UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTER ENDED JUNE 30, 2011
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 COMMISSION FILE NUMBER: 814-00237
 GLADSTONE CAPITAL CORPORATION
  MARYLAND
    
    54-2040781(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 1521 WESTBRANCH DRIVE, SUITE 200
MCLEAN, VIRGINIA 22102
 (703) 287-5800
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
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GLADSTONE CAPITAL CORPORATION
TABLE OF CONTENTS
 PART I. FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Condensed Consolidated Statements of Assets and Liabilities as of June 30, 2011 and September 30, 2010
    
    
    3Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2011 and
2010
    
    
    4Condensed Consolidated Statements of Changes in Net Assets for the nine months ended June 30, 2011
and 2010
    
    
    5Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2011 and 2010
    
    
    6Condensed Consolidated Schedules of Investments as of June 30, 2011 and September 30, 2010
    
    
    7Notes to Condensed Consolidated Financial Statements
    
    
    14Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    30Overview
    
    
    30Results of Operations
    
    
    33Liquidity and Capital Resources
    
    
    41Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    50Item 4. Controls and Procedures
    
    
    50PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    51Item 1A. Risk Factors
    
    
    51Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    51Item 3. Defaults Upon Senior Securities
    
    
    51Item 4. Removed and Reserved
    
    
    51Item 5. Other Information
    
    
    51Item 6. Exhibits
    
    
    51SIGNATURES
    
    
    52




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##### 



GLADSTONE CAPITAL CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
 June 30,
    
    
    September 30,2011
    
    
    2010ASSETSInvestments at fair valueNon-Control/Non-Affiliate investments (Cost of $290,669and $244,140,
respectively)
    
    $
    255,906
    
    
    $
    223,737Control investments (Cost of $84,521and $54,076, respectively)
    
    
    43,373
    
    
    
    33,372Total investments at fair value (Cost of $375,190and $298,216, respectively)
    
    
    299,279
    
    
    
    257,109Cash
    
    
    7,776
    
    
    
    7,734Interest receivable  investments in debt securities
    
    
    2,619
    
    
    
    2,648Interest receivable  employees(A)
    
    
    97
    
    
    
    104Due from custodian
    
    
    1,922
    
    
    
    255Deferred financing fees
    
    
    993
    
    
    
    1,266Prepaid assets
    
    
    660
    
    
    
    799Other assets
    
    
    784
    
    
    
    603TOTAL ASSETS
    
    $
    314,130
    
    
    $
    270,518LIABILITIESBorrowings at fair value (Cost of $92,200and $16,800, respectively)
    
    $
    92,700
    
    
    $
    17,940Accounts payable and accrued expenses
    
    
    601
    
    
    
    752Interest payable
    
    
    263
    
    
    
    693Fee due to Administrator(A)
    
    
    174
    
    
    
    267Fees due to Adviser(A)
    
    
    1,791
    
    
    
    673Other liabilities
    
    
    1,065
    
    
    
    947TOTAL LIABILITIES
    
    
    96,594
    
    
    
    21,272NET ASSETS
    
    $
    217,536
    
    
    $
    249,246ANALYSIS OF NET ASSETSCommon stock, $0.001 par value per share, 50,000,000 shares authorized and 21,039,242
shares issued and outstanding at June 30, 2011 and September 30, 2010
    
    $
    21
    
    
    $
    21Capital in excess of par value
    
    
    326,935
    
    
    
    326,935Notes receivable  employees(A)
    
    
    (4,998
    )
    
    
    (7,103
    )Net unrealized depreciation on investments
    
    
    (75,911
    )
    
    
    (41,108
    )Net unrealized appreciation on borrowings
    
    
    (500
    )
    
    
    (1,140
    )Overdistributed net investment income
    
    
    (758
    )
    
    
    (1,103
    )Accumulated net realized losses
    
    
    ( 27,253
    )
    
    
    (27,256
    )TOTAL NET ASSETS
    
    $
    217,536
    
    
    $
    249,246NET ASSETS PER SHARE
    
    $
    10.34
    
    
    $
    11.85
 
 (A)
    
    Refer to Note 4Related Party Transactionsfor additional
information. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
 3




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##### 



GLADSTONE CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
 Three Months Ended June 30,
    
    
    Nine Months Ended June 30,2011
    
    
    2010
    
    
    2011
    
    
    2010INVESTMENT INCOMEInterest incomeNon-Control/Non-Affiliate investments
    
    $
    7,028
    
    
    $
    6,992
    
    
    $
    19,722
    
    
    $
    23,037Control investments
    
    
    1,406
    
    
    
    375
    
    
    
    3,604
    
    
    
    1,853Notes receivable from employees(A)
    
    
    102
    
    
    
    108
    
    
    
    347
    
    
    
    330Total interest income
    
    
    8,536
    
    
    
    7,475
    
    
    
    23,673
    
    
    
    25,220Other incomeNon-Control/Non-Affiliate investments
    
    
    444
    
    
    
    494
    
    
    
    1,089
    
    
    
    2,367Control investments
    
    
    
    
    
    
    
    
    
    
    625
    
    
    
    Total other income
    
    
    444
    
    
    
    494
    
    
    
    1,714
    
    
    
    2,367Total Investment income
    
    
    8,980
    
    
    
    7,969
    
    
    
    25,387
    
    
    
    27,587EXPENSESLoan servicing fee(A)
    
    
    814
    
    
    
    819
    
    
    
    2,413
    
    
    
    2,600Base management fee(A)
    
    
    637
    
    
    
    658
    
    
    
    1,751
    
    
    
    2,118Incentive fee(A)
    
    
    1,133
    
    
    
    153
    
    
    
    3,395
    
    
    
    1,601Administration fee(A)
    
    
    174
    
    
    
    186
    
    
    
    535
    
    
    
    540Interest expense
    
    
    958
    
    
    
    891
    
    
    
    1,316
    
    
    
    3,562Amortization of deferred financing fees
    
    
    368
    
    
    
    240
    
    
    
    1,032
    
    
    
    1,182Professional fees
    
    
    360
    
    
    
    501
    
    
    
    894
    
    
    
    1,632Other expenses
    
    
    196
    
    
    
    178
    
    
    
    799
    
    
    
    1,142Expenses before credits from Adviser
    
    
    4,640
    
    
    
    3,626
    
    
    
    12,135
    
    
    
    14,377Credits to fees from Adviser(A)
    
    
    (194
    )
    
    
    (86
    )
    
    
    (348
    )
    
    
    (120
    )Total expenses net of credits to fees
    
    
    4,446
    
    
    
    3,540
    
    
    
    11,787
    
    
    
    14,257NET INVESTMENT INCOME
    
    
    4,534
    
    
    
    4,429
    
    
    
    13,600
    
    
    
    13,330REALIZED AND UNREALIZED (LOSS) GAIN ON:Net realized (loss) gain on investments
    
    
    (2
    )
    
    
    (2,865
    )
    
    
    3
    
    
    
    (2,893
    )Net unrealized (depreciation) appreciation on
investments
    
    
    (18,789
    )
    
    
    (1,556
    )
    
    
    (34,803
    )
    
    
    3,525Net unrealized (appreciation) depreciation on
borrowings
    
    
    (53
    )
    
    
    (1,756
    )
    
    
    640
    
    
    
    (1,405
    )Net loss on investments and borrowings
    
    
    (18,844
    )
    
    
    (6,177
    )
    
    
    (34,160
    )
    
    
    (773
    )NET (DECREASE) INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS
    
    $
    (14,310
    )
    
    $
    (1,748
    )
    
    $
    (20,560
    )
    
    $
    12,557NET (DECREASE) INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS PER SHARE:Basic and Diluted
    
    $
    (0.68
    )
    
    $
    (0.08
    )
    
    $
    (0.98
    )
    
    $
    0.60WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:Basic and Diluted
    
    
    21,039,242
    
    
    
    21,039,242
    
    
    
    21,039,242
    
    
    
    21,067,465
 
 (A)
    
    Refer to Note 4Related Party Transactionsfor additional
information. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
 4




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##### 



GLADSTONE CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
 Nine Months Ended June 30,2011
    
    
    2010Operations:Net investment income
    
    $
    13,600
    
    
    $
    13,330Net realized gain (loss) on investments
    
    
    3
    
    
    
    (2,893
    )Net unrealized (depreciation) appreciation on investments
    
    
    (34,803
    )
    
    
    3,525Net unrealized depreciation (appreciation) on borrowings
    
    
    640
    
    
    
    (1,405
    )Net (decrease) increase in net assets from operations
    
    
    (20,560
    )
    
    
    12,557Distributions:Distributions to stockholders
    
    
    (13,255
    )
    
    
    (13,271
    )Capital transactions:Shelf offering costs
    
    
    
    
    
    
    (28
    )Conversion of former employee stock option loans from
recourse to non-recourse
    
    
    
    
    
    
    (420
    )Repayment of principal on employee notes
    
    
    2,105
    
    
    
    Reclassification of principal on employee note
    
    
    
    
    
    
    515Net increase in net assets from capital transactions
    
    
    2,105
    
    
    
    67Total decrease in net assets
    
    
    (31,710
    )
    
    
    (647
    )Net assets at beginning of period
    
    
    249,246
    
    
    
    249,076Net assets at end of period
    
    $
    217,536
    
    
    $
    248,429
 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
 5




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##### 



GLADSTONE CAPITAL CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (DOLLAR AMOUNTS IN THOUSANDS)  (UNAUDITED)
 Nine Months Ended June 30,2011
    
    
    2010CASH FLOWS FROM OPERATING ACTIVITIESNet (decrease) increase in net assets resulting from operations
    
    $
    (20,560
    )
    
    $
    12,557Adjustments to reconcile net (decrease) increase in net assets resulting from
operations to net cash (used in) provided by operating activities:Purchase of investments
    
    
    (118,646
    )
    
    
    (8,337
    )Principal repayments on investments
    
    
    39,855
    
    
    
    56,900Proceeds from sale of investments
    
    
    777
    
    
    
    3,119Increase in investment balance due to paid in kind interest
    
    
    (12
    )
    
    
    (62
    )Repayment of paid in kind interest
    
    
    
    
    
    
    51Increase in investment balance due to transferred interest
    
    
    (204
    )
    
    
    (1,230
    )Net change in premiums, discounts and amortization
    
    
    1,420
    
    
    
    1,194Net realized (gain) loss on investments
    
    
    (163
    )
    
    
    2,893Net unrealized depreciation (appreciation) on investments
    
    
    34,803
    
    
    
    (3,525
    )Net unrealized (depreciation) appreciation on borrowings
    
    
    (640
    )
    
    
    1,405Amortization of deferred financing fees
    
    
    1,032
    
    
    
    1,182Change in compensation expense from non-recourse notes
    
    
    
    
    
    
    245Decrease in interest receivable
    
    
    36
    
    
    
    472(Increase) decrease in due from custodian
    
    
    (1,667
    )
    
    
    1,272Decrease (increase) in prepaid assets
    
    
    139
    
    
    
    (246
    )(Increase) decrease in other assets
    
    
    (181
    )
    
    
    1,211Decrease in accounts payable and accrued expenses
    
    
    (151
    )
    
    
    (440
    )(Decrease) increase in interest payable
    
    
    (430
    )
    
    
    7Increase in fees due to Adviser(A)
    
    
    1,118
    
    
    
    1,566Decrease in administration fee due to Administrator(A)
    
    
    (93
    )
    
    
    (30
    )Increase (decrease) in other liabilities
    
    
    118
    
    
    
    (172
    )Net cash (used in) provided by operating activities
    
    
    (63,449
    )
    
    
    70,032CASH FLOWS FROM FINANCING ACTIVITIES:Shelf offering costs
    
    
    
    
    
    
    (28
    )Proceeds from borrowings
    
    
    109,800
    
    
    
    8,400Repayments on borrowings
    
    
    (34,400
    )
    
    
    (62,500
    )Distributions paid
    
    
    (13,255
    )
    
    
    (13,271
    )Receipt of principal on employee notes
    
    
    2,105
    
    
    
    Deferred financing fees
    
    
    (759
    )
    
    
    (1,441
    )Net cash provided by (used in) financing activities
    
    
    63,491
    
    
    
    (68,840
    )NET INCREASE IN CASH
    
    
    42
    
    
    
    1,192CASH, BEGINNING OF PERIOD
    
    
    7,734
    
    
    
    5,276CASH, END OF PERIOD
    
    $
    7,776
    
    
    $
    6,468
 
 (A)
    
    Refer to Note 4Related Party Transactionsfor additional
information. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
 6




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##### 



GLADSTONE CAPITAL CORPORATION
 
 CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS  AS OF JUNE 30, 2011  (DOLLAR AMOUNTS IN THOUSANDS)  (UNAUDITED)
 Company(A)
    
    Industry
    
    Investment(B)
    
    Principal
    
    
    Cost
    
    
    Fair ValueNON-CONTROL/NON-AFFILIATE INVESTMENTSNon-syndicated Loans:Access Television Network, Inc.
    
    Service-cable airtime (infomercials)
    
    Senior Term Debt (14.0%, Due 2/2011) (D)
    
    $
    903
    
    
    $
    903
    
    
    $
    90Allison Publications, LLC
    
    Service-publisher of consumer oriented magazines
    
    Senior Term Debt (10.5%, Due 9/2012) (D)
    
    
    8,613
    
    
    
    8,632
    
    
    
    8,032BAS Broadcasting
    
    Service-radio station operator
    
    Senior Term Debt (11.5%, Due 7/2013) (D)
    
    
    7,465
    
    
    
    7,465
    
    
    
    6,439Chinese Yellow Pages Company
    
    Service-publisher of Chinese language
    
    Line of Credit, $250 available (7.3%, Due 11/2011) (D)
    
    
    450
    
    
    
    450
    
    
    
    360directories
    
    Senior Term Debt (7.3%, Due 11/2011) (D)
    
    
    198
    
    
    
    198
    
    
    
    159CMI Acquisition, LLC
    
    Service-recycling
    
    Senior Subordinated Term Debt (12.0%, Due 12/2016) (D)
    
    
    14,265
    
    
    
    14,265
    
    
    
    14,247FedCap Partners, LLC
    
    Private equity fund
    
    Class A Membership Units (G)
    
    
    1,200
    
    
    
    1,200
    
    
    
    1,200Uncalled Capital Commitment ($800)GFRC Holdings, LLC
    
    Manufacturing-glass-fiber reinforced  concrete
    
    Senior Term Debt (11.5%, Due 12/2012) (D)
    
    
    5,811
    
    
    
    5,811
    
    
    
    5,027Senior Subordinated Term Debt (14.0%, Due 12/2012) (C) (D)
    
    
    6,632
    
    
    
    6,632
    
    
    
    5,737Global Materials Technologies, Inc.
    
    Manufacturing-steel wool products and metal fibers
    
    Senior Term Debt (13.0%, Due 6/2012) (C) (D)
    
    
    2,835
    
    
    
    2,835
    
    
    
    2,395Heartland Communications Group
    
    Service-radio station operator
    
    Line of Credit, $0 available (10.0%, Due 3/2013) (D)
    
    
    100
    
    
    
    100
    
    
    
    44Line of Credit, $0 available (10.0%, Due 3/2013) (D)
    
    
    100
    
    
    
    100
    
    
    
    44Senior Term Debt (5.0%, Due 3/2013) (D)
    
    
    4,342
    
    
    
    4,312
    
    
    
    1,889Common Stock Warrants (8.75% ownership) (F) (G)
    
    
    
    
    
    
    66
    
    
    
    International Junior Golf Training Acquisition
    
    Service-golf training
    
    Line of Credit, $0 available (11.0%, Due 5/2012) (D)
    
    
    1,500
    
    
    
    1,500
    
    
    
    1,320Company
    
    
    
    Senior Term Debt (10.5%, Due 5/2012) (D)
    
    
    1,060
    
    
    
    1,060
    
    
    
    933Senior Term Debt (12.5%, Due 5/2012) (C)(D)
    
    
    2,500
    
    
    
    2,500
    
    
    
    2,200KMBQ Corporation
    
    Service-AM/FM radio broadcaster
    
    Line of Credit, $42 available (12.3, Due 7/2010) (D) (G) (H)
    
    
    162
    
    
    
    158
    
    
    
    8Senior Term Debt (12.3%, Due 7/2010) (D) (G) (H)
    
    
    2,081
    
    
    
    2,038
    
    
    
    102Legend Communications of Wyoming, LLC
    
    Service-operator of radio stations
    
    Senior Term Debt (12.0%, Due 6/2013) (D)
    
    
    9,812
    
    
    
    9,812
    
    
    
    5,789Senior Term Debt (14.0%, Due 7/2011) (D)
    
    
    220
    
    
    
    220
    
    
    
    130Newhall Holdings, Inc.
    
    Service-distributor of personal care products
    
    Line of Credit, $0 available (8.0%, Due 12/2012) (D)
    
    
    1,985
    
    
    
    1,985
    
    
    
    198and supplements
    
    Senior Term Debt (8.5%, Due 12/2012) (D)
    
    
    1,870
    
    
    
    1,870
    
    
    
    187Senior Term Debt (3.5%, Due 12/2012) (C)(D)
    
    
    2,000
    
    
    
    2,000
    
    
    
    200Senior Term Debt (3.5%, Due 12/2012) (C) (D)
    
    
    4,648
    
    
    
    4,648
    
    
    
    465Preferred Equity (1,000,000 shares) (F) (G)
    
    
    
    
    
    
    
    
    
    
    Common Stock (688,500 shares) (F) (G)
    
    
    
    
    
    
    
    
    
    
    Northern Contours, Inc.
    
    Manufacturing-veneer and laminate components
    
    Senior Subordinated Term Debt (13.0%, Due 9/2012) (D)
    
    
    6,171
    
    
    
    6,171
    
    
    
    5,670Northstar Broadband, LLC
    
    Service-cable TV franchise owner
    
    Senior Term Debt (0.7%, Due 12/2012) (D)
    
    
    95
    
    
    
    83
    
    
    
    75Precision Acquisition Group Holdings, Inc.
    
    Manufacturing-consumable components for the
    
    Equipment Note (13.0%, Due 11/2011) (D)
    
    
    1,000
    
    
    
    1,000
    
    
    
    945Aluminum industry
    
    Senior Term Debt (13.0%, Due 11/2011) (D)
    
    
    4,125
    
    
    
    4,125
    
    
    
    3,898Senior Term Debt (13.0%, Due 11/2011) (C) (D)
    
    
    4,053
    
    
    
    4,053
    
    
    
    3,830PROFITSystems Acquisition Co.
    
    Service-design and develop ERP software
    
    Line of Credit, $350 available (4.5%, Due 7/2011)(J)
    
    
    
    
    
    
    
    
    
    
    Senior Term Debt (8.5%, Due 7/2011) (D) (J)
    
    
    250
    
    
    
    250
    
    
    
    242Senior Term Debt (10.5%, Due 7/2011) (C) (D) (J)
    
    
    2,900
    
    
    
    2,900
    
    
    
    2,813RCS Management Holding Co.
    
    Service-healthcare supplies
    
    Senior Term Debt (9.5%, Due 1/2013) (D)
    
    
    1,563
    
    
    
    1,563
    
    
    
    1,524Senior Term Debt (11.5%, Due 1/2013) (C) (D)
    
    
    3,060
    
    
    
    3,060
    
    
    
    2,983Reliable Biopharmaceutical Holdings, Inc.
    
    Manufacturing-pharmaceutical and biochemical
    
    Line of Credit, $2,400 available (9.0%, Due 1/2013) (D)
    
    
    1,600
    
    
    
    1,600
    
    
    
    1,572intermediates
    
    Mortgage Note (9.5%, Due 12/2014) (D)
    
    
    7,190
    
    
    
    7,190
    
    
    
    7,064Senior Term Debt (12.0%, Due 12/2014) (C)(D)
    
    
    11,603
    
    
    
    11,603
    
    
    
    11,196Senior Subordinated Term Debt (12.5%, Due 12/2014) (D)
    
    
    6,000
    
    
    
    6,000
    
    
    
    5,670Common Stock Warrants (F) (G)(764 shares)
    
    
    
    
    
    
    209
    
    
    
    103Saunders & Associates
    
    Manufacturing-equipment provider for
    
    Line of Credit, $2,500 available (11.3%, Due 5/2013) (D)
    
    
    
    
    
    
    
    
    
    
    frequency control devices
    
    Senior Term Debt (11.3%, Due 5/2013) (D)
    
    
    8,947
    
    
    
    8,947
    
    
    
    8,969
 7




---



##### 



GLADSTONE CAPITAL CORPORATION  CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)  AS OF JUNE 30, 2011  (DOLLAR AMOUNTS IN THOUSANDS)  (UNAUDITED)
 Company(A)
    
    Industry
    
    Investment(B)
    
    Principal
    
    
    Cost
    
    
    Fair ValueSCI Cable, Inc.
    
    Service-cable, internet, voice provider
    
    Senior Term Debt (10.0%, Due 10/2012) (D) (G) (H)
    
    $
    1,666
    
    
    $
    951
    
    
    $
    75Senior Term Debt (10.0%, Due 10/2012) (D) (G) (H)
    
    
    2,931
    
    
    
    2,931
    
    
    
    132Sunburst Media  Louisiana, LLC
    
    Service-radio station operator
    
    Senior Term Debt (10.5%, Due 12/2011) (D)
    
    
    6,175
    
    
    
    6,181
    
    
    
    4,322Thibaut Acquisition Co.
    
    Service-design and distribute wall  covering
    
    Line of Credit, $250 available (9.0%, Due 1/2014) (D)
    
    
    750
    
    
    
    750
    
    
    
    722Senior Term Debt (8.5%, Due 1/2014) (D)
    
    
    550
    
    
    
    550
    
    
    
    529Senior Term Debt (12.0%, Due 1/2014) (C) (D)
    
    
    3,000
    
    
    
    3,000
    
    
    
    2,869Viapack, Inc.(K)
    
    Manufacturing-polyethylene film
    
    Senior Real Estate Term Debt (10.0%, Due 3/2014) (D)
    
    
    600
    
    
    
    600
    
    
    
    150Senior Term Debt (13.0%, Due 3/2014) (C) (D)
    
    
    3,925
    
    
    
    3,925
    
    
    
    981Westlake Hardware, Inc.
    
    Retail-hardware and variety
    
    Senior Subordinated Term Debt (12.3%, Due 1/2014) (D)
    
    
    12,000
    
    
    
    12,000
    
    
    
    11,700Senior Subordinated Term Debt (13.5%, Due 1/2014) (D)
    
    
    8,000
    
    
    
    8,000
    
    
    
    7,740Westland Technologies, Inc.
    
    Service-diversified conglomerate
    
    Line of Credit, $1,000 available (6.5%, Due 4/2012) (D)
    
    
    
    
    
    
    
    
    
    
    Senior Term Debt (7.5%, Due 4/2016)(D)
    
    
    2,000
    
    
    
    2,000
    
    
    
    1,993Senior Term Debt (12.5%, Due 4/2016) (D)
    
    
    4,000
    
    
    
    4,000
    
    
    
    3,985Common Stock Warrants (77,287 shares) (F) (G)
    
    
    
    
    
    
    350
    
    
    
    350Winchester Electronics
    
    Manufacturing-high bandwidth connectors and
    
    Senior Term Debt (5.2%, Due 5/2012) (D)
    
    
    1,250
    
    
    
    1,250
    
    
    
    1,244cables
    
    Senior Term Debt (5.7%, Due 5/2013) (D)
    
    
    1,682
    
    
    
    1,682
    
    
    
    1,669Senior Subordinated Term Debt (14.0%, Due 6/2013) (D)
    
    
    9,825
    
    
    
    9,825
    
    
    
    9,678Subtotal  Non-syndicated loans
    
    
    
    
    
    
    
    
    
    $
    197,509
    
    
    $
    161,888Syndicated Loans:Airvana Network Solutions, Inc.
    
    Service-telecommunications
    
    Senior Term Debt (10.0%, Due 3/2015) (E)
    
    $
    8,024
    
    
    $
    7,869
    
    
    $
    8,124Allied Security Holdings, LLC
    
    Service-contract security officer providers
    
    Senior Subordinated Term Debt (8.5%, Due 2/2018) (E)
    
    
    1,000
    
    
    
    990
    
    
    
    1,011Allied Specialty Vehicles, Inc.
    
    Manufacturing-specialty vehicles
    
    Senior Term Debt (9.5%, Due 2/2016) (E)
    
    
    9,975
    
    
    
    9,784
    
    
    
    9,776Ameriqual Group, LLC
    
    Manufacturing-production and distribution of food products
    
    Senior Term Debt (9.8%, Due 3/2016) (E)
    
    
    7,500
    
    
    
    7,356
    
    
    
    7,350Applied Systems, Inc.
    
    Software for property & casualty insurance industry
    
    Senior Subordinated Term Debt (9.3%, Due 6/2017) (E)
    
    
    1,000
    
    
    
    991
    
    
    
    1,010Ascend Learning, LLC
    
    Service-technology-based learning  solutions
    
    Senior Subordinated Term Debt (12.3%, Due 12/2017) (E)
    
    
    1,000
    
    
    
    971
    
    
    
    1,000Attachmate Corporate
    
    Service-develops, implements and supports software
    
    Senior Subordinated Term Debt (9.5%, Due 2/2017) (E)
    
    
    4,000
    
    
    
    3,961
    
    
    
    4,050Covad Communications Group, Inc.
    
    Service-telecommunications
    
    Senior Term Debt (12.0%, Due 11/2015) (E)
    
    
    1,900
    
    
    
    1,864
    
    
    
    1,924Ernest Health, Inc.
    
    Service-post-acute care services
    
    Senior Term Debt (10.3%, Due 5/2017)(E)
    
    
    2,000
    
    
    
    1,970
    
    
    
    1,970Global Brass and Copper, Inc.
    
    Service-telecommunications
    
    Senior Term Debt (10.3%, Due 8/2015) (E)
    
    
    2,976
    
    
    
    2,897
    
    
    
    3,092HGI Holding, Inc
    
    Service-telecommunications
    
    Senior Term Debt (6.8%, Due 10/2016)(E)
    
    
    1,757
    
    
    
    1,721
    
    
    
    1,772Hubbard Radio, LLC
    
    Service-radio station operator
    
    Senior Subordinated Term Debt (8.8%, Due 4/2018) (E)
    
    
    500
    
    
    
    495
    
    
    
    505Keypoint Government Solutions, Inc.
    
    Service-security consulting services
    
    Senior Term Debt (10.0%, Due 12/2015) (E)
    
    
    6,965
    
    
    
    6,932
    
    
    
    6,895Mood Media Corporation
    
    Service-media and marketing solutions
    
    Senior Term Debt (10.3%, Due 11/2018) (E)
    
    
    8,000
    
    
    
    7,921
    
    
    
    7,840National Surgical Hospitals, Inc.
    
    Service-physician-partnered surgical facilities
    
    Senior Term Debt (8.3%, Due 2/2017) (E)
    
    
    1,703
    
    
    
    1,675
    
    
    
    1,707Sensus USA, Inc.
    
    Service-provider of utility communication services
    
    Senior Term Debt (8.5%, Due 5/2018) (E)
    
    
    500
    
    
    
    495
    
    
    
    506Springs Window Fashions, LLC
    
    Manufacturing-window
    
    Senior Term Debt (11.3%, Due 11/2017) (E)
    
    
    5,000
    
    
    
    4,851
    
    
    
    4,850SRAM, LLC
    
    Manufacturing-premium bicycle components
    
    Senior Term Debt (8.5%, Due 12/2018) (E)
    
    
    2,500
    
    
    
    2,475
    
    
    
    2,500
 8




---



##### 



GLADSTONE CAPITAL CORPORATION
CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
AS OF JUNE 30, 2011
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
 Company(A)
    
    Industry
    
    Investment(B)
    
    Principal
    
    
    Cost
    
    
    Fair ValueTargus Group International, Inc.
    
    Manufacturing-carrying cases and  accessories for notebook computers
    
    Senior Term Debt (11.0%, Due 5/2016) (E)
    
    $
    10,000
    
    
    $
    9,803
    
    
    $
    9,838Ulterra Drilling Technologies, LP
    
    Manufacturing-oil field drill bits and slick-slip reduction tools
    
    Senior Term Debt (9.8%, Due 6/2016) (E)
    
    
    2,000
    
    
    
    1,960
    
    
    
    1,970Vision Solutions, Inc.
    
    Service-provider of information availability software
    
    Senior Term Debt (9.5%, Due 7/2017)(E)
    
    
    11,000
    
    
    
    10,912
    
    
    
    10,945Wall Street Systems Holdings, Inc.
    
    Service-software provider
    
    Senior Term Debt (9.0%, Due 6/2018) (E)
    
    
    3,000
    
    
    
    2,970
    
    
    
    3,019WP Evenflo Group Holdings Inc.
    
    Manufacturing-infant and juvenile
    
    Senior Term Debt (8.0%, Due 2/2013) (E)
    
    
    1,853
    
    
    
    1,853
    
    
    
    1,732products
    
    Senior Preferred Equity (333.3 shares) (F) (G)
    
    
    
    
    
    
    333
    
    
    
    409Junior Preferred Equity (111.1 shares) (F) (G)
    
    
    
    
    
    
    111
    
    
    
    142Common Stock (1,873.95 shares) (F) (G)
    
    
    
    
    
    
    
    
    
    
    81Subtotal  Syndicated loans
    
    
    
    
    
    
    
    
    
    $
    93,160
    
    
    $
    94,018Total Non-Control/Non-Affiliate Investments (represented 85.5% of total investments at fair value)
    
    
    
    
    
    $
    290,669
    
    
    $
    255,906CONTROL INVESTMENTSBERTL, Inc.
    
    Service-web-based evaluator of
    
    Line of Credit, $15 available (6.4%, Due 10/2011) (F) (G) (H)
    
    $
    1,330
    
    
    $
    1,330
    
    
    $
    imaging products
    
    Common Stock (100 shares) (F) (G)
    
    
    
    
    
    
    424
    
    
    
    Defiance Integrated Technologies,
    
    Manufacturing-trucking parts
    
    Senior Term Debt (11.0%, Due 4/2013) (C) (F)
    
    
    7,585
    
    
    
    7,585
    
    
    
    7,585Inc.
    
    
    
    Common Stock (15,500 shares) (F) (G)
    
    
    
    
    
    
    1
    
    
    
    4,489Lindmark Acquisition, LLC
    
    Service-advertising
    
    Senior Subordinated Term Debt (11.0%, Due 10/2012) (D) (G) (H)
    
    
    10,000
    
    
    
    10,000
    
    
    
    2,500Senior Subordinated Term Debt (13.0%, Due 10/2012) (D) (G) (H)
    
    
    2,000
    
    
    
    2,000
    
    
    
    500Senior Subordinated Term Debt (13.0%, Due Upon Demand)(D) (G)(H)
    
    
    1,909
    
    
    
    1,908
    
    
    
    478Common Stock (100 shares) (F) (G)
    
    
    
    
    
    
    317
    
    
    
    LocalTel, LLC
    
    Service-yellow pages publishing
    
    Line of credit, $77 available (10.0%, Due 12/2011) (F) (G) (H)
    
    
    1,773
    
    
    
    1,773
    
    
    
    752Line of Credit, $1,830 available (4.7%, Due 6/2012) (F) (G) (H)
    
    
    1,170
    
    
    
    1,170
    
    
    
    Senior Term Debt (12.5%, Due 2/2012) (F) (G) (H)
    
    
    325
    
    
    
    325
    
    
    
    Senior Term Debt (8.5%, Due 6/2012) (F) (G) (H)
    
    
    2,688
    
    
    
    2,688
    
    
    
    Senior Term Debt (10.5%, Due 6/2012) (C) (F) (G) (H)
    
    
    2,750
    
    
    
    2,750
    
    
    
    Common Stock Warrants (4,000 shares) (F) (G)
    
    
    
    
    
    
    
    
    
    
    Midwest Metal Distribution, Inc.
    
    Distribution-aluminum sheets and
    
    Senior Subordinated Term Debt (12.0%, Due 7/2013) (D)
    
    
    18,281
    
    
    
    18,260
    
    
    
    16,727stainless steel
    
    Common Stock (501 shares) (F) (G)
    
    
    
    
    
    
    138
    
    
    
    Sunshine Media Holdings(I)
    
    Service-publisher regional B2B trade
    
    Line of credit, $100 available (10.5%, Due 5/2016) (D)
    
    
    1,900
    
    
    
    1,900
    
    
    
    665magazines
    
    Senior Term Debt (10.5%, Due 5/2016) (D)
    
    
    16,948
    
    
    
    16,948
    
    
    
    5,932Senior Term Debt (5.0%, Due 5/2016) (C) (D)
    
    
    10,700
    
    
    
    10,700
    
    
    
    3,745Junior Preferred Equity (1013.5 shares) (F) (G)
    
    
    
    
    
    
    740
    
    
    
    Common Stock (933.5 shares) (F) (G)
    
    
    
    
    
    
    375
    
    
    
    U.S. Healthcare Communications, Inc.
    
    Service-magazine publisher/operator
    
    Line of credit, $131 available (6.0%, Due 12/2010) (F) (G) (H)
    
    
    269
    
    
    
    269
    
    
    
    Line of credit, $0 available (6.0%, Due 12/2010) (F) (G) (H)
    
    
    450
    
    
    
    450
    
    
    
    Common Stock (100 shares) (F) (G)
    
    
    
    
    
    
    2,470
    
    
    
    Total Control Investments (represented 14.5% of total investments at fair value)
    
    
    
    
    
    $
    84,521
    
    
    $
    43,373Total Investments
    
    
    
    
    
    
    
    
    
    $
    375,190
    
    
    $
    299,279
 9




---



##### 



(A)
    
    Certain of the securities listed in the above chart are issued by affiliate(s)
of the indicated portfolio company.(B)
    
    Percentage represents interest rates in effect at June 30, 2011, and due date
represents the contractual maturity date.(C)
    
    Last Out Tranche (LOT) of senior debt, meaning if the portfolio company is
liquidated, the holder of the LOT is paid after the senior debt.(D)
    
    Fair value was primarily based on opinions of value submitted by Standard & Poors
Securities Evaluations, Inc.(E)
    
    Security valued based on the indicative bid price on or near June 30, 2011,
offered by the respective syndication agents trading desk or secondary desk.(F)
    
    Fair value was primarily based on the total enterprise value of the portfolio
company using a liquidity waterfall approach. Gladstone Capital Corporation (the Company)
also considered discounted cash flow methodologies.(G)
    
    Security is non-income producing.(H)
    
    Debt security is on non-accrual status.(I)
    
    During the quarter ended March 31, 2011, the Company purchased a controlling
interest in common stock from existing shareholders of Sunshine Media Holdings. This purchase
resulted in the Company reclassifying the investment from Non-Control/Non-Affiliate to
Control.(J)
    
    Subsequent to June 30, 2011, PROFITSystems Acquisition Co.s debt securities were
extended to July 2014.(K)
    
    Subsequent to June 30, 2011, the Company purchased a controlling interest in the
equity securities of Viapack, Inc. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
 10




---



##### 



GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2010

(DOLLAR AMOUNTS IN THOUSANDS)
 Company(A)
    
    Industry
    
    Investment(B)
    
    Principal
    
    
    Cost
    
    
    Fair ValueNON-CONTROL/NON-AFFILIATE INVESTMENTSNon-syndicated Loans:Access Television Network, Inc.
    
    Service-cable airtime (infomercials)
    
    Senior Term Debt (14.0%, Due 12/2011) (E)
    
    $
    963
    
    
    $
    963
    
    
    $
    809Allison Publications, LLC
    
    Service-publisher of consumer oriented
    
    Senior Term Debt (10.5%, Due 9/2012) (E)
    
    
    9,064
    
    
    
    9,094
    
    
    
    8,543magazines
    
    Senior Term Debt (13.0%, Due 12/2010) (E)
    
    
    65
    
    
    
    65
    
    
    
    64BAS Broadcasting
    
    Service-radio station operator
    
    Senior Term Debt (11.5%, Due 7/2013) (E)
    
    
    7,465
    
    
    
    7,465
    
    
    
    6,644Chinese Yellow Pages Company
    
    Service-publisher of Chinese language
    
    Line of Credit, $250 available (7.3%, Due 11/2010) (E)
    
    
    450
    
    
    
    450
    
    
    
    428directories
    
    Senior Term Debt (7.3%, Due 11/2010) (E)
    
    
    333
    
    
    
    333
    
    
    
    317CMI Acquisition, LLC
    
    Service-recycling
    
    Senior Subordinated Term Debt (10.3%, Due 11/2012) (E)
    
    
    5,972
    
    
    
    5,972
    
    
    
    5,868FedCap Partners, LLC
    
    Private equity fund
    
    Class A Membership Units (H)
    
    
    400
    
    
    
    400
    
    
    
    400Uncalled Capital Commitment ($1,600)Finn Corporation
    
    Manufacturing-landscape equipment
    
    Common Stock Warrants (33,000 shares)(G)(H)
    
    
    
    
    
    
    37
    
    
    
    284GFRC Holdings LLC
    
    Manufacturing-glass-fiber reinforced
    
    Senior Term Debt (11.5%, Due 12/2012) (E)
    
    
    6,111
    
    
    
    6,111
    
    
    
    6,004concrete
    
    Senior Subordinated Term Debt (14.0%, Due 12/2012) (C) (E)
    
    
    6,632
    
    
    
    6,632
    
    
    
    6,450Global Materials Technologies, Inc.
    
    Manufacturing-steel wool products and metal  fibers
    
    Senior Term Debt (13.0%, Due 6/2012) (C) (E)
    
    
    3,560
    
    
    
    3,560
    
    
    
    2,937Heartland Communications Group
    
    Service-radio station operator
    
    Line of Credit, $100 available (8.5%, Due 3/2013)
    
    
    
    
    
    
    
    
    
    
    Line of Credit, $100 available (8.5%, Due 3/2013)
    
    
    
    
    
    
    
    
    
    
    Senior Term Debt (8.5%, Due 3/2013) (E)
    
    
    4,342
    
    
    
    4,301
    
    
    
    2,519Common Stock Warrants (8.75%) (G) (H)
    
    
    
    
    
    
    66
    
    
    
    Interfilm Holdings, Inc.
    
    Service-slitter and distributor of plastic films
    
    Senior Term Debt (12.3%, Due 10/2012) (E)
    
    
    2,400
    
    
    
    2,400
    
    
    
    2,382International Junior Golf Training
    
    Service-golf training
    
    Line of Credit, $1,500 available (9.0%, Due 5/2011) (E)
    
    
    
    
    
    
    
    
    
    
    Acquisition Company
    
    
    
    Senior Term Debt (8.5%, Due 5/2012) (E)
    
    
    1,557
    
    
    
    1,557
    
    
    
    1,537Senior Term Debt (10.5%, Due 5/2012) (C) (E)
    
    
    2,500
    
    
    
    2,500
    
    
    
    2,456KMBQ Corporation
    
    Service-AM/FM radio broadcaster
    
    Line of Credit, $39 available (12.3%, Due 7/2010) (E) (J) (P)
    
    
    161
    
    
    
    161
    
    
    
    16Senior Term Debt (12.3%, Due 7/2010) (E) (J) (P)
    
    
    1,921
    
    
    
    1,921
    
    
    
    192Legend Communications of Wyoming LLC
    
    Service-operator of radio stations
    
    Senior Term Debt (12.0%, Due 6/2013) (E)
    
    
    9,880
    
    
    
    9,880
    
    
    
    6,422Newhall Holdings, Inc.
    
    Service-distributor of personal care
    
    Line of Credit, $0 available (5.0%, Due 12/2012) (E)
    
    
    1,350
    
    
    
    1,350
    
    
    
    1,269products and supplements
    
    Senior Term Debt (5) (5.0%, Due 12/2012) (E)
    
    
    3,870
    
    
    
    3,870
    
    
    
    3,638Senior Term Debt (5.0%, Due 12/2012)(C) (E)
    
    
    4,648
    
    
    
    4,648
    
    
    
    4,323Preferred Equity (1,000,000 shares) (G) (H)
    
    
    
    
    
    
    
    
    
    
    Common Stock (688,500 shares)(G) (H)
    
    
    
    
    
    
    
    
    
    
    Northern Contours, Inc.
    
    Manufacturing-veneer and laminate  components
    
    Senior Subordinated Term Debt (13.0%, Due 9/2012) (E)
    
    
    6,301
    
    
    
    6,301
    
    
    
    5,765Northstar Broadband, LLC
    
    Service-cable TV franchise owner
    
    Senior Term Debt (0.7%, Due 12/2012) (E)
    
    
    135
    
    
    
    117
    
    
    
    102Pinnacle Treatment Centers, Inc.
    
    Service-Addiction treatment centers
    
    Line of Credit, $350 available (12.0%, Due 10/2010) (E) (L)
    
    
    150
    
    
    
    150
    
    
    
    150Senior Term Debt (10.5%, Due 12/2011) (E)
    
    
    1,950
    
    
    
    1,950
    
    
    
    1,945Senior Term Debt (10.5%, Due 12/2011) (C) (E)
    
    
    7,500
    
    
    
    7,500
    
    
    
    7,481Precision Acquisition Group Holdings,.
    
    Manufacturing-consumable
    
    Equipment Note (13.0%, Due 10/2010) (E) (M)
    
    
    1,000
    
    
    
    1,000
    
    
    
    950Inc
    
    components for  the Aluminum industry
    
    Senior Term Debt (13.0%, Due 10/2010) (E) (M)
    
    
    4,125
    
    
    
    4,125
    
    
    
    3,919Senior Term Debt (13.0%, Due 10/2010) (C) (E) (M)
    
    
    4,053
    
    
    
    4,053
    
    
    
    3,850
 11




---



##### 



GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2010

(DOLLAR AMOUNTS IN THOUSANDS)
 Company(A)
    
    Industry
    
    Investment(B)
    
    Principal
    
    
    Cost
    
    
    Fair ValuePROFITSystems Acquisition Co.
    
    Service-design and develop ERP
    
    Line of Credit, $350 available (4.5%, Due 7/2011)
    
    $
    
    
    
    $
    
    
    
    $
    software
    
    Senior Term Debt (8.5%, Due 7/2011) (E)
    
    
    1,000
    
    
    
    1,000
    
    
    
    940Senior Term Debt (10.5%, Due 7/2011) (C) (E)
    
    
    2,900
    
    
    
    2,900
    
    
    
    2,697RCS Management Holding Co.
    
    Service-healthcare supplies
    
    Senior Term Debt (9.5%, Due 1/2011) (C) (E)
    
    
    1,938
    
    
    
    1,937
    
    
    
    1,918Senior Term Debt (11.5%, Due 1/2011) (D) (E)
    
    
    3,060
    
    
    
    3,060
    
    
    
    3,029Reliable Biopharmaceutical Holdings,
    
    Manufacturing-pharmaceutical and
    
    Line of Credit, $3,800 available (9.0%, Due 10/2010) (E) (N)
    
    
    1,200
    
    
    
    1,200
    
    
    
    1,188Inc.
    
    biochemical intermediates
    
    Mortgage Note (9.5%, Due 10/2014) (E)
    
    
    7,256
    
    
    
    7,255
    
    
    
    7,201Senior Term Debt (9.0%, Due 10/2012) (E)
    
    
    1,080
    
    
    
    1,080
    
    
    
    1,069Senior Term Debt (11.0%, Due 10/2012) (C) (E)
    
    
    11,693
    
    
    
    11,693
    
    
    
    11,386Senior Subordinated Term Debt (12.0%, Due 10/2013) (E)
    
    
    6,000
    
    
    
    6,000
    
    
    
    5,730Common Stock Warrants (764 shares)(G) (H)
    
    
    
    
    
    
    209
    
    
    
    Saunders & Associates
    
    Manufacturing-equipment provider for frequency control devices
    
    Senior Term Debt (9.8%, Due 5/2013) (E)
    
    
    8,947
    
    
    
    8,947
    
    
    
    8,935SCI Cable, Inc.
    
    Service-cable, internet, voice provider
    
    Senior Term Debt (10.0%, Due 10/2012) (E) (J) (P)
    
    
    1,165
    
    
    
    450
    
    
    
    140Senior Term Debt (10.0%, Due 10/2012) (E) (J) (P)
    
    
    2,931
    
    
    
    2,931
    
    
    
    352Sunburst Media  Louisiana, LLC
    
    Service-radio station operator
    
    Senior Term Debt (10.5%, Due 6/2011) (E)
    
    
    6,375
    
    
    
    6,391
    
    
    
    5,100Sunshine Media Holdings
    
    Service-publisher regional B2B trade
    
    Line of credit, $401 available (10.5%, Due 2/2011)(E)
    
    
    1,599
    
    
    
    1,599
    
    
    
    1,499magazines
    
    Senior Term Debt (10.5%, Due 5/2012) (E)
    
    
    16,948
    
    
    
    16,948
    
    
    
    15,889Senior Term Debt (13.3%, Due 5/2012) (C) (E)
    
    
    10,700
    
    
    
    10,700
    
    
    
    9,898Thibaut Acquisition Co.
    
    Service-design and distribute wall
    
    Line of Credit, $0 available (9.0%, Due 1/2011) (E)
    
    
    1,000
    
    
    
    1,000
    
    
    
    970covering
    
    Senior Term Debt (8.5%, Due 1/2011) (E)
    
    
    1,075
    
    
    
    1,075
    
    
    
    1,043Senior Term Debt (12.0%, Due 1/2011) (C) (E)
    
    
    3,000
    
    
    
    3,000
    
    
    
    2,888Viapack, Inc.
    
    Manufacturing-polyethylene film
    
    Senior Real Estate Term Debt (10.0%, Due 3/2011) (E)
    
    
    675
    
    
    
    675
    
    
    
    672Senior Term Debt (13.0%, Due 3/2011) (C) (E)
    
    
    4,005
    
    
    
    4,005
    
    
    
    3,990Westlake Hardware, Inc.
    
    Retail-hardware and variety
    
    Senior Subordinated Term Debt (12.3%, Due 1/2014) (E)
    
    
    12,000
    
    
    
    12,000
    
    
    
    11,820Senior Subordinated Term Debt (13.5%, Due 1/2014) (E)
    
    
    8,000
    
    
    
    8,000
    
    
    
    7,800Winchester Electronics
    
    Manufacturing-high bandwidth
    
    Senior Term Debt (5.3%, Due 5/2012)(E)
    
    
    1,250
    
    
    
    1,250
    
    
    
    1,244connectors and cables
    
    Senior Term Debt (6.0%, Due 5/2013) (E)
    
    
    1,686
    
    
    
    1,686
    
    
    
    1,661Senior Subordinated Term Debt (14.0%, Due 6/2013) (E)
    
    
    9,875
    
    
    
    9,875
    
    
    
    9,603Subtotal  Non-syndicated loans
    
    
    
    
    
    
    
    
    
    $
    225,798
    
    
    $
    206,326Syndicated Loans:Airvana Network Solutions, Inc
    
    Service-telecommunications
    
    Senior Term Debt (11.0%, Due 8/2014) (F)
    
    
    9,056
    
    
    
    8,858
    
    
    
    8,942Puerto Rico Cable Acquisition Company, Inc.
    
    Service-telecommunications
    
    Senior Subordinated Term Debt (7.9%, Due 1/2012) (F)
    
    
    7,141
    
    
    
    7,159
    
    
    
    6,427WP Evenflo Group Holdings Inc.
    
    Manufacturing-infant and juvenile
    
    Senior Term Debt (8.0%, Due 2/2013) (F)
    
    
    1,881
    
    
    
    1,881
    
    
    
    1,655products
    
    Senior Preferred Equity (333.3 shares)(G) (H)
    
    
    
    
    
    
    333
    
    
    
    379Junior Preferred Equity (111.1 shares) (G) (H)
    
    
    
    
    
    
    111
    
    
    
    8Common Stock(1,873.95 shares)(G) (H)
    
    
    
    
    
    
    
    
    
    
    Subtotal  Syndicated loans
    
    
    
    
    
    
    
    
    
    $
    18,342
    
    
    $
    17,411Total Non-Control/Non-Affiliate Investments (represented 87% of total investments at fair value)
    

    $
    244,140
    
    
    $
    223,737
 12




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##### 



GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2010

(DOLLAR AMOUNTS IN THOUSANDS)
 Company(A)
    
    Industry
    
    Investment(B)
    
    Principal
    
    
    Cost
    
    
    Fair ValueCONTROL INVESTMENTSBERTL, Inc.
    
    Service-web-based evaluator of imaging products
    
    Line of Credit, $302 available (6.5%, Due 10/2010) (G) (J) (K) (P)
    
    $
    1,319
    
    
    $
    1,319
    
    
    $
    Common Stock (100 shares)(G) (H)
    
    
    
    
    
    
    424
    
    
    
    Defiance Integrated Technologies, Inc.
    
    Manufacturing-trucking parts
    
    Senior Term Debt (11.0%, Due 4/2013) (C) (E)
    
    
    8,325
    
    
    
    8,325
    
    
    
    8,325Common Stock (15,500 shares)(G) (H)
    
    
    
    
    
    
    1
    
    
    
    1,543Guaranty ($250)Lindmark Acquisition, LLC
    
    Service-advertising
    
    Senior Subordinated Term Debt (11.0%, Due 10/2012) (E) (I) (J) (P)
    
    
    10,000
    
    
    
    10,000
    
    
    
    5,000Senior Subordinated Term Debt (13.0%, Due 12/2010) (E) (I) (J) (P)
    
    
    2,000
    
    
    
    2,000
    
    
    
    1,000Senior Subordinated Term Debt (13.0%, Due Upon Demand) (E)(I)(J)(P)
    
    
    1,794
    
    
    
    1,794
    
    
    
    897Common Stock (100 shares)(G) (H)
    
    
    
    
    
    
    1
    
    
    
    LocalTel, LLC
    
    Service-yellow pages publishing
    
    Line of credit, $152 available (10.0%, Due 12/2010) (G) (J) (P)
    
    
    1,698
    
    
    
    1,698
    
    
    
    1,063Line of Credit, $1,830 available (4.8%, Due 6/2011) (G) (J) (P)
    
    
    1,170
    
    
    
    1,170
    
    
    
    Senior Term Debt (12.5%, Due 2/2012) (G) (J) (P)
    
    
    325
    
    
    
    325
    
    
    
    Senior Term Debt (8.5%, Due 6/2011) (G) (J) (P)
    
    
    2,688
    
    
    
    2,688
    
    
    
    Senior Term Debt (10.5%, Due 6/2011) (C) (G) (J) (P)
    
    
    2,750
    
    
    
    2,750
    
    
    
    Common Stock Warrants (4,000 shares)(G) (H)
    
    
    
    
    
    
    
    
    
    
    Midwest Metal Distribution, Inc.
    
    Distribution-aluminum sheets and
    
    Senior Subordinated Term Debt (12.0%, Due 7/2013) (E)
    
    
    18,281
    
    
    
    18,254
    
    
    
    15,539stainless steel
    
    Common Stock (501 shares)(G) (H)
    
    
    
    
    
    
    138
    
    
    
    U.S. Healthcare Communications, Inc.
    
    Service-magazine publisher/operator
    
    Line of credit, $131 available (6.0%, Due 12/2010) (G) (J) (P)
    
    
    269
    
    
    
    269
    
    
    
    5Line of credit, $0 available (6.0%, Due 12/2010) (G) (J) (P)
    
    
    450
    
    
    
    450
    
    
    
    Common Stock (100 shares)(G) (H)
    
    
    
    
    
    
    2,470
    
    
    
    Total Control Investments (represented 13% of total investments at fair value)
    
    $
    54,076
    
    
    $
    33,372Total Investments(O)
    
    
    
    
    
    $
    298,216
    
    
    $
    257,109
 
 (A)
    
    Certain of the securities listed in the chart above are issued by affiliate(s) of the indicated portfolio company.(B)
    
    Percentage represents interest rates in effect at September 30, 2010, and due date represents the contractual maturity date.(C)
    
    LOT of senior debt, meaning if the portfolio company is liquidated, the holder of the LOT is paid after the senior debt.(D)
    
    LOT of senior debt, meaning if the portfolio company is liquidated, the holder of
the LOT is paid after the senior debt, however, the debt is also junior to another LOT.(E)
    
    Fair value was primarily based on opinions of value submitted by Standard & Poors
Securities Evaluations, Inc.(F)
    
    Security valued based on the indicative bid price on or near September 30, 2010,
offered by the respective syndication agents trading desk or secondary desk.(G)
    
    Fair value was primarily based on the total enterprise value of the portfolio
company using a liquidity waterfall approach. The Company also considered discounted cash
flow methodologies.(H)
    
    Security is non-income producing.(I)
    
    Lindmarks loan agreement was amended in March 2009 to provide that any unpaid
current interest accrues as a success fee. The success fee is not recorded until paid (see
Note 2, Summary of Significant Accounting Policies  Interest Income Recognition).(J)
    
    BERTL, KMBQ, Lindmark, LocalTel, SCI Cable and U.S. Healthcare are currently past
due on interest payments and are on non-accrual.(K)
    
    BERTLs interest includes paid in kind interest. Please refer to Note 2 Summary
of Significant Accounting Policies. Subsequent to September 30, 2010, BERTLs line of credit
maturity date was extended to October 2011.(L)
    
    Subsequent to September 30, 2010, Pinnacles line of credit maturity date was
extended to January 2011.(M)
    
    Subsequent to September 30, 2010, Precisions equipment note and senior term loan
maturity dates were extended to November 2010.(N)
    
    Subsequent to September 30, 2010, Reliables line of credit limit was reduced to
$3,500, the interest rate floor was increased to 10.0% and the maturity date was extended to
January 2011.(O)
    
    Aggregate gross unrealized depreciation for federal income tax purposes is $1,919;
aggregate gross unrealized appreciation for federal income tax purposes is $43,023. Net
unrealized depreciation is $41,104 based on a tax cost of $298,186.(P)
    
    Debt security is on non-accrual status. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
 13




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##### 



GLADSTONE CAPITAL CORPORATION
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  JUNE 30, 2011  (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA AND AS OTHERWISE INDICATED)
 NOTE 1. ORGANIZATION
      NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Unaudited Interim Financial Statements and Basis of Presentation
  Condensed Consolidated Statement of Assets and Liabilities
 Reclassifications
  14




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##### 



Investment Valuation Policy
    Publicly-traded securities:
 Securities for which a limited market exists:
   Securities for which no market exists:
 15




---



##### 



(A)
    
    Portfolio investments comprised solely of debt securities:Debt securities that are not
publicly traded on an established securities market, or for which a limited market does not
exist (Non-Public Debt Securities), and that are issued by portfolio companies in which the
Company has no equity or equity-like securities, are fair valued in accordance with the terms
of the Policy, which utilizes opinions of value submitted to the Company by Standard & Poors
Securities Evaluations, Inc. (SPSE). The Company may also submit paid in kind (PIK)
interest to SPSE for its evaluation when it is determined that PIK interest is likely to be
received.
 (B)
    
    Portfolio investments in controlled companies comprised of a bundle of investments, which can
include debt and equity securities:The fair value of these investments is determined based on
the total enterprise value (TEV) of the portfolio company, or issuer, utilizing a liquidity
waterfall approach under ASC 820 for the Companys Non-Public Debt Securities and equity or
equity-like securities (e.g. preferred equity, common equity, or other equity-like securities)
that are purchased together as part of a package, where the Company has control or could gain
control through an option or warrant security; both the debt and equity securities of the
portfolio investment would exit in the mergers and acquisitions market as the principal
market, generally through a sale or recapitalization of the portfolio company. In accordance
with ASC 820, the Company applies the in-use premise of value which assumes the debt and
equity securities are sold together. Under this liquidity waterfall approach, the Company
first calculates the TEV of the issuer by incorporating some or all of the following factors:
 
    
    the issuers ability to make payments;
    
    the earnings of the issuer;
    
    recent sales to third parties of similar securities;
    
    the comparison to publicly traded securities; and
    
    DCF or other pertinent factors.
 In gathering the sales to third parties of similar securities, the Company may reference
industry statistics and use outside experts. Once the Company has estimated the TEV of the
issuer, the Company will subtract the value of all the debt securities of the issuer, which are
valued at the contractual principal balance. Fair values of these debt securities are discounted
for any shortfall of TEV over the total debt outstanding for the issuer. Once the values for all
outstanding senior securities (which include the debt securities) have been subtracted from the
TEV of the issuer, the remaining amount, if any, is used to determine the value of the issuers
equity or equity-like securities. If, in the Advisers judgment, the liquidity waterfall
approach does not accurately reflect the value of the debt component, the Adviser may recommend
that the Company use a valuation by SPSE, or, if that is unavailable, a DCF valuation technique.(C)
    
    Portfolio investments in non-controlled companies comprised of a bundle of investments, which
can include debt and equity securities:The Company values Non-Public Debt Securities that are
purchased together with equity or equity-like securities from the same portfolio company, or
issuer, for which the Company does not control or cannot gain control as of the measurement
date, using a hypothetical secondary market as the Companys principal market. In accordance
with ASC 820, the Company determines its fair value of these debt securities of non-control
investments assuming the sale of an individual debt security using the in-exchange premise of
value. As such, the Company estimates the fair value of the debt component using estimates of
value provided by SPSE and its own assumptions in the absence of observable market data,
including synthetic credit ratings, estimated remaining life, current market yield and
interest rate spreads of similar securities as of the measurement date. For equity or
equity-like securities of investments for which the Company does not control or cannot gain
control as of the measurement date, the Company estimates the fair value of the equity using
the in-exchange premise of value based on factors such as the overall value of the issuer, the
relative fair value of other units of account including debt, or other relative value
approaches. Consideration is also given to capital structure and other contractual obligations
that may impact the fair value of the equity. Further, the Company may utilize comparable
values of similar companies, recent investments and indices with similar structures and risk
characteristics or its own assumptions in the absence of other observable market data and may
also employ DCF valuation techniques.(D)
    
    Portfolio investments comprised of non-publicly traded non-control equity securities of other
funds:The Company values any uninvested capital of the non-control fund at par value and
values any invested capital at the value provided by the non-control fund.
  16




---



##### 



Investment Income Recognition
     Condensed
Consolidated Statements of Operations
 Recent Accounting Pronouncements
  NOTE 3. INVESTMENTS
  17




---



##### 




    
    Level 1  inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active markets;
    
    Level 2  inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, and inputs that are observable for the asset or
liability, either directly or indirectly, for substantially the full term of the financial
instrument. Level 2 inputs are in those markets for which there are few transactions, the
prices are not current, little public information exists or instances where prices vary
substantially over time or among brokered market makers; and
    
    Level 3 inputs to the valuation methodology are unobservable and significant to
the fair value measurement. Unobservable inputs are those inputs that reflect the Companys
own assumptions that market participants would use to price the asset or liability based upon
the best available information.
  ondensed Consolidated Statements of Assets and
Liabilities
 Level 3 InvestmentsTotal Fair Value Reported in CondensedConsolidated Statements of Assets and LiabilitiesJune 30, 2011
    
    
    September 30, 2010Non-Control/Non-Affiliate InvestmentsSenior term debt
    
    $
    185,603
    
    
    $
    163,203Senior subordinated term debt
    
    
    68,018
    
    
    
    59,463Preferred equity
    
    
    551
    
    
    
    387Common equity/equivalents
    
    
    1,734
    
    
    
    684Total Non-Control/Non-Affiliate
investments at fair value
    
    
    255,906
    
    
    
    223,737Control InvestmentsSenior term debt
    
    $
    18,678
    
    
    $
    9,393Senior subordinated term debt
    
    
    20,205
    
    
    
    22,436Common equity/equivalents
    
    
    4,490
    
    
    
    1,543Total Control investments at fair value
    
    
    43,373
    
    
    
    33,372Total investments at fair value
    
    $
    299,279
    
    
    $
    257,109
 Changes in Level 3 Fair Value Measurements of Investments
  Fair value measurements using unobservable data inputs (Level 3)
 Periods ended June 30, 2011:
 Non-Control/Non-Affiliate
    
    
    ControlInvestments
    
    
    Investments
    
    
    TotalThree months ended June 30, 2011:Fair value at March 31, 2011
    
    $
    208,461
    
    
    $
    48,652
    
    
    $
    257,113Net unrealized depreciation(A)
    
    
    (13,706
    )
    
    
    (5,083
    )
    
    
    (18,789
    )Issuances/Originations(B)
    
    
    65,845
    
    
    
    381
    
    
    
    66,226Settlements/Repayments
    
    
    (4,694
    )
    
    
    (577
    )
    
    
    (5,271
    )Fair value as of June 30, 2011
    
    $
    255,906
    
    
    $
    43,373
    
    
    $
    299,279
 18




---



##### 



Non-Control/Non-Affiliate
    
    
    ControlInvestments
    
    
    Investments
    
    
    TotalNine months ended June 30, 2011:Fair value at September 30, 2010
    
    $
    223,737
    
    
    $
    33,372
    
    
    $
    257,109Net realized gain
    
    
    163
    
    
    
    
    
    
    
    163Net unrealized depreciation(A)
    
    
    (22,061
    )
    
    
    (13,035
    )
    
    
    (35,096
    )Reversal of prior period net depreciation on realization(A)
    
    
    293
    
    
    
    
    
    
    
    293Issuances/Originations(B)
    
    
    115,970
    
    
    
    2,892
    
    
    
    118,862Settlements/Repayments
    
    
    (39,924
    )
    
    
    (1,351
    )
    
    
    (41,275
    )Sales
    
    
    (37
    )
    
    
    (740
    )
    
    
    (777
    )Transfer(C)
    
    
    (22,235
    )
    
    
    22,235
    
    
    
    Fair value as of June 30, 2011
    
    $
    255,906
    
    
    $
    43,373
    
    
    $
    299,279
 Senior
    
    
    Senior
    
    
    
    
    
    
    CommonTerm
    
    
    Subordinated
    
    
    Preferred
    
    
    Equity/Debt
    
    
    Term Debt
    
    
    Equity
    
    
    Equivalents
    
    
    TotalThree months ended June 30, 2011:Fair value at March 31, 2011
    
    $
    173,602
    
    
    $
    76,599
    
    
    $
    537
    
    
    $
    6,375
    
    
    $
    257,113Net unrealized (depreciation) appreciation(A)
    
    
    (16,849
    )
    
    
    (1,053
    )
    
    
    14
    
    
    
    (901
    )
    
    
    (18,789
    )Issuances/Originations(B)
    
    
    52,691
    
    
    
    12,785
    
    
    
    
    
    
    
    750
    
    
    
    66,226Settlements/Repayments
    
    
    (5,163
    )
    
    
    (108
    )
    
    
    
    
    
    
    
    
    
    
    (5,271
    )Fair value as of June 30, 2011
    
    $
    204,281
    
    
    $
    88,223
    
    
    $
    551
    
    
    $
    6,224
    
    
    $
    299,279
 Senior
    
    
    Senior
    
    
    
    
    
    
    CommonTerm
    
    
    Subordinated
    
    
    Preferred
    
    
    Equity/Debt
    
    
    Term Debt
    
    
    Equity
    
    
    Equivalents
    
    
    TotalNine months ended June 30, 2011:Fair value at September 30, 2010
    
    $
    172,596
    
    
    $
    81,899
    
    
    $
    386
    
    
    $
    2,228
    
    
    $
    257,109Net realized gain (loss)
    
    
    177
    
    
    
    (14
    )
    
    
    
    
    
    
    
    
    
    
    163Net unrealized (depreciation) appreciation(A)
    
    
    (34,067
    )
    
    
    (2,892
    )
    
    
    (210
    )
    
    
    2,073
    
    
    
    (35,096
    )Reversal of prior period net (appreciation)
depreciation on realization(A)
    
    
    (191
    )
    
    
    731
    
    
    
    
    
    
    
    (247
    )
    
    
    293Issuances/Originations(B)
    
    
    99,633
    
    
    
    15,907
    
    
    
    375
    
    
    
    2,947
    
    
    
    118,862Settlements/Repayments
    
    
    (33,867
    )
    
    
    (7,408
    )
    
    
    
    
    
    
    
    
    
    
    (41,275
    )Sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (777
    )
    
    
    (777
    )Fair value as of June 30, 2011
    
    $
    204,281
    
    
    $
    88,223
    
    
    $
    551
    
    
    $
    6,224
    
    
    $
    299,279
 Periods ended June 30, 2010:
 Non-Control/Non-Affiliate
    
    
    ControlInvestments
    
    
    Investments
    
    
    TotalThree months ended June 30, 2010:Fair value at March 31, 2010
    
    $
    256,227
    
    
    $
    35,524
    
    
    $
    291,751Net realized loss(B)
    
    
    
    
    
    
    (2,865
    )
    
    
    (2,865
    )Net unrealized depreciation(A)
    
    
    (48
    )
    
    
    (4,373
    )
    
    
    (4,421
    )Reversal of prior period net
depreciation on
realization(A)
    
    
    
    
    
    
    2,865
    
    
    
    2,865Issuances/Originations(B)
    
    
    1,185
    
    
    
    (67
    )
    
    
    1,118Settlements/Repayments
    
    
    (18,482
    )
    
    
    
    
    
    
    (18,482
    )Fair value as of June 30, 2010
    
    $
    238,882
    
    
    $
    31,084
    
    
    $
    269,966
 Non-Control/Non-Affiliate
    
    
    ControlInvestments
    
    
    Investments
    
    
    TotalNine months ended June 30, 2010:Fair value at September 30, 2009
    
    $
    286,997
    
    
    $
    33,972
    
    
    $
    320,969Net realized loss(B)
    
    
    (28
    )
    
    
    (2,865
    )
    
    
    (2,893
    )Net unrealized appreciation (depreciation)(A)
    
    
    3,162
    
    
    
    (5,939
    )
    
    
    (2,777
    )Reversal of prior period net depreciation on
realization(A)
    
    
    3,437
    
    
    
    2,865
    
    
    
    6,302Issuances/Originations(B)
    
    
    5,384
    
    
    
    3,051
    
    
    
    8,435Settlements/Repayments
    
    
    (56,951
    )
    
    
    
    
    
    
    (56,951
    )Sales
    
    
    (3,119
    )
    
    
    
    
    
    
    (3,119
    )Fair value as of June 30, 2010
    
    $
    238,882
    
    
    $
    31,084
    
    
    $
    269,966
 19




---



##### 



Senior
    
    
    Senior
    
    
    
    
    
    
    CommonTerm
    
    
    Subordinated
    
    
    Preferred
    
    
    Equity/Debt
    
    
    Term Debt
    
    
    Equity
    
    
    Equivalents
    
    
    TotalThree months ended June 30, 2010:Fair value at March 31, 2010
    
    $
    188,348
    
    
    $
    102,752
    
    
    $
    
    
    
    $
    651
    
    
    $
    291,751Net realized loss
    
    
    (1,280
    )
    
    
    
    
    
    
    (1,584
    )
    
    
    (1
    )
    
    
    (2,865
    )Net unrealized appreciation (depreciation)(A)
    
    
    (1,575
    )
    
    
    (2,898
    )
    
    
    235
    
    
    
    (183
    )
    
    
    (4,421
    )Reversal of prior period net depreciation on
realization(A)
    
    
    1,280
    
    
    
    
    
    
    
    1,584
    
    
    
    1
    
    
    
    2,865Issuances/Originations(B)
    
    
    793
    
    
    
    (141
    )
    
    
    
    
    
    
    466
    
    
    
    1,118Settlements/Repayments
    
    
    (4,528
    )
    
    
    (13,954
    )
    
    
    
    
    
    
    
    
    
    
    (18,482
    )Fair value as of June 30, 2010
    
    $
    183,038
    
    
    $
    85,759
    
    
    $
    235
    
    
    $
    934
    
    
    $
    269,966
 Senior
    
    
    Senior
    
    
    
    
    
    
    CommonTerm
    
    
    Subordinated
    
    
    Preferred
    
    
    Equity/Debt
    
    
    Term Debt
    
    
    Equity
    
    
    Equivalents
    
    
    TotalNine months ended June 30, 2010:Fair value at September 30, 2009
    
    $
    212,290
    
    
    
    105,794
    
    
    $
    
    
    
    $
    2,885
    
    
    $
    320,969Net realized (loss) gain
    
    
    (2,105
    )
    
    
    (570
    )
    
    
    (1,584
    )
    
    
    1,366
    
    
    
    (2,893
    )Net unrealized (depreciation)
appreciation(A)
    
    
    (364
    )
    
    
    (678
    )
    
    
    235
    
    
    
    (1,970
    )
    
    
    (2,777
    )Reversal of prior period net
depreciation (appreciation)
on realization(A)
    
    
    3,344
    
    
    
    1,620
    
    
    
    1,584
    
    
    
    (246
    )
    
    
    6,302Issuances/Originations(B)
    
    
    6,866
    
    
    
    1,103
    
    
    
    
    
    
    
    466
    
    
    
    8,435Settlements/Repayments
    
    
    (36,068
    )
    
    
    (19,316
    )
    
    
    
    
    
    
    (1,567
    )
    
    
    (56,951
    )Sales
    
    
    (925
    )
    
    
    (2,194
    )
    
    
    
    
    
    
    
    
    
    
    (3,119
    )Fair value as of June 30, 2010
    
    $
    183,038
    
    
    
    85,759
    
    
    $
    235
    
    
    $
    934
    
    
    $
    269,966
 
 (A)
    
    Included in unrealized appreciation (depreciation) on investments on the
accompanying Condensed Consolidated Statements of Operationsfor the three and nine months
ended June 30, 2011 and 2010.(B)
    
    Includes PIK, amortization of OID and other cost basis adjustments.(C)
    
    Transfer represents the fair value of Sunshine Media Holdings as of December 31,
2010, which was reclassified from a Non-Control/Non-Affiliate investment to a Control
investment during the three months ended March 31, 2011. Non-Control/Non-Affiliate Investments
  Control Investments
  20




---



##### 



Investment Concentrations
  June 30, 2011
    
    
    September 30, 2010Cost
    
    
    Fair Value
    
    
    Cost
    
    
    Fair ValueSenior term debt
    
    $
    265,986
    
    
    $
    204,281
    
    
    $
    200,041
    
    
    $
    172,596Senior subordinated term debt
    
    
    102,470
    
    
    
    88,223
    
    
    
    93,987
    
    
    
    81,899Preferred equity
    
    
    820
    
    
    
    551
    
    
    
    444
    
    
    
    387Common equity/equivalents
    
    
    5,914
    
    
    
    6,224
    
    
    
    3,744
    
    
    
    2,227Total investments
    
    $
    375,190
    
    
    $
    299,279
    
    
    $
    298,216
    
    
    $
    257,109
  June 30, 2011
    
    
    September 30, 2010Percentage
    
    
    
    
    
    
    Percentageof Total
    
    
    
    
    
    
    of TotalIndustry Classification
    
    Fair Value
    
    
    Investments
    
    
    Fair Value
    
    
    InvestmentsElectronics
    
    $
    46,925
    
    
    
    15.7
    %
    
    $
    25,080
    
    
    
    9.8
    %Healthcare, education & childcare
    
    
    34,789
    
    
    
    11.5
    
    
    
    41,098
    
    
    
    16.0Mining, steel, iron & non-precious metals
    
    
    33,370
    
    
    
    11.2
    
    
    
    24,343
    
    
    
    9.5Broadcast (TV & radio)
    
    
    31,245
    
    
    
    10.4
    
    
    
    44,562
    
    
    
    17.3Automobile
    
    
    21,850
    
    
    
    7.3
    
    
    
    9,868
    
    
    
    3.8Printing & publishing
    
    
    19,645
    
    
    
    6.6
    
    
    
    37,705
    
    
    
    14.7Retail stores
    
    
    19,440
    
    
    
    6.5
    
    
    
    19,620
    
    
    
    7.6Buildings & real estate
    
    
    10,763
    
    
    
    3.6
    
    
    
    12,454
    
    
    
    4.8Textiles & leather
    
    
    9,838
    
    
    
    3.3
    
    
    
    
    
    
    
    Home & office furnishings
    
    
    9,790
    
    
    
    3.3
    
    
    
    10,666
    
    
    
    4.1Diversified/conglomerate manufacturing
    
    
    8,693
    
    
    
    2.9
    
    
    
    2,042
    
    
    
    0.8Machinery
    
    
    8,673
    
    
    
    2.9
    
    
    
    8,719
    
    
    
    3.4Personal, food and miscellaneous services
    
    
    7,906
    
    
    
    2.6
    
    
    
    
    
    
    
    Personal & non-durable consumer products
    
    
    7,672
    
    
    
    2.6
    
    
    
    9,230
    
    
    
    3.6Beverage, food & tobacco
    
    
    7,350
    
    
    
    2.5
    
    
    
    
    
    
    
    Leisure, amusement, movies & entertainment
    
    
    6,953
    
    
    
    2.3
    
    
    
    3,994
    
    
    
    1.6Diversified/conglomerate service
    
    
    4,050
    
    
    
    1.4
    
    
    
    
    
    
    
    Diversified natural resources, precious
metals & minerals
    
    
    3,092
    
    
    
    1.0
    
    
    
    
    
    
    
    Oil & gas
    
    
    1,970
    
    
    
    0.7
    
    
    
    
    
    
    
    Telecommunications
    
    
    1,924
    
    
    
    0.6
    
    
    
    
    
    
    
    Aerospace & defense
    
    
    1,200
    
    
    
    0.4
    
    
    
    400
    
    
    
    0.2Chemicals, plastics & rubber
    
    
    1,131
    
    
    
    0.4
    
    
    
    7,044
    
    
    
    2.7Insurance
    
    
    1,010
    
    
    
    0.3
    
    
    
    
    
    
    
    Farming & agriculture
    
    
    
    
    
    
    
    
    
    
    284
    
    
    
    0.1Total investments
    
    $
    299,279
    
    
    
    100.0
    %
    
    $
    257,109
    
    
    
    100.0
    %
  June 30, 2011
    
    
    September 30, 2010Percent of
    
    
    
    
    
    
    Percentage ofTotal
    
    
    
    
    
    
    TotalGeographic Region
    
    Fair Value
    
    
    Investments
    
    
    Fair Value
    
    
    InvestmentsMidwest
    
    $
    142,136
    
    
    
    47.5
    %
    
    $
    109,299
    
    
    
    42.5
    %West
    
    
    73,379
    
    
    
    24.5
    
    
    
    59,684
    
    
    
    23.2South
    
    
    46,308
    
    
    
    15.5
    
    
    
    44,704
    
    
    
    17.4Northeast
    
    
    29,616
    
    
    
    9.9
    
    
    
    36,995
    
    
    
    14.4U.S. Territory
    
    
    7,840
    
    
    
    2.6
    
    
    
    6,427
    
    
    
    2.5Total Investments
    
    $
    299,279
    
    
    
    100.0
    %
    
    $
    257,109
    
    
    
    100.0
    %
 21




---



##### 



Investment Principal Repayments
  AmountFor the remaining three months ending
September 30:
    
    2011
    
    $
    9,246For the fiscal year ending September 30:
    
    2012
    
    
    55,8332013
    
    
    131,9872014
    
    
    29,8892015
    
    
    33,1542016 and thereafter
    
    
    110,508Total contractual repayments
    
    $
    370,617Investments in equity securities
    
    
    6,734Adjustments to cost basis on debt securities
    
    
    (2,161
    )Total cost basis of investments held at June 30, 2011:
    
    $
    375,190
 Receivables from Portfolio Companies
  NOTE 4. RELATED PARTY TRANSACTIONS
 Loans to Former Employees
  Investment Advisory and Management Agreement
  Condensed Consolidated Statements of Operations
 22




---



##### 



Three Months Ended June 30,
    
    
    Nine Months Ended June 30,2011
    
    
    2010
    
    
    2011
    
    
    2010Average total assets subject to base management fee(A)
    
    $
    290,200
    
    
    $
    295,400
    
    
    $
    277,600
    
    
    $
    314,533Multiplied by pro-rata annual base management fee of 2.0%
    
    
    0.5
    %
    
    
    0.5
    %
    
    
    1.5
    %
    
    
    1.5
    %Unadjusted base management fee
    
    $
    1,451
    
    
    $
    1,477
    
    
    $
    4,164
    
    
    $
    4,718Reduction for loan servicing fees(B)
    
    
    (814
    )
    
    
    (819
    )
    
    
    (2,413
    )
    
    
    (2,600
    )Base management fee(B)
    
    
    637
    
    
    
    658
    
    
    
    1,751
    
    
    
    2,118Credit for fees received by Adviser from the portfolio companies
    
    
    (77
    )
    
    
    
    
    
    
    (77
    )
    
    
    Fee reduction for the voluntary, irrevocable waiver of 2.0% fee
on senior syndicated loans to 0.5% per annum
    
    
    (117
    )
    
    
    (6
    )
    
    
    (250
    )
    
    
    (19
    )Net base management fee
    
    $
    443
    
    
    $
    652
    
    
    $
    1,424
    
    
    $
    2,099Incentive fee(B)
    
    
    1,133
    
    
    
    153
    
    
    
    3,395
    
    
    
    1,601Credit from voluntary, irrevocable waiver issued by Advisers
board of directors
    
    
    
    
    
    
    (80
    )
    
    
    (21
    )
    
    
    (101
    )Net incentive fee
    
    $
    1,133
    
    
    $
    73
    
    
    $
    3,374
    
    
    $
    1,500Credit for fees received by Adviser from the portfolio companies
    
    
    (77
    )
    
    
    
    
    
    
    
    
    
    
    Fee reduction for the voluntary, irrevocable waiver of 2.0% fee
on senior syndicated loans to 0.5% per annum
    
    
    (117
    )
    
    
    (6
    )
    
    
    (327
    )
    
    
    (19
    )Incentive fee credit
    
    
    
    
    
    
    (80
    )
    
    
    (21
    )
    
    
    (101
    )Credit to base management and incentive fees from Adviser
(B)
    
    $
    (194
    )
    
    $
    (86
    )
    
    $
    (348
    )
    
    $
    (120
    )
 
 (A)
    
    Average total assets subject to the base management fee is defined as total
assets, including investments made with proceeds of borrowings, less any uninvested cash and
cash equivalents resulting from borrowings, valued at the end of the applicable quarters
within the respective periods and appropriately adjusted for any share issuances or
repurchases during the periods.(B)
    
    Reflected as a line item on the Condensed Consolidated Statements of Operations. Base Management Fee
   Loan Servicing Fees
 The Adviser also services the loans held by Business Loan, in return for which it receives a
2.0% annual fee based on the monthly aggregate outstanding balance of loans pledged under the
Companys line of credit. Since the Company owns these loans, all loan servicing fees paid to
the Adviser are treated as reductions directly against the 2.0% base management fee under the
Advisory Agreement.
    
    Senior Syndicated Loan Fee WaiverThe Board of Directors accepted an unconditional and irrevocable voluntary waiver from the
Adviser to reduce the annual 2.0% base management fee on senior syndicated loan participations
to 0.5%, to the extent that proceeds resulting from borrowings were used to purchase such senior
syndicated loan participations, for the nine months ended June 30, 2011 and 2010.
    
    Portfolio Company FeesUnder the Advisory Agreement, the Adviser has also provided, and continues to provide,
managerial assistance and other services to the Companys portfolio companies and may receive
fees for services other than managerial assistance. 50% of certain of these fees and 100% of
other fees are credited against the base management fee that the Company would otherwise be
required to pay to the Adviser.
 Incentive Fee
  
    
    no incentive fee in any calendar quarter in which the Companys pre-incentive fee net
investment income does not exceed the
hurdle rate (7.0% annualized);
 23




---



##### 




    
    100% of the Companys pre-incentive fee net investment income with respect to that portion
of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is
less than 2.1875% in any calendar quarter (8.75% annualized); and
    
    20% of the amount of the Companys pre-incentive fee net investment income, if any, that
exceeds 2.1875% in any calendar quarter (8.75% annualized).
   Administration Agreement
  Related Party Fees Due
 Condensed Consolidated Statements of Assets and
Liabilities
 As of June 30, 2011
    
    
    As of September 30, 2010Base management fee due to Adviser
    
    $
    444
    
    
    $
    319Incentive fee due to Adviser
    
    
    1,133
    
    
    
    158Loan servicing fee due to Adviser
    
    
    214
    
    
    
    196Total fees due to Adviser
    
    
    1,791
    
    
    
    673Administration fee due to Administrator
    
    
    174
    
    
    
    267Total related party fees due
    
    $
    1,965
    
    
    $
    940
 24




---



##### 



NOTE 5. BORROWINGS
 Credit Facility
    Fair Value
 Condensed
Consolidated Statements of Assets and Liabilities
 Borrowings under Credit FacilityTotal Fair ValueReported in CondensedConsolidated Statements ofLevel 1
    
    
    Level 2
    
    
    Level 3
    
    
    Assets and LiabilitiesJune 30, 2011
    
    $
    
    
    
    $
    
    
    
    $
    92,700
    
    
    $
    92,700September 30, 2010
    
    $
    
    
    
    $
    
    
    
    $
    17,940
    
    
    $
    17,940
 Fair value measurements using unobservable data inputs (Level 3)
 Three Months Ended June 30,2011
    
    
    2010Fair value as of March 31, 2011 and 2010, respectively
    
    $
    33,646
    
    
    $
    53,000Unrealized appreciation(A)
    
    
    54
    
    
    
    1,756Borrowings
    
    
    59,000
    
    
    
    2,900Repayments
    
    
    
    
    
    
    (27,000
    )Fair value as of June 30, 2011 and 2010, respectively
    
    $
    92,700
    
    
    $
    30,656
 25




---



##### 



Nine Months Ended June 30,2011
    
    
    2010Fair value as of September 30, 2010 and 2009, respectively
    
    $
    17,940
    
    
    $
    83,350Unrealized (depreciation) appreciation(A)
    
    
    (640
    )
    
    
    1,406Borrowings
    
    
    109,800
    
    
    
    8,400Repayments
    
    
    (34,400
    )
    
    
    (62,500
    )Fair value as of June 30, 2011 and 2010, respectively
    
    $
    92,700
    
    
    $
    30,656
 
 (A)
    
    Included in net unrealized depreciation
(appreciation) on borrowings on the accompanying Condensed
Consolidated Statements of Operationsfor the three and nine
months ended June 30, 2011 and 2010.  NOTE 6. COMMON STOCK
 Registration Statement
 .
  Employee Notes
  OutstandingNumber of
    
    
    Strike Price of
    
    
    Amount of
    
    
    Balance of
    
    
    
    
    InterestIssue
    
    Options
    
    
    Options
    
    
    Promissory Note
    
    
    Employee Loans
    
    
    Maturity
    
    RateDate
    
    Exercised
    
    
    Exercised
    
    
    Issued to Employees
    
    
    at 6/30/11
    
    
    Date
    
    on NoteAug-01
    
    
    393,334
    
    
    
    15.00
    
    
    $
    5,900
    (A)
    
    $
    3,799
    
    
    Aug-10
    
    
    4.90
    %(B)Aug-01
    
    
    18,334
    
    
    
    15.00
    
    
    
    275
    (A)
    
    
    251
    
    
    Aug-10
    
    
    4.90
    (B)Aug-01
    
    
    18,334
    
    
    
    15.00
    
    
    
    275
    
    
    
    275
    
    
    Aug-11
    
    
    4.90Sep-04
    
    
    13,332
    
    
    
    15.00
    
    
    
    200
    
    
    
    198
    
    
    Sep-13
    
    
    5.00Jul-06
    
    
    13,332
    
    
    
    15.00
    
    
    
    200
    
    
    
    200
    
    
    Jul-15
    
    
    8.26Jul-06
    
    
    18,334
    
    
    
    15.00
    
    
    
    275
    
    
    
    275
    
    
    Jul-15
    
    
    8.26475,000
    
    
    
    
    
    
    $
    7,125
    
    
    $
    4,998
 
 (A)
    
    On September 7, 2010, the Company entered into redemption agreements (the
Redemption Agreements) with David Gladstone, the Companys Chairman and Chief Executive
Officer, and Laura Gladstone, the daughter of Mr. Gladstone, in connection with the maturity
of secured promissory notes executed by Mr. Gladstone and Ms. Gladstone in favor of the
Company on August 23, 2001, in the principal amounts of $5.9 million and $0.3 million,
respectively (collectively, the Notes). Mr. and Ms. Gladstone executed the Notes in payment
of the exercise price of certain stock options (the Options) to acquire
shares of the Companys common stock. Concurrently with the execution of the Notes, the Company
and Mr. and Ms. Gladstone entered into stock pledge agreements (collectively, the Pledge
Agreements), pursuant to which Mr. and Ms. Gladstone granted to the Company a first priority
security interest in the Pledged Collateral (as defined in the respective Pledge Agreements),
which included 393,334 and 18,334 shares, respectively, of the Companys common stock that Mr.
and Ms. Gladstone acquired pursuant to the exercise of the Options (collectively, the Pledged
Shares). An event of default was triggered under the Notes by virtue of Mr. and Ms. Gladstones
failure to repay the amounts outstanding under the Notes within five business days of August 23,
2010. The Redemption Agreements provide that, pursuant to the terms and conditions thereof, the
Company will automatically accept and retire the Pledged 26




---



##### 



Shares in partial or full satisfaction,
as applicable, of Mr. and Ms. Gladstones obligations to the Company under the Notes at such
time, if ever, that the trading price of the Companys common stock reaches $15 per share. In
entering into the Redemption Agreements, the Company reserved all of its existing rights under
the Notes and the Pledge Agreements, including, but not limited to, the ability to foreclose on
the Pledged Collateral at any time. On March 30, 2011 and June 27, 2011, Mr. Gladstone paid down
in the aggregate $2.1 million of the principal balance of his Note, leaving a principal balance
of $3.8 million outstanding. In connection with these payments, the Company released its first
priority security interest on 140,000 shares of Mr. Gladstones Pledged Shares, leaving a balance
of 253,334 shares in Pledged Collateral from Mr. Gladstone.(B)
    
    An event of default was triggered under the Note by virtue of the employees failure
to repay the amounts outstanding within five business days of August 23, 2010. As such, the
Company charged a default rate of 2% per annum under the Note for periods following default. ondensed
Consolidated Statements of Assets and Liabilities
 NOTE 7. NET (DECREASE) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS PER SHARE
  Three Months Ended June 30,
    
    
    Nine Months Ended June 30,2011
    
    
    2010
    
    
    2011
    
    
    2010Numerator for basic and diluted net (decrease)
increase in net assets resulting from operations per
share
    
    $
    (14,310
    )
    
    $
    (1,748
    )
    
    $
    (20,560
    )
    
    $
    12,557Denominator for basic and diluted weighted average shares
    
    
    21,039,242
    
    
    
    21,039,242
    
    
    
    21,039,242
    
    
    
    21,067,465Basic and diluted net (decrease) increase in net assets
resulting from operations per share
    
    $
    (0.68
    )
    
    $
    (0.08
    )
    
    $
    (0.98
    )
    
    $
    0.60
 NOTE 8. DISTRIBUTIONS
  DistributionFiscal Year
    
    Declaration Date
    
    Record Date
    
    Payment Date
    
    per Share2011
    
    October 5, 2010
    
    October 21, 2010
    
    October 29, 2010
    
    $
    0.07October 5, 2010
    
    November 19, 2010
    
    November 30, 2010
    
    
    0.07October 5, 2010
    
    December 23, 2010
    
    December 31, 2010
    
    
    0.07January 11, 2011
    
    January 21, 2011
    
    January 31, 2011
    
    
    0.07January 11, 2011
    
    February 21, 2011
    
    February 28, 2011
    
    
    0.07January 11, 2011
    
    March 21, 2011
    
    March 31, 2011
    
    
    0.07April 12, 2011
    
    April 22, 2011
    
    April 29, 2011
    
    
    0.07April 12, 2011
    
    May 20, 2011
    
    May 31, 2011
    
    
    0.07April 12, 2011
    
    June 20, 2011
    
    June 30, 2011
    
    
    0.07Nine Months Ended June 30, 2011:
    
    $
    0.632010
    
    October 6, 2009
    
    October 22, 2009
    
    October 30, 2009
    
    $
    0.07October 6, 2009
    
    November 19, 2009
    
    November 30, 2009
    
    
    0.07October 6, 2009
    
    December 22, 2009
    
    December 31, 2009
    
    
    0.07January 12, 2010
    
    January 21, 2010
    
    January 29, 2010
    
    
    0.07January 12, 2010
    
    February 18, 2010
    
    February 26, 2010
    
    
    0.07January 12, 2010
    
    March 23, 2010
    
    March 31, 2010
    
    
    0.07April 7, 2010
    
    April 22, 2010
    
    April 30, 2010
    
    
    0.07April 7, 2010
    
    May 20, 2010
    
    May 28, 2010
    
    
    0.07April 7, 2010
    
    June 22, 2010
    
    June 30, 2010
    
    
    0.07Nine Months Ended June 30, 2010:
    
    $
    0.63
  27




---



##### 



NOTE 9. COMMITMENTS AND CONTINGENCIES
   NOTE 10. FINANCIAL HIGHLIGHTS
 Three Months Ended June 30,
    
    
    Nine Months Ended June 30,2011
    
    
    2010
    
    
    2011
    
    
    2010Per Share Data(A)Net asset value at beginning of period
    
    $
    11.18
    
    
    $
    12.10
    
    
    $
    11.85
    
    
    $
    11.81Income from investment operations:Net investment income(B)
    
    
    0.22
    
    
    
    0.21
    
    
    
    0.65
    
    
    
    0.63Net realized gain on investments(B)
    
    
    
    
    
    
    (0.14
    )
    
    
    
    
    
    
    (0.14
    )Net unrealized (depreciation) appreciation on
investments(B)
    
    
    (0.90
    )
    
    
    (0.07
    )
    
    
    (1.66
    )
    
    
    0.17Net unrealized (appreciation) depreciation on
borrowings(B)
    
    
    
    
    
    
    (0.08
    )
    
    
    0.03
    
    
    
    (0.07
    )Total from investment operations
    
    
    (0.68
    )
    
    
    (0.08
    )
    
    
    (0.98
    )
    
    
    0.59Distributions to stockholders(C)
    
    
    (0.21
    )
    
    
    (0.21
    )
    
    
    (0.63
    )
    
    
    (0.63
    )Conversion of former employee stock option loans from recourse to
non-recourse
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.02
    )Reclassification of principal on employee note
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.02Repayment of principal on employee note
    
    
    0.05
    
    
    
    
    
    
    
    0.10
    
    
    
    Anti-dilutive effect from retirement of employee loan shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.04Net asset value at end of period
    
    $
    10.34
    
    
    $
    11.81
    
    
    $
    10.34
    
    
    $
    11.81Per share market value at beginning of period
    
    $
    11.31
    
    
    $
    11.80
    
    
    $
    11.27
    
    
    $
    8.93Per share market value at end of period
    
    
    9.24
    
    
    
    10.81
    
    
    
    9.24
    
    
    
    10.81Total return(D)(E)
    
    
    (16.66)
    %
    
    
    (6.74)
    %
    
    
    (13.24)
    %
    
    
    29.42
    %Shares outstanding at end of period
    
    
    21,039,242
    
    
    
    21,039,242
    
    
    
    21,039,242
    
    
    
    21,039,242Statement of Assets and Liabilities Data:Net assets at end of period
    
    $
    217,536
    
    
    $
    248,429
    
    
    $
    217,536
    
    
    $
    248,429Average net assets(F)
    
    
    228,291
    
    
    
    251,463
    
    
    
    242,754
    
    
    
    250,483Senior Securities Data:Total borrowings at fair value
    
    
    92,700
    
    
    
    30,656
    
    
    
    92,700
    
    
    
    30,656Asset coverage ratio(G)(H)
    
    
    336
    %
    
    
    893
    %
    
    
    336
    %
    
    
    893
    %Asset coverage per unit(H)
    
    $
    3,358
    
    
    $
    8,931
    
    
    $
    3,358
    
    
    $
    8,931Ratios/Supplemental Data:Ratio of expenses to average net assets-annualized(I)
    
    
    8.13
    %
    
    
    5.77
    %
    
    
    6.66
    %
    
    
    7.65
    %Ratio of net expenses to average net assets-annualized(J)
    
    
    7.79
    
    
    
    5.63
    
    
    
    6.47
    
    
    
    7.59Ratio of net investment income to average net assets-annualized
    
    
    7.94
    
    
    
    7.04
    
    
    
    7.47
    
    
    
    7.10
 
 (A)
    
    Based on actual shares outstanding at the end of the corresponding period. 28




---



##### 



(B)
    
    Based on weighted average basic per share data.(C)
    
    Distributions are determined based on taxable income calculated in
accordance with income tax regulations which may differ from amounts
determined under GAAP.(D)
    
    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 the estimated character of the Companys distributions please
refer to Note 8.(E)
    
    Amounts were not annualized.(F)
    
    Average net assets are computed using the average of the balance of
net assets at the end of each month of the reporting period.(G)
    
    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 and guaranty commitments.(H)
    
    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 (including interest payable and
guarantees). Asset coverage per unit is the asset coverage ratio expressed in
terms of dollar amounts per one thousand dollars of indebtedness.(I)
    
    Ratio of expenses to average net assets is computed using expenses
before credits from the Adviser to the base management and incentive fees,
but includes income tax expense.(J)
    
    Ratio of net expenses to average net assets is computed using total
expenses net of credits from the Adviser to the base management and incentive
fees, but includes income tax expense. NOTE 11. SUBSEQUENT EVENTS
 Distributions
  DistributionRecord Date
    
    Payment Date
    
    per ShareJuly 22, 2011
    
    July 29, 2011
    
    $
    0.07August 19, 2011
    
    August 31, 2011
    
    
    0.07September 22, 2011
    
    September 30, 2011
    
    
    0.07Total
    
    $
    0.21
 Investment Activity
  29




---



##### 



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(dollar amounts in thousands, except per share data and as otherwise indicated)
 All statements contained herein, other than historical facts, may constitute forward-looking
statements. These statements may relate to, among other things, future events or our future
performance or financial condition. In some cases, you can identify forward-looking statements by
terminology such as estimate, may, might, believe, will, provided, anticipate,
future, could, growth, plan, intend, expect, should, would, if, seek,
possible, potential, likely or the negative of such terms or comparable terminology. These
forward-looking statements involve known and unknown risks, uncertainties and other factors that
may cause our actual results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or achievements expressed or
implied by such forward-looking statements. We caution readers not to place undue reliance on any
such forward-looking statements. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future events or otherwise,
after the date of this Form 10-Q
 The following analysis of our financial condition and results of operations should be read in
conjunction with our condensed consolidated financial statements and the notes thereto contained
elsewhere in this report and in our Annual Report on Form 10-K for the fiscal year ended September
30, 2010.
 
 OVERVIEW
 General
   Business Environment
   30




---



##### 



Investment Highlights
 Purchases:
 Repayments:
 Sales:
 Recent Developments
 Credit Facility Amendment
  31




---



##### 



32




---



##### 



RESULTS OF OPERATIONS
 Comparison of the Three Months Ended June 30, 2011 to the Three Months Ended June 30, 2010
 For the Three Months Ended June 30,2011
    
    
    2010
    
    
    $ Change
    
    
    % ChangeINVESTMENT INCOMEInterest income
    
    $
    8,536
    
    
    $
    7,475
    
    
    $
    1,061
    
    
    
    14.2
    %Other income
    
    
    444
    
    
    
    494
    
    
    
    (50
    )
    
    
    (10.1
    )Total investment income
    
    
    8,980
    
    
    
    7,969
    
    
    
    1,011
    
    
    
    12.7EXPENSESLoan servicing fee
    
    
    814
    
    
    
    819
    
    
    
    (5
    )
    
    
    (0.6
    )Base management fee
    
    
    637
    
    
    
    658
    
    
    
    (21
    )
    
    
    (3.2
    )Incentive fee
    
    
    1,133
    
    
    
    153
    
    
    
    980
    
    
    
    640.5Administration fee
    
    
    174
    
    
    
    186
    
    
    
    (12
    )
    
    
    (6.5
    )Interest expense
    
    
    958
    
    
    
    891
    
    
    
    67
    
    
    
    7.5Amortization of deferred financing fees
    
    
    368
    
    
    
    240
    
    
    
    128
    
    
    
    53.3Professional fees
    
    
    360
    
    
    
    501
    
    
    
    (141
    )
    
    
    (28.1
    )Other expenses
    
    
    196
    
    
    
    178
    
    
    
    18
    
    
    
    10.1Expenses before credit from Adviser
    
    
    4,640
    
    
    
    3,626
    
    
    
    1,014
    
    
    
    28.0Credits to fees from Adviser
    
    
    (194
    )
    
    
    (86
    )
    
    
    (108
    )
    
    
    (125.6
    )Total expenses net of credits to fees from Adviser
    
    
    4,446
    
    
    
    3,540
    
    
    
    906
    
    
    
    25.6NET INVESTMENT INCOME
    
    
    4,534
    
    
    
    4,429
    
    
    
    105
    
    
    
    2.4REALIZED AND UNREALIZED LOSS ON:Net realized loss on investments
    
    
    (2
    )
    
    
    (2,865
    )
    
    
    (2,863
    )
    
    
    (99.9
    )Net unrealized depreciation on investments
    
    
    (18,789
    )
    
    
    (1,556
    )
    
    
    17,233
    
    
    
    1,107.5Net unrealized appreciation on borrowings
    
    
    (53
    )
    
    
    (1,756
    )
    
    
    (1,703
    )
    
    
    (97.0
    )Net loss on investments and borrowings
    
    
    (18,844
    )
    
    
    (6,177
    )
    
    
    12,667
    
    
    
    205.1NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS
    
    $
    (14,310
    )
    
    $
    (1,748
    )
    
    $
    12,562
    
    
    
    718.6
    %
 Investment Income
    33




---



##### 



As of June 30, 2011
    
    
    Three Months Ended June 30, 2011Company
    
    Fair Value
    
    
    % of Portfolio
    
    
    Interest Income
    
    
    % of Total RevenuesReliable Biopharmaceutical Holdings, Inc.
    
    $
    25,605
    
    
    
    8.6
    %
    
    $
    757
    
    
    
    8.9
    %Westlake Hardware, Inc.
    
    
    19,440
    
    
    
    6.5
    
    
    
    645
    
    
    
    7.6Midwest Metal Distribution, Inc.
(formerly Clinton Holdings, LLC)
    
    
    16,727
    
    
    
    5.6
    
    
    
    557
    
    
    
    6.5CMI Acquisition, LLC
    
    
    14,247
    
    
    
    4.8
    
    
    
    250
    
    
    
    2.9Winchester Electronics Co.
    
    
    12,591
    
    
    
    4.2
    
    
    
    388
    
    
    
    4.5Subtotalfive largest investments
    
    
    88,610
    
    
    
    29.7
    
    
    
    2,597
    
    
    
    30.4Other portfolio companies
    
    
    210,669
    
    
    
    70.3
    
    
    
    5,837
    
    
    
    68.4Other non-portfolio company revenue
    
    
    
    
    
    
    
    
    
    
    102
    
    
    
    1.2Total investment portfolio
    
    $
    299,279
    
    
    
    100.0
    %
    
    $
    8,536
    
    
    
    100.0
    %
 As of June 30, 2010
    
    
    Three Months Ended June 30, 2010Company
    
    Fair Value
    
    
    % of Portfolio
    
    
    Interest Income
    
    
    % of Total RevenuesSunshine Media Holdings
    
    $
    26,624
    
    
    
    9.9
    %
    
    $
    829
    
    
    
    11.1
    %Reliable Biopharmaceutical Holdings, Inc.
    
    
    26,521
    
    
    
    9.8
    
    
    
    733
    
    
    
    9.8Westlake Hardware, Inc.
    
    
    24,463
    
    
    
    9.1
    
    
    
    585
    
    
    
    7.8Midwest Metal Distribution, Inc.
(formerly Clinton Holdings, LLC)
    
    
    13,369
    
    
    
    5.0
    
    
    
    520
    
    
    
    7.0GFRC Holdings LLC
    
    
    12,624
    
    
    
    4.7
    
    
    
    388
    
    
    
    5.2Subtotalfive largest investments
    
    
    103,601
    
    
    
    38.5
    
    
    
    3,055
    
    
    
    40.9Other portfolio companies
    
    
    166,365
    
    
    
    61.5
    
    
    
    4,312
    
    
    
    57.7Other non-portfolio company revenue
    
    
    
    
    
    
    
    
    
    
    108
    
    
    
    1.4Total investment portfolio
    
    $
    269,966
    
    
    
    100.0
    %
    
    $
    7,475
    
    
    
    100.0
    %
 Operating Expenses
     Investment Advisory and Management Agreement Condensed Consolidated Financial Statements
 34




---



##### 



Three Months Ended June 30,2011
    
    
    2010Average total assets subject to base management fee(1)
    
    $
    290,200
    
    
    $
    295,400Multiplied by pro-rated annual base management fee of 2.0%
    
    
    0.5
    %
    
    
    0.5
    %Unadjusted base management fee
    
    $
    1,451
    
    
    $
    1,477Reduction for loan servicing fees(2)
    
    
    (814
    )
    
    
    (819
    )Base management fee(2)
    
    
    637
    
    
    
    658Credit for fees received by Adviser from the portfolio companies
    
    
    (77
    )
    
    
    Fee reduction for the voluntary, irrevocable waiver of 2.0% fee on senior
syndicated loans to 0.5% per annum
    
    
    (117
    )
    
    
    (6
    )Net base management fee
    
    $
    443
    
    
    $
    652Incentive fee(2)
    
    
    1,133
    
    
    
    153Credit from voluntary, irrevocable waiver issued by Advisers board of
directors
    
    
    
    
    
    
    (80
    )Net incentive fee
    
    $
    1,133
    
    
    $
    73Credit for fees received by Adviser from the portfolio companies
    
    
    (77
    )
    
    
    Fee reduction for the voluntary, irrevocable waiver of 2.0% fee on senior
syndicated loans to 0.5% per annum
    
    
    (117
    )
    
    
    (6
    )Incentive fee credit
    
    
    
    
    
    
    (80
    )Credit to base management and incentive fees from Adviser (2)
    
    $
    (194
    )
    
    $
    (86
    )
 
 (1)
    
    Average total assets subject to the base management fee is
defined as total assets, including investments made with proceeds of
borrowings, less any uninvested cash and cash equivalents resulting from
borrowings, valued at the end of the applicable quarters within the
respective periods and appropriately adjusted for any share issuances or
repurchases during the periods.(2)
    
    Reflected as a line item on the Condensed Consolidated
Statementss of Operations. Net Realized Loss on Investments
  Net Unrealized Depreciation on Investments
  Three Months Ended June 30, 2011Net UnrealizedAppreciationPortfolio Company
    
    Investment Classification
    
    (Depreciation)Midwest Metal Distribution, Inc.
    
    Control
    
    $
    546Newhall Holdings, Inc.
    
    Non-Control / Non-Affiliate
    
    
    (8,759
    )Viapack, Inc.
    
    Non-Control / Non-Affiliate
    
    
    (3,348
    )Sunshine Media Holdings
    
    Control
    
    
    (3,120
    )Lindmark Acquisition, LLC
    
    Control
    
    
    (1,391
    )Defiance Integrated Technologies, Inc.
    
    Control
    
    
    (1,026
    )Sunburst Media  Louisiana, LLC
    
    Non-Control / Non-Affiliate
    
    
    (447
    )Access Television Network, Inc.
    
    Non-Control / Non-Affiliate
    
    
    (354
    )SCI Cable, Inc.
    
    Non-Control / Non-Affiliate
    
    
    (252
    )Other, net (<$250)
    
    
    
    
    (638
    )Total:
    
    $
    (18,789
    )
  35




---



##### 



Three Months Ended June 30, 2010Net UnrealizedAppreciationPortfolio Company
    
    Investment Classification
    
    (Depreciation)Western Directories, Inc
    
    Non-Control / Non-Affiliate
    
    $
    2,865
    (1)Midwest Metal Distribution, Inc.
    
    Control
    
    
    514Heartland Communications Group
    
    Non-Control / Non-Affiliate
    
    
    489WP Evenflo Group Holdings, Inc.
    
    Non-Control / Non-Affiliate
    
    
    321Global Materials Technologies, Inc.
    
    Control
    
    
    250Lindmark Acquisition, LLC
    
    Non-Control / Non-Affiliate
    
    
    (3,534
    )LocalTel, LLC
    
    Control
    
    
    (1,055
    )Legend Communications of Wyoming, LLC
    
    Non-Control / Non-Affiliate
    
    
    (888
    )BERTL, Inc.
    
    Non-Control / Non-Affiliate
    
    
    (307
    )Other, net (<$250)
    
    
    
    
    (211
    )Total:
    
    $
    (1,556
    )
 
 (1)
    
    Reflects the reversal of $2.9 million in unrealized depreciation in
connection with the write-off of the investment.  Net Unrealized Appreciation on Borrowings
  Net Decrease in Net Assets Resulting from Operations
  36




---



##### 



Comparison of the Nine Months Ended June 30, 2011 to the Nine Months Ended June 30, 2010
 For the Nine Months Ended June 30,2011
    
    
    2010
    
    
    $ Change
    
    
    % ChangeINVESTMENT INCOMEInterest income
    
    $
    23,673
    
    
    $
    25,220
    
    
    $
    (1,547
    )
    
    
    (6.1
    )%Other income
    
    
    1,714
    
    
    
    2,367
    
    
    
    (653
    )
    
    
    (27.6
    )Total investment income
    
    
    25,387
    
    
    
    27,587
    
    
    
    (2,200
    )
    
    
    (8.0
    )EXPENSESLoan servicing fee
    
    
    2,413
    
    
    
    2,600
    
    
    
    (187
    )
    
    
    (7.2
    )Base management fee
    
    
    1,751
    
    
    
    2,118
    
    
    
    (367
    )
    
    
    (17.3
    )Incentive fee
    
    
    3,395
    
    
    
    1,601
    
    
    
    1,794
    
    
    
    112.1Administration fee
    
    
    535
    
    
    
    540
    
    
    
    (5
    )
    
    
    (0.9
    )Interest expense
    
    
    1,316
    
    
    
    3,562
    
    
    
    (2,246
    )
    
    
    (63.1
    )Amortization of deferred financing fees
    
    
    1,032
    
    
    
    1,182
    
    
    
    (150
    )
    
    
    (12.7
    )Professional fees
    
    
    894
    
    
    
    1,632
    
    
    
    (738
    )
    
    
    (45.2
    )Other expenses
    
    
    799
    
    
    
    1,142
    
    
    
    (343
    )
    
    
    (30.0
    )Expenses before credit from Adviser
    
    
    12,135
    
    
    
    14,377
    
    
    
    (2,242
    )
    
    
    (15.6
    )Credits to fees from Adviser
    
    
    (348
    )
    
    
    (120
    )
    
    
    (228
    )
    
    
    (190.0
    )Total expenses net of credits to fees from Adviser
    
    
    11,787
    
    
    
    14,257
    
    
    
    (2,470
    )
    
    
    (17.3
    )NET INVESTMENT INCOME
    
    
    13,600
    
    
    
    13,330
    
    
    
    270
    
    
    
    2.0REALIZED AND UNREALIZED (LOSS) GAIN ON:Net realized gain (loss) on investments
    
    
    3
    
    
    
    (2,893
    )
    
    
    2,896
    
    
    NMNet unrealized (depreciation) appreciation on investments
    
    
    (34,803
    )
    
    
    3,525
    
    
    
    (38,328
    )
    
    NMNet unrealized appreciation on borrowings
    
    
    640
    
    
    
    (1,405
    )
    
    
    2,045
    
    
    NMNet loss on investments and borrowings
    
    
    (34,160
    )
    
    
    (773
    )
    
    
    (33,387
    )
    
    NMNET (DECREASE) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS
    
    $
    (20,560
    )
    
    $
    12,557
    
    
    $
    (33,117
    )
    
    NM
 
 NM = Not Meaningful Investment Income
   37




---



##### 



As of June 30, 2011
    
    
    Nine Months Ended June 30, 2011Company
    
    Fair Value
    
    
    % of Portfolio
    
    
    Interest Income
    
    
    % of Total RevenuesReliable Biopharmaceutical Holdings, Inc.
    
    $
    25,605
    
    
    
    8.6
    %
    
    $
    2,266
    
    
    
    9.6
    %Westlake Hardware, Inc.
    
    
    19,440
    
    
    
    6.5
    
    
    
    1,934
    
    
    
    8.2Midwest Metal Distribution, Inc.
(formerly Clinton Holdings, LLC)
    
    
    16,727
    
    
    
    5.6
    
    
    
    1,670
    
    
    
    7.0CMI Acquisition, LLC
    
    
    14,247
    
    
    
    4.8
    
    
    
    559
    
    
    
    2.4Winchester Electronics Co.
    
    
    12,591
    
    
    
    4.2
    
    
    
    1,169
    
    
    
    4.9Subtotalfive largest investments
    
    
    88,610
    
    
    
    29.7
    
    
    
    7,598
    
    
    
    32.1Other portfolio companies
    
    
    210,669
    
    
    
    70.3
    
    
    
    15,728
    
    
    
    66.4Other non-portfolio company revenue
    
    
    
    
    
    
    
    
    
    
    347
    
    
    
    1.5Total investment portfolio
    
    $
    299,279
    
    
    
    100.0
    %
    
    $
    23,673
    
    
    
    100.0
    %
 As of June 30, 2010
    
    
    Nine Months Ended June 30, 2010Company
    
    Fair Value
    
    
    % of Portfolio
    
    
    Interest Income
    
    
    % of Total RevenuesSunshine Media Holdings
    
    $
    26,624
    
    
    
    9.9
    %
    
    $
    2,498
    
    
    
    9.9
    %Reliable Biopharmaceutical Holdings, Inc.
    
    
    26,521
    
    
    
    9.8
    
    
    
    2,230
    
    
    
    8.8Westlake Hardware, Inc.
    
    
    24,463
    
    
    
    9.1
    
    
    
    2,181
    
    
    
    8.6Midwest Metal Distribution, Inc.
(formerly Clinton Holdings, LLC)
    
    
    13,369
    
    
    
    5.0
    
    
    
    1,556
    
    
    
    6.2GFRC Holdings, LLC
    
    
    12,624
    
    
    
    4.7
    
    
    
    1,076
    
    
    
    4.3Subtotalfive largest investments
    
    
    103,601
    
    
    
    38.5
    
    
    
    9,541
    
    
    
    37.8Other portfolio companies
    
    
    166,365
    
    
    
    61.5
    
    
    
    15,349
    
    
    
    60.9Other non-portfolio company revenue
    
    
    
    
    
    
    
    
    
    
    330
    
    
    
    1.3Total investment portfolio
    
    $
    269,966
    
    
    
    100.0
    %
    
    $
    25,220
    
    
    
    100.0
    %
 Operating Expenses
    38




---



##### 



Investment
Advisory and Management Agreement Condensed
Consolidated Financial Statements
 Nine Months Ended June 30,2011
    
    
    2010Average total assets subject to base management fee(1)
    
    $
    277,600
    
    
    $
    314,533Multiplied by pro-rated annual base management fee of 2.0%
    
    
    1.5
    %
    
    
    1.5
    %Unadjusted base management fee
    
    $
    4,164
    
    
    $
    4,718Reduction for loan servicing fees(2)
    
    
    (2,413
    )
    
    
    (2,600
    )Base management fee(2)
    
    
    1,751
    
    
    
    2,118Credit for fees received by Adviser from the portfolio companies
    
    
    (77
    )
    
    
    Fee reduction for the voluntary, irrevocable waiver of 2.0% fee on senior
syndicated loans to 0.5% per annum
    
    
    (250
    )
    
    
    (19
    )Net base management fee
    
    $
    1,424
    
    
    $
    2,099Incentive fee(2)
    
    
    3,395
    
    
    $
    1,601Credit from voluntary, irrevocable waiver issued by Advisers board of
directors
    
    
    (21
    )
    
    
    (101
    )Net incentive fee
    
    $
    3,374
    
    
    $
    1,500Fee reduction for the voluntary, irrevocable waiver of 2.0% fee on senior
syndicated loans to 0.5% per annum
    
    
    (250
    )
    
    
    (19
    )Credit for fees received by Adviser from the portfolio companies
    
    
    (77
    )
    
    
    Incentive fee credit
    
    
    (21
    )
    
    
    (101
    )Credit to base management and incentive fees from Adviser (2)
    
    $
    (348
    )
    
    $
    (120
    )
 
 (1)
    
    Average total assets subject to the base management fee is
defined as total assets, including investments made with proceeds of
borrowings, less any uninvested cash and cash equivalents resulting from
borrowings, valued at the end of the applicable quarters within the
respective periods and appropriately adjusted for any share issuances or
repurchases during the periods.(2)
    
    Reflected as a line item on the Condensed Consolidated
Statement of Operations. Net Realized Gain (Loss) on Investments
  Net Unrealized (Depreciation) Appreciation on Investments
  39




---



##### 



Nine Months Ended June 30, 2011Net UnrealizedAppreciationPortfolio Company
    
    Investment Classification
    
    (Depreciation)Defiance Integrated Technologies, Inc.
    
    Control
    
    $
    2,947Midwest Metal Distribution, Inc.
    
    Control
    
    
    1,182Puerto Rico Cable Acquisition Company, Inc.
    
    Non-Control / Non-Affiliate
    
    
    732WP Evenflo Group Holdings, Inc.
    
    Non-Control / Non-Affiliate
    
    
    352Sunshine Media Holdings
    
    Control
    
    
    (18,360
    )Newhall Holdings, Inc.
    
    Non-Control / Non-Affiliate
    
    
    (8,814
    )Lindmark Acquisition, LLC
    
    Control
    
    
    (3,852
    )Viapack, Inc.
    
    Non-Control / Non-Affiliate
    
    
    (3,376
    )GFRC Holdings LLC
    
    Non-Control / Non-Affiliate
    
    
    (1,390
    )SCI Cable, Inc.
    
    Non-Control / Non-Affiliate
    
    
    (785
    )Heartland Communications Group
    
    Non-Control / Non-Affiliate
    
    
    (754
    )Access Television Network, Inc.
    
    Non-Control / Non-Affiliate
    
    
    (659
    )Legend Communications of Wyoming LLC
    
    Non-Control / Non-Affiliate
    
    
    (655
    )Sunburst Media  Louisiana, LLC
    
    Non-Control / Non-Affiliate
    
    
    (567
    )International Junior Golf Training
    
    Non-Control / Non-Affiliate
    
    
    (544
    )Acquisition CompanyLocalTel, LLC
    
    Control
    
    
    (386
    )Other, net (<$250)
    
    
    
    
    126Total:
    
    $
    (34,803
    )
   Nine Months Ended June 30, 2010Net Unrealized AppreciationPortfolio Company
    
    Investment Classification
    
    (Depreciation)Western Directories, Inc.
    
    Control
    
    $
    2,819
    (1)Visual Edge Technology, Inc.
    
    Non-Control / Non-Affiliate
    
    
    1,716
    (2)BAS Broadcasting
    
    Non-Control / Non-Affiliate
    
    
    1,229Westlake Hardware, Inc.
    
    Non-Control / Non-Affiliate
    
    
    794WP Evenflo Group Holdings, Inc.
    
    Non-Control / Non-Affiliate
    
    
    674Puerto Rico Cable Acquisition Company, Inc.
    
    Non-Control / Non-Affiliate
    
    
    582Northern Contours, Inc.
    
    Non-Control / Non-Affiliate
    
    
    562Kinetek Acquisition Corp.
    
    Non-Control / Non-Affiliate
    
    
    513CCS, LLC
    
    Non-Control / Non-Affiliate
    
    
    505
    (3)Pinnacle Treatment Centers, Inc.
    
    Non-Control / Non-Affiliate
    
    
    434Wesco Holdings, Inc.
    
    Non-Control / Non-Affiliate
    
    
    408Allison Publications, LLC
    
    Non-Control / Non-Affiliate
    
    
    388Gold Toe Investment Corp
    
    Non-Control / Non-Affiliate
    
    
    280Lindmark Acquisition, LLC
    
    Control
    
    
    (3,363
    )LocalTel, LLC
    
    Control
    
    
    (1,412
    )Legend Communications of Wyoming LLC
    
    Non-Control / Non-Affiliate
    
    
    (1,283
    )Defiance Integrated Technologies, Inc.
    
    Control
    
    
    (816
    )Finn Corporation
    
    Non-Control / Non-Affiliate
    
    
    (755
    )KMBQ Corporation
    
    Non-Control / Non-Affiliate
    
    
    (609
    )SCI Cable, Inc.
    
    Non-Control / Non-Affiliate
    
    
    (467
    )Sunshine Media Holdings
    
    Non-Control / Non-Affiliate
    
    
    (326
    )Other, net (<$250)
    
    
    
    
    1,652Total:
    
    $
    3,525
 
 (1)
    
    Reflects the reversal of $2.9 million in unrealized depreciation in
connection with the write-off of the investment.(2)
    
    Reflects the reversal of $1.7 million in unrealized depreciation in
connection with payoff of the line of credit and senior subordinated term loan of
Visual Edge Technology, Inc.(3)
    
    Reflects the reversal of the unrealized depreciation in connection with
the $0.3 million realized loss on the sale of CCS, LLC.  40




---



##### 



Net Unrealized Appreciation on Borrowings
  Net (Decrease) Increase in Net Assets Resulting from Operations
  
 LIQUIDITY AND CAPITAL RESOURCES
 Operating Activities
   Nine Months Ended June 30,2011
    
    
    2010Beginning investment portfolio at fair value
    
    $
    257,109
    
    
    $
    320,969New investments
    
    
    101,053
    
    
    
    580Disbursements to existing portfolio companies
    
    
    17,593
    
    
    
    7,757Principal repayments
    
    
    (39,855
    )
    
    
    (56,951
    )Proceeds from sales
    
    
    (777
    )
    
    
    (3,119
    )Increase in investment balance due to PIK
    
    
    12
    
    
    
    62Increase in investment balance due to transferred interest
    
    
    204
    
    
    
    1,230Net unrealized depreciation
    
    
    (34,803
    )
    
    
    (2,777
    )Reversal of prior period depreciation on realization
    
    
    
    
    
    
    6,302Net realized gain (loss)
    
    
    163
    
    
    
    (2,893
    )Net change in premiums, discounts and amortization
    
    
    (1,420
    )
    
    
    (479
    )Loan impairment / contra-investment
    
    
    
    
    
    
    (715
    )Ending investment portfolio at fair value
    
    $
    299,279
    
    
    $
    269,966
 41




---



##### 



AmountFor the remaining three months ending
September 30:
    

    2011
    
    
    $
    9,246For the fiscal year ending September 30:
    

    2012
    
    
    
    55,8332013
    
    
    
    131,9872014
    
    
    
    29,8892015
    
    
    
    33,1542016 and thereafter
    
    
    
    110,508Total contractual repayments
    
    $
    370,617Investments in equity securities
    
    
    6,734Adjustments to cost basis on debt securities
    
    
    (2,161
    )Total cost basis of investments held at June 30, 2011:
    
    $
    375,190
 Financing Activities
  Distributions
  Section 19(a) Notice
 Section 19(a) Notice
  Equity
  42




---



##### 



.
    Revolving Credit Facility
    43




---



##### 



Contractual Obligations and Off-Balance Sheet Arrangements
  Condensed Consolidated Statements of Assets and Liabilities
 As of June 30,
    
    
    As of September 30,2011
    
    
    2010Unused line of credit commitments
    
    $
    8,945
    
    
    $
    9,304Uncalled capital commitment
    
    
    800
    
    
    
    1,600Guarantees
    
    
    
    
    
    
    250Total
    
    $
    9,745
    
    
    $
    11,154
  Payments Due by PeriodLess thanContractual Obligations(1)
    
    1 Year
    
    
    1-3 Years
    
    
    4-5 Years
    
    
    After 5 Years
    
    
    TotalCredit Facility(2)
    
    $
    92,200
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    92,200
 
 (1)
    
    Excludes the unused commitments to extend credit or capital to our
portfolio companies for an aggregate amount of $9.7 million, as discussed above.(2)
    
    Principal balance of borrowings under the Credit Facility, based on the
contractual maturity due to the revolving nature of the facility. Critical Accounting Policies
  Investment Valuation
 Condensed Consolidated Financial
Statements
 General Valuation Policy:
  
    
    Level 1inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active markets;
    
    Level 2inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, and inputs that are observable for the asset or
liability, either directly or indirectly, for substantially the full term of the
 44




---



##### 



financial instrument. Level 2 inputs are in those markets for which there are few
transactions, the prices are not current, little public information exists or instances where
prices vary substantially over time or among brokered market makers; and
    
    Level 3inputs to the valuation methodology are unobservable and significant
to the fair value measurement. Unobservable inputs are those inputs that reflect our own
assumptions that market participants would use to price the asset or liability based upon
the best available information.
 Investments Condensed Consolidated Financial
Statements
    
    
    Publicly-traded securities;
    
    Securities for which a limited market exists; and
    
    Securities for which no market exists.
 Valuation Methods:
 Publicly-traded securities:
 Securities for which a limited market exists:
   45




---



##### 



Securities for which no market exists:
 (1)
    
    Portfolio investments comprised solely of debt securities:Debt securities that are not
publicly traded on an established securities market, or for which a limited market does not
exist (Non-Public Debt Securities), and that are issued by portfolio companies in which we
have no equity, or equity-like securities, are fair valued in accordance with the terms of the
policy, which utilizes opinions of value submitted to us by Standard & Poors Securities
Evaluations, Inc (SPSE). We may also submit paid in kind (PIK) interest to SPSE for its
evaluation when it is determined that PIK interest is likely to be received.In the case of Non-Public Debt Securities, we have engaged SPSE to submit opinions of value for
our debt securities that are issued by portfolio companies in which we own no equity, or
equity-like securities. SPSEs opinions of value are based on the valuations prepared by our
portfolio management team, as described below. We request that SPSE also evaluate and assign
values to success fees when we determine that there is a reasonable probability of receiving a
success fee on a given loan. SPSE will only evaluate the debt portion of our investments for
which we specifically request evaluation and may decline to make requested evaluations for any
reason, at its sole discretion. Upon completing our collection of data with respect to the
investments (which may include the information described below under Credit Information, the
risk ratings of the loans described below under Loan Grading and Risk Rating and the factors
described hereunder), this valuation data is forwarded to SPSE for review and analysis. SPSE
makes its independent assessment of the data that we have assembled and assesses its independent
data to form an opinion as to what they consider to be the market values for the securities.
With regard to its work, SPSE has issued the following paragraph:
  Condensed
Consolidated Financial Statements
  (2)
    
    Portfolio investments in controlled companies comprised of a bundle of investments, which can
include debt and equity securities:The fair value of these investments is determined based on
the total enterprise value (TEV) of the portfolio company, or issuer, utilizing a liquidity
waterfall approach under ASC 820. For Non-Public Debt Securities and equity or equity-like
securities (e.g. preferred equity, common equity, or other equity-like securities) that are
purchased together as part of a package, where we have control or could gain control through
an option or warrant security, both the debt and equity securities of the portfolio investment
would exit in the mergers and acquisitions market as the principal market, generally through a
sale or recapitalization of the portfolio company. In accordance with ASC 820, we apply the
in-use premise of value which assumes the debt and equity securities are sold together. Under
this approach, we first calculate the TEV of the issuer by incorporating some or all of the
following factors:
 
    
    the issuers ability to make payments;
    
    the earnings of the issuer;
    
    recent sales to third parties of similar securities;
 46




---



##### 




    
    the comparison to publicly traded securities; and
    
    DCF or other pertinent factors.
  (3)
    
    Portfolio investments in non-controlled companies comprised of a bundle of investments, which
can include debt and equity securities:We value Non-Public Debt Securities that are purchased
together with equity or equity-like securities from the same portfolio company, or issuer, for
which we do not control or cannot gain control as of the measurement date, using a
hypothetical secondary market as our principal market. In accordance with ASC 820, we
determine the fair value of these debt securities of non-control investments assuming the sale
of an individual debt security using the in-exchange premise of value (as defined in ASC 820).
As such, we estimate the fair value of the debt component using estimates of value provided by
SPSE and our own assumptions in the absence of observable market data, including synthetic
credit ratings, estimated remaining life, current market yield and interest rate spreads of
similar securities as of the measurement date. For equity or equity-like securities of
investments that we do not control or cannot gain control as of the measurement date, we
estimate the fair value of the equity using the in-exchange premise of value based on factors
such as the overall value of the issuer, the relative fair value of other units of account,
including debt, or other relative value approaches. Consideration also is given to capital
structure and other contractual obligations that may impact the fair value of the equity.
Further, we may utilize comparable values of similar companies, recent investments and indices
with similar structures and risk characteristics or our own assumptions in the absence of
other observable market data and may also employ DCF valuation techniques.(4)
    
    Portfolio investments comprised of non-publicly traded non-control equity securities of other
funds:We value any uninvested capital of the non-control fund at par value and value any
invested capital at the value provided by the non-control fund.
  Valuation Considerations:
 
    
    the nature and realizable value of the collateral;
    
    the portfolio companys earnings and cash flows and its ability to make payments
on its obligations;
    
    the markets in which the portfolio company does business;
    
    the comparison to publicly traded companies; and
    
    DCF and other relevant factors.
  Credit Information:
 Loan Grading and Risk Rating:
 47




---



##### 



First
    
    SecondCompanys System
    
    NRSRO
    
    NRSRO
    
    Gladstone Capitals Description(1)>10
    
    Baa2
    
    BBB
    
    Probability of Default (PD) during the next 10 years is 4% and the
Expected Loss upon Default (EL) is 1% or less10
    
    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%
 
 (1)
    
    The default rates set forth are for a 10 year term debt security. If a debt
security is less than 10 years, then the probability of default is adjusted to a lower
percentage for the shorter period, which may move the security higher on our risk rating
scale.   Rating
    
    June 30, 2011
    
    September 30, 2010Highest
    
    
    9.0
    
    
    
    10.0Average
    
    
    5.7
    
    
    
    6.1Weighted Average
    
    
    5.7
    
    
    
    5.9Lowest
    
    
    1.0
    
    
    
    1.0
  48




---



##### 



Rating
    
    June 30, 2011
    
    September 30, 2010Highest
    
    B+/B1
    
    B+/B2Average
    
    B-/B3
    
    B+/B2Weighted Average
    
    B-/B3
    
    B+/B2Lowest
    
    CCC+/Caa1
    
    B2
  Rating
    
    June 30, 2011
    
    September 30, 2010Highest
    
    9.0
    
    7.0Average
    
    6.3
    
    7.0Weighted Average
    
    7.5
    
    7.0Lowest
    
    4.0
    
    7.0
 Tax Status
 Federal Income Taxes
    Investment Income Recognition
   49




---



##### 



Condensed
Consolidated Statements of Operations
 Recent Accounting Pronouncements
 Condensed
Consolidated Financial Statements
 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
  85.6%
    
    variable rates with a floor and no ceiling6.5%
    
    variable rates without a floor or ceiling7.9%
    
    fixed rate100.0%
    
    total
  
 ITEM 4. CONTROLS AND PROCEDURES.
     50




---



##### 



PART IIOTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS.
  
 ITEM 1A. RISK FACTORS.
  Any inability to renew, extend or replace our Credit Facility on terms favorable to us, or at all,
could adversely impact our liquidity and ability to fund new investments or maintain distributions
to our stockholders.
   
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
  
 ITEM 4. REMOVED AND RESERVED.
 
 ITEM 5. OTHER INFORMATION.
  
 ITEM 6. EXHIBITS
  51




---



##### 



SIGNATURE
  GLADSTONE CAPITAL CORPORATIONBy:
    /s/ David WatsonDavid WatsonChief Financial Officer  52




---



##### 



EXHIBIT INDEX
 Exhibit
    
    Description3.1
    
    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, 2007.3.5
    
    Third 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 June 10, 2011.11
    
    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.
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