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, individual investors or are family-owned businesses, with a particular focus on senior notes. In addition, we may acquire from others existing loans that meet this profile. 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. 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 July 31, 2009, the closing market price of our common stock was $10.02, which price represented a 16% discount to our June 30, 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 nine months ended June 30, 2009, we recorded net unrealized appreciation on our portfolio of investments of $194. We may see 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 will be focused primarily on 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 No. 157-3"), provides guidance on the use of a discounted cash flow ("DCF") methodology to value investments in an illiquid market. Under FSP No. 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") No. 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 nine months ended June 30, 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 marketplace. As such, we have valued the syndicated loans that were not sold subsequent to June 30, 2009 using a DCF method for the quarter ended June 30, 2009. As of June 30, 2009, the portion of our investment portfolio that was valued using DCF was approximately $12,617, or 3.8% of the fair value of our total portfolio of investments.

Investment Highlights

Purchases: During the nine months ended June 30, 2009, we extended $24,711 of investments to existing portfolio companies through revolver draws or the additions of new term notes. The most substantial investments were to United Maritime, Saunders & Associates, Lindmark, VantaCore and GFRC.

Repayments: During the nine months ended June 30, 2009, three borrowers refinanced their loans for $14,075, three borrowers made unscheduled payoffs of $8,653, one borrower made an unscheduled partial payoff of $2,500, and we experienced contractual amortization, revolver repayments and some principal payments received ahead of schedule for an aggregate of $18,191, for total principal repayments of $43,419.

Sales: During the nine months ended June 30, 2009, we sold 1 non-syndicated loan and 16 syndicated loans (which resulted in our exit from 7 portfolio companies) for an aggregate of $41,962 in net proceeds.

Since our initial public offering in August 2001, we have made 260 different loans to, or investments in, 126 companies for a total of approximately $952,013, before giving effect to principal repayments on investments and divestitures.

Financing Highlights

On May 15, 2009 we, through our wholly-owned subsidiary Gladstone Business Loan, LLC ("Business Loan"), entered into a third amended and restated credit agreement providing for a $127,000 revolving line of credit arranged by Key Equipment Finance Inc. as administrative agent, replacing Deutsche Bank, A.G. as administrative agent (the "KEF Facility"). Branch Banking and Trust Company ("BB&T") also joined the KEF Facility as a committed lender. In connection with entering into the KEF Facility, we borrowed $35,881 under the KEF Facility to make a final payment to Deutsche Bank, A.G. in satisfaction of all unpaid principal and interest owed to Deutsche Bank under the prior credit agreement. The KEF Facility may be expanded up to $200,000 through the addition of other committed lenders to the facility. Without the addition of other committed lenders, the KEF Facility provides a total commitment of $127,000 through December 31, 2009, $102,000 from January 1, 2010 to May 11, 2010, and $77,000 thereafter. The KEF Facility matures on May 14, 2010, and if the facility is not renewed or extended by this date, all principal and interest will be due and payable within one year of the maturity date on May 14, 2011. Advances under the KEF Facility will generally bear interest at the 30-day LIBOR or commercial paper rate (subject to a minimum rate of 2%), plus 4% per annum, with a commitment fee of 0.75% per annum on undrawn amounts. As of June 30, 2009, there was approximately $91,700 of borrowings outstanding on the KEF Facility at an average rate of 6.99%, and the remaining borrowing capacity under the KEF Facility was $35,300. Available borrowings are subject to various constraints imposed under the KEF Facility, based on the aggregate loan balance pledged by Business Loan. Interest is payable monthly during the term of the KEF Facility. After May 14, 2010, if the KEF Facility is not renewed, all principal collections from our loans are required to be used to pay outstanding principal on the KEF Facility.

During the three months ended June 30, 2009, we elected to apply SFAS No. 159, The Fair Value Option for Financial Assets and Liabilities, specifically for our KEF Facility, which requires us to apply a fair value methodology to the KEF Facility as of June 30, 2009, which is the period that this liability became eligible under SFAS No. 159. Due to the nature of the KEF Facility being a short-term agreement and the fact that interest is based on a variable interest rate, the KEF Facility was fair valued at its approximate cost basis as of June 30, 2009.

RESULTS OF OPERATIONS

Comparison of the Three Months Ended June 30, 2009 to the Three Months Ended June 30, 2008

Investment Income

Investment income for the three months ended June 30, 2009 was $10,598, as compared to $11,420 for the three months ended June 30, 2008.

Interest income from our aggregate investment portfolio was $10,480 for the three months ended June 30, 2009, as compared to $11,236 for the three months ended June 30, 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 $756, or 6.7%, during the three months ended June 30, 2009 compared to the prior year period. This decrease was based on the overall reduction in the cost basis of our investments, resulting primarily from the sale of 15 syndicated loans and one-non syndicated loan during the quarter, partially

offset by a slight increase in the weighted average yield on our portfolio. The annualized weighted average yield on our portfolio was 10.4% for the three months ended June 30, 2009 as compared to 10.1% for the prior year period. During the three months ended June 30, 2009, three investments, for an aggregate of approximately $10,659 at cost, or 2.8% of the aggregate cost of our investment portfolio, were on non-accrual and during the prior year period, three investments, for an aggregate of approximately $8,424 at cost, or 1.9% of the aggregate cost of our investment portfolio, were on non-accrual.

Interest income from Non-Control/Non-Affiliate investments was $9,726 for the three months ended June 30, 2009, as compared to $11,220 for the comparable prior year period. This decrease resulted from an overall decrease in the aggregate Non-Control/Non-Affiliate investments held at June 30, 2009 compared to the prior year period. The success fees earned during the three months ended June 30, 2009 and 2008, included in interest income, were $123 and $0, respectively. Success fees earned during the three months ended June 30, 2009 resulted from a refinancing by ActivStyle.

Interest income from Control investments was $754 for the three months ended June 30, 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 June 30, 2009, which were converted from Non-Control/Non-Affiliate investments, 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 June 30, 2009

                        Interest    % of
Company                  Income     Total
Sunshine Media          $     839     8.0 %
Reliable Biopharma            768     7.3 %
Westlake Hardware             600     5.7 %
Clinton Aluminum              470     4.5 %
VantaCore                     418     4.0 %
Subtotal                    3,095    29.5 %
Other companies             7,385    70.5 %
Total interest income   $  10,480   100.0 %

Three months ended June 30, 2008

                        Interest    % of
Company                  Income     Total
Reliable Biopharma      $     758     6.7 %
Sunshine Media                693     6.2 %
Defiance Acquisition          674     6.0 %
Westlake Hardware             521     4.6 %
Clinton Aluminum              470     4.2 %
Subtotal                $   3,116    27.7 %
Other companies             8,120    72.3 %
Total interest income   $  11,236   100.0 %

Interest income from invested cash for the three months ended June 30, 2009 was nominal, as compared to $38 for the three months ended June 30, 2008. Interest income decreased from the prior year due to the amount of cash that was held in interest bearing accounts and the interest earned on our custodial account prior to disbursement.

Interest income from loans to our employees, in connection with the exercise of employee stock options, for the three months ended June 30, 2009 and June 30, 2008, was $118.

Prepayment fees and other income for the three months ended June 30, 2009 was $0 compared to $28 for the three months ended June 30, 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 $5,163 for the three months ended June 30, 2009, as compared to $4,723 for the three months ended June 30, 2008. Operating expenses for the three months ended June 30, 2009 reflected an increase in amortization of deferred financing fees incurred in connection with the previous revolving credit facility with Deutsche Bank AG (the "DB Facility") and the new KEF Facility.

Interest expense for the three months ended June 30, 2009 was $1,811, as compared to $1,771 for the three months ended June 30, 2008. This increase is primarily a result of higher weighted average annual interest cost, which is determined by using the annual stated interest rate plus commitment and other fees, plus the amortization of deferred financing fees divided by the weighted average debt outstanding.

Loan servicing fees for the three months ended June 30, 2009 were $1,410, as compared to $1,598 for the three months ended June 30, 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 June 30, 2009 was $457, as compared to $529 for the three months ended June 30, 2008. The base management fee is computed quarterly as described under "Investment Advisory and Management Agreement" in Note 4 of the notes to the consolidated financial statements in our Annual Report on Form 10-K as filed on December 2, 2008, and is summarized in the table below:

                                                                   Three months ended
                                                            June 30, 2009      June 30, 2008
Base management fee (1)                                    $           457    $           529
Credit for fees received by Adviser from the portfolio
companies                                                               (2 )             (348 )
Fee reduction for the voluntary, irrevocable waiver of
2.0% fee on senior syndicated loans to 0.5% per annum
(2)                                                                    (51 )              (97 )
Net base management fee                                    $           404    $            84

(2) The board of our Adviser voluntarily and irrevocably waived, for the three months ended June 30, 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 June 30, 2009 was $1,060, as compared to $1,340 for the three months ended June 30, 2008. The board of our Adviser waived the entire incentive fee for the three months ended June 30, 2009 and 2008. The incentive fee and associated credits are summarized in the table below:

                                                                   Three months ended
                                                            June 30, 2009      June 30, 2008
Incentive fee                                              $         1,060    $         1,340
Credit from voluntary, irrevocable waiver issued by
Adviser's board of directors                                        (1,060 )           (1,340 )
Net incentive fee                                          $             -    $             -

Administration fee for the three months ended June 30, 2009 was $218 as compared to $285 for the three months ended June 30, 2008. The decrease in the current year period is due to a decrease of administration staff and related expenses, as well as a decrease in our total assets in comparison to the total assets of all companies managed by our Adviser under similar agreements. The calculation of the administrative fee is described in detail above under "Investment Advisory and Management Agreement"in Note 4 of the notes to the consolidated financial statements in our Annual Report on Form 10-K as filed on December 2, 2008.

Other operating expenses (including professional fees, deferred financing fees, stockholder related costs, director's fees, insurance and other direct expenses) increased over the prior year period driven by amortization of additional fees incurred with amending our previous Deutsche Bank facility and entering into the new KEF Facility and legal fees incurred in connection with troubled loans in the current period.

Net Realized Loss on Investments

During the three months ended June 30, 2009, we realized a net loss of $10,594, as compared to a net loss of $86 for the three months ended June 30, 2008. The loss in the current period resulted from the sale of 15 syndicated loans and one non-syndicated loan.

Realized (Loss) Gain on Settlement of Derivative

During the three months ended June 30, 2009, we did not realize a gain or loss on settlement of derivative as the interest rate cap expired in February 2009 and we therefore did not receive any interest rate cap agreement payments during that period. During the three months ended June 30, 2008, we received a nominal interest rate cap agreement payments as a result of the one-month LIBOR having a downward trend. We received payments when the one-month LIBOR was 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 June 30, 2009, we did not record unrealized appreciation on derivative as the interest rate cap expired in February 2009. For the three months ended June 30, 2008, we recorded a nominal unrealized depreciation due to a decrease in the fair market value of our interest rate cap agreement.

Net Unrealized Appreciation (Depreciation) on Investments

Net unrealized appreciation (depreciation) on investments is the net change in the fair value of our investment portfolio 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 June 30, 2009, we recorded net unrealized appreciation on investments of $4,371, as compared to unrealized depreciation of ($3,802) for the prior year period. The unrealized appreciation in the current period is mainly attributable to the following:

†    Control investments                                                $   (2,703 )
†    Non-Control/Non-Affiliate investments                                  (2,067 )
     Reversal of previously unrealized depreciation upon realization
†    of losses                                                               9,141
     Total                                                              $    4,371

Net (Decrease) Increase in Net Assets Resulting from Operations

Overall, we realized a net decrease in net assets resulting from operations of . . .