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**UNITED STATES********SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

 

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**FORM 10-K**

 

**(MarkOne)**

 

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

 

**For the fiscal year ended March 31, 2010**

 

**OR**

 

**o****         TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**Commission file number 814-00704**

 

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**GLADSTONE INVESTMENT CORPORATION**

(Exact name of registrant as specified in its charter)

 

| **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) of the Act:

 

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

 

Securities registered pursuant to Section 12(g) of theAct:  **None**

 

Indicate by check mark if the registrant is a well-known seasonedissuer, as defined in Rule 405 of the Securities Act. YES o  NO x

 

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

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.  YES x  NO o

 

Indicate by check mark whether the registrant has submittedelectronically and posted on its corporate Web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation 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 if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not becontained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this 10-Kor any amendment to this Form 10-K.  o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See definitions of “large accelerated filer,” “accelerated filer,” and“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Checkone):

 

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

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12 b-2 of the Exchange Act).  YES o  NO x

 

The aggregate market value of the voting stock held by non-affiliates ofthe Registrant on September 30, 2009, based on the closing price on thatdate of $4.85 on the NASDAQ Global Select Market, was $105,676,160. For thepurposes of calculating this amount only, all directors and executive officersof the Registrant have been treated as affiliates. There were 22,080,133 sharesof the Registrant’s Common Stock, $0.001 par value, outstanding as of May 21,2010.

 

**Documents Incorporated by Reference. **Portions of the Registrant’sProxy Statement relating to the Registrant’s 2010 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-K FOR THE FISCAL YEAR ENDED**

**MARCH 31, 2010**

 

**TABLE OF CONTENTS**

 
| PART I   | Item 1  | Business                                                                                                            | 3  |
|---------------|--------------|---------------------------------------------------------------------------------------------------------------------|----|
|          | Item 1A | Risk Factors                                                                                                        | 16 |
|          | Item 1B | Unresolved  Staff Comments                                                                                          | 29 |
|          | Item 2  | Properties                                                                                                          | 29 |
|          | Item 3  | Legal Proceedings                                                                                                   | 29 |
| PART II  | Item 5  | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities | 29 |
|          | Item 6  | Selected  Financial Data                                                                                            | 30 |
|          | Item 7  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         | 32 |
|          | Item 7A | Quantitative  and Qualitative Disclosures About Market Risk                                                         | 58 |
|          | Item 8  | Financial  Statements and Supplementary Data                                                                        | 60 |
|          | Item 9  | Changes in  and Disagreements with Accountants on Accounting and Financial Disclosure                               | 90 |
|          | Item 9A | Controls and  Procedures                                                                                            | 91 |
|          | Item 9B | Other Information                                                                                                   | 91 |
| PART III | Item 10 | Directors,  Executive Officers and Corporate Governance                                                             | 91 |
|          | Item 11 | Executive  Compensation                                                                                             | 91 |
|          | Item 12 | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                    | 91 |
|          | Item 13 | Certain  Relationships and Related Transactions and Director Independence                                           | 91 |
|          | Item 14 | Principal  Accountant Fees and Services                                                                             | 91 |
| PART IV  | Item 15 | Exhibits and  Financial Statement Schedules                                                                         | 92 |
| SIGNATURES    | 93           |

 

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**FORWARD-LOOKING STATEMENTS**

 

*All statements contained herein, other than historicalfacts, may constitute “forward-looking statements.” These statements may relateto, among other things, future events or our future performance or financialcondition. In some cases, you can identify forward-looking statements byterminology such as “may,” “might,” “believe,” “will,” “provided,” “anticipate,”“future,” “could,” “growth,” “plan,” “intend,” “expect,” “should,” “would,” “if,”“seek,” “possible,” “potential,” “likely” or the negative of such terms orcomparable terminology. These forward-looking statements involve known andunknown risks, uncertainties and other factors that may cause our actualresults, levels of activity, performance or achievements to be materiallydifferent from any future results, levels of activity, performance orachievements expressed or implied by such forward-looking statements. Suchfactors include, among others: (1) further adverse changes in the economyand the capital markets; (2) risks associated with negotiation andconsummation of pending and future transactions; (3) the loss of one ormore of our executive officers, in particular David Gladstone, Terry LeeBrubaker, George Stelljes III or David Dullum; (4) changes in our businessstrategy; (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 Gladstone Investment Corporationand its wholly-owned subsidiaries unless the context otherwise indicates.*

 

**Item 1. Business**

 

**Overview**

 

Wewere established primarily 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. When we invest in buyouts we do so with the management teamof the portfolio companies and with other buyout funds.  We also sometimes invest in senior securedloans, common stock and, to a much lesser extent, senior and subordinatedsyndicated loans. Our investment objective is to generate both current incomeand capital gains through these debt and equity instruments.

 

Wewere incorporated under the General Corporation Laws of the State of Delawareon February 18, 2005. On June 22, 2005 we completed an initial publicoffering and commenced operations. 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”).  For federalincome tax purposes, we have elected to be treated as a regulated investmentcompany (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, asamended (the “Code”).  In order tocontinue to qualify as a RIC for federal income tax purposes and obtainfavorable RIC tax treatment, we must meet certain requirements, includingcertain minimum distribution requirements.

 

Weseek to achieve returns from current income from senior, subordinated andmezzanine debt, and capital gains from preferred stock and warrants to purchasecommon stock that we purchase in connection with buyouts and recapitalizationsof small and mid-sized companies with established management teams. We seek tomake investments that generally range between $10 million and$40 million each, although this investment size may vary proportionatelyas the size of our capital base changes. Typically, our investments mature inno more than seven years and accrue interest at fixed or variable rates withfloors in place.  We invest either byourselves or jointly with other buyout funds and/or management of the portfoliocompany, depending on the opportunity. If we are participating in an investmentwith one or more co-investors, our investment is likely to be smaller than ifwe were to be investing alone.

 

Weexpect that our target portfolio over time will primarily include the followingthree categories of investments in private companies:

 

·                  *SubordinatedDebt and Mezzanine 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 and subordinatedloans are collateralized by a subordinated lien on some or all of the assets ofthe borrower. We structure most of our mezzanine and subordinated loans withvariable interest rates, but some are fixed rate loans. In either event, westructure the loans at relatively high rates of interest that provide us withsignificant current interest income. Our subordinated and mezzanine loanstypically have maturities of five to seven years and provide for interest-onlypayments in the early years, with amortization of principal deferred to the lateryears of the mezzanine loans. In some cases, we may enter into loans that, bytheir terms, convert into equity or additional debt securities or deferpayments of interest for the first few years after our investment.

 

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Our subordinated and mezzanine debt investments may include equityfeatures, such as warrants or options to buy a significant common stock ownershipinterest in the portfolio company, or success fees if the business is sold. Ifa portfolio company appreciates in value, we may achieve additional investmentreturns from any equity interests we hold. If we are a minority interestholder, we may structure the warrants to provide provisions protecting ourrights as a minority-interest holder, such as the right to sell the warrantsback to the company upon the occurrence of specified events. In many cases, wealso obtain registration rights in connection with these equity interests,which may include demand and co-registration rights.

 

·                  *Preferredand Common Stock.*  We alsoacquire preferred or common stock, or both, in connection with a buyout orrecapitalization. These investments are generally in combination with aninvestment in one of our debt products. With respect to preferred or commonstock investments, we target an investment return substantially higher than ourinvestments in loans.  However, we canoffer no assurance that we can achieve such a return with respect to anyinvestment or our portfolio as a whole. The features of the preferred stock wereceive vary by transaction but may include priority distribution rights,superior voting rights, redemption rights, liquidation preferences and otherprovisions intended to protect our interests. Generally speaking, common stockdoes not have any current income and its value is realized, if at all, upon thesale of the business or following the company’s initial public offering.

 

·                  *SeniorSecured Debt.*  We mayprovide senior secured acquisition financing for some portfolio companies. Wetypically structure these senior secured loans to have terms of three to fiveyears, and they may provide for limited principal payments in the first fewyears of the term of the loan. We generally obtain security interests in theassets of our portfolio companies that will serve as collateral in support ofthe repayment of these senior loans. This collateral usually takes the form offirst priority liens on the assets of the portfolio company.  The interest rates on our senior secured loans aregenerally variable rates based on the London Interbank Offered Rate (“LIBOR”).

 

*Investment Concentrations*

 

Approximately 45.6% of the aggregate fair value of our investmentportfolio at March 31, 2010 was comprised of senior term debt, 34.4% wassenior subordinated term debt, 9.9% was preferred equity securities and 10.1%was common equity securities.  At March 31,2010, we had investments in 16 portfolio companies with an aggregate fair valueof $206.9 million, of which A. Stucki Holding Corp., Chase II Holdings Corp.and Cavert II Holding Corp. collectively comprised approximately $98.2 million,or 47.5% of our total investment portfolio, at fair value.  The following table outlines our investmentsby type at March 31, 2010 and 2009:

 
| ** **                    | ** ** | **March 31,  2010** | ** **  | **March 31,  2009** | ** ** |
|-------------------------------|------------|--------------------------|-------------|--------------------------|------------|
| **(in  thousands)**           | ** ** | **Cost**                 | ** **  | **Fair  Value**          | ** ** | **Cost** | ** ** | **Fair  Value** | ** ** |
| Senior Term Debt              | ** ** | **$**                    | **102,446** | ** **               | **$**      | **94,359** |   | $ | 224,261 |   | $ | 179,676 |   |
| Senior Subordinated Term Debt | ** ** | **79,799**               | ** **  | **71,112**               |       | 79,362 |   | 72,061 |   |
| Preferred Equity              | ** ** | **40,728**               | ** **  | **20,425**               |       | 40,728 |   | 40,043 |   |
| Common Equity/Equivalents     | ** ** | **4,594**                | ** **  | **20,962**               |       | 4,594 |   | 22,150 |   |
| **Total Investments**         | ** ** | **$**                    | **227,567** | ** **               | **$**      | **206,858** |   | $ | 348,945 |   | $ | 313,930 |   |

 

Investmentsat fair value consisted of the following industry classifications at March 31,2010 and 2009:

 
| ** **                                 | ** ** | **March 31,  2010** | ** **  | **March 31,  2009** | ** ** |
|--------------------------------------------|------------|--------------------------|-------------|--------------------------|------------|
| ** **                                 | ** ** | ** **               | ** **  | **Percentage  of**       | ** ** | ** ** | ** ** | **Percentage  of** | ** ** |
| **(dollars  in thousands)**                | ** ** | **Fair  Value**          | ** **  | **Total  Investments**   | ** ** | **Net  Assets** | ** ** | **Fair  Value** | ** ** | **Total  Investments** | ** ** | **Net  Assets** | ** ** |
| Machinery                                  | ** ** | **$**                    | **60,692**  | ** **               | **29.3**   | **%** | **31.5** | **%** | $ | 63,907 |   | 20.4 | % | 29.7 | % |
| Diversified/Conglomerate Manufacturing     | ** ** | **43,054**               | ** **  | **20.8**                 | ** ** | **22.3** |   | 56,944 |   | 18.1 |   | 26.5 |   |
| Containers, Packaging and Glass            | ** ** | **18,731**               | ** **  | **9.1**                  | ** ** | **9.7** |   | 21,446 |   | 6.8 |   | 10.0 |   |
| Aerospace and Defense                      | ** ** | **17,099**               | ** **  | **8.3**                  | ** ** | **8.9** |   | 22,436 |   | 7.2 |   | 10.4 |   |
| Chemicals, Plastics and Rubber             | ** ** | **13,585**               | ** **  | **6.6**                  | ** ** | **7.0** |   | 21,420 |   | 6.8 |   | 10.0 |   |
| Buildings and Real Estate                  | ** ** | **10,220**               | ** **  | **4.9**                  | ** ** | **5.3** |   | 10,709 |   | 3.4 |   | 5.0 |   |
| Cargo Transport                            | ** ** | **9,394**                | ** **  | **4.5**                  | ** ** | **4.9** |   | 13,324 |   | 4.3 |   | 6.2 |   |
| Healthcare, Education and Childcare        | ** ** | **9,374**                | ** **  | **4.5**                  | ** ** | **4.9** |   | 33,605 |   | 10.7 |   | 15.6 |   |
| Automobile                                 | ** ** | **9,040**                | ** **  | **4.4**                  | ** ** | **4.7** |   | 14,436 |   | 4.6 |   | 6.7 |   |
| Telecommunications                         | ** ** | **7,831**                | ** **  | **3.8**                  | ** ** | **4.1** |   | 9,139 |   | 2.9 |   | 4.3 |   |
| Oil and Gas                                | ** ** | **4,943**                | ** **  | **2.4**                  | ** ** | **2.6** |   | 6,171 |   | 2.0 |   | 2.9 |   |
| Printing and Publishing                    | ** ** | **2,895**                | ** **  | **1.4**                  | ** ** | **1.5** |   | 3,158 |   | 1.0 |   | 1.5 |   |
| Diversified/Conglomerate Service           | ** ** | **—**               | ** **  | **—**               | ** ** | **—** |   | 23,585 |   | 7.5 |   | 11.0 |   |
| Electronics                                | ** ** | **—**               | ** **  | **—**               | ** ** | **—** |   | 6,594 |   | 2.1 |   | 3.1 |   |
| Personal, Food, and Miscellaneous Services | ** ** | **—**               | ** **  | **—**               | ** ** | **—** |   | 3,552 |   | 1.1 |   | 1.6 |   |
| Broadcasting and Entertainment             | ** ** | **—**               | ** **  | **—**               | ** ** | **—** |   | 1,934 |   | 0.6 |   | 0.9 |   |
| Beverage, Food and Tobacco                 | ** ** | **—**               | ** **  | **—**               | ** ** | **—** |   | 1,570 |   | 0.5 |   | 0.7 |   |
| **Total Investments**                      | ** ** | **$**                    | **206,858** | ** **               | **100.0**  | **%** | ** ** |   | $ | 313,930 |   | 100.0 | % | ** ** | ** ** |

 

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Theinvestments at fair value were included in the following geographic regions ofthe United States at March 31, 2010 and 2009:

 
| ** **                  | ** ** | **March 31,  2010** | ** **  | **March 31,  2009** | ** ** |
|-----------------------------|------------|--------------------------|-------------|--------------------------|------------|
| ** **                  | ** ** | ** **               | ** **  | **Percentage  of**       | ** ** | ** ** | ** ** | **Percentage  of** | ** ** |
| **(dollars  in thousands)** | ** ** | **Fair  Value**          | ** **  | **Total  Investments**   | ** ** | **Net  Assets** | ** ** | **Fair  Value** | ** ** | **Total  Investments** | ** ** | **Net  Assets** | ** ** |
| Mid-Atlantic                | ** ** | **$**                    | **88,501**  | ** **               | **42.8**   | **%** | **45.9** | **%** | $ | 119,622 |   | 38.1 | % | 55.7 | % |
| Midwest                     | ** ** | **68,802**               | ** **  | **33.3**                 | ** ** | **35.6** |   | 105,945 |   | 33.7 |   | 49.3 |   |
| Southeast                   | ** ** | **25,493**               | ** **  | **12.3**                 | ** ** | **13.2** |   | 40,512 |   | 12.9 |   | 18.9 |   |
| West                        | ** ** | **16,124**               | ** **  | **7.8**                  | ** ** | **8.4** |   | 30,326 |   | 9.7 |   | 14.1 |   |
| Northeast                   | ** ** | **7,938**                | ** **  | **3.8**                  | ** ** | **4.1** |   | 17,525 |   | 5.6 |   | 8.1 |   |
| **Total Investments**       | ** ** | **$**                    | **206,858** | ** **               | **100.0**  | **%** | ** ** |   | $ | 313,930 |   | 100.0 | % | ** ** | ** ** |

 

Thegeographic region indicates the location of the headquarters for our portfoliocompanies. A portfolio company may have a number of other business locations inother geographic regions.

 

**Our Investment Adviser and Administrator**

 

GladstoneManagement Corporation (our “Adviser”) is led by a management team which hasextensive experience in our lines of business. Our Adviser also has anaffiliate, Gladstone Administration, LLC (the “Administrator”), which employsour chief financial officer, chief compliance officer, treasurer, internalcounsel and their respective staffs. Excluding our chief financial officer, allof our executive officers are officers or directors, or both, of our Adviserand our Administrator.

 

OurAdviser and Administrator also provide investment advisory and administrativeservices, respectively, to our affiliates, Gladstone Commercial Corporation (“GladstoneCommercial”), a publicly traded real estate investment trust; Gladstone CapitalCorporation (“Gladstone Capital”), a publicly traded BDC and RIC; GladstoneLending Corporation (“Gladstone Lending”), a public, non-traded BDC and RIC; Gladstone Partners Fund, L.P., a privatepartnership fund formed primarily to co-invest with us and Gladstone Capital; and GladstoneLand Corporation, a private agricultural real estate company owned by DavidGladstone, our chairman and chief executive officer.  The majority of our executive officers serveas either directors or executive officers, or both, of our Adviser, ourAdministrator, Gladstone Commercial, Gladstone Capital and Gladstone Lending.In the future, our Adviser and Administrator may provide investment advisoryand administrative services, respectively, to other funds, both public and private.

 

Wehave been externally managed by our Adviser pursuant to an investment advisoryand administrative agreement since our inception. Our Adviser was organized asa corporation under the laws of the State of Delaware on July 2, 2002 andis a registered investment adviser under the Investment Advisers’ Act of 1940,as amended. Our Adviser is headquartered in McLean, Virginia, a suburb ofWashington, D.C., and has offices in New York, Illinois, New Jersey,Connecticut, Texas and Georgia.

 

**Investment Process**

 

***Overview of Investment and ApprovalProcess***

 

Tooriginate investments, our Adviser’s investment professionals use an extensivereferral network comprised primarily of private equity sponsors, venturecapitalists, 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 will seek an initialscreening of the opportunity from our Adviser’s investment committee, which iscomposed of David Gladstone (our chairman and chief executive officer), TerryLee Brubaker (our co-vice chairman and chief operating officer) and GeorgeStelljes III (our co-vice chairman and chief investment officer). If theprospective portfolio company passes this initial screening, the investmentprofessionals conduct a due diligence investigation and create a detailedprofile summarizing the prospective portfolio company’s historical financialstatements, industry and management team and analyzing its conformity to ourgeneral investment criteria. The investment professionals then present thisprofile to our Adviser’s investment committee, which must approve eachinvestment. Further, each financing is available for review by the members ofour Board of Directors, a majority of whom are not “interested persons” asdefined in Section 2(a)(19) of the 1940 Act.

 

***Prospective Portfolio CompanyCharacteristics***

 

Wehave identified certain characteristics that we believe are important inidentifying and investing in prospective portfolio companies. The criterialisted below provide general guidelines for our investment decisions, althoughnot all of these criteria may be met by each portfolio 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, we 

 

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seekto invest in companies that generate relatively high and stable cash flow toprovide some assurance that they will be able to service their debt and pay anyrequired 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***

 

OurAdviser conducts what we believe are extensive due diligence investigations ofour prospective portfolio companies and investment opportunities. Our duediligence investigation of a prospective portfolio company may begin with areview of publicly available information and generally includes some or all ofthe following:

 

·                  a review of the prospectiveportfolio company’s historical and projected financial information;

 

·                  visits to the prospectiveportfolio company’s business site(s);

 

·                  interviews with theprospective portfolio company’s management, employees, customers and vendors;

 

·                  review of all loandocuments;

 

·                  background checks on theprospective portfolio company’s management team; and

 

·                  research on the prospectiveportfolio company’s products, services or particular industry.

 

Uponcompletion of a due diligence investigation and a decision to proceed with aninvestment in a buyout , recapitalization or other growth plan, our Adviser’sinvestment professionals who have primary responsibility for the investmentpresent the investment opportunity to our Adviser’s investment committee, whichconsists of Messrs. Gladstone, Brubaker and Stelljes. The investmentcommittee determines whether to pursue the potential investment. Additional duediligence of a potential investment may be conducted on our behalf by attorneysand independent accountants prior to the closing of the investment, as well asother outside advisers, as appropriate.

 

Wealso rely on the long-term relationships that our Adviser’s investmentprofessionals have with venture capitalists, leveraged buyout funds, investmentbankers, commercial bankers, private equity sponsors, and business brokers andon the extensive direct experiences of our executive officers and managingdirectors in providing debt and equity capital to small and medium-sizedprivate businesses.

 

***Investment Structure***

 

Oncewe have determined that a prospective acquisition, buyout or recapitalizationmeets our standards and investment criteria, we work with the management ofthat company and other capital providers to structure the transaction in a waythat provides us the greatest opportunity to maximize our return on theinvestment, while providing appropriate incentives to management of thecompany.  As we described in the Overviewsection above, the capital classes through which we typically structure a dealmay include 

 

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subordinatedand mezzanine debt, senior secured debt and preferred and common equity.  Through our risk management process, we seekto limit the downside risk of our investments by:

 

·                  making investments with anexpected total return (including both interest and potential equityappreciation) that we believe compensates us for the credit risk of theinvestment;

 

·                  seeking collateral orsuperior positions in the portfolio company’s capital structure where possible;

 

·                  incorporating put rights andcall protection into the investment structure where possible; and

 

·                  negotiating covenants inconnection with our investments that afford our portfolio companies as muchflexibility as possible in managing their businesses, consistent with thepreservation of our capital.

 

Weexpect to hold most of our investments in subordinated debt, mezzanine debt orequity interests until maturity or repayment, but we will sell our investmentsearlier if a liquidity event takes place, such as the sale or recapitalizationof a portfolio company or, in the case of an equity investment in a company,its initial public offering. Occasionally, we may sell some or all of oursubordinated debt, mezzanine debt or equity interests in a portfolio company toa third party, such as an existing investor in the portfolio company, through aprivately negotiated transaction.

 

***Temporary Investments***

 

Pendinginvestment in the debt of private companies, we invest our otherwise uninvestedcash primarily in cash, cash items, government securities or high-quality debtsecurities maturing in one year or less from the time of investment, to whichwe refer collectively as temporary investments, so that at least 70% of ourassets are “qualifying assets,” for purposes of the business developmentcompany provisions of the 1940 Act.  Forinformation regarding regulations to which we are subject and the definition of“qualifying assets,” see “—Regulation as a Business Development Company.”

 

***Hedging Strategies***

 

Althoughit has not yet happened, nor do we expect this to happen in the near future,when one of our portfolio companies in which we hold equity investments goespublic, we may undertake hedging strategies with regard to any equity intereststhat we may have in that company. We may mitigate risks associated with thevolatility of publicly traded securities by, for instance, selling securitiesshort or writing or buying call or put options. Hedging against a decline inthe value of such investments in public companies would not eliminatefluctuations in the values of such investments or prevent losses if the valuesof such investments decline, but it would establish other investments designedto gain from those same developments. Therefore, by engaging in hedgingtransactions, we can moderate the decline in the value of our hedgedinvestments in public companies. However, such hedging transactions would alsolimit our opportunity to gain from an increase in the value of our investmentin the public company. Pursuant to our line of credit, we have agreed to enterinto hedging transactions, such as interest rate cap agreements, in connectionwith the borrowings that we make under our line of credit. To date, we hold twointerest rate cap agreements.  Hedgingstrategies can pose risks to us and our stockholders, but we believe that suchactivities are manageable because they will be limited to only a portion of ourportfolio.

 

Section 12(a)(3) ofthe 1940 Act prohibits us from effecting a short sale of any security “incontravention of such rules and regulations or orders as the SEC mayprescribe as necessary or appropriate in the public interest or for theprotection of investors . . .” Though, to date, the Securities and ExchangeCommission (the “SEC”) has not yet promulgated regulations under this statute,it is possible that such regulations could be promulgated in the future in away that would require us to change any hedging strategies that we may adopt.Accordingly, we will only engage in hedging activities that comply withapplicable law and regulations.

 

**CompetitiveAdvantages**

 

Alarge number of entities compete with us and make the types of investments thatwe seek to make in small and medium-sized, privately-owned businesses. Suchcompetitors include private equity funds, leveraged buyout funds, venturecapital funds, investment banks and other equity and non-equity basedinvestment funds, and other financing sources, including traditional financialservices companies such as commercial banks. Many of our competitors aresubstantially larger than we are and have considerably greater funding sourcesthat are not available to us. In addition, certain of our competitors may havehigher risk tolerances or different risk assessments, which could allow them toconsider a wider variety of investments, establish more relationships and buildtheir market shares. Furthermore, many of these competitors are not subject tothe regulatory restrictions that the 1940 Act imposes on us as a business developmentcompany. However, we believe that we have the following competitive advantagesover other providers of financing to small and mid-sized businesses:

 

***Management expertise***

 

DavidGladstone, our chairman and chief executive officer, is also the chairman andchief executive officer of our Adviser and its affiliated companies (the “GladstoneCompanies”), and has been involved in all aspects of the Gladstone Companies’investment activities, including serving as a member of our Adviser’sinvestment committee. David Dullum is our president and has extensive 

 

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experiencein private equity investing in middle market companies. Terry Lee Brubaker isour co-vice chairman and chief operating officer and has substantial experiencein acquisitions 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 investmentopportunities developed through proprietary research capability and extensivenetwork of contacts***

 

OurAdviser seeks to identify potential investments both through active originationand due diligence and through its dialogue with numerous management teams,members of the financial community and potential corporate partners with whomour Adviser’s investment professionals have long-term relationships. We believethat our Adviser’s investment professionals have developed a broad network ofcontacts within the investment, commercial banking, private equity andinvestment management communities, and that their reputation in investmentmanagement enables us to identify well-positioned prospective portfoliocompanies which provide attractive investment opportunities. Additionally, ourAdviser expects to generate information from its professionals’ network ofaccountants, consultants, lawyers and management teams of portfolio companiesand other companies.

 

***Disciplined, value-and-income-oriented investment philosophy with afocus on preservation of capital***

 

Inmaking its investment decisions, our Adviser focuses on the risk and rewardprofile of each prospective portfolio company, seeking to minimize the risk ofcapital loss without foregoing the potential for capital appreciation. Weexpect our Adviser to use the same value-and-income-oriented investmentphilosophy that its professionals use in the management of the other GladstoneCompanies and to commit resources to management of downside exposure. OurAdviser’s approach seeks to reduce risk in investments by using some or all ofthe following:

 

·                  focusing on companies withgood market positions, established management teams and good cash flow;

 

·                  investing in businesses withexperienced management teams;

 

·                  engaging in extensive duediligence from the perspective of a long-term investor;

 

·                  investing at lowprice-to-cash flow multiples; or

 

·                  adopting flexibletransaction structures by drawing on the experience of the investmentprofessionals of our Adviser and its affiliates.

 

***Longer investment horizon with attractive publicly traded model***

 

Unlikeprivate equity and venture capital funds that are typically organized asfinite-life partnerships, we are not subject to standard periodic capitalreturn requirements. The partnership agreements of most private equity andventure capital funds typically provide that these funds may only investinvestors’ capital once and must return all capital and realized gains toinvestors within a finite time period, often seven to ten years. Theseprovisions often force private equity and venture capital funds to seek returnson their investments by causing their portfolio companies to pursue mergers,public equity offerings, or other liquidity events more quickly than mightotherwise 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***

 

Webelieve our management team’s broad expertise and ability to draw upon manyyears of combined experience enable our Adviser to identify, assess, andstructure investments successfully across all levels of a company’s capitalstructure and manage potential risk and return at all stages of the economiccycle. We are not subject to many of the regulatory limitations that governtraditional lending institutions such as banks. As a result, we are flexible inselecting and structuring investments, adjusting investment criteria andtransaction structures, and, in some cases, the types of securities in which weinvest. We believe that this approach enables our Adviser to identifyattractive investment opportunities that will continue to generate currentincome and capital gain potential throughout the economic cycle, includingduring turbulent periods in the capital markets. One example of our flexibilityis our ability to exchange our publicly-traded stock for the stock of anacquisition target in a tax-free reorganization under the Code. Aftercompleting an acquisition in such an exchange, we can restructure the capitalof the small company to include senior and subordinated debt.

 

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***Leverage***

 

Forthe purpose of making investments other than temporary investments and to takeadvantage of favorable interest rates, we may issue senior debt securities upto the maximum amount permitted by the 1940 Act. The 1940 Act currently permitsus to issue senior debt securities and preferred stock, which we refer tocollectively as 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 ourinvestments will have a greater impact on the value of our common stock to theextent that we have borrowed money to make investments. There is a possibilitythat the costs of borrowing could exceed the income we receive on theinvestments we make with such borrowed funds. In addition, our ability to paydistributions or incur additional indebtedness would be restricted if assetcoverage is less than twice our indebtedness. If the value of our assetsdeclines, we might be unable to satisfy that test. If this happens, we may findit necessary to liquidate a portion of our loan portfolio and repay a portionof our indebtedness at a time when a sale may be disadvantageous. Furthermore,any amounts 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.

 

**OngoingRelationships with and Monitoring of Portfolio Companies**

 

***Monitoring***

 

OurAdviser’s investment professionals monitor the financial trends of eachportfolio company on an ongoing basis to determine if each is meeting itsrespective business plans and to assess the appropriate course of action foreach company. We monitor the status and performance of each portfolio companyand use it to evaluate the overall performance of our portfolio.

 

OurAdviser employs various methods of evaluating and monitoring the performance ofour investments, which include some or all of the following:

 

·                  Assessment of success in theportfolio company’s overall adherence to its business plan and compliance withcovenants;

 

·                  Attendance at andparticipation in meetings of the portfolio company’s board of directors;

 

·                  Periodic contact, includingformal update interviews with portfolio company management, and, ifappropriate, the financial or strategic sponsor;

 

·                  Comparison with othercompanies in the portfolio company’s industry; and

 

·                  Review of monthly andquarterly financial statements and financial projections for portfoliocompanies.

 

***Managerial Assistance and Services***

 

Asa business development company, we make available significant managerialassistance to our portfolio companies and provide other services to suchportfolio companies. Neither we nor our Adviser currently receives fees inconnection with managerial assistance. Our Adviser provides other services toour portfolio companies and receives fees for these other services, certain ofwhich are credited by 50% against the investment advisory fees that we pay ourAdviser.

 

***Valuation Process***

 

Thefollowing is a general description of the steps we take each quarter todetermine the value of our investment portfolio. We value our investments inaccordance with the requirements of the 1940 Act. We value securities for whichmarket quotations are readily available at their market value. We value allother securities and assets at fair value as determined in good faith by ourBoard of Directors. In determining the value of our investments, our Adviser hasestablished an investment valuation policy (the “Policy”). The Policy has beenapproved by our Board of Directors, and each quarter the Board of Directorsreviews whether our Adviser has applied the Policy consistently and voteswhether or not to accept the recommended valuation of our investment portfolio.Due to the uncertainty inherent in the valuation process, such estimates offair value may differ significantly from the values that would have beenobtained had a ready market for the securities existed. Investments for whichmarket quotations are readily available are recorded in our financialstatements at such market quotations. With respect to any investments for whichmarket quotations are not readily available or reliable, we perform the followingvaluation process each quarter:

 

·                  Our quarterly valuationprocess begins with each portfolio company or investment being initiallyassessed by our Adviser’s investment professionals responsible for theinvestment, using the Policy.

 

·                  Preliminary valuationconclusions are then discussed with our management, and documented, along withany independent opinions of value provided by Standard & Poor’sSecurities Evaluations, Inc. (“SPSE”), for review by our Board ofDirectors.

 

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·                  Our Board of Directorsreviews this documentation and discusses the information provided by ourAdviser, management, and the opinions of value provided by SPSE to arrive at adetermination that the Policy has been followed for determining the aggregate fairvalue of our portfolio of investments.

 

Ourvaluation policies, procedures and processes are more fully described under “Management’sDiscussion and Analysis of Financial Condition and Results ofOperations—Critical Accounting Policies—Investment Valuation.”

 

***Investment Advisory and ManagementAgreement***

 

We entered into aninvestment advisory and management agreement with our Adviser (the “AdvisoryAgreement”), which is controlled by our chairman and chief executive officer.In accordance with the Advisory Agreement, we pay the Adviser fees ascompensation for its services, consisting of a base management fee and anincentive fee. On July 8, 2009, our Board of Directorsapproved the renewal of our Advisory Agreement with our Adviser through August 31,2010.

 

**BaseManagement Fee**

 

The basemanagement fee is computed and payable quarterly and is assessed at an annualrate of 2.0% computed on the basis of the value of our average gross assets atthe end of the two most recently completed quarters, which are total assets,including investments made with proceeds of borrowings, less any uninvestedcash or cash equivalents resulting from borrowings.  Overall, the base management fee cannotexceed 2.0% of total assets (as reduced by cash and cash equivalents pledged tocreditors) during any given fiscal year. In addition, the following three itemsare potential adjustments to the base management fee calculation.

 

·                  *LoanServicing Fees*

OurAdviser also services the loans held by our wholly owned subsidiary, GladstoneBusiness Investment, LLC (“Business Investment”), in return for which ourAdvisor receives a 2.0% annual fee based on the monthly aggregate outstandingbalance of loans pledged under our line of credit. Since we own these loans,all loan servicing fees paid to our Adviser are treated as reductions directlyagainst the 2.0% base management fee under the Advisory Agreement.

 

·                  *PortfolioCompany Fees*

Underthe Advisory Agreement, our Adviser has also provided and continues to providemanagerial assistance and other services to our portfolio companies and mayreceive fees for services other than managerial assistance.  50% of certain of these fees are credited against thebase management fee that we would otherwise be required to pay to our Adviser.

 

·                  *Senior Syndicated Loan Fee Waiver*

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, for the years ended March 31,2010 and 2009.  Subsequently, our Boardof Directors accepted an extension of this waiver from our Advisor for our yearending March 31, 2011, and any waived fees may not be recouped by ourAdvisor in the future.

 

**Incentive Fee**

 

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 anycalendar quarter in which its pre-incentive fee net investment income does notexceed the hurdle rate (7.0% annualized);

 

·                  100% of our pre-incentivefee net investment income with respect to that portion of such pre-incentivefee net investment income, if any, that exceeds the hurdle rate but is lessthan 2.1875% in any calendar quarter (8.75% annualized); and

 

·                  20% of the amount of ourpre-incentive fee net investment income, if any, that exceeds 2.1875% in anycalendar quarter (8.75% annualized).

 

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*Quarterly Incentive Fee Based on NetInvestment Income*

 

**Pre-incentivefee net investment income(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 a capital gains incentive feethat is determined and payable in arrears as of the end of each fiscal year (orupon termination of the Advisory Agreement, as of the termination date), andequals 20% of 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, as applicable,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 20.0% of suchamount, less the aggregate amount of any capital gains incentive fees paid inrespect of our portfolio in all prior years.

 

***Administration Agreement***

 

Wehave entered into an administration agreement with our Administrator (the “AdministrationAgreement”), whereby we pay separately for administrative services. TheAdministration Agreement provides for payments equal to our allocable portionof our Administrator’s overhead expenses in performing its obligations underthe Administration Agreement, including, but not limited to, rent and salariesand benefits expenses of our chief financial officer, chief compliance officer,treasurer, internal counsel and their respective staffs.  Our allocable portion of expenses is derivedby multiplying our Administrator’s total expenses by the percentage of ouraverage assets (the total assets at the beginning each quarter) in comparisonto the average total assets of all companies managed by our Adviser undersimilar agreements.

 

**MaterialU.S. Federal Income Tax Considerations**

 

***Regulated Investment Company Status***

 

Inorder to maintain the qualification for treatment as a RIC under Subchapter Mof the 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 timesduring the taxable year, we must maintain our status as a business developmentcompany.

 

·                  **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.

 

·                  **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.

 

Inthe first quarter of the fiscal year ended March 31, 2010, we sold 29senior syndicated loans (collectively the, “Syndicated Loan Sales”) that wereheld in our portfolio of investments at March 31, 2009 to variousinvestors in the syndicated loan market to repay amounts outstanding under ourprior line of credit with Deutsche Bank AG (the “Prior Credit Facility”), whichmatured in April 2009

 

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andwas not extended by Deutsche Bank AG. Such sales changed our asset composition in a manner that has affectedour ability to meet the 50% threshold requirement of the asset diversificationtest applicable to RICs under the Code, which we refer to as the 50% threshold.

 

Failureto meet the 50% threshold alone will not result in our loss of RIC status. Incircumstances where the failure to meet the quarterly 50% threshold is theresult of fluctuations in the value of assets, including as a result of thesale of assets, we will still be deemed to have satisfied the assetdiversification test and, therefore, maintain our RIC status, as long as wehave not made any new investments, including additional investments in ourportfolio companies (such as advances under outstanding lines of credit), sincethe time that we fell below the 50% threshold. At March 31, 2010, thefourth quarterly measurement date following the Syndicated Loan Sales, wesatisfied the 50% threshold through the purchase of short-term qualifiedsecurities, which was funded primarily through a short-term loan agreement.Subsequent to the March 31st measurementdate, the short-term qualified securities matured, and we repaid the short-termloan, at which time we again fell below the 50% threshold.  As of the date of this filing, we remainbelow the 50% threshold. Thus, while we currently qualify as a RIC despite ourcurrent inability to meet the 50% threshold and potential inability to do so inthe future, our RIC status will be threatened if we make a new or additionalinvestment before regaining compliance with the 50% threshold. If we make sucha new or additional investment and fail to regain compliance with the 50%threshold prior to the next quarterly measurement date following suchinvestment, we will be in non-compliance with the RIC rules and will havethirty days to “cure” our failure of the asset diversification test to avoidour loss of RIC status. Potential cures for failure of the assetdiversification test include raising additional equity or debt capital, andchanging the composition of our assets, which could include full or partialdivestitures of investments, such that we would once again meet or exceed the50% threshold.

 

Untilthe composition of our assets is above the required 50% threshold, we willcontinue to seek to deploy similar purchases of qualified securities usingshort-term loans that would allow us to satisfy the 50% threshold, therebyallowing us to make additional investments. There can be no assurance, however,that we will be able to enter into such a transaction on reasonable terms, ifat all. We also continue to explore a number of other strategies, includingchanging the composition of our assets, which could include full or partialdivestitures of investments, and raising additional equity or debt capital,such that we would once again meet or exceed the 50% threshold. Our ability toimplement any of these strategies will be subject to market conditions and anumber of risks and uncertainties that are, in part, beyond our control.

 

*Failure to Qualify as a RIC.*  If we are unable to qualify for treatment asa RIC, we will be subject to tax on all of our taxable income at regularcorporate rates. We would not be able to deduct distributions to stockholders,nor would we be required to make such distributions. Distributions would betaxable to our stockholders as dividend income to the extent of our current andaccumulated earnings and profits. Subject to certain limitations under theCode, corporate distributees would be eligible for the dividends receiveddeduction. Distributions in excess of our current and accumulated earnings andprofits would be treated first as a return of capital to the extent of thestockholder’s tax basis, and then as a gain realized from the sale or exchangeof property. If we fail to meet the RIC requirements for more than twoconsecutive years and then seek to requalify as a RIC, we would be required torecognize a gain to the extent of any unrealized appreciation on our assetsunless we make a special election to pay corporate-level tax on any suchunrealized appreciation recognized during the succeeding 10-year period. Absentsuch special election, any gain we recognized would be deemed distributed toour stockholders as a taxable distribution.

 

*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.

 

Theexcise tax would apply only to the amount by which 98% of our income exceedsthe amount of income we distribute, actually or on a deemed basis, tostockholders. We will be subject to regular corporate income tax, currently atrates up to 35%, on any undistributed income, including both ordinary incomeand capital gains. We intend to retain some or all of our capital gains, but todesignate the retained amount as a deemed distribution. In that case, amongother consequences, we will pay tax on the retained amount, each stockholderwill be required to include its share of the deemed distribution in income asif it had been actually distributed to the stockholder and the stockholder willbe entitled to claim a credit or refund equal to its allocable share of the taxwe pay on the retained capital gain. The amount of the deemed distribution netof such tax will be added to the stockholder’s cost basis for its common stock.Since we expect to pay tax on any retained capital gains at our regularcorporate capital gain tax rate, and since that rate is in excess of themaximum rate currently payable by individuals on long-term capital gains, theamount of tax that individual stockholders will be treated as having paid willexceed the tax they owe on the capital gain dividend and such excess may beclaimed as a credit or refund against the stockholder’s other tax obligations.A stockholder that is not subject to U.S. federal income tax or tax onlong-term capital gains would be required to file a U.S. federal incometax return on the appropriate form in order to claim a refund for the taxes wepaid. In order to utilize the deemed distribution approach, we must providewritten notice to the stockholders prior to the expiration of 60 daysafter the close of the relevant tax year. We will also be subject toalternative minimum tax, but any tax preference items would be apportionedbetween us and our stockholders in the same proportion that distributions,other than capital gain dividends, paid to each stockholder bear to our taxableincome determined without regard to the dividends paid deduction.

 

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Ifwe acquire debt obligations that were originally issued at a discount, whichwould generally include loans we make that are accompanied by warrants, thatbear interest at rates that are not either fixed rates or certain qualifiedvariable rates or that are not unconditionally payable at least annually overthe life of the obligation, we will be required to include in taxable incomeeach year a portion of the original issue discount (“OID”) that accrues overthe life of the obligation. Such OID will be included in our investment companytaxable income even though we receive no cash corresponding to such discountamount. As a result, we may be required to make additional distributionscorresponding to such OID amounts in order to satisfy the annual distributionrequirement and to continue to qualify as a RIC or to avoid the 4% excise tax.In this event, we may be required to sell temporary investments or other assetsto meet the RIC distribution requirements. Through March 31, 2010, weincurred no OID income.

 

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

 

*Distributions. *For any periodduring which we qualify for treatment as a RIC for federal income tax purposes,distributions to our stockholders attributable to our investment companytaxable income generally will be taxable as ordinary income to stockholders tothe extent of our current or accumulated earnings and profits. Anydistributions in excess of our earnings and profits will first be treated as areturn of capital to the extent of the stockholder’s adjusted basis in his orher shares of common stock and thereafter as gain from the sale of shares ofour common stock. Distributions of our long-term capital gains, designated byus as such, will be taxable to stockholders as long-term capital gainsregardless of the stockholder’s holding period for its common stock and whetherthe distributions are paid in cash or invested in additional common stock.Corporate stockholders are generally eligible for the 70% dividends receiveddeduction with respect to ordinary income, but not with respect to capitalgains dividends to the extent such amount designated by us does not exceed thedividends received by us from domestic corporations. Any dividend declared byus in October, November or December of any calendar year, payable tostockholders of record on a specified date in such a month and actually paidduring January of the following year, will be treated as if it were paidby us and received by the stockholders on December 31 of the previousyear. In addition, we may elect to relate a dividend back to the prior taxableyear if we (1) declare such dividend prior to the due date for filing ourreturn for that taxable year, (2) make the election in that return, and (3) distributethe amount in the 12-month period following the close of the taxable year butnot later than the first regular dividend payment following the declaration.Any such election will not alter the general rule that a stockholder willbe treated as receiving a dividend in the taxable year in which the dividend ismade, subject to the October, November, December rule describedabove.

 

Ingeneral, the tax rates applicable to our dividends other than dividendsdesignated as capital gain dividends will be the standard ordinary income taxrates, and not the lower federal income tax rate applicable to “qualifieddividend income.” If we distribute dividends that are attributable to actualdividend income received by us that is eligible to be, and is, designated by usas qualified dividend income, such dividends would be eligible for such lowerfederal income tax rate. For this purpose, “qualified dividend income” meansdividends received by us from United States corporations and qualifying foreigncorporations, provided that both we and the stockholder recipient of ourdividend satisfy certain holding period and other requirements in respect ofour shares (in the case of our stockholder) and the stock of such corporations(in our case). However, we do not anticipate receiving or distributing asignificant amount of qualified dividend income.

 

Ifa stockholder participates in our dividend reinvestment plan, any dividendsreinvested under the plan will be taxable to the stockholder to the sameextent, and with the same character, as if the stockholder had received thedividend in cash. The stockholder will have an adjusted basis in the additionalcommon shares purchased through the plan equal to the amount of the reinvesteddividend. The additional shares will have a new holding period commencing onthe day following the day on which the shares are credited to the stockholder’saccount.

 

*Sale of Our Shares. * A U.S. stockholdergenerally will recognize taxable gain or loss if the U.S. stockholdersells or otherwise disposes of his, her or its shares of our common stock. Anygain arising from such sale or disposition generally will be treated aslong-term capital gain or loss if the U.S. stockholder has held his, heror its shares for more than one year. Otherwise, it will be classified asshort-term capital gain or loss. However, any capital loss arising from thesale or disposition of shares of our common stock held for six months or lesswill be treated as long-term capital loss to the extent of the amount ofcapital gain dividends received, or undistributed capital gain deemed received,with respect to such shares.  Under thetax laws in effect as of the date of this filing, individual U.S. stockholdersare subject to a maximum federal income tax rate of 15% on their net capitalgain (*i.e.* the excess of realizednet long-term capital gain over realized net short-term capital loss for ataxable year) including any long-term capital gain derived from an investmentin our shares. Such rate is lower than the maximum rate on ordinary incomecurrently payable by individuals. Corporate U.S. stockholders currentlyare subject to federal income tax on net capital gain at the same rates appliedto their ordinary income (currently up to a maximum of 35%). Capital losses aresubject to limitations on use for both corporate and non-corporatestockholders.

 

*Backup Withholding. * We may be required towithhold federal income tax, or backup withholding, currently at a rate of 28%,from all taxable distributions to any non-corporate U.S. stockholder (1) whofails to furnish us with a correct taxpayer identification number or acertificate that such stockholder is exempt from backup withholding, or (2) withrespect to whom the Internal Revenue Service (“IRS”) notifies us that suchstockholder has failed to properly report certain interest and dividend incometo the IRS and to respond to

 

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noticesto that effect. An individual’s taxpayer identification number is generally hisor her social security number. Any amount withheld under backup withholding isallowed as a credit against the U.S. stockholder’s federal income taxliability, provided that proper information is provided to the IRS.

 

**Regulationas a Business Development Company**

 

Weare a closed-end, non-diversified management investment company that haselected to be regulated as a business development company under Section 54of the 1940 Act. As such, we are subject to regulation under the 1940 Act. The1940 Act contains prohibitions and restrictions relating to transactionsbetween business development companies and their affiliates, principalunderwriters and affiliates of those affiliates or underwriters and requiresthat a majority of the directors be persons other than “interested persons,” asdefined in the 1940 Act. In addition, the 1940 Act provides that we may notchange the nature of our business so as to cease to be, or to withdraw ourelection as, a business development company unless approved by a majority ofour outstanding “voting securities,” as defined in the 1940 Act.

 

Weintend to conduct our business so as to retain our status as a business developmentcompany. A business development company may use capital provided by publicstockholders and from other sources to invest in long-term private investmentsin businesses.  A business developmentcompany provides stockholders the ability to retain the liquidity of a publiclytraded stock while sharing in the possible benefits, if any, of investing inprimarily privately owned companies.  Ingeneral, a business development company must have been organized and have itsprincipal place of business in the United States and must be operated for thepurpose of making investments in qualifying assets, as described in Section 55(a) (1) —(3) of the 1940 Act.

 

***Qualifying Assets***

 

Underthe 1940 Act, a business development company may not acquire any asset otherthan assets of the type listed in Section 55(a) of the 1940 Act,which are referred to as qualifying assets, unless, at the time the acquisitionis made, qualifying assets, other than certain interests in furniture,equipment, real estate, or leasehold improvements (“operating assets”)represent at least 70% of the company’s total assets, exclusive of operatingassets. The types of qualifying assets in which we may invest under the 1940Act include, but are not limited to, the following:

 

(1)          Securities purchased intransactions not involving any public offering from the issuer of suchsecurities, which issuer is an eligible portfolio company. An eligibleportfolio company 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 not have any class of securities withrespect to which a broker or dealer may extend margin credit;

(ii)          it is controlled by the business development companyand for which an affiliate of the business development company serves as adirector;

(iii)       it has total assets of not more than $4 million andcapital and surplus of not less than $2 million;

(iv)      it does not have any class of securities listed on anational securities exchange; or

(v)         it has a class of securities listed on a nationalsecurities exchange, with an aggregate market value of outstanding voting andnon-voting equity of less than $250 million.

 

(2)          Securities received inexchange for or distributed on or with respect to securities described in (1) above,or pursuant 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 from thetime of investment.

 

***Asset Coverage***

 

Weare permitted, under specified conditions, to issue multiple classes ofindebtedness and one class of stock senior to our common stock if our assetcoverage, as defined in the 1940 Act, is at least 200% immediately after eachsuch issuance. In addition, while senior securities are outstanding, we mustmake provisions to prohibit any distribution to our stockholders or therepurchase of such securities or shares unless we meet the applicable assetcoverage ratios at the time of the distribution or repurchase. We may alsoborrow amounts up to 5% of the value of our total assets for temporarypurposes. The 1940 Act requires, among other things, that (1) immediately afterissuance and before any dividend or distribution is made with respect to ourcommon stock or before any purchase of our 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

 

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holdersof shares 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***

 

Abusiness development company generally must make available significantmanagerial assistance to issuers of certain of its portfolio securities thatthe business development company counts as a qualifying asset for the 70% testdescribed above. Making available significant managerial assistance means,among other things, any arrangement whereby the business development company,through its directors, officers or employees, offers to provide, and, ifaccepted, does so provide, significant guidance and counsel concerning themanagement, operations or business objectives and policies of a portfoliocompany. Significant managerial assistance also includes the exercise of acontrolling influence over the management and policies of the portfoliocompany. However, with respect to certain, but not all such securities, wherethe business development company purchases such securities in conjunction withone or more other persons acting together, one of the other persons in thegroup may make available such managerial assistance, or the businessdevelopment company may exercise such control jointly.

 

***Investment Policies***

 

Weseek to achieve a high level of current income and capital gains throughinvestments in debt securities and preferred and common stock that we acquiredin connection with buyout and other recapitalizations. The following investmentpolicies, along with these investment objectives, may not be changed withoutthe approval of our Board of Directors:

 

·                  We will at all times conduct our business soas to retain our status as a business development company. In order to retainthat status, we may not acquire any assets (other than non-investment assetsnecessary and appropriate to our operations as a business development company)if, after giving effect to such acquisition, the value of our “qualifyingassets” is less than 70% of the value of our total assets. We anticipate thatthe securities we seek to acquire, as well as temporary investments, willgenerally be qualifying assets.

 

·                  We will at all times endeavor to conduct ourbusiness so as to retain our status as a RIC under the Code. In order to do so,we must meet income source, asset diversification and annual distributionrequirements. We may issue senior securities, such as debt or preferred stock,to the extent permitted by the 1940 Act for the purpose of making investments,to fund share repurchases, or for temporary emergency or other purposes.

 

Withthe exception of our policy to conduct our business as a business developmentcompany, these policies are not fundamental and may be changed withoutstockholder approval.

 

***Code of Ethics***

 

Weand our Adviser have each adopted a code of ethics and business conductapplicable to our officers, directors and all employees of our Adviser and ourAdministrator that complies with the guidelines set forth in Item 406 ofRegulation S-K of the Securities Act of 1933, as amended (the “Securities Act”).  As required by the 1940 Act, this codeestablishes procedures for personal investments, restricts certain transactionsby our personnel and requires the reporting of certain transactions andholdings by our personnel.  A copy ofthis code is available for review, free of charge, at our website at www.GladstoneInvestment.com.  We intend to provide any required disclosureof any amendments to or waivers of the provisions of this code by postinginformation regarding any such amendment or waiver to our website within fourdays of its effectiveness.

 

***Compliance Policies and Procedures***

 

Weand our Adviser have adopted and implemented written policies and proceduresreasonably designed to prevent violation of the federal securities laws, andour Board of Directors is required to review these compliance policies andprocedures annually to assess their adequacy and the effectiveness of theirimplementation.  We have designated achief compliance officer, John Dellafiora, Jr., who also serves as chiefcompliance officer for our Adviser.

 

**Staffing**

 

Wedo not currently have any employees and do not expect to have any employees inthe foreseeable future.  Currently,services necessary for our business are provided by individuals who areemployees of our Adviser or our Administrator pursuant to the terms of theAdvisory Agreement and the Administration Agreement, respectively.  Excluding our chief financial officer, eachof our executive officers is an employee or officer, or both, of our Adviserand our Administrator.  No employee ofour Adviser or our Administrator will dedicate all of his or her time to us.  However, we expect that 25-30 full timeemployees of our Adviser and our Administrator will spend substantial time onour matters during the remainder of calendar year 2010 and all of calendar year2011.  To the extent we acquire moreinvestments, we anticipate that the number of employees of our Adviser and ourAdministrator who devote time to our matters will increase.

 

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Asof April 30, 2010, our Adviser and Administrator collectively had 51full-time employees. A breakdown of these employees is summarized by functionalarea in the table below:

 
| **Number of Individuals** | ** ** | **Functional Area**                                                          |
|---------------------------|------------|------------------------------------------------------------------------------|
| 11                        |       | Executive Management                                                         |
| 31                        |       | Investment Management,  Portfolio Management and Due Diligence               |
| 9                         |       | Administration,  Accounting, Compliance, Human Resources, Legal and Treasury |

 

**Available Information:**

 

Copiesof 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 SecuritiesExchange Act of 1934, as amended (the “Exchange Act”) are available free ofcharge through our website at www.gladstoneinvestment.com. A request for any ofthese reports may also be submitted to us by sending a written requestaddressed to Investor Relations Manager, Gladstone Investment Corporation, 1521Westbranch Drive, Suite 200, McLean, VA 22102, or by calling our toll-freeinvestor relations line at 1-866-366-5745. The public may read and copymaterials that we file with the SEC at the SEC’s Public Reference Room at100 F Street, NE, Washington, DC 20549. Information on the operation ofthe Public Reference Room may be obtained by calling the SEC at1-800-SEC-0330. The SEC also maintains a website that contains reports, proxyand information statements, and other information regarding issuers that fileelectronically with the SEC at http://www.sec.gov.

 

**Item 1A. Risk Factors**

 

*An investment in our securities involves a number ofsignificant risks and other factors relating to our structure and investmentobjectives. As a result, we cannot assure you that we will achieve ourinvestment objectives. You should consider carefully the following informationbefore making an investment in our securities.*

 

***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 isbeginning to recover from the recession that largely began in late 2007.Despite signs of economic improvement and stabilization in both the equity anddebt markets, however, conditions within the global credit markets generallycontinue to experience dislocation and stress.  As a result, we do notknow if adverse conditions will again intensify, and we are unable to gauge thefull extent to which the disruptions will affect us.  The longer these uncertain conditionspersist, the greater the probability that these factors could continue toincrease our costs of, 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 these unstable economic conditions, which may affectthe ability of one or more of our portfolio companies to repay our loans orengage in a liquidity event, such as a sale, recapitalization or initial publicoffering. These unstable economic conditions could also disproportionatelyimpact some of the industries in which we invest, causing us to be morevulnerable to losses in our portfolio, which could cause the number of ournon-performing assets to increase and the fair market value of our portfolio todecrease. The unstable economic conditions may also decrease the value ofcollateral securing some of our loans as well as the value of our equityinvestments which would decrease our ability to borrow under our line of creditor raise equity capital, thereby further reducing our ability to make newinvestments.

 

Theunstable economic conditions have affected the availability of credit generallyand we have seen a reduction in committed funding under our line of credit from$125.0 million to $50.0 million and the withdrawal of Deutsche Bank AG as acommitted lender.  Moreover, during thefirst quarter of fiscal year 2010, we were forced to sell 29 of the 32senior syndicated 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 line of credit limits ourdistributions to stockholders, and, as a result, beginning in fiscal year 2010,we decreased our monthly cash distribution rate by 50.0% as compared to theprior year period in an effort to more closely align our distributions to ournet investment income.  We do not knowwhen market conditions will fully stabilize, if adverse conditions willintensify or the full extent to which the disruptions will continue to affectus. Also, it is possible that persistent instability of the financial marketscould have other unforeseen material effects on our business.

 

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*We may experiencefluctuations in our quarterly and annual results based on the impact ofinflation in the United States.*

 

Themajority of our portfolio companies are in industries that are directlyimpacted by inflation, such as manufacturing and consumer goods and services.Our portfolio companies may not be able to pass on to customers increases intheir costs of production which could greatly affect their operating results,impacting their ability to repay our loans. In addition, any projected futuredecreases in our portfolio companies’ operating results due to inflation couldadversely impact the fair value of those investments. Any decreases in the fairvalue of our investments could result in future unrealized losses and thereforereduce our net assets resulting from operations.

 

***Risks Related to Our ExternalManagement***

 

*We are dependent upon our keymanagement 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.*

 

Wehave no employees. Our chief executive officer, president and chief investmentofficer, chief operating officer and chief financial officer, and the employeesof our Adviser, do not spend all of their time managing our activities and ourinvestment portfolio. We are particularly dependent upon David Gladstone,George Stelljes III, Terry Lee Brubaker and David Dullum in this regard. Ourexecutive officers and the employees of our Adviser allocate some, and in somecases a material portion, of their time to businesses and activities that arenot related to our business. We have no separate facilities and are completelyreliant on our Adviser, which has significant discretion as to theimplementation and execution of our business strategies and risk managementpractices. We are subject to the risk of discontinuation of our Adviser’soperations or termination of the Advisory Agreement and the risk that, uponsuch event, no suitable replacement will be found. We believe that our successdepends to a significant extent upon our Adviser and that discontinuation ofits operations could have a material adverse effect on our ability to achieveour investment objectives.

 

*Our incentive fee mayinduce our Adviser to make certain investments, including speculativeinvestments.*

 

Themanagement compensation structure that has been implemented under the AdvisoryAgreement may cause our Adviser to invest in high risk investments or takeother risks. In addition to its management fee, our Adviser is entitled underthe Advisory Agreement to receive incentive compensation based in part upon ourachievement of specified levels of income. In evaluating investments and othermanagement strategies, the opportunity to earn incentive compensation based onnet income may lead our Adviser to place undue emphasis on the maximization ofnet income at the expense of other criteria, such as preservation of capital,maintaining sufficient liquidity, or management of credit risk or market risk,in order to achieve higher incentive compensation. Investments with higheryield potential are generally riskier or more speculative. This could result inincreased risk to the value of our investment portfolio.

 

*We may be obligated to payour Adviser incentive compensation even if we incur a loss.*

 

TheAdvisory Agreement entitles our Adviser to incentive compensation for eachfiscal 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 to payour 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.”

 

Forthe quarter ended December 31, 2009, based on the Advisory Agreement, ourAdviser was entitled to an incentive fee of $588 even though we incurred a lossof $4.4 million for the quarter resulting primarily from a decline in the valueof our portfolio.  The Adviser’s board of directorssubsequently irrevocably waived and credited $102 of the incentive fee,resulting in a net incentive fee for the fiscal year ended March 31, 2010of $486.

 

*Our Adviser’s failure to identifyand invest in securities that meet our investment criteria or perform itsresponsibilities under the Advisory Agreement may adversely affect our abilityfor future growth.*

 

Ourability to achieve our investment objectives will depend on our ability togrow, which in turn will depend on our Adviser’s ability to identify and investin securities that meet our investment criteria. Accomplishing this result on acost-effective basis will be largely a function of our Adviser’s structuring ofthe investment process, its ability to provide competent and efficient servicesto us, and our access to financing on acceptable terms. The senior managementteam of our Adviser has substantial responsibilities under the AdvisoryAgreement. In order to grow, our Adviser will need to hire, train supervise andmanage new employees successfully. Any failure to manage our future growtheffectively could have a material adverse effect on our business, financialcondition and results of operations.

 

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*There are significantpotential conflicts of interest which could impact our investment returns.*

 

Ourexecutive officers and directors, and the officers and directors of ourAdviser, serve or may serve as officers, directors or principals of entitiesthat operate in the same or a related line of business as we do or ofinvestment funds managed by our affiliates. Accordingly, they may haveobligations to investors in those entities, the fulfillment of which might notbe in the best interests of us or our stockholders. For example, Mr. Gladstone,our chairman and chief executive officer, is the chairman of the board and chiefexecutive officer of our Adviser, Gladstone Capital and Gladstone Commercialand the sole stockholder of Gladstone Land. In addition, Mr. Brubaker, ourco-vice chairman, chief operating officer and secretary is the vice chairman,chief operating officer and secretary of our Adviser, Gladstone Capital andGladstone Commercial. Mr. Stelljes, our co-vice chairman and chiefinvestment officer, is also the president and chief investment officer of ourAdviser, Gladstone Capital and Gladstone Commercial. Mr. Dullum, ourpresident and a director, is a senior managing director of our Adviser and adirector of Gladstone Capital and Gladstone Commercial. Moreover, our Advisermay establish or sponsor other investment vehicles which from time to time mayhave potentially overlapping investment objectives with those of ours andaccordingly may invest in, whether principally or secondarily, asset classessimilar to those we target. For example, our Adviser recently filed aregistration statement with the Securities and Exchange Commission for aproposed initial public offering of common stock of Gladstone LendingCorporation, a proposed fund that would primarily invest in first and secondlien term loans.  While our Adviser generallyhas broad authority to make investments on behalf of the investment vehiclesthat it advises, our Adviser has adopted investment allocation procedures toaddress these potential conflicts and intends to direct investmentopportunities to the Gladstone affiliate with the investment strategy that mostclosely fits the investment opportunity. Nevertheless, the management of ourAdviser may face conflicts in the allocation of investment opportunities toother entities managed by our Adviser. As a result, it is possible that we maynot be given the opportunity to participate in certain investments made byother members of our Adviser and its affiliated companies or investment fundsmanaged by investment managers affiliated with our Adviser.

 

Incertain circumstances, we may make investments in a portfolio company in whichone of our affiliates has or will have an investment, subject to satisfactionof any regulatory restrictions and, where required, to the prior approval ofour Board of Directors. As of March 31, 2010, our Board of Directors hasapproved the following types of co-investment transactions:

 

·                  Our affiliate,Gladstone Commercial, may lease property to portfolio companies that we do notcontrol under 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 investsimultaneously with our affiliate Gladstone Capital in senior syndicated loanswhereby neither we nor any affiliate has the ability to dictate the terms ofthe loans.

 

·                  Additionally,pursuant to an exemptive order granted by the Securities and ExchangeCommission, our Adviser may sponsor a private investment fund to co-invest withus and Gladstone Capital in accordance with the terms and conditions of theorder.

 

Certainof our officers who are also officers of our Adviser may from time to timeserve as directors of certain of our portfolio companies. If an officer servesin such capacity with one of our portfolio companies, such officer will owefiduciary duties to all stockholders of the portfolio company, which duties mayfrom time to time conflict with the interests of our stockholders.

 

Inthe course of our investing activities, we will pay management and incentivefees to our Adviser and will reimburse our Administrator for certain expensesit 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 achieve through ourinvestors 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 not obligated toprovide a waiver of the base management fee, which could negatively impact ourearnings and our ability to maintain our current level of distributions to ourstockholders.*

 

TheAdvisory Agreement provides for a base management fee based on our grossassets. Since our 2008 fiscal year, our Board of Directors has accepted on aquarterly basis voluntary, unconditional and irrevocable waivers to reduce theannual 2.0% base management fee on senior syndicated loan participations to0.5% to the extent that proceeds resulting from borrowings were used topurchase such syndicated loan participations, and any waived fees may not berecouped by our Adviser in the future. However, our Adviser is not required toissue these or other waivers of fees under the Advisory Agreement, and to theextent our investment portfolio grows in the future, we expect these fees willincrease. If our Adviser does not issue these waivers in future quarters, itcould negatively impact our earnings and may compromise our ability to maintainour current level of distributions to our stockholders, which could have amaterial adverse impact on our stock price.

 

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*Our business model is dependentupon developing and sustaining strong referral relationships with investmentbankers, business brokers and other intermediaries.*

 

Weare dependent upon informal relationships with investment bankers, businessbrokers and traditional lending institutions to provide us with deal flow. Ifwe fail to maintain our relationship with such funds or institutions, or if wefail to establish strong referral relationships with other funds, we will notbe able to grow our portfolio of loans and fully execute our business plan.

 

***Risks Related to Our ExternalFinancing***

 

*In recent years, creditors havesignificantly curtailed their lending to business development companies,including us. Because of the limited amount of committed funding under our lineof credit, we will have limited ability fund new investments if we are unableto expand the facility.*

 

On April 13, 2010,through Business Investment, we entered into a third amended and restatedcredit agreement providing for a $50.0 million revolving line of credit (the “CreditFacility”) arranged by Branch Banking and Trust Company (“BB&T”) asadministrative agent. Key Equipment Finance Company Inc. also joined the CreditFacility as a committed lender. Committed funding under the Credit Facility was reduced from the $125.0million under our Prior Credit Facility and Deutsche Bank AG, which was a committed lender underthe Prior Credit Facility, elected not to participate in the Credit Facilityand withdrew its commitment. The Credit Facility may be expanded up to $125.0 million through theaddition 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 13, 2012, 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 13, 2013,our lenders have the right to apply all interest income to amounts outstandingunder the Credit Facility. As of May 21, 2010 we had $37.6 million of borrowing capacity under theCredit Facility. Therecan be no guarantee that we will be able to renew, extend or replace the CreditFacility upon its maturity in 2012 on terms that are favorable to us, if atall.  Our ability to expand the Credit Facility, and to obtain replacementfinancing at the time of its maturity, will be constrained by then-currenteconomic conditions affecting the credit markets.  In the event that weare not able to expand the Credit Facility, or to renew, extend or refinancethe Credit Facility at the time of its maturity, this could have a materialadverse effect on our liquidity and ability to fund new investments, ourability to make distributions to our stockholders and our ability to qualify asa RIC under the Code.

 

*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 may issuedebt securities, other evidences of indebtedness (including borrowings underour line of credit) and possibly preferred stock, up to the maximum amountpermitted by the 1940 Act. The 1940 Act currently permits us, as a businessdevelopment company, to issue debt securities, and preferred stock, which we referto collectively as senior securities, in amounts such that our asset coverage,as defined in the 1940 Act, is at least 200% after each issuance of seniorsecurities. As a result of issuing senior securities, we will be exposed to therisks associated with leverage. Although borrowing money for investmentsincreases the potential for gain, it also increases the risk of a loss. Adecrease in the value of our investments will have a greater impact on thevalue of our common stock to the extent that we have borrowed money to makeinvestments. There is a possibility that the costs of borrowing could exceedthe income we receive on the investments we make with such borrowed funds. Inaddition, our ability to pay distributions or incur additional indebtedness wouldbe restricted if asset coverage is not at least twice our indebtedness. If thevalue of our assets declines, we might be unable to satisfy that test. If thishappens, we may be required to liquidate a portion of our loan portfolio andrepay a portion of our indebtedness at a time when a sale, to the extentpossible given the limited market for many of our investments, may bedisadvantageous. Furthermore, any amounts that we use to service ourindebtedness will not be available for distributions to our stockholders.

 

·                  *CommonStock. *Because we are constrainedin our ability to issue debt for the reasons given above, we are dependent onthe issuance of equity as a financing source. If we raise additional funds byissuing more common stock or senior 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 thefuture may have rights, preferences and privileges more favorable than those ofour common stock. In addition, under the 1940 Act, we will generally not beable to issue additional shares of our common stock at a price below net assetvalue per share to purchasers, other than to our existing stockholders, througha rights offering without first obtaining the approval of our stockholders andour independent directors. If we were to sell shares of our common stock belowour then current net asset value per share, such sales would result in animmediate dilution to the net asset value per share. This dilution would occuras a result of the sale of shares at a price below the then current net assetvalue per 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. For example, ifwe sell an additional 10% of our common stock at a 5% discount from net assetvalue, a stockholder who does not participate in that offering for itsproportionate interest will suffer net asset value dilution of up to 0.5%

 

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or $5 per $1,000 of net asset value. This imposes constraints on our ability to raise capital when our commonstock is trading at below net asset value, as it has for the last year.

 

*A change in interest rates may adverselyaffect our profitability and our hedging strategy may expose us to additionalrisks.*

 

Weanticipate using a combination of equity and long-term and short-termborrowings to finance our investment activities. As a result, a portion of ourincome will depend upon the difference between the rate at which we borrowfunds and the rate at which we loan these funds. Higher interest rates on ourborrowings will decrease the overall return on our portfolio.

 

Ultimately,we expect approximately 80% of the loans in our portfolio to be at variablerates determined on the basis of a LIBOR rate and approximately 20% to be atfixed rates. As of May 21, 2010, our portfolio had approximately 13.6% ofthe total of the loan cost value at variable rates, approximately 48.6% of thetotal loan cost value at variable rates with floors and approximately 37.8% ofthe total loan portfolio cost basis at fixed rates.

 

Todate, we hold two interest rate cap agreements. While hedging activities mayinsulate us against adverse fluctuations in interest rates, they may also limitour ability to participate in the benefits of lower interest rates with respectto the hedged portfolio. Adverse developments resulting from changes ininterest rates or any future hedging transactions could have a material adverseeffect on our business, financial condition and results of operations. Ourability to receive payments pursuant to our interest rate cap agreement islinked to the ability of the counter-party to that agreement to make the requiredpayments. To the extent that the counter-party to the agreement is unable topay pursuant to the terms of the agreement, we may lose the hedging protectionof the interest rate cap agreement.

 

*In addition to regulatory limitations on our ability toraise capital, our line of credit contains various covenants which, if notcomplied with, could accelerate our repayment obligations under the 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 $37.6 millionwas available for borrowings as of May 21, 2010. The Credit Facilitypermits us to fund additional loans and investments as long as we are withinthe conditions set out in the credit agreement. Current market conditions haveforced us to write down the value of a portion of our assets as required by the1940 Act and 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 in value,the amount we can borrow on the Credit Facility decreases.

 

Asa result of the Credit Facility, we are subject to certain limitations on thetype of loan investments we make, including restrictions on geographicconcentrations, sector concentrations, loan size, dividend payout, paymentfrequency 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, maintaincertain financial ratios, including asset and interest coverage and a minimumnet worth. As of March 31, 2010, we were in compliance with thesecovenants; however, our continued compliance with these covenants depends onmany factors, some of which are beyond our control. In particular, depreciationin the valuation of our assets, which valuation is subject to changing marketconditions which remain very volatile, affects our ability to comply with thesecovenants.

 

Duringthe year ended March 31, 2010, net unrealized appreciation on our investmentswas $14.3 million, which reflected the reversal of $35.7 million in unrealizeddepreciation resulting from our realized losses.  Excluding reversals, we had $21.4 million inunrealized depreciation for the year ended March 31, 2010.  During the year ended March 31, 2009,net unrealized depreciation on our investments was $19.8 million.  Given the continued instability in thecapital markets, the cumulative unrealized depreciation in our portfolio mayincrease in future periods and threaten our ability to comply with thecovenants under the Credit Facility. Accordingly, there are no assurances that we will continue to complywith these covenants.  Under the CreditFacility, we are also required to maintain our status as a BDC under the 1940Act and as a RIC under the Code.  Because of recent changes in our assetportfolio, due to significant sales of Non-Control/Non-Affiliate investments,there is a significant possibility that we may not meet the assetdiversification threshold under the Code’s rules applicable to a RIC as ofour next quarterly testing date, June 30, 2010.  Although thisfailure alone, in our current situation, will not cause us to lose our RICstatus, it will be jeopardized if we make any new investments, includingadditional investments in our portfolio companies (such as advances under ouroutstanding lines of credit) our RIC status.  For more information on ourcurrent RIC status, see “Material U.S. Federal Income Tax Considerations —Regulated Investment Company Status.” Our failure to satisfy thesecovenants could result in foreclosure by our lenders, which would accelerateour repayment obligations under the facility and thereby have a materialadverse effect on our business, liquidity, financial condition, results ofoperations and ability to pay distributions to our stockholders.

 

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*Any inability to renew, extend orreplace our line of credit**on termsfavorable to us, or at all, couldadversely impact our liquidity and ability to fund new investments or maintaindistributions to our stockholders.*

 

Availabilityunder the Credit Facility will terminate on April 13, 2012 and if thefacility is not renewed or extended by such date, all principal and interestwill be due and payable on April 13, 2013, one year after the date ofmaturity.  Between the maturity date and April 13,2013, our lenders have the right to apply all interest income to amountsoutstanding under the Credit Facility.  Asof May 21, 2010, there was approximately $11.1 million of borrowingsoutstanding on the Credit Facility. There can be no guarantee that we will be able to renew, extend orreplace the Credit Facility on terms that are favorable to us, or at all. Ourability to obtain replacement financing will be constrained by current economicconditions affecting the credit markets. Consequently, any renewal, extensionor refinancing of the Credit Facility will likely result in significantlyhigher interest rates and related charges and may impose significantrestrictions on the use of borrowed funds with regard to our ability to fundinvestments or maintain distributions to stockholders. If we are unable tosecure replacement financing, we may be forced to sell certain assets ondisadvantageous terms, which may result in realized losses and such realizedlosses could materially exceed the amount of any unrealized depreciation onthese assets as of our most recent balance sheet date, which would have amaterial adverse effect on our results of operations. In addition to sellingassets, or as an alternative, we may issue equity in order to repay amountsoutstanding under the line of credit. Based on the recent trading prices of ourstock, such an equity offering may have a substantial dilutive impact on ourexisting stockholders’ interest in our earnings and assets and voting interestin us.

 

***Risks Related to Our Investments***

 

*We operate in a highly competitive market for investmentopportunities.*

 

Alarge number of entities compete with us and make the types of investments thatwe seek to make in small and mid-sized companies. We compete with public andprivate buyout funds, commercial and investment banks, commercial financing companies,and, to the extent they provide an alternative form of financing, hedge funds.Many of our competitors are substantially larger and have considerably greaterfinancial, technical, and marketing resources than we do. For example, somecompetitors may have a lower cost of funds and access to funding sources thatare not available to us. In addition, some of our competitors may have higherrisk tolerances or different risk assessments, which would allow them toconsider a wider variety of investments and establish more relationships thanus. Furthermore, many of our competitors are not subject to the regulatoryrestrictions that the 1940 Act imposes on us as a business development company.The competitive pressures we face could have a material adverse effect on ourbusiness, financial condition, and results of operations. Also, as a result ofthis competition, we may not be able to take advantage of attractive investmentopportunities from time to time, and we can offer no assurance that we will beable to identify and make investments that are consistent with our investmentobjective. We do not seek to compete based on the interest rates we offer, andwe believe that some of our competitors may make loans with interest rates thatwill be comparable to or lower than the rates we offer. We may lose investmentopportunities if we do not match our competitors’ pricing, terms, andstructure. However, if we match our competitors’ pricing, terms, and structure,we may experience decreased net interest income and increased risk of creditloss.

 

*Our investments in small and medium-sized portfoliocompanies are extremely risky and could cause you to 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 initial publicoffering 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 adeterioration in the value of any collateral and a reduction in the likelihoodof us realizing 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

 

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may face intense competition,including competition from companies with greater financial resources, moreextensive development, manufacturing, marketing and other capabilities and alarger number of qualified managerial and technical personnel.

 

·                  *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 portfoliocompanies may have significant variations in their operating results, may fromtime to time be parties to litigation, may be engaged in rapidly changingbusinesses with products subject to a substantial risk of obsolescence, mayrequire substantial additional capital to support their operations, to financeexpansion or to maintain their competitive position, may otherwise have a weakfinancial position or may be adversely affected by changes in the businesscycle. Our portfolio companies may not meet net income, cash flow and othercoverage tests typically imposed by their senior lenders. A borrower’s failureto satisfy financial or operating covenants imposed by senior lenders couldlead to defaults and, potentially, foreclosure on its senior credit facility,which could additionally trigger cross-defaults in other agreements. If thiswere to occur, it is possible that the borrower’s ability to repay our loanwould be jeopardized.

 

·                  *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 is uncertainty regarding thevalue 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 bySPSE or the use of internally developed discounted cash flow (“DCF”)methodologies or indicative bid price (“IBP”) offered by the respectiveoriginating syndication agent’s trading desk, or secondary desk, 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 are required to sell a security, we may ultimatelysell for an amount materially less than the estimated fair value calculated bySPSE, or utilizing the TEV, IBP or the DCF methodology.  During April and May of2009, we completed the sale of 29 of the 32 senior syndicated loans that wereheld in our portfolio of investments at March 31, 2009 to variousinvestors in the syndicated loan market.  As a result of these sales, wereceived approximately $69.2 million in net cash proceeds, which wasapproximately $34.6  million less than thecost 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 andrealizable value of any collateral;

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

·                  the markets inwhich the portfolio company does business;

·                  the comparisonto publicly traded companies; and

·                  discounted cashflow and other relevant factors.

 

Becausesuch valuations, particularly valuations of private securities and privatecompanies, are not susceptible to precise

 

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determination,may fluctuate over short periods of time, and may be based on estimates, ourdeterminations of fair value may differ from the values that might haveactually resulted had a readily available market for these securities beenavailable.

 

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 third-party evaluator. We believe that our equity valuation methodsreflect those regularly used as standards by other professionals in ourindustry who value equity securities. However, determination of fair value forsecurities that are not publicly traded, whether or not we use therecommendations of an independent third-party evaluator, necessarily involvesthe exercise of subjective judgment. Our net asset value could be adversely affectedif our determinations regarding the fair value of our investments werematerially higher than the values that we ultimately realize upon the disposalof such securities.

 

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

 

Wewill generally make investments in private companies whose securities are nottraded in any public market. Substantially all of the investments we presentlyhold and the investments we expect to acquire in the future are, and will be,subject to legal and other restrictions on resale and will otherwise be lessliquid than publicly traded securities. The illiquidity of our investments maymake it difficult for us to quickly obtain cash equal to the value at which werecord our investments if the need arises. This could cause us to missimportant investment opportunities. In addition, if we are required toliquidate all or a portion of our portfolio quickly, we may record substantialrealized losses upon liquidation. In addition, we may face other restrictionson our ability to liquidate an investment in a portfolio company to the extentthat we, our Adviser, or our respective officers, employees or affiliates havematerial non-public information regarding such portfolio company.

 

Dueto the uncertainty inherent in valuing these securities, our determinations offair value may differ materially from the values that could be obtained if aready market for these securities existed. Our net asset value could bematerially 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 couldbe negatively affected if a significant portfolio investment fails to performas expected.*

 

Ourtotal investment in companies may be significant individually or in theaggregate. As a result, if a significant investment in one or more companiesfails to perform as expected, our financial results could be more negativelyaffected and the magnitude of the loss could be more significant than if we hadmade smaller investments in more companies. This risk is heightened as a result of our sale of the majority ofsenior syndicated loans in the quarter ended June 30, 2009.  As a result of these sales and other exits,the total number of portfolio companies in which we hold investments decreasedfrom 46 at March 31, 2009 to 16 at March 31, 2010.  Our five largest investments represent 62.5%of the fair value of our total portfolio at March 31, 2010, compared to48.7% at March 31, 2009. Additionally, they represent 53.0% of our total revenues for the yearended March 31, 2010, compared to 39.7% for the year ended March 31,2009.  Any disposition of a significantinvestment in one or more companies may negatively impact our net investmentincome and limit our ability to pay distributions.

 

*When we are a debt or minorityequity investor in a portfolio company, which we expect will generally be thecase, we may not be in a position to control the entity, and its management maymake decisions that could decrease the value of our investment.*

 

Weanticipate that most of our investments will continue to be either debt orminority equity investments in our portfolio companies. Therefore, we are andwill 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.*

 

Ourstrategy includes making debt and equity investments in companies in connectionwith acquisitions, buyouts and recapitalizations, which subjects us to therisks associated with change in control transactions. Change in controltransactions often present a number of uncertainties. Companies undergoingchange in control transactions often face challenges retaining key employeesand maintaining relationships with customers and suppliers. While we hope toavoid many of these difficulties by participating in transactions where themanagement team is retained and by conducting thorough due diligence in advanceof our decision to invest, if our portfolio companies experience one or more ofthese problems, we may not realize the value that we expect in connection withour investments which would likely harm our operating results and financialcondition.

 

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

 

Inaddition to risks associated with delays in investing our capital, we are alsosubject to the risk that investments that we make in our portfolio companiesmay be repaid prior to maturity. We will first use any proceeds from prepaymentsto repay any borrowings outstanding on our line of credit. In the event thatfunds remain after repayment of our outstanding borrowings, then we willgenerally 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 ourportfolio companies may impact our quarterly and annual operating results.*

 

Theadverse effect of current unstable economic conditions on federal, state, andmunicipality revenues may induce these government entities to raise varioustaxes to make up for lost revenues. Additional taxation may have an adverseaffect on our portfolio companies’ earnings and reduce their ability to repayour loans to them, thus affecting our quarterly and annual operating results.

 

*Our portfolio is concentrated in alimited number of companies and industries, which subjects us to an increasedrisk of significant loss if any one of these companies does not repay us or ifthe industries experience downturns.*

 

Asof May 21, 2010, we had investments in 15 portfolio companies, of whichthere were three investments, A. Stucki Holding Corp., Chase II Holdings Corp.and Acme Cryogenics, Inc., that comprised approximately $84.0 million or38.7% of our total investment portfolio, at cost. A consequence of a limitednumber of investments is that the aggregate returns we realize may besubstantially adversely affected by the unfavorable performance of a smallnumber of such loans or a substantial write-down of any one investment. Beyondour regulatory and income tax diversification requirements, we do not havefixed 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 21, 2010, 30.9% of our total assets were invested in machinerycompanies, and 21.6% 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 aretypically long term and will require several years to realize liquidationevents.*

 

Sincewe generally make five to seven year term loans and hold our loans and relatedwarrants or other equity positions until the loans mature, you should notexpect realization events, if any, to occur over the near term. In addition, weexpect that any warrants or other equity positions that we receive when we makeloans may require several years to appreciate in value and we cannot give anyassurance that such appreciation will occur.

 

*The disposition of our investmentsmay result in contingent liabilities.*

 

Currently,all of our investments involve private securities. In connection with thedisposition of an investment in private securities, we may be required to makerepresentations about the business and financial affairs of the underlyingportfolio company typical of those made in connection with the sale of abusiness.  We may also be required toindemnify the purchasers of such investment to the extent that any suchrepresentations turn out to be inaccurate or with respect to certain potentialliabilities.  These arrangements mayresult in contingent liabilities that ultimately yield funding obligations thatmust be satisfied through our return of certain distributions previously madeto us.

 

*There may be circumstances whereour debt investments could be subordinated to claims of other creditors or wecould be subject to lender liability claims.*

 

Eventhough we have structured some of our investments as senior loans, if one ofour portfolio companies were to go bankrupt, depending on the facts andcircumstances, including the extent to which we actually provided managerialassistance to that portfolio company, a bankruptcy court might re-characterizeour debt investments and subordinate all, or a portion, of our claims to thatof other creditors.  Holders of debtinstruments ranking senior to our investments typically would be entitled toreceive payment in full before we receive any distributions.  After repaying such senior creditors, suchportfolio company may not have any remaining assets to use to repay itsobligation to us.  We may also be subjectto lender liability claims for actions taken by us with respect to a borrower’sbusiness or in instances in which we exercised control over the borrower.  It is possible that we could become subjectto a lender’s liability claim, including as a result of actions taken inrendering significant managerial assistance.

 

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*** ***

***Portfoliocompany litigation could result in additional costs and the diversion of managementtime and resources.***

*** ***

***In thecourse of providing significant managerial assistance to certain of ourportfolio companies, we sometimes serve as directors on the boards of suchcompanies. To the extent that litigation arises out of our investments in thesecompanies, we may be named as a defendant in such litigation, which couldresult in additional costs and the diversion of management time and resources.***

*** ***

*We maynot realize gains from our equity investments and other yield enhancements.*

 

Whenwe make a subordinated loan, we may receive warrants to purchase stock issuedby the borrower or other yield enhancements, such as success fees. Our goal isto ultimately dispose of these equity interests and realize gains upon ourdisposition of such interests. We expect that, over time, the gains we realizeon these warrants and other yield enhancements will offset any losses weexperience on loan defaults. However, any warrants we receive may notappreciate in value and, in fact, may decline in value and any other yieldenhancements, such as success fees, may not be realized. Accordingly, we maynot be able to realize gains from our equity interests or other yieldenhancements and any gains we may recognize might not be sufficient to offsetlosses we experience on our loan portfolio.

 

*Any unrealized depreciation weexperience on our investment portfolio may be an indication of future realizedlosses, which could reduce our income available for distribution.*

 

Asa business development company we are required to carry our investments atmarket value or, if no market value is ascertainable, at fair value asdetermined in good faith by or under the direction of our Board of Directors.Decreases in the market values or fair values of our investments will be recordedas unrealized depreciation. Since our inception, we have, at times, incurred acumulative net unrealized depreciation of our portfolio. Any unrealizeddepreciation in our investment portfolio could result in realized losses in thefuture and ultimately in reductions of our income available for distribution tostockholders in future periods.

 

***Risks Related to Our Regulation andStructure***

 

*We currently do not meetthe 50% threshold of the asset diversification test applicable to RICs underthe Code.  If we make any additionalinvestment in the future, including advances under outstanding lines of creditto our portfolio companies, and remain below this threshold as of June 30,2010, or any subsequent quarter end, we would lose our RIC status unless we areable to cure such failure within 30 days of the quarter end.*

 

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 ofcash, cash items, U.S. government securities, the securities of other RICs andother securities to the extent such other securities of any one issuer do notrepresent more than 5% of our total assets or more than 10% of the votingsecurities of such issuer. As a result of changes in the value of our assets during April andMay 2009, due to theSyndicated Loan Sales, we fell belowthe 50% threshold.  At March 31,2010, the fourth quarterly measurement date following the Syndicated LoanSales, we satisfied the 50% threshold through the purchase of short-termqualified securities, which was funded primarily through a short-term loanagreement. Subsequent to the March 31st measurementdate, the short-term qualified securities matured, and we repaid the short-termloan, at which time we again fell below the 50% threshold.  Untilthe composition of our assets is above the required 50% threshold, we willcontinue to seek to deploy similar purchases of qualified securities usingshort-term loans that would allow us to satisfy the asset diversification test,thereby allowing us to make new or additional investments. There can be noassurance, however, that we will be able to enter into such a transaction onreasonable terms, if at all.  Failure to meet this threshold alone doesnot 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 offluctuations in the value of assets, including in our case as a result of thesale of assets, we are still deemed under the rules to have satisfied theasset diversification test and, therefore, maintain our RIC status, as long aswe have not made any new investments, including additional investments in ourportfolio companies (such as advances under outstanding lines of credit), sincethe time that we fell below the 50% threshold. Thus, while we currently qualify as a RIC despite our current inabilityto meet the 50% threshold and potential inability to do so in the future, if wemake any new or additional investments before regaining compliance with theasset diversification test, our RIC status will be threatened.  Because, in most circumstances, we arecontractually required to advance funds on outstanding lines of credit upon therequest of our portfolio companies, we may have a limited ability to avoidadding to existing investments in a manner that would cause us to fail theasset diversification test as of June 30, 2010 or as of subsequentquarterly measurement dates.

 

If we were to make a new or additional investmentbefore regaining compliance with the 50% threshold, and we did not regaincompliance prior to the next quarterly measurement date following such investment,we would have thirty days to “cure” our failure to meet the 50% threshold toavoid our loss of RIC status. Potential cures for failure of the assetdiversification test include raising additional equity or debt capital as wehave done, or changing the composition of our assets, which could include fullor partial divestitures of investments, such that we would once again meet orexceed the 50% threshold.  Our ability toimplement any of these cures would be subject to market conditions and a numberof risks and uncertainties that would be, in part, beyond our control.  Accordingly, we can not guarantee you that wewould be successful in curing any failure of the asset diversification test,which would subject us to corporate level tax. For additional information about the consequences of failing to satisfythe RIC qualification, see “—We will be subject to corporate level tax if weare unable to satisfy Internal Revenue Code requirements for RIC qualification.”

 

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*We willbe subject to corporate-level tax if we are unable to satisfy Code requirementsfor RIC qualification.*

 

Tomaintain our qualification as a RIC, we must meet income source, assetdiversification and annual distribution requirements. The annual distributionrequirement is satisfied if we distribute at least 90% of our ordinary incomeand short-term capital gains to our stockholders on an annual basis. Because weuse leverage, we are subject to certain asset coverage ratio requirements underthe 1940 Act and could, under certain circumstances, be restricted from makingdistributions necessary to qualify as a RIC. Warrants we receive with respect todebt investments will create “original issue discount,” which we must recognizeas ordinary income, increasing the amounts we are required to distribute tomaintain RIC status. Because such warrants will not produce distributable cashfor us at the same time as we are required to make distributions in respect ofthe related original issue discount, we will need to use cash from othersources to satisfy such distribution requirements. The asset diversificationrequirements must be met at the end of each calendar quarter. If we fail tomeet these tests, we may need to quickly dispose of certain investments toprevent the loss of RIC status. Since most of our investments will be illiquid,such dispositions, if even possible, may not be made at prices advantageous tous and, in fact, may result in substantial losses. If we fail to qualify as aRIC for any reason and become fully subject to corporate income tax, theresulting corporate taxes could substantially reduce our net assets, the amountof income available for distribution, and the actual amount distributed. Such afailure would have a material adverse effect on us and our shares. Foradditional information regarding asset coverage ratio and RIC requirements, see“Business—Material U.S. Federal Income Tax Considerations—Regulated InvestmentCompany Status.”

 

Fromtime to time, some of our debt investments may include success fees that wouldgenerate payments to us if the business is ultimately sold.  Because the satisfaction of these successfees, and the ultimate payment of these fees, is uncertain, to date we have notrecognized any of these success fees as income, either for financial accountingor tax purposes, until the time that the success fees have actually been paid.  We have recently sought a determination fromthe IRS that it agrees with our tax treatment. If the IRS were to disagree with this approach, we would be required toaccrue these amounts as investment company taxable income, including animmediate accrual of amounts related to success fees that were not accrued inprior periods. As a result, we would be required to distribute such amounts toour stockholders in order to maintain RIC status.

 

*Changes in laws or regulationsgoverning our operations, or changes in the interpretation thereof, and anyfailure by us to comply with laws or regulations governing our operations mayadversely affect our business.*

 

Weand our portfolio companies are subject to regulation by laws at the local,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.”

 

*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.*

 

Weare subject to provisions of the Delaware General Corporation Law that, ingeneral, prohibit any business combination with a beneficial owner of 15% ormore of our common stock for three years unless the holder’s acquisition of ourstock was either approved in advance by our Board of Directors or ratified bythe Board of Directors and stockholders owning two-thirds of our outstandingstock not owned by the acquiring holder. Although we believe these provisionscollectively provide for an opportunity to receive higher bids by requiringpotential acquirers to negotiate with our Board of Directors, they would applyeven if the offer may be considered beneficial by some stockholders.

 

Wehave also adopted other measures that may make it difficult for a third partyto obtain control of us, including provisions of our certificate ofincorporation classifying our Board of Directors in three classes servingstaggered three-year terms, and provisions of our certificate of incorporationauthorizing our Board of Directors to induce the issuance of additional sharesof our stock. These provisions, as well as other provisions of our certificateof incorporation and bylaws, may delay, defer, or prevent a transaction or achange in control that might otherwise be in the best interests of ourstockholders.

 

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

 

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

 

Wemay experience fluctuations in our quarterly and annual operating results dueto a number of factors, including, among others, variations in our investmentincome, the interest rates payable on the debt securities we acquire, thedefault rates on such securities, the level of our expenses, variations in andthe timing of the recognition of realized and unrealized gains or losses, thelevel of our expenses, the degree to which we encounter competition in ourmarkets, and general economic conditions, including the impacts of inflation.The majority of our portfolio companies are in industries that are directlyimpacted by inflation, such as manufacturing and consumer goods and services.Our portfolio companies may not be able to pass on to customers increases intheir costs of production 

 

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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.*

 

Ourcurrent intention is to distribute at least 90% of our ordinary income andshort-term capital gains to our stockholders on a quarterly basis by payingmonthly distributions. We expect to retain net realized long-term capital gainsto supplement our equity capital and support the growth of our portfolio,although our Board of Directors may determine in certain cases to distributethese gains. In addition, our line of credit restricts the amount ofdistributions we are permitted to make. We cannot assure you that we will achieve investment results or maintaina tax status that will allow or require any specified level of cashdistributions.

 

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

 

OurBoard of Directors declares monthly distributions based on estimates of netinvestment income for each fiscal year, which may differ, and in the past havediffered, from actual results. Because our distributions are based on estimatesof net investment income that may differ from actual results, futuredistributions payable to our stockholders may also include a return of capital.Moreover, to the extent that we distribute amounts that exceed our accumulatedearnings and profits, these distributions constitute a return of capital. Areturn of capital represents a return of a stockholder’s original investment inshares of our stock and should not be confused with a distribution fromearnings and profits. Although return of capital distributions may not betaxable, such distributions may increase an investor’s tax liability forcapital gains upon the sale of our shares by reducing the investor’s tax basisfor such shares. Such returns of capital reduce our asset base and alsoadversely impact our ability to raise debt capital as a result of the leveragerestrictions under the 1940 Act, which could have a material adverse impact onour ability to make new investments.

 

*The market price of our shares may fluctuatesignificantly.*

 

Thetrading price of our common stock may fluctuate substantially. Due to theextreme volatility and disruption that have affected the capital and creditmarkets for over a year, we have experienced greater than usual stock pricevolatility.

 

Themarket price and marketability of our shares may from time to time besignificantly affected by numerous factors, including many over which we haveno control and that may not be directly related to us. These factors include,but are not limited to, the following:

 

·                  general economic trends and other externalfactors;

 

·                  price and volume fluctuations in the stockmarket from time to time, which are often unrelated to the operatingperformance of particular companies;

 

·                  significant volatility in the market priceand trading volume of shares of RICs, business development companies or othercompanies in our sector, which is not necessarily related to the operatingperformance of these companies;

 

·                  changes in regulatory policies or taxguidelines, particularly with respect to RICs or business developmentcompanies;

 

·                  loss of business development company status;

 

·                  loss of RIC status;

 

·                  changes in our earnings or variations in ouroperating results;

 

·                  changes in the value of our portfolio ofinvestments;

 

·                  any shortfall in our revenue or net income orany increase in losses from levels expected by securities analysts;

 

·                  departure of key personnel;

 

·                  operating performance of companies comparableto us;

 

·                  short-selling pressure with respect to ourshares or business development companies generally;

 

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

 

·                  loss of a major funding source.

 

Fluctuationsin the trading prices of our shares may adversely affect the liquidity of thetrading market for our shares and, if we seek to raise capital through futureequity financings, our ability to raise such equity capital.

 

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*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.*

 

InApril 2008 we completed an offering of transferable rights to subscribefor additional shares of our common stock, or subscription rights. Wedetermined to raise equity in this manner primarily because of the capitalraising constraints applicable to us under the 1940 Act when our stock istrading below its net asset value per share, as it was at the time of theoffering. In the event that we again issue subscription rights to our existingstockholders, there is a significant possibility that the rights offering willdilute the ownership interest and voting power of stockholders who do not fullyexercise their subscription rights. Stockholders who do not fully exercisetheir subscription rights should expect that they will, upon completion of therights offering, own a smaller proportional interest in the Company than wouldotherwise be the case if they fully exercised their subscription rights. Inaddition, because the subscription price of the rights offering is likely to beless than our most recently determined net asset value per share, ourstockholders are likely to experience an immediate dilution of the per sharenet asset value of their shares as a result of the offer. As a result of thesefactors, any future rights offerings of our common stock, or our announcementof our intention to conduct a rights offering, could have a material adverseimpact on the trading price of our common stock.

 

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

 

Sharesof closed-end investment companies frequently trade at a discount from netasset value. Since our inception, our common stock has at times traded abovenet asset value, and at times traded below net asset value. During the pastyear, our common stock has traded consistently, and at times significantly,below net asset value. Subsequent to March 31, 2010, our stock has tradedat discounts of up to 40.4% of our net asset value as of March 31, 2010.This characteristic of shares of closed-end investment companies is separateand distinct from the risk that our net asset value per share will decline. Aswith any stock, the price of our shares will fluctuate with market conditionsand other factors. If shares are sold, the price received may be more or lessthan the original investment. Whether investors will realize gains or lossesupon the sale of our shares will not depend directly upon our net asset value,but will depend upon the market price of the shares at the time of sale. Sincethe market price of our shares will be affected by such factors as the relativedemand for and supply of the shares in the market, general market and economicconditions and other factors beyond our control, we cannot predict whether theshares will trade at, below or above our net asset value. Under the 1940 Act,we are generally not able to issue additional shares of our common stock at aprice below net asset value per share to purchasers other than our existingstockholders through a rights offering without first obtaining the approval ofour stockholders and our independent directors. Additionally, at times when ourstock is trading below its net asset value per share, our dividend yield mayexceed the weighted average returns that we would expect to realize on newinvestments that would be made with the proceeds from the sale of such stock,making it unlikely that we would determine to issue additional shares in suchcircumstances. Thus, for as long as our common stock trades below net assetvalue we will be subject to significant constraints on our ability to raisecapital through the issuance of common stock. Additionally, an extended periodof time in which we are unable to raise capital may restrict our ability togrow and adversely impact our ability to increase or maintain ourdistributions.

 

*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.*

 

Atour most recent annual meeting, our stockholders approved a proposal designedto allow us to access the capital markets in a way that absent stockholderapproval, we are generally unable to due to restrictions applicable to businessdevelopment companies under the 1940 Act. Specifically, our stockholders approved a proposal that authorizes us tosell shares of our common stock below the then current net asset value pershare of our common stock in one or more offerings for a period of oneyear.  At the upcoming annualstockholders meeting scheduled for August 5, 2010, our stockholders willbe asked to vote in favor of this proposal for another year.  During the past year, our common stock has tradedconsistently, and at times significantly, below net asset value. Any decisionto sell shares of our common stock below the then current net asset value pershare of our common stock would be subject to the determination by our Board ofDirectors that such issuance is in our and our stockholders’ best interests.

 

Ifwe were to sell shares of our common stock below net asset value per share,such sales would result in an immediate dilution to the net asset value pershare. This dilution would occur as a result of the sale of shares at a pricebelow the then current net asset value per share of our common stock and aproportionately greater decrease in a stockholder’s interest in our earningsand assets and voting interest in us than the increase in our assets resultingfrom such issuance. The greater the difference between the sale price and thenet asset value per share at the time of the offering, the more significant thedilutive impact would be. Because the number of shares of common stock that couldbe so issued and the timing of any issuance is not currently known, the actualdilutive effect, if any, cannot be currently predicted.  However, if, for example, we sold anadditional 10% of our common stock at a 5% discount from net asset value, astockholder who did not participate in that offering for its proportionateinterest would suffer net asset value dilution of up to 0.5% or $5 per $1,000of net asset value.

 

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***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.*

 

Maintainingour network security is of critical importance because our systems store highlyconfidential financial models and portfolio company information. Although wehave implemented, and will continue to implement, security measures, ourtechnology platform is and will continue to be vulnerable to intrusion,computer viruses or similar disruptive problems caused by transmission fromunauthorized users. The misappropriation of proprietary information couldexpose us to a risk of loss or litigation.

 

*Terroristattacks, acts of war, or national disasters may affect any market for ourcommon stock, impact the businesses in which we invest, and harm our business,operating results, and financial conditions.*

 

Terroristacts, acts of war, or national disasters have created, and continue to create,economic and political uncertainties and have contributed to global economicinstability.  Future terroristactivities, military or security operations, or national disasters couldfurther weaken the domestic/global economies and create additionaluncertainties, which may negatively impact the businesses in which we investdirectly or indirectly and, in turn, could have a material adverse impact onour business, operating results, 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.  Our Adviser is thecurrent 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, Texas and Georgia.

 

**Item 3. Legal Proceedings**

 

Weare not currently subject to any material legal proceedings, nor, to ourknowledge, is any material legal proceeding threatened against us.

 

**PART II**

 

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

 

Ourcommon stock is traded on the NASDAQ Global Select Market under the symbol “GAIN.”The following table reflects, by quarter, the high and low closing prices pershare of our common stock on the NASDAQ Global Select Market for each fiscalquarter during the last two fiscal years.

 
| ** **  | ** ** | **Quarter  Ended** | ** ** | **High** | ** ** | **Low**    | ** ** |
|-------------|------------|--------------------|------------|----------|------------|------------|------------|
| **FY 2010** | ** ** | **6/30/09**        | ** ** | **$**    | **5.38**   | ** ** | **$**      | **3.52** | ** ** |
| ** **  | ** ** | **9/30/09**        | ** ** | **5.37** | ** ** | **4.02**   | ** ** |
| ** **  | ** ** | **12/31/09**       | ** ** | **5.11** | ** ** | **4.41**   | ** ** |
| ** **  | ** ** | **3/31/10**        | ** ** | **6.23** | ** ** | **4.61**   | ** ** |
|        |       |               |       |     |       |       |       |
| FY 2009     |       | 6/30/08            |       | $        | 9.78       |       | $          | 6.31 |   |
|        |       | 9/30/08            |       | 8.08     |       | 6.00       |       |
|        |       | 12/31/08           |       | 6.83     |       | 3.09       |       |
|        |       | 3/31/09            |       | 5.85     |       | 2.40       |       |

 

Asof May 17, 2010 there were approximately 30 stockholders of record ofour common stock; however, we believe there are approximately 10,000 more whohold our stock in the name of their broker which is called “street name.”

 

**Distributions**

 

Wecurrently intend to distribute in the form of cash distributions a minimum of90% of our ordinary income and short-term capital gains, if any, on a quarterlybasis to our stockholders in the form of monthly distributions. Amountspresented for each fiscal quarter of 2010 and 2009 represent the cumulativeamount of the distributions declared for the months composing such quarter. Thefollowing table reflects, by quarter, the distributions per share that we havedeclared on our common stock in the last two fiscal years:

 

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| ** **  | ** ** | **Quarter  Ended** | ** ** | **Cash  Distribution  Per Share** | ** ** |
|-------------|------------|--------------------|------------|-----------------------------------|------------|
| **FY 2010** | ** ** | **6/30/09**        | ** ** | **$**                             | **0.120**  | ** ** |
| ** **  | ** ** | **9/30/09**        | ** ** | **0.120**                         | ** ** |
| ** **  | ** ** | **12/31/09**       | ** ** | **0.120**                         | ** ** |
| ** **  | ** ** | **3/31/10**        | ** ** | **0.120**                         | ** ** |
|        |       |               |       |                              |       |
| FY 2009     |       | 6/30/08            |       | $                                 | 0.240      |   |
|        |       | 9/30/08            |       | 0.240                             |       |
|        |       | 12/31/08           |       | 0.240                             |       |
|        |       | 3/31/09            |       | 0.240                             |       |

 

**Recent Sales of Unregistered Securities and Purchasesof Equity Securities**

 

Wedid not sell any unregistered shares of common stock or repurchase any sharesof our common stock during the fiscal year ended March 31, 2010.

 

**Item 6. Selected Financial Data**

 

Thefollowing selected financial data for the fiscal years ended March 31,2010, 2009, 2008, 2007, and the period from June 22, 2005 (Commencement ofOperations) through March 31, 2006 are derived from our audited consolidatedfinancial statements. The data should be read in conjunction with ourconsolidated financial statements and notes thereto and “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”included elsewhere in this report.

 

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**GLADSTONE INVESTMENT CORPORATION**

**SELECTEDFINANCIAL DATA**

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

** **
| ** **                                                                                               | ** ** | **Year  Ended March 31,** | ** **  | **Period  June 22, 2005  (Commencement of  Operations) through** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|--------------------------------|-------------|-----------------------------------------------------------------------|------------|
| ** **                                                                                               | ** ** | **2010**                       | ** **  | **2009**                                                              | ** ** | **2008** | ** ** | **2007** | ** ** | **March 31,  2006** | ** ** |
| Statement of operations data:                                                                            | ** ** | ** **                     |        |                                                                  |       |   |   |   |   |   |   |
| Total investment income                                                                                  | ** ** | **$**                          | **20,785**  |                                                                  | $          | 25,812 |   | $ | 27,894 |   | $ | 17,262 |   | $ | 7,371 |   |
| Total expenses net of credits from Adviser                                                               | ** ** | **10,187**                     |        | 12,424                                                                |       | 14,842 |   | 6,114 |   | 1.487 |   |
| Net investment income                                                                                    | ** ** | **10,598**                     |        | 13,388                                                                |       | 13,052 |   | 11,148 |   | 5,884 |   |
| Net (loss) gain on investments                                                                           | ** ** | **(21,669**                    | **)**       | (24,837                                                               | )          | (13,993 | ) | (3,879 | ) | 170 |   |
| Net (decrease) increase in net assets resulting  from operations                                         | ** ** | **$**                          | **(11,071** | **)**                                                                 | $          | (11,449 | ) | $ | (941 | ) | $ | 7,269 |   | $ | 6,054 |   |
|                                                                                                     | ** ** | ** **                     |        |                                                                  |       |   |   |   |   |   |   |
| Per share data(1):                                                                                       | ** ** | ** **                     |        |                                                                  |       |   |   |   |   |   |   |
| Net (decrease) increase in net assets resulting  from operations per common share—basic and diluted | ** ** | **$**                          | **(0.50**   | **)**                                                                 | $          | (0.53 | ) | $ | (0.06 | ) | $ | 0.44 |   | $ | 0.37 |   |
| Net investment income before net (loss) gain on  investments per common share—basic and diluted     | ** ** | **0.48**                       |        | 0.62                                                                  |       | 0.79 |   | 0.67 |   | 0.36 |   |
| Cash distributions declared per share                                                                    | ** ** | **0.48**                       |        | 0.96                                                                  |       | 0.93 |   | 0.86 |   | 0.39 |   |
| Statement of assets and liabilities data:                                                                | ** ** | ** **                     |        |                                                                  |       |   |   |   |   |   |   |
| Total assets                                                                                             | ** ** | **$**                          | **297,161** |                                                                  | $          | 326,843 |   | $ | 352,293 |   | $ | 323,590 |   | $ | 230,324 |   |
| Net assets                                                                                               | ** ** | **192,978**                    |        | 214,802                                                               |       | 206,445 |   | 222,819 |   | 229,842 |   |
| Net asset value per share                                                                                | ** ** | **8.74**                       |        | 9.73                                                                  |       | 12.47 |   | 13.46 |   | 13.88 |   |
| Common shares outstanding                                                                                | ** ** | **22,080,133**                 |        | 22,080,133                                                            |       | 16,560,100 |   | 16,560,100 |   | 16,560,100 |   |
| Weighted common shares outstanding—basic and  diluted                                               | ** ** | **22,080,133**                 |        | 21,545,936                                                            |       | 16,560,100 |   | 16,560,100 |   | 16,391,589 |   |
| Senior securities data:                                                                                  | ** ** | ** **                     |        |                                                                  |       |   |   |   |   |   |   |
| Borrowings under line of credit (2)                                                                      | ** ** | **$**                          | **27,812**  |                                                                  | $          | 110,265 |   | $ | 144,835 |   | $ | 100,000 |   | — |   |
| Short term loan(2)                                                                                       | ** ** | **75,000**                     |        | —                                                                |       | — |   | — |   | — |   |
| Asset coverage ratio(3) (4)                                                                         | ** ** | **281**                        | **%**       | 293                                                                   | %          | 242 | % | 323 | % | N/A |   |
| Asset coverage per unit(4)                                                                               | ** ** | **$**                          | **2,814**   |                                                                  | $          | 2,930 |   | $ | 2,422 |   | $ | 3,228 |   | N/A |   |
| Other data:                                                                                              | ** ** | ** **                     |        |                                                                  |       |   |   |   |   |   |   |
| Number of portfolio companies                                                                            | ** ** | **16**                         |        | 46                                                                    |       | 52 |   | 47 |   | 22 |   |
| Average size of portfolio company investment at  cost                                                    | ** ** | **$**                          | **14,223**  |                                                                  | $          | 7,586 |   | $ | 6,746 |   | $ | 5,843 |   | $ | 6,967 |   |
| Principal amount of new investments                                                                      | ** ** | **4,788**                      |        | 53,002                                                                |       | 175,255 |   | 182,953 |   | 160,646 |   |
| Proceeds from loan repayments and investments sold                                                       | ** ** | **90,240**                     |        | 49,785                                                                |       | 96,437 |   | 61,167 |   | 7,381 |   |
| Weighted average yield on investments(5):                                                                | ** ** | **11.02**                      | **%**       | 8.22                                                                  | %          | 8.91 | % | 8.72 | % | 7.02 | % |
| Total return(6)                                                                                          | ** ** | **79.80**                      |        | (51.65                                                                | )          | (31.54 | ) | 4.36 |   | 3.39 |   |

 

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

 

(2)                See “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” formore information regarding our level of indebtedness.

 

(3)                As a businessdevelopment company, we are generally required to maintain an asset coverageratio of 200% of total consolidated assets, less all liabilities andindebtedness not represented by senior securities, to total borrowings andguaranty commitments.

 

(4)                Asset coverage perunit is the asset coverage ratio expressed in terms of dollar amounts per onethousand of indebtedness.

 

(5)               Weighted averageyield on investments equals interest income on investments divided by theannualized weighted average investment balance throughout the year.

 

(6)               Total returnequals the (decrease) increase of the ending market value over the beginningmarket value plus monthly distributions divided by the monthly beginning marketvalue.

 

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**Item 7.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

*The following analysis of our financial condition andresults of operations should be read in conjunction with our financialstatements and the notes thereto contained elsewhere in this Form 10-K.Except per share amounts, dollar amounts are in thousands unless otherwiseindicated.*

 

**OVERVIEW**

 

**General**

 

Wewere incorporated under the General Corporation Laws of the State of Delawareon February 18, 2005. We were primarily established for the purpose ofinvesting in subordinated loans, mezzanine debt, preferred stock and warrantsto purchase common stock of small and medium-sized companies in connection withbuyouts and other recapitalizations. We also invest in senior secured loans,common stock and, to a much lesser extent, senior and subordinated syndicatedloans. Our investment objective is to generate both current income and capitalgains through these debt and equity instruments. We operate as a closed-end,non-diversified management investment company and have elected to be treated asa business development company (“BDC”) under the Investment Company Act of 1940(the “1940 Act”).  In addition, for taxpurposes, we have elected to be treated as a regulated investment company (“RIC”)under the Internal Revenue Code of 1986, as amended (the “Code”).

 

**BusinessEnvironment**

 

Whileeconomic conditions generally appear to be improving somewhat, we remaincautious about a long-term economic recovery. The recent recession generally, and the disruptions in the capitalmarkets in particular, have decreased liquidity and increased our cost of debtand equity capital, where available. The longer these conditions persist, thegreater the probability that these factors could continue to increase our costsof, and significantly limit our access to, debt and equity capital and, thus,have an adverse effect on our operations and financial results. Many of thecompanies in which we have made or will make investments are still susceptibleto the economic conditions, which may affect the ability of one or more of ourportfolio companies to repay our loans or engage in a liquidity event, such asa sale, recapitalization or initial public offering. The economic conditionscould also disproportionately impact some of the industries in which we invest,causing us to be more vulnerable to losses in our portfolio, which could causethe number of our non-performing assets to increase and the fair market valueof our portfolio to decrease.  We do notknow when market conditions will stabilize, if adverse conditions willintensify or the full extent to which the disruptions will affect us.  If market instability persists orintensifies, we may experience difficulty in raising capital.

 

Theunstable economic conditions have affected the general availability of creditand, as a result, during the first quarter, we sold 29 senior syndicated loansthat were held in our portfolio of investments at March 31, 2009 tovarious investors in the syndicated loan market (the “Syndicated Loan Sales”)to repay amounts outstanding under our prior line of credit with Deutsche BankAG (the “Prior Credit Facility”), which matured in April 2009 and was notextended. These loans, in aggregate, had a cost value of approximately $104.2million, or 29.9% of the cost of our total investments, and an aggregate fairmarket value of approximately $69.8 million, or 22.2% of the fair market valueof our total investments, at March 31, 2009.  As a result of the settlement of these loansales, at March 31, 2010, we had two remaining senior syndicated loans, ofwhich one was paid off in April 2010. See “—Recent Developments—SyndicatedLoans” for more information regarding this transaction. We plan to exit theremaining senior syndicated loan in the long-term future.  Collectively, these sales have changed ourasset composition in a manner that has affected our ability to satisfy certainelements of the Code’s rules for maintenance of our RIC status. In orderto maintain our status as a RIC, in addition to other requirements, as of theclose of each quarter of our taxable year, we must meet the assetdiversification test, which requires that at least 50% of the value of ourassets consist of cash, cash items, U.S. government securities or certain otherqualified securities (the “50% threshold”). During the quarter ended March 31,2010, we fell below the required 50% asset diversification threshold.

 

Failureto meet the asset diversification test alone will not result in our loss of RICstatus. In circumstances where the failure to meet the 50% threshold is theresult of fluctuations in the value of assets, including as a result of thesale of assets, we will still be deemed under the Code’s rules to havesatisfied the asset diversification test and, therefore, maintain our RICstatus, 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. At March 31,2010, the fourth quarterly measurement date following the Syndicated LoanSales, we satisfied the 50% threshold through the purchase of short-termqualified securities, which was funded primarily through a short-term loanagreement. Subsequent to the March 31st measurementdate, the short-term qualified securities matured and we repaid the short-termloan, at which time we again fell below the 50% threshold. See “—RecentDevelopments—Short-Term Loan” for more information regarding this transaction.As of the date of this filing, we remain below the 50% threshold. Thus, whilewe currently qualify as a RIC despite our current inability to meet the 50%threshold and potential inability to do so in the future, if we make any new oradditional investments before regaining compliance with the assetdiversification test, our RIC status will be threatened. If we make a new oradditional investment and fail to regain compliance with the 50% threshold onthe next quarterly measurement date following such investment, we will be innon-compliance with the RIC rules and will 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

 

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testinclude raising additional equity or debt capital, or changing the compositionof our assets, which could include full or partial divestitures of investments,such that we would once again exceed the 50% threshold.

 

Untilthe composition of our assets is above the required 50% threshold, we willcontinue to seek to deploy similar purchases of qualified securities usingshort-term loans that would allow us to satisfy the asset diversification test,thereby allowing us to make additional investments. There can be no assurance,however, that we will be able to enter into such a transaction on reasonableterms, if at all. We also continue to explore a number of other 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. Our ability toimplement any of these strategies will be subject to market conditions and anumber of risks and uncertainties that are, in part, beyond our control.

 

TheSyndicated Loan Sales significantly changed the overall composition and reducedthe total size of our portfolio.  Becausethe Syndicated Loan Sales were from our Non-control/Non-Affiliate investmentcategory, the fair value of our Non-Control/Non-Affiliate investments decreasedfrom 30.2% to 10.1% of our total portfolio as of March 31, 2009 and 2010,respectively.  In addition, the size ofour portfolio decreased because we exited $110.6 million in investments, atcost, partially offset by $4.8 million in disbursements to existing portfoliocompanies, during the year ended March 31, 2010.  We expect the overall composition of ourinvestment portfolio to continue to consist of primarily Control and Affiliateinvestments. In light of current economic conditions, constraints on ourability to access the capital markets and the restraints upon our investingactivities required to maintain our RIC status, our near-term strategy will befocused 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 strategyhas resulted, and may continue to result, in significantly reduced investmentactivity, as our ability to make new investments under these conditions islargely dependent upon availability of proceeds from the sale or exit ofexisting portfolio investments, events which may be beyond our control, and hasimpacted our ability to satisfy the asset diversification test under theCode.  As our capital constraints andasset diversification improve, we intend to continue our strategy of makingconservative investments in businesses that we believe will weather the currenteconomic conditions and that are likely to produce attractive long-term returnsfor our stockholders.

 

OnApril 14, 2009, through our wholly-owned subsidiary, Gladstone BusinessInvestment, LLC (“Business Investment”), we entered into a second amended andrestated credit agreement providing for a $50.0 million revolving line ofcredit (the “Credit Facility”) arranged by Branch Banking and Trust Company (“BB&T”)as administrative agent. Key Equipment Finance Company Inc. also joined theCredit Facility as a committed lender. Under the terms of the Credit Facility, committed funding was reducedfrom $125.0 million under our prior facility to $50.0 million. See “—Liquidityand Capital Resources” section below for further information. The CreditFacility also limits our distributions to stockholders and, as a result, wedecreased our monthly cash distribution rate in April 2009 by 50% ascompared to the prior year 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 orintensifies, we may experience increasing difficulty in raising capital. On April 13,2010, we renewed the Credit Facility through Business Investment by enteringinto a third amended and restated credit agreement providing for a $50 million,two year revolving line of credit. As of May 21, 2010, approximately $11.1million was outstanding under the Credit Facility and $37.6 million wasavailable for borrowing due to certain limitations on our borrowing base.

 

Challengesin the current market are intensified for us by certain regulatory limitationsunder the Code and the 1940 Act, as well as contractual restrictions under theagreement governing the Credit Facility that further constrain our ability toaccess the capital markets. To maintain our qualification as a RIC, we mustsatisfy, among other requirements, an annual distribution requirement to payout at least 90% of our ordinary income and short-term capital gains to ourstockholders on an annual basis. Because we are required to distribute ourincome in this manner, and because the illiquidity of many of our investmentsmakes it difficult for us to finance new investments through the sale ofcurrent investments, our ability to make new investments is highly dependentupon external financing. Our external financing sources include the issuance ofequity securities, debt securities or other leverage such as borrowings underour line of credit. Our ability to seek external debt financing, to the extentthat it is available under current market conditions, is further subject to theasset coverage limitations of the 1940 Act, which require us to have at least a200% asset coverage ratio, meaning, generally, that for every dollar of debt,we must have two dollars of assets.

 

Recentmarket conditions have also affected the trading price of our common stock andthus our ability to finance new investments through the issuance of equity. On May 21,2010, the closing market price of our common stock was $5.44, which pricerepresented a 37.8% discount to our March 31, 2010 net asset value (“NAV”)per share. When our stock is trading below NAV, as it has consistently tradedsubsequent to September 30, 2008, our ability to issue equity isconstrained by provisions of the 1940 Act which generally prohibit the issuanceand sale of our common stock below NAV per share without stockholder approvalother than through sales to our then-existing stockholders pursuant to a rightsoffering. At our annual meeting of stockholders held on August 13, 2009,our stockholders approved a proposal which authorizes us to sell shares of ourcommon stock at a price below our then current NAV per share for a period ofone year from the date of approval, provided that our Board of Directors makescertain determinations prior to any such sale.

 

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Theunstable economic conditions may also continue to decrease the value ofcollateral securing some of our loans, as well as the value of our equityinvestments, which has impacted and may continue to impact our ability toborrow under our credit facility. Additionally, our line of credit containscovenants regarding the maintenance of certain minimum loan concentrations andnet worth covenants which are affected by the decrease in value of ourportfolio. Failure to meet these requirements would result in a default which,if we are unable to obtain a waiver from our lenders, would result in theacceleration of our repayment obligations under our line of credit.  As of March 31, 2010, we were incompliance with all of the facility covenants.

 

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, wewill continue to focus our near-term strategy primarily on retaining capitaland building the value of our existing portfolio companies to increase thelikelihood of maintaining potential future returns. We will also, where prudentand possible, continue to consider the sale of lower-yielding investments. Thishas resulted, and may continue to result, in significantly reduced investmentactivity, as our ability to make new investments under these conditions islargely dependent on availability of proceeds from the sale or exit of existingportfolio investments, which events may be beyond our control.

 

**InvestmentHighlights**

 

Duringthe fiscal year ended March 31, 2010, we extended approximately $4.8million of investments to existing portfolio companies through revolver drawsor additions to term notes. Also, during the fiscal year ended March 31,2010, we sold 30 syndicated loans for aggregate proceeds of approximately$74.7 million, and we received scheduled and unscheduled contractualprincipal repayments of approximately $15.5 million, for total principalrepayments of approximately $90.2 million. Since our initial publicoffering in June 2005 through March 31, 2010, we have made 142investments in 87 companies for a total of approximately $582.9 million, beforegiving effect to principal repayments on investments and divestitures.

 

**RecentDevelopments**

 

*Renewalof Credit Facility with Branch Bank and Trust Company*

 

OnApril 13, 2010, we renewed the Credit Facility through BusinessInvestment, by entering into a third amended and restated credit agreementproviding for a $50.0 million, two year revolving line of credit.  The Credit Facility maturity date is April 13,2012, and if it is not renewed or extended by then, all principal and interestwill be due and payable on or before April 13, 2013.  Advances under the Credit Facility weremodified to generally bear interest at the 30 day LIBOR rate (subject to aminimum rate of 2.0%), plus 4.5% per annum, with a commitment fee of 0.50% perannum on undrawn amounts when advances outstanding are above 50.0% of thecommitment and will be 1.0% on undrawn amounts if the advances outstanding arebelow 50.0% of the commitment.  Inconnection with the Credit Facility renewal, we paid an upfront fee of1.0%.  Other significant changes to theCredit facility include a reduced minimum net worth covenant, which wasmodified to $155.0million plus 50.0% of all equity and subordinated debt raised after April 13,2010 and to maintain “asset coverage” with respect to “senior securitiesrepresenting indebtedness” of at least 200%, in accordance with Section 18of the 1940 Act.

 

### *Short-TermLoan*

###  

For fiscal year 2010, for each of June 30,2009, September 30, 2009, December 31, 2009 and March 31, 2010(the “measurement dates”), we satisfied the 50% thresholdthrough the purchase of short-term qualified securities, which was fundedprimarily through a short-term loan agreement. Subsequent to the measurementdates, the short-term qualified securities matured and we repaid the short-termloan, at which time we again fell below the 50% threshold.  Therefore, for year end, on March 30,2010, we purchased $85.0 million of short-term United States Treasurysecurities through Jefferies & Company, Inc. (“Jefferies”).  The securities were purchased with $10.0million in funds drawn on the Credit Facility and the proceeds from a $75.0million short-term loan from Jefferies, with an effective annual interest rateof approximately 0.67%.  On April 1,2010, when the securities matured, we repaid the $75.0 million loan fromJefferies in full, and, on April 2, 2010, we repaid the $10.0 milliondrawn on the Credit Facility for the transaction.

 

### ***Non-Proprietary InvestmentActivity***

###  

### *Senior Syndicated LoanSales*

###  

### During April and May 2009,we finalized the Syndicated Loan Sales. The loans, in the aggregate, had a costvalue of approximately $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.

###  

InOctober 2009, we completed the sales of certain other syndicated loans(HMTBP Acquisition II Corp. and a portion of Interstate FiberNet, Inc.)and received approximately $5.5 million in net cash proceeds and recorded arealized loss of approximately $1.3 million.

 

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### Upon the settlement ofthese sales, the remaining non-proprietary loans in our investment portfoliohad a fair value of approximately $10.7 million, or 5.2% of our totalinvestments at March 31, 2010.

###  

Subsequentto March 31, 2010, Interstate FiberNet, Inc. made full repayment ofits senior term debt owed to us.  Thispayoff reduced our remaining non-proprietary loan balance further to $4.0million based on fair value as of March 31, 2010.

 

***Proprietary Investment Activity***

 

Duringour fiscal year ended March 31, 2010, we executed the followingtransactions with certain of our portfolio companies:

 

·                  In April 2009, A. Stucki Holding Corp. (“Stucki”)refinanced a portion of its senior term debt by making principal repayments ofapproximately $2.0 million, which represented the next three quarterly paymentsdue under normal amortization on both their senior term A ($1.6 million) andsenior term B ($412) loans.

 

·                  In April 2009, ASH Holdings Corp. (“ASH”)made a repayment of approximately $1.1 million on its revolving line of credit,which reduced the then-outstanding balance to $500.

 

·                  In April 2009, we entered into anagreement to reduce the available credit limit on Mathey Investment, Inc.’s(“Mathey”) revolving line of credit from $2.0 million to $1.0 million.  This was a non-cash transaction.

 

·                  In April 2009, we made an investmentdisbursement to Cavert II Holding Corp. (“Cavert”) for approximately $850 onits revolving line of credit, and the proceeds were used to make the next fourquarterly payments due under normal amortization for both its senior term A andsenior term B loans in a non-cash transaction. 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 for a nominal fee.

 

·                  In April 2009, we entered into anagreement to reduce the available credit limit on Chase II Holdings Corp.’s (“Chase”)revolving line of credit from $4.5 million to $3.5 million.  This was a non-cash transaction.

 

·                  In September, we agreed to an early terminationof our revolving line of credit to B-Dry, LLC, which had an original maturitydate of October 2009.  The revolvingline of credit was fully repaid at such time.

 

·                  In October 2009, we refinanced ourrevolving line of credit with Chase to a third party and the outstandingbalance of $3.5 million, plus accrued interest, was repaid in full.

 

·                  In October 2009, one of our portfoliocompanies entered into an agreement with a third party to act as an advisor inlooking at strategic investment alternatives.

 

·                  In October 2009, Stucki declared and, inNovember 2009, paid accrued dividends on its preferred stock, of which wereceived approximately $953.

 

·                  In October 2009, we entered into anagreement with Stucki to waive all quarterly principal payments due on its TermLoan A and Term Loan B notes for the period from April 1, 2010 through March 31,2011.  This was a non-cash transaction.

 

·                  In November 2009, we entered into anagreement to reduce the available credit limit on Danco Acquisition Corp.’srevolving line of credit from $3.0 million to $1.5 million.  This was a non-cash transaction.

 

·                  In December 2009, we assumed 100% ownership ofMathey, previously an Affiliate investment, exercising our right after certaindefaults on the part of Mathey and subsequent expiration of a forbearanceperiod granted by us.  We disbursedapproximately $282 to buy out the previous stockholders of Mathey and to payfor related legal expenses incurred in the process.  Our investment in Mathey was reclassifiedfrom an Affiliate to a Control investment in the third quarter of the fiscalyear ended March 31, 2010 and is shown as a Control investment on theconsolidated financial statements as of March 31, 2010**.**

 

·                  In January 2010, we entered into an agreementwith Noble Logistics, Inc. to extend the maturity of its revolving creditfacility to May 2010.

 

·                  In February 2010,we executed a guaranty of a wholesale financing facility agreement betweenAgricredit Acceptance, LLC (“Agricredit”) and Country Club Enterprise, LLC, oneof our Control Investments.  Refer toNote 11, Commitments and Contingencies, for further information regarding thisguaranty.

 

·                  Effective February 2010, the senior LOT note toMathey was restructured into two separate notes, Term Loan B and Term Loan C,with face values of $3.5 million and $3.7 million, respectively.

 

·                  In March 2010, we invested $870 in Stucki in the form ofadditional debt to the existing senior subordinated term debt for Stucki’sacquisition of the assets of Midland Reclamation Company (“Midland”).  Midland, located in Jerseyville, IL, is areconditioner of freight car and locomotive couplers and supplier of freightcar components.  The investment carriesthe same 

 

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terms as the original senior subordinated term debtfacility.  Our equity securities andownership position did not change as a result of this transaction.

 

·                  In March 2010, we entered into agreements with ASH to extend thematurity dates of both their revolving line of credit and their seniorsubordinated term debt to March 2013. This was a non-cash transaction.

 

·                  In March 2010, we disbursed $1.5 million to ASH under itsrevolving line of credit, the proceeds of which were used to pay off a facilitydue to the senior lender of ASH.

 

Refer to Note 14,Subsequent Events, for further investment activity occurring subsequent to March 31,2010.

 

*RegistrationStatement*

 

OnJuly 21, 2009, we filed a registration statement on Form N-2(Registration No. 333-160720) that was amended on October 2, 2009.The Securities and Exchange Commission (the “SEC”) declared the registration statementeffective on October 8, 2009, and such registration statement will permitus to issue, through one or more transactions, an aggregate of $300.0 millionin securities, consisting of common stock, preferred stock, subscriptionrights, debt securities and warrants to purchase common stock, or a combinationof these securities.

 

**InvestmentStrategy**

 

Weexpect that our target portfolio over time will include mostly subordinatedloans, mezzanine debt, preferred stock, and warrants to buy common stock. Structurally,subordinated loans and mezzanine loans usually rank lower in priority ofpayment to senior debt, such as senior bank debt, and may be unsecured.However, subordinated debt and mezzanine loans rank senior to common andpreferred equity in a borrower’s capital structure. Typically, subordinateddebt and mezzanine loans have elements of both debt and equity instruments,offering returns in the form of interest payments associated with senior debt,while providing lenders an opportunity to participate in the capitalappreciation of a borrower, if any, through an equity position. Due to itshigher risk profile and often less restrictive covenants as compared to seniordebt, mezzanine debt generally earns a higher return than senior secured debt.Any warrants associated with mezzanine loans are typically detachable, whichallows lenders to receive repayment of their principal on an agreedamortization schedule while retaining 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.

 

Ourprimary investment focuses are situations involving buyouts andrecapitalizations of small and mid-sized companies with established managementteams. We expect that our investments will generally range between$10 million and $40 million each, although this investment size mayvary proportionately as the size of our capital base changes.  Typically, our investments mature in no morethan seven years and accrue interest at fixed or variable rates. We intend toinvest either by ourselves or jointly with other buyout funds and/or managementof the portfolio company, depending on the opportunity. If we are participatingin an investment with one or more co-investors, then our investment is likelyto be smaller than if we were investing alone.

 

Certainloan investments may have a form of interest that is not paid currently but isaccrued and added to the loan balance and paid at the end of the term. Thisinterest is called paid in kind (“PIK”) interest. We generally seek investmentsthat do not generate PIK interest as we have to pay out this accrued interestas distributions to our stockholders and we may have to borrow money or raiseadditional capital in order to meet the tax test for RICs by having to pay outat least 90% of our income. As of March 31, 2010, none of our investmentsbore 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 with amortization of principal generally being deferred forseveral years. The principal amount of the loans and any accrued but unpaidinterest generally become due at maturity, generally at five to seven years.When we receive a warrant to purchase stock in a borrower in connection with aloan, the warrant will typically have an exercise price equal to the fair valueof the portfolio company’s common stock at the time of the loan and entitle usto purchase a modest percentage of the borrower’s stock.

 

Originalissue discount (“OID”) arises when we extend a loan and receive an equityinterest in the borrower at the same time. To the extent that the price paidfor the equity is not at market value, we must allocate part of the price paidfor the loan to the value of the equity. Then the amount allocated to theequity, the OID, must be amortized over the life of the loan. As with PIKinterest, the amortization of OID also produces income that must be recognizedfor purposes of satisfying the distribution requirements for a RIC underSubchapter M of the Code, whereas the cash is received, if at all, whenthe equity instrument is sold. We seek to avoid OID with all potentialinvestments under review, and as of March 31, 2010, we did not hold anyinvestments with OID income.

 

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Inaddition, as a business development company under the 1940 Act, we are requiredto make available significant managerial assistance to our portfolio companies.Our investment adviser, Gladstone Management Corporation, or our Adviser,provides these services on our behalf through its officers, who are also ourofficers. Currently, neither we nor our Adviser charges a fee for managerialassistance; however, if our Adviser does receive fees for such managerialassistance, our Adviser will credit the managerial assistance fees to the basemanagement fee due from us to our Adviser.

 

OurAdviser receives fees for other services it provides to our portfoliocompanies. These other fees are recognized as revenue when earned and aregenerally paid directly to our Adviser by the borrower or potential borrowerupon closing of the investment. The services our Adviser provides to portfoliocompanies vary by investment, but generally include a broad array of services,such as investment banking services, arranging bank and equity financing,structuring financing from multiple lenders and investors, reviewing existingcredit facilities, restructuring existing investments, raising equity and debtcapital from other investors, turnaround management, merger and acquisitionservices and recruiting new management personnel. When our Adviser receivesfees for these services, 50% of certain of those fees are 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.

 

OurAdviser also receives fees for monitoring and reviewing portfolio companyinvestments. These fees are generally paid annually or quarterly in advance toour Adviser throughout the life of the investment. Fees of this nature arerecorded as revenue by our Adviser when earned and are not credited against thebase management fee.

 

Wemay receive fees for the origination and closing services we provides toportfolio companies through our Adviser. These fees are paid directly to us andare recognized as revenue upon closing of the originated investment and arereported as fee income in the consolidated statements 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.

 

Inthe event that we expend significant effort in considering and negotiating apotential investment that ultimately is not consummated, we generally will seekreimbursement from the proposed borrower for our reasonable expenses incurredin connection with the transaction, including legal fees. Any amounts collectedfor expenses incurred by our Adviser in connection with unconsummatedinvestments will be reimbursed to our Adviser. Amounts collected for theseexpenses incurred by us will be reimbursed to us and will be recognized in theperiod in which such reimbursement is received, but there can be no guaranteethat we will be successful in collecting 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. One affiliate of our Adviser is Gladstone Administration, LLC (our “Administrator”),which employs our chief financial officer, chief compliance officer, treasurer,internal counsel and their respective staffs.

 

OurAdviser and Administrator also provide investment advisory and administrativeservices, respectively, to our affiliates, Gladstone Commercial Corporation (“GladstoneCommercial”), a publicly traded real estate investment trust; Gladstone CapitalCorporation (“Gladstone Capital”), a publicly traded BDC and RIC; GladstoneLending Corporation (“Gladstone Lending”), a public non-traded BDC and RIC; Gladstone Partners Fund, L.P., a privatepartnership fund formed primarily to co-invest with us and Gladstone Capital; and GladstoneLand Corporation, a private agricultural real estate company.  The majority of our executive officers serveas either directors or executive officers, or both, of our Adviser, ourAdministrator, Gladstone Commercial, Gladstone Capital and Gladstone Lending.In the future, our Adviser and Administrator may provide investment advisoryand administrative services, respectively, to other funds, both public andprivate.

 

**InvestmentAdvisory and Management Agreement**

 

Underthe amended and restated investment advisory and management agreement with ourAdviser (the “Advisory Agreement”), we pay our Adviser an annual basemanagement fee of 2% of our average gross assets, which is defined as totalassets, including investments made with proceeds of borrowings, less any uninvestedcash or cash equivalents resulting from borrowings, valued at the 

 

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endof the two most recently completed quarters and appropriately adjusted for anyshare issuances or repurchases during the current quarter.

 

Wealso pay our Adviser a two-part incentive fee under the AdvisoryAgreement.  The first part of theincentive fee is an income-based incentive fee which rewards our Adviser if ourquarterly net investment income (before giving effect to any incentive fee)exceeds 1.75% of our net assets (the “hurdle rate”). The second part of theincentive fee is a capital gains-based incentive fee that is determined andpayable in arrears as of the end of each fiscal year (or upon termination ofthe Advisory Agreement, as of the termination date), and equals 20% of ourrealized capital gains as of the end of the fiscal year. In determining thecapital gains-based incentive fee payable to our Adviser, we will calculate thecumulative aggregate realized capital gains and cumulative aggregate realizedcapital losses since our inception, and the aggregate unrealized capital depreciationas of the date of the calculation, as applicable, with respect to each of theinvestments in our portfolio.  TheAdviser did not earn the capital gains portion of the incentive fee for thefiscal year ended March 31, 2010.

 

Wepay our direct expenses including, but not limited to, directors’ fees, legaland accounting fees, stockholder related expenses, and directors and officersinsurance under the Advisory Agreement.

 

SinceApril 2006, our Board of Directors has accepted from our Adviser, unconditionaland irrevocable voluntarily waivers on a quarterly basis to reduce the annual2.0% base management fee on senior syndicated loans to 0.5% to the extent thatproceeds resulting from borrowings were used to purchase such syndicated loanparticipations.  In addition to the basemanagement and incentive fees under the Advisory Agreement, 50% of certain feesreceived by the Adviser from our portfolio companies are credited against theinvestment advisory fee and paid to the Adviser.

 

TheAdviser services our loan portfolio pursuant to a loan servicing agreement withBusiness Investment in return for a 2.0% annual fee, based on the monthlyaggregate outstanding loan balance of the loans pledged under our line ofcredit.

 

OnJuly 8, 2009, our Board of Directors approved the renewal of the AdvisoryAgreement with our Adviser through August 31, 2010.  We expect that the Board of Directors willapprove a further one year renewal in July 2010.

 

**AdministrationAgreement**

 

Wehave entered into an administration agreement with our Administrator (the “AdministrationAgreement”), whereby we pay separately for administrative services. TheAdministration Agreement provides for payments equal to our allocable portionof our Administrator’s overhead expenses in performing its obligations underthe Administration Agreement including, but not limited to, rent for employeesof our Administrator, and our allocable portion of the salaries and benefitsexpenses of our chief financial officer, chief compliance officer, internal counsel,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 of each quarter) in comparison to the averagetotal assets of all companies managed by our Adviser under similaragreements.  On July 8, 2009, ourBoard of Directors approved the renewal of this Administration Agreement withour Administrator through August 31, 2010. We expect that the Board ofDirectors will approve a further one year renewal in July 2010.

 

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

 

***Comparison of the FiscalYear Ended March 31, 2010 to the Fiscal Year Ended March 31, 2009***

 
| ** **                                                 | ** ** | **For the fiscal year ended March 31,** | ** **  |
|------------------------------------------------------------|------------|----------------------------------------------|-------------|
| ** **                                                 | ** ** | **2010**                                     | ** **  | **2009** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| INVESTMENT INCOME                                          | ** ** | ** **                                   |        |   |   |   |   |   |   |
| Interest income                                            | ** ** | **$**                                        | **19,817**  |   | $ | 25,245 |   | $ | (5,428 | ) | (21.5 | )% |
| Other income                                               | ** ** | **968**                                      |        | 567 |   | 401 |   | 70.7 |   |
| Total investment income                                    | ** ** | **20,785**                                   |        | 25,812 |   | (5,027 | ) | (19.5 | ) |
|                                                       | ** ** | ** **                                   |        |   |   |   |   |   |   |
| EXPENSES                                                   | ** ** | ** **                                   |        |   |   |   |   |   |   |
| Loan servicing fee                                         | ** ** | **3,747**                                    |        | 5,002 |   | (1,255 | ) | (25.1 | ) |
| Base management fee                                        | ** ** | **737**                                      |        | 1,699 |   | (962 | ) | (56.6 | ) |
| Incentive fee                                              | ** ** | **588**                                      |        | — |   | 588 |   | NM |   |
| Administration fee                                         | ** ** | **676**                                      |        | 821 |   | (145 | ) | (17.7 | ) |
| Interest expense                                           | ** ** | **1,988**                                    |        | 5,349 |   | (3,361 | ) | (62.8 | ) |
| Amortization of deferred financing fees                    | ** ** | **1,618**                                    |        | 323 |   | 1,295 |   | 400.9 |   |
| Other                                                      | ** ** | **1,659**                                    |        | 1,704 |   | (45 | ) | (2.6 | ) |
| Expenses before credits from Adviser                       | ** ** | **11,013**                                   |        | 14,898 |   | (3,885 | ) | (26.1 | ) |
| Credits to fees                                            | ** ** | **(826**                                     | **)**       | (2,474 | ) | 1,648 |   | (66.6 | ) |
| Total expenses net of credits to fee                       | ** ** | **10,187**                                   |        | 12,424 |   | (2,237 | ) | (18.0 | ) |
| NET INVESTMENT INCOME                                      | ** ** | **10,598**                                   |        | 13,388 |   | (2,790 | ) | (20.8 | ) |
|                                                       | ** ** | ** **                                   |        |   |   |   |   |   |   |
| REALIZED AND UNREALIZED (LOSS) GAIN ON:                    | ** ** | ** **                                   |        |   |   |   |   |   |   |
| Net realized loss on investments                           | ** ** | **(35,923**                                  | **)**       | (5,023 | ) | (30,900 | ) | 615.2 |   |
| Net realized loss on other                                 | ** ** | **(53**                                      | **)**       | — |   | (53 | ) | NM |   |
| Net unrealized appreciation (depreciation) on  investments | ** ** | **14,305**                                   |        | (19,814 | ) | 34,119 |   | NM |   |
| Net unrealized appreciation on other                       | ** ** | **2**                                        |        | — |   | 2 |   | NM |   |
| Net loss on investments, derivatives and borrowings        | ** ** | **(21,669**                                  | **)**       | (24,837 | ) | 3,168 |   | (12.8 | ) |
|                                                       | ** ** | ** **                                   |        |   |   |   |   |   |   |
| NET DECREASE IN NET ASSETS RESULTING FROM  OPERATIONS      | ** ** | **$**                                        | **(11,071** | **)** | $ | (11,449 | ) | $ | 378 |   | (3.3 | )% |

 

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*NM = Not Meaningful*

 

**Investment Income**

 

Totalinvestment income decreased by 19.5% for the year ended March 31, 2010 ascompared to the prior year. This decrease was due mainly to a decrease in thesize of our loan portfolio, specifically the senior syndicated loans, as wellas continuing decreases in the London Interbank Offered Rate (“LIBOR”), ascompared to the year ended March 31, 2009.

 

Interestincome from our investments in debt securities decreased for the year ended March 31,2010 as compared to the prior year several reasons. The level of interestincome from investments is directly related to the balance, at cost, of theinterest-bearing investment portfolio outstanding during the period multipliedby the weighted average yield. The weighted average yield varies from period toperiod based on the current stated interest rate on interest-bearing investmentsand the amounts of loans for which interest is not accruing. The weightedaverage cost basis of our interest-bearing investment portfolio during the yearended March 31, 2010 was approximately $179.2 million, compared toapproximately $297.5 million for the prior year, due primarily to the aggregatesenior syndicated loan sales that occurred during the current fiscal year endedMarch 31, 2010.  The weightedaverage cost basis of loans on non-accrual for the years ended March 31,2010 and 2009 was $6.6 million and $12.0 million, respectively.  The decrease in the non-accrual amount is dueto the write-off of two additional loans in the prior year that were onnon-accrual during fiscal year 2009.  Asof March 31, 2010, one loan, ASH Holdings Corp., was on non-accrual.

 

Alsocontributing to the decrease in our interest income from investments in debtsecurities was a decrease in the average LIBOR between the two fiscal years,which was approximately 0.28% for the year ended March 31, 2010, ascompared to 1.96% for the prior year.

 

Thefollowing table lists the interest income from investments for our five largestportfolio company investments at fair value during the respective periods:

 

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| ** **                                 | ** ** | **As of March 31, 2010** | ** **  | **Year Ended March 31, 2010** | ** ** |
|--------------------------------------------|------------|-------------------------------|-------------|------------------------------------|------------|
| **Company**                                | ** ** | **Fair Value**                | ** **  | **% of Portfolio**                 | ** ** | **Revenues** | ** ** | **% of Total  Revenues** | ** ** |
| A. Stucki Holding Corp.                    |       | $                             | 50,379      |                               | 24.3       | % | $ | 3,246 |   | 15.6 | % |
| Chase II Holdings Corp.                    |       | 29,101                        |        | 14.1                               |       | 2,545 |   | 12.2 |   |
| Cavert II Holding Corp.                    |       | 18,731                        |        | 9.1                                |       | 1,204 |   | 5.8 |   |
| Galaxy Tool Holding Corp.                  |       | 17,099                        |        | 8.3                                |       | 2,361 |   | 11.4 |   |
| Danco Acquisition Corp.                    |       | 13,953                        |        | 6.7                                |       | 1,661 |   | 8.0 |   |
| **Subtotal—five largest investments** | ** ** | **129,263**                   | ** **  | **62.5**                           | ** ** | **11,017** | ** ** | **53.0** | ** ** |
| Other portfolio companies                  |       | 77,595                        |        | 37.5                               |       | 9,768 |   | 47.0 |   |
| **Total investment portfolio**             | ** ** | **$**                         | **206,858** | ** **                         | **100.0**  | **%** | **$** | **20,785** | ** ** | **100.0** | **%** |

 
| ** **                                 | ** ** | **As of March 31, 2009** | ** **  | **Year Ended March 31, 2009** | ** ** |
|--------------------------------------------|------------|-------------------------------|-------------|------------------------------------|------------|
| **Company**                                | ** ** | **Fair Value**                | ** **  | **% of Portfolio**                 | ** ** | **Revenues** | ** ** | **% of Total  Revenues** | ** ** |
| A. Stucki Holding Corp.                    |       | $                             | 49,431      |                               | 15.8       | % | $ | 2,716 |   | 10.5 | % |
| Chase II Holdings Corp.                    |       | 40,880                        |        | 13.0                               |       | 2,811 |   | 10.9 |   |
| Galaxy Tool Holding Corp.                  |       | 22,437                        |        | 7.2                                |       | 1,436 |   | 5.6 |   |
| Acme Cryogenics, Inc.                 |       | 21,420                        |        | 6.8                                |       | 1,691 |   | 6.6 |   |
| Cavert II Holding Corp.                    |       | 18,632                        |        | 5.9                                |       | 1,587 |   | 6.1 |   |
| **Subtotal—five largest investments** | ** ** | **152,800**                   | ** **  | **48.7**                           | ** ** | **10,241** | ** ** | **39.7** | ** ** |
| Other portfolio companies                  |       | 161,130                       |        | 51.3                               |       | 15,571 |   | 60.3 |   |
| **Total investment portfolio**             | ** ** | **$**                         | **313,930** | ** **                         | **100.0**  | **%** | **$** | **25,812** | ** ** | **100.0** | **%** |

 

Theannualized weighted average yield on our portfolio, excluding cash and cashequivalents, for the year ended March 31, 2010 was 11.02%, compared to8.22% for the prior year.  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.  The increasein the weighted average yield for the current year ended March 31, 2010resulted primarily from our sales of lower interest-bearing senior syndicatedloans subsequent to March 31, 2009. The composition of our investment portfolio is primarily Control andAffiliate investments as of March 31, 2010.

 

Otherincome increased for the year ended March 31, 2010, as compared the prioryear, due to the receipt of approximately $953 of dividends from our preferredequity investment in Stucki. The prior year balance was due to dividendsreceived during the restructuring of our investment in Quench HoldingsCorp.  The remaining balance in otherincome is comprised of other miscellaneous income amounts.

 

**Operating Expenses**

 

Totaloperating expenses, excluding any voluntary and irrevocable credits to the basemanagement and incentive fees, decreased for the year ended March 31,2010, primarily due to a reduction in interest expense associated with theCredit Facility, as well as an overall decrease in the amount of fees due toour Adviser, partially offset by an increase in deferred financing fees relatedto the Credit Facility entered into in April 2009, as compared to theprior year.

 

Loanservicing fees decreased for the year ended March 31, 2010, as compared tothe prior year. These fees were incurred in connection with a loan servicingagreement between Business Investment and our Adviser, which is based on thevalue of the aggregate outstanding balance of eligible loans in our portfolio,and were directly credited against the amount of the base management fee due toour Adviser. The decrease in fees is a result of the reduced size of ourpledged loan portfolio, caused primarily by the Syndicated Loan Sales.

 

Thebase management fee decreased for the year ended March 31, 2010, ascompared to the prior year, which is reflective of fewer total assets heldduring the 2010 fiscal year when compared to the prior year. Likewise, due tothe liquidation of the majority of our syndicated loans, the credit receivedagainst the gross base management fee for investments in syndicated loans hasalso been reduced. The base management fee is computed quarterly, as describedunder *“Investment Advisory and ManagementAgreement”* in Note 4 of the notes to the accompanying consolidatedfinancial statements and is summarized in the table below:

 

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| ** **                                                                                          | ** ** | **Year  Ended March 31,** | ** **  |
|-----------------------------------------------------------------------------------------------------|------------|--------------------------------|-------------|
| ** **                                                                                          | ** ** | **2010**                       | ** **  | **2009** | ** ** |
| **Average total assets subject to  base management fee****(1)**                                     | ** ** | **$**                          | **224,200** |   | $ | 335,050 |   |
| Multiplied by annual  base management fee of 2%                                                     | ** ** | **2**                          | **%**       | 2 | % |
| **Unadjusted base management fee**                                                                  | ** ** | **4,484**                      |        | 6,701 |   |
| ** **                                                                                          | ** ** | ** **                     |        |   |   |
| Reduction for loan servicing fees(2)                                                                | ** ** | **(3,747**                     | **)**       | (5,002 | ) |
| **Base management fee****(2)**                                                                      | ** ** | **$**                          | **737**     |   | $ | 1,699 |   |
|                                                                                                | ** ** | ** **                     |        |   |   |
| *Credits to base management fee  from Adviser:*                                                     | ** ** | ** **                     |        |   |   |
| Fee reduction for the waiver of 2.0% fee on senior  syndicated loans to 0.5%                        | ** ** | **(291**                       | **)**       | (1,613 | ) |
| Credit for fees received by Adviser from the  portfolio companies                                   | ** ** | **(433**                       | **)**       | (861 | ) |
| **Credit to base management fee  from Adviser**                                                     | ** ** | **(724**                       | **)**       | (2,474 | ) |
|                                                                                                | ** ** | ** **                     |        |   |   |
| **Net base management fee**                                                                         | ** ** | **$**                          | **13**      |   | $ | (775 | ) |
|                                                                                                | ** ** | ** **                     |        |   |   |
| **Incentive fee**(2)                                                                                | ** ** | **$**                          | **588**     |   | $ | — |   |
| Credit from voluntary,  irrevocable waiver issued by Adviser’s board of directors              | ** ** | **(102**                       | **)**       | — |   |
| **Net incentive fee**                                                                               | ** ** | **$**                          | **486**     |   | $ | — |   |
| ** **                                                                                          | ** ** | ** **                     |        |   |   |
| **Total credits to fees:**                                                                          | ** ** | ** **                     |        |   |   |
| Fee reduction for the voluntary, irrevocable  waiver of 2.0% fee on senior syndicated loans to 0.5% | ** ** | **$**                          | **(291**    | **)** | $ | (1,613 | ) |
| Credit for fees received by Adviser from portfolio  companies                                       | ** ** | **(433**                       | **)**       | (861 | ) |
| Incentive fee credit                                                                                | ** ** | **(102**                       | **)**       | — |   |
| **Credit to base management and  incentive fees from Adviser**(2)                                   | ** ** | **$**                          | **(826**    | **)** | $ | (2,474 | ) |

 

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(1)            Average total assetssubject to the base management fee is defined as total assets, includinginvestments made with proceeds of borrowings, less any uninvested cash or cashequivalents resulting from borrowings, valued at the end of the four mostrecently completed quarters and appropriately adjusted for any share issuances orrepurchases during the current year.

(2)            Reflected as a line item onthe consolidated statement of operations located elsewhere in this report.

 

Forthe first time since our inception, an incentive fee was earned by the Adviserduring the third quarter of the year ended March 31, 2010, due in part toa one-time dividend received from Stucki.

 

Theadministration fee decreased for the year ended March 31, 2010, ascompared the prior year.  This decreasewas also a result of fewer total assets held during the year ended March 31,2010 in relation to the other funds administered by our Administrator, ascompared to the prior year.  Thecalculation of the administration fee is described in detail under *“Administration Agreement”* in Note 4 ofthe notes to the accompanying consolidated financial statements.

 

Interestexpense decreased for the year ended March 31, 2010, as compared to theprior year primarily due to decreased borrowings under the Credit Facility,partially offset by increased borrowing costs, during the year ended March 31,2010.  The weighted average balanceoutstanding on our line of credit during the year ended March 31, 2010 wasapproximately $25.8 million, as compared to $107.4 million in the prior year, adecrease of 76.0%.  The effective interestrate, excluding the impact of deferred financing fees, charged on ourborrowings increased under our Credit Facility during the year ended March 31,2010 to 7.59%, up from 4.98% under our Prior Credit Facility utilized duringthe prior fiscal year.

 

Weincurred significant one-time costs related to the termination of our PriorCredit Facility and transition to our Credit Facility, resulting in increasedamortization of deferred financing fees during the year ended March 31,2010 when compared to the prior year.

 

**Realized and Unrealized (Loss) Gain on Investments**

 

*Realized Losses*

 

Duringthe year ended March 31, 2010, we exited 30 senior syndicated loans and aportion of another senior syndicated loan for aggregate proceeds ofapproximately $74.7 million in cash and recorded a realized loss ofapproximately $35.9 million. For the year ended March 31, 2009, werecognized a net loss on ten sales and three early exits of senior syndicatedloans in the aggregate amount of approximately $5.0 million. The increase inrealized losses is attributable to the Syndicated Loan Sales, which resultedfrom the liquidity needs associated with the repayment of amounts outstandingunder our Prior Credit Facility that matured in April 2009.

 

*Unrealized Appreciation and Depreciation*

 

Netunrealized appreciation (depreciation) of investments is the net change in thefair value of our investment portfolio during the reporting period, includingthe reversal of previously recorded unrealized appreciation or depreciationwhen gains and losses are actually realized. During the year ended March 31,2010, we recorded net unrealized appreciation of investments in the aggregate 

 

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amountof $14.3 million, which included the reversal of $35.7 million in unrealizeddepreciation related to sales during the year. Excluding reversals, we had $21.4 million in net unrealized depreciationfor the year ended March 31, 2010. During the prior year, we had net unrealized depreciation of investmentsin the aggregate amount of $19.8 million. The unrealized appreciation (depreciation) across our investments forthe year ended March 31, 2010 was as follows:

 
| **Year  Ended March 31, 2010**    | ** ** |
|----------------------------------------|------------|
| **Portfolio Company**                  | ** ** | **Investment  Classification** | ** ** | **Net  Unrealized  Appreciation  (Depreciation)** | ** ** |
| Aggregate  Non-Proprietary Investments |       | Non-Control /  Non-Affiliate |   | $ | 37,997 | (1) |
| Cavert  II Holding Corp.               |       | Control |   | 3,162 |   |
| A.Stucki  Holding Corp.                |       | Control |   | 2,773 |   |
| Quench  Holdings Corp.                 |       | Affiliate |   | 1,032 |   |
| B-Dry,  LLC                            |       | Non-Control /  Non-Affiliate |   | 370 |   |
| ASH  Holdings Corp.                    |       | Control |   | (684 | ) |
| Mathey  Investments, Inc.         |       | Control |   | (838 | )(2) |
| Tread  Corp.                           |       | Affiliate |   | (1,227 | ) |
| Danco  Acquisition Corp.               |       | Affiliate |   | (1,875 | ) |
| Noble  Logistics, Inc.            |       | Affiliate |   | (2,251 | ) |
| Country  Club Enterprises, LLC         |       | Control |   | (3,856 | ) |
| Galaxy  Tool Holding Corp.             |       | Control |   | (5,338 | ) |
| Chase  II Holdings Corp.               |       | Control |   | (7,124 | ) |
| Acme  Cryogenics, Inc.            |       | Control |   | (7.836 | ) |
| **Total:**                             |       |   | ** ** | **$** | **14,305** | ** ** |

 

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(1)             Includes thereversal of approximately $35.7 million of previously-recorded unrealizeddepreciation relating to loans sold during the year ended March 31, 2010,as well as the net unrealized appreciation experienced during the year on Non-Control/Non-Affiliateinvestments held at March 31, 2010.

 

(2)             Investment wasreclassified from an Affiliate investment to a Control investment in the thirdquarter of the year ended March 31, 2010. Net unrealized depreciation of $838 includes $260 of unrealizedappreciation recorded while classified as an Affiliate investment and $1,098 ofunrealized depreciation recorded while classified as a Control investment.

 

Theprimary driver of our net unrealized appreciation for the year ended March 31,2010 was the reversal of previously-recorded unrealized depreciation on oursenior syndicated loan sales. Significant appreciation was also experienced in our equity holdings ofCavert and Stucki, as well as in our debt position of Interstate FiberNet.  Substantial depreciation occurred in ourequity holdings of several Control and Affiliate investments, most notablyChase, Acme Cryogenics, Galaxy Tool, and Country Club Enterprises.  The unrealized depreciation recognized on ourportfolio investments was due predominantly to a reduction in certaincomparable multiples and, to a lesser extent, the performance of some of ourportfolio companies used to estimate the fair value of our investments.

 

Theunrealized appreciation (depreciation) across our investments for the yearended March 31, 2009 was as follows:

 
| **Year  Ended March 31, 2009**    | ** ** |
|----------------------------------------|------------|
| **Portfolio Company**                  | ** ** | **Investment  Classification** | ** ** | **Net  Unrealized Appreciation (Depreciation)** | ** ** |
| A.Stucki  Holding Corp.                |       | Control |   | $ | 4,339 |   |
| Chase  II Holdings Corp.               |       | Control |   | 2,874 |   |
| ASH  Holdings Corp.                    |       | Control |   | 1,101 |   |
| Galaxy  Tool Holding Corp.             |       | Control |   | 1,027 |   |
| Tread  Corp.                           |       | Affiliate |   | 418 |   |
| Quench  Holdings Corp.                 |       | Affiliate |   | 392 | (1) |
| Cavert  II Holding Corp.               |       | Control |   | 384 |   |
| Mathey  Investments, Inc.         |       | Affiliate |   | (260 | ) |
| B-Dry,  LLC                            |       | Non-Control /  Non-Affiliate |   | (617 | ) |
| Danco  Acquisition Corp.               |       | Affiliate |   | (1,908 | ) |
| Acme  Cryogenics, Inc.            |       | Control |   | (4,143 | ) |
| Noble  Logistics, Inc.            |       | Affiliate |   | (7,620 | ) |
| Aggregate  Non-Proprietary Investments |       | Non-Control /  Non-Affiliate |   | (15,801 | ) |
| **Total:**                             |       |   | ** ** | **$** | **(19,814** | **)** |

 

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(1)            Investment wasreclassified from a Control investment to an Affiliate investment in the secondquarter of fiscal year 2009.  Netunrealized appreciation of $392 includes $3,447 of unrealized depreciationrecorded while classified as a Control investment and $3,055 of unrealizedappreciation recorded while classified as an Affiliate investment.

 

Theprimary driver of our net unrealized depreciation the year ended March 31,2009 was the decline in value of our senior syndicated loans, which depreciatedby $14.9 million, as well as significant decreases in value of our equityholdings in Acme and our overall investment in Noble Logistics.  Partially offsetting these declines weresizeable appreciations in our equity holdings of Stucki, Chase, and Quench.

 

Overour entire investment portfolio, we recorded an aggregate of approximately$35.1 million of net unrealized appreciation on our debt positions for the yearended March 31, 2010, while our equity holdings experienced an aggregateof approximately $20.8 million of net unrealized depreciation.  At March 31, 2010, the fair value of ourinvestment portfolio was less than the cost basis of our portfolio byapproximately $20.7 million, as compared to $35.0 million at March 31,2009, representing net unrealized appreciation of $14.3 million for theperiod.  We believe that our aggregateinvestment portfolio was valued at a depreciated value due primarily to thegeneral instability of the loan markets and resulting decrease in marketmultiples.   Due to the continueddevaluations over the past year on our equity investments, our entire portfoliowas fair valued at 90.9% of cost as of March 31, 2010.  The unrealized depreciation of ourinvestments does not have an impact on our current ability to pay distributionsto stockholders; however, it may be an indication of future realized losses,which could ultimately reduce our income available for distribution.

 

**Net Decrease in Net Assets Resulting from Operations**

 

Forthe year ended March 31,2010, we recorded a net decrease in net assets resulting from operations of$11.1 million as a result of the factors discussed above. For the year ended March 31, 2009, we recorded anet decrease in net assets resulting from operations of $11.4 million.  Our net decrease in net assets resulting fromoperations per basic and diluted weighted average common share for the years ended March 31, 2010 and 2009 were$0.50 and $0.53, respectively.

 

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***Comparison of the FiscalYear Ended March 31, 2009 to the Fiscal Year Ended March 31, 2008***

 
| ** **                                            | ** ** | **For the fiscal year ended March 31,** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                            | ** ** | **2009**                                     | ** ** | **2008** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| INVESTMENT INCOME                                     | ** ** | ** **                                   |       |   |   |   |   |   |   |
| Interest income                                       |       |                                         |       |   |   |   |   |   |   |
| Interest income                                       |       | $                                            | 25,245     |   | $ | 27,894 |   | $ | (2,649 | ) | (9.5 | )% |
| Other income                                          |       | 567                                          |       | — |   | 567 |   | NM |   |
| Total investment income                               |       | 25,812                                       |       | 27,894 |   | (2,082 | ) | (7.5 | ) |
|                                                  |       |                                         |       |   |   |   |   |   |   |
| EXPENSES                                              |       |                                         |       |   |   |   |   |   |   |
| Loan servicing fee                                    |       | 5,002                                        |       | 5,014 |   | (12 | ) | (0.2 | ) |
| Base management fee                                   |       | 1,699                                        |       | 1,803 |   | (104 | ) | (5.8 | ) |
| Administration fee                                    |       | 821                                          |       | 855 |   | (34 | ) | (4.0 | ) |
| Interest expense                                      |       | 5,349                                        |       | 7,733 |   | (2,384 | ) | (30.8 | ) |
| Amortization of deferred financing fees               |       | 323                                          |       | 734 |   | (411 | ) | (56.0 | ) |
| Other                                                 |       | 1,704                                        |       | 1,512 |   | 192 |   | 12.7 |   |
| Expenses before credits from Adviser                  |       | 14,898                                       |       | 17,651 |   | (2,753 | ) | (15.6 | ) |
| Credits to fees                                       |       | (2,474                                       | )          | (2,809 | ) | 335 |   | (11.9 | ) |
| Total expenses net of credits to fee                  |       | 12,424                                       |       | 14,842 |   | (2,418 | ) | (16.3 | ) |
| NET INVESTMENT INCOME                                 |       | 13,388                                       |       | 13,052 |   | 336 |   | 2.6 |   |
|                                                  |       |                                         |       |   |   |   |   |   |   |
| REALIZED AND UNREALIZED (LOSS) GAIN ON:               |       |                                         |       |   |   |   |   |   |   |
| Realized loss on investments                          |       | (5,023                                       | )          | (2,412 | ) | (2,611 | ) | 108.3 |   |
| Net unrealized depreciation on investments            |       | (19,814                                      | )          | (11,528 | ) | (8,286 | ) | 71.9 |   |
| Net unrealized depreciation on other                  |       | —                                       |       | (53 | ) | 53 |   | NM |   |
| Net loss on investments and derivatives               |       | (24,837                                      | )          | (13,993 | ) | (10,844 | ) | 77.5 |   |
|                                                  |       |                                         |       |   |   |   |   |   |   |
| NET DECREASE IN NET ASSETS RESULTING FROM  OPERATIONS |       | $                                            | (11,449    | ) | $ | (941 | ) | $ | (10,508 | ) | NM |   |

 

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*NM = Not Meaningful*

 

**Investment Income**

 

Investmentincome decreased for the year ended March 31, 2009, as compared to theyear ended March 31, 2008, due mainly to a reduction in the size of ourloan portfolio, as well as decreases in LIBOR over the respective periods.

 

Interestincome from our investments in debt securities decreased for the year ended March 31,2009, as compared to the prior year for several reasons. The level of interestincome from investments is directly related to the balance, at cost, of theinterest-bearing investment portfolio outstanding during the period multipliedby the weighted average yield. The weighted average yield varies from period toperiod based on the current stated interest rate on interest-bearinginvestments and the amounts of loans for which interest is not accruing.  The decline in interest income from our debtsecurities was primarily 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.

 

Interestincome from Non-Control/Non-Affiliate investments decreased for the year ended March 31,2009, as compared to the prior year. This decrease was the result of an overall decrease in the number ofNon-Control/Non-Affiliate investments held at March 31, 2009 compared tothe prior year, primarily due to sales and settlements of syndicated loanssubsequent to March 31, 2008.  Thisdecrease was further accentuated by drops in LIBOR, due to the instability andtightening of the credit markets.

 

Interestincome from Control investments increased slightly for the year ended March 31,2009 compared to the prior year.  Theincrease is attributable to the acquisition of two additional Control investments,Galaxy Tool Holding Corp. and Country Club Enterprises, LLC, purchased duringthe year ended March 31, 2009 as compared to the prior year; however, thisincrease was partially offset by the reclassification of Quench, a Controlinvestment at March 31, 2008, as an Affiliate investment in the secondquarter of fiscal year 2009.  Decreasesin LIBOR during the fiscal year ended March 31, 2009 played a minimal rolein interest income from our proprietary deals, as the majority of them includeinterest rate floors to protect against such circumstances.

 

Interestincome from Affiliate investments also increased for the year ended March 31,2009, as compared to the prior year. This increase was due mainly to thereclassification of Quench Holdings Corp. as an Affiliate investment, as notedabove, and the additional interest income accrued under the Affiliateinvestments classification as a result.

 

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Theinterest-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 companyinvestments at fair value during the respective periods:

 
| ** **                                 | ** ** | **As of March 31, 2009** | ** **  | **Year Ended March 31, 2009** | ** ** |
|--------------------------------------------|------------|-------------------------------|-------------|------------------------------------|------------|
| **Company**                                | ** ** | **Fair Value**                | ** **  | **% of Portfolio**                 | ** ** | **Revenues** | ** ** | **% of Total  Revenues** | ** ** |
| A. Stucki Holding Corp.                    |       | $                             | 49,431      |                               | 15.8       | % | $ | 2,716 |   | 10.5 | % |
| Chase II Holdings Corp.                    |       | 40,880                        |        | 13.0                               |       | 2,811 |   | 10.9 |   |
| Galaxy Tool Holding Corp.                  |       | 22,437                        |        | 7.2                                |       | 1,436 |   | 5.6 |   |
| Acme Cryogenics, Inc.                 |       | 21,420                        |        | 6.8                                |       | 1,691 |   | 6.6 |   |
| Cavert II Holding Corp.                    |       | 18,632                        |        | 5.9                                |       | 1,587 |   | 6.1 |   |
| **Subtotal—five largest investments** | ** ** | **152,800**                   | ** **  | **48.7**                           | ** ** | **10,241** | ** ** | **39.7** | ** ** |
| Other portfolio companies                  |       | 161,130                       |        | 51.3                               |       | 15,571 |   | 60.3 |   |
| **Total investment portfolio**             | ** ** | **$**                         | **313,930** | ** **                         | **100.0**  | **%** | **$** | **25,812** | ** ** | **100.0** | **%** |

 
| ** **                                 | ** ** | **As of March 31, 2008** | ** **  | **Year Ended March 31, 2008** | ** ** |
|--------------------------------------------|------------|-------------------------------|-------------|------------------------------------|------------|
| **Company**                                | ** ** | **Fair Value**                | ** **  | **% of Portfolio**                 | ** ** | **Revenues** | ** ** | **% of Total  Revenues** | ** ** |
| A. Stucki Holding Corp.                    |       | $                             | 44,687      |                               | 13.3       | % | $ | 3,377 |   | 12.1 | % |
| Chase II Holdings Corp.                    |       | 39,151                        |        | 11.7                               |       | 3,026 |   | 10.8 |   |
| Acme Cryogenics, Inc.                 |       | 25,563                        |        | 7.6                                |       | 1,695 |   | 6.1 |   |
| Cavert II Holding Corp.                    |       | 21,348                        |        | 6.4                                |       | 740 |   | 2.7 |   |
| Noble Logistics, Inc.                 |       | 18,532                        |        | 5.5                                |       | 1,518 |   | 5.4 |   |
| **Subtotal—five largest investments** | ** ** | **149,281**                   | ** **  | **44.5**                           | ** ** | **10,356** | ** ** | **37.1** | ** ** |
| Other portfolio companies                  |       | 186,324                       |        | 55.5                               |       | 17,538 |   | 62.9 |   |
| **Total investment portfolio**             | ** ** | **$**                         | **335,604** | ** **                         | **100.0**  | **%** | **$** | **27,894** | ** ** | **100.0** | **%** |

 

Theannualized 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 prior year.  The decreasein the weighted average yield resulted primarily from a reduction in theaverage LIBOR, due to the instability and tightening of the credit markets.

 

Interestincome from invested cash and cash equivalents decreased for the year ended March 31,2009 as compared to the prior year.  Thisdecrease is a result of lower interest rates offered by banks, as this incomeis derived mainly from interest earned on overnight sweeps of cash held atfinancial institutions, in addition to us using the proceeds from repayments onoutstanding loans during the year to pay down our line of credit.

 

Otherincome increased for the year ended March 31, 2009, as compared to theprior year period, due to dividends received during the restructuring of ourinvestment in Quench Holdings Corp. during August 2008.

 

**Operating Expenses**

 

Totaloperating expenses, excluding any voluntary and irrevocable credits to the basemanagement fee and incentive fees, decreased for the year ended March 31,2009 as compared to the prior year, primarily due to a reduction in interestcosts associated with our line of credit, as well as a decrease in the amountof deferred financing costs that were fully amortized during the fiscal yearended March 31, 2009.

 

Loanservicing fees remained relatively flat for the year ended March 31, 2009when compared to the prior year. These fees were incurred in connection with aloan servicing agreement between Business Investment and our Adviser, which isbased on the value of the aggregate outstanding portfolio pledged against thecredit facilities. These fees were directly credited against the amount of thebase management fee due to our Adviser. The consistency in loan servicing feesis the result of similar balances in our portfolio of loans being serviced byour Adviser during the comparable years.

 

Thebase management fee decreased for the year ended March 31, 2009, ascompared to the prior year period, which is reflective of fewer total assetsheld during the year ended March 31, 2009 when compared to the priorfiscal year. The base management fee is computed quarterly, as described under *“Investment Advisory and Management Agreement”*in Note 4 of the notes to the consolidated financial statements and issummarized in the table below:

 

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| ** **                                                                   | ** ** | **Year  Ended March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                   | ** ** | **2009**                       | ** ** | **2008** | ** ** |
| **Average total assets subject to  base management fee****(1)**              |       | $                              | 335,050    |   | $ | 340,850 |   |
| Multiplied by annual  base management fee of 2%                              |       | 2                              | %          | 2 | % |
| **Unadjusted base management fee**                                           |       | 6,701                          |       | 6,817 |   |
| ** **                                                                   |       |                           |       |   |   |
| Reduction for loan servicing fees(2)                                         |       | (5,002                         | )          | (5,014 | ) |
| **Base management fee****(2)**                                               |       | 1,699                          |       | 1,803 |   |
|                                                                         |       |                           |       |   |   |
| *Credits to base management fee  from Adviser:*                              |       |                           |       |   |   |
| Fee reduction for the waiver of 2.0% fee on senior  syndicated loans to 0.5% |       | (1,613                         | )          | (1,764 | ) |
| Credit for fees received by Adviser from the  portfolio companies            |       | (861                           | )          | (1,045 | ) |
| **Credit to base management fee  from Adviser****(2)**                       |       | (2,474                         | )          | (2,809 | ) |
|                                                                         |       |                           |       |   |   |
| **Net base management fee**                                                  |       | $                              | (775       | ) | **$** | (1,006 | ) |

 

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(1)            Average total assetssubject to the base management fee is defined as total assets, includinginvestments made with proceeds of borrowings, less any uninvested cash or cashequivalents resulting from borrowings, valued at the end of the four most recentlycompleted quarters and appropriately adjusted for any share issuances orrepurchases during the current year.

(2)            Reflected as a line item onthe consolidated statement of operations located elsewhere in this report.

 

The administration feespayable to our Administrator decreased slightly for the year ended March 31,2009 as compared to the prior year period. 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 decrease wasattributable to a modest decrease in our total assets in relation to the otherfunds serviced by our Administrator during the fiscal year ended March 31,2008.

 

Interest expensedecreased for the year ended March 31, 2009 as compared to the prior yearas a direct result of decreased borrowings under our line of credit during thefiscal year ended March 31, 2009 as compared to the prior fiscalyear.  While there was an increase in theinterest rate margin charged on the outstanding borrowings upon renewing thefacility during October 2009, the overall LIBOR base rate decrease duringthe period offset this interest rate margin increase.

 

Otheroperating expenses for the year ended March 31, 2009 (includingamortization of deferred financing fees, professional fees, stockholder relatedcosts, insurance expense, directors’ fees, and other direct expenses) decreasedslightly over the prior year, driven primarily by lower deferred financing feeamortization than in the prior year, as amortization of costs incurred inconnection with the previous line of credit were fully realized by October 2008.

 

**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 $5.0 million, and we recorded net unrealizeddepreciation of investments in the aggregate amount of $19.8 million.  At March 31, 2008, we recognized a netloss on the sale of 17 syndicated loans in the aggregate amount of $2.4million, and we recorded net unrealized depreciation of investments in theaggregate amount of $11.5 million.

 

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 Syndicated LoanSales.  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 debt and equityinvestments in non-controlled companies in accordance with board approvedvaluation policies, which valued the debt securities through the use of aliquidity waterfall approach.  Consistent with our Board of Directors’ongoing review and analysis of appropriate valuation policies, and inconjunction with our adoption of Financial Accounting Standards BoardAccounting Standards Codification (“ASC”) 820 on April 1, 2008, the Board ofDirectors modified our valuation procedures so that the debt portion of bundledinvestments in non-controlled companies is valued by Standard & Poor’sSecurities Evaluations, Inc. (“SPSE”), which change had a positive impacton net unrealized appreciation in the amount of approximately $8.5 million forthe fiscal year ended March 31, 2009. Our Control investments, however, performed quite well, appreciating invalue by an aggregate of approximately $5.6 million during the fiscalyear.  This increase was led by ourequity positions in Stucki, Chase and Galaxy Tools, as well as an increase inthe fair market value 

 

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ofthe debt portion of ASH, which previously had no fair value.  Countering this appreciation in value was anunrealized loss in the equity of Acme Cryogenics, which depreciated in fairvalue by approximately $4.1 million.

 

Althoughour investment portfolio had depreciated, our entire portfolio was fair valuedat 90.0% of the cost of the investments as of March 31, 2009.  We believe that the depreciation was 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.  The Syndicated Loan Sales, for example,resulted in a realized loss of approximately $34.6 million.

 

**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$11.4 million as a result of the factors discussed above. Our net decrease innet assets resulting from operations per basic and diluted weighted averagecommon share 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$0.9 million.  We will continue to incur base managementfees, which are likely to increase to the extent our investment portfoliogrows, and we may begin to incur incentive fees. The administrative fee payableto our Administrator is also likely to grow during future periods to the extentour 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**

 

Netcash provided by operating activities for the year ended March 31, 2010was approximately $99.3 million and consisted primarily of proceeds receivedfrom the Syndicated Loan Sales and the net loss realized on those sales andprincipal payments received from existing investments, partially offset by theunrealized appreciation experienced throughout our loan portfolio during theyear ended March 31, 2010.  Net cashprovided by operating activities for the year ended March 31, 2009 wasapproximately $13.6 million and consisted primarily of principal loanrepayments, proceeds from the sale of existing portfolio investments, and netunrealized depreciation of our investments. These cash inflows were partially offset by the purchases of two newControl investments, one new Affiliate investment and other disbursements toexisting portfolio companies.

 

AtMarch 31, 2010, we had investments in equity of, loans to, or syndicatedparticipations in, 16 private companies with an aggregate cost basis ofapproximately $227.6 million.  At March 31,2009, we had investments in equity of, loans to or syndicated participations in46 private companies with an aggregate cost basis of approximately $348.9million.  The following table summarizesour total portfolio investment activity during the years ended March 31,2010 and 2009:

 
| ** **                                     | ** ** | **Year  Ended March 31,** | ** **  |
|------------------------------------------------|------------|--------------------------------|-------------|
| ** **                                     | ** ** | **2010**                       | ** **  | **2009** | ** ** |
| Beginning  investment portfolio at fair value  | ** ** | **$**                          | **313,930** |   | $ | 335,604 |   |
| New  investments                               | ** ** | **4,788**                      |        | 53,002 |   |
| Principal  repayments                          | ** ** | **(15,534**                    | **)**       | (35,871 | ) |
| Proceeds  from sales                           | ** ** | **(74,706**                    | **)**       | (13,914 | ) |
| Net  unrealized appreciation (depreciation)(1) | ** ** | **14,305**                     |        | (19,814 | ) |
| Net  realized loss                             | ** ** | **(35,923**                    | **)**       | (5,023 | ) |
| Amortization  of premiums and discounts        | ** ** | **(2**                         | **)**       | (54 | ) |
| **Ending investment portfolio at fair value**  | ** ** | **$**                          | **206,858** |   | $ | 313,930 |   |

 

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(1)            Includes the reversal of unrealizeddepreciation due to investment exits for the years ended March 31, 2010and 2009 of $35.7 and $6.1 million, respectively.

 

Duringthe years ended March 31, 2010 and 2009, the following investment activityoccurred during each quarter of the respective fiscal year:

 
| **Quarter Ended**      | ** ** | **Investment  Disbursements (1)** | ** ** | **Principal  Repayments (2)** | ** ** | **Proceeds from  Sales/Exits (3)** | ** ** | **Net Loss  on Disposal** | ** ** |
|-----------------------------|------------|-----------------------------------|------------|-------------------------------|------------|------------------------------------|------------|--------------------------------|------------|
|                        |       |                              |       |                          |       |                               |       |                           |       |
| **June 30, 2009**      | ** ** | **$**                             | **1,500**  | **(a)**                       | **$**      | **7,575**                          | **(a)**    | **$**                          | **69,222** | ** ** | **$** | **(34,605** | **)** |
| **September 30, 2009** | ** ** | **318**                           | ** ** | **2,757**                     | ** ** | **—**                         | ** ** | **—**                     | ** ** |
| **December 31, 2009**  | ** ** | **595**                           | ** ** | **4,496**                     | ** ** | **5,484**                          | ** ** | **(1,318**                     | **)**      |
| **March 31, 2010**     | ** ** | **2,375**                         | ** ** | **706**                       | ** ** | **—**                         | ** ** | **—**                     | ** ** |
| **Total fiscal year 2010**  | ** ** | **$**                             | **4,788**  | ** **                    | **$**      | **15,534**                         | ** ** | **$**                          | **74,706** | ** ** | **$** | **(35,923** | **)** |
|                        |       |                              |       |                          |       |                               |       |                           |       |
| 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                             | (b)        | 9,068                         | (b)        | 687                                |       | (807                           | )          |
| Total fiscal year 2009      |       | $                                 | 53,002     |                          | $          | 35,871                             |       | $                              | 13,914     |   | $ | (5,023 | ) |

 

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(a)              Includes anon-cash transaction whereby a portfolio company, Cavert II Holdings Corp.,drew $850 on its revolving line of credit and immediately used the proceeds topay down its senior term A and senior term B loans.  No cash was disbursed in this transaction, asit was simply a transfer of balance.  The$850 drawn on the credit line was subsequently paid off in full, and the linewas sold to a third party for a nominal fee.

 

(b)             Includes anon-cash assumption of $3,043 worth of senior notes received from AmericanGreetings Corporation for our agreement to the RPG bankruptcy settlement inwhich we received the aforementioned notes and $909 in cash and recognized aloss on the settlement of approximately $601.

 

**(1) Investment Disbursements:**

** **
| ** **                  | ** ** | **New  Investments** | ** ** | **Disbursements  to Existing** | ** ** | **Total**                | ** ** |
|-----------------------------|------------|----------------------|------------|--------------------------------|------------|--------------------------|------------|
| **Quarter  Ended**          | ** ** | **Companies**        | ** ** | **Investments**                | ** ** | **Portfolio  Companies** | ** ** | **Disbursements** | ** ** |
| **June 30, 2009**      | ** ** | **0**                | ** ** | **$**                          | **—** | ** **               | **$**      | **1,500** | **(a)** | **$** | **1,500** | **(a)** |
| **September 30, 2009** | ** ** | **0**                | ** ** | **—**                     | ** ** | **318**                  | ** ** | **318** | ** ** |
| **December 31, 2009**  | ** ** | **0**                | ** ** | **—**                     | ** ** | **595**                  | ** ** | **595** | ** ** |
| **March 31, 2010**     | ** ** | **0**                | ** ** | **—**                     | ** ** | **2,375**                | ** ** | **2,375** | ** ** |
| **Total**                   | ** ** | **0**                | ** ** | **$**                          | **—** | ** **               | **$**      | **4,788** | ** ** | **$** | **4,788** | ** ** |

 
| ** **              | ** ** | **New  Investments** | ** ** | **Disbursements  to Existing** | ** ** | **Total**                | ** ** |
|-------------------------|------------|----------------------|------------|--------------------------------|------------|--------------------------|------------|
| **Quarter  Ended**      | ** ** | **Companies**        | ** ** | **Investments**                | ** ** | **Portfolio  Companies** | ** ** | **Disbursements** | ** ** |
| June 30, 2008      |       | 1                    | (b)        | $                              | 5,753      |                     | $          | 3,227 |   | $ | 8,980 |   |
| September 30, 2008 |       | 1                    | (c)        | 21,410                         |       | 6,222                    |       | 27,632 |   |
| December 31, 2008  |       | 1                    | (d)        | 10,725                         |       | 318                      |       | 11,043 |   |
| March 31, 2009     |       | 1                    | (e)        | 3,043                          | (e)        | 2,304                    |       | 5,347 | (e) |
| Total                   |       | 4                    |       | $                              | 40,931     |                     | $          | 12,071 |   | $ | 53,002 |   |

 

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(a)              See note (a) inprevious table.

(b)             TreadCorporation.

(c)              Galaxy ToolCorporation

(d)             Country ClubEnterprises, LLC.

(e)              See note (b) inprevious table.

 

**(2) Principal Repayments:**

** **
| **Quarter Ended**           | ** ** | **Scheduled Principal  Repayments** | ** ** | **Unscheduled Principal  Repayments****(a)** | ** ** | **Total Principal  Repayments** | ** ** |
|-----------------------------|------------|-------------------------------------|------------|----------------------------------------------|------------|---------------------------------|------------|
| **June 30, 2009**      | ** ** | **$**                               | **2,004**  | ** **                                   | **$**      | **5,571**                       | **(b)**    | **$** | **7,575** | ** ** |
| **September 30, 2009** | ** ** | **387**                             | ** ** | **2,370**                                    | **(c)**    | **2,757**                       | ** ** |
| **December 31, 2009**  | ** ** | **396**                             | ** ** | **4,100**                                    | **(d)**    | **4,496**                       | ** ** |
| **March 31, 2010**     | ** ** | **506**                             | ** ** | **200**                                      | ** ** | **706**                         |       |
| **Total**                   | ** ** | **$**                               | **3,293**  | ** **                                   | **$**      | **12,241**                      | ** ** | **$** | **15,534** | ** ** |

 
| **Quarter Ended**       | ** ** | **Scheduled Principal  Repayments** | ** ** | **Unscheduled Principal  Repayments (a)** | ** ** | **Total Principal  Repayments** | ** ** |
|-------------------------|------------|-------------------------------------|------------|-------------------------------------------|------------|---------------------------------|------------|
| June 30, 2008      |       | $                                   | 2,516      |                                      | $          | 977                             |       | $ | 3,493 |   |
| September 30, 2008 |       | 3,294                               |       | 15,547                                    | (e)        | 18,841                          |       |
| December 31, 2008       |       | 2,018                               |       | 2,451                                     |       | 4,469                           |       |
| March 31, 2009     |       | 1,920                               |       | 7,148                                     | (f)        | 9,068                           |       |
| Total                   |       | $                                   | 9,748      |                                      | $          | 26,123                          |       | $ | 35,871 |   |

 

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(a)              Includesprincipal repayments due to excess cash flows, covenant trips, exits, refinancing,etc.

(b)             Includesprincipal payments received in connection with the refinancing of Stucki andCavert.

(c)              Includes $2.0million voluntary prepayment from Cavert on its Senior Term Debt.

(d)             Includes fullrepayment of Chase line of credit in the amount of $3.5 million.

(e)              Includes earlypayoff of Hudson in the amount of $6.0 million and principal proceeds of $7.0million received in connection with the Quench Holdings Corp. restructuring.

(f)                Includes thereceipt of approximately $4.0 million in consideration from the RPG settlement($3.1 million in American Greetings Corp. senior notes and $900 cash), as wellas $996 in unscheduled principal payments from various senior syndicated loans.

 

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**(3) Investment Sales / Exits:**

 
| **Quarter Ended**           | ** ** | **Number of  Investments Exited** | ** ** | **Proceeds  Received** | ** ** | **Position  Exited** | ** ** | **Unamortized  Loan Costs****(a)** | ** **   | **Net Loss on  Exit** | ** **   |
|-----------------------------|------------|-----------------------------------|------------|------------------------|------------|----------------------|------------|------------------------------------|--------------|-----------------------|--------------|
| **June 30, 2009**      | ** ** | **29**                            | **(b)**    | **$**                  | **69,222** | ** **           | **$**      | **103,772**                        | ** **   | **$**                 | **55**       | ** ** | **$** | **(34,605** | **)** |
| **September 30, 2009** | ** ** | **0**                             | ** ** | **—**             | ** ** | **—**           | ** ** | **—**                         | ** **   | **—**            | ** **   |
| **December 31, 2009**  | ** ** | **1**                             | ** ** | **5,484**              | **(c)**    | **6,810**            | **(c)**    | **(8**                             | **)****(c)** | **(1,318**            | **)****(c)** |
| **March 31, 2010**     | ** ** | **0**                             | ** ** | **—**             | ** ** | **—**           | ** ** | **—**                         | ** **   | **—**            | ** **   |
| **Total**                   | ** ** | **30**                            | ** ** | **$**                  | **74,706** | ** **           | **$**      | **110,582**                        | ** **   | **$**                 | **47**       | ** ** | **$** | **(35,923** | **)** |

 
| **Quarter  Ended**      | ** ** | **Number  of  Investments Exited** | ** ** | **Proceeds  Received** | ** ** | **Position  Exited** | ** ** | **Unamortized  Loan Costs (a)** | ** ** | **Net  Loss on  Exit** | ** ** |
|-------------------------|------------|------------------------------------|------------|------------------------|------------|----------------------|------------|---------------------------------|------------|------------------------|------------|
| June 30, 2008      |       | 6                                  |       | $                      | 13,227     | (d)                  | $          | 14,926                          | (d)        | $                      | 19         | (d) | $ | (1,718 | )(d) |
| September 30, 2008 |       | 2                                  | (e)        | —                 |       | 2,480                |       | 18                              |       | (2,498                 | )          |
| December 31, 2008  |       | 0                                  |       | —                 |       | —               |       | —                          |       | —                 |       |
| March 31, 2009     |       | 2                                  | (f)        | 687                    |       | 1,492                |       | 2                               |       | (807                   | )          |
| Total                   |       | 10                                 |       | $                      | 13,914     |                 | $          | 18,898                          |       | $                      | 39         |   | $ | (5,023 | ) |

 

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(a)              Includes thebalance of premiums, discounts, acquisition costs, and deferred compensationunamortized at time of exit.

(b)             One syndicatedloan (Critical Homecare Solutions) was sold in two separate installments.

(c)              Includes thepartial sale of Interstate FiberNet, Inc.

(d)             Includes thepartial sale of three syndicated loans still held subsequent to June 30,2008 (CRC Health Group, Graham Packaging and Pinnacle Foods).  One syndicated loan (NPC International) wassold in two separate installments.

(e)              Includes thewrite-off of Lexicon and early payoff of Hudson.

(f)                Includes thewrite-off of RPG (cost basis in excess of consideration received in settlement)and the sale of Hargray.

 

Thefollowing table summarizes the contractual principal repayment and maturity ofour investment portfolio by fiscal year, assuming no voluntary prepayments, at March 31,2010.

 
| **Fiscal  Year Ending March 31,**             | ** ** | **Amount** | ** **  |
|----------------------------------------------------|------------|------------|-------------|
| 2011                                               |       | $          | 29,280      |   |
| 2012                                               |       | 50,701     |        |
| 2013                                               |       | 22,122     |        |
| 2014                                               |       | 55,817     |        |
| 2015                                               |       | 21,291     |        |
| Thereafter                                         |       | 3,043      |        |
| **Total Contractual Repayments**                   |       | $          | 182,254     |   |
| Investment in equity securities                    |       | 45,322     |        |
| Unamortized premiums on debt securities            |       | (9         | )           |
| **Total investments held at  March 31, 2010** | ** ** | **$**      | **227,567** | ** ** |

 

Ourmost recent investment in a new portfolio company occurred in November 2008.  In light of current economic conditions,constraints on our ability to access the capital markets and the restraintsupon our investing activities required to maintain our RIC status, ournear-term strategy will be focused on retaining capital and building the valueof our existing portfolio companies.  Wewill also, where prudent and possible, consider the sale of lower-yieldinginvestments. This strategy has resulted, and may continue to result, insignificantly 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, events whichmay be beyond our control, and our ability to satisfy the asset diversificationtest under the Code.  As our capitalconstraints and asset diversification improve, we intend to continue ourstrategy of making conservative investments in businesses that we believe willweather the current economic conditions and that are likely to produceattractive long-term returns for our stockholders.

 

**Financing Activities**

 

Net cash used infinancing activities for the fiscal year ended March 31, 2010 was approximately$18.8 million, which was primarily a result of net repayments on our line ofcredit in excess of borrowings by approximately $82.5 million, in addition toour distributions paid to stockholders of $10.6 million.  This was partially offset, however, by theproceeds received from borrowings under the short-term loan, as discussed inNote 5, “Borrowings — Short-term Loan,” in the accompanying notes to theconsolidated financial statements.

 

Net cash used infinancing activities for the fiscal year ended March 31, 2009 wasapproximately $15.7 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 theissuance of additional shares through a rights offering that provided netproceeds of $40.6 million.

 

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**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 $0.04 per common share duringeach month of the fiscal year ended March 31, 2010.  During the fiscal year ended March 31,2009, we declared and paid monthly cash distributions of $0.08 per common sharefor each month.

 

For the year ended March 31,2010, our distribution payments of approximately $10.6 million equaled our netinvestment income of approximately $10.6 million. We declared thesedistributions based on our estimates of net investment income for the fiscalyear.  Additionally, our covenants in ourCredit Facility restrict the amount of distributions that we can pay out to beno greater than our net investment income.

 

*Section 19(a) Disclosure*

 

OurBoard of Directors estimates the source of the distributions at the time oftheir declaration as required by Section 19(a) of the 1940 Act. On amonthly basis, if required under Section 19(a), the Company posts a Section 19(a) noticethrough the Depository Trust Company’s Legal Notice System and also sends toits registered stockholders a written Section 19(a) notice along withthe payment of distributions for any payment which includes a distributionestimated to be paid from any other source other than net investment income.The estimates of the source of the distribution are interim estimates based onGAAP that are subject to revision, and the exact character of the distributionsfor tax purposes cannot be determined until the final books and records of theCompany are finalized for the calendar year. Following the calendar year end,after definitive information has been determined by the Company, if the Companyhas made distributions of taxable income (or return of capital), the Companywill deliver a Form 1099-DIV to its stockholders specifying such amountand the tax characterization of such amount. Therefore, these estimates aremade solely in order to comply with the requirements of Section 19(a) ofthe 1940 Act and should not be relied upon for tax reporting or any otherpurposes and could differ significantly from the actual character ofdistributions for tax purposes.

 

The following GAAP estimates were made by the Boardof Directors during the quarter ended March 31, 2010:

 
| **Payment  Date**      | ** ** | **Ordinary Income** | ** ** | **Return of Capital** | ** ** | **Total Distribution** | ** ** |
|------------------------|------------|---------------------|------------|-----------------------|------------|------------------------|------------|
| January 29, 2010  |       | $                   | 0.042      |                  | $          | (0.002                 | )          | $ | 0.040 |   |
| February 26, 2010 |       | 0.035               |       | 0.005                 |       | 0.040                  |       |
| March 31, 2010    |       | 0.045               |       | (0.005                | )          | 0.040                  |       |
|                        |            |                     |            |                       |            |                        |            |  |  |  |

 

Becausethe Board of Directors declares distributions at the beginning of a quarter, itis difficult to estimate how much of the Company’s monthly distributions, basedon GAAP, will come from ordinary income, capital gains and returns of capital.Subsequent to the year ended March 31, 2010, the following correctionswere made to the above listed estimates for that quarter:

 
| **Payment  Date**      | ** ** | **Ordinary Income** | ** ** | **Return of Capital** | ** ** | **Total Distribution** | ** ** |
|------------------------|------------|---------------------|------------|-----------------------|------------|------------------------|------------|
| January 29, 2010  |       | $                   | 0.041      |                  | $          | (0.001                 | )          | $ | 0.040 |   |
| February 26, 2010 |       | 0.036               |       | 0.004                 |       | 0.040                  |       |
| March 31, 2010    |       | 0.045               |       | (0.005                | )          | 0.040                  |       |
|                        |            |                     |            |                       |            |                        |            |  |  |  |

 

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

 
| **Payment  Date**   | ** ** | **Ordinary Income** | ** ** | **Return of Capital** | ** ** | **Total Distribution** | ** ** |
|---------------------|------------|---------------------|------------|-----------------------|------------|------------------------|------------|
| April 30, 2010 |       | $                   | 0.040      |                  | $          | 0.000                  |       | $ | 0.040 |   |
| May 28, 2010   |       | 0.047               |       | (0.007                | )          | 0.040                  |       |
| June 30, 2010  |       | 0.046               |       | (0.006                | )          | 0.040                  |       |
|                     |            |                     |            |                       |            |                        |            |  |  |  |

 

**Issuance of Equity**

 

OnJuly 21, 2009, we filed a registration statement (the “RegistrationStatement”) with the SEC that was amended on October 2, 2009.  The Registration Statement, declaredeffective on October 8, 2009, permits us to issue, through one or moretransactions, up to an aggregate of $300.0 million in securities, consisting ofcommon stock, preferred stock, subscription rights, debt securities, warrantsto purchase common stock, or a combination of these securities. To date, wehave incurred approximately $155 of costs in connection with the RegistrationStatement.

 

Weanticipate issuing equity securities to obtain additional capital in thefuture. However, we cannot determine the terms of any future equity issuancesor whether we will be able to issue equity on terms favorable to us, or at all.Additionally, when our common stock is trading below net asset value, we willhave regulatory constraints under the 1940 Act on our ability to obtainadditional capital in this manner. At March 31, 2010, our stock closedtrading at $5.98, representing a 31.6% discount to our net asset value of $8.74per share. Generally, the 1940 Act provides that we may not issue stock for aprice below net asset value per share, without first obtaining the approval ofour stockholders and our independent directors or through a rights offering.

 

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Weraised additional capital within these regulatory constraints in April 2008through an offering of transferable subscription rights to purchase additionalshares of common stock (the “Rights Offering”). Pursuant to the RightsOffering, we sold 5,520,033 shares of our common stock at a subscription priceof $7.48 per share, which represented a purchase price equal to 93.0% of theweighted average closing price of our stock in the last five trading days ofthe subscription period. Net proceeds of the offering, after offering expensesborne by us, were approximately $40.4 million and were used to repayoutstanding borrowings under our line of credit. Should our common stockcontinue to trade below its net asset value per share, we may seek to conductsimilar offerings in the future in order to raise additional capital, althoughthere can be no assurance that we will be successful in our efforts to raisecapital.

 

**Future Capital Resources**

 

Atour 2009 annual stockholders meeting, our stockholders approved a proposal thatallows us to sell shares of our common stock at a price below our then current netasset value per share should we choose to do so. This proposal is in effectuntil our next annual stockholders meeting, currently scheduled for August 5,2010, at which time we will ask our stockholders to vote in favor of thisproposal for another year.

 

**Revolving Credit Facility**

 

On April 14, 2009,we entered into the Credit Facility, providing for a $50.0 million revolvingline of credit arranged by BB&T as administrative agent, replacing DeutscheBank, AG which served as administrative agent under our Prior Credit Facility.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 all amountsoutstanding under the Prior Credit Facility.  The Credit Facility may beexpanded up to $125.0 million through the addition of other committed lendersto the facility.  The Credit Facility was renewed for two years on April 13,2010 (see “—Subsequent Renewal of Revolving Credit Facility” below), whichextended the maturity date to April 13, 2012, and, if the facility is notrenewed or extended by this date, all unpaid principal and interest will be dueand payable within one year of the maturity date.    Advances under the Credit Facility willgenerally bear interest at the 30 day LIBOR rate (subject to a minimum rate of2.0%), plus 5.0% per annum, with a commitment fee of 0.75% per annum on undrawnamounts.  Interest is payable monthlyduring the term of the Credit Facility. Available borrowings are subject to various constraints imposed underthe Credit Facility, based on the aggregate loan balance pledged by BusinessInvestment.  As of March 31, 2010,we had approximately $27.8 million of principal outstanding with approximately$20.9 million of availability under the Credit Facility.

 

TheCredit Facility contains covenants that require Business Investment to maintainits status as a separate legal entity; prohibit certain significant corporatetransactions (such as mergers, consolidations, liquidations or dissolutions);and restrict material changes to our credit and collection policies withoutlenders consent. The facility also limits payments on distributions to theaggregate net investment income for the prior twelve months preceding April 2010.  We are also subject to certain limitations onthe type of loan investments we can make, including restrictions on geographicconcentrations, sector concentrations, loan size, dividend payout, paymentfrequency and status, average life and lien property.  The Credit Facility also requires us tocomply with other financial and operational covenants, which require us to,among other things, maintain certain financial ratios, including asset andinterest coverage a minimum net worth, and a minimum number of obligorsrequired in the borrowing base of the credit agreement.  Additionally, we are subject to a performanceguaranty that requires us to maintain a minimum net worth of $169.0 millionplus 50% of all equity and subordinated debt raised after April 14, 2009,to maintain “asset coverage” with respect to “senior securities representingindebtedness” of at least 200%, in accordance with Section 18 of the 1940Act, and to maintain its status as a BDC under the 1940 Act and as a RIC underthe Code.  As of March 31, 2010, wewere in compliance with all covenants.

 

DuringMay 2009, we cancelled our interest rate cap agreement with Deutsche BankAG and entered into a new interest rate cap agreement for a notional amount of$45.0 million that will effectively limit the interest rate on a portion of theborrowings under the Credit Facility.  Weincurred a premium fee of approximately $39 in conjunction with this agreement.

 

The administrative agentalso 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 21,2010, the amount due from the custodian was approximately $302.

 

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 $169.0 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 21, 2010, 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 

 

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volatile, affects ourability to comply with these covenants. During the fiscal year ended March 31,2010, net unrealized depreciation and net realized losses on our investmentswas approximately $21.6 million, compared to $24.8 million during the priorfiscal year. Given the unstable capital markets, net unrealized depreciation inour portfolio may increase in future periods and threaten our ability to complywith the covenants under our Credit Facility. Accordingly, there are noassurances that we will continue to comply with these covenants. Failure tocomply with these covenants would result in a default which, if we are unableto obtain a waiver from the lenders, could accelerate our repayment obligationsunder the Credit Facility and thereby have a material adverse impact on ourliquidity, financial condition, results of operations and ability to paydistributions to our stockholders as more fully described below.

 

The Credit Facilitymatures on April 13, 2012, 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 noguarantee that we will be able to renew, extend or replace the Credit Facilityon terms that are favorable to us, or at all. Our ability to obtain replacement financing will be constrained bycurrent economic conditions affecting the credit markets.  If we are not able to renew, extend orrefinance the Credit Facility, this would likely have a material adverse effecton our liquidity and ability to fund new investments or pay distributions toour stockholders.  Our inability to paydistributions could result in it failing to qualify as a RIC.  Consequently, any income or gains couldbecome taxable at corporate rates. If we are unable to secure replacementfinancing, we may be forced to sell certain assets on disadvantageous terms,which may result in realized losses such as those recorded in connection with the Syndicated Loan Sales, which resulted ina realized loss of approximately $34.6 million during the quarter ended June 30,2009.  Such realized losses couldmaterially exceed the amount of any unrealized depreciation on these assets asof our most recent balance sheet date, which would have a material adverseeffect on our results of operations.  Inaddition to selling assets, or as an alternative, we may issue equity in orderto repay amounts outstanding under the Credit Facility.  Based on the recent trading prices of ourstock, such an equity offering may have a substantial dilutive impact on ourexisting stockholders’ interest in our earnings and assets and voting interestin us.

 

*Subsequent Renewal of Revolving Credit Facility*

 

OnApril 13, 2010, we renewed the Credit Facility through BusinessInvestment, by entering into a third amended and restated credit agreementproviding for a $50.0 million, two year revolving line of credit.  The Credit Facility maturity date is April 13,2012, and if it is not renewed or extended by then, all principal and interestwill be due and payable on or before April 13, 2013.  Advances under the Credit Facility weremodified to generally bear interest at the 30 day LIBOR rate (subject to aminimum rate of 2.0%), plus 4.5% per annum, with a commitment fee of 0.50% perannum on undrawn amounts when advances outstanding are above 50.0% of thecommitment and will be 1.0% on undrawn amounts if the advances outstanding arebelow 50.0% of the commitment.  Inconnection with the Credit Facility renewal, we paid an upfront fee of1.0%.  Other significant changes to theCredit facility include a reduced minimum net worth covenant, which wasmodified to $155.0million plus 50% of all equity and subordinated debt raised after April 13,2010 and to maintain “asset coverage” with respect to “senior securitiesrepresenting indebtedness” of at least 200%, in accordance with Section 18of the 1940 Act.

 

In April 2010, we entered into a forward interest rate capagreement, effective May 2011 and expiring in May 2012, for anotional amount of $45.0 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.  We incurred apremium fee of approximately $41 in conjunction with this agreement.

 

**Short-Term Note**

 

For fiscal year 2010, for each of June 30,2009, September 30, 2009, December 31, 2009 and March 31, 2010(the “measurements dates”), we satisfied the 50% thresholdthrough the purchase of short-term qualified securities, which was fundedprimarily through a short-term loan agreement. Subsequent to the measurementdates, the short-term qualified securities matured and we repaid the short-termloan, at which time we again fell below the 50% threshold.  Therefore, for year end, on March 30,2010, we purchased $85.0 million of short-term United States Treasurysecurities through Jefferies.  Thesecurities were purchased with $10.0 million in funds drawn on the CreditFacility and the proceeds from a $75.0 million short-term loan from Jefferies,with an effective annual interest rate of approximately 0.67%.  On April 1, 2010, when the securitiesmatured, we repaid the $75.0 million loan from Jefferies in full, and, on April 2,2010, we repaid the $10.0 million drawn on the Credit Facility for thetransaction.

 

**Contractual Obligations andOff-Balance Sheet Arrangements**

 

We were not a party toany signed term sheets for potential investments as of March 31,2010.  However, we have certain lines ofcredit with our portfolio companies that have not been fully drawn.  Since these lines of credit have expirationdates and we expect many will never be fully drawn, the total line of creditcommitment amounts do not necessarily represent future cash requirements.  We estimate the fair value of these unusedline of credit commitments as of March 31, 2010 and 2009 to be nominal.

 

InOctober 2008, we executed a guaranty of a vehicle finance facilityagreement (the “Finance Facility”) between Ford Motor Credit Company (“FMC”)and ASH, one of our Control investments. The Finance Facility provides ASH with a line of credit of up to $250for component Ford parts used by 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 our replacement asguarantor.  The Finance Facility issecured by all of the assets of Business Investment.  As of March 31, 2010, we have 

 

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notbeen required to make any payments on the guaranty of the Finance Facility, andwe consider the credit risk to be remote and the fair value of the guaranty tobe minimal.

 

InFebruary 2010, we executed a guaranty of a wholesale financing facilityagreement (the “Floor Plan Facility”) between Agricredit Acceptance, LLC (“Agricredit”)and Country Club Enterprise, LLC (“CCE”), one of our Control Investments.  The Floor Plan Facility provides CCE withfinancing of up to $2.0 million to bridge the time and cash flow gap betweenthe order and delivery of golf cars to customers.  The guaranty will expire in February 2011unless it is renewed by us, CCE and Agricredit. In connection with this guaranty, we received a premium of $84 from CCEwhich approximates fair value.  As of March 31,2010, we have not been required to make any payments on the guaranty of theFloor Plan Facility, and we consider the credit risk to be remote.

 

In accordance with GAAP, the unused portions of these commitments arenot recorded on the accompanying consolidated balance sheets.  The following table summarizes the nominaldollar balance of unused line of credit commitments and guarantees as of March 31,2010 and 2009:

 
| ** **             | ** ** | **As  of March 31,** | ** ** |
|------------------------|------------|---------------------------|------------|
| ** **             | ** ** | **2010**                  | ** ** | **2009** | ** ** |
| Unused lines of credit | ** ** | **$**                     | **1,814**  |   | $ | 8,868 |   |
| Guarantees             | ** ** | **2,250**                 |       | 500 |   |
|                        |            |                           |            |  |  |  |  |

 

Thefollowing table shows our contractual obligations as of March 31, 2010:

 
| ** **                         | ** ** | **Payments  Due by Period** | ** ** |
|------------------------------------|------------|-----------------------------|------------|
| **Contractual Obligations****(1)** | ** ** | **Less  than 1  Year**      | ** ** | **1-3  Years** | ** ** | **4-5  Years** | ** ** | **After 5  Years** | ** ** | **Total** | ** ** |
| *Borrowings:*                      |       |                        |       |   |   |   |   |   |   |   |   |
| Short-term loan**(2)**             |       | $                           | 75,000     |   | $ | — |   | $ | — |   | $ | — |   | $ | 75,000 |   |
| Line of credit**(3)**              |       | —                      |       | 27,812 |   | — |   | — |   | 27,812 |   |
| **Total borrowings**               | ** ** | **$**                       | **75,000** | ** ** | **$** | **27,812** | ** ** | **$** | **—** | ** ** | **$** | **—** | ** ** | **$** | **102,812** | ** ** |

 

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**(1)**     Excludes theunused commitments to extend credit to our customers of $1.8 million, asdiscussed above.

**(2)**     On April 1,2010, we repaid the entire short-term loan.

**(3)**     Borrowings underthe Credit Facility are listed, at fair value, based on the contractualmaturity due to the revolving nature of the 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 reportedconsolidated amounts of assets and liabilities, including disclosure ofcontingent assets and liabilities at the date of the financial statements, andrevenues and expenses during the period reported. Actual results could differmaterially from those estimates. We have identified our investment valuationprocess, which was modified during the quarter ended September 30, 2009,as our most critical accounting policy.

 

**Investment Valuation**

 

Themost significant estimate inherent in the preparation of our condensedconsolidated financial statements is the valuation of investments and therelated 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.

 

Weadopted ASC 820 on April 1, 2008. In part, ASC 820 defines fair value andestablishes a framework for measuring fair value and expands disclosures aboutassets and liabilities measured at fair value. The new guidance 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. Theguidance 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) foridentical assets or liabilities in active markets;

 

·      *Level2*—inputs to the valuation methodology include quoted prices for similarassets and liabilities in active markets, and inputs that are observable forthe asset or liability, either directly or indirectly, for substantially thefull term of the financial instrument. Level 2 inputs are in those markets forwhich 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 and significantto the fair value measurement. Unobservable inputs are those inputs thatreflect our own assumptions that market participants would use to price theasset or liability based upon the best available information.

 

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SeeNote 3, “*Investments”* in the accompanying notesto our consolidated financial statements included elsewhere in this report foradditional information regarding fair value measurements and our adoption ofASC 820.

 

Weuse generally accepted valuation techniques to value our portfolio unless wehave specific information about the value of an investment to determineotherwise. From time to time we may accept an appraisal of a business in whichwe hold securities. These appraisals are expensive and occur infrequently butprovide a third-party valuation opinion that may differ in results, techniquesand scopes used to value our investments. When these specific third-party appraisals are engaged or accepted, wewould use estimates of value provided by such appraisals and our ownassumptions, including estimated remaining life, current market yield andinterest rate spreads of similar securities as of the measurement date, tovalue the investment we have in that business.

 

Indetermining the value of our investments, our Adviser has established aninvestment valuation policy (the “Policy”). The Policy has been approved by our Board of Directors, and each quarterour Board of Directors reviews whether our Adviser has applied the Policyconsistently and votes whether or not to accept the recommended valuation ofour investment portfolio.

 

ThePolicy, which is summarized below, applies to the following categories ofsecurities:

 

·      Publicly-traded securities;

·      Securities for which a limited market exists; and

·      Securities for which no market exists.

 

*Valuation Methods:*

 

**Publicly-traded securities:** We determine the value ofpublicly-traded securities based on the closing price for the security on theexchange or securities market on which it is listed and primarily traded on thevaluation date. To the extent that we own restricted securities that are notfreely tradable, but for which a public market otherwise exists, we will usethe market value of that security adjusted for any decrease in value resultingfrom the restrictive feature.

 

**Securities for which a limited market exists:**We valuesecurities that are not traded on an established secondary securities market,but for which a limited market for the security exists, such as certainparticipations in, or assignments of, syndicated loans, at the quoted bidprice.  In valuing these assets, weassess trading activity in an asset class, evaluate variances in prices andother market insights to determine if any available quote prices arereliable.  If we conclude that quotesbased on active markets or trading activity may be relied upon, firm bid pricesare requested; however, if a firm bid price is unavailable, we base the valueof the security upon the indicative bid price (“IBP”) offered by the respectiveoriginating syndication agent’s trading desk, or secondary desk, on or near thevaluation date.  To the extent that weuse the IBP as a basis for valuing the security, our Adviser may take furthersteps to consider additional information to validate that price in accordancewith the Policy.

 

In the event these limited markets become illiquidsuch that market prices are no longer readily available, we will value oursyndicated loans using alternative methods, such as estimated net presentvalues of the future cash flows or discounted cash flows. The use of a DCFmethodology follows that prescribed by ASC 820, which provides guidance on theuse of a reporting entity’s own assumptions about future cash flows andrisk-adjusted discount rates when relevant observable inputs, such as quotes inactive markets, are not available. When relevant observable market data doesnot exist, the alternative outlined in ASC 820 is the use of valuinginvestments based on DCF.  For thepurposes of using DCF to provide fair value estimates, we consider multipleinputs such as a risk-adjusted discount rate that incorporates adjustments thatmarket participants would make both for nonperformance and liquidityrisks.  As such, we developed a modifieddiscount rate approach that incorporates risk premiums including, among others,increased probability of default, or higher loss given default, or increasedliquidity risk. The DCF valuations applied to the syndicated loans provide anestimate of what we believe a market participant would pay to purchase asyndicated loan in an active market, thereby establishing a fair value.  We apply the DCF methodology in illiquidmarkets until quoted prices are available or are deemed reliable based ontrading activity.

 

As of March 31, 2010, we assessed tradingactivity in syndicated loan assets and determined that there continued to bemarket liquidity and a secondary market for these assets.  Thus, firm bid prices or IBPs were used tofair value our remaining unsold syndicated loans at March 31, 2010.

 

**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 equity securities; and (3) portfolioinvestments in non-controlled companies comprised of a bundle of investments,which can include debt and 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 we have no equity, or equity-like securities, arefair valued in accordance with the terms of the policy, which utilizes opinionsof value submitted to us by SPSE. We may also submit paid PIK interest to SPSEfor their evaluation when it is determined that PIK interest is likely to bereceived.

 

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Inthe case of Non-Public Debt Securities, we have engaged SPSE to submit opinionsof value for our debt securities that are issued by portfolio companies in whichwe own no equity, or equity-like securities. SPSE’s opinions of value are based on the valuations prepared by ourportfolio management team as described below. We request that SPSE also evaluate and assign values to success feeswhen we determine that there is a reasonable probability of receiving a successfee on a given loan. SPSE will only evaluate the debt portion of ourinvestments for which we specifically request evaluation, and may decline tomake requested evaluations for any reason at its sole discretion. Uponcompleting our collection of data with respect to the investments (which mayinclude the information described below under “—Credit Information,” the riskratings of the loans described below under “—Loan Grading and Risk Rating” andthe factors described hereunder), this valuation data is forwarded to SPSE forreview and analysis. SPSE makes its independent assessment of the data that wehave assembled and assesses its independent data to form an opinion as to whatthey consider to be the market values for the securities. With regard to itswork, SPSE has issued the following paragraph:

 

SPSEprovides evaluated price opinions which are reflective of what SPSE believesthe bid side of the market would be for each loan after careful review andanalysis of descriptive, market and credit information. Each price reflectsSPSE’s best judgment based upon careful examination of a variety of marketfactors. Because of fluctuation in the market and in other factors beyond itscontrol, SPSE cannot guarantee these evaluations. The evaluations reflect themarket prices, or estimates thereof, on the date specified. The prices arebased on comparable market prices for similar securities. Market informationhas been obtained from reputable secondary market sources. Although thesesources are considered reliable, SPSE cannot guarantee their accuracy.

 

SPSEopinions of value of our debt securities that are issued by portfolio companieswhere we have no equity, or equity-like securities are submitted to our Boardof Directors along with our Adviser’s supplemental assessment andrecommendation regarding valuation of each of these investments. Our Advisergenerally accepts the opinion of value given by SPSE; however, in certainlimited circumstances, such as when our Adviser may learn new informationregarding an investment between the time of submission to SPSE and the date ofour Board of Directors’ 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 consolidated financial statements.

 

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

 

(2)        **Portfolio investments in controlled companies comprised of a bundle ofinvestments, which can include debt and equity securities:** The fair valueof these investments is determined based on the total enterprise value (“TEV”)of the portfolio company, or issuer, utilizing a liquidity waterfall approachunder ASC 820.  For Non-Public DebtSecurities and equity or equity-like securities (e.g. preferred equity, equity,or other equity-like securities) that are purchased together as part of apackage, where we have control or could gain control through an option orwarrant security; both the debt and equity securities of the portfolioinvestment would exit in the mergers and acquisitions market as the principalmarket, generally through a sale or recapitalization of the portfolio company.In accordance with ASC 820, we apply the in-use premise of value which assumesthe debt and equity securities are sold together. Under this liquiditywaterfall approach, we continue to use the enterprise value methodologyutilizing a liquidity waterfall approach to determine the fair value of theseinvestments under ASC 820 if we have the ability to initiate a sale of aportfolio company as of the measurement date. Under this approach, we firstcalculate the TEV of the issuer by incorporating some or all of the followingfactors:

 

·                  the issuer’sability to make payments;

·                  the earnings ofthe issuer;

·                  recent sales tothird parties of similar securities;

·                  the comparisonto publicly traded securities; and

·                  DCF or otherpertinent factors.

 

Ingathering the sales to third parties of similar securities, we may referenceindustry statistics and use outside experts. Once we have estimated the TEV ofthe issuer, we subtract the value of all the debt securities of the issuer;which are valued at the contractual principal balance. Fair values of thesedebt securities are discounted for any shortfall of TEV over the total debtoutstanding for the issuer. Once the values for all outstanding seniorsecurities (which include the debt securities) have been subtracted from theTEV of the issuer, the remaining amount, if any, is used to determine the valueof the issuer’s equity or equity like securities.  If, in our Adviser’s judgment, the liquiditywaterfall approach does not accurately reflect the value of the debt component,our Adviser may recommend that we use a valuation by SPSE, or if that isunavailable, a DCF valuation technique.

 

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(3)        **Portfolio investments in non-controlled companies comprised of a bundleof investments, which can include debt and equity securities:**We valueNon-Public Debt Securities that are purchased together with equity orequity-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 ASC820, 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 ASC 820). As such, we estimate the fair value of thedebt component using estimates of value provided by SPSE and our ownassumptions in the absence of observable market data, including syntheticcredit ratings, estimated remaining life, current market yield and interestrate spreads of similar securities as of the measurement date. Subsequent to June 30,2009, for equity or equity-like securities of investments for which we do notcontrol or cannot gain control as of the measurement date, we estimate the fairvalue of the equity using the in-exchange premise of value based on factorssuch as the overall value of the issuer, the relative fair value of other unitsof account, including debt, or other relative value approaches. Considerationalso is given to capital structure and other contractual obligations that mayimpact the fair value of the equity. Further, we may utilize comparable valuesof similar companies, recent investments and indices with similar structuresand risk characteristics or our own assumptions in the absence of otherobservable market data and may also employ DCF valuation techniques.

 

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 we might reasonably expect to receiveupon the current sale of the security in an arms-length transaction in thesecurity’s principal market.

 

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

 

·                  the nature andrealizable value of the collateral;

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

·                  the markets inwhich the portfolio company does business;

·                  the comparisonto publicly traded companies; and

·                  DCF and otherrelevant factors.

 

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 provideannual audited and monthly unaudited financial statements. Using thesestatements or comparable information and board discussions, our Advisercalculates 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. During the three months ended March 31, 2010, we modified our riskrating model to incorporate additional factors in our qualitative andquantitative analysis.  While the overallprocess did not change, we believe the additional factors enhance the qualityof the risk ratings of our investments. No adjustments were made to prior periods as a result of thismodification.

 

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

 

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determinantsthat we believe are not used in the NRSRO rating. It is our understanding thatmost debt securities of medium-sized companies do not exceed the grade of BBBon an NRSRO scale, so there would be no debt securities in the middle marketthat would meet the definition of AAA, AA or A. Therefore, our scale beginswith the designation 10 as the best risk rating which may be equivalent to aBBB from an NRSRO, however, no assurance can be given that a 10 on our scale isequal 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%                             |

 

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(a)              Thedefault rates set forth are for a ten year term debt security. If a debtsecurity is less than ten years, then the probability of default is adjusted toa lower percentage for the shorter period, which may move the security higheron our risk rating scale

 

Theabove scale gives an indication of the probability of default and the magnitudeof the loss if there is a default. Our policy is to stop accruing interest onan investment if we determine that interest is no longer collectible.  As of March 31, 2010 and 2009, oneControl investment, ASH Holdings Corp., was on non-accrual with a fair value ofapproximately $2.2 million and $2.6 million, respectively, which represented1.0% and 0.8% of the fair value of all loans held in our portfolio at March 31,2010 and 2009, respectively. Additionally, we do not risk rate our equity securities.

 

Thefollowing table lists the risk ratings for all non-syndicated loans in ourportfolio as of March 31, 2010 and 2009, representing approximately 93.3%and 59.3%, respectively, of all loans in our portfolio at the end of eachperiod:

 
| ** **       | ** ** | **As  of March 31,** |
|------------------|------------|---------------------------|
| **Rating**       | ** ** | **2010**                  | ** ** | **2009** | ** ** |
| Highest          | ** ** | **9.0**                   |   | 7.0 |   |
| Average          | ** ** | **5.3**                   |   | 5.5 |   |
| Weighted Average | ** ** | **5.5**                   |   | 5.1 |   |
| Lowest           | ** ** | **2.0**                   |   | 2.0 |   |

 

Thefollowing table lists the risk ratings for syndicated loans in our portfoliothat were not rated by an NRSRO as of March 31, 2010 and 2009,representing approximately 1.3% and 11.9%, respectively, of all loans in ourportfolio at the end of each period:

 
| ** **       | ** ** | **As  of March 31,** | ** ** |
|------------------|------------|---------------------------|------------|
| **Rating**       | ** ** | **2010**                  | ** ** | **2009** | ** ** |
| Highest          | ** ** | **9.0**                   |       | 9.0 |   |
| Average          | ** ** | **9.0**                   |       | 8.0 |   |
| Weighted Average | ** ** | **9.0**                   |       | 8.0 |   |
| Lowest           | ** ** | **9.0**                   |       | 7.0 |   |

 

Forsyndicated loans that are currently rated by an NRSRO, we risk rate such loansin accordance with the risk rating systems of major risk rating organizations,such as those provided by an NRSRO. The following table lists the risk ratingsfor all syndicated loans in our portfolio that were rated by an NRSRO as of March 31,2010 and 2009, representing approximately 6.4% and 28.8%, respectively, of allloans in our portfolio at the end of each period:

 
| ** **       | ** ** | **As  of March 31,** | ** ** |
|------------------|------------|---------------------------|------------|
| **Rating**       | ** ** | **2010**                  | ** ** | **2009** | ** ** |
| Highest          | ** ** | **B+/Ba3**                |       | BB/Ba2 |   |
| Average          | ** ** | **B/B2**                  |       | B/B2 |   |
| Weighted Average | ** ** | **B/B2**                  |       | B/B2 |   |
| Lowest           | ** ** | **B-/B3**                 |       | CCC+/B3 |   |

 

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**Tax Status**

 

*Federal Income Taxes*

 

Weintend to continue to qualify for treatment as a RIC under Subtitle A, Chapter1 of Subchapter M of the Code. As a RIC, we are not subject to federal incometax on the portion of our taxable income and gains distributed to stockholders.To qualify as a RIC, we must meet certain source-of-income, assetdiversification and annual distribution requirements.  For more information regarding the requirementswe must meet as a RIC, see “—Business Environment.” Under the annualdistribution requirements, we are required to distribute to stockholders atleast 90% of our investment company taxable income, as defined by theCode.  Our policy is to pay out asdistributions up to 100% of that amount.

 

Inan effort to avoid certain excise taxes imposed on RICs, we currently intend todistribute during each calendar year, an amount at least equal to the sum of (1) 98%of our ordinary income for the calendar year, (2) 98% of our capital gainsin excess of capital losses for the one-year period ending on October 31of the calendar year, and (3) any ordinary income and net capital gainsfor preceding years that were not distributed during such years.

 

**RevenueRecognition**

 

*Interest and Dividend Income Recognition*

 

Interestincome, adjusted for amortization of premiums and acquisition costs and for theaccretion of discounts, is recorded on the accrual basis to the extent thatsuch amounts are expected to be collected. Generally, when a loan becomes 90 daysor more past due, or if our qualitative assessment indicates that the debtor isunable to service its debt or other obligations, we will place the loan onnon-accrual status and cease recognizing interest income on that loan until theborrower has demonstrated the ability and intent to pay contractual amountsdue.  However, we remain contractuallyentitled to this interest.  Interestpayments received on non-accrual loans may be recognized as income or appliedto principal depending upon management’s judgment.  Non-accrual loans are restored to accrualstatus when past due principal and interest is paid or as a result of arestructuring such that the interest income is deemed to be collectible, and inmanagement’s judgment, are likely to remain current. At March 31, 2010,one Control investment, ASH Holdings Corp., was on non-accrual with a fairvalue of approximately $2.2 million, or 1.0% of the fair value of all loansheld in our portfolio at March 31, 2010.  At March 31, 2009, one Control investment, ASH Holdings Corp., wason non-accrual with a fair value of approximately $2.6 million, or 0.8% of thefair value of all loans held in our portfolio at March 31, 2009.  Currently, we do not have investments thathave paid-in-kind, or PIK, interest.

 

Successfees are recorded upon receipt and are contractually due upon a change ofcontrol in a portfolio company.  To date,we have not recorded any success fees. Dividend income on preferred equity securities is accrued to the extentthat such amounts are expected to be collected and that we have the option tocollect such amounts in cash.  During theyear ended March 31, 2010, we recorded and collected approximately $953 ofdividends on preferred shares of A. Stucki Holding Corp.  During the year ended March 31, 2009, werecorded $567 of dividends on preferred shares of Quench Holdings Corp.  Otherwise, we have not accrued for any othersuch dividend income.

 

**Recent Accounting Pronouncements**

 

SeeNote 2, “Summary of Significant Accounting Policies” in the accompanying notesto our consolidated financial statements included elsewhere in this report fora description and our application of recent accounting pronouncements.  Our adoption of these recent accountingpronouncements did not have a material effect on our financial position andresults of operations.

 

**Item 7A. Quantitative and Qualitative Disclosures about Market Risk**

 

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, with approximately80% made at variable rates or variables rates with a floor mechanism. All ofour variable-rate loans have rates associated with either the current LIBOR orPrime Rate.  At March 31, 2010, ourportfolio, at cost, consisted of the following breakdown in relation to all outstanding debt:

 
| 16.5      | %      | Variable  rates              |       |
|-----------|--------|------------------------------|------------|
| 48.0      |   | Variable  rates with a floor |       |
| 35.5      |   | Fixed  rates                 |       |
| **100.0** | **%**  | **Total**                    | ** ** |

 

TheUnited States is beginning to recover from the recession that largely began inlate 2007.  Despite signs of economic improvement,however, unstable economic conditions could adversely affect the financialposition and results of operations of certain of the middle-

 

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marketcompanies in our portfolio, which ultimately could lead to difficulty inmeeting debt service requirements and an increase in defaults.  During the year ended March 31, 2010, weexperienced write-downs across our portfolio, most of which were due toreductions in comparable multiples and market pricing and to a lesser extentreductions in the performance of certain portfolio companies used to estimatethe fair value of our investments.  Therecan be no assurance that the performance of our portfolio companies will not befurther impacted by economic conditions, which could have a negative impact onour future results.

 

InApril 2009, we entered into a revolving line of credit with BB&T forup to $50.0 million.  Subsequently, werenewed the facility in April 2010 for an additional two years.  Advances under the line of credit will generally bearinterest at the 30-day LIBOR rate (subject to a minimum rate of 2.0%), plus4.5% per annum, with a commitment fee of 0.50% per annum on undrawn amountswhen advances outstanding are above 50.0% of the commitment and will be 1.0% onundrawn amounts if the advances outstanding are below 50.0% of thecommitment.  In connection with the facility,we paid an upfront fee of 1.0%.

 

InMay 2009, we entered into an interest rate cap agreement in connectionwith our line of credit. We purchased this interest rate cap agreement, whichexpires in May 2011 and has a notional amount of $45.0 million, for aone-time, up-front payment of $39. Additionally, in April 2010, we entered into a forward interestrate cap agreement, effective May 2011 and expiring in May 2012, inconnection with our April 2010 renewal of the line of credit. We paid aone-time, up-front fee of $41 for the forward interest rate cap agreement whichhas a notional amount of $45.0 million. Collectively, we have an interest rate cap agreement in placecontinuously through May 2012.

 

Theinterest rate cap agreement and the forward interest rate cap agreement entitleus to receive payments, if any, equal to the amount by which interest paymentson the current notional amount at the one month LIBOR exceed the payments onthe current notional amount at 6.5% and 6.0%, respectively. These agreementseffectively cap our interest payments on our line of credit borrowings, up tothe notional amount of the interest rate cap over the next two years. Thismitigates our exposure to increases in interest rates on our borrowings on ourline of credit, which are at variable rates. At March 31, 2010, theinterest rate cap agreement had a 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.

 
| **(dollars  in thousands)  Basis Point Change****(a)** | ** ** | **Increase in  Interest Income** | ** ** | **Increase in  Interest Expense** | ** ** | **Net Increase in  Net Assets Resulting from  Operations** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|-----------------------------------|------------|------------------------------------------------------------|------------|
| Up 300 basis points                                    |       | $                                | 719        |                              | $          | 111                                                        |       | $ | 608 |   |
| Up 200 basis points                                    |       | 468                              |       | 22                                |       | 446                                                        |       |
| Up 100 basis points                                    |       | 234                              |       | 0                                 |       | 234                                                        |       |
|                                                        |            |                                  |            |                                   |            |                                                            |            |  |  |  |

 

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(a) As of March 31,2010, our effective average LIBOR was 0.25%; thus, a 100 basis point decreasecould not occur.

 

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 from theresults 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                                                                                              | 61 |
|-----------------------------------------------------------------------------------------------------------------------------------------|----|
| Report  of Independent Registered Public Accounting Firm                                                                                | 62 |
| Consolidated Statements of Assets and Liabilities as  of March 31, 2010 and March 31, 2009                                    | 63 |
| Consolidated Statements of Operations for the years  ended March 31, 2010, March 31, 2009 and March 31, 2008             | 64 |
| Consolidated Statements of Changes in Net Assets for  the years ended March 31, 2010, March 31, 2009 and March 31,  2008 | 65 |
| Consolidated Statements of Cash Flows for the years  ended March 31, 2010, March 31, 2009 and March 31, 2008             | 66 |
| Consolidated Schedules of Investments as of  March 31, 2010 and March 31, 2009                                                | 67 |
| Notes to Consolidated Financial Statements                                                                                              | 72 |

 

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**Report of Management on InternalControls**

 

Tothe Stockholders and Board of Directors of Gladstone Investment Corporation:

 

Ourmanagement is responsible for establishing and maintaining adequate internalcontrol over financial reporting as defined in Rule 13a-15(f) underthe Securities Exchange Act of 1934. Our internal control over financialreporting is designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles andinclude those policies and procedures that: (1) pertain to the maintenanceof records that in reasonable detail accurately and fairly reflect ourtransactions and the dispositions of our assets; (2) provide reasonableassurance that our transactions are recorded as necessary to permit preparationof financial statements in accordance with generally accepted accountingprinciples, and that our receipts and expenditures are being made only inaccordance with appropriate authorizations; and (3) provide reasonableassurance regarding prevention or timely detection of unauthorized acquisition,use or disposition of our assets that could have a material effect on ourfinancial statements.

 

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Therefore, even those systems determined to beeffective can provide only reasonable assurance with respect to financialstatement preparation and presentation.

 

Underthe supervision and with the participation of our management, we assessed theeffectiveness of our internal control over financial reporting as of March 31,2010, using the criteria set forth by the Committee of Sponsoring Organizationsof the Treadway Commission (COSO) in Internal Control—Integrated Framework.Based on its assessment, management has concluded that our internal controlover financial reporting was effective as of March 31, 2010.

 

Ourmanagement’s assessment of the effectiveness of our internal control overfinancial reporting as of March 31, 2010 has been audited byPricewaterhouseCoopers LLP, an independent registered public accounting firm,as stated in their report which is included herein.

 

 

### May 24,2010

 

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**Report of Independent RegisteredPublic Accounting Firm**

 

Tothe Stockholders and Board of Directors of Gladstone Investment Corporation:

 

Inour opinion, the accompanying consolidated statements of assets andliabilities, including the schedules of investments, and the related statementsof operations, changes in net assets and cash flows present fairly, in allmaterial respects, the financial position of Gladstone Investment Corporation (the“Company”) and its subsidiaries at March 31, 2010 and 2009, and theresults of their operations and their cash flows for each of the three years inthe period ended March 31, 2010,****in conformitywith accounting principles generally accepted in the United States ofAmerica.  In addition, in our opinion, the financial statement schedule****listed in the index****appearingunder Item 15(a)(2) presents****fairly, in allmaterial respects, the information set forth therein when read in conjunctionwith the related consolidated financial statements.  Also, in our opinion, the Companymaintained, in all material respects, effective internal control over financialreporting as of March 31, 2010, based on criteria established in *Internal Control - Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO).  The Company’s management is responsible forthese financial statements and financial statement schedule, for maintainingeffective internal control over financial reporting and for its assessment ofthe effectiveness of internal control over financial reporting, included in theaccompanying Management’s Annual Report on Internal Control over FinancialReporting.  Our responsibility is toexpress opinions on these financial statements, on the financial statementschedule, and on the Company’s internal control over financial reporting basedon our integrated audits.  We conductedour audits in accordance with the standards of the Public Company AccountingOversight Board (United States).  Thosestandards require that we plan and perform the audits to obtain reasonableassurance about whether the financial statements are free of material misstatementand whether effective internal control over financial reporting was maintainedin all material respects.  Our audits ofthe financial statements included examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management,and evaluating the overall financial statement presentation.  Our audit of internal control over financialreporting included obtaining an understanding of internal control overfinancial reporting, assessing the risk that a material weakness exists, andtesting and evaluating the design and operating effectiveness of internalcontrol based on the assessed risk.  Ouraudits also included performing such other procedures as we considerednecessary in the circumstances. We believe that our audits provide a reasonablebasis for our opinions.

 

Acompany’s internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company’s internal control over financial reporting includes thosepolicies and procedures that (i) pertain to the maintenance of recordsthat, in reasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (ii) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (iii) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements.  Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

 

 

PricewaterhouseCoopersLLP

McLean,VA

May 24,2010

 

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**GLADSTONEINVESTMENT CORPORATION**

**CONSOLIDATEDSTATEMENTS OF ASSETS AND LIABILITIES**

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

 
| ** **                                                                                                                                | ** **   | **March 31,** | ** **  |
|-------------------------------------------------------------------------------------------------------------------------------------------|--------------|--------------------|-------------|
| ** **                                                                                                                                | ** **   | **2010**           | ** **  | **2009** | ** ** |
| ** **                                                                                                                                | *** *** | *** ***       | ** **  | ** ** | ** ** |
| **ASSETS**                                                                                                                                | ** **   | ** **         | ** **  | ** ** | ** ** |
| Cash  and cash equivalents                                                                                                                | ** **   | **$**              | **87,717**  |   | $ | 7,236 |   |
| Investments  at fair value                                                                                                                | ** **   | ** **         |        |   |   |
| Non-Control/Non-Affiliate  investments (Cost of **$22,674** and  $134,836, respectively)                                                  | ** **   | **20,946**         |        | 94,740 |   |
| Control  investments (Cost of **$152,166** and  $150,081, respectively)                                                                   | ** **   | **148,248**        |        | 166,163 |   |
| Affiliate  investments (Cost of **$52,727** and  $64,028, respectively)                                                                   | ** **   | **37,664**         |        | 53,027 |   |
| Total  investments (Cost of **$227,567** and  $348,945, respectively)                                                                     | ** **   | **206,858**        |        | 313,930 |   |
| Interest  receivable                                                                                                                      | ** **   | **1,234**          |        | 1,500 |   |
| Due  from Custodian                                                                                                                       | ** **   | **935**            |        | 2,706 |   |
| Deferred  financing fees                                                                                                                  | ** **   | **83**             |        | 1,167 |   |
| Prepaid  assets                                                                                                                           | ** **   | **221**            |        | 172 |   |
| Other  assets                                                                                                                             | ** **   | **113**            |        | 132 |   |
| **TOTAL ASSETS**                                                                                                                          | ** **   | **$**              | **297,161** |   | $ | 326,843 |   |
|                                                                                                                                      | ** **   | ** **         |        |   |   |
| **LIABILITIES**                                                                                                                           | ** **   | ** **         | ** **  | ** ** | ** ** |
| Borrowings  at fair value(1)                                                                                                              | ** **   | ** **         |        |   |   |
| Short-term  loan (Cost of **$75,000** and $0, respectively)                                                                               | ** **   | **$**              | **75,000**  |   | $ | — |   |
| Line  of credit (Cost of **$27,800** and  $110,265, respectively)                                                                         | ** **   | **27,812**         |        | 110,265 |   |
| Total  borrowings (Cost of **$102,800** and  $110,265, respectively)                                                                      | ** **   | **102,812**        |        | 110,265 |   |
| Accounts  payable and accrued expenses                                                                                                    | ** **   | **206**            |        | 1,283 |   |
| Fee  due to Administrator(2)                                                                                                              | ** **   | **149**            |        | 179 |   |
| Fees  due to Adviser(2)                                                                                                                   | ** **   | **721**            |        | 187 |   |
| Other  liabilities                                                                                                                        | ** **   | **295**            |        | 127 |   |
| **TOTAL LIABILITIES**                                                                                                                     | ** **   | **104,183**        |        | 112,041 |   |
| **NET ASSETS**                                                                                                                            | ** **   | **$**              | **192,978** |   | $ | 214,802 |   |
|                                                                                                                                      | ** **   | ** **         |        |   |   |
| **ANALYSIS OF NET ASSETS:**                                                                                                               | ** **   | ** **         | ** **  | ** ** | ** ** |
| Common  stock, $0.001 par value, 100,000,000 shares authorized, 22,080,133 shares  issued and outstanding at March 31, 2010 and 2009 | ** **   | **$**              | **22**      |   | $ | 22 |   |
| Capital  in excess of par value                                                                                                           | ** **   | **257,206**        |        | 257,361 |   |
| Net  unrealized depreciation of investment portfolio                                                                                      | ** **   | **(20,710**        | **)**       | (35,015 | ) |
| Net  unrealized depreciation of derivative                                                                                                | ** **   | **(39**            | **)**       | (53 | ) |
| Net  unrealized appreciation of borrowings under line of credit                                                                           | ** **   | **(12**            | **)**       | — |   |
| Accumulated  net realized investment loss                                                                                                 | ** **   | **(43,489**        | **)**       | (7,513 | ) |
| **TOTAL NET ASSETS**                                                                                                                      | ** **   | **$**              | **192,978** |   | $ | 214,802 |   |
|                                                                                                                                      | ** **   | ** **         |        |   |   |
| **NET ASSETS PER SHARE**                                                                                                                  | ** **   | **$**              | **8.74**    |   | $ | 9.73 |   |

 

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(1)    Beginning thequarter ended June 30, 2009, the Company elected to apply ASC 825, “FinancialInvestments”, which allows for the Company to fair value its borrowings. The March 31,2009 borrowing amounts are at cost.

(2)    Refer to Note4—*Related Party Transactions* foradditional information.

 

*THE ACCOMPANYINGNOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.*

 

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**GLADSTONE INVESTMENT CORPORATION**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(DOLLAR AMOUNTS IN THOUSANDSEXCEPT PER SHARE DATA)**

** **
| ** **                                                                            | ** ** | **Year Ended March 31,** | ** **  |
|---------------------------------------------------------------------------------------|------------|-------------------------------|-------------|
| ** **                                                                            | ** ** | **2010**                      | ** **  | **2009** | ** ** | **2008** | ** ** |
| INVESTMENT  INCOME                                                                    | ** ** | ** **                    |        |   |   |   |   |
| Interest  income                                                                      | ** ** | ** **                    |        |   |   |   |   |
| Non-Control/Non-Affiliate  investments                                                | ** ** | **$**                         | **2,393**   |   | $ | 8,494 |   | $ | 14,612 |   |
| Control  investments                                                                  | ** ** | **11,745**                    |        | 11,306 |   | 10,779 |   |
| Affiliate  investments                                                                | ** ** | **5,677**                     |        | 5,378 |   | 2,286 |   |
| Cash  and cash equivalents                                                            | ** ** | **2**                         |        | 67 |   | 217 |   |
| Total  interest income                                                                | ** ** | **19,817**                    |        | 25,245 |   | 27,894 |   |
| Other  income                                                                         | ** ** | **968**                       |        | 567 |   | — |   |
| Total  investment income                                                              | ** ** | **20,785**                    |        | 25,812 |   | 27,894 |   |
|                                                                                  | ** ** | ** **                    |        |   |   |   |   |
| EXPENSES                                                                              | ** ** | ** **                    |        |   |   |   |   |
| Loan  servicing fee(1)                                                                | ** ** | **3,747**                     |        | 5,002 |   | 5,014 |   |
| Base  management fee(1)                                                               | ** ** | **737**                       |        | 1,699 |   | 1,803 |   |
| Incentive  fee(1)                                                                     | ** ** | **588**                       |        | — |   | — |   |
| Administration  fee(1)                                                                | ** ** | **676**                       |        | 821 |   | 855 |   |
| Interest  expense                                                                     | ** ** | **1,988**                     |        | 5,349 |   | 7,733 |   |
| Amortization  of deferred financing fees                                              | ** ** | **1,618**                     |        | 323 |   | 734 |   |
| Professional  fees                                                                    | ** ** | **626**                       |        | 532 |   | 416 |   |
| Stockholder  related costs                                                            | ** ** | **295**                       |        | 485 |   | 268 |   |
| Insurance  expense                                                                    | ** ** | **262**                       |        | 222 |   | 231 |   |
| Directors  fees                                                                       | ** ** | **196**                       |        | 194 |   | 232 |   |
| Other  expenses                                                                       | ** ** | **280**                       |        | 271 |   | 365 |   |
| Expenses  before credits from Adviser                                                 | ** ** | **11,013**                    |        | 14,898 |   | 17,651 |   |
| Credits  to fees from Adviser(1)                                                      | ** ** | **(826**                      | **)**       | (2,474 | ) | (2,809 | ) |
| Total  expenses net of credits to fees                                                | ** ** | **10,187**                    |        | 12,424 |   | 14,842 |   |
|                                                                                  | ** ** | ** **                    |        |   |   |   |   |
| NET  INVESTMENT INCOME                                                                | ** ** | **10,598**                    |        | 13,388 |   | 13,052 |   |
|                                                                                  | ** ** | ** **                    |        |   |   |   |   |
| REALIZED  AND UNREALIZED (LOSS) GAIN ON:                                              | ** ** | ** **                    |        |   |   |   |   |
| Realized  loss on sale of Non-Control/Non-Affiliate investments                       | ** ** | **(35,923**                   | **)**       | (5,023 | ) | (2,412 | ) |
| Realized  loss on termination of derivative                                           | ** ** | **(53**                       | **)**       | — |   | — |   |
| Net  unrealized appreciation (depreciation) of Non-Control/Non-Affiliate  investments | ** ** | **38,367**                    |        | (16,418 | ) | (23,278 | ) |
| Net  unrealized (depreciation) appreciation of Control investments                    | ** ** | **(20,001**                   | **)**       | 9,029 |   | 10,339 |   |
| Net  unrealized (depreciation) appreciation of Affiliate investments                  | ** ** | **(4,061**                    | **)**       | (12,425 | ) | 1,411 |   |
| Net  unrealized appreciation (depreciation) of derivative                             | ** ** | **14**                        |        | — |   | (53 | ) |
| Net  unrealized appreciation of borrowings                                            | ** ** | **(12**                       | **)**       | — |   | — |   |
| Net  loss on investments, derivative and borrowings                                   | ** ** | **(21,669**                   | **)**       | (24,837 | ) | (13,993 | ) |
|                                                                                  | ** ** | ** **                    |        |   |   |   |   |
| NET  DECREASE IN NET ASSETS RESULTING FROM OPERATIONS                                 | ** ** | **$**                         | **(11,071** | **)** | $ | (11,449 | ) | $ | (941 | ) |
|                                                                                  | ** ** | ** **                    |        |   |   |   |   |
| NET  DECREASE IN NET ASSETS RESULTING FROM OPERATIONS PER COMMON SHARE:               | ** ** | ** **                    |        |   |   |   |   |
| Basic  and diluted                                                                    | ** ** | **$**                         | **(0.50**   | **)** | $ | (0.53 | ) | $ | (0.06 | ) |
|                                                                                  | ** ** | ** **                    |        |   |   |   |   |
| WEIGHTED  AVERAGE SHARES OF COMMON STOCK OUTSTANDING:                                 | ** ** | ** **                    |        |   |   |   |   |
| Basic  and diluted weighted average shares                                            | ** ** | **22,080,133**                |        | 21,545,936 |   | 16,560,100 |   |

 

----

(1)    Refer to Note4—*Related Party Transactions* foradditional information.

 

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

 

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**GLADSTONE INVESTMENT CORPORATION**

**CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS**

**(INTHOUSANDS)**

** **
| ** **                                                          | ** ** | **Year Ended March 31,** | ** **  |
|---------------------------------------------------------------------|------------|-------------------------------|-------------|
| ** **                                                          | ** ** | **2010**                      | ** **  | **2009** | ** ** | **2008** | ** ** |
| *Operations:*                                                       | ** ** | ** **                    |        |   |   |   |   |
| Net  investment income                                              | ** ** | **$**                         | **10,598**  |   | $ | 13,388 |   | $ | 13,052 |   |
| Realized  loss on sale of investments                               | ** ** | **(35,923**                   | **)**       | (5,023 | ) | (2,412 | ) |
| Realized  loss on termination of derivative                         | ** ** | **(53**                       | **)**       | — |   | — |   |
| Net  unrealized appreciation (depreciation) of investment portfolio | ** ** | **14,305**                    |        | (19,814 | ) | (11,528 | ) |
| Unrealized  appreciation (depreciation) of derivative               | ** ** | **14**                        |        | — |   | (53 | ) |
| Unrealized  appreciation of borrowings                              | ** ** | **(12**                       | **)**       | — |   | — |   |
| Net  decrease in net assets from operations                         | ** ** | **(11,071**                   | **)**       | (11,449 | ) | (941 | ) |
|                                                                | ** ** | ** **                    |        |   |   |   |   |
| *Capital transactions:*                                             | ** ** | ** **                    |        |   |   |   |   |
| Issuance  of common stock                                           | ** ** | **—**                    |        | 41,290 |   | — |   |
| Shelf  offering registration costs                                  | ** ** | **(155**                      | **)**       | (728 | ) | (32 | ) |
| Net  (decrease) increase in net assets from capital transactions    | ** ** | **(155**                      | **)**       | 40,562 |   | (32 | ) |
|                                                                | ** ** | ** **                    |        |   |   |   |   |
| *Distributions to stockholders from:*                               | ** ** | ** **                    |        |   |   |   |   |
| Net  investment income                                              | ** ** | **(10,598**                   | **)**       | (13,388 | ) | (13,052 | ) |
| Tax  return on capital                                              | ** ** | **—**                    |        | (7,368 | ) | (2,349 | ) |
| Net  decrease in net assets from distributions to stockholders      | ** ** | **(10,598**                   | **)**       | (20,756 | ) | (15,401 | ) |
|                                                                | ** ** | ** **                    |        |   |   |   |   |
| Total  (decrease) increase in net assets                            | ** ** | **(21,824**                   | **)**       | 8,357 |   | (16,374 | ) |
| Net  assets at beginning of year                                    | ** ** | **214,802**                   |        | 206,445 |   | 222,819 |   |
|                                                                | ** ** | ** **                    |        |   |   |   |   |
| Net  assets at end of year                                          | ** ** | **$**                         | **192,978** |   | $ | 214,802 |   | $ | 206,445 |   |

 

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

 

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**GLADSTONEINVESTMENT CORPORATION**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(INTHOUSANDS)**

** **
| ** **                                                                                                                              | ** ** | **Year Ended March 31,** | ** **  |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|-------------|
| ** **                                                                                                                              | ** ** | **2010**                      | ** **  | **2009** | ** ** | **2008** | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES**                                                                                               | ** ** | ** **                    |        |   |   |   |   |
| Net decrease in net assets resulting from  operations                                                                                   | ** ** | **$**                         | **(11,071** | **)** | $ | (11,449 | ) | $ | (941 | ) |
| Adjustments to reconcile net decrease in net assets  resulting from operations to net cash provided by (used in) operating  activities: | ** ** | ** **                    |        |   |   |   |   |
| Purchase of investments                                                                                                                 | ** ** | **(4,788**                    | **)**       | (49,959 | ) | (175,255 | ) |
| Principal repayments on investments                                                                                                     | ** ** | **15,534**                    |        | 32,828 |   | 64,240 |   |
| Proceeds from sales of investments                                                                                                      | ** ** | **74,706**                    |        | 13,914 |   | 32,197 |   |
| Net realized loss on sales of investments                                                                                               | ** ** | **35,923**                    |        | 5,023 |   | 2,412 |   |
| Net realized loss on termination of derivative                                                                                          | ** ** | **53**                        |        | — |   | — |   |
| Net unrealized (appreciation) depreciation of  investment portfolio                                                                     | ** ** | **(14,305**                   | **)**       | 19,814 |   | 11,528 |   |
| Net unrealized (appreciation) depreciation of  derivative                                                                               | ** ** | **(14**                       | **)**       | — |   | 53 |   |
| Net unrealized appreciation of borrowings                                                                                               | ** ** | **12**                        |        | — |   | — |   |
| Net amortization of premiums and discounts                                                                                              | ** ** | **2**                         |        | 54 |   | 222 |   |
| Amortization of deferred financing fees                                                                                                 | ** ** | **1,618**                     |        | 323 |   | 734 |   |
| Decrease (increase) in interest receivable                                                                                              | ** ** | **266**                       |        | 162 |   | (356 | ) |
| Decrease in due from custodian                                                                                                          | ** ** | **1,771**                     |        | 1,693 |   | 8,296 |   |
| (Increase) decrease in prepaid assets                                                                                                   | ** ** | **(49**                       | **)**       | 308 |   | (367 | ) |
| Decrease (increase) in other assets                                                                                                     | ** ** | **19**                        |        | 244 |   | (337 | ) |
| (Decrease) increase in accounts payable and accrued  expenses                                                                           | ** ** | **(1,077**                    | **)**       | 371 |   | 192 |   |
| (Decrease) increase in administration fee payable  to Administrator(2)                                                                  | ** ** | **(30**                       | **)**       | (29 | ) | 46 |   |
| Increase (decrease) in base management fee payable  to Adviser(2)                                                                       | ** ** | **130**                       |        | 269 |   | (80 | ) |
| Increase in incentive fee payable to Adviser(2)                                                                                         | ** ** | **486**                       |        | — |   | — |   |
| (Decrease) increase in loan servicing fee payable  to Adviser(2)                                                                        | ** ** | **(82**                       | **)**       | 7 |   | 11 |   |
| Increase in other liabilities                                                                                                           | ** ** | **168**                       |        | 38 |   | 4 |   |
| Net cash provided by (used in) operating activities                                                                                     | ** ** | **99,272**                    |        | 13,611 |   | (57,401 | ) |
|                                                                                                                                    | ** ** | ** **                    |        |   |   |   |   |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                                                                              | ** ** | ** **                    |        |   |   |   |   |
| Net (cost) proceeds from the issuance of common  stock                                                                                  | ** ** | **(155**                      | **)**       | 40,562 |   | (32 | ) |
| Borrowings from the line of credit                                                                                                      | ** ** | **107,500**                   |        | 123,850 |   | 222,850 |   |
| Repayments of the line of credit                                                                                                        | ** ** | **(189,965**                  | **)**       | (158,420 | ) | (178,015 | ) |
| Proceeds from short term borrowings                                                                                                     | ** ** | **290,000**                   |        | — |   | — |   |
| Repayments on short term borrowings                                                                                                     | ** ** | **(215,000**                  | **)**       | — |   | — |   |
| Purchase of derivative                                                                                                                  | ** ** | **(39**                       | **)**       | — |   | — |   |
| Deferred financing fees                                                                                                                 | ** ** | **(534**                      | **)**       | (971 | ) | (430 | ) |
| Distributions paid                                                                                                                      | ** ** | **(10,598**                   | **)**       | (20,756 | ) | (15,401 | ) |
| Net cash (used in) provided by financing activities                                                                                     | ** ** | **(18,791**                   | **)**       | (15,735 | ) | 28,972 |   |
|                                                                                                                                    | ** ** | ** **                    |        |   |   |   |   |
| **NET INCREASE (DECREASE) IN CASH  AND CASH EQUIVALENTS**                                                                               | ** ** | **80,481**                    |        | (2,124 | ) | (28,429 | ) |
| **CASH AND CASH EQUIVALENTS,  BEGINNING OF YEAR**                                                                                       | ** ** | **7,236**                     |        | 9,360 |   | 37,789 |   |
|                                                                                                                                    | ** ** | ** **                    |        |   |   |   |   |
| **CASH AND CASH EQUIVALENTS, END  OF YEAR**                                                                                             | ** ** | **$**                         | **87,717**  |   | $ | 7,236 |   | $ | 9,360 |   |
|                                                                                                                                    | ** ** | ** **                    |        |   |   |   |   |
| **CASH PAID DURING PERIOD FOR  INTEREST**                                                                                               | ** ** | **$**                         | **2,182**   |   | $ | 5,428 |   | $ | 7,615 |   |
| **CASH PAID DURING PERIOD FOR  TAXES**                                                                                                  | ** ** | **—**                    |        | — |   | — |   |
|                                                                                                                                    | ** ** | ** **                    |        |   |   |   |   |
| **NON-CASH ACTIVITIES****(1)**                                                                                                          | ** ** | **850**                       |        | 3,043 |   | — |   |

 

----

| (1)    | 2010:                                                                           | Non-cash  activities represent an investment disbursement to Cavert II Holding Corp.  for approximately $850 on their revolving line of credit, which proceeds were  used to make the next four quarterly payments due under normal amortization  for both their senior term A and senior term B loans in a non-cash  transaction. |
|--------|---------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 2009:                                                                           | Non-cash  activities represent the assumption of senior term notes from American  Greetings Corporation in exchange for a settlement agreement related to RPG,  a senior syndicated loan.                                                                                                                                          |
|   |                                                                            |                                                                                                                                                                                                                                                                                                                               |
| (2)    | Refer  to Note 4—*Related Party Transactions* for  additional information. |

 

*THE ACCOMPANYING NOTES ARE ANINTEGRAL PART TO THESE CONSOLIDATED FINANCIAL STATEMENTS.*

 

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**GLADSTONE INVESTMENT CORPORATION**

**CONSOLIDATEDSCHEDULES OF INVESTMENTS**

**MARCH 31, 2010**

**(DOLLAR AMOUNTS IN THOUSANDS)**

** **
| **Company****(1)**                                                                                      | ** **   | **Industry**                                                           | ** **   | **Investment****(2)**                                       | ** **   | **Cost**     | ** **   | **Fair Value** | ** **   |
|---------------------------------------------------------------------------------------------------------|--------------|------------------------------------------------------------------------|--------------|-------------------------------------------------------------|--------------|--------------|--------------|----------------|--------------|
|                                                                                                    |         |                                                                   |         |                                                        |         |         |         |           |         |
| **NON-CONTROL/NON-AFFILIATE  INVESTMENTS:**                                                             | *** *** | *** ***                                                           | *** *** | *** ***                                                | *** *** |
| ***Senior  Syndicated Loans:***                                                                         | *** *** | *** ***                                                           | *** *** | *** ***                                                | *** *** | *** *** | *** *** | *** ***   | *** *** |
| Interstate FiberNet, Inc.                                                                          |         | Service — provider of voice and data  telecommunications services |         | Senior Term Debt (4.3%, Due 7/2013)(8)                      |         | $            | 6,743        |           | $            | 6,762 |   |
| Survey Sampling, LLC                                                                                    |         | Service — telecommunications-based sampling                       |         | Senior Term Debt (9.5%, Due 5/2011)(3)                      |         | 2,385        |         | 1,069          |         |
| *Subtotal - Syndicated Loans*                                                                           |         |                                                                   |         |                                                        |         | $            | 9,128        |           | $            | 7,831 |   |
|                                                                                                    |         |                                                                   |         |                                                        |         |         |         |           |         |
| ***Non-syndicated  Loans:***                                                                            | *** *** | *** ***                                                           | *** *** | *** ***                                                | *** *** | *** *** | *** *** | *** ***   | *** *** |
| American Greetings Corporation                                                                          |         | Manufacturing and design — greeting cards                         |         | Senior Notes (7.4%, Due 6/2016)(3)                          |         | $            | 3,043        |           | $            | 2,895 |   |
|                                                                                                    |         |                                                                   |         |                                                        |         |         |         |           |         |
| B-Dry, LLC                                                                                              |         | Service — basement waterproofer                                   |         | Senior Term Debt (10.5%, Due 5/2014)(5)                     |         | 6,613        |         | 6,596          |         |
|                                                                                                    |         |                                                                   |         | Senior Term Debt (10.5%, Due 5/2014)(5)                     |         | 3,590        |         | 3,581          |         |
|                                                                                                    |         |                                                                   |         | Common Stock Warrants(4)                                    |         | 300          |         | 43             |         |
|                                                                                                    |         |                                                                   |         |                                                        |         | 10,503       |         | 10,220         |         |
|                                                                                                    |         |                                                                   |         |                                                        |         |         |         |           |         |
| **Total  Non-Control/Non-Affiliate Investments (represents 10.1% of total investments  at fair value)** | ** **   | **$**                                                                  | **22,674**   | ** **                                                  | **$**        | **20,946**   | ** **   |
| ** **                                                                                              | ** **   | ** **                                                             | ** **   | ** **                                                  | ** **   | ** **   | ** **   | ** **     | ** **   |
| **CONTROL  INVESTMENTS:**                                                                               | ** **   | ** **                                                             | ** **   | ** **                                                  | ** **   | ** **   | ** **   | ** **     | ** **   |
| A. Stucki Holding Corp.                                                                                 |         | Manufacturing — railroad freight car products                     |         | Senior Term Debt (4.7%, Due 3/2012)                         |         | $            | 9,101        |           | $            | 9,101 |   |
|                                                                                                    |         |                                                                   |         | Senior Term Debt (7.0%, Due 3/2012)(6)                      |         | 9,900        |         | 9,900          |         |
|                                                                                                    |         |                                                                   |         | Senior Subordinated Term Debt (13.0%, Due 3/2014)           |         | 9,456        |         | 9,456          |         |
|                                                                                                    |         |                                                                   |         | Preferred Stock                                             |         | 4,387        |         | 4,529          |         |
|                                                                                                    |         |                                                                   |         | Common Stock(4)                                             |         | 130          |         | 17,393         |         |
|                                                                                                    |         |                                                                   |         |                                                        |         | 32,974       |         | 50,379         |         |
|                                                                                                    |         |                                                                   |         |                                                        |         |         |         |           |         |
| Acme  Cryogenics, Inc.                                                                             |         | Manufacturing —  manifolds and pipes for industrial gasses        |         | Senior Subordinated Term Debt (11.5%, Due 3/2012)           |         | 14,500       |         | 13,585         |         |
|                                                                                                    |         |                                                                   |         | Preferred Stock(4)                                          |         | 6,984        |         | —         |         |
|                                                                                                    |         |                                                                   |         | Common Stock(4)                                             |         | 1,045        |         | —         |         |
|                                                                                                    |         |                                                                   |         | Common Stock Warrants(4)                                    |         | 24           |         | —         |         |
|                                                                                                    |         |                                                                   |         |                                                        |         | 22,553       |         | 13,585         |         |
|                                                                                                    |         |                                                                   |         |                                                        |         |         |         |           |         |
| ASH Holdings Corp.                                                                                      |         | Retail and Service —  school buses and parts                      |         | Revolver, $496 available (non-accrual, Due 3/2013)(5)       |         | 1,504        |         | 421            |         |
|                                                                                                    |         |                                                                   |         | Senior Subordinated Term Debt (non-accrual, Due  3/2013)(5) |         | 6,250        |         | 1,750          |         |
|                                                                                                    |         |                                                                   |         | Preferred Stock(4)                                          |         | 2,500        |         | —         |         |
|                                                                                                    |         |                                                                   |         | Common Stock Warrants(4)                                    |         | 4            |         | —         |         |
|                                                                                                    |         |                                                                   |         | Guaranty ($250)                                             |         |         |         |           |         |
|                                                                                                    |         |                                                                   |         |                                                        |         | 10,258       |         | 2,171          |         |
|                                                                                                    |         |                                                                   |         |                                                        |         |         |         |           |         |
| Cavert II Holdings  Corp.                                                                               |         | Manufacturing — bailing  wire                                     |         | Senior Term Debt (8.3%, Due 10/2012)(10)                    |         | 2,875        |         | 2,875          |         |
|                                                                                                    |         |                                                                   |         | Senior Term Debt (10.0%, Due 10/2012)(6)                    |         | 2,700        |         | 2,700          |         |
|                                                                                                    |         |                                                                   |         | Senior Subordinated Term Debt (13.0%, Due 10/2014)          |         | 4,671        |         | 4,671          |         |
|                                                                                                    |         |                                                                   |         | Preferred Stock(4)                                          |         | 4,110        |         | 4,959          |         |
|                                                                                                    |         |                                                                   |         | Common Stock(4)                                             |         | 69           |         | 3,526          |         |
|                                                                                                    |         |                                                                   |         |                                                        |         | 14,425       |         | 18,731         |         |
|                                                                                                    |         |                                                                   |         |                                                        |         |         |         |           |         |
| Chase II Holdings Corp.                                                                                 |         | Manufacturing — traffic  doors                                    |         | Senior Term Debt (8.8%, Due 3/2011)                         |         | 7,700        |         | 7,700          |         |
|                                                                                                    |         |                                                                   |         | Senior Term Debt (12.0%, Due 3/2011)(6)                     |         | 7,520        |         | 7,520          |         |
|                                                                                                    |         |                                                                   |         | Senior Subordinated Term Debt (13.0%, Due 3/2013)           |         | 6,168        |         | 6,168          |         |
|                                                                                                    |         |                                                                   |         | Preferred Stock(4)                                          |         | 6,961        |         | 7,713          |         |
|                                                                                                    |         |                                                                   |         | Common Stock(4)                                             |         | 61           |         | —         |         |
|                                                                                                    |         |                                                                   |         |                                                        |         | 28,410       |         | 29,101         |         |
|                                                                                                    |         |                                                                   |         |                                                        |         |         |         |           |         |
| Country Club Enterprises, LLC                                                                           |         | Service — golf cart distribution                                  |         | Senior Subordinated Term Debt (16.7%, Due 11/2014)(5)       |         | 7,000        |         | 6,869          |         |
|                                                                                                    |         |                                                                   |         | Preferred Stock(4)                                          |         | 3,725        |         | —         |         |
|                                                                                                    |         |                                                                   |         | Guaranty ($2,000)                                           |         |         |         |           |         |
|                                                                                                    |         |                                                                   |         |                                                        |         | 10,725       |         | 6,869          |         |

 

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**GLADSTONE INVESTMENT CORPORATION**

**CONSOLIDATEDSCHEDULES OF INVESTMENTS (Continued)**

**MARCH 31, 2010**

**(DOLLAR AMOUNTS IN THOUSANDS)**

 
| **Company****(1)**                                                                     | ** ** | **Industry**                                                     | ** **  | **Investment****(2)**                                              | ** ** | **Cost**    | ** **  | **Fair Value** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------------------------------------------------------|-------------|--------------------------------------------------------------------|------------|-------------|-------------|----------------|------------|
|                                                                                   |       |                                                             |        |                                                               |       |        |        |           |       |
| **CONTROL  INVESTMENTS *(Continued)*:**                                                |       |                                                             |        |                                                               |       |        |        |           |       |
| Galaxy  Tool Holding Corp.                                                             |       | Manufacturing — aerospace and plastics                      |        | Senior Subordinated Term Debt (13.5%, Due 8/2013)(5)               |       | $           | 17,250      |           | $          | 17,099 |   |
|                                                                                   |       |                                                             |        | Preferred Stock(4)                                                 |       | 4,112       |        | —         |       |
|                                                                                   |       |                                                             |        | Common Stock(4)                                                    |       | 48          |        | —         |       |
|                                                                                   |       |                                                             |        |                                                               |       | 21,410      |        | 17,099         |       |
|                                                                                   |       |                                                             |        |                                                               |       |        |        |           |       |
| Mathey  Investments, Inc.(7)                                                      |       | Manufacturing — pipe-cutting and pipe-fitting  equipment    |        | Revolving Credit Facility, $718 available (10.0%,  Due 3/2011)(5)  |       | 1,032       |        | 1,011          |       |
|                                                                                   |       |                                                             |        | Senior Term Debt (10.0%, Due 3/2013)(5)                            |       | 2,375       |        | 2,328          |       |
|                                                                                   |       |                                                             |        | Senior Term Debt (17.0%, Due 3/2014)(5) (6) (9)          |       | 7,227       |        | 6,974          |       |
|                                                                                   |       |                                                             |        | Common Stock(4)                                                    |       | 500         |        | —         |       |
|                                                                                   |       |                                                             |        | Common Stock Warrants(4)                                           |       | 277         |        | —         |       |
|                                                                                   |       |                                                             |        |                                                               |       | 11,411      |        | 10,313         |       |
|                                                                                   |       |                                                             |        |                                                               |       |        |        |           |       |
| **Total Control Investments  (represents 71.7% of total investments at fair value)**   | ** ** | **$**                                                            | **152,166** | ** **                                                         | **$**      | **148,248** | ** **  |
|                                                                                   |       |                                                             |        |                                                               |       |        |        |           |       |
| **AFFILIATE  INVESTMENTS:**                                                            |       |                                                             |        |                                                               |       |        |        |           |       |
| Danco Acquisition Corp.                                                                |       | Manufacturing — machining and sheet metal work              |        | Revolving Credit Facility, $600 available (10.0%,  Due 10/2010)(5) |       | $           | 900         |           | $          | 893 |   |
|                                                                                   |       |                                                             |        | Senior Term Debt (10.0%, Due 10/2012)(5)                           |       | 4,163       |        | 4,131          |       |
|                                                                                   |       |                                                             |        | Senior Term Debt (12.5%, Due 4/2013)(5)                            |       | 9,053       |        | 8,929          |       |
|                                                                                   |       |                                                             |        | Preferred Stock(4)                                                 |       | 2,500       |        | —         |       |
|                                                                                   |       |                                                             |        | Common Stock Warrants(4)                                           |       | 2           |        | —         |       |
|                                                                                   |       |                                                             |        |                                                               |       | 16,618      |        | 13,953         |       |
|                                                                                   |       |                                                             |        |                                                               |       |        |        |           |       |
| Noble Logistics, Inc.                                                             |       | Service — aftermarket auto parts delivery                   |        | Revolving Credit Facility, $0 available (4.2%, Due  5/2010)(5)     |       | 2,000       |        | 1,210          |       |
|                                                                                   |       |                                                             |        | Senior Term Debt (9.3%, Due 12/2011)(5)                            |       | 6,227       |        | 3,767          |       |
|                                                                                   |       |                                                             |        | Senior Term Debt (10.5%, Due 12/2011)(5) (6)                  |       | 7,300       |        | 4,417          |       |
|                                                                                   |       |                                                             |        | Preferred Stock(4)                                                 |       | 1,750       |        | —         |       |
|                                                                                   |       |                                                             |        | Common Stock(4)                                                    |       | 1,682       |        | —         |       |
|                                                                                   |       |                                                             |        |                                                               |       | 18,959      |        | 9,394          |       |
|                                                                                   |       |                                                             |        |                                                               |       |        |        |           |       |
| Quench Holdings Corp.                                                                  |       | Service — sales, installation and service of water  coolers |        | Senior Subordinated Term Debt (10.0%, Due 8/2013)(5)               |       | 8,000       |        | 6,150          |       |
|                                                                                   |       |                                                             |        | Preferred Stock(4)                                                 |       | 2,950       |        | 3,224          |       |
|                                                                                   |       |                                                             |        | Common Stock(4)                                                    |       | 447         |        | —         |       |
|                                                                                   |       |                                                             |        |                                                               |       | 11,397      |        | 9,374          |       |
|                                                                                   |       |                                                             |        |                                                               |       |        |        |           |       |
| Tread  Corp.                                                                           |       | Manufacturing — storage and transport equipment             |        | Senior Subordinated Term Debt (12.5%, Due 5/2013)(5)               |       | 5,000       |        | 4,943          |       |
|                                                                                   |       |                                                             |        | Preferred Stock(4)                                                 |       | 750         |        | —         |       |
|                                                                                   |       |                                                             |        | Common Stock & Debt Warrants(4)                           |       | 3           |        | —         |       |
|                                                                                   |       |                                                             |        |                                                               |       | 5,753       |        | 4,943          |       |
|                                                                                   |       |                                                             |        |                                                               |       |        |        |           |       |
| **Total Affiliate Investments (represents 18.2% of total  investments at fair value)** | ** ** | **$**                                                            | **52,727**  | ** **                                                         | **$**      | **37,664**  | ** **  |
|                                                                                   |       |                                                             |        |                                                               |       |        |        |           |       |
| **TOTAL INVESTMENTS**(11)                                                              | ** ** | ** **                                                       | ** **  | ** **                                                         | ** ** | **$**       | **227,567** | ** **     | **$**      | **206,858** | ** ** |

 

----

| (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,  2010, and due date represents the contractual maturity date.                                                                                                |
| (3)  | Valued  based on the indicative bid price on or near March 31, 2010, 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, 2010.                                                                                                      |
| (6)  | Last  Out Tranche of senior debt, meaning if the portfolio company is liquidated,  the holder of the Last Out Tranche is paid after the other senior debt and  before the senior subordinated debt.                                                 |
| (7)  | Restructured  in December 2009, resulting in the Company owning 100% of Mathey  Investments, Inc. and thus reclassifying it as a Control Investment.                                                                                      |
| (8)  | Security  was paid off, at par, subsequent to March 31, 2010 and was valued based  on the pay off.                                                                                                                                             |
| (9)  | Loan  was restructured into two separate term loans with face values of $3.7  million and $3.5 million effective February 2010.                                                                                                                |
| (10) | Loan  was repaid, in full, subsequent to March 31, 2010.                                                                                                                                                                                       |
| (11) | Aggregate  gross unrealized depreciation for federal income tax purposes is $43,465;  aggregate gross unrealized appreciation for federal income tax purposes is  $22,756. Net unrealized depreciation is $20,709 based on a tax cost of  $227,567. |

 

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

 

68

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Table of Contents

 

**GLADSTONE INVESTMENT CORPORATION**

**CONSOLIDATEDSCHEDULES OF INVESTMENTS**

**MARCH 31, 2009**

**(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 (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** | ** ** |

 

69

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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              |       |
|                           |       |                                                       |       | 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          |        | —              |       |
|                           |       |                                                       |       | Guaranty ($500)                                                     |       |       |        |                |       |
|                           |       |                                                       |       |                                                                |       | 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               |       |
|                           |       |                                                       |       | 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 (16.7% 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               |       |
|                            |       |                                                        |       | 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**  | ** **          | **$**      | **53,027** |   |
|                            |       |                                                        |       |                                                                         |       |     |        |                |       |
| **TOTAL INVESTMENTS**(11)       | ** ** | ** **                                                  | ** ** | ** **                                                                   | ** ** | **$**    | **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.                                                                                                                                                                                                                                                               |
| (9)  | Terms  of agreement were refinanced and revolver limit was reduced.                                                                                                                                                                                                                                                                |
| (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. |
| (11) | Aggregate  gross unrealized depreciation for federal income tax purposes is $60,184;  aggregate gross unrealized appreciation for federal income tax purposes is  $25,169. Net unrealized depreciation is $35,015 based on a tax cost of  $348,945.                                                                                |

 

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

 

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**GLADSTONE INVESTMENT CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**March 31,2010**

 

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

 

**Note 1.Organization**

 

GladstoneInvestment Corporation (the “Company”) was incorporated under the GeneralCorporation Laws of the State of Delaware on February 18, 2005 andcompleted an initial public offering on June 22, 2005. The Company is aclosed-end, non-diversified management investment company that has elected tobe treated as a business development company (“BDC”) under the InvestmentCompany Act of 1940, as amended (the “1940 Act”). In addition, the Company haselected to be treated for tax purposes as a regulated investment company (“RIC”)under the Internal Revenue Code of 1986, as amended (the “Code”). The Company’sinvestment objectives are to achieve a high level of current income and capitalgains by investing in debt and equity securities of established privatebusinesses.

 

GladstoneBusiness Investment, LLC (“Business Investment”), a wholly-owned subsidiary ofthe Company, was established on August 11, 2006 for the sole purpose ofowning the Company’s portfolio of investments in connection with its line ofcredit. The financial statements of Business Investment are consolidated withthose of the Company.

 

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

 

**Note 2.Summary of Significant Accounting Policies**

 

*Basis ofPresentation*

 

Theaccompanying consolidated financial statements include the accounts of theCompany and its wholly-owned subsidiaries. All significant intercompanybalances and transactions have been eliminated.

 

*Reclassifications*

 

Certainamounts in the prior year’s financial statements have been reclassified toconform to the presentation for the year ended March 31, 2010 with noeffect to net decrease in net assets resulting from operations.

 

*Consolidation*

 

UnderArticle 6 of Regulation S-X under the Securities Act of 1933, asamended, and the authoritative accounting guidance provided by the AICPA Auditand Accounting Guide for Investment Companies, the Company is not permitted toconsolidate any subsidiary or other entity that is not an investment company.

 

*Use ofEstimates*

 

Theconsolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the United States of America thatrequire management to make estimates and assumptions that affect the amountsreported in the financial statements and accompanying notes. Actual results maydiffer from those estimates.

 

*Cash and Cash Equivalents*

 

TheCompany considers all short-term, highly liquid investments that are bothreadily convertible to cash and have a maturity of three months or less at thetime of purchase to be cash equivalents. Items classified as cash equivalentsinclude temporary investments in commercial paper, United States Treasurysecurities and money-market funds. Cash and cash equivalents are carried atcost, which approximates fair value.  TheCompany places its cash and cash equivalents with financial institutions, and,at times, cash held in checking accounts may exceed the Federal DepositInsurance Corporation insured limit. The Company seeks to mitigate thisconcentration of credit risk by depositing funds with major financialinstitutions.

 

*Classificationof Investments*

 

Inaccordance with the 1940 Act, the Company classifies portfolio investments onits consolidated balance sheets and its consolidated schedules of investmentsinto the following categories:

 

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·                  **ControlInvestments***—*Investments in which theCompany owns more than 25% of the voting securities or has greater than 50%representation on the board of directors;

 

·                  **AffiliateInvestments**—Investments in which the Company owns between 5%and 25% of the voting securities and has less than 50% representation on theboard of directors; and

 

·                  **Non-Control/Non-AffiliateInvestments**—Investments in which the Company owns less than 5%of the voting securities.

 

*Investment Valuation Policy*

 

TheCompany 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.

 

TheCompany uses generally accepted valuation techniques to value its portfoliounless the Company has specific information about the value of an investment todetermine otherwise. From time to time the Company may accept an appraisal of abusiness in which the Company holds securities. These appraisals are expensiveand occur infrequently but provide a third-party valuation opinion that maydiffer in results, techniques and scopes used to value the Company’sinvestments.  When these specificthird-party appraisals are engaged or accepted, the Company uses estimates ofvalue provided by such appraisals and its own assumptions, including estimatedremaining life, current market yield and interest rate spreads of similarsecurities as of the measurement date, to value the investment the Company hasin that business.

 

ThePolicy, which is summarized below, applies to publicly-traded securities,securities for which a limited market exists, and securities for which nomarket exists.

 

**Publicly-traded securities:** The Company determines thevalue of publicly-traded securities based on the closing price for the securityon the exchange or securities market on which it is listed and primarily tradedon the valuation date.  To the extentthat the Company owns restricted securities that are not freely tradable, butfor which a public market otherwise exists, the Company will use the marketvalue of that security adjusted for any decrease in value resulting from therestrictive 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 quoted bidprice.  In valuing these assets, theCompany assesses trading activity in an asset class and 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 (“IBP”) offeredby the respective originating syndication agent’s trading desk, or secondarydesk, on or near the valuation date. To the extent that the Company uses theIBP as a basis for valuing the security, the Adviser may take further steps toconsider additional information to validate that price in accordance with thePolicy.

 

In the event these limited markets become illiquidsuch that market prices are no longer readily available, the Company will valueits syndicated loans using alternative methods, such as estimated net presentvalues of the future cash flows, or discounted cash flows (“DCF”). The use of aDCF methodology follows that prescribed by the Financial Accounting StandardsBoard (“FASB”) Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements andDisclosures,” which provides guidance on the use of a reporting entity’sown assumptions about future cash flows and risk-adjusted discount rates whenrelevant observable inputs, such as quotes in active markets, are notavailable. When relevant observable market data does not exist, the alternativeoutlined in ASC 820 is the useof valuing investments based on DCF.  Forthe purposes of using DCF to provide fair value estimates, the Companyconsiders multiple inputs such as a risk-adjusted discount rate thatincorporates adjustments that market participants would make both fornonperformance and liquidity risks.  Assuch, the Company develops a modified discount rate approach that incorporatesrisk premiums including, among others, increased probability of default, orhigher loss given default or increased liquidity risk. The DCF valuationsapplied to the syndicated loans provide an estimate of what the Companybelieves a market participant would pay to purchase a syndicated loan in anactive market, thereby establishing a fair value.  The Company will apply the DCF methodology inilliquid markets until quoted prices are available or are deemed reliable basedon trading activity.

 

As of March 31, 2010, the Company assessedtrading activity in its syndicated loan assets and determined that therecontinued to be market liquidity and a secondary market for these assets.  Thus, firm bid prices or IBPs were used tofair value the Company’s remaining syndicated loans at March 31, 2010.

 

**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 

 

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ofa bundle of securities, which can include debt and equity securities; and (3) portfolioinvestments in non-controlled companies comprised of a bundle of investments,which can include debt and equity securities.

 

**(1)****        ****Portfolio investmentscomprised 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 thatPIK interest is likely to be received.

 

**(2)****        ****Portfolioinvestments in controlled companies comprised of a bundle of investments, whichcan include debt and equity securities:** The fair value of theseinvestments is determined based on the total enterprise value (“TEV”) of theportfolio company, or issuer, utilizing a liquidity waterfall approach underASC 820 for the Company’s Non-Public Debt Securities and equity or equity-likesecurities (e.g. preferred equity, equity, or other equity-like securities)that are purchased together as part of a package, where the Company has controlor could gain control through an option or warrant security; both the debt andequity securities of the portfolio investment would exit in the mergers andacquisition market as the principal market, generally through a sale orrecapitalization of the portfolio company. In accordance with ASC 820, theCompany applies the in-use premise of value which assumes the debt and equitysecurities are sold together. Under this liquidity waterfall approach, theCompany first calculates the TEV of the issuer by incorporating some or all ofthe following factors to determine the TEV of the issuer:

 

·**                 **the issuer’sability to make payments;

·**                 **the earnings ofthe issuer;

·**                 **recent sales tothird parties of similar securities;

·**                 **the comparisonto publicly traded securities; and

·**                 **DCF or otherpertinent factors.

 

Ingathering the sales to third parties of similar securities, the Company mayreference industry statistics and use outside experts. Once the Company hasestimated the TEV of the issuer, the Company will subtract the value of all thedebt securities of the issuer, which are valued at the contractual principalbalance. Fair values of these debt securities are discounted for any shortfallof TEV over the total debt outstanding for the issuer. Once the values for alloutstanding senior securities (which include the debt securities) have beensubtracted from the TEV of the issuer, the remaining amount, if any, is used todetermine the value of the issuer’s equity or equity-like securities.  If, in the Adviser’s judgment, the liquiditywaterfall approach does not accurately reflect the value of the debt component,the Adviser may recommend that the Company use a valuation by SPSE, or, if thatis unavailable, a DCF valuation technique.

 

**(3)****        ****Portfolio investments innon-controlled companies comprised of a bundle of investments, which caninclude debt and equity securities:**The Company valuesNon-Public Debt Securities that are purchased together with equity orequity-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 ASC 820, the Company determines its fair value of these debtsecurities of non-control investments assuming the sale of an individual debtsecurity using the in-exchange premise of value. As such, the Company estimatesthe fair value of the debt component using estimates of value provided by SPSEand its own assumptions in the absence of observable market data, includingsynthetic credit ratings, estimated remaining life, current market yield andinterest rate spreads of similar securities as of the measurement date.Subsequent to June 30, 2009, for equity or equity-like securities ofinvestments for which the Company does not control or cannot gain control as ofthe measurement date, the Company estimates the fair value of the equity usingthe in-exchange premise of value based on factors such as the overall value ofthe issuer, the relative fair value of other units of account including debt,or other relative value approaches. Consideration is also given to capitalstructure and other contractual obligations that may impact the fair value ofthe equity. Further, the Company may utilize comparable values of similarcompanies, recent investments and indices with similar structures and riskcharacteristics or its own assumptions in the absence of other observablemarket data and may also employ DCF valuation techniques.

 

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.

 

Referto Note 3 for additional information regarding fair value measurements and theCompany’s adoption of ASC 820.

 

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*Interest and Dividend IncomeRecognition*

 

Interestincome, adjusted for amortization of premiums and acquisition costs, theaccretion of discounts and for the amortization of amendment fees, is recordedon the accrual basis to the extent that such amounts are expected to becollected. Generally, when a loan becomes 90 days or more past due, or if theCompany’s qualitative assessment indicates that the debtor is unable to serviceits debt or other obligations, the Company will place the loan on non-accrualstatus and cease recognizing interest income on that loan until the borrowerhas demonstrated the ability and intent to pay contractual amounts due.  However, the Company remains contractuallyentitled to this interest.  Interestpayments received on non-accrual loans may be recognized as income or appliedto principal depending upon management’s judgment.  Non-accrual loans are restored to accrualstatus when past due principal and interest is paid or due to a restructuringsuch that the interest income is deemed to be collectible, and in management’sjudgment, are likely to remain current. At March 31, 2010, one Controlinvestment, ASH Holdings Corp. (“ASH”), was on non-accrual with a fair value ofapproximately $2.2 million, or 1.0% of the fair value of all loans held in theCompany’s portfolio at March 31, 2010.  At March 31, 2009, one Control investment, ASH, was on non-accrualwith a fair value of approximately $2.6 million, or 0.8% of the fair value ofall loans held in the Company’s portfolio at March 31, 2009.  Currently, the Company does not haveinvestments that have paid-in-kind, or PIK, interest.

 

Successfees are recorded upon receipt and are contractually due upon a change ofcontrol in a portfolio company.  To date,the Company has not recorded any success fees. Dividend income on preferred equity securities is accrued to the extentthat such amounts are expected to be collected and that the Company has theoption to collect such amounts in cash. During the year ended March 31, 2010, the Company recorded andcollected approximately $953 of dividends on preferred shares of A. StuckiHolding Corp.  During the year ended March 31,2009, the Company recorded $567 of dividends on preferred shares of QuenchHoldings Corp.  Otherwise, the Companyhas not accrued for any other such dividend income.

 

*RealizedGain or Loss and Unrealized Appreciation or Depreciation of PortfolioInvestments*

 

Realizedgain or loss is recognized when an investment is disposed of and is computed asthe difference between the Company’s cost basis in the investment at thedisposition date and the net proceeds received from such disposition.Unrealized appreciation or depreciation displays the difference between thefair market value of the investment and the cost basis of such investment.

 

*DeferredFinancing Fees*

 

Costsassociated with the Company’s line of credit are deferred and amortized overthe life of the line of credit.

 

*RelatedParty Costs*

 

The Company has enteredinto an investment advisory and management agreement (the “Advisory Agreement”)with the Adviser, which is controlled by the Company’s chairman and chiefexecutive officer. In accordance with the Advisory Agreement, the Company paysthe Adviser fees as compensation for its services, consisting of a basemanagement fee and an incentive fee.  The Company hasentered into an administration agreement (the “Administration Agreement”) withGladstone Administration, LLC (the “Administrator) whereby it paysseparately for administrative services.  These fees are accrued when the servicesare performed and generally paid one month in arrears.  Refer to Note 4 for additional informationregarding these related party costs and agreements.

 

*FederalIncome Taxes*

 

TheCompany intends to continue to qualify for treatment as a RIC undersubchapter M of the Code, which generally allows it to avoid payingcorporate income taxes on any income or gains that it distributes to theCompany’s stockholders.  The Company hasdistributed and intends to distribute sufficient dividends to eliminate taxableincome.  The Company may also be subjectto federal excise tax if it does not distribute at least 98% of its investmentcompany taxable income and 98% of its capital gain net income in any calendaryear.

 

ASC 740, “Income Taxes”requires the evaluation of tax positions taken or expected to be taken in thecourse of preparing the Company’s tax returns to determine whether the taxpositions are “more-likely-than-not” of being sustained by the applicable taxauthorities.  Tax positions not deemed tosatisfy the “more-likely-than-not” threshold would be recorded as a tax benefitor expense in the current year.  TheCompany has evaluated the implications of ASC 870, for all open tax years andin all major tax jurisdictions, and determined that there is no material impacton the consolidated financial statements. The Company’sfederal tax returns for fiscal year 2007, 2008 and 2009 remain subject toexamination by the Internal Revenue Service.

 

*Dividends*

 

Dividendsto stockholders are recorded on the ex-dividend date. The Company is requiredto pay out at least 90% of its ordinary income and short-term capital gains foreach taxable year as a distribution to its stockholders in order to maintainits status as a RIC under Subtitle A, Chapter 1 of Subchapter M ofthe Code. It is the policy of the Company to pay out as a dividend up to 100%of those amounts. The amount to be paid out as a distribution is determined bythe Board of Directors each quarter and is based on the annual 

 

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earningsestimated by the management of the Company. Based on that estimate, adistribution is declared each quarter and is paid out monthly over the courseof the respective quarter. At year-end the Company may pay a bonus dividend, inaddition to the monthly dividends, to ensure that it has paid out at least 90%of its ordinary income and short-term capital gains for the year. The Companytypically retains long-term capital gains, if any, and does not pay them out asdistributions. If the Company decides to retain long-term capital gains, theportion of the retained capital gains will be subject to 35% tax.

 

*RecentAccounting Pronouncements*

 

In August 2009, FASB issued AccountingStandard Update (“ASU”) No. 2009-05, “Fair Value Measurements andDisclosures: Measuring Liabilities at Fair Value.”  The update provides clarification to ASC 820for the valuation techniques required to measure the fair value ofliabilities.  ASU No. 2009-05 alsoprovides clarification around required inputs to the fair value measurement ofa liability and definition of a Level 1 liability.  ASU No. 2009-05 is effective for interimand annual periods beginning after August 28, 2009.  The Company adopted ASU No. 2009-05beginning with the quarter ended December 31, 2009.  The adoption of this standard did not have amaterial effect on the Company’s financial position and results of operations.

 

In September 2009, the FASB issued ASU No. 2009-12,“Measuring Fair Value Measurements and Disclosures: Investments in CertainEntities That Calculate Net Asset Value per Share (or Its Equivalent),” thatprovides additional guidance on how companies should estimate the fair value ofcertain alternative investments, such as hedge funds, private equity funds andventure capital funds. The fair value of such investments can now be determinedusing net asset value (“NAV”) as a practical expedient, unless it is probablethat the investment will not be sold at a price equal to NAV. In thosesituations, the practical expedient cannot be used and disclosure of theremaining actions necessary to complete the sale will be required.  New disclosures of the attributes of allinvestments within the scope of the new guidance is required, regardless ofwhether an entity used the practical expedient to measure the fair value of anyof its investments.  ASU No. 2009-12is effective for the first annual or interim reporting period ending after December 15,2009, with early application permitted. The Company adopted ASU No. 2009-12beginning with the quarter ended December 31, 2009.  The adoption of this standard did not have amaterial effect on the Company’s financial position and results of operations.

 

InDecember 2009, FASB issued ASU No. 2009-17, “Consolidations:Improvements to Financial Reporting by Enterprises Involved with VariableInterest Entities,” that amends the FASB ASC for the issuance of FASB StatementNo. 167, “Amendments to FASB Interpretation No. 46(R).”  The amendments in this ASU replace thequantitative-based risks and rewards calculation for determining whichreporting entity, if any, has a controlling financial interest in a variableinterest entity with an approach focused on identifying which reporting entityhas the power to direct the activities of a variable interest entity that mostsignificantly impact such entity’s economic performance and (1) theobligation to absorb losses of such entity or (2) the right to receivebenefits from such entity. An approach that is expected to be primarilyqualitative will be more effective for identifying which reporting entity has acontrolling financial interest in a variable interest entity. The amendments inASU No. 2009-17 also require additional disclosures about a reportingentity’s involvement in variable interest entities, which will enhance theinformation provided to users of financial statements.  ASU No. 2009-17 is effective for annualperiods beginning after November 15, 2009. The Company does not believe the adoption of this standard will have amaterial impact on its financial position and results of operations.

 

InJanuary 2010, FASB issued ASU No. 2010-06, “Fair Value Measurementsand Disclosures,” that requires reporting entities to make new disclosuresabout recurring or nonrecurring fair-value measurements, including significanttransfers into and out of Level 1 and Level 2 fair-value measurements andinformation on purchases, sales, issuances, and settlements on a gross basis inthe reconciliation of Level 3 fair-value measurements.  The FASB also clarified existing fair-valuemeasurement disclosure guidance about the level of disaggregation, inputs, andvaluation techniques. The new and revised disclosures are required to beimplemented in fiscal interim or annual periods beginning after December 15,2009, except for the gross presentation of the Level 3 rollforward, which isrequired for annual reporting periods beginning after December 15,2010.  The Company adopted ASU No. 2010-06beginning with the year ended March 31, 2010.  The adoption of this standard did not have amaterial effect on the Company’s financial position and results of operations.

 

InFebruary 2010, FASB issued ASU No. 2010-09, “Subsequent Events,” thatamended its guidance on subsequent events. SEC filers are not required to disclose the date through which an entityhas evaluated subsequent events.  Theamended guidance was effective upon issuance for all entities except conduitbond obligors.

 

In February 2010, FASB issued ASU 2010-10, “Consolidations”to defer FAS 167, Amendments to FASB Interpretation No. 46(R), for certaininvestment entities that have the attributes of entities subject to ASC 946(the “investment company guide”). In addition, the ASU (1) amends therequirements for evaluating whether a decision maker or service contract is avariable interest to clarify that a quantitative approach should not be thesole consideration in assessing the criteria and (2) clarifies thatrelated parties should be considered in applying all of the decision maker andservice contract criteria. This standard does not have an impact on the Company’sfinancial position and results of operations.

 

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**Note 3. Investments**

 

TheCompany adopted guidance for fair value measurements, which defines fair value,establishes a framework for measuring fair value and expands disclosures aboutassets and liabilities measured at fair value. The guidance 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. Theguidance 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.

 

Asof March 31, 2010, all of the Company’s assets were valued using Level 3inputs.

 

Thefollowing table presents the financial instruments carried at fair value as of March 31,2010, by caption on the accompanying consolidated statements of assets andliabilities for each of the three levels of hierarchy established by ASC 820:

 
| ** **                                       | ** ** | **As  of March 31, 2010** | ** ** |
|--------------------------------------------------|------------|--------------------------------|------------|
| ** **                                       | ** ** | **Level 1**               | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total Fair Value  Reported in Condensed  Consolidated Statement of  Assets and Liabilities** | ** ** |
| **Non-Control/Non-Affiliate  Investments**       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Senior term debt                                 |       | $                              | —     |   | $ | — |   | $ | 20,903 |   | $ | 20,903 |   |
| Common equity/equivalents                        |       | —                         |       | — |   | 43 |   | 43 |   |
| **Total Non-Control/Non-Affiliate  Investments** | ** ** | **—**                     | ** ** | **—** | ** ** | **20,946** | ** ** | **20,946** | ** ** |
|                                             | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Control Investments**                          | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Senior term debt                                 |       | —                         |       | — |   | 50,110 |   | 50,110 |   |
| Senior subordinated term debt                    |       | —                         |       | — |   | 60,018 |   | 60,018 |   |
| Preferred equity                                 |       | —                         |       | — |   | 17,201 |   | 17,201 |   |
| Common equity/equivalents                        |       | —                         |       | — |   | 20,919 |   | 20,919 |   |
| **Total Control investments**                    | ** ** | **—**                     | ** ** | **—** | ** ** | **148,248** | ** ** | **148,248** | ** ** |
|                                             | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Affiliate Investments**                        | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Senior term debt                                 |       | —                         |       | — |   | 23,346 |   | 23,346 |   |
| Senior subordinated term debt                    |       | —                         |       | — |   | 11,094 |   | 11,094 |   |
| Preferred equity                                 |       | —                         |       | — |   | 3,224 |   | 3,224 |   |
| **Total Affiliate investments**                  | ** ** | **—**                     | ** ** | **—** | ** ** | **37,664** | ** ** | **37,664** | ** ** |
| ** **                                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Total Investments at fair value**              | ** ** | **$**                          | **—** | ** ** | **$** | **—** | ** ** | **$** | **206,858** | ** ** | **$** | **206,858** | ** ** |
| Cash Equivalents                                 |       | 85,000                         |       | — |   | — |   | 85,000 |   |
| ** **                                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Total Investments and Cash  Equivalents**      | ** ** | **$**                          | **85,000** | ** ** | **$** | **—** | ** ** | **$** | **206,858** | ** ** | **$** | **291,858** | ** ** |

 

Thefollowing table presents the financial instruments carried at fair value as of March 31,2009, by caption on the accompanying consolidated statements of assets andliabilities for each of the three levels of hierarchy established by ASC 820:

 
| ** **                                       | ** ** | **As  of March 31, 2009** | ** ** |
|--------------------------------------------------|------------|--------------------------------|------------|
| ** **                                       | ** ** | **Level 1**               | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total Fair Value  Reported in Condensed  Consolidated Statement of  Assets and Liabilities** | ** ** |
| **Non-Control/Non-Affiliate  Investments**       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Senior term debt                                 |       | $                              | —     |   | $ | — |   | $ | 94,740 |   | $ | 94,740 |   |
| **Total Non-Control/Non-Affiliate  Investments** | ** ** | **—**                     | ** ** | **—** | ** ** | **94,740** | ** ** | **94,740** | ** ** |
|                                             | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Control Investments**                          | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Senior term debt                                 |       | —                         |       | — |   | 50,209 |   | 50,209 |   |
| Senior subordinated term debt                    |       | —                         |       | — |   | 60,812 |   | 60,812 |   |
| Preferred equity                                 |       | —                         |       | — |   | 34,150 |   | 34,150 |   |
| Common equity/equivalents                        |       | —                         |       | — |   | 20,992 |   | 20,992 |   |
| **Total Control investments**                    | ** ** | **—**                     | ** ** | **—** | ** ** | **166,163** | ** ** | **166,163** | ** ** |
|                                             | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Affiliate Investments**                        | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Senior term debt                                 |       | —                         |       | — |   | 34,726 |   | 34,726 |   |
| Senior subordinated term debt                    |       | —                         |       | — |   | 11,249 |   | 11,249 |   |
| Preferred equity                                 |       | —                         |       | — |   | 5,893 |   | 5,893 |   |
| Common equity/equivalents                        |       | —                         |       | — |   | 1,159 |   | 1,159 |   |
| **Total Affiliate investments**                  | ** ** | **—**                     | ** ** | **—** | ** ** | **53,027** | ** ** | **53,027** | ** ** |
| ** **                                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Total Investments at fair value**              | ** ** | **$**                          | **—** | ** ** | **$** | **—** | ** ** | **$** | **313,930** | ** ** | **$** | **313,930** | ** ** |
| Cash Equivalents                                 |       | —                         |       | — |   | — |   | — |   |
| ** **                                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Total Investments and Cash  Equivalents**      | ** ** | **$**                          | **—** | ** ** | **$** | **—** | ** ** | **$** | **313,930** | ** ** | **$** | **313,930** | ** ** |

 

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*Changesin Level 3 Fair Value Measurements*

 

Thefollowing tables provide a roll-forward in the changes in fair value during theyear ended March 31, 2010 and 2009 for all investments for which theCompany determines 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 the unobservablefactors to the overall fair value measurement. However, Level 3 financialinstruments typically include, in addition to the unobservable or Level 3components, observable components (that is, components that are actively quotedand can be validated to external sources). Accordingly, the gains and losses inthe table below include changes in fair value due in part to observable factorsthat are part of the valuation methodology. Two tables are provided for each period, where the first table is brokenout by Control, Affiliate and Non-Control/Non-Affiliate classification, and thesecond table is broken out by major security type.

 

**Fair valuemeasurements using unobservable data inputs (Level 3)**

 

**Fiscal Year 2010:**

 
| ** **                                | ** ** | **Non-Control/  Non-Affiliate  Investments** | ** ** | **Control  Investments** | ** ** | **Affiliate  Investments** | ** ** | **Total**  | ** ** |
|-------------------------------------------|------------|----------------------------------------------|------------|--------------------------|------------|----------------------------|------------|------------|------------|
| **Year ended March 31,  2010:**      |       |                                         |       |                     |       |                       | ** ** | ** ** | ** ** |
| Fair value as of  March 31, 2009     |       | $                                            | 94,740     |                     | $          | 166,163                    |       | $          | 53,027     |   | $ | 313,930 |   |
| Total realized gains (losses)(1)          |       | (35,923                                      | )          | —                   |       | —                     |       | (35,923    | )          |
| Total unrealized gains (losses)(1)        |       | 38,367                                       |       | (20,001                  | )          | (4,061                     | )          | 14,305     |       |
| Issuances / Originations                  |       | 150                                          |       | 3,925                    |       | 713                        |       | 4,788      |       |
| Sales                                     |       | (74,706                                      | )          | —                   |       | —                     |       | (74,706    | )          |
| Settlements / Repayments                  |       | (1,682                                       | )          | (12,968                  | )          | (886                       | )          | (15,536    | )          |
| Transfers                                 |       | —                                       |       | 11,129                   |       | (11,129                    | )          | —     |       |
| **Fair value as of March 31,  2010** | ** ** | **$**                                        | **20,946** | ** **               | **$**      | **148,248**                | ** ** | **$**      | **37,664** | ** ** | **$** | **206,858** | ** ** |

 
| ** **                                | ** ** | **Senior  Term Debt** | ** ** | **Senior  Subordinated  Term Debt** | ** ** | **Preferred  Equity** | ** ** | **Common  Equity/  Equivalents** | ** ** | **Total**  | ** ** |
|-------------------------------------------|------------|-----------------------|------------|-------------------------------------|------------|-----------------------|------------|----------------------------------|------------|------------|------------|
| **Year ended March 31,  2010:**      |       |                  |       |                                |       |                  |       |                             |       |       |       |
| Fair value as of  March 31, 2009     |       | $                     | 179,676    |                                | $          | 72,062                |       | $                                | 40,042     |       | $          | 22,150 |   | $ | 313,930 |   |
| Total realized gains (losses)(1)          |       | (35,923               | )          | —                              |       | —                |       | —                           |       | (35,923    | )          |
| Total unrealized gains (losses) (1)       |       | 38,748                |       | (3,638                              | )          | (19,617               | )          | (1,188                           | )          | 14,305     |       |
| Issuances / Originations                  |       | 2,100                 |       | 2,688                               |       | —                |       | —                           |       | 4,788      |       |
| Sales                                     |       | (74,706               | )          | —                              |       | —                |       | —                           |       | (74,706    | )          |
| Settlements / Repayments                  |       | (15,536               | )          | —                              |       | —                |       | —                           |       | (15,536    | )          |
| **Fair value as of March 31,  2010** | ** ** | **$**                 | **94,359** | ** **                          | **$**      | **71,112**            | ** ** | **$**                            | **20,425** | ** ** | **$**      | **20,962** | ** ** | **$** | **206,858** | ** ** |

 

**Fiscal Year 2009:**

 
| ** **                                | ** ** | **Non-Control/  Non-Affiliate  Investments** | ** ** | **Control  Investments** | ** ** | **Affiliate  Investments** | ** ** | **Total** | ** ** |
|-------------------------------------------|------------|----------------------------------------------|------------|--------------------------|------------|----------------------------|------------|-----------|------------|
| **Year ended March 31,  2009:**      |       |                                         |       |                     |       |                       |       |      |       |
| Fair value as of  March 31, 2008     |       | $                                            | 142,739    |                     | $          | 145,407                    |       | $         | 47,458     |   | $ | 335,604 |   |
| Total realized gains (losses) (1)         |       | (5,023                                       | )          | —                   |       | —                     |       | (5,023    | )          |
| Total unrealized gains (losses) (1)       |       | (16,418                                      | )          | 9,029                    |       | (12,425                    | )          | (19,814   | )          |
| Issuances / Originations                  |       | —                                       |       | 39,756                   |       | 10,169                     |       | 49,925    |       |
| Purchases                                 |       | 34                                           |       | —                   |       | —                     |       | 34        |       |
| Sales                                     |       | (13,914                                      | )          | —                   |       | —                     |       | (13,914   | )          |
| Settlements / Repayments                  |       | (12,678                                      | )          | (10,043                  | )          | (10,161                    | )          | (32,882   | )          |
| Transfers                                 |       | —                                       |       | (17,986                  | )          | 17,986                     |       | —    |       |
| **Fair value as of March 31,  2009** | ** ** | **$**                                        | **94,740** | ** **               | **$**      | **166,163**                | ** ** | **$**     | **53,027** | ** ** | **$** | **313,930** | ** ** |

 

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| ** **                                | ** ** | **Senior  Term Debt** | ** **  | **Senior  Subordinated  Term Debt** | ** ** | **Preferred  Equity** | ** ** | **Common  Equity/  Equivalents** | ** ** | **Total**  | ** ** |
|-------------------------------------------|------------|----------------------------|-------------|------------------------------------------|------------|-----------------------|------------|----------------------------------|------------|------------|------------|
| **Year ended March 31,  2009:**      |       |                       |        |                                     |       |                  |       |                             |       |       |       |
| Fair value as of  March 31, 2008     |       | $                          | 237,878     |                                     | $          | 46,733                |       | $                                | 29,934     |       | $          | 21,059 |   | $ | 335,604 |   |
| Total realized gains (losses) (1)         |       | (5,023                     | )           | —                                   |       | —                |       | —                           |       | (5,023     | )          |
| Total unrealized gains (losses) (1)       |       | (14,744                    | )           | (7,500                                   | )          | 1,572                 |       | 858                              |       | (19,814    | )          |
| Issuances / Originations                  |       | 6,555                      |        | 34,550                                   |       | 8,587                 |       | 233                              |       | 49,925     |       |
| Purchases                                 |       | 34                         |        | —                                   |       | —                |       | —                           |       | 34         |       |
| Sales                                     |       | (13,914                    | )           | —                                   |       | —                |       | —                           |       | (13,914    | )          |
| Settlements / Repayments                  |       | (31,110                    | )           | (1,721                                   | )          | (51                   | )          | —                           |       | (32,882    | )          |
| **Fair value as of March 31,  2009** | ** ** | **$**                      | **179,676** | ** **                               | **$**      | **72,062**            | ** ** | **$**                            | **40,042** | ** ** | **$**      | **22,150** | ** ** | **$** | **313,930** | ** ** |

 

----

(1)             Included in the realized andunrealized (loss) gain section on the accompanying consolidated statement ofoperations for the year ended March 31, 2010.

 

### *Non-Proprietary InvestmentActivity*

 

### Non-proprietaryinvestments are investments that were not originated by the Company.  During April and May 2009, theCompany finalized the sale of 29 of the 32 senior syndicated loans that wereheld in its portfolio of investments at March 31, 2009 to variousinvestors in the syndicated loan market.  The loans, in the aggregate, hada cost value of approximately $104.2 million, or 29.9% of the cost value of theCompany’s total investments, and an aggregate fair market value ofapproximately $69.8 million, or 22.2% of the fair market value of the Company’stotal investments, at March 31, 2009.  As a result of these sales,the Company received approximately $69.2 million in net cash proceeds andrecorded a realized loss of approximately $34.6 million.

 

InOctober 2009, the Company completed the sales of certain other syndicatedloans (HMTBP Acquisition II Corp. and a portion of Interstate FiberNet, Inc.)and received approximately $5.5 million in net cash proceeds and recorded arealized loss of approximately $1.3 million.

 

### Upon the settlement ofthese sales, the remaining non-proprietary loans in the Company’s investmentportfolio had a fair value of approximately $10.7 million, or 5.2% of its totalinvestments at March 31, 2010.

 

Subsequentto March 31, 2010, Interstate FiberNet, Inc. made full repayment oftheir senior term debt owed to the Company. This payoff reduced the Company’s remaining non-proprietary loan balancefurther to $4.0, at fair value, as of March 31, 2010.

 

*ProprietaryInvestment Activity*

 

Duringour fiscal year ended March 31, 2010, the Company executed the followingtransactions with certain of its portfolio companies:

 

·                  In April 2009, A. Stucki Holding Corp. (“Stucki”)refinanced a portion of its senior term debt by making principal repayments ofapproximately $2.0 million, which represented the next three quarterly paymentsdue under normal amortization on both their senior term A ($1.6 million) andsenior term B ($412) loans.

 

·                  In April 2009, ASH made a repayment ofapproximately $1.1 million on its revolving line of credit, which reduced thethen-outstanding balance to $500.

 

·                  In April 2009, the Company entered intoan agreement to reduce the available credit limit on Mathey Investment, Inc.’s(“Mathey”) revolving line of credit from $2.0 million to $1.0 million.  This was a non-cash transaction.

 

·                  In April 2009, the Company made aninvestment disbursement to Cavert II Holding Corp. (“Cavert”) for approximately$850 on its revolving line of credit, and the proceeds were used to make thenext four quarterly payments due under normal amortization for both its seniorterm A and senior term B loans in a non-cash transaction.  Subsequently, on April 17, 2009, Cavertrepaid the outstanding $850 in principal plus accrued interest on its revolvingline of credit.  The revolving line ofcredit was then sold to a third party for a nominal fee.

 

·                  In April 2009, the Company entered intoan agreement to reduce the available credit limit on Chase II Holdings Corp.’s(“Chase”) revolving line of credit from $4.5 million to $3.5 million.  This was a non-cash transaction.

 

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·                  In September, the Company agreed to an earlytermination of its revolving line of credit to B-Dry, LLC, which had anoriginal maturity date of October 2009. The revolving line of credit was fully repaid at such time.

 

·                  In October 2009, the Company refinancedits revolving line of credit with Chase to a third party and the outstandingbalance of $3.5 million, plus accrued interest, was repaid in full.

 

·                  In October 2009, one of our portfoliocompanies entered into an agreement with a third party to act as an advisor inlooking at strategic investment alternatives.

 

·                  In October 2009, Stucki declared and, inNovember 2009, paid accrued dividends on its preferred stock, of which theCompany received approximately $953.

 

·                  In October 2009, the Company enteredinto an agreement with Stucki to waive all quarterly principal payments due onits Term Loan A and Term Loan B notes for the period April 1, 2010 throughMarch 31, 2011.  This was a non-cashtransaction.

 

·                  In November 2009, the Company enteredinto an agreement to reduce the available credit limit on Danco AcquisitionCorp.’s revolving line of credit from $3.0 million to $1.5 million.  This was a non-cash transaction.

 

·                  In December 2009, the Company assumed 100%ownership of Mathey, previously an Affiliate investment, exercising its rightafter certain defaults on the part of Mathey and subsequent expiration of aforbearance period granted by the Company. The Company disbursed approximately $282 to buy out the previousstockholders of Mathey and to pay for related legal expenses incurred in theprocess.  The Company’s investment inMathey was reclassified from an Affiliate to a Control investment in the thirdquarter of the year ended March 31, 2010 and is shown as a Controlinvestment on the consolidated financial statements as of March 31, 2010**.**

 

·                  In January 2010, the Company entered into anagreement with Noble Logistics, Inc. to extend the maturity of itsrevolving line of credit to May 2010. This was a non-cash transaction.

 

·                  In February 2010,the Company executed a guaranty of a wholesale financing facility agreementbetween Agricredit Acceptance, LLC (“Agricredit”) and Country Club Enterprise,LLC (“CCE”), one of its Control Investments. Refer to Note 11, Commitments and Contingencies, for further informationregarding this guaranty.

 

·                  Effective February 2010, the senior LOT note toMathey was restructured into two separate notes, term loan B and term loan C,with face values of $3.5 million and $3.7 million, respectively.

 

·                  In March 2010, the Company invested $870 in Stucki in the form of additionaldebt to the existing senior subordinated term debt for Stucki’s acquisition ofthe assets of Midland Reclamation Company (“Midland”).  Midland, located in Jerseyville, IL, is areconditioner of freight car and locomotive couplers and supplier of freightcar components.  The investment carriesthe same terms as the original senior subordinated term debt facility.  The Company’s equity securities and ownershipposition did not change as a result of this transaction.

 

·                  In March 2010, the Company entered into agreements with ASH toextend the maturity dates of both its revolving line of credit and its seniorsubordinated term debt to March 2013. This was a non-cash transaction.

 

·                  In March 2010, the Company disbursed $1.5 million to ASH under itsrevolving line of credit, the proceeds of which were used to pay off a facilitydue to the senior lender of ASH.

 

Refer to Note 14,Subsequent Events, for further investment activity occurring subsequent to March 31,2010.

 

*Investment Concentrations*

 

Approximately 45.6% of the aggregate fair value of the Company’sinvestment portfolio at March 31, 2010 was comprised of senior debt, 34.4%was senior subordinated debt, and 20.0% was preferred and common equitysecurities.  At March 31, 2010, theCompany had investments in 16 portfolio companies with an aggregate fair valueof $206.9 million, of which Stucki, Chase and Cavert collectively comprisedapproximately $98.2 million, or 47.5% of the Company’s total investmentportfolio, at fair value.  The followingtable outlines the Company’s investments by type at March 31, 2010 and2009:

 
| ** **                    | ** ** | **March 31,  2010** | ** **  | **March 31,  2009** | ** ** |
|-------------------------------|------------|--------------------------|-------------|--------------------------|------------|
| ** **                    | ** ** | **Cost**                 | ** **  | **Fair  Value**          | ** ** | **Cost** | ** ** | **Fair  Value** | ** ** |
| Senior Term Debt              | ** ** | **$**                    | **102,446** | ** **               | **$**      | **94,359** |   | $ | 224,261 |   | $ | 179,676 |   |
| Senior Subordinated Term Debt | ** ** | **79,799**               | ** **  | **71,112**               |       | 79,362 |   | 72,061 |   |
| Preferred Equity              | ** ** | **40,728**               | ** **  | **20,425**               |       | 40,728 |   | 40,043 |   |
| Common Equity/Equivalents     | ** ** | **4,594**                | ** **  | **20,962**               |       | 4,594 |   | 22,150 |   |
| **Total Investments**         | ** ** | **$**                    | **227,567** | ** **               | **$**      | **206,858** |   | $ | 348,945 |   | $ | 313,930 |   |

 

Investmentsat fair value consisted of the following industry classifications at March 31,2010 and 2009:

 

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| ** **                                 | ** ** | **March 31,  2010** | ** **  | **March 31,  2009** | ** ** |
|--------------------------------------------|------------|--------------------------|-------------|--------------------------|------------|
| ** **                                 | ** ** | ** **               | ** **  | **Percentage  of**       | ** ** | ** ** | ** ** | **Percentage  of** | ** ** |
| ** **                                 | ** ** | **Fair Value**      | ** **  | **Total  Investments**   | ** ** | **Net Assets** | ** ** | **Fair Value** | ** ** | **Total  Investments** | ** ** | **Net Assets** | ** ** |
| Machinery                                  | ** ** | **$**                    | **60,692**  | ** **               | **29.3**   | **%** | **31.5** | **%** | $ | 63,907 |   | 20.4 | % | 29.7 | % |
| Diversified/Conglomerate Manufacturing     | ** ** | **43,054**               | ** **  | **20.8**                 | ** ** | **22.3** |   | 56,944 |   | 18.1 |   | 26.5 |   |
| Containers, Packaging and Glass            | ** ** | **18,731**               | ** **  | **9.1**                  | ** ** | **9.7** |   | 21,446 |   | 6.8 |   | 10.0 |   |
| Aerospace and Defense                      | ** ** | **17,099**               | ** **  | **8.3**                  | ** ** | **8.9** |   | 22,436 |   | 7.2 |   | 10.4 |   |
| Chemicals, Plastics and Rubber             | ** ** | **13,585**               | ** **  | **6.6**                  | ** ** | **7.0** |   | 21,420 |   | 6.8 |   | 10.0 |   |
| Buildings and Real Estate                  | ** ** | **10,220**               | ** **  | **4.9**                  | ** ** | **5.3** |   | 10,709 |   | 3.4 |   | 5.0 |   |
| Cargo Transport                            | ** ** | **9,394**                | ** **  | **4.5**                  | ** ** | **4.9** |   | 13,324 |   | 4.3 |   | 6.2 |   |
| Healthcare, Education and Childcare        | ** ** | **9,374**                | ** **  | **4.5**                  | ** ** | **4.9** |   | 33,605 |   | 10.7 |   | 15.6 |   |
| Automobile                                 | ** ** | **9,040**                | ** **  | **4.4**                  | ** ** | **4.7** |   | 14,436 |   | 4.6 |   | 6.7 |   |
| Telecommunications                         | ** ** | **7,831**                | ** **  | **3.8**                  | ** ** | **4.1** |   | 9,139 |   | 2.9 |   | 4.3 |   |
| Oil and Gas                                | ** ** | **4,943**                | ** **  | **2.4**                  | ** ** | **2.6** |   | 6,171 |   | 2.0 |   | 2.9 |   |
| Printing and Publishing                    | ** ** | **2,895**                | ** **  | **1.4**                  | ** ** | **1.5** |   | 3,158 |   | 1.0 |   | 1.5 |   |
| Diversified/Conglomerate Service           | ** ** | **—**               | ** **  | **—**               | ** ** | **—** |   | 23,585 |   | 7.5 |   | 11.0 |   |
| Electronics                                | ** ** | **—**               | ** **  | **—**               | ** ** | **—** |   | 6,594 |   | 2.1 |   | 3.1 |   |
| Personal, Food, and Miscellaneous Services | ** ** | **—**               | ** **  | **—**               | ** ** | **—** |   | 3,552 |   | 1.1 |   | 1.6 |   |
| Broadcasting and Entertainment             | ** ** | **—**               | ** **  | **—**               | ** ** | **—** |   | 1,934 |   | 0.6 |   | 0.9 |   |
| Beverage, Food and Tobacco                 | ** ** | **—**               | ** **  | **—**               | ** ** | **—** |   | 1,570 |   | 0.5 |   | 0.7 |   |
| **Total Investments**                      | ** ** | **$**                    | **206,858** | ** **               | **100.0**  | **%** | ** ** |   | $ | 313,930 |   | 100.0 | % | ** ** | ** ** |

 

Theinvestments at fair value were included in the following geographic regions ofthe United States at March 31, 2010 and 2009:

 
| ** **            | ** ** | **March 31, 2010** | ** **  | **March 31, 2009** | ** ** |
|-----------------------|------------|------------------------------|-------------|------------------------------|------------|
| ** **            | ** ** | ** **                   | ** **  | **Percentage of**       | ** ** | ** ** | ** ** | **Percentage of** | ** ** |
| ** **            | ** ** | **Fair Value**          | ** **  | **Total Investments**   | ** ** | **Net Assets** | ** ** | **Fair Value** | ** ** | **Total Investments** | ** ** | **Net Assets** | ** ** |
| Mid-Atlantic          | ** ** | **$**                        | **88,501**  | ** **                   | **42.8**   | **%** | **45.9** | **%** | $ | 119,622 |   | 38.1 | % | 55.7 | % |
| Midwest               | ** ** | **68,802**                   | ** **  | **33.3**                     | ** ** | **35.6** |   | 105,945 |   | 33.7 |   | 49.3 |   |
| Southeast             | ** ** | **25,493**                   | ** **  | **12.3**                     | ** ** | **13.2** |   | 40,512 |   | 12.9 |   | 18.9 |   |
| West                  | ** ** | **16,124**                   | ** **  | **7.8**                      | ** ** | **8.4** |   | 30,326 |   | 9.7 |   | 14.1 |   |
| Northeast             | ** ** | **7,938**                    | ** **  | **3.8**                      | ** ** | **4.1** |   | 17,525 |   | 5.6 |   | 8.1 |   |
| **Total Investments** | ** ** | **$**                        | **206,858** | ** **                   | **100.0**  | **%** | ** ** |   | $ | 313,930 |   | 100.0 | % | ** ** | ** ** |

 

Thegeographic region indicates the location of the headquarters for the Company’sportfolio companies. A portfolio company may have a number of other businesslocations in other geographic regions.

 

*Investment Principal Repayments*

 

Thefollowing table summarizes the contractual principal repayments and maturity ofthe Company’s investment portfolio by fiscal year, assuming no voluntaryprepayments, at March 31, 2010:

 
| **Fiscal  Year Ending March 31,**             | ** ** | **Amount** | ** **  |
|----------------------------------------------------|------------|------------|-------------|
| 2011                                               |       | $          | 29,280      |   |
| 2012                                               |       | 50,701     |        |
| 2013                                               |       | 22,122     |        |
| 2014                                               |       | 55,817     |        |
| 2015                                               |       | 21,291     |        |
| Thereafter                                         |       | 3,043      |        |
| **Total Contractual Repayments**                   |       | $          | 182,254     |   |
| Investment in equity securities                    |       | 45,322     |        |
| Unamortized premiums on debt securities            |       | (9         | )           |
| **Total investments held at  March 31, 2010** | ** ** | **$**      | **227,567** | ** ** |

 

**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 8, 2009, the Company’s Board ofDirectors approved the renewal of the Advisory Agreement through August 31,2010.

 

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

 
| ** **                                                                                          | ** ** | **Year  Ended March 31,** | ** **  |
|-----------------------------------------------------------------------------------------------------|------------|--------------------------------|-------------|
| ** **                                                                                          | ** ** | **2010**                       | ** **  | **2009** | ** ** |
| **Average total assets subject to  base management fee****(1)**                                     | ** ** | **$**                          | **224,200** |   | $ | 335,050 |   |
| Multiplied by annual  base management fee of 2%                                                     | ** ** | **2**                          | **%**       | 2 | % |
| **Unadjusted base management fee**                                                                  | ** ** | **4,484**                      |        | 6,701 |   |
|                                                                                                | ** ** | ** **                     |        |   |   |
| Reduction for loan servicing fees(2)                                                                | ** ** | **(3,747**                     | **)**       | (5,002 | ) |
| **Base management fee****(2)**                                                                      | ** ** | **$**                          | **737**     |   | $ | 1,699 |   |
|                                                                                                | ** ** | ** **                     |        |   |   |
| *Credits to base management fee  from Adviser:*                                                     | ** ** | ** **                     |        |   |   |
| Fee reduction for the waiver of 2.0% fee on senior  syndicated loans to 0.5%                        | ** ** | **(291**                       | **)**       | (1,613 | ) |
| Credit for fees received by Adviser from the portfolio  companies                                   | ** ** | **(433**                       | **)**       | (861 | ) |
| **Credit to base management fee  from Adviser**                                                     | ** ** | **(724**                       | **)**       | (2,474 | ) |
|                                                                                                | ** ** | ** **                     |        |   |   |
| **Net base management fee**                                                                         | ** ** | **$**                          | **13**      |   | $ | (775 | ) |
|                                                                                                | ** ** | ** **                     |        |   |   |
| **Incentive fee**(2)                                                                                | ** ** | **$**                          | **588**     |   | $ | — |   |
| Credit from voluntary,  irrevocable waiver issued by Adviser’s board of directors              | ** ** | **(102**                       | **)**       | — |   |
| **Net incentive fee**                                                                               | ** ** | **$**                          | **486**     |   | $ | — |   |
| ** **                                                                                          | ** ** | ** **                     |        |   |   |
| **Total credits to fees:**                                                                          | ** ** | ** **                     |        |   |   |
| Fee reduction for the voluntary, irrevocable  waiver of 2.0% fee on senior syndicated loans to 0.5% | ** ** | **$**                          | **(291**    | **)** | $ | (1,613 | ) |
| Credit for fees received by Adviser from portfolio  companies                                       | ** ** | **(433**                       | **)**       | (861 | ) |
| Incentive fee credit                                                                                | ** ** | **(102**                       | **)**       | — |   |
| **Credit to base management and  incentive fees from Adviser**(2)                                   | ** ** | **$**                          | **(826**    | **)** | $ | (2,474 | ) |

 

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(1)    Averagetotal assets subject to the base management fee is defined as total assets,including investments made with proceeds of borrowings, less any uninvestedcash or cash equivalents resulting from borrowings, valued at the end of thefour most recently completed quarters and appropriately adjusted for any shareissuances or repurchases during the current year.

(2)    Reflectedas a line item on the consolidated statement of operations located elsewhere inthis report.

 

**BaseManagement Fee**

 

The basemanagement fee was computed and payable quarterly and was assessed at an annualrate of 2.0%, computed on the basis of the value of the Company’s average grossassets at the end of the two most recently completed quarters, which are totalassets, including investments made with proceeds of borrowings, less anyuninvested cash or cash equivalents resulting from borrowings.  In addition, the following three items areadjustments to the base management fee calculation.

 

·      *LoanServicing Fees*

TheAdviser also services the loans held by Business Investment, in return forwhich it receives a 2.0% annual fee based on the monthly aggregate outstandingbalance of loans pledged under the Company’s line of credit. Since the Companyowns these loans, all loan servicing fees paid to the Adviser are treated asreductions directly against the 2.0% base management fee under the AdvisoryAgreement.  For the years ended March 31,2010 and 2009, the Company recorded loan servicing fees due to the Adviser of$3.7 million and $5.0 million, respectively, all of which were deducted againstthe 2.0% base management fee in order to derive the base management fee lineitem in the accompanying consolidated statements of operations.

 

·      *Senior Syndicated Loan Fee Waiver*

The Company’sBoard of Directors accepted an unconditional and irrevocable voluntary waiverfrom the Adviser to reduce the annual 2.0% base management fee on seniorsyndicated loan participations to 0.5%, to the extent that proceeds resultingfrom borrowings were used to purchase such syndicated loan participations, forthe years ended March 31, 2010 and 2009. For the years ended March 31, 2010 and 2009, the Company recordedwaivers related to investments in senior syndicated loan participations of $291and $1,613, respectively, all of which were credited against the 2.0% basemanagement fee.

 

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·      *PortfolioCompany Fees*

Underthe Advisory Agreement, the Adviser has also provided, and continues toprovide, managerial assistance and other services to the Company’s portfoliocompanies and may receive fees for services other than managerialassistance.  50% of certain of these fees are credited against thebase management fee that the Company would otherwise be required to pay to theAdviser.  For the years ended March 31,2010 and 2009, the Company recorded credits for fees received by Adviser fromportfolio companies of $433 and $861, respectively, all of which were creditedagainst the 2.0% base management fee.

 

**Incentive Fee**

 

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 the Company’s net assets (the “hurdle rate”).The Company will pay the Adviser an income incentive fee with respect to theCompany’s pre-incentive fee net investment income in each calendar quarter asfollows:

 

·      no incentive fee in anycalendar quarter in which its pre-incentive fee net investment income does notexceed the hurdle rate (7.0% 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 and cumulativeaggregate realized capital losses since the Company’s inception, and theaggregate unrealized capital depreciation as of the date of the calculation, asapplicable, with respect to each of the investments in the Company’s portfolio.For this purpose,cumulative aggregate realized capital gains, if any, equals the sum of thedifferences between the net sales price of each investment, when sold, and theoriginal cost of such investment since our inception. Cumulative aggregaterealized capital losses equals the sum of the amounts by which the net salesprice of each investment, when sold, is less than the original cost of suchinvestment since our inception. Aggregate unrealized capital depreciationequals the sum of the difference, if negative, between the valuation of eachinvestment as of the applicable calculation date and the original cost of suchinvestment. At the end of the applicable year, the amount of capital gains thatserves as the basis for our calculation of the capital gains incentive feeequals the cumulative aggregate realized capital gains less cumulativeaggregate 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.

 

Becausepre-incentive fee net investment income was above the hurdle rate of 1.75% ofnet assets for the quarter ended December 31, 2009, the Company recordedan incentive fee of $588.  The Adviser’sboard of directors subsequently irrevocably waived and credited $102 of theincentive fee, resulting in a net incentive fee for the fiscal year ended March 31,2010 of $486.  Previously, noincome-based incentive fees had been recorded for the Company from inceptionthrough September 30, 2010. No capital gains incentive fee had beenrecorded for the Company from inception through March, 31, 2010, as cumulativeunrealized capital depreciation exceeded cumulative realized capital gains netof cumulative realized capital losses.

 

*Administration Agreement*

 

The Company has enteredinto an administration agreement (the “Administration Agreement”) withGladstone Administration, LLC (the “Administrator”), an affiliate of theAdviser 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 limited to, rent and thesalaries and benefits expenses of the Company’s chief financial officer, chiefcompliance officer, treasurer, internal counsel and their respective staffs.The Company’s allocable portion of expenses is derived by multiplying theAdministrator’s total allocable expenses by the percentage of the Company’saverage total assets (the total assets at the beginning of each quarter) incomparison to the average total assets of all companies managed by the Adviserunder similar agreements. On July 8, 2009, the Company’s Board ofDirectors approved the renewal of its Administration Agreement with theAdministrator through August 31, 2010. The Company recorded fees to the Administrator on theconsolidated statements of operations of $676 and $821 for the years ended March 31,2010 and 2009, respectively.

 

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*Related Party Fees Due*

 

Amountsdue to related parties on the accompanying consolidated statements of assetsand liabilities were as follows:

 
| ** **                                     | ** ** | **As  of March 31,** | ** ** |
|------------------------------------------------|------------|---------------------------|------------|
| ** **                                     | ** ** | **2010**                  | ** ** | **2009** | ** ** |
| Unpaid base management fee due to Adviser      | ** ** | **$**                     | **16**     |   | $ | (114 | ) |
| Unpaid loan servicing fee due to Adviser       | ** ** | **219**                   |       | 301 |   |
| Unpaid incentive fee due to Adviser            | ** ** | **486**                   |       | — |   |
| **Total due to Adviser**                       | ** ** | **$**                     | **721**    |   | $ | 187 |   |
| ** **                                     | ** ** | ** **                |       |   |   |
| Unpaid administration fee due to Administrator | ** ** | **$**                     | **149**    |   | $ | 179 |   |
| ** **                                     | ** ** | ** **                |       |   |   |
| **Total related party fees due**               | ** ** | **$**                     | **870**    |   | $ | 366 |   |

 

**Note 5.Borrowings**

 

*Line ofCredit*

 

OnApril 14, 2009, the Company, through its wholly-owned subsidiary, BusinessInvestment, entered into a second amended and restated credit agreement providingfor a $50.0 million revolving line of credit (the “Credit Facility”) arrangedby Branch Banking and Trust Company (“BB&T”) as administrative agent. KeyEquipment Finance Inc. also joined the Credit Facility as a committedlender.  In connection with entering intothe Credit Facility, the Company borrowed $43.8 million under the CreditFacility to make a final payment in satisfaction of all unpaid principal andinterest owed to Deutsche Bank AG under a prior line of credit.  The Credit Facility may be expanded up to$125.0 million through the addition of other committed lenders to thefacility.  On April 13, 2010, theCompany, through Business Investment, entered into a third amended and restatedcredit agreement providing for a $50.0 million, two year revolving line ofcredit, which extended the maturity date of the Credit Facility to April 13,2012. If the Credit facility is not renewed or extended by April 13, 2012,all unpaid principal and interest will be due and payable within one year ofthe maturity date. SeeNote 14. “Subsequent Events” for further information regarding the renewal ofthe Credit Facility. Prior to the April 13, 2010 renewal, advances underthe Credit Facility generally bear interest at the 30-day London InterbankOffered Rate (“LIBOR”) (subject to a minimum rate of 2.0%), plus 5.0% perannum, with a commitment fee of 0.75% per annum on undrawn amounts.  Interest is payable monthly during the termof the Credit Facility.  Availableborrowings are subject to various constraints imposed under the CreditFacility, based on the aggregate loan balance pledged by BusinessInvestment.  As of March 31, 2010,the Company has approximately $27.8 million of principal outstanding withapproximately $20.9 million of availability under the line of credit.

 

TheCredit Facility contains covenants that require Business Investment to maintainits status as a separate legal entity; prohibit certain significant corporatetransactions (such as mergers, consolidations, liquidations or dissolutions);and restrict material changes to the Company’s credit and collection policieswithout lenders consent. The facility also limits payments on distributions tothe aggregate net investment income for the prior twelve months preceding April 2010.  The Company is also subject to certainlimitations on the type of loan investments it can make, including restrictionson geographic concentrations, sector concentrations, loan size, dividendpayout, payment frequency and status, average life and lien property.  The Credit Facility also requires the Companyto comply with other financial and operational covenants, which require theCompany to, among other things, maintain certain financial ratios, includingasset and interest coverage a minimum net worth, and a minimum number ofobligors required in the borrowing base of the credit agreement.  Additionally, the Company is subject to aperformance guaranty that requires the Company to maintain a minimum net worthof $169.0 million plus 50.0% of all equity and subordinated debt raised after April 14,2009, to maintain “asset coverage” with respect to “senior securitiesrepresenting indebtedness” of at least 200%, in accordance with Section 18of the 1940 Act, and to maintain its status as a BDC under the 1940 Act and asa RIC under the Code.  As of March 31,2010, the Company was in compliance with all covenants.

 

*Short-TermLoan*

 

Similarto previous quarter ends for the year ended March 31, 2010, the Companypurchased $85.0 million of short-term United States Treasury securities throughJefferies on March 30, 2010.  Thesecurities were purchased with $10.0 million in funds drawn on the CreditFacility and the proceeds from a $75.0 million short-term loan from Jefferies,with an effective annual interest rate of approximately 0.67%.  On April 1, 2010, when the securitiesmatured, the Company repaid the $75.0 million loan from Jefferies in full, and,on April 2, 2010, repaid the $10.0 million drawn on the Credit Facilityfor the transaction.

 

*Fair Value*

 

TheCompany elected to apply ASC 825, “FinancialInstruments,” specifically for the Credit Facility and short-term loan,which was consistent with its application of ASC 820 to its investments.  The Company estimated the fair value of theCredit Facility using estimates of value provided by an independent third partyand its own assumptions in the absence of observable market data, includingestimated remaining life, credit party risk, current market yield and interestrate spreads of similar securities as of the measurement

 

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date.  Due to the three day duration of theshort-term loan, cost approximated fair value. The following table presents the Credit Facility and short-term loancarried at fair value as of March 31, 2010, by caption on the accompanyingconsolidated statements of assets and liabilities for each of the three levelsof hierarchy established by ASC 820:

** **
| ** **      | ** ** | **As  of March 31, 2010** | ** ** |
|-----------------|------------|--------------------------------|------------|
| ** **      | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | **Total  Fair Value** | ** ** |
| ** **      | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | **Reported  in** | ** ** |
| ** **      | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | **Consolidated  Statement of** | ** ** |
| ** **      | ** ** | **Level  1**                   | ** ** | **Level  2** | ** ** | **Level  3** | ** ** | **Assets  and Liabilities** | ** ** |
| Credit Facility |       | $                              | —     |   | $ | — |   | $ | 27,812 |   | $ |  27,812 |   |
| Short-Term Loan |       | —                         |       | — |   | 75,000 |   | 75,000 |   |
| **Total**       | ** ** | **$**                          | **—** | ** ** | **$** | **—** | ** ** | **$** | **102,812** | ** ** | **$** | ** 102,882** | ** ** |

 
| ** **                                        | ** ** | ** **   | ** ** | ** **     | ** ** | **Total  Fair Value**          | ** ** |
|---------------------------------------------------|------------|--------------|------------|----------------|------------|--------------------------------|------------|
| ** **                                        | ** ** | ** **   | ** ** | ** **     | ** ** | **Reported  in**               | ** ** |
| ** **                                        | ** ** | **Credit**   | ** ** | **Short-Term** | ** ** | **Consolidated  Statement of** | ** ** |
| ** **                                        | ** ** | **Facility** | ** ** | **Loan**       | ** ** | **Assets  and Liabilities**    | ** ** |
| **Year ended March 31, 2010:**               | ** ** | ** **   | ** ** | ** **     | ** ** | ** **                     | ** ** |
| Fair value at  March 31, 2009(1)             |       | $            | 110,265    |           | $          | —                         |       | $ | 110,265 |   |
| Borrowings                                        |       | 107,500      |       | 290,000        |       | 397,500                        |       |
| Repayments                                        |       | (189,965     | )          | (215,000       | )          | (404,965                       | )          |
| Net unrealized appreciation of Credit Facility(2) |       | 12           |       | —         |       | 12                             |       |
| **Fair value at March 31,  2010**            | ** ** | **$**        | **27,812** | ** **     | **$**      | **75,000**                     | ** ** | **$** | ** 102,812** | ** ** |

 

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(1)**   **ASC 825 was not adopted untilthe second quarter of fiscal year 2010; therefore, the Credit Facility is shownat its principal balance outstanding at March 31, 2009 in the table above.

(2)**   **Unrealized appreciation of$12 is reported on the accompanying consolidated statements of operations forthe twelve months ended March 31, 2010.

 

The fair value of thecollateral under the Credit Facility was approximately $201.8 million and$309.1 million at March 31, 2010 and 2009, respectively. The fair value ofthe collateral under the short-term loan was approximately $85.0 million as of March 31,2010.

 

**Note 6. Interest Rate Cap Agreements**

 

InMay 2009, the Company cancelled its interest rate cap agreement withDeutsche Bank AG and entered into an interest rate cap agreement with BB&Tthat effectively limits the interest rate on a portion of the borrowings underthe line of credit pursuant to the terms of the Credit Facility. The interestrate cap has a notional amount of $45.0 million at a cost of approximately$39.  At March 31, 2010, theinterest rate cap agreement had a nominal fair market value. The Companyrecords changes in the fair market value of the interest rate cap agreementquarterly based on the current market valuation at quarter end as unrealizeddepreciation or appreciation on derivative on the Company’s consolidatedstatement of operations. The interest rate cap agreement expires in May 2011.The agreement provides that the Company’s interest rate or cost of funds on aportion of its borrowings will be capped at 6.5% when the LIBOR rate is inexcess of 6.5%.  In April 2010, theCompany entered into a forward interest rate cap agreement for a notionalamount of $45 million with BB&T.  See Note 14. “Subsequent Events” forfurther information regarding this transaction.

 

Theuse of a cap involves risks that are different from those associated withordinary portfolio securities transactions. Cap agreements may be considered tobe illiquid. Although the Company will not enter into any such agreementsunless it believes that the other party to the transaction is creditworthy, theCompany does bear the risk of loss of the amount expected to be received undersuch agreements in the event of default or bankruptcy of the agreementcounterparty.

 

**Note 7. Common Stock**

 

Asof March 31, 2010 and 2009, 100,000,000 shares of common stock, $0.001 parvalue per share, were authorized and 22,080,133 shares of common stock wereoutstanding.

 

*RegistrationStatement*

 

OnJuly 21, 2009, the Company filed a registration statement on Form N-2(Registration No. 333-160720) that was amended on October 2, 2009.The SEC declared the registration statement effective on October 8, 2009,and such registration statement will permit the Company to issue, through oneor more transactions, an aggregate of $300.0 million in securities, consistingof common stock, preferred stock, subscription rights, debt securities andwarrants to purchase common stock, or a combination of these securities**.**

 

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**Note 8. Net Decrease in Net Assets Resulting fromOperations per Share**

 

Thefollowing table sets forth the computation of basic and diluted net decrease innet assets resulting from operations per share for the years ended March 31,2010 and 2009:

 
| ** **                                                                                      | ** ** | **Year  Ended March 31,** | ** **  |
|-------------------------------------------------------------------------------------------------|------------|--------------------------------|-------------|
| ** **                                                                                      | ** ** | **2010**                       | ** **  | **2009** | ** ** |
| Numerator for basic and diluted net decrease in net  assets resulting from operations per share | ** ** | **$**                          | **(11,071** | **)** | $ | (11,449 | ) |
| Denominator for basic and diluted weighted average  shares                                      | ** ** | **22,080,133**                 |        | 21,545,936 |   |
| **Basic and diluted net decrease  in net assets per share resulting from operations**           | ** ** | **$**                          | **(0.50**   | **)** | $ | (0.53 | ) |

 

**Note 9. Distributions**

 

TheCompany’s Board of Directors declared the following monthly distributions pershare for the fiscal years 2010 and 2009:

 
| **Declaration  Date** | ** ** | **Record Date**          | ** ** | **Payment Date**            | ** ** | **Distribution  per Share** | ** **     |
|-----------------------|------------|--------------------------|------------|-----------------------------|------------|-----------------------------|----------------|
| April 16, 2009   |       | April 27,  2009     |       | May 8,  2009           | ** ** | **$**                       | ** 0.04** | ** ** |
| April 16, 2009   |       | May 20,  2009       |       | May 29,  2009          | ** ** | **0.04**                    | ** **     |
| April 16, 2009   |       | June 22,  2009      |       | June 30,  2009         | ** ** | **0.04**                    | ** **     |
| July 8, 2009     |       | July 23,  2009      |       | July 31,  2009         | ** ** | **0.04**                    | ** **     |
| July 8, 2009     |       | August 21,  2009    |       | August 31,  2009       | ** ** | **0.04**                    | ** **     |
| July 8, 2009     |       | September 22,  2009 |       | September 30,  2009    | ** ** | **0.04**                    | ** **     |
| October 6, 2009  |       | October 22,  2009   |       | October 30,  2009      | ** ** | **0.04**                    | ** **     |
| October 6, 2009  |       | November 19,  2009  |       | November 30,  2009     | ** ** | **0.04**                    | ** **     |
| October 6, 2009  |       | December 22,  2009  |       | December 31,  2009     | ** ** | **0.04**                    | ** **     |
| January 12, 2010 |       | January 21,  2010   |       | January 29,  2010      | ** ** | **0.04**                    | ** **     |
| January 12, 2010 |       | February 18,  2010  |       | February 26,  2010     | ** ** | **0.04**                    | ** **     |
| January 12, 2010 |       | March 23,  2010     |       | March 31,  2010        | ** ** | **0.04**                    | ** **     |
|                  |       |                     | ** ** | **Total Fiscal Year 2010:** | ** ** | **$**                       | ** 0.48** | ** ** |

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

 

Aggregatedistributions declared and paid for the years ended March 31, 2010 and2009 were approximately $10.6 million and $20.8 million, respectively,which were declared based on an estimate of net investment income for thosefiscal years ended. Distributions declared for the year ended March 31,2010 equaled net investment income, while, for the year ended March 31,2009, distributions exceeded net investment income by approximately$7.4 million. Accordingly, a portion of the distributions declared duringthe year ended March 31, 2009 was treated as a return of capital to theCompany’s stockholders.

 

**Distribution of Income and Gains**

 

Netinvestment income of the Company is declared and distributed to stockholdersmonthly. Net realized gains from investment transactions, in excess ofavailable capital loss carryforwards, would be taxable to the Company if notdistributed, and, therefore, generally will be distributed at least annually.

 

Thetiming and characterization of certain income and capital gains distributionsare determined annually in accordance with federal tax regulations, which maydiffer from GAAP. These differences primarily relate to items recognized asincome for financial

 

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statementpurposes and realized gains for tax purposes. As a result, net investmentincome and net realized gain (loss) on investment transactions for a reportingperiod may differ significantly from distributions during such period.Accordingly, the Company may periodically make reclassifications among certainof its capital accounts without impacting the net asset value of the Company.Additionally, the following tables also include these adjustments for the yearsended March 31, 2010 and March 31, 2009, respectively.

 

TheCompany’s components of net assets on a tax-basis were as follows:

 
| ** **                                 | ** ** | **Year  Ended March 31,** | ** **  |
|--------------------------------------------|------------|--------------------------------|-------------|
| ** **                                 | ** ** | **2010**                       | ** **  | **2009** | ** ** |
| Capital loss carryforward                  | ** ** | **$**                          | **(43,507** | **)** | $ | (6,724 | ) |
| Post-October tax loss                 |       | —                         |        | (807 | ) |
| Other                                      | ** ** | **18**                         |        | 18 |   |
| Net unrealized depreciation of investments | ** ** | **(20,710**                    | **)**       | (35,015 | ) |
| Net unrealized depreciation of derivative  | ** ** | **(39**                        | **)**       | (53 | ) |
| Net unrealized depreciation of borrowings  | ** ** | **(12**                        | **)**       | — |   |
| Common stock                               | ** ** | **22**                         |        | 22 |   |
| Paid-in-capital                            | ** ** | **257,206**                    |        | 257,361 |   |
| **Net assets**                             | ** ** | **$**                          | **192,978** |   | $ | 214,802 |   |

 

TheCompany intends to retain realized gains to the extent of available capitalloss carryforwards. At March 31, 2010 and 2009, the Company had $36,783and $6,430 of capital loss carryforwards that expire in 2018 and 2017,respectively.

 

Forthe years ended March 31, 2010 and 2009, the Company recorded thefollowing adjustments to reflect tax character. Adjustments to paid-in-capitalrelate primarily to distributions in excess of net investment income. Resultsof operations and net assets were not affected by these revisions.

 
| ** **                          | ** ** | **Year  Ended March 31,** | ** ** |
|-------------------------------------|------------|--------------------------------|------------|
| ** **                          | ** ** | **2010**                       | ** ** | **2009** | ** ** |
| Undistributed net investment income | ** ** | **$**                          | **—** |   | $ | 7,368 |   |
| Paid-in-capital                     | ** ** | **—**                     |       | (7,368 | ) |
|                                     |            |                                |            |  |  |  |  |

 

Thetax character of distributions paid to stockholders by the Company issummarized as follows:

 
| ** **                           | ** ** | **Tax Year  Ended March 31,** | ** ** |
|--------------------------------------|------------|------------------------------------|------------|
| ** **                           | ** ** | **2010**                           | ** ** | **2009** | ** ** |
| Distributions from ordinary income   | ** ** | **$**                              | **10,598** |   | $ | 13,388 |   |
| Distributions from return of capital | ** ** | **—**                         |       | 7,368 |   |
| **Total Distributions**              | ** ** | **$**                              | **10,598** |   | $ | 20,756 |   |

 

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

 

TheCompany intends to continue to qualify for treatment as a RIC undersubchapter M of the Code.  As a RIC, the Company will not besubject to federal income tax on the portion of its taxable income and gainsdistributed to stockholders. To qualify as a RIC, the Company is required todistribute at least 90% of its investment company taxable income, as defined bythe Code. The Company intends to distribute at least 90% of its ordinaryincome, and, as a result, no income tax provisions have been recorded. TheCompany may, but does not intend to, pay out a return of capital. The Companymay also be subject to federal excise tax if it does not distribute at least98% of its investment company taxable income in any calendar year and 98% ofits capital gain net income in any calendar year.  The Company must also meet the asset diversification threshold underthe Code’s rules applicable to a RIC, which is referred toherein as the 50% threshold.  For fiscal year 2010, for each of June 30,2009, September 30, 2009, December 31, 2009 and March 31, 2010(the “measurements dates”), the Company satisfied the 50% thresholdthrough the purchase of short-term qualified securities, which was fundedprimarily through a short-term loan agreement. Subsequent to the measurementdates, the short-term qualified securities matured and the Company repaid theshort-term loan, at which time the Company again fell below the 50%threshold.  As of the date of thisfiling, the Company remains below the 50% threshold.  Thus, while the Company currently qualifiesas a RIC despite its current inability to meet the 50% threshold and potentialinability to do so in the future, if the Company makes any additional investmentsbefore regaining compliance with the asset diversification test, its RIC statuswill be threatened.  Failure to meet the 50% threshold alone willnot result in loss of the Company’s RIC status in its current situation.  In circumstances where the failure to meetthe 50% threshold as of a quarterly measurement date is the result offluctuations in the value of assets, including as a result of the sale ofassets, as in the Company’s present situation, the Company is still deemed tohave satisfied the asset diversification test and, therefore, maintain its RICstatus, as long as it has not made any new investments, including additionalinvestments in its existing portfolio companies (such as advances underoutstanding lines of credit), since the time that it fell below the 50%threshold.  If the Company makes aninvestment and does not regain compliance with the 50% threshold prior to thenext quarterly measurement date following the investment, it would have thirtydays to “cure” its failure of the asset diversification test to avoid a loss ofRIC status. Potential cures for failure of the asset diversification testinclude raising additional equity or debt capital or changing the composition 

 

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of the Company’s assets, which could include fullor partial divestitures of investments, such that the Company would once againmeet or exceed the 50% threshold.

 

**Note 11. Commitments and Contingencies**

 

At March 31,2010, the Company was not party to any signed term sheets for potentialinvestments.

 

InOctober 2008, the Company executed a guaranty of a vehicle financefacility agreement (the “Finance Facility”) between Ford Motor Credit Company (“FMC”)and ASH, one of the Company’s Control investments.  The Finance Facility provides ASH with a lineof credit of up to $250 for component Ford parts used by ASH to build truckbodies under a separate contract.  Titleand ownership of the parts are retained by Ford. The guaranty of the FinanceFacility will expire upon termination of the separate parts supply contractwith Ford or upon replacement of the Company as guarantor.  The Finance Facility is secured by all of theassets of Business Investment.  As of March 31,2010, the Company has not been required to make any payments on the guaranty ofthe Finance Facility, and the Company considers the credit risk to be remote.

 

InFebruary 2010, the Company executed a guaranty of a wholesale financingfacility agreement (the “Floor Plan Facility”) between Agricredit Acceptance,LLC (“Agricredit”) and CCE, one of the Company’s Control Investments.  The Floor Plan Facility provides CCE withfinancing of up to $2.0 million to bridge the time and cash flow gap between theorder and delivery of golf cars to customers. The guaranty expires in February 2011, unless it is renewed by theCompany, CCE and Agricredit.  Inconnection with this guaranty, the Company received a premium of $84 from CCE.As of March 31, 2010, the Company has not been required to make anypayments on the guaranty of the Floor Plan Facility, and the Company considersthe credit risk to be remote.

 

**Note 12. Financial Highlights**

** **
| ** **                                                      | ** ** | **Year Ended March 31,** | ** **  |
|-----------------------------------------------------------------|------------|-------------------------------|-------------|
| ** **                                                      | ** ** | **2010**                      | ** **  | **2009** | ** ** | **2008** | ** ** |
| Per Share Data**(1)**                                           |       |                          |        |   |   |   |   |
| Net asset value at beginning of year                            | ** ** | **$**                         | **9.73**    |   | $ | 12.47 |   | $ | 13.46 |   |
|                                                            | ** ** | ** **                    |        |   |   |   |   |
| *Income from investment  operations*                            | ** ** | ** **                    |        |   |   |   |   |
| Net investment income(2)                                        | ** ** | **0.48**                      |        | 0.62 |   | 0.79 |   |
| Realized loss on sale of investments(2)                         | ** ** | **(1.63**                     | **)**       | (0.23 | ) | (0.15 | ) |
| Net unrealized depreciation of investments(2)                   | ** ** | **0.65**                      |        | (0.92 | ) | (0.70 | ) |
| Total from investment operations                                | ** ** | **(0.50**                     | **)**       | (0.53 | ) | (0.06 | ) |
|                                                            | ** ** | ** **                    |        |   |   |   |   |
| *Distributions from:*                                           | ** ** | ** **                    |        |   |   |   |   |
| Net investment income                                           | ** ** | **(0.48**                     | **)**       | (0.62 | ) | (0.78 | ) |
| Tax return on capital                                           |       | —                        |        | (0.34 | ) | (0.15 | ) |
| Total distributions(3)                                          | ** ** | **(0.48**                     | **)**       | (0.96 | ) | (0.93 | ) |
|                                                            | ** ** | ** **                    |        |   |   |   |   |
| Shelf registration offering costs                               | ** ** | **(0.01**                     | **)**       | (0.03 | ) | — |   |
| Effect on distribution of rights offering after  record date(4) |       | —                        |        | (1.22 | ) | — |   |
| Net asset value at end of year                                  | ** ** | **$**                         | **8.74**    |   | $ | 9.73 |   | $ | 12.47 |   |
|                                                            | ** ** | ** **                    |        |   |   |   |   |
| Per share market value at beginning of year                     | ** ** | **$**                         | **3.67**    |   | $ | 9.32 |   | $ | 14.87 |   |
| Per share market value at end of year                           | ** ** | **5.98**                      |        | 3.82 |   | 9.41 |   |
| Total return(5)                                                 | ** ** | **79.80**                     | **%**       | (51.65 | )% | (31.54 | )% |
| Shares outstanding at end of year                               | ** ** | **22,080,133**                |        | 22,080,133 |   | 16,560,100 |   |
|                                                            | ** ** | ** **                    |        |   |   |   |   |
| Statement of Assets and Liabilities Data:                       | ** ** | ** **                    |        |   |   |   |   |
| Net assets at end of year                                       | ** ** | **$**                         | **192,978** |   | $ | 214,802 |   | $ | 206,445 |   |
| Average net assets(6)                                           | ** ** | **191,112**                   |        | 230,738 |   | 219,626 |   |
|                                                            | ** ** | ** **                    |        |   |   |   |   |
| Senior Securities Data:                                         | ** ** | ** **                    |        |   |   |   |   |
| Total borrowings                                                | ** ** | **$**                         | **102,812** |   | $ | 110,265 |   | $ | 144,835 |   |
| Asset coverage ratio(7)                                         | ** ** | **281**                       | **%**       | 293 | % | 242 | % |
| Average coverage per unit(8)                                    | ** ** | **$**                         | **2,814**   |   | $ | 2,930 |   | $ | 2,422 |   |
|                                                            | ** ** | ** **                    |        |   |   |   |   |
| Ratios/Supplemental Data:                                       | ** ** | ** **                    |        |   |   |   |   |
| Ratio of expenses to average net assets(9), (10)                | ** ** | **5.76**                      | **%**       | 6.46 | % | 8.04 | % |
| Ratio of net expenses to average net assets(9), (11)            | ** ** | **5.33**                      | **%**       | 5.38 | % | 6.76 | % |
| Ratio of net investment income to average net  assets(9)        | ** ** | **5.55**                      | **%**       | 5.80 | % | 5.94 | % |

 

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| (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 dividends reinvested in  accordance with the terms of the Company’s dividend reinvestment plan.                                    |
| (6)  |   | Calculated  using the average of the balance of net assets at the end of each month of  the reporting period.                                                                                                                                                                         |
| (7)  |   | As  a business development company, the Company is generally required to maintain  an asset coverage ratio of at least 200% of total consolidated assets, less  all liabilities and indebtedness not represented by senior securities, to  total borrowings and guaranty commitments. |
| (8)  |   | Asset  coverage per unit is the asset coverage ratio expressed in terms of dollar  amounts per one thousand of indebtedness.                                                                                                                                                          |
| (9)  |   | Amounts  are annualized.                                                                                                                                                                                                                                                              |
| (10) |   | Ratio  of expenses to average net assets is computed using expenses before credits  from the Adviser.                                                                                                                                                                                 |
| (11) |   | Ratio  of net expenses to average net assets is computed using total expenses net of  credits to the management fee.                                                                                                                                                                  |

 

**Note 13. Selected Quarterly Data (Unaudited)**

 
| ** **                                                                                                                    | ** ** | **Year  Ended March 31, 2010**    | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                                    | ** ** | **Quarter  Ended  June 30, 2009** | ** ** | **Quarter  Ended  September 30, 2009** | ** ** | **Quarter  Ended  December 31, 2009** | ** ** | **Quarter  Ended  March 31, 2010** | ** ** |
| Total investment income                                                                                                       |       | $                                      | 5,169      |   | $ | 4,943 |   | $ | 5,921 |   | $ | 4,752 |   |
| Net investment income                                                                                                         |       | 2,445                                  |       | 2,371 |   | 3,073 |   | 2,709 |   |
| Net (decrease) increase in net assets resulting  from operations                                                              |       | (9,190                                 | )          | (18,090 | ) | (4,420 | ) | 20,629 |   |
| Net (decrease) increase in net assets resulting  from operations per weighted average common share (basic & diluted) |       | $                                      | (0.42      | ) | $ | (0.82 | ) | $ | (0.20 | ) | $ | 0.93 |   |

 
| ** **                                                                                                                    | ** ** | **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 | ) |

 

**Note 14. Subsequent Events**

 

***Renewed CreditFacility***

 

On April 13, 2010,the Company entered into a third amended and restated credit agreement throughits wholly-owned subsidiary, Business Investment, providing for a $50.0 millionrevolving line of credit arranged by Branch Banking and Trust Company asadministrative agent. Key Equipment Finance Inc. also joined the CreditFacility as a committed lender. Subject to certain terms and conditions, 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 13, 2012 (the “Maturity Date”),and if it is not renewed or extended by the Maturity Date, all principal andinterest will be due and payable on or before April 13, 2013 (one yearafter the Maturity Date).  Advances underthe Credit Facility will generally bear interest at the 30 day LIBOR rate(subject to a minimum rate of 2.0%), plus 4.5% per annum, with a commitment feeof 0.50% per annum on undrawn amounts when advances outstanding are above 50.0%of the commitment and will be 1.0% on undrawn amounts if the advancesoutstanding are below 50.0% of the commitment. In connection with the Credit Facility, the Company paid an upfront feeof 1.0% of the committed amount.

 

Interest is payablemonthly during the term of the Credit Facility. Available borrowings aresubject to various constraints imposed under the Credit Agreement, based on theaggregate loan balance pledged by Business Investment, which varies as loansare added and repaid, regardless of whether such repayments are earlyprepayment or are made as contractually required.

 

The Credit Facilitycontains covenants that require Business Investment to maintain its status as aseparate entity; prohibit certain significant corporate transactions (such asmergers, consolidations, liquidations or dissolutions); and restrict materialchanges to the Company’s credit and collection policies. The facility alsorestricts some of the terms and provisions (including interest rates, terms tomaturity and payments schedules) and limits the borrower and industryconcentrations of loans that are eligible to secure advances as 

 

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well as limits onpayments of distributions. As of May 21, 2010, Business Investment was incompliance with all of the facility covenants. As of May 21, 2010 therewas $11.1 million of borrowings outstanding on the Credit Facility at aninterest rate of approximately 6.5% and the remaining borrowing capacity underthe Credit Facility was approximately $37.6 million.

 

The administrative agentalso 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 21,2010, the amount due from the custodian was $302.

 

The Adviser services theloans pledged under the Credit Facility. As a condition to this servicingarrangement, the Company executed a performance guaranty pursuant to which itguaranteed that the Adviser would comply fully with all of its obligationsunder the Credit Facility. The loan documents require the Company to maintain aminimum net worth of $155.0 million plus 50% of all equity and subordinateddebt raised after April 13, 2010 and to maintain “asset coverage” withrespect to “senior securities representing indebtedness” of at least 200%, inaccordance with Section 18 of the 1940 Act. As of May 21, 2010, theCompany was in compliance with the covenants under the performance guaranty.

 

***Portfolio Activity***

 

DuringApril and May 2010, the Company executed the following transactionswith certain of its portfolio companies:

 

·                  In April 2010, the Company received fullrepayment of its senior syndicated loan to Interstate FiberNet, Inc.  As of March 31, 2010, both fair valueand cost approximated net proceeds received of approximately $6.8 million.

 

·                  In April 2010, the Company executed aguaranty of vendor recourse for up to $1.8 million in individual customertransactions (the “Recourse Facility”) between Wells Fargo Financial Leasing, Inc.(“WFFL”) and CCE, one of its Control Investments.  The Recourse Facility provides CCE with theability to provide vendor recourse up to a limit of $2 million of transactionswith long-time customers who lack the financial history to qualify for thirdparty financing.  In connection with thisguaranty, the Company received a premium of $73 from CCE.

 

·                  In May 2010, the Company restructuredASH to defer all past-due interest owed until maturity.

 

·                  In May 2010, the Company disbursed $0.4 million to Acme Cryogenics, Inc. (“ACME”)in the form of additional debt to the existing senior subordinated term debt,the proceeds of which were used to pay down the facility due to the seniorlender of ACME.

 

·                  In May 2010,the Company received full repayment of approximately $2.9 million of its seniorterm A loan to Cavert.  There was no prepayment penalty associated withthis repayment.

 

### ***Short-TermLoan***

###  

OnMarch 30, 2010, the Company purchased $85.0 million of short-term UnitedStates Treasury securities through Jefferies. The securities were purchased with $10.0 million in funds drawn on theCredit Facility and the proceeds from a $75.0 million short-term loan fromJefferies with an effective annual interest rate of approximately 0.67%.  On April 1, 2010, when the securitiesmatured, the Company repaid the $75.0 million loan from Jefferies in full, and,on April 2, 2010, repaid the $10.0 million drawn on the Credit Facilityfor the transaction.

 

***Distributions***

 

OnApril 7, 2010, the Company’s Board of Directors declared the followingmonthly distributions:

 
| **Record  Date**    | ** ** | **Payment Date**     | ** ** | **Distribution per Share** | ** ** |
|---------------------|------------|----------------------|------------|----------------------------|------------|
| April 22, 2010 |       | April 30,  2010 |       | $                          | 0.04       |   |
| May 20, 2010   |       | May 28,  2010   |       | 0.04                       |       |
| June 22, 2010  |       | June 30,  2010  |       | 0.04                       |       |
|                     |            |                      |            |                            |            |  |

 

***Interest Rate Cap Agreement***

 

In April 2010, the Company entered into a forward interest ratecap agreement, effective May 2011 and expiring in May 2012, for anotional amount of $45.0 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 $41 in conjunction with this agreement.

 

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

 

Notapplicable.

 

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**Item 9A. Controls and Procedures**

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

 

Asof March 31, 2010 (the end of the period covered by this report), we,including our chief executive officer and chief financial officer, evaluated theeffectiveness and design and operation of our disclosure controls andprocedures. Based on that evaluation, our management, including the chiefexecutive officer and chief financial officer, concluded that our disclosurecontrols and procedures were effective in timely alerting management, includingthe chief executive officer and chief financial officer, of materialinformation about us required to be included in periodic SEC filings. However,in evaluation of the disclosure controls and procedures, management recognizedthat any controls and procedures, no matter how well designed and operated, canprovide only reasonable assurance of achieving the desired control objectives,and management necessarily was required to apply its judgment in evaluating thecost-benefit relationship of possible controls and procedures.

 
| 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                                                                            |

 

Therewere no changes in internal controls for the period ended March 31, 2010that have materially affected, or are reasonably likely to materially affect,our internal control over financial reporting.

 

**Item 9B. Other Information.**

 

Notapplicable.

 

**PART III**

 

Wewill file a definitive Proxy Statement for our 2010 Annual Meeting ofStockholders (the “2010 Proxy Statement”) with the SEC, pursuant toRegulation 14A, not later than 120 days after the end of our fiscalyear. Accordingly, certain information required by Part III has beenomitted under General Instruction G(3) to Form 10-K. Only thosesections of the 2010 Proxy Statement that specifically address the items setforth herein are incorporated by reference.

 

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

 

Theinformation required by Item 10 is hereby incorporated by reference fromour 2010 Proxy Statement under the captions “Election of Directors” and “Section 16(a) BeneficialOwnership Reporting Compliance.”

 

**Item 11. Executive Compensation**

 

Theinformation required by Item 11 is hereby incorporated by reference fromour 2010 Proxy Statement under the captions “Executive Compensation” and “DirectorCompensation.”

 

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

 

Theinformation required by Item 12 is hereby incorporated by reference fromour 2010 Proxy Statement under the caption “Security Ownership of CertainBeneficial Owners and Management.”

 

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

 

Theinformation required by Item 13 is hereby incorporated by reference fromour 2010 Proxy Statement under the captions “Certain Transactions” and “DirectorIndependence.”

 

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

 

Theinformation required by Item 14 is hereby incorporated by reference fromour 2010 Proxy Statement under the caption “Independent Registered PublicAccounting Firm Fees.”

 

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**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                                                                                                                                                                                                                                                                                                                                                                                                | 62     |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |   | Consolidated  Statements of Assets and Liabilities as of March 31, 2010 and March 31, 2009                                                                                                                                                                                                                                                                                                                                                              | 63     |
|   |   | Consolidated  Statements of Operations for the years ended March 31, 2010, March 31, 2009  and March 31, 2008                                                                                                                                                                                                                                                                                                                                           | 64     |
|   |   | Consolidated  Statements of Changes in Net Assets for the years ended March 31, 2010, March  31, 2009 and March 31, 2008                                                                                                                                                                                                                                                                                                                                | 65     |
|   |   | Consolidated  Statements of Cash Flows for the years ended March 31, 2010, March 31, 2009  and March 31, 2008                                                                                                                                                                                                                                                                                                                                           | 66     |
|   |   | Consolidated  Schedules of Investments as of March 31, 2010 and March 31, 2009                                                                                                                                                                                                                                                                                                                                                                          | 67     |
|   |   | Notes to Consolidated Financial Statements                                                                                                                                                                                                                                                                                                                                                                                                              | 72     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |
| 2.     |   | The  following financial statement schedule is filed herewith:                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |
|   |   | Schedule 12-14 Investments in and Advances to  Affiliates                                                                                                                                                                                                                                                                                                                                                                                               | 94     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |
|   |   | No other financial statement schedules are filed herewith because (1)  such schedules are not required or (2) the information has been presented in  the aforementioned financial statements.                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 3.     |   | Exhibits                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   | The following exhibits are filed as part of this  report or hereby incorporated by reference to exhibits previously 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   |   | 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.                                                                                                                                                                                                                    |
| 10.4   |   | 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.                                                                                                                                                                                                                  |
| 10.5   |   | 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.                                                                                                                                                |
| 10.6   |   | 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.                                                                                                                                         |
| 10.7   |   | Third Amended and  Restated Credit Agreement dated as of April 13, 2010 by and among Gladstone  Business Investment, LLC as Borrower, Gladstone Management Corporation as  Servicer, the Committed Lenders named therein, the Managing Agents named  therein, and Branch Banking and Trust Company as Administrative Agent,  incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K  (File No. 814-00704) filed on April 14, 2010. |
| 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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*                                       Denotes management contractor compensatory plan or arrangement.

 

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 
| ** **          | **GLADSTONE INVESTMENT CORPORATION** |
|---------------------|--------------------------------------|
| ** **          | ** **                           | ** ** |
| Date:  May 24, 2010 | By:                                  | /s/  DAVID WATSON |
|                |                                 | David  Watson |
|                |                                 | Chief  Financial Officer |

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of theregistrant and in the capacity and on the dates indicated.

 
| Date:  May 24, 2010 | By:    | /s/  DAVID GLADSTONE                                                                           |
|---------------------|--------|------------------------------------------------------------------------------------------------|
|                |   | David  Gladstone                                                                               |
|                |   | Chief  Executive Officer and Chairman of the Board of  Directors (principal executive officer) |
|                |   |                                                                                           |
| Date:  May 24, 2010 | By:    | /s/  TERRY LEE BRUBAKER                                                                        |
|                |   | Terry  Lee Brubaker                                                                            |
|                |   | Co-Vice  Chairman, Chief Operating Officer, Secretary and  Director                            |
|                |   |                                                                                           |
| Date:  May 24, 2010 | By:    | /s/  GEORGE STELLJES III                                                                       |
|                |   | George  Stelljes III                                                                           |
|                |   | Co-Vice  Chairman, Chief Investment Officer and Director                                       |
|                |   |                                                                                           |
| Date:  May 24, 2010 | By:    | /s/  DAVID A. R. DULLUM                                                                        |
|                |   | David  A. R. Dullum                                                                            |
|                |   | President  and Director                                                                        |
|                |   |                                                                                           |
| Date:  May 24, 2010 | By:    | /s/  DAVID WATSON                                                                              |
|                |   | David  Watson                                                                                  |
|                |   | Chief  Financial Officer (principal financial and accounting  officer)                         |
|                |   |                                                                                           |
| Date:  May 24, 2010 | By:    | /s/  ANTHONY W. PARKER                                                                         |
|                |   | Anthony  W. Parker                                                                             |
|                |   | Director                                                                                       |
|                |   |                                                                                           |
| Date:  May 24, 2010 | By:    | /s/  MICHELA A. ENGLISH                                                                        |
|                |   | Michela  A. English                                                                            |
|                |   | Director                                                                                       |
|                |   |                                                                                           |
| Date:  May 24, 2010 | By:    | /s/  PAUL ADELGREN                                                                             |
|                |   | Paul  Adelgren                                                                                 |
|                |   | Director                                                                                       |
|                |   |                                                                                           |
| Date:  May 24, 2010 | By:    | /s/  MAURICE COULON                                                                            |
|                |   | Maurice  Coulon                                                                                |
|                |   | Director                                                                                       |
|                |   |                                                                                           |
| Date:  May 24, 2010 | By:    | /s/  JOHN OUTLAND                                                                              |
|                |   | John  Outland                                                                                  |
|                |   | Director                                                                                       |
|                |   |                                                                                           |
| Date:  May 24, 2010 | By:    | /s/  GERARD MEAD                                                                               |
|                |   | Gerard  Mead                                                                                   |
|                |   | Director                                                                                       |

 

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**SCHEDULE12-14**

 

**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, 2010** | ** ** | **Amount  of  Equity in Net  Profit (Loss) for  the Year Ended  March 31, 2010****(2)** | ** **       | **Income  Earned for  the Year Ended  March 31, 2010** | ** ** | **Value at  March 31, 2010** | ** **  |
|---------------------------------|------------|------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------------|--------------------------------------------------------|------------|------------------------------|-------------|
|                            |       |                                           |       |                                                                                 |       |                                                                                    |             |                                                   |       |                         |        |
| **CONTROL INVESTMENTS**         |       |                                           |       |                                                                                 |       |                                                                                    |             |                                                   |       |                         |        |
| A. Stucki Holding Corp.         |       | Senior Term Debt                               |       | 9,101                                                                                |       |                                                                                    |             |                                                   |       | $                            |  9,101 |   |
|                            |       | Senior Term Debt                               |       | 9,900                                                                                |       |                                                                                    |             |                                                   |       | 9,900                        |        |
|                            |       | Senior Subordinated Term  Debt                 |       | 9,456                                                                                |       |                                                                                    |             |                                                   |       | 9,456                        |        |
|                            |       | Preferred Stock                                |       | 44                                                                                   |       |                                                                                    |             |                                                   |       | 4,529                        |        |
|                            |       | Common Stock**(3)**                            |       | 130                                                                                  |       |                                                                                    |             |                                                   |       | 17,393                       |        |
|                            |       |                                           |       |                                                                                 |       | $                                                                                       |  —     |                                                   | $          |  3,246                  |        | 50,379 |   |
|                            |       |                                           |       |                                                                                 |       |                                                                                    |             |                                                   |       |                         |        |
| Acme Cryogenics, Inc.           |       | Senior Subordinated Term  Debt                 |       | 14,500                                                                               |       |                                                                                    |             |                                                   |       | 13,585                       |        |
|                            |       | Preferred Stock**(3)**                         |       | 899                                                                                  |       |                                                                                    |             |                                                   |       | —                       |        |
|                            |       | Common Stock**(3)**                            |       | 418                                                                                  |       |                                                                                    |             |                                                   |       | —                       |        |
|                            |       | Common Stock Warrants**(3)**                   |       | 453                                                                                  |       |                                                                                    |             |                                                   |       | —                       |        |
|                            |       |                                           |       |                                                                                 |       | —                                                                                  |             | 1,691                                                  |       | 13,585                       |        |
|                            |       |                                           |       |                                                                                 |       |                                                                                    |             |                                                   |       |                         |        |
| ASH Holdings Corp.              |       | Revolving Credit  Facility                     |       | 1,504                                                                                |       |                                                                                    |             |                                                   |       | 421                          |        |
|                            |       | Senior Subordinated Term  Debt                 |       | 6,250                                                                                |       |                                                                                    |             |                                                   |       | 1,750                        |        |
|                            |       | Preferred Stock**(3)**                         |       | 3                                                                                    |       |                                                                                    |             |                                                   |       | —                       |        |
|                            |       | Common Stock Warrants**(3)**                   |       | 74                                                                                   |       |                                                                                    |             |                                                   |       | —                       |        |
|                            |       |                                           |       |                                                                                 |       | —                                                                                  |             | 71                                                     |       | 2,171                        |        |
|                            |       |                                           |       |                                                                                 |       |                                                                                    |             |                                                   |       |                         |        |
| Cavert II Holdings Corp         |       | Senior Term Debt                               |       | 2,875                                                                                |       |                                                                                    |             |                                                   |       | 2,875                        |        |
|                            |       | Senior Term Debt                               |       | 2,700                                                                                |       |                                                                                    |             |                                                   |       | 2,700                        |        |
|                            |       | Senior Subordinated Term  Debt                 |       | 4,671                                                                                |       |                                                                                    |             |                                                   |       | 4,671                        |        |
|                            |       | Preferred Stock**(3)**                         |       | 41                                                                                   |       |                                                                                    |             |                                                   |       | 4,959                        |        |
|                            |       | Common Stock**(3)**                            |       | 69                                                                                   |       |                                                                                    |             |                                                   |       | 3,526                        |        |
|                            |       |                                           |       |                                                                                 |       | —                                                                                  |             | 1,204                                                  |       | 18,731                       |        |
|                            |       |                                           |       |                                                                                 |       |                                                                                    |             |                                                   |       |                         |        |
| Chase II Holdings Corp.         |       | Senior Term Debt                               |       | 7,700                                                                                |       |                                                                                    |             |                                                   |       | 7,700                        |        |
|                            |       | Senior Term Debt                               |       | 7,520                                                                                |       |                                                                                    |             |                                                   |       | 7,520                        |        |
|                            |       | Senior Subordinated Term  Debt                 |       | 6,168                                                                                |       |                                                                                    |             |                                                   |       | 6,168                        |        |
|                            |       | Preferred Stock**(3)**                         |       | 70                                                                                   |       |                                                                                    |             |                                                   |       | 7,713                        |        |
|                            |       | Common Stock**(3)**                            |       | 61                                                                                   |       |                                                                                    |             |                                                   |       | —                       |        |
|                            |       |                                           |       |                                                                                 |       | —                                                                                  |             | 2,545                                                  |       | 29,101                       |        |
|                            |       |                                           |       |                                                                                 |       |                                                                                    |             |                                                   |       |                         |        |
| Country Club  Enterprises, LLC  |       | Senior Subordinated Term  Debt                 |       | 7,000                                                                                |       |                                                                                    |             |                                                   |       | 6,869                        |        |
|                            |       | Preferred Stock**(3)**                         |       | 2,380                                                                                |       |                                                                                    |             |                                                   |       | —                       |        |
|                            |       |                                           |       |                                                                                 |       | —                                                                                  |             | 1,194                                                  |       | 6,869                        |        |
|                            |       |                                           |       |                                                                                 |       |                                                                                    |             |                                                   |       |                         |        |
| Galaxy Tool Holding  Corp.      |       | Senior Subordinated Term  Debt                 |       | 17,250                                                                               |       |                                                                                    |             |                                                   |       | 17,099                       |        |
|                            |       | Preferred Stock**(3)**                         |       | 4,112                                                                                |       |                                                                                    |             |                                                   |       | —                       |        |
|                            |       | Common Stock**(3)**                            |       | 48                                                                                   |       |                                                                                    |             |                                                   |       | —                       |        |
|                            |       |                                           |       |                                                                                 |       | —                                                                                  |             | 2,361                                                  |       | 17,099                       |        |
|                            |       |                                           |       |                                                                                 |       |                                                                                    |             |                                                   |       |                         |        |
| Mathey Investments, Inc.**(4)** |       | Revolving Credit  Facility                     |       | 1,032                                                                                |       |                                                                                    |             |                                                   |       | 1,011                        |        |
|                            |       | Senior Term Debt                               |       | 2,375                                                                                |       |                                                                                    |             |                                                   |       | 2,328                        |        |
|                            |       | Senior Term Debt                               |       | 7,227                                                                                |       |                                                                                    |             |                                                   |       | 6,974                        |        |
|                            |       | Common Stock**(3)**                            |       | —                                                                               |       |                                                                                    |             |                                                   |       | —                       |        |
|                            |       | Common Stock Warrants**(3)**                   |       | —                                                                               |       |                                                                                    |             |                                                   |       | —                       |        |
|                            |       |                                           |       |                                                                                 |       | —                                                                                  |             | 1,492                                                  |       | 10,313                       |        |
|                            |       |                                           |       |                                                                                 |       |                                                                                    |             |                                                   |       |                         |        |
| **Total Control Investments**   |       |                                           | ** ** | ** **                                                                           | ** ** | **$**                                                                                   | ** —** | ** **                                             | **$**      | ** 13,804**             | ** **  | **$** | ** 148,248** | ** ** |

 

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| **Name of Issuer****(1)**       | ** ** | **Title of  Issue or Nature of  Indebtedness** | ** ** | **Number  of Shares  or Principal  Amount of  Indebtedness Held  at March 31, 2010** | ** ** | **Amount  of  Equity in Net  Profit (Loss) for  the Year Ended  March 31, 2010****(2)** | ** ** | **Income  Earned for  the Year Ended  March 31, 2010** | ** ** | **Value at  March 31, 2010** | ** ** |
|---------------------------------|------------|------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|------------------------------|------------|
|                            |       |                                           |       |                                                                                 |       |                                                                                    |       |                                                   |       |                         |       |
| **AFFILIATE INVESTMENTS**       |       |                                           |       |                                                                                 |       |                                                                                    |       |                                                   |       |                         |       |
| Danco Acquisition Corp.         |       | Revolving Credit  Facility                     |       | 900                                                                                  |       |                                                                                    |       |                                                   |       | $                            | 893        |   |
|                            |       | Senior Term Debt                               |       | 4,163                                                                                |       |                                                                                    |       |                                                   |       | 4,131                        |       |
|                            |       | Senior Term Debt                               |       | 9,053                                                                                |       |                                                                                    |       |                                                   |       | 8,929                        |       |
|                            |       | Preferred Stock**(3)**                         |       | —                                                                               |       |                                                                                    |       |                                                   |       | —                       |       |
|                            |       | Common Stock Warrants**(3)**                   |       | —                                                                               |       |                                                                                    |       |                                                   |       | —                       |       |
|                            |       |                                           |       |                                                                                 |       | $                                                                                       | —     |                                                   | $          | 1,661                        |       | 13,953 |   |
|                            |       |                                           |       |                                                                                 |       |                                                                                    |       |                                                   |       |                         |       |
| Noble Logistics, Inc.           |       | Revolving Credit  Facility                     |       | 2,000                                                                                |       |                                                                                    |       |                                                   |       | 1,210                        |       |
|                            |       | Senior Term Debt                               |       | 6,227                                                                                |       |                                                                                    |       |                                                   |       | 3,767                        |       |
|                            |       | Senior Term Debt                               |       | 7,300                                                                                |       |                                                                                    |       |                                                   |       | 4,417                        |       |
|                            |       | Preferred Stock**(3)**                         |       | 1,075                                                                                |       |                                                                                    |       |                                                   |       | —                       |       |
|                            |       | Common Stock**(3)**                            |       | 1,682                                                                                |       |                                                                                    |       |                                                   |       | —                       |       |
|                            |       |                                           |       |                                                                                 |       | —                                                                                  |       | 1,476                                                  |       | 9,394                        |       |
|                            |       |                                           |       |                                                                                 |       |                                                                                    |       |                                                   |       |                         |       |
| Quench Holdings Corp.           |       | Senior Subordinated Term  Debt                 |       | 8,000                                                                                |       |                                                                                    |       |                                                   |       | 6,150                        |       |
|                            |       | Preferred Stock**(3)**                         |       | —                                                                               |       |                                                                                    |       |                                                   |       | 3,224                        |       |
|                            |       | Common Stock**(3)**                            |       | 35                                                                                   |       |                                                                                    |       |                                                   |       | —                       |       |
|                            |       |                                           |       |                                                                                 |       | —                                                                                  |       | 815                                                    |       | 9,374                        |       |
|                            |       |                                           |       |                                                                                 |       |                                                                                    |       |                                                   |       |                         |       |
| Tread Corp.                     |       | Senior Subordinated Term  Debt                 |       | 5,000                                                                                |       |                                                                                    |       |                                                   |       | 4,943                        |       |
|                            |       | Preferred Stock**(3)**                         |       | 750                                                                                  |       |                                                                                    |       |                                                   |       | —                       |       |
|                            |       | Common Stock & Debt  Warrants**(3)**       |       | 1,023                                                                                |       |                                                                                    |       |                                                   |       | —                       |       |
|                            |       |                                           |       |                                                                                 |       | —                                                                                  |       | 634                                                    |       | 4,943                        |       |
|                            |       |                                           |       |                                                                                 |       |                                                                                    |       |                                                   |       |                         |       |
| **Total Affiliate Investments** |       |                                           | ** ** | ** **                                                                           | ** ** | **$**                                                                                   | **—** | ** **                                             | **$**      | **4,586**                    | ** ** | **$** | **37,664** | ** ** |

 

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| **(1)** | Certain  of the listed securities are issued by affiliate(s) of the indicated  portfolio company.                                                                                                   |
|---------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |                                                                                                                                                                                                |
| **(2)** | 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, 2010. |
|    |                                                                                                                                                                                                |
| **(3)** | Security  is non-income producing.                                                                                                                                                                  |
|    |                                                                                                                                                                                                |
| **(4)** | Portfolio  company had earned $1,091 of interest income as an Affiliate investment  before being reclassified as a Control investment in the third quarter of the  year ended March 31, 2010.       |

 

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| **Name of Issuer****(1)**                | ** ** | **Title of  Issue or  Nature of Indebtedness** | ** ** | **Value as  of  March 31, 2009** | ** **  | **Gross  Additions** | ** ** | **Gross   Reductions** | ** ** | **Value as  of  March 31, 2010** | ** **  |
|------------------------------------------|------------|------------------------------------------------|------------|----------------------------------|-------------|----------------------|------------|------------------------|------------|----------------------------------|-------------|
| ** **                               |       |                                           |       |                             |        |                 |       |                   |       |                             |        |
| **CONTROL INVESTMENTS**                  |       |                                           |       |                             |        |                 |       |                   |       |                             |        |
| A. Stucki Holding Corp.******(3)**       |       | Senior Term Debt                               |       | $                                | 11,246      |                 | $          | —                 |       | $                                | (2,145      | ) | $ | 9,101 |   |
|                                     |       | Senior Term Debt                               |       | 10,450                           |        | —               |       | (550                   | )          | 9,900                            |        |
|                                     |       | Senior Subordinated Term  Debt                 |       | 8,586                            |        | 870                  |       | —                 |       | 9,456                            |        |
|                                     |       | Preferred Stock                                |       | 5,128                            |        | —               |       | (599                   | )          | 4,529                            |        |
|                                     |       | Common Stock**(2)**                            |       | 14,021                           |        | 3,372                |       | —                 |       | 17,393                           |        |
|                                     |       |                                           |       | 49,431                           |        | 4,242                |       | (3,294                 | )          | 50,379                           |        |
|                                     |       |                                           |       |                             |        |                 |       |                   |       |                             |        |
| Acme Cryogenics, Inc.******(3)**         |       | Senior Subordinated Term  Debt                 |       | 14,500                           |        | —               |       | (915                   | )          | 13,585                           |        |
|                                     |       | Preferred Stock**(2)**                         |       | 6,920                            |        | —               |       | (6,920                 | )          | —                           |        |
|                                     |       | Common Stock**(2)**                            |       | —                           |        | —               |       | —                 |       | —                           |        |
|                                     |       | Common Stock Warrants**(2)**                   |       | —                           |        | —               |       | —                 |       | —                           |        |
|                                     |       |                                           |       | 21,420                           |        | —               |       | (7,835                 | )          | 13,585                           |        |
|                                     |       |                                           |       |                             |        |                 |       |                   |       |                             |        |
| ASH Holdings Corp.                       |       | Revolving Credit  Facility                     |       | 560                              |        | 1,504                |       | (1,643                 | )          | 421                              |        |
|                                     |       | Senior Subordinated Term  Debt                 |       | 2,078                            |        | 313                  |       | (641                   | )          | 1,750                            |        |
|                                     |       | Preferred Stock**(2)**                         |       | —                           |        | —               |       | —                 |       | —                           |        |
|                                     |       | Common Stock**(2)**                            |       | —                           |        | —               |       | —                 |       | —                           |        |
|                                     |       | Common Stock Warrants**(2)**                   |       | —                           |        | —               |       | —                 |       | —                           |        |
|                                     |       |                                           |       | 2,638                            |        | 1,817                |       | (2,284                 | )          | 2,171                            |        |
|                                     |       |                                           |       |                             |        |                 |       |                   |       |                             |        |
| Cavert II Holding Corp.******(3)**       |       | Revolving Credit  Facility                     |       | —                           |        | 850                  |       | (850                   | )          | —                           |        |
|                                     |       | Senior Term Debt                               |       | 5,687                            |        | —               |       | (2,812                 | )          | 2,875                            |        |
|                                     |       | Senior Term Debt                               |       | 2,950                            |        | —               |       | (250                   | )          | 2,700                            |        |
|                                     |       | Senior Subordinated Term  Debt                 |       | 4,671                            |        | —               |       | —                 |       | 4,671                            |        |
|                                     |       | Preferred Stock**(2)**                         |       | 4,591                            |        | 368                  |       | —                 |       | 4,959                            |        |
|                                     |       | Common Stock**(2)**                            |       | 733                              |        | 2,793                |       | —                 |       | 3,526                            |        |
|                                     |       |                                           |       | 18,632                           |        | 4,011                |       | (3,912                 | )          | 18,731                           |        |
|                                     |       |                                           |       |                             |        |                 |       |                   |       |                             |        |
| Chase II Holdings Corp.******(3)**       |       | Revolving Credit  Facility                     |       | 3,395                            |        | 105                  |       | (3,500                 | )          | —                           |        |
|                                     |       | Senior Term Debt                               |       | 8,800                            |        | —               |       | (1,100                 | )          | 7,700                            |        |
|                                     |       | Senior Term Debt                               |       | 7,680                            |        | —               |       | (160                   | )          | 7,520                            |        |
|                                     |       | Senior Subordinated Term  Debt                 |       | 6,168                            |        | —               |       | —                 |       | 6,168                            |        |
|                                     |       | Preferred Stock**(2)**                         |       | 9,300                            |        | —               |       | (1,587                 | )          | 7,713                            |        |
|                                     |       | Common Stock**(2)**                            |       | 5,537                            |        | —               |       | (5,537                 | )          | —                           |        |
|                                     |       |                                           |       | 40,880                           |        | 105                  |       | (11,884                | )          | 29,101                           |        |
|                                     |       |                                           |       |                             |        |                 |       |                   |       |                             |        |
| Country  Club Enterprises, LLC**(3)**    |       | Senior Subordinated Term  Debt                 |       | 7,000                            |        | —               |       | (131                   | )          | 6,869                            |        |
|                                     |       | Preferred Stock**(2)**                         |       | 3,725                            |        | —               |       | (3,725                 | )          | —                           |        |
|                                     |       |                                           |       | 10,725                           |        | —               |       | (3,856                 | )          | 6,869                            |        |
|                                     |       |                                           |       |                             |        |                 |       |                   |       |                             |        |
| Galaxy Tool Holdings  Corp.******(3)**   |       | Senior Subordinated Term  Debt                 |       | 17,250                           |        | —               |       | (151                   | )          | 17,099                           |        |
|                                     |       | Preferred Stock**(2)**                         |       | 4,486                            |        | —               |       | (4,486                 | )          | —                           |        |
|                                     |       | Common Stock**(2)**                            |       | 701                              |        | —               |       | (701                   | )          | —                           |        |
|                                     |       |                                           |       | 22,437                           |        | —               |       | (5,338                 | )          | 17,099                           |        |
|                                     |       |                                           |       |                             |        |                 |       |                   |       |                             |        |
| Mathey Investments, Inc.******(3)  (4)** |       | Revolving Credit  Facility                     |       | 529                              |        | 495                  |       | (13                    | )          | 1,011                            |        |
|                                     |       | Senior Term Debt                               |       | 2,339                            |        | —               |       | (11                    | )          | 2,338                            |        |
|                                     |       | Senior Term Debt                               |       | 7,082                            |        | —               |       | (108                   | )          | 6,974                            |        |
|                                     |       | Common Stock**(2)**                            |       | 446                              |        | —               |       | (446                   | )          | —                           |        |
|                                     |       | Common Stock Warrants**(2)**                   |       | 260                              |        | —               |       | (260                   | )          | —                           |        |
|                                     |       |                                           |       | 10,656                           |        | 495                  |       | (838                   | )          | 10,313                           |        |
|                                     |       |                                           |       |                             |        |                 |       |                   |       |                             |        |
| **Total Control Investments**            | ** ** | ** **                                     | ** ** | **$**                            | **176,819** | ** **           | **$**      | **10,670**             | ** ** | **$**                            | **(39,241** | **)** | **$** | **148,248** | ** ** |

 

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Table ofContents

 
| **Name of Issuer****(1)**          | ** ** | **Title of  Issue or  Nature of Indebtedness** | ** ** | **Value as  of  March 31, 2009** | ** ** | **Gross  Additions** | ** ** | **Gross   Reductions** | ** ** | **Value as  of  March 31, 2010** | ** ** |
|------------------------------------|------------|------------------------------------------------|------------|----------------------------------|------------|----------------------|------------|------------------------|------------|----------------------------------|------------|
| ** **                         |       |                                           |       |                             |       |                 |       |                   |       |                             |       |
| **AFFILIATE INVESTMENTS**          |       |                                           |       |                             |       |                 |       |                   |       |                             |       |
| Danco Acquisition Corp.******(3)** |       | Revolving Credit  Facility                     |       | $                                | 378        |                 | $          | 515                    |       | $                                | —     |   | $ | 893 |   |
|                               |       | Senior Term Debt                               |       | 4,584                            |       | 222                  |       | (675                   | )          | 4,131                            |       |
|                               |       | Senior Term Debt                               |       | 8,544                            |       | 445                  |       | (60                    | )          | 8,929                            |       |
|                               |       | Preferred Stock**(2)**                         |       | 2,558                            |       | —               |       | (2,558                 | )          | —                           |       |
|                               |       | Common Stock Warrants**(2)**                   |       | —                           |       | —               |       | —                 |       | —                           |       |
|                               |       |                                           |       | 16,064                           |       | 1,182                |       | (3,293                 | )          | 13,953                           |       |
|                               |       |                                           |       |                             |       |                 |       |                   |       |                             |       |
| Noble Logistics, Inc.******(3)**   |       | Revolving Credit  Facility                     |       | 1,500                            |       | —               |       | (290                   | )          | 1,210                            |       |
|                               |       | Senior Term Debt                               |       | 4,295                            |       | 500                  |       | (1,028                 | )          | 3,767                            |       |
|                               |       | Senior Term Debt                               |       | 5,475                            |       | —               |       | (1,058                 | )          | 4,417                            |       |
|                               |       | Senior Subordinated Term  Debt                 |       | 375                              |       | 125                  |       | (500                   | )          | —                           |       |
|                               |       | Senior Subordinated Term  Debt                 |       | 149                              |       | 1                    |       | (150                   | )          | —                           |       |
|                               |       | Preferred Stock**(2)**                         |       | —                           |       | —               |       | —                 |       | —                           |       |
|                               |       | Common Stock**(2)**                            |       | —                           |       | —               |       | —                 |       | —                           |       |
|                               |       |                                           |       | 11,794                           |       | 626                  |       | (3,026                 | )          | 9,394                            |       |
|                               |       |                                           |       |                             |       |                 |       |                   |       |                             |       |
| Quench Holdings Corp.******(3)**   |       | Senior Subordinated Term  Debt                 |       | 5,800                            |       | 350                  |       | —                 |       | 6,150                            |       |
|                               |       | Preferred Stock**(2)**                         |       | 2,542                            |       | 682                  |       | —                 |       | 3,224                            |       |
|                               |       | Common Stock**(2)**                            |       | —                           |       | —               |       | —                 |       | —                           |       |
|                               |       |                                           |       | 8,342                            |       | 1,032                |       | —                 |       | 9,374                            |       |
|                               |       |                                           |       |                             |       |                 |       |                   |       |                             |       |
| Tread Corp.******(3)**             |       | Senior Subordinated Term  Debt                 |       | 4,925                            |       | 18                   |       | —                 |       | 4,943                            |       |
|                               |       | Preferred Stock**(2)**                         |       | 793                              |       | —               |       | (793                   | )          | —                           |       |
|                               |       | Common Stock & Debt  Warrants**(2)**       |       | 453                              |       | —               |       | (453                   | )          | —                           |       |
|                               |       |                                           |       | 6,171                            |       | 18                   |       | (1,246                 | )          | 4,943                            |       |
|                               |       |                                           |       |                             |       |                 |       |                   |       |                             |       |
| **Total Affiliate Investments**    | ** ** | ** **                                     | ** ** | **$**                            | **42,371** | ** **           | **$**      | **2,858**              | ** ** | **$**                            | **(7,565** | **)** | **$** | **37,664** | ** ** |

 

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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)** | Some  or all of the securities of this portfolio company are pledged as collateral  to the Company’s Credit Facility.                       |
|    |                                                                                                                                             |
| **(4)** | Portfolio  company was reclassified from an Affiliate investment to a Control investment  in the third quarter of the year ended March 31, 2010. |

 

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