##### Table of Contents



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 DECEMBER 31, 2010
 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.
 o þ




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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 December 31, 2010 and September
30, 2010
    
    
    3Condensed Consolidated Statements of Operations for the three months ended December 31, 2010 and 2009
    
    
    4Condensed Consolidated Statements of Changes in Net Assets for the three months ended December 31,
2010 and 2009
    
    
    5Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 2010 and 2009
    
    
    6Condensed Consolidated Schedules of Investments as of December 31, 2010 and September 30, 2010
    
    
    7Notes to Condensed Consolidated Financial Statements
    
    
    13Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    28Overview
    
    
    28Results of Operations
    
    
    31Liquidity and Capital Resources
    
    
    35Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    44Item 4.
    
    Controls and Procedures
    
    
    44PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    45Item 1A.
    
    Risk Factors
    
    
    45Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    45Item 3.
    
    Defaults Upon Senior Securities
    
    
    45Item 4.
    
    Removed and Reserved
    
    
    45Item 5.
    
    Other Information
    
    
    45Item 6.
    
    Exhibits
    
    
    45SIGNATURES
    
    
    46EX-31.1EX-31.2EX-32.1EX-32.2
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GLADSTONE CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
 December 31,
    
    
    September 30,2010
    
    
    2010ASSETSCash
    
    $
    6,434
    
    
    $
    7,734Investments at fair valueNon-Control/Non-Affiliate investments (Cost of $242,058and $244,140,
respectively)
    
    
    216,612
    
    
    
    223,737Control investments (Cost of $54,499and $54,076, respectively)
    
    
    35,893
    
    
    
    33,372Total investments at fair value (Cost of $296,557 and $298,216, respectively)
    
    
    252,505
    
    
    
    257,109Interest receivable  investments in debt securities
    
    
    2,722
    
    
    
    2,648Interest receivable  employees(1)
    
    
    112
    
    
    
    104Due from custodian
    
    
    10,764
    
    
    
    255Deferred financing fees
    
    
    1,651
    
    
    
    1,266Prepaid assets
    
    
    814
    
    
    
    799Other assets
    
    
    495
    
    
    
    603TOTAL ASSETS
    
    $
    275,497
    
    
    $
    270,518LIABILITIESBorrowings at fair value (Cost of $24,600and $16,800, respectively)
    
    $
    25,301
    
    
    $
    17,940Accounts payable and accrued expenses
    
    
    379
    
    
    
    752Interest payable
    
    
    115
    
    
    
    693Fee due to Administrator(1)
    
    
    186
    
    
    
    267Fees due to Adviser(1)
    
    
    1,816
    
    
    
    673Other liabilities
    
    
    740
    
    
    
    947TOTAL LIABILITIES
    
    
    28,537
    
    
    
    21,272NET ASSETS
    
    $
    246,960
    
    
    $
    249,246ANALYSIS OF NET ASSETSCommon stock, $0.001 par value, 50,000,000 shares authorized and 21,039,242 shares
issued and outstanding at December 31, 2010 and September 30, 2010
    
    $
    21
    
    
    $
    21Capital in excess of par value
    
    
    326,935
    
    
    
    326,935Notes receivable  employees(1)
    
    
    (7,103
    )
    
    
    (7,103
    )Net unrealized depreciation on investments
    
    
    (44,052
    )
    
    
    (41,108
    )Net unrealized appreciation on borrowings
    
    
    (701
    )
    
    
    (1,140
    )Overdistributed net investment income
    
    
    
    
    
    
    (1,103
    )Accumulated net realized losses
    
    
    (28,140
    )
    
    
    (27,256
    )TOTAL NET ASSETS
    
    $
    246,960
    
    
    $
    249,246NET ASSETS PER SHARE
    
    $
    11.74
    
    
    $
    11.85
 
 (1)
    
    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 EndedDecember 31,2010
    
    
    2009INVESTMENT INCOMEInterest incomeNon-Control/Non-Affiliate investments
    
    $
    6,597
    
    
    $
    8,445Control investments
    
    
    1,126
    
    
    
    693Notes receivable from employees(1)
    
    
    122
    
    
    
    113Total interest income
    
    
    7,845
    
    
    
    9,251Other income
    
    
    161
    
    
    
    553Total investment income
    
    
    8,006
    
    
    
    9,804EXPENSESLoan servicing fee(1)
    
    
    842
    
    
    
    929Base management fee(1)
    
    
    505
    
    
    
    721Incentive fee(1)
    
    
    1,159
    
    
    
    375Administration fee(1)
    
    
    186
    
    
    
    178Interest expense
    
    
    (120
    )
    
    
    1,535Amortization of deferred financing fees
    
    
    297
    
    
    
    494Professional fees
    
    
    332
    
    
    
    912Other expenses
    
    
    220
    
    
    
    261Expenses before credits from Adviser
    
    
    3,421
    
    
    
    5,405Credits to fees from Adviser(1)
    
    
    (52
    )
    
    
    (29
    )Total expenses net of credits to fees
    
    
    3,369
    
    
    
    5,376NET INVESTMENT INCOME
    
    
    4,637
    
    
    
    4,428REALIZED AND UNREALIZED (LOSS) GAIN ON:Net realized loss on investments
    
    
    
    
    
    
    (920
    )Net unrealized (depreciation) appreciation on investments
    
    
    (2,944
    )
    
    
    2,599Net unrealized depreciation on borrowings
    
    
    439
    
    
    
    219Net (loss) gain on investments and borrowings
    
    
    (2,505
    )
    
    
    1,898NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS
    
    $
    2,132
    
    
    $
    6,326NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS PER
COMMON SHARE:Basic and Diluted
    
    $
    0.10
    
    
    $
    0.30WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:Basic and Diluted
    
    
    21,039,242
    
    
    
    21,087,574
 
 (1)
    
    Refer to Note 4Related Party Transactionsfor additional information. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
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GLADSTONE CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
 Three Months EndedDecember 31,2010
    
    
    2009Operations:Net investment income
    
    $
    4,637
    
    
    $
    4,428Net realized loss on investments
    
    
    
    
    
    
    (920
    )Net unrealized (depreciation) appreciation on investments
    
    
    (2,944
    )
    
    
    2,599Net unrealized depreciation on borrowings
    
    
    439
    
    
    
    219Net increase in net assets from operations
    
    
    2,132
    
    
    
    6,326Capital transactions:Shelf offering costs
    
    
    
    
    
    
    (39
    )Distributions to stockholders
    
    
    (4,418
    )
    
    
    (4,428
    )Reclassification of principal on employee note
    
    
    
    
    
    
    514Net decrease in net assets from capital transactions
    
    
    (4,418
    )
    
    
    (3,953
    )Total (decrease) increase in net assets
    
    
    (2,286
    )
    
    
    2,373Net assets at beginning of year
    
    
    249,246
    
    
    
    249,076Net assets at end of period
    
    $
    246,960
    
    
    $
    251,449
 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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GLADSTONE CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
 Three Months EndedDecember 31,2010
    
    
    2009CASH FLOWS FROM OPERATING ACTIVITIESNet increase in net assets resulting from operations
    
    $
    2,132
    
    
    $
    6,326Adjustments to reconcile net increase in net assets resulting from operations
to net cash provided by operating activities:Purchase of investments
    
    
    (11,794
    )
    
    
    (2,064
    )Principal repayments on investments
    
    
    13,208
    
    
    
    15,404Proceeds from sale of investments
    
    
    37
    
    
    
    2,782Increase in investment balance due to paid in kind interest
    
    
    (4
    )
    
    
    (55
    )Increase in investment balance due to transferred interest
    
    
    
    
    
    
    (103
    )Net change in premiums, discounts and amortization
    
    
    213
    
    
    
    45Net realized loss on investments
    
    
    
    
    
    
    920Net unrealized depreciation (appreciation) on investments
    
    
    2,944
    
    
    
    (2,599
    )Net unrealized depreciation on borrowings
    
    
    (439
    )
    
    
    (219
    )Amortization of deferred financing fees
    
    
    297
    
    
    
    494Increase in interest receivable
    
    
    (82
    )
    
    
    (139
    )Increase in due from custodian
    
    
    (10,509
    )
    
    
    (6,711
    )Increase in prepaid assets
    
    
    (15
    )
    
    
    (40
    )Decrease in due from Adviser(1)
    
    
    
    
    
    
    69Decrease in other assets
    
    
    108
    
    
    
    908Decrease in accounts payable and accrued expenses
    
    
    (373
    )
    
    
    (121
    )Decrease in interest payable
    
    
    (578
    )
    
    
    (39
    )Increase in fees due to Adviser(1)
    
    
    1,143
    
    
    
    451Decrease in administration fee due to Administrator(1)
    
    
    (81
    )
    
    
    (38
    )Decrease in other liabilities
    
    
    (207
    )
    
    
    (202
    )Net cash (used in) provided by operating activities
    
    
    (4,000
    )
    
    
    15,069CASH FLOWS FROM FINANCING ACTIVITIES:Shelf offering costs
    
    
    
    
    
    
    (39
    )Proceeds from borrowings
    
    
    10,000
    
    
    
    2,900Repayments on borrowings
    
    
    (2,200
    )
    
    
    (12,500
    )Distributions paid
    
    
    (4,418
    )
    
    
    (4,428
    )Deferred financing fees
    
    
    (682
    )
    
    
    96Net cash provided by (used in) financing activities
    
    
    2,700
    
    
    
    (13,971
    )NET (DECREASE) INCREASE IN CASH
    
    
    (1,300
    )
    
    
    1,098CASH, BEGINNING OF PERIOD
    
    
    7,734
    
    
    
    5,276CASH, END OF PERIOD
    
    $
    6,434
    
    
    $
    6,374
 
 (1)
    
    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 DECEMBER 31, 2010
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
 Company(1)
    
    Industry
    
    Investment(2)
    
    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) (4)
    
    $
    948
    
    
    $
    711Allison Publications, LLC
    
    Service-publisher of consumer
oriented magazines
    
    Senior Term Debt (10.5%, Due 9/2012) (4)
    
    
    8,940
    
    
    
    8,413BAS Broadcasting
    
    Service-radio station operator
    
    Senior Term Debt (11.5%, Due 7/2013) (4)
    
    
    7,465
    
    
    
    6,606Chinese Yellow Pages Company
    
    Service-publisher of Chinese language directories
    
    Line of Credit, $450 available (7.3%, Due 11/2011) (4)
    
    
    450
    
    
    
    425Senior Term Debt (7.3%, Due 11/2011) (4)
    
    
    288
    
    
    
    273CMI Acquisition, LLC
    
    Service-recycling
    
    Senior Subordinated Term Debt (10.3%, Due 11/2012) (4)
    
    
    5,976
    
    
    
    5,901FedCap Partners, LLC
    
    Private equity fund
    
    Class A Membership Units (7)
    
    
    400
    
    
    
    400Uncalled Capital Commitment ($1,600)GFRC Holdings LLC
    
    Manufacturing-glass-fiber reinforced concrete
    
    Senior Term Debt (11.5%, Due 12/2012) (4)
    
    
    6,011
    
    
    
    5,681Senior Subordinated Term Debt (14.0%, Due 12/2012) (3)(4)
    
    
    6,632
    
    
    
    6,267Global Materials Technologies, Inc.
    
    Manufacturing-steel wool products and metal fibers
    
    Senior Term Debt (13.0%, Due 6/2012) (3)(4)
    
    
    3,360
    
    
    
    2,780Heartland Communications Group
    
    Service-radio station operator
    
    Line of Credit, $100 available (8.5%, Due 3/2013)
    
    
    100
    
    
    
    58Line of Credit, $100 available (8.5%, Due 3/2013)
    
    
    
    
    
    
    Senior Term Debt (8.5%, Due 3/2013) (4)
    
    
    4,305
    
    
    
    2,508Common Stock Warrants (6)(7)
    
    
    66
    
    
    
    International Junior GolfTraining Acquisition Company
    
    Service-golf training
    
    Line of Credit, $1,000 available (9.0%, Due 5/2011) (4)
Senior Term Debt (8.5%, Due 5/2012) (4)
    
    
    1,000

1,391
    
    
    
    972

1,353Senior Term Debt (10.5%, Due 5/2012) (3)(4)
    
    
    2,500
    
    
    
    2,431KMBQ Corporation
    
    Service-AM/FM radio broadcaster
    
    Line of Credit, $200 available (non-accrual, Due 7/2010) (4)(8)(7)
    
    
    162
    
    
    
    16Senior Term Debt (non-accrual, Due 7/2010) (4)(8)(7)
    
    
    2,063
    
    
    
    204Legend Communications of Wyoming, LLC
    
    Service-operator of radio stations
    
    Senior Term Debt (12.0%, Due 6/2013) (4)
    
    
    9,880
    
    
    
    6,274Newhall Holdings, Inc.
    
    Service-distributor of personal care products and
    
    Line of Credit, $1,350 available (8.0%, Due 12/2012) (4)
    
    
    1,350
    
    
    
    1,276supplements
    
    Senior Term Debt Term A (5) (8.5%, Due 12/2012) (4)
    
    
    1,870
    
    
    
    1,767Senior Term Debt (5) (3.5%, Due 12/2012) (4)
    
    
    2,000
    
    
    
    1,860Senior Term Debt (3.5%, Due 12/2012) (3)(4)
    
    
    4,648
    
    
    
    4,276Preferred Equity (6)(7)
    
    
    
    
    
    
    Common Stock (6)(7)
    
    
    
    
    
    
    Northern Contours, Inc.
    
    Manufacturing-veneer and laminate components
    
    Senior Subordinated Term Debt (13.0%, Due 9/2012) (4)
    
    
    6,258
    
    
    
    5,741Northstar Broadband, LLC
    
    Service-cable TV franchise owner
    
    Senior Term Debt (0.7%, Due 12/2012) (4)
    
    
    104
    
    
    
    92Pinnacle Treatment Centers, Inc.
    
    Service-Addiction treatment centers
    
    Line of Credit, $500 available (12.0%, Due 1/2011) (4)(8)
    
    
    100
    
    
    
    100Senior Term Debt (10.5%, Due 12/2011) (4)(8)
    
    
    1,750
    
    
    
    1,750Senior Term Debt (10.5%, Due 12/2011) (3)(4)(8)
    
    
    7,500
    
    
    
    7,500Precision Acquisition Group Holdings, Inc.
    
    Manufacturing-consumable components for the aluminum
    
    Equipment Note (13.0%, Due 11/2011) (4)
    
    
    1,000
    
    
    
    940industry
    
    Senior Term Debt (13.0%, Due 11/2011) (4)
    
    
    4,125
    
    
    
    3,877Senior Term Debt (13.0%, Due 11/2011) (3)(4)
    
    
    4,053
    
    
    
    3,810PROFITSystems
Acquisition Co.
    
    Service-design and develop
ERP software
    
    Line of Credit, $350 available (4.5%, Due 7/2011)
Senior Term Debt (8.5%, Due 7/2011) (4)
    
    
    750
    
    
    
    711Senior Term Debt (10.5%, Due 7/2011) (3)(4)
    
    
    2,900
    
    
    
    2,719
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GLADSTONE CAPITAL CORPORATION
CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
AS OF DECEMBER 31, 2010
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
 Company(1)
    
    Industry
    
    Investment(2)
    
    Cost
    
    
    Fair ValueRCS Management Holding Co.
    
    Service-healthcare supplies
    
    Senior Term Debt (9.5%, Due 1/2011)
(3)(4)(9)
    
    $
    1,813
    
    
    $
    1,785Senior Term Debt (11.5%, Due
1/2011) (4)(9)
    
    
    3,060
    
    
    
    3,014Reliable Biopharmaceutical Holdings, Inc.
    
    Manufacturing-pharmaceutical and biochemical intermediates
    
    Line of Credit, $3,500 available
(10.0%, Due 1/2011)
(4)(9)
    
    
    1,500
    
    
    
    1,491Mortgage Note (9.5%, Due 10/2014) (4)
    
    
    7,234
    
    
    
    7,198Senior Term Debt (9.0%, Due 10/2012) (4)
    
    
    967
    
    
    
    961Senior Term Debt (11.0%, Due 10/2012) (3)(4)
    
    
    11,663
    
    
    
    11,415Senior Subordinated Term Debt (12.0%, Due 10/2013) (4)
    
    
    6,000
    
    
    
    5,760Common Stock Warrants (6)(7)
    
    
    209
    
    
    
    136Saunders & Associates
    
    Manufacturing-equipment provider for frequency control devices
    
    Senior Term Debt (9.8%, Due 5/2013) (4)
    
    
    8,947
    
    
    
    8,947SCI Cable, Inc.
    
    Service-cable, internet, voice provider
    
    Senior Term Debt (non-accrual, Due 10/2012) (4)(7)
    
    
    601
    
    
    
    132Senior Term Debt (non-accrual, Due 10/2012) (4)(7)
    
    
    2,931
    
    
    
    293Sunburst Media  Louisiana, LLC
    
    Service-radio station operator
    
    Senior Term Debt (10.5%, Due 6/2011) (4)
    
    
    6,335
    
    
    
    4,997Sunshine Media Holdings
    
    Service-publisher regional B2B trade magazines
    
    Line of credit, $2,000 available
(10.5%, Due 2/2011)
(4)(10)
    
    
    1,999
    
    
    
    1,499Senior Term Debt (10.5%, Due 5/2012) (4)(10)
    
    
    16,948
    
    
    
    12,711Senior Term Debt (13.3%, Due 5/2012) (3)(4)(10)
    
    
    10,700
    
    
    
    8,025Thibaut Acquisition Co.
    
    Service-design and distribute wall covering
    
    Line of Credit, $750 available
(9.0%, Due 1/2011)
(4)(9)
    
    
    750
    
    
    
    731Senior Term Debt (8.5%, Due 1/2011)
(4)(9)
    
    
    813
    
    
    
    792Senior Term Debt (12.0%, Due 1/2011) (3)(4)(9)
    
    
    3,000
    
    
    
    2,903Viapack, Inc.
    
    Manufacturing-polyethylene film
    
    Senior Real Estate Term Debt (10.0%, Due 3/2011) (4)
    
    
    650
    
    
    
    647Senior Term Debt (13.0%, Due 3/2011) (3)(4)
    
    
    3,978
    
    
    
    3,958Westlake Hardware, Inc.
    
    Retail-hardware and variety
    
    Senior Subordinated Term Debt (12.3%, Due 1/2014) (4)
    
    
    12,000
    
    
    
    11,835Senior Subordinated Term Debt (13.5%, Due 1/2014) (4)
    
    
    8,000
    
    
    
    7,810Winchester Electronics
    
    Manufacturing-high bandwidth
connectors and cables
    
    Senior Term Debt (5.3%, Due 5/2012) (4)
    
    
    1,250
    
    
    
    1,247Senior Term Debt (5.7%, Due 5/2013) (4)
    
    
    1,686
    
    
    
    1,669Senior Subordinated Term Debt (14.0%, Due 6/2013) (4)
    
    
    9,875
    
    
    
    9,653Subtotal  Non-syndicated loans
    
    
    
    
    
    
    223,254
    
    
    
    197,301Syndicated Loans:Airvana Network Solutions, Inc
    
    Service-telecommunications
    
    Senior Term Debt (11.0%, Due 8/2014) (5)
    
    $
    7,702
    
    
    $
    7,918Applied Systems
    
    Service - software for property & casualty insurance industry
    
    Senior Subordinated Term Debt (10%, Due 6/2017) (5)
    
    
    990
    
    
    
    1,000Ascend Learning
    
    Service - technology-based learning solutions
    
    Senior Subordinated Term Debt (12.3%, Due 12/2017) (5)
    
    
    970
    
    
    
    975Covad Communications
    
    Service-telecommunications
    
    Senior Term Debt (12.0%, Due 11/2015) (5)
    
    
    1,961
    
    
    
    2,025Global Brass
    
    Service-telecommunications
    
    Senior Term Debt (10.3%, Due 8/2015) (5)
    
    
    2,905
    
    
    
    3,168HGI
    
    Service-telecommunications
    
    Senior Term Debt (6.3%, Due 10/2016) (5)
    
    
    1,956
    
    
    
    1,998WP Evenflo Group Holdings Inc.
    
    Manufacturing-infant and juvenile products
    
    Senior Term Debt (8.0%, Due 2/2013) (5)
    
    
    1,876
    
    
    
    1,651Senior Preferred Equity (6)(7)
    
    
    333
    
    
    
    389Junior Preferred Equity (6)(7)
    
    
    111
    
    
    
    134Common Stock (6)(7)
    
    
    
    
    
    
    53Subtotal  Syndicated loans
    
    
    
    
    
    
    18,804
    
    
    
    19,311Total Non-Control/Non-Affiliate
Investments (represents 85.8% of total investments at fair value)
    
    $
    242,058
    
    
    $
    216,612
 8




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##### Table of Contents



GLADSTONE CAPITAL CORPORATION
CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
AS OF DECEMBER 31, 2010
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
 Company(1)
    
    Industry
    
    Investment(2)
    
    Cost
    
    
    Fair ValueCONTROL INVESTMENTSBERTL, Inc.
    
    Service-web-based
    
    Line of Credit, $1,621 available (non-evaluator of digital
    
    accrual, Due 10/2011) (6)(7)
    
    $
    1,399
    
    
    $
    imaging products
    
    Common Stock (6)(7)
    
    
    424
    
    
    
    Defiance Integrated Technologies, Inc.
    
    Manufacturing-trucking parts
    
    Senior Term Debt (11.0%, Due 4/2013) (3)(4)
    
    
    8,245
    
    
    
    8,245Common Stock (6)(7)
    
    
    1
    
    
    
    4,512Guaranty ($250)Lindmark Acquisition, LLC
    
    Service-advertising
    
    Senior Subordinated Term Debt (non-accrual, Due 10/2012) (4)(7)
    
    
    10,000
    
    
    
    4,500Senior Subordinated Term Debt (non-accrual, Due 12/2012) (4)(7)
    
    
    2,000
    
    
    
    900Senior Subordinated Term Debt
(non-accrual, Due Upon Demand) (4)(7)
    
    
    1,874
    
    
    
    843Common Stock (6)(7)
    
    
    317
    
    
    
    LocalTel, LLC
    
    Service-yellow pages publishing
    
    Line of credit, $1,850 available (non-accrual, Due 12/2011) (6)(7)
    
    
    1,723
    
    
    
    1,075Senior Term Debt (non-accrual, Due 2/2012) (6)(7)
    
    
    325
    
    
    
    Line of Credit, $3,000 available (non-accrual, Due 6/2011) (6)(7)
    
    
    1,170
    
    
    
    Senior Term Debt (non-accrual, Due 6/2011) (6)(7)
    
    
    2,688
    
    
    
    Senior Term Debt (non-accrual, Due 6/2011) (3)(6)(7)
    
    
    2,750
    
    
    
    Common Stock Warrants (6)(7)
    
    
    
    
    
    
    Midwest Metal
    
    Distribution-aluminum sheets
    
    Senior Subordinated Term Debt(4)Distribution, Inc.
    
    and stainless steel
    
    (12.0%, Due 7/2013)(4)
    
    
    18,256
    
    
    
    15,813Common Stock (6)(7)
    
    
    138
    
    
    
    U.S. Healthcare Communications, Inc.
    
    Service-magazine publisher/operator
    
    Line of credit, $400 available (non-accrual, Due 12/2010) (6)(7)
    
    
    269
    
    
    
    5Line of credit, $450 available (non-accrual, Due 12/2010) (6)(7)
    
    
    450
    
    
    
    Common Stock (6)(7)
    
    
    2,470
    
    
    
    Total Control
Investments (represents 14.2% of total investments at fair value)
    $
    54,499
    
    
    $
    35,893Total Investments
    
    
    
    
    
    $
    296,557
    
    
    $
    252,505
 
 (1)
    
    Certain of the listed securities are issued by affiliate(s) of the indicated
portfolio company.(2)
    
    Percentage represents interest rates in effect at December 31, 2010 and due date
represents the contractual maturity date.(3)
    
    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.(4)
    
    Fair value was primarily based on opinions of value submitted by Standard & Poors
Securities Evaluations, Inc.(5)
    
    Security valued based on the indicative bid price on or near December 31, 2010,
offered by the respective syndication agents trading desk or secondary desk.(6)
    
    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.(7)
    
    Security is non-income producing.(8)
    
    Security was paid off, at par, subsequent to December 31, 2010 and was valued based on the
exit.(9)
    
    Loan was amended or restructured subsequent to December 31, 2010, resulting in an extension to the
maturity date.(10)
    
    In January, the Company disbursed $1.5 million to purchase common stock from existing shareholders
of Sunshine Media Holdings. This purchase resulted in the Company taking a controlling position in Sunshine Media Holdings. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
 9




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##### Table of Contents



GLADSTONE CAPITAL CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2010
(DOLLAR AMOUNTS IN THOUSANDS)
 Company(1)
    
    Industry
    
    Investment(2)
    
    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) (5)
    
    $
    963
    
    
    $
    809Allison Publications, LLC
    
    Service-publisher of consumer oriented magazines
    
    Senior Term Debt (10.5%, Due 9/2012) (5)
    
    
    9,094
    
    
    
    8,543Senior Term Debt (13.0%, Due 12/2010) (5)
    
    
    65
    
    
    
    64BAS Broadcasting
    
    Service-radio station operator
    
    Senior Term Debt (11.5%, Due 7/2013) (5)
    
    
    7,465
    
    
    
    6,644Chinese Yellow Pages Company
    
    Service-publisher of Chinese language directories
    
    Line of Credit, $700 available (7.3%, Due 11/2010) (5)
    
    
    450
    
    
    
    428Senior Term Debt (7.3%, Due 11/2010) (5)
    
    
    333
    
    
    
    317CMI Acquisition, LLC
    
    Service-recycling
    
    Senior Subordinated Term Debt (10.3%, Due 11/2012) (5)
    
    
    5,972
    
    
    
    5,868FedCap Partners, LLC
    
    Private equity fund
    
    Class A Membership Units (8)
    
    
    400
    
    
    
    400Uncalled Capital Commitment ($1,600)Finn Corporation
    
    Manufacturing-landscape equipment
    
    Common Stock Warrants (7)(8)
    
    
    37
    
    
    
    284GFRC Holdings LLC
    
    Manufacturing-glass-fiber reinforced concrete
    
    Senior Term Debt (11.5%, Due 12/2012) (5)
    
    
    6,111
    
    
    
    6,004Senior Subordinated Term Debt (14.0%, Due 12/2012) (3)(5)
    
    
    6,632
    
    
    
    6,450Global Materials Technologies, Inc.
    
    Manufacturing-steel wool products and metal fibers
    
    Senior Term Debt (13.0%, Due 6/2012) (3)(5)
    
    
    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) (5)
    
    
    4,301
    
    
    
    2,519Common Stock Warrants (7)(8)
    
    
    66
    
    
    
    Interfilm Holdings, Inc.
    
    Service-slitter and distributor of plastic films
    
    Senior Term Debt (12.3%, Due 10/2012) (5)
    
    
    2,400
    
    
    
    2,382International Junior Golf Training Acquisition
    
    Service-golf training
    
    Line of Credit, $1,500 available (9.0%, Due 5/2011) (5)
    
    
    
    
    
    
    Company
    
    
    
    Senior Term Debt (8.5%, Due 5/2012) (5)
    
    
    1,557
    
    
    
    1,537Senior Term Debt (10.5%, Due 5/2012) (3)(5)
    
    
    2,500
    
    
    
    2,456KMBQ Corporation
    
    Service-AM/FM radio broadcaster
    
    Line of Credit, $200 available (non-accrual, Due 7/2010) (5)(8)(10)
    
    
    161
    
    
    
    16Senior Term Debt (non-accrual, Due 7/2010) (5)(8)(10)
    
    
    1,921
    
    
    
    192Legend Communications of Wyoming LLC
    
    Service-operator of radio stations
    
    Senior Term Debt (12.0%, Due 6/2013) (5)
    
    
    9,880
    
    
    
    6,422Newhall Holdings, Inc.
    
    Service-distributor of personal care products and supplements
    
    Line of Credit, $1,350 available (5.0%, Due 12/2012) (5)
    
    
    1,350
    
    
    
    1,269Senior Term Debt (5) (5.0%, Due 12/2012) (5)
    
    
    3,870
    
    
    
    3,638Senior Term Debt (5.0%, Due 12/2012) (3)(5)
    
    
    4,648
    
    
    
    4,323Preferred Equity (7)(8)
    
    
    
    
    
    
    Common Stock (7)(8)
    
    
    
    
    
    
    Northern Contours, Inc.
    
    Manufacturing-veneer and laminate components
    
    Senior Subordinated Term Debt (13.0%, Due 9/2012) (5)
    
    
    6,301
    
    
    
    5,765Northstar Broadband, LLC
    
    Service-cable TV franchise owner
    
    Senior Term Debt (0.7%, Due 12/2012) (5)
    
    
    117
    
    
    
    102Pinnacle Treatment Centers, Inc.
    
    Service-Addiction treatment centers
    
    Line of Credit, $500 available (12.0%, Due 10/2010) (5)(12)
    
    
    150
    
    
    
    150Senior Term Debt (10.5%, Due 12/2011) (5)
    
    
    1,950
    
    
    
    1,945Senior Term Debt (10.5%, Due 12/2011) (3)(5)
    
    
    7,500
    
    
    
    7,481Precision Acquisition Group Holdings, Inc.
    
    Manufacturing-consumable components for the aluminum
    
    Equipment Note (13.0%, Due 10/2010) (5)(13)
    
    
    1,000
    
    
    
    950industry
    
    Senior Term Debt (13.0%, Due 10/2010) (5)(13)
    
    
    4,125
    
    
    
    3,919Senior Term Debt (13.0%, Due 10/2010) (3)(5)(13)
    
    
    4,053
    
    
    
    3,850
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##### Table of Contents



GLADSTONE CAPITAL CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2010
(DOLLAR AMOUNTS IN THOUSANDS)
 Company(1)
    
    Industry
    
    Investment(2)
    
    Cost
    
    
    Fair ValuePROFITSystems
    
    Service-design and develop
    
    Line of Credit, $350 availableAcquisition Co.
    
    ERP software
    
    (4.5%, Due 7/2011)
    
    $
    
    
    
    $
    Senior Term Debt (8.5%, Due 7/2011) (5)
    
    
    1,000
    
    
    
    940Senior Term Debt (10.5%, Due 7/2011) (3)(5)
    
    
    2,900
    
    
    
    2,697RCS Management Holding Co.
    
    Service-healthcare supplies
    
    Senior Term Debt (9.5%, Due 1/2011) (3)(5)
    
    
    1,937
    
    
    
    1,918Senior Term Debt (11.5%, Due 1/2011) (4)(5)
    
    
    3,060
    
    
    
    3,029Reliable Biopharmaceutical Holdings, Inc.
    
    Manufacturing-pharmaceutical and
    
    Line of Credit, $5,000 available (9.0%, Due 10/2010) (5)(14)
    
    
    1,200
    
    
    
    1,188biochemical intermediates
    
    Mortgage Note (9.5%, Due 10/2014) (5)
    
    
    7,255
    
    
    
    7,201Senior Term Debt (9.0%, Due 10/2012) (5)
    
    
    1,080
    
    
    
    1,069Senior Term Debt (11.0%, Due 10/2012) (3)(5)
    
    
    11,693
    
    
    
    11,386Senior Subordinated Term Debt (12.0%, Due 10/2013) (5)
    
    
    6,000
    
    
    
    5,730Common Stock Warrants (7)(8)
    
    
    209
    
    
    
    Saunders & Associates
    
    Manufacturing-equipment provider for frequency control devices
    
    Senior Term Debt (9.8%, Due 5/2013) (5)
    
    
    8,947
    
    
    
    8,935SCI Cable, Inc.
    
    Service-cable, internet, voice provider
    
    Senior Term Debt (non-accrual, Due 10/2012) (5)(8)(10)
    
    
    450
    
    
    
    140Senior Term Debt (non-accrual, Due 10/2012) (5)(8)(10)
    
    
    2,931
    
    
    
    352Sunburst Media  Louisiana, LLC
    
    Service-radio station operator
    
    Senior Term Debt (10.5%, Due 6/2011) (5)
    
    
    6,391
    
    
    
    5,100Sunshine Media Holdings
    
    Service-publisher regional B2B trade magazines
    
    Line of credit, $2,000 available (10.5%, Due 2/2011) (5)
    
    
    1,599
    
    
    
    1,499Senior Term Debt (10.5%, Due 5/2012) (5)
    
    
    16,948
    
    
    
    15,889Senior Term Debt (13.3%, Due 5/2012) (3)(5)
    
    
    10,700
    
    
    
    9,898Thibaut Acquisition Co.
    
    Service-design and distribute wall covering
    
    Line of Credit, $1,000 available (9.0%, Due 1/2011) (5)
    
    
    1,000
    
    
    
    970Senior Term Debt (8.5%, Due 1/2011) (5)
    
    
    1,075
    
    
    
    1,043Senior Term Debt (12.0%, Due 1/2011) (3)(5)
    
    
    3,000
    
    
    
    2,888Viapack, Inc.
    
    Manufacturing-polyethylene film
    
    Senior Real Estate Term Debt (10.0%, Due 3/2011) (5)
    
    
    675
    
    
    
    672Senior Term Debt (13.0%, Due 3/2011) (3)(5)
    
    
    4,005
    
    
    
    3,990Westlake Hardware, Inc.
    
    Retail-hardware and variety
    
    Senior Subordinated Term Debt (12.3%, Due 1/2014) (5)
    
    
    12,000
    
    
    
    11,820Senior Subordinated Term Debt (13.5%, Due 1/2014) (5)
    
    
    8,000
    
    
    
    7,800Winchester Electronics
    
    Manufacturing-high bandwidth connectors and cables
    
    Senior Term Debt (5.3%, Due 5/2012) (5)
    
    
    1,250
    
    
    
    1,244Senior Term Debt (6.0%, Due 5/2013) (5)
    
    
    1,686
    
    
    
    1,661Senior Subordinated Term Debt (14.0%, Due 6/2013) (5)
    
    
    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) (6)
    
    $
    8,858
    
    
    $
    8,942Puerto Rico Cable Acquisition Company, Inc.
    
    Service-telecommunications
    
    Senior Subordinated Term Debt (7.9%, Due 1/2012) (6)
    
    
    7,159
    
    
    
    6,427WP Evenflo Group Holdings Inc.
    
    Manufacturing-infant and juvenile products
    
    Senior Term Debt (8.0%, Due 2/2013) (6)
    
    
    1,881
    
    
    
    1,655Senior Preferred Equity (7)(8)
    
    
    333
    
    
    
    379Junior Preferred Equity (7)(8)
    
    
    111
    
    
    
    8Common Stock (7)(8)
    
    
    
    
    
    
    Subtotal  Syndicated loans
    
    
    
    
    18,342
    
    
    
    17,411Total Non-Control/Non-Affiliate Investments
    
    $
    244,140
    
    
    $
    223,737
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##### Table of Contents



GLADSTONE CAPITAL CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2010
(DOLLAR AMOUNTS IN THOUSANDS)
 Company(1)
    
    Industry
    
    Investment(2)
    
    Cost
    
    
    Fair ValueCONTROL INVESTMENTSBERTL, Inc.
    
    Service-web-based evaluator of digital imaging products
    
    Line of Credit, $1,621 available (non-accrual, Due 10/2010) (7)(8)(10)(11)
    
    $
    1,319
    
    
    $
    Common Stock (7)(8)
    
    
    424
    
    
    
    Defiance Integrated Technologies, Inc.
    
    Manufacturing-trucking parts
    
    Senior Term Debt (11.0%, Due 4/2013) (3)(5)
    
    
    8,325
    
    
    
    8,325Common Stock (7)(8)
    
    
    1
    
    
    
    1,543Guaranty ($250)Lindmark Acquisition, LLC
    
    Service-advertising
    
    Senior Subordinated Term Debt (non-accrual, Due 10/2012) (5)(8)(9)(10)
    
    
    10,000
    
    
    
    5,000Senior Subordinated Term Debt (non-accrual, Due 12/2010) (5)(8)(9)(10)
    
    
    2,000
    
    
    
    1,000Senior Subordinated Term Debt (non-accrual, Due Upon Demand) (5)(8)(9)(10)
    
    
    1,794
    
    
    
    897Common Stock (7)(8)
    
    
    1
    
    
    
    LocalTel, LLC
    
    Service-yellow pages publishing
    
    Line of credit, $1,850 available (non-accrual, Due 12/2010) (7)(8)(10)
    
    
    1,698
    
    
    
    1,063Senior Term Debt (non-accrual, Due 2/2012) (7)(8)(10)
    
    
    325
    
    
    
    Line of Credit, $3,000 available (non-accrual, Due 6/2011) (7)(8)(10)
    
    
    1,170
    
    
    
    Senior Term Debt (non-accrual, Due 6/2011) (7)(8)(10)
    
    
    2,688
    
    
    
    Senior Term Debt (non-accrual, Due 6/2011) (3)(7)(8)(10)
    
    
    2,750
    
    
    
    Common Stock Warrants (7)(8)
    
    
    
    
    
    
    Midwest Metal Distribution, Inc.
    
    Distribution-aluminum sheets and stainless steel
    
    Senior Subordinated Term Debt (12.0%, Due 7/2013) (5)
    
    
    18,254
    
    
    
    15,539Common Stock (7)(8)
    
    
    138
    
    
    
    U.S. Healthcare Communications, Inc.
    
    Service-magazine publisher/ operator
    
    Line of credit, $400 available (non-accrual, Due 12/2010) (7)(8)(10)
    
    
    269
    
    
    
    5Line of credit, $450 available (non-accrual, Due 12/2010) (7)(8)(10)
    
    
    450
    
    
    
    Common Stock (7)(8)
    
    
    2,470
    
    
    
    Total Control Investments

    
    
    
    $
    54,076
    
    
    $
    33,372Total Investments(15)
    
    
    
    
    
    $
    298,216
    
    
    $
    257,109
 
 (1)
    
    Certain of the listed securities are issued by affiliate(s) of the indicated
portfolio company.(2)
    
    Percentage represents interest rates in effect at September 30, 2010 and due date
represents the contractual maturity date.(3)
    
    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.(4)
    
    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.(5)
    
    Fair value was primarily based on opinions of value submitted by Standard & Poors
Securities Evaluations, Inc.(6)
    
    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.(7)
    
    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.(8)
    
    Security is non-income producing.(9)
    
    Lindmarks loan agreement was amended in March 2009 such that any unpaid current
interest accrues at a success fee rate. The success fee is not recorded
until paid (see Note 2, Summary of Significant Accounting Policies  Interest Income
Recognition).(10)
    
    BERTL, KMBQ, Lindmark, LocalTel, SCI Cable and U.S. Healthcare are currently past
due on interest payments and are on non-accrual.(11)
    
    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.(12)
    
    Subsequent to September 30, 2010, Pinnacles line of credit maturity date was
extended to January 2011.(13)
    
    Subsequent to September 30, 2010, Precisions equipment note and senior term loan
maturity dates were extended to November 2010.(14)
    
    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.(15)
    
    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. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
 12




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GLADSTONE CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  DECEMBER 31, 2010  (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT 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
 13




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##### Table of Contents



Reclassifications
  Investment Valuation Policy
    Publicly-traded securities:
 Securities for which a limited market exists:
   14




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##### Table of Contents



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 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.(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 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 acquisition 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 to
determine the TEV of the issuer:
 
    
    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.
 (3)
    
    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. Subsequent to June 30,
2009, 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.
 (4)
    
    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.
 15




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##### Table of Contents



Interest Income Recognition
     Condensed
Consolidated Statements of Operations
 NOTE 3. INVESTMENTS
  
    
    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
 16




---



##### Table of Contents




    
    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
 As of December 31, 2010Total Fair ValueReported in CondensedConsolidated Statements ofLevel 1
    
    
    Level 2
    
    
    Level 3
    
    
    Assets and LiabilitiesNon-Control/Non-Affiliate InvestmentsSenior term debt
    
    $
    
    
    
    $
    
    
    
    $
    160,557
    
    
    $
    160,557Senior subordinated term debt
    
    
    
    
    
    
    
    
    
    
    54,943
    
    
    
    54,943Preferred equity
    
    
    
    
    
    
    
    
    
    
    523
    
    
    
    523Common equity/equivalents
    
    
    
    
    
    
    
    
    
    
    589
    
    
    
    589Total Non-Control/Non-Affiliate investments at fair value
    
    
    
    
    
    
    
    
    
    
    216,612
    
    
    
    216,612Control InvestmentsSenior term debt
    
    $
    
    
    
    $
    
    
    
    $
    9,325
    
    
    $
    9,325Senior subordinated term debt
    
    
    
    
    
    
    
    
    
    
    22,056
    
    
    
    22,056Common equity/equivalents
    
    
    
    
    
    
    
    
    
    
    4,512
    
    
    
    4,512Total Control investments at fair value
    
    
    
    
    
    
    
    
    
    
    35,893
    
    
    
    35,893Total investments at fair value
    
    $
    
    
    
    $
    
    
    
    $
    252,505
    
    
    $
    252,505
 Changes in Level 3 Fair Value Measurements of Investments
  Fair value measurements using unobservable data inputs (Level 3)
 Period ended December 31, 2010:
 Non-Control/Non-Affiliate
    
    
    ControlInvestments
    
    
    Investments
    
    
    TotalThree months ended December 31, 2010:Fair value at September 30, 2010
    
    $
    223,737
    
    
    $
    33,372
    
    
    $
    257,109Unrealized (depreciation) appreciation(1)
    
    
    (5,041
    )
    
    
    2,097
    
    
    
    (2,944
    )Issuances/Originations
    
    
    11,295
    
    
    
    503
    
    
    
    11,798Settlements/Repayments
    
    
    (13,342
    )
    
    
    (79
    )
    
    
    (13,421
    )Sales
    
    
    (37
    )
    
    
    
    
    
    
    (37
    )Fair value as of December 31, 2010
    
    $
    216,612
    
    
    $
    35,893
    
    
    $
    252,505
 17




---



##### Table of Contents



Senior
    
    
    Senior
    
    
    
    
    
    
    CommonTerm
    
    
    Subordinated
    
    
    Preferred
    
    
    Equity/Debt
    
    
    Term Debt
    
    
    Equity
    
    
    Equivalents
    
    
    TotalThree months ended December 31, 2010:Fair value at September 30, 2010
    
    $
    172,596
    
    
    $
    81,899
    
    
    $
    386
    
    
    $
    2,228
    
    
    $
    257,109Unrealized (depreciation) appreciation(1)
    
    
    (5,930
    )
    
    
    256
    
    
    
    137
    
    
    
    2,593
    
    
    
    (2,944
    )Issuances/Originations
    
    
    9,398
    
    
    
    2,083
    
    
    
    
    
    
    
    317
    
    
    
    11,798Settlements/Repayments
    
    
    (6,182
    )
    
    
    (7,239
    )
    
    
    
    
    
    
    
    
    
    
    (13,421
    )Sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (37
    )
    
    
    (37
    )Fair value as of December 31, 2010
    
    $
    169,882
    
    
    $
    76,999
    
    
    $
    523
    
    
    $
    5,101
    
    
    $
    252,505
 Period ended December 31, 2009:
 Non-Control/Non-Affiliate
    
    
    ControlInvestments
    
    
    Investments
    
    
    TotalThree months ended December 31, 2009:Fair value at September 30, 2009
    
    $
    286,997
    
    
    $
    33,972
    
    
    $
    320,969Realized losses(2)
    
    
    (920
    )
    
    
    
    
    
    
    (920
    )Unrealized appreciation (depreciation)(1)
    
    
    3,599
    
    
    
    (1,000
    )
    
    
    2,599Issuances/Originations
    
    
    935
    
    
    
    1,286
    
    
    
    2,221Settlements/Repayments
    
    
    (15,449
    )
    
    
    
    
    
    
    (15,449
    )Sales
    
    
    (2,782
    )
    
    
    
    
    
    
    (2,782
    )Fair value as of December 31, 2009
    
    $
    272,380
    
    
    $
    34,258
    
    
    $
    306,638
 Senior
    
    
    Senior
    
    
    
    
    
    
    CommonTerm
    
    
    Subordinated
    
    
    Preferred
    
    
    Equity/Debt
    
    
    Term Debt
    
    
    Equity
    
    
    Equivalents
    
    
    TotalThree months ended December 31, 2009:Fair value at September 30, 2009
    
    $
    212,290
    
    
    $
    105,794
    
    
    $
    
    
    
    $
    2,885
    
    
    $
    320,969Realized losses(2)
    
    
    (511
    )
    
    
    (409
    )
    
    
    
    
    
    
    
    
    
    
    (920
    )Unrealized appreciation (depreciation)(1)
    
    
    1,796
    
    
    
    2,236
    
    
    
    
    
    
    
    (1,433
    )
    
    
    2,599Issuances/Originations
    
    
    1,218
    
    
    
    1,003
    
    
    
    
    
    
    
    
    
    
    
    2,221Settlements/Repayments
    
    
    (15,293
    )
    
    
    (156
    )
    
    
    
    
    
    
    
    
    
    
    (15,449
    )Sales
    
    
    (923
    )
    
    
    (1,859
    )
    
    
    
    
    
    
    
    
    
    
    (2,782
    )Fair value as of December 31, 2009
    
    $
    198,577
    
    
    $
    106,609
    
    
    $
    
    
    
    $
    1,452
    
    
    $
    306,638
 
 (1)
    
    Included in unrealized appreciation (depreciation) on investments on the
accompanying Condensed Consolidated Statements of Operationsfor the three months ended
December 31, 2010 and 2009.(2)
    
    Included in net realized loss on investments on the accompanying Condensed
Consolidated Statements of Operationsfor the three months ended December 31, 2009. Non-Control/Non-Affiliate Investments
  Control Investments
  Investment Concentrations
  18




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##### Table of Contents



December 31, 2010
    
    
    September 30, 2010Cost
    
    
    Fair Value
    
    
    Cost
    
    
    Fair ValueSenior term debt
    
    $
    203,258
    
    
    $
    169,882
    
    
    $
    200,041
    
    
    $
    172,596Senior subordinated term debt
    
    
    88,830
    
    
    
    76,999
    
    
    
    93,987
    
    
    
    81,899Preferred equity
    
    
    445
    
    
    
    523
    
    
    
    444
    
    
    
    387Common equity/equivalents
    
    
    4,024
    
    
    
    5,101
    
    
    
    3,744
    
    
    
    2,227Total investments
    
    $
    296,557
    
    
    $
    252,505
    
    
    $
    298,216
    
    
    $
    257,109
  December 31, 2010
    
    
    September 30, 2010Percentage
    
    
    
    
    
    
    Percentageof Total
    
    
    
    
    
    
    of TotalIndustry Classification
    
    Fair Value
    
    
    Investments
    
    
    Fair Value
    
    
    InvestmentsHealthcare, education & childcare
    
    $
    42,085
    
    
    
    16.6
    %
    
    $
    41,098
    
    
    
    16.0
    %Broadcast (TV & radio)
    
    
    36,052
    
    
    
    14.3
    
    
    
    44,562
    
    
    
    17.3Printing & publishing
    
    
    32,425
    
    
    
    12.8
    
    
    
    37,705
    
    
    
    14.7Electronics
    
    
    24,945
    
    
    
    9.9
    
    
    
    25,080
    
    
    
    9.8Mining, steel, iron & non-precious metals
    
    
    24,495
    
    
    
    9.7
    
    
    
    24,343
    
    
    
    9.5Retail stores
    
    
    19,645
    
    
    
    7.8
    
    
    
    19,620
    
    
    
    7.6Automobile
    
    
    12,757
    
    
    
    5.1
    
    
    
    9,868
    
    
    
    3.8Buildings & real estate
    
    
    11,948
    
    
    
    4.7
    
    
    
    12,454
    
    
    
    4.8Personal & non-durable consumer products
    
    
    11,177
    
    
    
    4.4
    
    
    
    9,230
    
    
    
    3.6Home & office furnishings
    
    
    10,167
    
    
    
    4.0
    
    
    
    10,666
    
    
    
    4.1Machinery
    
    
    8,627
    
    
    
    3.4
    
    
    
    8,719
    
    
    
    3.4Chemicals, plastics & rubber
    
    
    4,605
    
    
    
    1.8
    
    
    
    7,044
    
    
    
    2.7Leisure, amusement, movies & entertainment
    
    
    4,757
    
    
    
    1.9
    
    
    
    3,994
    
    
    
    1.6Diversified natural resources, precious metals & minerals
    
    
    3,168
    
    
    
    1.3
    
    
    
    
    
    
    
    Diversified/conglomerate manufacturing
    
    
    2,227
    
    
    
    0.9
    
    
    
    2,042
    
    
    
    0.8Telecommunications
    
    
    2,025
    
    
    
    0.8
    
    
    
    
    
    
    
    Insurance
    
    
    1,000
    
    
    
    0.4
    
    
    
    
    
    
    
    Aerospace & defense
    
    
    400
    
    
    
    0.2
    
    
    
    400
    
    
    
    0.2Farming & agriculture
    
    
    
    
    
    
    
    
    
    
    284
    
    
    
    0.1Total investments
    
    $
    252,505
    
    
    
    100.0
    %
    
    $
    257,109
    
    
    
    100.0
    %
  December 31, 2010
    
    
    September 30, 2010Percent of
    
    
    
    
    
    
    Percentage ofTotal
    
    
    
    
    
    
    TotalGeographic Region
    
    Fair Value
    
    
    Investments
    
    
    Fair Value
    
    
    InvestmentsMidwest
    
    $
    119,424
    
    
    
    47.3
    %
    
    $
    109,299
    
    
    
    42.5
    %West
    
    
    56,156
    
    
    
    22.2
    
    
    
    59,684
    
    
    
    23.2South
    
    
    41,582
    
    
    
    16.5
    
    
    
    44,704
    
    
    
    17.4Northeast
    
    
    35,343
    
    
    
    14.0
    
    
    
    36,995
    
    
    
    14.4U.S. Territory
    
    
    
    
    
    
    
    
    
    
    6,427
    
    
    
    2.5Total Investments
    
    $
    252,505
    
    
    
    100.0
    %
    
    $
    257,109
    
    
    
    100.0
    %
  19




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##### Table of Contents



Investment Principal Repayments
  AmountFor the remaining nine months ending September 30:2011
    
    $
    50,640For the fiscal year ending September 30:2012
    
    
    73,3392013
    
    
    123,0432014
    
    
    31,2452015
    
    
    9,9252016 and thereafter
    
    
    5,045Total contractual repayments
    
    $
    293,237Investments in equity securities
    
    
    4,469Adjustments to cost basis on debt securities
    
    
    (1,149
    )Total cost basis of investments held at December 31, 2010:
    
    $
    296,557
 Receivables from Portfolio Companies
  NOTE 4. RELATED PARTY TRANSACTIONS
 Loans to Former Employees
  Investment Advisory and Management Agreement
  Condensed Consolidated Statements of Operations
 20




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##### Table of Contents



Three Months
Ended December 31,2010
    
    
    2009Average total assets subject to base management fee(1)
    
    $
    269,408
    
    
    $
    330,000Multiplied by pro-rated annual base management fee of 2.0%
    
    
    0.5
    %
    
    
    0.5
    %Unadjusted base management fee
    
    $
    1,347
    
    
    $
    1,650Reduction for loan servicing fees(2)
    
    
    (842
    )
    
    
    (929
    )Base management fee(2)
    
    
    505
    
    
    
    721Credit for fees received by Adviser from the portfolio companies
    
    
    
    
    
    
    Fee reduction for the voluntary, irrevocable waiver of 2.0% fee
on senior syndicated loans to 0.5% per annum
    
    
    (52
    )
    
    
    (7
    )Net base management fee
    
    $
    453
    
    
    $
    714Incentive fee
    
    $
    1,159
    
    
    $
    375Credit from voluntary, irrevocable waiver issued by Advisers
board of directors
    
    
    
    
    
    
    (22
    )Net incentive fee
    
    $
    1,159
    
    
    $
    353Credit for fees received by Adviser from the portfolio companies
    
    $
    
    
    
    $
    Fee reduction for the voluntary, irrevocable waiver of 2.0% fee
on senior syndicated loans to 0.5% per annum
    
    
    (52
    )
    
    
    (7
    )Incentive fee credit
    
    
    
    
    
    
    (22
    )Credit to base management and incentive
fees from Adviser(2)
    
    $
    (52
    )
    
    $
    (29
    )
 
 (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 Operationslocated elsewhere in this report. Base Management Fee
  
    
    Loan Servicing FeesThe 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 Companys 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 syndicated loan participations, for the three months ended December 31, 2010 and
2009.
    
    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
others are credited against the base management fee that the Company would otherwise be required
to pay to the Adviser.
 Incentive Fee
  21




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##### Table of Contents




    
    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% annualized);
 
    
    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
 Condensed Consolidated
Statements of Operations
 Related Party Fees Due
 Condensed Consolidated Statements of Assets and
Liabilities
 As of December 31,
    
    
    As of September 30,2010
    
    
    2010Unpaid base management fee to Adviser
    
    $
    453
    
    
    $
    319Unpaid incentive fee to Adviser
    
    
    1,159
    
    
    
    158Unpaid loan servicing fees to Adviser
    
    
    204
    
    
    
    196Total fees due to Adviser
    
    
    1,816
    
    
    
    673Unpaid administration fee due to Administrator
    
    
    186
    
    
    
    267Total related party fees due
    
    $
    2,002
    
    
    $
    940
 22




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##### Table of Contents



NOTE 5. BORROWINGS
    Fair Value
 Condensed
Consolidated Statements of Assets and Liabilities
 Borrowings under Credit FacilityTotal Fair ValueReported in CondensedConsolidated Statement ofLevel 1
    
    Level 2
    
    Level 3
    
    Assets and LiabilitiesDecember 31, 2010
    
    $
    
    
    
    $
    
    
    
    $
    25,301
    
    
    $
    25,301September 30, 2010
    
    $
    
    
    
    $
    
    
    
    $
    17,940
    
    
    $
    17,940
 Fair value measurements using unobservable data inputs (Level 3)
 Three Months Ended December 31,2010
    
    
    2009Fair value as of September 30, 2010 and 2009, respectively
    
    $
    17,940
    
    
    $
    83,350Unrealized depreciation(1)
    
    
    (439
    )
    
    
    (219
    )Borrowings
    
    
    10,000
    
    
    
    2,900Repayments
    
    
    (2,200
    )
    
    
    (12,500
    )Fair value as of December 31, 2010 and 2009, respectively
    
    $
    25,301
    
    
    $
    73,531
 
 (1)
    
    Included in unrealized depreciation on borrowings
on the accompanying Condensed Consolidated Statements of
Operationsfor the three months ended December 31, 2010 and
2009. 23




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##### Table of Contents



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 12/31/10
    
    
    Date
    
    
    on NoteAug-01
    
    
    393,334
    
    
    
    15.00
    
    
    $
    5,900
    (1)
    
    $
    5,900
    
    
    Aug-10
    
    
    4.90
    %(2)Aug-01
    
    
    18,334
    
    
    
    15.00
    
    
    
    275
    (1)
    
    
    255
    
    
    Aug-10
    
    
    4.90
    (2)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
    
    
    $
    7,103
 
 (1)
    
    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 $5,900 and $275 (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 a Stock Pledge
Agreements (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 Pledge
Agreement), which includes 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 (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 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.(2)
    
    An event of default was triggered under the Note by virtue of the employees failure
to repay the amounts outstanding within five business days of August 23, 2010. As such, the
Company charged a default rate of 2% under the Note for periods following the date of default.  24




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ondensed Consolidated Statements of Assets and Liabilities
 NOTE 7. NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS PER COMMON SHARE
  Three months endedDecember 31,2010
    
    2009Numerator for basic and diluted net increase in
net assets resulting from operations per common
share
    
    $
    2,132
    
    
    $
    6,326Denominator for basic and diluted shares
    
    
    21,039,242
    
    
    
    21,087,574Basic and diluted net increase in net assets
resulting from operations per common share
    
    $
    0.10
    
    
    $
    0.30
 NOTE 8. DISTRIBUTIONS
  DistributionFiscal Year
    
    Record Date
    
    Payment Date
    
    per Share2011
    
    October 21, 2010
    
    October 29, 2010
    
    $
    0.07November 19, 2010
    
    November 30, 2010
    
    $
    0.07December 23, 2010
    
    December 31, 2010
    
    $
    0.07Total
    
    $
    0.212010
    
    October 22, 2009
    
    October 30, 2009
    
    $
    0.07November 19, 2009
    
    November 30, 2009
    
    $
    0.07December 22, 2009
    
    December 31, 2009
    
    $
    0.07Total
    
    $
    0.21
   NOTE 9. COMMITMENTS AND CONTINGENCIES
   25




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NOTE 10. FINANCIAL HIGHLIGHTS
 Three Months EndedDecember 31,2010
    
    
    2009Per Share Data(1)Net asset value at beginning of period
    
    $
    11.85
    
    
    $
    11.81Income from investment operations:Net investment income(2)
    
    
    0.22
    
    
    
    0.21Net realized loss on investments(2)
    
    
    
    
    
    
    (0.04
    )Net unrealized (depreciation) appreciation on investments(2)
    
    
    (0.14
    )
    
    
    0.12Net unrealized appreciation on borrowings(2)
    
    
    0.02
    
    
    
    0.01Total from investment operations
    
    
    0.10
    
    
    
    0.30Distributions to stockholders(3)
    
    
    (0.21
    )
    
    
    (0.21
    )Reclassification of principal on employee note
    
    
    
    
    
    
    0.02Net asset value at end of period
    
    $
    11.74
    
    
    $
    11.92Per share market value at beginning of period
    
    $
    11.27
    
    
    $
    8.93Per share market value at end of period
    
    
    11.52
    
    
    
    7.69Total return(4)(5)
    
    
    4.11
    %
    
    
    (11.58
    )%Shares outstanding at end of period
    
    
    21,039,242
    
    
    
    21,087,574Statement of Assets and Liabilities Data:Net assets at end of period
    
    $
    246,960
    
    
    $
    251,449Average net assets(6)
    
    
    247,513
    
    
    
    248,874Senior Securities Data:Total borrowings
    
    
    25,301
    
    
    
    73,531Asset coverage ratio(7)(8)
    
    
    1,061
    %
    
    
    442
    %Asset coverage per unit(8)
    
    $
    10,612
    
    
    $
    4,420Ratios/Supplemental Data:Ratio of expenses to average net assets-annualized(9)
    
    
    5.53
    %
    
    
    8.69
    %Ratio of net expenses to average net assets-annualized(10)
    
    
    5.44
    
    
    
    8.64Ratio of net investment income to average net assets-annualized
    
    
    7.49
    
    
    
    7.12
 
 (1)
    
    Based on actual shares outstanding at the end of the
corresponding period.(2)
    
    Based on weighted average basic per share data.(3)
    
    Distributions are determined based on taxable income calculated in
accordance with income tax regulations which may differ from amounts
determined under accounting principles generally accepted in the United
States of America.(4)
    
    Total return equals the change in the ending market value of the
Companys common stock from the beginning of the period taking into account
distributions reinvested in accordance with the terms of the Companys
dividend reinvestment plan. Total return does not take into account
distributions that may be characterized as a return of capital. For further
information on the estimated character of the Companys distributions please
refer to Note 8.(5)
    
    Amounts were not annualized.(6)
    
    Average net assets are computed using the average of the balance of
net assets at the end of each month of the reporting period.(7)
    
    As a business development company, the Company is generally
required to maintain a ratio of at least 200% of total assets, less all
liabilities and indebtedness not represented by senior securities, to total
borrowings and guaranty commitments.(8)
    
    Asset coverage ratio is the ratio of the carrying value of the
Companys total consolidated assets, less all liabilities and indebtedness
not represented by senior securities, to the aggregate amount of senior
securities representing indebtedness (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.(9)
    
    Ratio of expenses to average net assets is computed using expenses
before credits from Adviser to the base management and incentive fees but
includes income tax expense.(10)
    
    Ratio of net expenses to average net assets is computed using
total expenses net of credits from Adviser to the base management and
incentive fees but includes income tax expense. 26




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NOTE 11. SUBSEQUENT EVENTS
 Distributions
  Record Date
    
    Payment Date
    
    Distribution per ShareJanuary 21, 2011
    
    January 31, 2011
    
    $
    0.07February 21, 2011
    
    February 28, 2011
    
    
    0.07March 21, 2011
    
    March 31, 2011
    
    
    0.07
 Investment Activity
  Northern Virginia SBIC License Application Not Granted
  27




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##### Table of Contents



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
   28




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Investment Highlights
 Purchases:
 Repayments:
 Sales:
  Recent Developments
 Credit Facility Amendment
  29




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30




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RESULTS OF OPERATIONS
 Comparison of the Three Months Ended December 31, 2010 to the Three Months Ended December 31, 2009
 A comparison of our operating results for the three months ended December 31, 2010 and 2009 is
below:
 For the three months ended December 31,2010
    
    
    2009
    
    
    $ Change
    
    
    % ChangeINVESTMENT INCOMEInterest income
    
    $
    7,845
    
    
    $
    9,251
    
    
    $
    (1,406
    )
    
    
    (15.2
    )Other income
    
    
    161
    
    
    
    553
    
    
    
    (392
    )
    
    
    (70.9
    )Total investment income
    
    
    8,006
    
    
    
    9,804
    
    
    
    (1,798
    )
    
    
    (18.3
    )EXPENSESLoan servicing fee
    
    
    842
    
    
    
    929
    
    
    
    (87
    )
    
    
    (9.4
    )Base management fee
    
    
    505
    
    
    
    721
    
    
    
    (216
    )
    
    
    (30.0
    )Incentive fee
    
    
    1,159
    
    
    
    375
    
    
    
    784
    
    
    
    209.1Administration fee
    
    
    186
    
    
    
    178
    
    
    
    8
    
    
    
    4.5Interest expense
    
    
    (120
    )
    
    
    1,535
    
    
    
    (1,655
    )
    
    NMAmortization of deferred financing fees
    
    
    297
    
    
    
    494
    
    
    
    (197
    )
    
    
    (39.9
    )Professional fees
    
    
    332
    
    
    
    912
    
    
    
    (580
    )
    
    
    (63.6
    )Other expenses
    
    
    220
    
    
    
    261
    
    
    
    (41
    )
    
    
    (15.7
    )Expenses before credit from Adviser
    
    
    3,421
    
    
    
    5,405
    
    
    
    (1,984
    )
    
    
    (36.7
    )Credit to base management and incentive fees from Adviser
    
    
    (52
    )
    
    
    (29
    )
    
    
    (23
    )
    
    
    79.3Total expenses net of credit to base management and
incentive fees
    
    
    3,369
    
    
    
    5,376
    
    
    
    (2,007
    )
    
    
    (37.3
    )NET INVESTMENT INCOME
    
    
    4,637
    
    
    
    4,428
    
    
    
    209
    
    
    
    4.7REALIZED AND UNREALIZED (LOSS) GAIN ON:Net realized loss on investments
    
    
    
    
    
    
    (920
    )
    
    
    920
    
    
    
    (100.0
    )Net unrealized (depreciation) appreciation on investments
    
    
    (2,944
    )
    
    
    2,599
    
    
    
    (5,543
    )
    
    NMNet unrealized appreciation on
borrowings
    
    
    439
    
    
    
    219
    
    
    
    220
    
    
    
    100.0Net (loss) gain on investments and borrowings
    
    
    (2,505
    )
    
    
    1,898
    
    
    
    (4,403
    )
    
    NMNET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS
    
    $
    2,132
    
    
    $
    6,326
    
    
    $
    (4,194
    )
    
    
    (66.3
    )
 NM = Not Meaningful
 Investment Income
  31




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As of December 31, 2010
    
    
    Three months ended December 31, 2010Company
    
    Fair Value
    
    % of Portfolio
    
    
    Revenues
    
    % of Total RevenuesReliable Biopharmaceutical Holding Inc.
    
    $
    26,961
    
    
    
    10.6
    %
    
    
    $
    754
    
    
    
    9.4
    %Sunshine Media Holdings
    
    
    22,235
    
    
    
    8.8
    
    
    
    
    864
    
    
    
    10.8Westlake Hardware, Inc.
    
    
    19,645
    
    
    
    7.8
    
    
    
    
    652
    
    
    
    8.2Clinton Holdings LLC (Midwest Metal)
    
    
    15,813
    
    
    
    6.3
    
    
    
    
    561
    
    
    
    7.0Defiance Acquisition Corp.
    
    
    12,757
    
    
    
    5.1
    
    
    
    
    231
    
    
    
    2.9Subtotalfive largest investments
    
    
    97,411
    
    
    
    38.6
    
    
    
    
    3,062
    
    
    
    38.3Other portfolio companies
    
    
    155,094
    
    
    
    61.4
    
    
    
    
    4,822
    
    
    
    60.2Other non-portfolio company revenue
    
    
    
    
    
    
    
    
    
    
    
    122
    
    
    
    1.5Total
    
    $
    252,505
    
    
    
    100.0
    %
    
    
    $
    8,006
    
    
    
    100.0
    %
 As of December 31, 2009
    
    
    Three months ended December 31, 2009Company
    
    Fair Value
    
    % of Portfolio
    
    
    Revenues
    
    % of Total RevenuesReliable Biopharmaceutical Holding Inc.
    
    $
    26,747
    
    
    
    8.7
    %
    
    
    $
    759
    
    
    
    7.7
    %Sunshine Media Holdings
    
    
    26,228
    
    
    
    8.6
    
    
    
    
    846
    
    
    
    8.6Westlake Hardware, Inc.
    
    
    24,213
    
    
    
    7.9
    
    
    
    
    924
    
    
    
    9.4Clinton Holdings LLC (Midwest Metal)
    
    
    13,712
    
    
    
    4.5
    
    
    
    
    522
    
    
    
    5.3Defiance Acquisition Corp.
    
    
    13,590
    
    
    
    4.4
    
    
    
    
    419
    
    
    
    4.3Subtotalfive largest investments
    
    
    104,490
    
    
    
    34.1
    
    
    
    
    3,470
    
    
    
    35.3Other portfolio companies
    
    
    202,148
    
    
    
    65.9
    
    
    
    
    6,221
    
    
    
    63.5Other non-portfolio company revenue
    
    
    
    
    
    
    
    
    
    
    
    113
    
    
    
    1.2Total
    
    $
    306,638
    
    
    
    100.0
    %
    
    
    $
    9,804
    
    
    
    100.0
    %
 Operating Expenses
    32




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Investment Advisory and Management Agreement Condensed Consolidated Financial Statements
 Three Months
Ended December 31,2010
    
    
    2009Average total assets subject to base management fee(1)
    
    $
    269,408
    
    
    $
    330,000Multiplied by pro-rated annual base management fee of 2.0%
    
    
    0.5
    %
    
    
    0.5
    %Unadjusted base management fee
    
    $
    1,347
    
    
    $
    1,650Reduction for loan servicing fees(2)
    
    
    (842
    )
    
    
    (929
    )Base management fee(2)
    
    
    505
    
    
    
    721Credit for fees received by Adviser from the portfolio companies
    
    
    
    
    
    
    Fee reduction for the voluntary, irrevocable waiver of 2.0% fee
on senior syndicated loans to 0.5% per annum
    
    
    (52
    )
    
    
    (7
    )Net base management fee
    
    $
    453
    
    
    $
    714Incentive fee
    
    $
    1,159
    
    
    $
    375Credit from voluntary, irrevocable waiver issued by Advisers
board of directors
    
    
    
    
    
    
    (22
    )Net incentive fee
    
    $
    1,159
    
    
    $
    353Credit for fees received by Adviser from the portfolio companies
    
    $
    
    
    
    $
    Fee reduction for the voluntary, irrevocable waiver of 2.0% fee
on senior syndicated loans to 0.5% per annum
    
    
    (52
    )
    
    
    (7
    )Incentive fee credit
    
    
    
    
    
    
    (22
    )Credit to base management and incentive fees from
Adviser(2)
    
    $
    (52
    )
    
    $
    (29
    )
 
 (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 Operationslocated elsewhere in this report. Net Realized Loss on Investments
  Net Unrealized (Depreciation) Appreciation on Investments
  33




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##### Table of Contents



Three months ended December 31, 2010Net UnrealizedAppreciationPortfolio Company
    
    Investment Classification
    
    (Depreciation)Defiance Integrated Technologies, Inc.
    
    Control
    
    $
    2,969Puerto Rico Cable Acquisition Company, Inc.
    
    Non-Control / Non-Affiliate
    
    
    732Midwest Metal Distribution, Inc.
    
    Control
    
    
    272Global Brass & Cooper, Inc.
    
    Non-Control / Non-Affiliate
    
    
    263Reliable Biopharmaceutical Holdings, Inc.
    
    Non-Control / Non-Affiliate
    
    
    250Sunshine Media Holdings
    
    Non-Control / Non-Affiliate
    
    
    (5,450
    )Lindmark Acquisitions
    
    Control
    
    
    (1,051
    )GFRC Holdings LLC
    
    Non-Control / Non-Affiliate
    
    
    (406
    )Other, net (<$250)
    
    
    
    
    (523
    )Total:
    
    $
    (2,944
    )
   Three months ended December 31, 2009Net UnrealizedAppreciationPortfolio Company
    
    Investment Classification
    
    (Depreciation)BAS Broadcasting
    
    Non-Control / Non-Affiliate
    
    $
    1,192
    (1)Westlake Hardware, Inc.
    
    Non-Control / Non-Affiliate
    
    
    544Kinetek Acquisition Corp.
    
    Non-Control / Non-Affiliate
    
    
    513

(2)Wesco Holdings, Inc.
    
    Non-Control / Non-Affiliate
    
    
    408

(3)WP Evenflo Group Holdings, Inc.
    
    Non-Control / Non-Affiliate
    
    
    343Puerto Rico Cable Acquisition Company, Inc.
    
    Non-Control / Non-Affiliate
    
    
    289Sunshine Media Holdings
    
    Non-Control / Non-Affiliate
    
    
    276Allison Publications, LLC
    
    Non-Control / Non-Affiliate
    
    
    265Pinnacle Treatment Centers, Inc.
    
    Non-Control / Non-Affiliate
    
    
    254Defiance Integrated Technologies, Inc.
    
    Control
    
    
    (816
    )Legend Communications of Wyoming LLC
    
    Non-Control / Non-Affiliate
    
    
    (543
    )LocalTel, LLC
    
    Control
    
    
    (524
    )KMBQ Corporation
    
    Non-Control / Non-Affiliate
    
    
    (385
    )Other, net (<$250)
    
    
    
    
    783Total:
    
    $
    2,599
 
 (1)
    
    Reflects the reversal of $0.5 million in unrealized depreciation in connection
with the payoff  of the senior term B loan of BAS Broadcasting.(2)
    
    Reflects the reversal of the unrealized depreciation in connection
with the $0.5 million realized loss on the sale of Kinetek Acquisition Corp.(3)
    
    Reflects the reversal of the unrealized depreciation in connection with
the $0.4 million realized loss on the sale of Wesco Holdings, Inc.   Net Unrealized Depreciation on Borrowings
  34




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Net Increase in Net Assets Resulting from Operations
  
 LIQUIDITY AND CAPITAL RESOURCES (dollar amounts in thousands, unless otherwise indicated)
 Operating Activities
   Three Months EndedDecember 31,2010
    
    
    2009Beginning investment portfolio at fair value
    
    $
    257,109
    
    
    $
    320,969New investments
    
    
    9,000
    
    
    
    Disbursements to existing portfolio companies
    
    
    2,794
    
    
    
    2,063Principal repayments (including repayment of PIK)
    
    
    (13,208
    )
    
    
    (15,404
    )Proceeds from sales
    
    
    (37
    )
    
    
    (2,782
    )Increase in investment balance due to PIK
    
    
    4
    
    
    
    55Increase in investment balance due to transferred interest
    
    
    
    
    
    
    103Unrealized (depreciation) appreciation
    
    
    (2,944
    )
    
    
    1,193Reversal of prior period depreciation on realization
    
    
    
    
    
    
    1,406Net realized loss
    
    
    
    
    
    
    (920
    )Amortization of premiums and discounts
    
    
    (213
    )
    
    
    (45
    )Ending investment portfolio at fair value
    
    $
    252,505
    
    
    $
    306,638
  AmountFor the remaining nine months ending
September 30:2011
    
    $
    50,640For the fiscal year ending September 30:2012
    
    
    73,3392013
    
    
    123,0432014
    
    
    31,2452015
    
    
    9,9252016
    
    
    5,045Total contractual repayments
    
    $
    293,237Investments in equity securities
    
    
    4,469Adjustments to cost basis on debt securities
    
    
    (1,149
    )Total cost basis of investments held at
December 31, 2010:
    
    $
    296,557
 35




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##### Table of Contents



Financing Activities
  Distributions
  Section 19(a) Disclosure
 Section 19(a) Disclosure
  Issuance of Equity
   36




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Revolving Credit Facility
    Contractual Obligations and Off-Balance Sheet Arrangements
   37




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##### Table of Contents



Condensed Consolidated Statements of Assets and Liabilities
 As of December 31,
    
    As of September 30,2010
    
    2010Unused line of credit commitments
    
    $
    6,099
    
    
    $
    9,304Uncalled capital commitment
    
    
    1,600
    
    
    
    1,600Guarantees
    
    
    250
    
    
    
    250
  Payments Due by PeriodLess thanContractual Obligations(1)
    
    1 Year
    
    
    1-3 Years
    
    
    4-5 Years
    
    
    After 5 Years
    
    
    TotalCredit Facility(2)
    
    $
    
    
    
    $
    24,600
    
    
    $
    
    
    
    $
    
    
    
    $
    24,600
 
 (1)
    
    Excludes the unused commitments to extend credit or capital to our
portfolio companies for an aggregate amount of $7.7 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 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.
 38




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Investments
    
    
    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:
   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
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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 liquidity waterfall approach, we continue to use the enterprise value methodology
utilizing a liquidity waterfall approach to determine the fair value of these investments
under ASC 820 if we have the ability to initiate a sale of a portfolio company as of the
measurement date. 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;
    
    the comparison to publicly traded securities; and
    
    DCF or other pertinent factors.
 In gathering the sales to third parties of similar securities, we may gather and analyze
industry statistics and use outside experts. Once we have estimated the TEV of the issuer, we
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
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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 our
Advisers judgment, the liquidity waterfall approach does not accurately reflect the value of
the debt component, our Adviser may recommend that we use a valuation by SPSE, or if that is
unavailable, a DCF valuation technique.(3)
    
    Portfolio investments in non-controlled companies comprised of a bundle of investments, which
can include debt and equity securities:We value Non-Public Debt Securities that are purchased
together with equity or equity-like securities from the same portfolio company, or issuer, for
which we do not control or cannot gain control as of the measurement date, using a
hypothetical secondary market as our principal market. In accordance with ASC 820, 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. Subsequent to June 30, 2009, 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:
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Companys
    
    First
    
    SecondSystem
    
    NRSRO
    
    NRSRO
    
    Gladstone Capitals Description(1)>10
    
    
    Baa2
    
    BBB
    
    Probability of Default (PD) during the next ten years is 4% and the Expected Loss (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 ten year term debt security. If a debt
security is less than ten years, then the probability of default is adjusted to a lower
percentage for the shorter period, which may move the security higher on our risk rating
scale.   Rating
    
    December 31, 2010
    
    September 30, 2010Highest
    
    
    10.0
    
    
    
    10.0Average
    
    
    6.4
    
    
    
    6.1Weighted Average
    
    
    6.5
    
    
    
    5.9Lowest
    
    
    3.0
    
    
    
    1.0
  Rating
    
    December 31, 2010
    
    September 30, 2010Highest
    
    B+/B2
    
    B+/B2Average
    
    B-/B3
    
    B+/B2Weighted Average
    
    B/B2
    
    B+/B2Lowest
    
    B-/B3
    
    B2
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Tax Status
 Federal Income Taxes
    Interest Income Recognition
     Condensed
Consolidated Statements of Operations
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
  84.7
    %
    
    variable rates with a floor5.6
    %
    
    variable rates without a floor or ceiling9.7
    %
    
    fixed rate100.0
    %
    
    total
  
 ITEM 4. CONTROLS AND PROCEDURES.
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PART IIOTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS.
  
 ITEM 1A. RISK FACTORS.
  
 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
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SIGNATURE
  GLADSTONE CAPITAL CORPORATIONBy:
    /s/ David WatsonDavid Watson
Chief Financial Officer  46




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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, 2007.11
    
    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.
  47