All statements contained herein, other than historical facts, may constitute "forward-looking statements." These statements may relate to, among other things, future events or our future performance or financial condition. In some cases, you can identify forward-looking statements by terminology such as "may," "might," "believe," "will," "provided," "anticipate," "future," "could," "growth," "plan," "intend," "expect," "should," "would," "if," "seek," "possible," "potential," "likely" or the negative of such terms or comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. We caution readers not to place undue reliance on any such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Form 10-Q.

The following analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the notes thereto contained elsewhere in this report and our annual report on Form 10-K for the fiscal year ended September 30, 2008.

OVERVIEW

General

We were incorporated under the General Corporation Laws of the State of Maryland on May 30, 2001. Our investment objectives are to achieve a high level of current income by investing in debt securities, consisting primarily of senior notes, senior subordinated notes and junior subordinated notes, of established private businesses that are substantially owned by leveraged buyout funds, venture capital funds, individual investors or are family-owned businesses, with a particular focus on senior notes. In addition, we may acquire existing loans that meet this profile from leveraged buyout funds, venture capital funds and others. We also seek to provide our stockholders with long-term capital growth through the appreciation in the value of warrants or other equity instruments that we may receive when we make loans. We operate as a closed-end, non-diversified management investment company, and have elected to be treated as a business development company under the Investment Company Act of 1940 (the "1940 Act"). In addition, for tax purposes we have elected to be treated as a regulated investment company ("RIC") under the Internal Revenue Code of 1986, as amended (the "Code").

We seek out small and medium-sized private U.S. businesses that meet certain criteria, including some but not all of the following: the potential for growth in cash flow, adequate assets for loan collateral, experienced management teams with a significant ownership interest in the borrower, profitable operations based on the borrower's cash flow, reasonable capitalization of the borrower (usually by leveraged buyout funds or venture capital funds) and the potential to realize appreciation and gain liquidity in our equity position, if any. We anticipate that liquidity in our equity position will be achieved through a merger or acquisition of the borrower, a public offering of the borrower's stock or by exercising our right to require the borrower to repurchase our warrants, though there can be no assurance that we will always have these rights. We lend to borrowers that need funds to finance growth, restructure their balance sheets or effect a change of control.

Business Environment

The current economic conditions generally and the disruptions in the capital markets in particular have decreased liquidity and increased our cost of debt and equity capital, where available. The longer these conditions persist, the greater the probability that these factors could continue to increase our cost and significantly limit our access to debt and equity capital, and thus have an adverse effect on our operations and financial results. Many of the companies in which we have made or will make investments may also be susceptible to the economic downturn, which may affect the ability of one or more of our portfolio companies to repay our loans or engage in a liquidity event, such as a sale, recapitalization or initial public offering. An economic downturn could also disproportionately impact some of the industries in which we invest, causing us to be more vulnerable to losses in our portfolio. Therefore, the number of our non-performing assets are likely to increase and the fair market value of our portfolio is likely to decrease during these periods. The economic downturn has affected the availability of credit generally and may prevent us from replacing or renewing our credit facility on reasonable terms, if at all. Effective April 14, 2009, we exercised our right to reduce the amount available under the DB Facility from $300 million to $162 million, which was part of our process of attempting to secure new financing. In addition, we entered into agreements to sell 13 of the 24 syndicated loans that were held in our portfolio of investments at March 31, 2009 to various investors in the syndicated loan market. The loans had an aggregate cost value of approximately $30.4 million, or 7% of the cost value of our total investments, and an aggregate fair market value of approximately $22.5 million, or 6% of the fair market value of our total investments, at March 31, 2009. As of May 5, 2009, we closed the sales of all

of these loans for an aggregate of $22.5 million in net proceeds. The Company used the proceeds of these sales and of the refinancings of certain proprietary investments to pay down the DB Facility. We do not know when market conditions will stabilize, if adverse conditions will intensify or the full extent to which the disruptions will affect us. If market instability persists or intensifies, we may experience difficulty in raising capital.

Challenges in the current market are intensified for us by certain regulatory limitations under the Code and the 1940 Act, as well as contractual restrictions under the agreement governing our credit facility that further constrain our ability to access the capital markets. To maintain our qualification as a RIC, we must satisfy, among other requirements, an annual distribution requirement to pay out at least 90% of our ordinary income and short-term capital gains to our stockholders on an annual basis. Because we are required to distribute our income in this manner, and because the illiquidity of many of our investments makes it difficult for us to finance new investments through the sale of current investments, our ability to make new investments is highly dependent upon external financing. Our external financing sources include the issuance of equity securities, debt securities or other leverage such as borrowings under our line of credit. Our ability to seek external debt financing, to the extent that it is available under current market conditions, is further subject to the asset coverage limitations of the 1940 Act, which require us to have at least a 200% asset coverage ratio, meaning generally that for every dollar of debt, we must have two dollars of assets.

Recent market conditions have also affected the trading price of our common stock and thus our ability to finance new investments through the issuance of equity. On April 17, 2009, the closing market price of our common stock was $6.23, which price represented a 49% discount to our March 31, 2009 net asset value ("NAV") per share. When our stock is trading below NAV, as it has consistently traded subsequent to September 30, 2008, our ability to issue equity is constrained by provisions of the 1940 Act which generally prohibit the issuance and sale of our common stock below NAV per share without stockholder approval other than through sales to our then-existing stockholders pursuant to a rights offering. At our annual meeting of stockholders held on February 19, 2009, stockholders approved a proposal which authorizes us to sell shares of our common stock at a price below our then current NAV per share for a period of one year from the date of approval, provided that our Board of Directors makes certain determinations prior to any such sale.

The economic downturn may also continue to decrease the value of collateral securing some of our loans, as well as the value of our equity investments, which has impacted and may continue to impact our ability to borrow under our credit facility. For the six months ended March 31, 2009, we recorded net unrealized depreciation on our portfolio of investments of $6.5 million, which was mainly attributable to the decrease in fair value of our portfolio. We may see further decreases in the value of our portfolio, which will further limit our ability to borrow under our current credit facility. Additionally, our credit facility contains covenants regarding the maintenance of certain minimum net worth requirements which are affected by the decrease in value of our portfolio. Failure to meet these requirements would result in a default which, if we are unable to obtain a waiver from our lenders, would result in the acceleration of our repayment obligations under the credit facility.

We expect that, given these regulatory and contractual constraints in combination with current market conditions, debt and equity capital may be costly or difficult for us to access for some time. For so long as this is the case, our near-term strategy has become somewhat dependent upon retaining capital and building the value of our existing portfolio companies to increase the likelihood of maintaining potential future returns. We will also, where prudent and possible, consider the sale of lower-yielding investments. This has resulted, and may continue to result, in significantly reduced investment activity, as our ability to make new investments under these conditions is largely dependent on availability of proceeds from the sale or exit of existing portfolio investments, which events may be beyond our control. As capital constraints improve, we intend to continue our strategy of making conservative investments in businesses that we believe will weather the current economy and that are likely to produce attractive long-term returns for our stockholders.

Use of Internally-Developed Discount Cash Flow Methodologies

Given the continued economic downturn, the market for syndicated loans has become increasingly illiquid with limited or no transactions for many of those securities which we hold. The Financial Accounting Standards Board ("FASB") Staff Position 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active("FSP 157-3"), provides guidance on the use of a discounted cash flow ("DCF") methodology to value investments in an illiquid market. Under FSP 157-3, indications of an illiquid market include cases where the volume and level of trading activity in the asset have declined significantly, the available prices vary significantly over time or amongst market participants, or the prices are not current. The marketplace for which we obtain indicative bids for purposes of determining fair value for our syndicated loan investments have recently shown these attributes of illiquidity. In accordance with Statement of Financial Accounting Standards ("SFAS") 157, our valuation procedures specify the use of third-party indicative bid quotes for valuing syndicated loans where there is a liquid public market for those loans and market pricing quotes are readily available. However, due to the market illiquidity and the lack of transactions during the six months ended March 31, 2009, we determined that the current agent bank non-binding indicative bids for the majority of our syndicated loans were unreliable and alternative procedures would need to be performed until liquidity returns to the market place. As such, we have valued

the syndicated loans that were not sold subsequent to March 31, 2009 using a DCF method for the quarter ended March 31, 2009. As of March 31, 2009, the portion of our investment portfolio that was valued using DCF was approximately $33.7 million, or 8.8% of the fair value of our total portfolio of investments.

Investment Highlights

During the six months ended March 31, 2009, we extended $17.1 million of investments to existing portfolio companies through revolver draws or the additions of new term notes. During the six months ended March 31, 2009, 2 borrowers refinanced their loans for $7.8 million, 2 borrowers made unscheduled payoffs of $7.0 million, and we experienced contractual amortization, revolver repayments and some principal payments received ahead of schedule of $13.2 million, for total principal repayments of $28.0 million. Since our initial public offering in August 2001, we have made 258 different loans to, or investments in, 126 companies for a total of approximately $948.4 million, before giving effect to principal repayments on investments and divestitures.

RESULTS OF OPERATIONS (dollar amounts in thousands, unless otherwise indicated)

Comparison of the Three Months Ended March 31, 2009 to the Three Months Ended March 31, 2008

Investment Income

Investment income for the three months ended March 31, 2009 was $10,929, as compared to $11,350 for the three months ended March 31, 2008.

Interest income from our investments in debt securities of private companies was $10,811 for the three months ended March 31, 2009, as compared to $11,124 for the three months ended March 31, 2008. The level of interest income from investments is directly related to the balance, at cost, of the interest-bearing investment portfolio outstanding during the period multiplied by the weighted average yield. The weighted average yield varies from period to period based on the current stated interest rate on interest-bearing investments and the amounts of loans for which interest is not accruing. Interest income from our investments decreased $313, or 2.8%, during the three months ended March 31, 2009 compared to the prior year period. This decrease was based on the overall reduction in the cost basis of our investments as well as the decrease in the weighted average yield on our portfolio. The annualized weighted average yield on our portfolio was 9.7% for the three months ended March 31, 2009 as compared to 10.1% for the three months ended March 31, 2008. The decrease in the annualized weighted average yield primarily resulted from a reduction in the average LIBOR from the prior year, as well as three investments being on non-accrual during the three months ended March 31, 2009 (Badanco, CCS and U.S. Healthcare) whereas only two investments were on non-accrual during the three months ended March 31, 2008 (LYP Holdings and Western Directories).

Interest income from Non-Control/Non-Affiliate investments was $10,329 for the three months ended March 31, 2009, as compared to $11,108 for the comparable prior year period. This decrease resulted from an overall decrease in the aggregate Non-Control/Non-Affiliate investments held at March 31, 2009 compared to the prior year period, as well as a decrease in LIBOR due to the instability and tightening of the credit markets. The success fees earned during the three months ended March 31, 2009 and 2008 were $21 and $0, respectively. Success fees earned during the three months ended March 31, 2009 resulted from a refinancing by It's Just Lunch.

Interest income from Control investments was $482 for the three months ended March 31, 2009, as compared to $16 in the comparable prior year period. The increase is attributable to three additional Control investments held during the quarter ended March 31, 2009 (Lindmark, LYP Holdings and Western Directories) as compared to the prior year period.

The following table lists the interest income from investments for the five largest portfolio companies during the respective periods:

Three months ended March 31, 2009

                        Interest    % of
Company                  Income     Total
Sunshine Media          $     824     7.6 %
Reliable Biopharma            757     7.0 %
Westlake Hardware             597     5.5 %
Clinton Aluminum              465     4.3 %
Vanta Core                    416     3.8 %
Subtotal                $   3,059    28.3 %
Other companies             7,752    71.7 %
Total interest income   $  10,811   100.0 %

Three months ended March 31, 2008

                        Interest    % of
Company                  Income     Total
Reliable Biopharma      $     749     6.7 %
Westlake Hardware             703     6.3 %
Sunshine Media                693     6.2 %
Clinton Aluminum              470     4.2 %
GFRC Cladding                 407     3.7 %
Subtotal                $   3,022    27.1 %
Other companies             8,102    72.9 %
Total interest income   $  11,124   100.0 %

Interest income from invested cash for the three months ended March 31, 2009 was $1, as compared to $103 for the three months ended March 31, 2008. Interest income came from the following sources:

                                                                    Three months ended
                                                            March 31, 2009        March 31, 2008
Interest earned on Gladstone Capital account (1)          $                -     $              7
Interest earned on Business Loan custodial account (2)                     1                   72
Interest earned on Gladstone Financial account (3)                         -                   24
Total interest income from invested cash                  $                1     $            103

Interest income from loans to our employees, in connection with the exercise of employee stock options, for the three months ended March 31, 2009 and March 31, 2008, was $117 and $118, respectively.

Prepayment fees and other income for the three months ended March 31, 2009 was $0 compared to $5 for the three months ended March 31, 2008. The income for the prior period consisted of prepayment penalty fees received upon the full repayment of certain loan investments ahead of contractual maturity.

Operating Expenses

Operating expenses, net of credits from the Adviser for fees earned and voluntary and irrevocable waivers to the base management and incentive fees, were $5,374 for the three months ended March 31, 2009, as compared to $4,908 for the three months ended March 31, 2008. Operating expenses for the three months ended March 31, 2009 reflected a significant increase in amortization of deferred financing fees incurred in connection with certain amendments to the DB Facility.

Interest expense for the three months ended March 31, 2009 was $2,016, as compared to $1,855 for the three months ended March 31, 2008. This increase is primarily a result of increased borrowings under our line of credit during the three months ended March 31, 2009, which borrowings were partially used to finance our increased investments.

Loan servicing fees for the three months ended March 31, 2009 were $1,526, as compared to $1,562 for the three months ended March 31, 2008. These fees were incurred in connection with a loan servicing agreement between Business Loan and our Adviser, which is based on the size of the portfolio.

Base management fee for the three months ended March 31, 2009 was $484, as compared to $557 for the three months ended March 31, 2008. The base management fee is computed quarterly as described under "Investment Advisory and Management Agreement" in Note 4 of the condensed consolidated financial statements, and is summarized in the table below:

                                                                    Three months ended
                                                            March 31, 2009      March 31, 2008
Base management fee (1)                                    $            484    $            557
Credit for fees received by Adviser from the portfolio
companies                                                               (80 )              (150 )
Fee reduction for the voluntary, irrevocable waiver of
2% fee on senior syndicated loans to 0.5% per annum (2)                 (97 )               (99 )
Net base management fee                                    $            307    $            308

(2) The board of our Adviser voluntarily and irrevocably waived, for the three months ended March 31, 2009 and 2008, the annual 2.0% base management fee to 0.5% for senior syndicated loan participations.

Incentive fee for the three months ended March 31, 2009 was $1,089, as compared to $1,288 for the three months ended March 31, 2008. The board of our Adviser waived the entire incentive fee for the three months ended March 31, 2009 and three months ended March 31, 2008. The incentive fee and associated credits are summarized in the table below:

                                                                   Three months ended
                                                            March 31, 2009     March 31, 2008
Incentive fee                                              $          1,089    $         1,288
Credit from voluntary, irrevocable waiver issued by
Adviser's board of directors                                         (1,089 )           (1,288 )
Net incentive fee                                          $              -    $             -

Administration fee for the three months ended March 31, 2009 was $211 as compared to $240 for the three months ended March 31, 2008. The slight decrease is due to a decrease of administration staff and related expenses.

Professional fees, consisting primarily of legal and audit fees, for the three months ended March 31, 2009 were $205, as compared to $410 for the three months ended March 31, 2008. The decrease is due to legal fees incurred in connection with troubled loans in the prior period.

Amortization of deferred financing fees, in connection with our line of credit, was $726 for the three months ended March 31, 2009, as compared to $184 for the three months ended March 31, 2008. The increase is due to the amortization of additional fees incurred with our line of credit. In February 2008, we increased the DB Facility from $220 million to $250 million, and in April 2008, we increased the DB Facility to $300 million and added BB&T as a committed lender. In June 2008, we renewed the DB Facility. The fees incurred for the above amendments are recorded in deferred financing fees on our consolidated statement of assets and liabilities, and amortized over the life of the DB Facility.

Stockholder related costs for the three months ended March 31, 2009 were $196, as compared to $138 for the three months ended March 31, 2008. Stockholder related costs include such recurring items as transfer agent fees, NASDAQ listing fees, costs associated with the Securities and Exchange Commission (the "SEC") filings, and the annual report printing and distribution costs. The increase was primarily attributed to higher proxy solicitation fees. At our annual meeting of stockholders held on February 19, 2009, stockholders approved a proposal which authorizes us to sell shares of our common stock at a price below our then current NAV per share for a period of one year from the date of approval, provided that our Board of Directors makes certain determinations prior to any such sale.

Directors' fees for the three months ended March 31, 2009 and 2008 were $48 and $57, respectively, and consisted of amortization of their annual stipend and individual meeting fees. The decrease was due to fewer committee meetings held in the current year period.

Insurance expense for the three months ended March 31, 2009 was $65, as compared to $59 for the three months ended March 31, 2008. The increase was primarily the result of an increase of our directors and officers insurance policy premiums.

Other expenses for the three months ended March 31, 2009 were $74, as compared to $95 for the three months ended March 31, 2008. The expenses primarily represent direct expenses such as travel related specifically to our portfolio companies, loan evaluation services for our portfolio companies, press releases and backup servicer expenses.

Net Realized Loss on Investments

During the three months ended March 31, 2009, we realized a net loss of $2,000 from writing off the remaining balance of the Greatwide second lien syndicated loan. The original loan was for $4,000 and the first $2,000 was sold in August 2008, while the remaining $2,000 was written off in the March 2009 quarter. There were no realized gains or losses in the three months ended March 31, 2008.

Realized (Loss) Gain on Settlement of Derivative

During the three months ended March 31, 2009, we realized a loss of $304 due to the expiration of the interest rate cap in February 2009. We did not receive any interest rate cap agreement payments during that period. During the three months ended March 31, 2008, we received interest rate cap agreement payments of $1 as a result of the one month LIBOR having a downward trend. We receive payments when the one month LIBOR is over 5%.

Net Unrealized Appreciation (Depreciation) on Derivative

Net unrealized appreciation (depreciation) on derivative is the net change in the fair value of our interest rate cap during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains and losses are realized. For the three months ended March 31, 2009, we recorded unrealized appreciation on derivative of $304, which resulted from the reversal of previously recorded unrealized depreciation when the loss was realized during the March 2009 quarter (see discussion above). For the three . . .