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**UNITEDSTATES********SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,DC 20549**

 

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**FORM 10-K**

 

**(Mark One)**

 
| **x** | ** ** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(D) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|------------|---------------------------------------------------------------------------------------------------------------|

 

**For the fiscal year ended March 31,2009**

 

**OR**

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

 

**Commissionfile number 814-00704**

 

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**GLADSTONEINVESTMENT CORPORATION**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                                                     | ** ** | **83-0423116**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification No.) |
|                                                             |       |                                  |
| **1521 Westbranch Drive,  Suite 200  McLean, Virginia**     | ** ** | **22102**                             |
| (Address of principal  executive offices)                        |       | (Zip Code)                            |

 

**(703) 287-5800**(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) ofthe Act:

 

| **Common Stock, $0.001 par value  per share** | ** ** | **NASDAQ Global Select Market**         |
|-----------------------------------------------|------------|-----------------------------------------|
| (Title of each class)                         |       | (Name of exchange on which  registered) |

 

Securities registeredpursuant to Section 12(g) of the Act: **None**

 

Indicate by check mark if theregistrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act. YES o  NO x

 

Indicate by check if theregistrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  YES o  NO x

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days.  YES x  NO o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files).  YES o  NO o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to thebest of registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this 10-K or any amendment tothis Form 10-K.  o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definitions of “largeaccelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

 

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12 b-2 ofthe Exchange Act).  YES o  NO x

 

The aggregate market value ofthe voting stock held by non-affiliates of the Registrant on September 30,2008, based on the closing price on that date of $6.88 on the NASDAQ GlobalSelect Market, was $210,637,992. For the purposes of calculating this amountonly, all directors and executive officers of the Registrant have been treatedas affiliates. There were 22,080,133 shares of the Registrant’s Common Stock,$0.001 par value, outstanding as of May 29, 2009.

 

**DocumentsIncorporated by Reference.**Portions of the Registrant’sProxy Statement relating to the Registrant’s 2009 Annual Meeting ofStockholders are incorporated by reference into Part III of this AnnualReport on Form 10-K as indicated herein.

 

 

 

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**GLADSTONE INVESTMENT CORPORATION**

**FORM 10-KFOR THE FISCAL YEAR ENDED**

**MARCH 31,2009**

 

**TABLE OFCONTENTS**

 
| PART I   | Item 1  | Business                                                                                                            | 3  |
|---------------|--------------|---------------------------------------------------------------------------------------------------------------------|----|
|          | Item 1A | Risk Factors                                                                                                        | 19 |
|          | Item 1B | Unresolved  Staff Comments                                                                                          | 32 |
|          | Item 2  | Properties                                                                                                          | 32 |
|          | Item 3  | Legal  Proceedings                                                                                                  | 32 |
|          | Item 4  | Submission  of Matters to a Vote of Security Holders                                                                | 32 |
| PART II  | Item 5  | Market  for Registrant’s Common Equity, Related Stockholder Matters and Issuer  Purchases of Equity Securities | 32 |
|          | Item 6  | Selected  Financial Data                                                                                            | 33 |
|          | Item 7  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         | 35 |
|          | Item 7A | Quantitative  and Qualitative Disclosures About Market Risk                                                         | 59 |
|          | Item 8  | Financial  Statements and Supplementary Data                                                                        | 61 |
|          | Item 9  | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure                               | 94 |
|          | Item 9A | Controls  and Procedures                                                                                            | 94 |
|          | Item 9B | Other  Information                                                                                                  | 94 |
| PART III | Item 10 | Directors,  Executive Officers and Corporate Governance                                                             | 94 |
|          | Item 11 | Executive  Compensation                                                                                             | 94 |
|          | Item 12 | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                    | 95 |
|          | Item 13 | Certain  Relationships and Related Transactions and Director Independence                                           | 95 |
|          | Item 14 | Principal  Accountant Fees and Services                                                                             | 95 |
| PART IV  | Item 15 | Exhibits  and Financial Statement Schedules                                                                         | 95 |
| SIGNATURES    | 97           |

 

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**FORWARD-LOOKING STATEMENTS**

 

*All statements containedherein, other than historical facts, may constitute “forward-looking statements”**within the meaning of Section 27A of theSecurities Act of 1933( the “Securities Act”), as amended, and Section 21Eof the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Thesestatements may relate to, among other things, future events or our futureperformance or financial condition. In some cases, you can identifyforward-looking statements by terminology such as “may,” “might,” “believe,” “will,”“provided,” “anticipate,” “future,” “could,” “growth,” “plan,” “intend,” “expect,”“should,” “would,” “if,” “seek,” “possible,” “potential,” “likely” or thenegative of such terms or comparable terminology. These forward-lookingstatements involve known and unknown risks, uncertainties and other factorsthat may cause our actual results, levels of activity, performance orachievements to be materially different from any future results, levels of activity,performance or achievements expressed or implied by such forward-lookingstatements. Such factors include, among others: (1) further adversechanges in the economy and the capital markets; (2) risks associated withnegotiation and consummation of pending and future transactions; (3) theloss of one or more of our executive officers, in particular David Gladstone,Terry Lee Brubaker, George Stelljes III or David Dullum; (4) changes inour business strategy; (5) availability, terms and deployment of capital; (6) changesin our industry, interest rates, exchange rates or the general economy; (7) thedegree and nature of our competition; and (8) those factors described inthe “Risk Factors” section of this Form 10-K.  We caution readers not to place unduereliance on any such forward-looking statement. We undertake no obligation topublicly update or revise any forward-looking statements, whether as a resultof new information, future events or otherwise, after the date of this Form 10-K.*

 

**PART I**

 

*In this Annual Report on Form 10-K,or Annual Report, the “Company,” “we,” “us,” and “our” refer to GladstoneInvestment Corporation and its wholly-owned subsidiaries unless the contextotherwise indicates.*

 

**Item 1. Business**

 

**Overview**

 

We were incorporated under the GeneralCorporation Laws of the State of Delaware on February 18, 2005. On June 22,2005 we completed an initial public offering and commenced operations. We wereprimarily established for the purpose of investing in subordinated loans,mezzanine debt, preferred stock and warrants to purchase common stock of smalland medium-sized companies in connection with buyouts and otherrecapitalizations. We also invest in senior secured loans, common stock and, toa much lesser extent, senior and subordinated syndicated loans. Our investmentobjective is to generate both current income and capital gains through thesedebt and equity instruments. We operate as a closed-end, non-diversifiedmanagement investment company and have elected to be treated as a businessdevelopment company (“BDC”) under the Investment Company Act of 1940, asamended (the “1940 Act”).

 

**Our Investment Strategy**

 

We seek to achieve returns from currentincome from senior, subordinated and mezzanine debt, and capital gains frompreferred stock and warrants to purchase common stock that we purchase inconnection with buyouts and recapitalizations of small and mid-sized companieswith established management teams. We seek to make investments that generallyrange between $10 million and $40 million each, although thisinvestment size may vary proportionately as the size of our capital basechanges. Typically, our investments mature in no more than seven years andaccrue interest at fixed or variable rates. We invest either by ourselves or jointly with other buyout funds and/ormanagement of the portfolio company, depending on the opportunity. If we areparticipating in an investment with one or more co-investors, then ourinvestment is likely to be smaller than if we were to be investing alone.

 

We expect that our target portfolio over timewill include mostly subordinated loans, mezzanine debt, preferred stock, andwarrants to buy common stock. Structurally, subordinated loans and mezzanineloans usually rank lower in priority of payment to senior debt, such as seniorbank debt, and may be unsecured. However, subordinated debt and mezzanine loansrank senior to common and preferred equity in a borrower’s capital structure.Typically, subordinated debt and mezzanine loans have elements of both debt andequity instruments, offering returns in the form of interest paymentsassociated with senior debt, while providing lenders an opportunity toparticipate in the capital appreciation of a borrower, if any, through anequity position. Due to its higher risk profile and often less restrictivecovenants as compared to senior debt, mezzanine debt generally earns a higherreturn than senior secured debt. Any warrants associated with mezzanine loansare typically detachable, which allows lenders to receive repayment of theirprincipal on an agreed amortization schedule while retaining 

 

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their equity interest in the borrower.Mezzanine debt also may include a “put” feature, which permits the holder tosell its equity interest back to the borrower at a price determined through apre-determined formula.

 

***Our Investments***

 

*Control and Affiliate Investments*

 

AtMarch 31, 2009 and 2008, we had investments in Control and Affiliateinvestments, at fair value, of approximately $157.0 million and $142.2 million,respectively, in revolving credit facilities, senior debt and subordinateddebt. In addition, at March 31, 2009 and 2008, we held, at fair value,approximately $62.2 million and $50.7 million, respectively, in preferredand common equity of those companies.

 

AtMarch 31, 2009 and 2008, our investments in Control investments, at fairvalue, represented approximately 77% and 70%, respectively, of our net assets.Also, at March 31, 2009 and 2008, our investments in Affiliateinvestments, at fair value, represented approximately 25% and 23%,respectively, of our net assets.

 

*InvestmentActivity*

 

On May 19, 2008, weinvested approximately $5.75 million in Tread Corporation (“Tread”) andits subsidiaries. The investment was comprised of approximately $750,000 inpreferred stock, $5.0 million of senior second lien debt notes and anominal amount in convertible common stock warrants. Tread, based in Roanoke,VA, was founded in 1957 and manufactures products that store, transport and mixthe primary ingredients for liquid explosives, which are ammonium nitrate andfuel oil.

 

On August 22, 2008,we invested approximately $21.4 million in Galaxy Tool Holding Corporation (“Galaxy”)and its subsidiaries.  The investment wascomprised of approximately $4.1 million and $48,000 in preferred stock andcommon stock, respectively, and $17.25 million in a senior second lien debtnote.  Galaxy, based in Winfield, KS, wasfounded in 1985 and is a manufacturer of specialized tooling for the aerospaceindustry, as well as blow and injection molds for the plastics industry.

 

OnAugust 29, 2008, we restructured our investment with Quench USA, LLC (“Quench”),reaching a settlement on the revolving credit facility and the term A seniorsubordinated debt and increased the term B senior subordinated debt to $8.0million.  In the restructuring,approximately $617,000 of distributions were received, $567,000 of which wererecorded as ordinary income.  Theremaining $50,000 reduced our basis in Quench. Furthermore, due to a decrease in our ownership percentage in theinvestment, Quench was reclassified in these financial statements as an “Affiliate”investment, along with all unrealized gains and losses and interest incomeassociated with the investment since the date of the restructuring.

 

OnSeptember 11, 2008, we invested approximately $3.1 million in A. StuckiHolding Corp. (“Stucki”) in the form of additional debt to the existing senior subordinated term debtfor Stucki’s acquisition of the assets of Alco Spring Industries, Inc. (“Alco”). Alco, located in Chicago, IL, is one of the last independent manufacturers ofhot wound springs for the transportation and heavy equipment industries. This investment carries the same terms as the original senior subordinated termdebt facility. Our equity securities and ownership position did not change as aresult of this transaction.

 

InOctober 2008, we executed a guaranty of a vehicle finance facilityagreement between Ford Motor Credit Company (“FMC”) and Auto Safety House, LLC(“ASH”), one of our Control investments (the “Finance Facility”).  The Finance Facility provides ASH with a lineof credit of up to $500,000 for component Ford parts used by ASH to build truckbodies under a separate contract.  Titleand ownership of the parts is retained by Ford. The guaranty of the FinanceFacility will expire upon termination of the separate parts supply contractwith Ford or upon our replacement as guarantor. The Finance Facility is secured by all the assets of BusinessInvestment.  As of March 31, 2009,we have not been required to make any payments on the guaranty of the FinanceFacility.

 

On November 10,2008, we invested approximately $10.7 million in Country Club Enterprises, LLC(“CCE”), comprised of approximately $3.7 million in preferred stock and $7.0million in subordinated term debt.  CCE,headquartered in Wareham, MA, was founded in 1975 and is one of the largestdistributors of golf carts in the United States.

 

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In April 2009, we entered into agreements with certain of ourControl and Affiliate investments that included repayments and reductions ofportions of certain senior term debt and revolving lines of credit. See Note13, “Subsequent Events” in our Notes to the Consolidated Financial Statements.

 

*Near-termInvestment Strategy and Compliance with the Regulated Investment Company AssetDiversification Test*

 

As of the date ofthis report, we have limited capital resources available to make additionalinvestments.  Moreover, because of recentchanges in our asset portfolio and their effect on our ability to satisfycertain elements of the Internal Revenue Code’s rules for maintenance of ourregulated investment company, or RIC, status, we are currently unable to makenew investments, including additional investments in our portfolio companies(such as advances under outstanding lines of credit), without jeopardizing ourcontinued status as a RIC.  Under the rulesapplicable to RICs, we are required to be in compliance with the assetdiversification test at each quarter end, with June 30, 2009 being the nextquarterly measurement date.  As of thedate of this report, however, due to sales of Non-Control/Non-Affiliateinvestments subsequent to the quarter ended March 31, 2009, there is a significantpossibility that at June 30, 2009, we will be below the 50% threshold of theasset diversification test.  However,failure to meet the asset diversification test alone will not result in ourloss of RIC status.  In circumstanceswhere the failure to meet the quarterly 50% threshold is the result offluctuations in the value of assets, including as a result of the sale ofassets, we are still deemed under the rules to satisfy the assetdiversification test and, therefore, maintain our RIC status, as long as wehave not made any new investments since the time that we fell below the 50%threshold.

 

Although wecurrently qualify as a RIC, if we make any additional investments beforeregaining compliance with the asset diversification test, our RIC status willbe threatened.  In this situation, if wedid not regain compliance with the 50% threshold prior to the next quarterlymeasurement date following the additional investment, we would be innon-compliance with the RIC rules and would have thirty days to “cure” ourfailure of the asset diversification test to avoid our loss of RIC status.Potential cures for failure of the asset diversification test include raisingadditional equity or debt capital, or changing the composition of our assets,which could include full or partial divestitures of investments, such that wewould once again exceed the 50% threshold.  We are currently seeking to obtain ashort-term credit facility under which we would be able to borrow funds at eachquarter end that would allow us to satisfy the asset diversification test forthe foreseeable future, thereby allowing us to make additional investmentsprior to June 30, 2009, or thereafter, and be in compliance with thistest.  There can be no assurance,however, that we will be able to enter into such a credit facility onreasonable terms, if at all, or that any other cures will be available to ussuch that our investment activity could resume.

 

*Non-Control/Non-Affiliate Investments*

 

At March 31, 2009 and 2008, we heldinvestments in Non-Control/Non-Affiliate investments of approximately$94.7 million and $142.7 million, at fair value, respectively. Theseinvestments were comprised primarily of syndicated loan participations ofsenior notes of both public and private companies and also non-syndicated loaninvestments where we did not have a significant ownership interest in theportfolio company. Also included in Non-Control/Non-Affiliate investments, atboth March 31, 2009 and 2008, were common stock warrants of oneNon-Control/Non-Affiliate company, which carried fair values of $0 and $265,respectively. Our investments, at fair value, in Non-Control/Non-Affiliateinvestments represented approximately 44% and 69% of our net assets at March 31,2009 and 2008, respectively. Subsequent to March 31, 2009, we sold 29 ofthe remaining 32 senior syndicated loans (collectively, the “SubsequentSyndicated Loan Sales”) included in the Non-Control/Non-Affiliate investmentsfor an aggregate of approximately $69.2 million in cash proceeds and recorded arealized loss of approximately $34.6 million in connection with these sales.These loans were sold to pay down all unpaid principal and interest owing toDeutsche Bank, A.G. under our prior credit agreement. Given foreseeable marketconditions, we do not intend to significantly continue to invest in seniorsyndicated loans in the near term.  SeeNote 13, “Subsequent Events” in our Notes to the Consolidated FinancialStatements.

 

*Investment Concentrations*

 

Approximately59.0% of the aggregate fair value of our investment portfolio at March 31,2009 consisted of senior term debt, approximately 21.2% was senior subordinatedterm debt and approximately 19.8% was preferred and common equity securities.At March 31, 2009, we had an aggregate of approximately $348.9 million, atcost, invested in 46 portfolio companies. The following table outlines ourinvestments by type at March 31, 2009 and 2008:

 
| ** **                                    | ** ** | **March 31, 2009** | ** **  | **March 31, 2008** | ** ** |
|-----------------------------------------------|------------|-------------------------|-------------|------------------------------|------------|
| ** **                                    | ** ** | **Cost**                | ** **  | **Fair Value**          | ** ** | **Cost** | ** ** | **Fair Value** | ** ** |
| Senior Term Debt                              |       | $                       | 230,861     |                         | $          | 185,161 |   | $ | 269,270 |   | $ | 244,878 |   |
| Senior Subordinated Term Debt                 |       | 72,762                  |        | 66,576                       |       | 43,894 |   | 38,644 |   |
| Subordinated Term Debt                        |       | —                  |        | —                       |       | 1,089 |   | 1,089 |   |
| Preferred & Common Equity Securities |       | 45,322                  |        | 62,193                       |       | 36,552 |   | 50,993 |   |
| **Total Investments**                         | ** ** | **$**                   | **348,945** | ** **                   | **$**      | **313,930** | ** ** | **$** | **350,805** | ** ** | **$** | **335,604** | ** ** |

 

As a result of the Subsequent Syndicated LoanSales, as of May 29, 2009, 46.3% of the aggregate fair value of ourinvestment portfolio consisted of senior term debt, approximately 27.7% wassenior subordinated term debt and 26.0% was preferred and common equitysecurities. As of May 29, 2009, we had an aggregate of approximately$239.7 million, at cost, invested in 17 portfolio companies.

 

Investments at fair value consisted of thefollowing industry classifications at March 31, 2009 and 2008:

 
| ** **                                | ** ** | **March 31, 2009** | ** **  | **March 31, 2008** | ** ** |
|-------------------------------------------|------------|-------------------------|-------------|------------------------------|------------|
| ** **                                | ** ** | ** **              | ** **  | **Percentage of**       | ** ** | ** ** | ** ** | **Percentage of** | ** ** |
| ** **                                | ** ** | **Fair Value**     | ** **  | **Total Investments**   | ** ** | **Net Assets** | ** ** | **Fair Value** | ** ** | **Total Investments** | ** ** | **Net Assets** | ** ** |
| Aerospace and Defense                     |       | $                       | 22,436      |                         | 7.2        | % | 10.4 | % | $ | — |   | 0.0 | % | 0.0 | % |
| Automobile                                |       | 14,436                  |        | 4.6                          | %          | 6.7 | % | 2,074 |   | 0.6 | % | 1.0 | % |
| Beverage, Food and Tobacco                |       | 1,570                   |        | 0.5                          | %          | 0.7 | % | 3,454 |   | 1.0 | % | 1.7 | % |
| Broadcasting and Entertainment            |       | 1,934                   |        | 0.6                          | %          | 0.9 | % | 3,499 |   | 1.1 | % | 1.7 | % |
| Buildings and Real Estate                 |       | 10,709                  |        | 3.4                          | %          | 5.0 | % | 11,734 |   | 3.5 | % | 5.7 | % |
| Cargo Transport                           |       | 13,324                  |        | 4.3                          | %          | 6.2 | % | 20,869 |   | 6.2 | % | 10.1 | % |
| Chemicals, Plastics and Rubber            |       | 21,420                  |        | 6.8                          | %          | 10.0 | % | 25,563 |   | 7.6 | % | 12.4 | % |
| Containers, Packaging and Glass           |       | 21,446                  |        | 6.8                          | %          | 10.0 | % | 26,286 |   | 7.8 | % | 12.7 | % |
| Diversified/Conglomerate Manufacturing    |       | 56,944                  |        | 18.1                         | %          | 26.5 | % | 57,500 |   | 17.1 | % | 27.9 | % |
| Diversified/Conglomerate Service          |       | 23,585                  |        | 7.5                          | %          | 11.0 | % | 30,742 |   | 9.2 | % | 14.9 | % |
| Ecological                                |       | —                  |        | 0.0                          | %          | 0.0 | % | 422 |   | 0.1 | % | 0.2 | % |
| Electronics                               |       | 6,594                   |        | 2.1                          | %          | 3.1 | % | 10,689 |   | 3.2 | % | 5.2 | % |
| Healthcare, Education and Childcare       |       | 33,605                  |        | 10.7                         | %          | 15.6 | % | 37,238 |   | 11.1 | % | 18.0 | % |
| Home and Office Furnishings               |       | —                  |        | 0.0                          | %          | 0.0 | % | 14,658 |   | 4.4 | % | 7.1 | % |
| Machinery                                 |       | 63,907                  |        | 20.4                         | %          | 29.8 | % | 66,439 |   | 19.8 | % | 32.2 | % |
| Oil and Gas                               |       | 6,171                   |        | 2.0                          | %          | 2.9 | % | — |   | 0.0 | % | 0.0 | % |
| Personal, Food and Miscellaneous Services |       | 3,552                   |        | 1.1                          | %          | 1.7 | % | 6,936 |   | 2.1 | % | 3.4 | % |
| Printing and Publishing                   |       | 3,158                   |        | 1.0                          | %          | 1.5 | % | 5,299 |   | 1.6 | % | 2.6 | % |
| Telecommunications                        |       | 9,139                   |        | 2.9                          | %          | 4.3 | % | 12,202 |   | 3.6 | % | 5.9 | % |
| **Total Investments**                     | ** ** | **$**                   | **313,930** | ** **                   | **100.0**  | **%** | ** ** | ** ** | **$** | **335,604** |   | **100.0** | **%** |   |   |

 

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The investments at fair value were includedin the following geographic regions of the United States at March 31, 2009and 2008:

 
| ** **            | ** ** | **March 31,  2009** | ** **  | **March 31, 2008** | ** ** |
|-----------------------|------------|--------------------------|-------------|------------------------------|------------|
| ** **            | ** ** | ** **               | ** **  | **Percentage of**       | ** ** | ** ** | ** ** | **Percentage of** | ** ** |
| ** **            | ** ** | **Fair Value**      | ** **  | **Total Investments**   | ** ** | **Net Assets** | ** ** | **Fair Value** | ** ** | **Total Investments** | ** ** | **Net Assets** | ** ** |
| Mid-Atlantic          |       | $                        | 119,622     |                         | 38.1       | % | 55.7 | % | $ | 131,883 |   | 39.3 | % | 63.9 | % |
| Midwest               |       | 105,945                  |        | 33.7                         | %          | 49.3 | % | 106,811 |   | 31.8 | % | 51.7 | % |
| Northeast             |       | 17,525                   |        | 5.6                          | %          | 8.2 | % | 10,718 |   | 3.2 | % | 5.2 | % |
| Southeast             |       | 40,512                   |        | 12.9                         | %          | 18.9 | % | 49,780 |   | 14.8 | % | 24.1 | % |
| West                  |       | 30,326                   |        | 9.7                          | %          | 14.1 | % | 36,412 |   | 10.9 | % | 17.6 | % |
| **Total Investments** | ** ** | **$**                    | **313,930** | ** **                   | **100.0**  | **%** | ** ** | ** ** | **$** | **335,604** | ** ** | **100.0** | **%** |   |   |

 

The geographic region depicts the location ofthe headquarters for our portfolio companies. A portfolio company may have anumber of other business locations in other geographic regions.

 

**Our Investment Adviser and Administrator**

 

Gladstone Management Corporation (our “Adviser”)is led by a management team which has extensive experience in our lines ofbusiness. Our Adviser also has a wholly-owned subsidiary, GladstoneAdministration, LLC (the “Administrator”), which employs our chieffinancial officer, chief compliance officer, treasurer and their respectivestaffs. Excluding our chief financial officer, all our executive officers areofficers or directors, or both, of our Adviser and our Administrator.

 

Our Adviser and Administrator also provideinvestment advisory and administrative services to our affiliates GladstoneCommercial Corporation (“Gladstone Commercial”), a publicly traded real estateinvestment trust; Gladstone Capital Corporation (“Gladstone Capital”), apublicly traded business development company; and Gladstone Land Corporation, aprivate agricultural real estate company owned by David Gladstone, our chairmanand chief executive officer. All of our directors and executive officers, withthe exception of our chief financial officer, serve as either directors orexecutive officers, or both, of Gladstone Commercial and Gladstone Capital. Inthe future, our Adviser and Administrator may provide investment advisory andadministrative services to other funds, both public and private, of which it isthe sponsor.

 

We have been externally managed by ourAdviser pursuant to an investment advisory and administrative agreement sinceour inception. Our Adviser was organized as a corporation under the laws of theState of Delaware on July 2, 2002, and is a registered investment adviserunder the Investment Advisers’ Act of 1940, as amended. Our Adviser isheadquartered in McLean, Virginia, a suburb of Washington, D.C., and hasoffices in the states of New York, New Jersey, Pennsylvania, Illinois, Texasand Georgia.

 

**Investment Process**

 

***Overview of Investment and ApprovalProcess***

 

To originate investments, our Adviser’sinvestment professionals use an extensive referral network comprised primarilyof venture capitalists, leveraged buyout funds, investment bankers, attorneys,accountants, commercial bankers and business brokers. Our Adviser’s investmentprofessionals review information received from these and other sources insearch of potential financing opportunities. If a potential opportunity matchesour investment objectives, the investment professionals 

 

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will seek an initial screening of theopportunity from our Adviser’s investment committee, which is composed of DavidGladstone (our chairman and chief executive officer), Terry Lee Brubaker (ourco-vice chairman and chief operating officer) and George Stelljes III (ourco-vice chairman and chief investment officer). If the prospective portfoliocompany passes this initial screening, the investment professionals conduct adue diligence investigation and create a detailed profile summarizing theprospective portfolio company’s historical financial statements, industry andmanagement team and analyzing its conformity to our general investment criteria.The investment professionals then present this profile to our Adviser’sinvestment committee, which must approve each investment. Further, eachfinancing is reviewed and approved by the members of our Board of Directors, amajority of whom are not “interested persons” as defined in Section 2(a)(19)of the 1940 Act.

 

***Prospective Portfolio CompanyCharacteristics***

 

We have identified certain characteristicsthat we believe are important in identifying and investing in prospectiveportfolio companies. The criteria listed below provide general guidelines forour investment decisions, although not all of these criteria may be met by eachportfolio company.

 

·                  *Value-and-IncomeOrientation and Positive Cash Flow.* Our investment philosophyplaces a premium on fundamental analysis from an investor’s perspective and hasa distinct value-and-income orientation. In seeking value, we focus oncompanies in which we can invest at relatively low multiples of earnings beforeinterest, taxes, depreciation and amortization (“EBITDA”), and that havepositive operating cash flow at the time of investment. In seeking income, weseek to invest in companies that generate relatively high and stable cash flowto provide some assurance that they will be able to service their debt and payany required distributions on preferred stock. Typically, we do not expect toinvest in start-up companies or companies with speculative business plans.

 

·                  *ExperiencedManagement.* We generally require that our portfolio companieshave experienced management teams. We also require the portfolio companies tohave in place proper incentives to induce management to succeed and to act inconcert with our interests as investors, including having significant equity orother interests in the financial performance of their companies.

 

·                  *StrongCompetitive Position in an Industry.* We seek to invest in targetcompanies that have developed strong market positions within their respectivemarkets and that we believe are well-positioned to capitalize on growthopportunities. We seek companies that demonstrate significant competitiveadvantages versus their competitors, which we believe will help to protecttheir market positions and profitability.

 

·                  *ExitStrategy.* We seek to invest in companies that we believe willprovide a stable stream of cash flow that is sufficient to repay the loans wemake to them and to reinvest in their respective businesses. We expect thatsuch internally generated cash flow, which will allow our portfolio companiesto pay interest on, and repay the principal of, our investments, will be a keymeans by which we exit from our investments over time. In addition, we alsoseek to invest in companies whose business models and expected future cashflows offer attractive possibilities for capital appreciation on any equity interestswe may obtain or retain. These capital appreciation possibilities includestrategic acquisitions by other industry participants or financial buyers,initial public offerings of common stock, or other capital market transactions.

 

·                  *LiquidationValue of Assets.* The prospective liquidation value of the assets, ifany, collateralizing loans in which we invest is an important factor in ourinvestment analysis. We emphasize both tangible assets, such as accountsreceivable, inventory, equipment, and real estate and intangible assets, suchas intellectual property, customer lists, networks, and databases, although therelative weight we place on these asset classes will vary by company andindustry.

 

***Extensive Due Diligence***

 

Our Adviser conducts what we believe areextensive due diligence investigations of our prospective portfolio companiesand investment opportunities. Our due diligence investigation of a prospectiveportfolio company may begin with a review of publicly available information,and generally includes some or all of the following:

 

·                  a review of theprospective portfolio company’s historical and projected financial information;

 

·                  visits to theprospective portfolio company’s business site(s);

 

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·                  interviews withthe prospective portfolio company’s management, employees, customers andvendors;

 

·                  review of allloan documents;

 

·                  backgroundchecks on the prospective portfolio company’s management team; and

 

·                  research on theprospective portfolio company’s products, services or particular industry.

 

Upon completion of a due diligenceinvestigation and a decision to proceed with an investment in a buyout or otherrecapitalization, our Adviser’s investment professionals who have primaryresponsibility for the investment present the investment opportunity to ourAdviser’s investment committee, which consists of Messrs. Gladstone,Brubaker and Stelljes. The investment committee determines whether to pursuethe potential investment. Additional due diligence of a potential investmentmay be conducted on our behalf by attorneys and independent accountants priorto the closing of the investment, as well as other outside advisers, asappropriate.

 

We also rely on the long-term relationshipsthat our Adviser’s investment professionals have with venture capitalists,leveraged buyout funds, investment bankers, commercial bankers and businessbrokers, and on the extensive direct experiences of our executive officers andmanaging directors in providing debt and equity capital to small andmedium-sized private businesses.

 

***Investment Structure***

 

Once we have determined that a prospectiveacquisition, buyout or recapitalization meets our standards and investment criteria,we work with the management of that company and other capital providers tostructure the transaction in a way that provides us the greatest opportunity tomaximize our return on the investment, while providing appropriate incentivesto management of the company.

 

*Subordinated Debt andMezzanine Debt.*  Weanticipate that over time, much of the capital that we invest will be in theform of subordinated or mezzanine debt. Most of our mezzanine loans areunsecured loans while most of the subordinated loans are collateralized by asubordinated lien on some or all of the assets of the borrower. We structuremost of our mezzanine and subordinated loans with variable interest rates, butsome are fixed rate loans. In either event, we structure the loans at relativelyhigh rates of interest that provide us with significant current interestincome. Our subordinated and mezzanine loans typically have maturities of fiveto ten years and provide for interest-only payments in the early years, withamortization of principal deferred to the later years of the mezzanine loans.In some cases we may enter into loans that, by their terms, convert into equityor additional debt securities or defer payments of interest for the first fewyears after our investment, but none of our loans to date are convertible intosuch debt or equity securities.

 

Our subordinated and mezzanine debt investmentsmay include equity features, such as warrants or options to buy a significantcommon stock ownership interest in the portfolio company or success fees if thebusiness is sold. If a portfolio company appreciates in value, we may achieveadditional investment returns from any equity interests we hold. If we are aminority interest holder, we may structure the warrants to provide provisionsprotecting our rights as a minority-interest holder such as the right to sellthe warrants back to the company upon the occurrence of specified events. Inmany cases, we also obtain registration rights in connection with these equityinterests, which may include demand and co-registration rights.

 

*Senior Secured Debt.*  We also provide senior secured acquisitionfinancing for some portfolio companies. We typically structure these seniorsecured loans to have terms of three to ten years, and they may provide forlimited principal payments in the first few years of the term of the loan. Wegenerally obtain security interests in the assets of our portfolio companiesthat will serve as collateral in support of the repayment of these seniorloans. This collateral usually takes the form of first priority liens on theassets of the portfolio company.   The interest rates on our senior securedloans are generally variable rates ranging between 3.5% and 7.0% over theLondon Interbank Offer Rate (“LIBOR”).

 

*Preferred and Common Stock.*  We also may acquire preferred or commonstock, or both, in connection with a buyout or recapitalization. With respectto preferred or common stock investments, we target an investment returnsubstantially higher than our investments in senior or subordinated loans.However, we can offer no assurance that we can achieve such a return withrespect to any investment or our portfolio as a whole. The features of thepreferred stock we receive vary by transaction, but may include prioritydistribution rights, superior voting rights, redemption rights, liquidationpreferences and other provisions intended to protect our interests. Generallyspeaking, common stock does not have any current income and its value isrealized, if at all, upon the sale of the business or following the company’sinitial public offering.

 

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*Risk Management.*  We seek to limit the downside risk of ourinvestments by:

 

·                  makinginvestments with an expected total return (including both interest and potentialequity appreciation) that we believe compensates us for the credit risk of theinvestment;

 

·                  seekingcollateral or superior positions in the portfolio company’s capital structurewhere possible;

 

·                  incorporatingput rights and call protection into the investment structure where possible;and

 

·                  negotiatingcovenants in connection with our investments that afford our portfoliocompanies as much flexibility as possible in managing their businesses,consistent with the preservation of our capital.

 

We expect to hold most of our investments insubordinated debt and mezzanine debt until maturity or repayment, but we willsell our investments earlier if a liquidity event takes place, such as the saleor recapitalization of a portfolio company or, in the case of an equityinvestment in a company, its initial public offering. Occasionally, we may sellsome or all of our subordinated debt, mezzanine debt or equity interests in aportfolio company to a third party, such as an existing investor in theportfolio company, through a privately negotiated transaction.

 

As described above, we may also providesenior debt in addition to subordinated debt and equity in connection with anacquisition.

 

***Temporary Investments***

 

Pending investment in the debt of privatecompanies, we invest our otherwise uninvested cash primarily in cash, cashitems, government securities or high-quality debt securities maturing in oneyear or less from the time of investment (collectively “temporary investments”)so that at least 70% of our assets are “qualifying assets,” for purposes of thebusiness development company provisions of the 1940 Act. For informationregarding regulations to which we are subject and the definition of “qualifyingassets,” see “—Regulation as a Business Development Company.”

 

***Hedging Strategies***

 

Although it has not yet happened, nor do weexpect this to happen in the near future, when one of our portfolio companiesin which we hold equity investments goes public, we may undertake hedgingstrategies with regard to any equity interests that we may have in thatcompany. We may mitigate risks associated with the volatility of publiclytraded securities by, for instance, selling securities short or writing orbuying call or put options. Hedging against a decline in the value of suchinvestments in public companies would not eliminate fluctuations in the valuesof such investments or prevent losses if the values of such investmentsdecline, but it would establish other investments designed to gain from thosesame developments. Therefore, by engaging in hedging transactions, we canmoderate the decline in the value of our hedged investments in publiccompanies. However, such hedging transactions would also limit our opportunityto gain from an increase in the value of our investment in the public company.Pursuant to our line of credit, we have agreed to enter into hedgingtransactions, such as interest rate cap agreements, in connection with theborrowings that we make under our line of credit. To date, we hold only oneinterest rate cap agreement. Hedging strategies can pose risks to us and ourstockholders, but we believe that such activities are manageable because theywill be limited to only a portion of our portfolio.

 

Section 12(a)(3) of the 1940 Actprohibits us from effecting a short sale of any security “in contravention ofsuch rules and regulations or orders as U.S. Securities and ExchangeCommission (the “SEC”) may prescribe as necessary or appropriate in the publicinterest or for the protection of investors . . .” Though, to date, the SEC hasnot yet promulgated regulations under this statute, it is possible that suchregulations could be promulgated in the future in a way that would require usto change any hedging strategies that we may adopt. Accordingly, we will onlyengage in hedging activities that comply with applicable law and regulations.

 

**Competitive Advantages**

 

A large number of entities compete with usand make the types of investments that we seek to make in small andmedium-sized privately-owned businesses. Such competitors include privateequity funds, leveraged buyout funds, venture capital funds, investment banksand other equity and non-equity based investment funds, and other financingsources, including traditional financial services companies such as commercialbanks. Many of our competitors are substantially larger than we are and haveconsiderably greater funding sources that are not available to us. In addition,certain of our 

 

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competitors may have higher risk tolerancesor different risk assessments, which could allow them to consider a widervariety of investments, establish more relationships and build their marketshares. Furthermore, many of these competitors are not subject to theregulatory restrictions that the 1940 Act imposes on us as a businessdevelopment company. However, we believe that we have the following competitiveadvantages over other providers of financing to small and mid-sized businesses:

 

***Management expertise***

 

David Gladstone, our chairman and chiefexecutive officer, is also the chairman and chief executive officer of ourAdviser and its affiliated companies (the “Gladstone Companies”), and has beeninvolved in all aspects of the Gladstone Companies’ investment activities,including serving as a member of our Adviser’s investment committee. DavidDullum is our president and has extensive experience in private equityinvesting in middle market companies. Terry Lee Brubaker is our co-vicechairman and chief operating officer and has substantial experience inacquisitions and operations of companies. George Stelljes III is our co-vicechairman and chief investment officer and has extensive experience in leveragedfinance. Messrs. Gladstone, Dullum, Brubaker and Stelljes have principalmanagement responsibility for our Adviser as its senior executive officers.These individuals dedicate a significant portion of their time to managing ourinvestment portfolio. Our senior management has extensive experience providingcapital to small and mid-sized companies and has worked together for more than10 years. In addition, we have access to the resources and expertise ofour Adviser’s investment professionals and supporting staff that possess abroad range of transactional, financial, managerial, and investment skills.

 

***Increased access to investment opportunities developed throughproprietary research capability and extensive network of contacts***

 

Our Adviser seeks to identify potentialinvestments both through active origination and due diligence and through itsdialogue with numerous management teams, members of the financial community andpotential corporate partners with whom our Adviser’s investment professionalshave long-term relationships. We believe that our Adviser’s investmentprofessionals have developed a broad network of contacts within the investment,commercial banking, private equity and investment management communities, andthat their reputation in investment management enables us to identifywell-positioned prospective portfolio companies which provide attractiveinvestment opportunities. Additionally, our Adviser expects to generateinformation from its professionals’ network of accountants, consultants,lawyers and management teams of portfolio companies and other companies.

 

***Disciplined, value-and-income-orientedinvestment philosophy with a focus on preservation of capital***

 

In making its investment decisions, ourAdviser focuses on the risk and reward profile of each prospective portfoliocompany, seeking to minimize the risk of capital loss without foregoing thepotential for capital appreciation. We expect our Adviser to use the samevalue-and-income-oriented investment philosophy that its professionals use inthe management of the other Gladstone Companies and to commit resources tomanagement of downside exposure. Our Adviser’s approach seeks to reduce risk ininvestments by using some or all of the following:

 

·                  focusing oncompanies with good market positions, established management teams and goodcash flow;

 

·                  investing inbusinesses with experienced management teams;

 

·                  engaging inextensive due diligence from the perspective of a long-term investor;

 

·                  investing atlow price-to-cash flow multiples; or

 

·                  adoptingflexible transaction structures by drawing on the experience of the investmentprofessionals of our Adviser and its affiliates.

 

***Longer investment horizon with attractivepublicly traded model***

 

Unlike private equity and venture capitalfunds that are typically organized as finite-life partnerships, we are notsubject to standard periodic capital return requirements. The partnershipagreements of most private equity and venture capital funds typically providethat these funds may only invest investors’ capital once and must return allcapital and realized gains to investors within a finite time period, oftenseven to ten years. These provisions often force private equity and venturecapital funds to seek returns on their investments by causing their portfoliocompanies to pursue mergers, public equity offerings, or 

 

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other liquidity events more quickly thanmight otherwise be optimal or desirable, potentially resulting in both a loweroverall return to investors and an adverse impact on their portfolio companies.We believe that our flexibility to make investments with a long-term view andwithout the capital return requirements of traditional private investmentvehicles provides us with the opportunity to achieve greater long-term returnson invested capital.

 

***Flexible transaction structuring***

 

We believe our management team’s broadexpertise and ability to draw upon many years of combined experience enable ourAdviser to identify, assess, and structure investments successfully across alllevels of a company’s capital structure and manage potential risk and return atall stages of the economic cycle. We are not subject to many of the regulatorylimitations that govern traditional lending institutions such as banks. As aresult, we are flexible in selecting and structuring investments, adjustinginvestment criteria and transaction structures, and, in some cases, the typesof securities in which we invest. We believe that this approach enables ourAdviser to identify attractive investment opportunities that will continue togenerate current income and capital gain potential throughout the economiccycle, including during turbulent periods in the capital markets. One exampleof our flexibility is our ability to exchange our publicly-traded stock for thestock of an acquisition target in a tax-free reorganization under the InternalRevenue Code of 1986, as amended (the “Code”). After completing an acquisitionin such an exchange, we can restructure the capital of the small company toinclude senior and subordinated debt.

 

***Leverage***

 

For the purpose of making investments otherthan temporary investments and to take advantage of favorable interest rates,we may issue senior debt securities (including borrowings under our currentline of credit) up to the maximum amount permitted by the 1940 Act. The 1940Act currently permits us to issue senior debt securities and preferred stock(collectively, “senior securities”) in amounts such that our asset coverage, asdefined in the 1940 Act, is at least 200% after each issuance of seniorsecurities. We may also incur such indebtedness to repurchase our common stock.As a result of issuing senior securities, we are exposed to the risks ofleverage. Although borrowing money for investments increases the potential forgain, it also increases the risk of loss. A decrease in the value of our investmentswill have a greater impact on the value of our common stock to the extent thatwe have borrowed money to make investments. There is a possibility that thecosts of borrowing could exceed the income we receive on the investments wemake with such borrowed funds. In addition, our ability to pay distributions orincur additional indebtedness would be restricted if asset coverage is lessthan twice our indebtedness. If the value of our assets declines, we might beunable to satisfy that test. If this happens, we may find it necessary toliquidate a portion of our loan portfolio and repay a portion of ourindebtedness at a time when a sale may be disadvantageous. Furthermore, anyamounts that we use to service our indebtedness will not be available fordistributions to our stockholders. Our Board of Directors is authorized toprovide for the issuance of preferred stock with such preferences, powers,rights and privileges as it deems appropriate, provided that such an issuanceadheres to the requirements of the 1940 Act. See “—Regulation as a BusinessDevelopment Company—Asset Coverage” for a discussion of our leveragingconstraints.

 

**Ongoing Relationships with and Monitoring of PortfolioCompanies**

 

***Monitoring***

 

Our Adviser’s investment professionals monitorthe financial trends of each portfolio company on an ongoing basis to determineif each is meeting its respective business plans and to assess the appropriatecourse of action for each company. We monitor the status and performance ofeach portfolio company and use it to evaluate the overall performance of ourportfolio.

 

Our Adviser employs various methods ofevaluating and monitoring the performance of our investments, which includesome or all of the following:

 

·                  Assessment ofsuccess in the portfolio company’s overall adherence to its business plan andcompliance with covenants;

 

·                  Attendance atand participation in meetings of the portfolio company’s board of directors;

 

·                  Periodiccontact, including formal update interviews with portfolio company management,and, if appropriate, the financial or strategic sponsor;

 

·                  Comparison withother companies in the portfolio company’s industry; and

 

·                  Review ofmonthly and quarterly financial statements and financial projections forportfolio companies.

 

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***Managerial Assistance and Services***

 

As a business development company, we makeavailable significant managerial assistance to our portfolio companies andprovide other services to such portfolio companies. Neither we nor our Advisercurrently receives fees in connection with managerial assistance. Our Adviserprovides other services to our portfolio companies and receives fees for theseother services, certain of which are credited by 50% against the investmentadvisory fees that we pay our Adviser.

 

***Valuation Process***

 

The following is a general description of thesteps we take each quarter to determine the value of our investment portfolio.We value our investments in accordance with the requirements of the 1940 Act.We value securities for which market quotations are readily available at theirmarket value. We value all other securities and assets at fair value asdetermined in good faith by our Board of Directors. In determining the value ofour investments, our Adviser has established an investment valuation policy(the “Policy”). The Policy has been approved by our Board of Directors, andeach quarter the Board of Directors reviews whether our Adviser has applied thePolicy consistently and votes whether or not to accept the recommendedvaluation of our investment portfolio. Due to the uncertainty inherent in thevaluation process, such estimates of fair value may differ significantly fromthe values that would have been obtained had a ready market for the securitiesexisted. Investments for which market quotations are readily available arerecorded in our financial statements at such market quotations. With respect toany investments for which market quotations are not readily available orreliable, we perform the following valuation process each quarter:

 

·                  Our quarterlyvaluation process begins with each portfolio company or investment beinginitially assessed by our Adviser’s investment professionals responsible forthe investment, using the Policy.

 

·                  Preliminaryvaluation conclusions are then discussed with our management, and documented,along with any independent opinions of value provided by Standard &Poor’s Loan Evaluation Service, Inc. (“SPSE”), for review by our Board ofDirectors.

 

·                  Our Board ofDirectors reviews this documentation and discusses the input of our Adviser,management, and the opinions of value of SPSE to arrive at a determination forthe aggregate fair value of our portfolio of investments.

 

Our valuation policies, procedures andprocesses are more fully described under “Management’s Discussion and Analysisof Financial Condition and Results of Operations—Critical AccountingPolicies—Investment Valuation.”

 

**Investment Advisory and Management Agreement**

 

We entered into aninvestment advisory and management agreement with our Adviser (the “AdvisoryAgreement”), which is controlled by our chairman and chief executive officer. On July 9,2008, our Board of Directors approved the renewal of its Advisory Agreementwith the Adviser through August 31, 2009. In accordancewith the Advisory Agreement, we pay the Adviser fees as compensation for itsservices, consisting of a base management fee and an incentive fee.

 

The base management feeis computed and payable quarterly and is assessed at an annual rate of 2.0%computed on the basis of the value of our average gross assets at the end ofthe two most recently completed quarters, which are total assets, includinginvestments made with proceeds of borrowings, less any uninvested cash or cashequivalents resulting from borrowings.

 

Our Board of Directorsaccepted an unconditional and irrevocable voluntary waiver from the Adviser toreduce the annual 2.0% base management fee on senior syndicated loanparticipations to 0.5%, to the extent that proceeds resulting from borrowingswere used to purchase such syndicated loan participations.  This waiver remained in effect and wasapplied through March 31, 2009, and any waived fees may not be recouped byour Adviser in the future.

 

When our Adviser receivesfees from portfolio companies, as discussed in Note 2 under “ServicesProvided to Portfolio Companies,” 50% of certain of these fees are creditedagainst the base management fee that we would otherwise be required to pay toour Adviser.

 

Inaddition, the Adviser services the loans held by our wholly owned subsidiaryGladstone Business Investment LLC 

 

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(“BusinessInvestment”), in return for which the Adviser receives a 2.0% annual fee basedon the monthly aggregate balance of loans held by Business Investment. Since weown these loans, all loan servicing fees paid to the Adviser are treated asreductions against the 2.0% base management fee payable to the Adviser.Overall, the base management fee due to the Adviser cannot exceed 2.0% of totalassets (as reduced by cash and cash equivalents pledged to creditors) duringany given fiscal year.

 

Theincentive fee consists of two parts: an income-based incentive fee and acapital gains incentive fee. The income-based incentive fee rewards the Adviserif our quarterly net investment income (before giving effect to any incentivefee) exceeds 1.75% of our net assets (the “hurdle rate”). We will pay theAdviser an income incentive fee with respect to our pre-incentive fee netinvestment income in each calendar quarter as follows:

 

·                  no incentive fee in any calendar quarter inwhich its pre-incentive fee net investment income does not exceed the hurdlerate (7% annualized);

 

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

 

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

 

*Quarterly Incentive Fee Based on NetInvestment Income*

 

**Pre-incentive fee net investmentincome(expressed as a percentage of the value of net assets)**

 

****

 

**Percentageof pre-incentive fee net investment incomeallocated to income-related portion of incentive fee**

 

The second part of the incentive fee is acapital gains incentive fee that is determined and payable in arrears as of theend of each fiscal year (or upon termination of the Advisory Agreement, as ofthe termination date), and equals 20% of our realized capital gains as of theend of the fiscal year. In determining the capital gains incentive fee payableto our Adviser, we calculate the cumulative aggregate realized capital gainsand cumulative aggregate realized capital losses since our inception, and theaggregate unrealized capital depreciation as of the date of the calculation, asapplicable, with respect to each of the investments in our portfolio. For this purpose, cumulative aggregaterealized capital gains, if any, equals the sum of the differences between thenet sales price of each investment, when sold, and the original cost of suchinvestment since our inception. Cumulative aggregate realized capital lossesequals the sum of the amounts by which the net sales price of each investment,when sold, is less than the original cost of such investment since ourinception. Aggregate unrealized capital depreciation equals the sum of thedifference, if negative, between the valuation of each investment as of theapplicable calculation date and the original cost of such investment. At theend of the applicable year, the amount of capital gains that serves as thebasis for our calculation of the capital gains incentive fee equals thecumulative aggregate realized capital gains less cumulative aggregate realizedcapital losses, less aggregate unrealized capital depreciation, with respect toour portfolio of investments. If this number is positive at the end of suchyear, then the capital gains incentive fee for such year equals 20% of suchamount, less the aggregate amount of any capital gains incentive fees paid inrespect of our portfolio in all prior years.

 

**Administration Agreement**

 

We have entered into an administrationagreement with our Administrator (the “Administration Agreement”), whereby wepay separately for administrative services. The Administration Agreementprovides for payments equal to our allocable portion of our Administrator’soverhead expenses in performing its obligations under the AdministrationAgreement 

 

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including, but not limited to, rent foremployees of our Administrator, and our allocable portion of the salaries andbenefits expenses of our chief financial officer, controller, chief complianceofficer, treasurer and their respective staffs. Our allocable portion of expenses is derived by multiplying ourAdministrator’s total expenses by the percentage of our average assets (thetotal assets at the beginning each quarter) in comparison to the average totalassets of all companies managed by our Adviser under similar agreements.

 

**License Agreement**

 

We entered into a licenseagreement with the Adviser, pursuant to which the Adviser has granted us anon-exclusive license to use the name “Gladstone” and the Diamond G trademark.The amount of the fee is negotiated on an annual basis by our compensationcommittee and must be approved by a majority of our independent directors. Thislicense agreement required us to pay the Adviser a royalty fee of one dollarper quarter through March 31, 2008, at which time it was increased to tendollars per quarter and will remain at ten dollars until the next renewal dateof March 31, 2010. The license arrangement will terminate in the eventthat Gladstone Management Corporation is no longer our investment adviser.

 

**Material U.S. Federal Income Tax Considerations**

 

***Regulated Investment Company Status***

 

In order to maintain the qualification fortreatment as a regulated investment company (“RIC”) under Subchapter M ofthe Code, we must distribute to our stockholders, for each taxable year, atleast 90% of our investment company taxable income, which is generally ourordinary income plus short-term capital gains. We refer to this as the annualdistribution requirement. We must also meet several additional requirements,including:

 

·                  *BusinessDevelopment Company Status.* At all times during eachtaxable year, we must maintain our status as a business development company;

 

·                  *Incomesource requirements.* At least 90% of our gross income for each taxableyear must be from dividends, interest, payments with respect to securitiesloans, gains from sales or other dispositions of securities or other incomederived with respect to our business of investing in securities, and net incomederived from an interest in a qualified publicly traded partnership; and

 

·                  *Assetdiversification requirements.* As of the close of eachquarter of our taxable year: (1) at least 50% of the value of our assetsmust consist of cash, cash items, U.S. government securities, the securities ofother regulated investment companies and other securities to the extent that (a) wedo not hold more than 10% of the outstanding voting securities of an issuer ofsuch other securities and (b) such other securities of any one issuer donot represent more than 5% of our total assets, and (2) no more than 25%of the value of our total assets may be invested in the securities of oneissuer (other than U.S. government securities or the securities of otherregulated investment companies), or of two or more issuers that are controlledby us and are engaged in the same or similar or related trades or businesses orin the securities of one or more qualified publicly traded partnerships.

 

While we were incompliance with the asset diversification test at March 31, 2009, changes inour asset portfolio during April and May have caused us to fall below therequired 50% threshold as of the date of this report.  As noted above, in order to maintain our RICstatus, we must satisfy the asset diversification test as of the end of eachquarter, subject to certain exceptions, with the next measurement date on June 30,2009.  In circumstances where we fail tomeet the quarterly 50% threshold as a result of fluctuations in the value ofour assets, including as a result of the sale of assets, as in our presentsituation, we will still be deemed to satisfy the asset diversification testand, therefore, maintain our RIC status, as long as we have not made any newinvestments, including additional investments in our portfolio companies (suchas advances under outstanding lines of credit), since the time that we fellbelow the 50% threshold.   As of the dateof this report, we have not made any such investments since the sale ofsyndicated loans that caused us to fall below the 50% threshold.  Accordingly, as long as we do not make anysuch investments prior to June 30, 2009, we will be deemed to satisfy the assetdiversification test at June 30, 2009, and our failure to satisfy the 50%threshold as of that date will not result in our loss of RIC status.  However, even if we maintain our RIC statusas of June 30, 2009, if in the future we make any new investments and then failto meet the 50% threshold at the next quarterly measurement date, this wouldresult in a failure of the asset diversification test at such measurement date.

 

If we fail theasset diversification test at June 30, 2009, or any future quarterlymeasurement date, as a result of making a new investment, we will have thirtydays to “cure” our failure of the 50% threshold to avoid a loss of our RICstatus. Potential cures include raising additional equity or debt capital, orchanging the composition of our assets, which could include full or partialdivestitures of investments, such that we would once again exceed the 50%threshold. We are currently seeking to obtain a short-term credit facility underwhich we would be able to borrow funds at each quarter end that would allow usto satisfy the asset diversification test for the foreseeable future, therebyallowing us to make additional investments prior to June 30, 2009 or thereafterand be in compliance with this test. There can be no assurance, however, that we will be able to enter intosuch a credit facility on reasonable terms, if at all, or that any other cureswill be available to us such that our investment activity could resume.

 

*Failure to Qualify as aRIC.*  If we are unable to qualify fortreatment as a RIC, we will be subject to tax on all of our taxable income atregular corporate rates. We would not be able to deduct distributions tostockholders, nor would we be required to make such distributions.Distributions would be taxable to our stockholders as dividend income to theextent of our current and accumulated earnings and profits. Subject to certainlimitations under the Code, corporate distributees would be eligible for thedividends received deduction. Distributions in excess of our current andaccumulated earnings and profits would be treated first as a return of capitalto the extent of the stockholder’s tax basis, and then as a gain realized fromthe sale or exchange of property. If we fail to meet the RIC requirements formore than two consecutive years and then seek to requalify as a RIC, we wouldbe required to recognize a gain to the extent of any unrealized appreciation onour assets unless we make a special election to pay corporate-level tax on anysuch unrealized appreciation recognized during the succeeding 10-year 

 

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period. Absent such special election, anygain we recognized would be deemed distributed to our stockholders as a taxabledistribution.

 

*Qualification as a RIC.*  If we qualify as a RIC and distribute tostockholders each year in a timely manner at least 90% of our investmentcompany taxable income, we will not be subject to federal income tax on theportion of our taxable income and gains we distribute to stockholders. Wewould, however, be subject to a 4% nondeductible federal excise tax if we donot distribute, actually or on a deemed basis, 98% of our income, includingboth ordinary income and capital gains.

 

The excise tax would apply only to the amountby which 98% of our income exceeds the amount of income we distribute, actuallyor on a deemed basis, to stockholders. We will be subject to regular corporateincome tax, currently at rates up to 35%, on any undistributed income,including both ordinary income and capital gains. We intend to retain some orall of our capital gains, but to designate the retained amount as a deemeddistribution. In that case, among other consequences, we will pay tax on theretained amount, each stockholder will be required to include its share of thedeemed distribution in income as if it had been actually distributed to thestockholder and the stockholder will be entitled to claim a credit or refundequal to its allocable share of the tax we pay on the retained capital gain.The amount of the deemed distribution net of such tax will be added to thestockholder’s cost basis for its common stock. Since we expect to pay tax onany retained capital gains at our regular corporate capital gain tax rate, andsince that rate is in excess of the maximum rate currently payable byindividuals on long-term capital gains, the amount of tax that individualstockholders will be treated as having paid will exceed the tax they owe on thecapital gain dividend and such excess may be claimed as a credit or refundagainst the stockholder’s other tax obligations. A stockholder that is notsubject to U.S. federal income tax or tax on long-term capital gains would berequired to file a U.S. federal income tax return on the appropriate formin order to claim a refund for the taxes we paid. In order to utilize thedeemed distribution approach, we must provide written notice to thestockholders prior to the expiration of 60 days after the close of therelevant tax year. We will also be subject to alternative minimum tax, but anytax preference items would be apportioned between us and our stockholders inthe same proportion that distributions, other than capital gain dividends, paidto each stockholder bear to our taxable income determined without regard to thedividends paid deduction.

 

If we acquire debt obligations that wereoriginally issued at a discount, which would generally include loans we makethat are accompanied by warrants, that bear interest at rates that are noteither fixed rates or certain qualified variable rates or that are notunconditionally payable at least annually over the life of the obligation, wewill be required to include in taxable income each year a portion of theoriginal issue discount (“OID”) that accrues over the life of the obligation.Such OID will be included in our investment company taxable income even thoughwe receive no cash corresponding to such discount amount. As a result, we maybe required to make additional distributions corresponding to such OID amountsin order to satisfy the annual distribution requirement and to continue toqualify as a RIC or to avoid the 4% excise tax. In this event, we may berequired to sell temporary investments or other assets to meet the RICdistribution requirements. Through March 31, 2009, we incurred no OIDincome.

 

***Taxation of Our U.S. Stockholders***

 

*Distributions.*  For any period during which we qualify fortreatment as a RIC for federal income tax purposes, distributions to ourstockholders attributable to our investment company taxable income generallywill be taxable as ordinary income to stockholders to the extent of our currentor accumulated earnings and profits. Any distributions in excess of ourearnings and profits will first be treated as a return of capital to the extentof the stockholder’s adjusted basis in his or her shares of common stock andthereafter as gain from the sale of shares of our common stock. Distributionsof our long-term capital gains, designated by us as such, will be taxable tostockholders as long-term capital gains regardless of the stockholder’s holdingperiod for its common stock and whether the distributions are paid in cash orinvested in additional common stock. Corporate stockholders are generallyeligible for the 70% dividends received deduction with respect to ordinaryincome, but not with respect to capital gain dividends to the extent suchamount designated by us does not exceed the dividends received by us fromdomestic corporations. Any dividend declared by us in October, November orDecember of any calendar year, payable to stockholders of record on aspecified date in such a month and actually paid during January of thefollowing year, will be treated as if it were paid by us and received by thestockholders on December 31 of the previous year. In addition, we mayelect to relate a dividend back to the prior taxable year if we (1) declaresuch dividend prior to the due date for filing our return for that taxableyear, (2) make the election in that return, and (3) distribute theamount in the 12-month period following the close of the taxable year but notlater than the first regular dividend payment following the declaration. Anysuch election will not alter the general rule that a stockholder will betreated as receiving a dividend in the taxable year in which the dividend ismade, subject to the October, November, December rule describedabove.

 

In general, the tax rates applicable to ourdividends other than dividends designated as capital gain dividends will be thestandard ordinary income tax rates, and not the lower federal income tax rateapplicable to “qualified dividend income.” If we distribute dividends that areattributable to actual dividend income received by us that is eligible to be,and is, designated by 

 

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us as qualified dividend income, suchdividends would be eligible for such lower federal income tax rate. For thispurpose, “qualified dividend income” means dividends received by us from UnitedStates corporations and qualifying foreign corporations, provided that both weand the stockholder recipient of our dividends satisfy certain holding periodand other requirements in respect of our shares (in the case of ourstockholder) and the stock of such corporations (in our case). However, we donot anticipate receiving or distributing a significant amount of qualifieddividend income.

 

If a stockholder participates in our dividendreinvestment plan, any dividends reinvested under the plan will be taxable tothe stockholder to the same extent, and with the same character, as if thestockholder had received the dividend in cash. The stockholder will have anadjusted basis in the additional common shares purchased through the plan equalto the amount of the reinvested dividend. The additional shares will have a newholding period commencing on the day following the day on which the shares arecredited to the stockholder’s account.

 

*Sale of our Shares.*  A U.S. stockholder generally will recognizetaxable gain or loss if the U.S. stockholder sells or otherwise disposes ofhis, her or its shares of our common stock. Any gain arising from such sale ordisposition generally will be treated as long-term capital gain or loss if theU.S. stockholder has held his, her or its shares for more than one year.Otherwise, it will be classified as short-term capital gain or loss. However,any capital loss arising from the sale or disposition of shares of our commonstock held for six months or less will be treated as long-term capital loss tothe extent of the amount of capital gain dividends received, or undistributedcapital gain deemed received, with respect to such shares. For taxable yearsbeginning before January 1, 2011, individual U.S. stockholders are subjectto a maximum federal income tax rate of 15% on their net capital gain (*i.e.*, the excess of realized net long-termcapital gain over realized net short-term capital loss for a taxable year)including any long-term capital gain derived from an investment in our shares.Such rate is lower than the maximum rate on ordinary income currently payableby individuals. Corporate U.S. stockholders currently are subject to federalincome tax on net capital gain at the same rates applied to their ordinaryincome (currently up to a maximum of 35%). Capital losses are subject tolimitations on use for both corporate and non-corporate stockholders.

 

*Backup Withholding.*  We may be required to withhold federal incometax, or backup withholding, currently at a rate of 28%, from all taxabledividends to any non-corporate U.S. stockholder (1) who fails to furnishus with a correct taxpayer identification number or a certificate that suchstockholder is exempt from backup withholding, or (2) with respect to whomthe Internal Revenue Service (“IRS”) notifies us that such stockholder hasfailed to properly report certain interest and dividend income to the IRS andto respond to notices to that effect. An individual’s taxpayer identificationnumber is generally his or her social security number. Any amount withheldunder backup withholding is allowed as a credit against the U.S. stockholder’sfederal income tax liability, provided that proper information is provided tothe IRS.

 

**Regulation as a Business Development Company**

 

We are a closed-end, non-diversifiedmanagement investment company that has elected to be regulated as a businessdevelopment company under Section 54 of the 1940 Act. As such, we aresubject to regulation under the 1940 Act. The 1940 Act contains prohibitionsand restrictions relating to transactions between business developmentcompanies and their affiliates, principal underwriters and affiliates of thoseaffiliates or underwriters and requires that a majority of the directors bepersons other than “interested persons,” as defined in the 1940 Act. Inaddition, the 1940 Act provides that we may not change the nature of ourbusiness so as to cease to be, or to withdraw our election as, a businessdevelopment company unless approved by a majority of our outstanding votingsecurities, as defined in the 1940 Act.

 

We intend to conduct our business so as toretain our status as a business development company. A business developmentcompany may use capital provided by public stockholders and from other sourcesto invest in long-term private investments in businesses. A businessdevelopment company provides stockholders the ability to retain the liquidityof a publicly traded stock while sharing in the possible benefits, if any, ofinvesting in primarily privately owned companies. In general, a businessdevelopment company must have been organized and have its principal place ofbusiness in the United States and must be operated for the purpose of makingcertain types of investments in qualifying assets listed inSections 55(a)(1)-(3) of the 1940 Act.

 

***Qualifying Assets***

 

Under the 1940 Act, a business developmentcompany may not acquire any asset other than assets of the type listed in Section 55(a) ofthe 1940 Act, which are referred to as qualifying assets, unless, at the timethe acquisition is made, qualifying assets represent at least 70% of thecompany’s total assets. The types of qualifying assets in which we may investunder the 1940 Act include, but are not limited to, the following:

 

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(1)                                  Securitiespurchased in transactions not involving any public offering from the issuer ofsuch securities, which issuer is an eligible portfolio company. An eligible portfoliocompany is generally defined in the 1940 Act as any issuer which:

 

(a)                                  is organizedunder the laws of, and has its principal place of business in, any state orstates in the United States;

 

(b)                                 is not aninvestment company (other than a small business investment company wholly ownedby the business development company) or otherwise excluded from the definitionof investment company; and

 

(c)                                  satisfies oneof the following:

 

(i)                                    it does nothave any class of securities with respect to which a broker or dealer mayextend margin credit;

 

(ii)                                 it iscontrolled by the business development company and the business developmentcompany in fact exercises a controlling influence and, as a result of suchcontrol, has an affiliate of who is a director of the portfolio company;

 

(iii)                              it has totalassets of not more than $4 million and capital and surplus of not lessthan $2 million; or

 

(iv)                             it does nothave any class of securities listed on a national securities exchange.

 

(2)           Securities received in exchange foror distributed on or with respect to securities described in (1) above, orpursuant to the exercise of options, warrants or rights relating to suchsecurities.

 

(3)           Cash, cash items, governmentsecurities or high quality debt securities maturing in one year or less fromthe time of investment.

 

***Asset Coverage***

 

We are permitted, under specified conditions,to issue multiple classes of indebtedness and one class of stock senior to ourcommon stock if our asset coverage, as defined in the 1940 Act, is at least200% immediately after each such issuance. In addition, while senior securitiesare outstanding, we must make provisions to prohibit any distribution to ourstockholders or the repurchase of such securities or shares unless we meet theapplicable asset coverage ratios at the time of the distribution or repurchase.We may also borrow amounts up to 5% of the value of our total assets fortemporary purposes. The 1940 Act requires, among other things, that (1) immediatelyafter issuance and before any dividend or distribution is made with respect toour common stock or before any purchase of common stock is made, the preferredstock, together with all other senior securities, must not exceed an amountequal to 50% of our total assets after deducting the amount of such dividend,distribution or purchase price, as the case may be, and (2) the holders ofshares of preferred stock, if any are issued, must be entitled as a class toelect two directors at all times and to elect a majority of the directors ifdividends on the preferred stock are in arrears by two years or more.

 

***Significant Managerial Assistance***

 

A business development company generally mustmake available significant managerial assistance to issuers of certain of itsportfolio securities that the business development company counts as aqualifying asset for the 70% test described above. Making available significantmanagerial assistance means, among other things, any arrangement whereby thebusiness development company, through its directors, officers or employees,offers to provide, and, if accepted, does so provide, significant guidance andcounsel concerning the management, operations or business objectives andpolicies of a portfolio company. Significant managerial assistance alsoincludes the exercise of a controlling influence over the management andpolicies of the portfolio company. However, with respect to certain, but notall such securities, where the business development company purchases suchsecurities in conjunction with one or more other persons acting together, oneof the other persons in the group may make available such managerialassistance, or the business development company may exercise such controljointly.

 

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***Investment Policies***

 

We seek to achieve a high level of currentincome and capital gains through investments in debt securities and preferredand common stock that we acquired in connection with buyout and otherrecapitalizations. The following investment policies, along with theseinvestment objectives, may not be changed without the approval of our Board ofDirectors:

 

·                  We will at alltimes conduct our business so as to retain our status as a business developmentcompany. In order to retain that status, we may not acquire any assets (otherthan non-investment assets necessary and appropriate to our operations as abusiness development company) if, after giving effect to such acquisition, thevalue of our “qualifying assets” is less than 70% of the value of our totalassets. We anticipate that the securities we seek to acquire, as well astemporary investments, will generally be qualifying assets.

 

·                  We will at alltimes endeavor to conduct our business so as to retain our status as aregulated investment company under the 1940 Act. In order to do so, we mustmeet income source, asset diversification and annual distribution requirements.We may issue senior securities, such as debt or preferred stock, to the extentpermitted by the 1940 Act for the purpose of making investments, to fund sharerepurchases, or for temporary emergency or other purposes.

 

With the exception of our policy to conductour business as a business development company, these policies are notfundamental and may be changed without stockholder approval.

 

***Code of Ethics***

 

We and our Adviser and Administrator haveeach adopted a code of ethics and business conduct applicable to our officers,directors and all employees of our Adviser that comply with the guidelines setforth in Item 406 of Regulation S-K of the Securities Act. Asrequired by the 1940 Act, this code establishes procedures for personalinvestments, restricts certain transactions by our personnel and requires thereporting of certain transactions and holdings by our personnel. A copy of thiscode is available for review, free of charge, at our website atwww.gladstoneinvestment.com. We intend to provide disclosure of any amendmentsto or waivers of the provisions of this code by posting information regardingany such amendment or waiver to our website within four days of itseffectiveness.

 

***Compliance Policies and Procedures***

 

We and our Adviser and Administrator haveadopted and implemented written policies and procedures reasonably designed toprevent violation of the federal securities laws, and our Board of Directors isrequired to review these compliance policies and procedures annually to assesstheir adequacy and the effectiveness of their implementation. We havedesignated a chief compliance officer, Jack Dellafiora, who also serves aschief compliance officer for our Adviser.

 

**Staffing**

 

We do not currently have any employees and donot expect to have any employees in the foreseeable future. Currently, servicesnecessary for our business are provided by individuals who are employees of ourAdviser and our Administrator pursuant to the terms of the Advisory Agreementand Administration Agreement, respectively. Each of our executive officers isan employee and executive officer of our Adviser or our Administrator. Noemployee of our Adviser or our Administrator will dedicate all of his or hertime to us. However, we expect that 35-40 full time employees of our Adviser andAdministrator will spend substantial time on our matters during the remainderof calendar year 2009 and all of calendar year 2010. To the extent that weacquire more investments, we anticipate that the number of employees of ourAdviser and our Administrator who devote time to our matters will increase.

 

Asof April 30, 2009, our Adviser and Administrator collectively had 63full-time employees. A breakdown of these employees is summarized by functionalarea in the table below:

 
| **Number of  Individuals** | ** ** | **Functional Area**                                                          |
|----------------------------|------------|------------------------------------------------------------------------------|
| 11                         |       | Executive Management                                                         |
| 42                         |       | Investment Management, Portfolio Management and Due  Diligence               |
| 10                         |       | Administration, Accounting, Compliance, Human  Resources, Legal and Treasury |

 

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**Available Information:**

** **

Copies of our annual report on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K, and amendments, if any, to those reportsfiled pursuant to Section 13(a) or 15(d) of the Exchange Act areavailable free of charge through our website at www.gladstoneinvestment.com. Arequest for any of these reports may also be submitted to us by sending awritten request addressed to Investor Relations Manager, Gladstone InvestmentCorporation, 1521 Westbranch Drive, Suite 200, McLean, VA 22102, or bycalling our toll-free investor relations line at 1-866-366-5745. The public mayread and copy materials that we file with the SEC at the SEC’s Public ReferenceRoom at 100 F Street, NE, Washington, DC 20549. Information on theoperation of the Public Reference Room may be obtained by calling the SECat 1-800-SEC-0330. The SEC also maintains a website that contains reports,proxy and information statements, and other information regarding issuers thatfile electronically with the SEC at http://www.sec.gov.

 

**Item 1A.  Risk Factors**

** **

***Risks Related to the Economy***

*** ***

*The current state of the economy and the capital marketsincreases the possibility of adverse effects on our financial position andresults of operations. Continued economic adversity could impair our portfoliocompanies’ financial positions and operating results and affect the industriesin which we invest, which could, in turn, harm our operating results. Continuedadversity in the capital markets could impact our ability to raise capital andreduce our volume of new investments.*

* *

The United States is in a recession. The recession generally and thedisruptions in the capital markets in particular have decreased liquidity andincreased our cost of debt and equity capital, where available. The longerthese conditions persist, the greater the probability that these factors couldcontinue to increase our costs of, and significantly limit our access to, debtand equity capital and, thus, have an adverse effect on our operations andfinancial results. Many of the companies in which we have made or will makeinvestments are also susceptible to the recession, which may affect the abilityof one or more of our portfolio companies to repay our loans or engage in aliquidity event, such as a sale, recapitalization or initial public offering.The recession could also disproportionately impact some of the industries inwhich we invest, causing us to be more vulnerable to losses in our portfolio,which could cause the number of our non-performing assets to increase and thefair market value of our portfolio to decrease. The recession may also decreasethe value of collateral securing some of our loans as well as the value of ourequity investments which would decrease our ability to borrow under our creditfacility or raise equity capital, thereby further reducing our ability to makenew investments.

 

The recession has affected the availability of credit generally and wehave seen a reduction in committed funding under our credit facility from$125.0 million to $50.0 million and the withdrawal of Deutsche Bank, A.G. as acommitted lender.  Moreover, subsequentto our fiscal year end, we were forced to sell 29 of the 32 seniorsyndicated loans that were held in our portfolio of investments at March 31,2009 in order to repay amounts outstanding under our prior creditfacility.  The loans, in aggregate, had a cost value of approximately$104.2 million, or 29.9% of the cost value of our total investments, and anaggregate fair market value of approximately $69.8 million, or 22.2% of thefair market value of our total investments, at March 31, 2009.  As aresult of these sales, we received approximately $69.2 million in net cashproceeds and recorded a realized loss of approximately $34.6 million.  Our current credit facility limits ourdistributions to stockholders and as a result we recently decreased our monthlycash distribution rate by 50% as compared to the prior three month period in aneffort to more closely align our distributions to our net investmentincome.  We do not know when marketconditions will stabilize, if adverse conditions will intensify or the fullextent to which the disruptions will continue to affect us. Also, it ispossible that persistent instability of the financial markets could have otherunforeseen material effects on our business.

 

*We may experience fluctuations in our quarterly and annualresults based on the impact of inflation in the United States.*

* *

The majority of our portfolio companies are in industries that aredirectly impacted by inflation, such as manufacturing and consumer goods andservices. Our portfolio companies may not be able to pass on to customersincreases in their costs of production which could greatly affect theiroperating results, impacting their ability to repay our loans. In addition, anyprojected future decreases in our portfolio companies’ operating results due toinflation could adversely impact the fair value of those investments. Anydecreases in the fair value of our investments could result in futureunrealized losses and therefore reduce our net assets resulting fromoperations.

 

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***Risks Related to Our External Management***

*** ***

*We are dependent upon ourkey management personnel and the key management personnel of our Adviser,particularly David Gladstone, George Stelljes III, Terry Lee Brubaker and DavidDullum, and on the continued operations of our Adviser, for our future success.*

* *

We have no employees. Our chief executive officer, president and chiefinvestment officer, chief operating officer and chief financial officer, andthe employees of our Adviser, do not spend all of their time managing ouractivities and our investment portfolio. We are particularly dependent uponDavid Gladstone, George Stelljes III, Terry Lee Brubaker and David Dullum inthis regard. Our executive officers and the employees of our Adviser allocatesome, and in some cases a material portion, of their time to businesses andactivities that are not related to our business. We have no separate facilitiesand are completely reliant on our Adviser, which has significant discretion asto the implementation and execution of our business strategies and riskmanagement practices. We are subject to the risk of discontinuation of ourAdviser’s operations or termination of the Advisory Agreement and the riskthat, upon such event, no suitable replacement will be found. We believe thatour success depends to a significant extent upon our Adviser and thatdiscontinuation of its operations could have a material adverse effect on ourability to achieve our investment objectives.

 

*Our incentive fee may induce our Adviser to make certaininvestments, including speculative investments.*

* *

The management compensation structure that has been implemented underthe Advisory Agreement may cause our Adviser to invest in high risk investmentsor take other risks. In addition to its management fee, our Adviser is entitledunder the Advisory Agreement to receive incentive compensation based in partupon our achievement of specified levels of income. In evaluating investmentsand other management strategies, the opportunity to earn incentive compensationbased on net income may lead our Adviser to place undue emphasis on themaximization of net income at the expense of other criteria, such aspreservation of capital, maintaining sufficient liquidity, or management ofcredit risk or market risk, in order to achieve higher incentive compensation.Investments with higher yield potential are generally riskier or morespeculative. This could result in increased risk to the value of our investmentportfolio.

 

*We may be obligated to pay our Adviser incentivecompensation even if we incur a loss.*

* *

The Advisory Agreement entitles our Adviser to incentive compensationfor each fiscal quarter in an amount equal to a percentage of the excess of ourinvestment income for that quarter (before deducting incentive compensation,net operating losses and certain other items) above a threshold return for thatquarter. When calculating our incentive compensation, our pre-incentive fee netinvestment income excludes realized and unrealized capital losses that we mayincur in the fiscal quarter, even if such capital losses result in a net losson our statement of operations for that quarter. Thus, we may be required topay our Adviser incentive compensation for a fiscal quarter even if there is adecline in the value of our portfolio or we incur a net loss for that quarter.For additional information on incentive compensation under the AdvisoryAgreement with our Adviser, see “Business—Investment Advisory and ManagementAgreement.”

 

*Our Adviser’s failure toidentify and invest in securities that meet our investment criteria or performits responsibilities under the Advisory Agreement may adversely affect ourability for future growth.*

* *

Our ability to achieve our investment objectives will depend on ourability to grow, which in turn will depend on our Adviser’s ability to identifyand invest in securities that meet our investment criteria. Accomplishing thisresult on a cost-effective basis will be largely a function of our Adviser’sstructuring of the investment process, its ability to provide competent andefficient services to us, and our access to financing on acceptable terms. Thesenior management team of our Adviser has substantial responsibilities underthe Advisory Agreement. In order to grow, our Adviser will need to hire, trainsupervise and manage new employees successfully. Any failure to manage ourfuture growth effectively could have a material adverse effect on our business,financial condition and results of operations.

 

*There are significant potential conflicts of interest whichcould impact our investment returns.*

* *

Our executive officers and directors, other than our chief financialofficer, and the officers and directors of our Adviser, serve or may serve asofficers, directors or principals of entities that operate in the same or arelated line of business as we do or of investment funds managed by ouraffiliates. Accordingly, they may have obligations to investors in thoseentities, the fulfillment of which might not be in the best interests of us orour stockholders. For example, Mr. Gladstone, our chairman and chiefexecutive officer, is the chairman of the board and chief executive officer ofour Adviser, Gladstone Capital and Gladstone Commercial. In addition, Mr. Brubaker,our co-vice chairman, chief operating officer and secretary is the vicechairman, chief operating officer and secretary of our Adviser, GladstoneCapital and Gladstone Commercial. Mr. Stelljes, 

 

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our co-vice chairman and chief investment officer, is also thepresident and chief investment officer of our Adviser, Gladstone Capital andGladstone Commercial. Mr. Dullum, our president and a director, is asenior managing director of our Adviser and a director of Gladstone Capital andGladstone Commercial. Moreover, our Adviser may establish or sponsor otherinvestment vehicles which from time to time may have potentially overlappinginvestment objectives with those of ours and accordingly may invest in, whetherprincipally or secondarily, asset classes similar to those we targeted. Whileour Adviser generally has broad authority to make investments on behalf of theinvestment vehicles that it advises, our Adviser has adopted investmentallocation procedures to address these potential conflicts and intends todirect investment opportunities to the Gladstone affiliate with the investmentstrategy that most closely fits the investment opportunity. Nevertheless, themanagement of our Adviser may face conflicts in the allocation of investmentopportunities to other entities managed by our Adviser. As a result, it ispossible that we may not be given the opportunity to participate in certaininvestments made by other members of the Gladstone Companies or investmentfunds managed by investment managers affiliated with our Adviser.

 

In certain circumstances, we may make investments in a portfoliocompany in which one of our affiliates has or will have an investment, subjectto satisfaction of any regulatory restrictions and, where required, to theprior approval of our Board of Directors. Our Board of Directors has approvedthe following types of co-investment transactions:

 

·                  Our affiliate, GladstoneCommercial, may lease property to portfolio companies that we do not controlunder certain circumstances. We may pursue such transactions only if (i) theportfolio company is not controlled by us or any of our affiliates, (ii) theportfolio company satisfies the tenant underwriting criteria of GladstoneCommercial, and (iii) the transaction is approved by a majority of ourindependent directors and a majority of the independent directors of GladstoneCommercial. We expect that any such negotiations between Gladstone Commercialand our portfolio companies would result in lease terms consistent with theterms that the portfolio companies would be likely to receive were they notportfolio companies of ours.

 

·                  We may invest simultaneouslywith our affiliate Gladstone Capital in senior syndicated loans whereby neitherwe nor any affiliate has the ability to dictate the terms of the loans.

 

Certain of our officers, who are also officers of our Adviser, may fromtime to time serve as directors of certain of our portfolio companies. If anofficer serves in such capacity with one of our portfolio companies, suchofficer will owe fiduciary duties to all stockholders of the portfolio company,which duties may from time to time conflict with the interests of ourstockholders.

 

In the course of our investing activities, we will pay management andincentive fees to the Adviser and will reimburse the Administrator for certainexpenses it incurs. As a result, investors in our common stock will invest on a“gross” basis and receive distributions on a “net” basis after expenses,resulting in, among other things, a lower rate of return than one might achievethrough our investors themselves making direct investments. As a result of thisarrangement, there may be times when the management team of our Adviser hasinterests that differ from those of our stockholders, giving rise to aconflict.

 

*Our Adviser is notobligated to provide a waiver of the base management fee, which couldnegatively impact our earnings and our ability to maintain our current level ofdistributions to our stockholders.*

* *

The Advisory Agreement provides for a base management fee based on ourgross assets. Since our 2008 fiscal year, our Board of Directors hasaccepted a voluntary waiver to reduce the annual 2.0% base management fee onsenior syndicated loan participations to 0.5% to the extent that proceedsresulting from borrowings were used to purchase such syndicated loanparticipations. However, our Adviser is not required to issue this or otherwaivers of fees under the Advisory Agreement, and to the extent our investmentportfolio grows in the future, we expect these fees will increase. If ourAdviser does not issue this waiver in future quarters, it could negativelyimpact our earnings and may compromise our ability to maintain our currentlevel of distributions to our stockholders, which could have a material adverseimpact on our stock price.

 

*Our business model isdependent upon developing and sustaining strong referral relationships withinvestment bankers, business brokers and other intermediaries.*

* *

We are dependent upon informal relationships with investment bankers,business brokers and traditional lending institutions to provide us with dealflow. If we fail to maintain our relationship with such funds or institutions,or if we fail to establish strong referral relationships with other funds, wewill not be able to grow our portfolio of loans and fully execute our businessplan.

 

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***Risks Related to Our External Financing***

*** ***

*Committed funding under ourcredit facility has been reduced from $125 million to $50 million.  Any inability to expand the credit facilitycould adversely impact our liquidity and ability to find new investments ormaintain distributions to our stockholders.*

* *

On April 14,2009 we, through our wholly-owned subsidiary Gladstone Business Investment,LLC, entered into a second amended and restated credit agreement providing fora $50.0 million revolving line of credit (the “Credit Facility”) arranged byBranch Banking and Trust Company (“BB&T”) as administrative agent. KeyEquipment Finance Company Inc. also joined the Credit Facility as a committedlender.  In connection with our entryinto the Credit Facility, we borrowed $43.8 million under the Credit Facilityto repay in full all principal and interest owing under our prior credit agreement.  Committed funding under the Credit Facilitywas reduced from the $125.0 million under our prior credit facility and Deutsche Bank A.G., who was a committedlender under the prior facility elected not to participate in the new facilityand withdrew its commitment.  As of May 29,2009 we had only $17.5million of availability to draw down borrowings under the Credit Facility.  The Credit Facility may be expanded up to$125.0 million through the addition of other committed lenders to the facility.  However, if additional lenders are unwillingto join the facility on its terms, we will be unable to expand the facility andthus will continue to have limited availability to finance new investmentsunder our line of credit.  The CreditFacility matures on April 14, 2010, and if the facility is not renewed orextended by this date, all principal and interest will be due and payablewithin one year of maturity. Between the maturity date and April 14, 2011,our lenders have the right to apply all interest income to amounts outstandingunder the Credit Facility.  There can be no guarantee that we will beable to renew, extend or replace the Credit Facility upon its maturity on termsthat are favorable to us, if at all.  Our ability to expand the CreditFacility, and to obtain replacement financing at the time of maturity, will beconstrained by current economic conditions affecting the credit markets. In the event that we are not able to expand the Credit Facility, or to renew,extend or refinance the Credit Facility at the time of its maturity, this couldhave a material adverse effect on our liquidity and ability to fund newinvestments.

 

*Our business plan is dependent upon external financing,which is constrained by the limitations of the 1940 Act.*

 

Ourbusiness requires a substantial amount of cash to operate and grow. We mayacquire such additional capital from the following sources:

 

·                  *SeniorSecurities.*  We intend to issue debt securities,other evidences of indebtedness (including borrowings under our line of credit)and possibly preferred stock, up to the maximum amount permitted by the 1940Act. The 1940 Act currently permits us, as a business development company, toissue debt securities and preferred stock (collectively, “senior securities”),in amounts such that our asset coverage, as defined in the 1940 Act, is atleast 200% after each issuance of senior securities. As a result of issuingsenior securities, we will be exposed to the risks associated with leverage.Although borrowing money for investments increases the potential for gain, italso increases the risk of a loss. A decrease in the value of our investmentswill have a greater impact on the value of our common stock to the extent thatwe have borrowed money to make investments. There is a possibility that thecosts of borrowing could exceed the income we receive on the investments wemake with 

 

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such borrowed funds. In addition, our ability to pay distributions orincur additional indebtedness would be restricted if asset coverage is not atleast twice our indebtedness. If the value of our assets declines, we might beunable to satisfy that test. If this happens, we may be required to liquidate aportion of our loan portfolio and repay a portion of our indebtedness at a timewhen a sale, to the extent possible given the limited market for many of ourinvestments, may be disadvantageous. Furthermore, any amounts that we use toservice our indebtedness will not be available for distributions to ourstockholders.

 

·                  *CommonStock.*  Because we are constrained in ourability to issue debt for the reasons given above, we are dependent on theissuance of equity as a financing source. If we raise additional funds byissuing more common stock or debt securities convertible into or exchangeablefor our common stock, the percentage ownership of our stockholders at the timeof the issuance would decrease and our common stock may experience dilution. Inaddition, any convertible or exchangeable securities that we issue in the futuremay have rights, preferences and privileges more favorable than those of ourcommon stock. In addition, under the 1940 Act, we will generally not be able toissue additional shares of our common stock at a price below net asset valueper share to purchasers other than our existing stockholders through a rightsoffering without first obtaining the approval of our stockholders and ourindependent directors. If we were to sell shares of our common stock below ourthen current net asset value per share, such sales would result in an immediatedilution to the net asset value per share. This dilution would occur as aresult of the sale of shares at a price below the then current net asset valueper share of our common stock and a proportionately greater decrease in astockholder’s interest in our earnings and assets and voting interest in usthan the increase in our assets resulting from such issuance. This imposesconstraints on our ability to raise capital when our common stock is trading atbelow net asset value, as it has for the last year.

 

*A change in interest ratesmay adversely affect our profitability and our hedging strategy may expose usto additional risks.*

* *

We anticipate using a combination of equity and long-term andshort-term borrowings to finance our investment activities. As a result, aportion of our income will depend upon the difference between the rate at whichwe borrow funds and the rate at which we loan these funds. Higher interestrates on our borrowings will decrease the overall return on our portfolio.

 

Ultimately, we expect approximately 80% of the loans in our portfolioto be at variable rates determined on the basis of a LIBOR rate andapproximately 20% to be at fixed rates. As of May 29, 2009, our portfoliohad approximately 23% of the total of the loan cost value at variable rates,approximately 46% of the total loan cost value at variable rates with floorsand approximately 31% of the total loan portfolio cost basis at fixed rates.

 

To date, we hold only one interest rate cap agreement. While hedgingactivities may insulate us against adverse fluctuations in interest rates, theymay also limit our ability to participate in the benefits of lower interestrates with respect to the hedged portfolio. Adverse developments resulting fromchanges in interest rates or any future hedging transactions could have amaterial adverse effect on our business, financial condition and results ofoperations. Our ability to receive payments pursuant to our interest rate capagreement is linked to the ability of the counter-party to that agreement tomake the required payments. To the extent that the counter-party to theagreement is unable to pay pursuant to the terms of the agreement, we may losethe hedging protection of the interest rate cap agreement.

 

*Our credit facility imposes certain restrictions on uswhich, if not complied with, could accelerate our repayment obligations underthe facility, thereby materially and adversely affecting our liquidity,financial condition, results of operations and ability to pay distributions.*

 

Wewill have a continuing need for capital to finance our loans. In order tomaintain RIC status, we will be required to distribute to our stockholders atleast 90% of our ordinary income and short-term capital gains on an annualbasis. Accordingly, such earnings will not be available to fund additionalloans. Therefore, we are party to the Credit Facility, which provides us with arevolving credit line facility of $50.0 million, of which only $17.5million was available for borrowings as of May 29, 2009. The CreditFacility permits us to fund additional loans and investments as long as we arewithin the conditions set out in the credit agreement. Current marketconditions have forced us to write down the value of a portion of our assets asrequired by fair value accounting rules. These are not realized losses, butconstitute adjustment in asset values for purposes of financial reporting andfor collateral value for the Credit Facility. As assets are marked down invalue, the amount we can borrow on the Credit Facility decreases.

 

As a result of the Credit Facility, we are subject to certainlimitations on the type of loan investments we make, including restrictions ongeographic concentrations, sector concentrations, loan size, dividend payout,payment frequency and status, and average life. The credit agreement also requires us to comply with other financial andoperational covenants, which require us to, among other things, maintain certainfinancial ratios, including asset and interest coverage and a minimum networth. As of March 31, 2009, we were in compliance with these covenants,however, our continued compliance with these covenants depends on many factors,some of which are beyond our control. In particular, depreciation in thevaluation of our assets, which valuation is subject to changing marketconditions which remain very volatile, affects our ability to comply with thesecovenants. During the year ended March 31, 2009, net unrealizeddepreciation on our investments was approximately $19.8 million, compared to$11.5 million in the year ended March 31, 2008. Given the continueddeterioration in the capital markets, net unrealized depreciation in ourportfolio may continue to increase in future periods and threaten our abilityto comply with the covenants under the Credit Facility.  Accordingly, there are no assurances that wewill continue to comply with these covenants. Under the Credit Facility, we are also required to maintain our statusas a BDC under the 1940 Act and as a RIC under the Code.  Becauseof recent changes in our asset portfolio, due to significant sales ofNon-Control/Non-Affiliate investments, there is a significant possibility thatwe may not meet the asset diversification threshold under the Code’s rules applicableto a regulated investment company, or RIC, as of our next quarterly testingdate, June 30, 2009.  Although thisfailure alone, in our current situation, will not cause us to lose our RICstatus will be jeopardized, ifwe make any new investments, including additional investments in our portfoliocompanies (such as advances under our outstanding lines of credit) our RICstatus.  For more information on ourcurrent RIC status, see “Material U.S. Federal Income Tax Considerations —Regulated Investment Company Status.”  Ourfailure to satisfy these covenants could result in foreclosure by our lenders,which would accelerate our repayment obligations under the facility and therebyhave a material adverse effect on our business, liquidity, financial condition,results of operations and ability to pay distributions to our stockholders.

 

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***Risks Related to Our Investments***

*** ***

*We operate in a highly competitive market forinvestment opportunities.*

* *

A large number of entities compete with and make the types ofinvestments that we seek to make in small and mid-sized companies. We competewith public and private buyout funds, commercial and investment banks,commercial financing companies, and, to the extent they provide an alternativeform of financing, hedge funds. Many of our competitors are substantiallylarger and have considerably greater financial, technical, and marketingresources than we do. For example, some competitors may have a lower cost offunds and access to funding sources that are not available to us. In addition,some of our competitors may have higher risk tolerances or different riskassessments, which would allow them to consider a wider variety of investmentsand establish more relationships than us. Furthermore, many of our competitorsare not subject to the regulatory restrictions that the 1940 Act imposes on usas a business development company. The competitive pressures we face could havea material adverse effect on our business, financial condition, and results ofoperations. Also, as a result of this competition, we may not be able to takeadvantage of attractive investment opportunities from time to time, and we canoffer no assurance that we will be able to identify and make investments thatare consistent with our investment objective. We do not seek to competeprimarily based on the interest rates we offer, and we believe that some of ourcompetitors may make loans with interest rates that will be comparable to orlower than the rates we offer. We may lose investment opportunities if we donot match our competitors’ pricing, terms, and structure. However, if we matchour competitors’ pricing, terms, and structure, we may experience decreased netinterest income and increased risk of credit loss.

 

*Our investments in small and medium-sized portfoliocompanies are extremely risky and you could lose all or a part of yourinvestment.*

 

Investmentsin small and medium-sized portfolio companies are subject to a number ofsignificant risks including the following:

 

·                  *Small and medium-sized businessesare likely to have greater exposure to economic downturns than largerbusinesses.*  Ourportfolio companies may have fewer resources than larger businesses, and thusthe current recession, and any further economic downturns or recessions aremore likely to have a material adverse effect on them. If one of our portfoliocompanies is adversely impacted by a recession, its ability to repay our loanor engage in a liquidity event, such as a sale, recapitalization or initialpublic offering would be diminished. Moreover,in light of our current near-term strategy of preserving capital, our inabilityto make additional investments in our portfolio companies at a time when theyneed capital may increase their exposure to the risks of the current recessionand future economic downturns.

 

·                  *Small and medium-sized businessesmay have limited financial resources and may not be able to repay the loans wemake to them.*  Ourstrategy includes providing financing to portfolio companies that typically isnot readily available to them. While we believe that this provides anattractive opportunity for us to generate profits, this may make it difficultfor the portfolio companies to repay their loans to us upon maturity. Aborrower’s ability to repay its loan may be adversely affected by numerousfactors, including the failure to meet its business plan, a downturn in itsindustry or negative economic conditions. A deterioration in a borrower’sfinancial condition and prospects usually will be accompanied by deteriorationin the value of any collateral and a reduction in the likelihood of usrealizing on any guarantees we may have obtained from the borrower’smanagement. Although we will sometimes seek to be the senior, secured lender toa borrower, in most of our loans we expect to be subordinated to a seniorlender, and our interest in any collateral would, accordingly, likely besubordinate to another lender’s security interest.

 

·                  *Small and medium-sized businessestypically have narrower product lines and smaller market shares than largebusinesses.*  Becauseour target portfolio companies are smaller businesses, they will tend to bemore vulnerable to competitors’ actions and market conditions, as well asgeneral economic downturns. In addition, our portfolio companies may faceintense competition, including competition from companies with greaterfinancial resources, more extensive development, manufacturing, marketing andother capabilities and a larger number of qualified managerial and technicalpersonnel.

 

·                  *There is generally little or nopublicly available information about these businesses.*  Because we seek to invest inprivately owned businesses, there is generally little or no publicly availableoperating and financial information about our potential portfolio companies. Asa result, we rely on our officers, our Adviser and its employees andconsultants to perform due diligence investigations of these portfoliocompanies, their operations and their prospects. We may not learn all of thematerial information we need to know regarding these businesses through ourinvestigations.

 

·                  *Small and medium-sized businessesgenerally have less predictable operating results.*  We expect that our portfolio 

 

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companies may havesignificant variations in their operating results, may from time to time beparties to litigation, may be engaged in rapidly changing businesses withproducts subject to a substantial risk of obsolescence, may require substantialadditional capital to support their operations, to finance expansion or tomaintain their competitive position, may otherwise have a weak financialposition or may be adversely affected by changes in the business cycle. Ourportfolio companies may not meet net income, cash flow and other coverage teststypically imposed by their senior lenders. A borrower’s failure to satisfyfinancial or operating covenants imposed by senior lenders could lead todefaults and, potentially, foreclosure on its senior credit facility, whichcould additionally trigger cross-defaults in other agreements. If this were tooccur, it is possible that the borrower’s ability to repay our loan would bejeopardized.

 

·                  *Small and medium-sized businessesare more likely to be dependent on one or two persons.*  Typically, the success of asmall or medium-sized business also depends on the management talents andefforts of one or two persons or a small group of persons. The death,disability or resignation of one or more of these persons could have a materialadverse impact on our borrower and, in turn, on us.

 

·                  *Small and medium-sized businessesmay have limited operating histories.*  While we intend to target stable companieswith proven track records, we may make loans to new companies that meet ourother investment criteria. Portfolio companies with limited operating historieswill be exposed to all of the operating risks that new businesses face and maybe particularly susceptible to, among other risks, market downturns,competitive pressures and the departure of key executive officers.

 

*Because the loans we make and equity securities we receivewhen we make loans are not publicly traded, there will be uncertainty regardingthe value of our privately held securities that could adversely affect ourdetermination of our net asset value.*

 

Ourportfolio investments are, and we expect will continue to be, in the form ofsecurities that are not publicly traded. The fair value of securities and otherinvestments that are not publicly traded may not be readily determinable. OurBoard of Directors has established an investment valuation policy andconsistently applied valuation procedures used to determine the fair value ofthese securities quarterly. These procedures for the determination of value ofmany of our debt securities rely on the opinions of value submitted to us byStandard and Poor’s Securities Evaluations, Inc (“SPSE”) or the use ofinternally developed discounted cash flow (“DCF”) methodologies, specificallyfor our syndicated loans, or internal methodologies based on the totalenterprise value (“TEV”) of the issuer used for certain of our equityinvestments. SPSE will only evaluate the debt portion of our investments forwhich we specifically request evaluation, and SPSE may decline to makerequested evaluations for any reason in its sole discretion.  However, to date, SPSE has accepted each ofour requests for evaluation.

 

Ouruse of these fair value methods is inherently subjective and is based onestimates and assumptions of each security. In the event that we sell a security, the sale proceeds that we receivefor that security may ultimately sell for an amount materially less than theestimated fair value calculated using SPSE, TEV or the DCF methodology.  During April 2009, wecompleted the sale of 29 of the 32 senior syndicated loans that were held inour portfolio of investments at March 31, 2009 to various investors in thesyndicated loan market.  As a result of these sales, we receivedapproximately $69.2 million in net cash proceeds, which was approximately $36.3million less than the cost value of such investments recorded as of December 31,2008.

 

Ourprocedures also include provisions whereby our Adviser will establish the fairvalue of any equity securities we may hold where SPSE or third-party agentbanks are unable to provide evaluations. The types of factors that may beconsidered in determining the fair value of our debt and equity securitiesinclude some or all of the following:

 

·  the nature and realizable valueof any collateral;

·  the portfolio company’searnings and cash flows and its ability to make payments on its obligations;

·  the markets in which theportfolio company does business;

·  the comparison to publiclytraded companies; and

·  discounted cash flow and otherrelevant factors.

 

Becausesuch valuations, particularly valuations of private securities and privatecompanies, are not susceptible to precise determination, may fluctuate overshort periods of time, and may be based on estimates, our determinations offair value may differ from the values that might have actually resulted had areadily available market for these securities been available.

 

Aportion of our assets are, and will continue to be, comprised of equitysecurities that are valued based on internal assessment using our own valuationmethods approved by our Board of Directors, without the input of SPSE or anyother 

 

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third-partyevaluator. We believe that our equity valuation methods reflect those regularlyused as standards by other professionals in our industry who value equitysecurities. However, determination of fair value for securities that are notpublicly traded, whether or not we use the recommendations of an independentthird-party evaluator, necessarily involves the exercise of subjectivejudgment. Our net asset value could be adversely affected if our determinationsregarding the fair value of our investments were materially higher than thevalues that we ultimately realize upon the disposal of such securities.

 

In April 2008,we adopted the provisions of Financial Accounting Standards Board (“FASB”)Statement No. 157, *Fair Value Measurements*andwe have followed the guidance of FASB Staff Position No. 157-3, *Determining the Fair Value of a Financial Asset When the Market forThat Asset Is Not Active,*which focused on**fairmarket value accounting. The impact on our consolidated financial statementsfor future periods cannot be determined at this time as it will be influencedby the estimates of fair value for those periods, the number and amount ofinvestments we originate, acquire or exit and the effect of any additionalguidance or any changes in the interpretation of this statement. If we arerequired to make further write-downs of our investment portfolio due to changesin market conditions, this could negatively impact the availability under our lineof credit and our ability to draw on the line of credit.

 

*The lackof liquidity of our privately held investments may adversely affect ourbusiness.*

* *

We will generally make investments in private companies whosesecurities are not traded in any public market. Substantially all of theinvestments we presently hold and the investments we expect to acquire in thefuture are, and will be, subject to legal and other restrictions on resale andwill otherwise be less liquid than publicly traded securities. The illiquidityof our investments may make it difficult for us to quickly obtain cash equal tothe value at which we record our investments if the need arises. This couldcause us to miss important investment opportunities. In addition, if we arerequired to liquidate all or a portion of our portfolio quickly, we may recordsubstantial realized losses upon liquidation. In addition, we may face otherrestrictions on our ability to liquidate an investment in a portfolio companyto the extent that we, our Adviser, or our respective officers, employees oraffiliates have material non-public information regarding such portfoliocompany.

 

Due to the uncertainty inherent in valuing these securities, ourdeterminations of fair value may differ materially from the values that wouldexist if a ready market for these securities existed. Our net asset value couldbe materially affected if our determinations regarding the fair value of ourinvestments are materially different from the values that we ultimately realizeupon our disposal of such securities.

 

*Our financial results could be negatively affected if asignificant portfolio investment fails to perform as expected.*

* *

Our total investment in companies may be significant individually or inthe aggregate. As a result, if a significant investment in one or morecompanies fails to perform as expected, our financial results could be morenegatively affected and the magnitude of the loss could be more significantthan if we had made smaller investments in more companies.  This risk is heightened as a result of our recent saleof the majority of senior syndicated loans that were held in our portfolio ofinvestments at March 31, 2009.  As aresult of these sales, the total number of portfolio companies in which we holdinvestments decreased from 46 to 17.

 

*When we are a debt orminority equity investor in a portfolio company, which we expect will generallybe the case, we may not be in a position to control the entity, and itsmanagement may make decisions that could decrease the value of our investment.*

* *

We anticipate that most of our investments will continue to be eitherdebt or minority equity investments in our portfolio companies. Therefore, weare and will remain subject to risk that a portfolio company may make businessdecisions with which we disagree, and the shareholders and management of suchcompany may take risks or otherwise act in ways that do not serve our bestinterests. As a result, a portfolio company may make decisions that coulddecrease the value of our portfolio holdings. In addition, we will generallynot be in a position to control any portfolio company by investing in its debtsecurities.

 

*We typically invest intransactions involving acquisitions, buyouts and recapitalizations ofcompanies, which will subject us to the risks associated with change in controltransactions.*

* *

Our strategy includes making debt and equity investments in companiesin connection with acquisitions, buyouts and recapitalizations, which subjectsus to the risks associated with change in control transactions. Change incontrol transactions often present a number of uncertainties. Companiesundergoing change in control transactions often face challenges retaining keyemployees and maintaining relationships with customers and suppliers. While wehope to avoid many of these difficulties by participating in transactions wherethe management team is retained and by conducting thorough due diligence 

 

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in advance of our decision to invest, if our portfolio companiesexperience one or more of these problems, we may not realize the value that weexpect in connection with our investments which would likely harm our operatingresults and financial condition.

 

*Prepayments of our loans byour portfolio companies could adversely impact our results of operations andreduce our return on equity.*

* *

In addition to risks associated with delays in investing our capital,we are also subject to the risk that investments that we make in our portfoliocompanies may be repaid prior to maturity. We will first use any proceeds fromprepayments to repay any borrowings outstanding on our credit facility. In theevent that funds remain after repayment of our outstanding borrowings, then wewill generally reinvest these proceeds in government securities, pending theirfuture investment in new debt and/or equity securities. These governmentsecurities will typically have substantially lower yields than the debtsecurities being prepaid and we could experience significant delays inreinvesting these amounts. As a result, our results of operations could bematerially adversely affected if one or more of our portfolio companies electsto prepay amounts owed to us. Additionally, prepayments could negatively impactour return on equity, which could result in a decline in the market price ofour common stock.

 

*Higher taxation of our portfolio companies may impact ourquarterly and annual operating results.*

* *

The recession’s adverse effect on federal, state, and municipalityrevenues may induce these government entities to raise various taxes to make upfor lost revenues. Additional taxation may have an adverse affect on ourportfolio companies’ earnings and reduce their ability to repay our loans tothem, thus affecting our quarterly and annual operating results.

 

*Our portfolio isconcentrated in a limited number of companies and industries, which subjects usto an increased risk of significant loss if any one of these companies does notrepay us or if the industries experience downturns.*

* *

As of May 29, 2009, we had investments in 17 portfolio companiesof which there were three investments, A. Stucki Holding Corp., Chase IIHoldings Corp. and Acme Cryogenics, Inc., that comprised approximately$87.4 million or 36.5% of our total investment portfolio, at cost. Aconsequence of a limited number of investments is that the aggregate returns werealize may be substantially adversely affected by the unfavorable performanceof a small number of such loans or a substantial write-down of any oneinvestment. Beyond our regulatory and income tax diversification requirements,we do not have fixed guidelines for industry concentration and our investments couldpotentially be concentrated in relatively few industries. In addition, while wedo not intend to invest 25% or more of our total assets in a particularindustry or group of industries at the time of investment, it is possible thatas the values of our portfolio companies change, one industry or a group ofindustries may comprise in excess of 25% of the value of our total assets. Asof May 29, 2009, 23.9% of our total assets were invested in machinerycompanies and 23.7% of our total assets were invested in diversifiedconglomerate manufacturing companies. As a result, a downturn in an industry inwhich we have invested a significant portion of our total assets could have amaterially adverse effect on us.

 

*Our investments are typically long term and will requireseveral years to realize liquidation events.*

* *

Since we generally make five to seven year term loans and hold ourloans and related warrants or other equity positions until the loans mature,you should not expect realization events, if any, to occur over the near term.In addition, we expect that any warrants or other equity positions that wereceive when we make loans may require several years to appreciate in value andwe cannot give any assurance that such appreciation will occur.

 

*We may not realize gains from our equity investments.*

* *

When we invest in mezzanine or senior secured loans, we may acquirewarrants or other equity securities as well. In addition we may invest inpreferred and common stock. Our goal is ultimately to dispose of such equityinterests and realize gains upon our disposition of such interests. However,the equity interests we receive may not appreciate in value and, in fact, maydecline in value. Accordingly, we may not be able to realize gains from ourequity interests, and any gains that we do realize on the disposition of anyequity interests may not be sufficient to offset any other losses weexperience.

 

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*Any unrealized depreciationwe experience on our investment portfolio may be an indication of futurerealized losses, which could reduce our income available for distribution.*

* *

As a business development company we are required to carry ourinvestments at market value or, if no market value is ascertainable, at fairvalue as determined in good faith by or under the direction of our Board ofDirectors. Decreases in the market values or fair values of our investmentswill be recorded as unrealized depreciation. Since our inception, we have, attimes, incurred a cumulative net unrealized depreciation of our portfolio. Anyunrealized depreciation in our investment portfolio could result in realizedlosses in the future and ultimately in reductions of our income available fordistribution to stockholders in future periods.

 

***Risks Related to Our Regulation and Structure***

 

*We currently do not meetthe 50% threshold of the asset diversification test  applicable to RICs under the Code.  If we make any additional investment in thefuture, including advances under outstanding lines of credit to our portfoliocompanies, and remain below this threshold as of June 30, 2009, or anysubsequent quarter end, we would lose our RIC status unless we are able to curesuch failure within 30 days of the quarter end.*

 

In order to maintain RIC status under the Code, in addition to otherrequirements, as of the close of each quarter of our taxable year, we must meetthe asset diversification test, which requires that at least 50% of the value ofour assets consist of cash, cash items, U.S. government securities, thesecurities of other RICs and other securities to the extent such othersecurities of any one issuer do not represent more than 5% of our total assetsor more than 10% of the voting securities of such issuer. As a result ofchanges in the value of our assets during April and May 2009, due to significant sales ofNon-Control/Non-Affiliate investments, wehave fallen below the required 50% asset diversification threshold as ofthe date of this report.  Failure to meetthis threshold alone does not result in loss of our RIC status in our currentsituation.  In circumstances where thefailure to meet the 50% threshold as of a quarterly measurement date is theresult of fluctuations in the value of assets, including in our case as aresult of the sale of assets, we are still deemed under the rules tosatisfy the asset diversification test and, therefore, maintain our RIC status,as long as we have not made any new investments, including additionalinvestments in our portfolio companies (such as advances under outstandinglines of credit), since the time that we fell below the 50% threshold.  Thus, although we currently qualify as a RICdespite our current, and potential future, inability to meet the 50% assetdiversification requirement, if we make any additional investments beforeregaining compliance with the asset diversification test, our RIC status willbe threatened.  Because, in mostcircumstances, we are contractually required to advance funds on outstandinglines of credit upon the request of our portfolio companies, we may have alimited ability to avoid adding to existing investments in a manner that wouldcause us to fail the asset diversification test as of June 30, 2009 or asof subsequent quarterly measurement dates.

 

If we were to makea new investment before regaining compliance with the 50% threshold, and we didnot regain compliance prior to the next quarterly measurement date followingthe investment, we would have thirty days to “cure” our failure of the 50%threshold to avoid our loss of RIC status. Potential cures for failure of theasset diversification test include raising additional equity or debt capital,or changing the composition of our assets, which could include full or partialdivestitures of investments, such that we would once again exceed the 50%threshold.  We are currently seeking toobtain a short-term credit facility under which we would be able to borrowfunds at each quarter end that would allow us to satisfy the assetdiversification test for the foreseeable future, thereby allowing us to makeadditional investments prior to June 30, 2009 or thereafter and be incompliance with this test.  There can beno assurance, however, that we will be able to enter into such a creditfacility on reasonable terms, if at all, or that any other cures will beavailable to us such that our investment activity could resume.  Ourability to implement any of these cures would be subject to market conditionsand a number of risks and uncertainties that would be, in part, beyond ourcontrol.  Accordingly, we can notguarantee you that we would be successful in curing any failure of the assetdiversification test, which would subject us to corporate level tax.  For additional information about theconsequences of failing to satisfy the RIC qualification, see “—We will besubject to corporate level tax if we are unable to satisfy Internal RevenueCode requirements for RIC qualification.”

 

*We will be subject tocorporate level tax if we are unable to satisfy Internal Revenue Coderequirements for RIC qualification.*

* *

To maintain our qualification as a RIC, we must meet income source,asset diversification and annual distribution requirements. The annualdistribution requirement is satisfied if we distribute at least 90% of ourordinary income and short-term capital gains to our stockholders on an annualbasis. Because we use leverage, we are subject to certain asset coverage ratiorequirements under the 1940 Act and could, under certain circumstances, berestricted from making distributions necessary to qualify as a RIC. Warrants wereceive with respect to debt investments will create “original issue discount,”which we must recognize as ordinary income, increasing the amounts we arerequired to distribute to maintain RIC status. Because such warrants will notproduce distributable cash for us at the same time as we are required to makedistributions in respect of the related original issue discount, we will needto use cash from other sources to satisfy such distribution requirements. Theasset diversification requirements must be met at the end of each calendarquarter. If we fail to meet these tests, we may need to quickly dispose ofcertain investments to prevent the loss of RIC status. Since most of ourinvestments will be illiquid, such dispositions, if even possible, may not bemade at prices advantageous to us and, in fact, may result in substantiallosses. If we fail to qualify as a RIC for any reason and become fully subjectto corporate income tax, the resulting corporate taxes could substantiallyreduce our net assets, the amount of income available for distribution, and theactual amount distributed. Such a failure would have a material adverse effecton us and our shares. For additional information regarding asset coverage ratioand RIC requirements, see “Business—Material U.S. Federal Income Tax Considerations—RegulatedInvestment Company Status.”

 

*Changes in laws orregulations governing our operations, or changes in the interpretation thereof,and any failure by us to comply with laws or regulations governing ouroperations may adversely affect our business.*

* *

We and our portfolio companies are subject to regulation by laws at thelocal, state and federal levels. These laws and regulations, as well as theirinterpretation, may be changed from time to time. Accordingly, any change inthese laws or regulations, or their interpretation, or any failure by us or ourportfolio companies to comply with these laws or regulations may adverselyaffect our business. For additional information regarding the regulations towhich we are subject, see “Business—Material U.S. Federal Income TaxConsiderations—Regulated Investment Company Status” and “Business—Regulation asa Business Development Company.”

 

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*Provisions of the DelawareGeneral Corporation Law and of our certificate of incorporation and bylawscould restrict a change in control and have an adverse impact on the price ofour common stock.*

 

We are subject to provisions of the DelawareGeneral Corporation Law that, in general, prohibit any business combinationwith a beneficial owner of 15% or more of our common stock for three yearsunless the holder’s acquisition of our stock was either approved in advance byour Board of Directors or ratified by the Board of Directors and stockholdersowning two-thirds of our outstanding stock not owned by the acquiring holder.Although we believe these provisions collectively provide for an opportunity toreceive higher bids by requiring potential acquirers to negotiate with ourBoard of Directors, they would apply even if the offer may be consideredbeneficial by some stockholders.

 

We have also adopted other measures that maymake it difficult for a third party to obtain control of us, includingprovisions of our certificate of incorporation classifying our Board ofDirectors in three classes serving staggered three-year terms, and provisionsof our certificate of incorporation authorizing our Board of Directors toinduce the issuance of additional shares of our stock. These provisions, aswell as other provisions of our certificate of incorporation and bylaws, maydelay, defer, or prevent a transaction or a change in control that mightotherwise be in the best interests of our stockholders.

 

***Risks Related to an Investment inOur Common Stock***

 

*We may experience fluctuations in our quarterly and annualoperating results.*

 

We may experience fluctuations in ourquarterly and annual operating results due to a number of factors, including,among others, variations in our investment income, the interest rates payableon the debt securities we acquire, the default rates on such securities, thelevel of our expenses, variations in and the timing of the recognition ofrealized and unrealized gains or losses, the level of our expenses, the degreeto which we encounter competition in our markets, and general economicconditions, including the impacts of inflation. The majority of our portfoliocompanies are in industries that are directly impacted by inflation, such asmanufacturing and consumer goods and services. Our portfolio companies may notbe able to pass on to customers increases in their costs of production whichcould greatly affect their operating results, impacting their ability to repayour loans. In addition, any projected future decreases in our portfoliocompanies’ operating results due to inflation could adversely impact the fairvalue of those investments. Any decreases in the fair value of our investmentscould result in future realized and unrealized losses and therefore reduce ournet assets resulting from operations. As a result of these factors, results forany period should not be relied upon as being indicative of performance infuture periods.

 

*There is a risk that youmay not receive distributions.*

 

Our current intention is to distribute atleast 90% of our ordinary income and short-term capital gains to ourstockholders on a quarterly basis by paying monthly distributions. We expect toretain net realized long-term capital gains to supplement our equity capitaland support the growth of our portfolio, although our Board of Directors maydetermine in certain cases to distribute these gains. We cannot assure you thatwe will achieve investment results or maintain a tax status that will allow orrequire any specified level of cash distributions.

 

*Distributions by us haveand may in the future continue to include a return of capital.*

 

Our Board of Directors declares monthlydistributions based on estimates of net investment income for each fiscal year,which may differ, and in the past have differed, from actual results. Becauseour distributions are based on estimates of net investment income that maydiffer from actual results, future distributions payable to our stockholdersmay also include a return of capital. Moreover, to the extent that wedistribute amounts that exceed our accumulated earnings and profits, thesedistributions constitute a return of capital. A return of capital represents areturn of a stockholder’s original investment in shares of our stock and shouldnot be confused with a distribution from earnings and profits. Although returnof capital distributions may not be taxable, such distributions may increase aninvestor’s tax liability for capital gains upon the sale of our shares byreducing the investor’s tax basis for such shares. Such returns of capitalreduce our asset base and also adversely impact our ability to raise debtcapital as a result of the leverage restrictions under the 1940 Act, whichcould have a material adverse impact on our ability to make new investments.

 

*The market price of our shares may fluctuatesignificantly.*

 

The trading price of our common stock mayfluctuate substantially. The extreme volatility and disruption that haveaffected the capital and credit markets for over a year has reachedunprecedented levels in recent months. We have experienced greater than usualstock price volatility.

 

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The market price and marketability of ourshares may from time to time be significantly affected by numerous factors,including many over which we have no control and that may not be directlyrelated to us. These factors include, but are not limited to, the following:

 

·      general economic trends andother external factors;

 

·      price and volumefluctuations in the stock market from time to time, which are often unrelatedto the operating performance of particular companies;

 

·      significant volatility inthe market price and trading volume of shares of RICs, business developmentcompanies or other companies in our sector, which is not necessarily related tothe operating performance of these companies;

 

·      changes in regulatorypolicies or tax guidelines, particularly with respect to RICs or businessdevelopment companies;

 

·      loss of business developmentcompany status;

 

·      loss of RIC status;

 

·      changes in our earnings orvariations in our operating results;

 

·      changes in the value of ourportfolio of investments;

 

·      any shortfall in our revenueor net income or any increase in losses from levels expected by securitiesanalysts;

 

·      departure of key personnel;

 

·      operating performance ofcompanies comparable to us;

 

·      short-selling pressure withrespect to our shares or business development companies generally;

 

·      the announcement ofproposed, or completed, offerings of our securities, including rights offering;and

 

·      loss of a major fundingsource.

 

Fluctuations in the trading prices of ourshares may adversely affect the liquidity of the trading market for our sharesand, if we seek to raise capital through future equity financings, our abilityto raise such equity capital.

 

*The issuance ofsubscription rights to our existing stockholders may dilute the ownership andvoting powers by existing stockholders in our common stock, dilute the netasset value of their shares and have a material adverse effect on the tradingprice of our common stock.*

 

In April 2008 we completed an offeringof transferable rights to subscribe for additional shares of our common stock,or subscription rights. We determined to raise equity in this manner primarilybecause of the capital raising constraints applicable to us under the 1940 Actwhen our stock is trading below its net asset value per share, as it was at thetime of the offering. In the event that we again issue subscription rights toour existing stockholders, there is a significant possibility that the rightsoffering will dilute the ownership interest and voting power of stockholderswho do not fully exercise their subscription rights. Stockholders who do notfully exercise their subscription rights should expect that they will, uponcompletion of the rights offering, own a smaller proportional interest in theCompany than would otherwise be the case if they fully exercised theirsubscription rights. In addition, because the subscription price of the rightsoffering is likely to be less than the Company’s most recently determined netasset value per share, our stockholders are likely to experience an immediatedilution of the per share net asset value of their shares as a result of theoffer. As a result of these factors, any future rights offerings of our commonstock, or our announcement of our intention to conduct a rights offering, couldhave a material adverse impact on the trading price of our common stock.

 

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*Shares of closed-end investment companies frequently tradeat a discount from net asset value.*

 

Shares of closed-end investment companiesfrequently trade at a discount from net asset value. Since our inception, ourcommon stock has at times traded above net asset value, and at times tradedbelow net asset value. During the past year, our common stock has tradedconsistently, and at times significantly, below net asset value. Subsequent to March 31,2009, our stock has traded at discounts of up to 64.3% of our net asset valueas of March 31, 2009. This characteristic of shares of closed-endinvestment companies is separate and distinct from the risk that our net assetvalue per share will decline. As with any stock, the price of our shares willfluctuate with market conditions and other factors. If shares are sold, theprice received may be more or less than the original investment. Whetherinvestors will realize gains or losses upon the sale of our shares will notdepend directly upon our net asset value, but will depend upon the market priceof the shares at the time of sale. Since the market price of our shares will beaffected by such factors as the relative demand for and supply of the shares inthe market, general market and economic conditions and other factors beyond ourcontrol, we cannot predict whether the shares will trade at, below or above ournet asset value. Under the 1940 Act, we are generally not able to issueadditional shares of our common stock at a price below net asset value pershare to purchasers other than our existing stockholders through a rightsoffering without first obtaining the approval of our stockholders and ourindependent directors. Additionally, at times when our stock is trading belowits net asset value per share, our distribution yield may exceed the weightedaverage returns that we would expect to realize on new investments that wouldbe made with the proceeds from the sale of such stock, making it unlikely thatwe would determine to issue additional shares in such circumstances. Thus, forso long as our common stock trades below its net asset value we will be subjectto significant constraints on our ability to raise capital. Additionally, anextended period of time in which we are unable to raise capital may restrictour ability to grow and adversely impact our ability to increase or maintainour distributions.

 

*Stockholders may incur dilution if we sell shares of ourcommon stock in one or more offerings at prices below the then current netasset value per share of our common stock.*

 

At our2008 annual meeting of stockholders, our stockholders approved a proposaldesigned to allow us to access the capital markets in a way that we were previouslyunable to as a result of restrictions that, absent stockholder approval, applyto business development companies under the 1940 Act. Specifically, ourstockholders approved a proposal that authorizes us to sell shares of ourcommon stock below the then current net asset value per share of our commonstock in one or more offerings for a period of one year. During the past year,our common stock has traded consistently, and at times significantly, below netasset value. Any decision to sell shares of our common stock below the thencurrent net asset value per share of our common stock would be subject to thedetermination by our Board of Directors that such issuance is in our and ourstockholders’ best interests.

 

If we were to sell shares of our common stockbelow net asset value per share, such sales would result in an immediatedilution to the net asset value per share. This dilution would occur as aresult of the sale of shares at a price below the then current net asset valueper share of our common stock and a proportionately greater decrease in astockholder’s interest in our earnings and assets and voting interest in usthan the increase in our assets resulting from such issuance. The greater thedifference between the sale price and the net asset value per share at the timeof the offering, the more significant the dilutive impact would be. Because thenumber of shares of common stock that could be so issued and the timing of anyissuance is not currently known, the actual dilutive effect, if any, cannot becurrently predicted.

 

***Other Risks***

 

*We could face losses andpotential liability if intrusion, viruses or similar disruptions to ourtechnology jeopardize our confidential information, whether through breach ofour network security or otherwise.*

 

Maintaining our network security is ofcritical importance because our systems store highly confidential financialmodels and portfolio company information. Although we have implemented, andwill continue to implement, security measures, our technology platform is andwill continue to be vulnerable to intrusion, computer viruses or similardisruptive problems caused by transmission from unauthorized users. Themisappropriation of proprietary information could expose us to a risk of lossor litigation.

 

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*Terrorist attacks, acts ofwar or national disasters may affect any market for our common stock, impactthe businesses in which we invest and harm our business, operating results andfinancial conditions.*

 

Terrorist acts, acts of war or national disasters have created, andcontinue to create, economic and political uncertainties and have contributedto global economic instability. Future terrorist activities, military orsecurity operations, or national disasters could further weaken thedomestic/global economies and create additional uncertainties, which maynegatively impact the businesses in which we invest directly or indirectly and,in turn, could have a material adverse impact on our business, operatingresults and financial condition. Losses from terrorist attacks and nationaldisasters are generally uninsurable.

 

**Item 1B. Unresolved Staff Comments**

 

None.

 

**Item 2. Properties**

 

Wedo not own any real estate or other physical properties materially important toour operations.  Gladstone ManagementCorporation is the current leaseholder of all properties in which we operate.  We occupy these premises pursuant to theAdvisory Agreement and Administration Agreement.  Our Adviser and Administrator areheadquartered in McLean, Virginia and our Adviser also has operations in NewYork, New Jersey, Illinois, Pennsylvania, Texas and Georgia.

 

**Item 3. Legal Proceedings**

 

We are not currently subject to any materiallegal proceedings, nor, to our knowledge, is any material legal proceedingthreatened against us.

 

**Item 4. Submission of Matters to a Vote of Security Holders**

 

Nomatters were submitted to a vote of security holders during the fourth quarterof the fiscal year ended March 31, 2009.

 

**PART II**

**Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters andIssuer Purchases of Equity Securities**

 

Our common stock is traded on the NASDAQGlobal Select Market under the symbol “GAIN.” The following table reflects, byquarter, the high and low closing prices per share of our common stock on theNASDAQ Global Select Market for each fiscal quarter during the last two fiscalyears.

 
| ** ** | ** ** | **Quarter  Ended** | ** ** | **High**    | ** ** | **Low**     | ** ** |
|------------|------------|--------------------|------------|-------------|------------|-------------|------------|
| FY 2009    |       | 3/31/09            |       | $           | 5.85       |        | $          | 2.40 |   |
|       |       | 12/31/08           |       | 6.83        |       |  3.09  |       |
|       |       | 9/30/08            |       | 8.08        |       |  6.00  |       |
|       |       | 6/30/08            |       | 9.78        |       | 6.31        |       |
|       |       |               |       |        |       |        |       |
| FY 2008    |       | 3/31/08            |       | $           | 10.94      |        | $          | 9.08 |   |
|       |       |  12/31/07     |       |  12.68 |       |  9.81  |       |
|       |       |  9/30/07      |       |  14.39 |       |  11.52 |       |
|       |       |  6/30/07      |       |  15.20 |       |  13.91 |       |

 

As of May 28, 2009 there wereapproximately 36 stockholders of record of our common stock.

 

**Distributions**

 

We currently intend to distribute in the formof cash distributions a minimum of 90% of our ordinary income and short-termcapital gains, if any, on a quarterly basis to our stockholders in the form ofmonthly distributions. Amounts presented for each fiscal quarter of 2009 and2008 represent the cumulative amount of the distributions declared for themonths composing such quarter. The following table reflects, by quarter, thedistributions per share that we have declared on our common stock in the lasttwo fiscal years:

 

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| ** ** | ** ** | **Quarter  Ended** | ** ** | **Cash  Distribution  Per Share** | ** ** |
|------------|------------|--------------------|------------|-----------------------------------|------------|
| FY 2009    |       | 3/31/09            |       | $                                 | 0.240      |   |
|       |       |  12/31/08     |       |  0.240                       |       |
|       |       |  9/30/08      |       |  0.240                       |       |
|       |       |  6/30/08      |       |  0.240                       |       |
| FY 2008    |       | 3/31/08            |       | $                                 | 0.240      |   |
|       |       |  12/31/07     |       |  0.240                       |       |
|       |       |  9/30/07      |       |  0.225                       |       |
|       |       |  6/30/07      |       |  0.225                       |       |

 

**Recent Sales of Unregistered Securities**

 

There were no unregistered sales of oursecurities during the fiscal year ended March 31, 2009.

 

**Item 6. Selected Financial Data**

 

The following selected financial data for thefiscal years ended March 31, 2009, 2008, 2007, and the period from June 22,2005 (Commencement of Operations) through March 31, 2006 are derived fromour audited consolidated financial statements. The data should be read inconjunction with our consolidated financial statements and notes thereto and “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”included elsewhere in this report.

 

**GLADSTONE INVESTMENT CORPORATION**

**SELECTED FINANCIAL DATA**

**(DOLLAR AMOUNTS INTHOUSANDS, EXCEPT PER SHARE AND PER UNIT DATA)**

** **
| ** **                                                      | ** ** | **Year Ended  March 31, 2009** | ** ** | **Year Ended  March 31, 2008** | ** ** | **Year Ended  March 31, 2007** | ** ** | **Period June 22, 2005  (Commencement of  Operations) through  March 31, 2006** | ** ** |
|-----------------------------------------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|
| Statement of Operations Data:                                   |       |                                |       |                                |       |                                |       |                                                                                      |       |
| Total Investment Income                                         |       | $                                   | 25,812     |                                | $          | 27,894                              |       | $                                                                                         | 17,262     |   | $ | 7,371 |   |
| Total Expenses                                                  |       | 12,424                              |       | 14,842                              |       | 6,114                               |       | 1.487                                                                                     |       |
| Net Investment Income                                           |       | 13,388                              |       | 13,052                              |       | 11,148                              |       | 5,884                                                                                     |       |
| Net (Loss) Gain on Investment                                   |       | (24,837                             | )          | (13,993                             | )          | (3,879                              | )          | 170                                                                                       |       |
| Net (Decrease) Increase in Net Assets Resulting from Operations |       | $                                   | (11,449    | )                                   | $          | (941                                | )          | $                                                                                         | 7,269      |   | $ | 6,054 |   |
|                                                            |       |                                |       |                                |       |                                |       |                                                                                      |       |
| Per Share Data (1):                                             |       |                                |       |                                |       |                                |       |                                                                                      |       |
| Basic and Diluted                                               |       | $                                   | (0.53      | )                                   | $          | (0.06                               | )          | $                                                                                         | 0.44       |   | $ | 0.37 |   |
| Cash Distributions Declared per share                           |       | 0.96                                |       | 0.93                                |       | 0.86                                |       | 0.39                                                                                      |       |
| Statement of Assets and Liabilities Data:                       |       |                                |       |                                |       |                                |       |                                                                                      |       |
| Total Assets                                                    |       | $                                   | 326,843    |                                | $          | 352,293                             |       | $                                                                                         | 323,590    |   | $ | 230,324 |   |
| Net Assets                                                      |       | 214,802                             |       | 206,445                             |       | 222,819                             |       | 229,842                                                                                   |       |
| Net Asset Value Per Share                                       |       | 9.73                                |       | 12.47                               |       | 13.46                               |       | 13.88                                                                                     |       |
| Common Shares Outstanding                                       |       | 22,080,133                          |       | 16,560,100                          |       | 16,560,100                          |       | 16,391,589                                                                                |       |
| Senior Securities Data:                                         |       |                                |       |                                |       |                                |       |                                                                                      |       |
| Borrowings under line of credit (2)                             |       | $                                   | 110,265    |                                | $          | 144,835                             |       | $                                                                                         | 100,000    |   | — |   |
| Asset coverage ratio (3) (4)                               |       | 295                                 | %          | 243                                 | %          | 323                                 | %          | N/A                                                                                       |       |
| Asset coverage per unit (4)                                     |       | $                                   | 2,948      |                                | $          | 2,425                               |       | $                                                                                         | 3,228      |   | N/A |   |
| Other Data:                                                     |       |                                |       |                                |       |                                |       |                                                                                      |       |
| Number of Portfolio Companies at Year End                       |       | 46                                  |       | 52                                  |       | 47                                  |       | 22                                                                                        |       |
| Principal Amount of New Investments                             |       | $                                   | 53,002     |                                | $          | 175,255                             |       | $                                                                                         | 182,953    |   | $ | 160,646 |   |
| Proceeds from Loan Repayments and Investments Sold              |       | 49,785                              |       | 96,438                              |       | 61,167                              |       | 7,381                                                                                     |       |
| Weighted Average Yield on Investments (5):                      |       | 8.22                                | %          | 8.91                                | %          | 8.72                                | %          | 7.02                                                                                      | %          |
| Total Return (6)                                                |       | (51.65                              | )%         | (31.54                              | )%         | 4.36                                | %          | 3.39                                                                                      | %          |

 

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(1)   Per share data for net(decrease) increase in net assets resulting from operations is based on theweighted common stock outstanding for both basic and diluted.

 

(2)    See “Management’s Discussion and Analysisof Financial Condition and Results of Operations” for more informationregarding our level of indebtedness.

 

(3)    As a business development company, we aregenerally required to maintain a ratio of 200% of total assets, less allliabilities and indebtedness not represented by senior securities, to totalborrowings.

 

(4)    Asset coverage ratio is the ratio of thecarrying value of our total consolidated assets, less all liabilities andindebtedness not represented by senior securities, to the aggregate amount ofsenior securities representing indebtedness. Asset coverage per unit is the asset coverage ratio expressed in termsof dollar amounts per $1,000 of indebtedness.

 

(5)    Weighted average yield oninvestments equals interest income on investments divided by the annualizedweighted average investment balance throughout the year.

 

(6)    Total return equals the(decrease) increase of the ending market value over the beginning market valueplus monthly distributions divided by the monthly beginning market value.

 

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**Item 7. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

 

*The following analysis ofour financial condition and results of operations should be read in conjunctionwith our financial statements and the notes thereto contained elsewhere in thisForm 10-K.*

 

**OVERVIEW**

 

**General**

 

We were incorporated under the GeneralCorporation Laws of the State of Delaware on February 18, 2005. We wereprimarily established for the purpose of investing in subordinated loans,mezzanine debt, preferred stock and warrants to purchase common stock of smalland medium-sized companies in connection with buyouts and otherrecapitalizations. We also invest in senior secured loans, common stock and, toa much lesser extent, senior and subordinated syndicated loans. Our investmentobjective is to generate both current income and capital gains through thesedebt and equity instruments. We operate as a closed-end, non-diversifiedmanagement investment company and have elected to be treated as a businessdevelopment company under the Investment Company Act of 1940 (the “1940 Act”).  In addition, for tax purposes, we haveelected to be treated as a regulated investment company (“RIC”) under theInternal Revenue Code of 1986, as amended (the “Code”).

 

**BusinessEnvironment**

The current economic conditions generally and the disruptions in thecapital markets in particular have decreased liquidity and increased our costof debt and equity capital, where available. The longer these conditionspersist, the greater the probability that these factors could continue toincrease our cost and significantly limit our access to debt and equitycapital, and thus have an adverse effect on our operations and financialresults. Many of the companies in which we have made or will make investmentsare also susceptible to the economic downturn, which may affect the ability ofone or more of our portfolio companies to repay our loans or engage in aliquidity event, such as a sale, recapitalization or initial public offering.The recession could also disproportionately impact some of the industries inwhich we invest, causing us to be more vulnerable to losses in our portfolio.Therefore, the numbers of our non-performing assets have, and are likely tocontinue to increase and the fair market value of our portfolio is likely tocontinue to decrease during these periods.

 

The recession has affected the availability of credit generally and, asa result, subsequent to our fiscal year end, we sold 29 of the 32senior syndicated loans that were held in our portfolio of investments at March 31,2009 to various investors in the syndicated loan market in order to repayamounts outstanding under our prior credit facility, which matured in April 2009. These loans, in aggregate, had a cost value of approximately $104.2 million, or29.9% of the cost value of our total investments, and an aggregate fair marketvalue of approximately $69.8 million, or 22.2% of the fair market value of ourtotal investments, at March 31, 2009.  In order to maintain RICstatus under the Code, in addition to other requirements, as of the close ofeach quarter of our taxable year, we must meet the asset diversification test,which requires that at least 50% of the value of our assets consist of cash,cash items, U.S. government securities, the securities of other regulatedinvestment companies and other securities to the extent such other securitiesof any one issuer do not represent more than 5% of our total assets. As aresult of changes in the value of our assets during April and May 2009,due to significant sales of Non-Control/Non-Affiliate investments, we havefallen below the required 50% asset diversification threshold as of the date ofthis report.  Failure to meet this thresholdalone does not result in loss of our RIC status in our current situation.  In circumstances where the failure to meetthe 50% threshold as of a quarterly measurement date is the result of fluctuationsin the value of assets, including in our case as a result of the sale ofassets,  we are still deemed under the rules tosatisfy the asset diversification test, and therefore maintain our RIC status,as long as we have not made any new investments, including additionalinvestments in our portfolio companies (such as advances under outstandinglines of credit), since the time that we fell below the 50% threshold.  Thus, although we currently qualify as a RICdespite our current, and potential future, inability to meet the 50% assetdiversification requirement, if we make any additional investments beforeregaining compliance with the asset diversification test, our RIC status willbe threatened.  In this situation, if wedid not regain compliance with the 50% threshold prior to the next quarterlymeasurement date following the investment, we would have thirty days to “cure”our failure of the asset diversification test to avoid a loss of our RICstatus. Potential cures for failure of the asset diversification test includeraising additional equity or debt capital, or changing the composition of ourassets, which could include full or partial divestitures of investments, suchthat we would once again exceed the 50% threshold.   As a result, we presently do not intend tomake any new investments until we once again exceed the 50% threshold.  We are exploring a number of strategies,including changing the composition of our assets, which could include full orpartial divestitures of investments, and raising additional equity or debtcapital, such that we would once again exceed the 50% threshold.  We are currently seeking to obtain ashort-term credit facility under which we would be able to borrow funds at eachquarter end that would allow us to satisfy the asset diversification test forthe foreseeable future, thereby allowing us to make additional investmentsprior to June 30, 2009 or thereafter and be in compliance with thistest.  There can be no assurance,however, that we will be able to enter into such a credit facility onreasonable terms, if at all, or that any other cures will be available to ussuch that our investment activity could resume. However, our ability to implement any of these approaches will besubject to market conditions and a number of risks and uncertainties that are,in part, beyond our control.

 

Under the terms of our new credit facility with BB&T, committedfunding was reduced from $125.0 million under our prior facility to $50.0million. See “Recent Developments” section below for further information.  As of May 29, 2009, $29.7 million wasoutstanding under our credit facility and only $17.5 million was available forborrowings under the line of credit.  As a result of this limited availabilityunder our credit facility and the restraints upon our investing activitiesrequired in order to maintain RIC status under the Code as described above, weare unsure when we will once again be in a position to make any newinvestments.  Our creditfacility also limits our distributions to stockholders and, as a result, werecently decreased our monthly cash distribution rate by 50% as compared to theprior three month period.   We do not know when market conditions willstabilize, if adverse conditions will intensify or the full extent to which thedisruptions will continue to affect us. If market instability persists or intensifies, we may experienceincreasing difficulty in raising capital.

 

Challenges in the current market are intensified for us by certainregulatory limitations under the Code and the 1940 Act, as well as contractualrestrictions under the agreement governing our credit facility that furtherconstrain our ability to access the capital markets.  To maintain our qualification as a RIC, wemust satisfy, among other requirements, an annual distribution requirement topay out at least 90% of our ordinary income and short-term capital gains to ourstockholders on an 

 

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annual basis.  Because we arerequired to distribute our income in this manner, and because the illiquidityof many of our investments makes it difficult for us to finance new investmentsthrough the sale of current investments, our ability to make new investments ishighly dependent upon external financing. Our external financing sources include the issuance of equitysecurities, debt securities or other leverage such as borrowings under our lineof credit.  Our ability to seek externaldebt financing, to the extent that it is available under current marketconditions, is further subject to the asset coverage limitations of the 1940Act, which require us to have at least a 200% asset coverage ratio, meaninggenerally that for every dollar of debt, we must have two dollars of assets.

 

The recession may also continue to decrease the value of collateralsecuring some of our loans, as well as the value of our equity investments,which has impacted and may continue to impact our ability to borrow under ourcredit facility.  For the year ended March 31,2009, we recorded net unrealized depreciation on our portfolio of investmentsof $19.8 million, which was mainly attributable to the decrease in fair valueof our portfolio.  We may see furtherdecreases in the value of our portfolio, which will further limit our abilityto borrow under our credit facility. Additionally, our credit facility contains covenants regarding themaintenance of certain minimum loan concentrations which are affected by thedecrease in value of our portfolio. Failure to meet these requirements would result in a default which, ifwe are unable to obtain a waiver from our lenders, would result in theacceleration of our repayment obligations under the credit facility.

 

Weexpect that, given these regulatory and contractual constraints in combinationwith current market conditions, debt and equity capital may be costly ordifficult for us to access for some time. For so long as this is the case, our near-term strategy depends onretaining capital and building the value of our existing portfolio companies toincrease the likelihood of maintaining potential future returns.  We will also, where prudent and possible,consider the sale of lower-yielding investments.  This has resulted, and may continue to result,in significantly reduced investment activity, as our ability to make newinvestments under these conditions is largely dependent on availability ofproceeds from the sale or exit of existing portfolio investments, which eventsmay be beyond our control.  As capitalconstraints improve, we intend to continue our strategy of making conservativeinvestments in businesses that we believe will weather the current economy and thatare likely to produce attractive long-term returns for our stockholders.

 

**Use of Internally-Developed Discount Cash FlowMethodologies**

 

Given the recession, the market for syndicated loanshas become increasingly illiquid with limited or no transactions for many ofthose securities which we hold. The Financial Accounting Standards Board (“FASB”)Staff Position No. 157-3, *Determiningthe Fair Value of a Financial Asset When the Market for That Asset is NotActive*, or FSP No. 157-3, provides guidance on the use of adiscounted cash flow (“DCF”) methodology to value investments in an illiquidmarket.  Under FSP No. 157-3,indications of an illiquid market include cases where the volume and level oftrading activity in the asset have declined significantly, the available pricesvary significantly over time or amongst market participants, or the prices arenot current. The marketplace for which we obtain indicative bids for purposesof determining fair value for our syndicated loan investments have recentlyshown these attributes of illiquidity.  Inaccordance with Statement of Financial Accounting Standards (“SFAS”) No. 157,our valuation procedures specify the use of third-party indicative bid quotesfor valuing syndicated loans where there is a liquid public market for thoseloans and market pricing quotes are readily available. However, due to themarket illiquidity and the lack of transactions during the year ended March 31,2009, we determined that the current agent bank non-binding indicative bids forthe majority of our syndicated loans were unreliable and alternative procedureswould need to be performed until liquidity returns to the marketplace.  However, we valued the majority of oursyndicated loans usingthe sale price obtained at or subsequent to March 31, 2009, since thesecurity was sold.  As of March 31,2009, the portion of our investment portfolio that was valued using DCF wasapproximately $14.3 million, or 4.6% of the fair value of our total portfolioof investments.

 

**InvestmentHighlights**

 

During the fiscal year ended March 31, 2009,we extended, directly or through participations, approximately$41.7 million of new loans to four new portfolio companies and $8.3million of investments to existing portfolio companies through revolver drawsor additions to term notes for a total of $50.0 million in new investments.Also, during the fiscal year ended March 31, 2009, we sold, were repaid infull, or otherwise exited 14 syndicated loans and part of one proprietary loanfor aggregate proceeds of approximately $28.3 million, and we receivedscheduled contractual principal repayments of approximately $18.4 million,for total principal repayments of approximately $46.7 million. Since ourinitial public offering in June 2005 through March 31, 2009, we havemade 142 investments in 87 companies for a total of approximately $566.0million, before giving affect to principal repayments on investments anddivestitures.

 

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**RecentDevelopments**

 

*NewCredit Facility with Branch Bank and Trust Company and Termination of DeutscheBank A.G. Credit Facility*

 

On April 14,2009, through our wholly-owned subsidiary Gladstone Business Investment, LLC (“BusinessInvestment”), we entered into a second amended and restated credit agreementproviding for a $50.0 million revolving line of credit (the “Credit Facility”),arranged by Branch Banking and Trust Company (“BB&T”) as administrativeagent. Key Equipment Finance Company Inc. also joined the Credit Facility as acommitted lender.  In connection with our entry into the Credit Facility,we borrowed $43.8 million under the Credit Facility to repay in full allamounts outstanding under our prior credit agreement with Deutsche Bank, A.G. The Credit Facility may be expanded up to $125.0 million through theaddition of other committed lenders to the facility.  The Credit Facilitymatures on April 14, 2010, and if the facility is not renewed or extendedby this date, all unpaid principal and interest will be due and payable withinone year of maturity.

 

### *Senior Syndicated LoanSales*

###  

### During April 2009, wecompleted the sale of 29 of the 32 senior syndicated loans that were held inour portfolio of investments at March 31, 2009 to various investors in thesyndicated loan market.  The loans, in aggregate, had a cost value ofapproximately $104.2 million, or 29.9% of the cost value of our totalinvestments, and an aggregate fair market value of approximately $69.8 million,or 22.2% of the fair market value of our total investments, at March 31,2009.  As a result of these sales, we received approximately $69.2 millionin net cash proceeds and recorded a realized loss of approximately $34.6million.   Upon the settlement of thesesales, and other refinancings, as discussed below, the remaining seniorsyndicated loans in our investment portfolio had a fair value of approximately$11.9 million, or 5.0% of our total investments.

###  

*ProprietaryInvestment Term Debt Repayments and Revolver Reductions/Extinguishments*

 

DuringApril 2009, we executed the following transactions with certain of ourportfolio companies:

 

·                  On April 9, 2009, A. Stucki HoldingCorp. refinanced a portion of their term debt by repaying approximately $2.0million of principal repayments which represents the next three quarterlypayments due under normal amortization on both their senior term A ($1.6million) and senior term B ($412,000) loans. Normal amortization is expected to resume on April 1, 2010.

 

·                  On April 9, 2009, ASH Holdings Corp.made a repayment of approximately $1.1 million on their revolving line ofcredit, which reduced the outstanding balance to approximately $500,000.

 

·                  On April 10, 2009, we entered into anagreement to reduce the available credit limit on Mathey Investment Inc.’srevolving line of credit from $2.0 million to $1.0 million.  This was a non-cash transaction.

 

·                  On April 10, 2009, we made an investmentdisbursement to Cavert II Holding Corp. (“Cavert”) for approximately $850,000on their revolving line of credit and used the proceeds to make next fourquarterly payments due under normal amortization for both their senior term Aand senior term B loans in a non-cash transaction.  Normal amortization on both of these loans isexpected to resume on July 1, 2010. Subsequently, on April 17, 2009, Cavert repaid the outstanding$850,000 in principal plus accrued interest on its revolving line of credit.

 

·                  On April 13, 2009, we entered into anagreement to reduce the available credit limit on Chase II Holdings Corp.’srevolving line of credit from $4.5 million to $3.5 million.  This was a non-cash transaction.

 

*InterestRate Cap Agreement*

 

DuringMay 2009, we cancelled our interest rate cap agreement with Deutsche BankA.G. and entered into a new interest rate cap agreement for a notional amountof $45 million that will effectively limit the interest rate on a portion of theborrowings under the Credit Facility.  Weincurred a premium fee of approximately $40,000 in conjunction with thisagreement.

 

**InvestmentStrategy**

 

We expect that our target portfolio over timewill include mostly subordinated loans, mezzanine debt, preferred stock, andwarrants to buy common stock. Structurally, subordinated loans and mezzanineloans usually rank lower in priority of 

 

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payment to senior debt, such as senior bankdebt, and may be unsecured. However, subordinated debt and mezzanine loans ranksenior to common and preferred equity in a borrower’s capital structure.Typically, subordinated debt and mezzanine loans have elements of both debt andequity instruments, offering returns in the form of interest paymentsassociated with senior debt, while providing lenders an opportunity toparticipate in the capital appreciation of a borrower, if any, through anequity position. Due to its higher risk profile and often less restrictivecovenants as compared to senior debt, mezzanine debt generally earns a higherreturn than senior secured debt. Any warrants associated with mezzanine loansare typically detachable, which allows lenders to receive repayment of theirprincipal on an agreed amortization schedule while retaining their equityinterest in the borrower. Mezzanine debt also may include a “put” feature,which permits the holder to sell its equity interest back to the borrower at aprice determined through a pre-determined formula.

 

Our primary investment focuses are situationsinvolving buyouts and recapitalizations of small and mid-sized companies withestablished management teams. We expect that our investments will generallyrange between $10 million and $40 million each, although thisinvestment size may vary proportionately as the size of our capital basechanges.  Typically, our investmentsmature in no more than seven years and accrue interest at fixed or variablerates. We intend to invest either by ourselves or jointly with other buyoutfunds and/or management of the portfolio company, depending on the opportunity.If we are participating in an investment with one or more co-investors, thenour investment is likely to be smaller than if we were investing alone.

 

Certain loan investments may have a form ofinterest that is not paid currently but is accrued and added to the loanbalance and paid at the end of the term. This interest is called paid in kind (“PIK”)interest. We generally seek investments that do not generate PIK interest as wehave to pay out this accrued interest as distributions to our stockholders andwe may have to borrow money or raise additional capital in order to meet thetax test for RICs by having to pay out at least 90% of our income. As of March 31,2009, none of our investments bore PIK interest.

 

Becausethe majority of our portfolio loans consist of term debt of private companieswho typically cannot or will not expend the resources to have their debtsecurities rated by a credit rating agency, we expect that several of the debtsecurities we acquire will be unrated. We cannot accurately predict whatratings these loans might receive if they were rated, and thus cannot determinewhether or not they could be considered “investment grade” quality.

 

Tothe extent possible, our loans generally are collateralized by a securityinterest in the borrower’s assets. Interest payments are generally made monthlyor quarterly (except to the extent of any PIK interest) with amortization ofprincipal generally being deferred for several years. The principal amount ofthe loans and any accrued but unpaid interest generally become due at maturity,generally at five to seven years. When we receive a warrant to purchase stockin a borrower in connection with a loan, the warrant will typically have anexercise price equal to the fair value of the portfolio company’s common stockat the time of the loan and entitle us to purchase a modest percentage of theborrower’s stock.

 

Original issue discount (“OID”) arises whenwe extend a loan and receive an equity interest in the borrower at the sametime. To the extent that the price paid for the equity is not at market value,we must allocate part of the price paid for the loan to the value of theequity. Then the amount allocated to the equity, the OID, must be amortizedover the life of the loan. As with PIK interest, the amortization of OID alsoproduces income that must be recognized for purposes of satisfying thedistribution requirements for a RIC under Subchapter M of the Code,whereas the cash is received, if at all, when the equity instrument is sold. Weseek to avoid OID with all potential investments under review, and as of March 31,2009, we did not hold any investments with OID income.

 

In addition, as a business developmentcompany under the 1940 Act, we are required to make available significantmanagerial assistance to our portfolio companies. Our investment adviser,Gladstone Management Corporation, or our Adviser, provides these services onour behalf through its officers, who are also our officers. Currently, neitherwe nor our Adviser charges a fee for managerial assistance; however, if ourAdviser does receive fees for such managerial assistance, our Adviser willcredit the managerial assistance fees to the base management fee due from us toour Adviser.

 

Our Adviser receives fees for other servicesit provides to our portfolio companies. These other fees are recognized asrevenue when earned and are generally paid directly to our Adviser by theborrower or potential borrower upon closing of the investment. The services ourAdviser provides to portfolio companies vary by investment, but generallyinclude a broad array of services, such as investment banking services,arranging bank and equity financing, structuring financing from multiplelenders and investors, reviewing existing credit facilities, restructuringexisting investments, raising equity and debt capital from other investors, turnaroundmanagement, merger and acquisition services and recruiting new managementpersonnel. When our Adviser receives fees for these services, 50% of certain ofthose fees are credited against the base management fee that we pay to ourAdviser. Any services of this nature subsequent to the closing would typicallygenerate a separate fee at the time of completion.

 

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Our Adviser also receives fees for monitoringand reviewing portfolio company investments. These fees are generally paidannually or quarterly in advance to our Adviser throughout the life of theinvestment. Fees of this nature are recorded as revenue by our Adviser whenearned and are not credited against the base management fee.

 

We may receive fees for the origination andclosing services we provides to portfolio companies through our Adviser. Thesefees are paid directly to us and are recognized as revenue upon closing of theoriginated investment and are reported as fee income in the consolidatedstatements of operations.

 

Priorto making an investment, we ordinarily enter into a non-binding term sheet withthe potential borrower. These non-binding term sheets are generally subject toa number of conditions, including, but not limited to, the satisfactorycompletion of our due diligence investigations of the potential borrower’sbusiness, reaching agreement on the legal documentation for the loan, and thereceipt of all necessary consents. Upon execution of the non-binding termsheet, the potential borrower generally pays the Adviser a non-refundable feefor services rendered by the Adviser through the date of the non-binding termsheet. These fees are received by the Adviser and are offset against the basemanagement fee payable to the Adviser, which has the effect of reducing ourexpenses to the extent of any such fees received by the Adviser.

 

In the event that we expend significanteffort in considering and negotiating a potential investment that ultimately isnot consummated, we generally will seek reimbursement from the proposedborrower for our reasonable expenses incurred in connection with thetransaction, including legal fees. Any amounts collected for expenses incurredby our Adviser in connection with unconsummated investments will be reimbursedto our Adviser. Amounts collected for these expenses incurred by us will bereimbursed to us and will be recognized in the period in which such reimbursementis received, but there can be no guarantee that we will be successful incollecting any such reimbursements.

 

**Our Adviser and Administrator**

 

OurAdviser is led by a management team which has extensive experience in our linesof business. Our Adviser is controlled by David Gladstone, our chairman andchief executive officer. Mr. Gladstone is also the chairman and chiefexecutive officer of our Adviser. David Dullum is our president and hasextensive experience in private equity investing in middle market companies.Terry Lee Brubaker is our co-vice chairman and has substantial experience inacquisitions and operations of companies. George Stelljes III is our co-vicechairman and chief investment officer and has extensive experience in leveragedfinance. Our Adviser also has a wholly-owned subsidiary, GladstoneAdministration, LLC (the “Administrator”), which employs our chief financialofficer, chief compliance officer, treasurer and their respective staffs.

 

Our Adviser and Administrator also provide investmentadvisory and administrative services to our affiliates, Gladstone CommercialCorporation, a publicly traded real estate investment trust; Gladstone CapitalCorporation, a publicly traded registered investment company; and GladstoneLand Corporation, a private agricultural real estate company.  With the exception of our chief financialofficer, all of our executive officers serve as either directors or executiveofficers, or both, of our Adviser, our Administrator, Gladstone CommercialCorporation and Gladstone Capital Corporation. In the future, our Adviser mayprovide investment advisory and administrative services to other funds, bothpublic and private, of which it is the sponsor.

 

We have been externally managed by ourAdviser pursuant to an investment advisory and administrative agreement sinceour inception. Our Adviser was organized as a corporation under the laws of theState of Delaware on July 2, 2002, and is a registered investment adviserunder the Investment Advisers’ Act of 1940, as amended. Our Adviser isheadquartered in McLean, Virginia, a suburb of Washington, D.C., and hasoffices in New York, Illinois, Pennsylvania, New Jersey, Texas and Georgia.

 

**Investment Advisory andManagement Agreement**

 

Pursuant to the amended and restated investmentadvisory and management agreement with our Adviser (the “Advisory Agreement”),we pay our Adviser fees, as compensation for its services, consisting of a basemanagement and a two-part incentive fee. On July 9, 2008, our Board of Directors approved the renewal ofthis Advisory Agreement with our Advisor through August 31, 2009.  The Board of Directors will consider afurther one year renewal in July 2009.

 

Beginning on January 1, 2007, the basemanagement fee was computed and payable quarterly and was assessed at an annualrate of 2.0% of our average gross assets, which is defined as total assets,including investments made with proceeds from borrowings, less any uninvestedcash and cash equivalents resulting from borrowings, calculated as of the endof the two most recently completed fiscal quarters.

 

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On January 9, 2007, our Board ofDirectors accepted an unconditional and irrevocable voluntary waiver from theAdviser to reduce the annual 2.0% base management fee on senior syndicated loanparticipations to 0.5%, to the extent that proceeds resulting from borrowingswere used to purchase such syndicated loan participations.  This waiver remains in effect and was appliedthrough March 31, 2009.

 

When our Adviser receives fees from ourportfolio companies, such as investment banking fees, structuring fees orexecutive recruiting services fees, 50% of certain of these fees will becredited against the base management fee that we would otherwise be required topay to our Adviser.

 

In addition, the Adviser services the loansheld by Business Investment in return for which our Adviser receives a 2.0%annual fee based on the monthly aggregate balance of loans held by BusinessInvestment. Since we indirectly own these loans, all loan servicing fees paidto our Adviser are treated as reductions against the 2.0% base management fee.Overall, the base management fee due to our Adviser cannot exceed 2.0% of totalassets (as reduced by cash and cash equivalents pledged to creditors) duringany given fiscal year.

 

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

 

·                  no incentivefee in any calendar quarter in which our pre-incentive fee net investmentincome does not exceed the hurdle rate (7% annualized);

 

·                  100% of ourpre-incentive fee net investment income with respect to that portion of suchpre-incentive fee net investment income, if any, that exceeds the hurdle ratebut is less than 2.1875% in any calendar quarter (8.75% annualized); and

 

·                  20% of theamount of our pre-incentive fee net investment income, if any, that exceeds2.1875% in any calendar quarter (8.75% annualized).

 

Thesecond part of the incentive fee is a capital gains incentive fee that isdetermined and payable in arrears as of the end of each fiscal year (or upontermination of the Advisory Agreement, as of the termination date) and equals20% of our realized capital gains as of the end of the fiscal year. Indetermining the capital gains incentive fee payable to our Adviser, wecalculate the cumulative aggregate realized capital gains and cumulativeaggregate realized capital losses since our inception, and the aggregateunrealized capital depreciation as of the date of the calculation, asapplicable, with respect to each of the investments in its portfolio.  For this purpose, cumulative aggregaterealized capital gains, if any, equals the sum of the differences between thenet sales price of each investment, when sold, and the original cost of suchinvestment since our inception. Cumulative aggregate realized capital lossesequals the sum of the amounts by which the net sales price of each investment,when sold, is less than the original cost of such investment since ourinception. Aggregate unrealized capital depreciation equals the sum of thedifference, if negative, between the valuation of each investment as of theapplicable calculation date and the original cost of such investment. At theend of the applicable year, the amount of capital gains that serves as thebasis for our calculation of the capital gains incentive fee equals thecumulative aggregate realized capital gains less cumulative aggregate realizedcapital losses, less aggregate unrealized capital depreciation, with respect toour portfolio of investments. If this number is positive at the end of suchyear, then the capital gains incentive fee for such year equals 20% of suchamount, less the aggregate amount of any capital gains incentive fees paid inrespect of our portfolio in all prior years.

 

We pay our direct expenses, including, butnot limited to, directors’ fees, legal and accounting fees, stockholder-relatedexpenses, and directors’ and officers’ insurance under the Advisory Agreement.

 

**Administration Agreement**

 

We have entered into an administrationagreement with our Administrator (the “Administration Agreement”), whereby wepay separately for administrative services. The Administration Agreementprovides for payments equal to our allocable portion of our Administrator’soverhead expenses in performing its obligations under the AdministrationAgreement including, but not limited to, rent for employees of ourAdministrator, and our allocable portion of the salaries and benefits expensesof our chief financial officer, chief compliance officer, treasurer and theirrespective staffs.  Our allocable portionof expenses is derived by multiplying our Administrator’s total expenses by thepercentage of our average assets (the total assets 

 

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at the beginning each quarter) in comparisonto the average total assets of all companies managed by our Adviser undersimilar agreements.  On July 9,2008, our Board of Directors approved the renewal of this AdministrationAgreement with our Administrator through August 31, 2009. The Board ofDirectors will consider a further one year renewal in July 2009.

 

**License Agreement**

 

We entered into a licenseagreement with the Adviser, pursuant to which the Adviser has granted us anon-exclusive license to use the name “Gladstone” and the Diamond G trademark.The amount of the fee is negotiated on an annual basis by our compensationcommittee and must be approved by a majority of our independent directors. Thislicense agreement required us to pay the Adviser a royalty fee of one dollarper quarter through March 31, 2008, at which time it was increased to tendollars per quarter and will remain at ten dollars until the next renewal dateof March 31, 2010. The license arrangement will terminate in the eventthat Gladstone Management Corporation is no longer our investment adviser.

 

**RESULTSOF OPERATIONS****(dollar amounts inthousands, except per share amounts or unless otherwise indicated)**

 

*COMPARISON OF THE FISCAL YEARSENDED MARCH 31, 2009 AND MARCH 31, 2008*

 

**Investment Income**

 

Investmentincome for the year ended March 31, 2009 was $25,812, as compared to$27,894 for the year ended March 31, 2008.

 

Interestincome from our investments in debt securities of private companies was $25,133for the year ended March 31, 2009, as compared to $27,629 for the prioryear. The level of interest income from investments is directly related to thebalance, at cost, of the interest-bearing investment portfolio outstandingduring the period multiplied by the weighted average yield. The weightedaverage yield varies from period to period based on the current stated interestrate on interest-bearing investments and the amounts of loans for whichinterest is not accruing. Interest income from our investments decreased $2,496,or 9.0%, during the year ended March 31, 2009 compared to the prior yearperiod. This change was due to the decrease in the weighted average yield ofour portfolio, attributable mainly to a reduction in the average LIBOR duringthe comparable time periods, which was approximately 1.96% for the year ended March 31,2009, compared to 4.74% in the prior year.

 

Interest income fromNon-Control/Non-Affiliate investments was $8,466 for the year ended March 31,2009, as compared to $14,575 for the prior year. This decrease was the result of anoverall decrease in the number of Non-Control/Non-Affiliate investments held atMarch 31, 2009 compared to the prior year, primarily due to sales andsettlements of syndicated loans subsequent to March 31, 2008. This decreasewas further accentuated by drops in LIBOR, due to the instability andtightening of the credit markets.

 

Interest income fromControl investments was $11,291 for the year ended March 31, 2009, ascompared to $10,768 for the prior year. The increase of $523 is attributable to theacquisition of two additional Control investments purchased during the yearended March 31, 2009 as compared to the prior year; however, this increasewas partially offset by the reclassification of Quench, a Control investment atMarch 31, 2008, as an Affiliate investment for the current reportingyear.  This reclassification took placein the second quarter of fiscal year 2009. Decreases in LIBOR during the current fiscal year played a minimal rolein interest income from our proprietary deals, as the majority of them includeinterest rate floors to protect against such circumstances.

 

Interest income fromAffiliate investments was $5,376 for the year ended March 31, 2009, ascompared to $2,286 for the prior year. The increase of $3,090 was a result of oneadditional Affiliate investment purchased during the current fiscal year, aswell the change in reclassification of Quench as an Affiliate investment, asnoted above.

 

The interest-bearing investment portfolio had an average cost basis ofapproximately $297.5 million for the year ended March 31, 2009, ascompared to an average cost basis of $292.9 million for the year ended March 31,2008.  The following table lists theinterest income from investments for the five largest portfolio companiesduring the respective periods:

 

**Year ended March 31, 2009**

 
| **Company**                | ** ** | **Interest  Income** | ** ** | **% of  Total** | ** ** |
|----------------------------|------------|----------------------|------------|-----------------|------------|
| Chase II Holdings Corp.    |       | $                    | 2,802      |            | 11.1       | % |
| A. Stucki Holding Corp.    |       | 2,716                |       | 10.8            | %          |
| Acme Cryogenics, Inc. |       | 1,691                |       | 6.7             | %          |
| Noble Logistics, Inc. |       | 1,635                |       | 6.5             | %          |
| Danco Acquisition Corp.    |       | 1,597                |       | 6.4             | %          |
| **Subtotal**               | ** ** | **$**                | **10,441** | ** **      | **41.5**   | **%** |
| Other companies            |       | 14,692               |       | 58.5            | %          |
| **Total interest income**  | ** ** | **$**                | **25,133** | ** **      | **100.0**  | **%** |

 

**Yearended March 31, 2008**

 
| **Company**                | ** ** | **Interest  Income** | ** ** | **% of  Total** | ** ** |
|----------------------------|------------|----------------------|------------|-----------------|------------|
| A. Stucki Holding Corp.    |       | $                    | 3,377      |            | 12.2       | % |
| Chase II Holdings Corp.    |       | 3,017                |       | 10.9            | %          |
| Acme Cryogenics, Inc. |       | 1,695                |       | 6.2             | %          |
| Noble Logistics, Inc. |       | 1,518                |       | 5.5             | %          |
| Quench Holdings Corp.      |       | 1,494                |       | 5.4             | %          |
| **Subtotal**               | ** ** | **$**                | **11,101** | ** **      | **40.2**   | **%** |
| Other companies            |       | 16,528               |       | 59.8            | %          |
| **Total interest income**  | ** ** | **$**                | **27,629** | ** **      | **100.0**  | **%** |

 

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The weighted average yield on our portfolio, excluding cash and cashequivalents, for the year ended March 31, 2009 was 8.22%, compared to8.91% for the year ended March 31, 2008. The decrease in the annualized weighted average yield resulted primarilyfrom a reduction in the average LIBOR, due to the instability and tightening ofthe credit markets.

 

Interestincome from invested cash and cash equivalents for the year ended March 31,2009 was $67, as compared to $217 for the prior year period.  This decrease is a result of lower interestrates offered by banks, as this income is derived mainly from interest earnedon overnight sweeps of cash held at financial institutions, in addition to ususing the proceeds from repayments on outstanding loans during the year to paydown our line of credit.

 

Otherincome was $612 for the year ended March 31, 2009, as compared to $48 forthe prior year.  This increase is due tothe gain realized on the restructuring of Quench during August 2008, whichincluded a cash distribution of approximately $617, of which $567 was recordedas other income.

 

**Operating Expenses**

 

Total operating expenses,excluding any voluntary and irrevocable credits to the base management fee,were $14,898 for the fiscal year ended March 31, 2009, as compared to$17,651 for the prior fiscal year, an overall decrease of $2,753, or15.6%.  The majority of this reductionwas due to a decrease in interest costs associated with our credit facility aswell as a decrease in the amount of deferred finance costs that were fullyamortized during the fiscal year ended March 31, 2009.

 

Loan servicing fees of $5,002were incurred for the year ended March 31, 2009, as compared to $5,014 forthe prior year. These fees were incurred in connection with a loan servicingagreement between Business Investment and our Adviser, which is based on thesize of the aggregate outstanding portfolio. These fees were directly creditedagainst the amount of the base management fee due to our Adviser. Theconsistency in loan servicing fees is the result of similar balances in ourportfolio of loans being serviced by our Adviser during the comparable years.

 

The base management feefor the year ended March 31, 2009 was $1,699, as compared to $1,803 forthe prior year. The decrease is reflective of fewer total assetsheld throughout the year ended March 31, 2009 when compared to the priorfiscal year. The basemanagement fee is computed quarterly, as described under “Investment Advisoryand Management Agreement” in Note 4 of our consolidated financial statements and issummarized in the table below:

 
| ** **                                                                     | ** ** | **Year ended**           | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                                     | ** ** | **March 31,  2009** | ** ** | **March 31,  2008** | ** ** |
| **Base management fee**                                                        |       | $                        | 1,699      |   | $ | 1,803 |   |
|                                                                           |       |                     |       |   |   |
| Credits to base management fee from Adviser:                                   |       |                     |       |   |   |
| Credit for fees received by Adviser from the portfolio companies               |       | (861                     | )          | (1,045 | ) |
| Fee reduction for the waiver of 2% fee on senior syndicated loans to  0.5% (1) |       | (1,613                   | )          | (1,764 | ) |
| **Credit to base management fee from Adviser**                                 |       | (2,474                   | )          | (2,809 | ) |
|                                                                           |       |                     |       |   |   |
| **Net base management fee**                                                    | ** ** | **$**                    | **(775**   | **)** | **$** | **(1,006** | **)** |

 

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(1)                   Our Adviser voluntarily andirrevocably waived the annual 2.0% base management fee to 0.5% for seniorsyndicated loan participations to the extent that proceeds resulting fromborrowings were used to purchase such syndicated loan participations.

 

The administration feewas $821 for the year ended March 31, 2009, as compared to $855 for theprior year. This fee consists of our allocable portion of our Administrator’srent and other overhead expenses, and our allocable portion of the salaries andbenefits of our chief financial officer, chief compliance officer, treasurer,and their respective staffs. Our allocable portion of expenses is derived bymultiplying the percentage of our average assets (the assets at the beginningof each quarter) in comparison to the average assets of all companies managedby our Adviser that are under similar administration agreements with ourAdministrator. The slight decrease was attributable to a modest decrease in ourtotal assets in relation to the other funds serviced by our Administratorduring the prior year.

 

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As a result of theSubsequent Syndicated Loan Sales and the parallel decrease in the size of ouraverage assets, and our current intention not to grow our portfolio in thenear-term, we expect that the base management fee and the administration feewill decrease correspondingly.

 

Interest expense was$5,349 for the year ended March 31, 2009, as compared to $7,733 for theprior year, a decrease of $2,384, or 30.8%. The decline was a direct result ofdecreased borrowings under our credit facility during the current fiscal yearas compared to the prior fiscal year. While there was an increase in the interest rate margin charged on theoutstanding borrowings upon renewing the facility during October 2009, theoverall LIBOR base rate decrease during the period offset this interest ratemargin increase.

 

Amortization of deferredfinance costs, in connection with our credit facility with Deutsche Bank A.G.,were $323 for the year ended March 31, 2009, as compared to $734 for theprior year. The decrease is attributable to full amortization of costs incurredin connection with the credit facility agreement during the current year.  There was no fee associated with the October 2009renewal of the credit facility.  We didincur approximately $1.2 million of financing fees directly related to our newcredit facility with Branch Bank and Trust Company during March 2009.  These costs have been capitalized as deferredfinancing fees at March 31, 2009 and will be amortized ratably over theterm of the new credit facility.

 

Professional fees,generally consisting of legal and audit fees, were $532 for the year ended March 31,2009, as compared to $416 for the prior year. The increase was due to higher audit fees as well as legal costsassociated with our SEC filings and the Registration Statement on Form N-2as well as additional legal costs related to the sale of senior syndicatedloans.

 

Stockholder related costswere $485 for the year ended March 31, 2009, as compared to $268 for theprior year. Stockholder related costs include such recurring items as annualNasdaq listing fees, transfer agent fees, annual report printing anddistribution and other annual meeting costs, costs associated with SEC filingsand press release costs. The increase was primarily attributable to theincrease in proxy solicitation and annual report printing fees.

 

Insurance expense was$222 for the year ended March 31, 2009, as compared to $231 for the prior year.Insurance expense consists of the amortization of the directors and officersinsurance policy and professional liability policy premiums and remainedrelatively flat over the comparable fiscal years.

 

Directors’ fees were $194for the year ended March 31, 2009, as compared to $232 for the prior year.Directors’ fees consist of the amortization of the directors’ annual stipendand individual meeting fees. The slight decrease is due to the timing ofcommittee meetings and a result of fewer meetings being held in the currentyear.

 

Other expenses were $271for year ended March 31, 2009, as compared to $365 for the prior year.These expenses consist of direct expenses such as non-reimbursable travelrelated specifically to our portfolio companies, consultant loan evaluationservices for our portfolio companies, backup servicer expenses and documentcustody fees, as well of franchise taxes due to the state of Delaware and otherfees surrounding state and regulatory licensing, registration and other corporatefiling fees.  The decrease in the currentyear from the prior year was attributed mainly to a reduction in franchisetaxes and annual reporting fees.

 

**Realizedand Unrealized (Loss) Gain on Investments**

 

For the year ended March 31,2009, we recognized a net loss on ten sales and three premature exits of seniorsyndicated loans in the aggregate amount of $5,023, and we recorded netunrealized depreciation of investments in the aggregate amount of $19,814.  At March 31, 2008, we recognized a netloss on the sale of 17 syndicated loans in the aggregate amount of $2,412, andwe recorded net unrealized depreciation of investments in the aggregate amountof $11,528.

 

AtMarch 31, 2009, the fair value of our investment portfolio was less thanthe cost basis of our portfolio by approximately $35.0 million, as compared to$15.2 at March 31, 2008, representing net unrealized depreciation of $19.8million for the year.  The majority ofour unrealized depreciation for the year occurred in our senior syndicatedloans, which decreased in value by $14.9 million during the fiscal year,primarily as a result of the pending consummation of the Subsequent SyndicatedLoan Sales.  The most significant lossesoccurred in Interstate Fibernet, LVI Services, Generac, CRC Health Group, PTSAcquisition Corp., and Network Solutions, all of which were sold subsequent to March 31,2009.  Our Affiliate investments alsoexperienced an overall devaluation, driven primarily by losses on NobleLogistics and on our debt and equity portions of Quench and Danco,respectively.  Slightly offsetting thiswas an appreciation in the value of our equity held in Quench.  We valued the debt portion of bundled debtand equity investments in non-controlled companies in accordance with boardapproved valuation policies, which valued the debt securities through the useof a liquidity waterfall approach.  Consistent with our board of directors’ongoing review and analysis of appropriate valuation policies, and inconjunction with our adoption of SFAS No.157 on April 1, 2008, the boardof directors modified our valuation procedures so that the debt portion ofbundled investments in non-controlled companies is valued by SPSE, which changehad a positive impact on net unrealized appreciation in the amount of approximately$8.5 million for the fiscal year ended March 31, 2009.  Our Controlinvestments, however, performed quite well, appreciating in value by anaggregate of approximately $5.6 million during the fiscal year.  This increase was led by our equity positionsin A. Stucki, Chase Industries and Galaxy Tools, as well

 

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asan increase in the fair market value of the debt portion of Auto Safety House,which previously had no fair value. Countering this appreciation in value was an unrealized loss in theequity of Acme Cryogenics, which depreciated in fair value by approximately $4.1million.

 

Subsequentto March 31, 2009, we sold 29 of the remaining 32 senior syndicated loansincluded in the Non-Control/Non-Affiliates (collectively, the “SubsequentSyndicated Loan Sales”) for aggregate proceeds of approximately $69.2 millionin cash and recorded a realized loss of approximately $34.6 million. TheSubsequent Syndicated Loan Sales areincluded in our consolidated assets as of March 31, 2009 and were valuedat their respective sale prices and were the primary cause of our increase inunrealized loss, which loss will be reflected in the results ofoperations for the three months ending June 30, 2009.  See Note 13, “SubsequentEvents” in the Notes to our consolidated financial statements.

 

Webelieve that our investment portfolio was valued at a depreciated value dueprimarily to the general instability of the loan markets. Although ourinvestment portfolio has depreciated, our entire portfolio was fair valued at90% of cost as of March 31, 2009. The unrealized depreciation of our investments does not have an impacton our current ability to pay distributions to stockholders; however, it may bean indication of future realized losses, which could ultimately reduce ourincome available for distribution.  TheSubsequent Syndicated Loan Sales, for example, resulted in a realized loss ofapproximately $34.6 million.

 

**Derivatives**

 

We recorded unrealizeddepreciation of our interest rate cap agreement purchased in October 2007and February 2008 of $0 and $53 for the years ended March 31, 2009and 2008, respectively.

 

During May 2009, we cancelled our interest rate cap agreement withDeutsche Bank  A.G. and entered into anew interest rate cap agreement for a notional amount of $45 million that willeffectively limit the interest rate on a portion of the borrowings under theCredit Facility.  We incurred a premiumfee of approximately $40 in conjunction with this agreement.

 

**NetDecrease in Net Assets Resulting from Operations**

 

For the year ended March 31,2009, we recorded a net decrease in net assets resulting from operations of$11,449 as a result of the factors discussed above. Our net decrease in netassets resulting from operations per basic and diluted weighted average commonshare for the years ended March 31, 2009 and 2008 were $0.53 and $0.06,respectively.  For the year ended March 31,2008, we recorded a net decrease in net assets resulting from operations of$941.  We will continue to incur base management fees, whichare likely to increase to the extent our investment portfolio grows, and we maybegin to incur incentive fees. The administrative fee payable to ourAdministrator is also likely to grow during future periods to the extent ouraverage total assets grow in comparison to prior periods and as the expensesincurred by our Administrator to support our operations increase.

 

*COMPARISON OF THE FISCAL YEARS ENDED MARCH 31,2008 AND MARCH 31, 2007*

 

**Investment Income**

 

Investment income for the year ended March 31,2008 was $27,894, as compared to $17,262 for the year ended March 31,2007.

 

Interestincome from our investments in debt securities of private companies was $27,629for the year ended March 31, 2008, as compared to $15,594 for the prioryear, representing an increase of $12,035, or 77% over the prior year.  This increase was due to a significant numberof additions to our investment portfolio for the year ended March 31,2008, at which time the average cost basis of our interest-bearing investmentportfolio was $292.9 million, as compared to $185.7 million in the prioryear.  This is also reflected in ourweighted average yield on our portfolio investments, excluding cash and cashequivalents, which was 8.91% for the year ended March 31, 2008, ascompared to 8.72% for the prior year.

 

Interest income fromNon-Control/Non-Affiliate investments was $14,575 for the year ended March 31,2008, as compared to $9,572 for the prior year. This increase was the result ofapproximately $27.8 million of additional Non-Control/Non-Affiliate investmentsmade during the year ended March 31, 2008.

 

Interest income fromControl investments was $10,768 for the year ended March 31, 2008, ascompared to $5,486 for the prior year. This increase is mainly attributable to the purchase of one additionalControl investment during the year ended March 31, 2008, as well as thetwo prior year purchases being held and earning income for an entire year.

 

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Interest income fromAffiliate investments was $2,286 for the year ended March 31, 2008, ascompared to $536 for the prior year. The increase of $1,750 was a result of two newAffiliate investments made during the year ending March 31, 2008, inaddition to the prior year purchase being held and earning income for an entireyear.

 

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

 

**Year ended March 31, 2008**

 
| **Company**                | ** ** | **Interest  Income** | ** ** | **% of   Total** | ** ** |
|----------------------------|------------|----------------------|------------|------------------|------------|
| A. Stucki Holding Corp.    |       | $                    | 3,377      |             | 12.2       | % |
| Chase II Holdings Corp.    |       | 3,017                |       | 10.9             | %          |
| Acme Cryogenics, Inc. |       | 1,695                |       | 6.2              | %          |
| Noble Logistics, Inc. |       | 1,518                |       | 5.5              | %          |
| Quench Holdings Corp.      |       | 1,494                |       | 5.4              | %          |
| **Subtotal**               | ** ** | **$**                | **11,101** | ** **       | **40.2**   | **%** |
| Other companies            |       | 16,528               |       | 59.8             | %          |
| **Total interest income**  | ** ** | **$**                | **27,629** | ** **       | **100.0**  | **%** |

 

**Year ended March 31, 2007**

 
| **Company**                          | ** ** | **Interest  Income** | ** ** | **% of  Total** | ** ** |
|--------------------------------------|------------|----------------------|------------|----------------------|------------|
| Chase II Holdings Corp.              |       | $                    | 3,063      |                 | 5.4        | % |
| Quench Holdings Corp.                |       | 1,405                |       | 5.4                  | %          |
| US Investigative Services, Inc. |       | 833                  |       | 3.8                  | %          |
| Graham Packaging Holding Co.         |       | 809                  |       | 3.7                  | %          |
| Sungard Data Systems                 |       | 713                  |       | 3.7                  | %          |
| **Subtotal**                         | ** ** | **$**                | **6,823**  | ** **           | **22.0**   | **%** |
| Other companies                      |       | 8,771                |       | 78.0                 | %          |
| **Total interest income**            | ** ** | **$**                | **15,594** | ** **           | **100.0**  | **%** |

 

Interestincome from invested cash and cash equivalents for the year ended March 31,2008 was $217, as compared to $1,662 for the prior year period.  This decrease is the result of having lesscash on hand in our interest bearing accounts during the year ended March 31,2008, as we had fully invested the proceeds from our initial public offeringand used the majority of the proceeds from sales and repayments on outstandingloans to pay down our line of credit.

 

Otherincome was $48 for the year ended March 31, 2008, as compared to $6 forthe prior year.  Other income iscomprised of loan amendment fees that are amortized over the remaining lives ofthe respective loans and other miscellaneous income amounts.  The increase is directly related toadditional amendment fees received during the year ended March 31, 2008.

 

**Operating Expenses**

 

Total operating expenses,excluding any voluntary and irrevocable credits to the base management fee,were $17,651 for the year ended March 31, 2008, as compared to $6,992 forthe prior year.  The majority of thischange was due to significant increases experienced in the loan servicing fee,interest expense, and amortization of deferred finance costs, all discussedbelow.

 

Loan servicing fees of$5,014 were incurred for the year ended March 31, 2008, as compared to$1,569 for the prior year. These fees were incurred in connection with a loanservicing agreement between Business Investment and our Adviser, which is basedon the size of the aggregate outstanding portfolio. These fees were directlycredited against the amount of the base management fee due to our Adviser. Theincrease in loan servicing fees is the result of an increase in our portfolioof loans being serviced by our Adviser during the year ended March 31,2008, as compared tothe prior year.

 

The base management feefor the year ended March 31, 2008 was $1,803, as compared to $2,413 forthe prior year.  The decrease in our basemanagement fee results from the increase in loan servicing fees, which servedas a reduction to the overall base management fee.  The base management fee is computedquarterly, as described under “Investment Advisory and Management Agreement” inNote 4 of the accompanying consolidated financial statements and issummarized in the table below:

 
| ** **                                                                     | ** ** | **Year ended**           | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                                     | ** ** | **March 31,  2008** | ** ** | **March 31,  2007** | ** ** |
| **Base management fee**                                                        |       | $                        | 1,803      |   | $ | 2,413 |   |
|                                                                           |       |                     |       |   |   |
| Credits to base management fee from Adviser:                                   |       |                     |       |   |   |
| Credit for fees received by Adviser from the portfolio companies               |       | (1,045                   | )          | (878 | ) |
| Fee reduction for the waiver of 2% fee on senior syndicated loans to  0.5% (1) |       | (1,764                   | )          | — |   |
| **Credit to base management fee from Adviser**                                 |       | (2,809                   | )          | (878 | ) |
|                                                                           |       |                     |       |   |   |
| **Net base management fee**                                                    | ** ** | **$**                    | **(1,006** | **)** | **$** | **(1,535** | **)** |

 

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(1)                   Our Adviser voluntarilywaived the annual 2.0% base management fee to 0.5% for senior syndicated loanparticipations to the extent that proceeds resulting from borrowings were usedto purchase such syndicated loan participations.

 

Administration feespayable to our Administrator were $855 for the year ended March 31, 2008,as compared to $527 for the prior year. This fee consists of our allocable portion of our Administrator’s rentand other overhead expenses, and our allocable portion of the salaries andbenefits of our chief financial officer, chief compliance officer, treasurer,and their respective staffs.  Ourallocable portion of expenses is derived by multiplying the total expenses bythe  percentage of our average assets(the assets at the beginning of each quarter) in comparison to the averageassets of all companies managed by our Adviser that are under similaradministration agreements with our Administrator. This increase is mainlyattributable to the personnel growth of our Administrator, as well as anincrease in the general overhead expenses incurred by our Administrator, partlyon our behalf.

 

Interest expense was$7,733 for the year ended March 31, 2008, as compared to $608 for theprior year. The increase was directly attributable to the increase inborrowings under our credit facility to fund our investment activity duringfiscal year 2008, whereas in the prior year we had a minimal draw on the creditfacility, and it was only outstanding for six months.

 

Amortization of deferredfinancing fees was $734 for the year ended March 31, 2008, as compared to$234 for the prior year. The increase was due to the amortization of a fullyear of deferred financing fees associated with the October 2007 renewalof our credit facility for the year ended March 31, 2008, as opposed toonly six months of amortization in the prior year.

 

Professional fees,consisting mainly of legal fees and accounting and audit fees, were $416 forthe year ended March 31, 2008, as compared to $586 for the prioryear.  The decrease is mainly related tothe timing of our general audit accruals and the initial capitalization andamortization of expenses related to our shelf registration statement on Form N-2.

 

Stockholder related costsremained relatively flat during the comparable periods at $268 for the yearended March 31, 2008, compared to $273 for the prior year. Stockholderrelated costs consist of annual Nasdaq listing fees, transfer agent fees,annual report printing and distribution and other annual meeting costs, costsassociated with SEC filings and press release costs.

 

Insurance expense was$231 for the year ended March 31, 2008, as compared to $262 for the prioryear. Insurance expense consists of the amortization of the directors andofficers insurance policy and professional liability policy premiums. Thedecrease was due to a reduction in the premiums for directors and officers’insurance for the policy period during fiscal year 2008.

 

Directors’ fees were $232for the year ended March 31, 2008, as compared to $208 for the prior year.Directors’ fees consist of the amortization of the directors’ annual stipendand individual meeting fees.  The slightdecrease is due to the timing of committee meetings and is a result of fewermeetings being held in the current quarter.

 

Other expenses were $365for year ended March 31, 2008, as compared to $312 for the prior year.These expenses consist of direct expenses such as travel related specificallyto our portfolio companies, loan evaluation services for our portfoliocompanies, backup servicer expenses, as well of franchise taxes due to thestate of Delaware and other fees surrounding state and regulatory licensing,registration and other corporate filing fees. The increase is primarily due to additional direct expenses incurred inrelation to the growth of our overall investment portfolio size.

 

**Realizedand Unrealized (Loss) Gain on Investments**

 

For the year ended March 31, 2008, werecognized a net loss on the sale of 17 loan participations in the aggregateamount of $2,412, and we recorded net unrealized depreciation of investments inthe aggregate amount of $11,528.  At March 31,2007, we recognized a net loss on the sale of nine loan participations in theaggregate amount of $94, and we recorded net unrealized depreciation ofinvestments in the aggregate amount of $3,785. The increase in realized losses is attributable to the need that weexperienced in the year ended March 31, 2008 for liquidity to invest inpotentially higher yielding investments, which caused us to sell certain loanparticipations.

 

At March 31, 2008, the fair value of ourinvestment portfolio was less than the cost basis of our portfolio by $15.2million, as compared to $3.7 million at March 31, 2007, representing netunrealized depreciation of approximately $11.5 million for the fiscalyear.  The decline in the fair value ofour investment portfolio during the fiscal year ended March 31, 2008 wasdue to devaluations in our senior syndicated loan participations, as ourNon-Control/Non-Affiliates experienced a $23.3 million 

 

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unrealized loss over the year ended March 31,2008.  This loss was partially offset byunrealized gains in our Control and Affiliate investments, which increased$11.8 million in aggregate.

 

Althoughour investment portfolio had depreciated, our entire portfolio was fair valuedat 96% of the cost of the investments as of March 31, 2008.  We believe that the depreciation is dueprimarily to the general instability of the loan markets.  The unrealized depreciation of ourinvestments does not have an impact on our current ability to pay distributionsto stockholders; however, it may be an indication of future realized losses,which could ultimately reduce our income available for distribution.

 

**Derivatives**

 

At March 31, 2008,we recorded net unrealized depreciation of $53 due to a decrease in the fairmarket value of our interest rate cap agreement purchased in October 2007and February 2008.

 

**Net(Decrease) Increase in Net Assets Resulting from Operations**

 

At March 31, 2008, we realized a netdecrease in net assets resulting from operations of $941 as a result of thefactors discussed above.  Our net(decrease) increase in net assets from operations per basic and dilutedweighted average common share for the years ended March 31, 2008 and 2007were ($0.06) and $0.44, respectively. For the year ended March 31, 2007, we recorded a net increase innet assets resulting from operations of $7.3 million.  We will continue to incur base managementfees, which are likely to increase to the extent that our investment portfoliogrows, and we may begin to incur incentive fees.  Our administrative expenses payable to ourAdministrator are also likely to grow during future periods to the extent thatour average total assets grow in comparison to prior periods and as theexpenses incurred by our Administrator to support our operations increase.

 

**LIQUIDITY AND CAPITAL RESOURCES****(dollar amounts in thousands, except per shareamounts or unless otherwise indicated)**

 

**Operating Activities**

 

AtMarch 31, 2009, we had investments in equity of, loans to, or syndicatedparticipations in, 46 private companies with a cost basis totalingapproximately $348.9 million.  At March 31,2008, we had investments in equity of, loans to or syndicated participations in52 private companies with a cost basis totaling approximately $350.8million.  At March 31, 2007, we hadinvestments in equity of or loans to or syndicated participations in 47 privatecompanies with a cost basis totaling approximately $274.6 million.

 

During the years ended March 31, 2009,2008 and 2007, the following investment activity occurred during each quarterof the respective fiscal year:

 
| **Quarter Ended**  | ** ** | **New  Investments (1)** | ** ** | **Principal  Repayments (2)** | ** ** | **Investments  Sold (3)** | ** ** | **Net (Loss) Gain  on Disposal** | ** ** |
|-------------------------|------------|--------------------------|------------|-------------------------------|------------|---------------------------|------------|---------------------------------------|------------|
|                    |       |                     |       |                          |       |                      |       |                                  |       |
| June 30, 2008      |       | $                        | 8,980      |                          | $          | 3,493                     |       | $                                     | 13,227     |   | $ | (1,718 | ) |
| September 30, 2008 |       | 27,632                   |       | 18,841                        |       | —                    |       | (2,498                                | )          |
| December 31, 2008  |       | 11,043                   |       | 4,469                         |       | —                    |       | —                                |       |
| March 31, 2009     |       | 5,347                    | *          | 9,068                         | *          | 687                       |       | (807                                  | )          |
| Total fiscal year 2009  |       | $                        | 53,002     |                          | $          | 35,871                    |       | $                                     | 13,914     |   | $ | (5,023 | ) |
|                    |       |                     |       |                          |       |                      |       |                                  |       |
| June 30, 2007      |       | $                        | 72,601     |                          | $          | 21,358                    |       | $                                     | 5,809      |   | $ | (48 | ) |
| September 30, 2007 |       | 41,183                   |       | 16,948                        |       | —                    |       | (4                                    | )          |
| December 31, 2007  |       | 43,551                   |       | 21,417                        |       | 9,887                     |       | (146                                  | )          |
| March 31, 2008     |       | 17,920                   |       | 4,517                         |       | 16,501                    |       | (2,214                                | )          |
| Total fiscal year 2008  |       | $                        | 175,255    |                          | $          | 64,240                    |       | $                                     | 32,197     |   | $ | (2,412 | ) |
|                    |       |                     |       |                          |       |                      |       |                                  |       |
| June 30, 2006      |       | $                        | 33,666     |                          | $          | 874                       |       | $                                     | 15,552     |   | $ | 3 |   |
| September 30, 2006 |       | 15,812                   |       | 5,964                         |       | 997                       |       | (2                                    | )          |
| December 31, 2006  |       | 69,373                   |       | 3,610                         |       | 3,041                     |       | (2                                    | )          |
| March 31, 2007     |       | 64,102                   |       | 19,974                        |       | 11,154                    |       | (93                                   | )          |
| Total fiscal year 2007  |       | $                        | 182,953    |                          | $          | 30,422                    |       | $                                     | 30,744     |   | $ | (94 | ) |

 

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*        Includes a non-cashassumption of $3,043 worth of senior notes received from American GreetingsCorporation for our agreement to the RPG bankruptcy settlement in which wereceived the aforementioned notes and $909 in cash and recognized a loss on thesettlement of approximately $601.

 

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### Subsequent to March 31,2009, we sold 29 of the 32 senior syndicated loans that were held in ourportfolio of investments at March 31, 2009.  The loans, in aggregate,had a cost value of approximately $104.2 million, or 29.9% of the cost value ofour total investments, and an aggregate fair market value of approximately$69.8 million, or 22.2% of the fair market value of our total investments, at March 31,2009.  As a result of the Subsequent Syndicated Loan Sales, as of May 29,2009, we had investments in equity of, loans to, or syndicatedparticipations in, 17 private companies with a cost basis totalingapproximately $239.7 million.

###  

**(1)   New Investments**

**Year Ended March 31, 2009**

During the year ended March 31, 2009,we extended, either directly or through participations, $44.7 million ofinvestments to five new portfolio companies and $8.3 million of investments toexisting portfolio companies through revolver draws, additions of newnotes or equity infusions, for total new investments of $53.0 million.  The originations of loansto new portfolio companies by quarter were as follows:

 
| **Quarter ended**       | ** ** | **Investments** | ** **    | **Companies** | ** ** | **Description**                                             | ** **        |
|-------------------------|------------|-----------------|---------------|---------------|------------|-------------------------------------------------------------|-------------------|
| June 30, 2008      |       | $               | 5.8  million  |          | 1          |                                                        | Tread Corporation |   |
| September 30, 2008 |       | 25.2  million   |          | 2             |       | Galaxy Tool Corp. and A.  Stucki (Alco Springs acquisition) |              |
| December 31, 2008  |       | 10.7  million   |          | 1             |       | Country Club Enterprises  LLC                               |              |
| March 31, 2009     |       | 3.0  million    |          | 1             |       | American Greetings Corporation (through RPG settlement)     |              |
| Total                   |       | $               | 44.7  million |          | 5          |                                                        |              |   |

 

**Year Ended March 31, 2008**

During the year ended March 31, 2008,we extended, either directly or through participations, $129.1 million ofinvestments to 23 new portfolio companies and $46.2 million of investments toexisting portfolio companies through revolver draws, additions of newnotes or equity infusions, for total new investments of $175.3 million.  The investments of loansto new portfolio companies by quarter were as follows:

 
| **Quarter ended**       | ** ** | **Investments** | ** **     | **Companies** | ** ** | **Description**                                             | ** **                               |
|-------------------------|------------|-----------------|----------------|---------------|------------|-------------------------------------------------------------|------------------------------------------|
| June 30, 2007      |       | $               | 56.7  million  |          | 14         |                                                        | B-Dry LLC and thirteen  syndicated loans |   |
| September 30, 2007 |       | 24.3  million   |           | 6             |       | Senior debt disbursed to six different syndicated borrowers |                                     |
| December 31, 2007  |       | 37.5  million   |           | 2             |       | Danco Acquisition and  Cavert II Holdings                   |                                     |
| March 31, 2008     |       | 10.6  million   |           | 1             |       | Mathey  Investments, Inc.                              |                                     |
| Total                   |       | $               | 129.1  million |          | 23         |                                                        |                                     |   |

 

**YearEnded March 31, 2007**

During the year ended March 31, 2007,we extended, either directly or through participations, $136.9 million ofinvestments to 36 new portfolio companies and $46.1 million of investments toexisting portfolio companies through revolver draws, additions of newnotes or equity infusions, for total new investments of $183.0 million.  The investments of loansto new portfolio companies by quarter were as follows:

 
| **Quarter ended**       | ** ** | **Investments** | ** **     | **Companies** | ** ** | **Description**                                                  | ** **                                                    |
|-------------------------|------------|-----------------|----------------|---------------|------------|------------------------------------------------------------------|---------------------------------------------------------------|
| June 30, 2006      |       | $               | 19.6  million  |          | 8          |                                                             | Senior debt disbursed to eight different syndicated borrowers |   |
| September 30, 2006 |       | 12.5  million   |           | 7             |       | Senior debt disbursed to seven different syndicated borrowers    |                                                          |
| December 31, 2006  |       | 63.7  million   |           | 15            |       | Noble Logistics, Acme  Cryogenics, and thirteen syndicated loans |                                                          |
| March 31, 2007     |       | 41.1  million   |           | 6             |       | A. Stucki Holding and five  syndicated loans                     |                                                          |
| Total                   |       | $               | 136.9  million |          | 36         |                                                             |                                                          |   |

 

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Ourlast investment in a new portfolio company was in November 2008.  In light of current economic conditions,limited borrowings available under our Credit Facility, constraints on ourability to access the capital markets and the restraints upon our investingactivities required in order to maintain RIC status, our near-term strategydepends on retaining capital and building the value of our existing portfoliocompanies.  We will also, where prudentand possible, consider the sale of lower-yielding investments.  This strategy has resulted, and may continueto result, in significantly reduced investment activity, as our ability to makenew investments under these conditions is largely dependent on availability ofproceeds from the sale or exit of existing portfolio investments, which eventsmay be beyond our control and our ability to satisfy the asset diversification testunder the Code.  As our capital constraintsand asset diversification improve, we intend to continue our strategy of makingconservative investments in businesses that we believe will weather the currenteconomy and that are likely to produce attractive long-term returns for ourstockholders.

 

**(2)   Principal Repayments**

**Year Ended March 31, 2009**

During the year ended March 31, 2009,one borrower made payment in full ahead of contractual maturity, two borrowersmade partial payoffs commensurate with exit/settlement agreements, and oneborrower made partial payment upon restructuring for an aggregate of $17.5million.  The payments received in fullahead of contractual maturity, syndicate loan payoff and unscheduled partialpayoffs by quarter were as follows:

 
| **Quarter ended**       | ** ** | **Repayments** | ** **    | **Companies** | ** ** | **Description**                                                                                                                                   | ** ** |
|-------------------------|------------|----------------|---------------|---------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| June 30, 2008      |       | $              | —        |          | —     |                                                                                                                                              | N/A        |   |
| September 30, 2008 |       | 13.5  million  |          | 3             |       | Lexicon (partial repayment  upon exit), Hudson (repaid in full ahead of maturity) and Quench (repaid in  full ahead of maturity and restructured) |       |
| December 31, 2008  |       | —         |          | —        |       | N/A                                                                                                                                               |       |
| March 31, 2009     |       | 4.0  million   |          | 1             |       | RPG settlement and  acquisition of AMG notes                                                                                                      |       |
| Total                   |       | $              | 17.5  million |          | 4          |                                                                                                                                              |       |   |

 

We also experienced contractualamortization, revolver repayments and some principal payments received ahead ofschedule in aggregate amount of $18.4 million, for total principal repaymentsof $35.9 million.

 

**Year Ended March 31, 2008**

During the year ended March 31, 2008,seven borrowers made payments in full ahead of contractual maturity for anaggregate of $36.7 million.  The paymentsreceived in full ahead of contractual maturity, refinancing and syndicate loanpayoffs by quarter were as follows:

 
| **Quarter ended**       | ** ** | **Repayments** | ** **    | **Companies** | ** ** | **Description**                                               | ** **                                                                         |
|-------------------------|------------|----------------|---------------|---------------|------------|---------------------------------------------------------------|------------------------------------------------------------------------------------|
| June 30, 2007      |       | $              | 16.1  million |          | 4          |                                                          | Patriot, Madison River,  Dresser and Maidenform (repaid in full ahead of maturity) |   |
| September 30, 2007 |       | 10.8  million  |          | 1             |       | USIS (repaid in full ahead  of maturity)                      |                                                                               |
| December 31, 2007  |       | 9.8  million   |          | 2             |       | ACS Media and U.S. Silica  (repaid in full ahead of maturity) |                                                                               |
| March 31, 2008     |       | —         |          | —        |       | N/A                                                           |                                                                               |
| Total                   |       | $              | 36.7  million |          | 7          |                                                          |                                                                               |   |

 

We also experienced contractualamortization, revolver repayments and some principal payments received ahead ofschedule in aggregate amount of $27.5 million, for total principal repaymentsof $64.2 million.

 

**Year Ended March 31, 2007**

During the year ended March 31, 2007,six borrowers made payments in full ahead of contractual maturity for anaggregate of $26.2 million.  The paymentsreceived in full ahead of contractual maturity and syndicate loan payoffs byquarter were as follows:

 
| **Quarter ended**       | ** ** | **Repayments** | ** **    | **Companies** | ** ** | **Description**                                                                    | ** ** |
|-------------------------|------------|----------------|---------------|---------------|------------|------------------------------------------------------------------------------------|------------|
| June 30, 2006      |       | $              | —        |          | —     |                                                                               | N/A        |   |
| September 30, 2006 |       | 5.0  million   |          | 2             |       | Tex Star Op and Fresh  Start (repaid in full ahead of maturity)                    |       |
| December 31, 2006  |       | 2.2  million   |          | 1             |       | MedAssets (repaid in full  ahead of maturity)                                      |       |
| March 31, 2007     |       | 19.0  million  |          | 3             |       | WastEquip, Brock Holdings  and Graham Packaging (repaid in full ahead of maturity) |       |
| Total                   |       | $              | 26.2  million |          | 6          |                                                                               |       |   |

 

Wealso experienced contractual amortization, revolver repayments and someprincipal payments received ahead of schedule in aggregate amount of $4.2million, for total principal repayments of $30.4 million.

 

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**(3)   Investments Sold**

**Year Ended March 31, 2009**

During the year ended March 31, 2009,we sold, either partially or in full, ten different syndicated loansfor aggregate proceeds of$13.9 million.  The sales by quarter wereas follows:

 
| **Quarter ended**       | ** ** | **Sales**    | ** **    | **Companies** | ** ** | **Description** | ** **                                                  |
|-------------------------|------------|--------------|---------------|---------------|------------|-----------------|-------------------------------------------------------------|
| June 30, 2008      |       | $            | 13.2  million |          | 9          |            | Full and partial sales of  nine different syndicated loans. |   |
| September 30, 2008 |       | —       |          | —        |       | N/A             |                                                        |
| December 31, 2008  |       | —       |          | —        |       | N/A             |                                                        |
| March 31, 2009     |       | 0.7  million |          | 1             |       | Sale of Hargray |                                                        |
| Total                   |       | $            | 13.9  million |          | 10         |            |                                                        |   |

 

### Asdiscussed elsewhere in this report, subsequent to March 31, 2009, we sold 29 ofthe 32 senior syndicated loans that were held in our portfolio of investmentsat March 31, 2009.  The loans, in aggregate, had a cost value of approximately$104.2 million, or 29.9% of the cost value of our total investments, and anaggregate fair market value of approximately $69.8 million, or 22.2% of thefair market value of our total investments, at March 31, 2009.

###  

**Year Ended March 31, 2008**

During the year ended March 31, 2008,we sold, either partially or in full, sixteen different syndicatedloans for aggregate proceeds of $32.2million.  The sales by quarter were asfollows:

 
| **Quarter ended**       | ** ** | **Sales**     | ** **    | **Companies** | ** ** | **Description**                                           | ** **                                          |
|-------------------------|------------|---------------|---------------|---------------|------------|-----------------------------------------------------------|-----------------------------------------------------|
| June 30, 2007      |       | $             | 5.8  million  |          | 4          |                                                      | Sales of Aramak, Latham,  Nutro and Central Parking |   |
| September 30, 2007 |       | —        |          | —        |       | N/A                                                       |                                                |
| December 31, 2007  |       | 9.9  million  |          | 2             |       | Partial sales of Graham  Packaging and West Corp.         |                                                |
| March 31, 2008     |       | 16.5  million |          | 10            |       | Full and partial sales of  ten different syndicated loans |                                                |
| Total                   |       | $             | 32.2  million |          | 16         |                                                      |                                                |   |

 

**Year Ended March 31, 2007**

During the year ended March 31, 2007,we sold, either partially or in full, nine different syndicated loansand common equity in one proprietary investment for aggregate proceeds of $30.7 million.  The salesby quarter were as follows:

 
| **Quarter ended**       | ** ** | **Sales**     | ** **    | **Companies** | ** ** | **Description**                               | ** **                                       |
|-------------------------|------------|---------------|---------------|---------------|------------|-----------------------------------------------|--------------------------------------------------|
| June 30, 2006      |       | $             | 15.5  million |          | 4          |                                          | Sales of Revere,  Burlington, Le Natures and ECI |   |
| September 30, 2006 |       | 1.0  million  |          | 1             |       | Sale of Hertz                                 |                                             |
| December 31, 2006  |       | 3.0  million  |          | 2             |       | Sale of Latham (partial)  and Fresh Start     |                                             |
| March 31, 2007     |       | 11.2  million |          | 3             |       | Sales of BMS, Sungard and  Acme common equity |                                             |
| Total                   |       | $             | 30.7  million |          | 10         |                                          |                                             |   |

 

Thefollowing table summarizes the contractual principal repayment and maturity ofour investment portfolio by fiscal year, assuming no voluntary prepayments, at March 31,2009.

 
| **Fiscal Year Ending March 31,**                                                           | ** ** | **Amount** | ** **  |
|-------------------------------------------------------------------------------------------------|------------|------------|-------------|
| 2010                                                                                            |       | $          | 12,057      |   |
| 2011                                                                                            |       | 27,054     |        |
| 2012                                                                                            |       | 53,180     |        |
| 2013                                                                                            |       | 14,941     |        |
| 2014                                                                                            |       | 74,228     |        |
| Thereafter                                                                                      |       | 18,352     |        |
| **Total Contractual Repayments**(including the impact of the Subsequent Syndicated Loan  Sales) |       | $          | 199,812     |   |
| Investment in equity securities                                                                 |       | 45,322     |        |
| Unamortized premiums on debt securities                                                         |       | 39         |        |
| Principal of Subsequent Syndicated Loan Sales                                                   |       | 103,772    |        |
| ** **                                                                                      | ** ** | ** ** | ** **  |
| **Total investments held at March 31, 2009**                                               | ** ** | **$**      | **348,945** | ** ** |

 

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**Operating Activities**

 

Net cash provided by operating activities forthe year ended March 31, 2009 was approximately $13.0 million andconsisted primarily of principal loan repayments, the sale of existingportfolio investments and net unrealized depreciation of our investments.  These cash inflows were partially offset bythe purchases of two new Control investments, one new Affiliate investment andother disbursements to existing portfolio companies.  For the year ended March 31, 2008, netcash used in operating activities was approximately $57.4 million and consistedprimarily of the purchase of two new Control investments, one new Affiliateinvestment and other disbursements to existing portfolio companies,partially offset by principal loan repayments, proceeds from sales of portfolioinvestments and a decrease in the amount due from our custodian.  Net cash used in operating activities for theyear ended March 31, 2007 was approximately $122.7 million and consistedprimarily of the purchase of an aggregate of approximately $35.0 million of Non-Control/Non-Affiliateinvestments in syndicated loans, two Affiliate investments and onenew Control investment, partially offset by principal loan repayments andproceeds from sales of portfolio investments.

 

**Financing Activities**

 

Net cash used infinancing activities for the fiscal year ended March 31, 2009 wasapproximately $15.1 million, which was primarily a result of repayments on ourline of credit in excess of borrowings by approximately $34.6 million, inaddition to our distributions paid to stockholders of $20.8 million.  This was partially offset, however, by theRights Offering (defined below), which provided net proceeds of $40.6 million.

 

Net cash provided byfinancing activities for the fiscal year ended March 31, 2008 wasapproximately $29.0 million, which was primarily a result of borrowings on ourline of credit in excess of repayments by approximately $44.8 million.  This was partially offset, however, bydistributions paid to our stockholders of $15.4 million.

 

Net cash provided byfinancing activities for the fiscal year ended March 31, 2007 wasapproximately $84.8 million, which was primarily a result of borrowings on ourline of credit in excess of repayments by approximately $100.0 million.  This was partially offset, however, bydistributions paid to our stockholders of $14.2 million.

 

**Distributions**

 

In order to qualify as aRIC and to avoid corporate level tax on the income we distribute to ourstockholders, we are required, under Subchapter M of the Code, to distribute atleast 90% of our ordinary income and short-term capital gains to ourstockholders on an annual basis. In accordance with these requirements, wedeclared and paid monthly cash distributions of $0.08 per common share duringeach month of the fiscal year ended March 31, 2009.  We declared and paid monthly distributions of$0.07 per common share for each month from April 2006 through December 2006,$0.075 per common share for each month from January 2007 to September 2007,and $0.08 per common share for each month from October 2007 through March 2008.

 

For the year ended March 31,2009, our distribution payments of approximately $20.8 million exceeded our netinvestment income by approximately $7.4 million. We declared thesedistributions based on our estimates of net investment income for the fiscalyear. Our investment pace continued to be slower than expected in our thirdfull year of operations and, consequently, our net investment income was lowerthan our original estimates.  A portionof the distributions declared during fiscal year 2009 was treated as a returnof capital to our stockholders.

 

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Inconnection with our negotiation of the Credit Facility, our Board of Directorsdecreased, by 50% from the prior three-month period, the amount of our monthlycash distributions and declared distributions of $0.04 per common share foreach of the months of April, May and June of 2009.

 

**Issuance of Equity**

 

During fiscal year 2007,we filed a registration statement with the SEC (the “Registration Statement”)that permits us to issue, through one or more transactions, up to an aggregateof $300 million in securities, consisting of common stock, preferred stock,subscription rights and/or debt securities, of which, to date, we have issued$41.3 million in common stock, which leaves a remaining capacity of $258.7million. To date, we have incurred approximately $728 of costs in connectionwith the Registration Statement.

 

We anticipate issuingequity securities to obtain additional capital in the future. However, we cannotdetermine the terms of any future equity issuances or whether we will be ableto issue equity on terms favorable to us, or at all. Additionally, when ourcommon stock is trading below net asset value, we will have regulatoryconstraints under the 1940 Act on our ability to obtain additional capital inthis manner. At March 31, 2009, our stock closed trading at $3.82,representing a 60.7% discount to our net asset value of $9.73 per share.Generally, the 1940 Act provides that we may not issue stock for a price belownet asset value per share, without first obtaining the approval of ourstockholders and our independent directors or through a rights offering.

 

We raised additionalcapital within these regulatory constraints in April 2008 through anoffering of transferable subscription rights to purchase additional shares ofcommon stock (the “Rights Offering”). Pursuant to the Rights Offering, we sold5,520,033 shares of our common stock at a subscription price of $7.48 pershare, which represented a purchase price equal to 93% of the weighted averageclosing price of our stock in the last five trading days of the subscriptionperiod. Net proceeds of the offering, after offering expenses borne by us, wereapproximately $40.6 million and were used to repay outstanding borrowings underour line of credit. Should our common stock continue to trade below its netasset value per share, we may seek to conduct similar offerings in the futurein order to raise additional capital, although there can be no assurance thatwe will be successful in our efforts to raise capital.

 

**Future Capital Resources**

 

Duringour 2008 annual stockholders meeting, our stockholders approved a proposal thatallows us to issue long-term rights, including warrants to purchase shares ofour common stock at an exercise price per share that will not be less than thegreater of the market value or net asset value of our common stock at a timesuch rights may be issued.  Our stockholders also approved a proposalthat allows us to sell shares of our common stock at a price below our thencurrent net asset value per share should we choose to do so. This proposal isin effect until our next annual stockholders meeting.

 

**New Revolving Credit Facility**

 

On April 14,2009, we entered into the Credit Facility, providing for a $50.0 millionrevolving line of credit arranged by BB&T as administrative agent,replacing Deutsche Bank, A.G. who served as administrative agent under ourprior credit facility. Key Equipment Finance Company Inc. also joined the CreditFacility as a committed lender.  In connection with our entry into theCredit Facility, we borrowed $43.8 million under the Credit Facility to repayin full all amounts outstanding under the prior credit agreement.  TheCredit Facility may be expanded up to $125.0 million through the addition ofother committed lenders to the facility.  The Credit Facility matures on April 14,2010 and, if the facility is not renewed or extended by this date, all unpaidprincipal and interest will be due and payable within one year ofmaturity.  Advances under the Credit Facility will generally bear interestat the 30 day LIBOR rate (subject to a minimum rate of 2%), plus 5% per annum,with a commitment fee of 0.75% per annum on undrawn amounts.

 

Interest ispayable monthly during the term of the Credit Facility.  Principal is payable after April 14,2010 through maturity out of all of our collections of principal from our  loans. Available borrowings are subject tovarious constraints imposed under the Credit Facility, based on the aggregateloan balance pledged by Business Investment, which varies as loans are addedand repaid, regardless of whether such repayments are early prepayment or aremade as contractually required.

 

The CreditFacility contains covenants that require Business Investment to maintain itsstatus as a separate entity, prohibit certain significant corporatetransactions (such as mergers, consolidations, liquidations or dissolutions)and restrict material changes to our credit and collection policies. The CreditFacility also restricts some of the terms and provisions (including interestrates, terms to maturity and payments schedules) and limits the borrower andindustry concentrations of loans that are 

 

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eligible to secureadvances as well as limits on payments of distributions. As of May 29,2009, Business Investment was in compliance with all of the facility covenants.As of May 29, 2009 there was $29.7 million of borrowings outstanding onthe Credit Facility at an interest rate of approximately 7.0%, and theremaining borrowing capacity under the Credit Facility was approximately$17.5 million.

 

During May 2009, we cancelled our interest rate cap agreement withDeutsche Bank A.G. and entered into a new interest rate cap agreement for anotional amount of $45 million that will effectively limit the interest rate ona portion of the borrowings under the Credit Facility.  We incurred a premium fee of approximately$40 in conjunction with this agreement.

 

The administrativeagent also requires that any interest or principal payments on pledged loans beremitted directly by the borrower into a lockbox account with The Bank of NewYork Mellon Trust Company, N.A as custodian. BB&T is also the trustee ofthe account and once a month remits the collected funds to us. At May 29,2009, the amount due from the custodian was approximately $867.

 

The Adviser services theloans pledged under the Credit Facility. As a condition to this servicingarrangement, we executed a performance guaranty pursuant to which it guaranteedthat the Adviser would comply fully with all of its obligations under theCredit Facility. The loan documents require us to maintain a minimum net worthof $169 million plus 50% of all equity and subordinated debt raised after April 14,2009 and to maintain “asset coverage” with respect to “senior securitiesrepresenting indebtedness” of at least 200%, in accordance with Section 18of the 1940 Act. As of May 29, 2009, we were in compliance with thecovenants under the performance guaranty.

 

Our continued compliancewith these covenants, however, depends on many factors, some of which arebeyond our control. In particular, depreciation in the valuation of our assets,which valuation is subject to changing market conditions that are presentlyvery volatile, affects our ability to comply with these covenants. During thefiscal year ended March 31, 2009, net unrealized depreciation on ourinvestments was approximately $19.8 million, compared to $11.5 million duringthe prior fiscal year. Given the continued deterioration in the capitalmarkets, net unrealized depreciation in our portfolio may continue to increase infuture periods and threaten our ability to comply with the covenants under ourCredit Facility. Accordingly, there are no assurances that we will continue tocomply with these covenants. Failure to comply with these covenants wouldresult in a default which, if we were unable to obtain a waiver from thelenders, could accelerate our repayment obligations under the Credit Facilityand thereby have a material adverse impact on our liquidity, financialcondition, results of operations and ability to pay distributions as more fullydescribed below.

 

The Credit Facilitymatures on April 14, 2010, and, if the facility is not renewed or extendedby this date, all unpaid principal and interest will be due and payable withinone year of maturity.  There can be no guaranteethat we will be able to renew, extend or replace the Credit Facility on termsthat are favorable to us, or at all.  Ourability to obtain replacement financing will be constrained by current economicconditions affecting the credit markets, which have significantly deterioratedover the last several months and may decline further.  Consequently, any renewal, extension orrefinancing of the Credit Facility will likely result in significantly higherinterest rates and related charges and may impose significant restrictions onthe use of borrowed funds with regard to our ability to fund investments ormaintain distributions.  For instance, inconnection with the recent establishment of our new credit facility, the sizeof the line was reduced from $125.0 million under our prior facility to $50.0million under our new credit facility and Deutsche Bank A.G., who was acommitted lender our prior credit facility elected not to participate in thenew facility and withdrew its commitment. If we are not able to renew, extend or refinance the Credit Facility,this would likely have a material adverse effect on our liquidity and abilityto fund new investments or pay distributions to our stockholders.  Our inability to paydistributions could result in us failing to qualify as a RIC.  Consequently, any income or gains couldbecome taxable at corporate rates. If we are unable to secure replacement financing, wemay be forced to sell certain assets on disadvantageous terms, which may resultin realized losses such as those recently recorded in connection with the Subsequent Syndicated Loan Sales, whichresulted in a realized loss of approximately $34.6 million during the quarterending June 30, 2009.  Suchrealized losses could materially exceed the amount of any unrealizeddepreciation on these assets as of our most recent balance sheet date, whichwould have a material adverse effect on our results of operations.  In addition to selling assets, or as analternative, we may issue equity in order to repay amounts outstanding underthe Credit Facility.  Based on the recenttrading prices of our stock, such an equity offering may have a substantialdilutive impact on our existing stockholders’ interest in our earnings andassets and voting interest in us.

 

**Contractual Obligations andOff-Balance Sheet Arrangements**

 

We were not a party toany signed term sheets for potential investments as of March 31,2009.  In October 2008, the Companyexecuted a guaranty of a vehicle finance facility agreement between Ford MotorCredit Company (“FMC”) and Auto Safety House, LLC (“ASH”), one of our Controlinvestments (the “Finance Facility”).  The Finance Facility provides ASHwith a line of credit of up to $500 for component Ford parts used by ASH tobuild truck bodies under a separate 

 

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contract.  Title andownership of the parts is retained by Ford. The guaranty of the FinanceFacility will expire upon termination of the separate parts supply contractwith Ford or upon our replacement as guarantor.  The Finance Facility issecured by all of the assets of Business Investment.  As of March 31,2009, we have not been required to make any payments on the guaranty of theFinance Facility.

 

**Critical Accounting Policies**

 

Thepreparation of financial statements and related disclosures in conformity withaccounting principles generally accepted in the United States (“GAAP”) requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities, and disclosure of contingent assets and liabilitiesat the date of the financial statements, and revenues and expenses during theperiod reported. Actual results could differ materially from those estimates.We have identified our investment valuation process as our most criticalaccounting policy.

 

***Investment Valuation***

 

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

 

*General Valuation Policy:*  We value our investments in accordance withthe requirements of the 1940 Act.  Asdiscussed more fully below, we value securities for which market quotations arereadily available and reliable at their market value.  We value all other securities and assets atfair value as determined in good faith by our Board of Directors.

 

InSeptember 2006, the Financial Accounting Standards Board issued *Statement of Financial Accounting StandardsNo. 157—Fair Value Measurements*(“SFAS No. 157”), which,for financial assets, is effective for fiscal years beginning afterNovember 15, 2007, with early adoption permitted. We adopted SFAS No. 157on April 1, 2008. In part, SFAS No. 157 defines fair value,establishes a framework for measuring fair value, and expands disclosures aboutassets and liabilities measured at fair value. The new standard provides aconsistent definition of fair value that focuses on exit price in theprincipal, or most advantageous, market and prioritizes, within a measurementof fair value, the use of market-based inputs over entity-specific inputs. Thestandard also establishes the following three-level hierarchy for fair valuemeasurements based upon the transparency of inputs to the valuation of an assetor liability as of the measurement date. 

 

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

 

·      *Level2*—inputs to the valuation methodology include quoted prices forsimilar assets and liabilities in active markets, and inputs that areobservable for the asset or liability, either directly or indirectly, for substantiallythe full term of the financial instrument. Level 2 inputs are in those marketsfor which there are few transactions, the prices are not current, little publicinformation exists or instances where prices vary substantially over time oramong brokered market makers; and

 

·      *Level3*—inputs to the valuation methodology are unobservable andsignificant to the fair value measurement. Unobservable inputs are those inputsthat reflect the Company’s own assumptions that market participants would useto price the asset or liability based upon the best available information.

 

See Note 3,“Investments” in our Notes to the consolidated financial statements foradditional information regarding fair value measurements and our adoption ofSFAS No. 157.

 

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

 

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

 

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

 

·                  Publicly-traded securities;

·                  Securities for which alimited market exists; and

·                  Securities for which nomarket exists.

 

*Valuation Methods:*

 

**Publicly-traded securities:** We determinethe value of publicly-traded securities based on the closing price for thesecurity on the exchange or securities market on which it is listed andprimarily traded on the valuation date. To the extent that we own restrictedsecurities that are not freely tradable, but for which a public marketotherwise exists, we will use the market value of that security adjusted forany decrease in value resulting from the restrictive feature.

 

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

 

In the event these limited markets become illiquid such that marketprices are no longer readily available, we will value our syndicated loansusing estimated net present values of the future cash flows or discounted cashflows. The use of a DCF 

 

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methodology follows that prescribed by FSP No. 157-3, whichprovides guidance on the use of a reporting entity’s own assumptions aboutfuture cash flows and risk-adjusted discount rates when relevant observableinputs, such as quotes in active markets, are not available. When relevantobservable market data does not exist, the alternative outlined in the FSP No. 157-3is the use of valuing investments based on DCF. For the purposes of using DCF to provide fair value estimates, weconsidered multiple inputs such as a risk-adjusted discount rate thatincorporates adjustments that market participants would make both fornonperformance and liquidity risks.  Assuch, we developed a modified discount rate approach that incorporates riskpremiums including, among others, increased probability of default, or higherloss given default, or increased liquidity risk.

 

The DCF valuations applied to the syndicated loansprovide an estimate of what we believe a market participant would pay topurchase a syndicated loan in an active market, thereby establishing a fairvalue.  We will continue to apply the DCFmethodology in illiquid markets until quoted prices are available or are deemedreliable based on trading activity.

 

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

 

(1)          **Portfolio investments comprised solely of debt securities:** We refer to asNon-Public Debt Securities those debt securities that are not publicly tradedon an established securities market, or for which a limited market does notexist, and that are issued by portfolio companies where we have no equity, orequity-like securities, and are fair valued in accordance with the terms of thepolicy, which utilizes opinions of value submitted to us by Standard &Poor’s Securities Evaluations, Inc. (“SPSE”). We may also submit PIKinterest to SPSE for their evaluation when it is determined that PIK interestis likely to be received.

 

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

 

SPSE provides evaluated price opinions whichare reflective of what SPSE believes the bid side of the market would be foreach loan after careful review and analysis of descriptive, market and creditinformation. Each price reflects SPSE’s best judgment based upon carefulexamination of a variety of market factors. Because of fluctuation in themarket and in other factors beyond its control, SPSE cannot guarantee theseevaluations. The evaluations reflect the market prices, or estimates thereof,on the date specified. The prices are based on comparable market prices forsimilar securities. Market information has been obtained from reputablesecondary market sources. Although these sources are considered reliable, SPSEcannot guarantee their accuracy.

 

SPSE opinions of value of our debt securitiesthat are issued by portfolio companies where we have no equity, or equity-likesecurities are submitted to our Board of Directors along with our Adviser’ssupplemental assessment and recommendation regarding valuation of each of theseinvestments. Our Adviser generally accepts the opinion of value given by SPSE,however, in certain limited circumstances, such as when our Adviser may learnnew information regarding an investment between the time of submission to SPSEand the date of the Board assessment, our Adviser’s conclusions as to value maydiffer from the opinion of value delivered by SPSE. Our Board of Directors thenreviews whether our Adviser has followed its established procedures fordeterminations of fair value, and votes to accept or reject the recommendedvaluation of our investment portfolio. Our Adviser and our managementrecommended, and the Board of Directors voted to accept, the opinions of valuedelivered by SPSE on the loans in our portfolio as denoted on the Schedule ofInvestments included in our accompanying condensed consolidated financialstatements.

 

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Because there is a delay between when weclose an investment and when the investment can be evaluated by SPSE, new loansare not valued immediately by SPSE; rather, management makes its owndetermination about the value of these investments in accordance with ourvaluation policy using the methods described herein.

 

(2)          **Portfolio investments in controlled companies comprised of a bundle ofinvestments, which can include debt and/or equity securities:**For Non-Public Debt Securities and equityor equity-like securities (e.g. preferred equity, equity, or other equity-likesecurities) that are purchased together as part of a package, where we havecontrol or could gain control through an option or warrant security, both thedebt and equity securities of the portfolio investment would exit in the mergersand acquisition market as the principal market, generally through a sale orrecapitalization of the portfolio company. Further, we believe that the in-usepremise of value (as defined in SFAS No. 157), which assumes the debt andequity securities are sold together, is appropriate as this would providemaximum proceeds to the seller. As a result, we continue to use the enterprisevalue methodology utilizing a liquidity waterfall approach to determine thefair value of these investments under SFAS No. 157 if we have the ability toinitiate a sale of a portfolio company as of the measurement date. Under thisapproach, we first calculate the total enterprise value of the issuer byincorporating some or all of the following factors: 

 

·                  the issuer’s ability to makepayments;

·                  the earnings of the issuer;

·                  recent sales to thirdparties of similar securities;

·                  the comparison to publiclytraded securities; and

·                  discounted cash flow orother pertinent factors.

 

In gathering the sales to third parties ofsimilar securities, we may reference industry statistics and use outsideexperts. Once we have estimated the total enterprise value of the issuer, wesubtract the value of all the debt securities of the issuer; which are valuedat the contractual principal balance. Fair values of these debt securities arediscounted for any shortfall of total enterprise value over the total debtoutstanding for the issuer. Once the values for all outstanding seniorsecurities (which include the debt securities) have been subtracted from thetotal enterprise value of the issuer, the remaining amount, if any, is used todetermine the value of the issuer’s equity or equity like securities.  If, in our Adviser’s judgment, the liquiditywaterfall approach does not accurately reflect the value of the debt component,the Adviser may recommend that we use a valuation by SPSE, or if that isunavailable, a DCF valuation technique.

 

(3)          **Portfolio investments in non-controlled companies comprised of a bundleof investments, which can include debt and/or equity securities:**We valueNon-Public Debt Securities that are purchased together with equity andequity-like securities from the same portfolio company, or issuer, for which wedo not control or cannot gain control as of the measurement date, using ahypothetical secondary market as our principal market. In accordance with SFAS No. 157,we determine the fair value of these debt securities of non-control investmentsassuming the sale of an individual debt security using the in-exchange premiseof value (as defined in SFAS No. 157). As such, we estimate the fair valueof the debt component using estimates of value provided by SPSE and our ownassumptions in the absence of market observable data, including syntheticcredit ratings, estimated remaining life, current market yield and interestrate spreads of similar securities as of the measurement date. For equity andequity-like securities of investments for which we do not control or cannotgain control as of the measurement date, we value the equity portion based onthe total enterprise value of the issuer, which is calculated using a liquiditywaterfall approach as described above.

 

Due to the uncertainty inherent in thevaluation process, such estimates of fair value may differ significantly fromthe values that would have been obtained had a ready market for the securitiesexisted, and the differences could be material. Additionally, changes in themarket environment and other events that may occur over the life of the investmentsmay cause the gains or losses ultimately realized on these investments to bedifferent than the valuations currently assigned. There is no single standardfor determining fair value in good faith, as fair value depends uponcircumstances of each individual case. In general, fair value is the amountthat we might reasonably expect to receive upon the current sale of thesecurity in an arms-length transaction in the security’s principal market.

 

*Valuation Considerations: *From time to time, dependingon certain circumstances, the Adviser may use the following valuationconsiderations, including but not limited to:

 

·                  the nature and realizable value of thecollateral;

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

·                  the markets in which the portfolio companydoes business;

·                  the comparison to publicly traded companies;and

·                  discounted cash flow and other relevantfactors.

 

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

 

*Credit Information:*  Our Adviser monitors a wide variety of keycredit statistics that provide information regarding our portfolio companies tohelp us assess credit quality and portfolio performance. We and our Adviserparticipate in the periodic board meetings of our portfolio companies in whichwe hold Control and Affiliate investments and also require them to 

 

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provide annual audited and monthly unaudited financial statements.Using these statements or comparable information and board discussions, ourAdviser calculates and evaluates the credit statistics.

 

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

 

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

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

 

----

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

 

The above scale gives anindication of the probability of default and the magnitude of the loss if thereis a default. Our policy is to stop accruing interest on an investment if wedetermine that interest is no longer collectible.  At March 31, 2009, one investment was onnon-accrual for approximately $2.6 million at fair value.  Additionally, we do not risk rate our equitysecurities.

 

The following table liststhe risk ratings for all non-syndicated loans in our portfolio at March 31,2009 and March 31, 2008, representing approximately 59% and 51%,respectively, of all loans in our portfolio at the end of each period:

 
| **Rating**       | ** ** | **March 31, 2009** | ** ** | **March 31, 2008** | ** ** |
|------------------|------------|------------------------------|------------|------------------------------|------------|
| Highest          |       | 7.0                          |       | 7.0                          |       |
| Average          |       | 5.5                          |       | 5.5                          |       |
| Weighted Average |       | 5.1                          |       | 5.1                          |       |
| Lowest           |       | 2.0                          |       | 1.0                          |       |

 

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The following table liststhe risk ratings for syndicated loans in our portfolio that were not rated byan NRSRO at March 31, 2009 and March 31, 2008, representingapproximately 12% and 13%, respectively, of all loans in our portfolio at theend of each period:

 
| **Rating**       |   | **March 31, 2009** |   | **March 31, 2008** |   |
|------------------|--------|------------------------------|--------|------------------------------|--------|
| Highest          |   | 9.0                          |   | 9.0                          |   |
| Average          |   | 8.0                          |   | 7.1                          |   |
| Weighted Average |   | 8.0                          |   | 7.3                          |   |
| Lowest           |   | 7.0                          |   | 1.0                          |   |

 

For syndicated loans thatare currently rated by an NRSRO, we risk rate such loans in accordance with therisk rating systems of major risk rating organizations, such as those providedby an NRSRO. The following table lists the risk ratings for all syndicatedloans in our portfolio that were rated by an NRSRO at March 31, 2009 and March 31,2008, representing approximately 29% and 36%, respectively, of all loans in ourportfolio at the end of each period:

 
| **Rating**       | ** ** | **March 31, 2009** | ** ** | **March 31, 2008** | ** ** |
|------------------|------------|------------------------------|------------|------------------------------|------------|
| Highest          |       | BB/Ba2                       |       | BB/Ba2                       |       |
| Average          |       | B/B2                         |       | B+/B1                        |       |
| Weighted Average |       | B/B2                         |       | B+/B1                        |       |
| Lowest           |       | CCC+/B3                      |       | CCC+/B2                      |       |

 

**Tax Status**

 

*FederalIncome Taxes*

 

We intend to continue to qualify for treatment as a RIC under SubtitleA, Chapter 1 of Subchapter M of the Code. As a RIC, we are notsubject to federal income tax on the portion of our taxable income and gainsdistributed to stockholders. To qualify as a RIC, we are required to distributeto stockholders at least 90% of investment company taxable income, as definedby the Code. It is our policy to pay out as a distribution up to 100% of thoseamounts.

 

In an effort to avoidcertain excise taxes imposed on RICs, we currently intend to distribute duringeach calendar year, an amount at least equal the sum of (1) 98% of ourordinary income for the calendar year, (2) 98% of our capital gains inexcess of capital losses for the one-year period ending on October 31 ofthe calendar year, and (3) any ordinary income and net capital gains forpreceding years that were not distributed during such years.

 

**RevenueRecognition**

 

*Interestand Dividend Income Recognition*

 

Interest income isrecorded on the accrual basis to the extent that such amounts are expected tobe collected.  We will stop accruinginterest on investments when it is determined that interest is no longercollectible.  Generally, when a loanbecomes 90 days or more past due and/or if our qualitative assessmentindicates that the debtor is unable to service its debt or other obligations,we will place the loan on non-accrual status and cease recognizing interestincome on that loan until the borrower has demonstrated the ability and intentto pay contractual amounts due.  However,we remain contractually entitled to this interest and may collect it upon thesale or recapitalization of the portfolio company.  At March 31, 2009, one Control investment was onnon-accrual with a fair value of approximately $2.6 million, or 0.8% ofthe fair value of all loans in our portfolio. At March 31, 2008, oneNon-Control/Non-Affiliate investment and one Control investment were onnon-accrual with an aggregate fair value of approximately $0.4 million, or0.1% of the fair value of all loans in our portfolio.

 

Conditional interest, ora success fee, is recorded when earned upon full repayment of a loaninvestment. To date we have not recorded any conditional interest. Dividendincome on preferred equity securities is accrued to the extent that suchamounts are expected to be collected and that we have the option to collectsuch amounts in cash. To date, we have not accrued any dividend income.

 

*ServicesProvided to Portfolio Companies*

 

As a business developmentcompany under the 1940 Act, we are required to make available significantmanagerial assistance 

 

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to our portfoliocompanies. We provide these services through our Adviser, who provides theseservices on our behalf through its officers who are also our officers.Currently, neither we nor our Adviser charges a fee for managerial assistance,however, if our Adviser does receive fees for such managerial assistance, ourAdviser will credit the managerial assistance fees to the base management feedue from us to our Adviser.

 

Our Adviser receives feesfor the other services it provides to our portfolio companies. These other feesare typically non-recurring, are recognized as revenue when earned and aregenerally paid directly to our Adviser by the borrower or potential borrowerupon the closing of the investment. The services our Adviser provides to ourportfolio companies vary by investment, but generally include a broad array ofservices such as investment banking services, arranging bank and equityfinancing, structuring financing from multiple lenders and investors, reviewingexisting credit facilities, restructuring existing investments, raising equityand debt capital, turnaround management, merger and acquisition services andrecruiting new management personnel. When our Adviser receives fees for theseservices, 50% of certain of those fees are voluntarily credited against thebase management fee that we pay to our Adviser. Any services of this naturesubsequent to the closing would typically generate a separate fee at the timeof completion.

 

Our Adviser also receivesfees for monitoring and reviewing portfolio company investments. These fees arerecurring and are generally paid annually or quarterly in advance to ourAdviser throughout the life of the investment. Fees of this nature are recordedas revenue by our Adviser when earned and are not credited against the basemanagement fee.

 

We may receive fees forthe origination and closing services we provide to portfolio companies throughour Adviser. These fees are paid directly to us and are recognized as revenueupon closing of the originated investment and are reported as fee income in theconsolidated statements of operations.

 

**Recent Accounting Pronouncements**

 

SeeNote 2, “Summary of Significant Accounting Policies” in the Notes to our consolidatedfinancial statements included elsewhere in this report.

 

**Item 7A. Quantitative and Qualitative Disclosures About Market Risk****(dollar amounts in thousands, unless otherwiseindicated)**

 

Marketrisk includes risks that arise from changes in interest rates, foreign currencyexchange rates, commodity prices, equity prices and other market changes thataffect market sensitive instruments.  Theprimary risk we believe we are exposed to is interest rate risk.  While we expect that ultimately approximately20% of the loans in our portfolio will be made at fixed rates, withapproximately 80% made at variable rates or variables rates with a floormechanism. At March 31, 2009, our portfolio consisted of the following breakdown in relation to all outstandingdebt:

 
| 50  | % | Variable rates               |   |
|-----|---|------------------------------|--------|
| 30  | % | Variable rates with a  floor |   |
| 20  | % | Fixed rates                  |   |
| 100 | % | Total                        |   |

 

Asa result of the Subsequent Syndicated Loan Sales, as of May 29, 2009, ourportfolio had approximately 23% of the total of the loan cost value at variablerates, approximately 46% of the total loan cost value at variable rates withfloors and approximately 31% of the total loan portfolio cost basis at fixedrates.  All of our variable-rate loanshave rates associated with either the current LIBOR or Prime Rate.

 

Wehad a $125.0 million revolving credit facility, based on variable rates, withDeutsche Bank A.G., which matured in April 2009.  As of March 31, 2009, there was anoutstanding principal balance of $110.3 million at a stated interest rate ofapproximately 0.7% plus a 3.5% program fee. In April 2009, we entered into a new revolving credit facility withBB&T for up to $50.0 million.  Advances under the new credit facilitywill generally bear interest at the 30-day LIBOR rate (subject to a minimumrate of 2%), plus 5% per annum, with a commitment fee of 0.75% per annum onundrawn amounts.  We borrowedapproximately $43.8 million under the new credit facility and, along with ourfunds, repaid all outstanding principal and interest on the prior creditfacility and terminated that credit facility.

 

InOctober 2007 and February 2008, we entered into an interest rate capagreement in connection with our prior line of credit. We purchased thisinterest rate cap agreement with a notional amount of $60 million for aone-time, up-front payment of $53. 

 

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Theinterest rate cap agreement entitles us to receive payments, if any, equal tothe amount by which interest payments on the current notional amount at onemonth LIBOR exceed the payments on the current notional amount at 9%. The capexpires in October 2009. This interest rate cap agreement effectively capsour interest payments on our line of credit borrowing, up to the notionalamount of the interest rate cap, at 9%. This mitigates our exposure toincreases in interest rates on our borrowings on our line of credit, which areat variable rates. At March 31, 2009, the interest rate cap agreement hada nominal fair market value.

 

Toillustrate the potential impact of changes in interest rates on our netincrease in net assets resulting from operations, we have performed thefollowing analysis, which assumes that our balance sheet remains constant andno further actions beyond the interest rate cap agreement are taken to alterour existing interest rate sensitivity.

 
| **Basis Point Change** | ** ** | **Increase   (Decrease) in  Interest Income** | ** ** | **Increase  (Decrease) in  Interest Expense** | ** ** | **Net Increase (Decrease) in  Net Assets Resulting from  Operations** | ** ** |
|------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| Up 200 basis points    |       | $                                             | 810        |                                          | $          | 163                                                                   |       | $ | 647 |   |
| Up 100 basis points    |       | 405                                           |       | 0                                             |       | 405                                                                   |       |
| Down 100 basis points  |       | (283                                          | )          | 0                                             |       | (283                                                                  | )          |
| Down 200 basis points  |       |                                          | (348       | )                                             |       | 0                                                                     |       |   | (348 | ) |

 

Althoughmanagement believes that this analysis is indicative of our existing interestrate sensitivity, it does not adjust for potential changes in credit quality,size and composition of our loan portfolio on the balance sheet and otherbusiness developments that could affect net increase in net assets resultingfrom operations.  Accordingly, noassurances can be given that actual results would not differ materially fromthe results under this hypothetical analysis.

 

Wemay also experience risk associated with investing in securities of companieswith foreign operations. We currently do not anticipate investing in debt orequity of foreign companies, but some potential portfolio companies may haveoperations located outside the United States. These risks include, but are notlimited to, fluctuations in foreign currency exchange rates, imposition offoreign taxes, changes in exportation regulations and political and socialinstability.

 

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**Item 8.  Financial Statements and Supplementary Data**

 

**Index toConsolidated Financial Statements**

 
| Report  of Management on Internal Controls                                                                                              | 62 |
|-----------------------------------------------------------------------------------------------------------------------------------------|----|
| Report  of Independent Registered Public Accounting Firm                                                                                | 63 |
| Consolidated  Statements of Assets and Liabilities as of March 31, 2009 and  March 31, 2008                                   | 64 |
| Consolidated  Schedules of Investments as of March 31, 2009 and 2008                                                               | 65 |
| Consolidated  Statements of Operations for the years ended March 31, 2009,  March 31, 2008 and March 31, 2007            | 71 |
| Consolidated Statements of Changes in Net Assets for  the years ended March 31, 2009, March 31, 2008 and March 31,  2007 | 72 |
| Consolidated  Statements of Cash Flows for the years ended March 31, 2009,  March 31, 2008 and March 31, 2007            | 73 |
| Financial  Highlights for the years ended March 31, 2009, March 31, 2008 and  March 31, 2007                             | 74 |
| Notes to Consolidated Financial Statements                                                                                              | 75 |

 

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### **Report of Management on Internal Controls**

###  

To the Stockholders and Board of Directors ofGladstone Investment Corporation:

 

Our management is responsible for establishingand maintaining adequate internal control over financial reporting as definedin Rule 13a-15(f) under the Securities Exchange Act of 1934. Ourinternal control over financial reporting is designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles and include those policies and procedures that: (1) pertainto the maintenance of records that in reasonable detail accurately and fairlyreflect our transactions and the dispositions of our assets; (2) providereasonable assurance that our transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that our receipts and expenditures are being madeonly in accordance with appropriate authorizations; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use or disposition of our assets that could have a material effecton our financial statements.

 

Because of its inherent limitations, internalcontrol over financial reporting may not prevent or detect misstatements.Therefore, even those systems determined to be effective can provide onlyreasonable assurance with respect to financial statement preparation andpresentation.

 

Under the supervision and with theparticipation of our management, we assessed the effectiveness of our internalcontrol over financial reporting as of March 31, 2009, using the criteriaset forth by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO) in Internal Control—Integrated Framework. Based on itsassessment, management has concluded that our internal control over financialreporting was effective as of March 31, 2009.

 

Our management’s assessment of theeffectiveness of our internal control over financial reporting as of March 31,2009 has been audited by PricewaterhouseCoopers LLP, an independent registeredpublic accounting firm, as stated in their report which is included herein.

 

 

### June 2, 2009

 

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### **Report of Independent Registered Public AccountingFirm**

###  

To the Stockholders and Board of Directors ofGladstone Investment Corporation:

 

In our opinion, the accompanying consolidatedstatements of assets and liabilities, including the schedules of investments,and the related statements of operations, changes in net assets and cash flowsand the financial highlights present fairly, in all material respects, thefinancial position of Gladstone Investment Corporation and its subsidiaries at March 31,2009 and 2008, and the results of their operations and their cash flows foreach of the three years in the period ended March 31, 2009****in conformity with accounting principles generally acceptedin the United States of America.  In addition, in our opinion, the financialstatement schedule****listed in theindex****appearing under Item 15(a)(2) presents****fairly, in all material respects, the information set forththerein when read in conjunction with the related consolidated financialstatements.  Also in our opinion,the Company maintained, in all material respects, effective internal controlover financial reporting as of March 31, 2009, based on criteriaestablished in *Internal Control - Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO).  The Company’s management isresponsible for these financial statements and financial statement schedule,for maintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reporting,included in the accompanying Management’s Annual Report on Internal Controlover Financial Reporting.  Ourresponsibility is to express opinions on these financial statements, on thefinancial statement schedule, and on the Company’s internal control overfinancial reporting based on our integrated audits.  We conducted our audits in accordance withthe standards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that weplan and perform the audits to obtain reasonable assurance about whether thefinancial statements are free of material misstatement and whether effectiveinternal control over financial reporting was maintained in all materialrespects.  Our audits of the financialstatements included examining, on a test basis, evidence supporting the amountsand disclosures in the financial statements, assessing the accountingprinciples used and significant estimates made by management, and evaluatingthe overall financial statement presentation. Our audit of internal control over financial reporting includedobtaining an understanding of internal control over financial reporting,assessing the risk that a material weakness exists, and testing and evaluatingthe design and operating effectiveness of internal control based on theassessed risk.  Our audits also includedperforming such other procedures as we considered necessary in thecircumstances. We believe that our audits provide a reasonable basis for ouropinions.

 

As discussed in Notes 2 and 3 to the consolidatedfinancial statements, effective April 1, 2008 the Company adopted SFAS No. 157“Fair Value Measures” and in 2009 changed the manner in which it accounts forits portfolio investments in non-controlled companies comprised of a bundle ofinvestments, which can include debt and/or equity securities.

 

A company’s internal control over financialreporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples.  A company’s internal controlover financial reporting includes those policies and procedures that (i) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (ii) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (iii) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the company’s assets that could have a material effect on the financialstatements.

 

Because of its inherent limitations, internalcontrol over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

 

PricewaterhouseCoopers LLP

McLean, VA

June 1, 2009

 

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**GLADSTONEINVESTMENT CORPORATIONCONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES**

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

 
| ** **                                                                                                                                                                            | ** ** | **March 31,** | ** ** | **March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                                                                                                                                                            | ** ** | **2009**           | ** ** | **2008**           | ** ** |
| ** **                                                                                                                                                                            | ** ** | ** **         | ** ** | ** **         | ** ** |
| ASSETS                                                                                                                                                                                |       |               |       |               |       |
| Non-Control/Non-Affiliate investments (Cost 3/31/09: $134,836;  3/31/08: $166,416)                                                                                                    |       | $                  | 94,740     |               | $          | 142,739 |   |
| Control investments (Cost 3/31/09: $150,081; 3/31/08: $138,354)                                                                                                                       |       | 166,163            |       | 145,407            |       |
| Affiliate investments (Cost 3/31/09: $64,028; 3/31/08: $46,035)                                                                                                                       |       | 53,027             |       | 47,458             |       |
| Total investments at fair value (Cost 3/31/09: $348,945; 3/31/08:  $350,805)                                                                                                          |       | 313,930            |       | 335,604            |       |
| Cash and cash equivalents                                                                                                                                                             |       | 7,236              |       | 9,360              |       |
| Interest receivable                                                                                                                                                                   |       | 1,500              |       | 1,662              |       |
| Due from custodian                                                                                                                                                                    |       | 2,706              |       | 4,399              |       |
| Due from Adviser (Refer to Note 4)                                                                                                                                                    |       | —             |       | 89                 |       |
| Deferred financing fees                                                                                                                                                               |       | 1,167              |       | 323                |       |
| Prepaid assets                                                                                                                                                                        |       | 172                |       | 480                |       |
| Other assets                                                                                                                                                                          |       | 132                |       | 376                |       |
| TOTAL ASSETS                                                                                                                                                                          |       | $                  | 326,843    |               | $          | 352,293 |   |
|                                                                                                                                                                                  |       |               |       |               |       |
| LIABILITIES                                                                                                                                                                           |       |               |       |               |       |
| Accounts payable and accrued expenses                                                                                                                                                 |       | $                  | 1,283      |               | $          | 716 |   |
| Fee due to Administrator (Refer to Note 4)                                                                                                                                            |       | 179                |       | 208                |       |
| Fees due to Adviser (Refer to Note 4)                                                                                                                                                 |       | 187                |       | —             |       |
| Borrowings under line of credit                                                                                                                                                       |       | 110,265            |       | 144,835            |       |
| Other liabilities                                                                                                                                                                     |       | 127                |       | 89                 |       |
| TOTAL LIABILITIES                                                                                                                                                                     |       | 112,041            |       | 145,848            |       |
| NET ASSETS                                                                                                                                                                            |       | $                  | 214,802    |               | $          | 206,445 |   |
|                                                                                                                                                                                  |       |               |       |               |       |
| ANALYSIS OF NET ASSETS                                                                                                                                                                |       |               |       |               |       |
| Common stock, $0.001 par value, 100,000,000 shares authorized;  22,080,133 and 16,560,100 shares issued and outstanding at March 31,  2009 and March 31, 2008, respectively |       | $                  | 22         |               | $          | 17 |   |
| Capital in excess of par value                                                                                                                                                        |       | 257,361            |       | 224,172            |       |
| Net unrealized depreciation of investment portfolio                                                                                                                                   |       | (35,015            | )          | (15,201            | )          |
| Net unrealized depreciation of derivative                                                                                                                                             |       | (53                | )          | (53                | )          |
| Accumulated net investment income                                                                                                                                                     |       | 18                 |       | 18                 |       |
| Accumulated net realized loss                                                                                                                                                         |       | (7,531             | )          | (2,508             | )          |
| TOTAL NET ASSETS                                                                                                                                                                      |       | $                  | 214,802    |               | $          | 206,445 |   |
| NET ASSETS PER SHARE                                                                                                                                                                  |       | $                  | 9.73       |               | $          | 12.47 |   |

 

*THEACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIALSTATEMENTS.*

 

64

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**GLADSTONE INVESTMENT CORPORATION**

**CONSOLIDATED SCHEDULES OFINVESTMENTS**

**MARCH 31, 2009**

**(DOLLARAMOUNTS IN THOUSANDS)**

 
| **Company  (1)**                                 | ** **   | **Industry**                                                      | ** **   | **Investment  (2)**                                                 | ** **   | **Cost**     | ** **   | **Fair  Value** | ** **   |
|--------------------------------------------------|--------------|-------------------------------------------------------------------|--------------|---------------------------------------------------------------------|--------------|--------------|--------------|-----------------|--------------|
|                                             |         |                                                              |         |                                                                |         |         |         |            |         |
| **NON-CONTROL/NON-AFFILIATE  INVESTMENTS**       | ** **   | ** **                                                        | ** **   | ** **                                                          | ** **   | ** **   | ** **   |
| ***Senior  Syndicated Loans:***                  | *** *** | *** ***                                                      | *** *** | *** ***                                                        | *** *** | *** *** | *** *** | *** ***    | *** *** |
| Activant  Solutions, Inc.                   |         | Service -  enterprise software and services                       |         | Senior Term Debt  (3.4%, Due 5/2013) (7)                            |         | $            | 1,658        |            | $            | 904 |   |
| Advanced Homecare  Holdings, Inc.           |         | Service - home  health nursing services                           |         | Senior Term Debt  (4.3%, Due 8/2014) (7)                            |         | 2,947        |         | 2,019           |         |
| Aeroflex, Inc.                              |         | Service -  provider of highly specialized electronic equipment    |         | Senior Term Debt  (4.5%, Due 8/2014) (7)                            |         | 1,892        |         | 1,083           |         |
| Compsych  Investments Corp.                      |         | Service -  employee assistance programs                           |         | Senior Term Debt  (3.8%, Due 2/2012) (7)                            |         | 3,083        |         | 2,405           |         |
| CRC Health  Group, Inc.                     |         | Service -  substance abuse treatment                              |         | Senior Term Debt  (3.5%, Due 2/2012) (7)                            |         | 7,772        |         | 5,026           |         |
| Critical Homecare  Solutions, Inc.          |         | Service - home  therapy and respiratory treatment                 |         | Senior Term Debt  (3.8%, Due 1/2012) (7)                            |         | 4,359        |         | 3,632           |         |
| Generac  Acquisition Corp.                       |         | Manufacturing -  standby power products                           |         | Senior Term Debt  (3.0%, Due 11/2013) (7)                           |         | 6,799        |         | 3,820           |         |
| Graham Packaging  Holdings Company               |         | Manufacturing -  plastic containers                               |         | Senior Term Debt  (3.6%, Due 10/2011) (7)                           |         | 3,348        |         | 2,813           |         |
| HMTBP Acquisition  II Corp.                      |         | Service -  aboveground storage tanks                              |         | Senior Term Debt  (3.5%, Due 5/2014) (3)                            |         | 3,838        |         | 2,942           |         |
| Huish  Detergents, Inc.                     |         | Manufacturing -  household cleaning products                      |         | Senior Term Debt  (2.3%, Due 4/2014) (7)                            |         | 1,966        |         | 1,690           |         |
| Hyland  Software, Inc.                      |         | Service -  provider of enterprise content management software     |         | Senior Term Debt  (3.6%, Due 7/2013) (7)                            |         | 3,912        |         | 2,990           |         |
| Interstate  Fibernet, Inc.                  |         | Service -  provider of voice and data telecommunications services |         | Senior Term Debt  (5.2%, Due 7/2013) (3)                            |         | 9,804        |         | 6,698           |         |
| KIK Custom  Products, Inc.                  |         | Manufacturing -  consumer products                                |         | Senior Term Debt  (2.8%, Due 5/2014) (7)                            |         | 3,941        |         | 1,862           |         |
| Kronos, Inc.                                |         | Service -  workforce management solutions                         |         | Senior Term Debt  (3.5%, Due 6/2014) (7)                            |         | 1,899        |         | 1,291           |         |
| Local TV Finance,  LLC                           |         | Service -  television station operator                            |         | Senior Term Debt  (2.5%, Due 5/2013) (7)                            |         | 985          |         | 359             |         |
| LVI  Services, Inc.                         |         | Service -  asbestos and mold remediation                          |         | Senior Term Debt  (4.5%, Due 11/2010) (7)                           |         | 5,916        |         | 2,673           |         |
| MedAssets, Inc.                             |         | Service -  pharmaceuticals and healthcare GPO                     |         | Senior Term Debt  (5.1%, Due 10/2013) (7)                           |         | 3,517        |         | 3,129           |         |
| Network  Solutions, LLC                          |         | Service -  internet domain solutions                              |         | Senior Term Debt  (3.2%, Due 3/2014) (7)                            |         | 8,672        |         | 5,506           |         |
| Open  Solutions, Inc.                       |         | Service -  software outsourcing for financial institutions        |         | Senior Term Debt  (3.3%, Due 1/2014) (7)                            |         | 2,648        |         | 1,206           |         |
| Ozburn-Hessey  Holding Co. LLC                   |         | Service - third  party logistics                                  |         | Senior Term Debt  (4.4%, Due 8/2012) (7)                            |         | 7,523        |         | 5,975           |         |
| Pinnacle Foods  Finance, LLC                     |         | Manufacturing -  branded food products                            |         | Senior Term Debt  (3.2%, Due 4/2014) (7)                            |         | 1,950        |         | 1,570           |         |
| PTS Acquisition  Corp.                           |         | Manufacturing -  drug delivery and packaging technologies         |         | Senior Term Debt  (2.8%, Due 4/2014) (7)                            |         | 6,877        |         | 4,264           |         |
| QTC  Acquisition, Inc.                      |         | Service -  outsourced disability evaluations                      |         | Senior Term Debt  (2.8%, Due 11/2012) (7)                           |         | 1,763        |         | 1,356           |         |
| Radio Systems  Corporation                       |         | Service - design  electronic pet containment products             |         | Senior Term Debt  (3.3%, Due 9/2013) (7)                            |         | 1,644        |         | 1,308           |         |
| Rally  Parts, Inc.                          |         | Manufacturing -  aftermarket motorcycle parts and accessories     |         | Senior Term Debt  (3.5%, Due 11/2013) (7)                           |         | 2,458        |         | 1,073           |         |
| SafeNet, Inc.                               |         | Service - chip  encryption products                               |         | Senior Term Debt  (4.2%, Due 4/2014) (7)                            |         | 2,949        |         | 2,008           |         |
| SGS  International, Inc.                    |         | Service - digital  imaging and graphics                           |         | Senior Term Debt  (4.0%, Due 12/2011) (7)                           |         | 1,475        |         | 978             |         |
| Survey Sampling,  LLC                            |         | Service - telecommunications-based  sampling                      |         | Senior Term Debt  (9.5%, Due 5/2011) (3)                            |         | 2,596        |         | 2,441           |         |
| Triad Laboratory  Alliance, LLC                  |         | Service -  regional medical laboratories                          |         | Senior Term Debt  (4.5%, Due 12/2011) (7)                           |         | 4,120        |         | 3,432           |         |
| Wastequip, Inc.                             |         | Service - process  and transport waste materials                  |         | Senior Term Debt  (2.8%, Due 2/2013) (7)                            |         | 2,893        |         | 1,530           |         |
| WaveDivision  Holdings, LLC                      |         | Service - cable                                                   |         | Senior Term Debt  (3.5%, Due 6/2014) (7)                            |         | 1,905        |         | 1,575           |         |
| West Corporation                                 |         | Service -  business process outsourcing                           |         | Senior Term Debt (2.9%,  Due 10/2013) (7)                           |         | 3,323        |         | 2,293           |         |
| ***Subtotal  - Senior Syndicated Loans***        |         |                                                              |         | $                                                                   | 120,432      |         | $            | 81,851          |         |
| * *                                         | * *     | * *                                                          | * *     | * *                                                            | * *     | * *     | * *     | * *        | * *     |
| ***Non-Syndicated  Loans***                      | * *     | * *                                                          | * *     | * *                                                            | * *     | * *     | * *     | * *        | * *     |
| American  Greetings Corporation                  |         | Manufacturing and  design - greeting cards                        |         | Senior Notes  (7.4%, Due 6/2016) (3) (10)                      |         | $            | 3,043        |            | $            | 2,180 |   |
|                                             |         |                                                              |         |                                                                |         |         |         |            |         |
| B-Dry, LLC                                       |         | Service -  basement waterproofer                                  |         | Revolving Credit  Facility, $300 available (10.5%, Due 10/2009) (5) |         | 450          |         | 443             |         |
|                                             |         |                                                              |         | Senior Term Debt  (10.0%, Due 5/2014) (5)                           |         | 6,681        |         | 6,464           |         |
|                                             |         |                                                              |         | Senior Term Debt  (10.0%, Due 5/2014) (5)                           |         | 3,930        |         | 3,802           |         |
|                                             |         |                                                              |         | Common Stock  Warrants (4)                                          |         | 300          |         | —          |         |
|                                             |         |                                                              |         |                                                                |         | 11,361       |         | 10,709          |         |
|                                             |         |                                                              |         |                                                                |         |         |         |            |         |
| **Total  Non-Control/Non-Affiliate Investments** | ** **   | ** **                                                        | ** **   | **$**                                                               | **134,836**  | ** **   | **$**        | **94,740**      | ** **   |

 

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**GLADSTONE INVESTMENT CORPORATION**

**CONSOLIDATED SCHEDULES OF INVESTMENTS (Continued)**

**MARCH 31, 2009**

**(DOLLAR AMOUNTS IN THOUSANDS)**

 
| **Company  (1)**               | ** ** | **Industry**                                               | ** ** | **Investment  (2)**                                                  | ** ** | **Cost**   | ** **  | **Fair  Value** | ** ** |
|--------------------------------|------------|------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|------------|-------------|-----------------|------------|
|                           |       |                                                       |       |                                                                 |       |       |        |            |       |
| **CONTROL  INVESTMENTS**       | ** ** | ** **                                                 | ** ** | ** **                                                           | ** ** | ** ** | ** **  | ** **      | ** ** |
| ** **                     | ** ** | ** **                                                 | ** ** | ** **                                                           | ** ** | ** ** | ** **  | ** **      | ** ** |
| A. Stucki Holding  Corp.       |       | Manufacturing -  railroad freight car products             |       | Senior Term Debt  (5.0%, Due 3/2012)                                 |       | $          | 11,246      |            | $          | 11,246 |   |
|                           |       |                                                       |       | Senior Term Debt  (7.2%, Due 3/2012) (6)                             |       | 10,450     |        | 10,450          |       |
|                           |       |                                                       |       | Senior  Subordinated Term Debt (13%, Due 3/2014)                     |       | 8,586      |        | 8,586           |       |
|                           |       |                                                       |       | Preferred Stock (4)                                                  |       | 4,387      |        | 5,128           |       |
|                           |       |                                                       |       | Common Stock (4)                                                     |       | 130        |        | 14,021          |       |
|                           |       |                                                       |       |                                                                 |       | 34,799     |        | 49,431          |       |
|                           |       |                                                       |       |                                                                 |       |       |        |            |       |
| Acme  Cryogenics, Inc.    |       | Manufacturing -  manifolds and pipes for industrial gasses |       | Senior  Subordinated Term Debt (11.5%, Due 3/2013)                   |       | 14,500     |        | 14,500          |       |
|                           |       |                                                       |       | Redeemable  Preferred Stock (4)                                      |       | 6,984      |        | 6,920           |       |
|                           |       |                                                       |       | Common Stock (4)                                                     |       | 1,045      |        | —          |       |
|                           |       |                                                       |       | Common Stock  Warrants (4)                                           |       | 25         |        | —          |       |
|                           |       |                                                       |       |                                                                 |       | 22,554     |        | 21,420          |       |
|                           |       |                                                       |       |                                                                 |       |       |        |            |       |
| ASH Holdings Corp.             |       | Retail and  Service - school buses and parts               |       | Revolver, $400  available (non-accrual, Due 3/2010) (5)              |       | 1,600      |        | 560             |       |
|                           |       |                                                       |       | Senior  Subordinated Term Debt (non-accrual, Due 1/2012) (5)         |       | 5,937      |        | 2,078           |       |
|                           |       |                                                       |       | Preferred Stock (4)                                                  |       | 2,500      |        | —          |       |
|                           |       |                                                       |       | Common Stock Warrants  (4)                                           |       | 4          |        | —          |       |
|                           |       |                                                       |       |                                                                 |       | 10,041     |        | 2,638           |       |
|                           |       |                                                       |       |                                                                 |       |       |        |            |       |
| Cavert II Holding  Corp.       |       | Manufacturing -  bailing wire                              |       | Revolving Credit  Facility, $3,000 available (8.0%, Due 10/2010) (8) |       | —     |        | —          |       |
|                           |       |                                                       |       | Senior Term Debt  (8.3%, Due 10/2012)                                |       | 5,687      |        | 5,687           |       |
|                           |       |                                                       |       | Senior Term Debt  (10.0%, Due 10/2012) (6)                           |       | 2,950      |        | 2,950           |       |
|                           |       |                                                       |       | Senior  Subordinated Term Debt (13.0%, Due 10/2014)                  |       | 4,671      |        | 4,671           |       |
|                           |       |                                                       |       | Preferred Stock (4)                                                  |       | 4,110      |        | 4,591           |       |
|                           |       |                                                       |       | Common Stock (4)                                                     |       | 69         |        | 733             |       |
|                           |       |                                                       |       |                                                                 |       | 17,487     |        | 18,632          |       |
|                           |       |                                                       |       |                                                                 |       |       |        |            |       |
| Chase II Holdings  Corp.       |       | Manufacturing -  traffic doors                             |       | Revolving Credit  Facility, $1,105 available (4.5%, Due 7/2010)      |       | 3,395      |        | 3,395           |       |
|                           |       |                                                       |       | Senior Term Debt  (8.8%, Due 3/2011)                                 |       | 8,800      |        | 8,800           |       |
|                           |       |                                                       |       | Senior Term Debt  (12.0%, Due 3/2011) (6)                            |       | 7,680      |        | 7,680           |       |
|                           |       |                                                       |       | Senior  Subordinated Term Debt (13.0%, Due 3/2013)                   |       | 6,168      |        | 6,168           |       |
|                           |       |                                                       |       | Redeemable  Preferred Stock (4)                                      |       | 6,961      |        | 9,300           |       |
|                           |       |                                                       |       | Common Stock (4)                                                     |       | 61         |        | 5,537           |       |
|                           |       |                                                       |       |                                                                 |       | 33,065     |        | 40,880          |       |
|                           |       |                                                       |       |                                                                 |       |       |        |            |       |
| Country Club  Enterprises, LLC |       | Service - golf  cart distribution                          |       | Subordinated Term  Debt (14.0% Due 11/2014)                          |       | 7,000      |        | 7,000           |       |
|                           |       |                                                       |       | Preferred Stock  (4)                                                 |       | 3,725      |        | 3,725           |       |
|                           |       |                                                       |       |                                                                 |       | 10,725     |        | 10,725          |       |
|                           |       |                                                       |       |                                                                 |       |       |        |            |       |
| Galaxy Tool  Holding Corp.     |       | Manufacturing -  aerospace and plastics                    |       | Senior  Subordinated Term Debt (13.5%, Due 8/2013)                   |       | 17,250     |        | 17,250          |       |
|                           |       |                                                       |       | Preferred Stock (4)                                                  |       | 4,112      |        | 4,486           |       |
|                           |       |                                                       |       | Common Stock (4)                                                     |       | 48         |        | 701             |       |
|                           |       |                                                       |       |                                                                 |       | 21,410     |        | 22,437          |       |
|                           |       |                                                       |       |                                                                 |       |       |        |            |       |
| Total Control  Investments     | ** ** | ** **                                                 | ** ** | ** **                                                           | ** ** | **$**      | **150,081** | ** **      | **$**      | **166,163** | ** ** |

 

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**GLADSTONE INVESTMENT CORPORATION**

**CONSOLIDATED SCHEDULES OF INVESTMENTS (Continued)**

**MARCH 31, 2009**

**(DOLLAR AMOUNTS IN THOUSANDS)**

 
| **Company  (1)**               | ** ** | **Industry**                                                | ** ** | **Investment  (2)**                                                       | ** ** | **Cost** | ** **  | **Fair  Value** | ** **  |
|--------------------------------|------------|-------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|----------|-------------|-----------------|-------------|
|                           |       |                                                        |       |                                                                      |       |     |        |            |        |
| AFFILIATE  INVESTMENTS         |       |                                                        |       |                                                                      |       |     |        |            |        |
|                           |       |                                                        |       |                                                                      |       |     |        |            |        |
| Danco Acquisition  Corp.       |       | Manufacturing -  machining and sheet metal work             |       | Revolving Credit  Facility, $2,600 available (9.3%, Due 10/2010) (5), (9) |       | $        | 400         |            | $           | 378 |   |
|                           |       |                                                        |       | Senior Term Debt  (9.3%, Due 10/2012) (5)                                 |       | 4,837    |        | 4,584           |        |
|                           |       |                                                        |       | Senior Term Debt  (11.5%, Due 4/2013) (5)                                 |       | 9,113    |        | 8,544           |        |
|                           |       |                                                        |       | Redeemable  Preferred Stock (4)                                           |       | 2,500    |        | 2,558           |        |
|                           |       |                                                        |       | Common Stock  Warrants (4)                                                |       | 3        |        | —          |        |
|                           |       |                                                        |       |                                                                      |       | 16,853   |        | 16,064          |        |
|                           |       |                                                        |       |                                                                      |       |     |        |            |        |
| Mathey  Investments, Inc. |       | Manufacturing -  pipe-cutting and pipe-fitting equipment    |       | Revolving Credit  Facility, $1,463 available (9.0%, Due 3/2011) (5), (9)  |       | 537      |        | 529             |        |
|                           |       |                                                        |       | Senior Term Debt  (9.0%, Due 3/2013) (5)                                  |       | 2,375    |        | 2,339           |        |
|                           |       |                                                        |       | Senior Term Debt  (12.0%, Due 3/2014) (5), (6)                            |       | 7,227    |        | 7,082           |        |
|                           |       |                                                        |       | Common Stock (4)                                                          |       | 500      |        | 446             |        |
|                           |       |                                                        |       | Common Stock  Warrants (4)                                                |       | 277      |        | 260             |        |
|                           |       |                                                        |       |                                                                      |       | 10,916   |        | 10,656          |        |
|                           |       |                                                        |       |                                                                      |       |     |        |            |        |
| Noble  Logistics, Inc.    |       | Service -  aftermarket auto parts delivery                  |       | Revolving Credit  Facility, $-0- available (6.5%, Due 12/2009) (5)        |       | 2,000    |        | 1,500           |        |
|                           |       |                                                        |       | Senior Term Debt  (10.5%, Due 12/2011) (5)                                |       | 5,727    |        | 4,295           |        |
|                           |       |                                                        |       | Senior Term Debt  (12.5%, Due 12/2011) (5), (6)                           |       | 7,300    |        | 5,475           |        |
|                           |       |                                                        |       | Senior  Subordinated Term Debt (18.0%, Due 12/2011)                       |       | 500      |        | 375             |        |
|                           |       |                                                        |       | Senior  Subordinated Term Debt (14.0%, Due 5/2009)                        |       | 150      |        | 149             |        |
|                           |       |                                                        |       | Preferred Stock  (4)                                                      |       | 1,750    |        | —          |        |
|                           |       |                                                        |       | Common Stock (4)                                                          |       | 1,682    |        | —          |        |
|                           |       |                                                        |       |                                                                      |       | 19,109   |        | 11,794          |        |
|                           |       |                                                        |       |                                                                      |       |     |        |            |        |
| Quench Holdings  Corp.         |       | Service - sales,  installation and service of water coolers |       | Senior  Subordinated Term Debt (10.0%, Due 8/2013) (5)                    |       | 8,000    |        | 5,800           |        |
|                           |       |                                                        |       | Preferred Stock  (4)                                                      |       | 2,950    |        | 2,542           |        |
|                           |       |                                                        |       | Common Stock  Warrants (4)                                                |       | 447      |        | —          |        |
|                           |       |                                                        |       |                                                                      |       | 11,397   |        | 8,342           |        |
|                           |       |                                                        |       |                                                                      |       |     |        |            |        |
| Tread Corp.                    |       | Manufacturing -  storage and transport equipment            |       | Senior Term Debt  (12.5%, Due 5/2013) (5)                                 |       | 5,000    |        | 4,925           |        |
|                           |       |                                                        |       | Preferred Stock  (4)                                                      |       | 750      |        | 793             |        |
|                           |       |                                                        |       | Common Stock  Warrants (4)                                                |       | 3        |        | 453             |        |
|                           |       |                                                        |       |                                                                      |       | 5,753    |        | 6,171           |        |
|                           |       |                                                        |       |                                                                      |       |     |        |            |        |
| Total Affiliate  Investments   | ** ** | ** **                                                  | ** ** | ** **                                                                |       | **$**    | **64,028**  | ** **      | **$**       | **53,027** |   |
|                           |       |                                                        |       |                                                                      |       |     |        |            |        |
| Total Investments              | ** ** | ** **                                                  | ** ** | ** **                                                                |       | **$**    | **348,945** | ** **      | **313,930** |   |

 

----

| (1)  | Certain  of the listed securities are issued by affiliate(s) of the indicated  portfolio company.                                                                                                                                                                                                                              |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)  | Percentage  represents the weighted average interest rates in effect at March 31,  2009, and due date represents the contractual maturity date.                                                                                                                                                                                |
| (3)  | Security  valued using internally-developed, risk-adjusted discounted cash flow  methodologies as of March 31, 2009.                                                                                                                                                                                                           |
| (4)  | Security  is non-income producing.                                                                                                                                                                                                                                                                                                  |
| (5)  | Fair  value based on opinions of value submitted by Standard & Poor’s  Securities Evaluations, Inc. at March 31, 2009.                                                                                                                                                                                      |
| (6)  | Last  Out Tranche of senior debt, meaning if the portfolio company is liquidated  then the holder of the Last Out Tranche is paid after the senior debt.                                                                                                                                                                            |
| (7)  | Security  valued based on the sale price obtained at or subsequent to March 31,  2009, since the security was sold.                                                                                                                                                                                                            |
| (8)  | Revolver  was sold to third party subsequent to March 31, 2009. See Note 13,  “Subsequent Events,” for detail.                                                                                                                                                                                                       |
| (9)  | Terms  of agreement were refinanced and revolver limit was reduced. See Note 13,  “Subsequent Events,” for detail.                                                                                                                                                                                                        |
| (10) | The  Company received non-cash assumption of $3,043 worth of senior notes received  from American Greetings Corporation for the Company’s agreement to the RPG  bankruptcy settlement in which the Company received the aforementioned notes  and $909 in cash and recognized a loss on the settlement of approximately  $601. |

 

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

 

67

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**GLADSTONE INVESTMENT CORPORATION**

**CONSOLIDATEDSCHEDULES OF INVESTMENTS**

**MARCH 31, 2008**

**(DOLLAR AMOUNTS IN THOUSANDS)**

 
| **Company  (1)**                                  | ** **   | **Industry**                                                         | ** **   | **Investment  (2)**                                            | ** **   | **Cost**     | ** **   | **Fair  Value** | ** **   |
|---------------------------------------------------|--------------|----------------------------------------------------------------------|--------------|----------------------------------------------------------------|--------------|--------------|--------------|-----------------|--------------|
|                                              |         |                                                                 |         |                                                           |         |         |         |            |         |
| **NON-CONTROL/NON-AFFILIATE INVESTMENTS**         |         |                                                                 |         |                                                           |         |         |         |
| ***Senior Syndicated Loans:***                    | *** *** | *** ***                                                         | *** *** | *** ***                                                   | *** *** | *** *** | *** *** | *** ***    | *** *** |
| Activant Solutions, Inc.                     |         | Service - enterprise software and services                           |         | Senior Term Debt (6.7%, Due 5/2013) (3)                        |         | $            | 1,734        |            | $            | 1,478 |   |
| Advanced Homecare Holdings, Inc.             |         | Service - home health nursing services                               |         | Senior Term Debt (6.4%, Due 8/2014) (3)                        |         | 2,977        |         | 2,829           |         |
| Aeroflex, Inc.                               |         | Service - provider of highly specialized electronic  equipment       |         | Senior Term Debt (6.4%, Due 8/2014) (3)                        |         | 1,898        |         | 1,851           |         |
| Compsych Investments Corp.                        |         | Service - employee assistance programs                               |         | Senior Term Debt (5.5%, Due 2/2012) (3), (5)                   |         | 3,421        |         | 2,965           |         |
| CRC Health Group, Inc.                       |         | Service - substance abuse treatment                                  |         | Senior Term Debt (4.9%, Due 2/2012) (3)                        |         | 9,878        |         | 8,536           |         |
| Critical Homecare Solutions, Inc.            |         | Service - home therapy and respiratory treatment                     |         | Senior Term Debt (6.1%, Due 1/2012) (3), (5)                   |         | 4,505        |         | 4,480           |         |
| Dealer Computer Services, Inc.               |         | Manufacturing & Service - systems for  automotive retailers |         | Senior Term Debt (6.8%, Due 9/2013) (3)                        |         | 1,799        |         | 1,595           |         |
| Generac Acquisition Corp.                         |         | Manufacturing - standby power products                               |         | Senior Term Debt (7.2%, Due 11/2013) (3), (5)                  |         | 6,874        |         | 5,435           |         |
| Graham Packaging Holdings Company                 |         | Manufacturing - plastic containers                                   |         | Senior Term Debt (5.9%, Due 10/2011) (3)                       |         | 5,420        |         | 4,938           |         |
| Hargray Communications Group, Inc.           |         | Service - triple-play (cable, phone, internet)  provider             |         | Senior Term Debt (4.9%, Due 6/2014) (3)                        |         | 963          |         | 860             |         |
| HMTBP Acquisition II Corp.                        |         | Service - aboveground storage tanks                                  |         | Senior Term Debt (4.9%, Due 5/2014) (3), (5)                   |         | 3,878        |         | 3,529           |         |
| Hudson Products Holdings, Inc.               |         | Manufacturing - heat transfer solutions                              |         | Senior Term Debt (7.0%, Due 12/2013) (3)                       |         | 6,020        |         | 5,283           |         |
| Huish Detergents, Inc.                       |         | Manufacturing - household cleaning products                          |         | Senior Term Debt (4.7%, Due 4/2014) (3)                        |         | 1,986        |         | 1,652           |         |
| Hyland Software, Inc.                        |         | Service - provider of enterprise content management  software        |         | Senior Term Debt (5.9%, Due 7/2013) (3)                        |         | 3,955        |         | 3,671           |         |
| Interstate Fibernet, Inc.                    |         | Service - provider of voice and data  telecommunications services    |         | Senior Term Debt (6.7%, Due 7/2013) (3)                        |         | 9,932        |         | 9,676           |         |
| KIK Custom Products, Inc.                    |         | Manufacturing - consumer products                                    |         | Senior Term Debt (4.9%, Due 5/2014) (3)                        |         | 3,981        |         | 2,746           |         |
| Kronos, Inc.                                 |         | Service - workforce management solutions                             |         | Senior Term Debt (5.0%, Due 6/2014) (3)                        |         | 1,971        |         | 1,577           |         |
| Lexicon Marketing USA, Inc.                  |         | Service - marketing to Hispanic community                            |         | Senior Term Debt (non-accrual) (3), (5)                        |         | 2,947        |         | 412             |         |
| Local TV Finance, LLC                             |         | Service - television station operator                                |         | Senior Term Debt (5.2%, Due 5/2013) (3)                        |         | 995          |         | 824             |         |
| LVI Services, Inc.                           |         | Service - asbestos and mold remediation                              |         | Senior Term Debt (7.5%, Due 11/2010) (3), (5)                  |         | 6,369        |         | 5,083           |         |
| MedAssets, Inc.                              |         | Service - pharmaceuticals and healthcare GPO                         |         | Senior Term Debt (5.2%, Due 10/2013) (3), (5)                  |         | 4,004        |         | 3,702           |         |
| National Mentor Holdings, Inc.               |         | Service - home health care                                           |         | Senior Term Debt (4.8%, Due 6/2013) (3)                        |         | 1,968        |         | 1,672           |         |
| Network Solutions, LLC                            |         | Service - internet domain solutions                                  |         | Senior Term Debt (5.2%, Due 3/2014) (3)                        |         | 9,196        |         | 7,355           |         |
| NPC International Inc.                            |         | Service - Pizza Hut franchisee                                       |         | Senior Term Debt (4.7%, Due 5/2013) (3)                        |         | 2,895        |         | 2,537           |         |
| Open Solutions, Inc.                         |         | Service - software outsourcing for financial  institutions           |         | Senior Term Debt (5.8%, Due 1/2014) (3)                        |         | 2,678        |         | 2,196           |         |
| Ozburn-Hessey Holding Co. LLC                     |         | Service - third party logistics                                      |         | Senior Term Debt (6.3%, Due 8/2012) (3)                        |         | 7,628        |         | 5,979           |         |
| Pinnacle Foods Finance, LLC                       |         | Manufacturing - branded food products                                |         | Senior Term Debt (7.4%, Due 4/2014) (3)                        |         | 3,971        |         | 3,454           |         |
| PTS Acquisition Corp.                             |         | Manufacturing - drug delivery and packaging  technologies            |         | Senior Term Debt (7.1%, Due 4/2014) (3)                        |         | 6,948        |         | 5,697           |         |
| QTC Acquisition, Inc.                        |         | Service - outsourced disability evaluations                          |         | Senior Term Debt (5.4%, Due 11/2012) (3)                       |         | 1,930        |         | 1,638           |         |
| Radio Systems Corporation                         |         | Service - design electronic pet containment products                 |         | Senior Term Debt (5.5%, Due 9/2013) (3)                        |         | 1,966        |         | 1,807           |         |
| Rally Parts, Inc.                            |         | Manufacturing - aftermarket motorcycle parts and  accessories        |         | Senior Term Debt (5.2%, Due 11/2013) (3)                       |         | 2,486        |         | 2,074           |         |
| RPG Holdings, Inc.                           |         | Manufacturing and design - greeting cards                            |         | Senior Term Debt (8.8%, Due 12/2011) (3)                       |         | 4,553        |         | 3,869           |         |
| SafeNet, Inc.                                |         | Service - chip encryption products                                   |         | Senior Term Debt (7.1%, Due 4/2014) (3)                        |         | 2,980        |         | 2,382           |         |
| SGS International, Inc.                      |         | Service - digital imaging and graphics                               |         | Senior Term Debt (6.9%, Due 12/2011) (3)                       |         | 1,594        |         | 1,430           |         |
| Stolle Machinery Company                          |         | Manufacturing - can-making equipment and parts                       |         | Senior Term Debt (7.8%, Due 9/2012) (3)                        |         | 494          |         | 458             |         |
| Survey Sampling, LLC                              |         | Service - telecommunications-based sampling                          |         | Senior Term Debt (5.2%, Due 5/2011) (3), (5)                   |         | 2,931        |         | 2,527           |         |
| Synagro Technologies, Inc.                   |         | Service - waste treatment and recycling                              |         | Senior Term Debt (5.1%, Due 3/2014) (3)                        |         | 498          |         | 422             |         |
| Triad Laboratory Alliance, LLC                    |         | Service - regional medical laboratories                              |         | Senior Term Debt (5.9%, Due 12/2011) (3), (5)                  |         | 4,900        |         | 4,154           |         |
| United Surgical Partners International, Inc. |         | Service - outpatient surgical provider                               |         | Senior Term Debt (5.4%, Due 4/2014) (3)                        |         | 1,320        |         | 1,152           |         |
| Wastequip, Inc.                              |         | Service - process and transport waste materials                      |         | Senior Term Debt (4.9%, Due 2/2013) (3)                        |         | 2,922        |         | 2,337           |         |
| WaveDivision Holdings, LLC                        |         | Service - cable                                                      |         | Senior Term Debt (6.7%, Due 6/2014) (3), (5)                   |         | 1,925        |         | 1,814           |         |
| West Corporation                                  |         | Service - business process outsourcing                               |         | Senior Term Debt (5.3%, Due 10/2013) (3)                       |         | 3,357        |         | 2,929           |         |
| *Subtotal - Senior Syndicated Loans*              |         |                                                                 |         |                                                           |         | $            | 154,647      |            | $            | 131,005 |   |
| * *                                          | * *     | * *                                                             | * *     | * *                                                       | * *     | * *     | * *     | * *        | * *     |
| ***Non-Syndicated Loans***                        | * *     | * *                                                             | * *     | * *                                                       | * *     | * *     | * *     | * *        | * *     |
| B-Dry, LLC                                        |         | Service - basement waterproofer                                      |         | Revolving Credit Facility, $-0- available (7.3%, Due  10/2008) |         | 750          |         | 750             |         |
|                                              |         |                                                                 |         | Senior Term Debt (10.0%, Due 5/2014)                           |         | 6,749        |         | 6,749           |         |
|                                              |         |                                                                 |         | Senior Term Debt (10.0%, Due 5/2014)                           |         | 3,970        |         | 3,970           |         |
|                                              |         |                                                                 |         | Common Stock Warrants (4)                                      |         | 300          |         | 265             |         |
|                                              |         |                                                                 |         |                                                           |         | 11,769       |         | 11,734          |         |
| **Total Non-Control/Non-Affiliate Investments**   |         |                                                                 | ** **   | **$**                                                          | **166,416**  | ** **   | **$**        | **142,739**     | ** **   |

 

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**GLADSTONE INVESTMENT CORPORATION**

**CONSOLIDATEDSCHEDULES OF INVESTMENTS (Continued)**

**MARCH 31, 2008**

**(DOLLAR AMOUNTS IN THOUSANDS)**

 
| **Company (1)**           | ** ** | **Industry**                                                | ** ** | **Investment (2)**                                        | ** ** | **Cost**   | ** **  | **Fair  Value** | ** ** |
|--------------------------------|------------|-------------------------------------------------------------|------------|----------------------------------------------------------------|------------|------------|-------------|-----------------|------------|
|                           |       |                                                        |       |                                                           |       |       |        |            |       |
| **CONTROL  INVESTMENTS**       |       |                                                        |       |                                                           |       |       |        |            |       |
|                           |       |                                                        |       |                                                           |       |       |        |            |       |
| A. Stucki Holding  Corp.       |       | Manufacturing -  railroad freight car products              |       | Senior Term Debt  (7.6%, Due 3/2012)                           |       | $          | 13,391      |            | $          | 13,391 |   |
|                           |       |                                                        |       | Senior Term Debt  (9.8%, Due 3/2012) (6)                       |       | 11,000     |        | 11,000          |       |
|                           |       |                                                        |       | Senior  Subordinated Term Debt (13%, Due 3/2014)               |       | 5,486      |        | 5,486           |       |
|                           |       |                                                        |       | Preferred Stock (4)                                            |       | 4,387      |        | 4,748           |       |
|                           |       |                                                        |       | Common Stock (4)                                               |       | 130        |        | 10,062          |       |
|                           |       |                                                        |       |                                                           |       | 34,394     |        | 44,687          |       |
|                           |       |                                                        |       |                                                           |       |       |        |            |       |
| Acme  Cryogenics, Inc.    |       | Manufacturing -  manifolds and pipes for industrial gasses  |       | Senior  Subordinated Term Debt (11.5%, Due 3/2013)             |       | 14,500     |        | 14,500          |       |
|                           |       |                                                        |       | Redeemable  Preferred Stock (4)                                |       | 6,984      |        | 7,795           |       |
|                           |       |                                                        |       | Common Stock (4)                                               |       | 1,045      |        | 2,977           |       |
|                           |       |                                                        |       | Common Stock  Warrants (4)                                     |       | 25         |        | 291             |       |
|                           |       |                                                        |       |                                                           |       | 22,554     |        | 25,563          |       |
|                           |       |                                                        |       |                                                           |       |       |        |            |       |
| ASH Holdings  Corp.            |       | Retail and  Service - school buses and parts                |       | Revolver, $1,250  available (non-accrual, Due 3/2010)          |       | 750        |        | —          |       |
|                           |       |                                                        |       | Senior  Subordinated Term Debt (non-accrual, Due 1/2012)       |       | 5,250      |        | —          |       |
|                           |       |                                                        |       | Preferred Stock (4)                                            |       | 2,500      |        | —          |       |
|                           |       |                                                        |       | Common Stock  Warrants (4)                                     |       | 4          |        | —          |       |
|                           |       |                                                        |       |                                                           |       | 8,504      |        | —          |       |
|                           |       |                                                        |       |                                                           |       |       |        |            |       |
| Cavert II Holding  Corp.       |       | Manufacturing -  bailing wire                               |       | Revolving Credit  Facility, $600 available (8.0%, Due 10/2010) |       | 2,400      |        | 2,400           |       |
|                           |       |                                                        |       | Senior Term Debt  (8.3%, Due 10/2012)                          |       | 6,337      |        | 6,337           |       |
|                           |       |                                                        |       | Senior Term Debt  (10.0%, Due 10/2012) (6)                     |       | 3,000      |        | 3,000           |       |
|                           |       |                                                        |       | Senior  Subordinated Term Debt (13.0%, Due 10/2014)            |       | 4,671      |        | 4,671           |       |
|                           |       |                                                        |       | Preferred Stock (4)                                            |       | 4,110      |        | 4,252           |       |
|                           |       |                                                        |       | Common Stock (4)                                               |       | 69         |        | 688             |       |
|                           |       |                                                        |       |                                                           |       | 20,587     |        | 21,348          |       |
|                           |       |                                                        |       |                                                           |       |       |        |            |       |
| Chase II Holdings  Corp.       |       | Manufacturing -  traffic doors                              |       | Revolving Credit  Facility, $220 available (7.1%, Due 3/2008)  |       | 3,280      |        | 3,280           |       |
|                           |       |                                                        |       | Senior Term Debt  (8.8%, Due 3/2011)                           |       | 9,900      |        | 9,900           |       |
|                           |       |                                                        |       | Senior Term Debt  (12.0%, Due 3/2011) (6)                      |       | 7,840      |        | 7,840           |       |
|                           |       |                                                        |       | Senior  Subordinated Term Debt (13.0%, Due 3/2013)             |       | 6,168      |        | 6,168           |       |
|                           |       |                                                        |       | Redeemable  Preferred Stock (4)                                |       | 6,961      |        | 8,455           |       |
|                           |       |                                                        |       | Common Stock (4)                                               |       | 61         |        | 3,508           |       |
|                           |       |                                                        |       |                                                           |       | 34,210     |        | 39,151          |       |
|                           |       |                                                        |       |                                                           |       |       |        |            |       |
| Quench Holdings  Corp.         |       | Service - sales,  installation and service of water coolers |       | Revolving Credit  Facility, $-0- available (7.1%, Due 3/2009)  |       | 1,500      |        | 1,500           |       |
|                           |       |                                                        |       | Senior Term Debt  (7.1%, Due 3/2011)                           |       | 4,250      |        | 4,250           |       |
|                           |       |                                                        |       | Senior  Subordinated Term Debt (11.5%, Due 3/2011)             |       | 7,820      |        | 7,820           |       |
|                           |       |                                                        |       | Equipment Line  Note (7)                                       |       | 1,088      |        | 1,088           |       |
|                           |       |                                                        |       | Convertible  Preferred Stock (4)                               |       | 3,000      |        | —          |       |
|                           |       |                                                        |       | Common Stock (4)                                               |       | 447        |        | —          |       |
|                           |       |                                                        |       |                                                           |       | 18,105     |        | 14,658          |       |
| ** **                     | ** ** | ** **                                                  | ** ** | ** **                                                     | ** ** | ** ** | ** **  | ** **      | ** ** |
| **Total  Control Investments** | ** ** | ** **                                                  | ** ** | ** **                                                     | ** ** | **$**      | **138,354** | ** **      | **$**      | **145,407** | ** ** |

 

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**GLADSTONE INVESTMENT CORPORATION**

**CONSOLIDATEDSCHEDULES OF INVESTMENTS (Continued)**

**MARCH 31, 2008**

**(DOLLAR AMOUNTS IN THOUSANDS)**

 
| **Company (1)**             | ** ** | **Industry**                                             | ** ** | **Investment (2)**                                             | ** ** | **Cost**   | ** **  | **Fair  Value** | ** ** |
|----------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------------------|------------|------------|-------------|-----------------|------------|
| ** **                       | ** ** | ** **                                               | ** ** | ** **                                                          | ** ** | ** ** | ** **  | ** **      | ** ** |
| **AFFILIATE  INVESTMENTS**       |       |                                                     |       |                                                                |       |       |        |            |       |
|                             |       |                                                     |       |                                                                |       |       |        |            |       |
| Danco Acquisition  Corp.         |       | Manufacturing -  machining and sheet metal work          |       | Revolving Credit  Facility, $2,400 available (9.3%, Due 10/2010)    |       | $          | 600         |            | $          | 600 |   |
|                             |       |                                                     |       | Senior Term Debt  (9.3%, Due 10/2012)                               |       | 5,550      |        | 5,550           |       |
|                             |       |                                                     |       | Senior Term Debt  (11.5%, Due 4/2013)                               |       | 8,578      |        | 8,578           |       |
|                             |       |                                                     |       | Redeemable  Preferred Stock (4)                                     |       | 2,500      |        | 2,576           |       |
|                             |       |                                                     |       | Common Stock  Warrants (4)                                          |       | 3          |        | 1,045           |       |
|                             |       |                                                     |       |                                                                |       | 17,231     |        | 18,349          |       |
|                             |       |                                                     |       |                                                                |       |       |        |            |       |
| Mathey  Investments, Inc.   |       | Manufacturing -  pipe-cutting and pipe-fitting equipment |       | Revolving Credit  Facility, $2,000 available (9.0%, Due 3/2011) (8) |       | —     |        | —          |       |
|                             |       |                                                     |       | Senior Term Debt  (9.0%, Due 3/2013) (8)                            |       | 2,500      |        | 2,500           |       |
|                             |       |                                                     |       | Senior Term Debt  (12.0%, Due 3/2014) (8)                           |       | 7,300      |        | 7,300           |       |
|                             |       |                                                     |       | Common Stock (4), (8)                                               |       | 500        |        | 500             |       |
|                             |       |                                                     |       | Common Stock  Warrants (4), (8)                                     |       | 277        |        | 277             |       |
|                             |       |                                                     |       |                                                                |       | 10,577     |        | 10,577          |       |
|                             |       |                                                     |       |                                                                |       |       |        |            |       |
| Noble  Logistics, Inc.      |       | Service -  aftermarket auto parts delivery               |       | Revolving Credit  Facility, $100 available (7.1%, Due 12/2009)      |       | 1,900      |        | 1,900           |       |
|                             |       |                                                     |       | Senior Term Debt  (8.5%, Due 12/2011)                               |       | 6,077      |        | 6,077           |       |
|                             |       |                                                     |       | Senior Term Debt  (10.5%, Due 3/2011) (6)                           |       | 7,000      |        | 7,000           |       |
|                             |       |                                                     |       | Preferred Stock (4)                                                 |       | 1,750      |        | 2,108           |       |
|                             |       |                                                     |       | Common Stock (4)                                                    |       | 1,500      |        | 1,447           |       |
|                             |       |                                                     |       |                                                                |       | 18,227     |        | 18,532          |       |
| **Total  Affiliate Investments** |       |                                                     |       |                                                                | ** ** | **$**      | **46,035**  | ** **      | **$**      | **47,458** | ** ** |
|                             |       |                                                     | ** ** | ** **                                                          | ** ** | ** ** | ** **  | ** **      | ** ** |
| **Total  Investments**           |       |                                                     |       |                                                                | ** ** | **$**      | **350,805** | ** **      | **$**      | **335,604** | ** ** |

 

----

| (1) | Certain  of the listed securities are issued by affiliate(s) of the indicated  portfolio company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Percentage  represents the weighted average interest rates in effect at March 31,  2008, and due date represents the contractual maturity date.                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (3) | Marketable  securities, such as syndicated loans, are valued based on the indicative bid  price on or near March 31, 2008, offered by the respective syndication  agent’s trading desk, or secondary desk.                                                                                                                                                                                                                                                                                                                                                                               |
| (4) | Security  is non-income producing.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (5) | Fair  value based on opinions of value submitted by Standard & Poor’s  Securities Evaluations, Inc. at March 31, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| (6) | Last  Out Tranche of senior debt, meaning if the portfolio company is liquidated  then the holder of the Last Out Tranche is paid after the senior debt.                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (7) | Total  available for future borrowing for the purposes of purchasing equipment is  $1,500. The undrawn amount of $411 may be drawn to purchase additional  equipment through 10/31/2010. The interest rate on all amounts drawn on the  equipment line note is 12% except for one draw of $188 whose interest rate is  15%. Each draw on the equipment line note is subject to its own amortization  and maturity, typically over a period of 20-24 months. At March 31,  2008, the last amortization payment due under current amounts drawn under the  equipment line note is 11/2009. |
| (8) | Valued  at cost due to recent acquisition.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |

 

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

 

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**GLADSTONE INVESTMENT CORPORATION**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(DOLLAR AMOUNTS IN THOUSANDS EXCEPTPER SHARE DATA)**

** **
| ** **                                                                         | ** ** | **Year Ended March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                         | ** ** | **2009**                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| INVESTMENT INCOME                                                                  |       |                          |       |   |   |   |   |
| Interest income                                                                    |       |                          |       |   |   |   |   |
| Non-Control/Non-Affiliate investments                                              |       | $                             | 8,466      |   | $ | 14,575 |   | $ | 9,572 |   |
| Control investments                                                                |       | 11,291                        |       | 10,768 |   | 5,486 |   |
| Affiliate investments                                                              |       | 5,376                         |       | 2,286 |   | 536 |   |
| Cash and cash equivalents                                                          |       | 67                            |       | 217 |   | 1,662 |   |
| Total interest income                                                              |       | 25,200                        |       | 27,846 |   | 17,256 |   |
| Other income                                                                       |       | 612                           |       | 48 |   | 6 |   |
| Total investment income                                                            |       | 25,812                        |       | 27,894 |   | 17,262 |   |
|                                                                               |       |                          |       |   |   |   |   |
| EXPENSES                                                                           |       |                          |       |   |   |   |   |
| Loan servicing fee (Refer to Note 4)                                               |       | 5,002                         |       | 5,014 |   | 1,569 |   |
| Base management fee (Refer to Note 4)                                              |       | 1,699                         |       | 1,803 |   | 2,413 |   |
| Administration fee (Refer to Note 4)                                               |       | 821                           |       | 855 |   | 527 |   |
| Interest expense                                                                   |       | 5,349                         |       | 7,733 |   | 608 |   |
| Amortization of deferred financing fees                                            |       | 323                           |       | 734 |   | 234 |   |
| Professional fees                                                                  |       | 532                           |       | 416 |   | 586 |   |
| Stockholder related costs                                                          |       | 485                           |       | 268 |   | 273 |   |
| Insurance expense                                                                  |       | 222                           |       | 231 |   | 262 |   |
| Directors fees                                                                     |       | 194                           |       | 232 |   | 208 |   |
| Other expenses                                                                     |       | 271                           |       | 365 |   | 312 |   |
| Expenses before credit from Adviser                                                |       | 14,898                        |       | 17,651 |   | 6,992 |   |
| Credit to base management fee from Adviser (Refer to Note 4)                       |       | (2,474                        | )          | (2,809 | ) | (878 | ) |
| Total expenses net of credit to base management fee                                |       | 12,424                        |       | 14,842 |   | 6,114 |   |
|                                                                               |       |                          |       |   |   |   |   |
| NET INVESTMENT INCOME                                                              |       | 13,388                        |       | 13,052 |   | 11,148 |   |
|                                                                               |       |                          |       |   |   |   |   |
| REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:                                |       |                          |       |   |   |   |   |
| Realized loss on sale of Non-Control/Non-Affiliate investments                     |       | (5,023                        | )          | (2,412 | ) | (94 | ) |
| Net unrealized depreciation of Non-Control/Non-Affiliate investments               |       | (16,418                       | )          | (23,278 | ) | (562 | ) |
| Net unrealized appreciation (depreciation) of Control investments                  |       | 9,029                         |       | 10,339 |   | (3,236 | ) |
| Net unrealized (depreciation) appreciation of Affiliate investments                |       | (12,425                       | )          | 1,411 |   | 13 |   |
| Net unrealized depreciation on derivative                                          |       | —                        |       | (53 | ) | — |   |
| Net loss on investments                                                            |       | (24,837                       | )          | (13,993 | ) | (3,879 | ) |
|                                                                               |       |                          |       |   |   |   |   |
| NET (DECREASE) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS                    |       | $                             | (11,449    | ) | $ | (941 | ) | $ | 7,269 |   |
|                                                                               |       |                          |       |   |   |   |   |
| NET (DECREASE) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS PER  COMMON SHARE: |       |                          |       |   |   |   |   |
| Basic and diluted                                                                  |       | $                             | (0.53      | ) | $ | (0.06 | ) | $ | 0.44 |   |
|                                                                               |       |                          |       |   |   |   |   |
| WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:                               |       |                          |       |   |   |   |   |
| Basic and diluted weighted average shares                                          |       | 21,545,936                    |       | 16,560,100 |   | 16,560,100 |   |

 

*THE ACCOMPANYING NOTES ARE AN INTEGRAL PART TO THESECONSOLIDATED FINANCIAL STATEMENTS.*

 

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**GLADSTONE INVESTMENT CORPORATION**

**CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS**

**(DOLLAR AMOUNTS IN THOUSANDS)**

** **
| ** **                                                      | ** ** | **Year Ended March 31,** | ** ** |
|-----------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                      | ** ** | **2009**                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| *Operations:*                                                   |       |                          |       |   |   |   |   |
| Net investment income                                           |       | $                             | 13,388     |   | $ | 13,052 |   | $ | 11,148 |   |
| Realized loss on sale of investments                            |       | (5,023                        | )          | (2,412 | ) | (94 | ) |
| Net unrealized depreciation of portfolio                        |       | (19,814                       | )          | (11,528 | ) | (3,785 | ) |
| Unrealized depreciation of derivative                           |       | —                        |       | (53 | ) | — |   |
| Net (decrease) increase in net assets from operations           |       | (11,449                       | )          | (941 | ) | 7,269 |   |
|                                                            |       |                          |       |   |   |   |   |
| *Capital transactions:*                                         |       |                          |       |   |   |   |   |
| Issuance of common stock                                        |       | 41,290                        |       | — |   | — |   |
| Shelf offering registration costs                               |       | (728                          | )          | (32 | ) | (133 | ) |
| Net increase (decrease) in net assets from capital transactions |       | 40,562                        |       | (32 | ) | (133 | ) |
|                                                            |       |                          |       |   |   |   |   |
| *Distributions to stockholders from:*                           |       |                          |       |   |   |   |   |
| Net investment income                                           |       | (13,388                       | )          | (13,052 | ) | (10,681 | ) |
| Tax return on capital                                           |       | (7,368                        | )          | (2,349 | ) | (3,478 | ) |
| Net decrease in net assets from distributions to stockholders   |       | (20,756                       | )          | (15,401 | ) | (14,159 | ) |
|                                                            |       |                          |       |   |   |   |   |
| Total increase (decrease) in net assets                         |       | 8,357                         |       | (16,374 | ) | (7,023 | ) |
| Net assets at beginning of period                               |       | 206,445                       |       | 222,819 |   | 229,842 |   |
| Net assets at end of period                                     |       | $                             | 214,802    |   | $ | 206,445 |   | $ | 222,819 |   |

 

*THEACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIALSTATEMENTS.*

 

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**GLADSTONEINVESTMENT CORPORATION**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(DOLLARAMOUNTS IN THOUSANDS)**

** **
| ** **                                                                                                                                        | ** ** | **Year Ended March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                                                                                        | ** ** | **2009**                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES**                                                                                                          |       |                          |       |   |   |   |   |
| Net (decrease) increase in net assets resulting from operations                                                                                   |       | $                             | (11,449    | ) | $ | (941 | ) | $ | 7,269 |   |
| Adjustments to reconcile net (decrease) increase in net assets resulting  from operations to net cash provided by (used in) operating activities: |       |                          |       |   |   |   |   |
| Purchase of investments                                                                                                                           |       | (49,959                       | )          | (175,255 | ) | (182,953 | ) |
| Principal repayments on investments                                                                                                               |       | 32,828                        |       | 64,240 |   | 30,422 |   |
| Proceeds from sale of investments                                                                                                                 |       | 13,914                        |       | 32,197 |   | 30,744 |   |
| Net unrealized depreciation of investment portfolio                                                                                               |       | 19,814                        |       | 11,528 |   | 3,785 |   |
| Net unrealized depreciation on derivative                                                                                                         |       | —                        |       | 53 |   | — |   |
| Net realized loss on sales of investments                                                                                                         |       | 5,023                         |       | 2,412 |   | 94 |   |
| Net amortization of premiums and discounts                                                                                                        |       | 54                            |       | 222 |   | 342 |   |
| Amortization of deferred financing fees                                                                                                           |       | (323                          | )          | 734 |   | 234 |   |
| Decrease (increase) in interest receivable                                                                                                        |       | 162                           |       | (356 | ) | (545 | ) |
| Decrease (increase) due from custodian                                                                                                            |       | 1,693                         |       | 8,296 |   | (12,695 | ) |
| Decrease (increase) in prepaid assets                                                                                                             |       | 308                           |       | (367 | ) | 19 |   |
| Decrease (increase) in other assets                                                                                                               |       | 244                           |       | (337 | ) | 50 |   |
| Increase (decrease) in accounts payable and accrued expenses                                                                                      |       | 371                           |       | 192 |   | 157 |   |
| (Decrease) increase in administration fee payable to Administrator  (See Note 4)                                                                  |       | (29                           | )          | 46 |   | (120 | ) |
| Increase (decrease) in base management fee payable to Adviser (See  Note 4)                                                                       |       | 269                           |       | (80 | ) | 103 |   |
| Increase in loan servicing fee payable to Adviser (See Note 4)                                                                                    |       | 7                             |       | 11 |   | 283 |   |
| Increase in other liabilities                                                                                                                     |       | 38                            |       | 4 |   | 81 |   |
| Net cash provided by (used in) operating activities                                                                                               |       | 12,965                        |       | (57,401 | ) | (122,730 | ) |
|                                                                                                                                              |       |                          |       |   |   |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                                                                                         |       |                          |       |   |   |   |   |
| Net proceeds from the issuance of common stock                                                                                                    |       | 40,562                        |       | (32 | ) | (133 | ) |
| Borrowings from the line of credit                                                                                                                |       | 123,850                       |       | 222,850 |   | 103,500 |   |
| Repayments on the line of credit                                                                                                                  |       | (158,420                      | )          | (178,015 | ) | (3,500 | ) |
| Deferred finance costs                                                                                                                            |       | (325                          | )          | (430 | ) | (862 | ) |
| Distributions paid                                                                                                                                |       | (20,756                       | )          | (15,401 | ) | (14,159 | ) |
| Net cash (used in) provided by financing activities                                                                                               |       | (15,089                       | )          | 28,972 |   | 84,846 |   |
|                                                                                                                                              |       |                          |       |   |   |   |   |
| **NET DECREASE IN CASH AND CASH EQUIVALENTS (1)**                                                                                                 |       | (2,124                        | )          | (28,429 | ) | (37,884 | ) |
|                                                                                                                                              |       |                          |       |   |   |   |   |
| **CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR**                                                                                                  |       | 9,360                         |       | 37,789 |   | 75,673 |   |
|                                                                                                                                              |       |                          |       |   |   |   |   |
| **CASH AND CASH EQUIVALENTS, END OF YEAR**                                                                                                        |       | $                             | 7,236      |   | $ | 9,360 |   | $ | 37,789 |   |
|                                                                                                                                              |       |                          |       |   |   |   |   |
| **CASH PAID DURING PERIOD FOR INTEREST**                                                                                                          |       | $                             | 5,428      |   | $ | 7,367 |   | $ | 360 |   |
| **CASH PAID DURING PERIOD FOR TAXES**                                                                                                             |       | —                        |       | — |   | — |   |
|                                                                                                                                              |       |                          |       |   |   |   |   |
| **NON-CASH ACTIVITIES (2)**                                                                                                                       |       | $                             | 3,043      |   | — |   | — |   |

 

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| (1)    | Cash and cash equivalents consist of demand deposits and highly  liquid investments with original maturities of three months or less when  purchased.                                     |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                      |
| (2)    | Non-cash activities represents the assumption of senior term notes  from American Greetings Corporation in exchange for a settlement agreement  related to RPG, a senior syndicated loan. |

 

*THE ACCOMPANYING NOTES AREAN INTEGRAL PART TO THESE CONSOLIDATED FINANCIAL STATEMENTS.*

 

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**GLADSTONE INVESTMENT CORPORATION**

**CONSOLIDATED FINANCIAL HIGHLIGHTS**

**(DOLLARAMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT DATA)**

 
| ** **                                                      | ** ** | **Year Ended March 31,** | ** ** |
|-----------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                      | ** ** | **2009**                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Per Share Data (1)                                              |       |                          |       |   |   |   |   |
| Balance at beginning of period                                  |       | $                             | 12.47      |   | $ | 13.46 |   | $ | 13.88 |   |
| *Income from investment operations*                             |       |                          |       |   |   |   |   |
| Net investment income (2)                                       |       | 0.62                          |       | 0.79 |   | 0.67 |   |
| Realized loss on sale of investments (2)                        |       | (0.23                         | )          | (0.15 | ) | (0.01 | ) |
| Net unrealized depreciation of investments (2)                  |       | (0.92                         | )          | (0.70 | ) | (0.22 | ) |
| Total from investment operations                                |       | (0.53                         | )          | (0.06 | ) | 0.44 |   |
| *Distributions to stockholders:*                                |       |                          |       |   |   |   |   |
| Net investment income                                           |       | (0.62                         | )          | (0.78 | ) | (0.75 | ) |
| Tax return on capital                                           |       | (0.34                         | )          | (0.15 | ) | (0.10 | ) |
| Total distributions (3)                                         |       | (0.96                         | )          | (0.93 | ) | (0.85 | ) |
|                                                            |       |                          |       |   |   |   |   |
| Rights offering costs                                           |       | (0.03                         | )          | — |   | (0.01 | ) |
| Effect on distribution of rights offering after record date (4) |       | (1.22                         | )          | — |   | — |   |
| Net asset value at end of period                                |       | $                             | 9.73       |   | $ | 12.47 |   | $ | 13.46 |   |
|                                                            |       |                          |       |   |   |   |   |
| Per share market value at beginning of period                   |       | $                             | 9.32       |   | $ | 14.87 |   | $ | 15.10 |   |
| Per share market value at end of period                         |       | 3.82                          |       | 9.41 |   | 14.87 |   |
| Total return (5)                                                |       | (51.65                        | )%         | (31.54 | )% | 4.36 | % |
| Shares outstanding at end of period                             |       | 22,080,133                    |       | 16,560,100 |   | 16,560,100 |   |
|                                                            |       |                          |       |   |   |   |   |
| Statement of Assets and Liabilities Data:                       |       |                          |       |   |   |   |   |
| Net assets at end of period                                     |       | $                             | 214,802    |   | $ | 206,445 |   | $ | 222,819 |   |
| Average net assets (6)                                          |       | 228,869                       |       | 219,626 |   | 225,643 |   |
|                                                            |       |                          |       |   |   |   |   |
| Senior Securities Data:                                         |       |                          |       |   |   |   |   |
| Borrowing under line of credit                                  |       | $                             | 110,265    |   | $ | 144,835 |   | $ | 100,000 |   |
| Asset coverage ratio (7), (8)                                   |       | 295                           | %          | 243 | % | 323 | % |
| Average coverage per unit (8)                                   |       | $                             | 2,948      |   | $ | 2,425 |   | $ | 3,228 |   |
|                                                            |       |                          |       |   |   |   |   |
| Ratios/Supplemental Data:                                       |       |                          |       |   |   |   |   |
| Ratio of expenses to average net assets (9)                     |       | 6.51                          | %          | 8.04 | % | 3.10 | % |
| Ratio of net expenses to average net assets (10)                |       | 5.43                          | %          | 6.76 | % | 2.71 | % |
| Ratio of net investment income to average net assets            |       | 5.85                          | %          | 5.94 | % | 4.94 | % |

 

----

| (1)  | Based  on actual shares outstanding at the end of the corresponding period.                                                                                                                                                                                                                                                                                   |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)  | Based  on weighted average basic per share data.                                                                                                                                                                                                                                                                                                              |
| (3)  | Distributions  are determined based on taxable income calculated in accordance with income  tax regulations which may differ from amounts determined under accounting principles  generally accepted in the United States of America.                                                                                                                         |
| (4)  | The  effect of distributions from the stock rights offering after the record date  represents the effect on net asset value of issuing additional shares after  the record date of a distribution.                                                                                                                                                            |
| (5)  | Total return equals the change in the  market value of the Company’s common stock from the beginning of the period  taking into account distributions reinvested in accordance with the terms of  our distribution reinvestment plan.For further information on estimated character of our  distributions, please refer to Note 9.                       |
| (6)  | Calculated  using the average of the ending monthly net assets for the respective  periods.                                                                                                                                                                                                                                                                   |
| (7)  | As  a business development company, the Company is generally required to maintain  a ratio of at least 200% of total assets to total borrowings.                                                                                                                                                                                                              |
| (8)  | Asset  coverage ratio is the ratio of the carrying value of the Company’s total  consolidated assets, less all liabilities and indebtedness not represented by  senior securities, to the aggregate amount of senior securities representing  indebtedness. Asset coverage per unit is expressed in terms of dollar amounts  per $1,000 of indebtedness. |
| (9)  | Ratio  of expenses to average net assets is computed using expenses before credit  from the Adviser.                                                                                                                                                                                                                                                          |
| (10) | Ratio  of net expenses to average net assets is computed using total expenses net of  credits to the management fee.                                                                                                                                                                                                                                          |

 

*THE ACCOMPANYING NOTES AREAN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.*

 

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**GLADSTONE INVESTMENT CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**March 31, 2009**

 

**(DOLLAR AMOUNTS IN THOUSANDS,EXCEPT PER SHARE DATA OR UNLESS OTHERWISE INDICATED)**

 

**Note 1. Organization**

 

Gladstone Investment Corporation (the “Company”)was incorporated under the General Corporation Laws of the State of Delaware onFebruary 18, 2005 and completed an initial public offering on June 22,2005. The Company is a closed-end, non-diversified management investmentcompany that has elected to be treated as a business development company underthe Investment Company Act of 1940, as amended (the “1940 Act”). In addition,the Company has elected to be treated for tax purposes as a regulatedinvestment company (“RIC”) under the Internal Revenue Code of 1986, as amended(the “Code”). The Company’s investment objectives are to achieve a high levelof current income and capital gains by investing in debt and equity securitiesof established private businesses.

 

Gladstone Business Investment, LLC (“BusinessInvestment”) a wholly-owned subsidiary of the Company, was established on August 11,2006 for the sole purpose of owning the Company’s portfolio of investments inconnection with its line of credit. The financial statements of BusinessInvestment are consolidated with those of the Company.

 

The Company is externally managed byGladstone Management Corporation (the “Adviser”), an unconsolidated affiliateof the Company.

 

**Note 2. Summary of Significant AccountingPolicies**

 

*Basis of Presentation*

 

The accompanying consolidated financialstatements include the accounts of the Company and its wholly-ownedsubsidiaries. All significant intercompany balances and transactions have beeneliminated.

 

*Consolidation*

 

Under Article 6 of Regulation S-Xunder the Securities Act of 1933, as amended, and the authoritative accountingguidance provided by the AICPA Audit and Accounting Guide for InvestmentCompanies, the Company is not permitted to consolidate any subsidiary or otherentity that is not an investment company.

 

*Use of Estimates*

 

The consolidated financial statements havebeen prepared in accordance with accounting principles generally accepted inthe United States of America that require management to make estimates andassumptions that affect the amounts reported in the financial statements andaccompanying notes. Actual results may differ from those estimates.

 

*Cash and Cash Equivalents*

 

The Company considers all short-term, highlyliquid investments that are both readily convertible to cash and have amaturity of three months or less at the time of purchase to be cashequivalents. Items classified as cash equivalents include temporary investmentsin commercial paper and money-market funds. Cash and cash equivalents arecarried at cost which approximates fair value.

 

*Concentrations of Credit Risk*

 

The Company places its cash and cashequivalents with financial institutions, and, at times, cash held in checkingaccounts may exceed the Federal Deposit Insurance Corporation insured limit.The Company seeks to mitigate this risk by depositing funds with majorfinancial institutions.

 

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*Classification of Investments*

 

The 1940 Act requires classification of theCompany’s investments by its respective level of control. As defined in the1940 Act, “Control Investments” are investments in those portfolio companiesthat the Company is deemed to “Control.” “Affiliate Investments” areinvestments in those portfolio companies that are “Affiliated Companies” of theCompany, as defined in the 1940 Act, other than Control Investments. “Non-Control/Non-AffiliateInvestments” are those that are neither Control Investments nor AffiliateInvestments. In general, the 1940 Act prescribes that the Company has controlover a portfolio company if it owns greater than 25% of the voting securitiesof the portfolio company. The Company is deemed to be an affiliate of aportfolio company if it owns between 5% and 25% of the voting securities ofsuch portfolio company or has one or more seats on the affiliated company’sboard of directors. However, if the Company holds 50% or more contractualrepresentation on a portfolio company’s board of directors, the Company will bedeemed to have control over the portfolio company.

 

*Investment Valuation Policy*

 

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

 

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

 

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

 

**Publicly-traded securities:** The Companydetermines the value of publicly-traded securities based on the closing pricefor the security on the exchange or securities market on which it is listed andprimarily traded on the valuation date. To the extent that the Company owns restricted securities that are notfreely tradable, but for which a public market otherwise exists, the Companywill use the market value of that security adjusted for any decrease in valueresulting from the restrictive feature.

 

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

 

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

 

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The DCF valuations applied to the syndicated loansprovide an estimate of what the Company believes a market participant would payto purchase a syndicated loan in an active market, thereby establishing a fairvalue.  The Company will continue toapply the DCF methodology in illiquid markets until quoted prices are availableor are deemed reliable based on trading activity.  However, the Company valued the majority ofits syndicated loans using the sale price obtained at or subsequent to March31, 2009, since the security was sold. As of March 31, 2009, the portion of the Company’s investment portfoliothat was valued using DCF was approximately $14.3 million, or 4.6% of the fairvalue of its total portfolio of investments.

 

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

 

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

 

**(2)****        ****Portfolioinvestments in controlled companies comprised of a bundle of investments, whichcan include debt and/or equity securities:** For the Company’sNon-Public Debt Securities and equity or equity-like securities (e.g. preferredequity, equity, or other equity-like securities) that are purchased together aspart of a package, where the Company has control or could gain control throughan option or warrant security, both the debt and equity securities of theportfolio investment would exit in the mergers and acquisition market as theprincipal market, generally through a sale or recapitalization of the portfoliocompany. Further, the Company believes that the in-use premise of value (asdefined in SFAS No. 157), which assumes the debt and equity securities are soldtogether, is appropriate as this would provide maximum proceeds to the seller.As a result, the Company will continue to use the enterprise value methodologyutilizing a liquidity waterfall approach to determine the fair value of theseinvestments under SFAS No. 157 if the Company has the ability to initiate asale of a portfolio company as of the measurement date. Under this approach,the Company first calculates the total enterprise value of the issuer byincorporating some or all of the following factors to determine the total enterprisevalue of the issuer: the issuer’s ability to make payments, the earnings of theissuer, recent sales to third parties of similar securities, the comparison topublicly traded securities, and discounted cash flow or other pertinentfactors.

 

**(3)****        ****Portfolioinvestments in non-controlled companies comprised of a bundle of investments,which can include debt and/or equity securities:**The Companyvalues Non-Public Debt Securities that are purchased together with equity andequity-like securities from the same portfolio company, or issuer, for whichthe Company does not control or cannot gain control as of the measurement date,using a hypothetical secondary market as the Company’s principal market. Inaccordance with SFAS No. 157, the Company determines its fair value of thesedebt securities of non-control investments assuming the sale of an individualdebt security using the in-exchange premise of value (as defined in SFAS No.157). As such, the Company estimates the fair value of the debt component usingestimates of value provided by SPSE and its own assumptions in the absence ofmarket observable data, including synthetic credit ratings, estimated remaininglife, current market yield and interest rate spreads of similar securities asof the measurement date. For equity and equity-like securities of investmentsfor which the Company does not control or cannot gain control as of themeasurement date, the Company values the equity portion based principally onthe total enterprise value of the issuer, which is calculated using a liquiditywaterfall approach.

 

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

 

SeeNote 3. For additional information regarding fair value measurements and theCompany’s adoption of SFAS No. 157.

 

*Interest and Dividend IncomeRecognition*

 

Interest income, adjustedfor amortization of premiums and acquisition costs and for the accretion ofdiscounts, is recorded on the accrual basis to the extent that such amounts areexpected to be collected. Generally, when a loan becomes 90 daysor more past due and/or if the Company’s qualitative assessment indicates thatthe debtor is unable to service its debt or other obligations, the Company willplace the loan on non-accrual status and cease recognizing interest income onthat loan until the borrower has demonstrated the ability and intent to paycontractual amounts due.  However, theCompany remains contractually entitled to this interest and may collect it uponthe sale or recapitalization of the portfolio company.  AtMarch 31, 2009, one Control investment was on non-accrual with a fairvalue of approximately $2.6 million, or 0.8% of the aggregate fair value of allloans in the Company’s portfolio. At March 31, 2008, oneNon-Control/Non-Affiliate investment and one Control investment were onnon-accrual with an aggregate fair value of approximately $0.4 million, or 0.1%of the fair value of all loans in our portfolio. Conditional interest, or asuccess fee, is recorded upon full repayment of a loan investment. To date, theCompany has not recorded any conditional interest. Dividend income on preferredequity securities is accrued to the extent that such amounts are expected to becollected and that the Company has the option to collect such amounts in cash.To date, the Company has not accrued any dividend income.

 

*Services Provided to Portfolio Companies*

 

As a business developmentcompany under the 1940 Act, the Company is required to make availablesignificant managerial assistance to its portfolio companies. The Companyprovides these services through its Adviser, who provides these services 

 

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on the Company’s behalfthrough its officers, who are also the Company’s officers. Currently, neitherthe Company nor its Adviser charges a fee for managerial assistance; however,if the Adviser does receive fees for such managerial assistance, it will creditthe managerial assistance fees to the base management fee due from the Companyto its Adviser.

 

The Adviser receives fees for the other services it provides to theCompany’s portfolio companies. These other fees are typically non-recurring,are recognized as revenue when earned and are generally paid directly to the Adviserby the borrower or potential borrower upon the closing of the investment. Theservices the Adviser provides to the Company’s portfolio companies vary byinvestment, but generally include a broad array of services such as investmentbanking services, arranging bank and equity financing, structuring financingfrom multiple lenders and investors, reviewing existing credit facilities,restructuring existing investments, raising equity and debt capital, turnaroundmanagement, merger and acquisition services and recruiting new managementpersonnel. When the Adviser receives fees for these services, 50% of certain ofthose fees are voluntarily credited against the base management fee that theCompany pays to its Adviser. Any services of this nature subsequent to theclosing would typically generate a separate fee at the time of completion.

 

TheAdviser also receives fees for monitoring and reviewing portfolio companyinvestments.  These fees are recurringand are generally paid annually or quarterly in advance to the Adviserthroughout the life of the investment. Fees of this nature are recorded as revenue by the Adviser when earnedand are not credited against the base management fee.

 

TheCompany may receive fees for non-recurring consulting or origination andclosing services it provides to portfolio companies through its Adviser. Thesefees are paid directly to the Company and are recognized as revenue uponclosing of the services provided and are reported as fee income in theconsolidated statements of operations.

 

*Realized Gain or Loss and Unrealized Appreciation orDepreciation of Portfolio Investments*

 

Realized gain or loss is recognized when aninvestment is disposed of and is computed as the difference between the Company’scost basis in the investment at the disposition date and the net proceedsreceived from such disposition. Unrealized appreciation or depreciationdisplays the difference between the fair market value of the investment and thecost basis of such investment.

 

*Deferred Finance Costs*

 

Costs associated with the Company’s line ofcredit facility with Branch Banking and Trust Company are deferred andamortized over the life of the credit facility, generally for a period of oneyear.

 

*Investment Advisory and Management Agreement withGladstone Management Corporation*

 

The Company has enteredinto an investment advisory and management agreement with the Adviser (the “AdvisoryAgreement”), which is controlled by the Company’s chairman and chief executiveofficer. In accordance with the Advisory Agreement, the Company pays theAdviser fees as compensation for its services, consisting of a base managementfee and an incentive fee.

 

Through December 31,2006, the base management fee was computed and payable quarterly and wasassessed at an annual rate of 2.0% computed on the basis of the average valueof the Company’s gross invested assets at the end of the two most recentlycompleted quarters, which were total assets less the cash proceeds and cash andcash equivalents from the proceeds of the Company’s initial public offeringthat were not invested in debt and equity securities of portfolio companies.Beginning on January 1, 2007, the base management fee was computed andpayable quarterly and was assessed at an annual rate of 2.0% computed on the basisof the value of the Company’s average gross assets at the end of the two mostrecently completed quarters, which are total assets, including investments madewith proceeds of borrowings, less any uninvested cash or cash equivalentsresulting from borrowings.

 

The Company’s Board ofDirectors accepted an unconditional and irrevocable voluntary waiver from theAdviser to reduce the annual 2.0% base management fee on senior syndicated loanparticipations to 0.5%, to the extent that proceeds resulting from borrowingswere used to purchase such syndicated loan participations, for the years ended March 31,2008 and 2007.

 

OnJuly 9, 2008, the Company’s Board of Directors approved the renewal of itsAdvisory Agreement with the Adviser through August 31, 2009.

 

When the Adviser receivesfees from portfolio companies, as discussed in Note 2 under “ServicesProvided to Portfolio Companies,” 50% of certain of these fees are creditedagainst the base management fee that the Company would otherwise be 

 

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required to pay to theAdviser.

 

Inaddition, the Adviser services the loans held by Business Investment, in returnfor which the Adviser receives a 2.0% annual fee based on the monthly aggregatebalance of loans held by Business Investment. Since the Company owns theseloans, all loan servicing fees paid to the Adviser are treated as reductionsagainst the 2.0% base management fee payable to the Adviser. Overall, the basemanagement fee due to the Adviser cannot exceed 2.0% of total assets (asreduced by cash and cash equivalents pledged to creditors) during any givenfiscal year.

 

Theincentive fee consists of two parts: an income-based incentive fee and acapital gains incentive fee. The income-based incentive fee rewards the Adviserif the Company’s quarterly net investment income (before giving effect to anyincentive fee) exceeds 1.75% of our net assets (the “hurdle rate”). The Companywill pay the Adviser an income incentive fee with respect to the Company’spre-incentive fee net investment income in each calendar quarter as follows:

 

·                  no incentive fee in anycalendar quarter in which its pre-incentive fee net investment income does notexceed the hurdle rate (7% annualized);

 

·                  100% of the Company’spre-incentive fee net investment income with respect to that portion of suchpre-incentive fee net investment income, if any, that exceeds the hurdle ratebut is less than 2.1875% in any calendar quarter (8.75% annualized); and

 

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

 

Thesecond part of the incentive fee is a capital gains incentive fee that will bedetermined and payable in arrears as of the end of each fiscal year (or upontermination of the Advisory Agreement, as of the termination date), and equals20% of the Company’s realized capital gains as of the end of the fiscal year.In determining the capital gains incentive fee payable to the Adviser, theCompany will calculate the cumulative aggregate realized capital gains andcumulative aggregate realized capital losses since the Company’s inception, andthe aggregate unrealized capital depreciation as of the date of thecalculation, as applicable, with respect to each of the investments in theCompany’s portfolio. Forthis purpose, cumulative aggregate realized capital gains, if any, equals thesum of the differences between the net sales price of each investment, whensold, and the original cost of such investment since our inception. Cumulativeaggregate realized capital losses equals the sum of the amounts by which thenet sales price of each investment, when sold, is less than the original costof such investment since our inception. Aggregate unrealized capitaldepreciation equals the sum of the difference, if negative, between thevaluation of each investment as of the applicable calculation date and theoriginal cost of such investment. At the end of the applicable year, the amountof capital gains that serves as the basis for our calculation of the capitalgains incentive fee equals the cumulative aggregate realized capital gains lesscumulative aggregate realized capital losses, less aggregate unrealized capitaldepreciation, with respect to the Company’s portfolio of investments. If thisnumber is positive at the end of such year, then the capital gains incentivefee for such year equals 20% of such amount, less the aggregate amount of anycapital gains incentive fees paid in respect of our portfolio in all prioryears.

 

*Administration Agreement with GladstoneAdministration, LLC*

 

The Company has entered into anadministration agreement with Gladstone Administration, LLC (the “Administrator)whereby it pays separately for administrative services (the “AdministrationAgreement”). The Administration Agreement provides for payments equal to itsallocable portion of its Administrator’s overhead expenses in performing itsobligations under the Administration Agreement including, but not limited to,rent for employees of our Administrator, and its allocable portion of thesalaries and benefits expenses of its chief financial officer, controller,chief compliance officer, treasurer and their respective staffs. The Company’sallocable portion of expenses is derived by multiplying its Administrator’stotal allocable expenses by the percentage of our average total assets (thetotal assets at the beginning and end of each quarter) in comparison to theaverage total assets of all companies managed by its Adviser under similaragreements.

 

*Federal Income Taxes*

 

The Company intends to continue to qualifyfor treatment as a RIC under subchapter M of the Code.  However,because of recent changes in the Company’s asset portfolio, due to sales ofNon-Control/Non-Affiliate investments, there is a significant possibility thatthe Company may not satisfy the asset diversification test under the Code’s rules applicableto a RIC as of its June 30, 2009 testing date, or subsequent quarterlytesting dates.  Failure to meet thisthreshold alone will not result in loss of the Company’s RIC status in itscurrent situation.  In circumstanceswhere the failure to meet the 50% threshold as of a quarterly measurement dateis the result of fluctuations in the value of assets, including as a result ofthe sale of assets, as in its present situation, the Company is still deemedunder the rules to satisfy the asset diversification test, and thereforemaintain its RIC status, as long as it has not made any new investments,including additional investments in its portfolio companies (such as advancesunder outstanding lines of credit), since the time that it fell below the 50%threshold.  Thus, although the Companycurrently qualifies as a RIC despite its current, and potential future,inability to meet the 50% asset diversification requirement, if the Companymakes any additional investments before regaining compliance with the assetdiversification test, its RIC status will be threatened.  In this situation, if the Company did notregain compliance with the 50% threshold prior to the next quarterlymeasurement date following the investment, it would have thirty days to “cure”its failure of the asset diversification test to avoid a loss of RIC status.  As a RIC, the Company will not be subject tofederal income tax on the portion of its taxable income and gains distributed tostockholders. To qualify as a RIC, the Company is required to distribute atleast 90% of its investment company taxable income, as defined by the Code. TheCompany intends to distribute at least 90% of its ordinary income. The Companymay, but does not intend to, pay out a return of capital. The Company may alsobe subject to federal excise tax if it does not distribute at last 98% of itsinvestment company taxable income in any calendar year and 98% of its capitalgain net income in any calendar year.

 

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FASB Interpretation No. 48, *Accounting for Uncertaintyin Income Taxes* (“FIN No. 48”). FIN No. 48 provides guidanceon how uncertain tax positions should be recognized, measured, presented, anddisclosed in the financial statements. FIN No. 48 requires the evaluationof tax positions taken or expected to be taken in the course of preparing theCompany’s tax returns to determine whether the tax positions will“more-likely-than-not” be sustained by the applicable tax authorities. Taxpositions not deemed to satisfy the “more-likely-than-not” threshold would berecorded as a tax benefit or expense in the current year FIN No. 48 is tobe applied to all open tax years.  TheCompany has reviewed the tax positions for the open tax years as of March 31,2009 and has determined that no provision for income tax is required in itsfinancial statements. The Company’s federal tax returns for fiscal year 2006,2007 and 2008 remain subject to examination by the Internal Revenue Service.The Company has evaluated the implications of FIN No. 48 and determinedthat there is no material impact on the consolidated financial statements.

 

*Dividends*

 

Dividends to stockholders are recorded on theex-dividend date. The Company is required to pay out at least 90% of itsordinary income and short-term capital gains for each taxable year as adistribution to its stockholders in order to maintain its status as a RIC underSubtitle A, Chapter 1 of Subchapter M of the Code. It is the policyof the Company to pay out as a dividend up to 100% of those amounts. The amountto be paid out as a distribution is determined by the Board of Directors eachquarter and is based on the annual earnings estimated by the management of theCompany. Based on that estimate, a distribution is declared each quarter and ispaid out monthly over the course of the respective quarter. At year-end theCompany may pay a bonus dividend, in addition to the monthly dividends, toensure that it has paid out at least 90% of its ordinary income and short-termcapital gains for the year. The Company has a policy of retaining long-termcapital gains, if any, and not paying them out as distributions. If the Companydecides to retain long-term capital gains, the portion of the retained capitalgains will be subject to 35% tax.

 

*Recent Accounting Pronouncements*

 

InApril 2009, the FASB issued FSP No. 115-2, *Recognition and Presentation of Other-Than-Temporary Impairments*(“FSP No. 115-2”), which was issued to make the guidance onother-than-temporary impairment more operational and to improve thepresentation and disclosure of other-than-temporary impairments on debt andequity securities in the financial statements. FSP No. 115-2 requires significant additional disclosures for bothannual and interim periods, including the amortized cost basis ofavailable-for-sale and held-to-maturity debt, the methodology and key importsused to measure the credit portion of other-than-temporary impairment, and aroll forward of amounts recognized in earnings for securities by major securitytype.  FSP No. 115-2 amendsStatement of Financial Accounting Standards (“SFAS”) No. 115, *Accounting for Certain Investments in Debt and EquitySecurities* (“SFAS No. 115”) and FSP No. 115-1, *The Meaning of Other-Than-Temporary Impairment and Its Application toCertain Investments* to require that entities identify major securityclasses consistent with how the securities are managed based on the nature andrisks of the security, and also expands, for disclosure purposes, the list ofmajor security types identified in SFAS No. 115. FSP No. 115-2 iseffective for interim and annual reporting periods ending after June 15,2009.  The Company does not believe theadoption of this pronouncement will have a material impact on its financialstatements.

 

In April 2009, the FASB issued FSP No. 157-4,*Determining Fair Value When the Volume andLevel of Activity for the Asset or Liability Have Significantly Decreased andIdentifying Transactions That Are Not Orderly* (“FSP No. 157-4”),which provides additional guidance for estimating fair value in accordance withFASB Statement No. 157 when the volume and level of activity for anasset or liability has significantly decreased and also provides guidance onidentifying circumstances that indicate a transaction is not orderly.  FSP No. 157-4 amends SFAS No. 157to require entities to disclose in interim and annual periods the inputs and valuationtechniques used to measure fair value together with any changes in valuationtechniques and related inputs during the period.  FSP No. 157-4 also requires reportingentities to define major categories**forboth debt and equity securities to be major security types as described inparagraph 19 of SFAS No. 115, *Accountingfor Certain Investments in Debt and Equity Securities*.  This requires entities to provide disclosureson a more disaggregated basis than previously had been required under SFAS No. 157.  FSP No. 157-4 is effective for interim andannual reporting periodsending after June 15, 2009, and shall beapplied prospectively.  The Companydoes not believe the adoption of this pronouncement will have a material impacton its financial statements.

 

In October 2008, the FASB issued FSP No. 157-3,which clarifies the application of SFAS No. 157 in a market that is notactive. More specifically, FSP No. 157-3 states that significant judgmentshould be applied to determine if observable data in a dislocated marketrepresents forced liquidations or distressed sales and is not representative offair value in an orderly transaction. FSP No. 157-3 also provides further guidance that the use of areporting entity’s own assumptions about future cash flows and appropriatelyrisk-adjusted discount rates is acceptable when relevant observable inputs arenot available.  In addition, FSP No. 157-3provides guidance on the level of reliability of broker quotes or pricingservices when measuring fair value in a non- active market stating that lessreliance should be placed on a quote that does not reflect actual market 

 

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transactions and a quote that is not abinding offer.  The guidance in FSP No. 157-3is effective upon issuance for all financial statements that have not beenissued and any changes in valuation techniques as a result of applying FSP No. 157-3are accounted for as a change in accounting estimate. The Company has appliedthe provisions of FSP No. 157-3 in determining the fair value of itssenior syndicate loan portfolio beginning at December 31, 2008.

 

InMarch 2008, the FASB issued SFAS No. 161, *Disclosures about Derivative Instruments and Hedging Activities*(“SFAS No. 161”), which is intended to help investors better understandhow derivative instruments and hedging activities affect an entity’s financialposition, financial performance and cash flows through enhanced disclosurerequirements.  The enhanced disclosuresprimarily surround disclosing the objectives and strategies for usingderivative instruments by their underlying risk as well as a tabular format ofthe fair values of the derivative instruments and their gains and losses.  SFAS No. 161 is effective for financialstatements issued for fiscal years and interim periods beginning after November 15,2008.  The adoption of this pronouncementdid not have a material impact on the reporting of its derivatives.

 

In December 2007, the FASB issued SFAS No. 141(R), *Business Combinations* (“SFAS No. 141(R)”). SFAS No. 141(R) establishesprinciples and requirements for how an acquirer recognizes and measures in itsfinancial statements the identifiable assets acquired, the liabilities assumed,any noncontrolling interest in the acquiree and the goodwill acquired. SFAS No. 141(R) alsoestablishes disclosure requirements to enable the evaluation of the nature andfinancial effects of the business combination. SFAS No. 141(R) iseffective as of the beginning of an entity’s fiscal year that begins after December 15,2008.  The Company adopted SFAS No. 141(R) on April 1, 2009 and concluded that the adoption of thispronouncement did have any material impact on its consolidated financialstatements.

 

**Note 3. Investments**

 

In September 2006, the FASB issued SFAS No. 157, *Fair Value Measurements* (“SFAS No. 157”), which, for financial assets, is effective for fiscal years beginningafter November 15, 2007, with early adoption permitted. The Company adopted SFAS No. 157 onApril 1, 2008. In part, SFAS No. 157 defines fair value,establishes a framework for measuring fair value and expands disclosures aboutassets and liabilities measured at fair value. The new standard provides aconsistent definition of fair value that focuses on exit price in theprincipal, or most advantageous, market and prioritizes, within a measurementof fair value, the use of market-based inputs over entity-specific inputs. Thestandard also establishes the following three-level hierarchy for fair valuemeasurements based upon the transparency of inputs to the valuation of an assetor liability as of the measurement date.

 

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

 

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

 

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

 

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

 

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

 
| ** **                            | ** ** | **As of March 31, 2009** | ** ** |
|---------------------------------------|------------|----------------------------------------------|------------|
| ** **                            | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | **Total Fair Value** | ** ** |
| ** **                            | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | **Reported in Condensed** | ** ** |
| ** **                            | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | **Consolidated Statement of** | ** ** |
| ** **                            | ** ** | **Level 1**                             | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Assets and Liabilities** | ** ** |
| Non-Control/Non-Affiliate investments |       | $                                            | —     |   | $ | — |   | $ | 94,740 |   | $ | 94,740 |   |
| Control investments                   |       | —                                       |       | — |   | 166,163 |   | 166,163 |   |
| Affiliate investments                 |       | —                                       |       | — |   | 53,027 |   | 53,027 |   |
| Total investments at fair value       |       | $                                            | —     |   | $ | — |   | $ | 313,930 |   | $ | 313,930 |   |

 

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*Changesin Level 3 Fair Value Measurements*

 

The following tableprovides a roll-forward in the changes in fair value during the year ended March 31,2008 to March 31, 2009 for all investments for which the Companydetermines fair value using unobservable (Level 3) factors. When adetermination is made to classify a financial instrument within Level 3 of thevaluation hierarchy, the determination is based upon the significance of theunobservable factors to the overall fair value measurement. However, Level 3financial instruments typically include, in addition to the unobservable orLevel 3 components, observable components (that is, components that areactively quoted and can be validated to external sources). Accordingly, thegains and losses in the table below include changes in fair value due in partto observable factors that are part of the valuation methodology.

 

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

 
| ** **                                        | ** ** | **Non-Control/**  | ** ** | ** **      | ** ** | ** **      | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|-------------------|------------|-----------------|------------|-----------------|------------|------------|------------|
| ** **                                        | ** ** | **Non-Affiliate** | ** ** | **Control**     | ** ** | **Affiliate**   | ** ** | ** ** | ** ** |
| ** **                                        | ** ** | **Investments**   | ** ** | **Investments** | ** ** | **Investments** | ** ** | **Total**  | ** ** |
| Fair value at March 31, 2008                 |       | $                 | 142,739    |            | $          | 145,407         |       | $          | 47,458     |   | $ | 335,604 |   |
| Total realized/unrealized (losses) gains (a)      |       | (21,441           | )          | 9,029           |       | (12,425         | )          | (24,837    | )          |
| New investments, repayments, and settlements, net |       | (26,558           | )          | 11,727          |       | 17,994          |       | 3,163      |       |
| Transfers in (out) of Level 3                     |       | —            |       | —          |       | —          |       | —     |       |
| Fair value as of March 31, 2009              |       | $                 | 94,740     |            | $          | 166,163         |       | $          | 53,027     |   | $ | 313,930 |   |

 

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(a) Realized/unrealizedgains and losses are reported on the accompanying condensed consolidatedstatements of operations for the year ended March 31, 2009.

 

The Company adopted SFAS No. 157effective as of April 1, 2008 and as described in note 2 changed itsmethodology for estimating the fair value of the debt component of its bundledsecurities in its non-controlled portfolio companies.  Applying the Company’s revised methodology inaccordance with SFAS No. 157, the Company experienced approximately $19.8million of net unrealized depreciation for the fiscal year ended March 31,2009.  In contrast, had the Companyvalued its portfolio companies in accordance with its previous valuationprocedures, which involved the determination of a total enterprise value of theissuer and use of a liquidity waterfall approach for the debt component of itsbundled securities in its non-controlled portfolio companies, the Company wouldhave experienced $28.3 million of net unrealized depreciation for the fiscalyear, reflecting an improvement in net unrealized depreciation of $8.5 millionas a result of the adoption of SFAS No. 157.

 

*Control and Affiliate Investments*

 

At March 31, 2009 and 2008, the Companyhad investments of approximately $157.0 million and $142.2 million,respectively, at fair value, in revolving credit facilities, senior debt andsubordinated debt of 12 portfolio companies. In addition, at March 31,2009 and 2008, the Company had invested approximately $62.2 million and$50.7 million respectively, in preferred and common equity of thosecompanies. At March 31, 2009 and 2008, the Company’s investments inControl investments, at fair value, represented approximately 77% and 70%,respectively, of the Company’s net assets. Also at March 31, 2009 and 2008,the Company’s investments, at fair value, in Affiliate investments representedapproximately 25% and 23%, respectively, of the Company’s net assets.

 

*Investment Activity*

 

On May 19, 2008, theCompany invested approximately $5.75 million in Tread Corporation (“Tread”)and its subsidiaries. The investment was comprised of approximately $750 inpreferred stock, $5.0 million of senior second lien debt notes and anominal amount in convertible common stock warrants. Tread, based in Roanoke,VA, was founded in 1957 and manufactures products that store, transport and mixthe primary ingredients for liquid explosives, which are ammonium nitrate andfuel oil.

 

On August 22, 2008,the Company invested approximately $21.4 million in Galaxy Tool HoldingCorporation (“Galaxy”) and its subsidiaries. The investment was comprised of approximately $4.1 million and $48 inpreferred stock and common stock, respectively, and $17.25 million in a seniorsecond lien debt note.  Galaxy, based inWinfield, KS, was founded in 1985 and is a manufacturer of specialized toolingfor the aerospace industry, as well as blow and injection molds for the 

 

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plastics industry.

 

OnAugust 29, 2008, the Company restructured its investment with Quench USA,LLC (“Quench”) on the revolving credit facility and the term A seniorsubordinated debt, and increasing the term B senior subordinated debt to $8.0million.  In the restructuring,approximately $617 of distributions were received, $567 of which were recordedas ordinary income.  The remaining $50reduced the Company’s basis in Quench. Furthermore, due to a decrease in the Company’s ownership percentage inthe investment, Quench was reclassified in these financial statements as an “Affiliate”investment, along with all unrealized gains and losses and interest incomeassociated with the investment since the date of the restructuring.

 

OnSeptember 11, 2008, the Company invested approximately $3.1 million in A.Stucki Holding Corp. (“Stucki”) in the form of additional debt to the existing senior subordinated term debtfor Stucki’s acquisition of the assets of Alco Spring Industries, Inc. (“Alco”). Alco, located in Chicago, IL, is one of the last independent manufacturers ofhot wound springs for the transportation and heavy equipment industries. This investment carries the same terms as the original senior subordinated termdebt facility. The Company’s equity securities and ownership position didnot change as a result of this transaction.

 

In October 2008, the Company executed a guaranty of a vehiclefinance facility agreement between Ford Motor Credit Company (“FMC”) and AutoSafety House, LLC (“ASH”), one of the Company’s Control investments (the “FinanceFacility”).  The Finance Facilityprovides ASH with a line of credit of up to $500 for component Ford parts usedby ASH to build truck bodies under a separate contract.  Title and ownership of the parts is retainedby Ford. The guaranty of the Finance Facility will expire upon termination ofthe separate parts supply contract with Ford or upon replacement of the Companyas guarantor.  The Finance Facility issecured by all of the assets of Business Investment.  As of March 31, 2009, the Company hasnot been required to make any payments on the guaranty of the Finance Facility.

 

On November 10,2008, the Company invested approximately $10.7 million in Country ClubEnterprises, LLC (“CCE”), comprised of approximately $3.7 million in preferredstock and $7.0 million in subordinated term debt.  CCE, headquartered in Wareham, MA, wasfounded in 1975 and is one of the largest distributors of golf carts in theUnited States.

 

In April 2009, the Company entered into agreements with certain ofits Control and Affiliate investments that included repayments and reductionsof portions of certain senior term debt and revolving lines of credit. See Note13, “Subsequent Events” for further information on these transactions.

 

*Non-Control/Non-Affiliate Investments*

 

At March 31, 2009 and2008, the Company held investments in Non-Control/Non-Affiliates ofapproximately $94.7 million and $142.7 million, at fair value, respectively.These investments were comprised primarily of syndicated loan participations ofsenior notes of private companies and also non-syndicated loan investmentswhere the Company does not have a significant ownership interest in theportfolio company. Included in Non-Control/Non-Affiliate investments, at both March 31,2009 and March 31, 2008, were common stock warrants of oneNon-Control/Non-Affiliate company, which carried fair values of $0 and $265,respectively. At March 31, 2009 and 2008, the Company’s investments, atfair value, in Non-Control/Non-Affiliates represented approximately 44% and69%, respectively, of the Company’s net assets.

 

DuringApril 2009, the Company sold 29 of the 32 senior syndicated loansremaining as of March 31, 2009 for an aggregate of approximately $69.2million in net cash proceeds and recorded a realized loss of approximately$34.6 million as a result of these sales. See Note 13. “Subsequent Events” for further information.

 

*Investment Concentrations*

 

Approximately 59.0% of the aggregate fairvalue of the Company’s investment portfolio at March 31, 2009 wascomprised of senior debt, approximately 21.2% was senior subordinated debt, andapproximately 19.8% was preferred and common equity securities. At March 31,2009, the Company had approximately $348.9 million invested in 46portfolio companies. The following table outlines our investments by type at March 31,2009 and 2008:

 
| ** **                                    | ** ** | **March 31, 2009** | ** **  | **March 31, 2008** | ** ** |
|-----------------------------------------------|------------|-------------------------|-------------|------------------------------|------------|
| ** **                                    | ** ** | **Cost**                | ** **  | **Fair Value**          | ** ** | **Cost** | ** ** | **Fair Value** | ** ** |
| Senior Term Debt                              |       | $                       | 230,861     |                         | $          | 185,161 |   | $ | 269,270 |   | $ | 244,878 |   |
| Senior Subordinated Term Debt                 |       | 72,762                  |        | 66,576                       |       | 43,894 |   | 38,644 |   |
| Subordinated Term Debt                        |       | —                  |        | —                       |       | 1,089 |   | 1,089 |   |
| Preferred & Common Equity Securities |       | 45,322                  |        | 62,193                       |       | 36,552 |   | 50,993 |   |
| **Total Investments**                         | ** ** | **$**                   | **348,945** | ** **                   | **$**      | **313,930** | ** ** | **$** | **350,805** | ** ** | **$** | **335,604** | ** ** |

 

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Investments at fair value consisted of thefollowing industry classifications at March 31, 2009 and 2008:

 
| ** **                                 | ** ** | **March 31,  2009** | ** **  | **March 31, 2008** | ** ** |
|--------------------------------------------|------------|--------------------------|-------------|------------------------------|------------|
| ** **                                 | ** ** | ** **               | ** **  | **Percentage of**       | ** ** | ** ** | ** ** | **Percentage of** | ** ** |
| ** **                                 | ** ** | **Fair Value**      | ** **  | **Total Investments**   | ** ** | **Net Assets** | ** ** | **Fair Value** | ** ** | **Total Investments** | ** ** | **Net Assets** | ** ** |
| Aerospace and  Defense                     |       | $                        | 22,436      |                         | 7.2        | % | 10.4 | % | $ | — |   | 0.0 | % | 0.0 | % |
| Automobile                                 |       | 14,436                   |        | 4.6                          | %          | 6.7 | % | 2,074 |   | 0.6 | % | 1.0 | % |
| Beverage, Food  and Tobacco                |       | 1,570                    |        | 0.5                          | %          | 0.7 | % | 3,454 |   | 1.0 | % | 1.7 | % |
| Broadcasting and  Entertainment            |       | 1,934                    |        | 0.6                          | %          | 0.9 | % | 3,499 |   | 1.1 | % | 1.7 | % |
| Buildings and  Real Estate                 |       | 10,709                   |        | 3.4                          | %          | 5.0 | % | 11,734 |   | 3.5 | % | 5.7 | % |
| Cargo Transport                            |       | 13,324                   |        | 4.3                          | %          | 6.2 | % | 20,869 |   | 6.2 | % | 10.1 | % |
| Chemicals,  Plastics and Rubber            |       | 21,420                   |        | 6.8                          | %          | 10.0 | % | 25,563 |   | 7.6 | % | 12.4 | % |
| Containers,  Packaging and Glass           |       | 21,446                   |        | 6.8                          | %          | 10.0 | % | 26,286 |   | 7.8 | % | 12.7 | % |
| Diversified/Conglomerate  Manufacturing    |       | 56,944                   |        | 18.1                         | %          | 26.5 | % | 57,500 |   | 17.1 | % | 27.9 | % |
| Diversified/Conglomerate  Service          |       | 23,585                   |        | 7.5                          | %          | 11.0 | % | 30,742 |   | 9.2 | % | 14.9 | % |
| Ecological                                 |       | —                   |        | 0.0                          | %          | 0.0 | % | 422 |   | 0.1 | % | 0.2 | % |
| Electronics                                |       | 6,594                    |        | 2.1                          | %          | 3.1 | % | 10,689 |   | 3.2 | % | 5.2 | % |
| Healthcare,  Education and Childcare       |       | 33,605                   |        | 10.7                         | %          | 15.6 | % | 37,238 |   | 11.1 | % | 18.0 | % |
| Home and Office  Furnishings               |       | —                   |        | 0.0                          | %          | 0.0 | % | 14,658 |   | 4.4 | % | 7.1 | % |
| Machinery                                  |       | 63,907                   |        | 20.4                         | %          | 29.8 | % | 66,439 |   | 19.8 | % | 32.2 | % |
| Oil and Gas                                |       | 6,171                    |        | 2.0                          | %          | 2.9 | % | — |   | 0.0 | % | 0.0 | % |
| Personal, Food  and Miscellaneous Services |       | 3,552                    |        | 1.1                          | %          | 1.7 | % | 6,936 |   | 2.1 | % | 3.4 | % |
| Printing and  Publishing                   |       | 3,158                    |        | 1.0                          | %          | 1.5 | % | 5,299 |   | 1.6 | % | 2.6 | % |
| Telecommunications                         |       | 9,139                    |        | 2.9                          | %          | 4.3 | % | 12,202 |   | 3.6 | % | 5.9 | % |
| **Total  Investments**                     | ** ** | **$**                    | **313,930** | ** **                   | **100.0**  | **%** | ** ** | ** ** | **$** | **335,604** |   | **100.0** | **%** |   |   |

 

The investments at fair value consisted ofthe following geographic regions of the United States at March 31, 2009and 2008:

 
|                   |       | **March 31,  2009** |        | **March 31, 2008** |      |
|------------------------|------------|--------------------------|-------------|------------------------------|-----------|
|                   |       |                     |        | **Percentage of**       |      |   |   | **Percentage of** |   |
|                   |       | **Fair Value**      |        | **Total Investments**   |      | **Net Assets** |   | **Fair Value** |   | **Total Investments** |   | **Net Assets** |   |
| Mid-Atlantic           |       | $                        | 119,622     |                         | 38.1      | % | 55.7 | % | $ | 131,883 |   | 39.3 | % | 63.9 | % |
| Midwest                |       | 105,945                  |        | 33.7                         | %         | 49.3 | % | 106,811 |   | 31.8 | % | 51.7 | % |
| Northeast              |       | 17,525                   |        | 5.6                          | %         | 8.2 | % | 10,718 |   | 3.2 | % | 5.2 | % |
| Southeast              |       | 40,512                   |        | 12.9                         | %         | 18.9 | % | 49,780 |   | 14.8 | % | 24.1 | % |
| West                   |       | 30,326                   |        | 9.7                          | %         | 14.1 | % | 36,412 |   | 10.9 | % | 17.6 | % |
| **Total  Investments** | ** ** | **$**                    | **313,930** | ** **                   | **100.0** | **%** | ** ** | ** ** | **$** | **335,604** |   | **100.0** | **%** |   |   |

 

The geographic region depicts the location ofthe headquarters for the Company’s portfolio companies. A portfolio company mayhave a number of other locations in other geographic regions.

 

*Investment Principal Repayments*

 

The following table summarizes thecontractual principal repayments and maturity of the Company’s investmentportfolio by fiscal year, assuming no voluntary prepayments, at March 31,2009 (in thousands):

 
| **Fiscal Year Ending March 31,**                                                           | ** ** | **Amount** | ** **  |
|-------------------------------------------------------------------------------------------------|------------|------------|-------------|
| 2010                                                                                            |       | $          | 12,057      |   |
| 2011                                                                                            |       | 27,054     |        |
| 2012                                                                                            |       | 53,180     |        |
| 2013                                                                                            |       | 14,941     |        |
| 2014                                                                                            |       | 74,228     |        |
| Thereafter                                                                                      |       | 18,352     |        |
| **Total Contractual Repayments**(including the impact of the Subsequent Syndicated Loan  Sales) |       | $          | 199,812     |   |
| Investment in equity securities                                                                 |       | 45,322     |        |
| Unamortized premiums on debt securities                                                         |       | 39         |        |
| Principal of Subsequent Syndicated Loan Sales                                                   |       | 103,772    |        |
| **Total investments held at March 31, 2009**                                               | ** ** | **$**      | **348,945** | ** ** |

 

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**Note 4. Related Party Transactions**

 

*Investment Advisory and Management Agreement*

 

The Company has enteredinto an investment advisory and management agreement with the Adviser (the “AdvisoryAgreement”), which is controlled by the Company’s chairman and chief executiveofficer. In accordance with the Advisory Agreement, the Company pays theAdviser fees as compensation for its services, consisting of a base managementfee and an incentive fee. On July 9, 2008, the Company’s Board ofDirectors approved the renewal of its Advisory Agreement with the Adviserthrough August 31, 2009.

 

Through December 31,2006, the base management fee was computed and payable quarterly and wasassessed at an annual rate of 2.0% computed on the basis of the average valueof the Company’s gross invested assets at the end of the two most recentlycompleted quarters, which were total assets less the cash proceeds and cash andcash equivalents from the proceeds of the Company’s initial public offeringthat were not invested in debt and equity securities of portfolio companies.Beginning on January 1, 2007, the base management fee was computed andpayable quarterly and was assessed at an annual rate of 2.0% computed on thebasis of the value of the Company’s average gross assets at the end of the twomost recently completed quarters, which are total assets, including investmentsmade with proceeds of borrowings, less any uninvested cash or cash equivalentsresulting from borrowings.

 

The Company’s Board ofDirectors accepted an unconditional and irrevocable voluntary waiver from theAdviser to reduce the annual 2.0% base management fee on senior syndicated loanparticipations to 0.5%, to the extent that proceeds resulting from borrowingswere used to purchase such syndicated loan participations, for the years ended March 31,2009 and 2008.

 

When the Adviser receivesfees from portfolio companies, as discussed in Note 2 under “ServicesProvided to Portfolio Companies,” 50% of certain of these fees are creditedagainst the base management fee that the Company would otherwise be required topay to the Adviser.

 

Thefollowing tables summarize the management fees and associated credits reflectedin the accompanying consolidated statements of operations (in thousands):

 
| ** **                                                                     | ** ** | **Fiscal Year Ended**    | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                                     | ** ** | **March 31,  2009** | ** ** | **March 31,  2008** | ** ** |
| **Base management fee**                                                        |       | $                        | 1,699      |   | $ | 1,803 |   |
|                                                                           |       |                     |       |   |   |
| Credits to base management fee from Adviser:                                   |       |                     |       |   |   |
| Credit for fees received by Adviser from the portfolio companies               |       | (861                     | )          | (1,045 | ) |
| Fee reduction for the waiver of 2% fee on senior syndicated loans to  0.5% (1) |       | (1,613                   | )          | (1,764 | ) |
| **Credit to base management fee from Adviser**                                 |       | (2,474                   | )          | (2,809 | ) |
|                                                                           |       |                     |       |   |   |
| **Net base management fee**                                                    | ** ** | **$**                    | **(775**   | **)** | **$** | **(1,006** | **)** |

 

----

(1)                                  TheAdviser voluntarily waived the annual 2.0% base management fee to 0.5% forsenior syndicated loan participations to the extent that proceeds resultingfrom borrowings were used to purchase such syndicated loan participation.

 

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AtMarch 31, 2009, a resulting base management fee credit of $114 was unpaidand is included as a reduction in the Fee due to Adviser line item in theaccompanying condensed consolidated statements of assets and liabilities.  The Fee due to Adviser of $187 also includesloan servicing fees of $301, as discussed below, paid by the Adviser on behalfof the Company.  At March 31, 2008,a base management fee credit of $384 was unpaid and included in Fee due toAdviser in the accompanying condensed consolidated statements of assets andliabilities.  The amount due from Adviserof $89 also includes loan servicing fees of $295.

 

Inaddition, the Adviser services the loans held by Business Investment, in returnfor which the Adviser receives a 2.0% annual fee based on the monthly aggregatebalance of loans held by Business Investment. Since the Company owns theseloans, all loan servicing fees paid to the Adviser are treated as reductionsagainst the 2.0% base management fee payable to the Adviser. Overall, the basemanagement fee due to the Adviser cannot exceed 2.0% of total assets (asreduced by cash and cash equivalents pledged to creditors) during any givenfiscal year.

 

Forthe year ended March 31, 2009 and 2008, the Company recorded loanservicing fees due to the Adviser of $5.0 million.  At March 31, 2009 and 2008, the Companyowed $301 and $295, respectively, of unpaid loan servicing fees to the Adviser,which are netted and recorded in Fee due to Adviser.

 

Theincentive fee consists of two parts: an income-based incentive fee and acapital gains incentive fee. The income-based incentive fee rewards the Adviserif the Company’s quarterly net investment income (before giving effect to anyincentive fee) exceeds 1.75% of our net assets (the “hurdle rate”). The Companywill pay the Adviser an income incentive fee with respect to the Company’spre-incentive fee net investment income in each calendar quarter as follows:

 

·                  no incentive fee in anycalendar quarter in which its pre-incentive fee net investment income does notexceed the hurdle rate (7% annualized);

 

·                  100% of the Company’spre-incentive fee net investment income with respect to that portion of suchpre-incentive fee net investment income, if any, that exceeds the hurdle ratebut is less than 2.1875% in any calendar quarter (8.75% annualized); and

 

·                  200% of the amount of theCompany’s pre-incentive fee net investment income, if any, that exceeds 2.1875%in any calendar quarter (8.75% annualized).

 

Thesecond part of the incentive fee is a capital gains incentive fee that will bedetermined and payable in arrears as of the end of each fiscal year (or upontermination of the Advisory Agreement, as of the termination date), and equals20% of the Company’s realized capital gains as of the end of the fiscal year.In determining the capital gains incentive fee payable to the Adviser, theCompany will calculate the cumulative aggregate realized capital gains andcumulative aggregate realized capital losses since the Company’s inception, andthe aggregate unrealized capital depreciation as of the date of thecalculation, as applicable, with respect to each of the investments in theCompany’s portfolio. Forthis purpose, cumulative aggregate realized capital gains, if any, equals thesum of the differences between the net sales price of each investment, whensold, and the original cost of such investment since our inception. Cumulativeaggregate realized capital losses equals the sum of the amounts by which thenet sales price of each investment, when sold, is less than the original costof such investment since our inception. Aggregate unrealized capitaldepreciation equals the sum of the difference, if negative, between thevaluation of each investment as of the applicable calculation date and theoriginal cost of such investment. At the end of the applicable year, the amountof capital gains that serves as the basis for our calculation of the capitalgains incentive fee equals the cumulative aggregate realized capital gains lesscumulative aggregate realized capital losses, less aggregate unrealized capitaldepreciation, with respect to the Company’s portfolio of investments. If thisnumber is positive at the end of such year, then the capital gains incentivefee for such year equals 20% of such amount, less the aggregate amount of anycapital gains incentive fees paid in respect of our portfolio in all prioryears.

 

Because pre-incentive fee net investment income was below the hurdlerate of 1.75% of net assets, no income-based incentive fee has been recordedfor the Company from inception through March 31, 2009. No capital gainsincentive fee had been recorded for the Company from inception through March,31, 2009 as cumulative unrealized capital depreciation exceeded cumulativerealized capital gains net of cumulative realized capital losses.

 

*Administration Agreement*

 

The Company has enteredinto an administration agreement (the “Administration Agreement”) withGladstone Administration, LLC (the “Administrator”), a wholly-owned subsidiaryof the Adviser whereby it pays separately for administrative services. TheAdministration Agreement provides for payments equal to the Company’s allocableportion of its Administrator’s overhead expenses in performing its obligationsunder the Administration Agreement including, but not 

 

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limited to, rent foremployees of the Administrator, and its allocable portion of the salaries andbenefits expenses of the Company’s chief financial officer, chief complianceofficer, treasurer and their respective staffs. The Company’s allocable portionof expenses is derived by multiplying the Administrator’s total allocableexpenses by the percentage of the Company’s average total assets (the totalassets at the beginning of each quarter) in comparison to the average totalassets of all companies managed by the Adviser under similar agreements. On July 9,2008, the Company’s Board of Directors approved the renewal of itsAdministration Agreement with the Administrator through August 31, 2009.

 

The Company recorded feesto the Administrator on the consolidated statements of operations of $821 and$855 for the years ended March 31, 2009 and 2008, respectively.  As of March 31, 2009 and 2008, $179 and$208, respectively, was unpaid and included in Fee due to Administrator in theaccompanying consolidated statements of assets and liabilities.

 

*License Agreement*

* *

The Company entered intoa license agreement with the Adviser, pursuant to which the Adviser granted theCompany a non-exclusive license to use the name “Gladstone” and the Diamond Gtrademark. The amount of the fee is negotiated on an annual basis by theCompany’s compensation committee and must be approved by a majority of itsindependent directors. This license agreement required the Company to pay theAdviser a royalty fee of one dollar per quarter through March 31, 2008 atwhich time it was increased to ten dollars per quarter and will remain at tendollars until the next renewal date of March 31, 2010. The licensearrangement will terminate in the event that Gladstone Management Corporationis no longer the Company’s investment adviser.

 

**Note 5.Line of Credit**

 

The Company,through its wholly-owned subsidiary, Business Investment, initially obtained a$100.0 million revolving credit facility in October 2006 with DeutscheBank A.G. and subsequently executed a credit agreement to raise the borrowingcapacity to $200.0 million.  In October 2008, the credit facility wasfurther amended and extended such that the borrowing capacity was reduced to$125.0 million and availability under the credit facility was extended to April 16,2009 in which all unpaid principal and interest would be required to be repaidunless an extension on the credit facility was executed.  The creditfacility contained several financial and non-financial covenants but alsocontained certain restrictions on the industry concentrations of loans thatwere eligible to secure borrowings under the credit facility. At March 31,2009, Business Investment was in compliance with all of the facility covenantsnotwithstanding.  Additionally at March 31, 2009, there was anoutstanding principal balance of $110.3 million under the credit facility witha borrowing capacity available of approximately $5.6 million.

 

On April 14,2009, the Company terminated its credit agreement with Deutsche Bank A.G. andentered into a Second Amended and Restated Credit Agreement (the “CreditAgreement”) with Branch Bank and Trust Company (“BB&T”) for a new creditfacility (the “Credit Facility”) of $50.0 million   The Companyimmediately borrowed approximately $43.8 million and repaid all outstandingunpaid principal and interest in satisfaction of the outstanding amount on thecredit facility with Deutsche Bank A.G. and terminated the prior creditagreement.  See Note 13. “Subsequent Events” for further information regardingthese transactions.

 

**Note 6. Interest Rate Cap Agreement**

** **

In October 2007 and February 2008,the Company entered into an interest rate cap agreement that effectively limitsthe interest rate on a portion of the borrowings under the line of credit pursuantto the terms of the Credit Facility. The interest rate cap has a notionalamount of $60 million at a cost of $53. At March 31, 2009, theinterest rate cap agreement had a nominal fair market value. The Companyrecords changes in the fair market value of the interest rate cap agreementmonthly based on the current market valuation at month end as unrealizeddepreciation or appreciation on derivative on the Company’s consolidatedstatement of operations. The interest rate cap agreement expires in October 2009.The agreement provides that the Company’s floating interest rate or cost offunds on a portion of the portfolio’s borrowings will be capped at 9% when theLIBOR rate is in excess of 9%. In May 2009, the Company cancelled itsinterest rate cap agreement with Deutsche Bank A.G. and entered into a newinterest rate cap agreement for a notional amount of $45 million with BB&T.See Note 13. “SubsequentEvents” for further information regarding this transaction.

 

The use of a cap involves risks that are differentfrom those associated with ordinary portfolio securities transactions. Capagreements may be considered to be illiquid. Although the Company will notenter into any such agreements unless it believes that the other party to thetransaction is creditworthy, the Company does bear the risk of loss of theamount expected to be received under such agreements in the event of default orbankruptcy of the agreement counterparty.

 

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**Note 7. Common Stock**

** **

As of March 31, 2009 and 2008,100,000,000 shares of common stock, $0.001 par value per share, were authorizedand 22,080,133 and 16,560,100 shares were outstanding, respectively.

 

**Note 8. Net (Decrease) Increase in Net AssetsResulting from Operations per Share**

** **

The following table sets forth thecomputation of basic and diluted net decrease in net assets resulting fromoperations per share for the years ended March 31, 2009 and March 31,2008:

 
| ** **                                                                                      | ** ** | **Year Ended  March 31,  2009** | ** **    | **Year Ended  March 31,  2008** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|--------------------------------------|---------------|--------------------------------------|------------|
| Numerator for basic and diluted net decrease in net assets resulting  from operations per share |       | $                                    |  (11,449 | )                                    | $          |  (941 | ) |
| Denominator for basic and diluted weighted average shares                                       |       | 21,545,936                           |          | 16,560,100                           |       |
| Basic and diluted net decrease in net assets per share resulting from  operations               |       | $                                    |  (0.53   | )                                    | $          |  (0.06 | ) |

 

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**Note 9. Distributions**

 

The Company’s Board of Directors declared thefollowing monthly distributions per share for the fiscal years 2009 and 2008:

 
| **Declaration Date**  | ** ** | **Record Date**         | ** ** | **Payment Date**        | ** ** | **Distribution  per Share** | ** ** |
|-----------------------|------------|-------------------------|------------|-------------------------|------------|-----------------------------|------------|
| January 13, 2009 |       | March 23, 2009     |       | March 31, 2009     |       | $                           | 0.08       |   |
| January 13, 2009 |       | February 19, 2009  |       | February 27, 2009  |       | $                           | 0.08       |   |
| January 13, 2009 |       | January 22, 2009   |       | January 30, 2009   |       | $                           | 0.08       |   |
| October 7, 2008  |       | December 22, 2008  |       | December 31, 2008  |       | $                           | 0.08       |   |
| October 7, 2008  |       | November 19, 2008  |       | November 28, 2008  |       | $                           | 0.08       |   |
| October 7, 2008  |       | October 23, 2008   |       | October 31, 2008   |       | $                           | 0.08       |   |
| July 9, 2008     |       | September 22, 2008 |       | September 30, 2008 |       | $                           | 0.08       |   |
| July 9, 2008     |       | August 21, 2008    |       | August 29, 2008    |       | $                           | 0.08       |   |
| July 9, 2008     |       | July 23, 2008      |       | July 31, 2008      |       | $                           | 0.08       |   |
| April 8, 2008    |       | June 20, 2008      |       | June 30, 2008      |       | $                           | 0.08       |   |
| April 8, 2008    |       | May 21, 2008       |       | May 30, 2008       |       | $                           | 0.08       |   |
| April 8, 2008    |       | April 22, 2008     |       | April 30, 2008     |       | $                           | 0.08       |   |
|                  |       |                    |       | Total Fiscal Year 2009  |       | $                           | 0.96       |   |

 
| **Declaration Date** | ** ** | **Record Date**         | ** ** | **Payment Date**        | ** ** | **Distribution  per Share** | ** ** |
|----------------------|------------|-------------------------|------------|-------------------------|------------|-----------------------------|------------|
| January 8, 2008 |       | March 21, 2008     |       | March 31, 2008     |       | $                           | 0.08       |   |
| January 8, 2008 |       | February 21, 2008  |       | February 29, 2008  |       | $                           | 0.08       |   |
| January 8, 2008 |       | January 23, 2008   |       | January 31, 2008   |       | $                           | 0.08       |   |
| October 9, 2007 |       | December 20, 2007  |       | December 31, 2007  |       | $                           | 0.08       |   |
| October 9, 2007 |       | November 21, 2007  |       | November 30, 2007  |       | $                           | 0.08       |   |
| October 9, 2007 |       | October 23, 2007   |       | October 31, 2007   |       | $                           | 0.08       |   |
| July 10, 2007   |       | September 20, 2007 |       | September 28, 2007 |       | $                           | 0.075      |   |
| July 10, 2007   |       | August 23, 2007    |       | August 31, 2007    |       | $                           | 0.075      |   |
| July 10, 2007   |       | July 23, 2007      |       | July 31, 2007      |       | $                           | 0.075      |   |
| April 11, 2007  |       | June 21, 2007      |       | June 29, 2007      |       | $                           | 0.075      |   |
| April 11, 2007  |       | May 22, 2007       |       | May 31, 2007       |       | $                           | 0.075      |   |
| April 11, 2007  |       | April 20, 2007     |       | April 30, 2007     |       | $                           | 0.075      |   |
|                 |       |                    |       | Total Fiscal Year 2008  |       | $                           | 0.93       |   |

 

Aggregate distributions declared and paid forthe years ended March 31, 2009 and 2008 were approximately $20.8 and$15.4 million, respectively, which were declared based on an estimate ofnet investment income for those fiscal years ended. Distributions declared forthe years ended March 31, 2009 and 2008 exceeded net investment income byapproximately $7.4 million and $2.3 million, respectively. A portionof the distributions declared during the years ended March 31, 2009 and2008 were treated as a return of capital to the Company’s stockholders.

 

**Distribution of Income andGains**

 

Net investment income of the Company isdeclared and distributed to stockholders monthly. Net realized gains frominvestment transactions, in excess of available capital loss carryforwards,would be taxable to the Company if not distributed, and, therefore, generallywill be distributed at least annually.

 

The timing and characterization of certainincome and capital gains distributions are determined annually in accordancewith federal tax regulations which may differ from GAAP. These differencesprimarily relate to items recognized as income for financial statement purposesand realized gains for tax purposes. As a result, net investment income and netrealized gain (loss) on investment transactions for a reporting period maydiffer significantly from distributions during such period. Accordingly, theCompany may periodically make reclassifications among certain of its capitalaccounts without impacting the net asset value of the Company. Additionally,the following tables also include these adjustments for the years ended March 31,2009 and March 31, 2008, respectively.

 

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The Company’s components of net assets on atax-basis were as follows:

 
| ** **                                 | ** ** | **Year Ended  March 31, 2009** | ** **    | **Year Ended  March 31, 2008** | ** ** |
|--------------------------------------------|------------|-------------------------------------|---------------|-------------------------------------|------------|
| Capital loss carryforward                  |       | $                                   |  (6,724  | )                                   | $          |  (294 | ) |
| Post-October tax loss                 |       | (807                                | )             | (2,214                              | )          |
| Other                                      |       | 18                                  |          | 18                                  |       |
| Net unrealized depreciation of investments |       | (35,015                             | )             | (15,201                             | )          |
| Net unrealized depreciation of derivative  |       | (53                                 | )             | (53                                 | )          |
| Common stock                               |       | 22                                  |          | 17                                  |       |
| Paid-in-capital                            |       | 257,361                             |          | 224,172                             |       |
| Net assets                                 |       | $                                   |  214,802 |                                | $          |  206,445 |   |

 

The Company intends to retain realized gainsto the extent of available capital loss carryforwards. At March 31, 2009and 2008, the Company had $6,430 and $198 of capital loss carryforwards thatexpire in 2017 and 2016, respectively.

 

For the years ended March 31, 2009 and2008, the Company recorded the following adjustments to reflect tax character.Adjustments paid-in-capital relate primarily to distributions in excess of netinvestment income. Results of operations and net assets were not affected bythese revisions.

 
| ** **                          | ** ** | **Year Ended  March 31, 2009** | ** **  | **Year Ended  March 31, 2008** | ** ** |
|-------------------------------------|------------|-------------------------------------|-------------|-------------------------------------|------------|
| Undistributed net investment income |       | $                                   |  7,368 |                                | $          |  2,349 |   |
| Paid-in-capital                     |       | (7,368                              | )           | (2,349                              | )          |
|                                     |            |                                     |             |                                     |            |  |  |

 

The tax character ofdistributions paid to stockholders by the Company is summarized as follows:

 
| ** **                           | ** ** | **Tax Year   Ended  March 31, 2009** | ** **   | **Tax Year   Ended  March 31, 2008** | ** ** | **Tax Year Ended  March 31, 2007** | ** ** |
|--------------------------------------|------------|-------------------------------------------|--------------|-------------------------------------------|------------|-----------------------------------------|------------|
| Distributions from ordinary income   |       | $                                         |  13,388 |                                      | $          |  13,052                            |       | $ |  10,681 |   |
| Distributions from return of capital |       | 7,368                                     |         | 2,349                                     |       | 3,478                                   |       |
|                                 |       | $                                         |  20,756 |                                      | $          |  15,401                            |       | $ |  14,159 |   |

 

***Section 19(a) Disclosure—Unaudited***

 

The Company’s Board of Directors estimatesthe source of the distributions at the time of their declaration as required bySection 19(a) of the 1940 Act. On a monthly basis, if required under Section 19(a),the Company posts a Section 19(a) notice through the Depository TrustCompany’s Legal Notice System (“LENS”) and also sends to its registeredstockholders a written Section 19(a) notice along with the payment ofdistributions for any payment which includes a distribution estimated to bepaid from any other source other than net investment income. The estimates ofthe source of the distribution are interim estimates based on GAAP that aresubject to revision, and the exact character of the distributions for taxpurposes cannot be determined until the final books and records of the Companyare finalized for the calendar year. Following the calendar year end, afterdefinitive information has been determined by the Company, if the Company hasmade distributions of taxable income (or return of capital), the Company willdeliver a Form 1099-DIV to its stockholders specifying such amount and thetax characterization of such amount. Therefore, these estimates are made solelyin order to comply with the requirements of Section 19(a) of the 1940Act and should not be relied upon for tax reporting or any other purposes andcould differ significantly from the actual character of distributions for taxpurposes.

 

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The following GAAP estimateswere made by the Board of Directors during the quarter ended March 31,2009:

 
| **Payment Date**       | ** ** | **Ordinary Income** | ** **  | **Return of Capital** | ** ** | **Total Distribution** | ** ** |
|------------------------|------------|---------------------|-------------|-----------------------|------------|------------------------|------------|
| January 30, 2009  |       | $                   |  0.054 |                  | $          |  0.0260           |       | $ |  0.080 |   |
| February 27, 2009 |       | 0.054               |        | 0.0260                |       | 0.080                  |       |
| March 31, 2009    |       | 0.088               |        | (0.008                | )          | 0.080                  |       |
|                        |            |                     |             |                       |            |                        |            |  |  |  |

 

Because the Board of Directors declaresdistributions at the beginning of a quarter, it is difficult to estimate howmuch of the Company’s monthly dividends and distributions, based on GAAP, willcome from ordinary income, capital gains and returns of capital. Subsequent tothe year ended March 31, 2009, the following corrections were made to theabove listed estimates for that quarter:

 
| **Payment Date**       | ** ** | **Ordinary Income** | ** **  | **Return of Capital** | ** ** | **Total Distribution** | ** ** |
|------------------------|------------|---------------------|-------------|-----------------------|------------|------------------------|------------|
| January 30, 2009  |       | $                   |  0.046 |                  | $          |  0.034            |       | $ |  0.080 |   |
| February 27, 2009 |       | 0.041               |        | 0.039                 |       | 0.080                  |       |
| March 31, 2009    |       | 0.047               |        | 0.033                 |       | 0.080                  |       |
|                        |            |                     |             |                       |            |                        |            |  |  |  |

 

For distributions declared subsequent toquarter end, the following estimates, based on GAAP, have been made pursuant toSection 19(a) of the 1940 Act:

 
| **Payment Date**   | ** ** | **Ordinary Income** | ** **  | **Return of Capital** | ** ** | **Total Distribution** | ** ** |
|--------------------|------------|---------------------|-------------|-----------------------|------------|------------------------|------------|
| May 8, 2009   |       | $                   |  0.043 |                  | $          | (0.003                 | )          | $ |  0.040 |   |
| May 29, 2009  |       | 0.037               |        | 0.003                 |       | 0.040                  |       |
| June 30, 2009 |       | 0.045               |        | (0.005                | )          | 0.040                  |       |
|                    |            |                     |             |                       |            |                        |            |  |  |  |

** **

**Note 10. Federal and State Income Taxes**

** **

The Company intends to continue to qualifyfor treatment as a RIC under subchapter M of the Code. However, because of recent changes in theCompany’s asset portfolio, due to sales of Non-Control/Non-Affiliateinvestments, there is a significant possibility that the Company may not meetthe asset diversification threshold under the Code’s rules applicable to aRIC as of its June 30, 2009 testing date. Failure to meet this thresholdalone will not result in loss of the Company’s RIC status in its currentsituation.  In circumstances where thefailure to meet the 50% threshold as of a quarterly measurement date is theresult of fluctuations in the value of assets, including as a result of thesale of assets, as in its present situation the Company is still deemed underthe rules to satisfy the asset diversification test, and thereforemaintain its RIC status, as long as it has not made any new investments, includingadditional investments in its portfolio companies (such as advances underoutstanding lines of credit), since the time that it fell below the 50%threshold.  Thus, although the Companycurrently qualifies as a RIC despite its current, and potential future,inability to meet the 50% asset diversification requirement, if the Companymakes any additional investments before regaining compliance with the assetdiversification test, its RIC status will be threatened.  In this situation, if the Company did notregain compliance with the 50% threshold prior to the next quarterlymeasurement date following the investment, it would have thirty days to “cure”its failure of the asset diversification test to avoid a loss of RIC status.Potential cures for failure of the asset diversification test include raisingadditional equity or debt capital, or changing the composition of the Company’sassets, which could include full or partial divestitures of investments, suchthe Company would once again exceed the 50% threshold. As a RIC, theCompany will not be subject to federal income tax on the portion of its taxableincome and gains distributed to stockholders. To qualify as a RIC, the Companyis required to distribute at least 90% of its investment company taxable income,as defined by the Code. The Company intends to distribute at least 90% of itsordinary income, and as a result, no income tax provisions have been recorded.The Company may, but does not intend to, pay out a return of capital. TheCompany may also be subject to federal excise tax if it does not distribute atleast 98% of its investment company taxable income in any calendar year and 98%of its capital gain net income in any calendar year.

 

**Note 11. Commitments and Contingencies**

 

At March 31, 2009, the Company was notparty to any signed term sheets for potential investments.

 

In October 2008, the Company executed a guaranty of a vehiclefinance facility agreement between Ford Motor Credit Company (“FMC”) and AutoSafety House, LLC (“ASH”), one of the Company’s control investments (the “FinanceFacility”).  The Finance Facilityprovides ASH with a line of credit of up to $500 for component Ford parts usedby ASH to build truck bodies under a separate contract.  Title and ownership of the parts is retainedby Ford. The guaranty of the Finance Facility will expire upon termination ofthe separate parts supply contract with Ford or upon replacement of the Companyas guarantor.  The Finance Facility issecured by all of the assets of Business Investment.  As of March 31, 2009, the Company hasnot been required to make any payments on the guaranty of the Finance Facility.

 

**Note 12. Selected Quarterly Data (Unaudited)**

 
| ** **                                                                                                                    | ** ** | **Year Ended March 31, 2009**    | ** **  |
|-------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|-------------|
| ** **                                                                                                                    | ** ** | **Quarter Ended  June 30, 2008** | ** **  | **Quarter Ended  September 30, 2008** | ** ** | **Quarter Ended  December 31, 2008** | ** ** | **Quarter Ended  March 31, 2009** | ** ** |
| Total Investment Income                                                                                                       |       | $                                     |  6,038 |   | $ |  6,816 |   | $ |  7,002 |   | $ |  5,956 |   |
| Net Investment Income                                                                                                         |       | 3,051                                 |        | 3,783 |   | 3,587 |   | 2,967 |   |
| Net (Decrease) Increase in Net Assets Resulting From Operations                                                               |       | (4,484                                | )           | 956 |   | (3,940 | ) | (3,981 | ) |
| Net (Decrease) Increase in Net Assets Resulting From Operations per  Weighted Average Common Share (Basic & Diluted) |       | $                                     |  (0.22 | ) | $ |  0.04 |   | $ |  (0.18 | ) | $ |  (0.18 | ) |

 

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| ** **                                                                                                                    | ** ** | **Year Ended March 31, 2008**    | ** **  |
|-------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|-------------|
| ** **                                                                                                                    | ** ** | **Quarter Ended  June 30, 2007** | ** **  | **Quarter Ended  September 30, 2007** | ** ** | **Quarter Ended  December 31, 2007** | ** ** | **Quarter Ended  March 31, 2008** | ** ** |
| Total Investment Income                                                                                                       |       | $                                     |  6,300 |   | $ |  7,157 |   | $ |  7,544 |   | $ |  6,893 |   |
| Net Investment Income                                                                                                         |       | 2,889                                 |        | 2,995 |   | 3,746 |   | 3,422 |   |
| Net Increase (Decrease) in Net Assets Resulting From Operations                                                               |       | 8,270                                 |        | (4,367 | ) | 5,109 |   | (9,953 | ) |
| Net Increase (Decrease) in Net Assets Resulting From Operations per  Weighted Average Common Share (Basic & Diluted) |       | $                                     |  0.50  |   | $ |  (0.26 | ) | $ |  0.31 |   | $ |  (0.60 | ) |

** **

**Note 13. Subsequent Events**

** **

***New Credit Facility with Branch Bank and Trust Company andTermination of Deutsche Bank A.G. Credit Facility***

*** ***

On April 14,2009 the Company, through its wholly-owned subsidiary Gladstone BusinessInvestment, LLC, entered into a second amended and restated credit agreementproviding for a $50 million revolving line of credit arranged by BB&T asadministrative agent, replacing Deutsche Bank, A.G. as administrative agent. KeyEquipment Finance Company Inc. also joined the Credit Facility as a committedlender.  In connection with entering into the Credit Facility, the Companyborrowed $43.8 million under the Credit Facility to make a final payment toDeutsche Bank, A.G. in satisfaction of all unpaid principal and interest owedto Deutsche Bank under the prior credit agreement.  The Credit Facilitymay be expanded up to $125 million through the addition of other committedlenders to the facility.  The Credit Facility matures on April 14,2010, and if the facility is not renewed or extended by this date, all unpaidprincipal and interest will be due and payable within one year of the maturitydate on April 14, 2011.  Advances under the Credit Facility willgenerally bear interest at the 30-day LIBOR rate (subject to a minimum rate of2%), plus 5% per annum, with a commitment fee of 0.75% per annum on undrawnamounts.

 

Interest ispayable monthly during the term of the Credit Facility. Principal is payableafter April 14, 2010 through maturity out of all of our collections ofprincipal from our loans. Available borrowings are subject to variousconstraints imposed under the Credit Agreement, based on the aggregate loanbalance pledged by Business Investment, which varies as loans are added andrepaid, regardless of whether such repayments are early prepayment or are madeas contractually required.

 

The CreditFacility contains covenants that require Business Investment to maintain itsstatus as a separate entity; prohibit certain significant corporatetransactions (such as mergers, consolidations, liquidations or dissolutions);and restrict material changes to the Company’s credit and collection policies.The facility also restricts some of the terms and provisions (includinginterest rates, terms to maturity and payments schedules) and limits theborrower and industry concentrations of loans that are eligible to secureadvances as well as limits on payments of distributions. As of May 29,2009, Business Investment was in compliance with all of the facility covenants.As of May 29, 2009 there was $29.7 million of borrowings outstandingon the Credit Facility at an interest rate of approximately 7.0% and theremaining borrowing capacity under the Credit Facility was approximately$17.5 million.

 

The administrativeagent also requires that any interest or principal payments on pledged loans beremitted directly by the borrower into a lockbox account with The Bank of NewYork Mellon Trust Company, N.A as custodian. BB&T is also the trustee ofthe account and once a month remits the collected funds to the Company. At May 29,2009, the amount due from the custodian was $867.

 

The Adviserservices the loans pledged under the Credit Facility. As a condition to thisservicing arrangement, the Company executed a performance guaranty pursuant towhich it guaranteed that the Adviser would comply fully with all of itsobligations under the Credit Facility. The loan documents require the Companyto maintain a minimum net worth of $169 million plus 50% of all equity andsubordinated debt raised after April 14, 2009 and to maintain “assetcoverage” with respect to “senior securities representing indebtedness” of atleast 200%, in accordance with Section 18 of the 1940 Act. As of May 29,2009, the Company was in compliance with the covenants under the performanceguaranty.

 

The Company’s continuedcompliance with these covenants, however, depends on many factors, some ofwhich are beyond the Company’s control. In particular, depreciation in thevaluation of its assets, which valuation is subject to changing marketconditions that are presently very volatile, affects the Company’s ability tocomply with these covenants. During the fiscal year ended March 31, 2009, net unrealizeddepreciation on the Company’s investments was approximately $19.8 million,compared to $11.5 during the prior fiscal year. Given the continueddeterioration in the capital markets, net unrealized depreciation in theCompany’s portfolio may continue to increase in future periods and threaten theCompany’s ability to comply with the covenants under its Credit Facility.Accordingly, there are no assurances that the Company will continue to complywith these covenants. Failure to comply with these covenants would result in adefault which, if the Company is unable to obtain a waiver from the lenders,could accelerate the Company’s repayment obligations under the Credit Facilityand thereby have a material adverse impact on its liquidity, financial condition,results of operations and ability to pay distributions as more fully describedbelow.

 

The Credit Facility matures on April 14, 2010, and, if thefacility is not renewed or extended by this date, all unpaid principal andinterest will be due and payable within one year of maturity. There can be no guarantee that the Company will be able to renew, extendor replace the Credit Facility on terms that are favorable to the Company, orat all.  The Company’s ability to obtainreplacement financing will be constrained by current economic conditionsaffecting the credit markets, which have significantly deteriorated over thelast several months and may decline further. Consequently, any renewal, extension or refinancing of the CreditFacility will likely result in significantly higher interest rates and relatedcharges and may impose significant restrictions on the use of borrowed fundswith regard to its ability to fund investments or maintain distributions.  For instance, in connection with the recentestablishment of the Company’s new credit facility, the size of the line wasreduced from $125.0 million under its prior facility to $50.0 million under itsnew credit facility and Deutsche Bank A.G., who was a committed lender underits prior credit facility elected not to participate in the new facility andwithdrew its commitment.  If the Companyis not able to renew, extend or refinance the Credit Facility, this wouldlikely have a material adverse effect on its liquidity and ability to fund newinvestments or pay distributions to its stockholders.  The Company’s inability to pay distributionscould result in it failing to qualify as a RIC. Consequently, any income or gains could become taxable at corporaterates. If the Company is unable to secure replacement financing, it may beforced to sell certain assets on disadvantageous terms, which may result inrealized losses such as those recently recorded in connection with theSubsequent Syndicated Loan Sales, which resulted in a realized loss ofapproximately $34.6 million during the quarter ending June 30, 2009.  Such realized losses couldmaterially exceed the amount of any unrealized depreciation on these assets asof the Company’s most recent balance sheet date, which would have a materialadverse effect on its results of operations. In addition to selling assets, or as an alternative, the Company mayissue equity in order to repay amounts outstanding under the CreditFacility.  Based on the recent tradingprices of its stock, such an equity offering may have a substantial dilutiveimpact on the Company’s existing stockholders’ interest in the Company’searnings and assets and voting interest in it.

 

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### ***Senior Syndicated Loan Sales***

### *** ***

### During April 2009,the Company finalized its sale of 29 of the 32 senior syndicated loans thatwere held in its portfolio of investments at March 31, 2009 to variousinvestors in the syndicated loan market.  The loans, in aggregate, had acost value of approximately $104.2 million, or 29.9% of the cost value of theCompany’s total investments, and an aggregate fair market value of approximately$69.8 million, or 22.2% of the fair market value of the Company’s totalinvestments, at March 31, 2009.  As a result of these sales, theCompany received approximately $69.2 million in net cash proceeds and recordeda realized loss of approximately $34.6 million.   Upon the settlement of these sales, theremaining senior syndicated loans had a cost value of approximately $16.1million, or 6.7% of the cost value of the Company’s total investments, and anaggregate fair value of approximately $11.9 million or 5.0% of the Company’stotal investments.  These loans are included in the Company’s consolidated assets as of March 31,2009 and were valued at their respective sale prices.

###  

In order to maintain RICstatus under the Code, in addition to other requirements, as of the close ofeach quarter of its taxable year, the Company must meet the assetdiversification test, which requires that at least 50% of the value ofits assets consist of cash, cash items, U.S. government securities, thesecurities of other RICs and other securities to the extent such othersecurities of any one issuer do not represent more than 5% of the Company’stotal assets or more than 10% of the voting securities of such issuer. As a result ofchanges in the value of the Company’s assets during April and May 2009,due to these sales of seniorsyndicated loans, the Company hasfallen below the required 50% asset diversification threshold as of thedate of this report.  Failure to meetthis threshold alone will not result in loss of RIC status in the Company’scurrent situation.  In circumstanceswhere the failure to meet the 50% threshold as of a quarterly measurement dateis the result of fluctuations in the value of assets, including as a result ofthe sale of assets, the Company is still deemed under the rules to satisfythe asset diversification test, and therefore maintain RIC status, as long asit has not made any new investments, including additional investments in itsportfolio companies (such as advances under outstanding lines of credit), sincethe time that the Company fell below the 50% threshold.  Thus, although the Company currentlyqualifies as a RIC despite its current, and potential future, inability to meetthe 50% asset diversification requirement, if the Company makes any additionalinvestments before regaining compliance with the asset diversification test,RIC status will be threatened.  Because,in most circumstances, the Company is contractually required to advance fundson outstanding lines of credit upon the request of its portfolio companies, theCompany may have a limited ability to avoid adding to existing investments in amanner that would cause it to fail the asset diversification test as of June 30,2009 or as of subsequent quarterly measurement dates.

 

If the Company were to make a new investment andthen fail to meet the 50% threshold, at the next quarterly measurement date,the Company would have thirty days to “cure” its failure of the assetdiversification test to avoid a loss of RIC status. Potential cures for failureof the asset diversification test include raising additional equity or debtcapital, or changing the composition of its assets, which could include full orpartial divestitures of investments, such that it would once again exceed the50% threshold. The Company is currently seeking to obtain ashort-term credit facility under which it would be able to borrow funds at eachquarter end that would allow it to satisfy the asset diversification test forthe foreseeable future, thereby allowing the Company to make additionalinvestments prior to June 30, 2009 or thereafter and be in compliance withthis test.  There can be no assurance,however, that the Company will be able to enter into such a credit facility onreasonable terms, if at all, or that any other cures will be available to theCompany such that its investment activity could resume. However, the Company’s ability to implement any of these cures would besubject to market conditions and a number of risks and uncertainties that wouldbe, in part, beyond its control.

 

***Proprietary Investments Term Debt Repayments and RevolverReductions/Extinguishments***

*** ***

DuringApril 2009, the Company executed the following transactions with certainof its portfolio companies:

 

·                  On April 9, 2009, A. Stucki HoldingCorp. refinanced a portion of their senior term debt by repaying approximately$2.0 million of principal repayments which represents the next three quarterlypayments due under normal amortization on both their senior term A ($1.6million) and senior term B ($412) loans. Normal amortization is expected to resume on April 1, 2010.

 

·                  On April 9, 2009, ASH Holdings Corp.made a repayment of approximately $1.1 million on their revolving line ofcredit which reduced the outstanding balance to $500.

 

·                  On April 10, 2009, the Company enteredinto an agreement to reduce the available credit limit on Mathey Investment, Inc.’srevolving line of credit from $2.0 million to $1.0 million.  This was a non-cash transaction.

 

·                  On April 10, 2009, the Company made aninvestment disbursement to Cavert II Holding Corp. for approximately $850 ontheir revolving line of credit and used the proceeds from it to make the nextfour quarterly payments due under normal amortization for both their seniorterm A and senior term B loans in a non-cash transaction.  Normal amortization on both of these loans isexpected to resume on July 1, 2010. Subsequently, on April 17, 2009, Cavert repaid the outstanding $850in principal plus accrued interest on its revolving line of credit.  The revolving line of credit was then sold toa third party, the Royal Bank of Canada, for a nominal fee.

 

·                  On April 13, 2009, the Company enteredinto an agreement to reduce the available credit limit on Chase II HoldingsCorp.’s revolving line of credit from $4.5 million to $3.5 million.  This was a non-cash transaction.

 

***Distributions***

*** ***

OnApril 16, 2009, the Company’s Board of Directors declared the followingmonthly distributions:

 
| **Record Date**     | ** ** | **Payment Date**   | ** ** | **Distribution per Share** | ** ** |
|---------------------|------------|--------------------|------------|----------------------------|------------|
| April 27, 2009 |       | May 8, 2009   |       | $                          | 0.04       |   |
| May 20, 2008   |       | May 29, 2009  |       | $                          | 0.04       |   |
| June 22, 2008  |       | June 30, 2009 |       | $                          | 0.04       |   |

 

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***Interest Rate Cap Agreement***

*** ***

In May 2009, the Company cancelled its interest rate cap agreementwith Deutsche Bank A.G. and entered into a new interest rate cap agreement fora notional amount of $45 million that will effectively limit the interest rateon a portion of the borrowings under the line of credit pursuant to the termsof the Credit Facility.  The Companyincurred a premium fee of approximately $40 in conjunction with this agreement.

 

**Item 9. Changes in and Disagreements with Accountants on Accounting andFinancial Disclosure**

** **

Not applicable.

 

**Item 9A. Controls and Procedures**

** **
| a) | Disclosure Controls and  Procedures |
|----|-------------------------------------|

 

As of March 31, 2009 (the end of theperiod covered by this report), we, including our chief executive officer andchief financial officer, evaluated the effectiveness and design and operationof our disclosure controls and procedures. Based on that evaluation, ourmanagement, including the chief executive officer and chief financial officer,concluded that our disclosure controls and procedures were effective in timelyalerting management, including the chief executive officer and chief financialofficer, of material information about us required to be included in periodicSEC filings. However, in evaluation of the disclosure controls and procedures,management recognized that any controls and procedures, no matter how well designedand operated can provide only reasonable assurance of achieving the desiredcontrol objectives, and management necessarily was required to apply itsjudgment in evaluating the cost-benefit relationship of possible controls andprocedures.

 
| b)     | Management’s Annual Report  on Internal Control over Financial Reporting                                                   |
|--------|---------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                            |
|   | Refer to Management’s  Report on Internal Control over Financial Reporting located in Item 8 of  this Form 10-K. |
|   |                                                                                                                            |
| c)     | Attestation Report of the  Independent Registered Public Accounting Firm                                                        |
|   |                                                                                                                            |
|   | Refer to the Report of  Independent Registered Public Accounting Firm located in Item 8 of this Form 10-K.            |
|   |                                                                                                                            |
| d)     | Change in Internal Control  over Financial Reporting                                                                            |

 

There were no changes in internal controlsfor the period ended March 31, 2009 that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

**Item 9B. Other Information.**

** **

Not applicable.

 

**PART III**

** **

We will file a definitive ProxyStatement for our 2009 Annual Meeting of Stockholders (the “2009 ProxyStatement”) with the SEC, pursuant to Regulation 14A, not later than120 days after the end of our fiscal year. Accordingly, certaininformation required by Part III has been omitted under GeneralInstruction G(3) to Form 10-K. Only those sections of the 2009Proxy Statement that specifically address the items set forth herein areincorporated by reference.

 

**Item 10. Directors, Executive Officers and Corporate Governance**

** **

The information required by Item 10 ishereby incorporated by reference from our 2009 Proxy Statement under thecaptions “Election of Directors” and “Section 16(a) BeneficialOwnership Reporting Compliance.”

 

**Item 11. Executive Compensation**

** **

The information required by Item 11 ishereby incorporated by reference from our 2009 Proxy Statement under thecaptions “Executive Compensation” and “Director Compensation.”

 

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**Item 12. Security Ownership of Certain Beneficial Owners and Management andRelated Stockholder Matters**

** **

The information required by Item 12 ishereby incorporated by reference from our 2009 Proxy Statement under thecaption “Security Ownership of Certain Beneficial Owners and Management.”

 

**Item 13. Certain Relationships and Related Transactions and Director Independence**

** **

The information required by Item 13 ishereby incorporated by reference from our 2009 Proxy Statement under thecaptions “Certain Transactions” and “Director Independence.”

 

**Item 14. Principal Accountant Fees and Services**

** **

The information required by Item 14 ishereby incorporated by reference from our 2009 Proxy Statement under thecaption “Independent Registered Public Accounting Firm Fees.”

 

**PART IV**

** **

**Item 15. Exhibits and Financial Statement Schedules**

** **
| **a.**     | **DOCUMENTS FILED AS PART OF THIS REPORT**        |
|------------|--------------------------------------------------------|
| ** ** | ** **                                             |
| 1.         | The following financial statements are filed herewith: |

 
| Report  of Independent Registered Public Accounting Firm                                                                                | 63 |
|-----------------------------------------------------------------------------------------------------------------------------------------|----|
| Consolidated  Statements of Assets and Liabilities as of March 31, 2009 and  March 31, 2008                                   | 64 |
| Consolidated  Schedules of Investments as of March 31, 2009 and March 31, 2008                                                | 65 |
| Consolidated  Statements of Operations for the years ended March 31, 2009,  March 31, 2008 and March 31, 2007            | 71 |
| Consolidated Statements of Changes in Net Assets for  the years ended March 31, 2009, March 31, 2008 and March 31,  2007 | 72 |
| Consolidated  Statements of Cash Flows for the years ended March 31, 2009,  March 31, 2008 and March 31, 2007            | 73 |
| Financial  Highlights for the years ended March 31, 2009, March 31, 2008 and  March 31, 2007                             | 74 |
| Notes to Consolidated Financial Statements                                                                                              | 75 |

 
| 2.     | Financial statement schedules                                                                      |
|--------|----------------------------------------------------------------------------------------------------|
|   |                                                                                               |
|   | The following financial statement schedule is filed herewith:                                      |
|   |                                                                                               |
|   | ·      Schedule 12-14 Investments in and Advances to Affiliates |

 

No other financial statementschedules are filed herewith because (1) such schedules are not requiredor (2) the information has been presented in the aforementioned financialstatements.

 

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| 3. | Exhibits |
|----|----------|

 

The following exhibits arefiled as part of this report or hereby incorporated by reference to exhibitspreviously filed with the SEC:

 
| 3.1   | Amended and Restated Certificate of Incorporation, incorporated by  reference to Exhibit a.2 to Pre-Effective Amendment No. 1 to the  Registration Statement on Form N-2 (File No. 333-123699), filed  May 13, 2005.                                                                                                 |
|-------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.2   | Amended and Restated Bylaws, incorporated by reference to  Exhibit b.2 to the Pre-effective Amendment No. 3 to the  Registration Statement on Form N-2 (File No. 333-123699), filed  June 21, 2005.                                                                                                                  |
| 3.3   | First Amendment to Amended and Restated Bylaws of Gladstone  Investment Corporation, incorporated by reference to Exhibit 99.1 to  Current Report on Form 8-K (File No. 814-00704) filed July 10,  2007.                                                                                                                  |
| 4.1   | Specimen Stock Certificate, incorporated by reference to  Exhibit 99.d to Form N-2/A (File No. 333-123699), filed  June 21, 2005.                                                                                                                                                                                         |
| 4.2   | Distribution Reinvestment Plan, incorporated by reference to  Exhibit 99.e to Pre-Effective Amendment No. 3 to the Registration  Statement on Form N-2 (File No. 333-123699), filed June 21,  2005.                                                                                                                  |
| 10.1* | Investment Advisory and Management Agreement between the Company and  Gladstone Management Corporation, dated June 22, 2005, incorporated by  reference to Exhibit 10.1 to the Annual Report on Form 10-K filed  June 14, 2006.                                                                                           |
| 10.2* | Administration Agreement between the Registrant and Gladstone  Administration, LLC, dated June 22, 2005, incorporated by reference  to Exhibit 10.2 to the Annual Report on Form 10-K filed  June 14, 2006.                                                                                                          |
| 10.3* | Trademark License Agreement between the Registrant and Gladstone  Management Corporation, incorporated by reference to Exhibit k.3 to the  Registration Statement on Form N-2 (File No. 333-123699), filed on  March 31, 2005.                                                                                            |
| 10.4  | Stock Transfer Agency Agreement between the Registrant and The Bank  of New York, incorporated by reference to Exhibit k.1 to Amendment  No. 1 to the Registration Statement on Form N-2 (File  No. 333-123699), filed May 13, 2005.                                                                                 |
| 10.5  | Custody Agreement between the Registrant and The Bank of New York,  incorporated by reference to Exhibit 99.j to Pre-Effective Amendment  No. 3 to the Registration Statement on Form N-2 (File  No. 333-123699), filed June 21, 2005.                                                                               |
| 10.6  | Joint Directors Nonqualified Excess Plan of Gladstone Commercial  Corporation, Gladstone Capital Corporation and Gladstone Investment  Corporations, dated as of July 11, 2006, incorporated by reference to  Exhibit 10.1 to the Current Report on Form 8-K (File No. 814-00704),  filed July 12, 2006.             |
| 10.7  | Second Amended and Restated Credit Agreement by and among Gladstone  Business Investment LLC, Branch Bank and Trust Company and certain other  parties, dated as of April 14, 2009, incorporated by reference to  Exhibit 10.1 to the Current Report on Form 8-K (File  No. 814-00704) filed on April 14, 2009. |
| 11    | Computation of Per Share Earnings (included in the notes to the  audited financial statements contained in this report).                                                                                                                                                                                                                      |
| 21    | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                                                                               |
| 31.1  | Certification of Chief Executive Officer pursuant to section 302  of The Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                     |
| 31.2  | Certification of Chief Financial Officer pursuant to section 302  of The Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                     |
| 32.1  | Certification of Chief Executive Officer pursuant to section 906  of The Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                     |
| 32.2  | Certification of Chief Financial Officer pursuant to section 906  of The Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                     |

 

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*                                       Denotesmanagement contract or compensatory plan or arrangement.

 

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**SIGNATURES**

** **

Pursuant to the requirementsof Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
| ** **              | **GLADSTONE INVESTMENT CORPORATION** |
|-------------------------|--------------------------------------|
| ** **              | ** **                           | ** ** |
| Date: June 2, 2009 | By:                                  | /s/ MARK PERRIGO |
|                    |                                 | Mark Perrigo |
|                    |                                 | Chief Financial Officer |

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, this report has been signed below bythe following persons on behalf of the registrant and in the capacity and onthe dates indicated.

 
| Date: June 2, 2009 | By:    | /s/ DAVID GLADSTONE                                                                           |
|-------------------------|--------|-----------------------------------------------------------------------------------------------|
|                    |   | David Gladstone                                                                               |
|                    |   | Chief Executive Officer and Chairman of the Board of Directors  (principal executive officer) |
|                    |   |                                                                                          |
| Date: June 2, 2009 | By:    | /s/ TERRY LEE BRUBAKER                                                                        |
|                    |   | Terry Lee Brubaker                                                                            |
|                    |   | Co-Vice Chairman, Chief Operating Officer, Secretary and Director                             |
|                    |   |                                                                                          |
| Date: June 2, 2009 | By:    | /s/ GEORGE STELLJES III                                                                       |
|                    |   | George Stelljes III                                                                           |
|                    |   | Co-Vice Chairman, Chief Investment Officer and Director                                       |
|                    |   |                                                                                          |
| Date: June 2, 2009 | By:    | /s/ DAVID A. R. DULLUM                                                                        |
|                    |   | David A. R. Dullum                                                                            |
|                    |   | President and Director                                                                        |
|                    |   |                                                                                          |
| Date: June 2, 2009 | By:    | /s/ MARK PERRIGO                                                                              |
|                    |   | Mark Perrigo                                                                                  |
|                    |   | Chief Financial Officer (principal financial and accounting officer)                          |
|                    |   |                                                                                          |
| Date: June 2, 2009 | By:    | /s/ ANTHONY W. PARKER                                                                         |
|                    |   | Anthony W. Parker                                                                             |
|                    |   | Director                                                                                      |
|                    |   |                                                                                          |
| Date: June 2, 2009 | By:    | /s/ MICHELA A. ENGLISH                                                                        |
|                    |   | Michela A. English                                                                            |
|                    |   | Director                                                                                      |
|                    |   |                                                                                          |
| Date: June 2, 2009 | By:    | /s/ PAUL ADELGREN                                                                             |
|                    |   | Paul Adelgren                                                                                 |
|                    |   | Director                                                                                      |
|                    |   |                                                                                          |
| Date: June 2, 2009 | By:    | /s/ MAURICE COULON                                                                            |
|                    |   | Maurice Coulon                                                                                |
|                    |   | Director                                                                                      |
|                    |   |                                                                                          |
| Date: June 2, 2009 | By:    | /s/ JOHN OUTLAND                                                                              |
|                    |   | John Outland                                                                                  |
|                    |   | Director                                                                                      |
|                    |   |                                                                                          |
| Date: June 2, 2009 | By:    | /s/ GERARD MEAD                                                                               |
|                    |   | Gerard Mead                                                                                   |
|                    |   | Director                                                                                      |

 

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Table of Contents

 

**SCHEDULE 12-14**

 

**GLADSTONE INVESTMENT CORPORATION**

**INVESTMENTSIN AND ADVANCES TO AFFILIATES**

 
| **Name of  Issuer (1)**          | ** ** | **Title of  Issue or  Nature of Indebtedness** | ** ** | **Number of  Shares  or Principal Amount  of Indebtedness  Held at  March 31, 2009** | ** ** | **Interest  Earned  for the year  ended  March 31, 2009** | ** ** | **Equity  in Net  Profit (Loss) for  the year ended  March 31, 2009 (3)** | ** ** | **Value at  March 31, 2009** | ** ** |
|----------------------------------|------------|------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| **CONTROL  INVESTMENTS**         |       |                                           |       |                                                                                      |       |                                                           |       |                                                                           |       |                              |       |
| A. Stucki Holding  Corporation   |       | Senior Term Debt                               |       | $                                                                                         | 11,246     |                                                           |       |                                                                           |       |                              | $          | 11,246 |   |
|                             |       | Senior Term Debt                               |       | 10,450                                                                                    |       |                                                           |       |                                                                           |       | 10,450                            |       |
|                             |       | Subordinated Term Debt                         |       | 8,586                                                                                     |       |                                                           |       |                                                                           |       | 8,856                             |       |
|                             |       | Redeemable Preferred Stock (2)                 |       | 44                                                                                        |       |                                                           |       |                                                                           |       | 5,128                             |       |
|                             |       | Common Stock (2)                               |       | 130                                                                                       |       |                                                           |       |                                                                           |       | 14,021                            |       |
|                             |       |                                           |       |                                                                                      |       | $                                                              | 2,716      |                                                                           | $          | —                            |       | 49,431 |   |
|                             |       |                                           |       |                                                                                      |       |                                                           |       |                                                                           |       |                              |       |
| Acme  Cryogenics, Inc.      |       | Senior Subordinated Term Debt                  |       | 14,500                                                                                    |       |                                                           |       |                                                                           |       | 14,500                            |       |
|                             |       | Redeemable Preferred Stock (2)                 |       | 899                                                                                       |       |                                                           |       |                                                                           |       | 6,920                             |       |
|                             |       | Common Stock (2)                               |       | 418                                                                                       |       |                                                           |       |                                                                           |       | —                            |       |
|                             |       | Common Stock Warrants (2)                      |       | 453                                                                                       |       |                                                           |       |                                                                           |       | —                            |       |
|                             |       |                                           |       |                                                                                      |       | 1,691                                                          |       | —                                                                         |       | 21,420                            |       |
|                             |       |                                           |       |                                                                                      |       |                                                           |       |                                                                           |       |                              |       |
| ASH Holdings  Corporation        |       | Revolving Credit Facility                      |       | 1,600                                                                                     |       |                                                           |       |                                                                           |       | 560                               |       |
|                             |       | Senior Subordinated Term Debt                  |       | 5,937                                                                                     |       |                                                           |       |                                                                           |       | 2,078                             |       |
|                             |       | Preferred Stock (2)                            |       | 2,500                                                                                     |       |                                                           |       |                                                                           |       | —                            |       |
|                             |       | Common Stock (2)                               |       | —                                                                                    |       |                                                           |       |                                                                           |       | —                            |       |
|                             |       | Common Stock Warrants (2)                      |       | 74                                                                                        |       |                                                           |       |                                                                           |       | —                            |       |
|                             |       |                                           |       |                                                                                      |       | —                                                         |       | —                                                                         |       | 2,638                             |       |
|                             |       |                                           |       |                                                                                      |       |                                                           |       |                                                                           |       |                              |       |
| Cavert II Holding  Corporation   |       | Revolving Credit Facility                      |       | —                                                                                    |       |                                                           |       |                                                                           |       | —                            |       |
|                             |       | Senior Term Debt                               |       | 5,687                                                                                     |       |                                                           |       |                                                                           |       | 5,687                             |       |
|                             |       | Senior Term Debt                               |       | 2,950                                                                                     |       |                                                           |       |                                                                           |       | 2,950                             |       |
|                             |       | Senior Subordinated Term Debt                  |       | 4,671                                                                                     |       |                                                           |       |                                                                           |       | 4,671                             |       |
|                             |       | Preferred Stock (2)                            |       | 41                                                                                        |       |                                                           |       |                                                                           |       | 4,591                             |       |
|                             |       | Common Stock (2)                               |       | 69                                                                                        |       |                                                           |       |                                                                           |       | 733                               |       |
|                             |       |                                           |       |                                                                                      |       | 1,587                                                          |       | —                                                                         |       | 18,632                            |       |
|                             |       |                                           |       |                                                                                      |       |                                                           |       |                                                                           |       |                              |       |
| Chase II Holdings  Corporation   |       | Revolving Credit Facility                      |       | 3,395                                                                                     |       |                                                           |       |                                                                           |       | 3,395                             |       |
|                             |       | Senior Term Debt                               |       | 8,800                                                                                     |       |                                                           |       |                                                                           |       | 8,800                             |       |
|                             |       | Senior Term Debt                               |       | 7,680                                                                                     |       |                                                           |       |                                                                           |       | 7,680                             |       |
|                             |       | Subordinated Term Debt                         |       | 6,168                                                                                     |       |                                                           |       |                                                                           |       | 6,168                             |       |
|                             |       | Redeemable Preferred Stock (2)                 |       | 70                                                                                        |       |                                                           |       |                                                                           |       | 9,300                             |       |
|                             |       | Preferred Stock (2)                            |       | 61                                                                                        |       |                                                           |       |                                                                           |       | 5,537                             |       |
|                             |       |                                           |       |                                                                                      |       |                                                           |       |                                                                           |       |                              |       |
| Country Club  Enterprises, LLC   |       | Subordinated Term Debt                         |       | 7,000                                                                                     |       |                                                           |       |                                                                           |       | 7,000                             |       |
|                             |       | Preferred Stock (2)                            |       | 2,380                                                                                     |       |                                                           |       |                                                                           |       | 3,725                             |       |
|                             |       |                                           |       |                                                                                      |       | 462                                                            |       | —                                                                         |       | 10,725                            |       |
|                             |       |                                           |       |                                                                                      |       |                                                           |       |                                                                           |       |                              |       |
| Galaxy Tool  Holding Corporation |       | Subordinated Term Debt                         |       | 17,250                                                                                    |       |                                                           |       |                                                                           |       | 17,250                            |       |
|                             |       | Preferred Stock (2)                            |       | 4,112                                                                                     |       |                                                           |       |                                                                           |       | 4,486                             |       |
|                             |       | Common Stock (2)                               |       | 48                                                                                        |       |                                                           |       |                                                                           |       | 701                               |       |
|                             |       |                                           |       |                                                                                      |       | 1,436                                                          |       | —                                                                         |       | 22,437                            |       |
| **Total  Control Investments**   | ** ** | ** **                                     | ** ** | ** **                                                                                | ** ** | **$**                                                          | **10,694** | ** **                                                                     | **$**      | **—**                        | ** ** | **$** | **166,163** | ** ** |
|                             |       |                                           |       |                                                                                      |       |                                                           |       |                                                                           |       |                              |       |
| **AFFILIATE  INVESTMENTS**       |       |                                           |       |                                                                                      |       |                                                           |       |                                                                           |       |                              |       |
| Danco Acquisition  Corporation   |       | Revolving Credit Facility                      |       | $                                                                                         | 400        |                                                           |       |                                                                           | $          | 378                               |       |   |   |
|                             |       | Senior Term Debt                               |       | 4,837                                                                                     |       |                                                           |       |                                                                           |       | 4,584                             |       |
|                             |       | Senior Term Debt                               |       | 9,113                                                                                     |       |                                                           |       |                                                                           |       | 8,544                             |       |
|                             |       | Redeemable Preferred Stock (2)                 |       | —                                                                                    |       |                                                           |       |                                                                           |       | 2,558                             |       |
|                             |       | Common Stock Warrants (2)                      |       | —                                                                                    |       |                                                           |       |                                                                           |       | —                            |       |
|                             |       |                                           |       |                                                                                      |       | $                                                              | 1,597      |                                                                           | $          | —                            |       | 16,064 |   |
|                             |       |                                           |       |                                                                                      |       |                                                           |       |                                                                           |       |                              |       |
| Mathey  Investments, Inc.   |       | Revolving Credit Facility                      |       | 537                                                                                       |       |                                                           |       |                                                                           |       | 529                               |       |
|                             |       | Senior Term Debt                               |       | 2,375                                                                                     |       |                                                           |       |                                                                           |       | 2,339                             |       |
|                             |       | Senior Term Debt                               |       | 7,227                                                                                     |       |                                                           |       |                                                                           |       | 7,082                             |       |
|                             |       | Common Stock (2)                               |       | —                                                                                    |       |                                                           |       |                                                                           |       | 446                               |       |
|                             |       | Common Stock Warrants (2)                      |       | —                                                                                    |       |                                                           |       |                                                                           |       | 260                               |       |
|                             |       |                                           |       |                                                                                      |       | 1,123                                                          |       | —                                                                         |       | 10,656                            |       |
|                             |       |                                           |       |                                                                                      |       |                                                           |       |                                                                           |       |                              |       |
| Noble  Logistics, Inc.      |       | Revolving Credit Facility                      |       | 2,000                                                                                     |       |                                                           |       | —                                                                         |       | 1,500                             |       |
|                             |       | Senior Term Debt                               |       | 5,727                                                                                     |       |                                                           |       |                                                                           |       | 4,295                             |       |
|                             |       | Senior Term Debt                               |       | 7,300                                                                                     |       |                                                           |       |                                                                           |       | 5,475                             |       |
|                             |       | Senior Subordinated Term Debt                  |       | 500                                                                                       |       |                                                           |       |                                                                           |       | 375                               |       |
|                             |       | Senior Subordinated Term Debt                  |       | 150                                                                                       |       |                                                           |       |                                                                           |       | 149                               |       |
|                             |       | Preferred Stock (2)                            |       | 1,000                                                                                     |       |                                                           |       |                                                                           |       | —                            |       |
|                             |       | Common Stock (2)                               |       | 1,500                                                                                     |       |                                                           |       |                                                                           |       | —                            |       |
|                             |       |                                           |       |                                                                                      |       | 1,635                                                          |       | —                                                                         |       | 11,794                            |       |
|                             |       |                                           |       |                                                                                      |       |                                                           |       |                                                                           |       |                              |       |
| Quench Holdings  Corporation (4) |       | Senior Subordinated Term Debt                  |       | 8,000                                                                                     |       |                                                           |       |                                                                           |       | 5,800                             |       |
|                             |       | Series A Preferred Stock (2)              |       | —                                                                                    |       |                                                           |       |                                                                           |       | 2,542                             |       |
|                             |       | Common Stock (2)                               |       | 35                                                                                        |       |                                                           |       |                                                                           |       | —                            |       |
|                             |       |                                           |       |                                                                                      |       | 1,068                                                          |       | —                                                                         |       | 8,342                             |       |
|                             |       |                                           |       |                                                                                      |       |                                                           |       |                                                                           |       |                              |       |
| Tread Corporation                |       | Senior Term Debt                               |       | 5,000                                                                                     |       |                                                           |       |                                                                           |       | 4,925                             |       |
|                             |       | Preferred Stock (2)                            |       | 750                                                                                       |       |                                                           |       |                                                                           |       | 793                               |       |
|                             |       | Common Stock Warrants (2)                      |       | 273                                                                                       |       |                                                           |       |                                                                           |       | 453                               |       |
|                             |       |                                           |       |                                                                                      |       | 550                                                            |       | —                                                                         |       | 6,171                             |       |
| **Total  Affiliate Investments** | ** ** | ** **                                     | ** ** | ** **                                                                                | ** ** | **$**                                                          | **5,973**  | ** **                                                                     | **$**      | **—**                        | ** ** | **$** | **53,027** | ** ** |

 

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| (1)    | Certain  of the listed securities are issued by affiliate(s) of the indicated  portfolio company.                                                                                                             |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                               |
| (2)    | Security  is non-income producing.                                                                                                                                                                                 |
|   |                                                                                                                                                                                                               |
| (3)    | In  accordance with Regulation S-X, rule 6-03(c)(i), the Company does  not consolidate its portfolio investments. Therefore, no equity in the net  profit (loss) was recorded as of March 31, 2009. |
|   |                                                                                                                                                                                                               |
| (4)    | Portfolio  company had earned $597 as a Control investment before being reclassified as  an Affiliate investment in the second quarter of the current fiscal year.                                                 |

 
| **Name of  Issuer(1)**         | ** ** | **Title of  Issue or  Nature of Indebtedness** | ** ** | **Value of  Each  Item as of  March 31, 2008** | ** ** | **Gross  Additions** | ** ** | **Gross   Reductions** | ** ** | **Value of  Each  Item as of  March 31, 2009** | ** ** |
|--------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------|------------|------------------------|------------|-----------------------------------------------------|------------|
| **CONTROL  INVESTMENTS**       |       |                                           |       |                                                |       |                 |       |                   |       |                                                |       |
| A. Stucki Holding  Corporation |       | Senior Term Debt                               |       | $                                                   | 13,391     |                 | $          | —                 |       | $                                                   | (2,145     | ) | $ | 11,246 |   |
|                           |       | Senior Term Debt                               |       | 11,000                                              |       | —               |       | (550                   | )          | 10,450                                              |       |
|                           |       | Subordinated Term  Debt                        |       | 5,486                                               |       | 3,800                |       | (700                   | )          | 8,586                                               |       |
|                           |       | Redeemable  Preferred Stock (2)                |       | 4,748                                               |       | 380                  |       | —                 |       | 5,128                                               |       |
|                           |       | Common Stock (2)                               |       | 10,062                                              |       | 3,959                |       | —                 |       | 14,021                                              |       |
|                           |       |                                           |       | 44,687                                              |       | 8,139                |       | (3,395                 | )          | 49,431                                              |       |
|                           |       |                                           |       |                                                |       |                 |       |                   |       |                                                |       |
| Acme  Cryogenics, Inc.    |       | Senior Subordinated Term Debt                  |       | 14,500                                              |       | —               |       | —                 |       | 14,500                                              |       |
|                           |       | Redeemable  Preferred Stock (2)                |       | 7,795                                               |       | —               |       | (875                   | )          | 6,920                                               |       |
|                           |       | Common Stock (2)                               |       | 2,977                                               |       | —               |       | (2,977                 | )          | —                                              |       |
|                           |       | Common Stock  Warrants (2)                     |       | 291                                                 |       | —               |       | (291                   | )          | —                                              |       |
|                           |       |                                           |       | 25,563                                              |       | —               |       | (4,143                 | )          | 21,420                                              |       |
|                           |       |                                           |       |                                                |       |                 |       |                   |       |                                                |       |
| ASH Holdings  Corporation      |       | Revolving Credit Facility                      |       | —                                              |       | 850                  |       | (290                   | )          | 560                                                 |       |
|                           |       | Senior  Subordinated Term Debt                 |       | —                                              |       | 2,078                |       | —                 |       | 2,078                                               |       |
|                           |       | Redeemable  Preferred Stock (2)                |       | —                                              |       | —               |       | —                 |       | —                                              |       |
|                           |       | Common Stock (2)                               |       | —                                              |       | —               |       | —                 |       | —                                              |       |
|                           |       | Common Stock Warrants  (2)                     |       | —                                              |       | —               |       | —                 |       | —                                              |       |
|                           |       |                                           |       | —                                              |       | 2,928                |       | (290                   | )          | 2,638                                               |       |
|                           |       |                                           |       |                                                |       |                 |       |                   |       |                                                |       |
| Cavert II Holding  Corporation |       | Revolving Credit Facility                      |       | 2,400                                               |       | 300                  |       | (2,700                 | )          | —                                              |       |
|                           |       | Senior Term Debt                               |       | 6,337                                               |       | —               |       | (650                   | )          | 5,687                                               |       |
|                           |       | Senior Term Debt                               |       | 3,000                                               |       | —               |       | (50                    | )          | 2,950                                               |       |
|                           |       | Senior Subordinated Term Debt                  |       | 4,671                                               |       | —               |       | —                 |       | 4,671                                               |       |
|                           |       | Preferred Stock (2)                            |       | 4,252                                               |       | 339                  |       | —                 |       | 4,591                                               |       |
|                           |       | Common Stock (2)                               |       | 688                                                 |       | 45                   |       | —                 |       | 733                                                 |       |
|                           |       |                                           |       | 21,348                                              |       | 684                  |       | (3,400                 | )          | 21,347,617                                          |       |
|                           |       |                                           |       |                                                |       |                 |       |                   |       |                                                |       |
| Chase II Holdings  Corporation |       | Revolving Credit Facility                      |       | 3,280                                               |       | 1,715                |       | (1,600                 | )          | 3,395                                               |       |
|                           |       | Senior Term Debt                               |       | 9,900                                               |       | —               |       | (1,100                 | )          | 8,800                                               |       |
|                           |       | Senior Term Debt                               |       | 7,840                                               |       | —               |       | (160                   | )          | 7,680                                               |       |
|                           |       | Subordinated Term  Debt                        |       | 6,168                                               |       | —               |       | —                 |       | 6,168                                               |       |
|                           |       | Redeemable  Preferred Stock (2)                |       | 8,455                                               |       | 845                  |       | —                 |       | 9300                                                |       |
|                           |       | Common Stock (2)                               |       | 3,508                                               |       | 2,029                |       | —                 |       | 5,537                                               |       |
|                           |       |                                           |       | 39,151                                              |       | 4,589                |       | (2,860                 | )          | 40,880                                              |       |
|                                |            |                                                |            |                                                     |            |                      |            |                        |            |                                                     |            |  |  |  |  |

 

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| **Name of  Issuer(1)**            | ** ** | **Title of  Issue or  Nature of Indebtedness** | ** ** | **Value of  Each  Item as of  March 31, 2008** | ** **  | **Gross  Additions** | ** ** | **Gross   Reductions** | ** ** | **Value of  Each  Item as of  March 31, 2009** | ** **  |
|-----------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------------|-------------|----------------------|------------|------------------------|------------|-----------------------------------------------------|-------------|
|                              |       |                                           |       |                                                |        |                 |       |                   |       |                                                |        |
| Country Club  Enterprises, LLC    |       | Subordinated Term Debt                         |       | —                                              |        | 7,000                |       | —                 |       | 7,000                                               |        |
|                              |       | Preferred Stock (2)                            |       | —                                              |        | 3,725                |       | —                 |       | 3,725                                               |        |
|                              |       |                                           |       | —                                              |        | 10,725               |       | —                 |       | 10,725                                              |        |
|                              |       |                                           |       |                                                |        |                 |       |                   |       |                                                |        |
| Galaxy Tool  Holdings Corporation |       | Subordinated Term Debt                         |       | —                                              |        | 17,250               |       | —                 |       | 17,250                                              |        |
|                              |       | Preferred Stock  (2)                           |       | —                                              |        | 4,486                |       | —                 |       | 4,486                                               |        |
|                              |       | Common Stock (2)                               |       | —                                              |        | 701                  |       | —                 |       | 701                                                 |        |
|                              |       |                                           |       | —                                              |        | 22,437               |       | —                 |       | 22,437                                              |        |
| **Total  Control Investments**    | ** ** | ** **                                     | ** ** | **$**                                               | **130,749** | ** **           | **$**      | **49,502**             | ** ** | **$**                                               | **(14,088** | **)** | **$** | **166,163** | ** ** |
| **AFFILIATE  INVESTMENTS**        |       |                                           |       |                                                |        |                 |       |                   |       |                                                |        |
| Danco Acquisition  Corp.          |       | Revolving Credit Facility                      |       | $                                                   | 600         |                 | $          | 400                    |       | $                                                   | (622        | ) | $ | 378 |   |
|                              |       | Senior Term Debt                               |       | 5,550                                               |        | —               |       | (966                   | )          | 4,584                                               |        |
|                              |       | Senior Term Debt                               |       | 8,578                                               |        | 630                  |       | (664                   | )          | 8,544                                               |        |
|                              |       | Redeemable  Preferred Stock (2)                |       | 2,576                                               |        | —               |       | (18                    | )          | 2,558                                               |        |
|                              |       | Common Stock  Warrants (2)                     |       | 1,045                                               |        | —               |       | (1,045                 | )          | —                                              |        |
|                              |       |                                           |       | 18,349                                              |        | 1,030                |       | (3,315                 | )          | 16,064                                              |        |
|                              |       |                                           |       |                                                |        |                 |       |                   |       |                                                |        |
| Mathey  Investments, Inc.    |       | Revolving Credit Facility                      |       | —                                              |        | 537                  |       | (8                     | )          | 529                                                 |        |
|                              |       | Senior Term Debt                               |       | 2,500                                               |        | —               |       | (161                   | )          | 2,339                                               |        |
|                              |       | Senior Term Debt                               |       | 7,300                                               |        | 73                   |       | (291                   | )          | 7,082                                               |        |
|                              |       | Common Stock (2)                               |       | 500                                                 |        | —               |       | (54                    | )          | 446                                                 |        |
|                              |       | Common Stock  Warrants (2)                     |       | 277                                                 |        | —               |       | (17                    | )          | 260                                                 |        |
|                              |       |                                           |       | 10,577                                              |        | 610                  |       | (531                   | )          | 10,656                                              |        |
|                              |       |                                           |       |                                                |        |                 |       |                   |       |                                                |        |
| Noble  Logistics, Inc.       |       | Revolving Credit Facility                      |       | 1,900                                               |        | 100                  |       | (500                   | )          | 1,500                                               |        |
|                              |       | Senior Term Debt                               |       | 6,077                                               |        | —               |       | (1,782                 | )          | 4,295                                               |        |
|                              |       | Senior Term Debt                               |       | 7,000                                               |        | 300                  |       | (1,825                 | )          | 5,475                                               |        |
|                              |       | Senior  Subordinated Term Debt                 |       | —                                              |        | 1,000                |       | (1,000                 | )          | —                                              |        |
|                              |       | Senior  Subordinated Term Debt                 |       | —                                              |        | 500                  |       | (125                   | )          | 375                                                 |        |
|                              |       | Senior  Subordinated Term Debt                 |       | —                                              |        | 150                  |       | (1                     | )          | 149                                                 |        |
|                              |       | Redeemable  Preferred Stock (2)                |       | 2,108                                               |        | —               |       | (2,108                 | )          | —                                              |        |
|                              |       | Common Stock (2)                               |       | 1,447                                               |        | 182                  |       | (1,629                 | )          | —                                              |        |
|                              |       |                                           |       | 18,532                                              |        | 2,232                |       | (8,970                 | )          | 11,794                                              |        |
|                              |       |                                           |       |                                                |        |                 |       |                   |       |                                                |        |
| Quench Holdings  Corporation      |       | Revolving Credit Facility                      |       | 1,500                                               |        | —               |       | (1,500                 | )          | —                                              |        |
|                              |       | Senior Term Debt                               |       | 4,250                                               |        | —               |       | (4,250                 | )          | —                                              |        |
|                              |       | Senior  Subordinated Term Debt                 |       | 7,820                                               |        | 225                  |       | (2,245                 | )          | 5,800                                               |        |
|                              |       | Equipment Line  Note                           |       | 1,088                                               |        | 588                  |       | (1,676                 | )          | —                                              |        |
|                              |       | Preferred Stock  (2)                           |       | —                                              |        | 2,592                |       | (50                    | )          | 2,542                                               |        |
|                              |       | Common Stock  Warrants (2)                     |       | —                                              |        | —               |       | —                 |       | —                                              |        |
|                              |       |                                           |       | 14,658                                              |        | 3,405                |       | (9,721                 | )          | 8,342                                               |        |
|                              |       |                                           |       |                                                |        |                 |       |                   |       |                                                |        |
| Tread Corporation                 |       | Senior Term Debt                               |       | —                                              |        | 5,000                |       | (75                    | )          | 4,925                                               |        |
|                              |       | Preferred Stock  (2)                           |       | —                                              |        | 793                  |       | —                 |       | 793                                                 |        |
|                              |       | Common Stock  Warrants (2)                     |       | —                                              |        | 453                  |       | —                 |       | 453                                                 |        |
|                              |       |                                           |       | —                                              |        | 6,246                |       | (75                    | )          | 6,171                                               |        |
| **Total  Affiliate Investments**  | ** ** | ** **                                     | ** ** | **$**                                               | **62,116**  | ** **           | **$**      | **13,523**             | ** ** | **$**                                               | **(22,612** | **)** | **$** | **53,027** | ** ** |

 

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(1)                                  Certain of thelisted securities are issued by affiliate(s) of the indicated portfoliocompany.

 

(2)                                  Security isnon-income producing.

 

100

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