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 "estimate," "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 in our Annual Report on Form 10-K for the fiscal year ended March 31, 2012.

OVERVIEW

General

We were incorporated under the General Corporation Law of the State of Delaware on February 18, 2005. We were established for the purpose of investing in debt and equity securities of established private businesses in the United States ("U.S."). Debt investments primarily come in the form of three types of loans, senior term loans: senior subordinated loans and junior subordinated debt. Equity investments take the form of preferred or common equity (or warrants or options to acquire the foregoing), often in connection with buyouts and other recapitalizations. To a much lesser extent, we also invest in senior and subordinated syndicated loans. Our investment objectives are (a) to achieve and grow current income by investing in debt securities of established businesses that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to stockholders that grow over time and (b) to provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities of established businesses that we believe can grow over time to permit us to sell our equity investments for capital gains. We aim to maintain a portfolio consisting of approximately 80% debt investment and 20% equity investment, at cost.

We focus on investing in 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. We invest by ourselves or jointly with other funds and/or management of the portfolio company, depending on the opportunity. If we are participating in an investment with one or more co-investors, our investment is likely to be smaller than if we were investing alone.

Business Environment

The strength of the global economy, and the U.S. economy in particular, continues to be uncertain and volatile, and we remain cautious about a long-term economic recovery. The recession in general, and the disruptions in the capital markets in particular, have impacted our liquidity options and increased the cost of debt and equity capital. Many of our portfolio companies, as well as those that we evaluate for possible investments, are impacted by these economic conditions. If these conditions persist, it may affect their ability to repay our loans or engage in a liquidity event, such as a sale, recapitalization or initial public offering.

Capital Raising Efforts

Despite the challenges in these uncertain economic times, over the past year, we have been able to complete an extension under our line of credit (our "Credit Facility"), a preferred stock public offering and a common stock public offering. In October 2012, we extended the maturity date on our Credit Facility an additional year to 2015. In March 2012, we issued 1.6 million shares of 7.125% Series A Cumulative Term Preferred Stock (our "Term Preferred Stock") for gross proceeds of $40.0 million. During the three months ended December 31, 2012, we issued 4.4 million shares of common stock for gross proceeds of $33.0 million. We discuss each of the foregoing in detail below under "Recent Developments."

At our annual meeting of stockholders held on August 9, 2012, our stockholders approved a proposal which authorizes us to sell shares of our common stock at a price below our then current NAV per share, subject to certain limitations, including that the number of shares issued and sold pursuant to such authority does not exceed 25% of our then outstanding common stock immediately prior to each such sale, provided that our Board of Directors makes certain determinations prior to any such sale. This proposal is in effect for one year from the date of stockholder approval. With our Board of Directors' approval, we issued shares of our common stock in October and November 2012 at a price per share below the then current NAV per share. The resulting proceeds, in part, will allow us to grow the portfolio by making new investments, generate additional income through these new investments, provide us additional equity capital to help ensure continued compliance with regulatory tests and allow us to increase our debt capital while still complying with our applicable debt to equity ratios. At our next annual meeting of stockholders, scheduled to take place in August 2013, we expect to ask our stockholders to vote in favor of this proposal again so that it may be in effect for another year.

New Investments

While conditions remain challenging, we are seeing an increase in the number of new investment opportunities consistent with our investing strategy of providing a combination of debt and equity in support of management and sponsor-led buyouts of small and medium-sized companies in the U.S. These opportunities and the aforementioned capital raising efforts have allowed us to invest approximately $183.7 million into 10 new proprietary debt and equity deals since October 2010. During the three months ended December 31, 2012, we invested $16.5 million in Frontier Packaging, Inc. ("Frontier").

Each of these new investments, as well as the majority of our debt securities in our portfolio has a success fee component, which enhances the yield on our debt investment. Unlike paid in kind ("PIK") income, we do not recognize the fee into income until it is received in cash. As a result, as of December 31, 2012, we have an off-balance sheet success fee receivable of $12.3 million, or approximately $0.47 per common share. Due to their contingent nature, there are no guarantees that we will be able to collect all of these success fees or know the timing of such collections.

Regulatory Compliance

Due to the limited number of investments in our portfolio, our current asset composition has affected our ability to satisfy certain elements of the Code's rules for maintenance of our RIC status. To maintain our status as a RIC, in addition to other requirements, as of the close of each quarter of our taxable year, we must meet the asset diversification test, which requires that at least 50% of the value of our assets consist of cash, cash items, U.S. government securities or certain other qualified securities (the "50% threshold"). During the quarter ended December 31, 2012, we again fell below the 50% threshold.

Failure to meet the 50% threshold alone will not result in our loss of RIC status. In circumstances where the failure to meet the 50% threshold is the result of fluctuations in the value of our assets, including as a result of the sale of assets, we will still be deemed to have satisfied the 50% threshold and, therefore, maintain our RIC status, provided that we have not made any new investments, including additional investments in our existing portfolio companies (such as advances under outstanding lines of credit), since the time that we fell below the 50% threshold. At December 31, 2012, we satisfied the 50% threshold primarily through the purchase of short-term qualified securities, which was funded through a short-term loan agreement. Subsequent to the December 31, 2012, measurement date, the short-term qualified securities matured and we repaid the short-term loan. See "-Recent Developments-Short-Term Loan" for more information regarding this transaction. As of the date of this filing, we are once again below the 50% threshold.

Thus, while we currently qualify as a RIC despite our recent inability to continuously meet the 50% threshold and potential inability to do so in the future, if we make any new or additional investments before regaining compliance with the asset diversification test, our RIC status could be threatened. If we make a new or additional investment and fail to regain compliance with the 50% threshold on the next quarterly measurement date following such investment, we will be in non-compliance with the RIC rules and will have thirty days to "cure" our failure to meet the 50% threshold to avoid the loss of our RIC status. Potential cures for failure of the asset diversification test include raising additional equity or debt capital, or changing the composition of our assets, which could include full or partial divestitures of investments, such that we would once again exceed the 50% threshold on a consistent basis.

Until the composition of our assets satisfies the required 50% threshold on a consistent basis, we will continue to seek to employ similar purchases of qualified securities using short-term loans that would allow us to satisfy the 50% threshold, thereby allowing us to make additional investments. There can be no assurance, however, that we will be able to enter into such a transaction on

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 an asset coverage ratio (as defined in Section 18(h) of the 1940 Act), of at least 200% on our senior securities representing indebtedness and our senior securities that are stock, which we refer to collectively as "senior securities." As of December 31, 2012, our asset coverage ratio was 292%. The ratio is impacted, in part, by our need to obtain a short-term loan at quarter end to satisfy the 50% threshold for our RIC status. Between the quarter end measurement dates, when we do not have a short-term loan outstanding, our leverage and asset coverage ratio improve. However, until the composition of our assets is above the required 50% threshold on a consistent basis, we will have to continue to obtain short-term loans on a quarterly basis. This strategy, while allowing us to satisfy the 50% threshold for our RIC status, limits our ability to use increased debt capital to make new investments, due to our asset coverage ratio limitations under the 1940 Act. Our common stock offering during the three months ended December 31, 2012, was completed, in part, to provide us additional equity capital to help ensure continued compliance with the 200% asset coverage ratio.

Investment Highlights

During the nine months ended December 31, 2012, we disbursed $68.0 million in new debt and equity investments and extended $12.6 million of investments to existing portfolio companies through revolver draws or additions to term notes. From our initial public offering in June 2005 through December 31, 2012, we have made 192 investments in 98 companies for a total of approximately $797.1 million, before giving effect to principal repayments on investments and divestitures.

Investment Activity

During the nine months ended December 31, 2012, the following significant transaction occurred:

• In May 2012, we invested $9.5 million in a new Affiliate investment, Packerland Whey Products, Inc. ("Packerland"), through a combination of debt and equity. Packerland is a processor of raw fluid whey, specializing in the production of protein supplements for dairy and beef cattle. In December 2012, our $7.0 million debt investment was paid off at par.

• In July 2012, we invested $21.3 million in a new Control investment, Drew Foam Companies, Inc. ("Drew Foam"), through a combination of debt and equity. Drew Foam is an expanded polystyrene foam molder and fabricator for a variety of applications in construction and packaging. In September 2012, $4.0 million of the debt and the line of credit was refinanced with a third-party. In December 2012, $1.8 million of our equity investment was sold to a third-party at cost.

• In July 2012, we invested $22.5 million in a new Control investment, Ginsey Holdings, Inc. ("Ginsey"), through a combination of debt and equity. Ginsey designs and markets a broad line of branded juvenile and adult bath products. In August 2012, we participated out $5.0 million of the debt to a third-party.

• In August 2012, we restructured our investment in Tread Corp. ("Tread"), converting $3.0 million of senior subordinated debt into preferred and common shares of Tread in a non-cash transaction.

• In November 2012, we invested $16.5 million in a new Control investment, Frontier, through a combination of debt and equity. Frontier is a supplier of a range of time sensitive packaging materials to the Alaskan seafood market, adding value through its expertise in product consolidation and logistics.

Recent Developments

Common Stock Offering

On October 5, 2012, we completed a public offering of 4.0 million shares of our common stock at a public offering price of $7.50 per share, which was below our then current NAV per share. Gross proceeds totaled $30.0 million and net proceeds, after deducting underwriting discounts and offering expenses borne by us, were $28.3 million, which was used to repay borrowings under our Credit Facility. In connection with the offering, the underwriters exercised their option to purchase an additional 395,825 shares at the public offering price to cover over-allotments, which resulted in gross proceeds of $3.0 million and net proceeds, after deducting underwriting discounts, of $2.8 million.

Short-Term Loan

For each quarter end since December 31, 2009 (the "measurement dates"), we satisfied the 50% threshold to maintain our status as a RIC, in part, through the purchase of short-term qualified securities, which were funded primarily through a short-term loan agreement. Subsequent to each of the measurement dates, the short-term qualified securities matured, and we repaid the short-term loan, at which time we again fell below the 50% threshold.

Credit Facility Extension

On October 5, 2012, we, through Business Investment, entered into an amendment (the "Amendment") to our revolving line of credit (our "Credit Facility"), which extended the maturity date on our Credit Facility one year. As a result of the Amendment, our Credit Facility is now scheduled to mature on October 25, 2015 (the "Extended Maturity Date") and, if not renewed or extended by the Extended Maturity Date, all principal and interest will be due and payable on or before October 25, 2016 (one year after the Extended Maturity Date). There remains a one-year extension option to be agreed upon by all parties, which may be exercised on or before October 26, 2013. All other terms of our Credit Facility remained the same.

Term Preferred Stock Offering

On March 6, 2012, we completed an offering of 1.4 million shares of Term Preferred Stock at a public offering price of $25.00 per share under our previous shelf registration statement on Form N-2 (File No. 333-160720). Net proceeds of the offering, after deducting underwriting discounts and offering expenses borne by us, were approximately $33.2 million, a portion of which was used to repay borrowings under our Credit Facility, with the remaining proceeds being held to make additional investments and for general corporate purposes. On March 13, 2012, the underwriters purchased an additional 0.2 million of our Term Preferred Stock to cover over-allotments, for which we received net proceeds, after deducting underwriting discounts, of $4.8 million.

Co-Investment Order

In an order dated July 26, 2012, the U.S. Securities and Exchange Commission (the "SEC") granted us the relief sought in the exemptive application we had previously filed with the SEC that expands our ability to co-invest with certain affiliates by permitting us, under certain circumstances, to co-invest with Gladstone Capital Corporation and any future business development company or closed-end management investment company that is advised by our investment adviser, Gladstone Management Corporation, (our "Adviser") (or sub-advised by our Adviser if it controls the fund) or any combination of the foregoing.

Modification to Investment Objectives and Strategies

On September 21, 2012, our Board of Directors approved limited revisions to our investment objectives and strategies, which went into effect on January 1, 2013. All of our current portfolio investments fit within the scope of our revised objectives and strategies, and no changes will need to be made to the current portfolio as a result of the revision.

Departure of Executive Officer and Director

On November 27, 2012, George Stelljes III informed the Company that he intended to resign as chief investment officer and co-vice chairman of the Board of Directors of the Company, although no effective date for his resignation has been determined. He will continue to perform his duties for the Company until his resignation is effective.

RESULTS OF OPERATIONS

Comparison of the Three months ended December 31, 2012, to the Three months
ended December 31, 2011



                                                      For the Three Months Ended December 31,
                                                2012             2011        $ Change        % Change
INVESTMENT INCOME
Interest income                               $   6,482        $  5,085      $   1,397            27.5 %
Other income                                        702              84            618           735.7

Total investment income                           7,184           5,169          2,015            39.0

EXPENSES
Base management fee                               1,440           1,140            300            26.3
Incentive fee                                       589               -            589              NM
Administration fee                                  191             182              9             4.9
Interest and dividend expense                     1,001             185            816           441.1
Amortization of deferred financing costs            194             106             88            83.0
Other                                               306             459           (153 )         (33.3 )

Expenses before credits from Adviser              3,721           2,072          1,649            79.6
Credits to fees                                    (489 )          (345 )         (144 )          41.7

Total expenses net of credits to fees             3,232           1,727          1,505            87.1

NET INVESTMENT INCOME                             3,952           3,442            510            14.8

REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on investments              96            (105 )          201              NM
Net unrealized appreciation of investments           46           1,769         (1,723 )         (97.4 )
Net unrealized appreciation of other                605             389            216            55.5

Net realized and unrealized gain on
investments and other                               747           2,053         (1,306 )         (63.6 )

NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS                                    $   4,699        $  5,495      $    (796 )         (14.5 )

NM = Not Meaningful

Investment Income

Total investment income increased by 39.0% for the three months ended December 31, 2012, as compared to the prior year period. This increase was primarily due to an overall increase in interest income in the three months ended December 31, 2012, as a result of an increase in the size of our loan portfolio during the three months ended December 31, 2012, as well as an increase in other income, which primarily consisted of dividends received from Acme Cryogenics, Inc. ("Acme").

Interest income from our investments in debt securities increased 27.5% for the three months ended December 31, 2012, as compared to the prior year period. The level of interest income from investments is directly related to the principal balance of our interest-bearing investment portfolio outstanding during the period multiplied by the weighted average yield. The weighted average principal balance of our interest-bearing investment portfolio during the three months ended December 31, 2012, was approximately $202.7 million, compared to approximately $161.4 million for the prior year period. This increase was primarily due to originating investments in Ginsey, Packerland, Drew Foam and Frontier partially offset by the restructuring of Tread. At December 31, 2012, loans to two portfolio companies, ASH Holdings Corp. ("ASH") and Tread, were on non-accrual, with an aggregate weighted average principal balance of $23.1 million during the three months ended December 31, 2012. At December 31, 2011, two loans, ASH and Country Club Enterprises ("CCE"), were on non-accrual, with an aggregate weighted average principal balance of $14.8 million. CCE went onto accrual and Tread went onto non-accrual during the three months ended December 31, 2012. The weighted average yield on our interest-bearing investments for the three months ended December 31, 2012, excluding cash and cash equivalents and receipts recorded as other income, was 12.7%, compared to 12.5% for the prior year period. The weighted average yield varies from period to period, based on the current stated interest rate on interest-bearing investments.

                                                 As of December 31, 2012                     Three months ended December 31, 2012
                                                                                                                       % of Total
                                                                                            Investment                 Investment
         Portfolio Company                 Fair Value            % of Portfolio               Income                     Income
SOG Specialty Knives and Tools, LLC      $       30,365                     11.1 %       $             670                        9.3 %
Acme Cryogenics, Inc.                            27,887                     10.2                     1,104                       15.4
Venyu Solutions, Inc.                            23,976                      8.8                       631                        8.8
Ginsey Holdings, Inc.                            23,235                      8.5                       450                        6.3
SBS, Industries, LLC                             18,528                      6.8                       406                        5.6

Subtotal-five largest investments               123,991                     45.4                     3,261                       45.4
Other portfolio companies                       149,269                     54.6                     3,923                       54.6

Total investment portfolio               $      273,260                    100.0 %       $           7,184                      100.0 %

                                                 As of December 31, 2011                     Three Months Ended December 31, 2011
                                                                                                                       % of Total
                                                                                            Investment                 Investment
. . .