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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



Form 10-K

ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended February 29, 2012o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from        to


Commission File No. 001-33376



SARATOGA INVESTMENT CORP.(Exact name of Registrant as specified in its charter)

Maryland(State or other jurisdiction of
incorporation or organization)

20-8700615(I.R.S. Employer
Identification Number)


535 Madison Avenue
New York, New York 10022(Address of principal executive offices)

(212) 906-7800(Registrant's telephone number, including area code)

Securities
registered pursuant to Section 12(b) of the Act:

Title of Each Class

Name of Each Exchange on Which RegisteredCommon Stock, par value $0.001 per share

The New York Stock Exchange


Securities
registered pursuant to Section 12(g) of the Act:None

Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o    No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the
Act. Yes o    No ý

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days: Yes ý    No o

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. ý

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

Large accelerated filer o

Accelerated filer o

Non-accelerated filer ý (Do not check if a
smaller reporting company)

Smaller reporting company o


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

The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of August 31, 2011
was approximately $39.4 million based upon a closing price of $16.69 reported for such date by the New York Stock Exchange.

The
number of outstanding common shares of the registrant as of May 23, 2012 was 3,876,661.

DOCUMENTS INCORPORATED BY REFERENCE

None.





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NOTE ABOUT REFERENCES

In this Annual Report on Form 10-K (the "Annual Report"), the "Company," "we," "us" and "our" refer to Saratoga
Investment Corp. and its wholly owned subsidiary, Saratoga Investment Funding LLC, unless the context otherwise requires. We refer to Saratoga Investment Advisors LLC, our investment
adviser, as "Saratoga Investment Advisors" or the "investment adviser."

NOTE ABOUT FORWARD-LOOKING STATEMENTS

Some of the statements in this Annual Report constitute forward-looking statements. Forward-looking statements relate to expectations,
beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify
forward-looking statements by terms such as
"anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "potential," "project," "should," "will" and "would" or the negative of these terms or other comparable terminology.

The
forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. These
beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us or are within our control. If a change occurs, our business, financial
condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements.

The
forward-looking statements contained in this Annual Report involve risks and uncertainties, including statements as to:



For
a discussion of factors that could cause our actual results to differ from forward-looking statements contained in this Annual Report, please see the discussion under Part I,
Item 1A "Risk Factors". You should not place undue reliance on these forward-looking statements. The forward-looking statements made in this Annual Report relate only to events as of the date
on which the statements are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date of this Annual Report.

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TABLE OF CONTENTS





PAGEPART I


4Item 1. Business


4Item 1A. Risk Factors


28Item 1B. Unresolved Staff Comments


47Item 2. Properties


47Item 3. Legal Proceedings


47Item 4. Mine Safety Disclosures


47PART II


48Item 5. Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities


48Item 6. Selected Financial Data


51Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations


54Item 7A. Quantitative and Qualitative Disclosures about Market Risk


76Item 8. Financial Statements and Supplementary
Data


76Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure


77Item 9A. Controls and Procedures


77Item 9B. Other Information


77PART III


78Item 10. Directors, Executive Officers and Corporate
Governance


78Item 11. Executive Compensation


81Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters


82Item 13. Certain Relationships and Related Transactions, and Director
Independence


84Item 14. Principal Accountant Fees and Services


85PART IV


86Item 15. Exhibits and Financial Statement Schedules


86Signatures


88


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PART I

ITEM 1.    BUSINESS

General

We are a specialty finance company that invests primarily in leveraged loans and mezzanine debt issued by private U.S. middle-market
companies, both through direct lending and through participation in loan syndicates. Our investment objective is to generate current income and, to a lesser extent, capital appreciation from our
investments. We are externally managed and advised by Saratoga Investment Advisors, LLC, a New York-based investment firm affiliated with Saratoga Partners, a middle market private
equity investment firm.

As
of February 29, 2012, we had net assets of $97.4 million and investments in 21 portfolio companies and an investment in all of the subordinated notes in one
collateralized loan obligation fund with fair value of $25.8 million. The weighted average yield on all of our debt investments, including our investment in the subordinated notes in the
collateralized loan obligation fund, as of February 29, 2012 was approximately 12.4%. As of February 29, 2012, we held equity investments consisting of common stock, limited partnership
interests and warrants to purchase common stock or other equity interests in our portfolio companies with an aggregate fair value of $5.7 million.

Our
portfolio is comprised primarily of investments in leveraged loans (both first and second lien term loans) issued by middle market companies. Leveraged loans are generally senior
debt instruments that rank ahead of subordinated debt of the portfolio company. Leveraged loans also have the benefit of security interests on the assets of the portfolio company, which may rank ahead
of, or be junior to, other security interests. We also purchase mezzanine debt and make equity investments in middle market companies. Mezzanine debt is typically unsecured and subordinated to senior
debt of the portfolio company.

While
our primary focus is to generate current income and capital appreciation from our debt and equity investments in middle market companies, we may invest up to 30% of the portfolio
in opportunistic investments in order to seek to enhance returns to stockholders. Such investments may include investments in distressed debt, including securities of companies in bankruptcy, foreign
debt, private equity, securities of public companies that are not thinly traded and structured finance vehicles such as collateralized loan obligation funds.

We
are an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a business development company ("BDC")
under the Investment Company Act of 1940 ("1940 Act"). As a BDC, we are required to comply with various regulatory requirements, including limitations on our use of debt. We finance our investments
through borrowings. However, as a BDC, we are only generally allowed to borrow amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowing.

We
have elected to be treated for U.S. federal income tax purposes as a regulated investment company ("RIC"), under Subchapter M of the Internal Revenue Code of 1986 (the "Code").
As a RIC, we generally will not have to pay corporate-level federal income taxes on any net ordinary income or capital gains that we distribute to our stockholders if we meet certain
source-of-income, distribution and asset diversification requirements.

In
addition, we have a wholly-owned subsidiary that is licensed as a small business investment company ("SBIC") and regulated by the Small Business Administration ("SBA"). See
"Item 1. BusinessRegulationSmall Business Investment Company Regulations." The SBIC license allows us, through our wholly-owned subsidiary, to issue
SBA-guaranteed debentures. We applied for exemptive relief from the Securities and Exchange Commission ("SEC") to permit us to exclude the debt of our SBIC subsidiary guaranteed by the SBA
from the 200% asset coverage ratio we are

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required
to maintain under the 1940 Act. Pursuant to the 200% asset coverage ratio limitation, we are permitted to borrow one dollar for every dollar we have in assets less all liabilities and
indebtedness not represented by debt securities issued by us or loans obtained by us.

If
we receive this exemptive relief from the SEC, we will have increased capacity to fund up to $150 million (the maximum amount of SBA-guaranteed debentures an SBIC
may currently have outstanding once certain conditions have been met) of investments with SBA-guaranteed debentures in addition to being able to fund investments with borrowings up to the
maximum amount of debt that the 200% asset coverage ratio limitation would allow us to incur.

Corporate History and Information

We commenced operations on March 23, 2007 as GSC Investment Corp. and completed an initial public offering ("IPO") of shares of
our common stock on March 28, 2007. From the date we commenced operations until July 30, 2010, we were managed and advised by GSCP (NJ), L.P., an entity affiliated with GSC
Group, Inc. In connection with the consummation of a recapitalization transaction on July 30, 2010, we engaged Saratoga Investment Advisors to replace GSCP (NJ), L.P. as our
investment adviser and changed our name to Saratoga Investment Corp.

The
recapitalization transaction consisted of (i) the private sale of 986,842 shares of our common stock for $15 million in aggregate purchase price to Saratoga Investment
Advisors and certain of its affiliates and (ii) the entry into a $40 million senior secured revolving credit facility with Madison Capital Funding LLC. We used the net proceeds
from the private sale of shares of our common stock and a portion of the funds available to us under the secured revolving credit facility with Madison Capital Funding LLC to pay the full
amount of principal and accrued interest, including default interest, outstanding under our revolving securitized credit facility with Deutsche Bank AG, New York Branch. Specifically, in July 2009, we
had exceeded permissible borrowing limits under the revolving securitized credit facility with Deutsche Bank, which resulted in an event of default under the revolving securitized credit facility. As
a result of the event of default, Deutsche Bank had the right to accelerate repayment of the outstanding indebtedness under the revolving securitized credit facility and to foreclose and liquidate the
collateral pledged under the revolving securitized credit facility. The revolving securitized credit facility with Deutsche Bank was terminated in connection with our payment of all amounts
outstanding thereunder on July 30, 2010.

On
March 28, 2012, our wholly-owned subsidiary, Saratoga Investment Corp. SBIC, LP, received an SBIC license from the SBA.

Our
corporate offices are located at 535 Madison Avenue, New York, New York 10022. Our telephone number is (212) 906-7800. We maintain a website on the Internet at
www.saratogainvestmentcorp.com. Information contained on our website is not incorporated by reference into this Annual Report, and you should not consider that information to be part of this Annual
Report.

Saratoga Investment Advisors

General

Our investment adviser is led by five principals, Christian L. Oberbeck, Michael J. Grisius, Richard A. Petrocelli, Thomas V.
Inglesby, and Charles G. Phillips, who collectively have over 80 years of experience in leveraged finance. Our investment adviser is affiliated with Saratoga Partners, a middle market private
equity investment firm. Saratoga Partners was established in 1984 to be the middle market private investment arm of Dillon Read & Co. Inc. and has been independent of Dillon Read
since 1998. Saratoga Partners has a 27-year history of private investments in middle market companies and focuses on public and private equity, preferred stock, and senior and mezzanine
debt investments.

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Our Relationship with Saratoga Investment Advisors

We utilize the personnel, infrastructure, relationships and experience of Saratoga Investment Advisors to enhance the growth of our
business. We currently have no employees and each of our executive officers is also an officer of Saratoga Investment Advisors.

We
have entered into an investment advisory and management agreement with Saratoga Investment Advisors. The initial term of the investment advisory and management agreement is for two
years from its effective date of July 30, 2010, with automatic, one-year renewals, subject to approval by our board of directors, a majority of whom must be our independent
directors. Pursuant to the investment advisory and management agreement, Saratoga Investment Advisors implements our business strategy on a day-to-day basis and performs
certain services for us under the direction of our board of directors. Saratoga Investment Advisors is responsible for, among other duties, performing all of our day-to-day
functions, determining investment criteria, sourcing, analyzing and executing investments, asset sales, financings and performing asset management duties.

Saratoga
Investment Advisors has formed an investment committee to advise and consult with its senior management team with respect to our investment policies, investment portfolio
holdings, financing and leveraging strategies and investment guidelines. We believe that the collective experience of the investment committee members across a variety of fixed income asset classes
will benefit us. The investment committee must unanimously approve all investments in excess of $5 million made by us. In addition, all sales of our investments must be approved by three out of
four investment committee members. The current members of the investment committee are Messrs. Oberbeck, Grisius, Petrocelli, Inglesby, and Phillips.

We
pay Saratoga Investment Advisors a fee for investment advisory and management services consisting of two componentsa base management fee and an incentive fee. The base
management fee is calculated at an annual rate of 1.75% of our gross assets which includes assets purchased with borrowed funds but excludes cash and cash equivalents. As a result, Saratoga Investment
Advisors will benefit as we incur debt or use leverage to purchase assets. Our board of directors will monitor the conflicts presented by this compensation structure by approving the amount of
leverage that we may incur.

In
addition to the base management fee, we pay Saratoga Investment Advisors an incentive fee which consists of two parts. First, we pay Saratoga Investment Advisors an incentive fee with
respect to our pre-incentive fee net investment income in each calendar quarter as follows:



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Pre-incentive
fee net investment income means interest income, dividend income and other income (including any other fees, such as commitment, origination, structuring,
diligence, managerial and consulting fees or other fees that we receive from portfolio companies) earned during the calendar quarter, minus our operating expenses for the quarter.

The
second part of the incentive fee is determined and payable in arrears as of the end of each fiscal year (or upon termination of the investment advisory and management agreement) and
equals 20% of our "incentive fee capital gains," which equals our realized capital gains on a cumulative basis from May 31, 2010 through the end of the year, if any, computed net of all
realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fee. Importantly, the capital gains portion
of the incentive fee is based on realized gains and realized and unrealized losses from May 31, 2010. Therefore, realized and unrealized losses incurred prior to such time will not be taken
into account when calculating the capital gains portion of the incentive fee, and Saratoga Investment Advisors will be entitled to 20% of incentive fee capital gains that arise after May 31,
2010. In addition, for the purpose of the "incentive fee capital gains" calculations, the cost basis for computing realized gains and losses on investments held by us as of May 31, 2010 will
equal the fair value of such investments as of such date.

We
have also entered into a separate administration agreement with Saratoga Investment Advisors pursuant to which Saratoga Investment Advisors furnishes us with office facilities,
equipment and clerical, bookkeeping and record keeping services. The administration agreement has an initial term of two years from its effective date of July 30, 2010, with automatic
one-year renewals, subject to approval by our board of directors, a majority of whom must be our independent directors. Under the administration agreement, Saratoga Investment Advisors
also performs, or oversees the performance of our required administrative services, which include, among other things, being responsible for the financial records which we are required to maintain,
preparing reports for our stockholders and reports required to be filed with the SEC. Payments under the administration agreement will be equal to an amount based upon the allocable portion of
Saratoga Investment Advisors' overhead in performing its obligations under the administration agreement, including rent and the allocable portion of the cost of our officers and their respective
staffs relating to the performance of services under the administration agreement. The amount payable to Saratoga Investment Advisors under the administration agreement is currently capped at
$1 million for each annual term of the agreement.

Investments

Our portfolio is comprised primarily of investments in leveraged loans (both first and second lien term loans) issued by middle market
companies. These investments are sourced in both the primary and secondary markets through a network of relationships with commercial and investment banks, commercial finance companies and financial
sponsors. The leveraged loans that we purchase are generally used to finance buyouts, acquisitions, growth, recapitalizations and other types of transactions. Leveraged loans are generally senior debt
instruments that rank ahead of subordinated debt of the portfolio company. Leveraged loans also have the benefit of security interests on the assets of the portfolio company, which may rank ahead of,
or be junior to, other security
interests. Substantially all of the debt investments held in our portfolio hold a non-investment grade rating by one or more rating agencies or, if not rated, would be rated below
investment grade if rated. As part of our long-term strategy, we also purchase mezzanine debt and make equity investments in middle market companies. Mezzanine debt is typically unsecured
and subordinated to senior debt of the portfolio company. For purposes of this Annual Report, we generally use the term "middle market" to refer to companies with annual EBITDA of between
$5 million and $50 million. EBITDA represents earnings before net

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interest
expense, income taxes, depreciation and amortization. Investments in middle market companies are generally less liquid than equivalent investments in companies with larger capitalizations.

As
a BDC, we are required to comply with certain regulatory requirements. For instance, we have to invest at least 70% of our total assets in "qualifying assets," including securities of
U.S. operating companies whose securities are not listed on a national securities exchange (i.e., New York Stock Exchange, NYSE Amex and The NASDAQ Stock Market), U.S. operating companies with
listed securities that have market capitalizations of less than $250 million, cash, cash equivalents, U.S. government securities and high-quality debt investments that mature in one
year or less.

While
our primary focus is to generate current income and capital appreciation from our debt and equity investments in middle market companies, we may invest up to 30% of the portfolio
in opportunistic investments in order to seek to enhance returns to stockholders. Such investments may include investments in distressed debt, private equity, securities of public companies that are
not thinly traded and structured finance vehicles such as collateralized loan obligation funds.



Our leveraged loan portfolio is comprised primarily of first lien and second lien term loans. First lien term loans are secured by a
first priority perfected security interest on all or substantially all of the assets of the borrower and typically include a first priority pledge of the capital stock of the borrower. First lien term
loans hold a first priority with regard to right of payment. Generally, first lien term loans offer floating rate interest payments, have a stated maturity of five to seven years, and have a fixed
amortization schedule. First lien term loans generally have restrictive financial and negative covenants. Second lien term loans are secured by a second priority perfected security interest on all or
substantially all of the assets of the borrower and typically include a second priority pledge of the capital stock of the borrower. Second lien term loans hold a second priority with regard to right
of payment. Second lien term loans offer either floating rate or fixed rate interest
payments, generally have a stated maturity of five to eight years, and may or may not have a fixed amortization schedule. Second lien term loans that do not have fixed amortization schedules require
payment of the principal amount of the loan upon the maturity date of the loan. Second lien term loans have less restrictive financial and negative covenants than those that govern first lien term
loans.



Mezzanine debt usually ranks subordinate in priority of payment to senior debt and is often unsecured. However, mezzanine debt ranks
senior to common and preferred equity in a borrowers' capital structure. Mezzanine debt typically has fixed rate interest payments and a stated maturity of six to eight years and does not have fixed
amortization schedules.

In
some cases, our debt investments may provide for a portion of the interest payable to be paid-in-kind interest ("PIK"). To the extent interest is
paid-in-kind, it will be payable through the increase of the principal amount of the obligation by the amount of interest due on the then-outstanding aggregate
principal amount of such obligation.



Equity investments may consist of preferred equity that is expected to pay dividends on a current basis or preferred equity that does
not pay current dividends. Preferred equity generally has a preference over common equity as to distributions on liquidation and dividends. In some cases, we may acquire common equity. In general, our
equity investments are not control-oriented investments and we expect that in many cases we will acquire equity securities as part of a group of private equity investors in which we are not the lead
investor.

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Opportunistic investments may include investments in distressed debt, which may include securities of companies in bankruptcy, debt and
equity securities of public companies that are not thinly traded, emerging market debt, structured finance vehicles such as collateralized loan obligation funds and debt of middle market companies
located outside the United States. In January 2008, we purchased for $30 million all of the outstanding subordinated notes of GSC Investment Corp. CLO 2007 LTD., ("Saratoga CLO"), a
collateralized loan obligation fund managed by us that invests primarily in leveraged loans. As of February 29, 2012, the Saratoga CLO portfolio consisted of $380.2 million in aggregate
principal amount of primarily senior secured first lien term loans in 147 obligors with an average obligor exposure of $2.7 million and $17.8 million in uninvested cash. The weighted
average maturity of the portfolio is 4.7 years.



Our investment adviser generally selects portfolio companies with one or more of the following
characteristics:





In managing us, Saratoga Investment Advisors employs the same investment philosophy and portfolio management methodologies used by
Saratoga Partners. Through this investment selection process, based on quantitative and qualitative analysis, Saratoga Investment Advisors seeks to identify portfolio companies with superior
fundamental risk-reward profiles and strong, defensible business franchises with the goal of minimizing principal losses while maximizing risk-adjusted returns. Saratoga
Investment Advisors' investment process emphasizes the following:



Our
investment adviser's investment process generally includes the following steps:



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In general, our investment adviser intends to select investments with financial covenants and terms that reduce leverage over time,
thereby enhancing credit quality. These methods include:



In
addition, limitations on asset sales and capital expenditures should prevent a company from changing the nature of its business or capitalization without our consent.

Our
investment adviser seeks, where appropriate, to limit the downside potential of our investments by:





We carry our investments at fair value, as approved in good faith using written policies and procedures adopted by our board of
directors. Investments for which market quotations are readily available are recorded in our financial statements at such market quotations subject to any decision by our board of directors to approve
a fair value determination to reflect significant events affecting the value of these investments. We value investments for which market quotations are not readily available at fair value as approved
in good faith by our board of directors based on input from Saratoga Investment Advisors, our audit committee and, if our board or audit committee so request, a third

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party
independent valuation firm. Determinations of fair value may involve subjective judgments and estimates. The types of factors that may be considered in determining the fair value of our
investments include the nature and realizable value of any collateral, the portfolio company's ability to make payments, the markets in which the portfolio company does business, market yield trend
analysis, comparison to publicly traded companies, discounted cash flow and other relevant factors.

Our
investment in the subordinated notes of Saratoga CLO is carried at fair value, which is based on a discounted cash flow model that utilizes prepayment, re-investment and
loss assumptions based on historical experience and projected performance, economic factors, the characteristics of the underlying cash flow, and comparable yields for similar collateralized loan
obligation fund subordinated notes or equity, when available. Specifically, we use Intex cash flow models, or an appropriate substitute, to form the basis for Saratoga CLO's valuation. The models use
a set of assumptions including projected default rates, recovery rates, reinvestment rate and prepayment rates in order to arrive at estimated cash flows. The assumptions are based on available market
data and projections
provided by third parties as well as management estimates. We use the output from the Intex models (i.e., the estimated cash flows from our investment in Saratoga CLO) to perform a discounted
cash flows analysis on expected future cash flows from our investment in Saratoga CLO to determine a valuation for the subordinated notes of Saratoga CLO held by us.

We
undertake a multi-step valuation process each quarter when valuing investments for which market quotations are not readily available, as described
below:



In
addition, all our investments are subject to the following valuation process:



Because
such valuations, and particularly valuations of private investments and private companies, are inherently uncertain, they may fluctuate over short periods of time and may be
based on estimates. The determination of fair value may differ materially from the values that would have been used if a ready market for these investments existed. Our net asset value could be
materially affected if the
determinations regarding the fair value of our investments were materially higher or lower than the values that we ultimately realize upon the disposal of such investments.



Saratoga Investment Advisors will closely monitor each investment we make and, when appropriate, will conduct a regular dialogue with
both the management team and other debtholders and seek specifically tailored financial reporting. In addition, in certain circumstances, senior investment professionals of Saratoga Investment
Advisors may take board seats or board observation seats.

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Distributions

Our distributions, if any, will be determined by our board of directors and paid out of assets legally available for distribution. Any
such distributions generally will be taxable to our stockholders, including to those stockholders who receive additional shares of our common stock pursuant to our dividend reinvestment plan. Prior to
January 2009, we paid quarterly dividends to our stockholders. However, in January 2009, we suspended the practice of paying quarterly dividends to our stockholders and have only paid three dividend
distributions (December 2011, 2010 and 2009) to our stockholders since such time.

In
order to maintain our qualification as a RIC, we must for each fiscal year distribute an amount equal to at least 90% of our ordinary net taxable income and realized net
short-term capital gains in excess of realized net long-term capital losses, if any, reduced by deductible expenses. In addition, we will be subject to federal excise taxes to
the extent we do not distribute during the calendar year at least (1) 98% of our ordinary income for the calendar year, (2) 98.2% of our capital gains in excess of capital losses for the
one year period ending on October 31 of the calendar year and (3) any ordinary income and net capital gains for preceding years that were not distributed during such years and on which
we paid no federal income tax. For the 2011 calendar year, we made distributions sufficient such that we did not incur any federal excise taxes. We may elect to
withhold from distribution a portion of our ordinary income for the 2012 calendar year and/or portion of the capital gains in excess of capital losses realized during the one year period ending
October 31, 2012, if any, and, if we do so, we would expect to incur federal excise taxes as a result.

We
maintain an "opt out" dividend reinvestment plan for our common stockholders. As a result, if we declare a dividend, then stockholders' cash dividends will be automatically reinvested
in additional shares of our common stock, unless they specifically "opt out" of the dividend reinvestment plan so as to receive cash dividends.

We
may distribute taxable dividends that are payable in cash or shares of our common stock at the election of each stockholder. Under certain applicable provisions of the Code and the
Treasury regulations, distributions payable in cash or in shares of stock at the election of stockholders are treated as taxable dividends. The Internal Revenue Service has issued private rulings
indicating that this rule will apply even where the total amount of cash that may be distributed is limited to no more than 20% of the total distribution. Under these rulings, if too many stockholders
elect to receive their distributions in cash, each such stockholder would receive a pro rata share of the total cash to be distributed and would receive the remainder of their distribution in shares
of stock. If we decide to make any distributions consistent with these rulings that are payable in part in our stock, taxable stockholders receiving such dividends will be required to include the full
amount of the dividend (whether received in cash, our stock, or a combination thereof) as ordinary income (or as long-term capital gain to the extent such distribution is properly reported
as a capital gain dividend) to the extent of our current and accumulated earnings and profits for United States federal income tax purposes. As a result, a U.S. stockholder may be required to pay tax
with respect to such dividends in excess of any cash received. If a U.S. stockholder sells the stock it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount
included in income with respect to the dividend, depending on the market price of our stock at the time of the sale. Furthermore, with respect to non-U.S. stockholders, we may be required
to withhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in stock. In addition, if a significant number of our stockholders
determine to sell shares of our stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our stock.

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Competition

Our primary competitors in providing financing to private middle market companies include public and private investment funds
(including private equity funds, mezzanine funds, BDCs and SBICs), commercial, investment banks and commercial financing companies. Many of
our competitors are substantially larger and have considerably greater financial and marketing resources than us. For example, some competitors may have access to funding sources that are not
available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which may allow them to consider a wider variety of investments. Furthermore, many
of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC. For additional information concerning the competitive risks we face, please see
Part I, Item 1A, "Risk FactorsWe operate in a highly competitive market for investment opportunities."

Staffing

We do not currently have any employees and do not expect to have any employees in the future. Services necessary for our business are
provided by individuals who are employees of Saratoga Investment Advisors, pursuant to the terms of the investment advisory and management agreement and the administration agreement. For a discussion
of the investment advisory and management agreement, see "BusinessInvestment Advisory and Management Agreement" below. We reimburse Saratoga Investment Advisors for our allocable portion
of expenses incurred by it in performing its obligations under the administration agreement, including rent and our allocable portion of the cost of our officers and their respective staffs, subject
to certain limitations. For a discussion of the administration agreement, see "BusinessAdministration Agreement" below.

Investment Advisory and Management Agreement

Saratoga Investment Advisors serves as our investment adviser. Subject to the overall supervision of our board of directors, Saratoga
Investment Advisors manages our day-to-day operations and provides investment advisory and management services to us. Under the terms of an investment advisory and management
agreement, Saratoga Investment Advisors:



Saratoga
Investment Advisors services under the investment advisory and management agreement are not exclusive, and it is free to furnish similar services to other entities.



Pursuant to the investment advisory and management agreement with Saratoga Investment Advisors, we pay Saratoga Investment Advisors a
fee for investment advisory and management services consisting of two componentsa base management fee and an incentive fee.

The
base management fee is paid quarterly in arrears, and equals 1.75% per annum of our gross assets (other than cash or cash equivalents but including assets purchased with borrowed
funds) and calculated at the end of each fiscal quarter based on the average value of our gross assets (other than cash or cash equivalents but including assets purchased with borrowed funds) as of
the end of such

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fiscal
quarter and the end of the immediate prior fiscal quarter. Base management fees for any partial month or quarter are appropriately pro-rated.

The
incentive fee has the following two parts:



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Quarterly Incentive Fee Based on "Pre-Incentive Fee Net Investment Income"Pre-Incentive Fee Net Investment Income  (expressed as a percentage of the value of net assets)

GRAPHIC

Percentage of Pre-Incentive Fee Net Investment  Income allocated to income-related portion of incentive fee



Examples of Quarterly Incentive Fee Calculation



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Pre-incentive
fee net investment income does not exceed hurdle rate, therefore there is no incentive fee.



Pre-incentive
fee net investment income exceeds hurdle rate, but does not fully satisfy the "catch-up" provision, therefore the income related portion of the
incentive fee is 0.3575%.

Incentive Fee

=

(100% × (pre-incentive fee net investment income-1.875%)=

100% (2.2325%-1.875%)=

100% (0.3575%)=

0.3575%


(1)The
hypothetical amount of pre-incentive fee net investment income shown is based on a percentage of total net assets.(2)Represents
7.5% annualized hurdle rate.(3)Represents
1.75% annualized management fee. For the purposes of this example, we have assumed that we have not incurred any indebtedness and that we
maintain no cash or cash equivalents.(4)The
"catch-up" provision is intended to provide our investment adviser with an incentive fee of 20% on all pre-incentive fee net
investment income as if a hurdle rate did not apply when our net investment income exceeds 2.344% in any fiscal quarter.




Pre-incentive
fee net investment income exceeds the hurdle rate, and fully satisfies the "catch-up" provision, therefore the income related portion of the
incentive fee is 0.5467%.

Incentive fee

=

100% × pre-incentive fee net investment income (subject to "catch-up")(4)Incentive fee

=

100% × "catch-up" + (20% × (Pre-incentive fee net investment income-2.344%))Catch up

=

2.344%-1.875%=

0.469%Incentive fee

=

(100% × 0.469%) + (20% × (2.7325%-2.344%))=

0.469% + (20% × 0.3885%)=

0.469% + 0.0777%=

0.5467%


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Example 2: Capital Gains Portion of Incentive Fee:



The
capital gains portion of the incentive fee, if any, calculated under the cumulative method would be:



The
capital gains portion of the incentive fee, if any, calculated under the cumulative method would be:





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The
investment advisory and management agreement with Saratoga Investment Advisors was approved by our board of directors at an in-person meeting of the directors, including
a majority of our independent directors, and was approved by our stockholders at the special meeting of stockholders held on July 30, 2010.

In
approving this agreement, the directors considered, among other things, (i) the nature, extent and quality of the advisory and other services to be provided to us by Saratoga
Investment Advisors; (ii) our investment performance and the investment performance of Saratoga Investment Advisors; (iii) the expected costs of the services to be provided by Saratoga
Investment Advisors (including management fees, advisory fees and expense ratios) and the profits expected to be realized by Saratoga Investment Advisors; (iv) the limited potential for
economies of scale in investment management associated with managing us; and (v) Saratoga Investment Advisors estimated pro forma profitability with respect to managing us.

The
investment advisory and management agreement will continue in effect for a period of two years from its effective date, and if not sooner terminated, will continue in effect for a
successive period of 12 months thereafter, provided that each continuance is specifically approved at least annually by both (i) the vote of a majority of the board members or the vote
of a majority of our outstanding voting securities (as such term is defined in the 1940 Act) and (ii) the vote of a majority of the board members who are not parties to the investment advisory
and management agreement or interested persons (as such term is defined in the 1940 Act) of any such party, cast in person at a meeting called for the purpose of voting on such approval. The
investment advisory and management agreement may be terminated as a whole at any time by us, without the payment of any penalty, upon the vote of a majority of the board members or a majority of our
outstanding voting securities or by Saratoga Investment Advisors, on 60 days' written notice by either party to the other, which notice may be waived by the non-terminating party.



The investment advisory and management agreement provides that all investment professionals of Saratoga Investment Advisors and its
staff, when and to the extent engaged in providing investment advisory services required to be provided by Saratoga Investment Advisors, and the compensation and routine overhead expenses of such
personnel allocable to such services, will be provided and paid for by Saratoga Investment Advisors and not by us.

We
bear all costs and expenses of our operations and transactions, including those relating to:



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The investment advisory and management agreement will remain in effect continuously, unless terminated under the termination provisions
of the agreement. The investment advisory and management agreement provides that it may be terminated at any time, without the payment of any penalty, upon 60 days written notice, by the vote
of stockholders holding a majority of our outstanding voting securities, or by the vote of our directors or by Saratoga Investment Advisors.

The
investment advisory and management agreement will, unless terminated as described above, continue until the second anniversary of its July 30, 2010 effective date and will
continue in effect from year to year thereafter so long as it is approved at least annually by (i) the vote of the board of directors, or by the vote of stockholders holding a majority of our
outstanding voting securities, and (ii) the vote of a majority of our directors who are not parties to the investment advisory and management agreement or "interested persons" (as such term is
defined in Section 2(a)(19) of the 1940 Act) of any party to such agreement, in accordance with the requirements of the 1940 Act.



Under the investment advisory and management agreement, Saratoga Investment Advisors and certain of its affiliates are not liable to us
for any action taken or omitted to be taken by Saratoga Investment Advisors in connection with the performance of any of its duties or obligations under the agreement or otherwise as an investment
adviser to us, except to the extent specified in Section 36(b)

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of
the 1940 Act concerning loss resulting from a breach of fiduciary duty (as the same is finally determined by judicial proceedings) with respect to the receipt of compensation for services and
except to the extent such action or omission constitutes gross negligence, willful misfeasance, bad faith or reckless disregard of its duties and obligations under the agreement.

We
also provide indemnification to Saratoga Investment Advisors and certain of its affiliates for damages, liabilities, costs and expenses incurred by them in or by reason of any
pending, threatened or completed action, suit, investigation or other proceeding arising out of or otherwise based upon the performance of any of its duties or obligations under the agreement or
otherwise as an investment adviser to us. However, we would not provide indemnification against any liability to us or our security holders to which Saratoga Investment Advisors or such affiliates
would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of any such person's duties or by reason of the reckless disregard of its duties and
obligations under the agreement.



Saratoga Investment Advisors is registered as an investment adviser under the Investment Advisers Act of 1940. The principal executive
offices of Saratoga Investment Advisors are located at 535 Madison Avenue, New York, New York 10022.

Administration Agreement

Pursuant to a separate administration agreement, Saratoga Investment Advisors, who also serves as our administrator, furnishes us with
office facilities, equipment and clerical, book-keeping and record keeping services. The administration agreement has an initial two year term commencing on July 30, 2010. Under the
administration agreement, our administrator also performs, or oversees the performance of, our required administrative services, which include, among other things, being responsible for the financial
records which we are required to maintain, preparing reports for our stockholders and reports required to be filed with the SEC. In addition, our administrator assists us in determining and publishing
our net asset value, oversees the preparation and filing of our tax returns and the printing and dissemination of reports to our stockholders, and generally oversees the payment of our expenses and
the performance of administrative and professional services rendered to us by others. Payments under the administration agreement equal an amount based upon our allocable portion of our
administrator's overhead in performing its obligations under the administration agreement, including rent and our allocable portion
of the cost of our officers and their respective staffs relating to the performance of services under this agreement (including travel expenses). Our allocable portion is based on the proportion that
our total assets bears to the total assets administered or managed by our administrator. Under the administration agreement, our administrator also provides managerial assistance, on our behalf, to
those portfolio companies who accept our offer of assistance. The amount payable under the administration agreement is currently capped at $1.0 million for each annual term of the agreement.
The administration agreement may be terminated by either party without penalty upon 60 days written notice to the other party.



Under the administration agreement, Saratoga Investment Advisors and certain of its affiliates are not liable to us for any action
taken or omitted to be taken by Saratoga Investment Advisors in connection with the performance of any of its duties or obligations under the agreement.

We
also provide indemnification to Saratoga Investment Advisors and certain of its affiliates for damages, liabilities, costs and expenses incurred by them in or by reason of any
pending, threatened or completed action, suit, investigation or other proceeding arising out of or otherwise based upon the performance of any of its duties or obligations under the agreement or
otherwise as an administrator to

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us.
However, we do not provide indemnification against any liability to us or our security holders to which Saratoga Investment Advisors or such affiliates would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the performance of any such person's duties or by reason of the reckless disregard of its duties and obligations under the agreement.

License Agreement

We entered into a trademark license agreement with Saratoga Investment Advisors, pursuant to which Saratoga Investment Advisors grants
us a non-exclusive, royalty-free license to use the name "Saratoga." Under this agreement, we have a right to use the "Saratoga" name, for so long as Saratoga Investment
Advisors or one of its affiliates remains
our investment adviser. Other than with respect to this limited license, we have no legal right to the "Saratoga" name. Saratoga Investment Advisors has the right to terminate the license agreement if
it is no longer acting as our investment adviser. In the event the investment advisory and management agreement is terminated, we would be required to change our name to eliminate the use of the name
"Saratoga."

Business Development Company Regulations

We have elected to be treated as a BDC under the 1940 Act. As with other companies regulated by the 1940 Act, a BDC must adhere to
certain substantive regulatory requirements. The 1940 Act contains prohibitions and restrictions relating to transactions between BDCs and their affiliates (including any investment advisers or
sub-advisers), principal underwriters and affiliates of those affiliates or underwriters, and requires that a majority of the directors be persons other than "interested persons," as that
term is defined in the 1940 Act. In addition, the 1940 Act provides that we may not change the nature of our business so as to cease to be, or to withdraw our election as, a BDC, unless approved by a
majority of our outstanding voting securities. A majority of the outstanding voting securities of a company is defined under the 1940 Act as the lesser of: (i) 67% or more of such company's
stock present at a meeting if more than 50% of the outstanding stock of such company is present and represented by proxy or (ii) more than 50% of the outstanding stock of such company.



Under the 1940 Act, a BDC may not acquire any asset other than 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 acquisition is made, qualifying assets represent at least 70% of the company's total assets. The principal categories of qualifying assets
relevant to our business are the following:



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As a BDC we offer, and must provide upon request, managerial assistance to our portfolio companies. This assistance could involve,
among other things, monitoring the operations of our portfolio companies, participating in board and management meetings, consulting with and advising officers of portfolio companies and providing
other organizational and financial guidance. Pursuant to a separate administration agreement, our investment adviser provides such managerial assistance on our behalf to portfolio companies that
request this assistance, recognizing that our involvement with each investment will vary based on factors including the size of the company, the nature of our investment, the company's overall stage
of development and our relative position in the capital structure. We may receive fees for these services.

In
addition, a BDC must have been organized and have its principal place of business in the United States and must be operated for the purpose of making investments in the types of
securities described in (1), (2) or (3) above under "Qualifying assets." However, in order to count portfolio securities as qualifying assets for the purpose of the 70%
test, the BDC must either control the issuer of the securities or must offer to make available to the issuer of the securities (other than small and solvent companies described above) significant
managerial assistance; except that, where the BDC purchases such securities in conjunction with one or more other persons acting together, one of the other persons in the group may make available such
managerial assistance. Making available significant managerial assistance means, among other things, any arrangement whereby the BDC, through its directors, officers or employees, offers to provide,
and, if accepted, does so provide, significant guidance and counsel concerning the management, operations or business objectives and policies of a portfolio company.

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As a BDC, pending investment in other types of "qualifying assets," as described above, our investments may consist of cash, cash
equivalents, U.S. Government securities or high-quality debt securities maturing in one year or less from the time of investment, which we refer to, collectively, as temporary investments,
so that 70% of our assets are qualifying assets. Typically, we will invest in U.S. Treasury bills or in repurchase agreements, provided that such agreements are fully collateralized by cash or
securities issued by the U.S. Government or its agencies. A repurchase agreement involves the purchase by an investor, such as us, of a specified security and the simultaneous agreement by the seller
to repurchase it at an agreed-upon future date and at a price which is greater than the purchase price by an amount that reflects an agreed-upon interest rate. There is no
percentage restriction on the proportion of our assets that may be invested in such repurchase agreements. However, if more than 25% of our total assets constitute repurchase agreements from a single
counterparty, we would not meet the asset diversification requirements in order to qualify as a RIC for U.S. federal income tax purposes. Thus, we do not intend to enter into repurchase agreements
with a single counterparty in excess of this limit. Our investment adviser will monitor the creditworthiness of the counterparties with which we enter into repurchase agreement transactions.



As a BDC, we are permitted, under specified conditions, to issue multiple classes of indebtedness and one class of shares of stock
senior to our common stock if our asset coverage, as defined in the 1940 Act, is at least equal to 200% immediately after each such issuance. In addition, while any indebtedness and senior securities
remain outstanding, we must generally make provisions to prohibit any distribution to our stockholders or the repurchase of such securities or stock unless we meet the applicable asset coverage ratios
at the time of the distribution or repurchase. We may also borrow amounts up to 5% of the value of our total assets for temporary or emergency purposes without regard to asset coverage.



We are generally not able to issue and sell our common stock at a price below net asset value per share. We may, however, sell our
common stock, warrants, options or rights to acquire our common stock, at a price below the current net asset value of the common stock if our board of directors determines that such sale is in our
best interests and that of our stockholders, and our stockholders approve such sale. In any such case, the price at which our securities are to be issued and sold may not be less than a price which,
in the determination of our board of directors, closely approximates the market value of such securities (less any distributing commission or discount). We may also make rights offerings to our
stockholders at prices per share less than the net asset value per share, subject to applicable requirements of the 1940 Act.



As a BDC, we and Saratoga Investment Advisors have each adopted a code of ethics pursuant to Rule 17j-1 under the
1940 Act that establishes procedures for personal investments and restricts certain personal securities transactions. Personnel subject to each code may invest in securities for their personal
investment accounts, including securities that may be purchased or held by us, so long as such investments are made in accordance with the code's requirements.



SEC registered investment advisers that have the authority to vote (client) proxies (which authority may be implied from a general
grant of investment discretion) are required to adopt policies and

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procedures
reasonably designed to ensure that the adviser votes proxies in the best interests of its clients. Registered investment advisers also must maintain certain records on proxy voting. In most
cases, we will invest in securities that do not generally entitle us to voting rights in our portfolio companies. When we do have voting rights, we will delegate the exercise of such rights to our
investment adviser.

Saratoga
Investment Advisors has particular proxy voting policies and procedures in place. In determining how to vote, officers of Saratoga Investment Advisors will consult with each
other, taking into account our interests and the interests of our investors, as well as any potential conflicts of interest. Saratoga Investment Advisors will consult with legal counsel to identify
potential conflicts of interest. Where a potential conflict of interest exists, Saratoga Investment Advisors may, if it so elects, resolve it by following the recommendation of a disinterested third
party, by seeking the direction of our independent directors or, in extreme cases, by abstaining from voting. While Saratoga Investment Advisors may retain an outside service to provide voting
recommendations and to assist in analyzing votes, it will not delegate its voting authority to any third party.

An
officer of Saratoga Investment Advisors will keep a written record of how all such proxies are voted. It will retain records of (1) proxy voting policies and procedures,
(2) all proxy statements received (or it may rely on proxy statements filed on the SEC's EDGAR system in lieu thereof), (3) all votes cast, (4) investor requests for voting
information, and (5) any specific documents prepared or received in connection with a decision on a proxy vote. If it uses an outside service, Saratoga Investment Advisors may rely on such
service to maintain copies of proxy statements and records, so long as such service will provide a copy of such documents promptly upon request.

Saratoga
Investment Advisors' proxy voting policies are not exhaustive and are designed to be responsive to the wide range of issues that may be subject to a proxy vote. In general,
Saratoga Investment Advisors will vote our proxies in accordance with these guidelines unless: (1) it has determined otherwise due to the specific and unusual facts and circumstances with
respect to a particular vote, (2) the subject matter of the vote is not covered by these guidelines, (3) a material
conflict of interest is present, or (4) it finds it necessary to vote contrary to its general guidelines to maximize stockholder value or our best interests.

In
reviewing proxy issues, Saratoga Investment Advisors generally will use the following guidelines:

Elections of Directors:In general, Saratoga Investment Advisors will vote in favor of the management-proposed slate of directors. If
there is a
proxy fight for seats on a portfolio company's board of directors, or Saratoga Investment Advisors determines that there are other compelling reasons for withholding our vote, it will determine the
appropriate vote on the matter. It may withhold votes for directors that fail to act on key issues, such as failure to: (1) implement proposals to declassify a board, (2) implement a
majority vote requirement, (3) submit a rights plan to a stockholder vote or (4) act on tender offers where a majority of stockholders have tendered their shares. Finally, Saratoga
Investment Advisors may withhold votes for directors of non-U.S. issuers where there is insufficient information about the nominees disclosed in the proxy statement.

Appointment of Auditors:We believe that a portfolio company remains in the best position to choose its independent auditors and
Saratoga Investment
Advisors will generally support management's recommendation in this regard.

Changes in Capital Structure:Changes in a portfolio company's organizational documents may be required by state or federal regulation.
In general,
Saratoga Investment Advisors will cast our votes in accordance with the management on such proposals. However, Saratoga Investment Advisors will consider carefully any proposal regarding a change in
corporate structure that is not required by state or federal regulation.

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Corporate Restructurings, Mergers and Acquisitions:We believe proxy votes dealing with corporate reorganizations are an extension of
the investment
decision. Accordingly, Saratoga Investment Advisors will analyze such proposals on a case-by-case basis and vote in accordance with its perception of our interests.

Proposals Affecting Stockholder Rights:We will generally vote in favor of proposals that give stockholders a greater voice in the
affairs of a
portfolio company and oppose any measure that seeks to limit such rights. However, when analyzing such proposals, Saratoga Investment Advisors will balance the financial impact of the proposal against
any impairment of stockholder rights as well as of our investment in the portfolio company.

Corporate Governance:We recognize the importance of good corporate governance. Accordingly, Saratoga Investment Advisors will
generally favor
proposals that promote transparency and accountability within a portfolio company.

Anti-Takeover Measures:Saratoga Investment Advisors will evaluate, on a case-by-case basis, any proposals
regarding anti-takeover measures to determine the likely effect on stockholder value dilution.

Share Splits:Saratoga Investment Advisors will generally vote with management on share split matters.

Limited Liability of Directors:Saratoga Investment Advisors will generally vote with management on matters that could adversely affect
the limited
liability of directors.

Social and Corporate Responsibility:Saratoga Investment Advisors will review proposals related to social, political and environmental
issues to
determine whether they may adversely affect stockholder value. It may abstain from voting on such proposals where they do not have a readily determinable financial impact on stockholder value.



We are committed to protecting the privacy of our stockholders. The following explains the privacy policies of Saratoga Investment
Corp., Saratoga Investment Advisors and their affiliated companies.

We
will safeguard, according to strict standards of security and confidentiality, all information we receive about our stockholders. The only information we collect from stockholders is
the holder's name, address, number of shares and social security number. This information is used only so that we can send annual reports and other information about us to the stockholder, and send
the stockholder proxy statements or other information required by law.

We
do not share this information with any non-affiliated third party except as described below.



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As a BDC, we will be periodically examined by the SEC for compliance with the 1940 Act.

We
are required to provide and maintain a bond issued by a reputable fidelity insurance company to protect us against larceny and embezzlement. Furthermore, as a BDC, we are prohibited
from protecting any director or officer against any liability to us or our stockholders arising from willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in
the conduct of such person's office.

We
and Saratoga Investment Advisors are each required to adopt and implement written policies and procedures reasonably designed to prevent violation of the federal securities laws,
review these policies and procedures annually for their adequacy and the effectiveness of their implementation, and designate a chief compliance officer to be responsible for administering the
policies and procedures.



We may be prohibited under the 1940 Act from knowingly participating in certain transactions with our affiliates without the prior
approval of our board of directors who are not interested persons and, in some cases, prior approval by the SEC. Thus, based on current SEC interpretations, co-investment transactions
involving a BDC like us and an entity that is advised by Saratoga Investment Advisors or an affiliated adviser generally could not be effected without SEC relief. The staff of the SEC has, however,
granted no-action relief permitting for purchases of a single class of privately-placed securities provided that the adviser negotiates no term other than price and certain other
conditions are met. As a result, currently we only expect to co-invest on a concurrent basis with affiliates of Saratoga Investment Advisors when each of us will own the same securities of
the issuer and when no term is negotiated other than price. Any such investment would be made, subject to compliance with existing regulatory guidance, applicable regulations and our allocation
procedures.

We
may in the future submit an exemptive application to the SEC to permit greater flexibility to negotiate the terms of co-investments because we believe that it will be
advantageous for us to co-invest with affiliates of Saratoga Investment Advisors where such investment is consistent with the investment objective, investment positions, investment
policies, investment strategies, investment restrictions, regulatory requirements and other pertinent factors applicable to us. However, there is no assurance that any application for exemptive
relief, if made, would be granted by the SEC.

Small Business Investment Company Regulations

On March 28, 2012, our wholly-owned subsidiary, Saratoga Investment Corp. SBIC, LP, received an SBIC license from the
SBA.

The
SBIC license allows our SBIC subsidiary to obtain leverage by issuing SBA-guaranteed debentures, subject to the satisfaction of certain customary procedures.
SBA-guaranteed debentures are non-recourse, interest only debentures with interest payable semi-annually and have a ten year maturity. The principal amount of
SBA-guaranteed debentures is not required to be paid prior to maturity but may be prepaid at any time without penalty. The interest rate of SBA-guaranteed debentures is fixed
at the time of issuance at a market-driven spread over U.S. Treasury Notes with 10-year maturities.

SBICs
are designed to stimulate the flow of private equity capital to eligible small businesses. Under SBA regulations, SBICs may make loans to eligible small businesses and invest in
the equity securities of small businesses. Under present SBA regulations, eligible small businesses include businesses that have a tangible net worth not exceeding $18 million and have average
annual fully taxed net income not exceeding $6 million for the two most recent fiscal years. In addition, an SBIC must devote 25% of its investment activity to "smaller" concerns as defined by
the SBA. A smaller concern is one that has a tangible net worth not exceeding $6 million and has average annual fully taxed net

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income
not exceeding $2 million for the two most recent fiscal years. SBA regulations also provide alternative size standard criteria to determine eligibility, which depend on the industry in
which the business is engaged and are based on such factors as the number of employees and gross sales. According to SBA regulations, SBICs may make long-term loans to small businesses,
invest in the equity securities of such businesses and provide them with consulting and advisory services.

SBA
regulations currently limit the amount of SBA-guaranteed debentures that an SBIC may issue to $150 million when it has at least $75 million in regulatory
capital. Affiliated SBICs are permitted to issue up to a combined maximum amount of $225 million in SBA-guaranteed debentures when they have at least $112.5 million in
combined regulatory capital. As of May 23, 2012, our SBIC subsidiary had $25 million in regulatory capital and no SBA-guaranteed debentures outstanding. The SBA restricts the
ability of SBICs to repurchase their capital stock. SBA regulations also include restrictions on a "change of control" or transfer of an SBIC and require that SBICs invest idle funds in accordance
with SBA regulations. In addition, our SBIC subsidiary may also be limited in its ability to make distributions to us if it does not have sufficient capital, in accordance with SBA regulations.

Our
SBIC subsidiary is subject to regulation and oversight by the SBA, including requirements with respect to maintaining certain minimum financial ratios and other covenants. Receipt of
an SBIC license does not assure that our SBIC subsidiary will receive SBA guaranteed debenture funding, which is dependent upon our SBIC subsidiary continuing to be in compliance with SBA regulations
and policies. The SBA, as a creditor, will have a superior claim to our SBIC subsidiary's assets over our stockholders in the event we liquidate our SBIC subsidiary or the SBA exercises its remedies
under the SBA-guaranteed debentures issued by our SBIC subsidiary upon an event of default.

Available Information

We file with or submit to the SEC annual, quarterly and current periodic reports, proxy statements and other information meeting the
informational requirements of the Securities Exchange of 1934, as amended (the "Exchange Act"). You may inspect and copy these reports, proxy statements and other information at the Public Reference
Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. Copies of these reports, proxy and information statements and other information may be obtained, after paying a duplicating fee, by electronic
request at the following e-mail address: publicinfo@sec.gov, or by writing the SEC's Public Reference Section, Washington, D.C. 20549-0102. In addition, the SEC maintains an
Internet website that contains reports, proxy and information statements and other information filed electronically by us with the SEC at http://www.sec.gov. Our Internet address is
http://www.saratogainvestmentcorp.com. We make available free of charge on our Internet website our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
Information contained on our website is not incorporated by reference into this Annual Report, and you should not consider that information to be part of this Annual Report.

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Item 1A.    Risk Factors

Investing in our common stock involves a high degree of risk. The risks set forth below are not the only risks we face. If any of the
following risks occur, our business and financial condition could be materially and adversely affected. In such case, our net asset value and the trading price of our common stock could decline.

The current state of the economy and financial markets increases the likelihood of adverse effects on our financial position and results of operations.

The broader economic fundamentals of the United States economy remain uncertain. Unemployment levels remain elevated and other economic
fundamentals remain depressed. In the event that the United States economic performance contracts, it is likely that the financial results of middle market companies, like those in which we invest,
could experience
deterioration or limited growth, which could ultimately lead to difficulty in meeting their debt service requirements and an increase in defaults. Consequently, we can provide no assurance that the
performance of certain of our portfolio companies will not be negatively impacted by economic or other conditions, which could also have a negative impact on our future results.

Although
we have been able to secure access to additional liquidity, the potential for volatility in the debt and in the equity capital markets provides no assurance that debt or equity
capital will be available to us in the future on favorable terms, or at all.

Saratoga Investment Advisors has a limited history of managing a BDC or a RIC.

The 1940 Act and the Code impose numerous constraints on the operations of BDCs and RICs that do not apply to the other investment
vehicles previously managed by the principals of Saratoga Investment Advisors. For example, under the 1940 Act, BDCs are required to invest at least 70% of their total assets primarily in securities
of qualifying U.S. private or thinly-traded companies. Moreover, qualification for taxation as a RIC under subchapter M of the Code requires satisfaction of source-of-income and diversification
requirements and our ability to avoid corporate-level taxes on our income and gains depends on our satisfaction of distribution requirements. The failure to comply with these provisions in a timely
manner could prevent us from qualifying as a BDC or RIC or could force us to pay unexpected taxes and penalties, which could be material.

Saratoga
Investment Advisors has been our investment adviser since July 30, 2010. Prior to that time, Saratoga Investment Advisors did not have any prior experience managing a BDC
or RIC and its lack of experience in managing a portfolio of assets under the constraints imposed by the 1940 Act and the Code on a BDC and a RIC, respectively, may hinder its ability to take
advantage of attractive investment opportunities and, as a result, achieve our investment objective.

We may be obligated to pay Saratoga Investment Advisors incentive fees even if we incur a net loss, regardless of the market value of our common stock.

Saratoga Investment Advisors is entitled to incentive fees for each fiscal quarter in an amount equal to a percentage of the excess of
our investment income for that quarter (before deducting incentive compensation, but net of operating expenses and certain other items) above a threshold return for that quarter. Our
pre-incentive fee net investment income, for incentive compensation purposes, excludes realized and unrealized capital gains or losses that we may incur in the fiscal quarter, even if such
capital gains or losses result in a net gain or loss on our statement of operations for that quarter. Thus, we may be required to pay Saratoga Investment Advisors incentive fees for a fiscal quarter
even if there is a decline in the value of our portfolio or we incur a net loss for that quarter.

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Under the terms of the investment advisory and management agreement, we may have to pay incentive fees to Saratoga Investment Advisors in connection with the sale of an
investment that is sold at a price higher than the fair value of such investment on May 31, 2010, even if we incur a loss on the sale of such investment.

Incentive fees on capital gains paid to Saratoga Investment Advisors under the investment advisory and management agreement equals 20%
of our "incentive fee capital gains," which equals our realized capital gains on a cumulative basis from May 31, 2010 through the end of the year, if any, computed net of all realized capital
losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fee. Under the investment advisory and management agreement,
the capital gains portion of the incentive fee is based on realized gains and realized and unrealized losses from May 31, 2010. Therefore, realized and unrealized losses incurred prior to such
time will not be taken into account when calculating the capital gains portion of the incentive fee, and Saratoga Investment Advisors will be entitled to 20% of the incentive fee capital gains that
arise after May 31, 2010. In addition, the cost basis for computing realized gains and losses on investments held by us as of May 31, 2010 will equal the fair value of such investments
as of such date. As a result, we may be required to pay incentive fees to Saratoga Investment Advisors on the sale of an investment even if we incur a realized loss on such investment, so long as the
investment is sold for an amount greater than its fair value as of May 31, 2010.

The way in which the base management and incentive fees under the investment advisory and management agreement is determined may encourage Saratoga Investment Advisors to
take actions that may not be in our stockholders' best interests.

The incentive fee payable by us to our investment adviser may create an incentive for it to make investments on our behalf that are
risky or more speculative than would be the case in the absence of such compensation arrangement, which could result in higher investment losses, particularly during cyclical economic downturns. The
way in which the incentive fee payable to our investment adviser is determined, which is calculated separately in two components as a percentage of the income (subject to a hurdle rate) and as a
percentage of the realized gain on invested capital, may encourage our investment adviser to use leverage to increase the return on our investments or otherwise manipulate our income so as to
recognize income in quarters where the hurdle rate is exceeded. Moreover, we pay Saratoga Investment Advisors a base management fee based on our total assets, including any investments made with
borrowings, which may create an incentive for it to cause us to incur more leverage than is prudent, or not to repay our outstanding indebtedness when it may be advantageous for us to do so, in order
to maximize its compensation. Under certain circumstances,
the use of leverage may increase the likelihood of default, which would disfavor the holders of our common stock.

The
incentive fee payable by us to our investment adviser also may create an incentive for our investment adviser to invest on our behalf in instruments that have a deferred interest
feature. Under these investments, we would accrue the interest over the life of the investment but would not receive the cash income from the investment until the end of the investment's term, if at
all. Our net investment income used to calculate the income portion of our incentive fee, however, includes accrued interest. Thus, a portion of the incentive fee would be based on income that we have
not yet received in cash and may never receive in cash if the portfolio company is unable to satisfy such interest payment obligation to us. Consequently, while we may make incentive fee payments on
income accruals that we may not collect in the future and with respect to which we do not have a "claw back" right against our investment adviser per se, the amount of accrued income written off in
any period will reduce the income in the period in which such write-off was taken and may thereby reduce such period's incentive fee payment.

In
addition, Saratoga Investment Advisors receives a quarterly income incentive fee based, in part, on our pre-incentive fee net investment income, if any, for the
immediately preceding calendar quarter. This income incentive fee is subject to a fixed quarterly hurdle rate before providing an income

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incentive
fee return to Saratoga Investment Advisors. This fixed hurdle rate was determined when then current interest rates were relatively low on a historical basis. Thus, if interest rates rise, it
would become easier for our investment income to exceed the hurdle rate and, as a result, more likely that Saratoga Investment Advisors will receive an income incentive fee than if interest rates on
our investments remained constant or decreased.

Moreover,
our investment adviser receives the incentive fee based, in part, upon net capital gains realized on our investments. Unlike the portion of the incentive fee based on income,
there is no performance threshold applicable to the portion of the incentive fee based on net capital gains. As a result, our investment adviser may have a tendency to invest more in investments that
are likely to result in capital gains as compared to income producing securities. Such a practice could result in our investing in more speculative securities than would otherwise be the case, which
could result in higher investment losses, particularly during economic downturns.

Our
board of directors will seek to ensure that Saratoga Investment Advisors is acting in the best interests of our stockholders and that any conflict of interest faced by Saratoga
Investment Advisors in its capacity as our investment adviser does not negatively impact us.

The base management fee we pay to Saratoga Investment Advisors may cause it to increase our leverage contrary to our interest.

We pay Saratoga Investment Advisors a quarterly base management fee based on the value of our total assets (including any assets
acquired with leverage). Accordingly, Saratoga Investment Advisors has an economic incentive to increase our leverage. Our board of directors monitors the conflicts presented by this compensation
structure by approving the amount of leverage that we incur. If our leverage is increased, we will be exposed to increased risk of loss, bear the increase cost of issuing and servicing such senior
indebtedness, and will be subject to any additional covenant restrictions imposed on us in an indenture or other instrument or by the applicable lender.

We employ leverage, which magnifies the potential for gain or loss on amounts invested and may increase the risk of investing in us.

Borrowings, also known as leverage, magnify the potential for gain or loss on amounts invested and, therefore, increase the risks
associated with investing in us. We borrow from and issue senior debt securities to banks and other lenders. Holders of these senior securities have fixed dollar claims on our assets that are superior
to the claims of our common stockholders. If the value of our assets increases, then leveraging would cause the net asset value attributable to our common stock to increase more sharply than it would
have had we not leveraged. Conversely, if the value of our assets decreases, leveraging would cause the net asset value to decline more sharply than it otherwise would have had we not leveraged.
Similarly, any increase in our income in excess of interest payable on the borrowed funds would cause our net income to increase more than it would without the leverage, while any decrease in our
income would cause net income to decline more sharply than it would have had we not borrowed. Such a decline could negatively affect our ability to make common stock dividend payments. Leverage is
generally considered a speculative investment technique and involves risks and special considerations for stockholders, including:



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Saratoga Investment Advisors' liability is limited under the investment advisory and management agreement and we will indemnify Saratoga Investments Advisors against certain
liabilities, which may lead it to act in a riskier manner on our behalf than it would when acting for its own account.

Saratoga Investment Advisors has not assumed any responsibility to us other than to render the services described in the investment
advisory and management agreement. Pursuant to the investment advisory and management agreement, Saratoga Investment Advisors and its officers and employees are not liable to us for their acts under
the investment advisory and management agreement absent willful misfeasance, bad faith, gross negligence or reckless disregard in the performance of their duties. We have agreed to indemnify, defend
and protect Saratoga Investment Advisors and its officers and employees with respect to all damages, liabilities, costs and expenses resulting from acts of Saratoga Investment Advisors not arising out
of willful misfeasance, bad faith, gross negligence or reckless disregard in the performance of their duties under the investment advisory and management agreement. These protections may lead Saratoga
Investment Advisors to act in a riskier manner when acting on our behalf than it would when acting for its own account.

Substantially all of our assets are subject to security interests under our senior secured revolving credit facility with Madison Capital Funding, or claims of the SBA with
respect to SBA-guaranteed debentures we may issue and if we default on our obligations thereunder, we may suffer adverse consequences, including Madison Capital Funding and/or the SBA foreclosing on
our assets.

Substantially all of our assets are pledged as collateral under our senior secured revolving credit facility with Madison Capital
Funding or will be subject to a superior claim
over our stockholders by the SBA once we have issued SBA-guaranteed debentures. If we default on our obligations under this facility, or upon their issuance, SBA-guaranteed
debentures, Madison Capital Funding may have the right to foreclose upon and sell, or otherwise transfer, the collateral subject to their security interests or superior claim. In such event, we may be
forced to sell our investments to raise funds to repay our outstanding borrowings in order to avoid foreclosure and these forced sales may be at times and at prices we would not consider advantageous.
Moreover, such deleveraging of our company could significantly impair our ability to effectively operate our business in the manner in which we have historically operated.

In
addition, if Madison Capital Funding exercises its right to sell the assets pledged under the senior secured revolving credit facility, such sales may be completed at distressed sale
prices, thereby diminishing or potentially eliminating the amount of cash available to us after repayment of the amounts outstanding under the senior secured revolving credit facility.

Changes in interest rates may affect our cost of capital and net investment income.

Because we may borrow to fund our investments, a portion of our net investment income may be dependent upon the difference between the
interest rate at which we borrow funds and the interest rate at which we invest these funds. A portion of our investments will have fixed interest rates, while a portion of our borrowings will likely
have floating interest rates. As a result, a significant change in market interest rates could have a material adverse effect on our net investment income. In periods of rising interest rates, our
cost of funds could increase, which would reduce our net investment income. We may hedge against such interest rate fluctuations by using standard hedging instruments such as

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futures,
options and forward contracts, subject to applicable legal requirements, including without limitation, all necessary registrations (or exemptions from registration) with the Commodity Futures
Trading Commission. These activities may limit our ability to participate in the benefits of lower interest rates with respect to the hedged borrowings. Adverse developments resulting from changes in
interest rates or hedging transactions could have a material adverse effect on our business, financial condition and results of operations.

There are significant potential conflicts of interest which could adversely impact our investment returns.

Our executive officers and directors, and the members of our investment adviser, serve or may serve as officers, directors or
principals of entities that operate in the same or a related line of business as we do or of investment funds managed by our affiliates. Accordingly, they may have obligations to investors in those
entities, the fulfillment of which might not be in the best interests of us or our stockholders. For example, Christian L. Oberbeck, our chief executive officer and managing member of our investment
adviser, is the managing partner of Saratoga Partners, a middle market private equity investment firm. In addition, the principals of our investment adviser may manage other funds which may from time
to time have overlapping investment objectives with those of us and accordingly invest in, whether principally or secondarily, asset classes similar to those targeted by us. If this should occur, the
principals of our investment adviser will face conflicts of interest in the allocation of investment opportunities to us and such other funds. Although our investment professionals will endeavor to
allocate investment opportunities in a fair and equitable manner, we and our common stockholders could be adversely affected in the event investment opportunities are allocated among us and other
investment vehicles managed or sponsored by, or affiliated with, our executive officers, directors and investment adviser, and the members of our investment adviser.

We may in the future choose to pay dividends in our own stock, in which case you may be required to pay tax in excess of the cash you receive.

We may distribute taxable dividends that are payable in part in our stock. For example, on November 15, 2011, our board of
directors declared a dividend of $3.00 per share to shareholders payable in cash or shares of our common stock. Under certain applicable provisions of the Code and the Treasury regulations,
distributions payable in cash or in shares of stock at the election of stockholders are treated as taxable dividends. The Internal Revenue Service has issued private rulings indicating that this rule
will apply even where the total amount of cash that may be distributed is limited to no more than 20% of the total distribution. Under these rulings, if too many stockholders elect to receive their
distributions in cash, each such stockholder would receive a pro rata share of the total cash to be distributed and would receive the remainder of their distribution in shares of stock. If we decide
to make any distributions consistent with these rulings that are payable in part in our stock, taxable stockholders receiving such dividends will be required to include the full amount of the dividend
(whether received in cash, our stock, or a combination thereof) as ordinary income (or as long-term capital gain to the extent such distribution is properly reported as a capital gain
dividend) to the extent of our current and accumulated earnings and profits for United States federal income tax purposes. As a result, a U.S. stockholder may be required to pay tax with respect to
such dividends in excess of any cash received. If a U.S. stockholder sells the stock it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in
income with respect to the dividend, depending on the market price of our stock at the time of the sale. Furthermore, with respect to non-U.S. stockholders, we may be required to withhold
U.S. tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in stock. In addition, if a significant number of our stockholders determine to sell
shares of our stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our stock.

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

We are subject to regulation at the local, state and federal levels. These laws and regulations, as well as their interpretation, may
be changed from time to time. Any change in these laws or regulations, or their interpretation, or any failure by us to comply with these laws or regulations may adversely affect our business.

Regulations governing our operation as a BDC will affect our ability to raise additional capital.

Under the provisions of the 1940 Act, we are permitted, as a BDC, to incur indebtedness or issue senior securities only in amounts such
that our asset coverage, as defined in the 1940 Act, equals at least 200% after such incurrence or issuance. Our ability to issue different types of securities is also limited. Compliance with these
requirements may unfavorably limit our investment opportunities and reduce our ability in comparison to other companies to profit from favorable spreads
between the rates at which we can borrow and the rates at which we can lend. As a business development company, therefore, we may need to issue equity more frequently than our privately owned
competitors, which may lead to greater stockholder dilution.

We
are not generally able to issue and sell our common stock at a price below net asset value per share. We may, however, sell our common stock, or warrants, options or rights to acquire
our common stock, at a price below the current net asset value of the common stock if our board of directors determines that such sale is in our best interests and the best interests of our
stockholders, and our stockholders approve such sale. In any such case, the price at which our securities are to be issued and sold may not be less than a price which, in the determination of our
board of directors, closely approximates the market value of such securities (less any commission or discount). If our common stock trades at a discount to net asset value, this restriction could
adversely affect our ability to raise capital.

The agreement governing our senior secured revolving credit facility with Madison Capital Funding contains various covenants that, among other things, limits our discretion
in operating our business and provides for certain minimum financial covenants.

We have entered into a senior secured revolving credit facility with Madison Capital Funding. The agreement governing this facility
contains customary default provisions such as the termination or departure of either Messrs. Oberbeck, Petrocelli or Grisius, a material adverse change in our business and the failure to
maintain certain minimum loan quality and performance standards. An event of default under the facility would result, among other things, in termination of the availability of further funds under the
facility and an accelerated maturity date for all amounts outstanding under the facility, which would likely disrupt our business and, potentially, the portfolio companies whose loans we financed
through the facility. This could reduce our revenues and, by delaying any cash payment allowed to us under the facility until the lender has been paid in full, reduce our liquidity and cash flow and
impair our ability to grow our business and maintain our status as a RIC.

Each
loan origination under the facility is subject to the satisfaction of certain conditions. We cannot assure you that we will be able to borrow funds under the facility at any
particular time or at all.

There is a risk that you may not receive distributions or that our distributions may not grow over time.

As a BDC for 1940 Act purposes and a RIC for U.S. federal income tax purposes, we intend to make distributions out of assets legally
available for distribution to our stockholders once such distributions are authorized by our board of directors and declared by us. We
cannot assure you that we will achieve investment results that will allow us to make a specified level of cash distributions or

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year-to-year
increases in cash distributions. In addition, due to the asset coverage test that is applicable to us as a BDC, we may be limited in our ability to make
distributions. Further, if we invest a greater amount of assets in equity securities that do not pay current dividends, it could reduce the amount available for distribution.

A failure on our part to maintain our qualification as a BDC would significantly reduce our operating flexibility.

If we fail to qualify as a BDC, we might be regulated as a registered closed-end investment company under the 1940 Act,
which would significantly decrease our operating flexibility.

We will be subject to corporate-level income tax if we fail to qualify as a RIC.

We seek to maintain our qualification as a RIC under the Code, which requires us to qualify continuously as a BDC and meet certain
source of income, distribution and asset diversification requirements.

The
source of income requirement is satisfied if we derive at least 90% of our annual gross income from interest, dividends, payments with respect to certain securities loans, gains from
the sale or other disposition of securities or options thereon or foreign currencies, or other income derived with respect to our business of investing in such securities or currencies, and net income
from interests in "qualified publicly traded partnerships," as defined in the Code.

The
annual distribution requirement is satisfied if we distribute to our stockholders on an annual basis an amount equal to at least 90% of our ordinary net taxable income and realized
net short-term capital gains in excess of realized net long-term capital losses, if any, reduced by deductible expenses. We are subject to certain asset coverage ratio
requirements under the 1940 Act and covenants under the senior secured revolving credit facility we have with
Madison Capital Funding that could, under certain circumstances, restrict us from making distributions necessary to qualify as a RIC. In such case, if we are unable to obtain cash from other sources,
we may fail to qualify as a RIC and, thus, may be subject to corporate-level income tax.

The
diversification requirements will be satisfied if we diversify our holdings so that at the end of each quarter of the taxable year: (i) at least 50% of the value of our assets
consists of cash, cash equivalents, U.S. government securities, securities of other regulated investment companies, and other securities if such other securities of any one issuer do not represent
more than 5% of the value of our assets or more than 10% of the outstanding voting securities of the issuer; and (ii) no more than 25% of the value of our assets is invested in the securities,
other than U.S. government securities or securities of other regulated investment companies, of one issuer or of two or more issuers that are controlled, as determined under applicable tax rules, by
us and that are engaged in the same or similar or related trades or businesses or in certain publicly traded partnerships.

Failure
to meet these tests may result in our having to (i) dispose of certain investments quickly or (ii) raise additional capital to prevent the loss of our RIC
qualification. Because most of our investments will be in private companies, any such dispositions could be made at disadvantageous prices and may result in substantial losses. If we raise additional
capital to satisfy the asset diversification requirements, it could take us time to invest such capital. During this period, we will invest the additional capital in temporary investments, such as
cash and cash equivalents, which we expect will earn yields substantially lower than the interest income that we anticipate receiving in respect of investments in leveraged loans and mezzanine debt.

If
we fail to qualify as a RIC for any reason, all of our taxable income will be subject to U.S. federal income tax at regular corporate rates. The resulting corporate taxes could
substantially reduce

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our
net assets, the amount of income available for distribution and the amount of our distributions. Such a failure would have a material adverse effect on us and our stockholders.

Because we intend to distribute between 90% and 100% of our income to our stockholders in connection with our election to be treated as a RIC, we will continue to need
additional capital to finance our growth. If additional funds are unavailable or not available on favorable terms, our ability to grow will be impaired.

In order to qualify for the tax benefits available to RICs and to minimize corporate-level taxes, we intend to distribute to our
stockholders between 90% and 100% of our annual taxable income, except that we may retain certain net capital gains for investment, and treat such amounts as deemed distributions to our stockholders.
If we elect to treat any amounts as deemed distributions, we must pay income taxes at the corporate rate on such deemed distributions on behalf of our stockholders. As a result of these requirements,
we will likely need to raise capital from other sources to grow our business. As a BDC, we generally are required to meet a coverage ratio of total assets, less liabilities and indebtedness not
represented by senior securities, to total senior securities, which includes all of our borrowings and any outstanding preferred stock, of at least 200%. These requirements limit the amount that we
may borrow. Because we will continue to need capital to grow our investment portfolio, these limitations may prevent us from incurring debt and require us to raise additional equity at a time when it
may be disadvantageous to do so.

While
we expect to be able to borrow and to issue additional debt and equity securities, we cannot assure you that debt and equity financing will be available to us on favorable terms,
or at all. Also, as a BDC, we generally are not permitted to issue equity securities priced below net asset value without stockholder approval. If additional funds are not available to us, we could be
forced to curtail or cease new investment activities, and our net asset value and share price could decline.

We may have difficulty paying our required distributions if we recognize income before or without receiving cash in respect of such income.

For federal income tax purposes, we may be required to recognize taxable income in circumstances in which we do not receive a
corresponding payment in cash. For example, we may on occasion hold debt obligations that are treated under applicable tax rules as having original issue discount (such as debt instruments with
payment-in-kind interest ("PIK") or, in certain cases, increasing interest rates or issued with warrants) and we must include in income each year a portion of the original
issue discount that accrues over the life of the obligation, regardless of whether cash representing such income is received by us in the same taxable year. For the year ended February 29,
2012, we received PIK income of $1.4 million. We may also have to include in income other amounts that we have not yet received in cash, such as deferred loan origination fees that are paid
after origination of the loan or are paid in non-cash compensation such as warrants or stock. In addition, we may be required to accrue for federal income tax purposes amounts attributable
to our investment in GSC Investment Corp. CLO 2007 LTD., a collateralized loan obligation fund, that may differ from the distributions paid in respect of our investment in the subordinated
notes of such collateralized loan obligation fund because of the factors set forth above or because distributions on the subordinated notes are contractually required to be diverted for reinvestment
or to pay down outstanding indebtedness.

Because
any original issue discount or other amounts accrued will be included in our investment company taxable income for the year of accrual, we may be required to make a distribution
to our stockholders in order to satisfy the annual distribution requirement, even though we will not have received any corresponding cash amount. As a result, we may have difficulty meeting the annual
distribution requirement necessary to obtain and maintain RIC tax treatment under the Code. We may have to sell some of our investments at times and/or at prices we would not consider advantageous,
raise additional debt or equity capital or forgo new investment opportunities for this purpose. If we are

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not
able to obtain cash from other sources, we may fail to qualify for RIC tax treatment and thus become subject to corporate-level income tax.

Our ability to enter into transactions with our affiliates is restricted.

We are prohibited under the 1940 Act from participating in certain transactions with certain of our affiliates without the prior
approval of the members of our independent directors and, in some cases, the SEC. Any person that owns, directly or indirectly, 5% or more of our outstanding voting securities is our affiliate for
purposes of the 1940 Act and we are generally prohibited from buying or selling any securities (other than our securities) from or to such affiliate, absent the prior approval of our independent
directors. The 1940 Act also prohibits certain "joint" transactions with certain of our affiliates, which could include investments in the same portfolio company, without prior approval of our
independent directors and, in some cases, the SEC. If a person acquires more than 25% of our voting securities, we are prohibited from buying or selling any security (other than any security of which
we are the issuer) from or to such person or certain of that person's affiliates, or entering into prohibited joint transactions with such person, absent the prior approval of the SEC. Similar
restrictions limit our ability to transact business with our officers, directors or investment adviser or their affiliates. As a result of these restrictions, we may be prohibited from buying or
selling any security (other than any security of which we are the issuer) from or to any portfolio company of a private equity fund managed by our investment adviser without the prior approval of the
SEC, which may limit the scope of investment opportunities that would otherwise be available to us.

We operate in a highly competitive market for investment opportunities.

A number of entities compete with us to make the types of investments that we make in private middle market companies. We compete with
other BDCs, public and private
funds (including SBICs), commercial and investment banks, commercial financing companies, insurance companies, high-yield investors, hedge funds, and, to the extent they provide an
alternative form of financing, private equity funds. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than us. Some
competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk
assessments that could allow them to consider a wider variety of investments and establish more relationships than us. Furthermore, many of our competitors are not subject to the regulatory
restrictions that the 1940 Act imposes on us as a BDC. As a result of this competition, we may not be able to take advantage of attractive investment opportunities from time to time, and we cannot
assure you that we will be able to identify and make investments that meet our investment objective.

We
do not seek to compete primarily based on the interest rates we offer and we believe that some of our competitors may make loans with interest rates that are comparable to or lower
than the rates we offer.

We
may lose investment opportunities if we do not match our competitors' pricing, terms and structure. If we match our competitors' pricing, terms and structure, we may experience
decreased net interest income and increased risk of credit loss. As a result of operating in such a competitive environment, we may make investments that are on better terms to our portfolio companies
than we originally anticipated, which may impact our return on these investments.

Economic recessions or downturns could impair our portfolio companies and harm our operating results.

Many of our portfolio companies may be susceptible to economic slowdowns or recessions and may be unable to repay our debt investments
during these periods. Therefore, our non-performing assets are likely to increase and the value of our portfolio is likely to decrease during these periods.

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Adverse
economic conditions also may decrease the value of collateral securing some of our debt investments and the value of our equity investments. Economic slowdowns or recessions could lead to
financial losses in our portfolio and a decrease in revenues, net income and assets. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or
result in a decision by lenders not to extend credit to us. These events could prevent us from increasing investments and harm our operating results.

We are a non-diversified investment company within the meaning of the 1940 Act, and therefore we are not limited with respect to the proportion of our assets
that may be invested in securities of a single issuer.

We are classified as a non-diversified investment company within the meaning of the 1940 Act, which means that we are not
limited by the 1940 Act with respect to the proportion of our assets that we may invest in securities of a single issuer. Although we seek to maintain a diversified portfolio in accordance with our
business strategies, to the extent that we assume large positions in the securities of a small number of issuers, our net asset value may fluctuate to a greater extent than that of a diversified
investment company as a result of changes in the financial condition or the market's assessment of the issuer. We may also be more susceptible to any single economic or regulatory occurrence than a
diversified investment company. Beyond our RIC asset diversification requirements, we do not have fixed guidelines for diversification, and our investments could be concentrated in relatively few
portfolio companies.

Our financial condition and results of operation depend on our ability to manage future investments effectively.

Our ability to achieve our investment objective depends on our ability to acquire suitable investments and monitor and administer those
investments, which depends, in turn, on Saratoga Investment Advisors' ability to identify, invest in and monitor companies that meet our investment criteria.

Accomplishing
this result on a cost-effective basis is largely a function of Saratoga Investment Advisors' structuring of the investment process and its ability to provide
competent, attentive and efficient service to us. Our executive officers and the officers and employees of Saratoga Investment Advisors have substantial responsibilities in connection with their roles
at Saratoga Partners as well as responsibilities under the investment advisory and management agreement. They may also be called upon to provide managerial assistance to our portfolio companies. These
demands on their time, which will increase as the number of investments grow, may distract them or slow the rate of investment. In order to grow, Saratoga Investment Advisors may need to hire, train,
supervise and manage new employees. However, we cannot assure you that any such employees will contribute to the work of Saratoga Investment Advisors. Any failure to manage our future growth
effectively could have a material adverse effect on our business and financial condition

We are exposed to risks associated with changes in interest rates.

General interest rate fluctuations and changes in credit spreads on floating rate loans may have a substantial negative impact on our
investments and investment opportunities and, accordingly, may have a material adverse effect on our rate of return on invested capital. In addition, an increase in interest rates would make it more
expensive to use debt to finance our investments. Decreases in credit spreads on debt that pays a floating rate of return would have an impact on the income generation of our floating rate assets.
Trading prices for debt that pays a fixed rate of return tend to fall as interest rates rise. Trading prices tend to fluctuate more for fixed rate securities that have longer maturities. Although we
have no policy governing the maturities of our investments, under current market conditions we expect that we will invest in a portfolio of debt generally having maturities of up to ten years. This
means that we will be subject to greater risk (other things being equal) than an entity

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investing
solely in shorter-term securities. A decline in the prices of the debt we own could adversely affect the trading price of our common stock.

We may experience fluctuations in our quarterly results.

We could experience fluctuations in our quarterly operating results due to a number of factors, including the interest rate payable on
the debt investments we make, the default rate on such investments, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to
which we encounter competition in our markets and general economic conditions. As a result of these factors, results for any period should not be relied upon as being indicative of performance in
future periods.

Substantially all of our portfolio investments are recorded at fair value as approved in good faith by our board of directors; such valuations are inherently uncertain and
may be materially higher or lower than the values that we ultimately realize upon the disposal of such investments.

A large percentage of our portfolio is, and we expect will continue to be, comprised of investments that are not publicly traded. The
value of investments that are not publicly traded may not be readily determinable. We value these investments quarterly at fair value as approved
in good faith by our board of directors. Where appropriate, Saratoga Investment Advisers may utilize the services of an independent valuation firm to aid it in determining fair value. The types of
factors that may be considered in valuing our investments include the nature and realizable value of any collateral, the portfolio company's ability to make payments and its earnings, the markets in
which the portfolio company does business, market yield trend analysis, comparison to publicly traded companies, discounted cash flow and other relevant factors. Because such valuations, and
particularly valuations of private investments and private companies, are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our determinations of fair value
may differ materially from the values that would have been used if a ready market for these investments existed. Our net asset value could be materially affected if the determinations regarding the
fair value of our investments were materially higher or lower than the values that we ultimately realize upon the disposal of such investments.

If we make unsecured debt investments, we may lack adequate protection in the event our portfolio companies become distressed or insolvent and will likely experience a lower
recovery than more senior debtholders in the event our portfolio companies defaults on their indebtedness.

We make unsecured debt investments in portfolio companies. Unsecured debt investments are unsecured and junior to other indebtedness of
the portfolio company. As a consequence, the holder of an unsecured debt investment may lack adequate protection in the event the portfolio company becomes distressed or insolvent and will likely
experience a lower recovery than more senior debtholders in the event the portfolio company defaults on its indebtedness. In addition, unsecured debt investments of middle-market companies are often
highly illiquid and in adverse market conditions may experience steep declines in valuation even if they are fully performing.

If we invest in the securities and other obligations of distressed or bankrupt companies, such investments may be subject to significant risks, including lack of income,
extraordinary expenses, uncertainty with respect to satisfaction of debt, lower-than expected investment values or income potentials and resale restrictions.

We are authorized to invest in the securities and other obligations of distressed or bankrupt companies. At times, distressed debt
obligations may not produce income and may require us to bear certain extraordinary expenses (including legal, accounting, valuation and transaction expenses) in order to protect and recover our
investment. Therefore, to the extent we invest in distressed debt, our ability to achieve current income for our stockholders may be diminished.

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We
also will be subject to significant uncertainty as to when and in what manner and for what value the distressed debt we invest in will eventually be satisfied (e.g., through a
liquidation of the obligor's assets, an exchange offer or plan of reorganization involving the distressed debt securities or a payment of some amount in satisfaction of the obligation). In addition,
even if an exchange offer is made or plan of reorganization is adopted with respect to distressed debt held by us, there can be no assurance that the securities or other assets received by us in
connection with such exchange offer or plan of reorganization will not have a lower value or income potential than may have been anticipated when the investment was made.

Moreover,
any securities received by us upon completion of an exchange offer or plan of reorganization may be restricted as to resale. As a result of our participation in negotiations
with respect to any exchange offer or plan of reorganization with respect to an issuer of distressed debt, we may be restricted from disposing of such securities if we are in possession of material
non-public information relating to the issuer.

Second priority liens on collateral securing loans that we make to our portfolio companies may be subject to control by senior creditors with first priority liens. If there
is a default, the value of the collateral may not be sufficient to repay in full both the first priority creditors and us.

Certain loans that we make to portfolio companies will be secured on a second priority basis by the same collateral securing senior
secured debt of such companies. The first priority liens on the collateral will secure the portfolio company's obligations under any outstanding senior debt and may secure certain other future debt
that may be permitted to be incurred by the company under the agreements governing the loans. The holders of obligations secured by the first priority liens on the collateral will generally control
the liquidation of and be entitled to receive proceeds from any realization of the collateral to repay their obligations in full before us. In addition, the value of the collateral in the event of
liquidation will depend on market and economic conditions, the availability of buyers and other factors. There can be no assurance that the proceeds, if any, from the sale or sales of all of the
collateral would be sufficient to satisfy the loan obligations secured by the second priority liens after payment in full of all obligations secured by the first priority liens on the collateral. If
such proceeds are not sufficient to repay amounts outstanding under the loan obligations secured by the second priority liens, then we, to the extent not repaid from the proceeds of the sale of the
collateral, will only have an unsecured claim against the company's remaining assets, if any.

The
rights we may have with respect to the collateral securing the loans we make to our portfolio companies with senior debt outstanding may also be limited pursuant to the terms of one
or more intercreditor agreements that we enter into with the holders of senior debt. Under such an intercreditor agreement, at any time that obligations that have the benefit of the first priority
liens are outstanding, any of the following actions that may be taken with respect to the collateral will be at the direction of the holders of the obligations secured by the first priority liens: the
ability to cause the commencement of enforcement proceedings against the collateral; the ability to control the conduct of such proceedings; the approval of amendments to collateral documents;
releases of liens on the collateral; and waivers of past defaults under collateral documents. We may not have the ability to control or direct such actions, even if our rights are adversely affected.

The lack of liquidity in our investments may adversely affect our business.

We primarily make investments in private companies. A portion of these securities may be subject to legal and other restrictions on
resale, transfer, pledge or other disposition or will otherwise be less liquid than publicly traded securities. The illiquidity of our investments may make it difficult for us to sell such investments
if the need arises. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we have previously recorded our
investments. In addition, we may face other restrictions on our ability to liquidate an

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investment
in a business entity to the extent that we or our investment adviser has or could be deemed to have material non-public information regarding such business entity.

The debt securities in which we invest are subject to credit risk and prepayment risk.

An issuer of a debt security may be unable to make interest payments and repay principal. We could lose money if the issuer of a debt
obligation is, or is perceived to be, unable or unwilling to make timely principal and/or interest payments, or to otherwise honor its obligations. The downgrade of a security by rating agencies may
further decrease its value.

Certain
debt instruments may contain call or redemption provisions which would allow the issuer thereof to prepay principal prior to the debt instrument's stated maturity. This is known
as prepayment risk. Prepayment risk is greater during a falling interest rate environment as issuers can reduce their cost of capital by refinancing higher interest debt instruments with lower
interest debt instruments. An issuer may also elect to refinance their debt instruments with lower interest debt instruments if the credit standing of the issuer improves. To the extent debt
securities in our portfolio are called or redeemed, we may receive less than we paid for such security and we may be forced to reinvest in lower yielding securities or debt securities of issuers of
lower credit quality.

Our investment in GSC Investment Corp. CLO 2007 LTD. constitutes a leveraged investment in a portfolio of predominantly senior secured first lien term loans and is
subject to additional risks and volatility.

At February 29, 2012, our investment in the subordinated notes of GSC Investment Corp. CLO 2007 LTD., a collateralized
loan obligation fund, had a fair value of $25.8 million and constituted 27.1% of our portfolio. This investment constitutes a first loss position in a portfolio that, as of February 29,
2012, was composed of $380.2 million in aggregate principal amount of primarily senior secured first lien term loans and $17.8 million in uninvested cash. A first loss position means
that we will suffer the first economic losses if the value of GSC Investment Corp. CLO 2007 LTD decreases. First loss positions typically carry a higher risk and earn a higher yield. Interest
payments generated from this portfolio will be used to pay the administrative expenses of GSC Investment Corp. CLO 2007 LTD. and interest on the debt issued by GSC Investment Corp. CLO
2007 LTD. before paying a return on the subordinated notes. Principal payments will be similarly applied to pay administrative expenses of GSC Investment Corp. CLO 2007 LTD. and for
reinvestment or repayment of GSC Investment Corp. CLO 2007 LTD. debt before paying a return on, or repayment of, the subordinated notes. In addition, 80% of our fixed management fee and 100%
our incentive management fee for acting as the collateral manager of GSC Investment Corp. CLO 2007 LTD. is subordinated to the payment of interest and principal on GSC Investment Corp. CLO
2007 LTD. debt. Any losses on the portfolio will accordingly reduce the cash flow available to pay these management fees and provide a return on, or repayment of, our investment. Depending on
the amount and timing of such losses, we may experience smaller than expected returns and, potentially, the loss of our entire investment.

As
the manager of the portfolio of GSC Investment Corp. CLO 2007 LTD., we will have some ability to direct the composition of the portfolio, but our discretion is limited by the
terms of the debt issued by GSC Investment Corp. CLO 2007 LTD., which may limit our ability to make investments that we feel are in the best interests of the subordinated notes, and the
availability of suitable investments. The performance of the portfolio is also subject to many of the same risks sets forth in this Annual Report with respect to portfolio investments in leveraged
loans.

Available information about privately held companies is limited.

We invest primarily in privately-held companies. Generally, little public information exists about these companies, and we
are required to rely on the ability of our investment adviser's investment professionals to obtain adequate information to evaluate the potential returns from investing in these

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companies.
These companies and their financial information are not subject to the Sarbanes-Oxley Act of 2002 and other rules that govern public companies. If we are unable to uncover all material
information about these companies, we may not make a fully informed investment decision, and we may lose money on our investments.

When we are a debt or minority equity investor in a portfolio company, we may not be in a position to control the entity, and its management may make decisions that could
decrease the value of our investment.

We make both debt and minority equity investments; therefore, we are subject to the risk that a portfolio company may make business
decisions with which we disagree, and the stockholders and management of such company may take risks or otherwise act in ways that do not serve our interests. As a result, a portfolio company may make
decisions that could decrease the value of our portfolio holdings.

Our portfolio companies may incur debt or issue equity securities that rank equally with, or senior to, our investments in such companies.

Our portfolio companies usually will have, or may be permitted to incur, other debt, or issue other equity securities that rank equally
with, or senior to, our investments. By their terms, such instruments may provide that the holders are entitled to receive payment of dividends, interest or principal on or before the dates on which
we are entitled to receive payments in respect of our investments. These debt instruments will usually prohibit the portfolio companies from paying interest on or repaying our investments in the event
and during the continuance of a default under such debt. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders of securities ranking
senior to our investment in that portfolio company would typically be entitled to receive payment in full before we receive any distribution in respect of our investment. After repaying such holders,
the portfolio company may not have any remaining assets to use for repaying its obligation to us. In the case of debtor ranking equally with our investments, we would have to share on an equal basis
any distributions with other holders in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company.

There may be circumstances where our debt investments could be subordinated to claims of other creditors or we could be subject to lender liability claims.

If one of our portfolio companies were to go bankrupt, even though we may have structured our interest as senior debt, depending on the
facts and circumstances, including the extent to which we actually provided managerial assistance to that portfolio company, a bankruptcy court might re-characterize our debt holding and
subordinate all or a portion of our claim to that of other creditors. In addition, lenders can be subject to lender liability claims for actions taken by them where they become too involved in the
borrower's business or exercise control over the borrower. It is possible that we could become subject to a lender's liability claim, including as a result of actions taken if we actually render
significant managerial assistance.

Investments in equity securities involve a substantial degree of risk.

We purchase common stock and other equity securities. Although equity securities have historically generated higher average total
returns than fixed-income securities over the long-term, equity securities also have experienced significantly more volatility in those returns and in recent years have significantly under
performed relative to fixed-income securities. The equity securities we acquire may fail to appreciate and may decline in value or become worthless and our ability to recover our investment will

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depend
on our portfolio company's success. Investments in equity securities involve a number of significant risks, including:



There
are special risks associated with investing in preferred securities, including:



Our investments in foreign debt, including that of emerging market issuers, may involve significant risks in addition to the risks inherent in U.S. investments.

Although there are limitations on our ability to invest in foreign debt, we may, from time to time, invest in debt of foreign
companies, including the debt of emerging market issuers. Investing in foreign companies may expose us to additional risks not typically associated with investing in U.S. companies. These risks
include changes in exchange control regulations, political and social instability, expropriation, imposition of foreign taxes, less liquid markets and less available information than is generally the
case in the United States, higher transaction costs, less government supervision of exchanges, brokers and issuers, less developed bankruptcy laws, difficulty in enforcing contractual obligations,
lack of uniform accounting and auditing standards and greater price volatility. Investments in the debt of emerging market issuers may subject us to additional risks such as inflation, wage and price
controls, and the imposition of trade barriers. Furthermore, economic conditions in emerging market countries are, to some extent, influenced by economic and securities market conditions in other
emerging market countries. Although economic conditions are different in each country, investors' reaction to developments in one country can have effects on the debt of issuers in other countries.

Although
most of our investments will be U.S. dollar-denominated, our investments that are denominated in a foreign currency will be subject to the risk that the value of a particular
currency will change in relation to one or more other currencies. Among the factors that may affect currency values

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are
trade balances, the level of short-term interest rates, differences in relative values of similar assets in different currencies, long-term opportunities for investment and
capital appreciation, and political developments. We may employ hedging techniques to minimize these risks, but we cannot assure you that we will fully hedge against these risks or that such
strategies will be effective.

We may expose ourselves to risks if we engage in hedging transactions.

We may utilize instruments such as forward contracts, currency options and interest rate swaps, caps, collars and floors to seek to
hedge against fluctuations in the relative values of our portfolio positions from changes in currency exchange rates and market interest rates. Use of these hedging instruments may expose us to
counter-party credit risk. Hedging against a decline in the values of our portfolio positions does not eliminate the possibility of fluctuations in the values of
such positions or prevent losses if the values of such positions decline. However, such hedging can establish other positions designed to gain from those same developments, thereby offsetting the
decline in the value of such portfolio positions. Such hedging transactions may also limit the opportunity for gain if the values of the portfolio positions should increase. Moreover, it may not be
possible to hedge against an exchange rate or interest rate fluctuation that is generally anticipated at an acceptable price.

Our board of directors may change our investment objective, operating policies and strategies without prior notice or stockholder approval, the effects of which may be
adverse.

Our board of directors has the authority to modify or waive our current investment objective, operating policies and strategies without
prior notice and without stockholder approval. We cannot predict the effect any changes to our current operating policies and strategies would have on our business, financial condition, and value of
our common stock. However, the effects might be adverse, which could negatively impact our ability to pay dividends and cause you to lose all or part of your investment.

Our common stock may trade at a discount to our net asset value per share.

Common stock of BDCs, as closed-end investment companies, frequently trade at a discount to net asset value. Our common
stock has traded at a discount to our net asset value since shortly after our initial public offering. The risk that our common stock may continue to trade at a discount to our net asset value is
separate and distinct from the risk that our net asset value per share may decline.

Our investments may be risky, and you could lose all or part of your investment.

Substantially all of our debt investments hold a non-investment grade rating by one or more rating agencies or, where not
rated by any rating agency, would be below investment grade, if rated. A below investment grade rating means that, in the rating agency's view, there is an increased risk that the obligor on such debt
will be unable to pay interest and repay principal on its debt in full. We also invest in debt that defers or pays PIK interest. To the extent interest payments associated with such debt are deferred,
such debt will be subject to greater fluctuations in value based on changes in interest rates, such debt could produce taxable income without a corresponding cash payment to us, and since we generally
do not receive any cash prior to maturity of the debt, the investment will be of greater risk.

In
addition, private middle market companies in which we invest are exposed to a number of significant risks, including:



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In
addition, our executive officers, directors and our investment adviser may, in the ordinary course of business, be named as defendants in litigation arising from our investments in
the portfolio companies.

Investing in our common stock may involve an above average degree of risk.

The investments we make in accordance with our investment objective may result in a higher amount of risk than alternative investment
options and volatility or loss of principal. Our investments in portfolio companies may be highly speculative and aggressive, and therefore, an investment in our common stock may not be suitable for
someone with lower risk tolerance.

The market price of our common stock may fluctuate significantly.

The market price and liquidity of the market for our common stock may be significantly affected by numerous factors, some of which are
beyond our control and may not be directly related to our operating performance. These factors include:



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Provisions of our governing documents and the Maryland General Corporation Law could deter future takeover attempts and have an adverse impact on the price of our common
stock.

We are governed by our charter and bylaws, which we refer to as our "governing documents."

Our
governing documents and the Maryland General Corporation Law contain provisions that may have the effect of delaying, deferring or preventing a future transaction or change in
control of us that might involve a premium price for our stockholders or otherwise be in their best interest.

Our
charter provides for the classification of our board of directors into three classes of directors, serving staggered three-year terms, which may render a change of
control of us or removal of our incumbent management more difficult. Furthermore, any and all vacancies on our board of directors will be filled generally only by the affirmative vote of a majority of
the remaining directors in office, even if the remaining directors do not constitute a quorum, and any director elected to fill a vacancy will serve for the remainder of the full term until a
successor is elected and qualifies.

Our
board of directors is authorized to create and issue new series of shares, to classify or reclassify any unissued shares of stock into one or more classes or series, including
preferred stock and, without stockholder approval, to amend our charter to increase or decrease the number of shares of stock that we have authority to issue, which could have the effect of diluting a
stockholder's ownership interest. Prior to the issuance of shares of stock of each class or series, including any reclassified series, our board of directors is required by our governing documents to
set the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each
class or series of shares of stock.

Our
governing documents also provide that our board of directors has the exclusive power to adopt, alter or repeal any provision of our bylaws, and to make new bylaws. The Maryland
General Corporation Law also contains certain provisions that may limit the ability of a third party to acquire control of us, such as:



The
provisions of the Maryland Business Combination Act will not apply, however, if our board of directors adopts a resolution that any business combination between us and any other
person will be exempt from the provisions of the Maryland Business Combination Act. Although our board of directors has adopted such a resolution, there can be no assurance that this resolution will
not be altered or repealed in whole or in part at any time. If the resolution is altered or repealed, the provisions of the Maryland Business Combination Act may discourage others from trying to
acquire control of us.

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As
permitted by Maryland law, our bylaws contain a provision exempting from the Maryland Control Share Acquisition Act any and all acquisitions by any person of our common stock.
Although our bylaws include such a provision, such a provision may also be amended or eliminated by our board of directors at any time in the future, subject to obtaining confirmation from the SEC
that it does not object to us being subject to the Maryland Control Share Acquisition Act.

We have no prior experience managing an SBIC and any failure to comply with SBA regulations, resulting from our lack of experience or otherwise, could have an adverse effect
on our operations.

On March 28, 2012, our wholly-owned subsidiary, Saratoga Investment Corp. SBIC, LP, received a license from the SBA to
operate as an SBIC under Section 301(c) of the Small Business Investment Act of 1958 and is regulated by the SBA.

The
SBA places certain limitations on the financing terms of investments by SBICs in portfolio companies and prohibits SBICs from providing funds for certain purposes or to businesses in
a few prohibited industries. Compliance with SBIC requirements may cause our SBIC subsidiary to forego attractive investment opportunities that are not permitted under SBA regulations.

Further,
SBA regulations require that an SBIC be periodically examined and audited by the SBA to determine its compliance with the relevant SBA regulations. The SBA prohibits, without
prior SBA approval, a "change of control" of an SBIC or transfers that would result in any person (or a group of persons acting in concert) owning 10% or more of a class of capital stock of an SBIC.
If our SBIC subsidiary fails to comply with applicable SBA regulations, the SBA could, depending on the severity of the violation, limit or prohibit its use of debentures, declare outstanding
debentures immediately due and payable, and/or limit it from making new investments. In addition, the SBA can revoke or suspend
a license for willful or repeated violation of, or willful or repeated failure to observe, any provision of the Small Business Investment Act of 1958 or any rule or regulation promulgated thereunder.
These actions by the SBA would, in turn, negatively affect us because our SBIC subsidiary is our wholly-owned subsidiary. We do not have any prior experience managing an SBIC. Our lack of experience
in complying with SBA regulations may hinder our ability to take advantage of our SBIC subsidiary's access to SBA-guaranteed debentures.

Any
failure to comply with SBA regulations could have an adverse effect on our operations.

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

The 1940 Act prohibits us from selling shares of our common stock at a price below the current net asset value per share of such stock,
with certain exceptions. One such exception is prior stockholder approval of issuances below net asset value provided that our board of directors makes certain determinations. At our 2011 annual
meeting of stockholders, our stockholders approved a proposal that authorizes us to sell shares of our common stock below the then current net asset value per share of our common stock in one or more
offerings for a period of one year ending on the earlier of September 27, 2012 or the date of our 2012 annual meeting of stockholders. Our board of directors adopted a policy that requires us
to sell or issue shares of our common stock at an offering price per share that is not less than 85% of the then current net asset value per share pursuant to this proposal. No change can be made to
this policy without unanimous approval of our independent directors. Continued access to this exception will require approval of similar proposals at future stockholder meetings.

If
we 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 per share. This dilution would
occur as a result of the sale of shares at a price below the then current net asset value per share of our common stock and

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a
proportionately greater decrease in a stockholder's interest in our earnings and assets and voting interest in us than the increase in our assets resulting from such issuance.

Because
the number of shares of common stock that could be so issued and the timing of any issuance is not currently known, the actual dilutive effect cannot be predicted.

The recent downgrade of the U.S. credit rating and the economic crisis in Europe could negatively impact our liquidity, financial condition and earnings.

Recent U.S. debt ceiling and budget deficit concerns, together with signs of deteriorating sovereign debt conditions in Europe, have
increased the possibility of additional credit-rating downgrades and economic slowdowns. Although U.S. lawmakers passed legislation to raise the federal debt ceiling, Standard & Poor's Ratings
Services lowered its long-term sovereign credit rating on the United States from "AAA" to "AA+" in August 2011. The impact of this or any further downgrades to the U.S. government's
sovereign credit rating, or its perceived creditworthiness, and the impact of the current crisis in Europe with respect to the ability of certain European Union countries to continue to service their
sovereign debt obligations is inherently unpredictable and could adversely effect the U.S. and global financial markets and economic conditions. There can be no assurance that governmental or other
measures to aid economic recovery will be effective. These developments, and the government's credit concerns in general, could cause interest rates and borrowing costs to rise, which may negatively
impact our ability to access the debt markets on favorable terms. In addition, the decreased credit rating could create broader financial turmoil and uncertainty, which may weigh heavily on our stock
price. Continued adverse economic conditions could have a material adverse effect on our business, financial condition and results of operations.

Item 1B.    Unresolved Staff Comments

None.

Item 2.    Properties

We do not own any real estate or other physical properties important to our operations, however, an affiliate of our investment adviser
leases office space for our executive offices at 535 Madison Avenue, New York, New York 10022.

Item 3.    Legal Proceedings

Neither we nor Saratoga Investment Advisors are currently subject to any material legal proceedings.

Item 4.    Mine Safety Disclosures

None.

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PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Price range of common stock

Our common stock is traded on the New York Stock Exchange under the symbol "SAR." Prior to July 30, 2010, our common stock
traded on the New York Stock Exchange under the symbol "GNV." The following table sets forth, for the two most recent fiscal years and the current fiscal year, the range of high and low sales prices
of our common stock as reported on the New York Stock Exchange, the sales price as a percentage of our net asset value ("NAV") and the dividends declared by us for each fiscal quarter. The net asset
value per share and high and low sales prices listed below reflect the 1:10 reverse stock split that occurred on August 12, 2010.

Year ended February 28, 2011

NAV(1)

High

LowFirst Quarter

$
34.32

$
25.50

$
17.00Second Quarter

$
29.71

$
20.40

$
14.40Third Quarter

$
24.95

$
22.66

$
17.14Fourth Quarter

$
26.26

$
21.68

$
17.23




Year ended February 29, 2012

NAV(1)

High

LowFirst Quarter

$
27.48

$
18.26

$
16.69Second Quarter

$
28.01

$
17.26

$
13.58Third Quarter

$
24.32

$
13.82

$
12.35Fourth Quarter

$
25.12

$
16.15

$
12.07




Price RangeYear ended February 28, 2013

NAV(1)

High

LowFirst Quarter through May 7, 2012

*


18.25


15.15


*Not
determinable at the time of filing.(1)Net
asset value per share is determined as of the last day in the relevant quarter and therefore may not reflect the net asset value per share on the date
of the high and low closing sales prices. The net asset values shown are based on outstanding shares at the end of each period.


Holders

The last reported price for our common stock on May 7, 2012 was $17.85 per share. As of May 7, 2012, there were 24
holders of record of our common stock.

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Dividend Policy

The following table summaries our dividends or distributions declared during fiscal 2009, 2010, 2011 and 2012:

Date Declared

Record Date

Payment Date

Amount
per ShareMay 22, 2008

May 30, 2008

June 13, 2008

$
3.90August 19, 2008

August 29, 2008

September 15, 2008

$
3.90December 8, 2008

December 18, 2008

December 29, 2008

$
2.50Total Dividends Declared for Fiscal 2009





$
10.30November 13, 2009

November 25, 2009

December 31, 2009

$
18.25
(1)Total Dividends Declared for Fiscal 2010





$
18.25November 12, 2010

November 19, 2010

December 29, 2010

$
4.40
(1)Total Dividends Declared for Fiscal 2011





$
4.40November 15, 2011

November 25, 2011

December 30, 2011

$
3.00
(1)Total Dividends Declared for Fiscal 2012





$
3.00


(1)This
dividend was paid by combination of shares of common stock and cash. Please see the discussion immediately following this table for more detail about
the composition of this dividend.


Our
distributions, if any, will be determined by our board of directors and paid out of assets legally available for distribution. Any such distributions will be taxable to our
stockholders, including to those stockholders who receive additional shares of our common stock pursuant to our dividend reinvestment plan. Prior to January 2009, we paid quarterly dividends to our
stockholders. However, in January 2009, we suspended the practice of paying quarterly dividends to our stockholders and have made three dividend distributions (in December 2011, 2010 and 2009) to our
stockholders since such time. We are prohibited from making distributions that cause us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or that violate our debt covenants.

Given
the size of our asset base and our growing pipeline of attractive investments, our board of directors believes that using our capital resources to build and diversify our portfolio
serves
stockholders' interests best by better positioning us to generate current income and capital appreciation on an increasing scale in future periods. Therefore, our board of directors determined to pay
a 20% cash and 80% stock dividend with respect to a significant portion of our taxable income for our 2012 fiscal year in accordance with certain IRS private letter rulings. For more detailed
information about this dividend, please see the discussion below.

In
order to maintain our qualification as a RIC, we must for each fiscal year distribute an amount equal to at least 90% of our ordinary net taxable income and realized net
short-term capital gains in excess of realized net long-term capital losses, if any, reduced by deductible expenses. In addition, we will be subject to federal excise taxes to
the extent we do not distribute during the calendar year at least (1) 98% of our ordinary income for the calendar year, (2) 98.2% of our capital gains in excess of capital losses for the
one year period ending on October 31 of the calendar year and (3) any ordinary income and net capital gains for preceding years that were not distributed during such years and on which
we paid no federal income tax. For the 2011 calendar year, the Company made distributions sufficient such that we did not incur any federal excise taxes. We may elect to withhold from distribution a
portion of our ordinary income for the 2012 calendar year and/or portion of the capital gains in excess of capital losses realized during the one year period ending October 31, 2012, if any,
and, if we do so, we would expect to incur federal excise taxes as a result.

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We
maintain an "opt out" dividend reinvestment plan for our common stockholders. As a result, if we declare a dividend, then stockholders' cash dividends will be automatically reinvested
in additional shares of our common stock, unless they specifically "opt out" of the dividend reinvestment plan so as to receive cash dividends.

Pursuant
to a revenue procedure (Revenue Procedure 2010-12), or the Revenue Procedure, issued by the Internal Revenue Service, or IRS, the IRS indicated that it would treat
distributions from certain publicly traded RICs (including BDCs) that were paid part in cash and part in stock as dividends that would satisfy the RIC's annual distribution requirements and qualify
for the dividends paid deduction for federal income tax purposes. In order to qualify for such treatment, the Revenue Procedure required that at least 10% of the total distribution be payable in cash
and that each stockholder have a right to elect to receive its entire distribution in cash. If too many stockholders elected to receive cash, each stockholder electing to receive cash must receive a
proportionate share of the cash to be distributed (although no stockholder electing to receive cash may receive less than 10% of such stockholder's distribution in cash). This Revenue Procedure
applied to distributions declared on or before December 31, 2012 with respect to taxable years ending on or before December 31, 2011.

Although
this Revenue Procedure is no longer available and did not apply to our distributions for our fiscal year ended February 29, 2012, the revenue procedure was based upon
certain applicable provisions of the Code and the Treasury regulations pursuant to which distributions payable in cash or in shares of
stock at the election of stockholders are treated as taxable dividends. Consistent with these provisions, the IRS has issued private letter rulings concluding that a RIC may treat a distribution of
its own stock as fulfilling its RIC distribution requirements if each stockholder may elect to receive his or her entire distribution in either cash or stock of the RIC subject to a limitation on the
aggregate amount of cash to be distributed to all stockholders, which limitation must be at least 20% of the aggregate declared distribution.

On
November 15, 2011, our board of directors declared a dividend of $3.00 per share payable on December 30, 2011, to common stockholders of record on November 25,
2011. Shareholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to
all shareholders was limited to $2.0 million or $0.60 per share.

Based
on shareholder elections, the dividend consisted of $2.0 million in cash and 599,584 shares of common stock, or 18% of our outstanding common stock prior to the dividend
payment. The amount of cash elected to be received was greater than the cash limit of 20.0% of the aggregate dividend amount, thus resulting in the payment of a combination of cash and stock to
shareholders who elected to receive cash. The number of shares of common stock comprising the stock portion was calculated based on a price of $13.117067 per share, which equaled the volume weighted
average trading price per share of the common stock on December 20, 21 and 22, 2011.

On
November 12, 2010, we declared a dividend of $4.40 per share which was paid on December 29, 2010. Stockholders had the option to receive payment of the dividend in cash,
shares of common stock, or a combination of cash and shares of common stock, provided that at least 10% of the distribution is payable in cash. Based on shareholder elections, the dividend consisted
of $1.2 million in cash and 596,235 shares of common stock, or 22% of our outstanding common stock prior to the dividend payment. The amount of cash elected to be received was greater than the
cash limit of 10.0% of the aggregate dividend amount, thus resulting in the payment of a combination of cash and stock to shareholders who elected to receive cash. The number of shares of common stock
comprising the stock portion was calculated based on a price of $17.8049 per share, which equaled the volume weighted average trading price per share of the common stock on December 20, 21 and
22, 2010.

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On
November 13, 2009, we declared a dividend of $18.25 per share payable on December 31, 2009. Stockholders had the option to receive payment of the dividend in cash,
shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all stockholders was limited to $2.1 million or $0.25 per share. Based
on stockholder elections, the dividend consisted of $2.1 million in cash and 8,648,725 shares of common stock, or 104% of our outstanding common stock prior to the dividend payment. The amount
of cash elected to be received was greater
than the cash limit of 13.7% of the aggregate dividend amount, thus resulting in the payment of a combination of cash and stock to stockholders who elected to receive cash.

Performance Graph

The following graph compares the return on our common stock with that of the Standard & Poor's 500 Stock Index and the NASDAQ
Financial 100 index, for the period from March 23, 2007, the date our common stock began trading, through February 29, 2012. The graph assumes that, on March 23, 2007, a person
invested $100 in each of our common stock, the Standard & Poor's 500 Stock Index and the NASDAQ Financial 100 index. The graph measures total shareholder return, which takes into account both
changes in stock price and dividends. It assumes that dividends paid are reinvested in like securities.

GRAPHIC

Sales of unregistered securities

Not applicable.

Issuer purchases of equity securities

We did not purchase any shares of our common stock in the open market during the year ended February 29, 2012.

Item 6.    Selected Financial Data

The following selected financial and other data for the years ended February 29, 2012, February 28, 2011, 2010, 2009 and
February 29, 2008 are derived from our consolidated financial statements which have been audited by Ernst & Young LLP, an independent registered public accounting firm, whose
report thereon is included within this Annual Report. The data should be read

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in
conjunction with our consolidated financial statements and notes thereto, which are included elsewhere in this Annual Report, and Part II, Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations".

SARATOGA INVESTMENT CORP.  SELECTED FINANCIAL DATA  (dollar amounts in thousands, except share and per share numbers)

Year Ended
February 29,
2012

Year Ended
February 28,
2011

Year Ended
February 28,
2010

Year Ended
February 28,
2009

Year Ended
February 29,
2008Income Statement Data:Interest and related portfolio income:Interest

$
11,262

$
12,050

$
13,324

$
21,142

$
20,744Management fee and other income


2,250


2,123


2,293


2,245


642Total interest and related portfolio income


13,512


14,173


15,617


23,387


21,386Expenses:Interest and credit facility financing expenses


1,298


2,612


4,096


2,605


5,031Base management and incentive management fees(1)


2,875


3,514


2,278


4,432


3,650Administrator expenses


1,000


810


671


961


892Administrative and other


2,638


4,882


3,502


2,433


2,766Expense reimbursement





(2,894
)

(671
)

(1,010
)

(1,789
)Total operating expenses after reimbursements


7,811


8,924


9,876


9,421


10,550Net investment income before income taxes


5,701


5,249


5,741


13,966


10,836Income tax expenses, including excise tax








(27
)

(140
)

(89
)Net investment income


5,701


5,249


5,714


13,826


10,747Realized and unrealized gain (loss) on investments and derivativesNet realized gain (loss)


(12,186
)

(24,684
)

(6,654
)

(7,143
)

3,908Net change in unrealized gain (loss)


19,760


36,393


(9,523
)

(27,998
)

(20,106
)Total net gain (loss)


7,574


11,709


(16,177
)

(35,141
)

(16,198
)Net increase (decrease) in net assets resulting from operations

$
13,275

$
16,958

$
(10,463
)
$
(21,315
)
$
(5,451
)


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Year Ended
February 29,
2012

Year Ended
February 28,
2011

Year Ended
February 28,
2010

Year Ended
February 28,
2009

Year Ended
February 29,
2008Per Share:Earnings (loss) per common sharebasic and diluted(2)

$
3.87

$
6.96

$
(9.86
)
$
(25.70
)
$
(7.00
)Net investment income per sharebasic and diluted(2)

$
1.66

$
2.15

$
5.40

$
16.70

$
13.80Net realized and unrealized gain (loss) per sharebasic and diluted(2)

$
2.21

$
4.81

$
(15.20
)
$
(42.40
)
$
(20.80
)Dividends declared per common share(3)

$
3.00

$
4.40

$
18.30

$
10.30

$
15.50Statement of Assets and Liabilities Data:Investment assets at fair value

$
95,360

$
80,025

$
89,373

$
118,912

$
172,837Total assets


125,491


98,769


96,935


130,662


192,842Total debt outstanding


20,000


4,500


36,992


58,995


78,450Stockholders' equity


97,380


86,071


55,478


68,014


97,869Net asset value per common share

$
25.12

$
26.26

$
32.70

$
82.00

$
118.00Common shares outstanding at end of year


3,876,661


3,277,077


16,940,109


8,291,384


8,291,384Other Data:Investments funded

$
38,679

$
9,014

$


$
28,260

$
314,003Principal collections related to investment repayments or sales

$
33,568

$
31,975

$
15,185

$
49,195

$
141,772Number of investments at year end


33


34


41


45


46Weighted average yield of income producing debt investmentsNon-control/non-affiliate


11.88
%

11.1
%

9.6
%

9.7
%

10.7
%Weighted average yield on income producing debt investmentsControl


20.17
%

15.8
%

8.3
%

12.2
%

8.2
%


(1)See
note 6 in consolidated financial statements.(2)For
the years ended February 29, 2012, and February 28, 2011, 2010, 2009 and February 29, 2008 amounts are calculated using weighted
average common shares outstanding of 3,434,345, 2,437,577, 1,061,351, 829,138, and 776,196 respectively.(3)Based
on 3.3 million common shares outstanding.


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Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our financial statements and related notes and other financial information
appearing elsewhere in this Annual Report. In addition to historical information, the following discussion and other parts of this Annual Report contain forward-looking information that involves risks
and uncertainties. Our actual results could differ materially from those anticipated by such forward-looking information due to the factors discussed under Part I, Item 1A "Risk Factors"
and "Note about Forward-Looking Statements" appearing elsewhere herein.

Overview

We are a Maryland corporation that has elected to be treated as a business development company ("BDC") under the Investment Company Act
of 1940 (the "1940 Act"). Our investment objective is to generate current income and, to a lesser extent, capital appreciation from our investments. We invest primarily in leveraged loans and
mezzanine debt issued by private U.S. middle market companies, both through direct lending and through participation in loan syndicates. We may also invest up to 30% of the portfolio in opportunistic
investments in order to seek to enhance returns to stockholders. Such investments may include investments in distressed debt, which may include securities of companies in bankruptcy, foreign debt,
private equity, securities of public companies that are not thinly traded and structured finance vehicles such as collateralized loan obligation funds. We have elected and qualified to be treated as a
regulated investment company ("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code").



We commenced operations, at the time known as GSC Investment Corp., on March 23, 2007 and completed an initial public offering
of shares of common stock on March 28, 2007. Prior to July 30, 2010, we were externally managed and advised by GSCP (NJ), L.P., an entity affiliated with GSC Group, Inc. In
connection with the consummation of a recapitalization transaction on July 30, 2010, we engaged Saratoga Investment Advisors ("SIA") to replace GSCP (NJ), L.P. as our investment adviser and
changed our name to Saratoga Investment Corp.

As
a result of the event of default under a revolving securitized credit facility with Deutsche Bank we previously had in place, the auditors of GSC Investment Corp. (now known as
Saratoga Investment Corp.) included in their audit report dated May 27, 2010 that there was substantial doubt about GSC Investment Corp.'s ability to continue as a going concern. In light of
the event of default under the revolving securitized credit facility, we engaged the investment banking firm of Stifel, Nicolaus & Company to evaluate strategic transaction opportunities and
consider alternatives for us in December 2008. On April 14, 2010, we entered into a stock purchase agreement with Saratoga Investment Advisors and certain of its affiliates and an assignment,
assumption and novation agreement with Saratoga Investment Advisors, pursuant to which we assumed certain rights and obligations of Saratoga Investment Advisors under a debt commitment letter Saratoga
Investment Advisors received from Madison Capital Funding LLC, indicating Madison Capital Funding's willingness to provide us with a $40 million senior secured revolving credit facility,
subject to the satisfaction of certain terms and conditions. In addition, we and GSCP (NJ), L.P. entered into a termination and release agreement, to be effective as of the closing of the transaction
contemplated by the stock purchase agreement, pursuant to which GSCP (NJ), L.P., among other things, agreed to waive any and all accrued and unpaid deferred incentive management fees up to and as of
the closing of the transaction contemplated by the stock purchase agreement but continued to be entitled to receive the base management fees earned through the date of the closing of the transaction
contemplated by the stock purchase agreement.

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On
July 30, 2010, the transactions contemplated by the stock purchase agreement with Saratoga Investment Advisors and certain of its affiliates were completed, and included the
following actions:



We
used the net proceeds from the private sale transaction and a portion of the funds available to us under the $40 million senior secured revolving credit facility with Madison
Capital Funding to pay the full amount of principal and accrued interest, including default interest, outstanding under our revolving securitized credit facility with Deutsche Bank. The revolving
securitized credit facility with Deutsche Bank was terminated in connection with our payment of all amounts outstanding thereunder on July 30, 2010.

On
August 12, 2010, we effected a one-for-ten reverse stock split of our outstanding common stock. As a result of the reverse stock split, every ten shares
of our common stock were converted into one share of our common stock. Any fractional shares received as a result of the reverse stock split were redeemed for cash. The total cash payment in lieu of
shares was $230. Immediately after the reverse stock split, we had 2,680,842 shares of our common stock outstanding.

Critical Accounting Policies



The preparation of financial statements in accordance with U.S. generally accepted accounting principles ("GAAP") requires management
to make certain estimates and assumptions affecting amounts reported in the Company's consolidated financial statements. We have identified investment

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valuation,
revenue recognition and the recognition of capital gains incentive fee expense as our most critical accounting estimates. We continuously evaluate our estimates, including those related to
the matters described below. These estimates are based on the information that is currently available to us and on various other assumptions that we believe to be reasonable under the circumstances.
Actual results could differ materially from those estimates under different assumptions or conditions. A discussion of our critical accounting policies follows.



The Company accounts for its investments at fair value in accordance with the Financial Accounting Standards Board ("FASB") Accounting
Standards Codification ("ASC") Topic 820,Fair Value Measurements and Disclosures("ASC 820"). ASC 820 defines fair value, establishes a framework for
measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements. ASC 820 requires
the Company to assume that its investments are to be sold at the statement of assets and liabilities date in the principal market to independent market participants, or in the absence of a principal
market, in the most advantageous market, which may be a hypothetical market. Market participants are defined as buyers and sellers in the principal or most advantageous market that are independent,
knowledgeable, and willing and able to transact.

Investments
for which market quotations are readily available are fair valued at such market quotations obtained from independent third party pricing services and market makers subject
to any decision by our board of directors to approve a fair value determination to reflect significant events affecting the value of these investments. We value investments for which market quotations
are not readily available at fair value as approved, in good faith, by our board of directors based on input from Saratoga Investment Advisers, the audit committee of our board of directors and a
third party independent valuation firm. Determinations of fair value may involve subjective judgments and estimates. The types
of factors that may be considered in determining the fair value of our investments include the nature and realizable value of any collateral, the portfolio company's ability to make payments, market
yield trend analysis, the markets in which the portfolio company does business, comparison to publicly traded companies, discounted cash flow and other relevant factors.

We
undertake a multi-step valuation process each quarter when valuing investments for which market quotations are not readily available, as described
below:



In
addition, all our investments are subject to the following valuation process:



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Our
investment in GSC Investment Corp. CLO 2007, Ltd. ("Saratoga CLO") is carried at fair value, which is based on a discounted cash flow model that utilizes prepayment,
re-investment and loss assumptions based on historical experience and projected performance, economic factors, the characteristics of the underlying cash flow, and comparable yields for
equity interests in collateralized loan obligation funds similar to Saratoga CLO, when available, as determined by our Manager and recommended to our board of directors. Specifically, we use Intex
cash flow models, or an appropriate substitute, to form the basis for the valuation of our investment in Saratoga CLO. The models use a set of assumptions including projected default rates, recovery
rates, reinvestment rate and prepayment rates in order to arrive at estimated valuations. The assumptions are based on available market data and projections provided by third parties as well as
management estimates. We use the output from the Intex models (i.e., the estimated cash flows) to perform a discounted cash flows analysis on expected future cash flows to determine a valuation
for our investment in Saratoga CLO.



Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis to the extent that
such amounts are expected to be collected. The Company stops accruing interest on its investments when it is determined that interest is no longer collectible. Discounts and premiums on investments
purchased are accreted/amortized over the life of the respective investment using the effective yield method. The amortized cost of investments represents the original cost adjusted for the accretion
of discounts and amortizations of premium on investments.

Loans
are generally placed on non-accrual status when there is reasonable doubt that principal or interest will be collected. Accrued interest is generally reserved when a
loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as a reduction in principal depending upon management's judgment
regarding collectability. Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in management's judgment, are likely to remain current,
although we may make exceptions to this general rule if the loan has sufficient collateral value and is in the process of collection.

Interest
income on our investment in Saratoga CLO is recorded using the effective interest method in accordance with the provisions of ASC Topic 325-40, Investments-Other, Beneficial
Interests in Securitized Financial Assets, based on the anticipated yield and the estimated cash flows over the projected life of the investment. Yields are revised when there
are changes in actual or estimated cash flows due to changes in prepayments and/or re-investments, credit losses or asset pricing. Changes in estimated yield are recognized as an
adjustment to the estimated yield over the remaining life of the investment from the date the estimated yield was changed.



The Company holds debt investments in its portfolio that contain a payment-in-kind ("PIK") interest provision.
The PIK interest, which represents contractually deferred interest added to the investment balance that is generally due at maturity, is generally recorded on the accrual basis to the extent such
amounts are expected to be collected. We stop accruing PIK interest if we do not expect the issuer to be able to pay all principal and interest when due.

Capital Gains Incentive Fee

The Company records an expense accrual relating to the capital gains incentive fee payable by the Company to its investment adviser
when the unrealized gains on its investments exceed all realized capital losses on its investments given the fact that a capital gains incentive fee would be owed to the investment adviser if the
Company were to liquidate its investment portfolio at such time. The actual

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incentive
fee payable to the Company's investment adviser related to capital gains will be determined and payable in arrears at the end of each fiscal year and will include only realized capital gains
for the period.



We generate revenue in the form of interest income and capital gains on the debt investments that we hold and capital gains, if any, on
equity interests that we may acquire. We expect our debt investments, whether in the form of leveraged loans or mezzanine debt, to have terms of up to ten years, and to bear interest at either a fixed
or floating rate. Interest on debt will be payable generally either quarterly or semi-annually. In some cases, our debt investments may provide for a portion of the interest to be
paid-in-kind ("PIK"). To the extent interest is paid-in-kind, it will be payable through the increase of the principal amount of the obligation by the
amount of interest due on the then-outstanding aggregate principal amount of such obligation. The principal amount of the debt and any accrued but unpaid interest will generally become due at the
maturity date. In addition, we may generate revenue in the form of commitment, origination, structuring or diligence fees, fees for providing managerial assistance or investment management services
and possibly consulting fees. Any such fees will be generated in connection with our investments and recognized as earned. We may also invest in preferred equity securities that pay dividends on a
current basis.

On
January 22, 2008, we entered into a collateral management agreement with GSC Investment Corp. CLO 2007 LTD., a collateralized loan obligation fund which we refer to as
"Saratoga CLO," pursuant to which we act as its collateral manager and receive a senior collateral management fee of 0.10% and a subordinate collateral management fee of 0.40% of the outstanding
principal amount of Saratoga CLO's assets, paid quarterly to the extent of available proceeds. We are also entitled to an incentive management fee equal to 20% of excess cash flow to the extent the
Saratoga CLO subordinated notes receive an internal rate of return equal to or greater than 12%.

We
recognize interest income on our investment in the subordinated notes of Saratoga CLO using the effective interest method, based on the anticipated yield and the estimated cash flows
over the projected life of the investment. Yields are revised when there are changes in actual or estimated cash flows due to changes in prepayments and/or re-investments, credit losses or
asset pricing. Changes in estimated yield are recognized as an adjustment to the estimated yield over the remaining life of the investment from the date the estimated yield was changed.



Our primary operating expenses include the payment of investment advisory and management fees, professional fees, directors and
officers insurance, fees paid to independent directors and administrator expenses, including our allocable portion of our administrator's overhead. Our investment advisory and management fees
compensate our investment adviser for its work in identifying, evaluating, negotiating, closing and monitoring our investments. We bear all other
costs and expenses of our operations and transactions, including those relating to:



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Pursuant
to the investment advisory and management agreement that we had with GSCP (NJ), L.P., our former investment adviser and administrator, we had agreed to pay GSCP (NJ), L.P. as
investment adviser a quarterly base management fee of 1.75% of the average value of our total assets (other than cash or cash equivalents but including assets purchased with borrowed funds) at the end
of the two most recently completed fiscal quarters, and appropriately adjusted for any share issuances or repurchases during the applicable fiscal quarter, and an incentive fee.

The
incentive fee had two parts:



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We
deferred cash payment of any incentive fee otherwise earned by our former investment adviser if, during the then most recent four full fiscal quarters ending on or prior to the date
such payment was to be made, the sum of (a) our aggregate distributions to our stockholders and (b) our change in net assets (defined as total assets less liabilities) (before taking
into account any incentive fees payable during that period) was less than 7.5% of our net assets at the beginning of such period. These calculations were appropriately pro rated for the first three
fiscal quarters of operation and adjusted for any share issuances or repurchases during the applicable period. Such incentive fee would become payable on the next date on which such test had been
satisfied for the most recent four full fiscal quarters or upon certain terminations of the investment advisory and management agreement. We commenced deferring cash payment of incentive fees during
the quarterly period ended August 31, 2007, and continued to defer such payments through the quarterly period ended May 31, 2010. As of July 30, 2010, the date on which GSCP (NJ),
L.P. ceased to be our investment adviser and administrator, we owed GSCP (NJ), L.P. $2.9 million in fees for services previously provided to us; of which $0.3 million has been paid by
us. GSCP (NJ), L.P. agreed to waive payment by us of the remaining $2.6 million in connection with the consummation of the stock purchase transaction with Saratoga Investment Advisors and
certain of its affiliates described elsewhere in this prospectus.

The
terms of the investment advisory and management agreement with Saratoga Investment Advisors, our current investment adviser, are substantially similar to the terms of the investment
advisory and management agreement we had entered into with GSCP (NJ), L.P., our former investment adviser, except for the following material distinctions in the fee
terms:



To
the extent that any of our leveraged loans are denominated in a currency other than U.S. dollars, we may enter into currency hedging contracts to reduce our exposure to fluctuations
in currency exchange rates. We may also enter into interest rate hedging agreements. Such hedging activities, which will be subject to compliance with applicable legal requirements, may include the
use of interest rate caps, futures, options and forward contracts. Costs incurred in entering into or settling such contracts will be borne by us.

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Portfolio and investment activity

Corporate Debt Portfolio Overview

At February 29,
2012

At February 28,
2011

At February 28,
2010($ in millions)Number of investments(2)

30

34

38Number of portfolio companies(2)

21

24

27Average investment size(2)

$2.3

$1.7

$1.9Weighted average maturity(2)

3.0yrs

3.1yrs

2.5yrsNumber of industries(2)

15

16

19Average investment per portfolio company(2)

$3.3

$2.5

$2.7Non-performing or delinquent investments(2)

$0.0

$0.0

$18.5Fixed rate debt (% of interest bearing portfolio)(1)

$18.7(29.3
)%
$9.4(18.6
)%
$33.0(46.9
)%Weighted average current coupon(1)

13.0
%
13.8
%
11.6
%Floating rate debt (% of interest bearing portfolio)(1)

$45.1(70.7
)%
$41.1(81.4
)%
$37.4(53.1
)%Weighted average current spread over LIBOR(1)

7.4
%
5.6
%
7.6
%


(1)Excludes
our investment in the subordinated notes of Saratoga CLO and investments in common stocks and limited partnership interests.(2)Excludes
our investment in the subordinated notes of Saratoga CLO and limited partnership interests.


During
the fiscal year ended February 29, 2012, we made $38.7 million investments in new or existing portfolio companies and had $33.6 million in
aggregate amount of exits and repayments resulting in net investments of $5.1 million for the year.

During
the fiscal year ended February 28, 2011, we made $9.0 million investments in new or existing portfolio companies and had $32.0 million in aggregate amount of
exits and repayments resulting in net repayments of $23.0 million for the year.

During
the fiscal year ended February 28, 2010, we made no investments in new or existing portfolio companies and had $15.2 million in aggregate amount of exits and
repayments resulting in net repayments of $15.2 million for the year.

Our
portfolio composition at February 29, 2012, and February 28, 2011 and 2010 was as follows:

Portfolio composition

At February 29, 2012

At February 28, 2011

At February 28, 2010Percentage
of Total
Portfolio

Weighted
Average
Current
Yield

Percentage
of Total
Portfolio

Weighted
Average
Current
Yield

Percentage
of Total
Portfolio

Weighted
Average
Current
YieldFirst lien term loans


38.0
%

10.1
%

23.1
%

9.5
%

18.6
%

8.6
%Second lien term loans


9.3


10.3


25.3


10.1


22.7


8.1Senior secured notes


11.2


16.0


12.4


15.9


31.0


11.6Senior unsecured loans


6.3


15.0


2.4


13.8


6.4


12.2Unsecured notes


2.1


19.3











Saratoga CLO subordinated notes


27.1


20.2


28.4


15.8


18.7


8.3Equity interests


6.0


N/A


8.4


N/A


2.6


N/ALimited partnership interests





N/A





N/A





N/ATotal


100.0
%

13.4
%

100.0
%

11.5
%

100.0
%

9.3
%


61

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Table of Contents

Our
investment in the subordinated notes of Saratoga CLO represents a first loss position in a portfolio that, at February 29, 2012, and February 28, 2011 and 2010, was
composed of $380.2, $410.2 and $387.1 million, respectively, in aggregate principal amount of predominantly senior secured first lien term loans. This investment is subject to unique risks.
("Risk FactorsOur investment in GSC Investment Corp. CLO 2007 LTD. constitutes a leveraged investment in a portfolio of predominantly senior secured first lien term loans and is
subject to additional risks and volatility"). We do not consolidate the Saratoga CLO portfolio in our financial statements. Accordingly, the metrics below do not include the underlying Saratoga CLO
portfolio investments. However, at February 29, 2012 and February 28, 2011 and 2010, one, three and five Saratoga CLO portfolio investments were in default and 99.3% , 97.0% and 92.3%,
respectively, of the Saratoga CLO portfolio investments had a CMR (as defined below) color rating of green or yellow.

Saratoga
Investment Advisors normally grades all of our investments using a credit and monitoring rating system ("CMR"). The CMR consists of a single component: a color rating. The color
rating is based on several criteria, including financial and operating strength, probability of default, and restructuring risk. The color ratings are characterized as follows:
(Green)strong credit; (Yellow)satisfactory credit; (Red)payment default risk, in payment default and/or significant restructuring activity.

The
CMR distribution of our investments at February 29, 2012 and February 28, 2011 was as follows:

Portfolio CMR distribution

At February 29, 2012

At February 28, 2011Color Score

Investments at
Fair Value

Percentage of
Total Portfolio

Investments at
Fair Value

Percentage of
Total Portfolio($ in thousands)

($ in thousands)Green

$
41,069


43.1
%
$
10,900


13.6
%Yellow


10,415


10.9


14,998


18.8Red


12,340


12.9


24,660


30.8N/A(1)


31,536


33.1


29,467


36.8Total

$
95,360


100.0
%
$
80,025


100.0
%


(1)Comprised
of our investment in the subordinated notes of Saratoga CLO, equity interests, and limited partnership interests.


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Table of Contents

Portfolio composition by industry grouping at fair value

The
following table shows the portfolio composition by industry grouping at fair value at February 29, 2012 and February 28, 2011.

At February 29, 2012

At February 28, 2011Investments at
Fair Value

Percentage of
Total Portfolio

Investments at
Fair Value

Percentage of
Total Portfolio($ in thousands)Structured Finance Securities(1)

$
25,846


27.1
%
$
22,732


28.4
%Logistics


11,100


11.6


2,499


3.1Electronics


8,914


9.3


8,634


10.8Consumer Products


7,584


7.9


10,249


12.8Metals


6,537


6.9


4,231


5.3Manufacturing


6,000


6.3


7,358


9.2Publishing


5,392


5.7


5,855


7.3Consumer Services


5,388


5.7


245


0.3Food and Beverage


5,249


5.5


1,546


1.9Healthcare Services


4,824


5.1


8,014


10.0Aerospace


3,500


3.7





Environmental


2,323


2.4


2,952


3.7Financial Services


1,600


1.7


1,710


2.2Education


592


0.6


259


0.3Homebuilding


289


0.3


816


1.0Building Products


222


0.2


155


0.2Packaging








2,453


3.1Oil and Gas








317


0.4Total

$
95,360


100.0
%
$
80,025


100.0
%


(1)Comprised
of our investment in the subordinated notes of Saratoga CLO.


Portfolio composition by geographic location at fair value

The
following table shows the portfolio composition by geographic location at fair value at February 29, 2012 and February 28, 2011. The
geographic composition is determined by the location of the corporate headquarters of the portfolio company.

At February 29, 2012

At February 28, 2011Investments at
Fair Value

Percentage of
Total Portfolio

Investments at
Fair Value

Percentage of
Total Portfolio($ in thousands)Other(1)


25,846


27.1


22,732


28.4West


21,615


22.7


16,332


20.4Southeast


19,878


20.8


7,815


9.8Midwest


15,451


16.2


18,490


23.1Northeast


12,570


13.2


12,203


15.2International








2,453


3.1Total

$
95,360


100.0
%
$
80,025


100.0
%


(1)Comprised
of our investment in the subordinated notes of Saratoga CLO.


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Table of Contents

Results of operations

Operating results for the years ended February 29, 2012, and February 28, 2011 and 2010 are as follows:

For the Year EndedFebruary 29,
2012

February 28,
2011

February 28,
2010($ in thousands)Total investment income

$
13,512

$
14,173

$
15,617Total expenses before waiver and reimbursement


7,811


11,819


10,547Total expense waiver and reimbursement





(2,895
)

(671
)Total expenses net of expense waiver and reimbursement


7,811


8,924


9,876Net investment income before income taxes


5,701


5,249


5,741Income tax expense, including excise tax








(27
)Net investment income


5,701


5,249


5,714Net realized losses


(12,186
)

(24,684
)

(6,654
)Net unrealized gains (losses)


19,760


36,393


(9,523
)Net increase (decrease) in net assets resulting from operations

$
13,275

$
16,958

$
(10,463
)




The composition of our investment income in each period was as follows:

February 29,
2012

February 28,
2011

February 28,
2010($ in thousands)Interest from investments

$
11,254

$
12,041

$
13,300Management of Saratoga CLO


2,012


2,032


2,057Interest from cash and cash equivalents and other income


246


100


260Total

$
13,512

$
14,173

$
15,617


For
the year ended February 28, 2012, total investment income decreased $0.6 million, or 3.9% compared to the fiscal year ended February 28, 2011. Interest income
from our investment in the subordinated notes of Saratoga CLO increased $0.9 million, or 27.4%, to $4.2 million for the year ended February 28, 2012 from $2.3 million for
the fiscal year ended February 28, 2011.

For
the year ended February 28, 2011, total investment income decreased $1.4 million, or 9.3% compared to the fiscal year ended February 28, 2010. The decrease is
predominantly attributable to a smaller total average portfolio, partially offset by an increase in the effective interest rate earned on our investment in the subordinated notes of Saratoga CLO.
Interest income from our investment in the
subordinated notes of Saratoga CLO increased $0.9 million, or 37.4%, to $3.3 million for the year ended February 28, 2011 from $2.4 million for the fiscal year ended
February 28, 2010.

For
the fiscal years ended February 29, 2012, and February 28, 2011 and 2010, total PIK income was $1.4 million, $1.1 million and $0.9 million,
respectively.

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The composition of our operating expenses in each period was as follows:

Operating Expenses

February 29,
2012

February 28,
2011

February 28,
2010($ in thousands)Interest and credit facility expense

$
1,298

$
2,612

$
4,096Base management fees


1,618


1,646


1,951Professional fees


1,455


3,325


2,071Incentive management fees


1,257


1,869


328Administrator expenses


1,000


810


671Insurance expenses


579


705


870Directors fees


209


373


295General and administrative expenses


390


479


265Other


5





Total operating expenses before manager waiver and reimbursement

$
7,811

$
11,819

$
10,547


For
the year ended February 29, 2012, total operating expenses before manager expense waiver and reimbursement decreased $4.0 million, or 33.9% compared to the fiscal year
ended February 28, 2011. For the year ended February 28, 2011, total operating expenses before manager expense waiver and reimbursement increased $1.3 million, or 12.1% compared
to the fiscal year ended February 28, 2010.

For
the year ended February 29, 2012, the decrease in interest and credit facility expense is primarily attributable to a decrease in outstanding debt during the year. For the
year ended February 28, 2011, the Company recorded a one time non-cash charge of $0.5 million as a result of the write-off of deferred financing costs on its
former credit facility, as a result of our July 30, 2009 event of default (please see "Financial Condition, Liquidity and Capital Resources" below for more information). For the
year ended February 29, 2012, the weighted average interest rate on our outstanding indebtedness was 7.50% compared to 8.75% for the fiscal year ended February 28, 2011 and 6.80% for the
fiscal year ended February 28, 2010.

For
the year ended February 29, 2012, base management fees decreased $0.03 million, or 1.7% compared to the fiscal year ended February 28, 2011. The reduction in
base management fees results from the slight decrease in the average value of our total net assets. For the year ended February 28, 2011, base management fees decreased $0.3 million, or
15.6% compared to the fiscal year ended February 28, 2010. The reduction in base management fees results from the decrease in the average value of our total net assets and the continued
reduction in the total portfolio size.

For
the year ended February 29, 2012, professional fees decreased $1.9 million, or 56.2% compared to the fiscal year ended February 28, 2011. For the year ended
February 28, 2011, professional fees increased $1.3 million, or 60.6% compared to the fiscal year ended February 28, 2010. The change in
professional fees for these periods is attributable to additional legal and professional fees incurred in the fiscal year ended February 28, 2011 associated with the evaluation of strategic
transaction opportunities including the refinancing of the Company's senior credit facility and the stock purchase transaction with Saratoga Investment Advisors and certain of its affiliates described
elsewhere in this Annual Report.

For
the year ended February 29, 2012, incentive management fees decreased $0.6 million, or 32.7% compared to the fiscal year ended February 28, 2011. The decrease in
incentive management fees is

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Table of Contents

primarily
attributable to a decrease in accrued incentive fees related to capital gains. See "Management's Discussion and Analysis of Financial Condition and Results of OperationsCritical
Accounting PoliciesCapital Gains Incentive Fee." For the year ended February 28, 2011, incentive management fees increased $1.5 million, or 470.3% compared to the fiscal
year ended February 28, 2010. The increase in incentive management fees is primarily attributable to an increase in accrued incentive fees related to capital gains. In connection with the
consummation of the stock purchase transaction with Saratoga Investment Advisors and certain of its affiliates described elsewhere in this Annual Report, the outstanding incentive fees owed to our
former external investment adviser were waived. See "OverviewExpense" above for more information.

For
the year ended February 29, 2012, manager expense waiver and reimbursement decreased $2.9 million, or 100.0% compared to the fiscal year ended February 28, 2011.
The decrease is primarily attributable to the reversal of previously accrued and recorded deferred incentive management fees in fiscal year ended February 28, 2011 related to net investment
income as a result of the agreement with our former investment adviser. For the year ended February 28, 2011, manager expense waiver and reimbursement increased $2.2 million, or 331.5%
compared to the fiscal year ended February 28, 2010. The increase is primarily attributable to the reversal of previously accrued and recorded deferred incentive management fees related to net
investment income as a result of the agreement with our former investment adviser.



For the fiscal year ended February 29, 2012, the Company had $33.6 million of sales, repayments, exits or restructurings
resulting in $12.2 million of net realized losses. The most significant realized gains and losses during the year ended February 29, 2012 were as follows:

Fiscal year ended February 29, 2012

Issuer

Asset Type

Gross
Proceeds

Cost

Net
Realized
Gain/(Loss)Grant US Holdings LLP.

Second Lien Term Loan

$
0

$
(6,348
)
$
(6,348
)Pracs Institute Ltd.

Second Lien Term Loan


0


(4,078
)

(4,078
)Bankruptcy Management Solutions, Inc.

Second Lien Term Loan


223


(2,645
)

(2,422
)


For
the fiscal year ended February 28, 2011, the Company had $32.0 million of sales, repayments, exits or restructurings resulting in $24.7 million of net realized
losses. The most significant realized gains and losses during the year ended February 28, 2011 were as follows:

Fiscal year ended February 28, 2011

Issuer

Asset Type

Gross
Proceeds

Cost

Net
Realized
Gain/(Loss)Custom Direct, Inc.

First Lien Term Loan

$
1,832

$
(1,535
)
$
297Legacy Cabinets, Inc.

Second Lien Term Loan


139


(2,002
)

(1,863
)Legacy Cabinets, Inc.

First Lien Term Loan


502


(1,496
)

(994
)Jason Incorporated

Unsecured Notes


2,354


(13,700
)

(11,346
)Bankruptcy Management Solutions, Inc.

Second Lien Term Loan


2,406


(4,793
)

(2,387
)McMillin Companies LLC

Senior Secured Notes


2,750


(6,342
)

(3,592
)Network Communications, Inc.

Unsecured Notes


1,285


(5,054
)

(3,769
)


For
the fiscal year ended February 28, 2010, the Company had $15.2 million of sales, repayments, exits or restructurings resulting in $6.7 million of net realized
losses. Net realized losses were comprised

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Table of Contents

of
$1.1 million of gross realized gains and $7.8 million of gross realized losses. The most significant realized gains and losses during the year ended February 28, 2010 were as
follows:

Fiscal year ended February 28, 2010

Issuer

Asset Type

Gross
Proceeds

Cost

Net
Realized
Gain/(Loss)($ in thousands)Atlantis Plastics Films, Inc.

First Lien Term Loan

$
521

$


$
482Asurion Corporation

First Lien Term Loan


1,930


(1,725
)

205Edgen Murray II, L.P.

Second Lien Term Loan


3,000


(2,832
)

168USS Mergerco, Inc.

Second Lien Term Loan


3,159


(5,847
)

(2,688
)Targus Group International, Inc.

Second Lien Term Loan


2,121


(4,793
)

(2,672
)Blaze Recycling & Metals, LLC

Senior Secured Notes


1,538


(2,495
)

(957
)




For the year ended February 29, 2012, our investments had an increase in net unrealized appreciation of $19.8 million
versus an increase in net unrealized depreciation of $36.4 million for the year ended February 28, 2011. The most significant cumulative changes in unrealized appreciation and
depreciation for the year ended February 29, 2012, were the following:

Fiscal year ended February 29, 2012

Issuer

Asset Type

Cost

Fair Value

Total
Unrealized
Appreciation/
(Depreciation)

YTD Change
in Unrealized
Appreciation/
(Depreciation)($ in thousands)Saratoga CLO

Other/ StructuredFinance Securities

$
23,541

$
25,846

$
2,305

$
6,938Targus Holdings, Inc

Common Stock


567


2,676


2,109


206USS Parent Holding Corp.

Voting Common Stock


3,026


2,225


(801
)

603Penton Media, Inc.

First Lien Term Loan


4,281


3,655


(626
)

(534
)


The
$6.9 million net unrealized appreciation in our investment in the Saratoga CLO subordinated notes was due to higher cash flow projections based on an increase in principal
balance and an improvement in the overcollateralization ratios, a decrease in the assumed portfolio default rate (based on better than forecast actual default rates and improved default forecasts) and
an improvement in reinvestment assumptions based on current market conditions and projections. In addition, for the year ended February 29, 2012 we had approximately $15.7 million of unrealized
appreciation due to the reversal of prior period unrealized depreciation recorded upon the exit of certain investments including approximately $6.1 million related to Energy Alloys, L.L.C., $6.3
million related to Grant U.S. Holdings LLP., $2.3 million related to Bankruptcy Management Solutions and $1.1 million related to Pracs Institute, LTD.

For
the year ended February 28, 2011, our investments had a increase in net unrealized appreciation of $36.4 million versus an increase in net unrealized depreciation of
$9.5 million for the

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year
ended February 28, 2010. The most significant cumulative changes in unrealized appreciation and depreciation for the year ended February 28, 2011, were the following:

Fiscal year ended February 28, 2011

Issuer

Asset Type

Cost

Fair
Value

Total
Unrealized
Appreciation/
(Depreciation)

YTD
Change in
Unrealized
Appreciation/
(Depreciation)($ in thousands)Saratoga CLO

Other/ StructuredFinance Securities

$
27,364

$
22,732

$
(4,632
)
$
7,902Targus Holdings, Inc.

Common Stock


567


2,882


2,315


2,644Targus Holdings, Inc.

Unsecured Notes


1,538


986


(552
)

(544
)M/C Acquisition Corp., LLC

First Lien Term Loan


871


259


(612
)

(398
)Dekko Technologies, LLC

Second Lien Term Loan


7,199


6,767


(432
)

1,629USS Parent Holding Corp.

Voting Common Stock


3,026


2,828


(198
)

855Bankruptcy Management Solutions, Inc.

Second Lien Term Loan


2,450


110


(2,340
)

(2,340
)PRACS Institute, LTD

Second Lien Term Loan


4,070


3,014


(1,056
)

(566
)Elyria Foundry Company, LLC

Senior Secured Notes


5,017


4,231


(786
)

312Grant U.S. Holdings LLP

Second Lien Term Loan


6,347





(6,347
)

(159
)


The
$7.9 million net unrealized appreciation in our investment in the Saratoga CLO subordinated notes was due to a decrease in the assumed portfolio default rate
(based on better than forecast actual default rates), a decrease in the assumed recovery rate, and a decrease of "CCC" rated investments and defaulted securities in the portfolio. The decrease in
unrealized depreciation in our investments in McMillin Companies, LLC and Elyria Foundry Company, LLC, were due to improved visibility of the outlook for these companies. The increase in
unrealized depreciation in our investments in Jason Incorporated and Energy Alloy were due to declining prospects for each of the companies. The change in the fair values of our investments in Grant
U.S. Holdings and Penton Media, Inc. were primarily due to fluctuations in the market quotations obtained for these investments compared to the prior period.

For
the year ended February 28, 2010, the Company had net unrealized losses of $9.5 million, which was comprised of $7.4 million in unrealized appreciation,
$25.5 million in unrealized depreciation and $8.6 million related to the reversal of prior period net unrealized depreciation recorded upon the exit of an investment. The most
significant changes in net unrealized appreciation and depreciation for the year ended February 28, 2010 are as follows:

Fiscal year ended February 28, 2010

Issuer

Asset Type

Cost

Fair
Value

Total
Unrealized
Appreciation/
(Depreciation)

YTD
Change in
Unrealized
Appreciation/
(Depreciation)($ in thousands)Terphane Holdings Corp.

Senior Secured Notes

$
10,437

$
9,791

$
(646
)
$
2,091Penton Media, Inc.

First Lien Term Loan


3,908


3,478


(430
)

1,286IDI Acquisition Corp.

Senior Secured Notes


3,679


3,621


(58
)

1,136Jason Incorporated

Unsecured Notes


13,700


1,688


(12,012
)

(8,190
)Saratoga CLO

Other/Structured Finance Securities


29,233


16,698


(12,535
)

(4,970
)Energy Alloys, LLC

Second Lien Term Loan


6,239


1,129


(5,110
)

(4,197
)


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For the year ended February 29, 2012, changes in the value of the interest rate caps purchased pursuant to the credit facilities
resulted in unrealized depreciation of $16,190 versus an unrealized depreciation of $25,882 for the year ended February 28, 2011.

For
the fiscal year ended February 28, 2011, changes in the value of the interest rate caps purchased pursuant to the credit facilities resulted in an unrealized depreciation of
$25,882 versus an unrealized appreciation of $2,634 for the fiscal year ended February 28, 2010. For a more detailed discussion of the interest rate caps, see "Note 8. Interest Rate Cap
Agreements" to our audited financial statements included elsewhere in this Annual Report.



For the fiscal years ended February 29, 2012 and February 28, 2011 we recorded a net increase in net assets resulting
from operations of $13.3 million, and $17.0 million, respectively, and a net decrease for the fiscal year ended February 28, 2010 of $10.5 million. Based on 3,434,345
weighted average common shares outstanding as of February 29, 2012, our per share net increase in net assets resulting from operations was $3.87 for the fiscal year ended February 29,
2012. This compares to a per share net increase in net assets resulting from operations of $6.96 for the fiscal year ended February 28, 2011 (based on 2,437,577 weighted average common shares
outstanding as of February 28, 2011) and a per share decrease in net assets resulting from operations of $9.86 for the fiscal year ended February 28, 2010 (based on 1,061,351 weighted
average common shares outstanding for the fiscal year ended February 28, 2010).

Financial condition, liquidity and capital resources

On April 11, 2007, we entered into a $100.0 million revolving securitized credit facility (the "Revolving Facility"). On
May 1, 2007, we entered into a $25.7 million term securitized credit facility (the "Term Facility" and, together with the Revolving Facility, the "Facilities"), which was fully drawn at
closing. In December 2007, we consolidated the Facilities by using a draw under the Revolving Facility to repay the Term Facility. In response to the market wide decline in financial asset prices,
which negatively affected the value of our portfolio, we terminated the revolving period of the Revolving Facility effective January 14, 2009 and commenced a two-year amortization
period during which all principal proceeds from the collateral was used to repay outstanding borrowings. In March 2009, we amended the Revolving Facility to decrease the minimum required
collateralization and increase the portion of the portfolio that can be invested in "CCC" rated investments in return for an increased interest rate and expedited amortization.

On
July 30, 2009, an event of default under the Revolving Facility occurred. As a result of this event of default, the lender under the Revolving Facility had the right to
accelerate repayment of the outstanding indebtedness and to foreclose and liquidate the collateral pledged thereunder. Due to the event of default, the interest rate on the Revolving Facility
increased from the commercial paper rate plus 4.00% to an interest rate at February 28, 2010 and May 31, 2010 of 9.25%.

On
July 30, 2010, we used the net proceeds from the stock purchase transaction with Saratoga Investment Advisors and certain of its affiliates and a portion of the funds available
to us under the senior secured revolving credit facility with Madison Capital Funding to pay the full amount of principal and accrued interest, including default interest, outstanding under the
Revolving Facility. Below is a summary of the terms of the senior secured revolving credit facility we entered into with Madison Capital Funding (the "Replacement Facility") on June 30, 2010.

Availability.The Company can draw up to the lesser of (i) $40 million (the "Facility Amount") and (ii) the product of
the
applicable advance rate (which varies from 50% to 75% depending on the

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type
of loan asset) and the value, determined in accordance with the Replacement Facility (the "Adjusted Borrowing Value"), of certain "eligible" loan assets pledged as security for the loan (the
"Borrowing Base"), in each case less (a) the amount of any undrawn funding commitments the Company has under any loan asset and which are not covered by amounts in the Unfunded Exposure Account
referred to below (the "Unfunded Exposure Amount") and (b) outstanding borrowings. Each loan asset held by the Company as of the date on which the Replacement Facility was closed was valued as
of that date and each loan asset that the Company acquires after such date will be valued at the lowest of its fair value, its face value (excluding accrued interest) and the purchase price paid for
such loan asset. Adjustments to the value of a loan asset will be made to reflect, among other things, changes in its fair value, a default by the obligor on the loan asset, insolvency of the obligor,
acceleration of the loan asset, and certain modifications to the terms of the loan asset.

The
Replacement Facility contains limitations on the type of loan assets that are "eligible" to be included in the Borrowing Base and as to the concentration level of certain categories
of loan assets in the Borrowing Base such as restrictions on geographic and industry concentrations, asset size and quality, payment frequency, status and terms, average life, and collateral
interests. In addition, if an asset is to remain an "eligible" loan asset, the Company may not make changes to the payment, amortization, collateral and certain other terms of the loan assets without
the consent of the administrative agent that will either result in subordination of the loan asset or be materially adverse to the lenders.

At
any time prior to the second anniversary of the closing of the Replacement Facility and subject to certain conditions, the Company may request an increase in the Facility Amount of up
to $60 million for a combined aggregate Facility Amount of $100 million.

Collateral.The Replacement Facility is secured by substantially all of the assets of the Company and includes the subordinated notes
("CLO Notes")
issued by Saratoga CLO and the Company's rights under the CLO Management Agreement (as defined below).

Interest Rate and Fees.Under the Replacement Facility, funds are borrowed from or through certain lenders at the greater of the
prevailing LIBOR
rate and 2.00%, plus an applicable margin of 5.50%. At the Company's option, funds may be borrowed based on an alternative base rate, which in no event will be less than 3.00%, and the applicable
margin over such alternative base rate is 4.50%. In addition, the Company pays the lenders a commitment fee of 0.75% per year on the unused amount of the Replacement Facility for the duration of the
Revolving Period (defined below). Accrued interest and commitment fees are payable monthly. The Company is also obligated to pay certain other fees to the lenders in connection with the closing of the
Replacement Facility.

Revolving Period and Maturity Date.The Company may make and repay borrowings under the Replacement Facility for a period of three years
following
the closing of the Replacement Facility (the "Revolving Period"). The Revolving Period may be terminated at an earlier time by the Company or, upon the occurrence of an event of default, by action of
the lenders or automatically. All borrowings and other amounts payable under the Replacement Facility are due and payable in full five years after the end of the Revolving Period.

Collateral Tests.It is a condition precedent to any borrowing under the Replacement Facility that the principal amount outstanding
under the
Replacement Facility, after giving effect to the proposed borrowings, not exceed the lesser of the Borrowing Base or the Facility Amount (the "Borrowing Base Test"). In addition to satisfying the
Borrowing Base Test, the following tests must also be satisfied (together with Borrowing Base Test, the "Collateral Tests"):



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The
Replacement Facility also requires payment of outstanding borrowings or replacement of pledged loan assets upon the Company's breach of its representation and warranty that pledged
loan assets included in the Borrowing Base are "eligible" loan assets. Such payments or replacements must equal the lower of the amount by which the Borrowing Base is overstated as a result of such
breach or any deficiency under the Collateral Tests at the time of repayment or replacement. Compliance with the Collateral Tests is also a condition to the discretionary sale of pledged loan assets
by the Company.

Priority of Payments.During the Revolving Period, the priority of payments provisions of the Replacement Facility require, after
payment of
specified fees and expenses and any necessary funding of the Unfunded Exposure Account, that collections of principal from the loan assets and, to the extent that these are insufficient, collections
of interest from the loan assets, be applied on each payment date to payment of outstanding borrowings if the Borrowing Base Test, the Overcollateralization Ratio and the Interest Coverage Ratio would
not otherwise be met. Similarly, following termination of the Revolving Period, collections of interest are required to be applied, after payment of certain fees and expenses, to cure any deficiencies
in the Borrowing Base Test, the Interest Coverage Ratio and the Overcollateralization Ratio as of the relevant payment date.

Reserve Account.The Replacement Facility requires the Company to set aside an amount equal to the sum of accrued interest, commitment
fees and
administrative agent fees due and payable on the next succeeding three payment dates (or corresponding to three payment periods). If for any monthly period during which fees and other payments accrue,
the aggregate Adjusted Borrowing Value of "eligible" pledged loan assets which do not pay cash interest at least quarterly exceeds 15% of the aggregate Adjusted Borrowing Value of "eligible" pledged
loan assets, the Company is required to set aside such interest and fees due and payable on the next succeeding six payment dates. Amounts in the reserve
account can be applied solely to the payment of administrative agent fees, commitment fees, accrued and unpaid interest and any breakage costs payable to the lenders.

Unfunded Exposure Account.With respect to revolver or delayed draw loan assets, the Company is required to set aside in a designated
account (the
"Unfunded Exposure Account") 100% of its outstanding and undrawn funding commitments with respect to such loan assets. The Unfunded Exposure Account is funded at the time the Company acquires a
revolver or delayed draw loan asset and requests a related borrowing under the Replacement Facility. The Unfunded Exposure Account is funded through a combination of proceeds of the requested
borrowing and other Company funds, and if for any reason such amounts are insufficient, through application of the priority of payment provisions described above.

Operating Expenses.The priority of payments provision of the Replacement Facility provides for the payment of certain operating
expenses of the
Company out of collections on principal and interest during the Revolving Period and out of collections on interest following the termination of the Revolving Period in accordance with the priority
established in such provision. The operating expenses

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payable
pursuant to the priority of payment provisions is limited to $350,000 for each monthly payment date or $2.5 million for the immediately preceding period of twelve consecutive monthly
payment dates. This ceiling can be increased by the lesser of 5% or the percentage increase in the fair market value of all the Company's assets only on the first monthly payment date to occur after
each one-year anniversary following the closing of the Replacement Facility. Upon the occurrence of a Manager Event (described below), the consent of the administrative agent is required
in order to pay operating expenses through the priority of payments provision.

Events of Default.The Replacement Facility contains certain negative covenants, customary representations and warranties and
affirmative covenants
and events of default. The Replacement Facility does not contain grace periods for breach by the Company of certain covenants, including, without limitation, preservation of existence, negative
pledge, change of name or jurisdiction and separate legal entity status of the Company covenants and certain other customary covenants. Other events of default under the Replacement Facility include,
among other things, the following:



Conditions to Acquisitions and Pledges of Loan Assets.The Replacement Facility imposes certain additional conditions to the
acquisition and pledge
of additional loan assets. Among other things, the Company may not acquire additional loan assets without the prior written consent of the administrative agent until such time that the administrative
agent indicates in writing its satisfaction with Saratoga Investment Advisors' policies, personnel and processes relating to the loan assets.

Fees and Expenses.The Company paid certain fees and reimbursed Madison Capital Funding for the aggregate amount of all documented,
out-of-pocket costs and expenses, including the reasonable fees and expenses of lawyers, incurred by Madison Capital Funding in connection with the Replacement

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Facility
and the carrying out of any and all acts contemplated thereunder up to and as of the date of closing of the stock purchase transaction with Saratoga Investment Advisors and certain of its
affiliates. These amounts totaled $2.0 million.

On
February 24, 2012, we amended our senior secured revolving credit facility with Madison Capital Funding LLC to, among other
things:



As
of February 29, 2012, we had $20.0 million outstanding under the Replacement Facility.

Our
asset coverage ratio, as defined in the 1940 Act, was 587% and 2,013% for the years ended February 29, 2012 and February 28, 2011, respectively.

At
February 29, 2012 and February 28, 2011, the fair value of investments, cash and cash equivalents and cash and cash equivalents, securitization accounts were as follows:

At February 29,
2012

At February 28,
2011Fair Value

Percent of
Total

Fair Value

Percent of
Total($ in thousands)Cash and cash equivalents

$
1,325


1.1
%
$
10,736


11.3
%Cash and cash equivalents, securitization accounts


25,534


20.9


4,370


4.6First lien term loans


36,196


29.6


18,475


19.4Second lien term loans


8,914


7.3


20,276


21.3Senior secured notes


10,706


8.8


9,892


10.4Senior unsecured loans


6,000


4.9





Unsecured notes


2,008


1.6


1,915


2.0Structured finance securities


25,846


21.1


22,732


23.9Equity Interest


5,690


4.7


6,735


7.1Total

$
122,219


100.0
%
$
95,131


100.0
%


On
November 15, 2011, our board of directors declared a dividend of $3.00 per share payable on December 30, 2011, to common stockholders of record on
November 25, 2011. Shareholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the
aggregate cash payable to all shareholders was limited to $2.0 million or $0.60 per share.

Based
on shareholder elections, the dividend consisted of $2.0 million in cash and 599,584 shares of common stock, or 18% of our outstanding common stock prior to the dividend
payment. The amount of cash elected to be received was greater than the cash limit of 20.0% of the aggregate dividend amount, thus resulting in the payment of a combination of cash and stock to
shareholders who elected to receive cash. The number of shares of common stock comprising the stock portion was calculated based on a price of $13.117067 per share, which equaled the volume weighted
average trading price per share of the common stock on December 20, 21 and 22, 2011.

On
November 12, 2010, our board of directors declared a dividend of $4.40 per share to shareholders payable in cash or shares of our common stock, in accordance with the
provisions of the IRS Revenue
Procedure 2010-12, which allows a publicly-traded regulated investment company to satisfy its distribution requirements with a distribution paid partly in common stock provided that at

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least
10% of the distribution is payable in cash. The dividend was paid on December 29, 2010 to common shareholders of record on November 19, 2010.

Based
on shareholder elections, the dividend consisted of $1.2 million in cash and 596,235 shares of common stock, or 22% of our outstanding common stock prior to the dividend
payment. The amount of cash elected to be received was greater than the cash limit of 10.0% of the aggregate dividend amount, thus resulting in the payment of a combination of cash and stock to
shareholders who elected to receive cash. The number of shares of common stock comprising the stock portion was calculated based on a price of $17.8049 per share, which equaled the volume weighted
average trading price per share of the common stock on December 20, 21 and 22, 2010.

On
November 13, 2009, our board of directors declared a dividend of $18.25 per share payable on December 31, 2009, to common stockholders of record on November 25,
2009. Shareholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to
all shareholders was limited to $2.1 million or $0.25 per share.

Based
on shareholder elections, the dividend consisted of $2.1 million in cash and 8,648,725 shares of common stock, or 104% of our outstanding common stock prior to the dividend
payment. The amount of cash elected to be received was greater than the cash limit of 13.7% of the aggregate dividend amount, thus resulting in the payment of a combination of cash and stock to
shareholders who elected to receive cash. The number of shares of common stock comprising the stock portion was calculated based on a price of $1.5099 per share, which equaled the volume weighted
average trading price per share of the common stock on December 24 and 28, 2009.

Given
the size of our asset base and our growing pipeline of attractive investments, our board of directors believes that using our capital resources to build and diversify our portfolio
serves stockholders' interests best by better positioning us to generate current income and capital appreciation on an increasing scale in future periods. Therefore, our board of directors has
determined not to pay any dividends at this time.

We
intend to continue to generate cash primarily from cash flows from operations, including interest earned from the temporary investment of cash in U.S. government securities and other
high-quality debt investments that mature in one year or less, future borrowings and future offerings of securities. Our primary use of funds is investments in our targeted asset classes
and cash distributions to holders of our common stock.

Although
we expect to fund the growth of our investment portfolio through the net proceeds from future equity offerings, including our dividend reinvestment plan, and issuances of senior
securities or future borrowings, to the extent permitted by the 1940 Act, our plans to raise capital may not be successful. In this regard, because our common stock has at times traded at a price
below our then-current net asset value per share and we are limited in our ability to sell our common stock at a price below net asset value per share, we may be limited in our ability to
raise equity capital. Our stockholders approved a proposal at our annual meeting of stockholders held on September 27, 2011 that authorizes us to sell shares of our common stock below the then
current net asset value per share in one or more offerings for a period ending on the earlier of September 27, 2012 or the date of our next annual meeting of stockholders. Our board of
directors adopted a policy that requires us to sell or issue shares of our common stock at an offering price per share that is not less than 85% of the then current net asset value per share pursuant
to this proposal. No change can be made to this policy without unanimous approval of our independent directors. We would need stockholder approval of a similar proposal to issue shares below net asset
value per share at any time after our next annual meeting of stockholders.

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In
addition, we intend to distribute between 90% and 100% of our taxable income to our stockholders in order to satisfy the requirements applicable to RICs under Subchapter M of
the Code. Consequently, we may not have the funds or the ability to fund new investments, to make additional investments in our portfolio companies, to fund our unfunded commitments to portfolio
companies or to repay borrowings. In addition, the illiquidity of our portfolio investments may make it difficult for us to sell these investments when desired and, if we are required to sell these
investments, we may realize significantly less than their recorded value.

Also,
as a BDC, we generally are required to meet a coverage ratio of total assets, less liabilities and indebtedness not represented by senior securities, to total senior securities,
which include all of our borrowings and any outstanding preferred stock, of at least 200%. This requirement limits the amount that we may borrow. To fund growth in our investment portfolio in the
future, we anticipate needing to raise additional capital from various sources, including the equity markets and other debt-related markets, which may or may not be available on favorable
terms, if at all.

Finally,
in light of the conditions in the financial markets and the U.S. economy overall, we, through a wholly-owned subsidiary, sought and obtained a license from the SBA to operate an
SBIC.

In
this regard, on March 28, 2012, our wholly-owned subsidiary, Saratoga Investment Corp. SBIC, LP, received a license from the SBA to operate as an SBIC under
Section 301(c) of the Small Business Investment Act of 1958. SBICs are designated to stimulate the flow of private equity capital to eligible small businesses. Under SBA regulations, SBICs may
make loans to eligible small businesses and invest in the equity securities of small businesses.

The
SBIC license allows our SBIC subsidiary to obtain leverage by issuing SBA-guaranteed debentures, subject to the issuance of a capital commitment by the SBA and other
customary procedures. SBA-guaranteed debentures are non-recourse, interest only debentures with interest payable semi-annually and have a ten year maturity. The
principal amount of SBA-guaranteed debentures is not required to be paid prior to maturity but may be prepaid at any time without penalty. The interest rate of SBA-guaranteed
debentures is fixed on a semi-annual basis at a market-driven spread over U.S. Treasury Notes with 10-year maturities.

SBA
regulations currently limit the amount that our SBIC subsidiary may borrow to a maximum of $150 million when it has at least $75 million in regulatory capital, receives
a capital commitment from the SBA and has been through an examination by the SBA subsequent to licensing. As of May 23, 2012, our SBIC subsidiary had $25 million in regulatory capital
and no SBA-guaranteed debentures outstanding.

We
applied for exemptive relief from the SEC on April 2, 2012 to permit us to exclude the debt of our SBIC subsidiary guaranteed by the SBA from our 200% asset coverage test under
the 1940 Act. If we receive an exemption for this SBA debt, we would have increased flexibility under the 200% asset coverage test.

We
cannot provide any assurance that these measures will provide sufficient sources of liquidity to support our operations and growth given the continued instability in the financial
markets and the weak U.S. economy.



The following table shows our payment obligations for repayment of debt and other contractual obligations at February 29, 2012:

Payment Due by PeriodTotal

Less Than
1 Year

1 - 3
Years

3 - 5
Years

More Than
5 Years($ in thousands)Long-Term Debt Obligations

$
20,000

$


$
20,000

$


$



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Off-balance sheet arrangements

At February 29, 2012 and February 28, 2011, we did not have any off-balance sheet arrangements that have or
are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources that are material to investors.

Item 7A.    Quantitative and Qualitative Disclosures about Market Risk

Our business activities contain elements of market risk. We consider our principal market risks to be fluctuations in interest rates.
Managing this risk is essential to our business. Accordingly, we have systems and procedures designed to identify and analyze our risks, to establish
appropriate policies and thresholds and to continually monitor this risk and thresholds by means of administrative and information technology systems and other policies and processes.

Interest
rate risk is defined as the sensitivity of our current and future earnings to interest rate volatility, including relative changes in different interest rates, variability of
spread relationships, the difference in re-pricing intervals between our assets and liabilities and the effect that interest rates may have on our cash flows. Changes in the general level
of interest rates can affect our net interest income, which is the difference between the interest income earned on interest earning assets and our interest expense incurred in connection with our
interest bearing debt and liabilities. Changes in interest rates can also affect, among other things, our ability to acquire leveraged loans, high yield bonds and other debt investments and the value
of our investment portfolio.

Our
investment income is affected by fluctuations in various interest rates, including LIBOR and the prime rate. A large portion of our portfolio is, and we expect will continue to be,
comprised of floating rate investments that utilize LIBOR. Our interest expense is affected by fluctuations in LIBOR. At February 29, 2012, we had $20.0 million of borrowings
outstanding.

In
April and May 2007, the Company entered into two interest rate cap agreements with notional amounts of $34.0 million (increased to $40.0 million in May 2007) and
$60.9 million. These agreements provide for a payment to the Company in the event LIBOR exceeds 8%, mitigating our exposure to increases in LIBOR. At February 29, 2012, the aggregate
interest rate cap agreement notional amount was $29.9 million.

We
have analyzed the potential impact of changes in interest rates on interest income from investments net of interest expense on the Replacement Facility. Assuming that our investments
as of February 29, 2012 were to remain constant for a full fiscal year and no actions were taken to alter the existing interest rate terms, a hypothetical change of 1% in interest rates would
cause a corresponding increase of approximately $0.7 million to our interest income net of interest expense.

Although
management believes that this measure is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in credit quality, size and composition
of the assets on the statement of assets and liabilities and other business developments that could magnify or diminish our sensitivity to interest rate changes, nor does it account for divergences in
LIBOR and the commercial paper rate, which have historically moved in tandem but, in times of unusual credit dislocations, have experienced periods of divergence. Accordingly no assurances can be
given that actual results would not materially differ from the potential outcome simulated by this estimate.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our financial statements are annexed to this Annual Report beginning on page F-1.

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ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

ITEM 9A.    CONTROLS AND PROCEDURES



Our CEO and our CFO have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined
in Rule 13a-15(e) of the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our CEO and CFO have concluded that our current disclosure
controls and procedures are effective as of the end of the period covered by this report.



The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined
by Rule 13a-15(f) of the Exchange Act) and for the assessment of the effectiveness of internal control over financial reporting. The Company's internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements. Because of its inherent
limitations, internal control over financial reporting may not prevent or detect misstatements and even when determined to be effective, can only provide reasonable assurance with respect to financial
statement preparation and presentation. Under the supervision and with the participation of management, including the CEO and CFO, the Company conducted an evaluation of the effectiveness of the
Company's internal control over financial reporting based on the criteria established in theInternal ControlIntegrated Frameworkissued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the Company's assessment, management believes that the Company maintained effective internal control over
financial reporting as of February 29, 2012.



There have been no changes in the Company's internal control over financial reporting (as defined in Rule 13a-15(f)
of Exchange Act) that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over
financial reporting.

ITEM 9B.    OTHER INFORMATION

None.

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PART III

ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Director and Executive Officer Information

Directors

The following table sets forth the names, ages and positions held by each of our directors, followed by a brief biography of each
individual, including the business experience of each individual during the past five years and the specific qualifications that let to the conclusion that each individual should serve as a director.

Name

Age

Position

Director
Since

Term
ExpiresInterested DirectorsChristian L. Oberbeck


52

Chairman of the Board, Chief Executive Officer and President


2010


2012Michael J. Grisius


48

Director


2010


2014Independent DirectorsSteven M. Looney


62

Director


2007


2013Charles S. Whitman III


70

Director


2007


2013G. Cabell Williams


58

Director


2007


2014


Christian L. OberbeckMr. Oberbeck has over 25 years of experience in leveraged finance, from distressed debt to private equity, and has
been involved in originating, structuring, negotiating, consummating, managing and monitoring investments in these businesses. Mr. Oberbeck is the Managing Partner of Saratoga Partners, a
middle market private equity investment firm, and has served on its investment committee since 1995. Mr. Oberbeck is also the Managing Member of Saratoga Investment Advisors, LLC, the
Company's investment adviser, and the Chief Executive Officer and President of the Company.

Prior
to assuming management responsibility for Saratoga Partners in 2008, Mr. Oberbeck has co-managed Saratoga Partners since 1995, when he joined Dillon Read and
Saratoga Partners from Castle Harlan, Inc., a corporate buyout firm which he had joined at its founding in 1987 and was a Managing Director, leading successful investments in manufacturing and
financial services companies. Prior to that, he worked in the Corporate Development Group of Arthur Young and in corporate finance at Blyth Eastman Paine Webber. Mr. Oberbeck has been a
director of numerous middle market companies.

Mr. Oberbeck
graduated from Brown University in 1982 with a BS in Physics and a BA in Mathematics. In 1985, he earned an MBA from Columbia University. Mr. Oberbeck's
qualifications as a director include his extensive experience in the investment and finance industry, as well as his intimate knowledge of the Company's operations, gained through his service as an
executive officer.

Michael J. GrisiusMr. Grisius has over 22 years of experience in leveraged finance, investment management and financial services. He
has originated, structured, negotiated, consummated, managed and monitored numerous successful investments in mezzanine debt, private equity, senior debt, structured products and commercial real
estate debt. Mr. Grisius is Chief Investment Officer and a Managing Director of Saratoga Investment Advisors, LLC, the Company's investment adviser. Mr. Grisius joined Saratoga
Investment Advisors, LLC in July 2011.

Prior
to joining Saratoga Investment Advisors, Mr. Grisius served as Managing Director at Allied Capital Corporation, where he was an investment professional for 16 years.
At Allied Capital Corporation, Mr. Grisius held several senior positions including co-head of Mezzanine Finance and

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member
of its Management Committee and its Investment Committee. In 2008, Mr. Grisius was appointed co-chairman of the Allied Capital Corporation's Investment Committee. He also had
responsibility for structuring and managing Unitranche Fund, LLC. During his tenure at Allied, Mr. Grisius built and led teams that made investments in subordinated debt, control equity
and real estate mortgage debt. Mr. Grisius has served on the board of directors of numerous middle market companies. Prior to joining Allied Capital Corp., Mr. Grisius worked in
leveraged finance at Chemical Bank from 1989 to 1992 and held senior accountant and consultant positions with KPMG LLP from 1985 to 1988.

Mr. Grisius
graduated with a BS from Georgetown University in 1985 and earned an MBA from Cornell University's Johnson Graduate School of Management in 1990. Mr. Grisius'
qualifications as a director include his broad experience in leverage finance, investment management, private equity and financial services.

Steven M. LooneyMr. Looney is a Managing Director of Peale Davies & Co. Inc., a consulting firm with particular expertise
in financial process and IT outsourcing, and is a CPA and an attorney. Mr. Looney also serves as a consultant and director to numerous companies in the healthcare, manufacturing and technology
services industries, including WH Industries Inc. Between 2000 and 2005, he served as Senior Vice President and Chief Financial Officer of PCCI, Inc., a private IT staffing and
outsourcing firm. Between 1992 and 2000, Mr. Looney worked at WH Industries as Chief Financial and Administrative Officer. Mr. Looney also serves as a director of Excellent Education for
Everyone, a nonprofit organization. Mr. Looney graduated summa cum laude from the University of Washington with a B.A. degree in Accounting and received a J.D. from the University of Washington
School of Law where he was a member of the law review. Mr. Looney's qualifications as director include his experience as a Managing Director of Peale Davies & Co. Inc. and
as Chief Financial and Administrative Officer of WH Industries, as well as his financial, accounting and legal expertise.

Charles S. Whitman IIIMr. Whitman is senior counsel (retired) at Davis Polk & Wardwell LLP. Mr. Whitman was a partner in
Davis Polk's Corporate Department for 28 years, representing clients in a broad range of corporate finance matters, including shelf registrations, securities compliance for financial
institutions, foreign asset privatizations, and mergers and acquisitions. From 1971 to 1973, Mr. Whitman served as Executive Assistant to three successive Chairmen of the SEC.
Mr. Whitman serves on the Legal Advisory Board of the National Association of Securities Dealers. Mr. Whitman graduated from Harvard College and graduated magna cum laude from Harvard
Law School with a LL.B. Mr. Whitman also received an LL.M. from Cambridge University in England. Mr. Whitman's qualifications as director include his 28 years of experience
representing clients, including AT&T, Exxon Mobil, General Motors and BP, in securities matters as a partner in Davis Polk's corporate department.

G. Cabell WilliamsMr. Williams has served as the Managing General Partner of Williams and Gallagher, a private equity partnership located in
Chevy Chase, Maryland since 2004. Since 2011, Mr. Williams has also served as a partner of Farragut Capital Partners, an investment firm based in Fairfax, VA. In 2004, Mr. Williams
concluded a 23 year career at Allied Capital Corporation, a business development company based in Washington, DC, which was acquired by Ares Capital Corporation in 2010. While at Allied,
Mr. Williams held a variety of positions, including President, COO and finally Managing Director following Allied's merger with its affiliates in 1998. From 1991 to 2004, Mr. Williams
either led or co-managed the firm's Private Equity Group. For the nine years prior to 1999, Mr. Williams led Allied's Mezzanine investment activities. For 15 years,
Mr. Williams served on Allied's Investment Committee where he was responsible for reviewing and approving all of the firm's investments. Prior to 1991, Mr. Williams ran Allied's Minority
Small Business Investment Company. He also founded Allied Capital Commercial Corporation, a real estate investment vehicle. Mr. Williams has served on the Board of various public and private
companies. Mr. Williams attended The Landon School, and graduated from Mercersburg Academy and Rollins College, receiving a B.S. in Business

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Administration
from the latter. Mr. Williams' qualifications as director include his 28 years of experience managing investment activities at Allied Capital, where he served in a variety
of positions, including President, COO and Managing Director.

Executive Officer Who Is Not also a Director

The following table sets forth the name, age and position held by our executive officer who is not also a director, followed by a brief
biography, including the business experience during the past five years.

Name

Age

PositionExecutive OfficerRichard A. Petrocelli


43

Chief Financial Officer, Secretary and Chief Compliance Officer


Richard A. PetrocelliMr. Petrocelli has over 20 years of experience including investment management, private equity and corporate
reorganizations. Mr. Petrocelli is a Managing Director and Chief Financial Officer at Saratoga Partners, a middle market private equity investment firm, and has been involved in originating,
structuring, negotiating, consummating, managing and monitoring middle market investments. Mr. Petrocelli is the Managing Director of Saratoga Investment Advisors, the Company's investment
adviser, and the Chief Financial Officer, Vice President, Secretary and Chief Compliance Officer of the Company. Mr. Petrocelli served as a director of the Company from 2010 until 2011.

Mr. Petrocelli
began his career as an accountant before transitioning to alternative assets at Gabelli Asset Management Company in 1993. Mr. Petrocelli's background brings
financial expertise to the diligence and oversight processes, which is critically important when dealing in complex transactions. In addition to his involvement in originating, structuring,
negotiating, consummating, managing and monitoring investments at Saratoga Partners, Mr. Petrocelli is currently the Chief Financial Officer of Saratoga Partners and is responsible for
reporting and compliance. Mr. Petrocelli joined Saratoga Partners in 1998 from Gabelli Asset Management. At Gabelli Asset Management, Mr. Petrocelli was a Vice President in the corporate
finance department with a primary focus on the Company's alternative investment business. Prior to that, he was a senior accountant at BDO Siedman. Mr. Petrocelli has served as a director of a
number of Saratoga Partners' portfolio companies.

Mr. Petrocelli
graduated with a BSBA from Georgetown University in 1990 and earned an MBA from New York University's Stern School of Business in 1999. He is a Certified Public
Accountant.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers, and persons who own 10% or
more of our voting stock, to file reports of ownership and changes in ownership of our equity securities with the SEC. Directors, executive officers and 10% or more holders are required by SEC
regulations to furnish us with copies of all Section 16(a) forms they file. Based solely on a review of the copies of those forms furnished to us, or written representations that no such forms
were required, we believe that our directors, executive officers and 10% or more beneficial owners complied with all Section 16(a) filing requirements during the year ended February 29,
2012.

Code of Business Conduct and Ethics

We have adopted a Code of Business Conduct and Ethics that applies to which applies to, among others, our executive officers, including
our principal executive officer and principal financial officer, as well as every officer, director and employee of the Company. Requests for copies should be sent in writing to Saratoga Investment
Corp., 535 Madison Avenue, New York, New York 10022. The

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Company's
Code of Business Conduct and Ethics is also available on our website athttp://saratogainvestmentcorp.com.

If
we make any substantive amendment to, or grant a waiver from, a provision of our Code of Business Conduct and Ethics, we will promptly disclose the nature of the amendment or waiver
on our website athttp://saratogainvestmentcorp.com.

Nomination of Directors

There have been no material changes to the procedures by which stockholders may recommend nominees to our Board of Directors
implemented since the filing of our Proxy Statement for our 2011 Annual Meeting of Stockholders.

Audit Committee

The current members of the audit committee are Steven M. Looney (Chairman), Charles S. Whitman III and
G. Cabell Williams. The Board has determined that Mr. Looney is an "audit committee financial expert" as defined under Item 407 of Regulation S-K of the
Securities Exchange Act of 1934 and that each of Messrs. Whitman and Williams are "financially literate" as required by NYSE corporate governance standards. All of these members are independent
directors.

ITEM 11.    EXECUTIVE COMPENSATION

Executive Compensation

Currently, none of our executive officers are compensated by us. We currently have no employees, and each of our executive officers is
also an employee of Saratoga Investment Advisors. Services necessary for our business are provided by individuals who are employees of Saratoga Investment Advisors, pursuant to the terms of an
investment advisory and management agreement and an administration agreement.

Director Compensation

Our independent directors receive an annual fee of $40,000. They also receive $2,500 plus reimbursement of reasonable
out-of-pocket expenses incurred in connection with attending each board meeting and receive $1,000 plus reimbursement of reasonable out-of-pocket
expenses incurred in connection with attending each committee meeting. In addition, the chairman of the audit committee receives an annual fee of $5,000 and the chairman of each other committee
receives an annual fee of $2,000 for their additional services in these capacities. In addition, we have purchased directors' and officers' liability insurance on behalf of our directors and officers.
Independent directors have the option to receive their directors' fees in the form of our common stock issued at a price per share equal to the greater of net asset value or the market price at the
time of payment. No compensation is paid to directors who are "interested persons."

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The
following table sets forth information concerning total compensation earned by or paid to each of our directors during the fiscal year ended February 29, 2012:

Name

Fees Earned or
Paid in Cash

TotalInterested DirectorChristian L. Oberbeck(1)





Michael J. Grisius(1)





Independent DirectorsSteven M. Looney

$
70,500

$
70,500Charles S. Whitman III

$
67,500

$
67,500G. Cabell Williams

$
67,500

$
67,500


(1)No
compensation was paid to directors who are interested persons of us as defined in the 1940 Act.


Compensation Committee Interlocks and Insider Participation

The current members of the compensation committee are G. Cabell Williams (Chairman), Steven M. Looney and
Charles S. Whitman III. All of these members are independent directors. The compensation committee is responsible for overseeing the Company's compensation policies generally and making
recommendations to the Board with respect to incentive compensation and equity-based plans of the Company that are subject to Board approval, evaluating executive officer performance and reviewing the
Company's management succession plan, overseeing and setting compensation for the Company's directors and, as applicable, its executive officers and, as applicable, preparing the report on executive
officer compensation that SEC rules require to be included in our annual report on Form 10-K. Currently, none of our executive officers are compensated by the Company and as such
the compensation committee is not required to produce a report on executive officer compensation for inclusion in our annual report on Form 10-K.

During
fiscal year 2012, none of the Company's executive officers served on the board of directors (or a compensation committee thereof or other board committee performing equivalent
functions) of any entities that had one or more executive officers serve on the compensation committee or on the board of directors. No current or past executive officers or employees of the Company
or its affiliates serve on the compensation committee.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth, as of May 23, 2012, the beneficial ownership of each current director, the nominees for
director, the Company's executive officers, each person known to us to beneficially own 5% or more of the outstanding shares of our common stock, and the executive officers and directors as a group.

The
percentage ownership is based on 3,876,661 shares of common stock outstanding as of May 23, 2012. Shares of common stock that are subject to warrants or other convertible
securities currently exercisable or exercisable within 60 days thereof, are deemed outstanding for the purposes of computing the percentage ownership of the person holding these options or
convertible securities, but are not deemed outstanding for computing the percentage ownership of any other person. Beneficial ownership is determined under the rules of the SEC and generally includes
voting or investment power with respect to securities. To our knowledge, unless otherwise indicated in the footnotes to this table, the persons and entities named in the table have sole voting and
sole investment power with respect to

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Table of Contents

all
shares beneficially owned. Unless otherwise indicated by footnote, the address for each listed individual is Saratoga Investment Corp., 535 Madison Avenue, New York, New York 10022.

Name of Beneficial Owners

Number of Shares of
Common Stock
Beneficially Owned

Percent of ClassInterested DirectorsChristian L. Oberbeck


1,052,384
(1)

27.1
%Michael J. Grisius


14,216


*Executive OfficerRichard A. Petrocelli


43,198


1.1
%Independent DirectorsSteven M. Looney


1,139


*Charles S. Whitman III


1,228


*G. Cabell Williams


15,004


*All Directors and Executive Officers as a Group


1,127,169


29.1
%Owners of 5% or more of our common stockBlack Diamond Capital Management, L.L.C.(2)


318,250


8.2
%Raging Capital Management, LLC(3)


308,999


8.0
%Magten Asset Management Corp.(4)


196,379


5.1
%


*Less
than 1%(1)Includes
814,927 shares of common stock directly held by Mr. Oberbeck, 120,972 shares of common stock held by Saratoga Investment Advisors, which
Mr. Oberbeck controls, and 116,485 shares of common stock held by CLO Partners LLC, an entity wholly owned by Mr. Oberbeck.(2)Includes
277,631 shares of common stock held by GSC CDO III, L.L.C. and certain of its affiliates. The address of Black Diamond Capital
Management, L.L.C. is One Sound Shore Drive, Suite 200, Greenwich, CT 06830.(3)Includes
116,731 shares of our common stock held by Raging Capital Fund, LP ("Raging Capital Fund") and 192,268 shares of our common stock held by
Raging Capital Fund (QP), LP ("Raging Capital Fund QP" and together with Raging Capital Fund, the "Raging Funds"). Raging Capital Management, LLC ("Raging Capital") is the general
partner of each of the Raging Funds. William C. Martin is the managing member of Raging Capital. By virtue of these relationships, each of Raging Capital and Mr. Martin may be deemed to
beneficially own our common Stock owned directly by the Raging Funds. The address of Raging Capital Fund is Ten Princeton Avenue, Rocky Hill, NJ 08553.(4)Includes
shares held by advisory clients of Magten Asset Management Corp., none of which owns more than 5% of the shares of our outstanding common stock.
Talton R. Embry is the managing director of Magten Asset Management Corp. By virtue of this relationship, Mr. Embry may also be deemed to beneficially own our common stock held by the advisory
clients of Magten Asset Management Corp. The address of Magten Asset Management Corp. is 17 East 89th Street, New York, NY 10128.


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ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Transactions with Related Persons

We have entered into an investment advisory and management agreement with Saratoga Investment Advisors, LLC. We have also
entered into a license agreement with Saratoga Investment Advisors, LLC, pursuant to which Saratoga Investment Advisors has agreed to grant us a non-exclusive,
royalty-free license to use the name "Saratoga." In addition, pursuant to the terms of the administration agreement, Saratoga Investment Advisors, LLC provides us with the office
facilities and administrative services necessary to conduct our day-to-day operations. Mr. Oberbeck, our chief executive officer and president, is the primary investor
in and controls Saratoga Investment Advisors, LLC.

Review, Approval or Ratification of Transactions with Related Persons

The Audit Committee of our Board is required to review and approve any transactions with related persons (as such term is defined in
Item 404 of Regulation S-K).

Director Independence

In accordance with rules of the New York Stock Exchange (the "NYSE"), the Board annually determines the independence of each director.
No director is considered independent unless the Board has determined that he or she has no material relationship with the Company. The Company monitors the status of its directors and officers
through the activities of the Company's Nominating and Corporate Governance Committee and through a questionnaire to be completed by each director no less frequently than annually, with updates
periodically if information provided in the most recent questionnaire has changed.

In
order to evaluate the materiality of any such relationship, the Board uses the definition of director independence set forth in the NYSE Listed Company Manual. Section 303A.00
of the NYSE Listed Company Manual provides that business development companies, or BDCs, such as the Company, are required to comply with all of the provisions of Section 303A applicable to
domestic issuers other than Sections 303A.02, the section that defines director independence. Section 303A.00 provides that a director of a BDC shall be considered to be independent if
he or she is not an "interested person" of the Company, as defined in Section 2(a)(19) of the 1940 Act. Section 2(a)(19) of the 1940 Act defines an "interested person" to include, among
other things, any person who has, or within the last two years had, a material business or professional relationship with the Company.

The
Board has determined that each of the directors is independent and has no relationship with the Company, except as a director and stockholder of the Company, with the exception of
Mr. Oberbeck, who is an interested person of the Company due to his position as an officer of the Company and Mr. Grisius, who is an interested person of the Company due to his position
as an officer of Saratoga Investment Advisors, LLC.

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ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

Independent Registered Public Accounting Firm

For the years ended February 29, 2012 and February 28, 2011, the Company incurred the following fees for services
provided by Ernst & Young LLP, including expenses:

Fiscal Year Ended
February 29, 2012

Fiscal Year Ended
February 28, 2011Audit Fees

$
265,200

$
235,000Audit Related Fees


172,300


150,000Tax Fees


37,000


37,000All Other Fees





30,000Total Fees

$
474,500

$
452,000


Audit Fees.Audit fees include fees for services that normally would be provided by the accountant in connection with statutory and
regulatory
filings or engagements and that generally only the independent accountant can provide. In addition to fees for the audit of our annual financial statements, the audit of the effectiveness of our
internal control over financial reporting and the review of our quarterly financial statements in accordance with generally accepted auditing standards, this category contains fees for comfort
letters, statutory audits, consents, and assistance with and review of documents filed with the SEC.

Audit Related Fees.Audit related fees are assurance related services that traditionally are performed by the independent accountant,
such as attest
services that are not required by statute or regulation.

Tax Fees.Tax fees include services in conjunction with preparation of the Company's tax return.

All Other Fees.Fees for other services would include fees for products and services other than the services reported above.

It
is the policy of the audit committee to pre-approve all audit, review or attest engagements and permissible non-audit services to be performed by our
independent registered public accounting firm.

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Table of Contents

PART IV

ITEM 15.    EXHIBITS AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULES

The following documents are filed or incorporated by reference as part of this Annual Report:

1.     Consolidated Financial Statements

The following financial statements of the Company are filed herewith:



2.     Financial Statement Schedule

Not applicable.

Schedule 12-14Investments
in and advances to affiliates

3.     Exhibits required to be filed by Item 601 of Regulation S-K

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

EXHIBIT INDEX

Exhibit Number

Description3.1
(a)
Articles of Incorporation of Saratoga Investment Corp. (incorporated by reference to Saratoga Investment Corp.'s Form 10-Q for the quarterly period ended May 31, 2007, File No. 001-33376).3.1
(b)
Articles of Amendment of Saratoga Investment Corp. (incorporated by reference to Saratoga Investment Corp.'s Current Report on Form 8-K filed August 3, 2010).3.1
(c)
Articles of Amendment of Saratoga Investment Corp. (incorporated by reference to Saratoga Investment Corp.'s Current Report on Form 8-K filed August 13, 2010).3.2

Amended and Restated Bylaws of Saratoga Investment Corp. (incorporated by reference to Saratoga Investment Corp.'s Current Report on Form 8-K filed on March 5, 2008).4.1

Specimen certificate of Saratoga Investment Corp.'s common stock, par value $0.001 per share. (incorporated by reference to Saratoga Investment Corp.'s Registration Statement on Form N-2, File No. 333-169135,
filed on September 1, 2010).


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Exhibit Number

Description4.2

Registration Rights Agreement dated July 30, 2010 between GSC Investment Corp., GSC CDO III L.L.C., and the investors party thereto (incorporated by reference to Saratoga Investment Corp.'s Current Report on
Form 8-K filed on August 3, 2010).10.1

Investment Advisory and Management Agreement dated July 30, 2010 between GSC Investment Corp. and Saratoga Investment Advisors, LLC (incorporated by reference to Saratoga Investment Corp.'s Current Report on
Form 8-K filed on August 3, 2010).10.2

Custodian Agreement dated March 21, 2007 between GSC Investment LLC and U.S. Bank National Association (incorporated by reference to Saratoga Investment Corp.'s Form 10-Q for the quarterly period ended
May 31, 2007).10.3

Administration Agreement dated July 30, 2010 between GSC Investment Corp. and Saratoga Investment Advisors, LLC (incorporated by reference to Saratoga Investment Corp.'s Current Report on Form 8-K filed on
August 3, 2010).10.4

Trademark License Agreement dated July 30, 2010 between Saratoga Investment Advisors, LLC and GSC Investment Corp. (incorporated by reference to Saratoga Investment Corp.'s Current Report on Form 8-K filed
on August 3, 2010).10.5

Credit, Security and Management Agreement dated July 30, 2010 by and among GSC Investment Funding LLC, Saratoga Investment Corp., Saratoga Investment Advisors, LLC, Madison Capital Funding LLC and U.S.
Bank National Association (incorporated by reference to Saratoga Investment Corp.'s Current Report on Form 8-K filed on August 3, 2010).10.6

Form of Indemnification Agreement between Saratoga Investment Corp. and each officer and director of Saratoga Investment Corp. (incorporated by reference to Amendment No. 2 to Saratoga Investment Corp.'s Registration
Statement on Form N-2 filed on January 12, 2007).21.1

List of Subsidiaries and jurisdiction of incorporation/organization: Saratoga Investment Funding LLCDelaware; Saratoga Investment Corp. SBIC, LPDelaware; and Saratoga Investment Corp. GP,
 LLCDelaware.31.1
*
Chief Executive Officer Certification Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
*
Chief Financial Officer Certification Pursuant to Rule 13a-14 of the Securities Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
*
Chief Executive Officer and Chief Financial Officer Certification pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.


*Filed
herewith


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SIGNATURES

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

SARATOGA INVESTMENT CORP.Date: May 23, 2012

By:

/s/ CHRISTIAN L. OBERBECK Christian L. Oberbeck Chief Executive Officer and PresidentBy:

/s/ RICHARD A. PETROCELLI Richard A. Petrocelli Chief Financial Officer, Chief Compliance
Officer and Secretary


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

Signature

Title

Date/s/ CHRISTIAN L. OBERBECK Christian L. Oberbeck

Chairman of the Board of Directors, Chief Executive Officer (Principal Executive Officer)

May 23, 2012/s/ MICHAEL J. GRISIUS Michael J. Grisius

Member of the Board of Directors

May 23, 2012/s/ RICHARD A. PETROCELLI Richard A. Petrocelli

Chief Financial Officer (Principal Accounting Officer and Principal Financial Officer)

May 23, 2012/s/ STEVEN M. LOONEY Steven M. Looney

Member of the Board of Directors

May 23, 2012/s/ CHARLES S. WHITMAN III Charles S. Whitman III

Member of the Board of Directors

May 23, 2012/s/ G. CABELL WILLIAMS G. Cabell Williams

Member of the Board of Directors

May 23, 2012


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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



Report of Independent Registered Public Accounting Firm


F-2Consolidated Statement of Assets and Liabilities as of February 29, 2012 and February 28, 2011


F-3Consolidated Statements of Operations for the years ended February 29, 2012, February 28, 2011 and 2010


F-4Consolidated Schedule of Investments as of February 29, 2012 and February 28, 2011


F-5Consolidated Statements of Changes in Net Assets for the years ended February 29, 2012, February 28, 2011, and
2010


F-11Consolidated Statements of Cash Flows for the years ended February 29, 2012, February 28, 2011 and
2010


F-12Notes to Consolidated Financial Statements


F-13


F-1

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Table of Contents

Report of Independent Registered Public Accounting Firm

The
Board of Directors and Shareholders of Saratoga Investment Corp.

We
have audited the accompanying consolidated statements of assets and liabilities of Saratoga Investment Corp (the "Company"), including the consolidated schedules of investments, as of
February 29, 2012 and February 28, 2011, and the related consolidated statements of operations, changes in net assets and cash flows for the years ended February 29, 2012,
February 28, 2011 and 2010. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our
audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial
reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. Our procedures included confirmation of securities owned as of February 29, 2012, by correspondence with the custodian and management or agents of the
underlying investments. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Saratoga Investment Corp. at
February 29, 2012 and February 28, 2011, and the consolidated results of its operations, changes in its net assets and its cash flows for the years ended February 29, 2012,
February 28, 2011 and 2010, in conformity with U.S. generally accepted accounting principles.

/s/
Ernst & Young LLP
New York, NY
May 23, 2012

F-2

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Table of Contents



Saratoga Investment Corp.

Consolidated Statements of Assets and Liabilities

As ofFebruary 29, 2012

February 28, 2011ASSETSInvestments at fair valueNon-control/non-affiliate investments (amortized cost of $73,161,722 and $73,779,271, respectively)

$
69,513,434

$
57,292,723Control investments (cost of $23,540,517 and $27,364,350, respectively)


25,846,414


22,732,038Total investments at fair value (amortized cost of $96,702,239 and $101,143,621, respectively)


95,359,848


80,024,761Cash and cash equivalents


1,325,698


10,735,755Cash and cash equivalents, securitization accounts


25,534,195


4,369,987Outstanding interest rate cap at fair value (cost of $131,000 and $131,000, respectively)


75


16,265Interest receivable, (net of reserve of $273,361 and $14,796, respectively)


1,689,404


1,666,083Deferred credit facility financing costs, net


1,199,490


1,638,768Management fee receivable


227,581


231,753Other assets


94,823


85,166Receivable from unsettled trades


59,511


Total assets

$
125,490,625

$
98,768,538LIABILITIESRevolving credit facility

$
20,000,000

$
4,500,000Payable for unsettled trades


4,072,500


4,900,000Management and incentive fees payable


2,885,670


2,203,806Accounts payable and accrued expenses


704,949


785,486Interest and credit facility fees payable


53,262


67,792Due to manager


394,094


240,000Total liabilities

$
28,110,475

$
12,697,084NET ASSETSCommon stock, par value $.001, 100,000,000 common shares authorized, 3,876,661 and 3,277,077 common shares issued and outstanding,
respectively

$
3,877

$
3,277Capital in excess of par value


161,644,426


153,768,680Distribution in excess of net investment income


(13,920,068
)

(8,918,890
)Accumulated net realized loss from investments and derivatives


(48,874,767
)

(37,548,016
)Net unrealized depreciation on investments and derivatives


(1,473,318
)

(21,233,597
)Total Net Assets


97,380,150


86,071,454Total liabilities and Net Assets

$
125,490,625

$
98,768,538NET ASSET VALUE PER SHARE

$
25.12

$
26.26




See accompanying notes to consolidated financial statements.

F-3

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Table of Contents



Saratoga Investment Corp.

Consolidated Statements of Operations

For the year ended
February 29, 2012

For the year ended
February 28, 2011

For the year ended
February 28, 2010INVESTMENT INCOMEInterest from investmentsNon-control/Non-affiliate investments

$
7,055,709

$
8,745,939

$
10,902,482Control investments


4,198,007


3,295,359


2,397,514Total interest income


11,253,716


12,041,298


13,299,996Interest from cash and cash equivalents


7,865


8,857


23,624Management fee income


2,011,516


2,032,357


2,057,397Other income


238,579


90,503


236,259Total investment income


13,511,676


14,173,015


15,617,276EXPENSESInterest and credit facility financing expenses


1,297,985


2,611,839


4,096,041Base management fees


1,617,496


1,645,552


1,950,760Professional fees


1,455,380


3,325,475


2,071,027Administrator expenses


1,000,000


810,416


670,720Incentive management fees


1,257,087


1,868,503


327,684Insurance


578,746


704,800


869,969Directors fees and expenses


208,851


373,385


294,932General & administrative


389,825


478,730


265,575Other expense


5,445





Expenses before expense waiver and reimbursement


7,810,815


11,818,700


10,546,708Expense reimbursement





(258,562
)

(670,720
)Waiver of deferred incentive management fees





(2,636,146
)

Total expenses net of expense waiver and reimbursement


7,810,815


8,923,992


9,875,988NET INVESTMENT INCOME BEFORE INCOME TAXES


5,700,861


5,249,023


5,741,288Income tax expense, including excise tax








(27,445
)NET INVESTMENT INCOME


5,700,861


5,249,023


5,713,843REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:Net realized loss from investments


(12,185,997
)

(24,684,262
)

(6,653,983
)Net unrealized appreciation (depreciation) on investments


19,776,469


36,419,362


(9,525,054
)Net unrealized appreciation (depreciation) on derivatives


(16,190
)

(25,882
)

2,634Net gain (loss) on investments


7,574,282


11,709,218


(16,176,403
)NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS

$
13,275,143

$
16,958,241

$
(10,462,560
)WEIGHTED AVERAGEBASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE*

$
3.87

$
6.96

$
(9.86
)WEIGHTED AVERAGE COMMON STOCK OUTSTANDINGBASIC AND DILUTED*


3,434,345


2,437,577


1,061,351


*Earnings
per share and Weighted average shares outstanding for the year ended February 28, 2010 have been adjusted to reflect a
one-for-ten reverse stock split in August 2010.




See accompanying notes to consolidated financial statements.

F-4

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Table of Contents



Saratoga Investment Corp.

Consolidated Schedule of Investments

February 29, 2012

Company(a)

Industry

Investment Interest Rate/Maturity

Principal/
Number of
Shares

Cost

Fair Value(c)

% of
Net
AssetsNon-control/Non-affiliated investments71.4%(b)Coast Plating, Inc.(d)

Aerospace

First Lien Term Loan 11.77% Cash, 9/13/2014

$
2,550,000

$
2,550,000

$
2,550,000


2.6
%Coast Plating, Inc.(d)

Aerospace

First Lien Term Loan 12.52% Cash, 9/13/2014

$
950,000


950,000.0


950,000


1.0
%Total Aerospace





3,500,000


3,500,000


3.6
%Legacy Cabinets Holdings(d)(h)

Building Products

Common Stock Voting A-1


2,535


220,900





0.0
%Legacy Cabinets Holdings(d)(h)

Building Products

Common Stock Voting B-1


1,600


139,424





0.0
%Legacy Cabinets, Inc.(d)

Building Products

First Lien Term Loan 7.25% (1.00% Cash/6.25% PIK), 5/3/2014

$
312,198


312,198


221,629


0.2
%Total Building Products





672,522


221,629


0.2
%Targus Group International, Inc.(d)

Consumer Products

First Lien Term Loan 11.00% Cash, 5/24/2016

$
3,980,000


3,911,828


3,944,976


4.1
%Targus Holdings, Inc.(d)

Consumer Products

Unsecured Notes 10.00% PIK, 6/14/2019

$
1,799,479


1,799,479


963,621


1.0
%Targus Holdings, Inc.(d)(h)

Consumer Products

Common Stock


62,413


566,765


2,675,645


2.7
%Total Consumer Products





6,278,072


7,584,242


7.8
%CFF Acquisition LLC(d)

Consumer Services

First Lien Term Loan 7.50% Cash, 7/31/2015

$
2,684,141


2,462,831


2,448,205


2.5
%PrePaid Legal Services, Inc.(d)

Consumer Services

First Lien Term Loan 11.00% Cash, 12/31/2016

$
3,000,000


2,920,411


2,940,000


3.0
%Total Consumer Services





5,383,242


5,388,205


5.5
%M/C Acquisition Corp., LLC(d)

Education

First Lien Term Loan 10.00% (4.25% Cash/5.75% PIK), 12/31/2012

$
2,944,596


1,790,662


591,864


0.6
%M/C Acquisition Corp., LLC(d)(h)

Education

Class A Common Stock


544,761


30,242





0.0
%Total Education





1,820,904


591,864


0.6
%Advanced Lighting Technologies, Inc.(d)

Electronics

Second Lien Term Loan 6.25% Cash, 6/1/2014

$
2,000,000


1,902,053


1,910,400


2.0
%Group Dekko, Inc. (fka Dekko Technologies, LLC)(d)

Electronics

Second Lien Term Loan 10.50% (6.50% Cash/4.00% PIK), 5/1/2013

$
7,571,152


7,571,152


7,003,316


7.2
%Total Electronics





9,473,205


8,913,716


9.2
%USS Parent Holding Corp.(d)(h)

Environmental

Non Voting Common Stock


765


133,002


97,810


0.1
%USS Parent Holding Corp.(d)(h)

Environmental

Voting Common Stock


17,396


3,025,798


2,225,180


2.3
%Total Environmental





3,158,800


2,322,990


2.4
%DCS Business Services, Inc.(d)

Financial Services

First Lien Term Loan 14.00% Cash, 9/30/2012

$
1,600,000


1,604,464


1,600,000


1.6
%Big Train, Inc.(d)

Food and Beverage

First Lien Term Loan 7.75% Cash, 3/31/2012

$
1,406,768


1,389,640


1,368,785


1.4
%HOA Restaurant Group, LLC.(d)

Food and Beverage

Senior Secured Notes 11.25% Cash, 4/1/2017

$
4,000,000


3,880,000


3,880,000


4.0
%Total Food and Beverage





5,269,640


5,248,785


5.4
%Maverick Healthcare Group(d)

Healthcare Services

First Lien Term Loan 10.75% Cash, 12/31/2016

$
4,950,000


4,867,725


4,824,270


5.0
%McMillin Companies LLC(d)(h)

Homebuilding

Senior Secured Notes 0% Cash, 12/31/2013

$
550,000


511,952


288,915


0.3
%


F-5

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Table of Contents

Saratoga Investment Corp.

Consolidated Schedule of Investments (Continued)

February 29, 2012

Company(a)

Industry

Investment Interest Rate/Maturity

Principal/
Number of
Shares

Cost

Fair Value(c)

% of
Net
AssetsCapstone Logistics, LLC(d)

Logistics

First Lien Term Loan 7.50% Cash, 9/16/2016

$
997,118


982,954


997,118


1.0
%Capstone Logistics, LLC(d)

Logistics

First Lien Term Loan 13.50% Cash, 9/16/2016

$
4,000,000


3,943,183


4,000,000


4.1
%Worldwide Express Operations, LLC(d)

Logistics

First Lien Term Loan 7.50% Cash, 6/30/2013

$
6,680,276


6,412,355


6,103,100


6.3
%Total Logistics





11,338,492


11,100,218


11.4
%Sabre Industries, Inc(d)

Manufacturing

Senior Unsecured Loan 15.00% (12.00% Cash/3.00% PIK), 6/6/2016

$
6,000,000


5,852,741


6,000,000


6.2
%Elyria Foundry Company, LLC(d)

Metals

Senior Secured Notes 17.00% (13.00% Cash/4.00% PIK), 3/1/2013

$
7,428,456


7,224,787


6,537,041


6.7
%Elyria Foundry Company, LLC(d)(h)

Metals

Warrants to Purchase Limited Liability Company Interests


3,000








0.0
%Total Metals





7,224,787


6,537,041


6.7
%Network Communications, Inc.(d)

Publishing

Unsecured Notes 8.60% PIK, 1/14/2020

$
2,422,095


1,924,577


1,044,892


1.0
%Network Communications, Inc.(d)(h)

Publishing

Common Stock


211,429





691,373


0.7
%Penton Media, Inc.(d)

Publishing

First Lien Term Loan 5.00% (4.00% Cash/ 1.00% PIK), 8/1/2014

$
4,839,526


4,280,599


3,655,294


3.8
%Total Publishing





6,205,176


5,391,559


5.5
%Sub Total Non-control/Non-affiliated investments







73,161,722


69,513,434


71.4
%Control investments26.5%(b)GSC Partners CDO GP III, LP(g)(h)

Financial Services

100% General Partnership Interest











0.0
%GSC Investment Corp. CLO 2007 LTD.(d)(e)(g)

Structured Finance
Securities

Other/Structured Finance Securities 17.38%, 1/21/2020

$
30,000,000


23,540,517


25,846,414


26.5
%Sub Total Control investments









23,540,517


25,846,414


26.5
%Affiliate investments0.0%(b)GSC Partners CDO GP III, LP(f)(h)

Financial Services

6.24% Limited Partnership Interest











0.0
%Sub Total Affiliate investments















0.0
%TOTAL INVESTMENTS97.9%(b)








$
96,702,239

$
95,359,848


97.9
%




Outstanding interest rate cap

Interest
rate

Maturity

Notional

Cost

Fair
Value

% of
Net
AssetsInterest rate cap


8.0
%

2/9/2014

$
19,591,837

$
87,000

$
54


0.0
%Interest rate cap


8.0
%

11/30/2013


10,332,000


44,000


21


0.0
%Total Outstanding interest rate cap










$
131,000

$
75


0.0
%


*Amounts
to less than 0.05%(a)All
of our equity and debt investments are issued by eligible portfolio companies, as defined in the Investment Company Act of 1940, except GSC Investment
Corp. CLO 2007 Ltd. and GSC Partners CDO GP III, LP.(b)Percentages
are based on net assets of $97,380,150 as of February 29, 2012.


F-6

---



Table of Contents

Saratoga Investment Corp.

Consolidated Schedule of Investments (Continued)

February 29, 2012

(c)Because
there is no readily available market value for these investments, the fair value of these investments is approved in good faith by our board of
directors. (see Note 3 to the consolidated financial statements).(d)These
securities are pledged as collateral under a senior secured revolving credit facility (see Note 6 to the consolidated financial statements).(e)17.38%
represents the modeled effective interest rate that is expected to be earned over the life of the investment.(f)As
defined in the Investment Company Act, we are an "Affiliate" of this portfolio company because we own 5% or more of the portfolio company's outstanding
voting securities. Transactions during the period in which the issuer was an Affiliate are as follows:


Company

Purchases

Redemptions

Sales
(cost)

Interest
Income

Management
fee income

Net Realized
gains/(losses)

Net
Unrealized
gains/(losses)GSC Partners CDO GP III, LP

$


$


$


$


$


$


$



(g)As
defined in the Investment Company Act, we "Control" this portfolio company because we own more than 25% of the portfolio company's outstanding voting
securities. Transactions during the period in which the issuer was both an Affiliate and a portfolio company that we Control are as follows:


Company

Purchases

Redemptions

Sales
(cost)

Interest
Income

Management
fee income

Net Realized
gains/(losses)

Net
Unrealized
gains/(losses)GSC Investment Corp. CLO 2007 LTD.

$


$


$


$
4,198,007

$
2,011,516

$


$
6,938,209GSC Partners CDO GP III, LP

$


$


$


$


$


$


$



(h)Non-income
producing at February 29, 2012.


F-7

---



Table of Contents

Saratoga Investment Corp.

Consolidated Schedule of Investments

February 28, 2011

Company(a)

Industry

Investment Interest
Rate/Maturity

Principal/
Number of Shares

Cost

Fair Value(c)

% of
Net
AssetsNon-control/Non-affiliated investments83.3%(b)Legacy Cabinets Holdings(d)(i)

Building Products

Common Stock Voting A-1

$
2,535

$
220,900

$



0.0
%Legacy Cabinets Holdings(d)(i)

Building Products

Common Stock Voting B-1


1,600


139,424





0.0
%Legacy Cabinets, Inc.(d)(i)

Building Products

First Lien Term Loan
7.25%, 5/3/2014

$
293,474


293,474


154,455


0.2
%Total Building Products





653,798


154,455


0.2
%Hopkins Manufacturing Corporation(d)

Consumer Products

Second Lien Term Loan
7.54%, 1/26/2012

$
3,250,000


3,249,024


3,233,750


3.7
%Targus Holdings, Inc.(d)

Consumer Products

First Lien Term Loan
8.75%, 11/22/2012

$
3,169,227


3,057,616


3,147,834


3.7
%Targus Holdings, Inc.(d)

Consumer Products

Unsecured Notes
10.00%, 12/14/2015

$
1,538,235


1,538,235


985,547


1.1
%Targus Holdings, Inc.(d)(i)

Consumer Products

Common Stock


62,413


566,765


2,881,608


3.3
%Total Consumer Products





8,411,640


10,248,739


11.8
%CFF Acquisition LLC(d)

Consumer Services

First Lien Term Loan
7.50%, 7/31/2013

$
285,876


285,876


244,424


0.3
%M/C Acquisition Corp., LLC(d)

Education

First Lien Term Loan
1.00%, 12/31/2012

$
870,791


870,791


258,625


0.3
%M/C Acquisition Corp., LLC(d)(i)

Education

Class A Common Stock


166,327


30,241





0.0
%Total Education





901,032


258,625


0.3
%Advanced Lighting Technologies, Inc.(d)

Electronics

Second Lien Term Loan
6.29%, 6/1/2014

$
2,000,000


1,858,442


1,867,092


2.2
%Dekko Technologies, LLC(d)

Electronics

Second Lien Term Loan
10.50%, 1/20/2012

$
7,198,935


7,198,935


6,766,999


7.9
%Total Electronics





9,057,377


8,634,091


10.1
%USS Parent Holding Corp.(d)(i)

Environmental

Non Voting Common Stock


765


133,002


124,311


0.1
%USS Parent Holding Corp.(d)(i)

Environmental

Voting Common Stock


17,396


3,025,798


2,828,080


3.3
%Total Environmental





3,158,800


2,952,391


3.4
%Bankruptcy Management Solutions, Inc.(d)

Financial Services

Second Lien Term Loan
1.25%, 8/20/2015

$
2,450,499


2,450,499


110,272


0.1
%Bankruptcy Management Solutions, Inc.(d)(i)

Financial Services

Common Stock

$
27,197








0.0
%Bankruptcy Management Solutions, Inc.(d)(i)

Financial Services

Warrants

$
2,510








0.0
%DCS Business Services, Inc.

Financial Services

First Lien Term Loan
13.75%, 9/30/2012

$
1,600,000


1,612,135


1,600,000


1.9
%Total Financial Services





4,062,634


1,710,272


2.0
%


F-8

---



Table of Contents

Saratoga Investment Corp.

Consolidated Schedule of Investments (Continued)

February 28, 2011

Company(a)

Industry

Investment Interest
Rate/Maturity

Principal/
Number of Shares

Cost

Fair Value(c)

% of
Net
AssetsBig Train, Inc.(d)

Food and Beverage

First Lien Term Loan
7.75%, 3/31/2012

$
1,687,008


1,403,224


1,545,637


1.8
%PRACS Institute, LTD(d)

Healthcare Services

Second Lien Term Loan
10.00%, 4/17/2013

$
4,093,750


4,069,847


3,014,420


3.5
%Maverick Healthcare Group(d)

Healthcare Services

First Lien Term Loan
10.75%, 12/31/2016

$
5,000,000


4,900,000


5,000,000


5.8
%Total Healthcare Services





8,969,847


8,014,420


9.3
%McMillin Companies LLC(d)

Homebuilding

Senior Secured Notes
9.53%, 10/31/2013

$
1,100,000


1,067,024


816,200


0.9
%Worldwide Express Operations, LLC(d)

Logistics

First Lien Term Loan
7.50%, 6/30/2013

$
2,865,629


2,862,910


2,498,828


2.9
%Jason Incorporated(d)(i)

Manufacturing

Senior Secured Notes
10.25%, 12/21/2015

$
2,414,272


2,414,272


2,391,318


2.8
%Specialized Technology Resources, Inc.(d)

Manufacturing

Second Lien Term Loan
7.26%, 12/15/2014

$
5,000,000


4,833,437


4,966,500


5.8
%Total Manufacturing





7,247,709


7,357,818


8.6
%Elyria Foundry Company, LLC(d)

Metals

Senior Secured Notes
17.00%, 3/1/2013

$
5,100,000


5,017,225


4,231,222


4.9
%Elyria Foundry Company, LLC(d)(i)

Metals

Warrants to Purchase Limited Liability Company Interests


3,000








0.0
%Total Metals





5,017,225


4,231,222


4.9
%Grant U.S. Holdings LLP(d)(e)(i)

Natural Resources

Second Lien Term Loan
0.00%, 9/20/2013

$
6,349,512


6,349,348





0.0
%Energy Alloys, LLC(d)(i)

Oil and Gas

Second Lien Term Loan
3.00%, 6/30/2015

$
6,429,092


6,429,092


316,954


0.4
%Energy Alloys, LLC(d)(i)

Oil and Gas

Warrants to Purchase Limited Liability Company Interests


3








0.0
%Total Oil and Gas





6,429,092


316,954


0.4
%Terphane Holdings Corp.(d)(e)(i)

Packaging

Senior Secured Notes
14.00%, 6/15/2015

$
2,500,000


2,500,000


2,453,250


2.9
%Network Communications, Inc.(d)(i)

Publishing

Unsecured Notes
8.60%, 1/14/2020

$
1,285,714


1,285,714


929,314


1.1
%Network Communications, Inc.(d)(i)

Publishing

Common Stock

$
211,429





900,688


1.0
%Penton Media, Inc.(d)

Publishing

First Lien Term Loan
5.00%, 8/1/2014

$
4,839,376


4,116,021


4,025,393


4.7
%Total Publishing





5,401,735


5,855,395


6.8
%Sub Total Non-control/Non-affiliated investments









73,779,271


57,292,721


66.6
%


F-9

---



Table of Contents

Saratoga Investment Corp.

Consolidated Schedule of Investments (Continued)

February 28, 2011

Company(a)

Industry

Investment Interest
Rate/Maturity

Principal/
Number of Shares

Cost

Fair Value(c)

% of
Net
AssetsControl investments28.2%(b)GSC Partners CDO GP III, LP(h)(i)

Financial Services

100% General
Partnership Interest











0.0
%GSC Investment Corp. CLO 2007 LTD.(d)(f)(h)

Structured Finance Securities

Other/Structured
Finance Securities
11.99%, 1/21/2020

$
30,000,000


27,364,350


22,732,038


26.4
%Sub Total Control investments









27,364,350


22,732,038


26.4
%Affiliate investments0.0%(b)GSC Partners CDO GP III, LP(g)(i)

Financial Services

6.24% Limited
Partnership Interest











0.0
%Sub Total Affiliate investments















0.0
%TOTAL INVESTMENTS111.5%(b)








$
101,143,621

$
80,024,759


93.0
%




Outstanding interest rate cap

Interest rate

Maturity

Notional

Cost

Fair Value

% of
Net AssetsInterest rate cap


8.0
%

2/9/2014

$
29,387,755

$
87,000

$
11,893


0.0
%Interest rate cap


8.0
%

11/30/2013


23,966,000


44,000


4,372


0.0
%Total Outstanding interest rate cap










$
131,000

$
16,265


0.0
%


*Amounts
to less than 0.05%(a)All
of our equity and debt investments are issued by eligible portfolio companies, as defined in the Investment Company Act of 1940, except Grant U.S.
Holdings LLP, GSC Investment Corp. CLO 2007 Ltd., Terphane Holdings Corp., and GSC Partners CDO GP III, LP.(b)Percentages
are based on net assets of as of $86,071,454 February 28, 2011.(c)Fair
valued investment (see Note 3 to the consolidated financial statements).(d)These
securities are pledged as collateral under a revolving securitized credit facility (see Note 7 to the consolidated financial statements).(e)Non-U.S.
company. The principal place of business for Terphane Holdings Corp is Brazil, and for Grant U.S. Holdings LLP is Canada.(f)11.99%
represents the modeled effective interest rate that is expected to be earned over the life of the investment.(g)As
defined in the Investment Company Act, we are an "Affiliate" of this portfolio company because we own 5% or more of the portfolio company's outstanding
voting securities. Transactions during the period in which the issuer was an Affiliate are as follows:


Company

Purchases

Redemptions

Sales (cost)

Interest
Income

Management
fee income

Net Realized
gains/
(losses)

Net Unrealized
gains/
(losses)GSC Partners CDO GP III, LP

$


$


$


$


$


$


$



(h)As
defined in the Investment Company Act, we "Control" this portfolio company because we own more than 25% of the portfolio company's outstanding voting
securities. Transactions during the period in which the issuer was both an Affiliate and a portfolio company that we Control are as follows:


Company

Purchases

Redemptions

Sales (cost)

Interest
Income

Management
fee income

Net Realized
gains/
(losses)

Net Unrealized
gains/
(losses)GSC Investment Corp. CLO 2007 LTD.

$


$


$


$
3,295,359

$
2,032,357

$


$
7,902,482GSC Partners CDO GP III, LP

$


$


$


$


$


$


$



(i)Non-income
producing at February, 2011.


F-10

---



Table of Contents



Saratoga Investment Corp.

Consolidated Statements of Changes in Net Assets

For the year ended
February 29, 2012

For the year ended
February 28, 2011

For the year ended
February 28, 2010INCREASE (DECREASE) FROM OPERATIONS:Net investment income

$
5,700,861

$
5,249,023

$
5,713,843Net realized loss from investments


(12,185,997
)

(24,684,262
)

(6,653,983
)Net unrealized appreciation (depreciation) on investments


19,776,469


36,419,362


(9,525,054
)Net unrealized appreciation (depreciation) on derivatives


(16,190
)

(25,882
)

2,634Net increase (decrease) in net assets from operations


13,275,143


16,958,241


(10,462,560
)DECREASE FROM SHAREHOLDER DISTRIBUTIONS:Distributions declared


(9,831,231
)

(11,795,705
)

(15,131,775
)Net decrease in net assets from shareholder distributions


(9,831,231
)

(11,795,705
)

(15,131,775
)CAPITAL SHARE TRANSACTIONS:Stock dividend distribution


7,864,784


10,615,905


13,058,710Issuance of common stock, net of issuance costs





14,814,861


Net increase in net assets from capital share transactions


7,864,784


25,430,766


13,058,710Total increase/(decrease) in net assets


11,308,696


30,593,302


(12,535,625
)Net assets at beginning of period


86,071,454


55,478,152


68,013,777Net assets at end of period

$
97,380,150

$
86,071,454

$
55,478,152Net asset value per common share

$
25.12

$
26.26

$
32.75Common shares outstanding at end of period


3,876,661


3,277,077


1,694,011Distribution in excess of net investment income

$
(13,920,068
)
$
(8,918,890
)
$
(2,846,135
)


*Net
Asset Value per share and end of year shares outstanding for the year ended February 28, 2010 has been adjusted to reflect a
one-for-ten reverse stock split in August 2010.




See accompanying notes to consolidated financial statements.

F-11

---



Table of Contents



Saratoga Investment Corp.

Consolidated Statements of Cash Flows

For the year ended
February 29, 2012

For the year ended
February 28, 2011

For the year ended
February 28, 2010Operating activitiesNET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS

$
13,275,143

$
16,958,241

$
(10,462,560
)ADJUSTMENTS TO RECONCILE NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS TO NET CASH PROVIDED BY (USED BY) OPERATING ACTIVITIES:Paid-in-kind interest income


(1,442,004
)

(1,144,799
)

(858,730
)Net accretion of discount on investments


(1,191,822
)

(732,522
)

(966,191
)Amortization of deferred credit facility financing costs


674,724


397,164


633,349Reversal of deferred incentive management fees





(2,636,146
)

Net realized (gain) loss from investments


12,185,997


24,684,262


6,653,983Net unrealized (appreciation) depreciation on investments


(19,776,469
)

(36,419,362
)

9,525,054Net unrealized (appreciation) depreciation on derivatives


16,190


25,882


(2,634
)Proceeds from sale and redemption of investments


33,568,147


31,974,810


15,185,210Purchase of investments


(38,678,936
)

(9,014,000
)

(Increase) decrease in operating assets:Cash and cash equivalents, securitization accounts


(21,164,208
)

(4,144,563
)

952,777Interest receivable


(23,321
)

1,807,878


(386,293
)Management fee receivable


4,172


96,175


(90,558
)Other assets


(9,657
)

55,106


180,988Receivable from unsettled trades


(59,511
)




Increase (decrease) in operating liabilities:Payable for unsettled trades


(827,500
)

4,900,000


Management and incentive fees payable


681,864


1,768,859


190,426Accounts payable and accrued expenses


(80,537
)

(325,595
)

410,544Interest and credit facility fees payable


(14,530
)

(199,374
)

194,341Due to manager


154,094


224,398


15,602NET CASH PROVIDED BY (USED BY) OPERATING ACTIVITIES


(22,708,164
)

28,276,414


21,175,308Financing activitiesIssuance of shares of common stock





15,000,001


Payment of common stock issuance costs





(185,140
)

Borrowings on debt


20,000,000


20,000,000


Paydowns on debt


(4,500,000
)

(52,492,222
)

(22,002,451
)Credit facility financing cost


(235,446
)

(2,035,932
)

(103,582
)Payments of cash dividends


(1,966,447
)

(1,179,800
)

(2,073,066
)NET CASH PROVIDED BY (USED BY) FINANCING ACTIVITIES


13,298,107


(20,893,093
)

(24,179,099
)NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS


(9,410,057
)

7,383,321


(3,003,791
)CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD


10,735,755


3,352,434


6,356,225CASH AND CASH EQUIVALENTS, END OF PERIOD

$
1,325,698

$
10,735,755

$
3,352,434Supplemental Information:Interest paid during the period

$
637,791

$
2,414,049

$
3,268,351Supplemental non-cash informationPaid-in-kind interest income

$
1,442,004

$
1,144,799

$
858,730Net accretion of discount on investments

$
1,191,822

$
732,522

$
966,191Amortization of deferred credit facility financing costs

$
674,724

$
397,164

$
633,349Reversal of deferred incentive management fees

$


$
2,636,146

$
Stock dividend distribution

$
7,864,784

$
10,615,905

$
13,058,710




See accompanying notes to consolidated financial statements.

F-12

---





Table of Contents

SARATOGA INVESTMENT CORP.        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        February 29, 2012

Note 1. Organization and Basis of Presentation

Saratoga Investment Corp. (the "Company", "we", "our" and "us") is a non-diversified closed end management investment company incorporated in Maryland that has elected to be
treated and is regulated as a business development company ("BDC") under the Investment Company Act of 1940 (the "1940 Act"). We commenced operations on March 23, 2007 as GSC Investment Corp.
and completed our initial public offering ("IPO") on March 28, 2007. We have elected to be treated as a regulated investment company ("RIC") under subchapter M of the Internal Revenue
Code (the "Code"). We expect to continue to qualify and to elect to be treated for tax purposes as a RIC. Our investment objective is to generate current income and, to a lesser extent, capital
appreciation from our investments.

GSC
Investment, LLC (the "LLC") was organized in May 2006 as a Maryland limited liability company. As of February 28, 2007, the LLC had not yet commenced its
operations and investment activities.

On
March 21, 2007, the Company was incorporated and concurrently therewith the LLC was merged with and into the Company, with the Company as the surviving entity, in
accordance with the procedure for such merger in the LLC's limited liability company agreement and Maryland law. In connection with such merger, each outstanding limited liability company
interest of the LLC was converted into a share of common stock of the Company.

On
July 30, 2010, the Company changed its name from "GSC Investment Corp." to "Saratoga Investment Corp." in conjunction with the transaction described in "Note 14.
Recapitalization Transaction" below.

We
are externally managed and advised by our investment adviser, Saratoga Investment Advisors, LLC (the "Manager"), pursuant to an investment advisory and management agreement.
Prior to July 30, 2010, we were managed and advised by GSCP (NJ), L.P.

The
accompanying consolidated financial statements have been prepared on the accrual basis of accounting in conformity with U.S. generally accepted accounting principles ("GAAP") and
include the accounts of the Company and its special purpose financing subsidiary, Saratoga Investment Funding, LLC (previously known as GSC Investment Funding LLC). All intercompany
accounts and transactions have been eliminated in consolidation. All references made to the "Company," "we," and "us" herein include Saratoga Investment Corp. and its consolidated subsidiary, except
as stated otherwise.

Note 2. Summary of Significant Accounting Policies

Use of Estimates in the Preparation of Financial Statements

The preparation of the accompanying consolidated financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and income, gains (losses) and
expenses during the period reported. Actual results could differ materially from those estimates.

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Table of Contents

SARATOGA INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

February 29, 2012

Note 2. Summary of Significant Accounting Policies (Continued)

Cash and Cash Equivalents

Cash and cash equivalents include short-term, liquid investments in a money market fund. Cash and cash equivalents are
carried at cost which approximates fair value. Per section 12(d)(1)(A) of the 1940 Act, the Company may not invest in another registered investment company such as, a money market fund if such
investment would cause the Company to exceed any of the following limitations:



Cash and Cash Equivalents, Securitization Accounts

Cash and cash equivalents, securitization accounts include amounts held in designated bank accounts in the form of cash and
short-term liquid investments in money market funds representing payments received on securitized investments or other reserved amounts associated with our $40 million senior secured
revolving credit facility with Madison Capital Funding LLC. The Company is required to use a portion of these amounts to pay interest expense, reduce borrowings, or pay other amounts in
accordance with the related securitization agreements. Cash held in such accounts may not be available for the general use of the Company.

Investment Classification

The Company classifies its investments in accordance with the requirements of the 1940 Act. Under the 1940 Act, "Control Investments"
are defined as investments in companies in which we own more than 25% of the voting securities or maintain greater than 50% of the board representation. Under the 1940 Act, "Affiliated Investments"
are defined as those non-control investments in companies in which we own between 5% and 25% of the voting securities. Under the 1940 Act, "Non-affiliated Investments" are
defined as investments that are neither Control Investments nor Affiliated Investments.

Investment Valuation

The Company accounts for its investments at fair value in accordance with the Financial Accounting Standards Board ("FASB") Accounting
Standards Codification ("ASC") Topic 820,Fair Value Measurements and Disclosures("ASC 820"). ASC 820 defines fair value, establishes a framework for
measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements. ASC 820 requires
the Company to assume that its investments are to be sold at the statement of assets and liabilities date in the principal market to independent market participants, or in the absence of a principal
market, in the most advantageous market, which may be a hypothetical market. Market participants are defined as buyers and sellers in the principal or most advantageous market that are independent,
knowledgeable, and willing and able to transact.

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Table of Contents

SARATOGA INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

February 29, 2012

Note 2. Summary of Significant Accounting Policies (Continued)

Investments
for which market quotations are readily available are fair valued at such market quotations obtained from independent third party pricing services and market makers subject
to any decision by our board of directors to approve a fair value determination to reflect significant events affecting the value of these investments. We value investments for which market quotations
are not readily available at fair value as approved, in good faith, by our board of directors based on input from our Manager, the audit committee of our board of directors and a third party
independent valuation firm. Determinations of fair value may involve subjective judgments and estimates. The types of factors that may be considered in determining the fair value of our investments
include the nature and realizable value of any collateral, the portfolio company's ability to make payments, market yield trend analysis, the markets in which the portfolio company does business,
comparison to publicly traded companies, discounted cash flow and other relevant factors.

We
undertake a multi-step valuation process each quarter when valuing investments for which market quotations are not readily available, as described
below:



In
addition, all our investments are subject to the following valuation process:



Our
investment in GSC Investment Corp. CLO 2007, Ltd. ("Saratoga CLO") is carried at fair value, which is based on a discounted cash flow model that utilizes prepayment,
re-investment and loss assumptions based on historical experience and projected performance, economic factors, the characteristics of the underlying cash flow, and comparable yields for
equity interests in collateralized loan obligation funds similar to Saratoga CLO, when available, as determined by our Manager and recommended to our board of directors. Specifically, we use Intex
cash flow models, or an appropriate substitute, to form the basis for the valuation of our investment in Saratoga CLO. The models use a set of assumptions including projected default rates, recovery
rates, reinvestment rate and prepayment rates in order to arrive at estimated valuations. The assumptions are based on available market data and projections provided by third parties as well as
management estimates. We use the output from the Intex models (i.e., the estimated cash flows) to perform a discounted cash flows analysis on expected future cash flows to determine a valuation
for our investment in Saratoga CLO.

F-15

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Table of Contents

SARATOGA INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

February 29, 2012

Note 2. Summary of Significant Accounting Policies (Continued)

Because
such valuations, and particularly valuations of private investments and private companies, are inherently uncertain, they may fluctuate over short periods of time and may be
based on estimates. The determination of fair value may differ materially from the values that would have been used if a ready market for these investments existed. Our net asset value could be
materially affected if the determinations regarding the fair value of our investments were materially higher or lower than the values that we ultimately realize upon the disposal of such investments.

Derivative Financial Instruments

We account for derivative financial instruments in accordance with ASC Topic 815,Derivatives and
Hedging("ASC 815"). ASC 815 requires recognizing all derivative instruments as either assets or liabilities on the consolidated statements of assets and liabilities at fair
value. The Company values derivative contracts at the closing fair value provided by the counterparty. Changes in the values of derivative contracts are included in the consolidated statements of
operations.

Investment Transactions and Income Recognition

Purchases and sales of investments and the related realized gains or losses are recorded on a trade-date basis. Interest
income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis to the extent that such amounts are expected to be collected. The Company stops accruing
interest on its investments when it is determined that interest is no longer collectible. Discounts and premiums on investments purchased are accreted/amortized over the life of the respective
investment using the effective yield method. The amortized cost of investments represents the original cost adjusted for the accretion of discounts and amortizations of premium on investments.

Loans
are generally placed on non-accrual status when there is reasonable doubt that principal or interest will be collected. Accrued interest is generally reserved when a
loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as a reduction in principal depending upon management's judgment
regarding collectability. Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in management's judgment, are likely to remain current,
although we may make exceptions to this general rule if the loan has sufficient collateral value and is in the process of collection.

Interest
income on our investment in Saratoga CLO is recorded using the effective interest method in accordance with the provisions of ASC Topic 325-40, Investments-Other, Beneficial Interests in Securitized Financial
Assets, based on the anticipated yield and the estimated cash flows over the projected
life of the investment. Yields are revised when there are changes in actual or estimated cash flows due to changes in prepayments and/or re-investments, credit losses or asset pricing.
Changes in estimated yield are recognized as an adjustment to the estimated yield over the remaining life of the investment from the date the estimated yield was changed.

F-16

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Table of Contents

SARATOGA INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

February 29, 2012

Note 2. Summary of Significant Accounting Policies (Continued)

Paid-in-Kind Interest

The Company holds debt investments in its portfolio that contain a payment-in-kind ("PIK") interest provision.
The PIK interest, which represents contractually deferred interest added to the investment balance that is generally due at maturity, is generally recorded on the accrual basis to the extent such
amounts are expected to be collected. We stop accruing PIK interest if we do not expect the issuer to be able to pay all principal and interest when due.

Deferred Credit Facility Financing Costs

Financing costs incurred in connection with our credit facilities are deferred and amortized using the straight line method over the
life of the respective facility.

Indemnifications

In the ordinary course of its business, the Company may enter into contracts or agreements that contain indemnifications or warranties.
Future events could occur that lead to the execution of these provisions against the Company. Based on its history and experience, management feels that the likelihood of such an event is remote.

Income Taxes

The Company has filed an election to be treated for tax purposes as a RIC under Subchapter M of the Code and, among other
things, intends to make the requisite distributions to its stockholders which will relieve the Company from federal income taxes. Therefore, no provision has been recorded for federal income taxes.

In
order to qualify as a RIC, among other requirements, the Company is required to timely distribute to its stockholders at least 90% of its investment company taxable income, as defined
by the Code, for each fiscal tax year. The Company will be subject to a nondeductible U.S. federal excise tax of 4% on undistributed income if it does not distribute at least 98% of its ordinary
income in any calendar year and 98.2% of its capital gain net income for each one-year period ending on October 31.

Depending
on the level of taxable income earned in a tax year, the Company may choose to carry forward taxable income in excess of current year dividend distributions into the next tax
year and pay a 4% excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year
dividend distributions for excise tax purposes, the Company accrues excise tax, if any, on estimated excess taxable income as taxable income is earned.

In
accordance with certain applicable Treasury regulations and private letter rulings issued by the Internal Revenue Service, a RIC may treat a distribution of its own stock as
fulfilling its RIC distribution requirements if each stockholder may elect to receive his or her entire distribution in either cash or stock of the RIC subject to a limitation on the aggregate amount
of cash to be distributed to all stockholders, which limitation must be at least 20% of the aggregate declared distribution. If too many stockholders elect to receive cash, each stockholder electing
to receive cash will receive a pro rata amount of cash (with the balance of the distribution paid in stock). In no event will any stockholder,

F-17

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Table of Contents

SARATOGA INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

February 29, 2012

Note 2. Summary of Significant Accounting Policies (Continued)

electing
to receive cash, receive less than 20% of his or her entire distribution in cash. If these and certain other requirements are met, for U.S federal income tax purposes, the amount of the
dividend paid in stock will be equal to the amount of cash that could have been received instead of stock.

ASC
740,Income Taxes, provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the
financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company's tax returns to determine whether the tax positions are
"more-likely-than-not" of being sustained by the applicable tax authority. Tax positions deemed to meet a "more-likely-than-not"
threshold would be recorded as a tax benefit or expense in the current period. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the
consolidated statement of operations. During the fiscal year ended February 29, 2012, the Company did not incur any interest or penalties. Although we file federal and state tax returns, our
major tax jurisdiction is federal. The 2009, 2010 and 2011 federal tax years for the Company remain subject to examination by the IRS.

Dividends

Dividends to common stockholders are recorded on the ex-dividend date. The amount to be paid out as a dividend is
determined by the board of directors. Net realized capital gains, if any, are generally distributed at least annually, although we may decide to retain such capital gains for reinvestment.

We
have adopted a dividend reinvestment plan that provides for reinvestment of our dividend distributions on behalf of our stockholders unless a stockholder elects to receive cash. As a
result, if our board of directors authorizes, and we declare, a cash dividend, then our stockholders who have not "opted out" of our dividend reinvestment plan will have their cash dividends
automatically reinvested in additional shares of our common stock, rather than receiving the cash dividends. If our common stock is trading below net asset value at the time of valuation, the plan
administrator may receive the dividend or distribution in cash and purchase common stock in the open market, on the New York Stock Exchange or elsewhere, for the account of each participant in our
dividend reinvestment plan.

Capital Gains Incentive Fee

The Company records an expense accrual on the Consolidated Statement of Operations, relating to the capital gains incentive fee payable
on the Consolidated Statement of Assets and Liabilities, by the Company to its investment adviser when the unrealized gains on its investments exceed all realized capital losses on its investments
given the fact that a capital gains incentive fee would be owed to the investment adviser if the Company were to liquidate its investment portfolio at such time. The actual incentive fee payable to
the Company's investment adviser related to capital gains will be determined and payable in arrears at the end of each fiscal year and will include only realized capital gains for the period.

New Accounting Pronouncements

In December 2011, the FASB issued ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities, which
requires entities to disclose information about offsetting and related arrangements to

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Table of Contents

SARATOGA INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

February 29, 2012

Note 2. Summary of Significant Accounting Policies (Continued)

enable
users of its financial statements to understand the effect of those arrangements on its financial position. The guidance is effective for fiscal years and interim periods beginning on or after
January 1, 2013 with retrospective application for all comparative periods presented. The adoption of this guidance, which is related to disclosure only, is not expected to have a material
impact on the Company's consolidated financial position, results of operations or cash flows.

In
May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs ("ASU
2011-04"), which amends U.S. GAAP to conform it with fair value measurement and disclosure requirements in International Financial Reporting Standards ("IFRS"). The amendments in
ASU 2011-04 change the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. We are currently
evaluating the impact this accounting standards update will have on our consolidated financial statements. The amendments in ASU 2011-04 are to be applied prospectively and are effective
during interim and annual periods beginning after December 15, 2011.

Risk Management

In the ordinary course of its business, the Company manages a variety of risks, including market risk and credit risk. Market risk is
the risk of potential adverse changes to the value of investments because of changes in market conditions such as interest rate movements and volatility in investment prices.

Credit
risk is the risk of default or non-performance by portfolio companies, equivalent to the investment's carrying amount.

The
Company is also exposed to credit risk related to maintaining all of its cash and cash equivalents, including those in securitization accounts, at a major financial institution and
credit risk related to any of its derivative counterparties.

The
Company has investments in lower rated and comparable quality unrated high yield bonds and bank loans. Investments in high yield investments are accompanied by a greater degree of
credit risk. The risk of loss due to default by the issuer is significantly greater for holders of high yield securities, because such investments are generally unsecured and are often subordinated to
other creditors of the issuer.

Note 3. Investments

As noted above, the Company values all investments in accordance with ASC 820. ASC 820 requires enhanced disclosures about assets and liabilities that are measured and reported at fair
value. As
defined in ASC 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

ASC
820 establishes a hierarchal disclosure framework which prioritizes and ranks the level of market price observability of inputs used in measuring investments at fair value. Market
price observability is affected by a number of factors, including the type of investment and the characteristics specific to the investment. Investments with readily available active quoted prices or
for which fair

F-19

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Table of Contents

SARATOGA INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

February 29, 2012

Note 3. Investments (Continued)

value
can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.

Based
on the observability of the inputs used in the valuation techniques, the Company is required to provide disclosures on fair value measurements according to the fair value
hierarchy. The fair value hierarchy ranks the observability of the inputs used to determine fair values. Investments carried at fair value are classified and disclosed in one of the following three
categories:



In
addition to using the above inputs in investment valuations, the Company continues to employ the valuation policy approved by the board of directors that is consistent with ASC 820
(see Note 2). Consistent with our Company's valuation policy, we evaluate the source of inputs, including any markets in which our investments are trading, in determining fair value.

The
following table presents fair value measurements of investments, by major class, as of February 29, 2012 (dollars in thousands), according to the fair value hierarchy:

Fair Value MeasurementsLevel 1

Level 2

Level 3

TotalFirst lien term loans

$


$


$
36,196

$
36,196Second lien term loans








8,914


8,914Senior secured notes








10,706


10,706Senior unsecured loans








6,000


6,000Unsecured notes








2,008


2,008Structured finance securities








25,846


25,846Equity interest








5,690


5,690Limited partnership interest











Total

$


$


$
95,360

$
95,360


F-20

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Table of Contents

SARATOGA INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

February 29, 2012

Note 3. Investments (Continued)

The
following table presents fair value measurements of investments, by major class, as of February 28, 2011 (dollars in thousands), according to the fair value hierarchy:

Fair Value MeasurementsLevel 1

Level 2

Level 3

TotalFirst lien term loans

$


$


$
18,475

$
18,475Second lien term loans








20,276


20,276Senior secured notes








9,892


9,892Unsecured notes








1,915


1,915Structured finance securities








22,732


22,732Equity interest








6,735


6,735Limited partnership interest











Total

$


$


$
80,025

$
80,025


The
following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the year ended February 29, 2012 (dollars in
thousands):

First lien
term loans

Second lien
term loans

Senior
secured
notes

Senior
unsecured
loans

Unsecured
notes

Structured
finance
securities

Common
stock/equities

TotalBalance as of February 28, 2011

$
18,475

$
20,276

$
9,892

$


$
1,915

$
22,732

$
6,735

$
80,025Net unrealized gains (losses)


(1,256
)

15,603


196


147


(807
)

6,938


(1,045
)

19,776Purchases and other adjustments to cost


27,732


602


6,226


5,853


900








41,313Sales and redemptions


(8,769
)

(14,868
)

(5,766
)







(3,824
)

(341
)

(33,568
)Net realized gain (loss) from investments


14


(12,699
)

158











341


(12,186
)Balance as of February 29, 2012

$
36,196

$
8,914

$
10,706

$
6,000

$
2,008

$
25,846

$
5,690

$
95,360


Purchases and other adjustments to cost include purchases of new investments at cost, effects of refinancing/restructuring, accretion/amortization
of income from discount/premium on debt securities, and PIK.

Sales
and redemptions represent net proceeds received from investments sold, and principal paydowns received, during the period.

The
net change in unrealized gain/loss on investments held as of February 29, 2012 is $4,057,635 and is included in net unrealized appreciation (depreciation) on investments in
the Consolidated Statements of Operations.

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Table of Contents

SARATOGA INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

February 29, 2012

Note 3. Investments (Continued)

The
following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the year ended February 28, 2011 (dollars in
thousands):

First lien
term loans

Second lien
term loans

Senior
secured
notes

Unsecured
notes

Structured
finance
securities

Common
stock/equities

TotalBalance as of February 28, 2010

$
16,653

$
20,267

$
27,742

$
5,690

$
16,698

$
2,323

$
89,373Net unrealized gains (losses)


1,356


4,834


4,568


13,706


7,903


4,052


36,419Purchases and other adjustments to cost


7,066


648


3,330


(511
)




360


10,893Sales and redemptions


(6,013
)

(25
)

(22,214
)

(1,855
)

(1,869
)




(31,976
)Net realized loss from investments


(587
)

(5,448
)

(3,534
)

(15,115
)







(24,684
)Balance as of February 28, 2011

$
18,475

$
20,276

$
9,892

$
1,915

$
22,732

$
6,735

$
80,025


Purchases and other adjustments to cost include purchases of new investments at cost, effects of refinancing/restructuring, accretion/amortization
of income from discount/premium on debt securities, and PIK.

Sales
and redemptions represent net proceeds received from investments sold, and principal paydowns received, during the period.

The
net change in unrealized gain/loss on investments held as of February 28, 2011 is $12,695,325 and is included in net unrealized appreciation (depreciation) on investments in
the Consolidated Statements of Operations.

The
composition of our investments as of February 29, 2012, at amortized cost and fair value were as follows (dollars in thousands):

Investments at
Amortized Cost

Amortized Cost
Percentage of
Total Portfolio

Investments at
Fair Value

Fair Value
Percentage of
Total PortfolioFirst lien term loans

$
38,379


39.7
%
$
36,196


38.0
%Second lien term loans


9,473


9.8


8,914


9.4Senior secured notes


11,617


12.0


10,706


11.2Senior unsecured loans


5,852


6.1


6,000


6.3Unsecured notes


3,724


3.8


2,008


2.1Structured finance securities


23,541


24.3


25,846


27.1Equity interest


4,116


4.3


5,690


5.9Limited partnership interest











Total

$
96,702


100.0
%
$
95,360


100.0
%


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Table of Contents

SARATOGA INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

February 29, 2012

Note 3. Investments (Continued)

The
composition of our investments as of February 28, 2011, at amortized cost and fair value were as follows (dollars in thousands):

Investments at
Amortized Cost

Amortized Cost
Percentage of
Total Portfolio

Investments at
Fair Value

Fair Value
Percentage of
Total PortfolioFirst lien term loans

$
19,402


19.2
%
$
18,475


23.1
%Second lien term loans


36,439


36.0


20,276


25.3Senior secured notes


10,999


10.9


9,892


12.4Unsecured notes


2,824


2.8


1,915


2.4Structured finance securities


27,364


27.0


22,732


28.4Equity interest


4,116


4.1


6,735


8.4Limited partnership interest











Total

$
101,144


100.0
%
$
80,025


100.0
%


For
loans and debt securities for which market quotations are not available, we determine their fair value based on third party indicative broker quotes, where available, or the
assumptions that a hypothetical market participant would use to value the security in a current hypothetical sale using a market yield valuation methodology. In applying the market yield valuation
methodology, we determine the fair value based on such factors as market participant assumptions including synthetic credit ratings, estimated remaining life, current market yield and interest rate
spreads of similar securities as of the measurement date. If, in our judgment, the market yield methodology is not sufficient or appropriate, we may use additional methodologies such as an asset
liquidation or expected recovery model.

For
equity securities of portfolio companies and partnership interests, we determine the fair value based on the market approach with value then attributed to equity or equity like
securities using the enterprise value waterfall valuation methodology. Under the enterprise value waterfall valuation methodology, we determine the enterprise fair value of the portfolio company and
then waterfall the enterprise value over the portfolio company's securities in order of their preference relative to one another. To estimate the enterprise value of the portfolio company, we weigh
some or all of the traditional market valuation methods and factors based on the individual circumstances of the portfolio company in order to estimate the enterprise value. The methodologies for
performing investments may be based on, among other things: valuations of comparable public companies, recent sales of private and public comparable companies, discounting the forecasted cash flows of
the portfolio company, third party valuations of the portfolio company, considering offers from third parties to buy the company, estimating the value to potential strategic buyers and considering the
value of recent investments in the equity securities of the portfolio company. For non-performing investments, we may estimate the liquidation or collateral value of the portfolio
company's assets and liabilities. We also take into account historical and anticipated financial results.

Our
investment in GSC Investment Corp. CLO 2007, Ltd. ("Saratoga CLO") is carried at fair value, which is based on a discounted cash flow model that utilizes prepayment,
re-investment and loss assumptions based on historical experience and projected performance, economic factors, the

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Table of Contents

SARATOGA INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

February 29, 2012

Note 3. Investments (Continued)

characteristics
of the underlying cash flow, and comparable yields for equity interests in collateralized loan obligation funds similar to Saratoga CLO, when available, as determined by our Manager
and recommended to our board of directors. Specifically, we use Intex cash flow models, or an appropriate substitute, to form the basis for the valuation of our investment in Saratoga CLO. The models
use a set of assumptions including projected default rates, recovery rates, reinvestment rate and prepayment rates in order to arrive at estimated valuations. The assumptions are based on available
market data and projections provided by third parties as well as management estimates. We use the output from the Intex models (i.e., the estimated cash flows) to perform a discounted cash
flows analysis on expected future cash flows to determine a valuation for our investment in Saratoga CLO at February 29, 2012. The significant inputs for the valuation model
include:



Note 4. Investment in GSC Investment Corp. CLO 2007, Ltd. ("Saratoga CLO")

On January 22, 2008, we invested $30 million in all of the outstanding subordinated notes of Saratoga CLO (which are referred in the unaudited balance sheet of Saratoga CLO
below as "Preference shares"), a collateralized loan obligation fund managed by us that invests primarily in senior secured loans. Additionally, we entered into a collateral management agreement with
Saratoga CLO pursuant to which we act as collateral manager to it. In return for our collateral management services, we are entitled to a senior collateral management fee of 0.10% and a subordinate
collateral management fee of 0.40% of the outstanding principal amount of Saratoga CLO's assets, to be paid quarterly to the extent of available proceeds. We are also entitled to an incentive
management fee equal to 20% of excess cash flow to the extent the Saratoga CLO subordinated notes receive an internal rate of return equal to or greater than 12%. For the years ended
February 29, 2012, February 28, 2011 and 2010, we accrued $2.0, $2.0 and $2.1 million in management fee income, respectively and $4.2, $3.3 and $2.4 million in interest
income, respectively, from Saratoga CLO. We did not accrue any amounts related to the incentive management fee as the 12% hurdle rate has not yet been achieved.

At
February 29, 2012, the Company determined that the fair value of its investment in the subordinated notes of Saratoga CLO was $25.8 million, whereas the net asset value
of Saratoga CLO on such date was $24.0 million. The Company does not believe that the net asset value of Saratoga CLO, which is the difference between Saratoga CLO's assets and liabilities at a
given point in time, necessarily equates to the fair value of its investment in the subordinated notes of Saratoga CLO. Specifically, the Company determines the fair value of its investment in the
subordinated notes of Saratoga CLO based on the present value of the projected future cash flows of the subordinated notes over the life of Saratoga CLO. At February 29, 2012, Saratoga CLO had
investments with a principal balance of $380.2 million and a weighted average spread over LIBOR of 3.6%, and had debt of $366.0 million with a weighted average spread over LIBOR of 1.4%. As a
result, Saratoga CLO earns a "spread" between the interest income it receives on its investments and the interest expense it pays on

F-24

---



Table of Contents

SARATOGA INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

February 29, 2012

Note 4. Investment in GSC Investment Corp. CLO 2007, Ltd. ("Saratoga CLO") (Continued)

its
debt and other operating expenses, which is distributed quarterly to the Company as the holder of its subordinated notes. At February 29, 2012, the total "spread", or projected future cash
flows of the subordinated notes, over the life of Saratoga CLO was $47.1 million, which had a present value of approximately $26.3 million, using a 16.0% discount rate. At
February 29, 2012, the fair value of the subordinated notes, which we base upon the present value of the projected cash flows, was $25.8 million, which was greater than the net asset value of
Saratoga CLO on such date by approximately $1.8 million.

At
February 28, 2011, the Company determined that the fair value of its investment in the subordinated notes of GSCIC CLO was $22.7 million, whereas the net asset value of
GSCIC CLO on such date was $26.9 million. The Company does not believe that the net asset value of GSCIC CLO, which is the difference between GSCIC CLO's assets and liabilities at a given point
in time, necessarily equates to the fair value of its investment in the subordinated notes of GSCIC CLO. Specifically, the Company determines the fair value of its investment in the subordinated notes
of GSCIC CLO based on the present value of the projected future cash flows of the subordinated notes over the life of GSCIC CLO. At February 28, 2011, GSCIC CLO had investments with a principal
balance of $410.2 million and a weighted average spread over LIBOR of 3.6%, and had debt of $366.0 million with a weighted average spread over LIBOR of 1.4%. As a result, GSCIC CLO earns a
"spread" between the interest income it receives on its investments and the interest expense it pays on its debt and other operating expenses, which is distributed quarterly to the Company as the
holder of its subordinated notes. At February 28, 2011, the total "spread", or projected future cash flows of the subordinated notes, over the life of GSCIC CLO was $45.4 million, which
had a present value of approximately $23.1 million, using a 20.0% discount rate. At February 28, 2011, the fair value of the subordinated notes, which we base upon the present value of
the projected cash flows, was $22.7 million, which was less than the net asset value of GSCIC CLO on such date by approximately $4.2 million.

Below
is certain summary financial information from the separate unaudited financial statements of Saratoga CLO as of February 29, 2012 and February 28, 2011 and for the
years ended February 29, 2012, February 28, 2011 and 2010.

F-25

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Table of Contents

SARATOGA INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

February 29, 2012

Note 4. Investment in GSC Investment Corp. CLO 2007, Ltd. ("Saratoga CLO") (Continued)

GSC Investment Corp. CLO 2007    Balance Sheet    (unaudited)

As ofFebruary 29, 2012

February 28, 2011ASSETSInvestmentsFair Value Loans

$
365,780,893

$
373,564,517Fair Value Bonds





2,243,464Fair Value Other/Structured finance securities


15,583,573


15,362,136Total investments at fair value


381,364,466


391,170,117Cash and cash equivalents


17,815,082


19,887,581Receivable from open trades


10,046,640


Interest receivable


1,581,438


1,737,017Other assets





Deferred bond issuance


2,819,118


3,545,449Total assets

$
413,626,744

$
416,340,164LIABILITIESInterest payable

$
826,741

$
701,640Payable from open trades


24,857,147


25,151,104Accrued senior collateral monitoring fee


45,516


46,351Accrued subordinate collateral monitoring fee


182,064


185,402Class A notes


296,000,000


296,000,000Class B notes


22,000,000


22,000,000Discount on class B notes


(477,483
)

(538,121
)Class C notes


14,000,000


14,000,000Class D notes


16,000,000


16,000,000Discount on class D notes


(505,106
)

(569,252
)Class E notes


17,960,044


17,960,044Discount on class E notes


(1,299,337
)

(1,464,346
)Total liabilities

$
389,589,586

$
389,472,822PARTNERS' CAPITALPreference shares principal

$
30,000,000

$
30,000,000Preferred shares


9,478,573


(14,270,311
)Partners distributions


(20,540,583
)

(12,611,230
)Net income


5,099,168


23,748,883Total capital


24,037,158


26,867,342Total liabilities and partners' capital

$
413,626,744

$
416,340,164


F-26

---





Table of Contents

SARATOGA INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

February 29, 2012

Note 4. Investment in GSC Investment Corp. CLO 2007, Ltd. ("Saratoga CLO") (Continued)

GSC Investment Corp. CLO 2007    Statement of Operations    (unaudited)

For the year ended
February 29
2012

For the year ended
February 28
2011

For the year ended
February 28
2010INVESTMENT INCOMEInterest from investments

$
20,032,687

$
20,838,831

$
22,551,961Interest from cash and cash equivalents


12,165


22,769


29,116Other income


509,365


416,035


572,888Total investment income


20,554,217


21,277,635


23,153,965EXPENSESInterest expense


6,551,269


6,566,657


7,885,807Professional fees


400,628


257,209


155,770Misc. Fee Expense


176,768


3,532


21,542Senior collateral monitoring fee


402,303


406,471


411,479Subordinate collateral monitoring fee


1,609,213


1,625,886


1,645,917Trustee expenses


100,551


101,625


102,828Amortization expense


1,016,124


1,015,333


1,418,238Total expenses


10,256,856


9,976,713


11,641,581NET INVESTMENT INCOME


10,297,361


11,300,922


11,512,384REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:Net realized gain/(loss) on investments


(4,547,952
)

750,253


(12,544,563
)Net unrealized appreciation/(depreciation) on investments


(650,241
)

11,697,708


85,492,320Net gain/(loss) on investments


(5,198,193
)

12,447,961


72,947,757NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

$
5,099,168

$
23,748,883

$
84,460,141


F-27

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Table of Contents

SARATOGA INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

February 29, 2012

Note 4. Investment in GSC Investment Corp. CLO 2007, Ltd. ("Saratoga CLO") (Continued)

GSC Investment Corp.        Consolidated Schedule of Investments        February 29, 2012        (unaudited)

Issuer_Name

Asset_Name

Asset_Type

Current
Rate

Maturity
Date

Principal /
Number of
Shares

Cost

Fair ValueElyria Foundry Company, LLC

Warrants

Equity


0.00
%




2,000

$


$
Network Communications, Inc.

Common

Equity


0.00
%




169,143


169,143


659,658OLD All, Inc (fka Aleris International Inc.)

Common

Equity


0.00
%




2,624


224,656


128,576PATS Aircraft, LLC

Common

Equity


0.00
%




51,813


282,326


282,329SuperMedia Inc. (fka Idearc Inc.)

Common Stock

Equity


0.00
%




10,821


28,784


5,411Academy, LTD.

Initial Term Loan

Loan


6.00
%

8/3/2018

$
2,000,000


1,986,129


1,999,540Acosta, Inc.

Term B Loan

Loan


4.75
%

3/1/2018

$
4,243,447


4,177,485


4,210,561Advanced Lighting Technologies, Inc.

Deferred Draw Term Loan (First Lien)

Loan


3.00
%

6/1/2013

$
251,309


241,553


240,628Advanced Lighting Technologies, Inc.

Term Loan (First Lien)

Loan


3.00
%

6/1/2013

$
4,582,873


4,478,009


4,388,101Aeroflex Incorporated

Tranche B Term Loan

Loan


4.25
%

5/9/2018

$
3,814,483


3,797,573


3,715,459Aerostructures Acquisition LLC

Term Loan

Loan


7.25
%

3/1/2013

$
554,722


543,949


542,240Alere Inc. (fka IM US Holdings, LLC)

Incremental B-1 Term Loan

Loan


4.50
%

6/30/2017

$
2,000,000


1,951,950


1,992,500Aptalis Pharma, Inc. (fka Axcan Intermediate Holdings Inc.)

Term Loan

Loan


5.50
%

2/10/2017

$
1,980,000


1,971,816


1,963,170Ashland Inc.

Term B Loan

Loan


3.75
%

8/23/2018

$
996,964


994,651


1,000,872Asurion, LLC (fka Asurion Corporation)

Term Loan (First Lien)

Loan


5.50
%

5/24/2018

$
5,659,091


5,608,344


5,635,040Aurora Diagnostics, LLC

Tranche B Term Loan

Loan


6.25
%

5/26/2016

$
508,611


508,611


499,288Autotrader.com, Inc.

Tranche B-1 Term Loan

Loan


4.00
%

12/15/2016

$
3,869,758


3,869,758


3,868,790Avantor Performance Materials Holdings, Inc.

Term Loan

Loan


5.00
%

6/24/2017

$
4,975,000


4,952,760


4,875,500AZ Chem US Inc.

Term Loan

Loan


7.25
%

12/22/2017

$
2,000,000


1,941,354


2,014,720BakerCorp International, Inc. (f/k/a B-Corp Holdings, Inc.)

Term Loan

Loan


5.00
%

6/1/2018

$
497,500


495,278


496,754Bass Pro Group, LLC

Term Loan

Loan


5.25
%

6/13/2017

$
2,985,000


2,958,694


2,977,000BJ's Wholesale Club, Inc.

Initial Loan (First Lien) Retired 03/14/2012

Loan


7.00
%

9/28/2018

$
1,995,000


1,901,076


2,013,015C.H.I. Overhead Doors, Inc. (CHI)

Term Loan (First Lien)

Loan


7.25
%

8/17/2017

$
3,079,513


3,022,863


3,035,876Capstone Logistics, LLC

Term Note A

Loan


7.50
%

9/16/2016

$
2,991,353


2,948,863


2,946,483Capsugel Holdings US, Inc.

Initial Term Loan

Loan


5.25
%

8/1/2018

$
3,990,000


3,979,634


4,012,783Celanese US Holdings LLC

Dollar Term C Loan (Extended)

Loan


3.33
%

10/31/2016

$
3,464,824


3,506,288


3,478,198Cenveo Corporation

Term B Facility

Loan


6.25
%

12/21/2016

$
2,737,105


2,715,168


2,719,150Charter Communications Operating, LLC

Term C Loan

Loan


3.83
%

9/6/2016

$
3,979,695


3,972,997


3,949,291CHS/ Community Health Systems, Inc.

Extended Term Loan

Loan


4.08
%

1/25/2017

$
4,170,088


4,042,207


4,120,589Cinedigm Digital Funding I, LLC

Term Loan

Loan


5.25
%

4/29/2016

$
1,482,007


1,471,669


1,468,121Cinemark USA, Inc.

Extended Term Loan

Loan


3.63
%

4/30/2016

$
5,587,889


5,348,623


5,576,546Consolidated Container Company LLC

Loan (First Lien)

Loan


2.50
%

3/28/2014

$
5,195,532


4,906,062


5,052,655Contec, LLC

Tranche B Term Loan

Loan


0.00
%

7/28/2014

$
2,644,318


2,613,795


1,057,727Covanta Energy Corporation

Funded Letter of Credit

Loan


1.98
%

2/10/2014

$
877,007


860,931


871,525Covanta Energy Corporation

Term Loan

Loan


1.79
%

2/10/2014

$
1,698,170


1,666,874


1,687,557CPI International Acquisition, Inc. (f/k/a Catalyst Holdings, Inc.)

Term B Loan

Loan


5.00
%

2/13/2017

$
4,950,000


4,929,526


4,912,875CRC Health Corporation

Term B-2 Loan

Loan


5.08
%

11/16/2015

$
1,991,877


1,896,087


1,782,730Crown Castle Operating Company

Tranche B Term Loan

Loan


4.00
%

1/31/2019

$
2,000,000


1,980,071


1,990,540CSC Holdings, LLC (fka CSC Holdings Inc (Cablevision))

Term A-3 Loan

Loan


2.24
%

3/31/2015

$
1,360,526


1,355,021


1,333,316


F-28

---



Table of Contents

SARATOGA INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

February 29, 2012

Note 4. Investment in GSC Investment Corp. CLO 2007, Ltd. ("Saratoga CLO") (Continued)

Issuer_Name

Asset_Name

Asset_Type

Current
Rate

Maturity
Date

Principal /
Number of
Shares

Cost

Fair ValueCulligan International Company

Dollar Loan

Loan


2.50
%

11/24/2012

$
2,393,216

$
2,360,219

$
1,714,141DaVita Inc.

Tranche B Term Loan

Loan


0.00
%

10/20/2016

$
3,989,924


3,989,924


3,999,061Del Monte Foods Company

Initial Term Loan

Loan


4.50
%

3/8/2018

$
1,492,500


1,489,291


1,464,098Dollar General Corporation

Tranche B-1 Term Loan

Loan


3.14
%

7/7/2014

$
5,378,602


5,196,110


5,382,905DS Waters of America, Inc.

Term Loan (First Lien)

Loan


0.00
%

8/29/2017

$
3,000,000


2,446,849


2,456,712DynCorp International Inc.

Term Loan

Loan


6.25
%

7/7/2016

$
732,056


721,414


729,538Education Management LLC

Tranche C-2 Term Loan

Loan


4.63
%

6/1/2016

$
3,967,860


3,706,684


3,712,448eInstruction Corporation

Initial Term Loan

Loan


6.51
%

7/2/2013

$
3,005,574


2,923,634


2,705,017Electrical Components International, Inc.

Synthetic Revolving Loan

Loan


6.75
%

2/4/2016

$
117,647


116,257


104,118Electrical Components International, Inc.

Term Loan

Loan


6.75
%

2/4/2017

$
1,804,706


1,782,426


1,597,165Federal-Mogul Corporation

Tranche B Term Loan

Loan


2.20
%

12/29/2014

$
2,616,289


2,475,132


2,500,204Federal-Mogul Corporation

Tranche C Term Loan

Loan


2.19
%

12/28/2015

$
1,334,841


1,257,114


1,275,614Fidelity National Information Services, Inc.

Term B Loan

Loan


4.25
%

7/18/2016

$
1,000,000


990,338


1,004,450First Data Corporation

2018 Dollar Term Loan

Loan


4.24
%

3/23/2018

$
2,290,451


2,202,287


2,041,845First Data Corporation

Non Extending B-1 Term Loan

Loan


2.99
%

9/24/2014

$
1,971,336


1,933,908


1,890,472First Data Corporation

Non Extending B-2 Term Loan

Loan


2.99
%

9/24/2014

$
990,052


971,955


949,440FleetPride Corporation

Term Loan

Loan


6.75
%

12/6/2017

$
1,000,000


980,767


995,000FR Acquisitions Holding Corporation (Luxembourg), S.A.R.L.

Facility B (Dollar)

Loan


5.08
%

12/18/2015

$
1,295,106


1,291,993


1,221,454FR Acquisitions Holding Corporation (Luxembourg), S.A.R.L.

Facility C (Dollar)

Loan


5.58
%

12/20/2016

$
1,295,106


1,291,613


1,227,929Freescale Semiconductor, Inc.

Tranche B-1 Term Loan

Loan


4.52
%

12/1/2016

$
1,534,348


1,468,484


1,496,711Fresenius Medical Care AG & Co., KGaA/Fresenius Medical Care Holdings, Inc.

Tranche B Term Loan

Loan


1.95
%

3/31/2013

$
4,224,718


4,206,870


4,209,889FTD Group, Inc.

Initial Term Loan

Loan


4.75
%

6/11/2018

$
3,982,494


3,943,002


3,902,844Generac Power System, Inc.

Tranche B Term Loan

Loan


3.75
%

2/9/2019

$
500,000


497,509


497,855General Nutrition Centers, Inc.

Tranche B Term Loan

Loan


4.25
%

3/2/2018

$
3,750,000


3,621,437


3,738,900Goodyear Tire & Rubber Company, The

Loan (Second Lien)

Loan


1.75
%

4/30/2014

$
5,700,000


5,339,456


5,607,375Graphic Packaging International, Inc.

Term B Loan Retired 03/16/2012

Loan


2.34
%

5/16/2014

$
3,045,465


2,910,836


3,041,993Grifols Inc.

New U.S. Tranche B Term Loan

Loan


0.00
%

6/1/2017

$
500,000


497,500


499,530Grosvenor Capital Management Holdings, LLLP

Tranche C Term Loan

Loan


4.31
%

12/5/2016

$
3,430,885


3,321,594


3,276,495Hanger Orthopedic Group, Inc.

Term C Loan

Loan


4.01
%

12/1/2016

$
3,960,000


3,972,323


3,905,550HCA Inc.

Tranche B-3 Term Loan

Loan


3.49
%

5/1/2018

$
5,734,690


5,383,348


5,638,634Health Management Associates, Inc.

Term B Loan

Loan


4.50
%

11/16/2018

$
3,000,000


2,970,763


2,981,640Hilsinger Company, The

Term Loan

Loan


5.26
%

12/31/2013

$
1,218,491


1,203,274


1,072,272Hunter Defense Technologies, Inc.

Term Loan

Loan


3.83
%

8/22/2014

$
4,459,263


4,388,148


3,879,559Huntsman International LLC

Extended Term B Loan

Loan


0.00
%

4/19/2017

$
4,000,000


3,955,000


3,923,200Hygenic Corporation, The

Term Loan

Loan


2.76
%

4/30/2013

$
1,563,048


1,536,828


1,438,004Infor Enterprise Solutions Holdings, Inc. (fka Magellan Holdings, Inc.)(Infor Global Solutions)

Extended Delayed Draw Term Loan (First Lien)

Loan


6.00
%

7/28/2015

$
1,314,907


1,229,818


1,276,828Infor Enterprise Solutions Holdings, Inc. (fka Magellan Holdings, Inc.)(Infor Global Solutions)

Extended Initial U.S. Term Loan (First Lien)

Loan


6.00
%

7/28/2015

$
2,520,239


2,356,915


2,447,253Inventiv Health, Inc. (fka Ventive Health, Inc)

Consolidated Term Loan

Loan


6.50
%

8/4/2016

$
494,587


494,587


475,422J. Crew Group, Inc.

Loan

Loan


4.75
%

3/7/2018

$
992,500


992,500


970,963Kalispel Tribal Economic Authority

Term Loan

Loan


7.50
%

2/25/2017

$
3,859,091


3,794,849


3,627,546


F-29

---



Table of Contents

SARATOGA INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

February 29, 2012

Note 4. Investment in GSC Investment Corp. CLO 2007, Ltd. ("Saratoga CLO") (Continued)

Issuer_Name

Asset_Name

Asset_Type

Current
Rate

Maturity
Date

Principal /
Number of
Shares

Cost

Fair ValueKey Safety Systems, Inc.

Term Loan (First Lien)

Loan


2.59
%

3/8/2014

$
3,821,774

$
3,604,295

$
3,667,718Kinetic Concepts, Inc.

Dollar Term B-1 Loan

Loan


7.00
%

5/4/2018

$
500,000


483,349


508,125Leslie's Poolmart, Inc.

Tranche B Term Loan

Loan


4.50
%

11/21/2016

$
3,960,000


3,965,615


3,920,400Metal Services, LLC

Delayed Draw Term Loan

Loan


9.75
%

9/29/2017

$
132,353


129,737


132,022Metal Services, LLC

U.S. Term Loan

Loan


9.75
%

9/29/2017

$
1,367,647


1,340,612


1,364,228Microsemi Corporation

Term Loan

Loan


0.00
%

2/2/2018

$
3,000,000


2,992,500


2,997,750National CineMedia, LLC

Term Loan

Loan


2.05
%

2/13/2015

$
2,655,172


2,572,741


2,608,707Nielsen Finance LLC

Class A Dollar Term Loan

Loan


2.26
%

8/9/2013

$
720,738


710,645


717,134Novelis, Inc.

Term B-2 Loan

Loan


4.00
%

3/10/2017

$
997,500


973,592


993,141Novelis, Inc.

Term Loan

Loan


4.00
%

3/10/2017

$
3,960,000


3,993,151


3,939,487Novell, Inc. (fka Attachmate Corporation, NetIQ Corporation)

Term Loan (First Lien)

Loan


6.50
%

4/27/2017

$
4,937,500


4,913,011


4,873,313NPC International, Inc.

Term Loan

Loan


6.75
%

12/28/2018

$
500,000


490,246


502,970NRG Energy, Inc.

Term Loan

Loan


4.00
%

7/1/2018

$
3,980,000


3,951,892


3,961,334NuSil Technology LLC.

Term Loan

Loan


5.25
%

4/7/2017

$
905,085


905,085


902,071Onex Carestream Finance LP

Term Loan

Loan


5.00
%

2/25/2017

$
4,961,770


4,941,092


4,707,479OpenLink International, Inc.

Initial Term Loan

Loan


7.75
%

10/30/2017

$
1,000,000


981,105


1,000,000PATS Aircraft, LLC

Term Loan

Loan


8.50
%

10/6/2016

$
431,472


248,964


388,325Pelican Products, Inc.

Term Loan

Loan


5.00
%

3/7/2017

$
2,673,704


2,673,704


2,653,651Penn National Gaming, Inc.

Term A Facility

Loan


1.79
%

7/14/2016

$
2,925,000


2,847,453


2,837,250Penn National Gaming, Inc.

Term B Facility

Loan


3.75
%

7/16/2018

$
995,000


992,736


996,930PetCo Animal Supplies, Inc.

New Loan

Loan


0.00
%

11/24/2017

$
1,500,000


1,498,125


1,493,115Pharmaceutical Product Development, Inc. (Jaguar Holdings, LLC)

Term Loan

Loan


6.25
%

12/5/2018

$
2,000,000


1,970,941


2,017,860Pharmaceutical Research Associates Group B.V.

Dutch Dollar Term Loan

Loan


3.81
%

12/15/2014

$
799,151


753,650


775,176Physician Oncology Services, LP

Delayed Draw Term Loan

Loan


6.25
%

1/31/2017

$
51,020


50,596


49,235Physician Oncology Services, LP

Effective Date Term Loan

Loan


6.25
%

1/31/2017

$
419,961


416,468


405,262Pinnacle Foods Finance LLC

Term Loan

Loan


2.84
%

4/2/2014

$
4,796,078


4,694,850


4,766,054Polyone Corporation

Loan

Loan


5.00
%

12/20/2017

$
500,000


495,160


500,730PRA International

U.S. Term Loan

Loan


3.81
%

12/15/2014

$
2,512,401


2,439,376


2,437,029Preferred Proppants, LLC

Term B Loan

Loan


7.50
%

12/15/2016

$
2,000,000


1,960,652


1,945,000Pre-Paid Legal Services, Inc.

Tranche A Term Loan

Loan


7.50
%

12/31/2016

$
2,695,122


2,659,371


2,607,530Prestige Brands, Inc.

Term B Loan

Loan


5.25
%

1/31/2019

$
1,000,000


985,047


1,003,060Pro Mach, Inc.

Term Loan

Loan


6.25
%

7/6/2017

$
1,990,000


1,972,106


1,930,300Quintiles Transnational Corp.

Term B Loan

Loan


5.00
%

6/8/2018

$
3,980,000


3,944,328


3,953,692RailAmerica, Inc.

Initial Loan

Loan


0.00
%

3/1/2019

$
500,000


497,500


497,500Ranpak Corp.

USD Term Loan (First Lien)

Loan


4.75
%

4/20/2017

$
2,744,392


2,732,572


2,716,948Rexnord LLC/RBS Global, Inc.

Tranche B-2 Term B Loan Retired 03/15/2012

Loan


2.50
%

7/19/2013

$
1,607,683


1,566,832


1,590,609Reynolds Group Holdings Inc.

Tranche B Term Loan

Loan


6.50
%

2/9/2018

$
1,963,643


1,963,643


1,977,880Reynolds Group Holdings Inc.

Tranche C Term Loan

Loan


6.50
%

8/9/2018

$
1,973,590


1,955,434


1,992,398Rocket Software, Inc.

Term Loan (First Lien)

Loan


7.00
%

2/8/2018

$
2,000,000


1,960,110


1,997,500Roundy's Supermarkets, Inc.

Tranche B Term Loan

Loan


5.75
%

2/13/2019

$
1,000,000


985,035


1,000,780Royal Adhesives and Sealants, LLC

Term A Loan

Loan


7.25
%

11/29/2015

$
4,785,882


4,729,636


4,715,862RPI Finance Trust

6.75 Year Term Loan

Loan


4.00
%

5/9/2018

$
5,472,500


5,447,342


5,462,868Safety-Kleen Systems, Inc.

Term Loan B

Loan


5.00
%

2/21/2017

$
250,000


247,501


250,000Savers, Inc.

New Term Loan

Loan


4.25
%

3/4/2017

$
464,891


464,891


464,426Scientific Games International Inc.

Tranche B-1 Term Loan

Loan


0.00
%

6/30/2015

$
2,000,000


1,985,000


1,985,000Scitor Corporation

Term Loan

Loan


5.00
%

2/15/2017

$
476,818


474,846


458,937Scotsman Industries, Inc.

Term Loan

Loan


5.75
%

4/30/2016

$
1,873,081


1,867,006


1,863,716Seminole Tribe of Florida

Term B-1 Delay Draw Loan

Loan


2.13
%

3/5/2014

$
616,208


605,662


607,476Seminole Tribe of Florida

Term B-2 Delay Draw Loan

Loan


2.13
%

3/5/2014

$
2,230,224


2,192,054


2,198,622Seminole Tribe of Florida

Term B-3 Delay Draw Loan

Loan


2.13
%

3/5/2014

$
1,108,287


1,082,950


1,092,583Sensata Technology BV/Sensata Technology Finance Company, LLC

Term Loan

Loan


0.00
%

5/12/2018

$
3,000,000


3,000,000


2,994,150Sensus USA Inc. (fka Sensus Metering Systems)

Term Loan (First Lien)

Loan


4.75
%

5/9/2017

$
1,985,000


1,976,380


1,981,030SI Organization, Inc., The

New Tranche B Term Loan

Loan


4.50
%

11/22/2016

$
3,960,000


3,928,772


3,794,987


F-30

---



Table of Contents

SARATOGA INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

February 29, 2012

Note 4. Investment in GSC Investment Corp. CLO 2007, Ltd. ("Saratoga CLO") (Continued)

Issuer_Name

Asset_Name

Asset_Type

Current
Rate

Maturity
Date

Principal /
Number of
Shares

Cost

Fair ValueSophia, L.P.

Initial Term Loan

Loan


6.25
%

7/19/2018

$
1,000,000

$
985,259

$
1,010,630SRA International Inc.

Term Loan

Loan


6.52
%

7/20/2018

$
3,725,714


3,582,427


3,665,171SRAM, LLC

Term Loan (First Lien)

Loan


4.76
%

6/7/2018

$
3,886,998


3,850,268


3,882,139SunCoke Energy, Inc.

Tranche B Term Loan

Loan


4.00
%

7/26/2018

$
4,484,984


4,452,979


4,473,771SunGard Data Systems Inc (Solar Capital Corp.)

Incremental Term B Loan

Loan


3.74
%

2/28/2014

$
356,996


356,996


355,911SunGard Data Systems Inc (Solar Capital Corp.)

Tranche A U.S. Term Loan

Loan


2.00
%

2/28/2014

$
140,691


138,222


140,363SunGard Data Systems Inc (Solar Capital Corp.)

Tranche B U.S. Term Loan

Loan


4.06
%

2/28/2016

$
3,253,748


3,173,463


3,246,265Sunquest Information Systems, Inc. (Misys Hospital Systems, Inc.)

Term Loan (First Lien)

Loan


6.25
%

12/16/2016

$
992,500


980,580


986,714SuperMedia Inc. (fka Idearc Inc.)

Loan

Loan


11.00
%

12/31/2015

$
326,109


317,228


164,685Taminco Global Chemical Corporation

Dollar Term Loan

Loan


6.25
%

2/15/2019

$
500,000


490,024


501,875TDG Holding Company (fka Dwyer Acquisition, Inc.)

Term Loan

Loan


7.00
%

12/23/2015

$
3,463,273


3,422,302


3,411,324Team Health, Inc.

Tranche B Term Loan

Loan


3.75
%

6/29/2018

$
4,477,500


4,457,147


4,331,981Texas Competitive Electric Holdings Company, LLC (TXU)

2014 Term Loan (Non-Extending)

Loan


3.76
%

10/10/2014

$
5,580,862


5,494,432


3,406,670TransDigm Inc.

Tranche B-1 Term Loan

Loan


4.00
%

2/14/2017

$
3,988,779


4,002,125


3,985,269TransFirst Holdings, Inc.

Term Loan (First Lien)

Loan


3.00
%

6/16/2014

$
2,387,500


2,350,983


2,282,044U.S. Security Associates Holdings, Inc.

Delayed Draw Term Loan

Loan


6.00
%

7/28/2017

$
163,000


161,527


161,778U.S. Security Associates Holdings, Inc.

Term Loan B

Loan


6.00
%

7/28/2017

$
125,000


124,375


124,688U.S. Security Associates Holdings, Inc.

Term Loan B

Loan


6.00
%

7/28/2017

$
834,908


827,364


832,820U.S. Silica Company

Loan

Loan


4.75
%

6/8/2017

$
1,990,000


1,981,242


1,972,588Univar Inc.

Term B Loan

Loan


5.00
%

6/30/2017

$
3,964,975


3,963,846


3,928,021UPC Financing Partnership

Facility AB

Loan


4.75
%

12/31/2017

$
1,000,000


971,447


998,250USI Holdings Corporation

Tranche B Term Loan

Loan


2.75
%

5/5/2014

$
4,782,211


4,685,075


4,678,581Valeant Pharmaceuticals International, Inc.

Tranche B Term Loan

Loan


3.75
%

2/13/2019

$
1,000,000


995,002


996,880Vantiv, LLC (fka Fifth Third Processing Solutions, LLC)

Term B-1 Loan (First Lien)

Loan


4.50
%

11/3/2016

$
3,979,950


3,988,810


3,982,776Verint Systems Inc.

Term Loan 2011

Loan


4.50
%

10/27/2017

$
1,985,000


1,976,319


1,978,807Visant Corporation (fka Jostens)

Tranche B Term Loan (2011)

Loan


5.25
%

12/22/2016

$
3,767,519


3,767,519


3,611,430Weight Watchers International, Inc.

Term B Loan

Loan


1.88
%

1/26/2014

$
1,229,200


1,220,261


1,221,518Weight Watchers International, Inc.

Term D Loan

Loan


2.88
%

6/30/2016

$
2,728,226


2,684,697


2,714,585Wendy's/Arby's Restaurants, LLC

Term Loan

Loan


5.00
%

5/24/2017

$
1,122,902


1,118,702


1,123,745Wil Research Laboratories, LLC

Term B Loan

Loan


4.00
%

9/26/2013

$
1,808,039


1,726,498


1,663,396WireCo WorldGroup Inc.

Term Loan

Loan


5.00
%

2/10/2014

$
1,992,943


1,967,101


1,953,084Yankee Candle Company, Inc., The

Term Loan

Loan


2.25
%

2/6/2014

$
2,537,336


2,419,753


2,523,428Yell Group Plc

Facility B1YB (USA) LLC (11/2009)

Loan


3.99
%

7/31/2014

$
3,139,856


3,090,757


961,141ALM 2010-1A

Floating05/2020B00162VAE5

Other/Structured
Finance Securities


2.78
%

5/20/2020

$
4,000,000


3,716,602


3,657,600BABSN 2007-1A

Floating01/2021D105617AAA9

Other/Structured
Finance Securities


3.81
%

1/18/2021

$
1,500,000


1,236,977


1,050,000GALE 2007-3A

Floating04/2021E363205AA3

Other/Structured


4.06
%

4/19/2021

$
4,000,000


3,311,208


2,800,000KATO 2006-9A

Floating01/2019B2L486010AA9

Other/Structured
Finance Securities


4.06
%

1/25/2019

$
5,000,000


4,227,490


3,500,000STCLO 2007-6A

Floating04/2021D86176YAG7

Other/Structured
Finance Securities


4.17
%

4/17/2021

$
5,000,000


4,077,701


3,500,000$
390,023,603

$
381,364,466


F-31

---



Table of Contents

SARATOGA INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

February 29, 2012

Note 4. Investment in GSC Investment Corp. CLO 2007, Ltd. ("Saratoga CLO") (Continued)

GSC Investment Corp.        Consolidated Schedule of Investments        February 28, 2011        (unaudited)

Issuer_Name

Asset_Name

Asset_Type

Current
Rate

Maturity
Date

Principal /
Number of
Shares

Cost

Fair ValueElyria Foundry Company, LLC

Warrants

Equity


0.00
%




2,000

$


$
M/C Acquisition Corp.

Common

Equity


0.00
%




378,434


68,806


Network Communications, Inc.

Common

Equity


0.00
%




169,143


169,143


720,549OLD AII, Inc (fka Aleris International Inc.)

Common

Equity


0.00
%




2,624


224,656


128,576SuperMedia Inc. (fka Idearc Inc.)

Common Stock

Equity


0.00
%




10,821


2,881,566


5,411ABP Corporation (Au Bon Pain)

Term Loan

Loan


8.50
%

2/28/2013

$
3,678,254


3,663,509


3,641,471Acosta, Inc.

Term B Loan

Loan


0.00
%

3/1/2018

$
500,000


500,000


504,625Acosta, Inc.

Term Loan Retired 03/01/2011

Loan


4.50
%

7/28/2013

$
1,904,344


1,860,734


1,901,926Advanced Lighting Technologies, Inc.

Deferred Draw Term Loan (First Lien)

Loan


3.07
%

6/1/2013

$
253,920


236,167


236,570Advanced Lighting Technologies, Inc.

Term Loan (First Lien)

Loan


3.06
%

6/1/2013

$
4,652,900


4,462,578


4,334,967Aeroflex Incorporated

Tranche B-1 Term Loan Retired 05/09/2011

Loan


4.31
%

8/15/2014

$
3,896,513


3,839,728


3,906,254Aeroflex Incorporated

Tranche B-2 Term Loan Retired 05/09/2011

Loan


4.81
%

8/15/2014

$
600,000


599,258


598,500Aerostructures Acquisition LLC

Term Loan

Loan


7.25
%

3/1/2013

$
617,575


593,524


571,257Affordable Care, Inc.

Term Loan

Loan


0.00
%

12/31/2015

$
1,000,000


985,000


985,000APS Healthcare, Inc.

Term Loan (First Lien)

Loan


3.52
%

3/30/2013

$
1,848,940


1,808,135


1,802,717Asurion, LLC (fka Asurion Corporation)

Term Loan (First Lien)

Loan


3.27
%

7/3/2014

$
5,925,000


5,811,967


5,828,719Aurora Diagnostics, LLC

Tranche B Term Loan

Loan


6.25
%

5/26/2016

$
508,611


508,611


509,033Autotrader.com, Inc.

Tranche B Term Loan

Loan


4.75
%

12/15/2016

$
2,000,000


1,990,316


2,018,760Axcan Intermediate Holdings Inc.

Term Loan

Loan


3.67
%

2/10/2017

$
1,333,333


1,323,393


1,346,453AZ Chem US Inc.

Term Loan Retired 03/11/2011

Loan


6.75
%

11/21/2016

$
989,362


975,102


1,001,422AZ Chem US Inc.

Term Loan Retired 03/11/2011

Loan


6.75
%

11/21/2016

$
2,968,085


2,989,634


3,004,266Bankruptcy Management Solutions, Inc.

Term Loan B

Loan


7.50
%

8/20/2014

$
3,956,481


3,544,161


1,819,981C.H.I. Overhead Doors, Inc. (CHI)

Term Loan

Loan


7.61
%

4/21/2015

$
5,077,648


5,042,065


5,090,342California Family Health LLC (fka CFF Acquisition LLC)

Term A Loan

Loan


7.50
%

7/31/2015

$
2,814,935


2,808,774


2,800,860CCM Merger Inc. (Motor City Casino)

Term B Loan Retired 03/01/2011

Loan


8.50
%

7/13/2012

$
3,390,358


3,272,522


3,390,358Celanese US Holdings LLC

Dollar Term B Loan (Non-Extended) Retired 05/06/2011

Loan


1.80
%

4/2/2014

$
682,863


669,206


684,495Celanese US Holdings LLC

Dollar Term C Loan (Extended)

Loan


0.00
%

10/31/2016

$
3,500,000


3,548,125


3,530,135Cenveo Corporation

Term B Facility

Loan


6.25
%

12/21/2016

$
3,000,000


2,970,945


3,027,510CHS/ Community Health Systems, Inc.

Extended Term Loan

Loan


3.81
%

1/25/2017

$
1,360,448


1,341,805


1,367,930CHS/ Community Health Systems, Inc.

Non-Extended Delayed Draw Term Loan

Loan


2.56
%

7/25/2014

$
139,402


135,936


138,646CHS/ Community Health Systems, Inc.

Non-Extended Term Loan

Loan


2.56
%

7/25/2014

$
2,705,964


2,640,759


2,691,298Cinedigm Digital Funding I, LLC

Term Loan

Loan


5.25
%

4/29/2016

$
1,861,233


1,845,123


1,870,539Cinemark USA, Inc.

Extended Term Loan

Loan


3.54
%

4/30/2016

$
5,644,908


5,345,039


5,690,802Citco III Limited

B Term Loan

Loan


4.46
%

6/30/2014

$
3,625,898


3,544,965


3,607,768Consolidated Container Company LLC

Loan (First Lien)

Loan


2.50
%

3/28/2014

$
5,286,113


4,848,098


5,173,783Consolidated Precision Products Corp.

Term Loan

Loan


7.75
%

4/17/2014

$
1,421,747


1,406,721


1,393,312Contec, LLC

Tranche B Term Loan

Loan


7.75
%

7/28/2014

$
2,658,068


2,620,135


2,409,991Continental Alloys & Services, Inc.

Term Facility

Loan


8.50
%

6/15/2012

$
3,003,802


2,886,239


3,001,308


F-32

---



Table of Contents

SARATOGA INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

February 29, 2012

Note 4. Investment in GSC Investment Corp. CLO 2007, Ltd. ("Saratoga CLO") (Continued)

Issuer_Name

Asset_Name

Asset_Type

Current
Rate

Maturity
Date

Principal /
Number of
Shares

Cost

Fair ValueCovanta Energy Corporation

Funded Letter of Credit

Loan


1.70
%

2/10/2014

$
877,007

$
852,656

$
873,876Covanta Energy Corporation

Term Loan

Loan


1.81
%

2/10/2014

$
1,715,999


1,668,245


1,709,873CPI International Acquisition, Inc. (f/k/a Catalyst Holdings, Inc.)

Term B Loan

Loan


5.00
%

2/13/2017

$
5,000,000


4,975,137


5,012,500CRC Health Corporation

Term B-2 Loan

Loan


4.80
%

11/16/2015

$
2,000,000


1,877,839


1,992,500Culligan International Company

Dollar Loan

Loan


2.52
%

11/24/2012

$
2,418,342


2,339,419


2,106,376DeCrane Aerospace, Inc. (fka DeCrane Aircraft Holdings, Inc.)

Second Lien Term Loan

Loan


0.00
%

2/21/2014

$
969,493


924,594


664,103Del Monte Foods Company

Initial Term Loan

Loan


0.00
%

3/8/2018

$
1,500,000


1,496,250


1,511,715Dollar General Corporation

Tranche B-1 Term Loan

Loan


3.03
%

7/7/2014

$
5,378,602


5,118,264


5,389,036DS Waters of America, Inc.

Term Loan

Loan


2.57
%

10/29/2012

$
495,888


482,802


485,350DynCorp International Inc.

Term Loan

Loan


6.25
%

7/7/2016

$
997,500


979,658


1,005,809Education Management LLC

Tranche C-2 Term Loan

Loan


4.31
%

6/1/2016

$
7,112,226


6,533,750


6,997,790eInstruction Corporation

Initial Term Loan

Loan


4.31
%

7/2/2013

$
3,036,981


2,892,088


2,794,023Electrical Components International, Inc.

Synthetic Revolving Loan

Loan


1.40
%

2/4/2016

$
117,647


115,903


117,941Electrical Components International, Inc.

Term Loan

Loan


6.75
%

2/4/2017

$
1,882,353


1,854,389


1,887,059Emdeon Business Services LLC

Term Loan (First Lien)

Loan


2.27
%

11/16/2013

$
4,877,709


4,730,606


4,855,369Federal-Mogul Corporation

Tranche B Term Loan

Loan


2.20
%

12/29/2014

$
2,643,542


2,449,987


2,573,330Federal-Mogul Corporation

Tranche C Term Loan

Loan


2.20
%

12/28/2015

$
1,348,746


1,249,431


1,312,923First Data Corporation

Non Extending B-1 Term Loan

Loan


3.01
%

9/24/2014

$
3,727,178


3,628,773


3,555,728First Data Corporation

Non Extending B-2 Term Loan

Loan


3.01
%

9/24/2014

$
1,868,259


1,820,772


1,783,123FleetCor Technologies Operating Company, LLC

Tranche 1 Term Loan

Loan


2.51
%

4/30/2013

$
4,461,805


4,354,515


4,461,805FleetCor Technologies Operating Company, LLC

Tranche 2 Term Loan

Loan


2.51
%

4/30/2013

$
901,783


880,096


901,783FR Acquisitions Holding Corporation (Luxembourg), S.A.R.L.

Facility B (Dollar)

Loan


4.80
%

12/18/2015

$
1,295,106


1,291,172


1,246,540FR Acquisitions Holding Corporation (Luxembourg), S.A.R.L.

Facility C (Dollar)

Loan


5.30
%

12/20/2016

$
1,295,106


1,290,884


1,253,015Freescale Semiconductor, Inc.

Extended Maturity Term Loan

Loan


4.51
%

12/1/2016

$
1,549,402


1,468,869


1,549,216Fresenius Medical Care AG & Co., KGaA/Fresenius Medical Care Holdings, Inc.

Tranche B Term Loan

Loan


1.68
%

3/31/2013

$
4,269,542


4,234,546


4,255,069Georgia-Pacific LLC

Term Loan B

Loan


2.30
%

12/23/2012

$
2,876,959


2,765,714


2,878,887Georgia-Pacific LLC

Term Loan C

Loan


3.55
%

12/23/2014

$
2,520,062


2,390,204


2,529,210Goodyear Tire & Rubber Company, The

Loan (Second Lien)

Loan


1.96
%

4/30/2014

$
5,700,000


5,172,419


5,631,600Graham Packaging Company, L.P.

C Term Loan

Loan


6.75
%

4/5/2014

$
4,586,342


4,586,342


4,605,467Graphic Packaging International, Inc.

Term B Loan

Loan


2.30
%

5/16/2014

$
3,317,758


3,102,031


3,315,701Grosvenor Capital Management Holdings, LLLP

Tranche C Term Loan

Loan


4.31
%

12/5/2016

$
3,548,952


3,412,119


3,531,207GSI Holdings L.L.C.

Term Loan

Loan


3.32
%

8/1/2014

$
5,794,414


5,687,799


5,664,039Hanger Orthopedic Group, Inc.

Term B Loan

Loan


5.25
%

12/1/2016

$
4,000,000


4,014,504


4,039,160HCA Inc.

Tranche B-1 Term Loan

Loan


2.55
%

11/18/2013

$
5,734,690


5,470,319


5,720,353Hilsinger Company, The

Term Loan

Loan


3.55
%

12/31/2013

$
1,438,859


1,411,074


1,294,973Hoffmaster Group, Inc.

Term Loan (First Lien)

Loan


7.00
%

6/2/2016

$
3,728,750


3,656,667


3,733,411Hunter Defense Technologies, Inc.

Term Loan

Loan


3.56
%

8/22/2014

$
4,600,368


4,496,163


4,493,042Hygenic Corporation, The

Term Loan

Loan


2.80
%

4/30/2013

$
1,731,548


1,674,176


1,614,668Infor Enterprise Solutions Holdings, Inc. (fka Magellan Holdings, Inc.)(Infor Global Solutions)

Extended Delayed Draw Term Loan (First Lien)

Loan


6.02
%

7/28/2015

$
1,329,765


1,218,397


1,311,813


F-33

---



Table of Contents

SARATOGA INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

February 29, 2012

Note 4. Investment in GSC Investment Corp. CLO 2007, Ltd. ("Saratoga CLO") (Continued)

Issuer_Name

Asset_Name

Asset_Type

Current
Rate

Maturity
Date

Principal /
Number of
Shares

Cost

Fair ValueInfor Enterprise Solutions Holdings, Inc. (fka Magellan Holdings, Inc.)(Infor Global Solutions)

Extended Initial U.S. Term Loan (First Lien)

Loan


6.02
%

7/28/2015

$
2,548,716

$
2,334,952

$
2,514,308Insight Equity A.P. X, LP

Term Loan

Loan


4.47
%

12/18/2012

$
1,568,246


1,561,020


1,411,421Intrapac Corporation/Corona Holdco

1st Lien Term Loan

Loan


3.80
%

5/18/2012

$
3,813,798


3,717,037


2,855,581Inventiv Health, Inc. (fka Ventive Health, Inc)

Term B-1 Loan

Loan


4.75
%

8/4/2016

$
166,667


166,667


167,362Inventiv Health, Inc. (fka Ventive Health, Inc)

Term B-2 Loan

Loan


1.63
%

8/4/2016

$






1,390J. Crew Group, Inc.

Loan

Loan


0.00
%

3/7/2018

$
1,000,000


1,000,000


1,002,190Kalispel Tribal Economic Authority

Term Loan

Loan


7.50
%

2/25/2017

$
4,000,000


3,920,037


3,920,037Key Safety Systems, Inc.

Term Loan (First Lien)

Loan


2.55
%

3/8/2014

$
3,863,090


3,536,408


3,752,026Kinetek Industries, Inc.

Term B-1 Loan

Loan


3.94
%

11/10/2013

$
1,285,429


1,221,491


1,219,011Kinetek Industries, Inc.

Term B-2 Loan

Loan


3.94
%

11/10/2013

$
130,372


123,957


123,636Lender Processing Services, Inc.

Term Loan B

Loan


2.76
%

7/2/2014

$
633,750


630,214


631,373Leslie's Poolmart, Inc.

Tranche B Term Loan (Expired 3.1.2011)

Loan


6.00
%

11/21/2016

$
4,000,000


4,006,665


4,040,000M/C Acquisition Corp.

Tranche C Term Loan

Loan


1.00
%

12/31/2012

$
1,981,257


1,981,257


297,188Matthew Warren Industries, Inc.

Term Loan

Loan


7.25
%

11/1/2013

$
1,396,992


1,332,049


1,131,564National Diversified Sales, Inc.

Term Loan

Loan


3.56
%

8/9/2011

$
1,260,509


1,224,767


1,247,904Nielsen Finance LLC

Class A Dollar Term Loan

Loan


2.26
%

8/9/2013

$
4,924,279


4,806,327


4,936,590Novelis, Inc.

Term Loan (Old)

Loan


5.25
%

12/17/2016

$
4,000,000


4,039,222


4,056,800Novell, Inc. (fka Attachmate Corporation, NetIQ Corporation)

Term Loan (First Lien)

Loan


0.00
%

4/27/2017

$
4,000,000


3,960,000


3,960,000NPC International, Inc.

Term Loan

Loan


2.04
%

5/3/2013

$
4,317,595


4,161,647


4,309,521NRG Energy, Inc.

Extended Maturity Credit-Linked Deposit

Loan


3.55
%

8/31/2015

$
1,000,000


1,003,705


1,007,000NRG Energy, Inc.

Original Maturity Credit-Linked Deposit

Loan


2.05
%

2/1/2013

$
739,113


723,964


738,085NRG Energy, Inc.

Original Maturity Term Loan

Loan


2.04
%

2/1/2013

$
2,880,954


2,823,408


2,876,950NuSil Technology LLC.

Tranche B Term Loan

Loan


6.00
%

2/18/2015

$
3,780,000


3,749,885


3,780,000Nuveen Investments, Inc.

Non-Extended First-Lien Term Loan

Loan


3.30
%

11/13/2014

$
2,494,682


2,450,410


2,429,197Nyco Holdings 3 ApS (Nycomed)

Facility B2

Loan


4.26
%

12/29/2014

$
1,766,354


1,687,712


1,730,391Nyco Holdings 3 ApS (Nycomed)

Facility C2

Loan


4.76
%

12/29/2015

$
1,765,817


1,679,620


1,738,694Onex Carestream Finance LP

Term Loan

Loan


0.00
%

2/25/2017

$
5,000,000


4,975,000


4,975,000Pelican Products, Inc.

Term Loan Old

Loan


5.75
%

11/30/2016

$
3,000,000


2,971,226


3,020,010Pharmaceutical Research Associates Group B.V.

Dutch Dollar Term Loan

Loan


3.56
%

12/15/2014

$
928,355


856,513


900,504Physician Oncology Services, LP

Delayed Draw Term Loan

Loan


0.00
%

1/31/2017

$



(510
)

(51,020
)Physician Oncology Services, LP

Effective Date Term Loan

Loan


0.00
%

1/31/2017

$
448,980


444,490


444,490Pinnacle Foods Finance LLC

Term Loan

Loan


2.76
%

4/2/2014

$
4,818,867


4,668,244


4,808,555PRA International

U.S. Term Loan

Loan


3.56
%

12/15/2014

$
1,286,657


1,187,087


1,222,324Prestige Brands, Inc.

Term Loan

Loan


4.75
%

3/24/2016

$
4,167,500


4,152,819


4,189,629QA Direct Holdings, LLC

Term Loan Retired 03/23/2011

Loan


8.25
%

8/10/2014

$
1,756,006


1,746,771


1,747,226QCE, LLC (Quiznos)

Term Loan (First Lien)

Loan


5.01
%

5/5/2013

$
2,713,190


2,642,924


2,579,457Quintiles Transnational Corp.

Term B Loan (First Lien)

Loan


2.31
%

3/31/2013

$
1,350,372


1,341,560


1,346,996Ranpak Corp.

US Dollar Term Loan B (First Lien) Retired 04/20/2011

Loan


4.77
%

12/27/2013

$
2,729,247


2,702,688


2,592,785Repconstrickland, Inc.

Term B Loan

Loan


10.00
%

2/19/2014

$
2,982,729


2,963,648


2,744,111Rexnord LLC/RBS Global, Inc.

Tranche B-2 Term B Loan

Loan


2.56
%

7/19/2013

$
1,624,606


1,553,407


1,614,940Royal Adhesives and Sealants, LLC

Term A Loan

Loan


7.25
%

11/29/2015

$
5,000,000


4,925,515


4,925,515Royalty Pharma Finance Trust

Tranche B Term Loan

Loan


2.55
%

4/16/2013

$
4,111,216


4,104,705


4,126,633Scitor Corporation

Term Loan

Loan


5.00
%

2/15/2017

$
500,000


497,514


503,540Scotsman Industries, Inc.

Term Loan

Loan


5.51
%

4/30/2016

$
942,875


934,736


946,411Seminole Tribe of Florida

Term B-1 Delay Draw Loan

Loan


1.81
%

3/5/2014

$
623,301


607,432


619,592Seminole Tribe of Florida

Term B-2 Delay Draw Loan

Loan


1.81
%

3/5/2014

$
2,254,231


2,196,806


2,240,818Seminole Tribe of Florida

Term B-3 Delay Draw Loan

Loan


1.81
%

3/5/2014

$
1,418,608


1,377,771


1,410,167SI Organization, Inc., The

New Tranche B Term Loan

Loan


4.50
%

11/22/2016

$
4,000,000


3,961,772


4,030,000Specialized Technology Resources, Inc.

Term Loan (First Lien)

Loan


2.76
%

6/13/2014

$
3,525,541


3,444,179


3,283,160


F-34

---



Table of Contents

SARATOGA INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

February 29, 2012

Note 4. Investment in GSC Investment Corp. CLO 2007, Ltd. ("Saratoga CLO") (Continued)

Issuer_Name

Asset_Name

Asset_Type

Current
Rate

Maturity
Date

Principal /
Number of
Shares

Cost

Fair ValueSunGard Data Systems Inc (Solar Capital Corp.)

Incremental Term B Loan

Loan


3.76
%

2/28/2014

$
500,000

$
500,000

$
503,325SunGard Data Systems Inc (Solar Capital Corp.)

Tranche A U.S. Term Loan

Loan


2.01
%

2/28/2014

$
197,048


191,855


196,124SunGard Data Systems Inc (Solar Capital Corp.)

Tranche B U.S. Term Loan

Loan


3.93
%

2/28/2016

$
4,557,119


4,416,466


4,579,905Sunquest Information Systems, Inc. (Misys Hospital Systems, Inc.)

Term Loan (First Lien)

Loan


6.25
%

12/16/2016

$
1,000,000


985,480


1,005,000SuperMedia Inc. (fka Idearc Inc.)

Loan

Loan


11.00
%

12/31/2015

$
359,815


347,869


238,604Survey Sampling International, LLC

Term Loan

Loan


10.40
%

12/31/2012

$
1,775,683


1,766,073


1,154,194Targus Holdings, Inc.

Tranche B Term Loan (First Lien)

Loan


8.75
%

11/22/2012

$
2,789,590


2,701,112


2,768,668TDG Holding Company (fka Dwyer Acquisition, Inc.)

Term Loan

Loan


7.00
%

12/23/2015

$
4,000,000


3,940,238


3,940,000Team Finance LLC (a.k.a Team Health Holdings, LLC)

Term Loan

Loan


2.27
%

11/23/2012

$
5,570,899


5,369,893


5,543,045Telcordia Technologies, Inc.

Term Loan

Loan


6.75
%

4/30/2016

$
3,970,000


3,961,377


3,982,426Texas Competitive Electric Holdings Company, LLC (TXU)

Initial Tranche B-2 Term Loan

Loan


3.79
%

10/10/2014

$
5,805,000


5,740,180


4,834,868TransFirst Holdings, Inc.

Term Loan (First Lien)

Loan


3.06
%

6/15/2014

$
2,412,500


2,359,447


2,320,029Tricorbraun Inc. (fka Kranson Industries, Inc.)

Term Loan B

Loan


2.51
%

7/31/2013

$
1,223,256


1,173,926


1,180,442Triumph Group Inc.

Loan Retired 04/05/2011

Loan


4.50
%

6/16/2016

$
1,243,750


1,238,248


1,246,088U.S. Security Holdings, Inc.

Acquisition Term Loan

Loan


4.04
%

5/8/2013

$
106,289


102,005


105,224U.S. Security Holdings, Inc.

Tranche B Term Loan

Loan


4.04
%

5/8/2013

$
564,358


541,608


561,536U.S. Silica Company

Loan

Loan


5.75
%

5/9/2016

$
1,343,250


1,337,430


1,344,929United States Infrastructure Corporation (fka Stripe Acquisition, Inc.)

Term Loan

Loan


5.50
%

5/13/2015

$
1,393,000


1,381,246


1,394,741Univar Inc.

Term B Loan

Loan


0.00
%

6/30/2017

$
3,000,000


3,000,000


3,000,000USI Holdings Corporation

Tranche B Term Loan

Loan


2.77
%

5/5/2014

$
4,832,287


4,689,161


4,820,206Visant Corporation (fka Jostens)

Tranche B Term Loan (2011)

Loan


0.00
%

12/22/2016

$
4,000,000


4,000,000


4,000,000Weasler Engineering, Inc.

Term Loan

Loan


6.76
%

9/30/2013

$
1,195,707


1,023,493


1,171,792Weight Watchers International, Inc.

Term B Loan

Loan


1.81
%

1/26/2014

$
1,242,139


1,228,356


1,239,034Weight Watchers International, Inc.

Term D Loan

Loan


2.56
%

6/30/2016

$
2,755,924


2,701,780


2,765,377Wendy's/Arby's Restaurants, LLC

Term Loan

Loan


5.00
%

5/24/2017

$
1,194,000


1,188,678


1,202,585Wenner Media LLC

Term Loan

Loan


2.01
%

10/2/2013

$
2,830,535


2,750,229


2,717,314Wesco Aircraft Hardware Corp.

Loan (Second Lien) Retired 04/07/2011

Loan


6.02
%

3/28/2014

$
1,720,000


1,655,183


1,721,428Wil Research Laboratories, LLC

Term B Loan

Loan


4.31
%

9/26/2013

$
1,828,419


1,693,356


1,609,009WireCo WorldGroup Inc.

Term Loan

Loan


5.25
%

2/10/2014

$
4,687,066


4,582,305


4,687,066Worldwide Express Operations, LLC

Term Loan

Loan


7.50
%

6/30/2013

$
3,844,761


3,844,761


3,075,809Yankee Candle Company, Inc.

Term Loan

Loan


2.27
%

2/6/2014

$
2,537,336


2,358,862


2,530,409Yell Group Plc

Facility B1YB (USA) LLC (11/2009)

Loan


4.01
%

7/31/2014

$
3,216,223


3,148,334


1,485,897ALM 2010-1A

Floating05/2020B00162VAE5

Other/Structured
Finance Securities


2.58
%

5/20/2020

$
4,000,000


3,682,050


3,657,600BABSN 2007-1A

Floating01/2021D105617AAA9

Other/Structured
Finance Securities


3.55
%

1/18/2021

$
1,500,000


1,207,311


1,050,000GALE 2007-3A

Floating04/2021E363205AA3

Other/Structured
Finance Securities


3.80
%

4/19/2021

$
4,000,000


3,235,640


2,800,000KATO 2006-9A

Floating01/2019B2L

Other/Structured


3.80
%

1/25/2019

$
5,000,000


4,115,337


3,500,000486010AA9

Finance SecuritiesNetwork Communications, Inc.

8.600%01/20206412BAD3

Unsecured Notes


8.60
%

1/14/2020

$
1,028,572


3,260,000


743,452STCLO 2007-6A

Floating04/2021D86176YAG7

Other/Structured
Finance Securities


3.90
%

4/17/2021

$
5,000,000


3,976,453


3,500,000Elyria Foundry Company, LLC

13.000%03/2013290608AA6

Unsecured Notes


17.00
%

3/1/2013

$
2,040,000


2,006,316


1,500,012$
402,031,794

$
391,170,117


F-35

---



Table of Contents

SARATOGA INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

February 29, 2012

Note 5. Income Taxes

The Company intends to operate so as to qualify to be taxed as a RIC under Subchapter M of the Code and, as such, will not be subject to federal income tax on the portion of
taxable income and gains distributed to stockholders.

The
Company owns 100% of Saratoga CLO, an exempted company incorporated in the Cayman Islands. For financial reporting purposes, the Saratoga CLO is not included as part of the
consolidated financial statements. For federal income tax purposes, the Company has requested and received approval from the Internal Revenue Service to treat the Saratoga CLO as a disregarded entity.
As such, for federal income tax purposes and for purposes of meeting the RIC qualification and diversification tests, the results of operations of the Saratoga CLO are included with those of the
Company.

To
qualify as a RIC, the Company is required to meet certain income and asset diversification tests in addition to distributing at least 90% of its investment company taxable income, as
defined by the Code. Because federal income tax regulations differ from GAAP, distributions in accordance with tax regulations may differ from net investment income and realized gains recognized for
financial reporting purposes. Differences may be permanent or temporary in nature. Permanent differences are reclassified among capital accounts in the financial statements to reflect their tax
character. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes. As of February 29, 2012 and February 28,
2011, the Company reclassified for book purposes amounts arising from permanent book/tax differences primarily related to nondeductible excise tax, meals & entertainment, market discount,
interest income with respect to the Saratoga CLO which is consolidated for tax purposes, and the tax character of distributions as follows (dollars in thousands):

February 29,
2012

February 28,
2011Accumulated net investment income/(loss)

$
(871
)
$
474Accumulated net realized gains (losses) on investments


859


(474
)Additional paid-in-capital


12





For
income tax purposes, distributions paid to shareholders are reported as ordinary income, return of capital, long term capital gains or a combination thereof. The tax
character of distributions paid for the years ended February 29, 2012 and February 28, 2011 was as follows (dollars in thousands):

February 29,
2012

February 28,
2011Ordinary Income

$
9,831

$
11,796Capital gains





Return of capital





Total

$
9,831

$
11,796


For
federal income tax purposes, as of February 29, 2012, the aggregate net unrealized depreciation for all securities is $8.3 million. The aggregate cost
of securities for federal income tax purposes is $459.1 million.

F-36

---



Table of Contents

SARATOGA INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

February 29, 2012

Note 5. Income Taxes (Continued)

For
federal income tax purposes, as of February 28, 2011, the aggregate net unrealized depreciation for all securities is $18.2 million. The aggregate cost of securities
for federal income tax purposes is $466.6 million.

At
February 29, 2012 and February 28, 2011, the components of accumulated losses on a tax basis as detailed below differ from the amounts reflected per the Company's
consolidated statements of assets and liabilities by temporary book/tax differences primarily arising from the consolidation of the Saratoga CLO for tax purposes, market discount and original issue
discount income, interest income accrual on defaulted bonds, write-off of investments, and amortization of organizational expenditures (dollars in thousands).

February 29,
2012

February 28,
2011Post October loss deferred

$
(12,117
)
$
(9,819
)Accumulated capital losses


(50,249
)

(36,610
)Other temporary differences


(297
)

(59
)Undistributed ordinary income


4,385


1,760Unrealized depreciation


(8,266
)

(18,172
)Total components of accumulated losses

$
(66,544
)
$
(62,900
)


Post-October
losses represent losses realized on investments from November 1, 2011 to February 29, 2012, in accordance with federal income tax
regulations, the Company has elected to defer and treat as having arisen in the following fiscal year.

The
Company has incurred capital losses of $19.3, $14.1 and $3.2 million for the years ended February 28, 2011, 2010 and 2009. Such capital losses will be available to offset
future capital gains if any and if unused, will expire on February 28, 2019, 2018 and 2017.

The
Company has incurred a short term capital loss of $11.5 million and a long term capital loss of $2.1 million for the year ended February 29, 2012. Such capital
losses will be available to offset future capital gains. There is no expiration for these capital losses.

Management
has analyzed the Company's tax positions taken on federal income tax returns for all open years (fiscal years 2009-2012), and has concluded that no provision for
uncertain income tax positions is required in the Company's financial statements.

On
December 22, 2010, the Regulated Investment Company Modernization Act of 2010 (the "Modernization Act") was enacted, and the provisions with the Modernization Act are effective
for the Company for the year ended February 29, 2012. The Modernization Act is the first major piece of legislation affecting RICs since 1986 and it modernizes several of the federal income and
excise tax provisions related to RICs. Some highlights of the enacted provisions are as follows:

New
capital losses may now be carried forward indefinitely, and retain the character of the original loss. Under pre-enactment law, capital losses could be carried forward for eight
years, and carried forward as short-term capital, irrespective of the character of the original loss.

The
Modernization Act contains simplification provisions, which are aimed at preventing disqualification of a RIC for "inadvertent" failures of the asset diversification and/or
qualifying income

F-37

---



Table of Contents

SARATOGA INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

February 29, 2012

Note 5. Income Taxes (Continued)

tests.
Additionally, the Modernization Act exempts RICs from the preferential dividend rule, and repealed the 60-day designation requirement for certain types of pay-through income and
gains.

Finally,
the Modernization Act contains several provisions aimed at preserving the character of distributions made by a fiscal year RIC during the portion of its taxable year ending
after October 31 or December 31, reducing the circumstances under which a RIC might be required to file amended Forms 1099 to restate previously reported distributions.

Note 6. Agreements

On July 30, 2010, the Company entered into an investment advisory and management agreement (the "Management Agreement") with our Manager. The initial term of the Management
Agreement is two years, with automatic, one-year renewals at the end of each year subject to certain approvals by our board of directors and/or our stockholders. Pursuant to the Management
Agreement, our Manager implements our business strategy on a day-to-day basis and performs certain services for us, subject to oversight by our board of directors. Our Manager
is responsible for, among other duties, determining investment criteria, sourcing, analyzing and executing investments transactions, asset sales, financings and performing asset management duties.
Under the Management Agreement, we have agreed to pay our Manager a management fee for investment advisory and management services consisting of a base management fee and an incentive fee.

The
base management fee of 1.75% is calculated based on the average value of our gross assets (other than cash or cash equivalents, but including assets purchased with borrowed funds) at
the end of the two most recently completed fiscal quarters, and appropriately adjusted for any share issuances or repurchases during the applicable fiscal quarter.

The
incentive fee consists of the following two parts:

The
first, payable quarterly in arrears, equals 20% of our pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets at the end of
the immediately preceding quarter, that exceeds a 1.875% quarterly (7.5% annualized) hurdle rate measured as of the end of each fiscal quarter, subject to a "catch-up" provision. Under
this provision, in any fiscal quarter, our Manager receives no incentive fee unless our pre-incentive fee net investment income exceeds the hurdle rate of 1.875%. Our Manager will receive
100% of pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than or equal to 2.344% in any fiscal quarter (9.376% annualized); and 20% of the amount
of the our pre-incentive fee net investment income, if any, that exceeds 2.344% in any fiscal quarter (9.376% annualized). Notwithstanding the foregoing, with respect to any period ending
on or prior to December 31, 2010, our manager will receive 20% of
pre-incentive fee net investment income, if any, that exceeds the hurdle rate of 1.875% without any catch-up provision. Amounts received from our portfolio companies as a
return of capital are not included in calculating this portion of the incentive fee. Since the hurdle rate is based on net assets, a return of less than the hurdle rate on total assets may still
result in an incentive fee.

The
second part of the incentive fee is determined and payable in arrears as of the end of each fiscal year (or upon termination of the Management Agreement) and equals 20% of our
"incentive fee capital gains," which equals our realized capital gains on a cumulative basis from May 31, 2010 through the end of the year, if any, computed net of all realized capital losses
and unrealized capital

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Table of Contents

SARATOGA INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

February 29, 2012

Note 6. Agreements (Continued)

depreciation
on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fee. Importantly, the capital gains portion of the incentive fee is based on realized gains
and realized and unrealized losses from May 31, 2010. Therefore, realized and unrealized losses incurred prior to such time will not be taken into account when calculating the capital gains
portion of the incentive fee, and our Manager will be entitled to 20% of incentive fee capital gains that arise after May 31, 2010. In addition, for the purpose of the "incentive fee capital
gains" calculations, the cost basis for computing realized gains and losses on investments held by us as of May 31, 2010 will equal the fair value of such investments as of such date.

The
terms of the Management Agreement with our Manager is substantially similar to the terms (i.e., a quarterly base management fee of 1.75% of the average value of our total
assetsother than cash or cash equivalents but including assets purchased with borrowed fundsat the end of the two most recently completed fiscal quarters, and an incentive
fee) of the investment advisory and management agreement we had entered into with GSCP (NJ), L.P., our former investment adviser, except for the following material distinctions in the fee
terms:



For
the years ended February 29, 2012, February 28, 2011 and 2010, we incurred $1.6, $1.6 and $2.0 million in base management fees, respectively. For the years ended
February 29, 2012, February 28, 2011 and 2010, we incurred $0.5, $0.4 and $0.3 million in incentive fees related to pre-incentive fee net investment income. For the
year ended February 28, 2011, we incurred $0.4 million in incentive fees related to pre-incentive fee net investment income and recorded a $2.6 million reversal in
previously recorded deferred incentive management fees related to net investment income as a result of the agreement of our former investment adviser, GSCP (NJ), L.P., to waive such amount in
connection with the recapitalization transaction described in "Note 14.

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Table of Contents

SARATOGA INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

February 29, 2012

Note 6. Agreements (Continued)

Recapitalization
Transaction" below. For the year ended February 29, 2012, we accrued $0.7 million in incentive management fees related to capital gains. The accrual is calculated using
both realized and unrealized capital gains for the period. The actual incentive fee related to capital gains will be determined and payable in arrears at the end of the fiscal year and will include
only realized capital gains for the period. As of February 29, 2012, $0.4 million of base management fees and $2.5 million of incentive fees were accrued and included in
management and incentive fees payable in the accompanying consolidated statement of assets and liabilities. As of February 28, 2011, $2.2 million of management and incentive fees were
accrued and included in management and incentive fees payable in the accompanying consolidated statement of assets and liabilities.

On
July 30, 2010, the Company entered into a separate administration agreement (the "Administration Agreement") with our Manager, pursuant to which our Manager, as our
administrator, has agreed to furnish us with the facilities and administrative services necessary to conduct our day-to-day operations and provide managerial assistance on our
behalf to those portfolio companies to which we are required to provide such assistance. The initial term of the
Administration Agreement is two years, with automatic, one-year renewals at the end of each year subject to certain approvals by our board of directors and/or our stockholders. The amount
payable to our Manager as administrator is capped at $1 million for the initial two year term of the administration agreement.

The
amount payable to GSCP (NJ), L.P., our former investment adviser and administrator, as administrator was capped to the effect that such amount, together with our other
operating expenses, could not exceed an amount equal to 1.5% per annum of our net assets attributable to common stock. In addition, for the one-year term of the administration agreement
that expired on March 21, 2011, GSCP (NJ), L.P. had agreed to waive our reimbursement obligation under the administration agreement until our total assets exceeded
$500 million.

For
the years ended February 29, 2012, February 28, 2011 and 2010, we recognized $1.0, $0.8 and $0.7 million in administrator expenses for the periods, pertaining to
bookkeeping, record keeping and other administrative services provided to us in addition to our allocable portion of rent and other overhead related expenses. As of February 29, 2012,
$0.4 million of administrator expenses were accrued and included in due to manager in the accompanying consolidated statement of assets and liabilities.

Note 7. Borrowings

As a BDC, we are only allowed to employ leverage to the extent that our asset coverage, as defined in the 1940 Act, equals at least 200% after giving effect to such leverage. The amount
of leverage that we employ at any time depends on our assessment of the market and other factors at the time of any proposed borrowing.

On
April 11, 2007, we entered into a $100.0 million revolving securitized credit facility (the "Revolving Facility"). On May 1, 2007, we entered into a
$25.7 million term securitized credit facility (the "Term Facility" and, together with the Revolving Facility, the "Facilities"), which was fully drawn at closing. In December 2007, we
consolidated the Facilities by using a draw under the Revolving Facility to repay
the Term Facility. In response to the market wide decline in financial asset prices, which negatively affected the value of our portfolio, we terminated the revolving period of the

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Table of Contents

SARATOGA INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

February 29, 2012

Note 7. Borrowings (Continued)

Revolving
Facility effective January 14, 2009 and commenced a two-year amortization period during which all principal proceeds from the collateral was used to repay outstanding
borrowings. A significant percentage of our total assets had been pledged under the Revolving Facility to secure our obligations thereunder. Under the Revolving Facility, funds were borrowed from or
through certain lenders and interest was payable monthly at the greater of the commercial paper rate and our lender's prime rate plus 4.00% plus a default rate of 2.00% or, if the commercial paper
market was unavailable, the greater of the prevailing LIBOR rates and our lender's prime rate plus 6.00% plus a default rate of 3.00%.

In
March 2009, we amended the Revolving Facility to increase the portion of the portfolio that could be invested in "CCC" rated investments in return for an increased interest rate and
expedited amortization. As a result of these transactions, we expected to have additional cushion under our borrowing base under the Revolving Facility that would allow us to better manage our capital
in times of declining asset prices and market dislocation.

On
July 30, 2009, we exceeded the permissible borrowing limit under the Revolving Facility for 30 consecutive days, resulting in an event of default under the Revolving
Facility. As a result of this event of default, our lender had the right to accelerate repayment of the outstanding indebtedness under the Revolving Facility and to foreclose and liquidate the
collateral pledged thereunder. Acceleration of the outstanding indebtedness and/or liquidation of the collateral could have had a material adverse effect on our liquidity, financial condition and
operations.

On
July 30, 2010, we used the net proceeds from (i) the stock purchase transaction and (ii) a portion of the funds available to us under the $45.0 million
senior secured revolving credit facility (the "Replacement Facility") with Madison Capital Funding LLC, in each case, described in "Note 14. Recapitalization Transaction" below, to pay
the full amount of principal and accrued interest, including default interest, outstanding under the Revolving Facility. As a result, the Revolving Facility was terminated in connection therewith.
Substantially all of our total assets have been pledged under the Replacement Facility to secure our obligations thereunder.

On
February 24, 2012, we amended our senior secured revolving credit facility with Madison Capital Funding LLC to, among other
things:



As
of February 29, 2012, there was $20.0 million outstanding under the Replacement Facility and the Company is in compliance with all of the limitations and requirements of
the Replacement Facility. $2.3 million of financing costs related to the Replacement Facility have been capitalized and are being amortized over the term of the facility. For the years ended
February 29, 2012, February 28, 2011 and

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Table of Contents

SARATOGA INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

February 29, 2012

Note 7. Borrowings (Continued)

2010,
we recorded $0.6, $2.2 and $3.5 million of interest expense, respectively. For the years ended February 29, 2012, February 28, 2011 and 2010, we recorded $0.7, $0.4 and
$0.6 million of amortization of deferred financing costs related to the Replacement Facility and Revolving Facility, respectively. The interest rates during the years ended February 29,
2012, February 28, 2011and 2010 on the outstanding borrowings ranged from 0.75% to 7.50%, 7.50% to 9.25%, and 1.37% to 9.25% respectively.

The
Replacement Facility contains limitations as to how borrowed funds may be used, such as restrictions on industry concentrations, asset size, weighted average life, currency
denomination and collateral interests. The Replacement Facility also includes certain requirements relating to portfolio performance, the violation of which could result in the limit of further
advances and, in some cases, result in an event of default, allowing the lenders to accelerate repayment of amounts owed thereunder. The Replacement Facility has an eight year term, consisting of a
three year period (the "Revolving Period"), under which the Company may make and repay borrowings, and a final maturity five years from the end of the Revolving Period. Availability on the Replacement
Facility will be subject to a borrowing base calculation, based on, among other things, applicable advance rates (which vary from 50% to 75% of par or fair value depending on the type of loan asset)
and the value of certain "eligible" loan assets included as part of the Borrowing Base. Funds may be borrowed at the greater of the prevailing LIBOR rate and 2.00%, plus an applicable margin of 5.50%.
At the Company's option,
funds may be borrowed based on an alternative base rate, which in no event will be less than 3.00%, and the applicable margin over such alternative base rate is 4.50%. In addition, the Company will
pay the lenders a commitment fee of 0.75% per year on the unused amount of the Replacement Facility for the duration of the Revolving Period.

Our
borrowing base under the Replacement Facility was $27.9 million at February 29, 2012. For purposes of determining the borrowing base, most assets are assigned the
values set forth in our most recent quarterly report on Form 10-Q filed with the SEC. Accordingly, the February 29, 2012 borrowing base relies upon the valuations set forth
in the quarterly report on Form 10-Q for the quarter ended November 30, 2011. The valuations presented in this Annual Report on Form 10-K will not be
incorporated into the borrowing base until after this Annual Report on Form 10-K is filed with the SEC.

At
any time prior to the second anniversary of the closing of the Replacement Facility and subject to certain conditions, we may request an increase in the Replacement Facility amount of
up to $60 million for a combined aggregate Replacement Facility amount of $100 million.

Note 8. Interest Rate Cap Agreements

In April and May 2007, pursuant to the requirements of the Facilities, we, through wholly owned subsidiary, entered into interest rate cap agreements with Deutsche Bank AG with notional
amounts of $34.0 million and $60.9 million at costs of $75,000, and $44,000, respectively. In May 2007, we increased the notional amount under the $34.0 million agreement from
$34.0 million to $40.0 million for an additional cost of $12,000. The agreements expire in February 2014 and November 2013, respectively. These interest rate caps are treated as
free-standing derivatives under ASC 815 and are presented at their fair value on the consolidated statements of assets and liabilities and the changes in their fair value are included on
the consolidated statements of operations.

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Table of Contents

SARATOGA INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

February 29, 2012

Note 8. Interest Rate Cap Agreements (Continued)

The agreements provide for a payment to us in the event LIBOR exceeds 8%, mitigating our exposure to increases in LIBOR. With respect to calculating the payments under these agreements,
the notional amount is determined based on a pre-determined schedule set forth in the respective agreements which provides for a reduction in the notional amount at specified dates until
the maturity of the agreements. As of November 30, 2010, we did not receive any such payments as the LIBOR has not exceeded 8%. As of February 29, 2012, the total notional amount
outstanding for the interest rate caps was $29.9 million with an aggregate fair value of $75, which is recorded in outstanding interest cap at fair value on our consolidated statements of
assets and liabilities. For the years ended February 29, 2012, February 28, 2011 and 2010, we recorded $(16,190), $(25,884) and $2,634 of unrealized (depreciation) /appreciation,
respectively, on derivatives in our consolidated statements of operations related to the change in the fair value of the interest rate cap agreements.

The
table below summarizes our interest rate cap agreements as of February 29, 2012 (dollars in thousands):

Instrument

Type

Notional

Interest Rate

Maturity

Fair ValueInterest Rate Cap

Free Standing Derivative

$
19,592


8.0
%

Feb 2014

$
.05Interest Rate Cap

Free Standing Derivative


10,332


8.0


Nov 2013


.02Net fair value










$
.07


The
table below summarizes our interest rate cap agreements as of February 28, 2011 (dollars in thousands):

Instrument

Type

Notional

Interest Rate

Maturity

Fair ValueInterest Rate Cap

Free Standing Derivative

$
29,388


8.0
%

Feb 2014

$
12Interest Rate Cap

Free Standing Derivative


23,966


8.0


Nov 2013


4Net fair value










$
16


Note 9. Directors Fees

The independent directors receive an annual fee of $40,000. They also receive $2,500 plus reimbursement of reasonable out-of-pocket expenses incurred in
connection with attending each board meeting and receive $1,000 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each committee
meeting. In addition, the chairman of the Audit Committee receives an annual fee of $5,000 and the chairman of each other committee receives an annual fee of $2,000 for their additional services in
these capacities. In addition, we have purchased directors' and officers' liability insurance on behalf of our directors and officers. Independent directors have the option to receive their directors'
fees in the form of our common stock issued at a price per share equal to the greater of net asset value or the market price at the time of payment. No compensation is paid to directors who are
"interested persons" of the Company (as such term is defined in the 1940 Act). For the years ended February 29, 2012, February 28, 2011 and 2010, we accrued $0.2, $0.4 and
$0.3 million for directors' fees expense, respectively. As of February 29, 2012 and February 28, 2011, $49,500 and $51,000 in directors' fees expense were unpaid and included in
accounts payable and

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Table of Contents

SARATOGA INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

February 29, 2012

Note 9. Directors Fees (Continued)

accrued
expenses in the consolidated statements of assets and liabilities. As of February 29, 2012, we had not issued any common stock to our directors as compensation for their services.

Note 10. Stockholders' Equity

On May 16, 2006, GSC Group, Inc. capitalized the LLC, by contributing $1,000 in exchange for 67 shares, constituting all of the issued and outstanding shares of
the LLC.

On
March 20, 2007, the Company issued 95,995.5 and 8,136.2 shares of common stock, priced at $150.00 per share, to GSC Group and certain individual employees of GSC Group,
respectively, in exchange for the general partnership interest and a limited partnership interest in GSC Partners CDO III GP, LP, collectively valued at $15.6 million. At
this time, the 6.7 shares owned by GSC Group in the LLC were exchanged for 6.7 shares of the Company.

On
November 13, 2009, we declared a dividend of $18.25 per share payable on December 31, 2009. Shareholders had the option to receive payment of the dividend in cash,
shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all shareholders was limited to $2.1 million or $2.50 per share. Based
on shareholder elections, the dividend consisted of $2.1 million in cash and 864,872.5 of newly issued shares of common stock.

On
July 30, 2010, our Manager and its affiliates purchased 986,842 shares of common stock at $15.20 per share. Total proceeds received from this sale were $15.0 million.
See "Note 14. Recapitalization Transaction."

On
August 12, 2010, we effected a one-for-ten reverse stock split of our outstanding common stock. As a result of the reverse stock split, every ten shares
of our common stock were converted into one share of our common stock. Any fractional shares received as a result of the reverse stock split were redeemed for cash. The total cash payment in lieu of
shares was $230. Immediately after the reverse stock split, we had 2,680,842 shares of our common stock outstanding.

On
November 12, 2010, we declared a dividend of $4.40 per share payable on December 29, 2010. Shareholders had the option to receive payment of the dividend in cash, shares
of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all shareholders was limited to approximately $1.2 million or $0.44 per share.
Based on shareholder elections, the dividend consisted of approximately $1.2 million in cash and 596,235 shares of common stock.

On
November 15, 2011, we declared a dividend of $3.00 per share payable on December 30, 2011. Shareholders had the option to receive payment of the dividend in cash, shares
of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all shareholders was limited to approximately $2.0 million or $0.60 per share.
Based on shareholder elections, the dividend consisted of approximately $2.0 million in cash and 599,584 shares of common stock.

Note 11. Earnings Per Share

In accordance with the provisions of FASB ASC 260, "Earnings per Share" ("ASC 260"), basic earnings per share is computed by dividing earnings available to common shareholders by the
weighted

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Table of Contents

SARATOGA INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

February 29, 2012

Note 11. Earnings Per Share (Continued)

average
number of shares outstanding during the period. Other potentially dilutive common shares, and the related impact to earnings, are considered when calculating earnings per share on a diluted
basis.

The
following information sets forth the computation of the weighted average basic and diluted net decrease in net assets per share from operations for the years ended
February 29, 2012, February 28, 2011 and 2010 (dollars in thousands except share and per share amounts):

Basic and diluted

February 29,
2012

February 28,
2011

February 28,
2010Net increase (decrease) in net assets from operations

$
13,275

$
16,958

$
(10,463
)Weighted average common shares outstanding


3,434,345


2,437,577


1,061,351Earnings (loss) per common share-basic and diluted

$
3.87

$
6.96

$
(9.86
)


Note 12. Dividend

On November 15, 2011, we declared a dividend of $3.00 per share payable on December 30, 2011. Shareholders had the option to receive payment of the dividend in cash, shares
of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all shareholders was limited to approximately $2.0 million or $0.60 per share.

Based
on shareholder elections, the dividend consisted of approximately $2.0 million in cash and 599,584 shares of common stock, or 18% of our outstanding common stock prior to
the dividend payment. The amount of cash elected to be received was greater than the cash limit of 20.0% of the aggregate dividend amount, thus resulting in the payment of a combination of cash and
stock to shareholders who elected to receive cash. The number of shares of common stock comprising the stock portion was calculated based on a price of $13.1171 per share, which equaled the volume
weighted average trading price per share of the common stock on December 20, 21 and 22, 2011. The financial statements for the period ended November 30, 2011 have been retroactively
adjusted to reflect the increase in common stock as a result of the dividend in accordance with the provisions of ASC 505-20-S50 regarding disclosure of a capital
structure change after the interim balance sheet but before the release of the financial statements.

On
November 12, 2010, we declared a dividend of $4.40 per share payable on December 23, 2010. Shareholders had the option to receive payment of the dividend in cash, shares
of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all shareholders was limited to approximately $1.2 million or $0.44 per share.

Based
on shareholder elections, the dividend consisted of approximately $1.2 million in cash and 596,235 shares of common stock, or 22% of our outstanding common stock prior to
the dividend payment. The amount of cash elected to be received was greater than the cash limit of 10.0% of the aggregate dividend amount, thus resulting in the payment of a combination of cash and
stock to shareholders who elected to receive cash. The number of shares of common stock comprising the stock portion was calculated based on a price of $17.8049 per share, which equaled the volume
weighted average trading price per share of the common stock on December 20, 21 and 22, 2010. The financial statements for the
period ended November 30, 2010 have been retroactively adjusted to reflect the increase in common stock as a result of the dividend in accordance with the provisions of

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Table of Contents

SARATOGA INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

February 29, 2012

Note 12. Dividend (Continued)

ASC 505-20-S50
regarding disclosure of a capital structure change after the interim balance sheet but before the release of the financial statements.

The
following tables summarize dividends declared during the years ended February 29, 2012, February 28, 2011 and 2010 (dollars in thousands except per share amounts):

Date Declared

Record Date

Payment Date

Amount
Per Share*

Total
AmountNovember 15, 2011


November 25, 2011


December 30, 2011

$
3.00

$
9,831Total dividends declared







$
3.00

$
9,831




Date Declared

Record Date

Payment Date

Amount
Per Share*

Total
AmountNovember 12, 2010


November 19, 2010


December 29, 2010

$
4.40

$
11,796Total dividends declared







$
4.40

$
11,796




Date Declared

Record Date

Payment Date

Amount
Per Share*

Total
AmountNovember 13, 2009


November 25, 2009


December 31, 2009

$
18.25

$
15,132Total dividends declared







$
18.25

$
15,132


*Amount
per share is calculated based on the number of shares outstanding at the date of declaration. For 2009, the amount per share has been adjusted to
reflect a one-for-ten reverse stock split effectuated in August 2010.


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Table of Contents

SARATOGA INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

February 29, 2012

Note 13. Financial Highlights

The following is a schedule of financial highlights for the years ended February 29, 2012, February 28, 2011, 2010, 2009 and February 29, 2008:

For
2010, 2009 and 2008, the amount per share has been adjusted to reflect a one-for-ten reverse stock split effectuated in August 2010.

February 29,
2012

February 28,
2011

February 28,
2010

February 28,
2009

February 29,
2008Per share data:(7)Net asset value at beginning of period

$
26.26

$
32.75

$
82.00

$
118.00

$
140.30Net investment income(1)


1.66


2.15


5.40


16.70


13.00Net realized and unrealized gains and losses on investments and derivatives


2.21


4.81


(15.30
)

(42.40
)

(19.80
)Net increase (decrease) in net assets from operations


3.87


6.96


(9.90
)

(25.70
)

(6.80
)Distributions declared from net investment income


(3.00
)

(4.40
)

(18.25
)

(10.30
)

(13.70
)Distributions declared from net realized capital gains














(1.80
)Total distributions to stockholders


(3.00
)

(4.40
)

(18.25
)

(10.30
)

(15.50
)Other(5)


(2.01
)

(9.05
)

(21.10
)




Net asset value at end of period

$
25.12

$
26.26

$
32.75

$
82.00

$
118.00Net assets at end of period

$
97,380,150

$
86,071,454

$
55,478,152

$
68,013,777

$
97,869,040Shares outstanding at end of period


3,876,661


3,277,077


1,694,010


829,138


829,138Per share market value at end of period(7)

$
15.88

$
21.25

$
19.20

$
19.90

$
110.40Total return based on market value(2)


12.82
%

38.25
%

113.10
%

(70.33
)%

0.45
%Total return based on net asset value(3)


17.51
%

0.16
%

(11.92
)%

14.40
%

10.96
%Ratio/Supplemental data:(6)Ratio of net investment income to average, net assets(4)(6)


6.11
%

6.53
%

8.10
%

15.19
%

8.11
%Ratio of operating expenses to average net assets(4)


5.63
%

12.05
%

9.78
%

7.12
%

5.91
%Ratio of incentive management fees to average net assets


1.35
%

2.45
%

0.52
%

2.05
%

0.64
%Ratio of credit facility related expenses to average net assets


1.39
%

3.42
%

6.54
%

3.05
%

4.51
%Ratio of total expenses to average net assets(4)


8.36
%

12.02
%

16.84
%

12.23
%

11.05
%


(1)Net
investment income per share is calculated using the weighted average shares outstanding during the period. Net investment income excluding expense
waiver and reimbursement equals $2.05, $4.75, $15.46 and $10.80 per share for the years ended February 28, 2011, 2010, 2009 and February 29, 2008, respectively.(2)Total
investment return is calculated assuming a purchase of common shares at the current market value on the first day and a sale at the current market
value on the last day of the periods reported. Dividends and distributions, if any, are assumed for purposes of this calculation to be reinvested at prices obtained under the Company's dividend
reinvestment plan. Total investment return does not reflect brokerage commissions. Total investment returns covering less than a full period are not annualized.(3)Total
investment return is calculated assuming a purchase of common shares at the current net asset value on the first day and a sale at the current net
asset value on the last day of the periods reported. Dividends and distributions, if any, are assumed for purposes of this calculation to be reinvested at prices obtained under the Company's dividend
reinvestment plan. Total investment return does not reflect brokerage commissions.(4)For
the year ended February 28, 2011, net of the expense waiver and reimbursement arrangement, the ratio of net investment income, operating
expenses, total expenses to average net assets is 6.87%, 11.71%, and 11.68%, respectively. For the year ended February 28, 2010, net of the expense waiver and reimbursement arrangement, the
ratio of net investment income, operating expenses, total expenses to average net assets is 9.12%, 8.71% and 15.77%, respectively. For the year ended February 28, 2009, net of the expense
waiver and reimbursement arrangement, the ratio of net investment income, operating expenses, total expenses to average net assets is 16.21%, 5.94% and 11.04%, respectively. For the year ended
February 29, 2008, net of the expense waiver and reimbursement agreement, the ratio of net investment income, operating expenses, total expenses to average net assets is 9.63%, 4.51% and 9.45%,
respectively.


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Table of Contents

SARATOGA INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

February 29, 2012

Note 13. Financial Highlights (Continued)

(5)Represents
the dilutive effect of the common stock dividend issuance at a price below net asset value per share during the period.(6)These
ratios for the years ended February 28, 2010, 2009 and February 29, 2008 do not include the effect of the waiver of deferred incentive
fees which is (3.83)% on a non-annualized basis as this is a one time waiver.(7)February 28,
2010, 2009 and February 29, 2008 data has been adjusted to reflect a one-for-ten reverse stock split
effectuated in August 2010.


Note 14. Recapitalization Transaction

In July 2010, we consummated a recapitalization transaction that was necessitated by the fact that we had exceeded permissible borrowing limits under the Revolving Facility in July 2009,
which resulted in an event of default under the Revolving Facility. As a result of the event of default under the Revolving Facility, the lender had the right to accelerate repayment of the
outstanding indebtedness under the Revolving Facility and to foreclose and liquidate the collateral pledged thereunder. We engaged the investment banking firm of Stifel, Nicolaus & Company to
evaluate strategic transaction opportunities and consider alternatives for us in December 2008. On April 14, 2010, we entered into a stock purchase agreement with our Manager and certain of its
affiliates and an assignment, assumption and novation agreement with our Manager, pursuant to which we assumed certain rights and obligations of our Manager under a debt commitment letter our Manager
received from Madison Capital Funding LLC, indicating Madison Capital Funding's willingness to provide us with the Replacement Facility, subject to the satisfaction of certain terms and
conditions. In addition, we and GSCP (NJ), L.P., our then external investment adviser, entered into a termination and release agreement, to be effective as of the closing of the transaction
contemplated by the stock purchase agreement, pursuant to which GSCP (NJ), L.P., among other things, agreed to waive any and all accrued and unpaid deferred incentive management fees up to and
as of the closing of the transaction contemplated by the stock purchase agreement but continued to be entitled to receive the base management fees earned through the date of the closing of the
transaction contemplated by the stock purchase agreement.

On
July 30, 2010, the transactions contemplated by the stock purchase agreement with our Manager and certain of its affiliates was completed, and included the following
actions:



F-48

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Table of Contents

SARATOGA INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

February 29, 2012

Note 14. Recapitalization Transaction (Continued)



We
used the net proceeds from the private sale transaction and a portion of the funds available to us under the Replacement Facility to pay the full amount of principal and accrued
interest, including default interest, outstanding under Revolving Facility. The Revolving Facility with Deutsche Bank was terminated in connection with our payment of all amounts outstanding
thereunder on July 30, 2010.

Note 15. Selected Quarterly Data (Unaudited)

2012($ in thousands, except per share numbers)

Qtr 4

Qtr 3

Qtr 2

Qtr 1Interest and related portfolio income

$
2,947

$
3,033

$
2,887

$
2,387Net investment income


1,578


824


2,720


579Net realized and unrealized gain (loss)


1,501


5,390


(4,448
)

5,131Net increase (decrease) in net assets resulting from operations


3,081


6,213


(1,728
)

5,709Net investment income (loss) per common share at end of each quarter

$
0.79

$
1.88

$
(0.53
)
$
1.74Net realized and unrealized gain (loss) per common share at end of each quarter

$
0.37

$
1.63

$
(1.36
)
$
1.57Dividends declared per common share

$


$
3.00

$


$
Net asset value per common share

$
25.12

$
24.32

$
27.48

$
28.01




2011($ in thousands, except per share numbers)

Qtr 4

Qtr 3

Qtr 2

Qtr 1Interest and related portfolio income

$
2,624

$
4,580

$
2,566

$
2,270Net investment income


830


1,935


2,482


2Net realized and unrealized gain


3,463


1,375


4,218


2,653Net increase in net assets resulting from operations


4,294


3,310


6,700


2,655Net investment income per common share at end of each quarter

$
0.25

$
0.70

$
1.21

$
0.00Net realized and unrealized gain per common share at end of each quarter

$
1.06

$
0.50

$
2.06

$
1.57Dividends declared per common share

$


$
4.40

$


$
Net asset value per common share

$
26.26

$
24.95

$
29.71

$
34.32


F-49

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Table of Contents

SARATOGA INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

February 29, 2012

Note 15. Selected Quarterly Data (Unaudited) (Continued)



2010($ in thousands, except per share numbers)

Qtr 4

Qtr 3

Qtr 2

Qtr 1Interest and related portfolio income

$
3,637

$
3,530

$
3,685

$
4,764Net investment income


1,201


869


1,080


2,564Net realized and unrealized gain (loss)


(10,067
)

8,258


(17,168
)

2,800Net increase (decrease) in net assets resulting from operations


(8,866
)

9,128


(16,088
)

5,364Net investment income per common share at end of each quarter

$
0.70

$
1.00

$
1.30

$
3.10Net realized and unrealized gain (loss) per common share at end of each quarter

$
(5.90
)
$
9.10

$
(20.70
)
$
3.40Dividends declared per common share

$


$
18.25

$


$
Net asset value per common share

$
32.75

$
38.00

$
69.10

$
88.50


Note 16. Subsequent Events

Management has evaluated subsequent events through the date of issuance of the consolidated financial statements included herein. There have been no subsequent events that occurred
during such period that would require disclosure in this Form 10-K or would be required to be recognized in the consolidated financial statements as of and for the years ended
February 29, 2012 except for the following:

On
March 28, 2012, our wholly-owned subsidiary, Saratoga Investment Corp. SBIC, LP, received an SBIC license from the SBA. See "Item 1.
BusinessRegulationSmall Business Investment Company Regulations." The SBIC license allows us, through our wholly-owned subsidiary, to issue SBA-guaranteed
debentures. We applied for exemptive relief from the SEC to
permit us to exclude the debt of our SBIC subsidiary guaranteed by the SBA from the 200% asset coverage ratio we are required to maintain under the 1940 Act. Pursuant to the 200% asset coverage ratio
limitation, we are permitted to borrow one dollar for every dollar we have in assets less all liabilities and indebtedness not represented by debt securities issued by us or loans obtained by us.

If
we receive this exemptive relief from the SEC, we will have increased capacity to fund up to $150 million (the maximum amount of SBA-guaranteed debentures an SBIC
may currently have outstanding once certain conditions have been met) of investments with SBA-guaranteed debentures in addition to being able to fund investments with borrowings up to the
maximum amount of debt that the 200% asset coverage ratio limitation would allow us to incur.

F-50

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