 
|Ascend Learning, LLC                               |  | Service-technology-based learning solutions                                     |  | Senior Subordinated Term Debt (11.53%, Due 12/2017)(E)  |  |           | 1,000  |   |         |   | 972    |            |         |   | 980    | 
|                                                   |  |                                                                                 |  |                                                         | 
|Attachmate Corporate                               |  | Service-develops, implements and supports software                              |  | Senior Subordinated Term Debt (9.5%, Due 2/2017)(E)     |  |           | 4,000  |   |         |   | 3,962  |            |         |   | 3,810  | 
|                                                   |  |                                                                                 |  |                                                         | 
|Autoparts Holdings Limited                         |  | Supplier to the light and heavy-duty vehicle after market for replacement parts |  | Senior Term Debt (10.5%, Due 1/2018)(E)                 |  |           | 1,000  |   |         |   | 995    |            |         |   | 978    | 
|                                                   |  |                                                                                 |  |                                                         | 
|Covad Communications Group, Inc.                   |  | Service-telecommunications                                                      |  | Senior Term Debt (12.0%, Due 11/2015)(E)                |  |           | 1,850  |   |         |   | 1,818  |            |         |   | 1,795  | 
|                                                   |  |                                                                                 |  |                                                         | 
|Ernest Health, Inc.                                |  | Service-post-acute care services                                                |  | Senior Term Debt (10.3%, Due 5/2017)(E)                 |  |           | 2,000  |   |         |   | 1,971  |            |         |   | 1930   | 
|                                                   |  |                                                                                 |  |                                                         | 
|Global Brass and Copper, Inc.                      |  | Manufacturing - steel wool products and metal fibers                            |  | Senior Term Debt (10.3%, Due 8/2015)(E)                 |  |           | 2,969  |   |         |   | 2,893  |            |         |   | 3,054  | 
|                                                   |  |                                                                                 |  |                                                         | 
|HGI Holding, Inc                                   |  | Service - distributor of disposable medical products                            |  | Senior Term Debt (6.8%, Due 10/2016)(E)                 |  |           | 1,757  |   |         |   | 1,723  |            |         |   | 1,687  | 
|                                                   |  |                                                                                 |  |                                                         | 
|Hubbard Radio, LLC                                 |  | Service-radio station operator                                                  |  | Senior Subordinated Term Debt (8.8%, Due 4/2018)(E)     |  |           | 500    |   |         |   | 495    |            |         |   | 488    | 
|                                                   |  |                                                                                 |  |                                                         | 
|Keypoint Government Solutions, Inc.                |  | Service-security consulting services                                            |  | Senior Term Debt (10.0%, Due 12/2015)(E)                |  |           | 6,948  |   |         |   | 6,916  |            |         |   | 6,670  | 



12



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##### Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

AS OF SEPTEMBER 30, 2011

(DOLLAR AMOUNTS IN THOUSANDS)



|                                                                                                   |  |                                                                     |  |                                                              |  |           |         |   |        |   |         |            |        |   |        | 
|-------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------- |  | ------------------------------------------------------------ |  | --------- | ------- | - | ------ | - | ------- | ---------- | ------ | - | ------ | 
|Company(A)                                                                                         |  | Industry                                                            |  | Investment(B)                                                |  | Principal |         |   | Cost   |   |         | Fair Value |       
|                                                                                                   |  |                                                                     | 
|NON-CONTROL/NON-AFFILIATE INVESTMENTS (Continued):                                                 |  |                                                                     |  |                                                              |  |           |         |   |        |   |         |           
|Mood Media Corporation                                                                             |  | Service-media and marketing solutions                               |  | Senior Term Debt (10.3%, Due 11/2018)(E)                     |  | $         | 8,000   |   |        | $ | 7,923   |            |        | $ | 7,370  | 
|                                                                                                   |  |                                                                     |  |                                                              | 
|National Surgical Hospitals, Inc.                                                                  |  | Service-physician-partnered surgical facilities                     |  | Senior Term Debt (8.3%, Due 2/2017)(E)                       |  |           | 1,694   |   |        |   | 1,658   |            |        |   | 1,627  | 
|                                                                                                   |  |                                                                     |  |                                                              | 
|Sensus USA, Inc.                                                                                   |  | Service-provider of utility communication services                  |  | Senior Term Debt (8.5%, Due 5/2018)(E)                       |  |           | 500     |   |        |   | 495     |            |        |   | 483    | 
|                                                                                                   |  |                                                                     |  |                                                              | 
|Springs Window Fashions, LLC                                                                       |  | Manufacturing-window coverings                                      |  | Senior Term Debt (11.3%, Due 11/2017)(E)                     |  |           | 5,000   |   |        |   | 4,855   |            |        |   | 4,750  | 
|                                                                                                   |  |                                                                     |  |                                                              | 
|SRAM, LLC                                                                                          |  | Manufacturing-premium bicycle components                            |  | Senior Term Debt (8.5%, Due 12/2018)(E)                      |  |           | 2,500   |   |        |   | 2,476   |            |        |   | 2,475  | 
|                                                                                                   |  |                                                                     |  |                                                              | 
|Targus Group International, Inc.                                                                   |  | Manufacturing-carrying cases and accessories for notebook computers |  | Senior Term Debt (11.0%, Due 5/2016)(E)                      |  |           | 9,975   |   |        |   | 9,785   |            |        |   | 9,626  | 
|                                                                                                   |  |                                                                     |  |                                                              | 
|Ulterra Drilling Technologies, LP                                                                  |  | Manufacturing-oil field drill bits and slick-slip reduction tools   |  | Senior Term Debt (9.5%, Due 6/2016)(E)                       |  |           | 1,975   |   |        |   | 1,937   |            |        |   | 1,916  | 
|                                                                                                   |  |                                                                     |  |                                                              | 
|Vision Solutions, Inc.                                                                             |  | Service-provider of information availability software               |  | Senior Term Debt (9.5%, Due 7/2017)(E)                       |  |           | 11,000  |   |        |   | 10,915  |            |        |   | 10,560 | 
|                                                                                                   |  |                                                                     |  |                                                              | 
|Wall Street Systems Holdings, Inc.                                                                 |  | Service-software provider                                           |  | Senior Term Debt (9.0%, Due 6/2018)(E)                       |  |           | 3,000   |   |        |   | 2,971   |            |        |   | 2,880  | 
|                                                                                                   |  |                                                                     |  |                                                              | 
|WP Evenflo Group Holdings Inc.                                                                     |  | Manufacturing-infant and juvenile products                          |  | Senior Term Debt (8.0%, Due 2/2013)(E)                       |  |           | 1,853   |   |        |   | 1,853   |            |        |   | 1,723  | 
|                                                                                                   |  |                                                                     |  | Senior Preferred Equity (333 shares)(F) (G)                  |  |           |         |   |        |   | 333     |            |        |   | 419    | 
|                                                                                                   |  |                                                                     |  | Junior Preferred Equity (111 shares)(F) (G)                  |  |           |         |   |        |   | 111     |            |        |   | 146    | 
|                                                                                                   |  |                                                                     |  | Common Stock (1,874 shares)(F) (G)                           |  |           |         |   |        |   |        |            |        |   | 210    | 
|                                                                                                   |  |                                                                     |  |                                                              |  |           |         |   |        |   |         |            |        |   |        | 
|                                                                                                   |  |                                                                     |  |                                                              |  |           |         |   |        |   | 2,297   |            |        |   | 2,498  | 
|                                                                                                   |  |                                                                     |  |                                                              |  |           |         |   |        |   |         |            |        |   |        | 
|                                                                                                   |  |                                                                     |  |                                                             
|Subtotal - Syndicated loans                                                                        |  |                                                                     |  |                                                              |  |           |         | $ | 92,062 |   |         | $          | 90,663 |  
|                                                                                                   |  |                                                                     |  |                                                              |  |           |         |   |        |   |         |            |        |   |        | 
|Total Non-Control/Non-Affiliate Investments (represented 84.9% of total investments at fair
value) |  |                                                                     |  |                                                              |  | $         | 288,266 |   |        | $ | 257,302 |           
|                                                                                                   |  |                                                                     |  |                                                              |  |           |         |   |        |   |         |            |        |   |        | 
|                                                                                                   |  |                                                                     |  |                                                             
|CONTROL INVESTMENTS:                                                                               |  |                                                                     |  |                                                              |  |           |         |   |        |   |         |            |        |  
|                                                                                                   |  |                                                                     |  |                                                              | 
|BERTL, Inc.                                                                                        |  | Service-web-based evaluator of imaging products                     |  | Line of Credit, $6 available (6.4%, Due 10/2011)(F)(H)       |  | $         | 1,427   |   |        | $ | 1,355   |            |        | $ |       | 
|                                                                                                   |  |                                                                     |  | Common Stock (100 shares)(F) (G)                             |  |           |         |   |        |   | 424     |            |        |   |       | 
|                                                                                                   |  |                                                                     |  |                                                              |  |           |         |   |        |   |         |            |        |   |        | 
|                                                                                                   |  |                                                                     |  |                                                              |  |           |         |   |        |   | 1779    |            |        |   |       | 
|                                                                                                   |  |                                                                     |  |                                                              | 
|Defiance Integrated Technologies, Inc.                                                             |  | Manufacturing-trucking parts                                        |  | Senior Term Debt (11.0%, Due 4/2013)(C) (F)                  |  |           | 7,505   |   |        |   | 7,505   |            |        |   | 7,505  | 
|                                                                                                   |  |                                                                     |  | Common Stock (15,500 shares)(F) (G)                          |  |           |         |   |        |   | 1       |            |        |   | 7,534  | 
|                                                                                                   |  |                                                                     |  |                                                              |  |           |         |   |        |   |         |            |        |   |        | 
|                                                                                                   |  |                                                                     |  |                                                              |  |           |         |   |        |   | 7,506   |            |        |   | 15,039 | 
|                                                                                                   |  |                                                                     |  |                                                              | 
|Kansas Cable Holdings, Inc.                                                                        |  | Service - cable, internet, voice provider                           |  | Line of Credit, $179 available (10.0%, Due 10/2012)(D)(H)    |  |           | 346     |   |        |   | 337     |            |        |   | 14     | 
|                                                                                                   |  |                                                                     |  | Senior Term Debt (10.0%,
Due 10/2012)(D)(H)                  |  |           | 1,500   |   |        |   | 1,444   |            |        |   | 60     | 
|                                                                                                   |  |                                                                     |  | Senior Term Debt (10.0%, Due 10/2012)(D)(H)                  |  |           | 1,039   |   |        |   | 1,000   |            |        |   | 42     | 
|                                                                                                   |  |                                                                     |  | Common Stock (100 shares)(F) (G)                             |  |           |         |   |        |   |        |            |        |   |       | 
|                                                                                                   |  |                                                                     |  |                                                              |  |           |         |   |        |   |         |            |        |   |        | 
|                                                                                                   |  |                                                                     |  |                                                              |  |           |         |   |        |   | 2,781   |            |        |   | 116    | 
|                                                                                                   |  |                                                                     |  |                                                              | 
|Lindmark Acquisition, LLC                                                                          |  | Service-advertising                                                 |  | Senior Subordinated Term Debt (11.0%, Due 10/2012)(D)(H)     |  |           | 10,000  |   |        |   | 10,000  |            |        |   | 2,000  | 
|                                                                                                   |  |                                                                     |  | Senior Subordinated Term Debt (13.0%, Due 10/2012)(D)(H)     |  |           | 2,000   |   |        |   | 2,000   |            |        |   | 400    | 
|                                                                                                   |  |                                                                     |  | Senior Subordinated Term Debt (13.0%, Due Upon Demand)(D)(H) |  |           | 1,908   |   |        |   | 1,908   |            |        |   | 383    | 
|                                                                                                   |  |                                                                     |  | Common Stock (100 shares)(F) (G)                             |  |           |         |   |        |   | 317     |            |        |   |       | 
|                                                                                                   |  |                                                                     |  |                                                              |  |           |         |   |        |   |         |            |        |   |        | 
|                                                                                                   |  |                                                                     |  |                                                              |  |           |         |   |        |   | 14,225  |            |        |   | 2,783  | 
|                                                                                                   |  |                                                                     |  |                                                              | 
|LocalTel, LLC                                                                                      |  | Service-yellow pages publishing                                     |  | Line of credit, $2 available (10.0%, Due 12/2011)(F)(H)      |  |           | 1,848   |   |        |   | 1,848   |            |        |   | 734    | 
|                                                                                                   |  |                                                                     |  | Line of Credit, $1,830 available (4.7%, Due 6/2012)(F)(H)    |  |           | 1,170   |   |        |   | 1,170   |            |        |   |       | 
|                                                                                                   |  |                                                                     |  | Senior Term Debt (12.5%, Due 2/2012)(F)(H)                   |  |           | 325     |   |        |   | 325     |            |        |   |       | 
|                                                                                                   |  |                                                                     |  | Senior Term Debt (8.5%, Due 6/2012)(F)(H)                    |  |           | 2,688   |   |        |   | 2,688   |            |        |   |       | 
|                                                                                                   |  |                                                                     |  | Senior Term Debt (10.5%, Due 6/2012)(C) (F)(H)               |  |           | 2,750   |   |        |   | 2,750   |            |        |   |       | 
|                                                                                                   |  |                                                                     |  | Common Stock Warrants (4,000 shares)(F) (G)                  |  |           |         |   |        |   |        |            |        |   |       | 
|                                                                                                   |  |                                                                     |  |                                                              |  |           |         |   |        |   |         |            |        |   |        | 
|                                                                                                   |  |                                                                     |  |                                                              |  |           |         |   |        |   | 8,781   |            |        |   | 734    | 
|                                                                                                   |  |                                                                     |  |                                                              | 
|Midwest Metal Distribution, Inc.                                                                   |  | Distribution-aluminum sheets and stainless steel                    |  | Senior Subordinated Term Debt (12.0%, Due 7/2013)(D)         |  |           | 18,281  |   |        |   | 18,262  |            |        |   | 17,184 | 
|                                                                                                   |  |                                                                     |  | Common Stock (501 shares)(F) (G)                             |  |           |         |   |        |   | 138     |            |        |   |       | 
|                                                                                                   |  |                                                                     |  |                                                              |  |           |         |   |        |   |         |            |        |   |        | 
|                                                                                                   |  |                                                                     |  |                                                              |  |           |         |   |        |   | 18,400  |            |        |   | 17,184 | 
|                                                                                                   |  |                                                                     |  |                                                              | 
|Sunshine Media Holdings                                                                            |  | Service-publisher regional B2B trade magazines                      |  | Line of credit, $1,100 available (10.5%, Due 8/2014)(D)      |  |           | 900     |   |        |   | 900     |            |        |   | 270    | 
|                                                                                                   |  |                                                                     |  | Senior Term Debt (10.5%, Due 5/2016)(D)                      |  |           | 16,948  |   |        |   | 16,948  |            |        |   | 5,084  | 
|                                                                                                   |  |                                                                     |  | Senior Term Debt (5.0%, Due 5/2016)(C) (D)                   |  |           | 10,700  |   |        |   | 10,700  |            |        |   | 3,210  | 
|                                                                                                   |  |                                                                     |  | Junior Preferred Equity (6,689 shares)(F) (G)                |  |           |         |   |        |   | 2,475   |            |        |   |       | 
|                                                                                                   |  |                                                                     |  | Common Stock (934 shares)(F) (G)                             |  |           |         |   |        |   | 740     |            |        |   |       | 
|                                                                                                   |  |                                                                     |  |                                                              |  |           |         |   |        |   |         |            |        |   |        | 
|                                                                                                   |  |                                                                     |  |                                                              |  |           |         |   |        |   | 31,763  |            |        |   | 8,564  | 



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GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

AS OF SEPTEMBER 30, 2011

(DOLLAR AMOUNTS IN THOUSANDS)



|                                                                                 |  |                                     |  |                                                          |  |           |         |  |      |   |         |            |  |   |       | 
|-------------------------------------------------------------------------------- |  | ----------------------------------- |  | -------------------------------------------------------- |  | --------- | ------- |  | ---- | - | ------- | ---------- |  | - | ----- | 
|Company(A)                                                                       |  | Industry                            |  | Investment(B)                                            |  | Principal |         |  | Cost |   |         | Fair Value | 
|                                                                                 |  |                                     | 
|CONTROL INVESTMENTS (Continued):                                                 |  |                                     |  |                                                          |  |           |         |  |      |   |         |           
|                                                                                 |  |                                     |  |                                                          | 
|U.S. Healthcare Communications, Inc.                                             |  | Service-magazine publisher/operator |  | Line of credit, $131 available (6.0%, Due 12/2010)(F)(H) |  | $         | 269     |  |      | $ | 269     |            |  | $ |      | 
|                                                                                 |  |                                     |  | Line of credit, $0 available (6.0%, Due 12/2010)(F)(H)   |  |           | 450     |  |      |   | 450     |            |  |   |      | 
|                                                                                 |  |                                     |  | Common Stock (100 shares)(F) (G)                         |  |           |         |  |      |   | 2,470   |            |  |   |      | 
|                                                                                 |  |                                     |  |                                                          |  |           |         |  |      |   |         |            |  |   |       | 
|                                                                                 |  |                                     |  |                                                          |  |           |         |  |      |   | 3,189   |            |  |   |      | 
|                                                                                 |  |                                     |  |                                                          | 
|Viapack, Inc.                                                                    |  | Manufacturing-polyethylene film     |  | Line of Credit, $900 available (10.0%, Due 3/2013)(D)    |  |           | 1,600   |  |      |   | 1,600   |            |  |   | 320   | 
|                                                                                 |  |                                     |  | Senior Real Estate Term Debt (10.0%, Due 3/2014)(D)      |  |           | 600     |  |      |   | 600     |            |  |   | 120   | 
|                                                                                 |  |                                     |  | Senior Term Debt (13.0%, Due 3/2014)(C) (D)              |  |           | 3,925   |  |      |   | 3,925   |            |  |   | 785   | 
|                                                                                 |  |                                     |  | Preferred Equity (100 shares)(F) (G)                     |  |           |         |  |      |   |        |            |  |   |      | 
|                                                                                 |  |                                     |  |                                                          |  |           |         |  |      |   |         |            |  |   |       | 
|                                                                                 |  |                                     |  |                                                          |  |           |         |  |      |   | 6,125   |            |  |   | 1,225 | 
|                                                                                 |  |                                     |  |                                                          |  |           |         |  |      |   |         |            |  |   |       | 
|                                                                                 |  |                                     | 
|Total Control Investments (represented 15.1% of total investments at fair value) |  |                                     |  |                                                          |  | $         | 94,549  |  |      | $ | 45,645  |           
|                                                                                 |  |                                     |  |                                                          |  |           |         |  |      |   |         |            |  |   |       | 
|Total Investments(I)                                                             |  |                                     |  |                                                          |  | $         | 382,815 |  |      | $ | 302,947 |           
|                                                                                 |  |                                     |  |                                                          |  |           |         |  |      |   |         |            |  |   |       | 



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

|(B) | Percentage represents interest rates in effect at September 30, 2011, and due date represents the contractual maturity date.
|--- | ----------------------------------------------------------------------------------------------------------------------------

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

|(D) | Fair value was primarily based on opinions of value submitted by Standard & Poors Securities Evaluations, Inc.
|--- | ---------------------------------------------------------------------------------------------------------------

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

|(F) | Fair value was primarily based on the total enterprise value of the portfolio company using a liquidity waterfall approach. We also considered
discounted cash flow methodologies.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

|(I) | For the year ended September 30, 2011, cumulative gross unrealized depreciation for federal income tax purposes is $88,670 and cumulative gross
unrealized appreciation for federal income tax purposes is $8,566. For the year ended September 30, 2011, cumulative net unrealized depreciation is $80,104 based on a tax cost of $383,052.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



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GLADSTONE CAPITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MARCH 31, 2012

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

NOTE 1. ORGANIZATION

Gladstone Capital
Corporation was incorporated under the General Corporation Laws of the State of Maryland on May 30, 2001 and completed an initial public offering on August 23, 2001. The terms we, our, and us all refer
to Gladstone Capital Corporation and its consolidated subsidiaries. We are a closed-end, non-diversified management investment company that has elected to be treated as a business development company (BDC) under the Investment Company
Act of 1940, as amended (the 1940 Act). In addition, we have elected to be treated for tax purposes as a regulated investment company (RIC) under the Internal Revenue Code of 1986, as amended (the Code). Our
investment objective is to achieve a high level of current income by investing in debt securities, consisting primarily of senior notes, senior subordinated notes and junior subordinated notes, with a particular focus on senior notes, of established
private businesses in the United States (U.S) that are substantially owned by leveraged buyout funds, individual investors or are family-owned businesses. In addition, we may acquire existing loans that meet this profile from other
funds.

Gladstone Business Loan, LLC (Business Loan), a wholly-owned subsidiary of ours, was established on February 3, 2003
for the sole purpose of owning our portfolio of investments in connection with our line of credit.

Gladstone Financial Corporation
(Gladstone Financial), a wholly-owned subsidiary of ours, was established on November 21, 2006 for the purpose of holding a license to operate as a Specialized Small Business Investment Company. Gladstone Financial (previously known
as Gladstone SSBIC Corporation) acquired this license in February 2007. The license enables us, through this subsidiary, to make investments in accordance with the United States Small Business Administration guidelines for specialized small business
investment companies.

The financial statements of the subsidiaries are consolidated with those of ours.

We are externally managed by Gladstone Management Corporation (the Adviser), an affiliate of ours.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Unaudited Interim Financial Statements and Basis of Presentation

We prepare our interim
financial statements in accordance with accounting principles generally accepted in the U.S. (GAAP) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X
under the Securities Act of 1933, as amended (the Securities Act). Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with GAAP are omitted. The accompanying condensed consolidated financial
statements include our accounts and those of our wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. Under Article 6 of Regulation S-X under the Securities Act, and the authoritative
accounting guidance provided by the AICPA Audit and Accounting Guide for Investment Companies, we are not permitted to consolidate any portfolio company investments, including those in which we have a controlling interest. In our opinion, all
adjustments, consisting solely of normal recurring accruals, necessary for the fair statement of financial statements for the interim periods have been included. The results of operations for the three and six months ended March 31, 2012, are
not necessarily indicative of results that ultimately may be achieved for the year. The interim financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in our annual report on
Form 10-K for the fiscal year ended September 30, 2011, as filed with the Securities and Exchange Commission (the SEC) on November 14, 2011.

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

Reclassifications

Certain amounts in
the prior periods financial statements have been reclassified to conform to the presentation for the three and six month periods ended March 31, 2012, with no effect to net decrease in net assets resulting from operations.



15



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##### Table of Contents

Investment Valuation Policy

We carry our investments at fair value to the extent that market quotations are readily available and reliable and otherwise at fair value as determined in good faith by our board of directors (the
Board of Directors). In determining the fair value of our investments, the Adviser has established an investment valuation policy (the Policy). The Policy has been approved by our Board of Directors, and each quarter our
Board of Directors reviews whether the Adviser has applied the Policy consistently and votes whether to accept the recommended valuation of our investment portfolio. Such determination of fair values may involve subjective judgments and estimates.

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

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

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

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

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

As of March 31, 2012 and September 30, 2011, we determined that the indicative bid prices were reliable indicators of fair value
for our syndicate investments. However, because of the private nature of this marketplace (meaning actual transactions are not publicly reported); we determined that these valuation inputs were classified as Level 3 within the fair value hierarchy
as defined in ASC 820.

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



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



|(B) | Portfolio investments in controlled companies comprised of a bundle of investments, which can include debt and equity securities: The fair value of these
investments is determined based on the total enterprise value (TEV) of the portfolio company, or issuer, utilizing a liquidity waterfall approach under ASC 820 for our Non-Public Debt Securities and equity or equity-like securities
(e.g., preferred equity, common equity or other equity-like securities) that are purchased together as part of a package, where we have control or could gain control through an option or warrant security; both the debt and equity securities of the
portfolio investment would exit in the mergers and acquisitions market as the principal market, generally through a sale of the portfolio company. We manage our risk related to these investments at the aggregated issuer level and generally exit the
debt and equity securities together. Applying the liquidity waterfall approach to all of the investments of an issuer, we first calculate the TEV of the issuer by incorporating some or all of the following factors:
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



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

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



|(C) | Portfolio investments in non-controlled companies comprised of a bundle of investments, which can include debt and equity securities:We value Non-Public Debt
Securities that are purchased together with equity or equity-like securities from the same portfolio company, or issuer, for which we do not control or cannot gain control as of the measurement date, using a hypothetical secondary market as our
principal market. In accordance with ASC 820 (as amended by the FASBs Accounting Standards Update No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S.
GAAP and International Financial Reporting Standards (IFRS), (ASU 2011-04), we have defined our unit of account at the investment level (either debt or equity) and as such determine our fair value of
these non-control investments assuming the sale of an individual security using the standalone premise of value. As such, we estimate the fair value of the debt component using estimates of value provided by SPSE and our own assumptions in the
absence of observable market data, including synthetic credit ratings, estimated remaining life, current market yield and interest rate spreads of similar securities as of the measurement date. For equity or equity-like securities of investments for
which we do not control or cannot gain control as of the measurement date, we estimate the fair value of the equity based on factors such as the overall value of the issuer, the relative fair value of other units of account, including debt, or other
relative value approaches. Consideration is also given to capital structure and other contractual obligations that may impact the fair value of the equity. Furthermore, we may utilize comparable values of similar companies, recent investments and
indices with similar structures and risk characteristics or DCF valuation techniques and, in the absence of other observable market data, our own assumptions.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(D) | Portfolio investments comprised of non-publicly traded, non-control equity securities of other funds:We generally value any uninvested capital of the
non-control fund at par value and values any invested capital at the value provided by the non-control fund.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Due to the
uncertainty inherent in the valuation process, such estimates of fair value may differ significantly and materially from the values that would have been obtained had a ready market for the securities existed. Additionally, changes in the market



17



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##### Table of Contents

environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the valuations currently
assigned. There is no single standard for determining fair value in good faith, as fair value depends upon circumstances of each individual case. In general, fair value is the amount that we might reasonably expect to receive upon the current sale
of the security in an orderly transaction between market participants at the measurement date.

Refer to Note 3Investmentsfor additional information regarding fair value measurements and our application of ASC 820.

Interest Income Recognition

Interest income, adjusted for amortization of premiums and acquisition costs, the accretion of discounts and the amortization of amendment
fees, is recorded on the accrual basis to the extent that such amounts are expected to be collected. Generally, when a loan becomes 90 days or more past due, or if our qualitative assessment indicates that the debtor is unable to service its debt or
other obligations, we will place the loan on non-accrual status and cease recognizing interest income on that loan until the borrower has demonstrated the ability and intent to pay contractual amounts due. However, we remain contractually entitled
to this interest. Interest payments received on non-accrual loans may be recognized as income or applied to the cost basis, depending upon managements judgment. Generally, non-accrual loans are restored to accrual status when past due
principal and interest are paid and, in managements judgment, are likely to remain current, or due to a restructuring such that the interest income is deemed to be collectable. At March 31, 2012, eight portfolio companies were either
fully or partially on non-accrual with an aggregate debt cost basis of $43.8 million, or 12.1% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of $4.6 million, or 1.7% of the fair value of all debt investments
in our portfolio. At September 30, 2011, eight portfolio companies were on non-accrual with an aggregate debt cost basis of $41.1 million, or 11.0% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of $5.3
million, or 1.8% of the fair value of all debt investments in our portfolio.

As of March 31, 2012 and September 30, 2011, we had 27
original issue discount (OID) loans, primarily from the syndicated loans in our portfolio. We recorded OID income of $74 and $0.2 million for the three and six months ended March 31, 2012, respectively, as compared to $29 and $53
for the three and six months ended March 31, 2011. The unamortized balance of OID investments as of March 31, 2012 and September 30, 2011 totaled $1.4 million and $1.5 million, respectively.

As of March 31, 2012 and September 30, 2011, we had no investments that bore PIK interest. PIK interest, computed at the contractual rate
specified in a loan agreement, is added to the principal balance of a loan and recorded as income. To maintain our status as a RIC, this non-cash source of income must be paid out to common stockholders in the form of distributions, even though we
have not yet collected the cash. We recorded no PIK income during the three and six months ended March 31, 2012, respectively, as compared to $4 and $8 for the three and six months ended March, 31, 2011, respectively.

We also transfer past due interest to the principal balance as stipulated in certain loan amendments with portfolio companies. There were no such
transfers during the three and six months ended March 31, 2012. We transferred past due interest to the principal balance of $0.2 million for both the three and six months ended March 31, 2011, respectively.

Other Income Recognition

We record
success fees upon receipt. Success fees are typically contractually due upon a change of control in a portfolio company and are recorded in other income in our accompanying Condensed Consolidated Statements of Operations. We recorded $2.0
million of success fess during the six months ended March 31, 2012, which resulted from our exit of Global Materials Technologies, Inc and RCS Management Holding Co. We recorded $0.6 million of success fees during the six months ended
March 31, 2011, which resulted from our exits of Pinnacle Treatment Centers, Inc. and Interfilm Holdings, Inc.

Recent Accounting
Pronouncements

In May 2011, the FASB issued ASU 2011-04 which results in a consistent definition of fair value and common requirements for
measurement of and disclosure about fair value between GAAP and IFRS. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011, and as such we have adopted this ASU beginning with our quarter ended
March 31, 2012. We have increased our disclosures related to Level 3 fair value measurement, in addition to other required disclosures. There were no related impacts on our financial position or results of operations.



18



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##### Table of Contents

NOTE 3. INVESTMENTS

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



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



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



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

We transfer investments in and out of Level 1, 2 and 3 securities as of the beginning balance sheet date, based on changes in the use of observable and
unobservable inputs utilized to perform the valuation for the period. During the six months ended March 31, 2012 and 2011, there were no transfers in or out of Level 3.

The following table presents the investments carried at fair value as of March 31, 2012 and September 30, 2011, by caption on our accompanying Condensed Consolidated Statements of Assets and
Liabilitiesand by security type, all of which are valued using Level 3 inputs:



|                                            |  |                                                                                                                                                           |         |  |                    |   |         | 
|------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------- | ------- |  | ------------------ | - | ------- | 
|                                            |  | Total Recurring Fair ValueMeasurements Reported inCondensedConsolidated Statements of
Assets andLiabilitiesUsing SignificantUnobservable Inputs (Level 3) |        
|                                            |  | March 31, 2012                                                                                                                                            |         |  | September 30, 2011 |  
|Non-Control/Non-Affiliate Investments       |  |                                                                                                                                                           |         |  |                    |   |         | 
|Senior term debt                            |  | $                                                                                                                                                         | 166,442 |  |                    | $ | 182,002 | 
|Senior subordinated term debt               |  |                                                                                                                                                           | 76,019  |  |                    |   | 72,182  | 
|Preferred equity                            |  |                                                                                                                                                           | 595     |  |                    |   | 566     | 
|Common equity/equivalents                   |  |                                                                                                                                                           | 3,179   |  |                    |   | 2,552   | 
|                                            |  |                                                                                                                                                           |         |  |                    |   |         | 
|Total Non-Control/Non-Affiliate Investments |  | $                                                                                                                                                         | 246,235 |  |                    | $ | 257,302 | 
|                                            |  |                                                                                                                                                           |         |  |                    |   |         | 
|                                            |  |                                                                                                                                                          
|Control Investments                         |  |                                                                                                                                                           |         |  |                    |   |         | 
|Senior term debt                            |  | $                                                                                                                                                         | 13,558  |  |                    | $ | 18,143  | 
|Senior subordinated term debt               |  |                                                                                                                                                           | 19,678  |  |                    |   | 19,966  | 
|Common equity/equivalents                   |  |                                                                                                                                                           | 8,696   |  |                    |   | 7,536   | 
|                                            |  |                                                                                                                                                           |         |  |                    |   |         | 
|Total Control Investments                   |  | $                                                                                                                                                         | 41,932  |  |                    | $ | 45,645  | 
|                                            |  |                                                                                                                                                           |         |  |                    |   |         | 
|                                            |  |                                                                                                                                                          
|Total Investments at Fair Value             |  | $                                                                                                                                                         | 288,167 |  |                    | $ | 302,947 | 
|                                            |  |                                                                                                                                                           |         |  |                    |   |         | 



19



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##### Table of Contents

In accordance with ASU 2011-04, the following table provides quantitative information about our Level 3 fair
value measurements of our investments as of March 31, 2012. In addition to the techniques and inputs noted in the table below, according to our valuation policy we may also use other valuation techniques and methodologies when determining our
fair value measurements. The below table is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to our fair value measurements. The weighted average calculations in the table below are
based on the principal balances for all debt related calculations and on the cost basis for all equity related calculations for the particular input.



|                                         |  |                                                                |         |  |                                    |               |                   |                     |                          |  |                            | 
|---------------------------------------- |  | -------------------------------------------------------------- | ------- |  | ---------------------------------- | ------------- | ----------------- | ------------------- | ------------------------ |  | -------------------------- | 
|                                         |  | Quantitative Information about Level 3 Fair Value Measurements |        
|                                         |  | Fair Value as ofMarch 31, 2012                                 |         |  | ValuationTechniques/
Methodologies |               | UnobservableInput |                     | Range / 
WeightedAverage | 
|                                         |  |                                                                |         | 
|Non-syndicated debt only investments     |  | $                                                              | 99,306  |  |                                    | SPSE(A)       |                   | EBITDA(B)           |                          |  | ($310) - $14,058 / $4,976  | 
|                                         |  |                                                                |         |  |                                    |               |                   | Risk Ratings(C)     |                          |  | 2.0 - 10.0 / 6.3           | 
|                                         |  |                                                                |         | 
|Syndicated debt only investments         |  |                                                                | 95,503  |  |                                    | Market Quotes |                   | IBP(D)              |                          |  | 93.5% - 101.4% / 98.3%     | 
|                                         |  |                                                                |         | 
|Bundled debt and equity investments      |  |                                                                | 92,205  |  |                                    | SPSE(A)       |                   | EBITDA(B)           |                          |  | ($1,595) - $6,406 /$3,087  | 
|                                         |  |                                                                |         |  |                                    |               |                   | Risk Ratings(C)     |                          |  | 3.0 - 6.0 / 4.6            | 
|                                         |  |                                                                |         |  |                                    | TEV           |                   | EBITDA multiples(B) |                          |  | 4.6 - 9.7 / 5.9            | 
|                                         |  |                                                                |         |  |                                    |               |                   | EBITDA(B)           |                          |  | ($1,595) -$25,026 / $2,921 | 
|                                         |  |                                                                |         | 
|Other Investments                        |  |                                                                | 1,153   |  |                                    |               |                   |                     |                          |  |                            | 
|                                         |  |                                                                |         |  |                                    |               |                   |                     |                          |  |                            | 
|                                         |  |                                                                |         | 
|Total Fair Value for Level 3 Investments |  | $                                                              | 288,167 |  |                                    |               |                   |                     |                          |  |                            | 
|                                         |  |                                                                |         |  |                                    |               |                   |                     |                          |  |                            | 



|(A) | SPSE makes an independent assessment of the data we submit to them (which includes the financial and operational performance, as well as our internally
assessed risk ratings of the portfolio companies  see footnote (C) below) and its own independent data to form an opinion as to what they consider to be the market values for our securities. With regard to its work, SPSE has stated that
the data submitted to us is regarded as proprietary in nature.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(B) | Earnings before interest expense, taxes, depreciation and amortization (EBITDA) is an unobservable input which is generally based on the
most recently available trailing twelve month financial statements submitted to us from the portfolio companies. EBITDA multiples, indexed in accordance with our valuation policy, represent our estimation of where market participants might price
these investments. For our bundled debt and equity investments, the EBITDA and EBITDA multiples impact the TEV fair value determination and the value of the issuers debt, equity, or equity-like securities are valued in accordance with our
liquidity waterfall approach.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(C) | As part of our valuation procedures, we risk rate all of our investments in debt securities. We use the Nationally Recognized Statistical Rating
Organizations risk rating system for generally all of syndicated loans and a proprietary risk rating system for all other debt securities. Our risk rating system uses a scale of 0 to 10, with 10 being the lowest probability of default. The
risk rating system covers both qualitative and quantitative aspects of the portfolio company business and the securities we hold.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(D) | We generally base the value of our syndicated debt securities on the IBP offered by the respective originating syndication agents trading desk,
or secondary desk, on or near the valuation date. These bid prices are non-binding and are generally based on the underlying company performance and security characteristics, as well as other market conditions and credit risk factors.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In general, included in the internally assessed TEV model used to value our proprietary debt and equity investments, the
significant unobservable inputs are the portfolio companys EBITDA and EBITDA multiples. All other factors holding constant, increases (decreases) in the EBITDA and/or the EBITDA multiples inputs would result in a higher (lower) fair value
measurement. Per our valuation policy, we generally use an indexed EBITDA multiple. EBITDA and EBITDA multiple inputs do not have to directionally correlate since EBITDA is a company performance metric and EBITDA multiples can be influenced by
market, industry, size and other factors.

Changes in Level 3 Fair Value Measurements of Investments

The following tables provide the changes in fair value, broken out by security type, during the three and six-month periods ending March 31, 2012 and
2011 for all investments for which we determine fair value using unobservable (Level 3) factors. When a determination is made to classify a financial instrument within Level 3 of the valuation hierarchy, such determination is based upon the
significance of the unobservable factors to the overall fair value measurement. However, Level 3 financial instruments typically include, in addition to the unobservable, or Level 3, inputs, observable inputs (that is, components that are actively
quoted and can be validated to external sources). In these cases, we categorize all of the inputs as the lowest level input within the hierarchy. Accordingly, the gains and losses in the tables below include changes in fair value, due in part to
observable factors that are part of the valuation methodology.



20



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##### Table of Contents

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

Periods ended March 31, 2012:



|                                                                           |  |                |         |   |                             |   |        |                 |  |   |                          |   |  |       |        |   |  |   |         |  
|-------------------------------------------------------------------------- |  | -------------- | ------- | - | --------------------------- | - | ------ | --------------- |  | - | ------------------------ | - |  | ----- | ------ | - |  | - | ------- | -
|Three months ended March 31, 2012:                                         |  | SeniorTermDebt |         |   | SeniorSubordinatedTerm Debt |   |        | PreferredEquity |  |   | CommonEquity/Equivalents |   |  | Total |       
|                                                                           |  |                |         |   |                            
|Fair value as of December 31, 2011                                         |  | $              | 192,821 |   |                             | $ | 88,004 |                 |  | $ | 581                      |   |  | $     | 11,440 |   |  | $ | 292,846 |  
|Total gains or losses                                                      |  |                |         |   |                             |   |        |                 |  |   |                          |   |  |       |        |   |  |   |         |  
|Net realized gain(a)                                                       |  |                | 37      |   |                             |   |       |                 |  |   |                         |   |  |       |       |   |  |   | 37      |  
|Net unrealized (depreciation) appreciation(b)                              |  |                | (6,292  | ) |                             |   | (784   | )               |  |   | (986                     | ) |  |       | 435    |   |  |   | (7,627  | )
|Reversal of prior period net depreciation on realization(b)                |  |                | 458     |   |                             |   |       |                 |  |   |                         |   |  |       |       |   |  |   | 458     |  
|New investments, repayments and settlements(c)                             |  |                |         |   |                             |   |        |                 |  |   |                          |   |  |       |        |   |  |   |         |  
|Issuances/originations                                                     |  |                | 8,858   |   |                             |   | 8,500  |                 |  |   | 1,000                    |   |  |       |       |   |  |   | 18,358  |  
|Settlements/repayments                                                     |  |                | (13,912 | ) |                             |   | (23    | )               |  |   |                         |   |  |       |       |   |  |   | (13,935 | )
|Sales                                                                      |  |                | (1,970  | ) |                             |   |       |                 |  |   |                         |   |  |       |       |   |  |   | (1,970  | )
|                                                                           |  |                |         |   |                             |   |        |                 |  |   |                          |   |  |       |        |   |  |   |         |  
|Fair value as of March 31, 2012                                            |  | $              | 180,000 |   |                             | $ | 95,697 |                 |  | $ | 595                      |   |  | $     | 11,875 |   |  | $ | 288,167 |  
|                                                                           |  |                |         |   |                             |   |        |                 |  |   |                          |   |  |       |        |   |  |   |         |  
|                                                                           |  |                |         |   |                            
|Six months ended March 31, 2012:                                           |  | SeniorTermDebt |         |   | SeniorSubordinatedTerm Debt |   |        | PreferredEquity |  |   | CommonEquity/Equivalents |   |  | Total |       
|                                                                           |  |                |         |   |                            
|Fair value as of September 30, 2011                                        |  | $              | 200,145 |   |                             | $ | 92,148 |                 |  | $ | 566                      |   |  | $     | 10,088 |   |  | $ | 302,947 |  
|Total gains or losses                                                      |  |                |         |   |                             |   |        |                 |  |   |                          |   |  |       |        |   |  |   |         |  
|Net realized loss(a)                                                       |  |                | (8,363  | ) |                             |   |       |                 |  |   |                         |   |  |       |       |   |  |   | (8,363  | )
|Net unrealized (depreciation) appreciation(b)                              |  |                | (15,128 | ) |                             |   | (2,028 | )               |  |   | (1,572                   | ) |  |       | 1,787  |   |  |   | (16,941 | )
|Reversal of prior period net depreciation on realization(b)                |  |                | 11,571  |   |                             |   | 444    |                 |  |   |                         |   |  |       |       |   |  |   | 12,015  |  
|New investments, repayments and settlements(c)                             |  |                |         |   |                             |   |        |                 |  |   |                          |   |  |       |        |   |  |   |         |  
|Issuances/originations                                                     |  |                | 16,688  |   |                             |   | 11,320 |                 |  |   | 1,601                    |   |  |       |       |   |  |   | 29,609  |  
|Settlements/repayments                                                     |  |                | (18,454 | ) |                             |   | (6,187 | )               |  |   |                         |   |  |       |       |   |  |   | (24,641 | )
|Sales                                                                      |  |                | (6,459  | ) |                             |   |       |                 |  |   |                         |   |  |       |       |   |  |   | (6,459  | )
|                                                                           |  |                |         |   |                             |   |        |                 |  |   |                          |   |  |       |        |   |  |   |         |  
|Fair value as of March 31, 2012                                            |  | $              | 180,000 |   |                             | $ | 95,697 |                 |  | $ | 595                      |   |  | $     | 11,875 |   |  | $ | 288,167 |  
|                                                                           |  |                |         |   |                             |   |        |                 |  |   |                          |   |  |       |        |   |  |   |         |  
|Periods ended March 31, 2011:                                              |  |                |         |   |                             |   |        |                 |  |   |                          |   |  |       |       
|Three months ended March 31, 2011:                                         |  | SeniorTermDebt |         |   | SeniorSubordinatedTerm Debt |   |        | PreferredEquity |  |   | CommonEquity/Equivalents |   |  | Total |       
|                                                                           |  |                |         |   |                            
|Fair value as of December 31, 2010                                         |  | $              | 169,882 |   |                             | $ | 76,999 |                 |  | $ | 523                      |   |  | $     | 5,101  |   |  | $ | 252,505 |  
|Total gains or losses                                                      |  |                |         |   |                             |   |        |                 |  |   |                          |   |  |       |        |   |  |   |         |  
|Net realized gain (loss)(a)                                                |  |                | 177     |   |                             |   | (14    | )               |  |   |                         |   |  |       |       |   |  |   | 163     |  
|Net unrealized (depreciation) appreciation(b)                              |  |                | (11,268 | ) |                             |   | (1,364 | )               |  |   | (361                     | ) |  |       | 134    |   |  |   | (12,859 | )
|Reversal of prior period net appreciation on realization(b)                |  |                | (210    | ) |                             |   |       |                 |  |   |                         |   |  |       |       |   |  |   | (210    | )
|New investments, repayments and settlements(c)                             |  |                |         |   |                             |   |        |                 |  |   |                          |   |  |       |        |   |  |   |         |  
|Issuances/originations                                                     |  |                | 37,544  |   |                             |   | 1,038  |                 |  |   | 375                      |   |  |       | 1,880  |   |  |   | 40,837  |  
|Settlements/repayments                                                     |  |                | (22,523 | ) |                             |   | (60    | )               |  |   |                         |   |  |       |       |   |  |   | (22,583 | )
|Sales                                                                      |  |                |        |   |                             |   |       |                 |  |   |                         |   |  |       | (740   | ) |  |   | (740    | )
|                                                                           |  |                |         |   |                             |   |        |                 |  |   |                          |   |  |       |        |   |  |   |         |  
|Fair value as of March 31, 2011                                            |  | $              | 173,602 |   |                             | $ | 76,599 |                 |  | $ | 537                      |   |  | $     | 6,375  |   |  | $ | 257,113 |  
|                                                                           |  |                |         |   |                             |   |        |                 |  |   |                          |   |  |       |        |   |  |   |         |  
|                                                                           |  |                |         |   |                            
|Six months ended March 31, 2011:                                           |  | SeniorTermDebt |         |   | SeniorSubordinatedTerm Debt |   |        | PreferredEquity |  |   | CommonEquity/Equivalents |   |  | Total |       
|                                                                           |  |                |         |   |                            
|Fair value as of September 30, 2010                                        |  | $              | 172,596 |   |                             | $ | 81,899 |                 |  | $ | 386                      |   |  | $     | 2,228  |   |  | $ | 257,109 |  
|Total gains or losses                                                      |  |                |         |   |                             |   |        |                 |  |   |                          |   |  |       |        |   |  |   |         |  
|Net realized gain (loss)(a)                                                |  |                | 177     |   |                             |   | (14    | )               |  |   |                         |   |  |       |       |   |  |   | 163     |  
|Net unrealized (depreciation) appreciation(b)                              |  |                | (17,218 | ) |                             |   | (1,839 | )               |  |   | (224                     | ) |  |       | 2,974  |   |  |   | (16,307 | )
|Reversal of prior period net (appreciation) depreciation on realization(b) |  |                | (191    | ) |                             |   | 731    |                 |  |   |                         |   |  |       | (247   | ) |  |   | 293     |  



21



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##### Table of Contents

|                                               |  |                |         |   |                             |   |        |                 |  |   |                          |  |  |       |       |   |  |   |         |  
|---------------------------------------------- |  | -------------- | ------- | - | --------------------------- | - | ------ | --------------- |  | - | ------------------------ |  |  | ----- | ----- | - |  | - | ------- | -
|Six months ended March 31, 2011:               |  | SeniorTermDebt |         |   | SeniorSubordinatedTerm Debt |   |        | PreferredEquity |  |   | CommonEquity/Equivalents |  |  | Total |      
|New investments, repayments and settlements(c) |  |                |         |   |                             |   |        |                 |  |   |                          |  |  |       |       |   |  |   |         |  
|Issuances/originations                         |  |                | 46,942  |   |                             |   | 3,122  |                 |  |   | 375                      |  |  |       | 2,197 |   |  |   | 52,636  |  
|Settlements/repayments                         |  |                | (28,704 | ) |                             |   | (7,300 | )               |  |   |                         |  |  |       |      |   |  |   | (36,004 | )
|Sales                                          |  |                |        |   |                             |   |       |                 |  |   |                         |  |  |       | (777  | ) |  |   | (777    | )
|                                               |  |                |         |   |                             |   |        |                 |  |   |                          |  |  |       |       |   |  |   |         |  
|Fair value as of March 31, 2011                |  | $              | 173,602 |   |                             | $ | 76,599 |                 |  | $ | 537                      |  |  | $     | 6,375 |   |  | $ | 257,113 |  
|                                               |  |                |         |   |                             |   |        |                 |  |   |                          |  |  |       |       |   |  |   |         |  



|(a) | Included in net realized gain (loss) on Non-Control/Non-Affiliate and Control investments on our accompanying Condensed Consolidated Statements of
Operations for the three and six months ended March 31, 2012 and 2011.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | Included in net unrealized depreciation on Non-Control/Non-Affiliate and Control investments on our accompanying Condensed Consolidated Statements
of Operations for the three and six months ended March 31, 2012 and 2011.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) | Includes increases in the cost basis of investments resulting from new portfolio investments, the amortization of discounts, premiums and closing fees
as well as decreases in the cost basis of investments resulting from principal repayments or sales.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Non-Control/Non-Affiliate Investments

As of March 31, 2012 and September 30, 2011, we held 46 and 50 Non-Control/Non-Affiliate investments in the aggregate fair value of $246.2
million and $257.3 million, respectively. Of these, we had a total of 24 syndicate loans in the aggregate fair value of $96.8 million and $90.7 million, as of March 31, 2012 and September 30, 2011, respectively. During the six months ended
March 31, 2012, we added two new Non-Control/Non-Affiliate investments, with an aggregate fair value of $10.0 million at March 31, 2012, and four Non-Control/Non-Affiliate investments paid off early, for which we received aggregate
principal payments of $14.9 million. Additionally, we funded $11.4 million to existing Non-Control/Non-Affiliate portfolio companies during the six months ended March 31, 2012. The following sales and restructures of Non-Control/Non-Affiliate
investments occurred during the six months ended March 31, 2012:



| |  |  | KMBQ Corporation  In November 2011, we invested $1.6 million in Ohana Media Group (Ohana) to facilitate its purchase of
certain of KMBQ Corporations (KMBQ) assets out of receivership. In connection with this transaction, we received net proceeds of $1.2 million and recorded a realized loss during the three months ended December 31, 2011
totaling $1.0 million. Ohana replaced KMBQ on our Condensed Consolidated Schedule of Investments as a Non-Control/Non-Affiliate investment at December 31, 2011.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Newhall Holdings, Inc.  In December 2011, we sold our investments in Newhall Holdings, Inc. (Newhall) for net proceeds of $3.3
million, which resulted in a realized loss of $7.4 million recorded in the three months ended December 31, 2011.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Control Investments

As of
March 31, 2012 and September 30, 2011, we held nine Control investments in the aggregate fair value of $41.9 million and $45.6 million, respectively. During the six months ended March 31, 2012, five Control investments made draws on
their lines of credit, totaling $4.6 million. We did not exit any Control investments during the six months ended March 31, 2012. The following restructures of Control investments occurred during the six months ended March 31, 2012:



| |  |  | Sunshine Media Holdings - Effective October 1, 2011, we restructured Sunshine Media Holdings (Sunshine) by reducing the
interest rates on its line of credit, senior term debt and LOT senior term debt to preserve capital at the portfolio company to further enable Sunshine to invest in new and existing initiatives. In addition, we funded $1.6 million through additional
preferred equity investments and $2.1 million through additional line of credit draws to Sunshine for the six months ended March 31, 2012. We placed our investment in Sunshines LOT senior term debt on non-accrual status effective
January 1, 2012.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Viapack, Inc. - Effective January 1, 2012, we restructured our investment in Viapack, Inc. (Viapack), by reducing the interest rates
on its line of credit, senior real estate term debt and senior term debt to preserve capital at the portfolio company to enable it to invest in existing initiatives. In addition, we funded $1.8 million to Viapack through additional draws on its line
of credit for the six months ended March 31, 2012. We placed our investment in Viapacks LOT senior term debt on non-accrual status effective January 1, 2012.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



22



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##### Table of Contents

Investment Concentrations

As of March 31, 2012, our investment portfolio consisted of loans to 55 companies located in 26 states across 23 different industries with an aggregate fair value of $288.2 million. As of
March 31, 2012, there were 24 syndicated investments totaling $96.7 million at cost and $96.8 million at fair value, or 25.9% and 33.6% of the total aggregate portfolio, respectively.

The following table outlines our investments by security type as of March 31, 2012 and September 30, 2011:



|                              |  |                |         |  |                    |  |       |      |  |   |            |  |  |  |       |   |  |   |         |  |  |  |       |   |  |   |         |  |  |  |       |  
|----------------------------- |  | -------------- | ------- |  | ------------------ |  | ----- | ---- |  | - | ---------- |  |  |  | ----- | - |  | - | ------- |  |  |  | ----- | - |  | - | ------- |  |  |  | ----- | -
|                              |  | March 31, 2012 |         |  | September 30, 2011 | 
|                              |  | Cost           |         |  | Fair Value         |  |       | Cost |  |   | Fair Value | 
|Senior term debt              |  | $              | 249,904 |  |                    |  | 67.0  | %    |  | $ | 180,000    |  |  |  | 62.5  | % |  | $ | 266,491 |  |  |  | 69.6  | % |  | $ | 200,145 |  |  |  | 66.1  | %
|Senior subordinated term debt |  |                | 112,272 |  |                    |  | 30.1  |      |  |   | 95,697     |  |  |  | 33.2  |   |  |   | 107,140 |  |  |  | 28.0  |   |  |   | 92,148  |  |  |  | 30.4  |  
|Common equity/equivalents     |  |                | 6,264   |  |                    |  | 1.7   |      |  |   | 11,875     |  |  |  | 4.1   |   |  |   | 7,999   |  |  |  | 2.1   |   |  |   | 10,088  |  |  |  | 3.3   |  
|Preferred equity              |  |                | 4,520   |  |                    |  | 1.2   |      |  |   | 595        |  |  |  | 0.2   |   |  |   | 1,185   |  |  |  | 0.3   |   |  |   | 566     |  |  |  | 0.2   |  
|                              |  |                |         |  |                    |  |       |      |  |   |            |  |  |  |       |   |  |   |         |  |  |  |       |   |  |   |         |  |  |  |       |  
|Total investments             |  | $              | 372,960 |  |                    |  | 100.0 | %    |  | $ | 288,167    |  |  |  | 100.0 | % |  | $ | 382,815 |  |  |  | 100.0 | % |  | $ | 302,947 |  |  |  | 100.0 | %
|                              |  |                |         |  |                    |  |       |      |  |   |            |  |  |  |       |   |  |   |         |  |  |  |       |   |  |   |         |  |  |  |       |  

Investments at fair value consisted of the following industry classifications at March 31, 2012 and
September 30, 2011:



|                                                          |  |                |         |  |                               |  |       |            |  |   |                               |  |  |  |       |  
|--------------------------------------------------------- |  | -------------- | ------- |  | ----------------------------- |  | ----- | ---------- |  | - | ----------------------------- |  |  |  | ----- | -
|                                                          |  | March 31, 2012 |         |  | September 30, 2011            | 
|Industry Classification                                   |  | Fair Value     |         |  | Percentageof TotalInvestments |  |       | Fair Value |  |   | Percentageof TotalInvestments | 
|                                                          |  |                |         | 
|Electronics                                               |  | $              | 53,484  |  |                               |  | 18.6  | %          |  | $ | 45,752                        |  |  |  | 15.1  | %
|Mining, steel, iron & non-precious metals                 |  |                | 32,063  |  |                               |  | 11.1  |            |  |   | 33,734                        |  |  |  | 11.1  |  
|Healthcare, education & childcare                         |  |                | 30,034  |  |                               |  | 10.4  |            |  |   | 34,106                        |  |  |  | 11.3  |  
|Automobile                                                |  |                | 26,725  |  |                               |  | 9.3   |            |  |   | 25,768                        |  |  |  | 8.5   |  
|Broadcast (TV & radio)                                    |  |                | 20,420  |  |                               |  | 7.1   |            |  |   | 28,194                        |  |  |  | 9.3   |  
|Retail stores                                             |  |                | 19,340  |  |                               |  | 6.7   |            |  |   | 19,340                        |  |  |  | 6.4   |  
|Aerospace & defense                                       |  |                | 15,212  |  |                               |  | 5.3   |            |  |   | 10,003                        |  |  |  | 3.3   |  
|Printing & publishing                                     |  |                | 12,923  |  |                               |  | 4.5   |            |  |   | 17,623                        |  |  |  | 5.8   |  
|Textiles & leather                                        |  |                | 9,801   |  |                               |  | 3.4   |            |  |   | 9,626                         |  |  |  | 3.2   |  
|Personal & non-durable consumer products                  |  |                | 8,582   |  |                               |  | 3.0   |            |  |   | 6,962                         |  |  |  | 2.3   |  
|Personal, food and miscellaneous services                 |  |                | 7,915   |  |                               |  | 2.7   |            |  |   | 7,635                         |  |  |  | 2.5   |  
|Machinery                                                 |  |                | 7,664   |  |                               |  | 2.7   |            |  |   | 8,696                         |  |  |  | 2.9   |  
|Beverage, food & tobacco                                  |  |                | 7,295   |  |                               |  | 2.5   |            |  |   | 7,332                         |  |  |  | 2.4   |  
|Diversified/conglomerate manufacturing                    |  |                | 7,251   |  |                               |  | 2.5   |            |  |   | 8,790                         |  |  |  | 2.9   |  
|Buildings & real estate                                   |  |                | 6,557   |  |                               |  | 2.3   |            |  |   | 10,275                        |  |  |  | 3.4   |  
|Leisure, amusement, movies & entertainment                |  |                | 6,054   |  |                               |  | 2.1   |            |  |   | 6,607                         |  |  |  | 2.2   |  
|Diversified/conglomerate service                          |  |                | 3,990   |  |                               |  | 1.4   |            |  |   | 3,810                         |  |  |  | 1.3   |  
|Home & office furnishings                                 |  |                | 3,952   |  |                               |  | 1.4   |            |  |   | 9,715                         |  |  |  | 3.2   |  
|Diversified natural resources, precious metals & minerals |  |                | 2,993   |  |                               |  | 1.0   |            |  |   | 3,054                         |  |  |  | 1.0   |  
|Other(A)                                                  |  |                | 5,912   |  |                               |  | 2.0   |            |  |   | 5,925                         |  |  |  | 1.9   |  
|                                                          |  |                |         |  |                               |  |       |            |  |   |                               |  |  |  |       |  
|Total investments                                         |  | $              | 288,167 |  |                               |  | 100.0 | %          |  | $ | 302,947                       |  |  |  | 100.0 | %
|                                                          |  |                |         |  |                               |  |       |            |  |   |                               |  |  |  |       |  



|(A) | No individual industry within this category exceeds 1%.
|--- | -------------------------------------------------------

The investments at fair value were included in the following geographic regions of the U.S. at March 31, 2012 and September 30, 2011:



|                  |  |                |         |  |                             |  |       |            |  |   |                                |  |  |  |       |  
|----------------- |  | -------------- | ------- |  | --------------------------- |  | ----- | ---------- |  | - | ------------------------------ |  |  |  | ----- | -
|                  |  | March 31, 2012 |         |  | September 30, 2011          | 
|Geographic Region |  | Fair Value     |         |  | Percent 
ofTotalInvestments |  |       | Fair Value |  |   | Percentage 
ofTotalInvestments | 
|Midwest           |  | $              | 133,425 |  |                             |  | 46.3  | %          |  | $ | 144,292                        |  |  |  | 47.6  | %
|West              |  |                | 76,264  |  |                             |  | 26.5  |            |  |   | 70,862                         |  |  |  | 23.4  |  
|South             |  |                | 45,234  |  |                             |  | 15.7  |            |  |   | 52,265                         |  |  |  | 17.3  |  
|Northeast         |  |                | 25,764  |  |                             |  | 8.9   |            |  |   | 28,158                         |  |  |  | 9.3   |  
|Other  non U.S.  |  |                | 7,480   |  |                             |  | 2.6   |            |  |   | 7,370                          |  |  |  | 2.4   |  
|                  |  |                |         |  |                             |  |       |            |  |   |                                |  |  |  |       |  
|Total Investments |  | $              | 288,167 |  |                             |  | 100.0 | %          |  | $ | 302,947                        |  |  |  | 100.0 | %
|                  |  |                |         |  |                             |  |       |            |  |   |                                |  |  |  |       |  

The geographic region reflects the location of the headquarters of our portfolio companies. A portfolio company may have
a number of other business locations in other geographic regions.



23



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##### Table of Contents

Investment Principal Repayments

The following table summarizes the contractual principal repayments and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, at March 31, 2012:



|                                                  |  |                                                         |  |        |         |  
|------------------------------------------------- |  | ------------------------------------------------------- |  | ------ | ------- | -
|                                                  |  |                                                         |  | Amount |        
|For the remaining six months ending September 30: |  | 2012                                                    |  | $      | 30,816  |  
|For the fiscal year ending September 30:          |  | 2013                                                    |  |        | 106,242 |  
|                                                  |  | 2014                                                    |  |        | 51,190  |  
|                                                  |  | 2015                                                    |  |        | 31,517  |  
|                                                  |  | 2016                                                    |  |        | 75,867  |  
|                                                  |  | Thereafter                                              |  |        | 67,925  |  
|                                                  |  |                                                         |  |        |         |  
|                                                  |  | Total contractual repayments                            |  | $      | 363,557 |  
|                                                  |  | Investments in equity securities                        |  |        | 10,784  |  
|                                                  |  | Adjustments to cost basis on debt securities            |  |        | (1,381  | )
|                                                  |  |                                                         |  |        |         |  
|                                                  |  | Total cost basis of investments held at March 31, 2012: |  | $      | 372,960 |  
|                                                  |  |                                                         |  |        |         |  

Receivables from Portfolio Companies

Receivables from portfolio companies represent non-recurring costs that we incurred on behalf of portfolio companies and are included in other assets on our accompanying Condensed Consolidated
Statements of Assets and Liabilities. We maintain an allowance for uncollectible receivables from portfolio companies, which is determined based on historical experience and managements expectations of future losses. We charge the accounts
receivable to the established provision when collection efforts have been exhausted and the receivables are deemed uncollectible. As of March 31, 2012 and September 30 2011, we had gross receivables from portfolio companies of $0.6
million. The allowance for uncollectible receivables was $0.3 million and $0.4 million as of March 31, 2012 and September 30, 2011, respectively. In addition, we recorded an allowance for uncollectible interest receivable of $21 and $65 as
of March 31, 2012 and September 30, 2011, respectively.

NOTE 4. RELATED PARTY TRANSACTIONS

Loans to Former Employees

We have
outstanding loans to certain employees of the Adviser, each of whom was a joint employee of the Adviser (or our previous adviser, Gladstone Capital Advisers, Inc.) and us at the time the loans were originally provided. The loans were extended to
such employees to allow them to exercise options granted under the Amended and Restated 2001 Equity Incentive Plan, which has since been terminated. The loans require the quarterly payment of interest at the market rate in effect at the date of
issuance, have varying terms not exceeding ten years and have been recorded as a reduction of net assets. The loans are evidenced by full recourse notes that are due upon maturity or 60 days following termination of employment, and the shares of
common stock purchased with the proceeds of the loans are posted as collateral. We received $3 and $1.1 million of principal repayments during the six months ended March 31, 2012 and 2011, respectively. Additionally, one employee redeemed
39,082 common shares (20,000 in December 2011 and 19,082 in January 2012) to pay off $0.3 million of principal on his outstanding loans during the six months ended March 31, 2012. We recognized interest income from all employee loans of $0.1
million for the three and six months ended March 31, 2012, respectively, and $0.1 million and $0.2 million for the three and six months ended March 31, 2011, respectively. Refer to Note 7Common Stock for additional information
related to these transactions.

Investment Advisory and Management Agreement

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



24



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##### Table of Contents

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



|                                                                                                             |  |                              |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------ |  | ---------------------------- | ------- | - | ------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                                             |  | Three Months Ended March 31, |         |   | Six Months Ended March 31 |  
|                                                                                                             |  | 2012                         |         |   | 2011                      |   |         | 2012 |  |   | 2011    |  
|Average total assets subject to base management fee (A)                                                      |  | $                            | 307,600 |   |                           | $ | 273,000 |      |  | $ | 309,400 |   |  | $ | 271,200 |  
|Multiplied by prorated annual base management fee of 2.0%                                                    |  |                              | 0.5     | % |                           |   | 0.5     | %    |  |   | 1.0     | % |  |   | 1.0     | %
|                                                                                                             |  |                              |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Gross base management fee (B)                                                                                |  | $                            | 1,538   |   |                           | $ | 1,365   |      |  | $ | 3,094   |   |  | $ | 2,712   |  
|Reduction for loan servicing fees                                                                            |  |                              | (864    | ) |                           |   | (757    | )    |  |   | (1,823  | ) |  |   | (1,599  | )
|                                                                                                             |  |                              |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Base management fee                                                                                          |  |                              | 674     |   |                           |   | 608     |      |  |   | 1,271   |   |  |   | 1,113   |  
|                                                                                                             |  |                              |         |  
|Credit for fees received by Adviser from the portfolio companies                                             |  |                              | (5      | ) |                           |   |        |      |  |   | (53     | ) |  |   |        |  
|Fee reduction for the voluntary, irrevocable waiver of 2.0% fee on senior syndicated loans to 0.5% per annum |  |                              | (118    | ) |                           |   | (81     | )    |  |   | (243    | ) |  |   | (133    | )
|                                                                                                             |  |                              |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Net base management fee                                                                                      |  | $                            | 551     |   |                           | $ | 527     |      |  | $ | 975     |   |  | $ | 980     |  
|                                                                                                             |  |                              |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|                                                                                                             |  |                              |         |  
|Incentive fee(B)                                                                                             |  |                              | 1,304   |   |                           |   | 1,102   |      |  |   | 2,339   |   |  |   | 2,261   |  
|Credit from voluntary, irrevocable waiver issued by Advisers board of directors                             |  |                              |        |   |                           |   | (21     | )    |  |   | (278    | ) |  |   | (21     | )
|                                                                                                             |  |                              |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Net incentive fee                                                                                            |  | $                            | 1,304   |   |                           | $ | 1,081   |      |  | $ | 2,061   |   |  | $ | 2,240   |  
|                                                                                                             |  |                              |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|                                                                                                             |  |                              |         |  
|Credit for fees received by Adviser from the portfolio companies                                             |  |                              | (5      | ) |                           |   |        |      |  |   | (53     | ) |  |   |        |  
|Fee reduction for the voluntary, irrevocable waiver of 2.0% fee on senior syndicated loans to 0.5% per annum |  |                              | (118    | ) |                           |   | (81     | )    |  |   | (243    | ) |  |   | (133    | )
|Incentive fee credit                                                                                         |  |                              |        |   |                           |   | (21     | )    |  |   | (278    | ) |  |   | (21     | )
|                                                                                                             |  |                              |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Credit to base management and incentive fees from Adviser (B)                                                |  | $                            | (123    | ) |                           | $ | (102    | )    |  | $ | (574    | ) |  | $ | (154    | )
|                                                                                                             |  |                              |         |   |                           |   |         |      |  |   |         |   |  |   |         |  



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

|(B) | Reflected as a line item on our Condensed Consolidated Statements of Operations.
|--- | --------------------------------------------------------------------------------

Base Management Fee

The base management
fee is payable quarterly and assessed at an annual rate of 2.0%, computed on the basis of the value of our average total assets at the end of the two most recently completed quarters, which are total assets, including investments made with proceeds
of borrowings, less any cash or cash equivalents resulting from borrowings and appropriately adjusted for any share issuances or repurchases during the periods. In addition, the following three items are adjustments to the base management fee
calculation.



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

The Adviser also services the loans held by Business Loan, in return for which it receives a 1.5% annual fee, based on the monthly aggregate outstanding balance of loans pledged under our line of credit.
Since we own these loans, all loan servicing fees paid to the Adviser are treated as reductions directly against the 2.0% base management fee under the Advisory Agreement.



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

Our Board of Directors accepted an unconditional and irrevocable voluntary waiver from the Adviser to reduce the annual 2.0% base management fee on senior syndicated loan participations to 0.5%, to the
extent that proceeds resulting from borrowings were used to purchase such senior syndicated loan participations, for the six months ended March 31, 2012 and 2011.



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

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



25



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##### Table of Contents

Incentive Fee

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



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



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



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

Our Board of Directors accepted an unconditional and irrevocable voluntary waiver from the Adviser to reduce the
income-based incentive fee to the extent net investment income did not cover all distributions to common stockholders for the six months ended March 31, 2012 and 2011.

The second part of the incentive fee is a capital gains-based incentive fee that will be determined and payable in arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement,
as of the termination date) and equals 20% of our realized capital gains as of the end of the fiscal year. In determining the capital gains-based incentive fee payable to the Adviser, we will calculate the cumulative aggregate realized capital gains
and cumulative aggregate realized capital losses since our inception, and the aggregate unrealized capital depreciation as of the date of the calculation, as applicable, with respect to each of the investments in our portfolio. For this purpose,
cumulative aggregate realized capital gains, if any, equals the sum of the differences between the net sales price of each investment, when sold, and the original cost of such investment since our inception. Cumulative aggregate realized capital
losses equals the sum of the amounts by which the net sales price of each investment, when sold, is less than the original cost of such investment since our inception. Aggregate unrealized capital depreciation equals the sum of the difference, if
negative, between the valuation of each investment as of the applicable calculation date and the original cost of such investment. At the end of the applicable year, the amount of capital gains that serves as the basis for our calculation of the
capital gains-based incentive fee equals the cumulative aggregate realized capital gains less cumulative aggregate realized capital losses, less aggregate unrealized capital depreciation, with respect to our portfolio of investments. If this number
is positive at the end of such year, then the capital gains-based incentive fee for such year equals 20% of such amount, less the aggregate amount of any capital gains-based incentive fees paid in respect of our portfolio in all prior years. No
capital gains-based incentive fee has been recorded since our inception through March 31, 2012, as cumulative unrealized capital depreciation has exceeded cumulative realized capital gains net of cumulative realized capital losses.

Additionally, in accordance with GAAP, we did not accrue a capital gains-based incentive fee. This GAAP accrual is calculated using the aggregate
cumulative realized capital gains and losses and aggregate cumulative unrealized capital depreciation included in the calculation of the capital gains-based incentive fee plus the aggregate cumulative unrealized capital appreciation. If such amount
is positive at the end of a relevant period, then GAAP requires us to record a capital gains-based incentive fee equal to 20% of such amount, less the aggregate amount of actual capital gains-based incentive fees paid in all prior years. If such
amount is negative, then there is no accrual for such year. GAAP requires that the capital gains-based incentive fee accrual consider the cumulative aggregate unrealized capital appreciation in the calculation, as a capital gains-based incentive fee
would be payable if such unrealized capital appreciation were realized. There can be no assurance that such unrealized capital appreciation will be realized in the future. No GAAP accrual for a capital gains-based incentive fee has been recorded
since our inception through March 31, 2012.

As a BDC, we make available significant managerial assistance to our portfolio companies and
provide other services to such portfolio companies. Although neither we nor our Adviser receive fees in connection with managerial assistance, the Adviser provides other services to our portfolio companies and receives fees for these other
services.

Administration Agreement

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



26



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##### Table of Contents

Related Party Fees Due

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



|                                   |  |                      |       |  |                          |   |       | 
|---------------------------------- |  | -------------------- | ----- |  | ------------------------ | - | ----- | 
|                                   |  | As of March 31, 2012 |       |  | As of September 30, 2011 |  
|Base management fee due to Adviser |  | $                    | 551   |  |                          | $ | 330   | 
|Incentive fee due to Adviser       |  |                      | 1,304 |  |                          |   | 1,203 | 
|Loan servicing fee due to Adviser  |  |                      | 208   |  |                          |   | 227   | 
|                                   |  |                      |       |  |                          |   |       | 
|Total fees due to Adviser          |  |                      | 2,063 |  |                          |   | 1,760 | 
|                                   |  |                      |       |  |                          |   |       | 
|                                   |  |                     
|Fee due to Administrator           |  |                      | 211   |  |                          |   | 194   | 
|                                   |  |                      |       |  |                          |   |       | 
|Total related party fees due       |  | $                    | 2,274 |  |                          | $ | 1,954 | 
|                                   |  |                      |       |  |                          |   |       | 

NOTE 5. BORROWINGS

Line of Credit

On January 19, 2012, we, through our wholly-owned subsidiary, Business
Loan, entered into Amendment No. 3 to the fourth amended and restated credit agreement (the Credit Facility), to extend the maturity date of our $137.0 million revolving line of credit from March 15, 2012 to January 18,
2015 (the Maturity Date). Our Credit Facility was arranged by Key Equipment Finance Inc. (Keybank) as administrative agent. Branch Banking and Trust Company (BB&T) and ING Capital LLC (ING) also
joined our Credit Facility as committed lenders. Subject to certain terms and conditions, our Credit Facility may be expanded to a maximum of $237.0 million through the addition of other committed lenders to the facility. If our Credit Facility
is not renewed or extended by the Maturity Date, all principal and interest will be due and payable on or before January 18, 2016 (one year after the Maturity Date). The interest rates on advances under our Credit Facility remain unchanged and
generally bear interest at a 30-day London Interbank Offered Rate (LIBOR) (subject to a minimum rate of 1.5%), plus 3.75% per annum, with a commitment fee of 0.5% per annum on undrawn amounts when our facility is drawn more
than 50% and 1.0% per annum on undrawn amounts when our facility is drawn less than 50%. We incurred fees of $1.4 million in January 2012 in connection with this amendment.

The following tables summarize noteworthy information related to our Credit Facility at cost:



|                          |  |                |         |  |                    |   |         | 
|------------------------- |  | -------------- | ------- |  | ------------------ | - | ------- | 
|                          |  | March 31, 2012 |         |  | September 30, 2011 |  
|Commitment amount         |  | $              | 137,000 |  |                    | $ | 137,000 | 
|Borrowings outstanding(A) |  |                | 65,800  |  |                    |   | 99,400  | 
|Availability              |  |                | 54,200  |  |                    |   | 24,700  | 



|                                        |  |                                      |        |   |                                   |   |        |      |  |   |        |   |  |   |        |  
|--------------------------------------- |  | ------------------------------------ | ------ | - | --------------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                        |  | For the Three 
MonthsEnded March 31, |        |   | For the Six MonthsEnded
March 31, |  
|                                        |  | 2012                                 |        |   | 2011                              |   |        | 2012 |  |   | 2011   |  
|Weighted average borrowings outstanding |  | $                                    | 62,018 |   |                                   | $ | 14,464 |      |  | $ | 68,174 |   |  | $ | 17,203 |  
|Effective interest rate(B)              |  |                                      | 6.2    | % |                                   |   | 6.3    | %    |  |   | 6.1    | % |  |   | 6.5    | %
|Commitment (unused) fees incurred       |  | $                                    | 177    |   |                                   | $ | 277    |      |  | $ | 318    |   |  | $ | 461    |  



|(A) | The March 31, 2012 balance decreased significantly as compared to the September 30, 2011 balance due to repayments with the proceeds from our
Term Preferred Stock offering in November 2011.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

Interest is payable monthly during the term of our Credit Facility. Available borrowings are subject to various constraints imposed under our Credit Facility, based on the aggregate loan balance pledged
by Business Loan, which varies as loans are added and repaid, regardless of whether such repayments are prepayments or made as contractually required. The administrative agent also requires that any interest or principal payments on pledged loans be
remitted directly by the borrower into a lockbox account with Keybank as custodian. Keybank, who also serves as the trustee of the account, generally remits the collected funds to us monthly.

Our Credit Facility contains covenants that require Business Loan to maintain its status as a separate legal entity, prohibit certain significant corporate transactions (such as mergers, consolidations,
liquidations or dissolutions), and restrict material changes to our credit and collection policies. Our Credit Facility also limits payments on distributions to aggregate net investment income for each of the twelve month periods ending
September 30, 2012, 2013, 2014 and 2015. Business Loan is also subject to certain limitations on the type of loan investments it can apply as collateral towards the borrowing base in order to receive additional borrowing availability under our
Credit Facility, including restrictions on



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geographic concentrations, sector concentrations, loan size, dividend payout, payment frequency and status, average life and lien property. Our Credit Facility further requires Business Loan to
comply with other financial and operational covenants, which obligate Business Loan to, among other things, maintain certain financial ratios, including asset and interest coverage and a minimum number of obligors required in the borrowing base of
the credit agreement. Additionally, we are subject to a performance guaranty that requires us to maintain (i) a minimum net worth of $190.0 million plus 50.0% of all equity and subordinated debt raised after January 19, 2012,
(ii) asset coverage with respect to senior securities representing indebtedness of at least 200%, in accordance with Section 18 of the 1940 Act and (iii) our status as a BDC under the 1940 Act and as a RIC
under the Code. The facility requires a minimum of 20 obligors in the borrowing base and as of March 31, 2012, Business Loan had 37 obligors. As of March 31, 2012, we were in compliance with all of the facility covenants.

Fair Value

We elected to apply ASC 825,
Financial Instruments, specifically for our Credit Facility, which was consistent with our application of ASC 820 to our investments. Generally, we estimate the fair value of our Credit Facility using estimates of value provided by an
independent third party and our own assumptions in the absence of observable market data, including estimated remaining life, counterparty credit risk, current market yield and interest rate spreads of similar securities as of the measurement date.
However, as the renewal of our Credit Facility occurred during the three months ended March 31, 2012, cost was determined to approximate fair value as of March 31, 2012. At both March 31, 2012 and September 30, 2011, our Credit
Facility was valued using Level 3 inputs.

The following tables present our Credit Facility carried at fair value as of March 31, 2012
and September 30, 2011, by caption on our accompanying Condensed Consolidated Statements of Assets and Liabilities for Level 3 of the hierarchy established by ASC 820 and the changes in fair value of our Credit Facility during the three
and six months ended March 31, 2012 and 2011:



|           |  |                                                                                                                                                              |        |  |                    |   |         | 
|---------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------ |  | ------------------ | - | ------- | 
|           |  | Total Recurring Fair Value Measurement Reported inCondensed 
Consolidated Statements ofAssets and Liabilities Using Significant UnobservableInputs (Level 3) |       
|           |  | March 31, 2012                                                                                                                                               |        |  | September 30, 2011 |  
|Borrowings |  | $                                                                                                                                                            | 65,800 |  |                    | $ | 100,012 | 
|           |  |                                                                                                                                                              |        |  |                    |   |         | 

Total Fair value Reported inCondensed Consolidated Statements of Assets and
Liabilities



|                                                          |  |                              |         |   |      |   |         |  
|--------------------------------------------------------- |  | ---------------------------- | ------- | - | ---- | - | ------- | -
|                                                          |  | Three Months Ended March 31, |        
|                                                          |  | 2012                         |         |   | 2011 |  
|Fair value as of December 31, 2011 and 2010, respectively |  | $                            | 57,213  |   |      | $ | 25,301  |  
|Net unrealized depreciation(A)                            |  |                              | (313    | ) |      |   | (255    | )
|Borrowings                                                |  |                              | 21,900  |   |      |   | 40,800  |  
|Repayments                                                |  |                              | (13,000 | ) |      |   | (32,200 | )
|                                                          |  |                              |         |   |      |   |         |  
|Fair value as of March 31, 2012 and 2011, respectively    |  | $                            | 65,800  |   |      | $ | 33,646  |  
|                                                          |  |                              |         |   |      |   |         |  



|                                                           |  |                            |         |   |      |   |         |  
|---------------------------------------------------------- |  | -------------------------- | ------- | - | ---- | - | ------- | -
|                                                           |  | Six Months Ended March 31, |        
|                                                           |  | 2012                       |         |   | 2011 |  
|Fair value as of September 30, 2011 and 2010, respectively |  | $                          | 100,012 |   |      | $ | 17,940  |  
|Net unrealized depreciation(A)                             |  |                            | (612    | ) |      |   | (694    | )
|Borrowings                                                 |  |                            | 32,900  |   |      |   | 50,800  |  
|Repayments                                                 |  |                            | (66,500 | ) |      |   | (34,400 | )
|                                                           |  |                            |         |   |      |   |         |  
|Fair value as of March 31, 2012 and 2011, respectively     |  | $                          | 65,800  |   |      | $ | 33,646  |  
|                                                           |  |                            |         |   |      |   |         |  



|(A) | Included in net unrealized depreciation on borrowings on our accompanying Condensed Consolidated Statements of Operations for the three and six
months ended March 31, 2012 and 2011.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The fair value of the collateral under our Credit Facility was $239.0 million
and $256.9 million at March 31, 2012 and September 30, 2011, respectively.

NOTE 6. MANDATORILY REDEEMABLE PREFERRED STOCK

In November 2011, we completed a public offering of 1.5 million shares of 7.125% Series 2016 Term Preferred Stock, par value $0.001
per share (Term Preferred Stock), at a public offering price of $25.00 per share. Gross proceeds totaled $38.5 million and net proceeds, after deducting underwriting discounts and offering expenses borne by us, were $36.3 million and
were used to repay a portion of outstanding borrowings under the Credit Facility. We incurred $2.2 million in total offering costs related to these transactions, which have been recorded as deferred financing fees on our Condensed Consolidated
Statements of Assets and Liabilitiesand will be amortized over the redemption period ending December 31, 2016.



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The shares have a redemption date of December 31, 2016 and are traded under the ticker symbol of
GLAD PRA on the New York Stock Exchange (NYSE). The Term Preferred Stock is not convertible into our common stock or any other security. The Term Preferred Stock provides for a fixed dividend equal to 7.125% per year,
payable monthly (which equates to approximately $2.7 million per year). We are required to redeem all of the outstanding Term Preferred Stock on December 31, 2016 for cash at a redemption price equal to $25.00 per share plus an amount equal to
accumulated but unpaid dividends, if any, to the date of redemption. In addition, there are two other potential redemption triggers: 1) if we fail to maintain an asset coverage ratio of at least 200%, we are required to redeem a portion of the
outstanding Term Preferred Stock or otherwise cure the ratio redemption trigger and 2) at our sole option, at any time on or after December 31, 2012, we may redeem the Term Preferred Stock. See Note 12Subsequent Eventsfor
discussion of the transfer of the listing of our Term Preferred Stock from the NYSE to the NASDAQ Global Select Market (NASDAQ).

Our Board of Directors declared the following monthly distributions to preferred stockholders for the six months ended March 31, 2012:



|            |  |                    |  |                  |  |                                  |  |                   |            |                                    |            | 
|----------- |  | ------------------ |  | ---------------- |  | -------------------------------- |  | ----------------- | ---------- | ---------------------------------- | ---------- | 
|Fiscal Year |  | Time Period        |  | Declaration Date |  | Record Date                      |  | Payment Date      |            | Distributionper TermPreferredShare |           
|            |  |                    |  |                  | 
|2012        |  | November 4  30(A) |  | December 6, 2011 |  | December 16, 2011                |  | December 30, 2011 |            | $                                  | 0.13359375 | 
|            |  | December 1  31    |  | December 6, 2011 |  | December 16, 2011                |  | December 30, 2011 |            |                                    | 0.14843750 | 
|            |  | January 1  31     |  | January 10, 2012 |  | January 23, 2012                 |  | January 21, 2012  |            |                                    | 0.14843750 | 
|            |  | February 1  29    |  | January 10, 2012 |  | February 21, 2012                |  | February 29, 2012 |            |                                    | 0.14843750 | 
|            |  | March 1  31       |  | January 10, 2012 |  | March 22, 2012                   |  | March 30, 2012    |            |                                    | 0.14843750 | 
|            |  |                    |  |                  |  |                                  |  |                   |            |                                    |            | 
|            |  |                    |  |                  |  | Six Months Ended March 31, 2012: |  | $                 | 0.72734375 |                                   
|            |  |                    |  |                  |  |                                  |  |                   |            |                                    |            | 



|(A) | November 2011 was prorated from the time the Term Preferred Stock was issued and outstanding as per our final prospectus supplement dated
October 28, 2011.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------

In accordance with ASC 480, Distinguishing Liabilities from Equity, mandatorily
redeemable financial instruments should be classified as liabilities in the balance sheet and therefore the related dividend payments are treated as dividend expense on our statement of operations as of the ex-dividend date.

NOTE 7. COMMON STOCK

Registration
Statement

On October 20, 2009, we filed a registration statement on Form N-2 (File No. 333-162592) that was amended on
December 9, 2009 and which the SEC declared effective on January 28, 2010, and we filed post-effective amendments to such registration statement on April 7, 2011, June 15, 2011, and July 13, 2011, which were declared
effective by the SEC on July 15, 2011. We filed a post-effective amendment to such registration statement on March 6, 2012, which has not yet been declared effective. The registration statement permits us to issue, through one or more
transactions, up to an aggregate of $300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities and warrants to purchase common stock, including through a combined offering of such
securities.

On May 17, 2010, together with the Advisor, we entered into an equity distribution agreement (the
Agreement) with BB&T Capital Markets, a division of Scott & Stringfellow, LLC (the Agent), under which we may, from time to time, issue and sell through the Agent, as sales agent, up to 2.0 million shares
(the Shares) of our common stock, par value $0.001 per share, based upon instructions from us (including, at a minimum, the number of Shares to be offered, the time period during which sales are requested to be made, any limitation on
the number of Shares that may be sold in any one day and any minimum price below which sales may not be made). Sales of Shares through the Agent, if any, will be executed by means of either ordinary brokers transactions on NASDAQ in accordance
with Rule 153 under the Securities Act of 1933, as amended, or such other sales of the Shares as shall be agreed by us and the Agent. The compensation payable to the Agent for sales of Shares with respect to which the Agent acts as sales
agent shall be equal to 2.0% of the gross sales price of the Shares sold pursuant to the Agreement. To date, we have not issued any shares pursuant to this Agreement.

During the quarter ended December 31, 2011, pursuant to the terms of our articles of incorporation, as amended, our Board of Directors approved reclassifying 4.0 million shares of common stock
to shares of preferred stock.



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Employee Notes

The following table is a summary of all outstanding notes issued to employees of the Adviser for the exercise of stock options:



|           |  |                                   |         |  |                                 |       |                                                      |   |       |                                                      |  |   |              |  |                             |        |  |  |      |     
|---------- |  | --------------------------------- | ------- |  | ------------------------------- | ----- | ---------------------------------------------------- | - | ----- | ---------------------------------------------------- |  | - | ------------ |  | --------------------------- | ------ |  |  | ---- | ----
|Issue Date |  | OriginalNumber ofOptionsExercised |         |  | Strike Price ofOptionsExercised |       | Original Amount ofPromissory NoteIssued to Employees |   |       | OutstandingBalance ofEmployee Loansat March 31, 2012 |  |   | MaturityDate |  | OriginalInterestRateon Note |       
|Aug-01     |  |                                   | 393,334 |  |                                 | 15.00 |                                                      | $ | 5,900 | (A)                                                  |  | $ | 2,749        |  |                             | Aug-10 |  |  | 4.90 | %(B)
|Aug-01     |  |                                   | 18,334  |  |                                 | 15.00 |                                                      |   | 275   | (A)                                                  |  |   | 200          |  |                             | Aug-10 |  |  | 4.90 | (B) 
|Aug-01     |  |                                   | 18,334  |  |                                 | 15.00 |                                                      |   | 275   | (C)                                                  |  |   |             |  |                             | Aug-11 |  |  | 4.90 |     
|Sep-04     |  |                                   | 13,332  |  |                                 | 15.00 |                                                      |   | 200   | (C)                                                  |  |   | 98           |  |                             | Sep-13 |  |  | 5.00 |     
|Jul-06     |  |                                   | 13,332  |  |                                 | 15.00 |                                                      |   | 200   |                                                      |  |   | 200          |  |                             | Jul-15 |  |  | 8.26 |     
|Jul-06     |  |                                   | 18,334  |  |                                 | 15.00 |                                                      |   | 275   |                                                      |  |   | 275          |  |                             | Jul-15 |  |  | 8.26 |     
|           |  |                                   |         |  |                                 |       |                                                      |   |       |                                                      |  |   |              |  |                             |        |  |  |      |     
|           |  |                                   | 475,000 |  |                                 |       |                                                      | $ | 7,125 |                                                      |  | $ | 3,522        |  |                             |        |  |  |      |     
|           |  |                                   |         |  |                                 |       |                                                      |   |       |                                                      |  |   |              |  |                             |        |  |  |      |     



|(A) | On September 7, 2010, we entered into redemption agreements (the
Redemption Agreements) with David Gladstone, our Chairman and Chief Executive Officer, and Laura Gladstone, the daughter of Mr. Gladstone and an officer of the Adviser, and one of our Managing Directors, in connection with the
maturity of secured promissory notes executed by Mr. Gladstone and Ms. Gladstone in favor of us on August 23, 2001, in the principal amounts of $5.9 million and $0.3 million, respectively (collectively, the
Notes). Mr. and Ms. Gladstone executed the Notes to facilitate their payment of the exercise price of certain stock options (the Options) to acquire shares of our common stock. Concurrently with the execution
of the Notes, we, together with Mr. and Ms. Gladstone entered into stock pledge agreements (collectively, the Pledge Agreements), pursuant to which Mr. and Ms. Gladstone granted to us a first priority security
interest in the Pledged Collateral (as defined in the respective Pledge Agreements), which included 393,334 and 18,334 shares, respectively, of our common stock that Mr. and Ms. Gladstone acquired pursuant to the exercise of the Options
(collectively, the Pledged Shares). An event of default was triggered under the Notes by virtue of Mr. and Ms. Gladstones failure to repay the amounts outstanding under the Notes within five business days of
August 23, 2010. The Redemption Agreements provide that, pursuant to the terms and conditions thereof, we will automatically accept and retire the Pledged Shares in partial or full satisfaction, as applicable, of Mr. and
Ms. Gladstones obligations to us under the Notes at such time, if ever, that the trading price of our common stock reaches $15 per share. In entering into the Redemption Agreements, we reserved all of our existing rights under the
Notes and the Pledge Agreements, including, but not limited to, the ability to foreclose on the Pledged Collateral at any time. On March 30, 2011, June 27, 2011 and September 26, 2011, Mr. Gladstone paid down an aggregate of
$3.2 million of the principal balance of his note, leaving a principal balance of $2.7 million outstanding as of March 31, 2012. In connection with these payments, we released our first priority security interest on 210,000 common shares of
Mr. Gladstones Pledged Shares, leaving a balance of 183,334 common shares in Pledged Collateral from Mr. Gladstone as of March 31, 2012. On September 28, 2011, Ms. Gladstone paid down $0.1 million of the principal
balance of her 2001 note, leaving a principal balance of $0.2 million outstanding on this note as of March 31, 2012. The principal balances under her 2006 notes remain unchanged at an aggregate balance of $0.5 million as of March 31, 2012.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(B) | An event of default was triggered under these Notes by virtue of Mr. and Ms. Gladstones failure to repay the amounts outstanding within
five business days of August 23, 2010. As such, we charged a default rate of an additional 2% per annum under these Notes for all periods following default.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(C) | On December 20, 2011, we entered into an amended and restated redemption agreement with an employee of the Adviser in connection with the maturity
of a secured promissory note executed by the employee in favor of us on August 23, 2001, in the principal amount of $0.3 million. Pursuant to the redemption agreement, on December 29, 2011, we redeemed 20,000 shares of our common stock
that had been pledged as collateral on the employee note, resulting in a reduction of $0.2 million on the employee note, leaving a principal balance of $0.1 million as of December 31, 2011. On January 26, 2012, we redeemed an additional
19,082 shares of our common stock that had been pledged as collateral on the employee note, resulting in the employees defaulted loan being fully paid off and a reduction of $0.1 million on the employees other note, leaving a remaining
principal balance thereon of $0.1 million as of March 31, 2012.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In accordance with ASC 505, Equity,
receivables from employees for the issuance of capital stock to employees prior to the receipt of cash payment should be reflected in the balance sheet as a reduction to stockholders equity. Therefore, these recourse notes were recorded as
loans to employees and are included in the equity section of our accompanying Condensed Consolidated Statements of Assets and Liabilities. As of March 31, 2012, we determined that these notes were still recourse.



NOTE 8. NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS PER COMMON
SHARE

The following table sets forth the computation of basic and diluted net decrease in net assets resulting from operations per
weighted average common share for the three and six months ended March 31, 2012 and 2011:



|                                                                                                      |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|----------------------------------------------------------------------------------------------------- |  | --------------------------- | ---------- | - | ------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                                                      |  | Three Months EndedMarch 31, |            |   | Six Months EndedMarch 31, |  
|                                                                                                      |  | 2012                        |            |   | 2011                      |   |            | 2012 |  |   | 2011       |  
|Numerator for basic and diluted net decrease in net assets resulting from operations per common share |  | $                           | (1,603     | ) |                           | $ | (8,381     | )    |  | $ | (2,892     | ) |  | $ | (6,250     | )
|Denominator for basic and diluted weighted average common shares                                      |  |                             | 21,005,402 |   |                           |   | 21,039,242 |      |  |   | 21,022,087 |   |  |   | 21,039,242 |  
|                                                                                                      |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Basic and diluted net decrease in net assets resulting from operations per common share               |  | $                           | (0.08      | ) |                           | $ | (0.40      | )    |  | $ | (0.14      | ) |  | $ | (0.30      | )
|                                                                                                      |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  



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NOTE 9. DISTRIBUTIONS TO COMMON STOCKHOLDERS

Our Board of Directors declared the following monthly distributions to common stockholders for the six months ended March 31, 2012 and 2011:



|            |  |                  |  |                                  |  |                   |      |                             |      | 
|----------- |  | ---------------- |  | -------------------------------- |  | ----------------- | ---- | --------------------------- | ---- | 
|Fiscal Year |  | Declaration Date |  | Record Date                      |  | Payment Date      |      | Distributionper CommonShare |     
|2012        |  | October 11, 2011 |  | October 21, 2011                 |  | October 31, 2011  |      | $                           | 0.07 | 
|            |  | October 11, 2011 |  | November 17, 2011                |  | November 30, 2011 |      |                             | 0.07 | 
|            |  | October 11, 2011 |  | December 21, 2011                |  | December 30, 2011 |      |                             | 0.07 | 
|            |  | January 10, 2012 |  | January 23, 2012                 |  | January 31, 2012  |      |                             | 0.07 | 
|            |  | January 10, 2012 |  | February 21, 2012                |  | February 29, 2012 |      |                             | 0.07 | 
|            |  | January 10, 2012 |  | March 22, 2012                   |  | March 30, 2012    |      |                             | 0.07 | 
|            |  |                  |  |                                  |  |                   |      |                             |      | 
|            |  |                  |  | Six Months Ended March 31, 2012: |  | $                 | 0.42 |                            
|            |  |                  |  |                                  |  |                   |      |                             |      | 
|            |  |                  |  |                                 
|2011        |  | October 5, 2010  |  | October 21, 2010                 |  | October 29, 2010  |      | $                           | 0.07 | 
|            |  | October 5, 2010  |  | November 19, 2010                |  | November 30, 2010 |      |                             | 0.07 | 
|            |  | October 5, 2010  |  | December 23, 2010                |  | December 31, 2010 |      |                             | 0.07 | 
|            |  | January 11, 2011 |  | January 21, 2011                 |  | January 31, 2011  |      |                             | 0.07 | 
|            |  | January 11, 2011 |  | February 21, 2011                |  | February 28, 2011 |      |                             | 0.07 | 
|            |  | January 11, 2011 |  | March 21, 2011                   |  | March 31, 2011    |      |                             | 0.07 | 
|            |  |                  |  |                                  |  |                   |      |                             |      | 
|            |  |                  |  | Six Months Ended March 31, 2011: |  | $                 | 0.42 |                            
|            |  |                  |  |                                  |  |                   |      |                             |      | 

Aggregate common distributions declared and paid for the six months ended March 31, 2012 and 2011 were each
approximately $8.8 million, which were declared based on estimates of net investment income for the respective fiscal years. The characterization of the common distributions declared and paid for the fiscal year ended September 30, 2012 will be
determined at year end and cannot be determined at this time. For the fiscal year ended September 30, 2011, taxable income available for common distributions exceeded distributions declared and paid, and, in accordance with Section 855(a)
of the Code, we elected to treat a portion of the first common distribution paid in fiscal year 2012 as having been paid in the prior year.

NOTE 10. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

We are party to
certain legal proceedings incidental to the normal course of our business, including the enforcement of our rights under contracts with our portfolio companies. We are required to establish reserves for litigation matters where those matters present
loss contingencies that are both probable and estimable. When loss contingencies are not both probable and estimable, we do not establish reserves. Based on current knowledge, we do not believe that loss contingencies, if any, arising from pending
investigations, litigation or regulatory matters will have a material adverse effect on our financial condition or results of operation.

Escrow Holdbacks

From time to
time, we will enter into arrangements as it relates to exits of certain investments whereby specific amounts of the proceeds are held in escrow in order to be used to satisfy potential obligations as stipulated in the sales agreements. We record
escrow amounts in restricted cash on our accompanying Condensed Consolidated Statements of Assets and Liabilities. We establish a contingent liability against the escrow amounts if we determine that it is probable and estimable that a portion
of the escrow amounts will not be ultimately received at the end of the escrow period. The aggregate contingent liability amount recorded against the escrow amounts was $1.2 million and $0 as of March 31, 2012 and September 30, 2011,
respectively, and is located in other liabilities on our accompanying Condensed Consolidated Statements of Assets and Liabilities.

Financial Commitments and Obligations

We have lines of credit and capital commitments with
certain of our portfolio companies that have not been fully drawn or called. Since these commitments have expiration dates and we expect many will never be fully drawn or called, the total commitment amounts do not necessarily represent future cash
requirements.

In addition to the lines of credit and capital commitments with portfolio companies, we also extend certain guarantees on
behalf of some of our portfolio companies during the normal course of business. In January 2012, we executed a guarantee for one of our Control investments, Viapack, to irrevocably and unconditionally guarantee payment and performance of
Viapacks obligations



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regarding purchase agreements and expenses to one of its vendors. This guarantee is limited to a maximum of $0.6 million and terminates within 30 days written notice not to extend further credit.
As of September 30, 2011, we were not party to any signed guarantees.

We estimated the fair value of our unused line of credit
commitments, uncalled capital commitment and guarantee as of March 31, 2012 and September 30, 2011 to be minimal; and therefore, they are not recorded on our accompanying Condensed Consolidated Statements of Assets and Liabilities.
The following table summarizes the dollar balances of unused line of credit commitments, uncalled capital commitment and guarantee as of March 31, 2012 and September 30, 2011:



|                                  |  |                     |        |  |                         |   |        | 
|--------------------------------- |  | ------------------- | ------ |  | ----------------------- | - | ------ | 
|                                  |  | As of March 31,2012 |        |  | As of September 30,2011 |  
|Unused line of credit commitments |  | $                   | 8,810  |  |                         | $ | 12,990 | 
|Uncalled capital commitment       |  |                     | 800    |  |                         |   | 800    | 
|Guarantee                         |  |                     | 600    |  |                         |   |       | 
|                                  |  |                     |        |  |                         |   |        | 
|Total                             |  | $                   | 10,210 |  |                         | $ | 13,790 | 
|                                  |  |                     |        |  |                         |   |        | 

NOTE 11. FINANCIAL HIGHLIGHTS



|                                                                      |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|--------------------------------------------------------------------- |  | --------------------------- | ---------- | - | ------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                      |  | Three Months EndedMarch 31, |            |   | Six Months EndedMarch 31, |  
|                                                                      |  | 2012                        |            |   | 2011                      |   |            | 2012 |  |   | 2011       |  
|Per Common Share Data(A)                                              |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Net asset value at beginning of period                                |  | $                           | 9.90       |   |                           | $ | 11.74      |      |  | $ | 10.16      |   |  | $ | 11.85      |  
|                                                                      |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Net investment income(B)                                              |  |                             | 0.25       |   |                           |   | 0.21       |      |  |   | 0.45       |   |  |   | 0.43       |  
|Net realized loss on investments(B)                                   |  |                             |           |   |                           |   |           |      |  |   | (0.39      | ) |  |   |           |  
|Net unrealized depreciation of investments(B)                         |  |                             | (0.34      | ) |                           |   | (0.62      | )    |  |   | (0.23      | ) |  |   | (0.76      | )
|Net unrealized depreciation of borrowings(B)                          |  |                             | 0.01       |   |                           |   | 0.01       |      |  |   | 0.03       |   |  |   | 0.03       |  
|Distributions to common stockholders from net investment income(B)(C) |  |                             | (0.21      | ) |                           |   | (0.21      | )    |  |   | (0.42      | ) |  |   | (0.42      | )
|Repayment of principal on employee notes                              |  |                             | 0.01       |   |                           |   | 0.05       |      |  |   | 0.02       |   |  |   | 0.05       |  
|Stock redemption for repayment on employee notes                      |  |                             | (0.01      | ) |                           |   |           |      |  |   | (0.02      | ) |  |   |           |  
|Other, net(D)                                                         |  |                             | 0.01       |   |                           |   |           |      |  |   | 0.02       |   |  |   |           |  
|                                                                      |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Net asset value at end of period                                      |  | $                           | 9.62       |   |                           | $ | 11.18      |      |  | $ | 9.62       |   |  | $ | 11.18      |  
|                                                                      |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|                                                                      |  |                             |            |  
|Per common share market value at beginning of period                  |  | $                           | 7.63       |   |                           | $ | 11.52      |      |  | $ | 6.86       |   |  | $ | 11.27      |  
|Per common share market value at end of period                        |  |                             | 8.11       |   |                           |   | 11.31      |      |  |   | 8.11       |   |  |   | 11.31      |  
|Total return(E)                                                       |  |                             | 8.93       | % |                           |   | 1.86       | %    |  |   | 24.46      | % |  |   | 4.12       | %
|Common shares outstanding at end of period                            |  |                             | 21,000,160 |   |                           |   | 21,039,242 |      |  |   | 21,000,160 |   |  |   | 21,039,242 |  
|Statement of Assets and Liabilities Data:                             |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Net assets at end of period                                           |  | $                           | 202,002    |   |                           | $ | 235,215    |      |  | $ | 202,002    |   |  | $ | 235,215    |  
|Average net assets(F)                                                 |  |                             | 207,018    |   |                           |   | 252,457    |      |  |   | 208,995    |   |  |   | 249,985    |  
|Senior Securities Data:                                               |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Borrowings under Credit Facility, at cost                             |  |                             | 65,800     |   |                           |   | 33,200     |      |  |   | 65,800     |   |  |   | 33,200     |  
|Mandatorily redeemable preferred stock                                |  |                             | 38,497     |   |                           |   |           |      |  |   | 38,497     |   |  |   |           |  
|Asset coverage ratio(G)(H)                                            |  |                             | 292        | % |                           |   | 807        | %    |  |   | 292        | % |  |   | 807        | %
|Asset coverage per unit(H)                                            |  | $                           | 2,922      |   |                           | $ | 8,073      |      |  | $ | 2,922      |   |  | $ | 8,073      |  
|Ratios/Supplemental Data:                                             |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Ratio of expenses to average net assets-annualized(I)                 |  |                             | 11.41      | % |                           |   | 6.45       | %    |  |   | 10.77      | % |  |   | 6.00       | %
|Ratio of net expenses to average net assets-annualized(J)             |  |                             | 11.17      |   |                           |   | 6.29       |      |  |   | 10.22      |   |  |   | 5.87       |  
|Ratio of net investment income to average net assets-annualized       |  |                             | 10.08      |   |                           |   | 7.02       |      |  |   | 9.22       |   |  |   | 7.25       |  



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

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

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

|(D) | Represents the impact of the different share amounts (weighted average shares outstanding during the period and shares outstanding at the end of the
period) in the per share data calculations and rounding impacts.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(E) | Total return equals the change in the ending market value of our common stock from the beginning of the period, taking into account distributions
reinvested in accordance with the terms of our dividend reinvestment plan. Total return does not take into account distributions that may be characterized as a return of capital. For further information on the estimated character of our
distributions to common stockholders, please refer to Note 9Distributions to Common Stockholders. Total return is not annualized.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(F) | Average net assets are computed using the average of the balance of net assets at the end of each month of the reporting period.
|--- | --------------------------------------------------------------------------------------------------------------------------------



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|(G) | As a BDC, we are 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 and guaranty commitments. Our mandatorily redeemable preferred stock is characterized as borrowings for the asset coverage ratio.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(H) | Asset coverage ratio is the ratio of the carrying value of our total consolidated assets, less all liabilities and indebtedness not represented by
senior securities, to the aggregate amount of senior securities representing indebtedness (including interest payable and guarantees). Asset coverage per unit is the asset coverage ratio expressed in terms of dollar amounts per one thousand dollars
of indebtedness.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(I) | Ratio of expenses to average net assets is computed using expenses before credits from the Adviser to the base management and incentive fees and
including income tax expense.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(J) | Ratio of net expenses to average net assets is computed using total expenses net of credits from the Adviser to the base management and incentive fees
and including income tax expense.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 12. SUBSEQUENT EVENTS

Distributions

In April 2012, our Board
of Directors declared the following monthly cash distributions to common and preferred stockholders:



|                      |  |                |  |                             |      |  |                                     |   |           | 
|--------------------- |  | -------------- |  | --------------------------- | ---- |  | ----------------------------------- | - | --------- | 
|Record Date           |  | Payment Date   |  | Distributionper CommonShare |      |  | Distribution perTerm PreferredShare |  
|April 20, 2012        |  | April 30, 2012 |  | $                           | 0.07 |  |                                     | $ | 0.1484375 | 
|May 18, 2012          |  | May 31, 2012   |  |                             | 0.07 |  |                                     |   | 0.1484375 | 
|June 20, 2012         |  | June 29, 2012  |  |                             | 0.07 |  |                                     |   | 0.1484375 | 
|                      |  |                |  |                             |      |  |                                     |   |           | 
|Total for the Quarter |  |                |  | $                           | 0.21 |  |                                     | $ | 0.4453125 | 
|                      |  |                |  |                             |      |  |                                     |   |           | 

Investment Activity

Subsequent to March 31, 2012, we extended an aggregate amount of approximately $0.7 million to 4 existing portfolio companies in revolver draws and received scheduled repayments of $1.8 million from
16 portfolio companies.

Term Preferred Stock Listing

On May 1, 2012, we transferred our listing of Term Preferred Stock from the NYSE to NASDAQ. The new trading symbol on NASDAQ for the Term Preferred Stock is GLADP.



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

All statements
contained herein, other than historical facts, may constitute forward-looking statements. These statements may relate to, among other things, future events or our future performance or financial condition. In some cases, you can identify
forward-looking statements by terminology such as estimate, may, might, believe, will, provided, anticipate, future, could,
growth, plan, intend, expect, should, would, if, seek, possible, potential, likely or the negative of such terms or
comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future
results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. We caution readers not to place undue reliance on any such forward-looking statements. We undertake no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Form 10-Q.

The following analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the notes thereto contained elsewhere
in this report and in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011.

OVERVIEW

General

We were incorporated under the
General Corporation Laws of the State of Maryland on May 30, 2001. Our investment objective is to achieve a high level of current income by investing in debt securities, consisting primarily of senior notes, senior subordinated notes and junior
subordinated notes, with a particular focus on senior notes, of established private businesses in the United States (U.S.) that are substantially owned by leveraged buyout funds, individual investors or are family-owned businesses. In
addition, we may acquire existing loans that meet this profile from other funds. We also seek to provide our stockholders with long-term capital growth through the appreciation in the value of warrants or other equity instruments that we may receive
when we make loans. We operate as a closed-end, non-diversified management investment company, and have elected to be treated as a business development company (BDC) under the Investment Company Act of 1940, as amended (the 1940
Act). In addition, for tax purposes we have elected to be treated as a regulated investment company (RIC) under the Internal Revenue Code of 1986, as amended (the Code).

We focus on investing in small and medium-sized private U.S. businesses that meet certain criteria, including some but not all of the following: the
potential for growth in cash flow, adequate assets for loan collateral, experienced management teams with a significant ownership interest in the borrower, profitable operations based on the borrowers cash flow, reasonable capitalization of
the borrower (usually by leveraged buyout funds or venture capital funds) and the potential to realize appreciation and gain liquidity in our equity position, if any. We anticipate that liquidity in our equity position will be achieved through a
merger or acquisition of the borrower, a public offering of the borrowers stock or by exercising our right to require the borrower to repurchase our warrants, though there can be no assurance that we will always have these rights. We lend to
borrowers that need funds to finance growth, restructure their balance sheets or effect a change of control. We invest by ourselves or jointly with other funds and/or management of the portfolio company, depending on the opportunity. If we are
participating in an investment with one or more co-investors, our investment is likely to be smaller than if we were investing alone.

Business Environment

While economic
conditions generally appear to be improving, we remain cautious about a long-term economic recovery. The recent recession in general, and the disruptions in the capital markets in particular, have impacted our liquidity options and increased
the cost of debt and equity capital. Many of our portfolio companies, as well as those that we evaluate for possible investment, are impacted by these economic conditions. If these conditions continue to persist, it may affect their ability to repay
our loans or engage in a liquidity event, such as a sale, recapitalization or initial public offering. The economic conditions could also disproportionately impact some of the industries in which we have invested, causing us to be more vulnerable to
losses in our portfolio, which could cause the number of our non-performing assets to increase and the fair market value of our portfolio to decrease. We do not know if market conditions will continue to improve or if adverse conditions will again
intensify, and we do not know the full extent to which the economic downturn will affect us. If market instability persists or intensifies, we may experience continued difficulty in raising additional capital.

Despite the challenges during these uncertain economic times, in the six months ended March 31, 2012, we have been able to complete both a preferred
stock public offering and a renewal of our $137.0 million line of credit (our Credit Facility, defined



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under Recent Developments  Renewal of Credit Facility below). In November 2011, we issued 1.5 million shares of term preferred stock (our Term Preferred
Stock, defined under Recent Developments  Term Preferred Stock Offering below) for gross proceeds of $38.5 million. In addition, in January 2012 we closed on an amendment on our Credit Facility to extend its maturity
until 2015. We discuss each of the foregoing in detail below under Recent Developments.

Market conditions have affected
the trading price of our common stock and our ability to finance new investments through the issuance of equity. On April 27, 2012, the closing market price of our common stock was $8.04, a 16.4% discount to our March 31, 2012 net asset
value (NAV) per common share of $9.62. When our stock trades below NAV, as it has periodically traded over the last three years, our ability to issue equity is constrained by provisions of the 1940 Act, which generally prohibits the
issuance and sale of our common stock below NAV per common share without stockholder approval other than through sales to our then-existing stockholders pursuant to a rights offering. At our annual meeting of stockholders held on February 16,
2012, our stockholders approved a proposal authorizing us to sell shares of our common stock at a price below our then current NAV per common share subject to certain limitations (including, but not limited to, that the cumulative number of shares
issued and sold pursuant to such authority does not exceed 25% of our then outstanding common stock immediately prior to each such sale) for a period of one year from the date of approval, provided that our Board of Directors makes certain
determinations prior to any such sale.

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

The continued unsteady economic recovery may also continue to cause the value of the collateral securing some of our loans to fluctuate, as well as the value of our equity investments, which has impacted
and may continue to impact our ability to borrow under our Credit Facility. Additionally, our Credit Facility contains covenants regarding the maintenance of certain minimum loan concentrations and net worth covenants, which are affected by the
decrease in value of our portfolio. Failure to meet these requirements would result in a default which, if we are unable to obtain a waiver from our lenders, would cause an acceleration of our repayment obligations under our Credit Facility. As of
March 31, 2012, we were in compliance with all of our Credit Facilitys covenants.

We expect that, given these regulatory and
contractual constraints in combination with current market conditions, debt and equity capital may continue to be costly or difficult for us to access in the near term. However, we believe that our recent public offering of Term Preferred Stock and
our three year renewal on our Credit Facility will increase our ability to make conservative investments in businesses that we believe will weather the current economic conditions and will be likely to produce attractive long-term returns for our
stockholders.

Investment Highlights

During the six months ended March 31, 2012, we extended an aggregate of $10.1 million of investments to two new portfolio companies and an aggregate of $19.5 million of investments to existing
portfolio companies through existing revolver draws, new term notes or additions to term notes and equity. Also, during the six months ended March 31, 2012, we sold three portfolio companies for aggregate proceeds of approximately $6.5 million,
and we received scheduled and unscheduled contractual principal repayments of approximately $24.8 million from existing portfolio companies, including four early payoffs. Since our initial public offering in August 2001, we have made 311 different
loans to, or investments in, 155 companies for a total of approximately $1.1 billion, before giving effect to principal repayments on investments and divestitures.



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Investment Activity

During the six months ended March 31, 2012, we executed the following transactions with certain of our portfolio companies:

Repayments and Exits:



| |  |  | During the six months ended March 31, 2012, borrowers made principal repayments totaling $24.8 million in the aggregate, consisting of $14.9
million of unscheduled early payoffs as well as $9.9 million in contractual amortization, revolver repayments and principal payments. Included in the principal payments were the net proceeds at par from early payoffs by Northern Contours, Inc.
(Northern Contours) of $6.1 million, Global Materials Technology Inc. (GMT) of $2.4 million, RCS Management Holding Co. (RCS) of $4.4 million, and Ernest Health Inc. (Ernest Health) of $2.0 million. In
relation to these exits, we received $1.1 million in success fees from GMT and $0.9 million in success fees from RCS.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In December 2011, we sold our investments in Newhall Holdings Inc. (Newhall) for net proceeds of $3.3 million, which resulted in a realized
loss of $7.4 million recorded in the three months ended December 31, 2011.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Workouts:



| |  |  | Effective October 2011, we restructured Sunshine Media Holdings (Sunshine), by reducing the interest rates on its line of credit, senior
term debt and LOT senior term debt to preserve Sunshines capital to further enable it to invest in new and existing initiatives. We have also invested $1.6 million in preferred equity and $2.1 million in line of credit draws to Sunshine during
the six months ended March 31, 2012. We placed our investment in Sunshines LOT senior term debt on non-accrual status effective January 1, 2012.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In November 2011, we invested $1.6 million in Ohana Media Group (Ohana) to facilitate its purchase of certain of KMBQ Corporations
(KMBQ) assets out of receivership. In connection with this transaction, we received net proceeds of $1.2 million and recorded a realized loss during the three months ended December 31, 2011 totaling $1.0 million. Ohana replaced KMBQ
on our Condensed Consolidated Schedule of Investments as a Non-Control/Non-Affiliate investment at December 31, 2011.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Effective January 2012, we restructured our investment in Viapack, Inc. (Viapack) by reducing the interest rates on its line of credit,
senior real estate term debt and senior term debt to preserve Viapacks capital to enable it to invest in existing initiatives. We have also invested $1.8 million in line of credit draws to Viapack during the six months ended March 31,
2012. We placed our investment in Viapacks LOT senior term debt on non-accrual status effective January 1, 2012.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Refer to Note 12Subsequent Events in our Condensed Consolidated Financial Statements included elsewhere in this Form 10-Q for
investment activity occurring subsequent to March 31, 2012.

Recent Developments

Renewal of Credit Facility

On
January 19, 2012, we entered into Amendment No. 3 to the fourth amended and restated credit agreement (the Credit Facility), through Gladstone Business Loan, LLC (Business Loan), to extend the maturity date of our
$137.0 million line of credit from March 15, 2012 to January 18, 2015 (the Maturity Date). The interest rates remained unchanged. Our Credit Facility was arranged by Key Equipment Finance Inc. (Keybank) as
administrative agent. Branch Banking and Trust Company (BB&T) and ING Capital LLC (ING) also joined our Credit Facility as committed lenders. Subject to certain terms and conditions, our Credit Facility may be expanded to
a maximum of $237.0 million through the addition of other committed lenders to the facility. If our Credit Facility is not renewed or extended by the Maturity Date, all principal and interest will be due and payable on or before January 18,
2016 (one year after the Maturity Date). Our Credit Facility also limits payments on distributions to the aggregate net investment income for each of the twelve month periods ended September 30, 2012, 2013, 2014 and 2015. The interest rates on
advances under our Credit Facility remained unchanged at 30-day London Interbank Offered Rate (LIBOR) subject to a minimum rate of 1.5%, plus 3.75% per annum, with a commitment fee of 0.5% per annum on undrawn amounts when our
Credit Facility is drawn more than 50% and 1.0% per annum on undrawn amounts when our Credit Facility is drawn less than 50%. We incurred fees of $1.4 million in January 2012 in connection with this amendment. All other terms of our Credit
Facility remained substantially unchanged.



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Term Preferred Stock Offering

In November 2011, we completed an offering of 1.5 million shares of 7.125% Series 2016 Term Preferred Stock, par value $0.001 per share (Term Preferred Stock), at a public offering price
of $25.00 per share under a shelf registration statement on Form N-2 (File No. 333-162592) and pursuant to a prospectus dated July 15, 2011, as supplemented by a final prospectus supplement dated October 28, 2011, which was filed with
the Securities and Exchange Commission (SEC) on October 31, 2011. Net proceeds of the offering, after deducting underwriting discounts and offering expenses borne by us were approximately $36.3 million and were used to repay a
portion of outstanding borrowings under our Credit Facility. Refer to Note 6Mandatorily Redeemable Preferred Stock in our Condensed Consolidated Financial Statements included elsewhere in this Form 10-Q for further discussion of
our Term Preferred Stock offering.

RESULTS OF OPERATIONS

Comparison of the Three Months Ended March 31, 2012, to the Three Months Ended March 31, 2011



|                                                           |  |                                      |        |   |      |   |         |          |  |   |          |   |  |  |       |  
|---------------------------------------------------------- |  | ------------------------------------ | ------ | - | ---- | - | ------- | -------- |  | - | -------- | - |  |  | ----- | -
|                                                           |  | For the Three Months Ended March 31, |       
|                                                           |  | 2012                                 |        |   | 2011 |   |         | $ Change |  |   | % Change |  
|INVESTMENT INCOME                                          |  |                                      |        |   |      |   |         |          |  |   |          |   |  |  |       |  
|Interest income                                            |  | $                                    | 8,954  |   |      | $ | 7,290   |          |  | $ | 1,664    |   |  |  | 22.8  | %
|Other income                                               |  |                                      | 2,042  |   |      |   | 1,108   |          |  |   | 934      |   |  |  | 84.3  |  
|                                                           |  |                                      |        |   |      |   |         |          |  |   |          |   |  |  |       |  
|Total investment income                                    |  |                                      | 10,996 |   |      |   | 8,398   |          |  |   | 2,598    |   |  |  | 30.9  |  
|                                                           |  |                                      |        |   |      |   |         |          |  |   |          |   |  |  |       |  
|                                                           |  |                                      |        |  
|EXPENSES                                                   |  |                                      |        |   |      |   |         |          |  |   |          |   |  |  |       |  
|Base management fee                                        |  |                                      | 1,538  |   |      |   | 1,365   |          |  |   | 173      |   |  |  | 12.7  |  
|Incentive fee                                              |  |                                      | 1,304  |   |      |   | 1,102   |          |  |   | 202      |   |  |  | 18.3  |  
|Administration fee                                         |  |                                      | 209    |   |      |   | 175     |          |  |   | 34       |   |  |  | 19.4  |  
|Interest expense                                           |  |                                      | 999    |   |      |   | 478     |          |  |   | 521      |   |  |  | 109.0 |  
|Dividend expense on mandatorily redeemable preferred stock |  |                                      | 686    |   |      |   |        |          |  |   | 686      |   |  |  | NM    |  
|Amortization of deferred financing fees                    |  |                                      | 277    |   |      |   | 368     |          |  |   | (91      | ) |  |  | (24.7 | )
|Professional fees                                          |  |                                      | 362    |   |      |   | 201     |          |  |   | 161      |   |  |  | 80.1  |  
|Other general and administrative expenses                  |  |                                      | 528    |   |      |   | 383     |          |  |   | 145      |   |  |  | 37.9  |  
|                                                           |  |                                      |        |   |      |   |         |          |  |   |          |   |  |  |       |  
|Expenses before credits from Adviser                       |  |                                      | 5,903  |   |      |   | 4,072   |          |  |   | 1,831    |   |  |  | 45.0  |  
|Credits to fees from Adviser                               |  |                                      | (123   | ) |      |   | (102    | )        |  |   | (21      | ) |  |  | (20.6 | )
|                                                           |  |                                      |        |   |      |   |         |          |  |   |          |   |  |  |       |  
|Total expenses net of credits                              |  |                                      | 5,780  |   |      |   | 3,970   |          |  |   | 1,810    |   |  |  | 45.6  |  
|                                                           |  |                                      |        |   |      |   |         |          |  |   |          |   |  |  |       |  
|                                                           |  |                                      |        |  
|NET INVESTMENT INCOME                                      |  |                                      | 5,216  |   |      |   | 4,428   |          |  |   | 788      |   |  |  | 17.8  |  
|                                                           |  |                                      |        |   |      |   |         |          |  |   |          |   |  |  |       |  
|                                                           |  |                                      |        |  
|REALIZED AND UNREALIZED GAIN (LOSS):                       |  |                                      |        |   |      |   |         |          |  |   |          |   |  |  |       |  
|Net realized gain on investments                           |  |                                      | 37     |   |      |   | 5       |          |  |   | 32       |   |  |  | 640.0 |  
|Net unrealized depreciation of investments                 |  |                                      | (7,169 | ) |      |   | (13,069 | )        |  |   | 5,900    |   |  |  | 45.1  |  
|Net unrealized depreciation of borrowings                  |  |                                      | 313    |   |      |   | 255     |          |  |   | 58       |   |  |  | 22.7  |  
|                                                           |  |                                      |        |   |      |   |         |          |  |   |          |   |  |  |       |  
|Net loss from investments and borrowings                   |  |                                      | (6,819 | ) |      |   | (12,809 | )        |  |   | 5,990    |   |  |  | 46.8  |  
|                                                           |  |                                      |        |   |      |   |         |          |  |   |          |   |  |  |       |  
|                                                           |  |                                      |        |  
|NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS       |  | $                                    | (1,603 | ) |      | $ | (8,381  | )        |  | $ | 6,778    |   |  |  | 80.9  | %
|                                                           |  |                                      |        |   |      |   |         |          |  |   |          |   |  |  |       |  

NM = Not Meaningful

Investment Income

Interest income from our investments in debt securities increased for
the three months ended March 31, 2012 by 22.8%, as compared to the three months ended March 31, 2011, for several reasons, but primarily due to the increased investment activity during the second half of fiscal year 2011, partially offset
by a decline in our weighted average yield when comparing the quarter ended March 31, 2012 to the prior year quarter. The increase in investment activity was primarily in syndicated investments, which increased from 12 investments as of
March 31, 2011, to 24 investments as of March 31, 2012. The level of interest income from investments is directly related to the principal balance of the interest-bearing investment portfolio outstanding during the period multiplied by the
weighted average yield. The weighted average principal balance of our interest-bearing investment portfolio during the quarter ended March 31, 2012 was $325.6 million, compared to $256.9 million for the prior year quarter. The annualized
weighted average yield on our interest-bearing investment portfolio for the three months ended March 31, 2012 was 11.0%, compared to 11.3% for the prior year period. The weighted average yield varies from period to period based on the current
stated interest rate on interest-bearing investments. The decrease in the weighted average yield on our portfolio for the quarter ended March 31, 2012 resulted primarily from the purchase of syndicated loans, which generally bear lower interest
rates than our existing proprietary debt investments and the restructuring of our debt investments in certain of our portfolio companies to lower interest rates. During the three months ended March 31, 2012, eight portfolio companies were
either fully or partially on



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non-accrual, for an aggregate of $43.8 million at cost, or 12.1% of the aggregate cost of our debt investment portfolio, and during the prior year period, six portfolio companies were on
non-accrual, for an aggregate of $30.4 million at cost, or 9.9% of the aggregate cost of our debt investment portfolio.

Other income for the
three months ended March 31, 2012 consisted primarily of $1.1 million in success fees from the early payoff of GMT and $0.9 million in success fees from the early payoff of RCS. During the three months ended March 31, 2011, we received
$0.6 million in a settlement related, in part, to US Healthcare Communications, Inc. (US Healthcare) and $0.5 million in success fees earned from our exit in Pinnacle Treatment Centers, Inc. (Pinnacle).

The following tables list the investment income from investments in our five largest portfolio company investments at fair value during the respective
periods:



|                                          |  |                      |         |  |                                   |  |       |                  |  |   |                     |  |  |  |       |  
|----------------------------------------- |  | -------------------- | ------- |  | --------------------------------- |  | ----- | ---------------- |  | - | ------------------- |  |  |  | ----- | -
|                                          |  | As of March 31, 2012 |         |  | Three Months Ended March 31, 2012 | 
|Company                                   |  | Fair Value           |         |  | % of Portfolio                    |  |       | InvestmentIncome |  |   | % of Total Revenues | 
|Reliable Biopharmaceutical Holdings, Inc. |  | $                    | 27,392  |  |                                   |  | 9.5   | %                |  | $ | 801                 |  |  |  | 7.3   | %
|Westlake Hardware, Inc.                   |  |                      | 19,340  |  |                                   |  | 6.7   |                  |  |   | 645                 |  |  |  | 5.9   |  
|Midwest Metal Distribution, Inc.          |  |                      | 17,870  |  |                                   |  | 6.2   |                  |  |   | 559                 |  |  |  | 5.1   |  
|Defiance Integrated Technologies, Inc.    |  |                      | 16,041  |  |                                   |  | 5.6   |                  |  |   | 204                 |  |  |  | 1.8   |  
|CMI Acquisition, LLC                      |  |                      | 14,194  |  |                                   |  | 4.9   |                  |  |   | 507                 |  |  |  | 4.6   |  
|                                          |  |                      |         |  |                                   |  |       |                  |  |   |                     |  |  |  |       |  
|Subtotalfive largest investments         |  |                      | 94,837  |  |                                   |  | 32.9  |                  |  |   | 2,716               |  |  |  | 24.7  |  
|Other portfolio companies                 |  |                      | 193,330 |  |                                   |  | 67.1  |                  |  |   | 8,217               |  |  |  | 74.7  |  
|Other non-portfolio company revenue       |  |                      |        |  |                                   |  |      |                  |  |   | 63                  |  |  |  | 0.6   |  
|                                          |  |                      |         |  |                                   |  |       |                  |  |   |                     |  |  |  |       |  
|Total investment portfolio                |  | $                    | 288,167 |  |                                   |  | 100.0 | %                |  | $ | 10,996              |  |  |  | 100.0 | %
|                                          |  |                      |         |  |                                   |  |       |                  |  |   |                     |  |  |  |       |  



|                                          |  |                      |         |  |                                   |  |       |                  |  |   |                     |  |  |  |       |  
|----------------------------------------- |  | -------------------- | ------- |  | --------------------------------- |  | ----- | ---------------- |  | - | ------------------- |  |  |  | ----- | -
|                                          |  | As of March 31, 2011 |         |  | Three Months Ended March 31, 2011 | 
|Company                                   |  | Fair Value           |         |  | % of Portfolio                    |  |       | InvestmentIncome |  |   | % of Total Revenues | 
|Reliable Biopharmaceutical Holdings, Inc. |  | $                    | 25,699  |  |                                   |  | 10.0  | %                |  | $ | 770                 |  |  |  | 9.2   | %
|Westlake Hardware, Inc.                   |  |                      | 19,570  |  |                                   |  | 7.6   |                  |  |   | 638                 |  |  |  | 7.6   |  
|Midwest Metal Distribution, Inc.          |  |                      | 16,179  |  |                                   |  | 6.3   |                  |  |   | 553                 |  |  |  | 6.6   |  
|Defiance Integrated Technologies, Inc.    |  |                      | 13,680  |  |                                   |  | 5.3   |                  |  |   | 225                 |  |  |  | 2.7   |  
|Sunshine Media Holdings                   |  |                      | 13,161  |  |                                   |  | 5.1   |                  |  |   | 637                 |  |  |  | 7.6   |  
|                                          |  |                      |         |  |                                   |  |       |                  |  |   |                     |  |  |  |       |  
|Subtotalfive largest investments         |  |                      | 88,289  |  |                                   |  | 34.3  |                  |  |   | 2,823               |  |  |  | 33.7  |  
|Other portfolio companies                 |  |                      | 168,824 |  |                                   |  | 65.7  |                  |  |   | 5,453               |  |  |  | 64.9  |  
|Other non-portfolio company revenue       |  |                      |        |  |                                   |  |      |                  |  |   | 122                 |  |  |  | 1.4   |  
|                                          |  |                      |         |  |                                   |  |       |                  |  |   |                     |  |  |  |       |  
|Total investment portfolio                |  | $                    | 257,113 |  |                                   |  | 100.0 | %                |  | $ | 8,398               |  |  |  | 100.0 | %
|                                          |  |                      |         |  |                                   |  |       |                  |  |   |                     |  |  |  |       |  

Operating Expenses

Operating expenses, net of credits to fees from the Adviser, increased for the three months ended March 31, 2012 by 45.6%, as compared to the prior year period. This increase was primarily due to an
increase in interest expense on our Credit Facility and the distributions on our Term Preferred Stock during the quarter ended March 31, 2012.

Interest expense increased for the three months ended March 31, 2012, as compared to the prior year period, primarily due to increased borrowings under our Credit Facility to facilitate our increased
investment activity during the three months ended March 31, 2012, as compared to the prior year period. The weighted average balance outstanding on our Credit Facility during the quarter ended March 31, 2012 was approximately $62.0
million, as compared to $14.5 million in the prior year period, an increase of 328.8%.

During the three months ended March 31, 2012, we
paid $0.7 million of dividends on our Term Preferred Stock. We classify these dividends as dividend expense on our Condensed Consolidated Statements of Operations. There were no preferred stock dividends paid in the three months ended
March 31, 2011, as our Term Preferred Stock offering occurred in November 2011.

The base management fee increased for the three months
ended March 31, 2012, as compared to the prior year period, primarily due to the greater amount of total assets subject to the base management fee that we held, resulting from a net increase in investment production. An incentive fee was earned
by the Adviser during the three months ended March 31, 2012, due primarily to increased investment income.



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The base management and incentive fees are computed quarterly, as described under Investment
Advisory and Management Agreement in Note 4 of the notes to our accompanying Condensed Consolidated Financial Statements and are summarized in the following table:



|                                                                                                             |  |                              |         |   |      |   |         |  
|------------------------------------------------------------------------------------------------------------ |  | ---------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                             |  | Three Months Ended March 31, |        
|                                                                                                             |  | 2012                         |         |   | 2011 |  
|Average total assets subject to base management fee(A)                                                       |  | $                            | 307,600 |   |      | $ | 273,000 |  
|Multiplied by prorated annual base management fee of 2.0%                                                    |  |                              | 0.5     | % |      |   | 0.5     | %
|                                                                                                             |  |                              |         |   |      |   |         |  
|Gross base management fee(B)                                                                                 |  | $                            | 1,538   |   |      | $ | 1,365   |  
|Reduction for loan servicing fees                                                                            |  |                              | (864    | ) |      |   | (757    | )
|                                                                                                             |  |                              |         |   |      |   |         |  
|Base management fee                                                                                          |  |                              | 674     |   |      |   | 608     |  
|                                                                                                             |  |                             
|Credit for fees received by Adviser from the portfolio companies                                             |  |                              | (5      | ) |      |   |        |  
|Fee reduction for the voluntary, irrevocable waiver of 2.0% fee on senior syndicated loans to 0.5% per annum |  |                              | (118    | ) |      |   | (81     | )
|                                                                                                             |  |                              |         |   |      |   |         |  
|Net base management fee                                                                                      |  | $                            | 551     |   |      | $ | 527     |  
|                                                                                                             |  |                              |         |   |      |   |         |  
|                                                                                                             |  |                             
|Incentive fee(B)                                                                                             |  |                              | 1,304   |   |      |   | 1,102   |  
|Credit from voluntary, irrevocable waiver issued by Advisers board of directors                             |  |                              |        |   |      |   | (21     | )
|                                                                                                             |  |                              |         |   |      |   |         |  
|Net incentive fee                                                                                            |  | $                            | 1,304   |   |      | $ | 1,081   |  
|                                                                                                             |  |                              |         |   |      |   |         |  
|                                                                                                             |  |                             
|Credit for fees received by Adviser from the portfolio companies                                             |  |                              | (5      | ) |      |   |        |  
|Fee reduction for the voluntary, irrevocable waiver of 2.0% fee on senior syndicated loans to 0.5% per annum |  |                              | (118    | ) |      |   | (81     | )
|Incentive fee credit                                                                                         |  |                              |        |   |      |   | (21     | )
|                                                                                                             |  |                              |         |   |      |   |         |  
|Credit to base management and incentive fees from Adviser(B)                                                 |  | $                            | (123    | ) |      | $ | (102    | )
|                                                                                                             |  |                              |         |   |      |   |         |  



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

|(B) | Reflected as a line item on our Condensed Consolidated Statements of Operations.
|--- | --------------------------------------------------------------------------------

Professional expenses increased for the three months ended March 31, 2012, as compared to the period year period, due to an increase in audit and
legal expenses.

Realized and Unrealized Gains (Losses) on Investments

Net Realized Gain

For the three months ended March 31, 2012, we recorded a realized
gain on investments of $37 primarily due to a realized gain from an unamortized discount on the early payoff of Ernest Health, Inc.. There were $5 in net realized gains for the three months ended March 31, 2011, primarily due to realized gains
from unamortized discounts on exits during the quarter, partially offset by realized losses in connection with workout expenditures on Sunshine.

Net Unrealized Depreciation

Net unrealized depreciation of investments is the net change
in the fair value of our investment portfolio during the reporting period, including the reversal of previously-recorded unrealized appreciation or depreciation when gains and losses are actually realized. During the quarter ended March 31,
2012, we recorded net unrealized depreciation of investments in the aggregate amount of $7.2 million. Over our entire portfolio, the net unrealized depreciation is comprised of approximately $6.6 million on our debt investments and approximately
$0.6 million on our equity investments for the three months ended March 31, 2012.

During the prior year period ended March 31,
2011, we recorded net unrealized depreciation of investments in the aggregate amount of $13.1 million. Over our entire portfolio, the net unrealized depreciation consisted of approximately $12.9 million on our debt investments and approximately $0.2
million on our equity investments for the three months ended March 31, 2011.



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The realized gains and unrealized appreciation (depreciation) across our investments for the three months
ended March 31, 2012 were as follows:



|                                                       |  |                                   |    |  |                                      |   |        |                                   |  |   |                |  |  |   |        |  
|------------------------------------------------------ |  | --------------------------------- | -- |  | ------------------------------------ | - | ------ | --------------------------------- |  | - | -------------- |  |  | - | ------ | -
|                                                       |  | Three Months Ended March 31, 2012 |   
|Portfolio Company                                      |  | Realized Gain                     |    |  | UnrealizedAppreciation(Depreciation) |   |        | Reversal ofUnrealizedDepreciation |  |   | Net Gain(Loss) | 
|Legend Communications of Wyoming, LLC                  |  | $                                 |   |  |                                      | $ | 320    |                                   |  | $ | 110            |  |  | $ | 430    |  
|North American Aircraft Services, LLC                  |  |                                   |   |  |                                      |   | 329    |                                   |  |   |               |  |  |   | 329    |  
|RCS Management Holding Co.                             |  |                                   |   |  |                                      |   |       |                                   |  |   | 306            |  |  |   | 306    |  
|WP Evenflo Group Holdings, Inc.                        |  |                                   |   |  |                                      |   | 299    |                                   |  |   |               |  |  |   | 299    |  
|International Junior Golf Training Acquisition Company |  |                                   |   |  |                                      |   | (408   | )                                 |  |   |               |  |  |   | (408   | )
|LocalTel, LLC                                          |  |                                   |   |  |                                      |   | (428   | )                                 |  |   |               |  |  |   | (428   | )
|Precision Acquisition Group Holdings, Inc.             |  |                                   |   |  |                                      |   | (482   | )                                 |  |   |               |  |  |   | (482   | )
|Viapack, Inc.                                          |  |                                   |   |  |                                      |   | (522   | )                                 |  |   |               |  |  |   | (522   | )
|Lindmark Acquisition, LLC                              |  |                                   |   |  |                                      |   | (556   | )                                 |  |   |               |  |  |   | (556   | )
|Saunders & Associates                                  |  |                                   |   |  |                                      |   | (816   | )                                 |  |   |               |  |  |   | (816   | )
|Sunburst Media  Louisiana, LLC                        |  |                                   |   |  |                                      |   | (900   | )                                 |  |   |               |  |  |   | (900   | )
|BAS Broadcasting                                       |  |                                   |   |  |                                      |   | (1,120 | )                                 |  |   |               |  |  |   | (1,120 | )
|GFRC Holdings, LLC                                     |  |                                   |   |  |                                      |   | (1,157 | )                                 |  |   |               |  |  |   | (1,157 | )
|Sunshine Media Holdings                                |  |                                   |   |  |                                      |   | (2,379 | )                                 |  |   |               |  |  |   | (2,379 | )
|Other, net (<$250)                                     |  |                                   | 37 |  |                                      |   | 193    |                                   |  |   | 42             |  |  |   | 272    |  
|                                                       |  |                                   |    |  |                                      |   |        |                                   |  |   |                |  |  |   |        |  
|Total:                                                 |  | $                                 | 37 |  |                                      | $ | (7,627 | )                                 |  | $ | 458            |  |  | $ | (7,132 | )
|                                                       |  |                                   |    |  |                                      |   |        |                                   |  |   |                |  |  |   |        |  

The largest drivers of our net unrealized depreciation for the three months ended March 31, 2012, were the
unrealized depreciation on Sunshine of $2.4 million, GFRC Holdings, LLC of $1.2 million and BAS Broadcasting of $1.1 million, which were all due to a continued decline in these portfolio companies financial and operational performance.

The realized (losses) gains and net unrealized appreciation (depreciation) across our investments for the three months ended March 31,
2011, were as follows:



|                                                                |  |                                   |      |   |                                          |   |         |                                                 |  |   |                 |   |  |   |         |  
|--------------------------------------------------------------- |  | --------------------------------- | ---- | - | ---------------------------------------- | - | ------- | ----------------------------------------------- |  | - | --------------- | - |  | - | ------- | -
|                                                                |  | Three Months Ended March 31, 2011 |     
|Portfolio Company                                               |  | Realized(Loss)Gain                |      |   | Net UnrealizedAppreciation(Depreciation) |   |         | Reversal ofUnrealizedDepreciation(Appreciation) |  |   | Net Gain (Loss) |  
|Defiance Integrated Technologies, Inc.                          |  | $                                 |     |   |                                          | $ | 1,003   |                                                 |  | $ |                |   |  | $ | 1,003   |  
|Midwest Metal Distribution, Inc.                                |  |                                   |     |   |                                          |   | 364     |                                                 |  |   |                |   |  |   | 364     |  
|Kansas Cable Holdings, Inc. (formerly known as SCI Cable, Inc.) |  |                                   |     |   |                                          |   | (316    | )                                               |  |   |                |   |  |   | (316    | )
|Reliable Biopharmaceutical Holdings, Inc.                       |  |                                   |     |   |                                          |   | (346    | )                                               |  |   | 6               |   |  |   | (340    | )
|LocalTel, LLC                                                   |  |                                   |     |   |                                          |   | (361    | )                                               |  |   |                |   |  |   | (361    | )
|International Junior Golf Training Acquisition Company          |  |                                   |     |   |                                          |   | (408    | )                                               |  |   |                |   |  |   | (408    | )
|Legend Communications of Wyoming, LLC                           |  |                                   |     |   |                                          |   | (434    | )                                               |  |   |                |   |  |   | (434    | )
|Heartland Communications Group                                  |  |                                   |     |   |                                          |   | (598    | )                                               |  |   |                |   |  |   | (598    | )
|GFRC Holdings, LLC                                              |  |                                   |     |   |                                          |   | (810    | )                                               |  |   |                |   |  |   | (810    | )
|Lindmark Acquisition, LLC                                       |  |                                   |     |   |                                          |   | (1,410  | )                                               |  |   |                |   |  |   | (1,410  | )
|Sunshine Media Holdings                                         |  |                                   | (156 | ) |                                          |   | (9,790  | )                                               |  |   |                |   |  |   | (9,946  | )
|Other, net (<$250)                                              |  |                                   | 161  |   |                                          |   | 247     |                                                 |  |   | (216            | ) |  |   | 192     |  
|                                                                |  |                                   |      |   |                                          |   |         |                                                 |  |   |                 |   |  |   |         |  
|Total:                                                          |  | $                                 | 5    |   |                                          | $ | (12,859 | )                                               |  | $ | (210            | ) |  | $ | (13,064 | )
|                                                                |  |                                   |      |   |                                          |   |         |                                                 |  |   |                 |   |  |   |         |  

The primary driver in our net unrealized depreciation for the quarter ended March 31, 2011, was the notable
depreciation in Sunshine of $9.8 million, which was primarily due to diminished portfolio company financial and operational performance and the restructure. During the quarter ended March 31, 2011, as part of the Sunshine restructure, we
acquired a controlling equity position, restructured certain of the debt terms, and infused additional equity capital in the form of preferred equity.

At March 31, 2012, the fair value of our investment portfolio was less than its cost basis by approximately $84.8 million, and our entire investment portfolio was valued at 77.3% of cost, as compared
to cumulative net unrealized depreciation of $77.6 million and a valuation of our entire portfolio at 79.1% of cost at December 31, 2011. This represents net unrealized depreciation of $7.2 million for the three months ended March 31,
2012.



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We believe that our aggregate investment portfolio was valued at a depreciated value as of March 31,
2012, due primarily to the general instability of the loan markets and lingering effects of the recent recession on the performances of certain of our portfolio companies. The cumulative net unrealized depreciation of our investments does not have
an impact on our current ability to pay distributions to stockholders; however, it may be an indication of future realized losses, which could ultimately reduce our income available for distribution to common stockholders.

Net Unrealized Depreciation of Borrowings

Net unrealized depreciation of borrowings is the net change in the fair value of our Credit Facility during the reporting period, including the reversal
of previously recorded unrealized appreciation or depreciation when gains and losses are realized. As the renewal of the Credit Facility occurred during the three months ended March 31, 2012, cost was determined to approximate fair value; thus
the cumulative net unrealized appreciation of our Credit Facility of $0.3 million as of December 31, 2011 was reversed during the quarter ended March 31, 2012. The Credit Facility was fair valued at $65.8 million and $100.0 million as of
March 31, 2012 and September 30, 2011, respectively.

Net Decrease in Net Assets Resulting from Operations

For the three months ended March 31, 2012, we realized a net decrease in net assets resulting from operations of $1.6 million as a result of the
factors discussed above. For the three months ended March 31, 2011, we realized a net decrease in net assets resulting from operations of $8.4 million. Our net decrease in net assets resulting from operations per basic and diluted weighted
average common share for the three months ended March 31, 2012 and 2011 were $0.08 and $0.40, respectively.

Comparison of the Six
Months Ended March 31, 2012, to the Six Months Ended March 31, 2011



|                                                           |  |                                    |         |   |      |   |         |          |  |   |          |   |  |  |        |  
|---------------------------------------------------------- |  | ---------------------------------- | ------- | - | ---- | - | ------- | -------- |  | - | -------- | - |  |  | ------ | -
|                                                           |  | For the Six Months Ended March 31, |        
|                                                           |  | 2012                               |         |   | 2011 |   |         | $ Change |  |   | % Change |  
|INVESTMENT INCOME                                          |  |                                    |         |   |      |   |         |          |  |   |          |   |  |  |        |  
|Interest income                                            |  | $                                  | 18,275  |   |      | $ | 15,135  |          |  | $ | 3,140    |   |  |  | 20.7   | %
|Other income                                               |  |                                    | 2,042   |   |      |   | 1,270   |          |  |   | 772      |   |  |  | 60.8   |  
|                                                           |  |                                    |         |   |      |   |         |          |  |   |          |   |  |  |        |  
|Total investment income                                    |  |                                    | 20,317  |   |      |   | 16,405  |          |  |   | 3,912    |   |  |  | 23.8   |  
|                                                           |  |                                    |         |   |      |   |         |          |  |   |          |   |  |  |        |  
|                                                           |  |                                    |         |  
|EXPENSES                                                   |  |                                    |         |   |      |   |         |          |  |   |          |   |  |  |        |  
|Base management fee                                        |  |                                    | 3,094   |   |      |   | 2,712   |          |  |   | 382      |   |  |  | 14.1   |  
|Incentive fee                                              |  |                                    | 2,339   |   |      |   | 2,261   |          |  |   | 78       |   |  |  | 3.4    |  
|Administration fee                                         |  |                                    | 404     |   |      |   | 361     |          |  |   | 43       |   |  |  | 11.9   |  
|Interest expense                                           |  |                                    | 2,138   |   |      |   | 358     |          |  |   | 1,780    |   |  |  | 497.2  |  
|Dividend expense on mandatorily redeemable preferred stock |  |                                    | 1,120   |   |      |   |        |          |  |   | 1,120    |   |  |  | NM     |  
|Amortization of deferred financing fees                    |  |                                    | 734     |   |      |   | 664     |          |  |   | 70       |   |  |  | 10.5   |  
|Professional fees                                          |  |                                    | 655     |   |      |   | 534     |          |  |   | 121      |   |  |  | 22.7   |  
|Other general and administrative expenses                  |  |                                    | 773     |   |      |   | 603     |          |  |   | 170      |   |  |  | 28.2   |  
|                                                           |  |                                    |         |   |      |   |         |          |  |   |          |   |  |  |        |  
|Expenses before credits from Adviser                       |  |                                    | 11,257  |   |      |   | 7,493   |          |  |   | 3,764    |   |  |  | 50.2   |  
|Credits to fees from Adviser                               |  |                                    | (574    | ) |      |   | (154    | )        |  |   | (420     | ) |  |  | (272.7 | )
|                                                           |  |                                    |         |   |      |   |         |          |  |   |          |   |  |  |        |  
|Total expenses net of credits                              |  |                                    | 10,683  |   |      |   | 7,339   |          |  |   | 3,344    |   |  |  | 45.6   |  
|                                                           |  |                                    |         |   |      |   |         |          |  |   |          |   |  |  |        |  
|                                                           |  |                                    |         |  
|NET INVESTMENT INCOME                                      |  |                                    | 9,634   |   |      |   | 9,066   |          |  |   | 568      |   |  |  | 6.3    |  
|                                                           |  |                                    |         |   |      |   |         |          |  |   |          |   |  |  |        |  
|                                                           |  |                                    |         |  
|REALIZED AND UNREALIZED (LOSS) GAIN:                       |  |                                    |         |   |      |   |         |          |  |   |          |   |  |  |        |  
|Net realized (loss) gain on investments                    |  |                                    | (8,212  | ) |      |   | 5       |          |  |   | (8,217   | ) |  |  | NM     |  
|Net unrealized depreciation of investments                 |  |                                    | (4,926  | ) |      |   | (16,014 | )        |  |   | 11,088   |   |  |  | 69.2   |  
|Net unrealized depreciation of borrowings                  |  |                                    | 612     |   |      |   | 693     |          |  |   | (81      | ) |  |  | (11.7  | )
|                                                           |  |                                    |         |   |      |   |         |          |  |   |          |   |  |  |        |  
|Net loss from investments and borrowings                   |  |                                    | (12,526 | ) |      |   | (15,316 | )        |  |   | 2,790    |   |  |  | 18.2   |  
|                                                           |  |                                    |         |   |      |   |         |          |  |   |          |   |  |  |        |  
|                                                           |  |                                    |         |  
|NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS       |  | $                                  | (2,892  | ) |      | $ | (6,250  | )        |  | $ | 3,358    |   |  |  | 53.7   | %
|                                                           |  |                                    |         |   |      |   |         |          |  |   |          |   |  |  |        |  

NM = Not Meaningful

Investment Income

Interest income from our investments in debt securities increased for
the six months ended March 31, 2012 by 20.7%, as compared to the six months ended March 31, 2011, for several reasons, but primarily due to the increased investment activity during the second half of fiscal year 2011, partially offset by a
decline in our weighted average yield when comparing the six months ended March 31, 2012 to the prior year period. The increase in investment activity was primarily in the syndicated investments, which increased from 12 investments as of
March 31, 2011 to 24 investments as of March 31, 2012. The level of



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interest income from investments is directly related to the principal balance of the interest-bearing investment portfolio outstanding during the period multiplied by the weighted average yield.
The weighted average principal balance of our interest-bearing investment portfolio during the six months ended March 31, 2012 was $331.5 million, compared to $262.7 million for the prior year period. The annualized weighted average yield on
our interest-bearing investment portfolio for the six months ended March 31, 2012 was 10.9%, compared to 11.4% for the prior year period. The weighted average yield varies from period to period based on the current stated interest rate on
interest-bearing investments. The decrease in the weighted average yield on our portfolio for the six months ended March 31, 2012 resulted primarily from the restructuring of our debt investments in certain of our portfolio companies to lower
interest rates and additionally the purchase of syndicated loans, which generally bear lower interest rates than our existing proprietary debt investments. During the six months ended March 31, 2012, eight portfolio companies were either fully
or partially on non-accrual, for an aggregate of $43.8 million at cost, or 12.1% of the aggregate cost of our debt investment portfolio, and during the prior year period, six investments were on non-accrual, for an aggregate of $30.4 million at
cost, or 9.9% of the aggregate cost of our debt investment portfolio.

Other income for the six months ended March 31, 2012 consisted
primarily of $1.1 million in success fees from the early payoff of GMT and $0.9 million in success fees from the early payoff of RCS. During the six months ended March 31, 2011, we received $0.6 million in a settlement related, in part, to U.S.
Healthcare and success fees in aggregate of $0.6 million earned from our exits in Pinnacle and Interfilm Holdings, Inc. (Interfilm).

The following tables list the investment income from investments in our five largest portfolio company investments at fair value during the respective periods:



|                                          |  |                      |         |  |                                 |  |       |                  |  |   |                     |  |  |  |       |  
|----------------------------------------- |  | -------------------- | ------- |  | ------------------------------- |  | ----- | ---------------- |  | - | ------------------- |  |  |  | ----- | -
|                                          |  | As of March 31, 2012 |         |  | Six Months Ended March 31, 2012 | 
|Company                                   |  | Fair Value           |         |  | % of Portfolio                  |  |       | InvestmentIncome |  |   | % of Total Revenues | 
|Reliable Biopharmaceutical Holdings, Inc. |  | $                    | 27,392  |  |                                 |  | 9.5   | %                |  | $ | 1,586               |  |  |  | 7.8   | %
|Westlake Hardware, Inc.                   |  |                      | 19,340  |  |                                 |  | 6.7   |                  |  |   | 1,296               |  |  |  | 6.4   |  
|Midwest Metal Distribution, Inc.          |  |                      | 17,870  |  |                                 |  | 6.2   |                  |  |   | 1,124               |  |  |  | 5.5   |  
|Defiance Integrated Technologies, Inc.    |  |                      | 16,041  |  |                                 |  | 5.6   |                  |  |   | 413                 |  |  |  | 2.0   |  
|CMI Acquisition, LLC                      |  |                      | 14,194  |  |                                 |  | 4.9   |                  |  |   | 1,000               |  |  |  | 4.9   |  
|                                          |  |                      |         |  |                                 |  |       |                  |  |   |                     |  |  |  |       |  
|Subtotalfive largest investments         |  |                      | 94,837  |  |                                 |  | 32.9  |                  |  |   | 5,419               |  |  |  | 26.6  |  
|Other portfolio companies                 |  |                      | 193,330 |  |                                 |  | 67.1  |                  |  |   | 14,762              |  |  |  | 72.7  |  
|Other non-portfolio company revenue       |  |                      |        |  |                                 |  |      |                  |  |   | 136                 |  |  |  | 0.7   |  
|                                          |  |                      |         |  |                                 |  |       |                  |  |   |                     |  |  |  |       |  
|Total investment portfolio                |  | $                    | 288,167 |  |                                 |  | 100.0 | %                |  | $ | 20,317              |  |  |  | 100.0 | %
|                                          |  |                      |         |  |                                 |  |       |                  |  |   |                     |  |  |  |       |  



|                                          |  |                      |         |  |                                 |  |       |                  |  |   |                     |  |  |  |       |  
|----------------------------------------- |  | -------------------- | ------- |  | ------------------------------- |  | ----- | ---------------- |  | - | ------------------- |  |  |  | ----- | -
|                                          |  | As of March 31, 2011 |         |  | Six Months Ended March 31, 2011 | 
|Company                                   |  | Fair Value           |         |  | % of Portfolio                  |  |       | InvestmentIncome |  |   | % of Total Revenues | 
|Reliable Biopharmaceutical Holdings, Inc. |  | $                    | 25,699  |  |                                 |  | 10.0  | %                |  | $ | 1,524               |  |  |  | 9.3   | %
|Westlake Hardware, Inc.                   |  |                      | 19,570  |  |                                 |  | 7.6   |                  |  |   | 1,289               |  |  |  | 7.8   |  
|Midwest Metal Distribution, Inc.          |  |                      | 16,179  |  |                                 |  | 6.3   |                  |  |   | 1,118               |  |  |  | 6.8   |  
|Defiance Integrated Technologies, Inc.    |  |                      | 13,680  |  |                                 |  | 5.3   |                  |  |   | 457                 |  |  |  | 2.8   |  
|Sunshine Media Holdings                   |  |                      | 13,161  |  |                                 |  | 5.1   |                  |  |   | 1,509               |  |  |  | 9.2   |  
|                                          |  |                      |         |  |                                 |  |       |                  |  |   |                     |  |  |  |       |  
|Subtotalfive largest investments         |  |                      | 88,289  |  |                                 |  | 34.3  |                  |  |   | 5,897               |  |  |  | 35.9  |  
|Other portfolio companies                 |  |                      | 168,824 |  |                                 |  | 65.7  |                  |  |   | 10,264              |  |  |  | 62.6  |  
|Other non-portfolio company revenue       |  |                      |        |  |                                 |  |      |                  |  |   | 244                 |  |  |  | 1.5   |  
|                                          |  |                      |         |  |                                 |  |       |                  |  |   |                     |  |  |  |       |  
|Total investment portfolio                |  | $                    | 257,113 |  |                                 |  | 100.0 | %                |  | $ | 16,405              |  |  |  | 100.0 | %
|                                          |  |                      |         |  |                                 |  |       |                  |  |   |                     |  |  |  |       |  

Operating Expenses

Operating expenses, net of credits to fees from the Adviser, increased for the six months ended March 31, 2012 by 45.6%, as compared to the prior year period. This increase was primarily due to an
increase in interest expense on our Credit Facility and the distributions on our Term Preferred Stock for the six months ended March 31, 2012.

Interest expense increased for the six months ended March 31, 2012, as compared to the prior year period, due primarily to increased borrowings under our Credit Facility to facilitate the increased
investment activity during the six months ended March 31, 2012, as compared to the prior year period. The weighted average balance outstanding on our Credit Facility during the six months ended March 31, 2012 was approximately $68.2
million, as compared to $17.2 million in the prior year period, an increase of 296.5%.



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During the six months ended March 31, 2012, we paid $1.1 million of dividends on our Term Preferred
Stock. We classify these dividends as dividend expense on our Condensed Consolidated Statements of Operations. There were no preferred stock dividends paid in the six months ended March 31, 2011, as our Term Preferred Stock offering
occurred in November 2011.

The base management fee increased for the six months ended March 31, 2012, as compared to the prior year
period, primarily due to the greater amount of total assets subject to the base management fee that we held resulting from a net increase in investment production. Due to increased syndicated loan holdings, there was an increase in the fee reduction
for the voluntary, irrevocable waiver of the 2.0% fee on senior syndicated loans to 0.5% per annum, when compared to the prior year period. An incentive fee of $2.3 million was earned by the Adviser during the six months ended March 31,
2012 and 2011, respectively. However, during the six month period ended March 31, 2012, the incentive fee was partially waived by the Adviser to ensure distributions to common stockholders are covered entirely by net investment income.

The base management and incentive fees are computed quarterly, as described under Investment Advisory and Management
Agreement in Note 4 of the notes to our accompanying Condensed Consolidated Financial Statements and are summarized in the following table:



|                                                                                                             |  |                            |         |   |      |   |         |  
|------------------------------------------------------------------------------------------------------------ |  | -------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                             |  | Six Months Ended March 31, |        
|                                                                                                             |  | 2012                       |         |   | 2011 |  
|Average total assets subject to base management fee(A)                                                       |  | $                          | 309,400 |   |      | $ | 271,200 |  
|Multiplied by prorated annual base management fee of 2.0%                                                    |  |                            | 1.0     | % |      |   | 1.0     | %
|                                                                                                             |  |                            |         |   |      |   |         |  
|Gross base management fee(B)                                                                                 |  | $                          | 3,094   |   |      | $ | 2,712   |  
|Reduction for loan servicing fees                                                                            |  |                            | (1,823  | ) |      |   | (1,599  | )
|                                                                                                             |  |                            |         |   |      |   |         |  
|Base management fee                                                                                          |  |                            | 1,271   |   |      |   | 1,113   |  
|                                                                                                             |  |                           
|Credit for fees received by Adviser from the portfolio companies                                             |  |                            | (53     | ) |      |   |        |  
|Fee reduction for the voluntary, irrevocable waiver of 2.0% fee on senior syndicated loans to 0.5% per annum |  |                            | (243    | ) |      |   | (133    | )
|                                                                                                             |  |                            |         |   |      |   |         |  
|Net base management fee                                                                                      |  | $                          | 975     |   |      | $ | 980     |  
|                                                                                                             |  |                            |         |   |      |   |         |  
|                                                                                                             |  |                           
|Incentive fee(B)                                                                                             |  |                            | 2,339   |   |      |   | 2,261   |  
|Credit from voluntary, irrevocable waiver issued by Advisers board of directors                             |  |                            | (278    | ) |      |   | (21     | )
|                                                                                                             |  |                            |         |   |      |   |         |  
|Net incentive fee                                                                                            |  | $                          | 2,061   |   |      | $ | 2,240   |  
|                                                                                                             |  |                            |         |   |      |   |         |  
|                                                                                                             |  |                           
|Credit for fees received by Adviser from the portfolio companies                                             |  |                            | (53     | ) |      |   |        |  
|Fee reduction for the voluntary, irrevocable waiver of 2.0% fee on senior syndicated loans to 0.5% per annum |  |                            | (243    | ) |      |   | (133    | )
|Incentive fee credit                                                                                         |  |                            | (278    | ) |      |   | (21     | )
|                                                                                                             |  |                            |         |   |      |   |         |  
|Credit to base management and incentive fees from Adviser (B)                                                |  | $                          | (574    | ) |      | $ | (154    | )
|                                                                                                             |  |                            |         |   |      |   |         |  



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

|(B) | Reflected as a line item on our Condensed Consolidated Statements of Operations.
|--- | --------------------------------------------------------------------------------

Realized and Unrealized Gains (Losses) on Investments

Net Realized (Loss) Gain

For the six months ended March 31, 2012, we recorded a net
realized loss on investments of $8.2 million, which primarily consisted of a realized loss of $1.0 million due to the restructure of KMBQ and a realized loss of $7.4 million related to the sale of Newhall, partially offset by $0.2 million of
realized gains upon our receipt of escrowed proceeds in connection with our exit in fiscal year 2010 of our investment in ACE Expeditors, Inc. There were $5 in net realized gains for the six months ended March 31, 2011 primarily due to realized
gains from unamortized discounts on exits during the quarter, partially offset by realized losses in connection with workout expenditures on Sunshine.



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Net Unrealized Depreciation

Net unrealized depreciation of investments is the net change in the fair value of our investment portfolio during the reporting period, including the reversal of previously-recorded unrealized
appreciation or depreciation when gains and losses are actually realized. During the six months ended March 31, 2012, we recorded net unrealized depreciation of investments in the aggregate amount of $4.9 million, which included the reversal of
$12.0 million in aggregate unrealized depreciation related to the sale of Newhall, payoff of Northern Contours and restructure of KMBQ. Excluding reversals, we had $16.9 million in net unrealized depreciation for the six months ended March 31,
2012. Excluding reversals of $12.0 million, over our entire investment portfolio, we recorded approximately $17.1 million of net unrealized depreciation on our debt investments, while recording approximately $0.2 million of net unrealized
appreciation on our equity investments for the six months ended March 31, 2012.

During the six months ended March 31, 2011, we
recorded net unrealized depreciation of investments in the aggregate amount of $16.0 million. Over our entire investment portfolio, we recorded approximately $18.5 million of net unrealized depreciation on our debt investments, while our equity
investments experienced net unrealized appreciation of approximately $0.2 million for the six months ended March 31, 2011.

The realized
(losses) gains and unrealized appreciation (depreciation) across our investments for the six months ended March 31, 2012 were as follows:



|                                                       |  |                                 |        |   |                                      |   |         |                                    |  |   |                |  |  |   |         |  
|------------------------------------------------------ |  | ------------------------------- | ------ | - | ------------------------------------ | - | ------- | ---------------------------------- |  | - | -------------- |  |  | - | ------- | -
|                                                       |  | Six Months Ended March 31, 2012 |       
|Portfolio Company                                      |  | Realized (Loss)Gain             |        |   | UnrealizedAppreciation(Depreciation) |   |         | Reversal 
ofUnrealizedDepreciation |  |   | Net Gain(Loss) | 
|Newhall Holdings, Inc.                                 |  | $                               | (7,356 | ) |                                      | $ |        |                                    |  | $ | 9,978          |  |  | $ | 2,622   |  
|Defiance Integrated Technologies, Inc.                 |  |                                 |       |   |                                      |   | 1,161   |                                    |  |   |               |  |  |   | 1,161   |  
|Midwest Metal Distribution, Inc.                       |  |                                 |       |   |                                      |   | 681     |                                    |  |   |               |  |  |   | 681     |  
|Northern Contours, Inc.                                |  |                                 |       |   |                                      |   |        |                                    |  |   | 444            |  |  |   | 444     |  
|Global Materials Technologies, Inc.                    |  |                                 |       |   |                                      |   | 422     |                                    |  |   |               |  |  |   | 422     |  
|WP Evenflo Group Holdings, Inc.                        |  |                                 |       |   |                                      |   | 345     |                                    |  |   |               |  |  |   | 345     |  
|Keypoint Government Solutions, Inc                     |  |                                 |       |   |                                      |   | 275     |                                    |  |   |               |  |  |   | 275     |  
|KMBQ Corporation                                       |  |                                 | (1,044 | ) |                                      |   |        |                                    |  |   | 1,135          |  |  |   | 91      |  
|Kansas Cable Holdings, Inc.                            |  |                                 |       |   |                                      |   | (417    | )                                  |  |   |               |  |  |   | (417    | )
|LocalTel, LLC                                          |  |                                 |       |   |                                      |   | (544    | )                                  |  |   |               |  |  |   | (544    | )
|Saunders & Associates                                  |  |                                 |       |   |                                      |   | (861    | )                                  |  |   |               |  |  |   | (861    | )
|Lindmark Acquisition, LLC                              |  |                                 |       |   |                                      |   | (974    | )                                  |  |   |               |  |  |   | (974    | )
|International Junior Golf Training Acquisition Company |  |                                 |       |   |                                      |   | (1,015  | )                                  |  |   |               |  |  |   | (1,015  | )
|Precision Acquisition Group Holdings, Inc.             |  |                                 |       |   |                                      |   | (1,033  | )                                  |  |   |               |  |  |   | (1,033  | )
|Sunburst Media  Louisiana, LLC                        |  |                                 |       |   |                                      |   | (1,462  | )                                  |  |   |               |  |  |   | (1,462  | )
|Viapack, Inc.                                          |  |                                 |       |   |                                      |   | (1,701  | )                                  |  |   |               |  |  |   | (1,701  | )
|BAS Broadcasting                                       |  |                                 |       |   |                                      |   | (2,128  | )                                  |  |   |               |  |  |   | (2,128  | )
|GFRC Holdings, LLC                                     |  |                                 |       |   |                                      |   | (3,408  | )                                  |  |   |               |  |  |   | (3,408  | )
|Sunshine Media Holdings                                |  |                                 |       |   |                                      |   | (6,394  | )                                  |  |   |               |  |  |   | (6,394  | )
|Other, net (<$250)                                     |  |                                 | 188    |   |                                      |   | 112     |                                    |  |   | 458            |  |  |   | 607     |  
|                                                       |  |                                 |        |   |                                      |   |         |                                    |  |   |                |  |  |   |         |  
|Total:                                                 |  | $                               | (8,212 | ) |                                      | $ | (16,941 | )                                  |  | $ | 12,015         |  |  | $ | (13,289 | )
|                                                       |  |                                 |        |   |                                      |   |         |                                    |  |   |                |  |  |   |         |  

The largest drivers of our net unrealized depreciation for the six months ended March 31, 2012, were the unrealized
depreciation in Sunshine of $6.4 million, GFRC Holdings, LLC of $3.4 million and BAS Broadcasting of $2.1 million, which were all due to a continued diminished portfolio company financial and operational performance.



44



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The realized (losses) gains and net unrealized appreciation (depreciation) across our investments for the
six months ended March 31, 2011, were as follows:



|                                                                |  |                                 |      |   |                                          |   |         |                                                 |  |   |                 |   |  |   |         |  
|--------------------------------------------------------------- |  | ------------------------------- | ---- | - | ---------------------------------------- | - | ------- | ----------------------------------------------- |  | - | --------------- | - |  | - | ------- | -
|                                                                |  | Six Months Ended March 31, 2011 |     
|Portfolio Company                                               |  | Realized(Loss)Gain              |      |   | Net UnrealizedAppreciation(Depreciation) |   |         | Reversal ofUnrealizedDepreciation(Appreciation) |  |   | Net Gain (Loss) |  
|Defiance Integrated Technologies, Inc.                          |  | $                               |     |   |                                          | $ | 3,972   |                                                 |  | $ |                |   |  | $ | 3,972   |  
|Puerto Rico Cable Acquisition Company, Inc.                     |  |                                 | (16  | ) |                                          |   |        |                                                 |  |   | 732             |   |  |   | 716     |  
|Midwest Metal Distribution, Inc.                                |  |                                 |     |   |                                          |   | 636     |                                                 |  |   |                |   |  |   | 636     |  
|WP Evenflo Group Holdings, Inc.                                 |  |                                 |     |   |                                          |   | 333     |                                                 |  |   |                |   |  |   | 333     |  
|Access Television Network, Inc.                                 |  |                                 |     |   |                                          |   | (305    | )                                               |  |   |                |   |  |   | (305    | )
|LocalTel, LLC                                                   |  |                                 |     |   |                                          |   | (374    | )                                               |  |   |                |   |  |   | (374    | )
|International Junior Golf Training Acquisition Company          |  |                                 |     |   |                                          |   | (479    | )                                               |  |   |                |   |  |   | (479    | )
|Kansas Cable Holdings, Inc. (formerly known as SCI Cable, Inc.) |  |                                 |     |   |                                          |   | (533    | )                                               |  |   |                |   |  |   | (533    | )
|Legend Communications of Wyoming LLC                            |  |                                 |     |   |                                          |   | (582    | )                                               |  |   |                |   |  |   | (582    | )
|Heartland Communications Group                                  |  |                                 |     |   |                                          |   | (654    | )                                               |  |   |                |   |  |   | (654    | )
|GFRC Holdings, LLC                                              |  |                                 |     |   |                                          |   | (1,216  | )                                               |  |   |                |   |  |   | (1,216  | )
|Lindmark Acquisition, LLC                                       |  |                                 |     |   |                                          |   | (2,461  | )                                               |  |   |                |   |  |   | (2,461  | )
|Sunshine Media Holdings                                         |  |                                 | (156 | ) |                                          |   | (15,240 | )                                               |  |   |                |   |  |   | (15,396 | )
|Other, net (<$250)                                              |  |                                 | 177  |   |                                          |   | 596     |                                                 |  |   | (439            | ) |  |   | 334     |  
|                                                                |  |                                 |      |   |                                          |   |         |                                                 |  |   |                 |   |  |   |         |  
|Total:                                                          |  | $                               | 5    |   |                                          | $ | (16,307 | )                                               |  | $ | 293             |   |  | $ | (16,009 | )
|                                                                |  |                                 |      |   |                                          |   |         |                                                 |  |   |                 |   |  |   |         |  

The primary driver of our net unrealized depreciation for the six months ended March 31, 2011, was the notable
depreciation in Sunshine, which was primarily due to continued diminished portfolio company financial and operational performance and the restructure. During the quarter ended March 31, 2011, as part of the Sunshine restructure, we acquired a
controlling equity position, restructured certain of the debt terms, and infused additional equity capital in the form of preferred equity.

At March 31, 2012, the fair value of our investment portfolio was less than its cost basis by approximately $84.8 million, and our entire investment
portfolio was valued at 77.3% of cost, as compared to cumulative net unrealized depreciation of $79.9 million, and a valuation of our entire portfolio at 79.1% of cost, at September 30, 2011, representing net unrealized depreciation of $4.9
million for the six months ended March 31, 2012.

We believe that our aggregate investment portfolio was valued at a depreciated value as
of March 31, 2012, due primarily to the general instability of the loan markets and lingering effects of the recent recession on the performances of certain of our portfolio companies. The cumulative net unrealized depreciation of our
investments does not have an impact on our current ability to pay distributions to stockholders; however, it may be an indication of future realized losses, which could ultimately reduce our income available for distribution to stockholders.

Net Unrealized Depreciation of Borrowings

Net unrealized depreciation of borrowings is the net change in the fair value of our Credit Facility during the reporting period, including the reversal of previously recorded unrealized appreciation or
depreciation when gains and losses are realized. As the renewal of our Credit Facility occurred during the three months ended March 31, 2012, cost was determined to approximate fair value; thus the cumulative net unrealized appreciation of our
Credit Facility of $0.3 million as of December 31, 2011 was reversed during the quarter ended March 31, 2012. The Credit Facility was fair valued at $65.8 million and $100.0 million as of March 31, 2012 and September 30, 2011,
respectively.

Net Decrease in Net Assets Resulting from Operations

For the six months ended March 31, 2012, we realized a net decrease in net assets resulting from operations of $2.9 million as a result of the factors discussed above. For the six months ended
March 31, 2011, we realized a net decrease in net assets resulting from operations of $6.3 million. Our net decrease in net assets resulting from operations per basic and diluted weighted average common share for the six months ended
March 31, 2012 and 2011 were $0.14 and $0.30, respectively.



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LIQUIDITY AND CAPITAL RESOURCES

Operating Activities

Net cash
provided by operating activities during the six months ended March 31, 2012 was $8.5 million, as compared to net cash used in operating activities of $6.7 million for the six months ended March 31, 2011. The increase was primarily due
to the decrease in purchases of investments and the increase in sales proceeds, which were offset by the decrease in principal payments in the six months ended March 31, 2012. Despite a net decrease in investment activity during the six months
ended March 31, 2012, our portfolio size is larger due to originations in the second half of fiscal year 2011, which increased our interest income during the six months ended March 31, 2012. The majority of cash from operating activities
is generated from the interest payments on debt securities that we receive from our portfolio companies. We utilize this cash to primarily fund new investments, interest payments on our Credit Facility, distributions to our stockholders,
management fees to our Adviser, and other operating expenses.

At March 31, 2012, we had investments in equity of, loans to, or syndicated
participations in, 55 private companies with an aggregate cost basis of approximately $373.0 million. At March 31, 2011, we had investments in equity of, loans to, or syndicated participations in, 45 private companies with an aggregate cost
basis of approximately $314.2 million.

The following table summarizes our total portfolio investment activity during the six months ended
March 31, 2012 and 2011 at fair value:



|                                                           |  |                            |         |   |      |   |         |  
|---------------------------------------------------------- |  | -------------------------- | ------- | - | ---- | - | ------- | -
|                                                           |  | Six Months EndedMarch 
31, |        
|                                                           |  | 2012                       |         |   | 2011 |  
|Beginning investment portfolio at fair value               |  | $                          | 302,947 |   |      | $ | 257,109 |  
|New investments                                            |  |                            | 10,090  |   |      |   | 44,203  |  
|Disbursements to existing portfolio companies              |  |                            | 19,519  |   |      |   | 8,220   |  
|Principal repayments (including repayment of PIK)          |  |                            | (24,760 | ) |      |   | (35,227 | )
|Proceeds from sales                                        |  |                            | (6,459  | ) |      |   | (777    | )
|Increase in investment balance due to PIK                  |  |                            |        |   |      |   | 8       |  
|Increase in investment balance due to transferred interest |  |                            |        |   |      |   | 204     |  
|Net unrealized depreciation                                |  |                            | (16,941 | ) |      |   | (16,307 | )
|Reversal of prior period depreciation on realization       |  |                            | 12,015  |   |      |   | 293     |  
|Net realized (loss) gain                                   |  |                            | (8,363  | ) |      |   | 163     |  
|Amortization of premiums and discounts                     |  |                            | 119     |   |      |   | (776    | )
|                                                           |  |                            |         |   |      |   |         |  
|Ending investment portfolio at fair value                  |  | $                          | 288,167 |   |      | $ | 257,113 |  
|                                                           |  |                            |         |   |      |   |         |  

The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal
year, assuming no voluntary prepayments, at March 31, 2012.



|                                                  |  |                                                         |  |        |         |  
|------------------------------------------------- |  | ------------------------------------------------------- |  | ------ | ------- | -
|                                                  |  |                                                         |  | Amount |        
|For the remaining six months ending September 30: |  | 2012                                                    |  | $      | 30,816  |  
|For the fiscal year ending September 30:          |  | 2013                                                    |  |        | 106,242 |  
|                                                  |  | 2014                                                    |  |        | 51,190  |  
|                                                  |  | 2015                                                    |  |        | 31,517  |  
|                                                  |  | 2016                                                    |  |        | 75,867  |  
|                                                  |  | Thereafter                                              |  |        | 67,925  |  
|                                                  |  |                                                         |  |        |         |  
|                                                  |  | Total contractual repayments                            |  | $      | 363,557 |  
|                                                  |  | Investments in equity securities                        |  |        | 10,784  |  
|                                                  |  | Adjustments to cost basis on debt securities            |  |        | (1,381  | )
|                                                  |  |                                                         |  |        |         |  
|                                                  |  | Total cost basis of investments held at March 31, 2012: |  | $      | 372,960 |  
|                                                  |  |                                                         |  |        |         |  

Financing Activities

Net cash used in financing activities for the six months ended March 31, 2012 was $7.5 million and consisted primarily of net repayments on the Credit Facility of $33.6 million, distributions to
common stockholders of $8.8 million and $3.6 million of deferred financing fees related to our Term Preferred Stock offering in November 2011 of $2.2 million and the renewal of our Credit Facility in January 2012 of $1.4 million. These financing
activities were partially offset by proceeds from the issuance of Term Preferred Stock of $38.5 million during this six month period. Net cash provided by financing activities for the six months ended March 31, 2011 was $7.9 million and
consisted primarily of net borrowings from the Credit Facility of $16.4 million, partially offset by distributions to stockholders of $8.8 million.



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Distributions

To qualify as a RIC and thus avoid corporate level tax on the income we distribute to our stockholders, we are required, under Subchapter M of the Code, to distribute at least 90% of our ordinary income
and short-term capital gains to our stockholders on an annual basis. In accordance with these requirements, we declared and paid monthly cash distributions of $0.07 per common share for each of the six months from October 2011 through March 2012. In
April 2012, our Board of Directors declared a monthly distribution of $0.07 per common share for each of April, May and June 2012. We declared these distributions based on our estimates of net taxable income for the fiscal year.

For the fiscal year ended September 30, 2011, which includes the six months ended March 31, 2011, our distributions to common stockholders
totaled approximately $17.7 million. Distributions to common stockholders declared for the fiscal year ended September 30, 2011 were comprised 100% from ordinary income and none from a return of capital. At year-end, we elected to treat a
portion of the first distribution paid after year-end as having been paid in the prior year, in accordance with Section 855(a) of the Code. The characterization of the common distributions declared and paid for the fiscal year ending
September 30, 2012 will be determined at year end and cannot be determined at this time.

We also declared and paid monthly cash
distributions of $0.13359375 per share of Term Preferred Stock for a prorated portion of November and $0.1484375 per share of Term Preferred Stock for each of the four months from December 2011 through March 2012. In April 2012, our Board of
Directors also declared a monthly distribution of $0.1484375 per preferred share for each of April, May and June 2012. In accordance with accounting principles generally accepted in the U.S. (GAAP) purposes, we treat these monthly
distributions as an operating expense. For tax purposes, these preferred distributions are deemed to be paid entirely out of ordinary income to preferred stockholders.

Equity

On October 20, 2009, we filed a registration statement (the
Registration Statement) on Form N-2 (File No. 333-162592) that was amended on December 9, 2009, and which the SEC declared effective on January 28, 2010. A post-effective amendment thereto was declared effective by the SEC
on July 15, 2011. We filed another post-effective amendment to the Registration Statement on March 6, 2012, which has not yet been declared effective. The Registration Statement permits us to issue, through one or more transactions, up to
an aggregate of $300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities and warrants to purchase common stock, including through a combined offering of such securities. To date, under the
Registration Statement, we have issued $38.5 million in Term Preferred Stock and have entered into an agreement described in greater detail below, to potentially issue up to 2.0 million shares of common stock from time to time in the future.

On October 31, 2011, pursuant to the terms of our articles of incorporation, as amended, our Board of Directors approved reclassifying
4.0 million shares from common stock to preferred stock.

Common Stock

On May 17, 2010, we entered into an equity distribution agreement (the Agreement) with BB&T Capital Markets, a division of Scott & Stringfellow, LLC (the Agent),
under which we may, from time to time, issue and sell through the Agent, as sales agent, up to 2.0 million shares (the Shares) of our common stock, par value $0.001 per share, based upon instructions from us (including, at a
minimum, the number of Shares to be offered, the time period during which sales are requested to be made, any limitation on the number of Shares that may be sold in any one day and any minimum price below which sales may not be made). Sales of
Shares through the Agent, if any, will be executed by means of either ordinary brokers transactions on the NASDAQ Global Select Market (NASDAQ) in accordance with Rule 153 under the Securities Act of 1933, as amended, or such
other sales of the Shares as shall be agreed by us and the Agent. The compensation payable to the Agent for sales of Shares with respect to which the Agent acts as sales agent shall be equal to 2.0% of the gross sales price of the Shares sold
pursuant to the Agreement. To date, we have not issued any Shares pursuant to this Agreement.

We anticipate issuing equity securities to
obtain additional capital in the future. However, we cannot determine the terms of any future equity issuances or whether we will be able to issue equity on terms favorable to us, or at all. Additionally, when our common stock is trading below NAV
per common share, as it has periodically traded over the last three years, we will have regulatory constraints under the 1940 Act on our ability to obtain additional capital in this manner. Generally, the 1940 Act provides that we may not issue and
sell our common stock at a price below our NAV per common share, other than to our then existing common stockholders pursuant to a rights offering, without first obtaining approval from our stockholders and our independent directors. As of
March 31, 2012, our NAV per common share was $9.62 and as of April 27, 2012 our closing market price was $8.04 per share. To the extent that our common stock trades at a market price below our NAV per common share, we



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will generally be precluded from raising equity capital through public offerings of our common stock, other than pursuant to stockholder approval or a rights offering. The asset coverage
requirement of a BDC under the 1940 Act effectively limits our ratio of debt to equity to 1:1. To the extent that we are unable to raise capital through the issuance of equity, our ability to raise capital through the issuance of debt may also be
inhibited to the extent of the regulatory debt to equity ratio limits.

At our Annual Meeting of Stockholders held on February 16, 2012,
our stockholders approved a proposal that authorizes us to sell shares of our common stock at a price below our then current NAV per common share for a period of one year, provided that our Board of Directors makes certain determinations prior to
any such sale. We have not issued any common stock since February 2008 and have never issued common stock below NAV per common share.

Term
Preferred Stock

Pursuant to our Registration Statement, in November 2011, we completed an offering of 1.5 million shares of Term
Preferred Stock at a public offering price of $25.00 per share. Gross proceeds totaled $38.5 million and net proceeds, after deducting underwriting discounts and offering expenses borne by us were approximately $36.3 million and were used to repay a
portion of outstanding borrowings under our Credit Facility. We incurred $2.2 million in total offering costs related to these transactions, which have been recorded as an asset in accordance with GAAP and amortized over the redemption period ending
December 31, 2016.

The Term Preferred Stock provides for a fixed dividend equal to 7.125% per year, payable monthly (which equates
to approximately $2.7 million per year). We are required to redeem all of the outstanding Term Preferred Stock on December 31, 2016 for cash at a redemption price equal to $25.00 per share plus an amount equal to accumulated but unpaid
dividends, if any, to the date of redemption. The Term Preferred Stock has a preference over our common stock with respect to these dividends, whereby no distributions are payable on our common stock unless the stated dividends, including any
accrued and unpaid dividends, on the Term Preferred Stock have been paid in full. In addition, there are two other potential redemption triggers for the Term Preferred Stock: (1) if we fail to maintain an asset coverage ratio of at least 200%,
we are required to redeem a portion of the outstanding Term Preferred Stock or otherwise cure the ratio redemption trigger; and (2) at our sole option, at any time on or after December 31, 2012.

The Term Preferred Stock has been recorded as a liability in accordance with GAAP and as such affects our asset coverage, exposing us to additional
leverage risks. In addition, the Term Preferred Stock is not convertible into our common stock or any other security.

On May 1, 2012, we
transferred the listing of our Term Preferred Stock from the NYSE to NASDAQ. The new trading symbol on NASDAQ for the Term Preferred Stock is GLADP.

Revolving Credit Facility

On January 19, 2012, we, through Business Loan,
entered into Amendment No. 3 to our Credit Facility, to extend the maturity date of our $137.0 million revolving line of credit from March 15, 2012 to January 18, 2015 (the Maturity Date). Our Credit Facility was arranged
by Keybank as administrative agent and BB&T and ING also joined our Credit Facility as committed lenders. Subject to certain terms and conditions, our Credit Facility may be expanded to a maximum of $237.0 million through the addition of other
committed lenders thereto. The interest rates remained unchanged with advances under our Credit Facility generally bearing interest at a 30-day LIBOR subject to a minimum rate of 1.5%, plus 3.75% per annum, with a commitment fee of
0.5% per annum on undrawn amounts when the facility is drawn more than 50% and 1.0% per annum on undrawn amounts when the facility is drawn less than 50%. If our Credit Facility is not renewed or extended by January 18, 2015, all
principal and interest will be due and payable on or before January 18, 2016 (one year thereafter). All other terms of our Credit Facility remained substantially unchanged.

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

The administrative agent also requires that any interest or principal payments on pledged loans be remitted directly by the borrower into a lockbox account with Keybank as custodian. Keybank, who also
serves as the trustee of the account, generally remits the collected funds to us once a month.

Our Credit Facility contains covenants that
require Business Loan to maintain its status as a separate legal entity, prohibit certain significant corporate transactions (such as mergers, consolidations, liquidations or dissolutions), and restrict material changes to



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our credit and collection policies. Our Credit Facility also limits payments on distributions to the aggregate net investment income for each of the twelve month periods ending September 30,
2012, 2013, 2014, and 2015. Business Loan is also subject to certain limitations on the type of loan investments it can apply toward availability credit in the borrowing base, including restrictions on geographic concentrations, sector
concentrations, loan size, distribution payout, payment frequency and status, average life and lien property. Our Credit Facility further requires Business Loan to comply with other financial and operational covenants, which obligate Business Loan
to, among other things, maintain certain financial ratios, including asset and interest coverage and a minimum number of obligors required in the borrowing base of the credit agreement. Additionally, we are subject to a performance guaranty that
requires us to maintain (i) a minimum net of $190.0 million plus 50.0% of all equity and subordinated debt raised after January 19, 2002, (ii) asset coverage with respect to senior securities representing
indebtedness of at least 200%, in accordance with Section 18 of the 1940 Act and (iii) our status as a BDC under the 1940 Act and as a RIC under the Code. The facility requires a minimum of 20 obligors in the borrowing base and as of
March 31, 2012, Business Loan had 37 obligors. As of March 31, 2012, we were in compliance with all of the facility covenants.

Contractual Obligations and Off-Balance Sheet Arrangements

We have lines of credit and capital commitments with certain of our portfolio companies that have not been fully drawn or called, respectively. Since these commitments have expiration dates and we expect
many will never be fully drawn or called, the total commitment amounts do not necessarily represent future cash requirements.

In addition to
the lines of credit and capital commitments with our portfolio companies, we, from time to time, have also extended certain guarantees on behalf of some our portfolio companies. As of March 31, 2012, we had one guarantee outstanding to Viapack
up to $0.6 million. As of March 31, 2012, we have not been required to make any payments on this guarantee and we consider the credit risks to be remote and the fair value of the guarantee to be minimal. As of September 30, 2011, we were
not party to any signed guarantees.

We estimate the fair value of our unused line of credit commitments, uncalled capital commitment, and
guarantee as of March 31, 2012 to be minimal; and therefore, they are not recorded on our accompanying Condensed Consolidated Statements of Assets and Liabilities.

The following table shows our contractual obligations as of March 31, 2012 at cost:



|                                                                                                                                     |  |                                  |   |  |           |   |        |           |  |   |               |  |  |       |   |  |  |   |         | 
|------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------------- | - |  | --------- | - | ------ | --------- |  | - | ------------- |  |  | ----- | - |  |  | - | ------- | 
|                                                                                                                                     |  | Principal Payments Due by Period |  
|Contractual Obligations(A)                                                                                                           |  | Less than1 Year                  |   |  | 1-3 Years |   |        | 4-5 Years |  |   | After 5 Years |  |  | Total |  
|Credit Facility(B)                                                                                                                   |  | $                                |  |  |           | $ | 65,800 |           |  | $ |              |  |  | $     |  |  |  | $ | 65,800  | 
|Term Preferred Stock, $0.001 par value, $25 liquidation preference; 4,000,000 authorized and 1,539,882 shares issued and
outstanding |  |                                  |  |  |           |   |       |           |  |   | 38,497        |  |  |       |  |  |  |   | 38,497  | 
|                                                                                                                                     |  |                                  |   |  |           |   |        |           |  |   |               |  |  |       |   |  |  |   |         | 
|Total                                                                                                                                |  | $                                |  |  |           | $ | 65,800 |           |  | $ | 38,497        |  |  | $     |  |  |  | $ | 104,297 | 
|                                                                                                                                     |  |                                  |   |  |           |   |        |           |  |   |               |  |  |       |   |  |  |   |         | 



|(A) | Excludes our unused line of credit commitments, uncalled capital commitments and guarantee to our portfolio companies in an aggregate amount of $10.2
million.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------

|(B) | Principal balance of borrowings under our Credit Facility, based on the current contractual maturity due to the revolving nature of the facility.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------



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CRITICAL ACCOUNTING POLICIES

The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported consolidated amounts of assets and
liabilities, including disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the period reported. Actual results could differ materially from those estimates. We have identified our
investment valuation process as our most critical accounting policy.

Investment Valuation

The most significant estimate inherent in the preparation of our Condensed Consolidated Financial Statements is the valuation of investments and
the related amounts of unrealized appreciation and depreciation of investments recorded.

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

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



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



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



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

As of March 31, 2012 and September 30, 2011, all of our investments were valued using Level 3 inputs. See Note 3Investmentsin the
accompanying notes to our Condensed Consolidated Financial Statements included elsewhere in this report for additional information regarding fair value measurements and our application of ASC 820.

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

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

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



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



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



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



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Valuation Methods:

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

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

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

As of March 31, 2012
and September 30, 2011, we determined that the indicative bid prices were reliable indicators of fair value for our syndicated investments. However, because of the private nature of this marketplace (meaning actual transactions are not
publicly-reported), we determined that these valuation inputs were classified as Level 3 within the fair value hierarchy as defined in ASC 820.

Securities for which no market exists: The valuation methodology for securities for which no market exists falls into four categories:
(1) portfolio investments comprised solely of debt securities; (2) portfolio investments in controlled companies comprised of a bundle of securities, which can include debt and equity securities; (3) portfolio investments in
non-controlled companies comprised of a bundle of investments, which can include debt and equity securities; and (4) portfolio investments comprised of non-publicly traded non-control equity securities of other funds.



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

In the case of Non-Public Debt Securities, we have engaged SPSE to submit opinions of
value for our debt securities that are issued by portfolio companies in which we own no equity, or equity-like securities. SPSE will only evaluate the debt portion of our investments for which we specifically request evaluation and may decline to
make requested evaluations for any reason, at its sole discretion. Quarterly, we collect data with respect to the investments (which includes portfolio company financial and operational performance and the information described below under
Credit Information, the risk ratings of the loans described below under Loan Grading and Risk Rating and the factors described hereunder). This portfolio company data is then forwarded to SPSE for review and
analysis. SPSE makes its independent assessment of the data that we have assembled and assesses its independent data to form an opinion as to what they consider to be the market values for the securities. With regard to its work, SPSE has issued the
following paragraph:

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



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

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



|(2) | Portfolio investments in controlled companies comprised of a bundle of investments, which can include debt and equity securities:The fair value of these
investments is determined based on the total enterprise value (TEV) of the portfolio company, or issuer, utilizing a liquidity waterfall approach under ASC 820 for our Non-Public Debt Securities and equity or equity-like securities
(e.g., preferred equity, common equity or other equity-like securities) that are purchased together as part of a package, where we have control or could gain control through an option or warrant security; both the debt and equity securities of the
portfolio investment would exit in the mergers and acquisitions market as the principal market, generally through a sale of the portfolio company. We manage our risk related to these investments at the aggregated issuer level and generally exit the
debt and equity securities together. Applying the liquidity waterfall approach to all of the investments of an issuer, we first calculate the TEV of the issuer by incorporating some or all of the following factors:
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



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

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



|(3) | Portfolio investments in non-controlled companies comprised of a bundle of investments, which can include debt and equity securities:We value
Non-Public Debt Securities that are purchased together with equity or equity-like securities from the same portfolio company, or issuer, for which we do not control or cannot gain control as of the measurement date, using a hypothetical secondary
market as our principal market. In accordance with ASC 820 (as amended by the FASBs Accounting Standards Update No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure
Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS), (ASU 2011-04), we have defined our unit of account at the investment level (either debt or equity) and as such determine
our fair value of these
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | non-control investments assuming the sale of an individual security using the standalone premise of value. As such, we estimate the fair value of the debt component using estimates of value
provided by SPSE and our own assumptions in the absence of observable market data, including synthetic credit ratings, estimated remaining life, current market yield and interest rate spreads of similar securities as of the measurement date. For
equity or equity-like securities of investments for which we do not control or cannot gain control as of the measurement date, we estimate the fair value of the equity based on factors such as the overall value of the issuer, the relative fair value
of other units of account including debt, or other relative value approaches. Consideration also is given to capital structure and other contractual obligations that may impact the fair value of the equity. Furthermore, we may utilize comparable
values of similar companies, recent investments and indices with similar structures and risk characteristics or DCF valuation techniques and, in the absence of other observable market data, our own assumptions.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Portfolio investments comprised of non-publicly traded non-control equity securities of other funds:We generally value any uninvested capital of the non-control
fund at par value and value any invested capital at the value provided by the non-control fund.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Due to the uncertainty inherent
in the valuation process, such estimates of fair value may differ significantly and materially from the values that would have been obtained had a ready market for the securities existed. Additionally, changes in the market environment and other
events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned. There is no single standard for determining fair value in good
faith, as fair value depends upon circumstances of each individual case. In general, fair value is the amount that we might reasonably expect to receive upon the current sale of the security in an orderly transaction between market participants at
the measurement date.

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



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



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



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



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



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

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

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

Loan
Grading and Risk Rating: As part of our valuation procedures above, we risk rate all of our investments in debt securities. For syndicated loans that have been rated by a Nationally Recognized Statistical Rating Organization (NRSRO),
we use the NRSROs risk rating for such security. For all other debt securities, we use a proprietary risk rating system. Our risk rating system uses a scale of 0 to 10, with 10 being the lowest probability of default. This system is used to
estimate the probability of default on debt securities and the probability of loss if there is a default. These types of systems are referred to as risk rating systems and are used by banks and rating agencies. The risk rating system covers both
qualitative and quantitative aspects of the business and the securities we hold.

For the debt securities for which we do not use a
third-party NRSRO risk rating, we seek to have our risk rating system mirror the risk rating systems of major risk rating organizations, such as those provided by an NRSRO. While we seek to mirror the NRSRO systems, we cannot provide any assurance
that our risk rating system will provide the same risk rating as an NRSRO for these securities. The following chart is an estimate of the relationship of our risk rating system to the designations used by two NRSROs as they risk rate debt securities
of major companies. Because our system rates debt securities of companies that are unrated by any NRSRO, there can be no assurance that the correlation to the NRSRO set out below is accurate. We believe our risk rating would be significantly higher
than a typical NRSRO risk rating because the risk rating of the typical NRSRO is designed for larger businesses. However, our risk rating has been designed to risk rate the securities of smaller businesses that are not rated by a typical NRSRO.
Therefore, when we use our risk rating on larger business securities, the risk rating is higher than a typical NRSRO rating. The primary difference between our risk rating and the rating of a typical NRSRO is that our risk rating



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uses more quantitative determinants and includes qualitative determinants that we believe are not used in the NRSRO rating. It is our understanding that most debt securities of medium-sized
companies do not exceed the grade of BBB on an NRSRO scale, so there would be no debt securities in the middle market that would meet the definition of AAA, AA or A. Therefore, our scale begins with the designation >10 as the best risk rating
which may be equivalent to a BBB from an NRSRO; however, no assurance can be given that a >10 on our scale is equal to a BBB or Baa2 on an NRSRO scale.



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



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

The
above scale gives an indication of the probability of default and the magnitude of the loss if there is a default. Generally, our policy is to stop accruing interest on an investment if we determine that interest and principal is no longer
collectable. At March 31, 2012, eight portfolio companies were either fully or partially on non-accrual with an aggregate cost basis of approximately $43.8 million, or 12.1% of the cost basis of all debt investments in our portfolio, and an
aggregate fair value of approximately $4.6 million, or 1.7% of the fair value of all debt investments in our portfolio. At September 30, 2011, eight portfolio companies were on non-accrual with an aggregate cost basis of approximately $41.1
million, or 11.0% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of approximately $5.3 million, or 1.8% of the fair value of all debt investments in our portfolio. Additionally, we do not risk rate our equity
securities.

The following table lists the risk ratings for all non-syndicated loans in our portfolio at March 31, 2012 and
September 30, 2011, representing approximately 73.9% and 75.7%, respectively, of the principal balance of all loans in our portfolio at the end of each period:



|                 |  |                 |  |                    
|---------------- |  | --------------- |  | -------------------
|                 |  | As of March 31, |  | As of September 30,
|Rating           |  | 2012            |  | 2011               
|Highest          |  | 10              |  | 9.0                
|Average          |  | 5.8             |  | 5.5                
|Weighted Average |  | 5.5             |  | 5.3                
|Lowest           |  | 1.0             |  | 1.0                

For syndicated loans that are currently rated by an NRSRO, we risk rate such loans in accordance with the risk rating
systems of major risk rating organizations, such as those provided by an NRSRO. The following table lists the risk ratings for all syndicated loans in our portfolio that were rated by an NRSRO at March 31, 2012 and September 30, 2011,
representing approximately 16.7% and 19.1%, respectively, of the principal balance of all loans in our portfolio at the end of each period:



|                 |  |                 |  |                    
|---------------- |  | --------------- |  | -------------------
|                 |  | As of March 31, |  | As of September 30,
|Rating           |  | 2012            |  | 2011               
|Highest          |  | B+/B1           |  | B+/B1              
|Average          |  | B/B2            |  | B/B2               
|Weighted Average |  | B/B2            |  | B/B2               
|Lowest           |  | NR/Caa1         |  | NR/Caa2            



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The following table lists the risk ratings for all syndicated loans in our portfolio that were not rated by
an NRSRO. At March 31, 2012 and September 30, 2011, these loans represented 9.4% and 5.2%, respectively, of the principal balance of all loans in our portfolio at the end of each period:



|                 |  |                 |  |                    
|---------------- |  | --------------- |  | -------------------
|                 |  | As of March 31, |  | As of September 30,
|Rating           |  | 2012            |  | 2011               
|Highest          |  | 7.0             |  | 7.0                
|Average          |  | 5.0             |  | 5.0                
|Weighted Average |  | 4.9             |  | 5.0                
|Lowest           |  | 4.0             |  | 4.0                

Tax Status

Federal Income Taxes

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

In an effort to limit certain excise taxes imposed on RICs, we generally distribute,
during each calendar year, an amount at least equal to the sum of: (1) 98% of our ordinary income for the calendar year, (2) 98.2% of our capital gains in excess of capital losses for the one-year period ending on October 31 of the
calendar year, and (3) any ordinary income and net capital gains from preceding years that were not distributed during such years. Under the RIC Modernization Act (the RIC Act), we will be permitted to carry forward capital losses
incurred in taxable years beginning after September 30, 2011, for an unlimited period. However, any losses incurred during those future taxable years will be required to be utilized prior to the losses incurred in pre-enactment taxable years,
which carry an expiration date. As a result of this ordering rule, pre-enactment capital loss carryforwards may be more likely to expire unused. Additionally, post-enactment capital loss carryforwards will retain their character as either short-term
or long-term capital losses rather than being considered all short-term as permitted under the previous regulation.

We sought and received
approval for a change in accounting method from the IRS related to our tax treatment for success fees. As a result, we, in effect, will continue to account for the recognition of income from the success fees upon receipt. However, starting
January 1, 2011, the tax characterization of the success fee amount was and will continue to be treated as ordinary income. Prior to January 1, 2011, we had treated the success fee amount as a capital gain for tax characterization
purposes. The approved change in accounting method does not require us to retroactively change the capital gains treatment of the success fees received prior to January 1, 2011.

Revenue Recognition

Interest Income Recognition

Interest income, adjusted for amortization of premiums and acquisition costs, the accretion of discounts and the amortization of amendment fees, is
recorded on the accrual basis to the extent that such amounts are expected to be collected. Generally, when a loan becomes 90 days or more past due, or if our qualitative assessment indicates that the debtor is unable to service its debt or other
obligations, we will place the loan on non-accrual status and cease recognizing interest income on that loan until the borrower has demonstrated the ability and intent to pay contractual amounts due. However, we remain contractually entitled to this
interest. Interest payments received on non-accrual loans may be recognized as income or applied to the cost basis, depending upon managements judgment. Generally, non-accrual loans are restored to accrual status when past due principal and
interest are paid and, in managements judgment, are likely to remain current, or due to a restructuring such that the interest income is deemed to be collectable. At March 31, 2012, eight portfolio companies were either fully or partially
on non-accrual with an aggregate debt cost basis of $43.8 million, or 12.1% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of $4.6 million, or 1.7% of the fair value of all debt investments in our portfolio.
At September 30, 2011, eight portfolio companies were on non-accrual with an aggregate debt cost basis of $41.1 million, or 11.0% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of $5.3 million, or 1.8%
of the fair value of all debt investments in our portfolio.



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As of March 31, 2012 and September 30, 2011, we had 27 original issue discount (OID)
loans, primarily from the syndicated loans in our portfolio. We recorded OID income of $74 and $0.2 million for the three and six months ended March 31, 2012, respectively, as compared to $29 and $53 for the three and six months ended
March 31, 2011. The unamortized balance of OID investments as of March 31, 2012 and September 30, 2011 totaled $1.4 million and $1.5 million, respectively.

As of March 31, 2012 and September 30, 2011, we had no investments that bore PIK interest. PIK interest, computed at the contractual rate specified in the loan agreement, is added to the
principal balance of the loan and recorded as income. To maintain our status as a RIC, this non-cash source of income must be paid out to common stockholders in the form of distributions, even though we have not yet collected the cash. We recorded
PIK income of $0 for the three and six months ended March 31, 2012, respectively, as compared to $4 and $8 for the three and six months ended March, 31, 2011, respectively.

We also transfers past due interest to the principal balance as stipulated in certain loan amendments with portfolio companies. We transferred past due interest to the principal balance of $0 for both the
three and six months ended March 31, 2012, as compared to $0.2 million for both the three and six months ended March 31, 2011, respectively.

Other Income Recognition

We record success fees upon receipt. Success fees are typically
contractually due upon a change of control in a portfolio company and are recorded in other income in our accompanying Condensed Consolidated Statements of Operations. We recorded $2.0 million of success fess during the six months ended
March 31, 2012, which resulted from our exits of GMT and RCS. We recorded $0.6 million of success fees during the six months ended March 31, 2011, which resulted from our exits of Pinnacle and Interfilm.

Recent Accounting Pronouncements

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market
changes that affect market sensitive instruments. The prices of securities held by us may decline in response to certain events, including those directly involving the companies whose securities are owned by us; conditions affecting the general
economy; overall market changes; local, regional or global political, social or economic instability; and interest rate fluctuations.

Interest rate risk is the primary risk to which we believe we are exposed. Because we borrow money to make investments, our net investment is dependent
upon the difference between the rate at which we borrow funds and the rate at which we invest those funds. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net
investment income. We use a combination of debt and equity capital to finance our investing activities. We may use interest rate risk management techniques to limit our exposure to interest rate fluctuations. Such techniques may include various
interest rate hedging activities to the extent permitted by the 1940 Act. We have analyzed the potential impact of changes in interest rates on interest income net of interest expense.

We target to have approximately 10% of the loans in our portfolio at fixed rates, with approximately 90% made at variable rates. As of March 31, 2012, our portfolio consisted of the following at
cost:



| |       |   |  |                                          
| | ----- | - |  | -----------------------------------------
| | 87.6  | % |  | variable rates with a floor              
| | 6.0   | % |  | variable rates without a floor or ceiling
| | 6.4   | % |  | fixed rates                              
| |       |   |  |                                          
| | 100.0 | % |  | total                                    
| |       |   |  |                                          

All of our variable-rate loans have rates associated with either the current LIBOR or prime rate.

There have been no material changes in the quantitative and qualitative market risk disclosures for the six months ended March 31, 2012 from that
disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011, as filed with the SEC on November 14, 2011.



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ITEM 4. CONTROLS AND PROCEDURES.

a) Evaluation of Disclosure Controls and Procedures

As of March 31, 2012 (the end of the period covered by this report), we, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness and design and operation of our
disclosure controls and procedures. Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective at a reasonable assurance level in
timely alerting management, including the Chief Executive Officer and Chief Financial Officer, of material information about us required to be included in periodic SEC filings. However, in evaluation of the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.

b) Changes in Internal Control over Financial Reporting

There were no changes in internal controls for the three months ended March 31, 2012, that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.

PART IIOTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

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



|ITEM 1A. | RISK FACTORS.
|-------- | -------------

Our business is subject to
certain risks and events that, if they occur, could adversely affect our financial condition and results of operations and the trading price of our capital stock. For a discussion of these risks, please refer to the Risk Factors
section of our Annual Report on Form 10-K for the fiscal year ended September 30, 2011, filed by us with the SEC on November 14, 2011, as well as the Risk Factors of our Post-Effective Amendment No. 6 to our Registration
Statement on Form N-2 (No. 333-162592), as filed with the SEC on March 6, 2012.

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

The following table provides detail about our share repurchases during the three months
ended March 31, 2012:



|                               |  |                                     |        |  |                            |   |      |                                                                                  |  |  |                                                                              |  |  |  |   | 
|------------------------------ |  | ----------------------------------- | ------ |  | -------------------------- | - | ---- | -------------------------------------------------------------------------------- |  |  | ---------------------------------------------------------------------------- |  |  |  | - | 
|                               |  | Total Numberof 
SharesPurchased (A) |        |  | AveragePrice Paidper Share |   |      | Total Number of 
SharesPurchased as Part of PubliclyAnnounced Plans or 
Programs |  |  | Maximum Number ofShares 
That May Yet BePurchased Under the Plansor Programs | 
|                               |  |                                     |        | 
|January 1  January 31, 2012   |  |                                     | 19,082 |  |                            | $ | 9.30 |                                                                                  |  |  |                                                                             |  |  |  |  | 
|                               |  |                                     |        | 
|February 1  February 29, 2012 |  |                                     |       |  |                            |   |     |                                                                                  |  |  |                                                                             |  |  |  |  | 
|                               |  |                                     |        | 
|March 1  March 31, 2012       |  |                                     |       |  |                            |   |     |                                                                                  |  |  |                                                                             |  |  |  |  | 
|                               |  |                                     |        |  |                            |   |      |                                                                                  |  |  |                                                                              |  |  |  |   | 
|                               |  |                                     |        | 
|Total share repurchases        |  |                                     | 19,082 |  |                            | $ | 9.30 |                                                                                  |  |  |                                                                             |  |  |  |  | 
|                               |  |                                     |        |  |                            |   |      |                                                                                  |  |  |                                                                              |  |  |  |   | 



|(A) | Amounts represent shares redeemed from an employee of the Adviser pursuant to the terms of an amended and restated redemption agreement. For additional
information regarding this redemption, see Note 7Common Stockin the accompanying notes to our Condensed Consolidated Financial Statements included elsewhere in this report.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5. OTHER INFORMATION.

Not applicable.

ITEM 6. EXHIBITS

See the exhibit index.



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SIGNATURE

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



GLADSTONE CAPITAL CORPORATIONBy:

/s/ David WatsonDavid WatsonChief Financial Officer and Treasurer


Date: May 1, 2012



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EXHIBIT INDEX



|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        | 
|3.1     |  | Articles of Amendment and Restatement of the Articles of Incorporation, incorporated by reference to Exhibit a.2 to Pre-Effective Amendment No. 1 to the Registration Statement on
Form N-2 (File No. 333-63700), filed July 27, 2001.                                                                                                                                                                                                                           
|        | 
|3.2     |  | By-laws, incorporated by reference to Exhibit b to Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-63700), filed July 27,
2001.                                                                                                                                                                                                                                                                                            
|        | 
|3.3     |  | Amendment to By-laws, incorporated by reference to Exhibit 3.3 to our Quarterly Report on Form 10-Q for the quarter ended December 31, 2003 (File No. 814-00237), filed February 17,
2004.                                                                                                                                                                                                                                                                       
|        | 
|3.4     |  | Second amendment to By-laws, incorporated by reference to Exhibit 99.1 to our Current Report on Form 8-K (File No. 814-00237), filed July 10, 2007.                                                                                                                                                                                                                                                                                                              
|        | 
|3.5     |  | Third amendment to By-laws, incorporated by reference to Exhibit 99.1 to our Current Report on Form 8-K (File No. 814-00237), filed June 10, 2011.                                                                                                                                                                                                                                                                                                               
|        | 
|3.6     |  | Articles Supplementary Establishing and Fixing the Rights and Preferences of the Term Preferred Shares, including Appendix A thereto relating to the Term Preferred Shares, 7.125%
Series 2016, incorporated by reference to Exhibit 2.a.2 to Post-Effective Amendment No. 5 to the Registration Statement on Form N-2 (File No. 333-162592), filed October 31, 2011.                                                                                            
|        | 
|10.1    |  | Amendment No. 3 to the Fourth Amended and Restated Credit Agreement, dated as of January 19, 2012, by and among Gladstone Business Loan, LLC as Borrower, Gladstone Management
Corporation as Servicer, the Committed Lenders named therein, the Managing Agents named therein, and Key Equipment Finance Inc. as Administrative Agent, incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K (File No.
814-00237), filed January 24, 2012.
|        | 
|11      |  | Computation of Per Share Earnings (included in the notes to the unaudited condensed consolidated financial statements contained in this report).                                                                                                                                                                                                                                                                                                                 
|        | 
|31.1    |  | Certification of Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                              
|        | 
|31.2    |  | Certification of Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                              
|        | 
|32.1    |  | Certification of Chief Executive Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                              
|        | 
|32.2    |  | Certification of Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                              

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



60