• Our future operating results and business prospects if the proposed merger is not completed;

• Our ability to negotiate an arrangement with the lenders of our Amended Securitization Facility for repayment terms that do not require us to use all principal and interest collected from the debt investments secured by the facility to pay down amounts outstanding thereunder;

• Our ability to negotiate other financing and/or strategic alternatives, including possible debt or equity financing, acquisition or disposition of assets, and other strategic transactions;

• Our ability to maintain our status as a RIC under the Code;

• Our ability to continue as a going concern;

• Our future operating results;

• Our business prospects and the prospects of our portfolio companies;

• The ability of our portfolio companies to achieve their objectives;

• Our expected financings and investments;

• Future changes in laws or regulations (including the interpretation of these laws and regulations by regulatory authorities) and conditions in our operating areas, particularly with respect to business development companies and RIC's;

• The adequacy of our cash resources and working capital; and

• The timing of cash flows, if any, from the operations of our portfolio companies.

In addition, words such as "anticipate," "believe," "expect" and "intend" indicate a forward-looking statement, although not all forward-looking statements include these words. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth in "Risk Factors" in this quarterly report on Form 10-Q, our quarterly report on Form 10-Q for the quarter ended March 31, 2009 and in our 2008 annual report on Form 10-K.
We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report on Form 10-Q, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make through reports that we may file in the future with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

In light of the unprecedented instability in the financial markets and the severe slowdown in the overall economy, we do not have adequate liquidity, including access to the debt and equity capital markets, to operate our business in the manner in which we have historically operated. As a result, our short-term business focus has shifted from making debt and equity investments to preserving our liquidity position. In this regard, on April 3, 2009, a termination event occurred under the Amended Securitization Facility due to the amount of our advances outstanding under the facility exceeding the maximum availability under the facility for more than three consecutive business days. The maximum availability under the facility is determined by, among other things, the fair market value of all eligible loans serving as collateral under the facility. Because the fair market value of certain eligible loans decreased at December 31, 2008, our advances outstanding under the facility exceeded the maximum availability under the facility. This determination was made in connection with the delivery of a borrowing base report to the facility lenders on March 31, 2009. As a result of the occurrence of the termination event under the facility, we can no longer make additional advances under the facility. Also, the interest rate payable under the Amended Securitization Facility increased from the commercial paper rate plus 1.75% to the prime rate plus 3.75%. In addition, the terms of the facility require that from April 3, 2009 all principal, interest and fees collected from the debt investments secured by the facility must be used to pay down amounts outstanding under the facility within 24 months following the date of the termination event. Substantially all of our debt investments are secured under our Amended Securitization Facility. The facility also permits the lenders, upon notice to us, to accelerate amounts outstanding under the facility and exercise other rights and remedies provided by the facility, including the right to sell the collateral under the facility. To date, we have not received any such notice from the lenders. At September 30, 2009, the interest rate under the Amended Securitization Facility was 7.0%.
Moreover, our independent registered public accounting firm issued an opinion on our December 31, 2008 consolidated financial statements that states that the consolidated financial statements were prepared assuming we will continue as a going concern and further states that the uncertainty regarding the renewal of our liquidity facility raises substantial doubt about our ability to continue as a going concern. At the time our independent registered public accounting firm issued this opinion, we were negotiating the renewal of the liquidity facility, which matured on April 11, 2009, that supported our Amended Securitization Facility with certain liquidity banks. In the event that the liquidity banks did not renew the liquidity facility, the terms of the Amended Securitization Facility would require, among other things, that all principal and interest collected from the debt investments secured by the facility be used to pay down amounts outstanding under the facility by April 2011. Subsequent to the issuance of this opinion by our independent registered public accounting firm, the liquidity banks determined not to renew the liquidity facility supporting our Amended Securitization Facility.
On August 3, 2009, we and Prospect Capital Corporation entered into an Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which we will merge with and into Prospect Capital, with Prospect Capital continuing as the surviving company (the "Merger"). Subject to the terms and conditions of the Merger Agreement, if the Merger is completed, each issued and outstanding share of our common stock will be converted into 0.3992 shares of Prospect Capital's common stock and any fractional shares resulting from the application of the exchange ratio will be paid in cash. The exchange ratio will be adjusted for any dividend we may declare prior to the closing of the Merger. If not exercised prior to completion of the Merger, outstanding stock options will vest and be cancelled in exchange for the payment in cash to the holder of these stock options of $0.01 per share of our common stock into which these options are exercisable. Further, in connection with the Merger, each share of our restricted stock then outstanding will vest and all restrictions with respect to such shares of restricted stock will lapse. In addition, (a) a number of shares of each holder of restricted stock will be cancelled in exchange for the cash value per share of Prospect Capital's common stock into which it is convertible at the time of the consummation of the Merger in an amount estimated to be sufficient to pay applicable taxes in connection with the vesting of such shares and (b) the remaining number of shares of restricted stock will be converted in the Merger into shares of Prospect Capital's common stock on the same terms as all other shares of our common stock. In connection with the completion of the Merger, Prospect Capital will pay off the outstanding principal and accrued interest and up to $1.35 million of related fees and expenses due under the Amended Securitization Facility. As of September 30, 2009, there was approximately $112.7 million outstanding under the Amended Securitization Facility. Further, as a condition to Prospect Capital agreeing to execute the Merger Agreement, we agreed to reverse, immediately prior to the Merger, the $11.8 million federal income tax ordinary loss deduction that we previously disclosed we would incur with respect to our investments in L.A. Spas, Inc. As a result, we estimate that distributable income for RIC purposes at September 30, 2009 would have been $9.4 million. If the Merger is approved by the Company's shareholders, immediately prior to the Merger, the Company will pay a final dividend in an amount equal to all of its undistributed net ordinary income and capital gains through the closing date of the Merger. It is currently estimated that the amount of the final dividend will be $0.38 per share assuming that the merger closes on December 2, 2009. The actual amount of the final dividend may be more or less than the estimated amount and will be determined immediately prior to the closing of the merger. In accordance with a recent IRS revenue procedure, the dividend will be payable up to 10% in cash and at least 90% in newly issued shares of the Company's common stock.
The Merger Agreement also contains certain termination rights for us and Prospect Capital, as the case may be, including: if the Merger has not been completed by December 15, 2009; if there is a breach by the other party that is not or cannot be cured within 30 days' notice of such breach and such breach would result in a failure of the conditions to closing set forth in the Merger Agreement; if our Board of Directors fails to recommend the Merger to our stockholders; if we breach our obligations in any material respect regarding any alternative business combination proposals; or if our stockholders have voted to not approve the Merger. In addition, the Merger Agreement provides that, in connection with the termination of the Merger Agreement under specified circumstances, we

may be required to pay Prospect Capital a termination fee equal to $3.2 million and/or $250,000 to reimburse certain expenses and make certain other payments.
On October 26, 2009, we filed a definitive proxy statement calling for a special meeting of shareholders to be held on November 18, 2009 to vote on the proposed merger with Prospect Capital. Our shareholders at the close of business on October 21, 2009 will be eligible to vote at the special meeting on the proposed merger. Consummation of the Merger is expected occur shortly after shareholder approval, if obtained, and is subject to certain additional conditions including, among others, the accuracy of the representations and warranties of each party and compliance by each party with its obligations under the Merger Agreement.

                                                                   September 30, 2009          December 31, 2008

Beginning portfolio at fair value                                 $        322,370,748        $       384,725,753
Investments in debt securities                                              10,273,276                 79,096,786
Investments in equity securities                                                   188                  3,245,937
Investment repayments                                                      (41,222,305 )              (95,018,988 )
Increase in payment-in-kind interest/dividends                               3,459,359                  5,452,124
Sale of investments                                                         (4,552,011 )              (15,267,401 )
Change in unearned revenue                                                     760,464                    129,458
Realized loss on investments                                               (29,574,549 )                        -
Change in fair value of investments                                         (4,082,847 )              (39,992,921 )

Ending portfolio at fair value                                    $        257,432,323        $       322,370,748

As of September 30, 2009 and December 31, 2008, the composition of our portfolio at fair value was as follows:

                                                         September 30, 2009                              December 31, 2008
                                               Investments at          Percentage of           Investments at          Percentage of
                                                 Fair Value           Total Portfolio            Fair Value           Total Portfolio

Senior secured revolving lines of credit      $     13,263,235                     5.1 %      $     10,266,191                     3.2 %
Senior secured term loans                          112,631,833                    43.8             146,372,476                    45.4
Junior secured term loans                           46,846,973                    18.2              58,076,196                    18.0
Senior subordinated debt                            75,300,016                    29.3              93,365,112                    29.0
Investments in equity securities                     9,390,266                     3.6              14,290,773                     4.4


Totals                                        $    257,432,323                   100.0 %      $    322,370,748                   100.0 %

For the nine months ended September 30, 2009 and the year ended December 31, 2008, the weighted average yield on all of our outstanding debt investments was approximately 11.1% and 12.1%, respectively. The weighted average balance of our debt investment portfolio during the nine months ended September 30, 2009 was $287.8 million, down from $333.2 million during the

fourth quarter of 2008. Yields are computed using actual interest income earned for the year (annualized for the nine months ended September 30, 2009), including amortization of loan fees and original issue discount, divided by the weighted average fair value of debt investments. As of September 30, 2009 and December 31, 2008, $99.4 million and $123.5 million, respectively, of our portfolio investments at fair value were at fixed interest rates, which represented approximately 39% and 38%, respectively, of our total portfolio of investments at fair value. We generally structure our subordinated debt investments at fixed rates while many of our senior secured and junior secured loans are at variable rates.
At September 30, 2009 and December 31, 2008, our equity investments consisted of common and preferred stock, LLC membership interests and warrants to acquire equity interests in certain of our portfolio companies. Warrants to acquire equity interests allow us to participate in the potential appreciation in the value of the portfolio company, while minimizing the amount of upfront cost to us.
The composition of our investment portfolio by industry sector, using Moody's Industry Classifications, excluding unearned income, as of September 30, 2009 and December 31, 2008 at cost and fair value was as follows:

                                                  September 30, 2009                                                   December 31, 2008
                                 Cost             % (1)         Fair Value          % (1)            Cost             % (1)         Fair Value          % (1)
Machinery                    $  51,630,468          16.9 %     $  36,317,853          14.1 %     $  51,384,711          14.0 %     $  39,527,874          12.3 %
Personal & Nondurable
Consumer Products               38,542,006          12.6          35,301,536          13.7          39,609,196          10.8          39,247,796          12.2
Health Care, Education &
Childcare                       38,478,623          12.6          35,673,123          13.9          39,749,005          10.9          39,501,102          12.2
Automobile                      30,462,731          10.0          22,205,720           8.6          33,276,374           9.1          26,487,272           8.2
Textiles & Leather              28,827,184           9.4          27,472,364          10.7          29,557,681           8.1          29,368,566           9.1
Metals & Minerals               23,111,237           7.6          23,111,237           9.0          23,049,480           6.3          22,453,909           7.0
Mining, Steel, Iron &
Nonprecious Metals              18,001,311           5.9          10,687,048           4.1          18,092,545           4.9          17,245,764           5.3
Electronics                     15,798,122           5.2          15,698,746           6.1          31,033,364           8.5          30,033,495           9.3
Retail Stores                   11,367,454           3.7          11,286,420           4.4          10,978,984           3.0          10,872,284           3.4
Housewares & Durable
Consumer Products               11,110,217           3.6           6,577,119           2.5          11,005,810           3.0           9,333,052           2.9
Printing & Publishing            9,159,502           3.0           7,550,800           2.9          26,302,411           7.2          18,159,998           5.6
Ecological                       8,724,829           2.9           8,412,229           3.3           8,556,102           2.3           8,164,902           2.5
Grocery                          8,515,329           2.8           8,750,177           3.4           8,156,189           2.2           8,278,569           2.6
Insurance                        5,052,366           1.7           3,826,463           1.5           5,000,000           1.4           4,048,200           1.3
Buildings & Real Estate          4,415,588           1.5           4,415,588           1.7           4,613,182           1.3           4,613,182           1.4
Diversified/Conglomerate
Service                          1,570,736           0.5                   -             -           1,570,736           0.4             623,500           0.2
Aerospace & Defense                463,168           0.1             145,900           0.1             463,168           0.1             173,600           0.1
Chemicals, Plastic &
Rubber                                   -             -                   -             -          16,659,410           4.6           9,347,006           2.9
Oil & Gas                                -             -                   -             -           3,840,677           1.1           3,840,677           1.2
Personal, Food &
Miscellaneous Services                   -             -                   -             -           3,000,000           0.8           1,050,000           0.3


Total                        $ 305,230,871         100.0 %     $ 257,432,323         100.0 %     $ 365,899,025         100.0 %     $ 322,370,748         100.0 %

(1) Represents percentage of total portfolio.

At September 30, 2009 and December 31, 2008, we did not have any investment in excess of 10% of the total investment portfolio at fair value. Investment income, consisting of interest, dividends and fees can fluctuate dramatically upon repayment of an investment or sale of an equity interest. Revenue recognition in any given period can be highly concentrated among several portfolio companies. During the three and nine months ended September 30, 2009 and 2008, we did not record investment income from any portfolio company in excess of 10% of total investment income.

                             September 30, 2009                         December 31, 2008
                     Investments at       Percentage of        Investments at       Percentage of
Investment Rating      Fair Value        Total Portfolio         Fair Value        Total Portfolio
1                   $     84,419,431                 34.0 %   $     82,179,735                 26.7 %
2                         97,997,274                 39.5          184,507,897                 59.9
3                         55,442,985                 22.4           21,275,475                  6.9
4                          4,890,139                  2.0            8,477,320                  2.7
5                          5,292,228                  2.1           11,639,548                  3.8


Totals              $    248,042,057                100.0 %   $    308,079,975                100.0 %

At September 30, 2009 and December 31, 2008, we had loans and equity investments from three of our portfolio companies on non-accrual status. See "-Critical Accounting Policies - Interest and Dividend Income Recognition" for a discussion of when we place debt investments on non-accrual status.
In the event that the United States economy continues in a prolonged recession, it is possible that the financial results of small- to mid-sized companies, similar to those in which we invest, could experience further deterioration, which could ultimately lead to difficulty in meeting debt service requirements and an increase in defaults. We can provide no assurance that the performance of certain of our portfolio companies will not be negatively impacted by these economic or other conditions which could have a negative impact on our future results.
Results of Operations
The principal measure of our financial performance is net income (loss) which includes net investment income, net realized gain (loss) and net unrealized appreciation (depreciation). Net investment income is the difference between our income from interest, dividends, fees, and other investment income and our operating expenses. Net realized gain (loss) on investments is the difference between the proceeds received from dispositions of portfolio investments and their stated cost. Net unrealized appreciation (depreciation) on interest rate swaps is the net change in the fair value of our outstanding swap agreements. Net unrealized appreciation (depreciation) on investments is the net change in the fair value of our investment portfolio.
Comparison for the three months ended September 30, 2009 and 2008 Total Investment Income
Total investment income includes interest and dividend income on our investments, fee income and other investment income. Fee income consists principally of loan and arrangement fees, annual administrative fees, unused fees, prepayment fees, amendment fees, equity structuring fees and waiver fees. Other investment income consists primarily of the accelerated recognition of deferred financing fees received from our portfolio companies on the repayment of the outstanding investment, the sale of the investment or reduction of available credit.
Total investment income for the three months ended September 30, 2009 and 2008, was $8.1 million and $10.2 million, respectively. For the three months ended September 30, 2009, this amount consisted of interest income of $5,000 from cash and cash equivalents, $7.8 million of interest and dividend income from portfolio investments (which included $1.2 million in payment-in-kind, or PIK interest, and dividends), $138,000 of fee income and $112,000 in other investment income. For the three months ended September 30, 2008, this amount consisted of interest income of $21,000 from cash and cash equivalents, $9.4 million of interest and dividend income from portfolio investments (which included $1.3 million in payment-in-kind, or PIK interest, and dividends), $460,000 in fee income and $329,000 in other investment income.
The decrease in our total investment income for the three months ended September 30, 2009 as compared to the three months ended September 30, 2008 was primarily attributable to a decrease in the weighted average fair value balance outstanding of our interest-bearing investment portfolio during the quarter ended September 30, 2009. The primary reason behind the decrease in total investment income was a decrease in interest income due to the decrease in the weighted average fair value balance of our investment portfolio, and a decrease in the weighted average yield of our investments. During the three months ended September 30, 2009, the weighted average fair value balance outstanding of our interest-bearing investment portfolio was approximately $263.2 million as compared to approximately $313.8 million during the three months ended September 30, 2008. The weighted average yield on our investments during the three months ended September 30, 2009 decreased as a result of an increase in the number of loans on non-accrual status and an overall decrease in market interest rates.
Expenses
Expenses include compensation expense, interest on our outstanding indebtedness, professional fees, and general and administrative expenses.

Expenses for the three months ended September 30, 2009 and 2008, were $6.9 million and $3.7 million, respectively. Expenses increased for the three months ended September 30, 2009 as compared to the three months ended September 30, 2008 by approximately $3.2 million, primarily as a result of . . .