UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTER ENDED JUNE 30, 2005

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER: 814-00237

GLADSTONE CAPITAL CORPORATION

(Exact name of registrant as specified in its charter)

MARYLAND		54-2040781
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1521 WESTBRANCH DRIVE, SUITE 200 MCLEAN, VIRGINIA 22102
(Address of principal executive office)

(703) 287-5800
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.

Yes ý No o.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12 b-2 of the Exchange Act).

Yes ý No o.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. The number of shares of the issuer’s Common Stock, $0.001 par value, outstanding as of August 3, 2005 was 11,303,510.

GLADSTONE CAPITAL CORPORATION

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Consolidated Balance Sheets as of June 30, 2005 and September 30, 2004
	Schedules of Investments as of June 30, 2005 and September 30, 2004
	Consolidated Statements of Operations for the three months ended June 30, 2005 and June 30, 2004
	Consolidated Statements of Operations for the nine months ended June 30, 2005 and June 30, 2004
	Consolidated Statement of Stockholders’ Equity for the nine months ended June 30, 2005 and June 30, 2004
	Consolidated Statements of Cash Flows for the nine months ended June 30, 2005 and June 30, 2004
	Financial Highlights for the three and nine months ended June 30, 2005 and June 30, 2004
	Notes to Consolidated Financial Statements

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

	Overview
	Results of Operations
	Liquidity and Capital Resources

Item 3.	Quantitative and Qualitative Disclosure About Market Risk

Item 4.	Controls and Procedures

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds

Item 3.	Defaults Upon Senior Securities

Item 4.	Submission of Matters to a Vote of Security Holders

Item 5.	Other Information

Item 6.	Exhibits

SIGNATURES

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	June 30, 2005			September 30, 2004

ASSETS
Investments at fair value (Cost 6/30/2005: $197,749,877; 9/30/2004: $149,189,306)	$	194,708,459		$	146,446,240
Cash and cash equivalents	766,922			15,969,890
Cash and cash equivalents pledged to creditors	—			49,984,950
Interest receivable – investments in debt securities	1,199,684			837,336
Interest receivable – employees	90,915			112,960
Due from custodian	12,230,425			1,203,079
Due from affiliate	—			109,639
Deferred financing costs	171,250			350,737
Prepaid assets	71,622			191,676
Other assets	81,186			127,220

TOTAL ASSETS	$	209,320,463		$	215,333,727

LIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES
Accounts payable	$	206,399		$	105,921
Fees due to affiliate	319,411			113,511
Borrowings under lines of credit	54,590,000			40,743,547
Accrued expenses and deferred liabilities	198,819			798,096
Funds held in escrow	200,000			—
Repurchase agreement	—			21,345,997

Total Liabilities	$	55,514,629		$	63,107,072

STOCKHOLDERS’ EQUITY
Common stock, $0.001 par value, 50,000,000 shares authorized and 11,303,510 and 11,278,510 shares issued and outstanding, respectively	$	11,304		$	11,279
Capital in excess of par value	164,610,873			164,294,781
Notes receivable for sale of stock to employees	(8,792,349		)	(9,432,678		)
Net unrealized depreciation on investments	(3,041,418		)	(2,743,066		)
Unrealized depreciation on derivative	(272,266		)	(214,259		)
Realized gain on sale of investments	42,250			12,500
Distributions less than net investment income	1,247,440			298,098

Total Stockholders’ Equity	$	153,805,834		$	152,226,655

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	209,320,463		$	215,333,727

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART TO THESE CONSOLIDATED FINANCIAL STATEMENTS.

GLADSTONE CAPITAL CORPORATION

SCHEDULE OF INVESTMENTS

AS OF JUNE 30, 2005

(UNAUDITED)

Company (1)	Industry	Investment (2)	Cost		Fair Value

Advanced Homecare Management, Inc.	Home health nursing services	Senior Subordinated Term Debt (6) (12.6%, Due 12/2010)	$	7,500,000	$	7,500,000

Allied Extruders, Inc.	Polyethylene film manufacturer	Senior Term Debt (3) (12.3%, Due 7/2009)	3,950,000		3,969,750

ARI Holdings, Inc.	Manufacturing-auto parts	Senior Term Debt	3,926,969		3,720,000
		(8.2%, Due 2/2008)

Badanco Acquisition Corp.	Manufacturing-luggage	Senior Term Debt (6)	6,982,519		6,991,247
		(8.6%, Due 2/2010)
		Senior Term Debt (3)(6)	8,650,000		8,660,813
		(11.8%, Due 2/2010)

Benetech, Inc.	Dust management systems for the coal and electric utility	Senior Term Debt (6) (8.5%, Due 5/2009)	2,925,000		2,946,938
	industries	Senior Term Debt (3) (6)	3,250,000		3,290,625
		(11.5%, Due 5/2009)

Consolidated Bedding, Inc.	Manufacturing-mattresses	Senior Subordinated Term Debt (6)	2,964,609		2,937,558
		(12.0%, Due 3/2009)

Coyne International Enterprises	Industrial services	Senior Term Debt (3) (5) (6) (13.0%, PIK 2%, Due 7/2007)	7,530,010		7,520,597

Defiance Stamping	Manufacturing-trucking parts	Senior Term Debt (3)	6,325,000		6,325,000
Company		(11.1%, Due 4/2010)

Finn Corporation	Manufacturing-landscape	Senior Subordinated Term Debt (6)	10,500,000		7,350,000
	equipment	(13.0%, Due 2/2006)
		Common Stock Warrants	37,000		630,360

Gammill, Inc.	Designer and assembler of	Senior Term Debt (6)	3,771,427		3,776,141
	quilting machines and	(9.5%, Due 12/2008)
	accessories	Senior Term Debt (3) (6)	4,690,625		4,673,035
		(12.0%, Due 12/2008)

Global Materials	Manufacturing-steel wool	Senior Term Debt (3) (6)	5,500,000		5,506,875
Technologies, Inc.	products and metal fibers	(13.0%, Due 11/2009)

Infor Global Solutions Ltd.	Enterprise application solutions	Senior Subordinated Term Debt (7) (10.6%, Due 4/2012)	6,814,500		6,965,000

John Henry Holdings,	Manufacturing-packaging	Senior Subordinated Term Debt(6)	5,474,630		5,472,500
Inc.	products	(10.3%, Due 6/2011)

Marcal Paper Mills, Inc.	Manufacturing-paper products	Senior Subordinated Term Debt (6)	6,450,000		6,111,375
		(13.0%, Due 12/2006)
		First Mortgage Loan (5)	9,324,325		9,129,447
		(16%, PIK 1%, Due 12/2006)

Company (1)	Industry	Investment (2)	Cost		Fair Value

MedAssets, Inc.	Pharmaceuticals and	Senior Term Debt (6)	1,390,618		1,384,507
	healthcare GPO	(9.8%, Due 3/2007)
		Senior Subordinated Term Debt (6)	6,502,578		6,500,000
		(15.0%, Due 3/2008)

Mistras Holdings Corp.	Nondestructive testing	Senior Term Debt (3) (6)	9,666,666		9,497,499
	instruments, systems and	(10.5%, Due 8/2008)
	services	Senior Term Debt (3) (6)	4,833,334		4,742,709
		(12.5%, Due 8/2008)
		Senior Term Debt (3) (6)	1,000,000		986,750
		(13.5%, Due 8/2008)

Northern Contours	Manufacturing-veneer and	Senior Subordinated Term Debt (8)	7,000,000		7,000,000
Northern Contours of Kentucky, Inc.	laminate components	(10.1%, Due 5/2010)
Norcon Holding LLC
Norcon Lewis LLC

Penn Engineering &	Manufacturing-fractional	Senior Subordinated Term Debt (8)	5,009,881		5,000,000
Manufacturing Corp.	horsepower engines	(9.5%, Due 5/2012)
PN Merger Sub Inc.
PEM Holding Co.

Polar Corporation	Manufacturing-trailer parts	Senior Subordinated Term Debt (6)	8,615,503		8,585,000
		(9.5%, Due 6/2010)

Regency Gas Services	Midstream gas gathering and	Senior Subordinated Term Debt (7)	5,030,613		5,000,000
LLC	processing	(8.8%, Due 12/2010)

Santana Plastics	Manufacturing-polyethylene	Senior Term Debt (3)(6)	6,000,000		6,022,500
	bathroom partitions	(11.2%, Due 11/2009)
		Senior Term Debt (4)(6)	1,950,000		1,957,313
		(13.0%, Due 11/2009)

SCPH Holdings, Inc.	Manufacturing-underwater and	Credit Facility (9)	—		—
Sea Con Phoenix, Inc.	harsh environment components	(8.0%, Due 3/2006)
Phoenix Optix, Inc.		Senior Term Debt (3)(6)	3,325,000		3,329,156
		(8.5%, Due 2/2010)
		Senior Term Debt (6)	3,000,000		3,003,750
		(12.0%, Due 2/2010)

Survey Sampling	Service-telecommunications	Senior Subordinated Term Debt (6)	4,514,642		4,545,000
		(10.7%, Due 5/2012)

Tech Lighting LLC	Manufacturing-low voltage	Senior Subordinated Term Debt (6)	9,013,066		8,977,500
	lighting systems	(10.4%, Due 10/2010)

Woven Electronics	Custom electrical cable	Senior Term Debt (4) (6) (10)	8,344,999		8,750,566
Corporation	assemblies	(11.5%, Due 3/2009)

Xspedius Communications	Service-telecommunications	Senior Subordinated Term Debt (6)	5,986,363		5,948,948
LLC		(10.0%, Due 3/2010)

Total:			$	197,749,877	$	194,708,459

(1) We do not “Control,” and are not an “Affiliate” of, any of our portfolio companies, each as defined in the Investment Company Act of 1940, as amended (the “1940 Act”). In general, under the 1940 Act, we would “Control” a portfolio company if we owned 25% or more of its voting securities and would be an “Affiliate” of a portfolio company if we owned 5% or more of its voting securities.

(2) Percentage represents interest rates in effect at June 30, 2005 and due date represents the contractual maturity date.

(3) Last Out Tranche of senior debt, meaning if the company is liquidated then the holder of the Last Out Tranche is paid after the senior debt.

(4) Last Out Tranche of senior debt, meaning if the company is liquidated then the holder of the Last Out Tranche is paid after the senior debt, however the debt is junior to another Last Out Tranche.

(5) Has some paid in kind (PIK) interest. Refer to Note 7 “Payment in Kind Interest” hereto and Note 2 “Summary of Significant Accounting Policies” of the Company’s Form 10-K for the fiscal year ended September 30, 2004.

(6) Fair value was based on valuation prepared and provided by Standard & Poor’s Loan Evaluation Services.

(7) Marketable securities are valued based on the bid price, as of June 30, 2005, from the respective originating syndication agent’s trading desk.

(8) Investment was valued at cost due to recent acquisition.

(9) Availability under the credit facility totals $500,000. There were no borrowings outstanding at June 30, 2005.

(10) Includes a success fee with a $322,117 fair value and no cost basis.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART TO THESE CONSOLIDATED FINANCIAL STATEMENTS.

GLADSTONE CAPITAL CORPORATION

SCHEDULE OF INVESTMENTS

AS OF SEPTEMBER 30, 2004

Company (1)	Industry	Investment (2)	Cost		Fair Value

A and G, Inc.	Activewear products	Senior Term Debt (3) (6)	$	12,250,000	$	12,250,000
(d/b/a Alstyle)		(11.0%, Due 6/2008)

Allied Extruders, Inc.	Polyethylene film manufacturer	Senior Term Debt (3)	4,000,000		4,000,000
		(12.3%, Due 7/2009)

America’s Water Heater	Household appliances rental	Senior Term Debt (4) (6) (8)	12,000,000		12,840,000
Rentals	(12.5%, Due 2/2009)

ARI Holdings, Inc.	Manufacturing-auto parts	Senior Term Debt (6)	1,190,141		1,188,653
		(9.75%, Due 6/2008)
		Senior Subordinated Term Debt (5) (6)	3,657,164		3,634,306
		(11%, PIK 4%, Due 12/2008)

Bear Creek Corporation	Premium horticultural and food products	Senior Subordinated Term Debt (7) (9.1%, Due 6/2010)	6,000,000		6,090,000

Benetech, Inc.	Dust management systems for the coal and electric utility	Senior Term Debt (6) (8.5%, Due 5/2009)	3,168,750		3,160,828
	industries	Senior Term Debt (3) (6)	3,250,000		3,241,875
		(11.5%, Due 5/2009)

Burt’s Bees, Inc.	Personal & household products	Senior Term Debt (7)	975,000		987,188
		(5.4%, Due 11/2009)

Coyne International Enterprises	Industrial services	Senior Term Debt (3) (5) (6) (13.0%, PIK 2%, Due 7/2007)	15,700,625		15,308,110

Finn Corporation	Manufacturing-landscape equipment	Senior Subordinated Term Debt (6) (13.0%, Due 2/2006)	10,500,000		7,612,500
		Common Stock Warrants	37,000		474,984

Gammill, Inc.	Designer and assembler of quilting machines and	Senior Term Debt (6) (9.5%, Due 12/2008)	4,708,013		4,731,553
	accessories	Senior Term Debt (3) (6)	4,750,000		4,767,813
		(12.0%, Due 12/2008)

Inca Metal Products Corporation	Material handling and storage products	Senior Term Debt (3) (6) (4.6%, Due 9/2006)	2,387,548		2,136,855
Kingway Acquisition, Inc.
Clymer Acquisition, Inc.

Maidenform, Inc.	Intimate apparel	Senior Subordinated Term Debt (7)	10,003,571		10,175,000
		(9.4%, Due 5/2011)

Marcal Paper Mills, Inc.	Manufacturing-paper products	Senior Subordinated Term Debt (6)	6,800,000		6,188,000
		(13.0%, Due 12/2006)
		First Mortgage Loan (5)	9,254,715		9,254,715
		(16%, Due 12/2006)

MedAssets, Inc.	Pharmaceuticals and healthcare GPO	Senior Term Debt (7) (5.9%, Due 3/2007)	1,815,497		1,806,887
		Senior Subordinated Term Debt (7)	6,503,282		6,500,000
		(11.2%, Due 3/2008)

Mistras Holdings Corp.	Nondestructive testing	Senior Term Debt (3) (6)	9,833,333		9,759,583
	instruments, systems and	(10.5%, Due 8/2008)
	services	Senior Term Debt (3) (6)	4,916,667		4,867,500
		(12.5%, Due 8/2008)
		Senior Term Debt (3) (6)	1,000,000		1,000,000
		(13.5%, Due 8/2008)

Woven Electronics Corporation	Custom electrical cable assemblies	Senior Term Debt (3) (6) (6.5%, Due 3/2009)	2,488,000		2,484,890
		Senior Term Debt (4) (6)	12,000,000		11,985,000
		(11.5%, Due 3/2009)

Total:			$	149,189,306	$	146,446,240

(2) Percentage represents interest rates in effect at September 30, 2004 and due date represents the contractual maturity date.

(3) Last Out Tranche of senior debt, meaning if the company is liquidated then the holder of the Last Out Tranche is paid after the senior debt.

(6) Fair value was based on valuation prepared and provided by Standard & Poor’s Loan Evaluation Services.

(7) Marketable securities are valued based on the bid price, as of September 30, 2004, from the respective originating syndication agent’s trading desk.

(8) Includes a success fee with a fair value of $660,000 and no cost basis.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART TO THESE CONSOLIDATED FINANCIAL STATEMENTS.

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENT OF OPERATIONS

(UNAUDITED)

	Three Months Ended
	June 30, 2005			June 30, 2004
INVESTMENT INCOME
Interest income – investments	$	5,766,233		$	5,700,139
Interest income – cash and cash equivalents	7,631			15,268
Interest income – notes receivable from employees	108,065			112,528
Fee income (Refer to Note 12)	—			399,375
Other income	245,297			482,500
Total investment income	6,127,226			6,709,810

EXPENSES
Loan servicing (Refer to Note 10)	687,971			—
Management fee (Refer to Notes 10 and 13)	358,631			—
Professional fees	133,505			36,746
Amortization of deferred financing costs	100,663			99,365
Interest	563,336			211,085
Stockholder related costs	16,475			10,643
Directors fees	26,624			28,000
Insurance	43,891			63,369
Salaries and benefits	—			1,253,073
Rent	—			34,873
General and administrative	64,304			247,092
Expenses before credit from Gladstone Management	1,995,400			1,984,246
Credit to management fee for fees collected by Gladstone Management (Refer to Note 13)	(240,600		)	—
Total expenses net of credit to management fee	1,754,800			1,984,246

NET INVESTMENT INCOME BEFORE INCOME TAXES	4,372,426			4,725,564
Income tax expense	—			—
NET INVESTMENT INCOME	4,372,426			4,725,564

UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Unrealized depreciation on derivative	(49,044		)	(129,576		)
Net unrealized (depreciation)/appreciation on investments	(389,229		)	1,013,905
Net unrealized (loss) gain on investments	(438,273		)	884,329

NET INCREASE IN STOCKHOLDERS’ EQUITY RESULTING FROM OPERATIONS	$	3,934,153		$	5,609,893

NET INCREASE IN STOCKHOLDERS’ EQUITY RESULTING FROM OPERATIONS PER COMMON SHARE:
Basic	$	0.35		$	0.56
Diluted	$	0.34		$	0.54

WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:
Basic	11,299,010			10,105,270
Diluted	11,578,637			10,301,390

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART TO THESE CONSOLIDATED FINANCIAL STATEMENTS.

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENT OF OPERATIONS

(UNAUDITED)

	Nine Months Ended
	June 30, 2005			June 30, 2004
INVESTMENT INCOME
Interest income – investments	$	16,671,756		$	13,118,652
Interest income – cash and cash equivalents	29,101			81,223
Interest income – notes receivable from employees	336,382			330,698
Fee income (Refer to Note 12)	—			1,010,606
Other income	1,054,917			504,500
Total investment income	18,092,156			15,045,679

EXPENSES
Loan servicing (Refer to Note 10)	1,804,465			—
Management fee (Refer to Notes 10 and 13)	1,075,940			—
Professional fees	528,610			460,592
Amortization of deferred financing costs	284,487			252,797
Interest	1,174,587			391,237
Stockholder related costs	192,785			130,623
Directors fees	77,624			85,210
Insurance	134,053			200,654
Salaries and benefits	—			2,063,549
Rent	—			106,597
General and administrative	176,939			563,595
Expenses before credit from Gladstone Management	5,449,490			4,254,854
Credit to management fee for fees collected by Gladstone Management (Refer to Note 13)	(977,100		)	—
Total expenses net of credit to management fee	4,472,390			4,254,854

NET INVESTMENT INCOME BEFORE INCOME TAXES	13,619,766			10,790,825
Income tax expense	138,678			—
NET INVESTMENT INCOME	13,481,088			10,790,825

REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain on sale of investment	29,750			12,500
Unrealized depreciation on derivative	(58,007		)	(134,643		)
Net unrealized depreciation on investments	(298,352		)	(849,132		)
Net realized and unrealized gain (loss) on investments	(326,609		)	(971,275		)

NET INCREASE IN STOCKHOLDERS’ EQUITY RESULTING FROM OPERATIONS	$	13,154,479		$	9,819,550

NET INCREASE IN STOCKHOLDERS’ EQUITY RESULTING FROM OPERATIONS PER COMMON SHARE:
Basic	$	1.17		$	0.97
Diluted	$	1.13		$	0.95

WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:
Basic	11,288,784			10,091,576
Diluted	11,602,986			10,336,733

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART TO THESE CONSOLIDATED FINANCIAL STATEMENTS.

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

	Common Stock			Capital in Excess of			Notes Receivable From Sale of			Distributions Less Than/(in Excess of) Net Investment			Realized Gain on Sale of		Unrealized Appreciation/ (Depreciation)			Unrealized Appreciation/ (Depreciation)			Total Stockholders’
	Shares	Amount		Par Value			Common Stock			Income			Investment		of Investments			of Derivatives			Equity

Balance at September 30, 2003	10,081,844	$	10,082	$	140,416,674		$	(8,985,940	)	$	(416,094	)	$	—	$	(222,340	)	$	—		$	130,802,382

Issuance of Common Stock under Stock option Plan	31,600	32		479,837			(350,010		)	—			—		—			—			129,859

Repayment of Principal on Notes Receivable	—	—		—			103,252			—			—		—			—			103,252

Shelf Offering Costs	—	—		(43,598		)	—			—			—		—			—			(43,598		)

Net Increase in Stockholders’ Equity Resulting from Operations	—	—		—			—			10,790,825			12,500		(849,132		)	(134,643		)	9,819,550

Distributions Declared ($1.005 per common share)	—	—		—			—			(10,142,870		)	—		—			—			(10,142,870		)

Balance at June 30, 2004	10,113,444	$	10,114	$	140,852,913		$	(9,232,698	)	$	231,861		$	12,500	$	(1,071,472	)	$	(134,643	)	$	130,668,575

Balance at September 30, 2004	11,278,510	$	11,279	$	164,294,781		$	(9,432,678	)	$	298,098		$	12,500	$	(2,743,066	)	$	(214,259	)	$	152,226,655

Issuance of Common Stock under Stock Option Plan	25,000	25		427,325			(157,100		)	—			—		—			—			270,250

Repayment of Principal on Notes Receivable	—	—		—			797,429			—			—		—			—			797,429

Shelf Offering Costs	—	—		(111,233		)	—			—			—		—			—			(111,233		)

Net Increase in Stockholders’ Equity Resulting from Operations	—	—		—			—			13,481,088			29,750		(298,352		)	(58,007		)	13,154,479

Distributions Declared ($1.11 per common share)	—	—		—			—			(12,531,746		)	—		—			—			(12,531,746		)

Balance at June 30, 2005	11,303,510	$	11,304	$	164,610,873		$	(8,792,349	)	$	1,247,440		$	42,250	$	(3,041,418	)	$	(272,266	)	$	153,805,834

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART TO THESE CONSOLIDATED FINANCIAL STATEMENTS.

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

	Nine Months Ended
	June 30, 2005			June 30, 2004
CASH FLOWS FROM OPERATING ACTIVITIES
Net increase in stockholders’ equity resulting from operations	$	13,154,479		$	9,819,550
Adjustments to reconcile net increase in stockholders’ equity resulting from operations to net cash provided by operating activities:
Depreciation	—			24,356
Net amortization of premiums and discounts	(6,949		)	835
Amortization of deferred financing costs	284,487			252,797
Unrealized depreciation on derivative	58,007			134,643
Change in net unrealized depreciation	298,352			849,132
(Increase) decrease in interest receivable	(340,303		)	338,894
(Increase) decrease in funds due from custodian	(11,027,346		)	579,328
Decrease (increase) in prepaid assets	120,054			(295,627		)
Decrease (increase) in due from affiliate	109,639			(61,079		)
Increase in other assets	(11,973		)	(274,306		)
Increase in accounts payable	100,478			122,885
(Decrease) increase in accrued expenses and deferred liabilities	(599,277		)	324,804
Increase in fees due to affiliate	205,900			—
Increase in funds held in escrow	200,000			—
Increase in investment balance due to payment in kind interest	(348,509		)	(412,659		)
Net cash provided by operating activities	2,197,039			11,403,553

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments	(126,195,458		)	(82,267,500		)
Principal repayments on investments	77,990,345			33,890,716
Proceeds from repurchase agreements	—			240,114,596
Repayment of repurchase agreements	(21,345,997		)	(264,655,000		)
Receipt of principal on notes receivable - employees	797,429			103,252
Disposal of furniture & equipment, net	—			9,498
Net cash used in investing activities	(68,753,681		)	(72,804,438		)

CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from the lines of credit	136,800,000			61,750,000
Repayments on the lines of credit	(122,953,547		)	(28,229,334		)
Distributions paid	(12,531,746		)	(13,469,879		)
Shelf offering costs	(111,233		)	(43,598		)
Deferred financing costs	(105,000		)	—
Exercise of stock options	270,250			129,851
Net cash provided by financing activities	1,368,724			20,137,040

NET DECREASE IN CASH AND CASH EQUIVALENTS (1)	(65,187,918		)	(41,263,845		)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	65,954,840			101,166,221
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	766,922		$	59,902,376

CASH PAID DURING PERIOD FOR INTEREST	$	1,073,417		$	129,910
CASH PAID DURING PERIOD FOR INCOME TAXES	$	138,678		$	—
NON-CASH FINANCING ACTIVITIES
Notes receivable issued in exchange for common stock associated with the exercise of employee stock options	$	157,100		$	350,010

(1) Cash and cash equivalents consist of demand deposits and highly liquid investments with original maturities of three months or less when purchased.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART TO THESE CONSOLIDATED FINANCIAL STATEMENTS.

GLADSTONE CAPITAL CORPORATION

FINANCIAL HIGHLIGHTS

(UNAUDITED)

	Three Months Ended
	June 30, 2005			June 30, 2004

Per Share Data (1)
Net asset value at beginning of period	$	13.64		$	12.71
Income from investment operations:
Net investment income (2)	0.39			0.47
Realized gain on sale of investment (2)	—			—
Net unrealized gain/(loss) on investments (2)	(0.03		)	0.10
Net unrealized (loss) on derivatives (2)	—			(0.01		)
Total from investment operations	0.36			0.56
Less distributions:
Distributions from net investment income