Table ofContents

 

 

 

**UNITEDSTATES********SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-Q**

 

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

 

**FOR THEQUARTER ENDED MARCH 31, 2009**

 

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

 

**COMMISSIONFILE NUMBER: 814-00237**

 

**GLADSTONECAPITAL CORPORATION**

(Exact name ofregistrant as specified in its charter)

 

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

 

**1521WESTBRANCH DRIVE, SUITE 200**

**MCLEAN,VIRGINIA 22102**

(Address of principalexecutive office)

 

**(703)287-5800**

(Registrant’s telephonenumber, including area code)

 

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

 

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

 

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

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

 

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

 

Indicate the number of shares outstandingof each of the issuer’s classes of common stock, as of the latest practicabledate.  The number of shares of the issuer’sCommon Stock, $0.001 par value, outstanding as of May 5, 2009 was21,087,574.

 

 

 

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Table ofContents

 

**GLADSTONECAPITAL CORPORATION**

**TABLE OF CONTENTS**

 
| PART I.  | FINANCIAL  INFORMATION                                                                                              |   |
|---------------|---------------------------------------------------------------------------------------------------------------------|--------|
|          |                                                                                                                |   |
| Item  1.      | Financial  Statements (Unaudited)                                                                                   |   |
|          |                                                                                                                |   |
|          | Condensed Consolidated  Statements of Assets and Liabilities as of March 31, 2009 and  September 30, 2008 | 2      |
|          | Condensed  Consolidated Schedules of Investments as of March 31, 2009 and  September 30, 2008             | 3      |
|          | Condensed Consolidated Statements of Operations for  the three and six months ended March 31, 2009 and 2008    | 11     |
|          | Condensed Consolidated Statements of Changes in Net  Assets for the six months ended March 31, 2009 and 2008   | 12     |
|          | Condensed Consolidated Statements of Cash Flows for  the six months ended March 31, 2009 and 2008              | 13     |
|          | Financial  Highlights for the three and six months ended March 31, 2009 and 2008                               | 14     |
|          | Notes to  Condensed Consolidated Financial Statements                                                               | 15     |
|          |                                                                                                                |   |
| Item 2.       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         | 29     |
|          | Overview                                                                                                            | 29     |
|          | Results of Operations                                                                                               | 31     |
|          | Liquidity and  Capital Resources                                                                                    | 38     |
|          |                                                                                                                |   |
| Item 3.       | Quantitative  and Qualitative Disclosure About Market Risk                                                          | 46     |
|          |                                                                                                                |   |
| Item 4.       | Controls and  Procedures                                                                                            | 46     |
|          |                                                                                                                |   |
| PART II. | OTHER INFORMATION                                                                                                   |   |
|          |                                                                                                                |   |
| Item 1.       | Legal Proceedings                                                                                                   | 47     |
|          |                                                                                                                |   |
| Item 1A.      | Risk Factors                                                                                                        | 47     |
|          |                                                                                                                |   |
| Item 2.       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                        | 48     |
|          |                                                                                                                |   |
| Item 3.       | Defaults  Upon Senior Securities                                                                                    | 48     |
|          |                                                                                                                |   |
| Item 4.       | Submission  of Matters to a Vote of Security Holders                                                                | 48     |
|          |                                                                                                                |   |
| Item 5.       | Other Information                                                                                                   | 49     |
|          |                                                                                                                |   |
| Item 6.       | Exhibits                                                                                                            | 49     |
|          |                                                                                                                |   |
| SIGNATURES    | 49                                                                                                                  |

 

1

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Table ofContents

 

**GLADSTONECAPITAL CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES**

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

**(UNAUDITED)**

 
| ** **                                                                                                                                                     | ** ** | **March 31,** | ** ** | **September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|------------------------|------------|
| ** **                                                                                                                                                     | ** ** | **2009**           | ** ** | **2008**               | ** ** |
| ASSETS                                                                                                                                                         |       |               |       |                   |       |
| Non-Control/Non-Affiliate investments (Cost 3/31/09:  $417,063; 9/30/08: $448,356)                                                                             |       | $                  | 369,595    |                   | $          | 407,153 |   |
| Control investments (Cost 3/31/09: $27,500; 9/30/08:  $12,514)                                                                                                 |       | 15,502             |       | 780                    |       |
| Total investments at fair value (Cost 3/31/09:  $444,563; 9/30/08: $460,870)                                                                                   |       | 385,097            |       | 407,933                |       |
| Cash                                                                                                                                                           |       | 10,529             |       | 6,493                  |       |
| Interest receivable — investments in debt securities                                                                                                      |       | 3,473              |       | 3,588                  |       |
| Interest receivable — employees (Refer to Note 4)                                                                                                         |       | 117                |       | 91                     |       |
| Due from custodian                                                                                                                                             |       | 10,132             |       | 4,544                  |       |
| Deferred financing fees                                                                                                                                        |       | 637                |       | 1,905                  |       |
| Prepaid assets                                                                                                                                                 |       | 249                |       | 306                    |       |
| Other assets                                                                                                                                                   |       | 1,156              |       | 838                    |       |
| TOTAL ASSETS                                                                                                                                                   |       | $                  | 411,390    |                   | $          | 425,698 |   |
|                                                                                                                                                           |       |               |       |                   |       |
| LIABILITIES                                                                                                                                                    |       |               |       |                   |       |
| Accounts payable                                                                                                                                               |       | $                  | 8          |                   | $          | 8 |   |
| Interest payable                                                                                                                                               |       | 481                |       | 646                    |       |
| Fee due to Administrator (Refer to Note 4)                                                                                                                     |       | 211                |       | 247                    |       |
| Due to Adviser (Refer to Note 4)                                                                                                                               |       | 691                |       | 457                    |       |
| Borrowings under line of credit                                                                                                                                |       | 153,370            |       | 151,030                |       |
| Accrued expenses and deferred liabilities                                                                                                                      |       | 1,295              |       | 1,328                  |       |
| Funds held in escrow                                                                                                                                           |       | 121                |       | 234                    |       |
| TOTAL LIABILITIES                                                                                                                                              |       | 156,177            |       | 153,950                |       |
| NET ASSETS                                                                                                                                                     |       | $                  | 255,213    |                   | $          | 271,748 |   |
|                                                                                                                                                           |       |               |       |                   |       |
| ANALYSIS OF NET ASSETS                                                                                                                                         |       |               |       |                   |       |
| Common stock, $0.001 par value, 50,000,000 shares  authorized and 21,087,574 shares issued and outstanding at March 31,  2009 and September 30, 2008 |       | $                  | 21         |                   | $          | 21 |   |
| Capital in excess of par value                                                                                                                                 |       | 334,140            |       | 334,143                |       |
| Notes receivable — employees (Refer to Note 4)                                                                                                            |       | (9,171             | )          | (9,175                 | )          |
| Net unrealized depreciation on investments                                                                                                                     |       | (59,466            | )          | (52,937                | )          |
| Unrealized depreciation on derivative                                                                                                                          |       | —             |       | (304                   | )          |
| Distributions in excess of net investment income                                                                                                               |       | (10,311            | )          | —                 |       |
| TOTAL NET ASSETS                                                                                                                                               |       | $                  | 255,213    |                   | $          | 271,748 |   |
| NET ASSETS PER SHARE                                                                                                                                           |       | $                  | 12.10      |                   | $          | 12.89 |   |

 

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

 

2

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Table ofContents

 

**GLADSTONECAPITAL CORPORATION**

**CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS**

**AS OF MARCH 31,2009**

**(DOLLARAMOUNTS IN THOUSANDS)**

**(UNAUDITED)**

** **
| **Company (1)**                                        | ** **                               | **Industry**                                            | ** **   | **Investment  (2)**                                                    | ** **   | **Cost**     | ** **   | **Fair  Value** | ** **   |
|--------------------------------------------------------|------------------------------------------|---------------------------------------------------------|--------------|------------------------------------------------------------------------|--------------|--------------|--------------|-----------------|--------------|
| ** **                                             | ** **                               | ** **                                              | ** **   | ** **                                                             | ** **   | ** **   | ** **   | ** **      | ** **   |
| **NON-CONTROL/NON-AFFILIATE  INVESTMENTS**             | ** **                               | ** **                                              | ** **   | ** **                                                             | ** **   | ** **   | ** **   |
|                                                   |                                     |                                                    |         |                                                                   |         |         |         |            |         |
| ***Non-syndicated Loans:***                            | *** ***                             | *** ***                                            | *** *** | *** ***                                                           | *** *** | *** *** | *** *** | *** ***    | *** *** |
|                                                   |                                     |                                                    |         |                                                                   |         |         |         |            |         |
| Access Television  Network, Inc.                  |                                     | Service-cable  airtime (infomercials)                   |         | Senior Term Debt  (10.5%, Due 6/2009) (5) (9)                     |         | $            | 1,313        |            | $            | 1,290 |   |
|                                                   |                                     |                                                    |         |                                                                   |         |         |         |            |         |
| ACE Expediters,  Inc                                   |                                     | Service-over-the-ground  logistics                      |         | Senior Term Debt  (13.5%, Due 1/2012) (5)                              |         | 5,000        |         | 4,650           |         |
|                                                   |                                     |                                                    |         | Common Stock  Warrants (8) (14)                                   |         | 200          |         | 698             |         |
|                                                   |                                     |                                                    |         |                                                                   |         |         |         |            |         |
| ActivStyle  Acquisition Co.                            |                                     | Service-medical  products distribution                  |         | Line of Credit,  $1,500 available (4.7%, Due 7/2009) (5)               |         | 1,500        |         | 1,477           |         |
|                                                   |                                     |                                                    |         | Senior Term Debt  (8.5%, Due 9/2012) (5)                               |         | 4,524        |         | 4,456           |         |
|                                                   |                                     |                                                    |         | Senior Term Debt  (10.5%, Due 9/2012) (3) (5) (9)            |         | 4,435        |         | 4,256           |         |
|                                                   |                                     |                                                    |         |                                                                   |         |         |         |            |         |
| Allison  Publications, LLC                             |                                     | Service-publisher  of consumer oriented magazines       |         | Senior Term Debt  (10.0%, Due 9/2012) (5)                              |         | 10,019       |         | 8,469           |         |
|                                                   |                                     |                                                    |         |                                                                   |         |         |         |            |         |
| Anitox  Acquisition Company                            |                                     | Manufacturing-preservatives  for animal feed            |         | Line of Credit,  $3,000 available (4.7%, Due 1/2010) (5)               |         | 2,000        |         | 1,860           |         |
|                                                   |                                     |                                                    |         | Senior Term Debt  (8.5%, Due 1/2012) (5)                               |         | 3,151        |         | 2,930           |         |
|                                                   |                                     |                                                    |         | Senior Term Debt  (10.5%, Due 1/2012) (3) (5)                     |         | 3,688        |         | 3,356           |         |
|                                                   |                                     |                                                    |         |                                                                   |         |         |         |            |         |
| Badanco  Acquisition Corp.                             |                                     | Service-luggage  design and distribution                |         | Senior  Subordinated Term Debt (non-accrual, Due 7/2012) (5) (10) |         | 9,409        |         | 4,704           |         |
|                                                   |                                     |                                                    |         |                                                                   |         |         |         |            |         |
| BAS Broadcasting                                       |                                     | Service-radio  station operator                         |         | Senior Term Debt  (11.5%, Due 7/2013) (5)                              |         | 7,300        |         | 6,752           |         |
|                                                   |                                     |                                                    |         | Senior Term Debt  (12.0%, Due 7/2009) (3) (5)                     |         | 950          |         | 929             |         |
|                                                   |                                     |                                                    |         |                                                                   |         |         |         |            |         |
| CCS, LLC                                               |                                     | Service-cable TV  franchise owner                       |         | Senior Term Debt  (non-accrual, Due 8/2008) (5) (10)              |         | 631          |         | 221             |         |
|                                                   |                                     |                                                    |         |                                                                   |         |         |         |            |         |
| Chinese Yellow  Pages Company                     |                                     | Service-publisher  of Chinese language directories      |         | Line of Credit,  $700 available (7.3%, Due 9/2010) (5)                 |         | 675          |         | 602             |         |
|                                                   |                                     |                                                    |         | Senior Term Debt  (7.3%, Due 9/2010) (5)                               |         | 610          |         | 539             |         |
|                                                   |                                     |                                                    |         |                                                                   |         |         |         |            |         |
| Clinton Holdings,  LLC                                 |                                     | Distribution-aluminum  sheets and stainless steel       |         | Senior  Subordinated Term Debt (12.0%, Due 1/2013) (5)                 |         | 15,500       |         | 14,241          |         |
|                                                   |                                     |                                                    |         | Common Stock  Warrants (8) (14)                                   |         | 109          |         | —          |         |
|                                                   |                                     |                                                    |         |                                                                   |         |         |         |            |         |
| CMI Acquisition,  LLC                                  |                                     | Service-recycling                                       |         | Senior  Subordinated Term Debt (7.5%, Due 11/2012) (5)                 |         | 6,414        |         | 5,837           |         |
|                                                   |                                     |                                                    |         |                                                                   |         |         |         |            |         |
| Defiance  Acquisition Corp.                            |                                     | Manufacturing-trucking  parts                           |         | Senior Term Debt  (11.0%, Due 4/2010) (3) (5)                     |         | 6,305        |         | 4,413           |         |
|                                                   |                                     |                                                    |         |                                                                   |         |         |         |            |         |
| Doe & Ingalls  Management LLC                 |                                     | Distributor-specialty  chemicals                        |         | Senior Term Debt  (6.8%, Due 11/2010) (5)                              |         | 2,700        |         | 2,551           |         |
|                                                   |                                     |                                                    |         | Senior Term Debt  (7.8%, Due 11/2010) (3) (5)                     |         | 4,388        |         | 4,124           |         |
|                                                   |                                     |                                                    |         |                                                                   |         |         |         |            |         |
| Finn Corporation                                       |                                     | Manufacturing-landscape  equipment                      |         | Common Stock Warrants  (8) (14)                                   |         | 37           |         | 1,800           |         |
|                                                   |                                     |                                                    |         |                                                                   |         |         |         |            |         |
| GFRC Holdings LLC                                      |                                     | Manufacturing-glass-fiber  reinforced concrete          |         | Line of Credit, $2,000  available (4.7%, Due 12/2010) (5)              |         | 750          |         | 731             |         |
|                                                   |                                     |                                                    |         | Senior Term Debt  (9.0%, Due 12/2012) (5)                              |         | 6,975        |         | 6,661           |         |
|                                                   |                                     |                                                    |         | Senior Subordinated  Term Debt (11.5%, Due 12/2012) (3) (5)       |         | 6,682        |         | 6,307           |         |
|                                                   |                                     |                                                    |         |                                                                   |         |         |         |            |         |
| Global Materials Technologies, Inc.               |                                     | Manufacturing-steel  wool products and metal fibers     |         | Senior Term Debt  (13.0%, Due 11/2009) (3) (5)                    |         | 4,510        |         | 4,014           |         |
|                                                   |                                     |                                                    |         |                                                                   |         |         |         |            |         |
| Heartland  Communications Group                        |                                     | Service-radio  station operator                         |         | Senior Term Debt  (10.0%, Due 5/2011) (5)                              |         | 4,574        |         | 3,180           |         |
|                                                   |                                     |                                                    |         |                                                                   |         |         |         |            |         |
| Interfilm  Holdings, Inc.                         |                                     | Service-slitter  and distributor of plastic films       |         | Senior Term Debt  (10.5%, Due 10/2012) (5)                             |         | 4,975        |         | 4,589           |         |
|                                                   |                                     |                                                    |         |                                                                   |         |         |         |            |         |
| International Junior Golf Training Acquisition Company |                                     | Service-golf  training                                  |         | Line of Credit,  $1,500 available (9.0%, Due 5/2010) (5)               |         | 1,400        |         | 1,330           |         |
|                                                   | Senior Term Debt  (4.7%, Due 5/2012) (5) |                                                    | 2,352        |                                                                   | 2,152        |         |
|                                                   |                                     |                                                    |         | Senior Term Debt  (10.5%, Due 5/2012) (3) (5)                     |         | 2,500        |         | 2,231           |         |
|                                                   |                                     |                                                    |         |                                                                   |         |         |         |            |         |
| It’s Just Lunch  International, LLC               |                                     | Service-dating  service                                 |         | Senior Term Debt  (10.0%, Due 6/2012) (5)                              |         | 4,350        |         | 4,132           |         |
|                                                   |                                     |                                                    |         |                                                                   |         |         |         |            |         |
| KMBQ Corporation                                       |                                     | Service-AM/FM  radio broadcaster                        |         | Line of Credit,  $200 available (11.0%, Due 3/2010) (5)                |         | 153          |         | 76              |         |
|                                                   |                                     |                                                    |         | Senior Term Debt  (11.0%, Due 3/2010) (5)                              |         | 1,788        |         | 890             |         |
|                                                   |                                     |                                                    |         |                                                                   |         |         |         |            |         |
| Legend  Communications of Wyoming LLC                  |                                     | Service-operator  of radio stations                     |         | Line of Credit,  $500 available (11.0%, Due 6/2011) (5)                |         | 497          |         | 475             |         |
|                                                   |                                     |                                                    |         | Senior Term Debt  (11.0%, Due 6/2013) (5)                              |         | 9,250        |         | 8,834           |         |
|                                                   |                                     |                                                    |         |                                                                   |         |         |         |            |         |
| Multi-Ag Media  LLC                                    |                                     | Service-dairy  magazine publisher/ information database |         | Senior Term Debt  (7.3%, Due 12/2009) (5)                              |         | 1,792        |         | 1,516           |         |
|                                                        |                                          |                                                         |              |                                                                        |              |              |              |                 |              |  |  |

 

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Table ofContents

 

**GLADSTONECAPITAL CORPORATION**

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

**AS OF MARCH 31,2009**

**(DOLLARAMOUNTS IN THOUSANDS)**

**(UNAUDITED)**

 
| **Company  (1)**                                 | ** ** | **Industry**                                        | ** ** | **Investment  (2)**                                       | ** ** | **Cost** | ** ** | **Fair  Value** | ** ** |
|--------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------------|------------|----------|------------|-----------------|------------|
|                                             |       |                                                |       |                                                      |       |     |       |            |       |
| Newhall  Holdings, Inc.                     |       | Service-distributor  of personal care products and  |       | Line of Credit,  $3,000 available (11.3%, Due 5/2010) (5) |       | $        | 300        |            | $          | 270 |   |
|                                             |       | supplements                                         |       | Senior Term Debt  (5) (11.3%, Due 5/2012) (5)        |       | 4,050    |       | 3,645           |       |
|                                             |       |                                                |       | Senior Term Debt  (14.3%, Due 5/2012) (3) (5)        |       | 4,455    |       | 3,943           |       |
|                                             |       |                                                |       |                                                      |       |     |       |            |       |
| Northern  Contours, Inc.                    |       | Manufacturing-veneer  and laminate components       |       | Senior  Subordinated Term Debt (10.0%, Due 5/2010) (5)    |       | 6,737    |       | 5,845           |       |
|                                             |       |                                                |       |                                                      |       |     |       |            |       |
| Pinnacle  Treatment Centers, Inc.           |       | Service-Addiction  treatment centers                |       | Line of Credit,  $500 available (4.7%, Due 12/2009)       |       | —   |       | —          |       |
|                                             |       |                                                |       | Senior Term Debt  (8.5%, Due 12/2011) (5)                 |       | 3,150    |       | 2,945           |       |
|                                             |       |                                                |       | Senior Term Debt  (10.5%, Due 12/2011) (3) (5)       |       | 7,500    |       | 6,938           |       |
|                                             |       |                                                |       |                                                      |       |     |       |            |       |
| Precision  Acquisition Group Holdings, Inc. |       | Manufacturing-consumable  components for the        |       | Equipment Note,  $1,500 available (8.5%, Due 10/2011) (5) |       | 1,000    |       | 975             |       |
|                                             |       | aluminum industry                                   |       | Senior Term Debt  (8.5%, Due 10/2010) (5)                 |       | 4,500    |       | 4,388           |       |
|                                             |       |                                                |       | Senior Term Debt  (11.5%, Due 10/2010) (3) (5)       |       | 4,116    |       | 4,013           |       |
|                                             |       |                                                |       |                                                      |       |     |       |            |       |
| PROFITSystems Acquisition  Co.                   |       | Service-design  and develop ERP software            |       | Line of Credit,  $1,250 available (4.7%, Due 7/2009)      |       | —   |       | —          |       |
|                                             |       |                                                |       | Senior Term Debt  (8.5%, Due 7/2011) (5)                  |       | 1,900    |       | 1,724           |       |
|                                             |       |                                                |       | Senior Term Debt  (10.5%, Due 7/2011) (3) (5)        |       | 2,900    |       | 2,596           |       |
|                                             |       |                                                |       |                                                      |       |     |       |            |       |
| RCS Management  Holding Co.                      |       | Service-healthcare  supplies                        |       | Senior Term Debt  (8.5%, Due 1/2011) (3) (5)         |       | 2,687    |       | 2,506           |       |
|                                             |       |                                                |       | Senior Term Debt  (10.5%, Due 1/2011) (4) (5)        |       | 3,060    |       | 2,808           |       |
|                                             |       |                                                |       |                                                      |       |     |       |            |       |
| Reliable  Biopharmaceutical Holdings, Inc.  |       | Manufacturing-pharmaceutical  and biochemical       |       | Line of Credit,  $5,000 available (9.0%, Due 10/2010) (5) |       | 1,700    |       | 1,624           |       |
|                                             |       | intermediates                                       |       | Mortgage Note  (9.5%, Due 10/2014) (5)                    |       | 7,369    |       | 7,111           |       |
|                                             |       |                                                |       | Senior Term Debt  (9.0%, Due 10/2012) (5)                 |       | 1,665    |       | 1,590           |       |
|                                             |       |                                                |       | Senior Term Debt  (11.0%, Due 10/2012) (3) (5)       |       | 11,873   |       | 11,190          |       |
|                                             |       |                                                |       | Senior  Subordinated Term Debt (12.0%, Due 10/2013) (5)   |       | 6,000    |       | 5,250           |       |
|                                             |       |                                                |       | Common Stock  Warrants (8) (14)                      |       | 209      |       | —          |       |
|                                             |       |                                                |       |                                                      |       |     |       |            |       |
| Saunders &  Associates                  |       | Manufacturing-equipment  provider for frequency     |       | Line of Credit,  $2,500 available (5.0%, Due 5/2009) (5)  |       | 2,500    |       | 2,425           |       |
|                                             |       | control devices                                     |       | Senior Term Debt  (9.8%, Due 5/2013) (5)                  |       | 10,835   |       | 10,510          |       |
|                                             |       |                                                |       |                                                      |       |     |       |            |       |
| SCI  Cable, Inc.                            |       | Service-cable,  internet, voice provider            |       | Senior Term Debt  (9.3%, Due 10/2008) (5) (11)       |       | 2,710    |       | 678             |       |
|                                             |       |                                                |       |                                                      |       |     |       |            |       |
| Sunburst Media -  Louisiana, LLC                 |       | Service-radio  station operator                     |       | Senior Term Debt  (10.5%, Due 6/2011) (5)                 |       | 6,422    |       | 5,610           |       |
|                                             |       |                                                |       |                                                      |       |     |       |            |       |
| Sunshine Media  Holdings                         |       | Service-publisher  regional B2B trade magazines     |       | Senior Term Debt  (11.0%, Due 5/2012) (5)                 |       | 17,000   |       | 15,725          |       |
|                                             |       |                                                |       | Senior Term Debt  (13.5%, Due 5/2012) (3) (5)        |       | 10,700   |       | 9,684           |       |
|                                             |       |                                                |       |                                                      |       |     |       |            |       |
| Thibaut  Acquisition Co.                         |       | Service-design  and disbribute wall covering        |       | Line of Credit,  $1,000 available (5.5%, Due 1/2011) (5)  |       | 1,000    |       | 915             |       |
|                                             |       |                                                |       | Senior Term Debt  (5.5%, Due 1/2011) (5)                  |       | 1,662    |       | 1,521           |       |
|                                             |       |                                                |       | Senior Term Debt  (10.5%, Due 1/2011) (3) (5)        |       | 3,000    |       | 2,663           |       |
|                                             |       |                                                |       |                                                      |       |     |       |            |       |
| Tulsa Welding  School                            |       | Service-private  welding school                     |       | Line of credit,  $750 available (9.5%, 9/2011) (5)        |       | —   |       | —          |       |
|                                             |       |                                                |       | Senior Term Debt  (9.5%, 9/2013) (5)                      |       | 4,250    |       | 4,208           |       |
|                                             |       |                                                |       | Senior Term Debt  (12.8%, 9/2013) (5)                     |       | 8,000    |       | 7,900           |       |
|                                             |       |                                                |       |                                                      |       |     |       |            |       |
| Vanta Core                                       |       | Service-acquisition  of aggregate quarries          |       | Senior  Subordinated Term Debt (12.0%, 8/2013) (5)        |       | 13,865   |       | 13,622          |       |
|                                             |       |                                                |       |                                                      |       |     |       |            |       |
| Viapack, Inc.                               |       | Manufacturing-polyethylene  film                    |       | Senior Real  Estate Term Debt (10.0%, Due 3/2011) (5)     |       | 800      |       | 720             |       |
|                                             |       |                                                |       | Senior Term Debt  (13.0%, Due 3/2011) (3) (5)        |       | 4,062    |       | 3,636           |       |
|                                             |       |                                                |       |                                                      |       |     |       |            |       |
| Visual Edge Technology, Inc.                |       | Service-office  equipment distribution              |       | Senior  Subordinated Term Debt (15.5%, Due 8/2011) (5)    |       | 5,000    |       | 3,750           |       |
|                                             |       |                                                |       |                                                      |       |     |       |            |       |
| Westlake  Hardware, Inc.                    |       | Retail-hardware  and variety                        |       | Senior  Subordinated Term Debt (9.0%, Due 1/2011) (5)     |       | 15,000   |       | 13,538          |       |
|                                             |       |                                                |       | Senior  Subordinated Term Debt (10.3%, Due 1/2011) (5)    |       | 10,000   |       | 8,800           |       |
|                                             |       |                                                |       |                                                      |       |     |       |            |       |
| Winchester  Electronics                          |       | Manufacturing-high  bandwidth connectors and cables |       | Senior Term Debt  (7.0%, Due 5/2013) (5)                  |       | 438      |       | 419             |       |
|                                             |       |                                                |       | Senior Term Debt  (6.1%, Due 5/2013) (5)                  |       | 1,690    |       | 1,547           |       |
|                                             |       |                                                |       | Senior  Subordinated Term Debt (14.0%, Due 6/2013) (5)    |       | 9,925    |       | 8,920           |       |
|                                             |       |                                                |       |                                                      |       |     |       |            |       |
| *Subtotal - Non-syndicated loans*                |       |                                                |       |                                                      |       | 347,436  |       | 313,425         |       |
|                                                  |            |                                                     |            |                                                           |            |          |            |                 |            |  |  |

 

4

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Table ofContents

 

**GLADSTONECAPITAL CORPORATION**

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

**AS OF MARCH 31,2009**

**(DOLLARAMOUNTS IN THOUSANDS)**

**(UNAUDITED)**

 
| **Company  (1)**                                  | ** **   | **Industry**                                                | ** **   | **Investment  (2)**                                             | ** **   | **Cost**     | ** **   | **Fair  Value** | ** **   |
|---------------------------------------------------|--------------|-------------------------------------------------------------|--------------|-----------------------------------------------------------------|--------------|--------------|--------------|-----------------|--------------|
|                                              |         |                                                        |         |                                                            |         |         |         |            |         |
| ***Syndicated Loans:***                           | *** *** | *** ***                                                | *** *** | *** ***                                                    | *** *** | *** *** | *** *** | *** ***    | *** *** |
|                                              |         |                                                        |         |                                                            |         |         |         |            |         |
| AKQA Holdings                                     |         | Service - market  and advertising                           |         | Senior Term Debt  (5.7%, Due 3/2013) (6)                        |         | 8,367        |         | 8,976           |         |
|                                              |         |                                                        |         |                                                            |         |         |         |            |         |
| Bresnan  Communications, LLC                      |         | Service-telecommunications                                  |         | Senior Term Debt  (3.6%, Due 9/2013) (7)                        |         | 3,001        |         | 2,624           |         |
|                                              |         |                                                        |         | Senior  Subordinated Term Debt (5.0%, Due 3/2014) (7)           |         | 1,508        |         | 1,088           |         |
|                                              |         |                                                        |         |                                                            |         |         |         |            |         |
| CHG  Companies, Inc.                         |         | Service-healthcare  staffing                                |         | Letter of Credit,  $400 available (1.1%, Due 12/2012) (7)       |         | 400          |         | 333             |         |
|                                              |         |                                                        |         | Senior Term Debt  (3.0%, Due 12/2012) (7)                       |         | 1,519        |         | 1,265           |         |
|                                              |         |                                                        |         | Senior  Subordinated Term Debt (6.5%, Due 12/2013) (6)          |         | 500          |         | 429             |         |
|                                              |         |                                                        |         |                                                            |         |         |         |            |         |
| Emdeon Business  Services, Inc.                   |         | Service-healthcare  technology solutions                    |         | Senior Term Debt  (2.5%, Due 11/2013) (7)                       |         | 2,293        |         | 2,008           |         |
|                                              |         |                                                        |         | Senior  Subordinated Term Debt (5.5%, Due 5/2014) (7)           |         | 2,010        |         | 1,463           |         |
|                                              |         |                                                        |         |                                                            |         |         |         |            |         |
| GTM  Holdings, Inc.                          |         | Manufacturing-socks                                         |         | Senior Term Debt  (8.5%, Due 10/2013) (7)                       |         | 489          |         | 271             |         |
|                                              |         |                                                        |         | Senior  Subordinated Term Debt (11.8%, Due 4/2014) (6)          |         | 500          |         | 416             |         |
|                                              |         |                                                        |         |                                                            |         |         |         |            |         |
| Harrington  Holdings, Inc.                   |         | Service -  healthcare products distribution                 |         | Senior Term Debt  (2.8%, Due 1/2014) (7)                        |         | 2,431        |         | 2,064           |         |
|                                              |         |                                                        |         | Senior  Subordinated Term Debt (6.5%, Due 1/2014) (7)           |         | 5,000        |         | 3,050           |         |
|                                              |         |                                                        |         |                                                            |         |         |         |            |         |
| John Henry  Holdings, Inc.                   |         | Manufacturing-packaging  products                           |         | Senior  Subordinated Term Debt (7.6%, Due 6/2011) (6)           |         | 8,000        |         | 6,394           |         |
|                                              |         |                                                        |         |                                                            |         |         |         |            |         |
| Kinetek  Acquisition Corp.                        |         | Manufacturing-custom  engineered motors & controls |         | Senior Term Debt  (3.0%, Due 11/2013) (6)                       |         | 1,440        |         | 1,046           |         |
|                                              |         |                                                        |         | Senior  Subordinated Term Debt (6.0%, Due 5/2014) (6)           |         | 1,507        |         | 1,218           |         |
|                                              |         |                                                        |         |                                                            |         |         |         |            |         |
| Puerto Rico Cable  Acquisition Company, Inc. |         | Service-telecommunications                                  |         | Senior  Subordinated Term Debt (8.0%, Due 1/2012) (6)           |         | 7,181        |         | 5,974           |         |
|                                              |         |                                                        |         |                                                            |         |         |         |            |         |
| RedPrairie  Holding, Inc.                    |         | Service-design  and develop supply chain software           |         | Senior Term Debt  (4.3%, Due 7/2012) (7)                        |         | 4,390        |         | 3,062           |         |
|                                              |         |                                                        |         | Senior  Subordinated Term Debt (7.7%, Due 1/2013) (7)           |         | 3,000        |         | 1,493           |         |
|                                              |         |                                                        |         |                                                            |         |         |         |            |         |
| RiskMetrics Group  Holdings, LLC                  |         | Service - develop  risk and wealth management solutions     |         | Senior Term Debt  (3.2%, Due 1/2014) (7)                        |         | 1,937        |         | 1,762           |         |
|                                              |         |                                                        |         |                                                            |         |         |         |            |         |
| United Maritime  Group, LLC                       |         | Service-cargo  transport                                    |         | Senior  Subordinated Term Debt (8.0%, Due 12/2013) (6)          |         | 5,529        |         | 4,942           |         |
|                                              |         |                                                        |         |                                                            |         |         |         |            |         |
| Wesco  Holdings, Inc.                        |         | Service-aerospace  parts and distribution                   |         | Senior Term Debt  (2.7%, Due 9/2013) (7)                        |         | 2,449        |         | 1,984           |         |
|                                              |         |                                                        |         | Senior  Subordinated Term Debt (6.2%, Due 3/2014) (6)           |         | 2,266        |         | 1,632           |         |
|                                              |         |                                                        |         |                                                            |         |         |         |            |         |
| WP Evenflo Group Holdings  Inc.                   |         | Manufacturing-infant  and juvenile products                 |         | Senior Term Debt  (3.3%, Due 2/2013) (6) (12)              |         | 1,910        |         | 1,220           |         |
|                                              |         |                                                        |         | Senior  Subordinated Term Debt (6.8%, Due 2/2014) (6) (12) |         | 2,000        |         | 1,456           |         |
|                                              |         |                                                        |         |                                                            |         |         |         |            |         |
| *Subtotal - Syndicated loans*                     |         |                                                        |         |                                                            |         | 69,627       |         | 56,170          |         |
|                                              |         |                                                        |         |                                                            |         |         |         |            |         |
| **Total  Non-Control/Non-Affiliate Investments**  | ** **   | ** **                                                  | ** **   | **$**                                                           | **417,063**  | ** **   | **$**        | **369,595**     | ** **   |
|                                                   |              |                                                             |              |                                                                 |              |              |              |                 |              |  |  |

 

5

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Table ofContents

 

**GLADSTONECAPITAL CORPORATION**

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

**AS OF MARCH 31,2009**

**(DOLLARAMOUNTS IN THOUSANDS)**

**(UNAUDITED)**

 
| **Company  (1)**                          | ** ** | **Industry**                                             | ** ** | **Investment  (2)**                                                      | ** ** | **Cost**   | ** **  | **Fair  Value** | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|------------|-------------|-----------------|------------|
| **CONTROL  INVESTMENTS**                  | ** ** | ** **                                               | ** ** | ** **                                                               | ** ** | ** ** | ** **  | ** **      | ** ** |
|                                      |       |                                                     |       |                                                                     |       |       |        |            |       |
| BERTL, Inc.                          |       | Service-web-based  evaluator of digital imaging products |       | Line of Credit,  $842 available (6.7%, Due 10/2009) (13) (15)            |       | $          | 842         |            | $          | — |   |
|                                      |       |                                                     |       | Common Stock  (8) (15)                                              |       | 424        |        | —          |       |
|                                      |       |                                                     |       |                                                                     |       |       |        |            |       |
| Lindmark  Acquisition, LLC                |       | Service-advertising                                      |       | Senior  Subordinated Term Debt (11.3%, Due 10/2012) (14)                 |       | 12,000     |        | 12,000          |       |
|                                      |       |                                                     |       | Senior  Subordinated Term Debt (13.0%, Due 10/2012)(14)                  |       | 1,264      |        | 1,264           |       |
|                                      |       |                                                     |       | Common Stock  (8) (14)                                              |       | 1          |        | 1               |       |
|                                      |       |                                                     |       |                                                                     |       |       |        |            |       |
| LYP Holdings  Corp.                       |       | Service-yellow  pages publishing                    |       | Line of credit,  $1,250 available (10.0%, 5/2009) (15)                   |       | 603        |        | 603             |       |
|                                      |       |                                                     |       | Senior Term Debt  (12.5%, Due 2/2012) (15)                               |       | 250        |        | 250             |       |
|                                      |       |                                                     |       | Line of Credit,  $3,000 available (5.0%, Due 6/2009) (15)                |       | 1,170      |        | 864             |       |
|                                      |       |                                                     |       | Senior Term Debt  (8.5%, Due 6/2011) (15)                                |       | 2,687      |        | —          |       |
|                                      |       |                                                     |       | Senior Term Debt  (10.5%, Due 6/2011) (3) (15)                      |       | 2,750      |        | —          |       |
|                                      |       |                                                     |       | Common Stock  Warrants (8) (15)                                     |       | 1          |        | —          |       |
|                                      |       |                                                     |       |                                                                     |       |       |        |            |       |
| U.S. Healthcare Communications, Inc. |       | Service-magazine  publisher/operator                     |       | Line of credit,  $200 available (non-accrual, Due 3/2010) (10) (15) |       | 169        |        | 169             |       |
|                                      |       |                                                     |       | Line of credit,  $450 available (non-accrual, Due 3/2010) (10) (15) |       | 450        |        | 351             |       |
|                                      |       |                                                     |       | Common Stock  (8) (15)                                              |       | 2,470      |        | —          |       |
|                                      |       |                                                     |       |                                                                     |       |       |        |            |       |
| Western  Directories, Inc.           |       | Service-directory  publisher                             |       | Line of credit,  $1,000 available (10%, Due 8/2009) (15)                 |       | 834        |        | —          |       |
|                                      |       |                                                     |       | Preferred Stock  (8) (15)                                           |       | 1,584      |        | —          |       |
|                                      |       |                                                     |       | Common Stock  (8) (15)                                              |       | 1          |        | —          |       |
|                                      |       |                                                     |       |                                                                     |       |       |        |            |       |
| **Total  Control Investments**            | ** ** | ** **                                               | ** ** | ** **                                                               | ** ** | **$**      | **27,500**  | ** **      | **$**      | **15,502** | ** ** |
| ** **                                | ** ** | ** **                                               | ** ** | ** **                                                               | ** ** | ** ** | ** **  | ** **      | ** ** |
| **Total  Investments**                    | ** ** | ** **                                               | ** ** | ** **                                                               | ** ** | **$**      | **444,563** | ** **      | **$**      | **385,097** | ** ** |

 

----

| (1)  | Certain of the listed securities are issued by  affiliate(s) of the indicated portfolio company.                                                                                                                   |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)  | Percentage represents interest rates in effect at  March 31, 2009 and due date represents the contractual maturity date.                                                                                           |
| (3)  | Last Out Tranche of senior debt, meaning if the  portfolio company is liquidated then the holder of the Last Out Tranche is  paid after the senior debt.                                                                |
| (4)  | Last Out Tranche of senior debt, meaning if the  portfolio company is liquidated then the holder of the Last Out Tranche is  paid after the senior debt, however, the debt is also junior to another Last  Out Tranche. |
| (5)  | Fair value was based on opinions of value submitted  by Standard & Poor’s Securities Evaluations, Inc.                                                                                               |
| (6)  | Security valued using internally-developed,  risk-adjusted discounted cash flow methodologies as of March 31, 2009.                                                                                                |
| (7)  | Security valued based on the transaction sale price  subsequent to March 31, 2009 (see Note 11).                                                                                                                   |
| (8)  | Security is non-income producing.                                                                                                                                                                                       |
| (9)  | Access Television and ActivStyle include success  fees with fair values of $10 and $65, respectively.                                                                                                                   |
| (10) | Badanco, CCS and U.S. Healthcare are currently past  due on interest payments and are on non-accrual.                                                                                                                   |
| (11) | SCI Cable’s loan expired in October 2008. The  Company is actively working to recover amounts due under this loan, however,  there is no assurance that there will be a full recovery of amounts past due.    |
| (12) | WP Evenflo was past due as of March 31, 2009.  The Company is actively working to recover amounts due under the loans,  however, there is no assurance that there will be a full recovery of amounts  past due.    |
| (13) | BERTL’s interest is currently being capitalized as  Paid in Kind (“PIK”) interest.                                                                                                                       |
| (14) | Lindmark valued at cost due to recent restructuring  as a control investment.                                                                                                                                           |
| (15) | Fair value was based on the total enterprise value  of the portfolio company, which was calculated using a liquidity waterfall  approach.                                                                               |

 

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

 

6

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Table ofContents

 

**GLADSTONECAPITAL CORPORATION**

**CONDENSEDCONSOLIDATED SCHEDULE OF INVESTMENTS**

**AS OFSEPTEMBER 30, 2008**

**(DOLLARAMOUNTS IN THOUSANDS)**

 
| **Company  (1)**                                | ** **   | **Industry**                                        | ** **   | **Investment  (2)**                                              | ** **   | **Cost**     | ** **   | **Fair  Value** | ** **   |
|-------------------------------------------------|--------------|-----------------------------------------------------|--------------|------------------------------------------------------------------|--------------|--------------|--------------|-----------------|--------------|
| ** **                                      | ** **   | ** **                                          | ** **   | ** **                                                       | ** **   | ** **   | ** **   | ** **      | ** **   |
| **NON-CONTROL/NON-AFFILIATE  INVESTMENTS**      | ** **   | ** **                                          | ** **   | ** **                                                       | ** **   | ** **   | ** **   |
|                                            |         |                                                |         |                                                             |         |         |         |            |         |
| ***Non-syndicated Loans:***                     | *** *** | *** ***                                        | *** *** | *** ***                                                     | *** *** | *** *** | *** *** | *** ***    | *** *** |
|                                            |         |                                                |         |                                                             |         |         |         |            |         |
| Access Television  Network, Inc.           |         | Service-cable  airtime (infomercials)               |         | Senior Term Debt  (10.5%, Due 3/2009) (6)                        |         | $            | 1,923        |            | $            | 1,774 |   |
|                                            |         |                                                |         |                                                             |         |         |         |            |         |
| ACE Expediters,  Inc                            |         | Service -  over-the-ground logistics                |         | Line of Credit,  $850 available (6.0%, Due 1/2011)               |         | —       |         | —          |         |
|                                            |         |                                                |         | Senior Term Debt  (9.8%, Due 1/2012) (6)                         |         | 11,966       |         | 11,248          |         |
|                                            |         |                                                |         | Common Stock  Warrants (8)                                       |         | 200          |         | 142             |         |
|                                            |         |                                                |         |                                                             |         |         |         |            |         |
| ActivStyle  Acquisition Co.                     |         | Service-medical  products distribution              |         | Line of Credit,  $1,500 available (6.7%, Due 7/2009) (6)         |         | 1,100        |         | 1,059           |         |
|                                            |         |                                                |         | Senior Term Debt  (8.5%, Due 9/2012) (6)                         |         | 4,721        |         | 4,543           |         |
|                                            |         |                                                |         | Senior Term Debt  (10.5%, Due 9/2012) (3) (6)               |         | 4,435        |         | 4,213           |         |
|                                            |         |                                                |         |                                                             |         |         |         |            |         |
| Allison  Publications, LLC                      |         | Service-publisher  of consumer oriented magazines   |         | Line of Credit,  $4,000 available (9.0%, Due 9/2010)             |         | —       |         | —          |         |
|                                            |         |                                                |         | Senior Term Debt  (9.0%, Due 9/2012) (6)                         |         | 10,465       |         | 9,568           |         |
|                                            |         |                                                |         |                                                             |         |         |         |            |         |
| Anitox  Acquisition Company                     |         | Manufacturing-preservatives  for animal feed        |         | Line of Credit,  $3,000 available (6.7%, Due 1/2010) (6)         |         | 2,000        |         | 1,880           |         |
|                                            |         |                                                |         | Senior Term Debt  (8.5%, Due 1/2012) (6)                         |         | 3,388        |         | 3,185           |         |
|                                            |         |                                                |         | Senior Term Debt  (10.5%, Due 1/2012) (3) (6)               |         | 3,688        |         | 3,388           |         |
|                                            |         |                                                |         |                                                             |         |         |         |            |         |
| Badanco  Acquisition Corp.                      |         | Service-luggage  design and distribution            |         | Senior  Subordinated Term Debt (11.5%, Due 7/2012) (6)           |         | 9,458        |         | 8,795           |         |
|                                            |         |                                                |         |                                                             |         |         |         |            |         |
| BAS Broadcasting                                |         | Service-radio  station operator                     |         | Senior Term Debt  (11.5%, Due 7/2013) (5)                        |         | 7,300        |         | 7,209           |         |
|                                            |         |                                                |         | Senior Term Debt  (12.0%, Due 7/2009) (3) (5)               |         | 1,000        |         | 988             |         |
|                                            |         |                                                |         |                                                             |         |         |         |            |         |
| CCS, LLC                                        |         | Service-cable TV  franchise owner                   |         | Senior Term Debt  (9.0%, Due 8/2008) (6)                         |         | 728          |         | 364             |         |
|                                            |         |                                                |         |                                                             |         |         |         |            |         |
| Chinese Yellow  Pages Company              |         | Service-publisher  of Chinese language directories  |         | Line of Credit,  $700 available (9.0%, Due 9/2010) (6)           |         | 575          |         | 529             |         |
|                                            |         |                                                |         | Senior Term Debt  (9.0%, Due 9/2010) (6)                         |         | 702          |         | 638             |         |
|                                            |         |                                                |         |                                                             |         |         |         |            |         |
| Clinton Holdings,  LLC                          |         | Distribution-aluminum  sheets and stainless steel   |         | Senior  Subordinated Term Debt (12.0%, Due 1/2013) (6)           |         | 15,500       |         | 14,880          |         |
|                                            |         |                                                |         | Common Stock  Warrants (8)                                       |         | 109          |         | —          |         |
|                                            |         |                                                |         |                                                             |         |         |         |            |         |
| CMI Acquisition,  LLC                           |         | Service-recycling                                   |         | Senior  Subordinated Term Debt (10.2%, Due 11/2012) (6)          |         | 6,414        |         | 6,061           |         |
|                                            |         |                                                |         |                                                             |         |         |         |            |         |
| Community Media  Corporation                    |         | Service-publisher  of free weekly newspapers        |         | Senior Term Debt  (7.0%, Due 8/2012) (6)                         |         | 987          |         | 936             |         |
|                                            |         |                                                |         |                                                             |         |         |         |            |         |
| Defiance  Acquisition Corporation               |         | Manufacturing-trucking  parts                       |         | Senior Term Debt  (11.0%, Due 4/2010) (3) (6)               |         | 6,165        |         | 5,055           |         |
|                                            |         |                                                |         |                                                             |         |         |         |            |         |
| Doe &  Ingalls Management LLC          |         | Distributor-specialty  chemicals                    |         | Senior Term Debt  (6.8%, Due 11/2010) (6)                        |         | 3,100        |         | 2,945           |         |
|                                            |         |                                                |         | Senior Term Debt  (7.8%, Due 11/2010) (3) (6)               |         | 4,410        |         | 4,167           |         |
|                                            |         |                                                |         |                                                             |         |         |         |            |         |
| Finn Corporation                                |         | Manufacturing-landscape  equipment                  |         | Common Stock  Warrants (8)                                       |         | 37           |         | 1,578           |         |
|                                            |         |                                                |         |                                                             |         |         |         |            |         |
| GFRC Holdings LLC                               |         | Manufacturing-glass-fiber  reinforced concrete      |         | Line of Credit,  $3,000 available (6.7%, Due 12/2010)            |         | —       |         | —          |         |
|                                            |         |                                                |         | Senior Term Debt  (9.3%, Due 12/2012) (6)                        |         | 7,362        |         | 7,105           |         |
|                                            |         |                                                |         | Senior  Subordinated Term Debt (11.8%, Due 12/2012) (3) (6) |         | 6,716        |         | 6,414           |         |
|                                            |         |                                                |         |                                                             |         |         |         |            |         |
| Global Materials Technologies, Inc.        |         | Manufacturing-steel  wool products and metal fibers |         | Senior Term Debt  (13.0%, Due 11/2009) (3) (6)              |         | 4,640        |         | 4,153           |         |
|                                            |         |                                                |         |                                                             |         |         |         |            |         |
| Heartland  Communications Group, LLC            |         | Service-radio  station operator                     |         | Line of Credit,  $500 available (10.0%, Due 12/2008) (6)         |         | 105          |         | 79              |         |
|                                            |         |                                                |         | Senior Term Debt  (10.0%, Due 5/2011) (6)                        |         | 4,523        |         | 3,386           |         |
|                                            |         |                                                |         |                                                             |         |         |         |            |         |
| Interfilm  Holdings, Inc.                  |         | Service-slitter  and distributor of plastic films   |         | Senior Term Debt  (10.5%, Due 10/2012) (6)                       |         | 5,000        |         | 4,750           |         |
|                                            |         |                                                |         |                                                             |         |         |         |            |         |
| International  Junior Golf Training Acquisition |         | Service-golf  training                              |         | Line of Credit,  $1,500 available (9.2%, Due 5/2010) (6)         |         | 1,400        |         | 1,288           |         |
| Company                                         |         |                                                |         | Senior Term Debt  (6.7%, Due 5/2012) (6)                         |         | 2,551        |         | 2,347           |         |
|                                            |         |                                                |         | Senior Term Debt  (10.5%, Due 5/2012) (3) (6)               |         | 2,500        |         | 2,288           |         |
|                                            |         |                                                |         |                                                             |         |         |         |            |         |
| It’s Just Lunch  International, LLC        |         | Service-dating  service                             |         | Line of Credit,  $750 available (6.5%, Due 6/2009) (6)           |         | 550          |         | 275             |         |
|                                            |         |                                                |         | Senior Term Debt  (6.7%, Due 6/2011) (6)                         |         | 3,300        |         | 1,650           |         |
|                                            |         |                                                |         | Senior Term Debt  (10.5%, Due 6/2011) (3) (6) (9)      |         | 500          |         | 250             |         |
|                                                 |              |                                                     |              |                                                                  |              |              |              |                 |              |  |  |

 

7

----

Table ofContents

 

**GLADSTONE CAPITAL CORPORATION**

**CONDENSED CONSOLIDATED SCHEDULE OFINVESTMENTS (Continued)**

**SEPTEMBER 30, 2008**

**(DOLLAR AMOUNTS IN THOUSANDS)**

 
| **Company  (1)**                                 | ** ** | **Industry**                                           | ** ** | **Investment  (2)**                                       | ** ** | **Cost** | ** ** | **Fair  Value** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------------|------------|-----------------------------------------------------------|------------|----------|------------|-----------------|------------|
| KMBQ Corporation                                 |       | Service-AM/FM  radio broadcaster                       |       | Line of Credit,  $200 available (11.0%, Due 3/2010) (6)   |       | $        | 153        |            | $          | 137 |   |
|                                             |       |                                                   |       | Senior Term Debt  (11.0%, Due 3/2010) (6)                 |       | 1,792    |       | 1,594           |       |
|                                             |       |                                                   |       |                                                      |       |     |       |            |       |
| Legend  Communications of Wyoming LLC            |       | Service-operator  of radio stations                    |       | Line of Credit,  $500 available (11.0%, Due 6/2011) (5)   |       | 397      |       | 392             |       |
|                                             |       |                                                   |       | Senior Term Debt  (11.0%, Due 6/2013) (5)                 |       | 9,250    |       | 9,134           |       |
|                                             |       |                                                   |       |                                                      |       |     |       |            |       |
| Lindmark Outdoor  Advertising LLC                |       | Service-advertising                                    |       | Senior  Subordinated Term Debt (11.0%, Due 10/2012) (6)   |       | 11,421   |       | 9,651           |       |
|                                             |       |                                                   |       |                                                      |       |     |       |            |       |
| Multi-Ag Media  LLC                              |       | Service-dairy  magazine publisher/information database |       | Senior Term Debt  (9.0%, Due 12/2009) (6)                 |       | 2,072    |       | 1,853           |       |
|                                             |       |                                                   |       |                                                      |       |     |       |            |       |
| Newhall  Holdings, Inc.                     |       | Service-distributor  of personal care products and     |       | Line of Credit,  $4,000 available (6.0%, Due 5/2010) (6)  |       | 2,100    |       | 1,880           |       |
|                                             |       | supplements                                            |       | Senior Term Debt  (8.3%, Due 5/2012) (6)                  |       | 4,230    |       | 3,807           |       |
|                                             |       |                                                   |       | Senior Term Debt  (11.3%, Due 5/2012) (3) (6)        |       | 4,500    |       | 4,016           |       |
|                                             |       |                                                   |       |                                                      |       |     |       |            |       |
| Northern  Contours, Inc.                    |       | Manufacturing-veneer  and laminate components          |       | Senior  Subordinated Term Debt (10.0%, Due 5/2010) (6)    |       | 6,912    |       | 6,082           |       |
|                                             |       |                                                   |       |                                                      |       |     |       |            |       |
| Pinnacle  Treatment Centers, Inc.           |       | Service-Addiction  treatment centers                   |       | Line of Credit,  $500 available (6.7%, Due 12/2009)       |       | —   |       | —          |       |
|                                             |       |                                                   |       | Senior Term Debt  (8.5%, Due 12/2011) (6)                 |       | 3,550    |       | 3,319           |       |
|                                             |       |                                                   |       | Senior Term Debt  (10.5%, Due 12/2011) (3) (6)       |       | 7,500    |       | 6,938           |       |
|                                             |       |                                                   |       |                                                      |       |     |       |            |       |
| Precision  Acquisition Group Holdings, Inc. |       | Manufacturing-consumable  components for the           |       | Equipment Note,  $1,500 available (8.5%, Due 10/2011) (6) |       | 1,000    |       | 993             |       |
|                                             |       | aluminum industry                                      |       | Senior Term Debt  (8.5%, Due 10/2010) (6)                 |       | 4,750    |       | 4,714           |       |
|                                             |       |                                                   |       | Senior Term Debt  (11.5%, Due 10/2010) (3) (6)       |       | 4,158    |       | 4,127           |       |
|                                             |       |                                                   |       |                                                      |       |     |       |            |       |
| PROFITSystems Acquisition  Co.                   |       | Service-design  and develop ERP software               |       | Line of Credit,  $1,250 available (6.7%, Due 7/2009)      |       | —   |       | —          |       |
|                                             |       |                                                   |       | Senior Term Debt  (8.5%, Due 7/2011) (6)                  |       | 2,200    |       | 2,027           |       |
|                                             |       |                                                   |       | Senior Term Debt  (10.5%, Due 7/2011) (3) (6)        |       | 2,900    |       | 2,657           |       |
|                                             |       |                                                   |       |                                                      |       |     |       |            |       |
| RCS Management  Holding Co.                      |       | Service-healthcare  supplies                           |       | Senior Term Debt  (8.5%, Due 1/2011) (3) (6)         |       | 2,875    |       | 2,695           |       |
|                                             |       |                                                   |       | Senior Term Debt  (10.5%, Due 1/2011) (4) (6)        |       | 3,060    |       | 2,815           |       |
|                                             |       |                                                   |       |                                                      |       |     |       |            |       |
| Reliable  Biopharmaceutical Holdings, Inc.  |       | Manufacturing-pharmaceutical  and biochemical          |       | Line of Credit,  $5,000 available (9.0%, Due 10/2010) (6) |       | 1,600    |       | 1,528           |       |
|                                             |       | intermediates                                          |       | Mortgage Note  (9.5%, Due 10/2014) (6)                    |       | 7,407    |       | 7,147           |       |
|                                             |       |                                                   |       | Senior Term Debt  (9.0%, Due 10/2012) (6)                 |       | 1,800    |       | 1,719           |       |
|                                             |       |                                                   |       | Senior Term Debt  (11.0%, Due 10/2012) (3) (6)       |       | 11,933   |       | 11,352          |       |
|                                             |       |                                                   |       | Senior  Subordinated Term Debt (12.0%, Due 10/2013) (6)   |       | 6,000    |       | 5,445           |       |
|                                             |       |                                                   |       | Common Stock  Warrants (8)                                |       | 209      |       | —          |       |
|                                             |       |                                                   |       |                                                      |       |     |       |            |       |
| Saunders &  Associates                  |       | Manufacturing-equipment  provider for frequency        |       | Line of Credit,  $2,500 available (6.9%, Due 5/2009)      |       | —   |       | —          |       |
|                                             |       | control devices                                        |       | Senior Term Debt  (9.8%, Due 5/2013) (6)                  |       | 10,945   |       | 10,740          |       |
|                                             |       |                                                   |       |                                                      |       |     |       |            |       |
| SCI  Cable, Inc.                            |       | Service-cable,  internet, voice provider               |       | Senior Term Debt  (11.0%, Due 10/2008) (6)                |       | 2,712    |       | 1,355           |       |
|                                             |       |                                                   |       |                                                      |       |     |       |            |       |
| Sunburst Media -  Louisiana, LLC                 |       | Service-radio  station operator                        |       | Senior Term Debt  (9.5%, Due 6/2011) (6)                  |       | 7,857    |       | 6,728           |       |
|                                             |       |                                                   |       |                                                      |       |     |       |            |       |
| Sunshine Media  Holdings                         |       | Service-publisher  regional B2B trade magazines        |       | Line of Credit,  $3,000 available (11.0%, Due 5/2010) (6) |       | 700      |       | 627             |       |
|                                             |       |                                                   |       | Senior Term Debt  (11.0%, Due 5/2012) (6)                 |       | 17,000   |       | 15,300          |       |
|                                             |       |                                                   |       | Senior Term Debt  (13.5%, Due 5/2012) (3) (6)        |       | 10,000   |       | 8,750           |       |
|                                             |       |                                                   |       |                                                      |       |     |       |            |       |
| Thibaut Acquisition  Co.                         |       | Service-design  and disbribute wall covering           |       | Line of Credit,  $2,000 available (7.0%, Due 1/2011) (6)  |       | 2,000    |       | 1,838           |       |
|                                             |       |                                                   |       | Senior Term Debt  (7.0%, Due 1/2011) (6)                  |       | 2,013    |       | 1,849           |       |
|                                             |       |                                                   |       | Senior Term Debt  (10.5%, Due 1/2011) (3) (6)        |       | 3,000    |       | 2,685           |       |
|                                             |       |                                                   |       |                                                      |       |     |       |            |       |
| Tulsa Welding  School                            |       | Service-private  welding school                        |       | Line of credit,  $2,000 available (9.5%, 9/2011)          |       | —   |       | —          |       |
|                                             |       |                                                   |       | Senior Term Debt  (9.5%, 9/2013) (5)                      |       | 4,000    |       | 4,000           |       |
|                                             |       |                                                   |       | Senior Term Debt  (12.8%, 9/2013) (5)                     |       | 8,000    |       | 8,000           |       |
|                                             |       |                                                   |       |                                                      |       |     |       |            |       |
| Vanta Core                                       |       | Service-acquisition  of aggregate quarries             |       | Senior  Subordinated Term Debt (12.0%, 8/2013) (6)        |       | 13,100   |       | 12,936          |       |
|                                             |       |                                                   |       |                                                      |       |     |       |            |       |
| Viapack, Inc.                               |       | Manufacturing-polyethylene  film                       |       | Senior Real  Estate Term Debt (7.0%, Due 3/2011) (6)      |       | 850      |       | 780             |       |
|                                             |       |                                                   |       | Senior Term Debt  (11.3%, Due 3/2011) (3) (6)        |       | 4,091    |       | 3,733           |       |
|                                             |       |                                                   |       |                                                      |       |     |       |            |       |
| Visual Edge  Technology, Inc.               |       | Service-office  equipment distribution                 |       | Senior  Subordinated Term Debt (11.5%, Due 8/2011) (6)    |       | 5,000    |       | 2,925           |       |
|                                                  |            |                                                        |            |                                                           |            |          |            |                 |            |  |  |

 

8

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Table ofContents

 

**GLADSTONE CAPITAL CORPORATION**

**CONDENSED CONSOLIDATED SCHEDULE OFINVESTMENTS (Continued)**

**SEPTEMBER 30, 2008**

**(DOLLARAMOUNTS IN THOUSANDS)**

 
| **Company  (1)**                                  | ** **   | **Industry**                                                | ** **   | **Investment  (2)**                                                    | ** **   | **Cost**     | ** **   | **Fair  Value** | ** **   |
|---------------------------------------------------|--------------|-------------------------------------------------------------|--------------|------------------------------------------------------------------------|--------------|--------------|--------------|-----------------|--------------|
| Westlake  Hardware, Inc.                     |         | Retail-hardware  and variety                                |         | Senior  Subordinated Term Debt (9.0%, Due 1/2011) (6)                  |         | $            | 15,000       |            | $            | 13,800 |   |
|                                              |         |                                                        |         | Senior  Subordinated Term Debt (10.3%, Due 1/2011) (6)                 |         | 10,000       |         | 9,000           |         |
|                                              |         |                                                        |         |                                                                   |         |         |         |            |         |
| Winchester Electronics                            |         | Manufacturing-high  bandwidth connectors and cables         |         | Senior Term Debt  (8.0%, Due 5/2013) (6)                               |         | 1,699        |         | 1,563           |         |
|                                              |         |                                                        |         | Senior  Subordinated Term Debt (13.0%, Due 6/2013) (6)                 |         | 9,950        |         | 9,055           |         |
|                                              |         |                                                        |         |                                                                   |         |         |         |            |         |
| *Subtotal  - Non-syndicated loans*                |         |                                                        |         |                                                                   |         | 371,204      |         | 340,816         |         |
|                                              |         |                                                        |         |                                                                   |         |         |         |            |         |
| ***Syndicated Loans:***                           | *** *** | *** ***                                                | *** *** | *** ***                                                           | *** *** | *** *** | *** *** | *** ***    | *** *** |
|                                              |         |                                                        |         |                                                                   |         |         |         |            |         |
| AKQA Holdings                                     |         | Service - market  and advertising                           |         | Senior Term Debt  (7.7%, Due 3/2013) (7)                               |         | $            | 8,273        |            | $            | 7,980 |   |
|                                              |         |                                                        |         |                                                                   |         |         |         |            |         |
| Bresnan  Communications, LLC                      |         | Service-telecommunications                                  |         | Senior Term Debt  (4.8%, Due 9/2013) (7)                               |         | 3,001        |         | 2,670           |         |
|                                              |         |                                                        |         | Senior  Subordinated Term Debt (7.6%, Due 3/2014) (7)                  |         | 1,508        |         | 1,305           |         |
|                                              |         |                                                        |         |                                                                   |         |         |         |            |         |
| CHG  Companies, Inc.                         |         | Service-healthcare  staffing                                |         | Letter of Credit,  $400 available (6.0%, Due 12/2012) (7)              |         | 400          |         | 356             |         |
|                                              |         |                                                        |         | Senior Term Debt  (5.3%, Due 12/2012) (7)                              |         | 1,572        |         | 1,399           |         |
|                                              |         |                                                        |         | Senior  Subordinated Term Debt (8.5%, Due 12/2013) (7)                 |         | 500          |         | 425             |         |
|                                              |         |                                                        |         |                                                                   |         |         |         |            |         |
| Country Road Communications  LLC                  |         | Service-telecommunications                                  |         | Senior  Subordinated Term Debt (11.5%, Due 7/2013) (7)                 |         | 5,973        |         | 5,880           |         |
|                                              |         |                                                        |         |                                                                   |         |         |         |            |         |
| Emdeon Business  Services, Inc.              |         | Service-healthcare  technology solutions                    |         | Senior Term Debt  (5.8%, Due 11/2013) (7)                              |         | 2,359        |         | 2,027           |         |
|                                              |         |                                                        |         | Senior  Subordinated Term Debt (8.8%, Due 5/2014) (7)                  |         | 2,011        |         | 1,720           |         |
|                                              |         |                                                        |         |                                                                   |         |         |         |            |         |
| GTM  Holdings, Inc.                          |         | Manufacturing-socks                                         |         | Senior Term Debt  (8.5%, Due 10/2013) (7)                              |         | 491          |         | 359             |         |
|                                              |         |                                                        |         | Senior  Subordinated Term Debt (11.8%, Due 4/2014) (7)                 |         | 500          |         | 325             |         |
|                                              |         |                                                        |         |                                                                   |         |         |         |            |         |
| Greatwide  Logistics Services, Inc.          |         | Service -  logistics and transportation                     |         | Senior Term Debt  (non-accrual, Due 12/2013) (7) (10)             |         | 3,950        |         | 2,765           |         |
|                                              |         |                                                        |         | Senior  Subordinated Term Debt (non-accrual, Due 6/2014) (7) (10) |         | 2,000        |         | 700             |         |
|                                              |         |                                                        |         |                                                                   |         |         |         |            |         |
| Harrington  Holdings, Inc.                   |         | Service -  healthcare products distribution                 |         | Senior Term Debt  (6.0%, Due 1/2014) (7)                               |         | 2,463        |         | 2,192           |         |
|                                              |         |                                                        |         | Senior  Subordinated Term Debt (9.7%, Due 1/2014) (7)                  |         | 5,000        |         | 3,750           |         |
|                                              |         |                                                        |         |                                                                   |         |         |         |            |         |
| John Henry  Holdings, Inc.                   |         | Manufacturing-packaging  products                           |         | Senior  Subordinated Term Debt (11.6%, Due 6/2011) (7)                 |         | 8,000        |         | 7,600           |         |
|                                              |         |                                                        |         |                                                                   |         |         |         |            |         |
| Kinetek  Acquisition Corp.                        |         | Manufacturing-custom  engineered motors & controls |         | Senior Term Debt  (6.2%, Due 11/2013) (7)                              |         | 1,478        |         | 1,326           |         |
|                                              |         |                                                        |         | Senior  Subordinated Term Debt (9.2%, Due 5/2014) (7)                  |         | 1,508        |         | 1,275           |         |
|                                              |         |                                                        |         |                                                                   |         |         |         |            |         |
| Puerto Rico Cable  Acquisition Company, Inc. |         | Service-telecommunications                                  |         | Senior  Subordinated Term Debt (11.3%, Due 1/2012) (7)                 |         | 7,189        |         | 5,570           |         |
|                                              |         |                                                        |         |                                                                   |         |         |         |            |         |
| RedPrairie  Holding, Inc.                    |         | Service-design  and develop supply chain software           |         | Senior Term Debt  (6.1%, Due 7/2012) (7)                               |         | 4,412        |         | 4,014           |         |
|                                              |         |                                                        |         | Senior  Subordinated Term Debt (9.3%, Due 1/2013) (7)                  |         | 3,000        |         | 2,550           |         |
|                                              |         |                                                        |         |                                                                   |         |         |         |            |         |
| RiskMetrics Group  Holdings, LLC                  |         | Service - develop  risk and wealth management solutions     |         | Senior Term Debt  (5.8%, Due 1/2014) (7)                               |         | 1,936        |         | 1,812           |         |
|                                              |         |                                                        |         |                                                                   |         |         |         |            |         |
| United Maritime  Group, LLC                       |         | Service-cargo  transport                                    |         | Senior Subordinated  Term Debt (11.2%, Due 12/2013) (7)                |         | 1,000        |         | 950             |         |
|                                              |         |                                                        |         |                                                                   |         |         |         |            |         |
| Wesco  Holdings, Inc.                        |         | Service-aerospace  parts and distribution                   |         | Senior Term Debt  (6.0%, Due 9/2013) (7)                               |         | 2,451        |         | 2,212           |         |
|                                              |         |                                                        |         | Senior  Subordinated Term Debt (9.5%, Due 3/2014) (7)                  |         | 2,267        |         | 1,980           |         |
|                                              |         |                                                        |         |                                                                   |         |         |         |            |         |
| WP Evenflo Group Holdings  Inc.                   |         | Manufacturing-infant  and juvenile products                 |         | Senior Term Debt  (5.3%, Due 2/2013) (7)                               |         | 1,910        |         | 1,595           |         |
|                                              |         |                                                        |         | Senior  Subordinated Term Debt (8.8%, Due 2/2014) (7)                  |         | 2,000        |         | 1,600           |         |
|                                              |         |                                                        |         |                                                                   |         |         |         |            |         |
| *Subtotal  - Syndicated loans*                    |         |                                                        |         |                                                                   |         | 77,152       |         | 66,337          |         |
|                                              |         |                                                        |         |                                                                   |         |         |         |            |         |
| **Total  Non-Control/Non-Affiliate Investments**  | ** **   | ** **                                                  | ** **   | **$**                                                                  | **448,356**  | ** **   | **$**        | **407,153**     | ** **   |

 

9

----

Table ofContents

 

**GLADSTONE CAPITAL CORPORATION**

**CONDENSED CONSOLIDATED SCHEDULE OFINVESTMENTS (Continued)**

**SEPTEMBER 30, 2008**

**(DOLLARAMOUNTS IN THOUSANDS)**

 
| **Company  (1)**                          | ** ** | **Industry**                                             | ** ** | **Investment  (2)**                                                        | ** ** | **Cost**   | ** **  | **Fair  Value** | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|------------|-------------|-----------------|------------|
| **CONTROL  INVESTMENTS**                  | ** ** | ** **                                               | ** ** | ** **                                                                 | ** ** | ** ** | ** **  | ** **      | ** ** |
|                                      |       |                                                     |       |                                                                       |       |       |        |            |       |
| BERTL, Inc.                          |       | Service-web-based  evaluator of digital imaging products |       | Line of Credit,  $700 available (8.7%, Due 10/2009) (11) (12)              |       | $          | 742         |            | $          | — |   |
|                                      |       |                                                     |       | Common Stock (8)                                                           |       | 424        |        | —          |       |
|                                      |       |                                                     |       |                                                                       |       |       |        |            |       |
| LYP Holdings  Corp.                       |       | Service-yellow  pages publishing                         |       | Line of credit,  $500 available (10.0%, 5/2009) (12)                       |       | 75         |        | —          |       |
|                                      |       |                                                     |       | Line of Credit,  $3,000 available (non-accrual, Due 6/2009) (10) (12) |       | 1,170      |        | —          |       |
|                                      |       |                                                     |       | Senior Term Debt  (non-accrual, Due 6/2011) (10) (12)                 |       | 2,688      |        | —          |       |
|                                      |       |                                                     |       | Senior Term Debt  (non-accrual, Due 6/2011) (3) (10) (12)        |       | 2,750      |        | —          |       |
|                                      |       |                                                     |       | Common Stock  Warrants (8)                                                 |       | 1          |        | —          |       |
|                                      |       |                                                     |       |                                                                       |       |       |        |            |       |
| U.S. Healthcare Communications, Inc. |       | Service-magazine  publisher/operator                     |       | Line of credit,  $200 available (non-accrual, Due 3/2010) (10)             |       | 90         |        | 90              |       |
|                                      |       |                                                     |       | Line of credit,  $450 available (non-accrual, Due 3/2010) (10)             |       | 450        |        | 450             |       |
|                                      |       |                                                     |       | Common Stock (8)                                                           |       | 2,470      |        | 240             |       |
|                                      |       |                                                     |       |                                                                       |       |       |        |            |       |
| Western  Directories, Inc.           |       | Service-directory  publisher                             |       | Line of credit,  $1,000 available (10%, Due 8/2009) (12)                   |       | 69         |        | —          |       |
|                                      |       |                                                     |       | Preferred Stock  (8)                                                       |       | 1,584      |        | —          |       |
|                                      |       |                                                     |       | Common Stock (8)                                                           |       | 1          |        | —          |       |
|                                      |       |                                                     |       |                                                                       |       |       |        |            |       |
| **Total  Control Investments**            | ** ** | ** **                                               | ** ** | ** **                                                                 | ** ** | **$**      | **12,514**  | ** **      | **$**      | **780** | ** ** |
| ** **                                | ** ** | ** **                                               | ** ** | ** **                                                                 | ** ** | ** ** | ** **  | ** **      | ** ** |
| **Total  Investments**                    | ** ** | ** **                                               | ** ** | ** **                                                                 | ** ** | **$**      | **460,870** | ** **      | **$**      | **407,933** | ** ** |

 

----

| (1)  | Certain of the listed securities are issued by  affiliate(s) of the indicated portfolio company.                                                                                                                                                                                                            |
|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)  | Percentage represents interest rates in effect at  September 30, 2008 and due date represents the contractual maturity  date.                                                                                                                                                                               |
| (3)  | Last Out Tranche of senior debt, meaning if the  company is liquidated then the holder of the Last Out Tranche is paid after  the senior debt.                                                                                                                                                                   |
| (4)  | Last Out Tranche of senior debt, meaning if the  company is liquidated then the holder of the Last Out Tranche is paid after  the senior debt, however the debt is junior to another Last Out Tranche.                                                                                                           |
| (5)  | Investment valued at cost due to recent acquisition.                                                                                                                                                                                                                                                             |
| (6)  | Fair value was based on opinions of value submitted  by Standard & Poor’s Securities Evaluations, Inc.                                                                                                                                                                                        |
| (7)  | Marketable securities, such as syndicated loans, are  valued based on the indicative bid price, as of September 30, 2008, from  the respective originating syndication agent’s trading desk.                                                                                                           |
| (8)  | Security is non-income producing.                                                                                                                                                                                                                                                                                |
| (9)  | It’s Just Lunch may borrow an additional $1,750 of  the senior term debt facility, subject to certain conditions including  Gladstone Capital’s approval, borrowings of $500 were outstanding at September 30,  2008.                                                                             |
| (10) | Greatwide, LYP Holdings and U.S. Healthcare are  currently past due on interest payments and are on non-accrual.                                                                                                                                                                                                 |
| (11) | BERTL line of credit was overdrawn by $42 as of  September 30, 2008. The Company is currently restructuring the line of  credit. BERTL interest is currently being capitalized as Paid in Kind (“PIK”)  interest. Please refer to Note 2 “Summary of Significant Accounting  Policies.” |
| (12) | Fair value was based on the total enterprise value  of the issuer, which was calculated using a liquidity waterfall approach.                                                                                                                                                                                    |

 

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

 

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**GLADSTONECAPITAL CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(UNAUDITED)**

 
| ** **                                                                         | ** ** | **Three Months Ended March 31,** | ** ** | **Six Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2009**                                             | ** ** | **2008**                                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| INVESTMENT INCOME                                                                  |       |                                                 |       |                                               |       |   |   |   |   |
| Interest income — Non-Control/Non-Affiliate  investments                      |       | $                                                    | 10,329     |                                               | $          | 11,108 |   | $ | 21,990 |   | $ | 22,233 |   |
| Interest income — Control investments                                         |       | 482                                                  |       | 16                                                 |       | 502 |   | 30 |   |
| Interest income — Cash                                                        |       | 1                                                    |       | 103                                                |       | 11 |   | 247 |   |
| Interest income — Notes receivable from employees  (Refer to Note 4)          |       | 117                                                  |       | 118                                                |       | 235 |   | 236 |   |
| Prepayment fees and other income                                                   |       | —                                               |       | 5                                                  |       | — |   | 5 |   |
| Total investment income                                                            |       | 10,929                                               |       | 11,350                                             |       | 22,738 |   | 22,751 |   |
|                                                                               |       |                                                 |       |                                               |       |   |   |   |   |
| EXPENSES                                                                           |       |                                                 |       |                                               |       |   |   |   |   |
| Interest expense                                                                   |       | 2,016                                                |       | 1,855                                              |       | 4,478 |   | 4,211 |   |
| Loan servicing fee (Refer to Note 4)                                               |       | 1,526                                                |       | 1,562                                              |       | 3,149 |   | 2,943 |   |
| Base management fee (Refer to Note 4)                                              |       | 484                                                  |       | 557                                                |       | 917 |   | 1,134 |   |
| Incentive fee (Refer to Note 4)                                                    |       | 1,089                                                |       | 1,288                                              |       | 2,265 |   | 2,749 |   |
| Administration fee (Refer to Note 4)                                               |       | 211                                                  |       | 240                                                |       | 438 |   | 452 |   |
| Professional fees                                                                  |       | 205                                                  |       | 410                                                |       | 518 |   | 539 |   |
| Amortization of deferred financing fees                                            |       | 726                                                  |       | 184                                                |       | 1,446 |   | 258 |   |
| Stockholder related costs                                                          |       | 196                                                  |       | 138                                                |       | 284 |   | 258 |   |
| Directors fees                                                                     |       | 48                                                   |       | 57                                                 |       | 97 |   | 111 |   |
| Insurance expense                                                                  |       | 65                                                   |       | 59                                                 |       | 122 |   | 113 |   |
| Other expenses                                                                     |       | 74                                                   |       | 95                                                 |       | 140 |   | 161 |   |
| Expenses before credit from Adviser                                                |       | 6,640                                                |       | 6,445                                              |       | 13,854 |   | 12,929 |   |
| Credit to base management and incentive fees from Adviser  (Refer to Note 4)       |       | (1,266                                               | )          | (1,537                                             | )          | (2,553 | ) | (3,923 | ) |
| Total expenses net of credit to base management and  incentive fees                |       | 5,374                                                |       | 4,908                                              |       | 11,301 |   | 9,006 |   |
|                                                                               |       |                                                 |       |                                               |       |   |   |   |   |
| NET INVESTMENT INCOME                                                              |       | 5,555                                                |       | 6,442                                              |       | 11,437 |   | 13,745 |   |
|                                                                               |       |                                                 |       |                                               |       |   |   |   |   |
| REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS  AND DERIVATIVE:                |       |                                                 |       |                                               |       |   |   |   |   |
| Net realized loss on investments                                                   |       | (2,000                                               | )          | —                                             |       | (3,731 | ) | — |   |
| Realized (loss) gain on settlement of derivative                                   |       | (304                                                 | )          | 1                                                  |       | (304 | ) | 7 |   |
| Unrealized appreciation (depreciation) on derivative                               |       | 304                                                  |       | (2                                                 | )          | 304 |   | (12 | ) |
| Net unrealized appreciation (depreciation) on  investments                         |       | 6,725                                                |       | (18,345                                            | )          | (6,528 | ) | (23,744 | ) |
| Net gain (loss) on investments                                                     |       | 4,725                                                |       | (18,346                                            | )          | (10,259 | ) | (23,749 | ) |
|                                                                               |       |                                                 |       |                                               |       |   |   |   |   |
| NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM  OPERATIONS                   |       | $                                                    | 10,280     |                                               | $          | (11,904 | ) | $ | 1,178 |   | $ | (10,004 | ) |
|                                                                               |       |                                                 |       |                                               |       |   |   |   |   |
| NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM  OPERATIONS PER COMMON SHARE: |       |                                                 |       |                                               |       |   |   |   |   |
| Basic and Diluted                                                                  |       | $                                                    | 0.48       |                                               | $          | (0.61 | ) | $ | 0.05 |   | $ | (0.55 | ) |
|                                                                               |       |                                                 |       |                                               |       |   |   |   |   |
| WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:                               |       |                                                 |       |                                               |       |   |   |   |   |
| Basic and Diluted                                                                  |       | 21,087,574                                           |       | 19,670,333                                         |       | 21,087,574 |   | 18,312,018 |   |

 

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

 

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**GLADSTONECAPITAL CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS**

**(DOLLAR AMOUNTS IN THOUSANDS)**

**(UNAUDITED)**

 
| ** **                                                       | ** ** | **Six Months Ended March 31,** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                       | ** ** | **2009**                                           | ** ** | **2008** | ** ** |
| *Operations:*                                                    |       |                                               |       |   |   |
| Net investment income                                            |       | $                                                  | 11,437     |   | $ | 13,745 |   |
| Net realized loss on investments                                 |       | (3,731                                             | )          | — |   |
| Realized (loss) gain on settlement of derivative                 |       | (304                                               | )          | 7 |   |
| Unrealized appreciation (depreciation) on derivative             |       | 304                                                |       | (12 | ) |
| Net unrealized depreciation on investments                       |       | (6,528                                             | )          | (23,744 | ) |
| Net increase (decrease) in net assets from  operations           |       | 1,178                                              |       | (10,004 | ) |
|                                                             |       |                                               |       |   |   |
| *Capital transactions:*                                          |       |                                               |       |   |   |
| Issuance of common stock under shelf offering                    |       | —                                             |       | 106,226 |   |
| Shelf offering costs                                             |       | (3                                                 | )          | (715 | ) |
| Distributions to stockholders                                    |       | (17,714                                            | )          | (15,666 | ) |
| Repayment of principal on employee notes                         |       | 4                                                  |       | 49 |   |
| Net (decrease) increase in net assets from capital  transactions |       | (17,713                                            | )          | 89,894 |   |
|                                                             |       |                                               |       |   |   |
| Total (decrease) increase in net assets                          |       | (16,535                                            | )          | 79,890 |   |
| Net assets at beginning of year                                  |       | 271,748                                            |       | 220,959 |   |
| Net assets at end of period                                      |       | $                                                  | 255,213    |   | $ | 300,849 |   |

 

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

 

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**GLADSTONECAPITAL CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(DOLLAR AMOUNTS IN THOUSANDS)**

**(UNAUDITED)**

 
| ** **                                                                                                                                         | ** ** | **Six Months ended March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                                                                                         | ** ** | **2009**                                           | ** ** | **2008** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES**                                                                                                           |       |                                               |       |   |   |
| Net increase (decrease) in net assets resulting from  operations                                                                                   |       | $                                                  | 1,178      |   | $ | (10,004 | ) |
| Adjustments to reconcile net (decrease) increase in  net assets resulting from operations to net cash provided by (used in)  operating activities: |       |                                               |       |   |   |
| Purchase of investments                                                                                                                            |       | (17,129                                            | )          | (93,824 | ) |
| Principal repayments on investments                                                                                                                |       | 27,980                                             |       | 7,047 |   |
| Proceeds from sale of investments                                                                                                                  |       | 2,212                                              |       | — |   |
| Net amortization of premiums and discounts                                                                                                         |       | (109                                               | )          | 167 |   |
| Increase in investment balance due to payment in  kind interest                                                                                    |       | (377                                               | )          | (26 | ) |
| Net realized loss on investments                                                                                                                   |       | 3,731                                              |       | — |   |
| Amortization of deferred financing fees                                                                                                            |       | 1,445                                              |       | 258 |   |
| Realized loss on settlement of derivative                                                                                                          |       | 304                                                |       | — |   |
| Unrealized (appreciation) depreciation on derivative                                                                                               |       | (304                                               | )          | 12 |   |
| Change in net unrealized depreciation on investments                                                                                               |       | 6,528                                              |       | 23,744 |   |
| Decrease (increase) in interest receivable                                                                                                         |       | 89                                                 |       | (876 | ) |
| (Increase) decrease in funds due from custodian                                                                                                    |       | (5,588                                             | )          | 160 |   |
| Decrease in prepaid assets                                                                                                                         |       | 57                                                 |       | 57 |   |
| (Increase) decrease in other assets                                                                                                                |       | (317                                               | )          | 83 |   |
| Increase in accounts payable                                                                                                                       |       | —                                             |       | 11 |   |
| Decrease in interest payable                                                                                                                       |       | (166                                               | )          | (220 | ) |
| (Decrease) increase in accrued expenses and deferred  liabilities                                                                                  |       | (33                                                | )          | 207 |   |
| Increase (decrease) in fees due to affiliate (Refer  to Note 4)                                                                                    |       | 235                                                |       | (16 | ) |
| (Decrease) increase in administration fee due to  Gladstone Administration (Refer to Note 4)                                                       |       | (37                                                | )          | 3 |   |
| (Decrease) increase in funds held in escrow                                                                                                        |       | (113                                               | )          | 224 |   |
| Net cash provided by (used in) operating activities                                                                                                |       | 19,586                                             |       | (72,993 | ) |
|                                                                                                                                               |       |                                               |       |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                                                                                          |       |                                               |       |   |   |
| Redemption of U.S. Treasury Bill                                                                                                                   |       |  —                                       |       | 2,484 |   |
| Net cash provided by investing activities                                                                                                          |       |  —                                       |       | 2,484 |   |
|                                                                                                                                               |       |                                               |       |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                                                                                          |       |                                               |       |   |   |
| Net proceeds from the issuance of common stock                                                                                                     |       |  —                                       |       | 106,226 |   |
| Shelf offering costs                                                                                                                               |       | (3                                                 | )          | (715 | ) |
| Borrowings from the line of credit                                                                                                                 |       | 39,300                                             |       | 95,900 |   |
| Repayments on the line of credit                                                                                                                   |       | (36,960                                            | )          | (116,881 | ) |
| Distributions paid                                                                                                                                 |       | (17,714                                            | )          | (15,666 | ) |
| Receipt of principal on notes receivable — employees  (Refer to Note 4)                                                                       |       | 4                                                  |       | 49 |   |
| Deferred financing fees                                                                                                                            |       | (177                                               | )          | (327 | ) |
| Net cash (used in) provided by financing activities                                                                                                |       | (15,550                                            | )          | 68,586 |   |
|                                                                                                                                               |       |                                               |       |   |   |
| **NET INCREASE (DECREASE) IN CASH**                                                                                                                |       | 4,036                                              |       | (1,923 | ) |
| **CASH, BEGINNING OF PERIOD**                                                                                                                      |       | 6,493                                              |       | 8,839 |   |
| **CASH, END OF PERIOD**                                                                                                                            |       | $                                                  | 10,529     |   | $ | 6,916 |   |

* *

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

 

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**GLADSTONECAPITAL CORPORATION**

**FINANCIAL HIGHLIGHTS**

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

**(UNAUDITED)**

 
| ** **                                                             | ** ** | **Three months ended March 31,** | ** ** | **Six months ended March 31,** | ** ** |
|------------------------------------------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                             | ** ** | **2009**                                             | ** ** | **2008**                                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| Per Share Data (1)                                                     |       |                                                 |       |                                               |       |   |   |   |   |
| Net asset value at beginning of period                                 |       | $                                                    | 12.04      |                                               | $          | 15.08 |   | $ | 12.89 |   | $ | 14.97 |   |
| *Income from investment operations:*                                   |       |                                                 |       |                                               |       |   |   |   |   |
| Net investment income (2)                                              |       | 0.26                                                 |       | 0.33                                               |       | 0.54 |   | 0.75 |   |
| Net realized loss on investments (2)                                   |       | (0.09                                                | )          | —                                             |       | (0.18 | ) | — |   |
| Realized loss on settlement of derivative (2)                          |       | (0.01                                                | )          | —                                             |       | (0.01 | ) | — |   |
| Unrealized appreciation on derivative (2)                              |       | 0.01                                                 |       | —                                             |       | 0.01 |   | — |   |
| Net unrealized appreciation (depreciation) on  investments (2)         |       | 0.31                                                 |       | (0.94                                              | )          | (0.31 | ) | (1.30 | ) |
| Total from investment operations                                       |       | 0.48                                                 |       | (0.61                                              | )          | 0.05 |   | (0.55 | ) |
|                                                                   |       |                                                 |       |                                               |       |   |   |   |   |
| Distributions to stockholders (3)                                      |       | (0.42                                                | )          | (0.42                                              | )          | (0.84 | ) | (0.84 | ) |
| Issuance of common stock under shelf offering                          |       | —                                               |       | 0.24                                               |       | — |   | 0.73 |   |
| Offering costs                                                         |       | —                                               |       | (0.02                                              | )          | — |   | (0.04 | ) |
| Net asset value at end of period                                       |       | $                                                    | 12.10      |                                               | $          | 14.27 |   | $ | 12.10 |   | $ | 14.27 |   |
|                                                                   |       |                                                 |       |                                               |       |   |   |   |   |
| Per share market value at beginning of period                          |       | $                                                    | 8.09       |                                               | $          | 17.01 |   | $ | 15.24 |   | $ | 19.52 |   |
| Per share market value at end of period                                |       | $                                                    | 6.26       |                                               | $          | 18.71 |   | $ | 6.26 |   | 18.71 |   |
| Total return (4)(5)                                                    |       | (17.93                                               | )%         | 12.69                                              | %          | (54.11 | )% | 0.45 | % |
| Shares outstanding at end of period                                    |       | 21,087,574                                           |       | 21,087,574                                         |       | 21,087,574 |   | 21,087,574 |   |
|                                                                   |       |                                                 |       |                                               |       |   |   |   |   |
| Statement of Assets and Liabilities Data:                              |       |                                                 |       |                                               |       |   |   |   |   |
| Net assets at end of period                                            |       | $                                                    | 255,213    |                                               | $          | 300,849 |   | $ | 255,213 |   | $ | 300,849 |   |
| Average net assets (6)                                                 |       | $                                                    | 249,526    |                                               | $          | 293,158 |   | $ | 255,763 |   | $ | 279,259 |   |
| Senior Securities Data:                                                |       |                                                 |       |                                               |       |   |   |   |   |
| Borrowings under line of credit                                        |       | $                                                    | 153,370    |                                               | $          | 123,459 |   | $ | 153,370 |   | $ | 123,459 |   |
| Asset coverage ratio (7)(8)                                            |       | 266                                                  | %          | 344                                                | %          | 266 | % | 344 | % |
| Asset coverage per unit (8)                                            |       | $                                                    | 2,664      |                                               | $          | 3,437 |   | $ | 2,664 |   | $ | 3,437 |   |
| Ratios/Supplemental Data:                                              |       |                                                 |       |                                               |       |   |   |   |   |
| Ratio of expenses to average net assets —annualized  (9)          |       | 10.64                                                | %          | 8.79                                               | %          | 10.83 | % | 9.26 | % |
| Ratio of net expenses to average net assets  —annualized (10)     |       | 8.61                                                 | %          | 6.70                                               | %          | 8.84 | % | 6.45 | % |
| Ratio of net investment income to average net assets  —annualized |       | 8.91                                                 | %          | 8.79                                               | %          | 8.94 | % | 9.84 | % |

 

----

| (1)  |   | Based on actual shares outstanding at  the end of the corresponding period.                                                                                                                                                                                                                                                                                                                                                                                                        |
|------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)  |   | Based on weighted average basic per  share data.                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| (3)  |   | Distributions are determined based on  taxable income calculated in accordance with income tax regulations which may  differ from amounts determined under accounting principles generally accepted  in the United States of America.                                                                                                                                                                                                                                              |
| (4)  |   | Total return equals the change in the  ending market value of the Company’s common stock from the beginning of the  period taking into account distributions reinvested in accordance with the  terms of the Company’s dividend reinvestment plan. Total return does not take  into account distributions that may be characterized as a return of capital.  For further information on estimated character of the Company’s distributions  please refer to Note 9. |
| (5)  |   | Amounts were not annualized.                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (6)  |   | Average net assets are computed using  the average of the balance of net assets at the end of each month of the  reporting period.                                                                                                                                                                                                                                                                                                                                                 |
| (7)  |   | As a business development company, the  Company is generally required to maintain a ratio of at least 200% of total  assets, less all liabilities and indebtedness not represented by senior  securities, to total borrowings.                                                                                                                                                                                                                                                     |
| (8)  |   | Asset coverage ratio is the ratio of the  carrying value of the Company’s total consolidated assets, less all  liabilities and indebtedness not represented by senior securities, to the  aggregate amount of senior securities representing indebtedness. Asset  coverage per unit is the asset coverage ratio expressed in terms of dollar  amounts per $1,000 of indebtedness.                                                                                             |
| (9)  |   | Ratio of expenses to average net assets  is computed using expenses before credits from Adviser to the base management  and incentive fees and including income tax expense.                                                                                                                                                                                                                                                                                                       |
| (10) |   | Ratio of net expenses to average net  assets is computed using total expenses net of credits from Adviser to the  base management and incentive fees and including income tax expense.                                                                                                                                                                                                                                                                                             |

 

*THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESECONDENSED CONSOLIDATED FINANCIAL STATEMENTS.*

 

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**GLADSTONECAPITAL CORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31,2009**

**(DOLLARAMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA AND AS OTHERWISE INDICATFD)**

**(UNAUDITED)**

 

**NOTE 1.  ORGANIZATION**

 

GladstoneCapital Corporation (the “Company”) was incorporated under the GeneralCorporation Laws of the State of Maryland on May 30, 2001.  The Company is a closed-end, non-diversifiedmanagement investment company that has elected to be treated as a businessdevelopment company (“BDC “) under the Investment Company Act of 1940, asamended (the “1940 Act”).  In addition,the Company has elected to be treated for tax purposes as a regulatedinvestment company (“RIC”) under the Internal Revenue Code of 1986, as amended(the “Code”).  The Company’s investmentobjectives are to achieve a high level of current income by investing in debtand equity securities of established private businesses.

 

GladstoneBusiness Loan, LLC (“Business Loan”), a wholly-owned subsidiary of the Company,was established on February 3, 2003 for the purpose of holding the Company’sportfolio of loan investments.  GladstoneCapital Advisers, Inc. is also a wholly-owned subsidiary of the Company,which was established on December 30, 2003.

 

GladstoneSBIC, LP (“Gladstone SBIC”) and Gladstone SBIC GP, LLC, the general partner ofGladstone SBIC, were established on December 4, 2008 as wholly-ownedsubsidiaries of the Company for the purpose of applying for and holding alicense to enable the Company, through Gladstone SBIC, to make investments inaccordance with the United States Small Business Administration guidelines forsmall business investment companies.

 

GladstoneFinancial Corporation (“Gladstone Financial”), a wholly-owned subsidiary of theCompany, was established on November 21, 2006 for the purpose of holding alicense to operate as a Specialized Small Business Investment Company.  Gladstone Financial (previously known asGladstone SSBIC Corporation) acquired this license in February 2007.  This will enable the Company, through thissubsidiary, to make investments in accordance with the United States SmallBusiness Administration guidelines for specialized small business investmentcompanies.

 

Thefinancial statements of the subsidiaries are consolidated with those of theCompany.

 

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

 

**NOTE 2.  SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

 

*Unaudited Interim Financial Statements*

 

Interimfinancial statements of the Company are prepared in accordance with accountingprinciples generally accepted in the United States of America (“GAAP”) forinterim financial information and pursuant to the requirements for reporting onForm 10-Q and Article 10 of Regulation S-X.  Accordingly, certain disclosures accompanyingannual financial statements prepared in accordance with GAAP are omitted.  In the opinion of the Company’s management,all adjustments, consisting solely of normal recurring accruals, necessary forthe fair statement of financial statements for the interim periods have beenincluded.  The current period’s resultsof operations are not necessarily indicative of results that ultimately may beachieved for the year.  The interimfinancial statements and notes thereto should be read in conjunction with thefinancial statements and notes thereto included in the Company’s Form 10-Kfor the fiscal year ended September 30, 2008, as filed with the Securitiesand Exchange Commission (the “SEC”) on December 2, 2008.

 

Theyear-end condensed balance sheet data was derived from audited financialstatements, but does not include all disclosures required by GAAP.

 

*Investment Valuation Policy*

 

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

 

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The Company uses generally accepted valuationtechniques to value its portfolio unless the Company has specific informationabout the value of an investment to determine otherwise. From time to time theCompany may accept an appraisal of a business in which the Company holdssecurities. These appraisals are expensive and occur infrequently but provide athird-party valuation opinion that may differ in results, techniques and scopesused to value the Company’s investments. When these specific third-party appraisals are engaged or accepted, theCompany uses such appraisals to value the investment the Company has in thatbusiness if it was determined that the appraisals were the best estimate offair value.

 

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

 

**Publicly-traded securities:** The Company determines the value ofpublicly-traded securities based on the closing price for the security on theexchange or securities market on which it is listed and primarily traded on thevaluation date.  To the extent that theCompany owns restricted securities that are not freely tradable, but for whicha public market otherwise exists, the Company will use the market value of thatsecurity adjusted for any decrease in value resulting from the restrictivefeature.

 

**Securities for which a limited marketexists:** TheCompany values securities that are not traded on an established secondarysecurities market, but for which a limited market for the security exists, suchas certain participations in, or assignments of, syndicated loans, at thequoted price.  In valuing these assets,the Company assesses trading activity in an asset class and evaluates variancesin prices and other market insights to determine if any available quote pricesare reliable.  If the Company concludesthat quotes based on active markets or trading activity may be relied upon,firm bid prices are requested; however, if a firm bid price is unavailable, theCompany bases the value of the security upon the indicative bid price offeredby the respective originating syndication agent’s trading desk, or secondarydesk, on or near the valuation date. To the extent that the Company uses theindicative bid price as a basis for valuing the security, the Adviser may takefurther steps to consider additional information to validate that price inaccordance with the Policy.

 

In the event these limited markets become illiquid such that marketprices are no longer readily available, the Company will value its syndicatedloans using estimated net present values of the future cash flows or discountedcash flows (“DCF”). The use of a DCF methodology follows that prescribed byFinancial Accounting Standards Board (“FASB”) Staff Position No. 157-3, *Determining the Fair Value of a Financial Asset Whenthe Market for That Asset Is Not Active* (“FSP No. 157-3”),which provides guidance on the use of a reporting entity’s own assumptionsabout future cash flows and risk-adjusted discount rates when relevantobservable inputs, such as quotes in active markets, are not available. Whenrelevant observable market data does not exist, the alternative outlined in theFSP No. 157-3 is the use of valuing investments based on DCF.  For the purposes of using DCF to provide fairvalue estimates, the Company considered multiple inputs such as a risk-adjusteddiscount rate that incorporates adjustments that market participants would makeboth for nonperformance and liquidity risks. As such, the Company developed a modified discount rate approach thatincorporates risk premiums including, among others, increased probability ofdefault, or higher loss given default, or increased liquidity risk.

 

The DCF valuationsapplied to the syndicated loans provide an estimate of what the Companybelieves a market participant would pay to purchase a syndicated loan in anactive market, thereby establishing a fair value.  The Company will continue to apply the DCFmethodology in illiquid markets until quoted prices are available or are deemedreliable based on trading activity.

 

**Securities for which no marketexists:** Thevaluation methodology for securities for which no market exists falls intothree categories: (1) portfolio investments comprised solely of debtsecurities; (2) portfolio investments in controlled companies comprised ofa bundle of securities, which can include debt and/or equity securities; and (3) portfolioinvestments in non-controlled companies comprised of a bundle of investments,which can include debt and/or equity securities.

 

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

 

**(2)****        ****Portfolio investments in controlledcompanies comprised of a bundle of investments, which can include debt and/orequity securities:**The Company values Non-Public Debt Securities and/or equity or equity-likesecurities (e.g. preferred equity, equity or other equity-like securities) thatare purchased together as part of a package, where we have control or couldgain control through an option or warrant security, based on the totalenterprise value of the issuer, which is calculated using a liquidity waterfallapproach.  If, in the Adviser’s judgment,the liquidity waterfall approach does not accurately reflect the value of thedebt 

 

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component, the Advisermay recommend that the Company use a valuation by SPSE or, if that isunavailable, a DCF valuation technique.

 

**(3)****        ****Portfolio investments in non-controlledcompanies comprised of a bundle of investments, which can include debt and/orequity securities:**TheCompany values Non-Public Debt Securities and/or equity or equity-likesecurities that are purchased together from the same “non-controlled” portfoliocompany, or issuer, by valuing the debt portion with SPSE (as described above)and valuing the equity portion based principally on the total enterprise valueof the issuer, which is calculated using a liquidity waterfall approach.

 

Due to the uncertaintyinherent in the valuation process, such estimates of fair value may differsignificantly from the values that would have been obtained had a ready marketfor the securities existed, and the differences could be material.Additionally, changes in the market environment and other events that may occurover the life of the investments may cause the gains or losses ultimatelyrealized on these investments to be different than the valuations currentlyassigned. There is no single standard for determining fair value in good faith,as fair value depends upon circumstances of each individual case. In general,fair value is the amount that the Company might reasonably expect to receiveupon the current sale of the security in an arms-length transaction in thesecurity’s principal market.

 

*Interest Income Recognition*

 

Interest income, adjusted for amortization of premiums and acquisitioncosts and for the accretion of discounts, is recorded on the accrual basis tothe extent that such amounts are expected to be collected.  Generally, when a loan becomes 90 days ormore past due and/or if the Company’s qualitative assessment indicates that thedebtor is unable to service its debt or other obligations, the Company willplace the loan on non-accrual status and cease recognizing interest income onthat loan until the borrower has demonstrated the ability and intent to paycontractual amounts due.  However, theCompany remains contractually entitled to this interest and may collect it uponthe sale or recapitalization of the portfolio company.  At March 31, 2009, two Non-Control/Non-Affiliateinvestments and one Control investment were on non-accrual with an aggregatecost basis of approximately $10.7 million or 2.4% of the cost basis of allinvestments in the Company’s portfolio. At September 30, 2008, one Non-Control/Non-Affiliate investment andtwo Control investments were on non-accrual with a cost basis of approximately$13.1 million at September 30, 2008, or 2.8% of the cost basis of allloans in the Company’s portfolio. Conditional interest, or a success fee, is recorded upon full repaymentof a loan investment.

 

*Paid in Kind Interest*

 

TheCompany has a loan in its portfolio which contains a PIK provision. The PIKinterest, computed at the contractual rate specified in each loan agreement, isadded to the principal balance of the loan and recorded as income. To maintainthe Company’s status as a RIC, this non-cash source of income must be paid outto stockholders in the form of distributions, even though the Company has notyet collected the cash. The Company recorded PIK interest income of $13 and $31for the three and six months ended March 31, 2009, respectively, ascompared to $16 and $30 for the three and six months ended March 31, 2008,respectively, from investments on the accompanying condensed consolidatedstatements of operations.

 

*Recent Accounting Pronouncements*

 

InApril 2009, the FASB issued FSP No. 115-2, *Recognition and Presentation of Other-Than-Temporary Impairments*(“FSP No. 115-2”), which was issued to make the guidance on other-than-temporaryimpairment more operational and to improve the presentation and disclosure ofother-than-temporary impairments on debt and equity securities in the financialstatements.  FSP 115-2 requiressignificant additional disclosures for both annual and interim periods,including the amortized cost basis of available-for-sale and held-to-maturitydebt, the methodology and key imports used to measure the credit portion ofother-than-temporary impairment, and a roll forward of amounts recognized inearnings for securities by major security type. FSP No. 115-2 amends Statement of Financial Accounting Standards (“SFAS”)No. 115, *Accounting for Certain Investmentsin Debt and Equity Securities* (“SFAS No. 115”) and FSP No. 115-1,*The Meaning of Other-Than-Temporary Impairment andIts Application to Certain Investments* to require that entities identifymajor security classes consistent with how the securities are managed based onthe nature and risks of the security, and also expands, for disclosurepurposes, the list of major security types identified in SFAS No. 115. FSP No. 115-2is effective for interim and annual reporting periods ending after June 15,2009.  The Company does not believe theadoption of this pronouncement will have a material impact on its financialstatements.

 

InApril 2009, the FASB issued FSP No. 157-4, *Determining Fair Value When the Volume and Level of Activity for theAsset or Liability Have Significantly Decreased and Identifying TransactionsThat Are Not Orderly* (“FSP No. 157-4”), which providesadditional guidance for estimating fair value in accordance with FASB StatementNo. 157 whenthe volume and level of activity for an asset or liability has significantlydecreased and also provides guidance on identifying circumstances that indicatea transaction is not orderly.  FSP No. 157-4 amends SFAS No. 157 torequire entities to disclose in interim and annual periods the inputs andvaluation techniques used to measure fair value together with any changes invaluation techniques and related inputs during the period.  FSP No. 

 

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157-4also requires reporting entities to define major categories**for both debt and equity securities to bemajor security types as described in paragraph 19 of SFAS No. 115, *Accounting for Certain Investments in Debt and EquitySecurities*.  This requiresentities to provide disclosures on a more disaggregated basis than previouslyhad been required under SFAS No. 157. FSP No. 157-4 is effective for interim and annual reporting periodsending after June 15,2009, and shall be applied prospectively.  The Company does not believe the adoption ofthis pronouncement will have a material impact on its financial statements.

 

In October 2008, the FASB issued FSP No. 157-3,*Determining the Fair Value of a FinancialAsset When the Market for That Asset Is Not Active*.  FSP No. 157-3  clarifies the application of SFAS No. 157 in a market that is notactive. More specifically, FSP No. 157-3 states that significant judgment shouldbe applied to determine if observable data in a dislocated market representsforced liquidations or distressed sales and is not representative of fair valuein an orderly transaction.  FSP No. 157-3also provides further guidance that the use of a reporting entity’s ownassumptions about future cash flows and appropriately risk-adjusted discountrates is acceptable when relevant observable inputs are not available.  In addition, FSP No. 157-3 providesguidance on the level of reliability of broker quotes or pricing services whenmeasuring fair value in a non- active market stating that less reliance shouldbe placed on a quote that does not reflect actual market transactions and aquote that is not a binding offer.  Theguidance in FSP No. 157-3 is effective upon issuance for all financialstatements that have not been issued and any changes in valuation techniques asa result of applying FSP No. 157-3 are accounted for as a change inaccounting estimate. The Company adopted this pronouncement during the sixmonths ended March 31, 2009.

 

In March 2008, the FASB issued SFAS No. 161,*Disclosures about Derivative Instruments andHedging Activities* (“SFAS No. 161”), which is intended to helpinvestors better understand how derivative instruments and hedging activitiesaffect an entity’s financial position, financial performance and cash flowsthrough enhanced disclosure requirements. The enhanced disclosures primarily surround disclosing the objectivesand strategies for using derivative instruments by their underlying risk aswell as a tabular format of the fair values of the derivative instruments andtheir gains and losses.  SFAS No. 161is effective for financial statements issued for fiscal years and interimperiods beginning after November 15, 2008. The adoption of this pronouncement did not have a material impact on thereporting of its derivatives.

 

In December 2007, the FASB issued SFAS No. 141(R), *Business Combinations* (“SFAS No. 141(R)”).SFAS No. 141(R) establishes principles and requirements for how anacquirer recognizes and measures in its financial statements the identifiableassets acquired, the liabilities assumed, any non-controlling interest in theacquiree and the goodwill acquired. SFAS No. 141(R) also establishesdisclosure requirements to enable the evaluation of the nature and financialeffects of the business combination. SFAS No. 141(R) is effective asof the beginning of an entity’s fiscal year that begins after December 15,2008.  The Company is required to adoptSFAS No. 141 (R) on October 1, 2009 and is currently evaluatingthe impact of this pronouncement on its condensed consolidated financialstatements.

 

In February 2007, the FASB issued SFAS No. 159,*The Fair Value Option for Financial Assets andFinancial Liabilities* (“SFAS No. 159”).  Among other requirements, SFAS No. 159permits entities to choose to measure many financial instruments and certainother items at fair value.  SFAS No. 159is effective for the first fiscal year that begins after November 15,2007.  The Company adopted SFAS No. 159on October 1, 2008.  Based upon itsreview, the Company elected not to adopt SFAS No. 159 for financialliabilities that were in its portfolio as of September 30, 2008.  However, the Company may elect to apply SFAS No. 159to future financial liabilities. The impact on its financials from thepotential application of SFAS No. 159 to a future liability would dependupon the attributes of the specific financial liability.  The Company’s adoption of SFAS No. 159had no material impact on its condensed consolidated financial statements as ofMarch 31, 2009.

 

**NOTE 3. INVESTMENTS**

 

In September 2006, the FASB issued SFAS No. 157, *Fair Value Measurements* (“SFAS No. 157”), which, for financial assets, is effective for fiscal years beginning afterNovember 15, 2007, with early adoption permitted. The Company adopted SFASNo. 157 on October 1, 2008. The adoption of SFAS No. 157 did not have a material impact on thecondensed consolidated financial statements as of and for the six months ended March 31,2009.  In part, SFAS No. 157 definesfair value, establishes a framework for measuring fair value and expandsdisclosures about assets and liabilities measured at fair value. The newstandard provides a consistent definition of fair value that focuses on exitprice in the principal, or most advantageous, market and prioritizes, within ameasurement of fair value, the use of market-based inputs over entity-specificinputs. The standard also establishes the following three-level hierarchy forfair value measurements based upon the transparency of inputs to the valuationof an asset or liability as of the measurement date.

 

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

 

·                  *Level 2***— inputs to the valuation methodologyinclude quoted prices for similar assets and liabilities in active markets, andinputs that are observable for the asset or liability, either directly orindirectly, for substantially the full term of the financial instrument. 

 

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Level 2 inputs are inthose markets for which there are few transactions, the prices are not current,little public information exists or instances where prices vary substantiallyover time or among brokered market makers; and

 

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

 

At March 31, 2009, all of the Company’s assets were valued usingLevel 3 inputs.

 

The following table presents the financial instruments carried at fairvalue as of March 31, 2009, by caption on the accompanying condensedconsolidated statements of assets and liabilities for each of the three levelsof hierarchy established by SFAS No. 157:

 
| ** **                            | ** ** | **As of March 31, 2009** | ** ** |
|---------------------------------------|------------|-------------------------------|------------|
| ** **                            | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | **Total Fair Value** | ** ** |
| ** **                            | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | **Reported in Condensed** | ** ** |
| ** **                            | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | **Consolidated Statements of** | ** ** |
| ** **                            | ** ** | **Level 1**                   | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Assets and Liabilities** | ** ** |
| Non-Control/Non-Affiliate investments |       | $                             | —     |   | $ | — |   | $ | 369,595 |   | $ | 369,595 |   |
| Control investments                   |       | —                        |       | — |   | 15,502 |   | 15,502 |   |
| Total investments at fair value       |       | $                             | —     |   | $ | — |   | $ | 385,097 |   | $ | 385,097 |   |

 

*Changes in Level 3 Fair ValueMeasurements*

 

The following table provides a roll-forward in the changes in fairvalue during the six-month period from September 30, 2008 to March 31,2009, and for the three-month period from December 31, 2008 to March 31,2009 for all investments for which the Company determines fair value usingunobservable (Level 3) factors. When a determination is made to classify afinancial instrument within Level 3 of the valuation hierarchy, thedetermination is based upon the significance of the unobservable factors to theoverall fair value measurement. However, Level 3 financial instrumentstypically include, in addition to the unobservable or Level 3 components,observable components (that is, components that are actively quoted and can bevalidated to external sources). Accordingly, the losses in the table belowinclude changes in fair value due in part to observable factors that are partof the valuation methodology.

 

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

 
| ** **                                                | ** ** | **Non-Control/**  | ** ** | ** **      | ** ** | ** **     | ** ** | ** ** | ** ** |
|-----------------------------------------------------------|------------|-------------------|------------|-----------------|------------|----------------|------------|------------|------------|
| ** **                                                | ** ** | **Non-Affiliate** | ** ** | **Control**     | ** ** | ** **     | ** ** | ** ** | ** ** |
| ** **                                                | ** ** | **Investments**   | ** ** | **Investments** | ** ** | **Derivative** | ** ** | **Total**  | ** ** |
| **Six months ended March 31, 2009:**                 |       |              |       |            |       |           |       |       |       |
| Fair value at September 30, 2008                     |       | $                 | 407,153    |            | $          | 780            |       | $          | —     |   | $ | 407,933 |   |
| Realized losses (a)                                       |       | (3,731            | )          | —          |       | (304           | )          | (4,035     | )          |
| Reversal of prior period depreciation on realization  (b) |       | 3,145             |       | —          |       | 304            |       | 3,449      |       |
| Unrealized appreciation (depreciation) (b)                |       | (12,387           | )          | 2,714           |       | —         |       | (9,673     | )          |
| New investments, repayments, and settlements, net  (c)    |       | (24,585           | )          | 12,008          |       | —         |       | (12,577    | )          |
| Transfers in (out) of Level 3                             |       | —            |       | —          |       | —         |       | —     |       |
| Fair value as of March 31, 2009                      |       | $                 | 369,595    |            | $          | 15,502         |       | $          | —     |   | $ | 385,097 |   |
|                                                      |       |              |       |            |       |           |       |       |       |
| **Three months ended March 31, 2009:**               |       |              |       |            |       |           |       |       |       |
| Fair value at December 31, 2008                      |       | $                 | 384,012    |            | $          | 566            |       | $          | —     |   | $ | 384,578 |   |
| Realized losses (a)                                       |       | (2,000            | )          | —          |       | (304           | )          | (2,304     | )          |
| Reversal of prior period depreciation on realization  (b) |       | 1,960             |       | —          |       | 304            |       | 2,264      |       |
| Unrealized appreciation (b)                               |       | 1,239             |       | 3,526           |       | —         |       | 4,765      |       |
| New investments, repayments, and settlements, net  (c)    |       | (15,616           | )          | 11,410          |       | —         |       | (4,206     | )          |
| Transfers in (out) of Level 3                             |       | —            |       | —          |       | —         |       | —     |       |
| Fair value as of March 31, 2009                      |       | $                 | 369,595    |            | $          | 15,502         |       | $          | —     |   | $ | 385,097 |   |

 

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(a)          Included in net realized loss on investments andrealized (loss) gain on settlement of derivative on the accompanying condensedconsolidated statements of operations for the three and six months ended March 31,2009.

(b)         Included in unrealized appreciation (depreciation) oninvestments on the accompanying condensed consolidated statements of operationsfor the three and six months ended March 31, 2009.

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

 

*Non-Control/Non-AffiliateInvestments*

 

At March 31, 2009 and September 30, 2008, the Company heldNon-Control/Non-Affiliate investments in the aggregate of approximately $369.6million and $407.2 million, at fair value, respectively.

 

*Control Investments*

 

At March 31, 2009 and September 30, 2008, the Company heldControl investments in the aggregate of approximately $15.5 million and $0.8million at fair value, respectively.  At March 31,2009, the Control investments were comprised of BERTL, Inc. (“BERTL”),Lindmark Acquisition, LLC (“Lindmark”), LYP Holdings Corp. (“LYP Holdings”),U.S. Healthcare Communications, Inc. (“U.S. Healthcare”) and WesternDirectories, Inc. (“Western Directories”).

 

·                  *BERTL:*The Company originally purchased a pastdue debt instrument in MCA Communications, LLC, and the Company accepted a deedin lieu of foreclosure in satisfaction of BERTL’s obligations under the debtinstrument on September 28, 2007. BERTL is a web-based evaluator of digital imaging products.

 

·                  *Lindmark:* On March 18, 2009, the Companyacquired from the previous owner certain assets of Lindmark OutdoorAdvertising, LLC, consisting of all tangible and intangible personalproperty.  The Company acquired theseassets through a newly formed subsidiary, Lindmark, and intends to continue thebusiness under its control.  Lindmark isa billboard advertising company.

 

·                  *LYP Holdings:*On July 2, 2008, the Companyacquired from the previous owner certain assets of LocalTel, Inc, consisting ofall tangible and intangible personal property. The Company acquired these assets through a newly formed subsidiary, LYPHoldings, and intends to continue the business under its control.  LYP Holdings is a publisher of communityyellow page directories.

 

·                  *U.S. Healthcare:* The Company offered at public salecertain assets of U.S Healthcare Communications, LLC on January 30, 2008,consisting generally of all fixtures of tangible and intangible personalproperty.  The Company acquired theseassets in the sale through a newly formed subsidiary, U.S. Healthcare, andintends to continue the business under its control.  U.S. Healthcare is a service-magazineoperator.

 

·                  *Western Directories:* On August 27, 2008, the Companyacquired from the previous owner certain assets of West Coast Yellow Pages, Inc.,consisting of all tangible and intangible personal property.  The Company acquired these assets through anewly formed subsidiary, Western Directories, and intends to continue thebusiness under its control.  WesternDirectories is a telephone book publisher.

 

*Investment Concentrations*

 

At March 31, 2009, the Company had aggregateinvestments in 60 portfolio companies, and approximately 64.7% of the aggregatefair value was senior debt, approximately 34.7% was senior subordinated debt,no investments were in junior subordinated debt, and approximately 0.6% was inequity securities.  The following tableoutlines the Company’s investments by type at March 31, 2009 and September 30,2008:

 
| ** **                    | ** ** | **March 31, 2009** | ** ** | **September 30, 2008** | ** ** |
|-------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                    | ** ** | **Cost**                | ** ** | **Fair Value**              | ** ** | **Cost** | ** ** | **Fair Value** | ** ** |
| Senior Term Debt              |       | $                       | 282,733    |                        | $          | 248,966 |   | $ | 297,910 |   | $ | 265,297 |   |
| Senior Subordinated Term Debt |       | 156,797                 |       | 133,632                     |       | 157,927 |   | 140,676 |   |
| Preferred Equity Securities   |       | 1,584                   |       | —                      |       | 1,584 |   | — |   |
| Common Equity Securities      |       | 3,449                   |       | 2,499                       |       | 3,449 |   | 1,960 |   |
| Total Investments             |       | $                       | 444,563    |                        | $          | 385,097 |   | $ | 460,870 |   | $ | 407,933 |   |

 

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Investmentsat fair value consisted of the following industry classifications as of March 31,2009 and September 30, 2008:

 
| ** **                                                   | ** ** | **March 31, 2009** | ** ** | **September 30, 2008** | ** ** |
|--------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                   | ** ** | ** **              | ** ** | **Percentage**              | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| **Industry Classification**                                  | ** ** | **Fair Value**          | ** ** | **Total  Investments**      | ** ** | **Net  Assets** | ** ** | **Fair Value** | ** ** | **Total  Investments** | ** ** | **Net  Assets** | ** ** |
| Aerospace & Defense                                 |       | $                       | 3,616      |                        | 0.9        | % | 1.4 | % | $ | 4,192 |   | 1.0 | % | 1.6 | % |
| Automobile                                                   |       | 4,414                   |       | 1.1                         | %          | 1.7 | % | 5,055 |   | 1.2 | % | 1.9 | % |
| Broadcast (TV & Radio)                              |       | 51,885                  |       | 13.5                        | %          | 20.3 | % | 52,336 |   | 12.8 | % | 19.2 | % |
| Buildings and Real Estate                                    |       | 13,699                  |       | 3.5                         | %          | 5.4 | % | 13,519 |   | 3.3 | % | 5.0 | % |
| Cargo Transport                                              |       | 10,291                  |       | 2.7                         | %          | 4.0 | % | 15,805 |   | 3.9 | % | 5.8 | % |
| Chemicals, Plastics & Rubber                        |       | 15,621                  |       | 4.1                         | %          | 6.1 | % | 16,375 |   | 4.0 | % | 6.0 | % |
| Diversified/Conglomerate Manufacturing                       |       | 2,676                   |       | 0.7                         | %          | 1.0 | % | 3,195 |   | 0.8 | % | 1.2 | % |
| Diversified Natural Resources, Precious Metals and  Minerals |       | 13,622                  |       | 3.5                         | %          | 5.3 | % | 12,936 |   | 3.2 | % | 4.8 | % |
| Electronics                                                  |       | 34,959                  |       | 9.1                         | %          | 13.7 | % | 35,208 |   | 8.6 | % | 13.0 | % |
| Farming & Agriculture                               |       | 9,947                   |       | 2.6                         | %          | 3.9 | % | 10,031 |   | 2.5 | % | 3.7 | % |
| Finance                                                      |       | 1,762                   |       | 0.5                         | %          | 0.7 | % | 1,812 |   | 0.4 | % | 0.7 | % |
| Healthcare, Education & Childcare                   |       | 74,869                  |       | 19.4                        | %          | 29.3 | % | 76,642 |   | 18.8 | % | 28.2 | % |
| Home & Office Furnishings                           |       | 14,693                  |       | 3.8                         | %          | 5.8 | % | 15,379 |   | 3.8 | % | 5.7 | % |
| Leisure, Amusement, Movies & Entertainment          |       | 9,846                   |       | 2.6                         | %          | 3.9 | % | 8,097 |   | 2.0 | % | 3.0 | % |
| Machinery                                                    |       | 9,376                   |       | 2.4                         | %          | 3.7 | % | 9,834 |   | 2.4 | % | 3.6 | % |
| Mining, Steel, Iron & Non-Precious Metals           |       | 24,091                  |       | 6.3                         | %          | 9.4 | % | 25,095 |   | 6.2 | % | 9.2 | % |
| Personal and Non-durable Consumer Products                   |       | 7,858                   |       | 2.0                         | %          | 3.1 | % | 9,703 |   | 2.4 | % | 3.6 | % |
| Printing & Publishing                               |       | 54,144                  |       | 14.1                        | %          | 21.2 | % | 60,440 |   | 14.8 | % | 22.2 | % |
| Retail Stores                                                |       | 22,337                  |       | 5.8                         | %          | 8.8 | % | 22,800 |   | 5.6 | % | 8.4 | % |
| Textiles & Leather                                  |       | 5,391                   |       | 1.4                         | %          | 2.1 | % | 9,479 |   | 2.3 | % | 3.5 | % |
| **Total**                                                    |       | $                       | 385,097    |                        | 100.0      | % |   |   | $ | 407,933 |   | 100.0 | % |   |   |

 

Theinvestments at fair value were included in the following geographic regions ofthe United States at March 31, 2009 and September 30, 2008:

 
| ** **             | ** ** | **March 31, 2009** | ** ** | **September 30, 2008** | ** ** |
|------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **             | ** ** | ** **              | ** ** | **Percentage**              | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| **Geographic  Region** | ** ** | **Fair Value**          | ** ** | **Total  Investments**      | ** ** | **Net  Assets** | ** ** | **Fair Value** | ** ** | **Total  Investments** | ** ** | **Net  Assets** | ** ** |
| Midwest                |       | $                       | 196,393    |                        | 51.0       | % | 77.0 | % | $ | 206,271 |   | 50.6 | % | 69.4 | % |
| West                   |       | 85,379                  |       | 22.2                        | %          | 33.5 | % | 85,294 |   | 20.9 | % | 29.0 | % |
| Southeast              |       | 45,445                  |       | 11.8                        | %          | 17.8 | % | 49,374 |   | 12.1 | % | 20.4 | % |
| Mid-Atlantic           |       | 39,303                  |       | 10.2                        | %          | 15.4 | % | 50,807 |   | 12.4 | % | 14.7 | % |
| Northeast              |       | 12,603                  |       | 3.3                         | %          | 4.9 | % | 10,617 |   | 2.6 | % | 4.3 | % |
| U.S. Territory         |       | 5,974                   |       | 1.5                         | %          | 2.3 | % | 5,570 |   | 1.4 | % | 1.9 | % |
|                   |       | $                       | 385,097    |                        | 100.0      | % |   |   | $ | 407,933 |   | 100.0 | % |   |   |

 

Thegeographic region depicts the location of the headquarters for the Company’sportfolio companies.  A portfolio companymay have a number of other business locations in other geographic regions.

 

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*Investment Principal Repayments*

 

The following table summarizes the contractual principal repayment andmaturity of the Company’s investment portfolio by fiscal year, assuming novoluntary prepayments:

 
| ** **                                              | ** ** | ** **                                                                           | ** ** | **Amount** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|------------|------------|
| For the remaining six months ending  September 30: |       | 2009                                                                                 |       | $          | 17,296     |   |
| For the fiscal year  ending September 30:          |       | 2010                                                                                 |       | 42,544     |       |
|                                                    |       | 2011                                                                                 |       | 99,211     |       |
|                                                    |       | 2012                                                                                 |       | 100,300    |       |
|                                                    |       | 2013                                                                                 |       | 140,070    |       |
|                                                    |       | 2014                                                                                 |       | 35,026     |       |
|                                                    |       | Thereafter                                                                           |       | 6,851      |       |
| ** **                                              | ** ** | **Total Contractual Repayments**                                                     |       | $          | 441,298    |   |
|                                                    |       | Investments in Equity Securities                                                     |       | 5,033      |       |
| ** **                                              |       | Unamortized premiums, discounts and investment  acquisition costs on debt securities |       | (1,768     | )          |
| ** **                                              | ** ** | **Total**                                                                            |       | $          | 444,563    |   |

 

**NOTE 4. RELATED PARTY TRANSACTIONS**

 

*Loans to Employees*

 

TheCompany provided loans to employees of the Adviser, who at the time of theloans were joint employees of the Company and either the Adviser or the Company’sprevious investment adviser, Gladstone Capital Advisers, Inc., for the exerciseof options under the Amended and Restated 2001 Equity Incentive Plan, which hassince been terminated and is no longer in operation.  The loans require the quarterly payment ofinterest at the market rate in effect at the date of issue, have varying termsnot exceeding ten years and have been recorded as a reduction of netassets.  The loans are evidenced by fullrecourse notes that are due upon maturity or 60 days following termination ofemployment, and the shares of common stock purchased with the proceeds of theloan are posted as collateral.  No newloans were issued during the three and six months ended March 31, 2009 or March 31,2008. The Company received $4 and $49 of principal repayments during the sixmonths ended March 31, 2009 and March 31, 2008, respectively.  The Company recognized interest income fromall employee stock option loans of $117 and $235 for the three and six monthsended March 31, 2009, respectively, and $118 and $236 for the three andsix months ended March 31, 2008, respectively.

 

*Investment Advisory and Management Agreement*

 

TheCompany is externally managed by the Adviser, which is controlled by itschairman and chief executive officer, under a contractual investment advisoryagreement.  On October 1, 2006, theCompany entered into the investment advisory agreement (the “Advisory Agreement”).

 

*Terms of the Advisory Agreement*

 

Underthe Advisory Agreement, the Company pays the Adviser an annual base managementfee of 2% of its average gross assets, which is defined as total assets lessuninvested cash and cash equivalents resulting from borrowings calculated as ofthe end of the two most recently completed fiscal quarters.  The Advisory Agreement also includes atwo-part incentive fee.

 

Thefirst part of the incentive fee is an income-based incentive fee which rewardsthe Adviser if the Company’s quarterly net investment income (before givingeffect to any incentive fee) exceeds 1.75% of the Company’s net assets (the “hurdlerate”). The Company pays the Adviser an income incentive fee with respect toits pre-incentive fee net investment income in each calendar quarter asfollows:

 

·             no incentive fee in any calendar quarter in which itspre-incentive fee net investment income does not exceed the hurdle rate (7%annualized);

 

·             100% of pre-incentive fee net investment income withrespect to that portion of such pre-incentive fee net investment income, ifany, that exceeds the hurdle rate but is less than 2.1875% in any calendarquarter (8.75% annualized); and

 

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·             20% of the amount of pre-incentive fee net investmentincome, if any, that exceeds 2.1875% in any calendar quarter (8.75%annualized).

 

The second part of the incentive fee is a capital gains incentive feethat is determined and payable in arrears as of the end of each fiscal year (orupon termination of the Advisory Agreement, as of the termination date) andequals 20% of the Company’s realized capital gains as of the end of the fiscalyear. In determining the capital gains incentive fee payable to the Adviser,the Company calculates the cumulative aggregate realized capital gains andcumulative aggregate realized capital losses since the Company’s inception, andthe aggregate unrealized capital depreciation as of the date of thecalculation, as applicable, with respect to each of the investments in itsportfolio.  For this purpose, cumulativeaggregate realized capital gains, if any, equals the sum of the differencesbetween the net sales price of each investment, when sold, and the originalcost of such investment since the Company’s inception. Cumulative aggregaterealized capital losses equals the sum of the amounts by which the net salesprice of each investment, when sold, is less than the original cost of suchinvestment since the Company’s inception. Aggregate unrealized capitaldepreciation equals the sum of the difference, if negative, between thevaluation of each investment as of the applicable calculation date and theoriginal cost of such investment. At the end of the applicable year, the amountof capital gains that serves as the basis for the Company’s calculation of thecapital gains incentive fee equals the cumulative aggregate realized capitalgains less cumulative aggregate realized capital losses, less aggregateunrealized capital depreciation, with respect to the Company’s portfolio ofinvestments. If this number is positive at the end of such year, then thecapital gains incentive fee for such year equals 20% of such amount, less theaggregate amount of any capital gains incentive fees paid in respect of theCompany’s portfolio in all prior years.

 

TheAdviser’s board of directors voluntarily and irrevocably waived, for the threeand six months ended March 31, 2009 and March 31, 2008, the annual2.0% base management fee to 0.5% for senior syndicated loan participations andalso irrevocably waived the entire incentive fee due for the three and sixmonths ended March 31, 2009 and March 31, 2008.

 

Inaddition to the base management and incentive fees under the AdvisoryAgreement, certain fees received by the Adviser from the Company’s portfoliocompanies are credited against the investment advisory fee.  For the three and six months ended March 31,2009 and March 31, 2008, 50% of certain of the fees received by theAdviser were voluntarily and irrevocably credited against the base managementfee.  The Company will continue to payits direct expenses including, but not limited to, directors’ fees, legal andaccounting fees, stockholder related expenses, and directors’ and officers’insurance under the Advisory Agreement.

 

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

 
| ** **                                                                                                  | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                  | ** ** | **March 31,  2009**         | ** ** | **March 31,  2008**       | ** ** | **March 31,  2009** | ** ** | **March 31,  2008** | ** ** |
| Base management fee                                                                                         |       | $                                | 484        |                           | $          | 557 |   | $ | 917 |   | $ | 1,134 |   |
| Credit for fees received by Adviser from the  portfolio companies                                           |       | (80                              | )          | (150                           | )          | (85 | ) | (972 | ) |
| Fee reduction for the voluntary, irrevocable waiver  of 2% fee on senior syndicated loans to 0.5% per annum |       | (97                              | )          | (99                            | )          | (203 | ) | (202 | ) |
| Net base management fee                                                                                     |       | $                                | 307        |                           | $          | 308 |   | $ | 629 |   | $ | (40 | ) |
|                                                                                                        |       |                             |       |                           |       |   |   |   |   |
| Incentive fee                                                                                               |       | $                                | 1,089      |                           | $          | 1,288 |   | $ | 2,265 |   | $ | 2,749 |   |
| Credit from voluntary, irrevocable waiver issued by  Adviser’s board of directors                      |       | (1,089                           | )          | (1,288                         | )          | (2,265 | ) | (2,749 | ) |
| Net incentive fee                                                                                           |       | $                                | —     |                           | $          | — |   | $ | — |   | $ | — |   |
|                                                                                                        |       |                             |       |                           |       |   |   |   |   |
| Credit for fees received by Adviser from the  portfolio companies                                           |       | $                                | (80        | )                              | $          | (150 | ) | $ | (85 | ) | $ | (972 | ) |
| Fee reduction for the voluntary, irrevocable waiver  of 2% fee on senior syndicated loans to 0.5% per annum |       | (97                              | )          | (99                            | )          | (203 | ) | (202 | ) |
| Incentive fee credit                                                                                        |       | (1,089                           | )          | (1,288                         | )          | (2,265 | ) | (2,749 | ) |
| Credit to base management and incentive fees from  Adviser                                                  |       | $                                | (1,266     | )                              | $          | (1,537 | ) | $ | (2,553 | ) | $ | (3,923 | ) |

 

Overall,the base management fee due to the Adviser cannot exceed 2% of total assets (asreduced by cash and cash equivalents pledged to creditors) during any givenfiscal year.  Amounts included in the Dueto Adviser in the accompanying condensed consolidated statements of assets andliabilities were as follows:

 

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| ** **                                             | ** ** | **March 31,  2009** | ** ** | **September 30,  2008** | ** ** |
|--------------------------------------------------------|------------|--------------------------|------------|------------------------------|------------|
| Unpaid base management fee to Adviser                  |       | $                        | 307        |                         | $          | 83 |   |
| Unpaid expenses Adviser paid on behalf of the  Company |       | 16                       |       | —                       |       |
| Unpaid loan servicing fees to Adviser                  |       | 368                      |       | 374                          |       |
| Total Due to Adviser                                   |       | $                        | 691        |                         | $          | 457 |   |

 

*Loan Servicing and Portfolio Company Fees*

 

TheAdviser also services the loans held by Business Loan, in return for which itreceives a 1.5% annual fee based on the monthly aggregate outstanding balanceof the loans pledged under the Company’s line of credit.  Since the Company owns these loans, all loanservicing fees paid to the Adviser are treated as reductions directly againstthe 2% base management fee under the Advisory Agreement.  Effective in April 2006, the Adviser’sboard of directors voluntarily reduced the annual servicing fee rate on thesenior syndicated loans to 0.5%. For the three and six months ended March 31,2009 and 2008, these loan servicing fees totaled $1,526 and $3,149, and $1,562and $2,943, respectively, all of which were deducted against the 2% basemanagement fee in order to derive the base management fee which is presented asthe line item Base management fee in the accompanying condensed consolidatedstatements of operations.  Under theAdvisory Agreement, the Adviser has also provided and continues to providemanagerial assistance and other services to the Company’s portfolio companiesand may receive fees for services other than managerial assistance services.

 

*Administration Agreement*

 

OnOctober 1, 2006, the Company entered into an administration agreement (the“Administration Agreement”) with Gladstone Administration, LLC (the “Administrator”),a wholly-owned subsidiary of the Adviser. Under the Administration Agreement, the Company pays separately foradministrative services.  TheAdministration Agreement provides for payments equal to the Company’s allocableportion of the Administrator’s overhead expenses in performing its obligationsunder the Administration Agreement, including, but not limited to, rent foremployees of the Administrator, and the allocable portion of salaries andbenefits expenses of the Company’s chief financial officer, chief complianceofficer, treasurer and their respective staffs. The Company recorded an administration fee of $211 and $240, for thethree months ended March 31, 2009 and 2008, respectively, and $438 and$452, for the six months ended March 31, 2009 and 2008, respectively.  At March 31, 2009 and September 30,2008, the Company owed $211 and $247, respectively, of unpaid administrationfees to the Adviser, which is recorded in the Fee due to Administrator in theaccompanying condensed consolidated statements of assets and liabilities.

 

On July 9, 2008, the Company’s Board of Directorsapproved the renewal of its Administration Agreement with the Administratorthrough August 31, 2009.

 

*LicenseAgreement*

 

The Company has entered into a license agreement withthe Adviser, pursuant to which the Adviser has granted the Company anon-exclusive license to use the name “Gladstone” and the Diamond G trademark.The amount of the fee is negotiated on an annual basis by the Company’scompensation committee, and must be approved by a majority of the Company’sindependent directors. The fee was increased to ten dollars per quartereffective at the beginning of the last contract term, which began on December 20,2007, and as a result of the most recent negotiations, the fee will remain atten dollars for the current contract term, which began on December 20,2008. The license arrangement will terminate in the event that GladstoneManagement Corporation is no longer the Company’s Adviser.

 

**NOTE 5. LINE OF CREDIT**

 

Through Business Loan, the Company has a revolving credit facility (the“DB Facility”) with Deutsche Bank AG, as administrative agent, pursuant towhich Business Loan pledges the loans it holds to secure future advances bycertain institutional lenders. The interest rate charged on the advances underthe DB Facility is based on the Commercial Paper (“CP”) rate, which isequivalent to the weighted average per annum rates paid by the DB Facility’s CPlenders in respect of CP notes issued by the CP lender during such period.  Business Loan also has the ability to borrowat an alternative rate from the committed lenders if CP lenders are unable tofund advances.  The alternative rate isthe London Interbank Offered Rate (“LIBOR”), or if LIBOR is unavailable, thePrime Rate or the Federal Funds Rate, plus 1.0%.  In February 2008, the Company increasedthe DB Facility from $220 million to $250 million, and in April 2008, theCompany increased the DB Facility to $300 million and added Branch Banking andTrust Company (“BB&T”) as a committed lender.  In June 2008, the Company renewed the DBFacility, which matures on May 21, 2009. The fees incurred for the above amendments are recorded in deferred financingfees in the accompanying condensed consolidated statements of assets andliabilities.

 

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As of March 31, 2009, the outstanding principal balance under theDB Facility was approximately $153,370 at a stated interest rate ofapproximately 2.03%, plus a 2.50% program fee. The Company is also charged an unused commitment fee of 0.75% perannum.  Available borrowings are subjectto various constraints imposed under the credit agreement, based on theaggregate loan balance pledged by Business Loan, which varies as loans areadded and repaid, regardless of whether such repayments are early prepayment orare made as contractually required.  At March 31,2009, the remaining borrowing capacity available under the DB Facility was$146,630.  The weighted averageborrowings outstanding under the DB Facility for the six months ended March 31,2009 and 2008 were $145,855 and $142,790, respectively, at a weighted averageannual interest cost of 8.12% and 6.26%, respectively, which was computed byusing the annual stated interest rate plus commitment and other fees, plus theamortization of deferred financing fees divided by the weighted average debtoutstanding.

 

The DB Facility contains covenants that require Business Loan tomaintain its status as a separate entity, prohibit certain significantcorporate transactions (such as mergers, consolidations, liquidations ordissolutions), and restrict material changes to the Company’s credit andcollection policies. The DB Facility also restricts some of the terms andprovisions (including terms to maturity and payments schedules) and limits theborrower and industry concentrations of loans that are eligible to secureadvances.  As of March 31, 2009,Business Loan was in compliance with all of the DB Facility covenants.

 

The administrative agent also requires that any interest or principalpayments on pledged loans be remitted directly by the borrower into a lockboxaccount with the Bank of New York Mellon Corp. as custodian.  Deutsche Bank AG is also the trustee of theaccount and once a month remits the collected funds to the Company.  At March 31, 2009 and September 30,2008, the amount due from custodian was $10,132 and $4,544, respectively.

 

The Adviser also services the loans pledged under the DB Facility.  As a condition to this servicing arrangement,the Company executed a performance guaranty pursuant to which it guaranteedthat the Adviser would comply fully with all of its obligations under the DBFacility.  The performance guarantyrequires that the Company maintain a minimum net worth of $100 million and 75%of equity issuances after May 2003 and maintain “asset coverage” withrespect to “senior securities representing indebtedness” of at least 200%, inaccordance with Section 18 of the 1940 Act.  As of March 31, 2009, the Company was incompliance with all covenants under the performance guaranty.  However, continued compliance with thesecovenants depends on many factors, some of which are beyond the Company’scontrol.  In particular, depreciation inthe valuation of the Company’s assets, which valuation is subject to changingmarket conditions which are presently very volatile, affects the Company’sability to comply with these covenants.

 

Availability under the DB Facility will terminate on May 21,2009.  If the DB Facility is not renewedor extended by this date, all principal and interest will be immediately dueand payable within one year of the maturity date.  There can be no guarantee that the Companywill be able to renew, extend or replace the DB Facility on terms that arefavorable to the Company, or at all.  TheCompany’s ability to obtain replacement financing will be constrained bycurrent economic conditions affecting the credit markets, which havesignificantly deteriorated over the last several months and may declinefurther.  Consequently, any renewal,extension or refinancing of the DB Facility will likely result in significantlyhigher interest rates and related charges and may impose significantrestrictions on the use of borrowed funds with regard to the Company’s abilityto fund investments or pay distributions to its stockholders.  If the Company is not able to renew, extendor refinance the DB Facility, this would likely have a material adverse effecton its liquidity and ability to fund new investments or pay distributions toits stockholders.  The Company’sinability to pay distributions could result in it failing to qualify as aRIC.  Consequently, any income or gainscould become taxable at corporate rates. If the Company is unable to secure replacement financing, it may be forcedto sell certain assets on disadvantageous terms, which may result in realizedlosses, and such realized losses could materially exceed the amount of anyunrealized depreciation on these assets as of the most recent balance sheetdate, which would have a material adverse effect on the results of operations.  In addition to selling assets, or as analternative, the Company may issue equity in order to repay amounts outstandingunder the DB Facility.  Based on therecent trading prices of the stock, such an equity offering may have a substantialdilutive impact on the Company’s existing stockholders’ interest in itsearnings and assets and voting interest in the Company.  Effective April 14, 2009, the Companyexercised its right to reduce the amount available under the DB Facility from$300 million to $162 million.  Seefurther discussion in Note 11. Subsequent Events.

 

**NOTE 6. INTEREST RATE CAP AGREEMENT**

 

Pursuant to the DB Facility, the Company had an interest rate capagreement, with an initial notional amount of $35.0 million at a cost of $304that effectively limited the interest rate on a portion of the borrowings underthe line of credit.  The interest ratecap agreement expired in February 2009.

 

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At September 30, 2008, the interest rate cap agreement had anominal fair market value, which is recorded in other assets on the Company’sconsolidated statement of assets and liabilities.  The Company recorded changes in the fairmarket value of the interest rate cap agreement monthly based on the currentmarket valuation at month end as unrealized depreciation or appreciation onderivative on the Company’s consolidated statement of operations. The agreementprovided that the Company’s floating interest rate or cost of funds on aportion of the portfolio’s borrowings would be capped at 5% when the LIBOR ratewas in excess of 5%.  During the threeand six months ended March 31, 2009, the Company recorded $304 of lossfrom the interest rate cap agreement, recorded as a realized loss on thesettlement of derivative on the Company’s consolidated statements ofoperations.  During the three and sixmonths ended March 31, 2008, the Company recorded $1 and $7 of income fromthe interest rate cap agreement, recorded as a realized gain on the settlementof derivative on the Company’s consolidated statements of operations.

 

**NOTE 7. COMMON STOCK TRANSACTIONS**

 

Transactionsin common stock were as follows:

 
| ** **                         | ** ** | **Shares** | ** ** | **Total Value** | ** ** |
|------------------------------------|------------|------------|------------|----------------------|------------|
| Balance at September 30, 2008 |       | 21,087,574 |       | $                    | 334,164    |   |
| Shelf offering costs               |       | —     |       | (3                   | )          |
| Balance at March 31, 2009     |       | 21,087,574 |       | $                    | 334,161    |   |

 

**NOTE 8. NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROMOPERATIONS PER COMMON SHARE**

 

Thefollowing table sets forth the computation of basic and diluted net increase(decrease) in net assets per common share resulting from operations per sharefor the three and six months ended March 31, 2009 and 2008:

 
| ** **                                                                                                 | ** ** | **Three months ended March 31,** | ** ** | **Six months ended March 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                                                 | ** ** | **2009**                                             | ** ** | **2008**                                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| Numerator for basic and diluted net increase  (decrease) in net assets resulting from operations per share |       | $                                                    | 10,280     |                                               | $          | (11,904 | ) | $ | 1,178 |   | $ | (10,004 | ) |
|                                                                                                       |       |                                                 |       |                                               |       |   |   |   |   |
| Denominator for basic and diluted shares                                                                   |       | 21,087,574                                           |       | 19,670,333                                         |       | 21,087,574 |   | 18,312,018 |   |
| Basic and diluted net increase (decrease) in net  assets resulting from operations per share               |       | $                                                    | 0.48       |                                               | $          | (0.61 | ) | $ | 0.05 |   | $ | (0.55 | ) |

 

**NOTE 9. DISTRIBUTIONS**

 

*Distributions*

 

Thefollowing table lists the per share distributions paid for the three and six monthsended March 31, 2009 and 2008:

 
| **Fiscal Year** | ** ** | **Record Date**   | ** ** | **Payment Date**  | ** ** | **Distribution  per Share** | ** ** |
|----------------------|------------|------------------------|------------|------------------------|------------|----------------------------------|------------|
| 2009                 |       | March 23, 2009    |       | March 30, 2009    |       | $                                | 0.14       |   |
|                 |       | February 19, 2009 |       | February 27, 2009 |       | $                                | 0.14       |   |
|                 |       | January 22, 2009  |       | January 31, 2009  |       | $                                | 0.14       |   |
|                 |       | December 22, 2008 |       | December 31, 2008 |       | $                                | 0.14       |   |
|                 |       | November 19, 2008 |       | November 28, 2008 |       | $                                | 0.14       |   |
|                 |       | October 23, 2008  |       | October 31, 2008  |       | $                                | 0.14       |   |
|                 |       |                   |       | Total                  |       | $                                | 0.84       |   |
|                 |       |                   |       |                   |       |                             |       |
| 2008                 |       | March 21, 2008    |       | March 31, 2008    |       | $                                | 0.14       |   |
|                 |       | February 21, 2008 |       | February 29, 2008 |       | $                                | 0.14       |   |
|                 |       | January 23, 2008  |       | January 31, 2008  |       | $                                | 0.14       |   |
|                 |       | December 20, 2007 |       | December 31, 2007 |       | $                                | 0.14       |   |
|                 |       | November 21, 2007 |       | November 30, 2007 |       | $                                | 0.14       |   |
|                 |       | October 23, 2007  |       | October 31, 2007  |       | $                                | 0.14       |   |
|                 |       |                   |       | Total                  |       | $                                | 0.84       |   |

 

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Aggregate distributions declared and paid for the sixmonths ended March 31, 2009 and 2008 were approximately $17.7 million and$15.7 million, respectively.  Alldistributions were declared based on estimates of net investment income for therespective fiscal years, and some of the distributions include a return of capital.

 

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

 

*Section 19(a) Disclosure*

 

TheCompany’s Board of Directors estimates the source of the distributions at thetime of their declaration as required by Section 19(a) of the 1940Act.  On a monthly basis, if requiredunder Section 19(a), the Company posts a Section 19(a) noticethrough the Depository Trust Company’s Legal Notice System (“LENS”) and alsosends to its registered stockholders a written Section 19(a) noticealong with the payment of distributions for any payment which includes adistribution estimated to be paid from any other source other than netinvestment income.  The estimates of thesource of the distribution are interim estimates based on GAAP that are subjectto revision, and the exact character of the distributions for tax purposescannot be determined until the books and records of the Company are finalizedfor the calendar year.  Following thecalendar year end, after definitive information has been determined by theCompany, if the Company has made distributions of taxable income (or return ofcapital), the Company will deliver a Form 1099-DIV to its stockholdersspecifying such amount and the tax characterization of such amount.  Therefore, these estimates are made solely inorder to comply with the requirements of Section 19(a) of the 1940Act and should not be relied upon for tax reporting or any other purposes andcould differ significantly from the actual character of distributions for taxpurposes.

 

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

 
| **Month Ended**   | ** ** | **Ordinary Income** | ** ** | **Return of Capital** | ** ** | **Total Distribution** | ** ** |
|------------------------|------------|--------------------------|------------|---------------------------------|------------|-----------------------------|------------|
| March 31, 2009    |       | $                        | 0.104      |                            | $          | 0.036                       |       | $ | 0.140 |   |
| February 28, 2009 |       | 0.105                    |       | 0.035                           |       | 0.140                       |       |
| January 31, 2009  |       | 0.105                    |       | 0.035                           |       | 0.140                       |       |
|                        |            |                          |            |                                 |            |                             |            |  |  |  |

 

Becausethe Board of Directors declares distributions at the beginning of a quarter, itis difficult to estimate how much of the Company’s monthly distributions, basedon GAAP, will come from ordinary income, capital gains, and returns ofcapital.  Subsequent to the quarter endedMarch 31, 2009, the following corrections were made to the above listedestimates for that quarter:

 
| **Month Ended**   | ** ** | **Ordinary Income** | ** ** | **Return of Capital** | ** ** | **Total Distribution** | ** ** |
|------------------------|------------|--------------------------|------------|---------------------------------|------------|-----------------------------|------------|
| March 31, 2009    |       | $                        | 0.099      |                            | $          | 0.041                       |       | $ | 0.140 |   |
| February 28, 2009 |       | 0.071                    |       | 0.069                           |       | 0.140                       |       |
| January 31, 2009  |       | 0.095                    |       | 0.045                           |       | 0.140                       |       |
|                        |            |                          |            |                                 |            |                             |            |  |  |  |

 

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

 
| **Month Ended** | ** ** | **Ordinary Income** | ** ** | **Return of Capital** | ** ** | **Total Distribution** | ** ** |
|----------------------|------------|--------------------------|------------|---------------------------------|------------|-----------------------------|------------|
| April 30, 2009  |       | $                        | 0.070      |                            | $          | —                      |       | $ | 0.070 |   |
|                      |            |                          |            |                                 |            |                             |            |  |  |  |

 

**NOTE 10. COMMITMENT AND CONTINGENCIES**

 

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

 

**NOTE 11. SUBSEQUENT EVENTS**

 

*Distributions*

 

In April 2009, the Company’s Board of Directors declared the followingmonthly cash distribution:

 
| **Record Date** | ** ** | **Payment Date** | ** ** | **Distribution  per Share** | ** ** | ** ** | ** ** |
|----------------------|------------|-----------------------|------------|----------------------------------|------------|------------|------------|
| April 27, 2009  |       | May 8, 2009      |       | $                                | 0.070      |       |       |   |
|                      |            |                       |            |                                  |            |            |            |  |

 

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*Investment Activity*

 

Subsequent to March 31, 2009, the Company extended approximately $4.7million of revolver draws and additional investments to existing portfoliocompanies.  The Company also receivedapproximately $31.3 million from scheduled and unscheduled loan repayments andsyndicated loan sales.

 

### The Company entered into agreements to sell13 of the 24 syndicated loans that were held in its portfolio of investments atMarch 31, 2009 to various investors in the syndicated loan market. The loans had an aggregate cost value of approximately $30.4 million, or 7% ofthe cost value of the Company’s total investments, and an aggregate fair marketvalue of approximately $22.5 million, or 6% of the fair market value of theCompany’s total investments, at March 31, 2009.  As of May 5,2009, the Company has closed the sales of all of these loans for an aggregateof $22.5 million in net proceeds.  The Company used the proceeds of thesesales and of the refinancings of certain proprietary investments to pay downthe DB Facility.  Accordingly, these loans are included in the Company’scondensed consolidated assets as of March 31, 2009 and the loans arevalued at their respective sale prices.

###  

The syndicated loan sales are shown below:

 
| 1  | Bresnan Communications, LLC - Senior Term Debt                       |
|----|----------------------------------------------------------------------|
| 2  | Bresnan Communications, LLC - Senior Subordinated  Term Debt         |
| 3  | CHG Companies, Inc. - Letter of Credit                          |
| 4  | CHG Companies, Inc. - Senior Term Debt                          |
| 5  | Emdeon Business Services, Inc. - Senior Term  Debt              |
| 6  | Emdeon Business Services, Inc. - Senior  Subordinated Term Debt |
| 7  | GTM Holdings, Inc. - Senior Term Debt                           |
| 8  | Harrington Holdings, Inc. - Senior Term Debt                    |
| 9  | Harrington Holdings, Inc. - Senior Subordinated  Term Debt      |
| 10 | RedPrairie Holding, Inc. - Senior Term Debt                     |
| 11 | RedPrairie Holding, Inc. - Senior Subordinated  Term Debt       |
| 12 | RiskMetrics Group Holdings, LLC - Senior Term Debt                   |
| 13 | Wesco Holdings, Inc. — Senior Term Debt                    |

 

*Line of Credit*

 

Effective April 14, 2009, the Company elected to exercise itsright to reduce the amount available under the DB Facility from $300 million to$162 million.

 

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**ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.**

 

**All statements contained herein, other than historical facts,may constitute “forward-looking statements.” These statements may relate to,among other things, future events or our future performance or financialcondition. In some cases, you can identify forward-looking statements byterminology such as “may,” “might,” “believe,” “will,” “provided,” “anticipate,”“future,” “could,” “growth,” “plan,” “intend,” “expect,” “should,” “would,” “if,”“seek,” “possible,” “potential,” “likely” or the negative of such terms orcomparable terminology. These forward-looking statements involve known andunknown risks, uncertainties and other factors that may cause our actualresults, levels of activity, performance or achievements to be materiallydifferent from any future results, levels of activity, performance orachievements expressed or implied by such forward-looking statements. Wecaution readers not to place undue reliance on any such forward-lookingstatements. We undertake no obligation to publicly update or revise anyforward-looking statements, whether as a result of new information, futureevents or otherwise, after the date of this Form 10-Q**.

 

**The following analysis of ourfinancial condition and results of operations should be read in conjunctionwith our condensed consolidated financial statements and the notes thereto containedelsewhere in this report and our annual report on Form 10-K for the fiscalyear ended September 30, 2008.**

 

**OVERVIEW**

 

**General**

 

We were incorporated under the General CorporationLaws of the State of Maryland on May 30, 2001. Our investment objectivesare to achieve a high level of current income by investing in debt securities,consisting primarily of senior notes, senior subordinated notes and juniorsubordinated notes, of established private businesses that are substantiallyowned by leveraged buyout funds, venture capital funds, individual investors orare family-owned businesses, with a particular focus on senior notes. Inaddition, we may acquire existing loans that meet this profile from leveragedbuyout funds, venture capital funds and others. We also seek to provide ourstockholders with long-term capital growth through the appreciation in thevalue of warrants or other equity instruments that we may receive when we makeloans. We operate as a closed-end, non-diversified management investment company,and have elected to be treated as a business development company under theInvestment Company Act of 1940 (the “1940 Act”).  In addition, for tax purposes we have electedto be treated as a regulated investment company (“RIC”) under the Internal RevenueCode of 1986, as amended (the “Code”).

 

We seek out small and medium-sized private U.S.businesses that meet certain criteria, including some but not all of thefollowing: the potential for growth in cash flow, adequate assets for loancollateral, experienced management teams with a significant ownership interestin the borrower, profitable operations based on the borrower’s cash flow,reasonable capitalization of the borrower (usually by leveraged buyout funds orventure capital funds) and the potential to realize appreciation and gainliquidity in our equity position, if any. We anticipate that liquidity in ourequity position will be achieved through a merger or acquisition of theborrower, a public offering of the borrower’s stock or by exercising our rightto require the borrower to repurchase our warrants, though there can be noassurance that we will always have these rights. We lend to borrowers that needfunds to finance growth, restructure their balance sheets or effect a change ofcontrol.

 

**Business Environment**

 

The current economic conditions generally and the disruptions in thecapital markets in particular have decreased liquidity and increased our costof debt and equity capital, where available. The longer these conditionspersist, the greater the probability that these factors could continue toincrease our cost and significantly limit our access to debt and equitycapital, and thus have an adverse effect on our operations and financialresults. Many of the companies in which we have made or will make investmentsmay also be susceptible to the economic downturn, which may affect the abilityof one or more of our portfolio companies to repay our loans or engage in aliquidity event, such as a sale, recapitalization or initial public offering.An economic downturn could also disproportionately impact some of theindustries in which we invest, causing us to be more vulnerable to losses inour portfolio. Therefore, the number of our non-performing assets are likely toincrease and the fair market value of our portfolio is likely to decreaseduring these periods.  The economicdownturn has affected the availability of credit generally and may prevent usfrom replacing or renewing our credit facility on reasonable terms, if atall.  Effective April 14, 2009, weexercised our right to reduce the amount available under the DB Facility from$300 million to $162 million, which was part of our process of attempting tosecure new financing.  In addition, we entered into agreements to sell 13 of the 24syndicated loans that were held in our portfolio of investments at March 31,2009 to various investors in the syndicated loan market.  The loans had anaggregate cost value of approximately $30.4 million, or 7% of the cost value ofour total investments, and an aggregate fair market value of approximately$22.5 million, or 6% of the fair market value of our total investments, at March 31,2009.  As of May 5, 2009, we closed the sales of all 

 

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of these loans for an aggregate of $22.5million in net proceeds.  The Company used the proceeds of these sales andof the refinancings of certain proprietary investments to pay down the DB Facility. We do not know whenmarket conditions will stabilize, if adverse conditions will intensify or thefull extent to which the disruptions will affect us.  If market instability persists orintensifies, we may experience difficulty in raising capital.

 

Challenges in the current market are intensified for us by certainregulatory limitations under the Code and the 1940 Act, as well as contractualrestrictions under the agreement governing our credit facility that furtherconstrain our ability to access the capital markets.  To maintain our qualification as a RIC, wemust satisfy, among other requirements, an annual distribution requirement topay out at least 90% of our ordinary income and short-term capital gains to ourstockholders on an annual basis.  Becausewe are required to distribute our income in this manner, and because theilliquidity of many of our investments makes it difficult for us to finance newinvestments through the sale of current investments, our ability to make newinvestments is highly dependent upon external financing.  Our external financing sources include theissuance of equity securities, debt securities or other leverage such asborrowings under our line of credit.  Ourability to seek external debt financing, to the extent that it is availableunder current market conditions, is further subject to the asset coveragelimitations of the 1940 Act, which require us to have at least a 200% assetcoverage ratio, meaning generally that for every dollar of debt, we must havetwo dollars of assets.

 

Recent market conditions have also affected the trading price of ourcommon stock and thus our ability to finance new investments through theissuance of equity.  On April 17,2009, the closing market price of our common stock was $6.23, which pricerepresented a 49% discount to our March 31, 2009 net asset value (“NAV”)per share.  When our stock is tradingbelow NAV, as it has consistently traded subsequent to September 30, 2008,our ability to issue equity is constrained by provisions of the 1940 Act whichgenerally prohibit the issuance and sale of our common stock below NAV pershare without stockholder approval other than through sales to ourthen-existing stockholders pursuant to a rights offering.  At our annual meeting of stockholders held onFebruary 19, 2009, stockholders approved a proposal which authorizes us tosell shares of our common stock at a price below our then current NAV per sharefor a period of one year from the date of approval, provided that our Board ofDirectors makes certain determinations prior to any such sale.

 

The economic downturn may also continue to decrease the value ofcollateral securing some of our loans, as well as the value of our equityinvestments, which has impacted and may continue to impact our ability toborrow under our credit facility.  Forthe six months ended March 31, 2009, we recorded net unrealizeddepreciation on our portfolio of investments of $6.5 million, which was mainlyattributable to the decrease in fair value of our portfolio.  We may see further decreases in the value ofour portfolio, which will further limit our ability to borrow under our currentcredit facility.  Additionally, our creditfacility contains covenants regarding the maintenance of certain minimum networth requirements which are affected by the decrease in value of ourportfolio.  Failure to meet theserequirements would result in a default which, if we are unable to obtain awaiver from our lenders, would result in the acceleration of our repaymentobligations under the credit facility.

 

We expect that, given these regulatory and contractual constraints incombination with current market conditions, debt and equity capital may becostly or difficult for us to access for some time.  For so long as this is the case, ournear-term strategy has become somewhat dependent upon retaining capital andbuilding the value of our existing portfolio companies to increase thelikelihood of maintaining potential future returns.  We will also, where prudent and possible,consider the sale of lower-yielding investments.  This has resulted, and may continue toresult, in significantly reduced investment activity, as our ability to makenew investments under these conditions is largely dependent on availability ofproceeds from the sale or exit of existing portfolio investments, which eventsmay be beyond our control.  As capitalconstraints improve, we intend to continue our strategy of making conservativeinvestments in businesses that we believe will weather the current economy andthat are likely to produce attractive long-term returns for our stockholders.

 

**Use of Internally-Developed DiscountCash Flow Methodologies**

 

Given thecontinued economic downturn, the market for syndicated loans has becomeincreasingly illiquid with limited or no transactions for many of thosesecurities which we hold. The Financial Accounting Standards Board (“FASB”)Staff Position 157-3, *Determining the FairValue of a Financial Asset When the Market for That Asset is Not Active*(“FSP 157-3”), provides guidance on the use of a discounted cash flow (“DCF”)methodology to value investments in an illiquid market.  Under FSP 157-3, indications of an illiquidmarket include cases where the volume and level of trading activity in theasset have declined significantly, the available prices vary significantly overtime or amongst market participants, or the prices are not current. Themarketplace for which we obtain indicative bids for purposes of determiningfair value for our syndicated loan investments have recently shown theseattributes of illiquidity.  In accordancewith Statement of Financial Accounting Standards (“SFAS”) 157, our valuationprocedures specify the use of third-party indicative bid quotes for valuingsyndicated loans where there is a liquid public market for those loans andmarket pricing quotes are readily available. However, due to the marketilliquidity and the lack of transactions during the six months ended March 31,2009, we determined that the current agent bank non-binding indicative bids forthe majority of our syndicated loans were unreliable and alternative procedureswould need to be performed until liquidity returns to the market place.  As such, we have valued 

 

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the syndicatedloans that were not sold subsequent to March 31, 2009 using a DCF methodfor the quarter ended March 31, 2009. As of March 31, 2009, the portion of our investment portfolio thatwas valued using DCF was approximately $33.7 million, or 8.8% of the fair valueof our total portfolio of investments.

 

**Investment Highlights**

 

During the six months ended March 31, 2009, we extended $17.1million of investments to existing portfolio companies through revolver drawsor the additions of new term notes. During the six months ended March 31, 2009, 2 borrowers refinancedtheir loans for $7.8 million, 2 borrowers made unscheduled payoffs of $7.0million, and we experienced contractual amortization, revolver repayments andsome principal payments received ahead of schedule of $13.2 million, for totalprincipal repayments of $28.0 million.  Since our initial public offering in August 2001, we have made 258different loans to, or investments in, 126 companies for a total ofapproximately $948.4 million, before giving effect to principal repayments oninvestments and divestitures.

 

**RESULTSOF OPERATIONS (dollar amounts inthousands, unless otherwise indicated)**

 

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

 

**Investment Income**

 

Investment income for the three months ended March 31, 2009 was$10,929, as compared to $11,350 for the three months ended March 31, 2008.

 

Interest income from our investments in debt securities of privatecompanies was $10,811 for the three months ended March 31, 2009, ascompared to $11,124 for the three months ended March 31, 2008.  The level of interest income from investmentsis directly related to the balance, at cost, of the interest-bearing investmentportfolio outstanding during the period multiplied by the weighted averageyield.  The weighted average yield variesfrom period to period based on the current stated interest rate oninterest-bearing investments and the amounts of loans for which interest is notaccruing.  Interest income from ourinvestments decreased $313, or 2.8%, during the three months ended March 31,2009 compared to the prior year period. This decrease was based on the overall reduction in the cost basis ofour investments as well as the decrease in the weighted average yield on ourportfolio.  The annualized weightedaverage yield on our portfolio was 9.7% for the three months ended March 31,2009 as compared to 10.1% for the three months ended March 31, 2008.  The decrease in the annualized weightedaverage yield primarily resulted from a reduction in the average LIBOR from theprior year, as well as three investments being on non-accrual during the threemonths ended March 31, 2009 (Badanco, CCS and U.S. Healthcare) whereasonly two investments were on non-accrual during the three months ended March 31,2008 (LYP Holdings and Western Directories).

 

Interest income from Non-Control/Non-Affiliate investments was $10,329for the three months ended March 31, 2009, as compared to $11,108 for thecomparable prior year period.  Thisdecrease resulted from an overall decrease in the aggregateNon-Control/Non-Affiliate investments held at March 31, 2009 compared tothe prior year period, as well as a decrease in LIBOR due to the instabilityand tightening of the credit markets. The success fees earned during the three months ended March 31,2009 and 2008 were $21 and $0, respectively.  Success fees earned during the three months ended March 31, 2009resulted from a refinancing by It’s Just Lunch.

 

Interest income from Control investments was $482 for the three monthsended March 31, 2009, as compared to $16 in the comparable prior yearperiod.  The increase is attributable tothree additional Control investments held during the quarter ended March 31,2009 (Lindmark, LYP Holdings and Western Directories) as compared to the prioryear period.

 

The following table lists the interest income from investments for thefive largest portfolio companies during the respective periods:

 

**Three months ended March 31, 2009**

 
| **Company**               | ** ** | **Interest  Income** | ** ** | **% of  Total** | ** ** |
|---------------------------|------------|----------------------|------------|----------------------|------------|
| Sunshine Media            |       | $                    | 824        |                 | 7.6        | %  |
| Reliable Biopharma        |       | 757                  |       | 7.0                  | %     |
| Westlake Hardware         |       | 597                  |       | 5.5                  | %     |
| Clinton Aluminum          |       | 465                  |       | 4.3                  | %     |
| Vanta Core                |       | 416                  |       | 3.8                  | %     |
| **Subtotal**              | ** ** | **$**                | **3,059**  | ** **           | **28.3**   | **% ** |
| Other companies           |       | 7,752                |       | 71.7                 | %     |
| **Total interest income** | ** ** | **$**                | **10,811** | ** **           | **100.0**  | **% ** |

 

**Three months ended March 31, 2008**

 
| **Company**               | ** ** | **Interest  Income** | ** ** | **% of  Total** | ** ** |
|---------------------------|------------|----------------------|------------|----------------------|------------|
| Reliable Biopharma        |       | $                    | 749        |                 | 6.7        | % |
| Westlake Hardware         |       | 703                  |       | 6.3                  | %          |
| Sunshine Media            |       | 693                  |       | 6.2                  | %          |
| Clinton Aluminum          |       | 470                  |       | 4.2                  | %          |
| GFRC Cladding             |       | 407                  |       | 3.7                  | %          |
| **Subtotal**              | ** ** | **$**                | **3,022**  | ** **           | **27.1**   | **%** |
| Other companies           |       | 8,102                |       | 72.9                 | %          |
| **Total interest income** | ** ** | **$**                | **11,124** | ** **           | **100.0**  | **%** |

 

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Interest income from invested cash for the three months ended March 31,2009 was $1, as compared to $103 for the three months ended March 31,2008.  Interest income came from thefollowing sources:

 
| ** **                                              | ** ** | **Three months ended** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                              | ** ** | **March 31, 2009**     | ** ** | **March 31, 2008** | ** ** |
| Interest earned on Gladstone Capital account (1)        |       | $                                | —     |   | $ | 7 |   |
| Interest earned on Business Loan custodial account  (2) |       | 1                                |       | 72 |   |
| Interest earned on Gladstone Financial account (3)      |       | —                           |       | 24 |   |
| Total interest income from invested cash                |       | $                                | 1          |   | $ | 103 |   |

 

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| (1) | Interest earned on our Gladstone Capital account  during the three months ended March 31, 2008 resulted from proceeds  received from the equity offerings done during the three month period that  were held in the account prior to being invested or used to pay down the line  of credit. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Interest earned on our Business Loan custodial  account during the three months ended March 31, 2008 resulted from large  cash amounts held in the account prior to disbursement. During such three  month period, we had $13.7 million of originations to new portfolio  companies.         |
| (3) | Interest earned on our Gladstone Financial account  during the three months ended March 31, 2008 resulted from the U.S.  Treasury bill that was held with an original maturity of six months.                                                                                                |

 

Interest income from loans to our employees, in connection with theexercise of employee stock options, for the three months ended March 31,2009 and March 31, 2008, was $117 and $118, respectively.

 

Prepayment fees and other income for the three months ended March 31,2009 was $0 compared to $5 for the three months ended March 31, 2008.  The income for the prior period consisted ofprepayment penalty fees received upon the full repayment of certain loaninvestments ahead of contractual maturity.

 

**Operating Expenses**

 

Operating expenses, net of credits from the Adviser for fees earned andvoluntary and irrevocable waivers to the base management and incentive fees,were $5,374 for the three months ended March 31, 2009, as compared to$4,908 for the three months ended March 31, 2008. Operating expenses forthe three months ended March 31, 2009 reflected a significant increase inamortization of deferred financing fees incurred in connection with certainamendments to the DB Facility.

 

Interest expense for the three months ended March 31, 2009 was$2,016, as compared to $1,855 for the three months ended March 31,2008.  This increase is primarily aresult of increased borrowings under our line of credit during the three monthsended March 31, 2009, which borrowings were partially used to finance ourincreased investments.

 

Loan servicing fees for the three months ended March 31, 2009 were$1,526, as compared to $1,562 for the three months ended March 31,2008.  These fees were incurred inconnection with a loan servicing agreement between Business Loan and ourAdviser, which is based on the size of the portfolio.

 

Base management fee for the three months ended March 31, 2009 was$484, as compared to $557 for the three months ended March 31, 2008.  The base management fee is computed quarterlyas described under *“Investment Advisory andManagement Agreement”* in Note 4 of the condensed consolidatedfinancial statements, and is summarized in the table below:

 
| ** **                                                                                                      | ** ** | **Three months ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                      | ** ** | **March 31, 2009**     | ** ** | **March 31, 2008** | ** ** |
| Base management fee (1)                                                                                         |       | $                                | 484        |   | $ | 557 |   |
| Credit for fees received by Adviser from the  portfolio companies                                               |       | (80                              | )          | (150 | ) |
| Fee reduction for the voluntary, irrevocable waiver  of 2% fee on senior syndicated loans to 0.5% per annum (2) |       | (97                              | )          | (99 | ) |
| Net base management fee                                                                                         |       | $                                | 307        |   | $ | 308 |   |

 

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(1)          Base management fee is net of loan servicing fees perthe terms of the Amended Advisory Agreement.

(2)          The board of our Adviser voluntarily and irrevocablywaived, for the three months ended March 31, 2009 and 2008, the annual2.0% base management fee to 0.5% for senior syndicated loan participations.

 

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Incentive fee for the three months ended March 31, 2009 was$1,089, as compared to $1,288 for the three months ended March 31,2008.  The board of our Adviser waivedthe entire incentive fee for the three months ended March 31, 2009 andthree months ended March 31, 2008. The incentive fee and associated credits are summarized in the tablebelow:

 
| ** **                                                                             | ** ** | **Three months ended** | ** ** |
|----------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                             | ** ** | **March 31, 2009**     | ** ** | **March 31, 2008** | ** ** |
| Incentive fee                                                                          |       | $                                | 1,089      |   | $ | 1,288 |   |
| Credit from voluntary, irrevocable waiver issued by  Adviser’s board of directors |       | (1,089                           | )          | (1,288 | ) |
| Net incentive fee                                                                      |       | $                                | —     |   | $ | — |   |

 

Administration fee for the three months ended March 31, 2009 was$211 as compared to $240 for the three months ended March 31, 2008. Theslight decrease is due to a decrease of administration staff and relatedexpenses.

 

Professional fees, consisting primarily of legal and audit fees, forthe three months ended March 31, 2009 were $205, as compared to $410 forthe three months ended March 31, 2008. The decrease is due to legal fees incurred in connection with troubledloans in the prior period.

 

Amortization of deferred financing fees, in connection with our line ofcredit, was $726 for the three months ended March 31, 2009, as compared to$184 for the three months ended March 31, 2008.  The increase is due to the amortization ofadditional fees incurred with our line of credit.  In February 2008, we increased the DBFacility from $220 million to $250 million, and in April 2008, weincreased the DB Facility to $300 million and added BB&T as a committedlender.  In June 2008, we renewedthe DB Facility.  The fees incurred forthe above amendments are recorded in deferred financing fees on ourconsolidated statement of assets and liabilities, and amortized over the lifeof the DB Facility.

 

Stockholder related costs for the three months ended March 31,2009 were $196, as compared to $138 for the three months ended March 31,2008.  Stockholder related costs includesuch recurring items as transfer agent fees, NASDAQ listing fees, costsassociated with the Securities and Exchange Commission (the “SEC”) filings, andthe annual report printing and distribution costs.  The increase was primarily attributed tohigher proxy solicitation fees.  At ourannual meeting of stockholders held on February 19, 2009, stockholdersapproved a proposal which authorizes us to sell shares of our common stock at aprice below our then current NAV per share for a period of one year from thedate of approval, provided that our Board of Directors makes certaindeterminations prior to any such sale.

 

Directors’ fees for the three months ended March 31, 2009 and 2008were $48 and $57, respectively, and consisted of amortization of their annualstipend and individual meeting fees.  Thedecrease was due to fewer committee meetings held in the current year period.

 

Insurance expense for the three months ended March 31, 2009 was$65, as compared to $59 for the three months ended March 31, 2008. Theincrease was primarily the result of an increase of our directors and officersinsurance policy premiums.

 

Other expenses for the three months ended March 31, 2009 were $74,as compared to $95 for the three months ended March 31, 2008.  The expenses primarily represent directexpenses such as travel related specifically to our portfolio companies, loanevaluation services for our portfolio companies, press releases and backupservicer expenses.

 

**Net Realized Loss on Investments**

 

During the three months ended March 31, 2009, we realized a net lossof $2,000 from writing off the remaining balance of the Greatwide second liensyndicated loan.  The original loan wasfor $4,000 and the first $2,000 was sold in August 2008, while theremaining $2,000 was written off in the March 2009 quarter.  There were no realized gains or losses in thethree months ended March 31, 2008.

 

**Realized (Loss) Gain on Settlement ofDerivative**

 

During the three months ended March 31, 2009, we realized a lossof $304 due to the expiration of the interest rate cap in February 2009.  We did not receive any interest rate capagreement payments during that period. During the three months ended March 31, 2008, we received interestrate cap agreement payments of $1 as a result of the one month LIBOR having adownward trend.  We receive payments whenthe one month LIBOR is over 5%.

 

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**Net Unrealized Appreciation(Depreciation) on Derivative**

 

Net unrealized appreciation (depreciation) on derivative is the netchange in the fair value of our interest rate cap during the reporting period,including the reversal of previously recorded unrealized appreciation ordepreciation when gains and losses are realized.  For the three months ended March 31,2009, we recorded unrealized appreciation on derivative of $304, which resultedfrom the reversal of previously recorded unrealized depreciation when the losswas realized during the March 2009 quarter (see discussion above).  For the three months ended March 31,2008, we recorded unrealized depreciation of $2 due to a decrease in the fairmarket value of our interest rate cap agreement.

 

**Net Unrealized Appreciation(Depreciation) on Investments**

 

Net unrealized appreciation (depreciation) on investments is the netchange in the fair value of our investment portfolio during the reportingperiod, including the reversal of previously recorded unrealized appreciationor depreciation when gains and losses are realized.  For the three months ended March 31,2009, we recorded net unrealized appreciation on investments of $6,725, ascompared to unrealized depreciation of $18,345 for the prior year period.  The unrealized appreciation is mainlyattributable to the net increase in fair value on our portfolio, most notablyin the following:

 
| · | Control investments                            |   | $     | 3,526                                      |  (mostly  notably Lindmark and LYP Holdings) |
|--------|------------------------------------------------|--------|-------|--------------------------------------------|---------------------------------------------------|
| · | Non-Control investments                        |   | 1,239 |  (most notably  It’s Just Lunch) |
| · | Reversal of previously unrealized depreciation |   | 1,960 |  (Greatwide  second lien)             |
|   | Total                                          |   | $     | 6,725                                      |                                              |

 

**Net Increase (Decrease) in Net Assets Resulting fromOperations**

 

Overall, we realized a net increase in net assets resulting fromoperations of $10,280 for the three months ended March 31, 2009.  Based on a weighted-average of 21,087,574basic and diluted shares outstanding, our net increase in net assets fromoperations per weighted-average common share for the three months ended March 31,2009 was $0.48, basic and diluted.  Forthe three months ended March 31, 2008, we realized a net decrease in netassets resulting from operations of $(11,904). Based on a weighted-average of 19,670,333 basic and diluted sharesoutstanding, our net decrease in net assets from operations perweighted-average common share for the three months ended March 31, 2008was $(0.61) basic and diluted.

 

***Comparison of the Six Months Ended March 31,2009 to the Six Months Ended March 31, 2008***

 

**Investment Income**

 

Investment income for the six months ended March 31, 2009 was$22,738, as compared to $22,751 for the six months ended March 31, 2008.

 

Interest income from our investments in debt securities of privatecompanies was $22,492 for the six months ended March 31, 2009, as comparedto $22,263 for the six months ended March 31, 2008.  The level of interest income from investmentsis directly related to the balance, at cost, of the interest-bearing investmentportfolio outstanding during the period multiplied by the weighted averageyield.  The weighted average yield variesfrom period to period based on the current stated interest rate on interest-bearinginvestments and the amounts of loans for which interest is not accruing.  Interest income from our investmentsincreased $229, or 1.0%, during the six months ended March 31, 2009compared to the prior year period.  Thisincrease was based on the growth in interest income from our Controlinvestments, offset by the decrease in the weighted average yield on ourportfolio.  The annualized weightedaverage yield on our portfolio was 10.0% for the six months ended March 31,2009 as compared to 10.6% for the six months ended March 31, 2008.  The decrease in the annualized weightedaverage yield primarily resulted from a reduction in the average LIBOR from theprior year, as well as three investments being on non-accrual during the sixmonths ended March 31, 2009 (Badanco, CCS and U.S. Healthcare) whereas twoinvestments were on non-accrual during the three months ended March 31,2008 (LYP Holdings and Western Directories).

 

Interest income from Non-Control/Non-Affiliate investments was $21,990for the six months ended March 31, 2009, as compared to $22,233 for thecomparable prior year period.  Thisdecrease resulted from an overall decrease in the aggregateNon-Control/Non-Affiliate investments held at March 31, 2009 compared tothe prior year period, as well as a decrease in LIBOR due to the instabilityand tightening of the credit markets. The success fees earned during the six months ended March 31, 2009and 2008 were $21 and $346, respectively. Success fees earned during the six months ended March 31, 2009resulted from a refinancing by It’s Just Lunch. Success fees earned during the six months ended March 31, 2008resulted from a refinancing by Westlake Hardware.

 

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Interest income from Control investments was $502 for the six monthsended March 31, 2009, as compared to $30 in the comparable prior yearperiod.  The increase is attributable tothree additional Control investments held during the six months ended March 31,2009 (Lindmark, LYP Holdings and Western Directories) as compared to the prioryear period.

 

The following table lists the interest income from investments for thefive largest portfolio companies during the respective periods:

 

**Six months ended March 31, 2009**

 
| **Company**               | ** ** | **Interest  Income** | ** ** | **%  of Total** | ** **  |
|---------------------------|------------|----------------------|------------|----------------------|-------------|
| Sunshine Media            |       | $                    | 1,667      |                 | 7.4         | %  |
| Reliable Biopharma        |       | 1,530                |       | 6.8                  | %      |
| Westlake Hardware         |       | 1,213                |       | 5.4                  | %      |
| Clinton Aluminum          |       | 940                  |       | 4.2                  | %      |
| Vanta Core                |       | 857                  |       | 3.8                  | %      |
| **Subtotal**              | ** ** | **6,207**            | ** ** | **27.6**             | **% ** |
| Other companies           |       | 16,285               |       | 72.4                 | %      |
| **Total interest income** | ** ** | **22,492**           | ** ** | **100.0**            | **% ** |
|                           |            |                      |            |                      |             |  |

 

**Six months ended March 31, 2008**

 
| **Company**               | ** ** | **Interest  Income** | ** ** | **% of  Total** | ** ** |
|---------------------------|------------|----------------------|------------|----------------------|------------|
| Sunshine Media            |       | $                    | 1,403      |                 | 6.3        | % |
| Westlake Hardware         |       | 1,378                |       | 6.2                  | %          |
| Reliable Biopharma        |       | 1,332                |       | 6.0                  | %          |
| Clinton Aluminum          |       | 957                  |       | 4.3                  | %          |
| Winchester Electronics    |       | 700                  |       | 3.1                  | %          |
| **Subtotal**              | ** ** | **$**                | **5,770**  | ** **           | **25.9**   | **%** |
| Other companies           |       | 16,493               |       | 74.1                 | %          |
| **Total interest income** | ** ** | **$**                | **22,263** | ** **           | **100.0**  | **%** |

 

Interest income from invested cash for the six months ended March 31,2009 was $11, as compared to $247 for the six months ended March 31,2008.  Interest income came from thefollowing sources:

 
| ** **                                              | ** ** | **Six months ended** | ** ** |
|---------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                              | ** ** | **March 31, 2009**   | ** ** | **March 31, 2008** | ** ** |
| Interest earned on Gladstone Capital account (1)        |       | $                              | —     |   | $ | 50 |   |
| Interest earned on Business Loan custodial account  (2) |       | 10                             |       | 142 |   |
| Interest earned on Gladstone Financial account (3)      |       | 1                              |       | 55 |   |
| Total interest income from invested cash                |       | $                              | 11         |   | $ | 247 |   |

 

----

| (1) | Interest earned on our Gladstone Capital account  during the six months ended March 31, 2008 resulted from proceeds  received from the equity offerings done during the six month period that were  held in the account prior to being invested or used to pay down the line of  credit. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Interest earned on our Business Loan custodial  account during the six months ended March 31, 2008 resulted from large  cash amounts held in the account prior to disbursement. During such six month  period, we had $71.7 million of originations to new portfolio companies.          |
| (3) | Interest earned on our Gladstone Financial account  during the six months ended March 31, 2008 resulted from the U.S.  Treasury bill that was held with an original maturity of six months.                                                                                              |

 

Interest income from loans to our employees, in connection with the exerciseof employee stock options, for the six months ended March 31, 2009 and March 31,2008, was $235 and $236, respectively.

 

**Operating Expenses**

 

Operating expenses, net of credits from the Adviser for fees earned andvoluntary and irrevocable waivers to the base management and incentive fees,were $11,301 for the six months ended March 31, 2009, as compared to$9,006 for the six months ended March 31, 2008. Operating expenses for thesix months ended March 31, 2009 reflected an increase in loan servicingfees and a significant increase in amortization of deferred financing feesincurred in connection with certain amendments to the DB Facility .

 

Interest expense for the six months ended March 31, 2009 was$4,478, as compared to $4,211 for the six months ended March 31,2008.  This increase is primarily aresult of increased borrowings under our line of credit during the three monthsended March 31, 2009, which borrowings were partially used to finance ourincreased investments.

 

Loan servicing fees for the six months ended March 31, 2009 were$3,149, as compared to $2,943 for the six months ended March 31,2008.  These fees were incurred inconnection with a loan servicing agreement between Business Loan and ourAdviser, which is based on the size of the portfolio.

 

Base management fee for the six months ended March 31, 2009 was$917, as compared to $1,134 for the six months ended March 31, 2008.  The base management fee is computed quarterlyas described under *“Investment Advisory andManagement Agreement”* in Note 4 of the condensed consolidatedfinancial statements, and is summarized in the table below:

 

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| ** **                                                                                                        | ** ** | **Six months ended** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                        | ** ** | **March 31, 2009**   | ** ** | **March 31, 2008** | ** ** |
| Base management fee (1)                                                                                           |       | $                              | 917        |   | $ | 1,134 |   |
| Credit for fees received by Adviser from the  portfolio companies                                                 |       | (85                            | )          | (972 | ) |
| Fee reduction for the voluntary, irrevocable waiver  of 2.0% fee on senior syndicated loans to 0.5% per annum (2) |       | (203                           | )          | (202 | ) |
| Net base management fee                                                                                           |       | $                              | 629        |   | $ | (40 | ) |

 

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(1)          Base management fee is net of loan servicing fees perthe terms of the Amended Advisory Agreement.

 

(2)          The board of our Adviser voluntarily and irrevocablywaived, for the six months ended March 31, 2009 and 2008, the annual 2.0%base management fee to 0.5% for senior syndicated loan participations.

 

Incentive fee for the six months ended March 31, 2009 was $2,265,as compared to $2,749 for the six months ended March 31, 2008.  The board of our Adviser waived the entireincentive fee for the six months ended March 31, 2009 and March 31,2008.  The incentive fee and associatedcredits are summarized in the table below:

 
| ** **                                                                             | ** ** | **Six months ended** | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                             | ** ** | **March 31, 2009**   | ** ** | **March 31, 2008** | ** ** |
| Incentive fee                                                                          |       | $                              | 2,265      |   | $ | 2,749 |   |
| Credit from voluntary, irrevocable waiver issued by  Adviser’s board of directors |       | (2,265                         | )          | (2,749 | ) |
| Net incentive fee                                                                      |       | $                              | —     |   | $ | — |   |

 

Administration fee for the six months ended March 31, 2009 was$438 as compared to $452 for the six months ended March 31, 2008. Theslight decrease is due to a decrease of administration staff and relatedexpenses.

 

Professional fees, consisting primarily of legal and audit fees, forthe six months ended March 31, 2009 were $518, as compared to $539 for thesix months ended March 31, 2008. The decrease is due to legal fees incurred in connection with troubledloans in the prior period.

 

Amortization of deferred financing fees, in connection with our line ofcredit, was $1,446 for the six months ended March 31, 2009, as compared to$258 for the six months ended March 31, 2008.  The increase is due to the amortization ofadditional fees incurred with our line of credit.  In February 2008, we increased the DBFacility from $220 million to $250 million and in April 2008, increasedthe DB Facility to $300 million and added BB&T as a committed lender.  In June 2008, we renewed the DBFacility.  The fees incurred for theabove amendments are recorded in deferred financing fees on our consolidatedstatement of assets and liabilities, and amortized over the life of the DBFacility.

 

Stockholder related costs for the six months ended March 31, 2009were $284, as compared to $258 for the six months ended March 31,2008.  Stockholder related costs includesuch recurring items as transfer agent fees, NASDAQ listing fees, costsassociated with SEC filings, and the annual report printing and distributioncosts.  The increase was primarilyattributed to higher proxy solicitation fees. At our annual meeting of stockholders held on February 19, 2009,stockholders approved a proposal which authorizes us to sell shares of ourcommon stock at a price below our then current NAV per share for a period ofone year from the date of approval, provided that our Board of Directors makescertain determinations prior to any such sale.

 

Directors’ fees for the six months ended March 31, 2009 and 2008were $97 and $111 respectively, and consisted of amortization of their annualstipend and individual meeting fees.  Thedecrease is due to fewer committee meetings held in the current year period.

 

Insurance expense for the six months ended March 31, 2009 was$122, as compared to $113 for the six months ended March 31, 2008. Theincrease was primarily the result of an increase of our directors’ and officers’insurance policy premiums.

 

Other expenses for the six months ended March 31, 2009 were $140,as compared to $161 for the six months ended March 31, 2008.  The expenses primarily represent directexpenses such as travel related specifically to our portfolio companies, loanevaluation services for our portfolio companies, press releases and backupservicer expenses.

 

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**Net Realized Loss on Investments**

 

During the six months ended March 31, 2009, we realized a net lossof $3,731, which consisted of $2,000 from the write-off of a portion of theGreatwide second lien syndicated loan, $1,758 loss from the sale of theGreatwide second lien syndicated loan, offset by a $27 gain from the CountryRoad payoff.  There were no realizedgains or losses in the six months ended March 31, 2008.

 

**Realized (Loss) Gain on Settlement ofDerivative**

 

During the six months ended March 31, 2009, we realized a loss of$304 due to the expiration of the interest rate cap in February 2009.  We did not receive any interest rate capagreement payments during that period. During the six months ended March 31, 2008, we received interestrate cap agreement payments of $7 as a result of the one month LIBOR having adownward trend.  We receive payments whenthe one month LIBOR is over 5%.

 

**Net Unrealized Appreciation(Depreciation) on Derivative**

 

Net unrealized appreciation (depreciation) on derivative is the netchange in the fair value of our interest rate cap during the reporting period,including the reversal of previously recorded unrealized appreciation or depreciationwhen gains and losses are realized.  Forthe six months ended March 31, 2009, we recorded unrealized appreciationon derivative of $304, which resulted from the reversal of previously recordedunrealized depreciation when the loss was realized during the March 2009period (see discussion above).  For thesix months ended March 31, 2008, we recorded unrealized depreciation of$12 due to a decrease in the fair market value of our interest rate capagreement.

 

**Net Unrealized Appreciation(Depreciation) on Investments**

 

Net unrealized depreciation on investments is the net change in thefair value of our investment portfolio during the reporting period, includingthe reversal of previously recorded unrealized appreciation or depreciationwhen gains and losses are realized.  Forthe six months ended March 31, 2009, we recorded net unrealizeddepreciation on investments of $6,528, as compared to $23,744, for the prioryear period.  The unrealized depreciationis mainly attributable to the net decrease in fair value on our portfolio, mostnotably in the following:

 
| · |   | Control investments                            |   | $       | 2,714  |                                               | (mostly notably Lindmark and LYP Holdings) |
|--------|--------|------------------------------------------------|--------|---------|--------|----------------------------------------------------|--------------------------------------------|
| · |   | Non-Control investments                        |   | (12,387 | )      | (most notably Badanco, RedPrairie, and John Henry) |
| · |   | Reversal of previously unrealized depreciation |   | 3,145   |   | (Greatwide first and second liens)                 |
|   |   | Total                                          |   | $       | (6,528 | )                                                  |                                       |

 

We believe that our investment portfolio was valued at a depreciatedvalue due primarily to the general instability of the loan markets.  Although our investment portfolio hasdepreciated, our entire portfolio was fair valued at 87% of cost as of March 31,2009.  The unrealized depreciation of ourinvestments does not have an impact on our current ability to pay distributionsto stockholders; however, it may be an indication of future realized losses,which could ultimately reduce our income available for distribution.

 

**Net Increase (Decrease) in Net Assets Resulting fromOperations**

 

Overall, we realized a net increase in net assets resulting fromoperations of $1,178 for the six months ended March 31, 2009.  Based on a weighted-average of 21,087,574basic and diluted shares outstanding, our net decrease in net assets fromoperations per weighted-average common share for the three months ended March 31,2009 was $0.05, basic and diluted.  Forthe six months ended March 31, 2008, we realized a net decrease in netassets resulting from operations of $(10,004). Based on a weighted-average of 18,312,018 basic and diluted sharesoutstanding, our net decrease in net assets from operations per weighted-averagecommon share for the six months ended March 31, 2008 was $(0.55) basic anddiluted.

 

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**LIQUIDITY AND CAPITAL RESOURCES (dollar amounts in thousands,unless otherwise indicated)**

 

**Operating Activities**

 

At March 31, 2009, we had investments in debt securities of, orloans to, 60 private companies, totaling approximately $444,563 (cost basis) oftotal assets.  During the six monthsended March 31, 2009 and March 31, 2008, the following investmentactivity occurred:

 
| **Quarter  Ended**     | ** ** | **New  Investments (1)** | ** ** | **Principal  Repayments (2)** | ** ** | **Investments  Sold** | ** ** | **Net Loss on  Disposal** | ** ** |
|------------------------|------------|-------------------------------|------------|------------------------------------|------------|-----------------------|------------|-------------------------------------|------------|
| March 31, 2009    |       | $                             | 8,427      |                               | $          | 13,053                |       | $                                   | —     |   | $ | (2,000 | ) |
| December 31, 2008 |       | 8,702                         |       | 14,927                             |       | 2,212                 |       | (1,731                              | )          |
|                   |       | $                             | 17,129     |                               | $          | 27,980                |       | $                                   | 2,212      |   | $ | (3,731 | ) |
|                   |       |                          |       |                               |       |                  |       |                                |       |
| March 31, 2008    |       | $                             | 20,483     |                               | $          | 3,000                 |       | $                                   | —     |   | $ | — |   |
| December 31, 2007 |       | 73,341                        |       | 4,047                              |       | —                |       | —                              |       |
|                   |       | $                             | 93,824     |                               | $          | 7,047                 |       | $                                   | —     |   | $ | — |   |

 

----

**(1)****      ****New Investments**

 

During the six monthsended March 31, 2009, we extended $17.1 million of investments to existingportfolio companies through revolver draws or the additions of new termnotes.  The most substantial investmentswere to United Maritime, Saunders & Associates, Lindmark, Vanta Coreand GRFC.

 

During the six monthsended March 31, 2008, we extended, directly or through participations,$71.7 million of loan originations to 6 new portfolio companies and $22.1million of investments to existing portfolio companies through revolver drawsor the additions of new term notes, for total new investments of $93.8million.  The originations of loans tonew portfolio companies by quarter were as follows:

 
| **Quarter ended** | ** ** | **Originations** | ** **   | **Companies** | ** ** | **Description**                                      | ** **     |
|------------------------|------------|------------------|--------------|---------------|------------|------------------------------------------------------|----------------|
| March 31, 2008    |       | $                | 13.7 million |          | 1          |                                                 | ACE Expediters |   |
| December 31, 2007 |       | 58.0 million     |         | 5             |       | Interfilm, Reliable,  Lindmark, GS Maritime and GFRC |           |
| Total                  |       | $                | 71.7 million |          | 6          |                                                 |           |   |

 

**(2)****      ****Principal Repayments**

 

During the six monthsended March 31, 2009, 2 borrowers refinanced their loans for $7.8 million,2 borrowers made unscheduled payoffs of $7.0 million, and we experiencedcontractual amortization, revolver repayments and some principal paymentsreceived ahead of schedule of $13.2 million, for total principal repayments of$28.0 million.  The refinancings/payoffsby quarter were as follows:

 
| **Quarter ended** | ** ** | **Repayments** | ** ** | **Companies** | ** ** | **Description**                    | ** ** |
|------------------------|------------|----------------|------------|---------------|------------|------------------------------------|------------|
| March 31, 2009    |       | Refinancing    |       | 2             |       | ACE Expediters and  Sunburst Media |       |
| December 31, 2008 |       | Payoff         |       | 2             |       | Country Road and  Community Media  |       |

 

During the six monthsended March 31, 2008, one borrower partially paid off its loan for $0.5million and we experienced contractual amortization, revolver repayments andsome principal payments received ahead of schedule of $6.5 million, for totalprincipal repayments of $7.0 million. The total and partial payoffs by quarter were as follows:

 
| **Quarter ended** | ** ** | **Repayments** | ** ** | **Companies** | ** ** | **Description**                                   | ** ** |
|------------------------|------------|----------------|------------|---------------|------------|---------------------------------------------------|------------|
| March 31, 2008    |       | Partial payoff |       | 1             |       | Risk Metrics — Senior Subordinated Term Debt |       |
| December 31, 2007 |       | None           |       | —        |       |                                              |       |

 

**(3)****      ****Investments Sold**

 

During the six monthsended March 31, 2009, we sold one $2.2 million syndicated loan (GreatwideSenior Term Debt).

 

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The following table summarizes the contractual principal repayments andmaturity of our investment portfolio by fiscal year, assuming no voluntaryprepayments:

 
| ** **                                              | ** ** | ** **                                                                           | ** ** | **Amount** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|------------|------------|
| For the remaining six months ending  September 30: |       | 2009                                                                                 |       | $          | 17,296     |   |
| For the fiscal year ending September 30:           |       | 2010                                                                                 |       | 42,544     |       |
|                                                    |       | 2011                                                                                 |       | 99,211     |       |
|                                                    |       | 2012                                                                                 |       | 100,300    |       |
|                                                    |       | 2013                                                                                 |       | 140,070    |       |
|                                                    |       | 2014                                                                                 |       | 35,026     |       |
|                                                    |       | Thereafter                                                                           |       | 6,851      |       |
| ** **                                              |       | **Total Contractual Repayments**                                                     |       | $          | 441,298    |   |
|                                                    |       | Investments in Equity Securities                                                     |       | 5,033      |       |
|                                                    |       | Unamortized premiums, discounts and investment  acquisition costs on debt securities |       | (1,768     | )          |
| ** **                                              |       | **Total**                                                                            |       | $          | 444,563    |   |

 

Net cash provided by operating activities for the six months ended March 31,2009, consisting primarily of the items described in*—Results of Operations* and the investment activitydescribed above, was $19,586 as compared to net cash used in operatingactivities of $72,993 for the six months ended March 31, 2008.

 

**Investing Activities**

 

Net cash provided by investing activities for the six months ended March 31,2008 was $2,484, which resulted from the redemption of the U.S. Treasury billheld by Gladstone Financial.

 

**Financing Activities**

 

Net cash used in financing activities for the six months ended March 31,2009 was $15,550 and mainly consisted of distribution payments of $17,714,offset by net borrowings on our line of credit of $2,340.  Net cash provided by financing activities was$68,586 for the six months ended March 31, 2008 and consisted of twoofferings of common stock for net proceeds of $106,226, offset by netrepayments on our line of credit of $20,981 and distribution payments of$15,666.

 

**Distributions**

 

In order to qualify as a RIC and to avoid corporate level tax on theincome we distribute to our stockholders, we are required, under Subchapter Mof the Code, to distribute at least 90% of our ordinary income and short-termcapital gains to our stockholders on an annual basis. In accordance with theserequirements, we declared and paid monthly cash distributions of $0.14 per commonshare for January, February and March 2009.  In April 2009, our Board of Directorsdeclared a monthly distribution of $0.07 per common share for April 2009.  The DB Facility matures on May 21, 2009and although there can be no guarantee, we expect to have a new line of creditin place on or before that date.  If andwhen a new line is in place, the board will meet to consider the dividend for May andJune and we will make an additional announcement at that time.

 

**Issuance of Equity**

 

During fiscal year 2007, we filed a registration statement on Form N-2(File No. 333-143027) (the “Registration Statement”) with the SEC thatpermits us to issue, through one or more transactions, up to an aggregate of$300 million in securities, consisting of common stock, or debt securities, ofwhich to date we have issued $123.8 million in common stock, which leaves aremaining capacity of $176.2 million.

 

We anticipate issuing equity securities to obtain additional capital inthe future.  However, we cannot determinethe terms of any future equity issuances or whether we will be able to issueequity on terms favorable to us, or at all. Additionally, when our common stock is trading below NAV, we will haveregulatory constraints under the 1940 Act on our ability to obtain additionalcapital in this manner.  Generally, the1940 Act provides that we may not issue and sell our common stock at a pricebelow our NAV per share, other than to our then existing stockholders pursuantto a rights offering, without first obtaining approval from our stockholdersand our independent directors.  As of March 31,2009, our NAV per share was $12.10 and our closing market price was $6.26 pershare.  To the extent that our commonstock continues to trade at a market price below our NAV per share, we willgenerally be precluded from raising equity capital through public offerings ofour common stock, other than pursuant to a rights offering.  The asset coverage 

 

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requirement of a BDC under the 1940 Act effectively limits our ratio ofdebt to equity to 1:1.  To the extentthat we are unable to raise capital through the issuance of equity, our abilityto raise capital through the issuance of debt may also be inhibited to theextent of our regulatory debt to equity ratio limits.

 

At our annual meeting of stockholders held on February 19, 2009,stockholders approved a proposal which authorizes us to sell shares of ourcommon stock at a price below our then current NAV per share for a period ofone year, provided that our Board of Directors makes certain determinationsprior to any such sale.

 

**Revolving Credit Facility**

 

Through our wholly-owned subsidiary, Business Loan, we have a revolvingcredit facility (the “DB Facility”) with Deutsche Bank AG, as administrativeagent.  Pursuant to the DB Facility,Business Loan has pledged the loans it holds to secure future advances bycertain institutional lenders.  Theinterest rate charged on the advances under the DB Facility is based on theCommercial Paper (“CP”) rate, which is equivalent to the weighted average perannum rates paid by the DB Facility’s CP lenders in respect of CP notes issuedby the CP lender during such period. Business Loan also has the ability to borrow at an alternative rate fromthe committed lenders if CP lenders are unable to fund advances.  The alternative rate is the London InterbankOffered Rate (“LIBOR”), or if LIBOR is unavailable, the Prime Rate or theFederal Funds Rate plus 1.0%.  In February 2008,we increased the DB Facility from $220 million to $250 million, and in April 2008,we increased the DB Facility to $300 million and added BB&T as a committedlender.  In June 2008, we renewedthe DB Facility, which matures on May 21, 2009.  Effective April 14, 2009, we exercisedour right to reduce the amount available under the DB Facility from $300million to $162 million as part of our process of attempting to secure newfinancing.

 

As of March 31, 2009, the outstanding principal balance under thiscredit facility was approximately $153,370 at an interest rate of approximately2.03% plus a 2.50% program fee.  We arealso charged an unused commitment fee of 0.75% per annum.  Available borrowings are subject to variousconstraints imposed by Deutsche Bank AG, based on the aggregate loan balancepledged by Business Loan, which varies as loans are added and repaid,regardless of whether such repayments are early prepayment or are made as contractuallyrequired.  At March 31, 2009, theremaining borrowing capacity available under the DB Facility was $146,630.

 

The DB Facility contains covenants that require Business Loan tomaintain its status as a separate entity, prohibit certain significant corporatetransactions (such as mergers, consolidations, liquidations or dissolutions),and restrict material changes to our credit and collection policies.  The facility also restricts some of the termsand provisions (including interest rates, terms to maturity and paymentsschedules) and limits the borrower and industry concentrations of loans thatare eligible to secure advances.  As of March 31,2009, Business Loan was in compliance with all of the DB Facility covenants.

 

The administrative agent also requires that any interest or principalpayments on pledged loans be remitted directly by the borrower into a lockboxaccount with the Bank of New York Mellon Corp. as custodian.  Deutsche Bank AG is also the trustee of theaccount and once a month remits the collected funds to us.  At March 31, 2009 and September 30,2008, the amount due from custodian was $10,132 and $4,544, respectively.

 

Our Adviser also services the loans pledged under the DB Facility.  As a condition to this servicing arrangement,we executed a performance guaranty pursuant to which we guaranteed that ourAdviser would comply fully with all of its obligations under the facility. Theperformance guaranty requires us to maintain a minimum net worth of $100million plus 75% of equity issued after May 2003 and to maintain “assetcoverage” with respect to “senior securities representing indebtedness” of atleast 200%, in accordance with Section 18 of the 1940 Act.  As of March 31, 2009, we were incompliance with our covenants under the performance guaranty.  However, our continued compliance with thesecovenants depends on many factors, some of which are beyond our control. Inparticular, depreciation in the valuation of our assets, which valuation is subjectto changing market conditions which are presently very volatile, affects ourability to comply with these covenants. During the six months ended March 31,2009, net unrealized depreciation on our investments was approximately $6,528,compared to $23,744 during the comparable period in the prior year.  Given the further deterioration in thecapital markets and pricing levels subsequent to this period, net unrealizeddepreciation in our portfolio may continue to increase in future periods andthreaten our ability to comply with the covenants under our DB Facility.  Accordingly, there are no assurances that wewill continue to comply with these covenants. Failure to comply with these covenants would result in a default which,if we were unable to obtain a waiver from the lenders, could accelerate ourrepayment obligations under the DB Facility and thereby have a material adverseimpact on our liquidity, financial condition, results of operations and abilityto pay distributions.

 

Availability under the DB Facility will terminate on May 21, 2009.  If the DB Facility is not renewed or extendedby May 21, 2009, all principal and interest will be due and payable withinone year of the maturity date.  There canbe no guarantee that we will be able to renew, extend or replace the DBFacility on terms that are favorable to us, or at all.  Our ability to obtain replacement financingwill be constrained by current economic conditions affecting the creditmarkets, which have significantly 

 

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deteriorated over the last several months and may decline further.  Consequently, any renewal, extension orrefinancing of the DB Facility will likely result in significantly higherinterest rates and related charges and may impose significant restrictions onthe use of borrowed funds with regard to our ability to fund investments or paydistributions to our stockholders.  If weare not able to renew, extend or refinance the DB Facility, this would likelyhave a material adverse effect on our liquidity and ability to fund newinvestments or pay our distributions. Our inability to pay distributions to our stockholders could result inus failing to qualify as a RIC. Consequently, any income or gains could become taxable at corporaterates.  If we are unable to securereplacement financing, we may be forced to sell certain assets ondisadvantageous terms, which may result in realized losses, and such realizedlosses could materially exceed the amount of any unrealized depreciation onthese assets as of our most recent balance sheet date, which would have amaterial adverse effect on our results of operations.  We sold 13 of the 24syndicated loans that were held in our portfolio of investments atMarch 31, 2009 to various investors in the syndicated loan market for anaggregate of $22.5 million in net proceeds. In addition toselling assets, or as an alternative, we may issue equity in order to repayamounts outstanding under the DB Facility. Based on the recent trading prices of our stock, such an equity offeringmay have a substantial dilutive impact on our existing stockholders’ interestin our earnings and assets and voting interest in us.

 

**Contractual Obligations**

 

As of March 31, 2009, we were not party to any signed term sheetsfor potential investments.

 

**Off-Balance Sheet Arrangements**

 

We did not have any off-balance sheet arrangements as defined in Item303(a)(4)(ii) of Regulation S-K as of March 31, 2009.

 

**Critical Accounting Policies**

 

The preparation of financial statements and related disclosures inconformity with accounting principles generally accepted in the United Statesrequires management to make estimates and assumptions that affect the reportedconsolidated amounts of assets and liabilities, and disclosure of contingentassets and liabilities at the date of the financial statements, and revenuesand expenses during the period reported. Actual results could differ materiallyfrom those estimates.  We have identifiedour investment valuation process, which was amended during the six months endedMarch 31, 2009, as our most critical account policy.

 

***InvestmentValuation***

 

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

 

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

 

We use generally accepted valuation techniques to value our portfoliounless we have specific information about the value of an investment todetermine otherwise. From time to time we may accept an appraisal of a businessin which we hold securities. These appraisals are expensive and occurinfrequently but provide a third-party valuation opinion that may differ inresults, techniques and scopes used to value our investments.  When these specific third-party appraisalsare engaged or accepted, we would use such appraisals to value the investmentwe have in that business if we determined that the appraisals were the bestestimate of fair value.

 

In determining the value of our investments, our Adviser hasestablished an investment valuation policy (the “Policy”).  The Policy has been approved by our Board ofDirectors, and each quarter the Board of Directors reviews whether our Adviserhas applied the Policy consistently, and votes whether or not to accept therecommended valuation of our investment portfolio.

 

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

 

·                  Publicly-traded securities;

·                  Securities for which a limited market exists; and

·                  Securities for which no market exists.

 

*Valuation Methods:*

 

**Publicly-traded securities:** We determine the value ofpublicly-traded securities based on the closing price for the security on theexchange or securities market on which it is listed and primarily traded on thevaluation date. To the extent that we own restricted 

 

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securities that are not freely tradable, but for which a public marketotherwise exists, we will use the market value of that security adjusted forany decrease in value resulting from the restrictive feature.

 

**Securities for which a limited marketexists:**We valuesecurities that are not traded on an established secondary securities market,but for which a limited market for the security exists, such as certainparticipations in, or assignments of, syndicated loans, at the quoted bidprice.  In valuing these assets, weassess trading activity in an asset class, evaluate variances in prices andother market insights to determine if any available quote prices are reliable.  If we conclude that quotes based on activemarkets or trading activity may be relied upon, firm bid prices are requested;however, if a firm bid price is unavailable, we base the value of the securityupon the indicative bid price offered by the respective originating syndicationagent’s trading desk, or secondary desk, on or near the valuation date.  To the extent that we use the indicative bidprice as a basis for valuing the security, our Adviser may take further stepsto consider additional information to validate that price in accordance with thePolicy.

 

In the event these limited markets become illiquid such that marketprices are no longer readily available, we will value our syndicated loansusing estimated net present values of the future cash flows or discounted cashflows. The use of a DCF methodology follows that prescribed by FSP 157-3, *Determining the Fair Value of a Financial Asset Whenthe Market for That Asset Is Not Active*, which provides guidance onthe use of a reporting entity’s own assumptions about future cash flows andrisk-adjusted discount rates when relevant observable inputs, such as quotes inactive markets, are not available. When relevant observable market data doesnot exist, the alternative outlined in the FSP 157-3 is the use of valuinginvestments based on DCF.  For thepurposes of using DCF to provide fair value estimates, we considered multipleinputs such as a risk-adjusted discount rate that incorporates adjustments thatmarket participants would make both for nonperformance and liquidity risks.  As such, we developed a modified discountrate approach that incorporates risk premiums including, among others,increased probability of default, or higher loss given default, or increasedliquidity risk.

 

The DCF valuationsapplied to the syndicated loans provide an estimate of what we believe a marketparticipant would pay to purchase a syndicated loan in an active market,thereby establishing a fair value.  Wewill continue to apply the DCF methodology in illiquid markets until quotedprices are available or are deemed reliable based on trading activity.

 

**Securities for which no marketexists:** Thevaluation methodology for securities for which no market exists falls intothree categories: (1) portfolio investments comprised solely of debtsecurities; (2) portfolio investments in controlled companies comprised ofa bundle of securities, which can include debt and/or equity securities; and (3) portfolioinvestments in non-controlled companies comprised of a bundle of investments,which can include debt and/or equity securities.

 

(1)         **Portfolio investments comprisedsolely of debt securities:** Debt securities that are not publicly traded on anestablished securities market, or for which a limited market does not exist (“Non-PublicDebt Securities”), and that are issued by portfolio companies where we have noequity, or equity-like securities, are fair valued in accordance with the termsof the policy, which utilizes opinions of value submitted to us by Standard &Poor’s Securities Evaluations, Inc. (“SPSE”). We may also submit paid inkind (“PIK”) interest to SPSE for their evaluation when it is determined thePIK interest is likely to be received.

 

In the case of Non-PublicDebt Securities, we have engaged SPSE to submit opinions of value for our debtsecurities that are issued by portfolio companies in which we own no equity, orequity-like securities.  SPSE’s opinionsof value are based on the valuations prepared by our portfolio management teamas described below.  We request that SPSEalso evaluate and assign values to success fees (conditional interest includedin some loan securities) when we determine that the probability of receiving asuccess fee on a given loan is above 6-8%, a threshold of significance. SPSEwill only evaluate the debt portion of our investments for which wespecifically request evaluation, and may decline to make requested evaluationsfor any reason at its sole discretion. Upon completing our collection of datawith respect to the investments (which may include the information describedbelow under “—Credit Information,” the risk ratings of the loans describedbelow under “—Loan Grading and Risk Rating” and the factors describedhereunder), this valuation data is forwarded to SPSE for review and analysis.SPSE makes its independent assessment of the data that we have assembled andassesses its independent data to form an opinion as to what they consider to bethe market values for the securities. With regard to its work, SPSE has issuedthe following paragraph:

 

SPSE provides evaluatedprice opinions which are reflective of what SPSE believes the bid side of themarket would be for each loan after careful review and analysis of descriptive,market and credit information. Each price reflects SPSE’s best judgment basedupon careful examination of a variety of market factors. Because of fluctuationin the market and in other factors beyond its control, SPSE cannot guaranteethese evaluations. The evaluations reflect the market prices, or estimatesthereof, on the date specified. The prices are based on comparable marketprices for similar securities. Market information has been obtained fromreputable secondary market sources. Although these sources are consideredreliable, SPSE cannot guarantee their accuracy.

 

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SPSE opinions of value ofour debt securities that are issued by portfolio companies where we have noequity, or equity-like securities are submitted to our Board of Directors alongwith our Adviser’s supplemental assessment and recommendation regardingvaluation of each of these investments. Our Adviser generally accepts theopinion of value given by SPSE, however, in certain limited circumstances, suchas when our Adviser may learn new information regarding an investment betweenthe time of submission to SPSE and the date of the Board assessment, ourAdviser’s conclusions as to value may differ from the opinion of valuedelivered by SPSE. Our Board of Directors then reviews whether our Adviser hasfollowed its established procedures for determinations of fair value, and votesto accept or reject the recommended valuation of our investment portfolio. OurAdviser and our management recommended, and the Board of Directors voted toaccept, the opinions of value delivered by SPSE on the loans in our portfolioas denoted on the Schedule of Investments included in our accompanyingcondensed consolidated financial statements.

 

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

 

(2)         **Portfolio investments in controlledcompanies comprised of a bundle of investments, which can include debt and/orequity securities:**We value Non-Public Debt Securities and/or equity or equity-like securities(e.g. preferred equity, equity or other equity-like securities) that arepurchased together from the same “controlled” portfolio company, or issuer, aspart of a package based on the total enterprise value of the issuer, which iscalculated using a liquidity waterfall approach.  Under this approach, we first calculate thetotal enterprise value of the issuer by incorporating some or all of thefollowing 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

·                  discounted cash flow or other pertinent factors.

 

In gathering the sales tothird parties of similar securities, we may reference industry statistics anduse outside experts. Once we have estimated the total enterprise value of theissuer, we subtract the value of all the debt securities of the issuer; whichare valued at the contractual principal balance. Fair values of these debtsecurities are discounted for any shortfall of total enterprise value over thetotal debt outstanding for the issuer. Once the values for all outstandingsenior securities (which include the debt securities) have been subtracted fromthe total enterprise value of the issuer, the remaining amount, if any, is usedto determine the value of the issuer’s equity or equity like securities.  If, in our Adviser’s judgment, the liquiditywaterfall approach does not accurately reflect the value of the debt component,our Adviser may recommend that we use a valuation by SPSE or, if that isunavailable, a DCF valuation technique.

 

(3)         **Portfolio investments innon-controlled companies comprised of a bundle of investments, which caninclude debt and/or equity securities:**We value Non-Public Debt Securities and/or equity orequity-like securities that are purchased together from the same “non-controlled”portfolio company, or issuer, by valuing the debt portion with SPSE (asdescribed above) and valuing the equity portion based principally on the totalenterprise value of the issuer, which is calculated using a liquidity waterfallapproach as described above.

 

Due to the uncertaintyinherent in the valuation process, such estimates of fair value may differsignificantly from the values that would have been obtained had a ready marketfor the securities existed, and the differences could be material.Additionally, changes in the market environment and other events that may occurover the life of the investments may cause the gains or losses ultimatelyrealized on these investments to be different than the valuations currentlyassigned. 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 thecurrent sale of the security in an arms-length transaction in the security’sprincipal market.

 

*Valuation Considerations:  *From time to time, depending on certain circumstances,the Adviser may use the following valuation considerations, including but notlimited to:

 

·      the nature and realizable value of thecollateral;

·      the portfolio company’s earnings and cashflows and its ability to make payments on its obligations;

·      the markets in which the portfolio companydoes business;

·      the comparison to publicly traded companies;and

·      discounted cash flow and other relevantfactors.

 

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Because such valuations, particularly valuations ofprivate securities and private companies, are not susceptible to precisedetermination, may fluctuate over short periods of time, and may be based onestimates, our determinations of fair value may differ from the values thatmight have actually resulted had a readily available market for thesesecurities been available.

 

*Credit Information:* Our Adviser monitors a wide variety of key credit statistics thatprovide information regarding our portfolio companies to help us assess creditquality and portfolio performance. We and our Adviser participate in theperiodic board meetings of our portfolio companies in which we hold Control andAffiliate investments and also require them to provide annual audited andmonthly unaudited financial statements. Using these statements or comparableinformation and board discussions, our Adviser calculates and evaluates thecredit statistics.

 

*Loan Grading and Risk Rating:* As part of our valuation procedures above, we risk rate all of ourinvestments in debt securities. For syndicated loans that have been rated by anNRSRO (as defined in Rule 2a-7 under the 1940 Act), we use the NRSRO’srisk rating for such security. For all other debt securities, we use aproprietary 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 toestimate the probability of default on debt securities and the probability ofloss if there is a default. These types of systems are referred to as riskrating systems and are used by banks and rating agencies. The risk ratingsystem covers both qualitative and quantitative aspects of the business and thesecurities we hold.

 

For the debt securities for which we do not use a third-party NRSROrisk rating, we seek to have our risk rating system mirror the risk ratingsystems 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 thatour risk rating system will provide the same risk rating as an NRSRO for thesesecurities. The following chart is an estimate of the relationship of our riskrating system to the designations used by two NRSROs as they risk rate debtsecurities of major companies. Because our system rates debt securities ofcompanies that are unrated by any NRSRO, there can be no assurance that thecorrelation to the NRSRO set out below is accurate. We believe our risk ratingwould be significantly higher than a typical NRSRO risk rating because the riskrating of the typical NRSRO is designed for larger businesses. However, ourrisk rating has been designed to risk rate the securities of smaller businessesthat are not rated by a typical NRSRO. Therefore, when we use our risk ratingon larger business securities, the risk rating is higher than a typical NRSROrating. The primary difference between our risk rating and the rating of atypical NRSRO is that our risk rating uses more quantitative determinants andincludes qualitative determinants that we believe are not used in the NRSROrating. It is our understanding that most debt securities of medium-sizedcompanies do not exceed the grade of BBB on an NRSRO scale, so there would beno debt securities in the middle market that would meet the definition of AAA,AA or A. Therefore, our scale begins with the designation 10 as the best riskrating which may be equivalent to a BBB from an NRSRO, however, no assurancecan be given that a 10 on our scale is equal to a BBB on an NRSRO scale.

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

 

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

 

The above scale gives an indication of the probability of default andthe magnitude of the loss if there is a default. Our policy is to stop accruinginterest on an investment if we determine that interest is no longercollectible. At March 31, 2009, two Non-Control/Non-Affiliate investmentsand one Control investment were on non-accrual. At September 30, 2008 one Non-Control/Non-Affiliate investment andtwo Control investments were on non-accrual. Additionally, we do not risk rate our equity securities.

 

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The following table lists the risk ratings for all non-syndicated loansin our portfolio at March 31, 2009 and September 30, 2008,representing approximately 84%, of all loans in our portfolio at the end ofeach period:

 
| **Rating**       | ** ** | **Mar. 31, 2009** | ** ** | **Sept. 30, 2008** | ** ** |
|------------------|------------|-----------------------------|------------|------------------------------|------------|
| Average          | ** ** | **7.2**                     | ** ** | **7.3**                      | ** ** |
| Weighted Average | ** ** | **7.1**                     | ** ** | **7.0**                      | ** ** |
| Highest          | ** ** | **9.0**                     | ** ** | **9.0**                      | ** ** |
| Lowest           | ** ** | **5.0**                     | ** ** | **5.0**                      | ** ** |

 

The following table lists the risk ratings for all syndicated loans inour portfolio that were not rated by an NRSRO at March 31, 2009 and September 30,2008, representing approximately 6% of all loans in our portfolio at the end ofeach period:

 
| **Rating**       | ** ** | **Mar. 31, 2009** | ** ** | **Sept. 30, 2008** | ** ** |
|------------------|------------|-----------------------------|------------|------------------------------|------------|
| Average          | ** ** | **6.8**                     | ** ** | **6.6**                      | ** ** |
| Weighted Average | ** ** | **6.9**                     | ** ** | **6.7**                      | ** ** |
| Highest          | ** ** | **8.0**                     | ** ** | **7.0**                      | ** ** |
| Lowest           | ** ** | **6.0**                     | ** ** | **6.0**                      | ** ** |

 

For syndicated loans that are currently rated by an NRSRO, we risk ratesuch loans in accordance with the risk rating systems of major risk ratingorganizations, such as those provided by an NRSRO. The following table liststhe risk ratings for all syndicated loans in our portfolio that were rated byan NRSRO at March 31, 2009 and September 30, 2008, representingapproximately 10% of all loans in our portfolio at the end of each period:

 
| **Rating**       | ** ** | **Mar. 31, 2009** | ** ** | **Sept.30, 2008** | ** ** |
|------------------|------------|-----------------------------|------------|------------------------|------------|
| Average          |       | CCC+/Caa1                   |       | CCC+/Caa1              |       |
| Weighted Average |       | CCC+/Caa1                   |       | CCC+/Caa1              |       |
| Highest          |       | BB/Ba3                      |       | BB/Ba3                 |       |
| Lowest           |       | CC/Ca                       |       | CC/C                   |       |

 

***Tax Status***

 

We intend to continue to qualify for treatment as a RIC under SubtitleA, Chapter 1 of Subchapter M of the Code. As a RIC, we are not subject tofederal income tax on the portion of our taxable income and gains distributedto stockholders. To qualify as a RIC, we are required to distribute tostockholders at least 90% of our investment company taxable income, as definedby the Code.  We have a policy to pay outas a distribution up to 100% of that amount.

 

In an effort to avoid certain excise taxes imposed on RICs, wecurrently intend to distribute during each calendar year, an amount at least equalto the sum of (1) 98% of our ordinary income for the calendar year, (2) 98%of our capital gains in excess of capital losses for the one-year period endingon October 31 of the calendar year and (3) any ordinary income andnet capital gains for preceding years that were not distributed during suchyears.

 

***Revenue Recognition***

 

*Interest Income Recognition*

 

Interest income is recorded on the accrual basis to the extent thatsuch amounts are expected to be collected. We will stop accruing interest oninvestments and write off any previously accrued and uncollected interest whenit is determined that interest is no longer collectible. At March 31,2009, two Non-Control/Non-Affiliate investments and one Control investment wereon non-accrual with an aggregate cost basis of approximately $10.7 million, or2.4% of the cost basis of all investments in the Company’s portfolio.  At September 30, 2008, oneNon-Control/Non-Affiliate investment and two Control investments were onnon-accrual with an aggregate cost basis of approximately $13.1 million at September 30,2008, or 2.8% of the cost basis of all loans in the Company’s portfolio.  Conditional interest or a success fee isrecorded when earned upon full repayment of a loan investment.

 

*Paid in Kind Interest*

 

We may hold loans in our portfolio which contain a PIK interestprovision. The PIK interest, computed at the contractual rate specified in eachloan agreement, is added to the principal balance of the loan and recorded asinterest income. To maintain our status 

 

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as a RIC, this non-cash source of income must be paid out tostockholders in the form of distributions, even though we have not yetcollected the cash.  As of March 31,2009, one loan in our portfolio bore PIK interest.

 

*Services Provided to PortfolioCompanies*

 

As a business development company under the 1940 Act,we are required to make available significant managerial assistance to ourportfolio companies. We provide these services through our Adviser, whoprovides these services on our behalf through its officers who are also ourofficers.  Currently, neither we nor ourAdviser charges a fee for managerial assistance, however, if our Adviser doesreceive fees for such managerial assistance, our Adviser will credit themanagerial assistance fees to the base management fee due from us to ourAdviser.

 

Our Adviser receives fees for the other services it providesto our portfolio companies.  These otherfees are typically non-recurring, are recognized as revenue when earned and aregenerally paid directly to our Adviser by the borrower or potential borrowerupon the closing of the investment. The services our Adviser provides to ourportfolio companies vary by investment, but generally include a broad array ofservices such as investment banking services, arranging bank and equityfinancing, structuring financing from multiple lenders and investors, reviewingexisting credit facilities, restructuring existing investments, raising equityand debt capital, turnaround management, merger and acquisition services andrecruiting new management personnel. Effective April 1, 2007, when our Adviser receives fees for theseservices, 50% of certain of those fees are voluntarily and irrevocably creditedagainst the base management fee that we pay to our Adviser, whereas prior tosuch date fees were 100% credited.  Anyservices of this nature subsequent to the closing would typically generate aseparate fee at the time of completion.

 

Our Adviser also receives fees for monitoring andreviewing portfolio company investments. These fees are recurring and are generally paid annually or quarterly inadvance to our Adviser throughout the life of the investment.  Fees of this nature are recorded as revenueby our Adviser when earned and are not credited against the base managementfee.

 

We may receive fees for the origination and closingservices we provide to portfolio companies through our Adviser.  These fees are paid directly to us and arerecognized as revenue upon closing of the originated investment and arereported as fee income in the accompanying condensed consolidated statements ofoperations.

 

**Recent Accounting Pronouncements**

 

Refer to Note 2 in the accompanying condensed consolidated financialstatements for a summary of recently issued accounting pronouncements.

 

**ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.**

 

We are subject to financial market risks, including changes in interestrates.  We estimate that ultimatelyapproximately 20% of the loans in our portfolio will be made at fixed rates andapproximately 80% will be made at variable rates.  As of March 31, 2009, our portfolioconsisted of the following:

 
| 68  | % | variable rates with a  floor               |   |
|-----|---|--------------------------------------------|--------|
| 2   | % | variable rates with a  floor and ceiling   |   |
| 26  | % | variable rates without  a floor or ceiling |   |
| 4   | % | fixed rate                                 |   |
| 100 | % | total                                      |   |

 

There have been no material changes in the quantitative and qualitativemarket risk disclosures for the six months ended March 31, 2009 from thatdisclosed in our Annual Report on Form 10-K for the fiscal year ended September 30,2008, as filed with the SEC on December 2, 2008.

 

**ITEM 4.CONTROLS AND PROCEDURES.**

 

a) Evaluation of Disclosure Controls and Procedures

 

As of March 31, 2009, we, including our Chief Executive Officerand Chief Financial Officer, evaluated the effectiveness of the design andoperation of our disclosure controls and procedures (as defined in Exchange ActRules 13a-15(e) and 15d-15(e)). Based on that evaluation, our management, including the Chief ExecutiveOfficer and Chief Financial Officer, concluded that our disclosure controls andprocedures were effective in timely alerting management, including the ChiefExecutive Officer and Chief Financial Officer, of material information about usrequired to be included in periodic Securities and Exchange Commissionfilings.  However, 

 

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in evaluating the disclosure controls and procedures, managementrecognized that any controls and procedures, no matter how well designed andoperated can provide only reasonable assurance of achieving the desired controlobjectives, and management necessarily was required to apply its judgment inevaluating the cost-benefit relationship of possible controls and procedures.

 

b) Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal control over financialreporting that occurred during the quarter ended March 31, 2009, that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

**PART II–OTHER INFORMATION**

 

**ITEM 1.LEGAL PROCEEDINGS.**

 

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

 

**ITEM1A. RISK FACTORS.**

 

Our business is subject to certain risks and events that, if theyoccur, could adversely affect our financial condition and results of operationsand the trading price of our common 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 30,2008, filed by us with the Securities and Exchange Commission on December 2,2008.  In connection with our preparationof this quarterly report, management has reviewed and considered these riskfactors and has determined that the following risk factors should be read inconnection with the existing risk factors disclosed in the Form 10-K.

 

***Risk related to ourexternal financing***

 

*Any inability to renew, extend or replace our creditfacility on terms favorable to us, or at all, could adversely impact ourliquidity and ability to fund new investments or pay dividends to ourstockholders.*

 

Availabilityunder the DB Facility will terminate on May 21, 2009.  If the DB Facility is not renewed or extendedby May 21, 2009, all principal and interest will be due and payable withinone year of the maturity date.  There canbe no guarantee that we will be able to renew, extend or replace the DBFacility on terms that are favorable to us, or at all.  Our ability to obtain replacement financingwill be constrained by current economic conditions affecting the creditmarkets, which have significantly deteriorated over the last several months andmay decline further.  Consequently, anyrenewal, extension or refinancing of the DB Facility will likely result insignificantly higher interest rates and related charges and may imposesignificant restrictions on the use of borrowed funds with regard to ourability to fund investments or pay distributions to our stockholders.  If we are not able to renew, extend orrefinance the DB Facility, this would likely have a material adverse effect onour liquidity and ability to fund new investments or pay distributions to ourstockholders.  Our inability to paydistributions could result in us failing to qualify as a RIC.  Consequently, any income or gains couldbecome taxable at corporate rates.  If weare unable to secure replacement financing, we may be forced to continue tosell certain assets on disadvantageous terms, which may result in realizedlosses, and such realized losses could materially exceed the amount of anyunrealized depreciation on these assets as of our most recent balance sheetdate, which would have a material adverse effect on our results ofoperations.  We sold 13 of the 24syndicated loans that were held in our portfolio of investments at March 31,2009 to various investors in the syndicated loan market for an aggregate of$22.5 million in net proceeds.  Inaddition to selling assets, or as an alternative, we may issue equity in orderto repay amounts outstanding under the DB Facility.  Based on the recent trading prices of ourstock, such an equity offering may have a substantial dilutive impact on ourexisting stockholders’ interest in our earnings and assets and voting interestin us.

 

***Risk related to ourinvestments***

 

*Because the loans we make and equitysecurities we receive when we make loans are not publicly traded, there will beuncertainty regarding the value of our privately held securities that couldadversely affect our determination of our net asset value.*

 

Our portfolio investments are, and we expect will continue to be, inthe form of securities that are not publicly traded. The fair value ofsecurities and other investments that are not publicly traded may not bereadily determinable. Our Board of Directors has established an investmentvaluation policy and consistently applied valuation procedures used todetermine the fair value of these securities quarterly. These procedures forthe determination of value of many of our debt securities rely on the opinionsof value submitted to us by SPSE, the use of internally developed DCFmethodologies, or internal methodologies based on the total enterprise value (“TEV”)of the issuer used for certain of our equity investments. SPSE will only 

 

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evaluate the debt portion of our investments for which we specificallyrequest evaluation, and SPSE may decline to make requested evaluations for anyreason in its sole discretion.  However,to date, SPSE has accepted each of our requests for evaluation.

 

Our use of these fair value methods is inherently subjective and isbased on estimates and assumptions of each security.  In the event that we are required to sell asecurity, which likelihood is heightened as we approach the maturity of ourcredit facility in May 2009, we may ultimately sell for an amountmaterially less than the estimated fair value calculated by SPSE, TEV or theDCF methodology.  We sold 13 of the 24 syndicated loans that were heldin our portfolio of investments at March 31, 2009 to various investors inthe syndicated loan market for an aggregate of $22.5 million in net proceeds.  The loans had an aggregate a cost value ofapproximately $30.4 million, or 7% of the cost value of our total investments,and an aggregate fair market value of approximately $22.5 million, or 6% of thefair market value of our total investments, at March 31, 2009. 

 

Our procedures also include provisions whereby our Adviser willestablish the fair value of any equity securities we may hold where SPSE orthird-party agent banks are unable to provide evaluations. The types of factorsthat may be considered in determining the fair value of our debt and equitysecurities include some or all of the following:

 

·  the nature andrealizable value of any collateral;

·  the portfoliocompany’s earnings and cash flows and its ability to make payments on itsobligations;

·  the markets inwhich the portfolio company does business;

·  the comparisonto publicly traded companies; and

·  discountedcash flow and other relevant factors.

 

Because such valuations, particularly valuations of private securitiesand private companies, are not susceptible to precise determination, mayfluctuate over short periods of time, and may be based on estimates, ourdeterminations of fair value may differ from the values that might haveactually resulted had a readily available market for these securities beenavailable.

 

A portion of our assets are, and will continue to be, comprised ofequity securities that are valued based on internal assessment using our ownvaluation methods approved by our Board of Directors, without the input of SPSEor any other third-party evaluator. We believe that our equity valuationmethods reflect those regularly used as standards by other professionals in ourindustry who value equity securities. However, determination of fair value forsecurities that are not publicly traded, whether or not we use therecommendations of an independent third-party evaluator, necessarily involvesthe exercise of subjective judgment. Our net asset value could be adverselyaffected if our determinations regarding the fair value of our investments werematerially higher than the values that we ultimately realize upon the disposalof such securities.

 

In April 2008, we adopted the provisions of FASB Statement No. 157,*Fair Value Measurements*and wehave followed the guidance of FSP 157-3, which focused on**fair market value accounting. The impacton our condensed consolidated financial statements for future periods cannot bedetermined at this time as it will be influenced by the estimates of fair valuefor those periods, the number and amount of investments we originate, acquireor exit and the effect of any additional guidance or any changes in theinterpretation of this statement. If we are required to make further write-downsof our investment portfolio due to changes in market conditions, this couldnegatively impact the availability under our line of credit and our ability todraw on the line of credit.

 

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

 

Notapplicable.

 

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

 

Notapplicable.

 

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

 

The 2009 Annual Meeting of Stockholders was held on February 19,2009. The stockholders voted and approved the following matters:

 

·                  The election of four directors to hold office untilthe 2012 Annual Meeting of Stockholders.

 
| **Nominee**        | ** ** | **Shares Voted  For** | ** ** | **Authority  Withheld** | ** ** |
|--------------------|------------|----------------------------|------------|-------------------------|------------|
| Terry Lee Brubaker |       | 14,087,486                 |       | 559,241                 |       |
| Maurice W. Coulon  |       | 14,096,864                 |       | 549,863                 |       |
| David A. R. Dullum |       | 14,078,847                 |       | 567,880                 |       |
| Gerard Mead        |       | 14,156,697                 |       | 490,030                 |       |

 

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The other directors whoseterms of office continued after the meeting are listed below:

 
| **Director**              | ** ** | **End of term** | ** ** |
|---------------------------|------------|---------------------------|------------|
| Paul Adelgren             |       | 2010                      |       |
| David Gladstone           |       | 2010                      |       |
| John H. Outland           |       | 2010                      |       |
| Michela English           |       | 2011                      |       |
| Anthony W. Parker         |       | 2011                      |       |
| George Stelljes, III |       | 2011                      |       |

 

·                  The authorization for a period of one year of the saleof shares of our common stock at a price below our then current net asset valueper share.

** **
| **Number of Shares** | ** ** | ** **         | ** ** |
|--------------------------------|------------|--------------------|------------|
| **Shares  Voted For**     | ** ** | **Voted  Against** | ** ** | **Abstained** | ** ** | **Broker  Non-Votes** | ** ** |
| 9,214,584                      |       | 1,817,004          |       | 239,758 |   | 3,375,381 |   |

 

·                  Theratification of the selection by the Audit Committee of the Board of Directorsof PricewaterhouseCoopers LLP as our independent registered public accountingfirm for our fiscal year ending September 30, 2009.

** **
| **Number of Shares** |       |               |       |
|--------------------------------|------------|--------------------|------------|
| **Shares  Voted For**     | ** ** | **Voted  Against** | ** ** | **Abstained** |   |   |   |
| 14,355,236                     |       | 172,563            |       | 118,928 |   |   |   |

** **

**ITEM 5.OTHER INFORMATION.**

 

Notapplicable

 

**ITEM6.  EXHIBITS**

 

Seethe exhibit index.

 

**SIGNATURE**

 

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

 
| ** ** | ** ** | **GLADSTONE CAPITAL CORPORATION** |
|------------|------------|-----------------------------------|
|       |       |                              |
|       |       | By:                               | /s/  GRESFORD GRAY |
|       |       | Gresford  Gray                    |
|       |       | Chief  Financial Officer          |

 

Date:May 5, 2009

 

49

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Table ofContents

 

**EXHIBITINDEX**

 
| **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 the Company’s  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 the  Company’s Current Report on Form 8-K (File No. 814-00237), filed  July 10, 2007.                                                                           |
|        |       |                                                                                                                                                                                                                                                                |
| 11          |       | Computation  of Per Share Earnings (included in the notes to the unaudited condensed  consolidated financial statements contained in this report).                                                                                                                  |
|        |       |                                                                                                                                                                                                                                                                |
| 31.1        |       | Certification  of Chief Executive Officer pursuant to section 302 of The Sarbanes-Oxley Act  of 2002.                                                                                                                                                               |
|        |       |                                                                                                                                                                                                                                                                |
| 31.2        |       | Certification  of Chief Financial Officer pursuant to section 302 of The Sarbanes-Oxley Act  of 2002.                                                                                                                                                               |
|        |       |                                                                                                                                                                                                                                                                |
| 32.1        |       | Certification  of Chief Executive Officer pursuant to section 906 of The Sarbanes-Oxley Act  of 2002.                                                                                                                                                               |
|        |       |                                                                                                                                                                                                                                                                |
| 32.2        |       | Certification  of Chief Financial Officer pursuant to section 906 of The Sarbanes-Oxley Act  of 2002.                                                                                                                                                               |

 

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

 

50

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