FORM 10-Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

FOR THE QUARTER ENDED JUNE 30, 2012

¨	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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12 b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

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 per share, outstanding as of July 31, 2012 was 21,000,160.

GLADSTONE CAPITAL CORPORATION

TABLE OF CONTENTS


PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Statements of Assets and Liabilities as of June 30, 2012 and September 30, 2011	3
	Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2012 and 2011	4
	Condensed Consolidated Statements of Changes in Net Assets for the nine months ended June 30, 2012 and 2011	5
	Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2012 and 2011	6
	Condensed Consolidated Schedules of Investments as of June 30, 2012 and September 30, 2011	7
	Notes to Condensed Consolidated Financial Statements	15

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
	Overview	35
	Results of Operations	38
	Liquidity and Capital Resources	48

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	59

Item 4.	Controls and Procedures	59

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	60

Item 1A.	Risk Factors	60

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	60

Item 3.	Defaults Upon Senior Securities	60

Item 4.	Mine Safety Disclosures	60

Item 5.	Other Information	60

Item 6.	Exhibits	60

SIGNATURES		61

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)


	June 30, 2012			September 30, 2011
ASSETS
Investments at fair value
Non-Control/Non-Affiliate investments (Cost of $293,579 and $288,266, respectively)	$	260,757		$	257,302
Control investments (Cost of $100,923 and $94,549, respectively)		37,830			45,645

Total investments at fair value (Cost of $394,502 and $382,815, respectively)		298,587			302,947
Cash		9,327			6,732
Restricted cash		1,175			—
Interest receivable – investments in debt securities		2,871			3,066
Interest receivable – employees^(A)		62			—
Due from custodian		5,410			2,547
Deferred financing fees		3,212			650
Other assets		1,062			1,682

TOTAL ASSETS	$	321,706		$	317,624

LIABILITIES
Borrowings at fair value (Cost of $87,300 and $99,400, respectively)	$	91,777		$	100,012
Mandatorily redeemable preferred stock, $0.001 par value per share, $25 liquidation preference per share; 4,000,000 and no shares authorized; 1,539,882 and no shares issued and outstanding at June 30, 2012 and September 30, 2011, respectively		38,497			—
Accounts payable and accrued expenses		339			513
Interest payable		225			289
Fees due to Adviser^(A)		1,726			1,760
Fee due to Administrator^(A)		175			194
Other liabilities		1,954			1,135

TOTAL LIABILITIES	$	134,693		$	103,903

Commitments and contingencies^(B)
NET ASSETS	$	187,013		$	213,721

ANALYSIS OF NET ASSETS
Common stock, $0.001 par value per share, 46,000,000 and 50,000,000 shares authorized; 21,000,160 and 21,039,242 shares issued and outstanding at June 30, 2012 and September 30, 2011, respectively	$	21		$	21
Capital in excess of par value		326,580			326,913
Notes receivable from employees^(A)		(3,519	)		(3,858	)
Cumulative net unrealized depreciation of investments		(95,915	)		(79,867	)
Cumulative net unrealized appreciation of borrowings		(4,477	)		(612	)
Net investment income in excess of distributions		108			108
Accumulated net realized losses		(35,785	)		(28,984	)

TOTAL NET ASSETS	$	187,013		$	213,721

NET ASSET VALUE PER COMMON SHARE AT END OF PERIOD	$	8.91		$	10.16

^(A)	Refer to Note 4—Related Party Transactions for additional information.

^(B)	Refer to Note 10—Commitments and Contingencies for additional information.

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

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)


	Three Months Ended June 30,						Nine Months Ended June 30,
	2012			2011			2012			2011
INVESTMENT INCOME
Interest income
Non-Control/Non-Affiliate investments	$	8,093		$	7,028		$	23,822		$	19,722
Control investments		827			1,406			3,236			3,604
Cash		1			—			7			1
Notes receivable from employees^(A)		62			102			192			346

Total interest income		8,983			8,536			27,257			23,673
Other income
Non-Control/Non-Affiliate investments		978			444			3,020			1,089
Control investments		—			—			—			625

Total other income		978			444			3,020			1,714

Total investment income		9,961			8,980			30,277			25,387


EXPENSES
Base management fee^(A)		1,561			1,451			4,655			4,164
Incentive fee^(A)		1,217			1,133			3,556			3,395
Administration fee^(A)		175			174			579			535
Interest expense on borrowings		1,167			958			3,305			1,316
Dividend expense on mandatorily redeemable preferred stock		686			—			1,806			—
Amortization of deferred financing fees		252			368			987			1,032
Professional fees		135			360			790			894
Other general and administrative expenses		281			196			1,054			799

Expenses before credits from Adviser		5,474			4,640			16,732			12,135
Credits to fees from Adviser^(A)		(382	)		(194	)		(956	)		(348	)

Total expenses net of credits		5,092			4,446			15,776			11,787

NET INVESTMENT INCOME		4,869			4,534			14,501			13,600


REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss):
Non-Control/Non-Affiliate investments		150			—			(8,062	)		161
Control investments		—			(2	)		—			(158	)

Total net realized gain (loss)		150			(2	)		(8,062	)		3
Net unrealized (depreciation) appreciation:
Non-Control/Non-Affiliate investments		(5,128	)		(13,706	)		(1,862	)		(21,768	)
Control investments		(5,994	)		(5,083	)		(14,186	)		(13,035	)
Borrowings		(4,477	)		(53	)		(3,865	)		640

Net unrealized depreciation		(15,599	)		(18,842	)		(19,913	)		(34,163	)

Net realized and unrealized loss		(15,449	)		(18,844	)		(27,975	)		(34,160	)

NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS	$	(10,580	)	$	(14,310	)	$	(13,474	)	$	(20,560	)

NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS PER COMMON SHARE
Basic and Diluted	$	(0.50	)	$	(0.68	)	$	(0.64	)	$	(0.98	)

WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING
Basic and Diluted		21,000,160			21,039,242			21,014,805			21,039,242

^(A)	Refer to Note 4—Related Party Transactions for additional information.

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

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)


	Nine Months Ended June 30,
	2012			2011
OPERATIONS:
Net investment income	$	14,501		$	13,600
Net realized (loss) gain on investments		(8,062	)		3
Net unrealized depreciation of investments		(16,048	)		(34,803	)
Net unrealized (appreciation) depreciation of borrowings		(3,865	)		640

Net decrease in net assets resulting from operations		(13,474	)		(20,560	)


DISTRIBUTIONS:
Distributions to common stockholders		(13,240	)		(13,255	)


CAPITAL TRANSACTIONS:
Stock redemption for repayment of principal on employee notes^(A)		(332	)		—
Repayment of principal on employee notes^(A)		338			2,105

Net increase in net assets from capital transactions		6			2,105


Total decrease in net assets		(26,708	)		(31,710	)
NET ASSETS AT BEGINNING OF PERIOD		213,721			249,246

NET ASSETS AT END OF PERIOD	$	187,013		$	217,536

^(A)	Refer to Note 4—Related Party Transactions for additional information.

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

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)


	Nine Months Ended June 30,
	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net decrease in net assets resulting from operations	$	(13,474	)	$	(20,560	)
Adjustments to reconcile net decrease in net assets resulting from operations to net cash used in operating activities:
Purchase of investments		(66,254	)		(118,646	)
Principal repayments on investments		39,980			39,855
Proceeds from sale of investments		6,459			777
Increase in investment balance due to paid-in-kind interest		—			(12	)
Increase in investment balance due to transferred interest		—			(204	)
Net change in premiums, discounts and amortization		(115	)		1,420
Net realized loss (gain) on investments		8,242			(163	)
Net unrealized depreciation of investments		16,048			34,803
Net unrealized appreciation (depreciation) of borrowings		3,865			(640	)
Increase in restricted cash		(1,175	)		—
Amortization of deferred financing fees		987			1,032
Decrease in interest receivable		133			36
Increase in due from custodian		(2,863	)		(1,667	)
Decrease (increase) in other assets		620			(42	)
Decrease in accounts payable and accrued expenses		(175	)		(151	)
Decrease in interest payable		(64	)		(430	)
(Decrease) increase in fees due to Adviser^(A)		(19	)		1,118
Decrease in fee due to Administrator^(A)		(34	)		(93	)
Increase in other liabilities		819			118

Net cash used in operating activities		(7,020	)		(63,449	)


CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings		69,900			109,800
Repayments on borrowings		(82,000	)		(34,400	)
Proceeds from issuance of mandatorily redeemable preferred stock		38,497			—
Deferred financing fees		(3,548	)		(759	)
Distributions paid to common stockholders		(13,240	)		(13,255	)
Receipt of principal on employee notes		6			2,105

Net cash provided by financing activities		9,615			63,491


NET INCREASE IN CASH		2,595			42

CASH, BEGINNING OF PERIOD		6,732			7,734

CASH, END OF PERIOD	$	9,327		$	7,776


NON-CASH ACTIVITIES^(B)	$	332		$	—

^(A)	Refer to Note 4—Related Party Transactions for additional information.

^(B)	Redemption of 39,082 shares of common stock to reduce the principal balance of an employee loan by $332. Refer to Note 7—Common Stock for additional information.

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

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS

AS OF JUNE 30, 2012

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)


Company^(A)	Industry	Investment^(B)	Principal		Cost		Fair Value
NON-CONTROL/NON-AFFILIATE INVESTMENTS:
Non-syndicated Loans:
Access Television Network, Inc.	Service-cable airtime (infomercials)	Senior Term Debt (14.0%, Due 2/2011) ^{(D) (H)}	$	903	$	903	$	—
Allison Publications, LLC	Service-publisher of consumer oriented Magazines	Senior Term Debt (10.5%, Due 9/2012) ^(D)		8,014		8,018		7,453
BAS Broadcasting	Service-radio station operator	Senior Term Debt (11.5%, Due 7/2013) ^(D)		7,465		7,465		2,240
Chinese Yellow Pages Company	Service-publisher of Chinese language directories	Line of Credit, $0 available (7.3%, Due 11/2012) ^(D)		450		450		225
		Senior Term Debt (7.3%, Due 11/2012) ^(D)		33		33		17

						483		242
CMI Acquisition, LLC	Service-recycling	Senior Subordinated Term Debt (14.0%, Due 12/2016) ^(D)		14,265		14,265		13,552
FedCap Partners, LLC	Private equity fund	Class A Membership Units (80 units) ^(G)				1,200		2,163
		Uncalled Capital Commitment ($800)
Francis Drilling Fluids, Ltd.	Service—oil and natural gas drilling logistics network provider	Senior Subordinated Term Debt (12.0%, Due 11/2017) ^(I)		15,000		15,000		15,000
		Common Stock Warrants (4.2% ownership) ^{(G) (I)}				1,000		1,000

						16,000		16,000
GFRC Holdings, LLC	Manufacturing-glass-fiber reinforced concrete	Senior Term Debt (11.5%, Due 12/2013) ^(D)		5,224		5,224		2,612
		Senior Subordinated Term Debt (14.0%, Due 12/2013) ^(D)		6,598		6,598		3,299

						11,822		5,911
Heartland Communications Group	Service-radio station operator	Line of Credit, $0 available (5.0%, Due 3/2013) ^(D)		100		100		33
		Line of Credit, $55 available (10.0%, Due 3/2013) ^(D)		45		45		15
		Senior Term Debt (5.0%, Due 3/2013) ^(D)		4,343		4,329		1,411
		Common Stock Warrants (8.8% ownership) ^{(F) (G)}				66		—

						4,540		1,459
International Junior Golf Training Acquisition Company	Service-golf training	Line of Credit, $200 available (11.0%, Due 5/2014) ^(D)		2,025		2,025		1,215
		Senior Term Debt (10.5%, Due 5/2014) ^(D)		561		561		337
		Senior Term Debt (12.5%, Due 5/2014) ^(C)(D)		2,500		2,500		1,500

						5,086		3,052
Legend Communications of Wyoming, LLC	Service-operator of radio stations	Senior Term Debt (12.0%, Due 6/2013) ^(D)		8,932		8,932		4,466
North American Aircraft Services, LLC	Service—repairs and maintains aircraft fuel tanks and fuel systems	Line of Credit, $500 available (6.5%, Due 8/2012) ^(D)		1,500		1,500		1,478
		Senior Term Debt (7.5%, Due 8/2016) ^(D)		4,516		4,516		4,448
		Senior Subordinated Term Debt (11.8%, Due 8/2016) ^(D)		4,750		4,750		4,679
		Senior Subordinated Term Debt (12.5%, Due 8/2016) ^(D)		2,820		2,820		2,778
		Common Stock Warrants (4.6% ownership) ^{(F) (G)}				350		452

						13,936		13,835
Northstar Broadband, LLC	Service-cable TV franchise owner	Senior Term Debt (0.7%, Due 12/2012) ^(D)		35		31		30
Ohana Media Group	Service—AM/FM radio broadcast	Senior Term Debt (10.0%, Due 10/2016)^(D)		1,590		1,590		1,423
POP Radio, L.P.	Service—advertiser-supported in-store radio network	Senior Term Debt (11.8%, Due 5/2017) ^(I)		11,500		11,500		11,500
		Senior Subordinated Term Debt (11.0%, Due 11/2017) ^(I)		500		500		500

						12,000		12,000
Precision Acquisition Group Holdings, Inc.	Manufacturing-consumable components for the Aluminum industry	Equipment Note (13.0%, Due 3/2013) ^(D)		1,000		1,000		820
		Senior Term Debt (13.0%, Due 3/2013) ^(D)		4,125		4,125		3,383
		Senior Term Debt (13.0%, Due 3/2013) ^{(C) (D)}		4,053		4,053		3,323

						9,178		7,526
PROFIT Systems Acquisition Co.	Service-design and develop ERP Software	Line of Credit, $350 available (11.3%, Due 7/2012)^(D)		—		—		—
		Senior Term Debt (10.5%, Due 7/2014) ^{(C) (D)}		2,700		2,700		2,538

						2,700		2,538
Reliable Biopharmaceutical Holdings, Inc.	Manufacturing-pharmaceutical and biochemical intermediates	Line of Credit, $1,100 available (9.0%, Due 1/2013) ^(D)		2,900		2,900		2,683
		Mortgage Note (9.5%, Due 12/2014) ^(D)		7,098		7,098		6,566
		Senior Term Debt (12.0%, Due 12/2014) ^{(C) (D)}		11,482		11,482		10,621
		Senior Subordinated Term Debt (12.5%, Due 12/2014) ^(D)		6,000		6,000		5,550
		Common Stock Warrants (764 shares)^{(F) (G)}				209		—

						27,689		25,420

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

AS OF JUNE 30, 2012

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)


Company^(A)	Industry	Investment^(B)	Principal		Cost		Fair Value
NON-CONTROL/NON-AFFILIATE INVESTMENTS (Continued):
Saunders & Associates	Manufacturing-equipment provider for frequency control devices	Line of Credit, $1,500 available (11.3%, Due 5/2013) ^(D)	$	—	$	—	$	—
		Senior Term Debt (11.3%, Due 5/2013) ^(D)		8,947		8,947		7,828

						8,947		7,828
Sunburst Media—Louisiana, LLC	Service-radio station operator	Senior Term Debt (10.5%, Due 11/2013) ^(D)		6,000		6,000		1,800

Thibaut Acquisition Co.	Service-design and distribute wall Covering	Line of Credit, $450 available (9.0%, Due 1/2014) ^(D)		550		550		538
		Senior Term Debt (8.5%, Due 1/2014) ^(D)		156		156		153
		Senior Term Debt (12.0%, Due 1/2014) ^{(C) (D)}		3,000		3,000		2,917

						3,706		3,608
Westlake Hardware, Inc.	Retail-hardware and variety	Senior Subordinated Term Debt (12.3%, Due 1/2014) ^(D)		12,000		12,000		11,580
		Senior Subordinated Term Debt (13.5%, Due 1/2014) ^(D)		8,000		8,000		7,680

						20,000		19,260
Westland Technologies, Inc.	Service-diversified conglomerate	Senior Term Debt (7.5%, Due 4/2016)^(D)		1,650		1,650		1,567
		Senior Term Debt (12.5%, Due 4/2016) ^(D)		4,000		4,000		3,800
		Common Stock Warrants (77,287 shares) ^{(F) (G)}				350		260

						6,000		5,627
Winchester Electronics	Manufacturing-high bandwidth connectors and cables	Senior Term Debt (6.5%, Due 5/2013) ^{(D) (J)}		1,250		1,250		1,250
		Senior Term Debt (7.0%, Due 5/2013) ^{(D) (J)}		1,665		1,665		1,665
		Senior Subordinated Term Debt (13.5%, Due 6/2013) ^{(D) (J)}		9,725		9,725		9,725

						12,640		12,640

*Subtotal —Non-syndicated loans*					$	203,131	$	170,073

Syndicated Loans:
Airvana Network Solutions, Inc.	Service-telecommunications	Senior Term Debt (10.0%, Due 3/2015) ^(E)	$	2,143	$	2,077	$	2,078
Allied Security Holdings, LLC	Service-contract security officer providers	Senior Subordinated Term Debt (8.5%, Due 2/2018) ^(E)		1,000		991		990
Allied Specialty Vehicles, Inc.	Manufacturing-specialty vehicles	Senior Term Debt (9.5%, Due 2/2016) ^(E)		9,875		9,719		9,677
Ameriqual Group, LLC	Manufacturing-production and distribution of food products	Senior Term Debt (9.0%, Due 3/2016) ^(E)		7,425		7,307		7,276
Applied Systems, Inc.	Software for property & casualty insurance industry	Senior Subordinated Term Debt (9.3%, Due 6/2017) ^(E)		1,000		991		990
Ascend Learning, LLC	Service-technology-based learning solutions	Senior Subordinated Term Debt (11.5%, Due 12/2017) ^(E)		1,000		974		997
Autoparts Holdings Limited	Distributor—light and heavy-duty vehicle replacement parts	Senior Term Debt (10.5%, Due 1/2018) ^(E)		1,000		996		870
Blue Coat Systems, Inc.	Distributor—internet security and network acceleration appliances	Senior Subordinated Term Debt (11.5%, Due 8/2018)^(E)		8,500		8,497		8,500
HGI Holding, Inc	Service— distributor of disposable medical products	Senior Term Debt (6.8%, Due 10/2016)^(E)		1,566		1,538		1,566
Hubbard Radio, LLC	Service-radio station operator	Senior Subordinated Term Debt (8.8%, Due 4/2018) ^(E)		500		496		499
Keypoint Government Solutions, Inc.	Service-security consulting services	Senior Term Debt (10.0%, Due 12/2015) ^(E)		6,380		6,354		6,284
Mood Media Corporation	Service-media and marketing solutions	Senior Term Debt (10.3%, Due 11/2018) ^(E)		8,000		7,928		7,760
National Surgical Hospitals, Inc.	Service-physician-partnered surgical facilities	Senior Term Debt (8.3%, Due 2/2017) ^(E)		1,682		1,649		1,631
PLATO Learning, Inc.	Service—education based software provider	Senior Subordinated Term Debt (11.3%, Due 5/2019) ^(E)		5,000		4,901		4,900
Sensus USA, Inc.	Service-provider of utility communication Services	Senior Term Debt (8.5%, Due 5/2018) ^(E)		500		496		497
Springs Window Fashions, LLC	Manufacturing-window coverings	Senior Term Debt (11.3%, Due 11/2017) ^(E)		7,000		6,848		6,790

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

AS OF JUNE 30, 2012

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)


Company^(A)	Industry	Investment^(B)	Principal		Cost		Fair Value
NON-CONTROL/NON-AFFILIATE INVESTMENTS (Continued):
SRAM, LLC	Manufacturing-premium bicycle components	Senior Term Debt (8.5%, Due 12/2018) ^(E)	$	2,500	$	2,478	$	2,513
Targus Group International, Inc.	Manufacturing-carrying cases and accessories for notebook computers	Senior Term Debt (11.0%, Due 5/2016) ^(E)		9,900		9,735		9,801
Ulterra Drilling Technologies, LP	Manufacturing-oil field drill bits and slick-slip reduction tools	Senior Term Debt (9.5%, Due 6/2016) ^(E)		1,888		1,856		1,892
Vision Solutions, Inc.	Service-provider of information availability software	Senior Term Debt (9.5%, Due 7/2017)^(E)		11,000		10,923		10,890
Wall Street Systems Holdings, Inc.	Service-software provider	Senior Term Debt (9.0%, Due 6/2018) ^(E)		3,000		2,973		3,008
WP Evenflo Group Holdings, Inc.	Manufacturing-infant and juvenile Products	Senior Term Debt (8.0%, Due 2/2013) ^(E)		277		277		274
		Senior Preferred Equity (333 shares) ^{(F) (G)}				111		450
		Junior Preferred Equity (111 shares) ^{(F) (G)}				333		160
		Common Stock (1,874 shares) ^{(F) (G)}				—		389

						721		1,273

*Subtotal—Syndicated loans*					$	90,448	$	90,682

Total Non-Control/Non-Affiliate Investments (represented 87.3% of total investments at fair value)					$	293,579	$	260,755

CONTROL INVESTMENTS:
BERTL, Inc.	Service-web-based evaluator of imaging products	Line of Credit, $150 available (6.5%, Due 7/2012)^{(F) (H)}	$	1,359	$	1,359	$	—
		Common Stock (100 shares) ^{(F) (G)}				424		—

						1,783		—
Defiance Integrated Technologies, Inc.	Manufacturing-trucking parts	Senior Term Debt (11.0%, Due 4/2013) ^{(C) (F)}		7,265		7,265		7,265
		Common Stock (15,500 shares) ^{(F) (G)}				1		7,099

						7,266		14,364
Kansas Cable Holdings, Inc.	Service - cable, internet, voice provider	Line of Credit, $155 available (10.0%, Due 10/2012)^{(D) (H)}		820		811		4
		Senior Term Debt (10.0%, Due 10/2012) ^{(D) (H)}		1,500		1,444		8
		Senior Term Debt (10.0%, Due 10/2012) ^{(D) (H)}		1,039		1,000		5
		Common Stock (100 shares) ^{(F) (G)}				—		—

						3,255		17
Lindmark Acquisition, LLC	Service-advertising	Senior Subordinated Term Debt (11.0%, Due 10/2012) ^{(D) (H)}		10,000		10,000		1,000
		Senior Subordinated Term Debt (13.0%, Due 10/2012) ^{(D) (H)}		2,000		2,000		200
		Senior Subordinated Term Debt (13.0%, Due Upon Demand) ^{(D) (H)}		1,909		1,909		191
		Common Stock (100 shares) ^{(F) (G)}				317		—

						14,226		1,391
LocalTel, LLC	Service-yellow pages publishing	Line of credit, $435 available (10.0%, Due 6/2013) ^{(F) (H)}		2,415		2,415		559
		Line of Credit, $1,830 available (4.7%, Due 6/2013) ^{(F) (H)}		1,170		1,170		—
		Senior Term Debt (12.5%, Due 6/2013) ^{(F) (H)}		325		325		—
		Senior Term Debt (8.5%, Due 6/2013) ^{(F) (H)}		2,688		2,687		—
		Senior Term Debt (10.5%, Due 6/2013) ^{(C) (F) (H)}		2,750		2,750		—
		Common Stock Warrants (4,000 shares) ^{(F) (G)}				—		—

						9,347		559
Midwest Metal Distribution, Inc.	Distribution-aluminum sheets and stainless steel	Senior Subordinated Term Debt (12.0%, Due 7/2013) ^(D)		18,281		18,269		17,595
		Common Stock (501 shares) ^{(F) (G)}				138		—

						18,407		17,595
Sunshine Media Holdings	Service-publisher regional B2B trade magazines	Line of credit, $351 available (4.8%, Due 8/2014) ^{(D) (H)}		1,649		1,649		165
		Senior Term Debt (4.8%, Due 5/2016) ^{(D) (H)}		16,948		16,948		1,695
		Senior Term Debt (5.5%, Due 5/2016) ^{(C) (D) (H)}		10,700		10,700		1,070
		Junior Preferred Equity (14,2573 shares) ^{(F) (G)}				5,275		—
		Common Stock (934 shares) ^{(F) (G)}				740		—

						35,312		2,930
U.S. Healthcare Communications, Inc.	Service-magazine publisher/operator	Line of credit, $131 available (6.0%, Due 12/2010) ^{(F) (H)}		269		269		—
		Line of credit, $0 available (6.0%, Due 12/2010) ^{(F) (H)}		450		450		—
		Common Stock (100 shares) ^{(F) (G)}				2,470		—

						3,189		—

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

AS OF JUNE 30, 2012

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)


Company^(A)	Industry	Investment^(B)	Principal		Cost		Fair Value
CONTROL INVESTMENTS (Continued):
Viapack, Inc.	Manufacturing-polyethylene film	Line of Credit, $187 available (6.5%, Due 3/2013) ^(D)	$	3,613	$	3,613	$	433
		Senior Real Estate Term Debt (5.0%, Due 3/2014) ^(D)		600		600		72
		Senior Term Debt (6.2%, Due 3/2014) ^{(C) (D) (H)}		3,925		3,925		471
		Preferred Equity (100 shares) ^{(F) (G)}				—		—
		Guarantee ($300)

						8,138		976

Total Control Investments (represented 12.7% of total investments at fair value)					$	100,923	$	37,832

Total Investments					$	394,502	$	298,587

^(A)	Certain of the securities listed in the above schedule are issued by affiliate(s) of the indicated portfolio company.

^(B)	Percentage represents interest rates in effect at June 30, 2012, and due date represents the contractual maturity date.

^(C)	Last Out Tranche (“LOT”) of senior debt, meaning if the portfolio company is liquidated, the holder of the LOT is paid after the senior debt.

^(D)	Fair value was primarily based on opinions of value submitted by Standard & Poor’s Securities Evaluations, Inc.

^(E)	Security valued based on the indicative bid price on or near June 30, 2012, offered by the respective syndication agent’s trading desk or secondary desk.

^(F)	Fair value was primarily based on the total enterprise value of the portfolio company using a liquidity waterfall approach. We also considered discounted cash flow methodologies.

^(G)	Security is non-income producing.

^(H)	Debt security is on non-accrual status.

^(I)	New proprietary portfolio investment valued at cost, as it was determined that the price paid during the three months ended June 30, 2012, best represents fair value as of June 30, 2012.

^(J)	Security was paid off, at par, subsequent to June 30, 2012, and was valued based on the payoff.

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

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2011

(DOLLAR AMOUNTS IN THOUSANDS)


Company^(A)	Industry	Investment^(B)	Principal		Cost		Fair Value
NON-CONTROL/NON-AFFILIATE INVESTMENTS:

Non-syndicated Loans:

Access Television Network, Inc.	Service-cable airtime (infomercials)	Senior Term Debt (14.0%, Due 2/2011) ^{(D) (H)}	$	903	$	903	$	45

Allison Publications, LLC	Service-publisher of consumer oriented magazines	Senior Term Debt (10.5%, Due 9/2012) ^(D)		8,463		8,478		7,861

BAS Broadcasting	Service-radio station operator	Senior Term Debt (11.5%, Due 7/2013) ^(D)		7,465		7,465		6,233

Chinese Yellow Pages Company	Service-publisher of Chinese language directories	Line of Credit, $250 available (7.3%, Due 11/2011) ^(D)		450		450		338
		Senior Term Debt (7.3%, Due 11/2011) ^(D)		168		168		126

						618		464

CMI Acquisition, LLC	Service-recycling	Senior Subordinated Term Debt (13.0%, Due 12/2016) ^(D)		14,265		14,265		14,336

FedCap Partners, LLC	Private equity fund	Class A Membership Units (80 units) ^(G)				1,200		1,153
		Uncalled Capital Commitment ($800)

GFRC Holdings, LLC	Manufacturing-glass-fiber reinforced concrete	Senior Term Debt (11.5%, Due 12/2012) ^(D)		5,617		5,617		4,719
		Senior Subordinated Term Debt (14.0%, Due 12/2012) ^(D)		6,615		6,615		5,557

						12,232		10,276

Global Materials Technologies, Inc.	Manufacturing-steel wool products and metal fibers	Senior Term Debt (13.0%, Due 6/2012) ^{(C) (D)}		2,635		2,635		2,212

Heartland Communications Group	Service-radio station operator	Line of Credit, $0 available (5.0%, Due 3/2013) ^(D)		100		100		41
		Line of Credit, $0 available (10.0%, Due 3/2013) ^(D)		100		100		41
		Senior Term Debt (5.0%, Due 3/2013) ^(D)		4,342		4,316		1,780
		Common Stock Warrants (8.8% ownership) ^{(F) (G)}				66		—

						4,582		1,862

International Junior Golf Training Acquisition Company	Service-golf training	Line of Credit, $0 available (11.0%, Due 5/2012) ^(D)		1,500		1,500		1,275
		Senior Term Debt (10.5%, Due 5/2012) ^(D)		861		861		732
		Senior Term Debt (12.5%, Due 5/2012) ^(C)(D)		2,500		2,500		2,125

						4,861		4,132

KMBQ Corporation	Service-AM/FM radio broadcaster	Line of Credit, $42 available (12.3%, Due 7/2010) ^{(D) (H)}		162		158		76
		Senior Term Debt (12.3%, Due 7/2010) ^{(D) (H)}		2,081		2,038		984

						2,196		1,060

Legend Communications of Wyoming, LLC	Service-operator of radio stations	Senior Term Debt (12.0%, Due 6/2013) ^(D)		9,745		9,745		5,408
		Senior Term Debt (16.0%, Due 7/2011) ^(D)		220		220		123

						9,965		5,531

Newhall Holdings, Inc.	Service-distributor of personal care products and supplements	Line of Credit, $0 available (8.0%, Due 12/2012) ^{(D) (H)}		1,985		1,985		98
		Senior Term Debt (8.5%, Due 12/2012) ^{(D) (H)}		1,870		1,870		94
		Senior Term Debt (3.5%, Due 12/2012) ^(C) ^{(D) (H)}		2,000		2,000		100
		Senior Term Debt (3.5%, Due 12/2012) ^{(C) (D) (H)}		4,648		4,648		232
		Preferred Equity (1,000,000 shares) ^{(F) (G) (H)}				—		—
		Common Stock (688,500 shares) ^{(F) (G)}				—		—

						10,503		524

North American Aircraft Services LLC	Service - repairs and maintains aircraft fuel tanks and fuel systems	Line of Credit, $1,500 available (6.5%, Due 8/2012) ^(D)		500		500		500
		Senior Term Debt (7.5%, Due 8/2016) ^(D)		3,250		3,250		3,250
		Senior Subordinated Term Debt (11.8%, Due 8/2016) ^(D)		4,750		4,750		4,750
		Common Stock Warrants (4.8% ownership) ^{(F) (G)}				350		350

						8,850		8,850

Northern Contours, Inc.	Manufacturing-veneer and laminate components	Senior Subordinated Term Debt (13.0%, Due 9/2012) ^(D)		6,128		6,128		5,684

Northstar Broadband, LLC	Service-cable TV franchise owner	Senior Term Debt (0.7%, Due 12/2012) ^(D)		80		70		64

Precision Acquisition Group Holdings, Inc.	Manufacturing-consumable components for the aluminum industry	Equipment Note (13.0%, Due 11/2011) ^(D)		1,000		1,000		948
		Senior Term Debt (13.0%, Due 11/2011) ^(D)		4,125		4,125		3,908
		Senior Term Debt (13.0%, Due 11/2011) ^{(C) (D)}		4,053		4,053		3,840

						9,178		8,696

PROFIT Systems Acquisition Co.	Service-design and develop ERP software	Line of Credit, $350 available (11.25%, Due 7/2012)^(D)		—		—		—
		Senior Term Debt (10.5%, Due 7/2014) ^{(C) (D)}		3,150		3,150		3,024

						3,150		3,024

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

AS OF SEPTEMBER 30, 2011

(DOLLAR AMOUNTS IN THOUSANDS)


Company^(A)	Industry	Investment^(B)	Principal		Cost		Fair Value
NON-CONTROL/NON-AFFILIATE INVESTMENTS (Continued):
RCS Management Holding Co.	Service-healthcare supplies	Senior Term Debt (9.5%, Due 1/2013) ^(D)	$	1,438	$	1,438	$	1,367
		Senior Term Debt (11.5%, Due 1/2013) ^{(C) (D)}		3,060		3,060		2,907

						4,498		4,274

Reliable Biopharmaceutical Holdings, Inc.	Manufacturing-pharmaceutical and biochemical intermediates	Line of Credit, $2,800 available (9.0%, Due 1/2013) ^(D)		1,200		1,200		1,176
	Manufacturing-pharmaceutical and biochemical intermediates	Mortgage Note (9.5%, Due 12/2014) ^(D)		7,168		7,168		7,025
		Senior Term Debt (12.0%, Due 12/2014) ^(C)(D)		11,573		11,573		10,906
		Senior Subordinated Term Debt (12.5%, Due 12/2014) ^(D)		6,000		6,000		5,655
		Common Stock Warrants (764 shares)^{(F) (G)}				209		534

						26,150		25,296

Saunders & Associates	Manufacturing-equipment provider for frequency control devices	Line of Credit, $2,500 available (11.3%, Due 5/2013) ^(D)		—		—		—
		Senior Term Debt (11.3%, Due 5/2013) ^(D)		8,947		8,947		8,913

						8,947		8,913

Sunburst Media—Louisiana, LLC	Service-radio station operator	Senior Term Debt (10.5%, Due 12/2011) ^(D)		6,100		6,103		3,964

Thibaut Acquisition Co.	Service-design and distribute wall covering	Line of Credit, $400 available (9.0%, Due 1/2014) ^(D)		600		600		585
	Service-design and distribute wall covering	Senior Term Debt (8.5%, Due 1/2014) ^(D)		550		550		536
		Senior Term Debt (12.0%, Due 1/2014) ^{(C) (D)}		3,000		3,000		2,910

						4,150		4,031

Westlake Hardware, Inc.	Retail-hardware and variety	Senior Subordinated Term Debt (12.3%, Due 1/2014) ^(D)		12,000		12,000		11,640
		Senior Subordinated Term Debt (13.5%, Due 1/2014) ^(D)		8,000		8,000		7,700

						20,000		19,340

Westland Technologies, Inc.	Service-diversified conglomerate	Line of Credit, $1,000 available (6.5%, Due 4/2012) ^(D)		—		—		—
		Senior Term Debt (7.5%, Due 4/2016)^(D)		2,000		2,000		1,995
		Senior Term Debt (12.5%, Due 4/2016) ^(D)		4,000		4,000		3,990
		Common Stock Warrants (77,287 shares) ^{(F) (G)}				350		307

						6,350		6,292

Winchester Electronics	Manufacturing-high bandwidth connectors and cables	Senior Term Debt (5.2%, Due 5/2012) ^(D)		1,250		1,250		1,238
	Manufacturing-high bandwidth connectors and cables	Senior Term Debt (5.7%, Due 5/2013) ^(D)		1,677		1,677		1,656
		Senior Subordinated Term Debt (14.0%, Due 6/2013) ^(D)		9,800		9,800		9,628

						12,727		12,522

*Subtotal—Non-syndicated loans*					$	196,204	$	166,639

Syndicated Loans:

Airvana Network Solutions, Inc.	Service-telecommunications	Senior Term Debt (10.0%, Due 3/2015) ^(E)	$	6,048	$	5,912	$	6,048

Allied Security Holdings, LLC	Service-contract security officer providers	Senior Subordinated Term Debt (8.5%, Due 2/2018) ^(E)		1,000		991		965

Allied Specialty Vehicles, Inc.	Manufacturing-specialty vehicles	Senior Term Debt (9.5%, Due 2/2016) ^(E)		9,950		9,767		9,751

Ameriqual Group, LLC	Manufacturing-production and distribution of food products	Senior Term Debt (9.0%, Due 3/2016) ^(E)		7,481		7,344		7,332

Applied Systems, Inc.	Software for property & casualty insurance industry	Senior Subordinated Term Debt (9.3%, Due 6/2017) ^(E)		1,000		991		990

Ascend Learning, LLC	Service-technology-based learning solutions	Senior Subordinated Term Debt (11.53%, Due 12/2017) ^(E)		1,000		972		980

Attachmate Corporate	Service-develops, implements and supports software	Senior Subordinated Term Debt (9.5%, Due 2/2017) ^(E)		4,000		3,962		3,810

Autoparts Holdings Limited	Supplier to the light and heavy-duty vehicle after market for replacement parts	Senior Term Debt (10.5%, Due 1/2018) ^(E)		1,000		995		978

Covad Communications Group, Inc.	Service-telecommunications	Senior Term Debt (12.0%, Due 11/2015) ^(E)		1,850		1,818		1,795

Ernest Health, Inc.	Service-post-acute care services	Senior Term Debt (10.3%, Due 5/2017)^(E)		2,000		1,971		1930

Global Brass and Copper, Inc.	Manufacturing—steel wool products and metal fibers	Senior Term Debt (10.3%, Due 8/2015) ^(E)		2,969		2,893		3,054

HGI Holding, Inc	Service—distributor of disposable medical products	Senior Term Debt (6.8%, Due 10/2016)^(E)		1,757		1,723		1,687

Hubbard Radio, LLC	Service-radio station operator	Senior Subordinated Term Debt (8.8%, Due 4/2018) ^(E)		500		495		488

Keypoint Government Solutions, Inc.	Service-security consulting services	Senior Term Debt (10.0%, Due 12/2015) ^(E)		6,948		6,916		6,670

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

AS OF SEPTEMBER 30, 2011

(DOLLAR AMOUNTS IN THOUSANDS)


Company^(A)	Industry	Investment^(B)	Principal		Cost		Fair Value
NON-CONTROL/NON-AFFILIATE INVESTMENTS (Continued):
Mood Media Corporation	Service-media and marketing solutions	Senior Term Debt (10.3%, Due 11/2018) ^(E)	$	8,000	$	7,923	$	7,370

National Surgical Hospitals, Inc.	Service-physician-partnered surgical facilities	Senior Term Debt (8.3%, Due 2/2017) ^(E)		1,694		1,658		1,627

Sensus USA, Inc.	Service-provider of utility communication services	Senior Term Debt (8.5%, Due 5/2018) ^(E)		500		495		483

Springs Window Fashions, LLC	Manufacturing-window coverings	Senior Term Debt (11.3%, Due 11/2017) ^(E)		5,000		4,855		4,750

SRAM, LLC	Manufacturing-premium bicycle components	Senior Term Debt (8.5%, Due 12/2018) ^(E)		2,500		2,476		2,475

Targus Group International, Inc.	Manufacturing-carrying cases and accessories for notebook computers	Senior Term Debt (11.0%, Due 5/2016) ^(E)		9,975		9,785		9,626

Ulterra Drilling Technologies, LP	Manufacturing-oil field drill bits and slick-slip reduction tools	Senior Term Debt (9.5%, Due 6/2016) ^(E)		1,975		1,937		1,916

Vision Solutions, Inc.	Service-provider of information availability software	Senior Term Debt (9.5%, Due 7/2017)^(E)		11,000		10,915		10,560

Wall Street Systems Holdings, Inc.	Service-software provider	Senior Term Debt (9.0%, Due 6/2018) ^(E)		3,000		2,971		2,880

WP Evenflo Group Holdings Inc.	Manufacturing-infant and juvenile products	Senior Term Debt (8.0%, Due 2/2013) ^(E)		1,853		1,853		1,723
		Senior Preferred Equity (333 shares) ^(F) (G)				333		419
		Junior Preferred Equity (111 shares) ^(F) (G)				111		146
		Common Stock (1,874 shares) ^{(F) (G)}				—		210

						2,297		2,498

*Subtotal—Syndicated loans*					$	92,062	$	90,663

Total Non-Control/Non-Affiliate Investments (represented 84.9% of total investments at fair value)					$	288,266	$	257,302


CONTROL INVESTMENTS:

BERTL, Inc.	Service-web-based evaluator of imaging products	Line of Credit, $6 available (6.4%, Due 10/2011)^{(F) (H)}	$	1,427	$	1,355	$	—
		Common Stock (100 shares) ^{(F) (G)}				424		—

						1779		—

Defiance Integrated Technologies, Inc.	Manufacturing-trucking parts	Senior Term Debt (11.0%, Due 4/2013) ^{(C) (F)}		7,505		7,505		7,505
		Common Stock (15,500 shares) ^{(F) (G)}				1		7,534

						7,506		15,039

Kansas Cable Holdings, Inc.	Service - cable, internet, voice provider	Line of Credit, $179 available (10.0%, Due 10/2012)^{(D) (H)}		346		337		14
		Senior Term Debt (10.0%, Due 10/2012) ^{(D) (H)}		1,500		1,444		60
		Senior Term Debt (10.0%, Due 10/2012) ^{(D) (H)}		1,039		1,000		42
		Common Stock (100 shares) ^{(F) (G)}				—		—

						2,781		116

Lindmark Acquisition, LLC	Service-advertising	Senior Subordinated Term Debt (11.0%, Due 10/2012)^(D)(H)		10,000		10,000		2,000
		Senior Subordinated Term Debt (13.0%, Due 10/2012)^(D)(H)		2,000		2,000		400
		Senior Subordinated Term Debt (13.0%, Due Upon Demand) ^{(D) (H)}		1,908		1,908		383
		Common Stock (100 shares) ^{(F) (G)}				317		—

						14,225		2,783

LocalTel, LLC	Service-yellow pages publishing	Line of credit, $2 available (10.0%, Due 12/2011) ^{(F) (H)}		1,848		1,848		734
		Line of Credit, $1,830 available (4.7%, Due 6/2012) ^{(F) (H)}		1,170		1,170		—
		Senior Term Debt (12.5%, Due 2/2012) ^{(F) (H)}		325		325		—
		Senior Term Debt (8.5%, Due 6/2012) ^{(F) (H)}		2,688		2,688		—
		Senior Term Debt (10.5%, Due 6/2012) ^{(C) (F) (H)}		2,750		2,750		—
		Common Stock Warrants (4,000 shares) ^{(F) (G)}				—		—

						8,781		734

Midwest Metal Distribution, Inc.	Distribution-aluminum sheets and stainless steel	Senior Subordinated Term Debt (12.0%, Due 7/2013) ^(D)		18,281		18,262		17,184
		Common Stock (501 shares) ^{(F) (G)}				138		—

						18,400		17,184

Sunshine Media Holdings	Service-publisher regional B2B trade magazines	Line of credit, $1,100 available (10.5%, Due 8/2014) ^(D)		900		900		270
		Senior Term Debt (10.5%, Due 5/2016) ^(D)		16,948		16,948		5,084
		Senior Term Debt (5.0%, Due 5/2016) ^{(C) (D)}		10,700		10,700		3,210
		Junior Preferred Equity (6,689 shares) ^{(F) (G)}				2,475		—
		Common Stock (934 shares) ^{(F) (G)}				740		—

						31,763		8,564

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

AS OF SEPTEMBER 30, 2011

(DOLLAR AMOUNTS IN THOUSANDS)


Company^(A)	Industry	Investment^(B)	Principal		Cost		Fair Value
CONTROL INVESTMENTS (Continued):

U.S. Healthcare Communications, Inc.	Service-magazine publisher/operator	Line of credit, $131 available (6.0%, Due 12/2010) ^{(F) (H)}	$	269	$	269	$	—
		Line of credit, $0 available (6.0%, Due 12/2010) ^{(F) (H)}		450		450		—
		Common Stock (100 shares) ^{(F) (G)}				2,470		—

						3,189		—

Viapack, Inc.	Manufacturing-polyethylene film	Line of Credit, $900 available (10.0%, Due 3/2013) ^(D)		1,600		1,600		320
		Senior Real Estate Term Debt (10.0%, Due 3/2014) ^(D)		600		600		120
		Senior Term Debt (13.0%, Due 3/2014) ^{(C) (D)}		3,925		3,925		785
		Preferred Equity (100 shares) ^{(F) (G)}				—		—

						6,125		1,225

Total Control Investments (represented 15.1% of total investments at fair value)					$	94,549	$	45,645

Total Investments					$	382,815	$	302,947

^(A)	Certain of the securities listed in the above schedule are issued by affiliate(s) of the indicated portfolio company.

^(B)	Percentage represents interest rates in effect at September 30, 2011, and due date represents the contractual maturity date.

^(C)	Last Out Tranche (“LOT”) of senior debt, meaning if the portfolio company is liquidated, the holder of the LOT is paid after the senior debt.

^(D)	Fair value was primarily based on opinions of value submitted by Standard & Poor’s Securities Evaluations, Inc.

^(E)	Security valued based on the indicative bid price on or near September 30, 2011, offered by the respective syndication agent’s trading desk or secondary desk.

^(F)	Fair value was primarily based on the total enterprise value of the portfolio company using a liquidity waterfall approach. We also considered discounted cash flow methodologies.

^(G)	Security is non-income producing.

^(H)	Debt security is on non-accrual status.

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

GLADSTONE CAPITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 2012

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA AND AS OTHERWISE INDICATED)

NOTE 1. ORGANIZATION

Gladstone Capital Corporation was incorporated under the General Corporation Laws of the State of Maryland on May 30, 2001 and completed an initial public offering on August 23, 2001. The terms “we,” “our,” and “us” all refer to Gladstone Capital Corporation and its consolidated subsidiaries. We are a closed-end, non-diversified management investment company that has elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, we have elected to be treated for tax purposes as a regulated investment company (“RIC”) under the Internal Revenue Code of 1986, as amended (the “Code”). Our investment objective is 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, with a particular focus on senior notes, of established private businesses in the United States (“U.S.”) that are substantially owned by leveraged buyout funds, individual investors or are family-owned businesses. In addition, we may acquire existing loans that meet this profile from other funds. 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.

Gladstone Business Loan, LLC (“Business Loan”), a wholly-owned subsidiary of ours, was established on February 3, 2003 for the sole purpose of owning our portfolio of investments in connection with our line of credit.

Gladstone Financial Corporation (“Gladstone Financial”), a wholly-owned subsidiary of ours, was established on November 21, 2006 for the purpose of holding a license to operate as a Specialized Small Business Investment Company. Gladstone Financial (previously known as Gladstone SSBIC Corporation) acquired this license in February 2007. The license enables us, through this subsidiary, to make investments in accordance with the United States Small Business Administration guidelines for specialized small business investment companies.

The financial statements of the subsidiaries are consolidated with those of ours.

We are externally managed by Gladstone Management Corporation (the “Adviser”), an affiliate of ours.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Unaudited Interim Financial Statements and Basis of Presentation

We prepare our interim financial statements in accordance with accounting principles generally accepted in the U.S. (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X under the Securities Act of 1933, as amended (the “Securities Act”). Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with GAAP are omitted. The accompanying condensed consolidated financial statements include our accounts and those of our wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. Under Article 6 of Regulation S-X under the Securities Act, and the authoritative accounting guidance provided by the AICPA Audit and Accounting Guide for Investment Companies, we are not permitted to consolidate any portfolio company investments, including those in which we have a controlling interest. In our opinion, all adjustments, consisting solely of normal recurring accruals, necessary for the fair statement of financial statements for the interim periods have been included. The results of operations for the three and nine months ended June 30, 2012 are not necessarily indicative of results that ultimately may be achieved for the year. The interim financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended September 30, 2011, as filed with the Securities and Exchange Commission (the “SEC”) on November 14, 2011.

Our fiscal year-end Condensed Consolidated Statement of Assets and Liabilities was derived from audited financial statements, but does not include all disclosures required by GAAP.

Reclassifications

Certain amounts in the prior period’s financial statements have been reclassified to conform to the presentation for the three and nine month periods ended June 30, 2012, with no effect to net decrease in net assets resulting from operations.

Investment Valuation Policy

We carry our investments at fair value to the extent that market quotations are readily available and reliable and otherwise at fair value as determined in good faith by our board of directors (the “Board of Directors”). In determining the fair value of our investments, our Adviser has established an investment valuation policy (the “Policy”). The Policy has been approved by our Board of Directors, and each quarter our Board of Directors reviews whether our Adviser has applied the Policy consistently and votes whether to accept the recommended valuation of our investment portfolio. Such determination of fair values may involve subjective judgments and estimates.

We use generally accepted valuation techniques to value our portfolio unless we have specific information about the value of an investment to determine otherwise. From time to time, we may accept an appraisal of a business in which we hold securities. These appraisals are expensive and occur infrequently, but provide a third-party valuation opinion that may differ in results, techniques and scope used to value our investments. When we obtain these specific third-party appraisals, we use estimates of value provided by such appraisals and our own assumptions, including estimated remaining life, current market yield and interest rate spreads of similar securities as of the measurement date, to value our investments.

The Policy, summarized below, applies to publicly traded securities, securities for which a limited market exists and securities for which no market exists.

Publicly traded securities: We determine the value of publicly traded securities based on the closing price for the security on the exchange or securities market on which it is listed and primarily traded on the valuation date. To the extent that we own restricted securities that are not freely tradable, but for which a public market otherwise exists, we will use the market value of that security adjusted for any decrease in value resulting from the restrictive feature. As of June 30, 2012 and September 30, 2011, we did not have any investments in publicly traded securities.

Securities for which a limited market exists: We value securities that are not traded on an established secondary securities market, but for which a limited market for the security exists, such as certain participations in, or assignments of, syndicated loans, at the quoted bid price, which are non-binding. In valuing these assets, we assess trading activity in an asset class and evaluate variances in prices and other market insights to determine if any available quoted prices are reliable. In general, if we conclude that quotes based on active markets or trading activity may be relied upon, firm bid prices are requested; however, if firm bid prices are unavailable, we base the value of the security upon the indicative bid price (“IBP”) offered by the respective originating syndication agent’s trading desk, or secondary desk, on or near the valuation date. To the extent that we use the IBP as a basis for valuing the security, the Adviser may take further steps to consider additional information to validate that price in accordance with the Policy, including but not limited to reviewing a range of indicative bids to the extent the Adviser has ready access to such qualified information.

In the event these limited markets become illiquid to a degree that market prices are no longer readily available, we will value our syndicated loans using alternative methods, such as estimated net present values of the future cash flows or discounted cash flows (“DCF”). The use of a DCF methodology follows that prescribed by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures,” which provides guidance on the use of a reporting entity’s own assumptions about future cash flows and risk-adjusted discount rates when relevant observable inputs, such as quotes in active markets, are not available. When relevant observable market data does not exist, an alternative outlined in ASC 820 is the valuation of investments based on DCF. For the purposes of using DCF to provide fair value estimates, we consider multiple inputs, such as a risk-adjusted discount rate that incorporates adjustments that market participants would make, both for nonperformance and liquidity risks. As such, we develop a modified discount rate approach that incorporates risk premiums including, among other things, increased probability of default, higher loss given default or increased liquidity risk. The DCF valuations applied to the syndicated loans provide an estimate of what we believe a market participant would pay to purchase a syndicated loan in an active market, thereby establishing a fair value. We will apply the DCF methodology in illiquid markets until quoted prices are available or are deemed reliable based on trading activity.

As of June 30, 2012 and September 30, 2011, we determined that the indicative bid prices were reliable indicators of fair value for our syndicate investments. However, because of the private nature of this marketplace (meaning actual transactions are not publicly reported), we determined that these valuation inputs were classified as Level 3 within the fair value hierarchy as defined in ASC 820.

Securities for which no market exists: The valuation methodology for securities for which no market exists falls into four categories: (A) portfolio investments comprised solely of debt securities; (B) portfolio investments in controlled companies comprised of a bundle of securities, which can include debt and equity securities; (C) portfolio investments in non-controlled companies comprised of a bundle of investments, which can include debt and equity securities; and (D) portfolio investments comprised of non-publicly traded, non-control equity securities of other funds.

(A)

Portfolio investments comprised solely of debt securities: Debt securities that are not publicly traded on an established securities market, or for which a market does not exist (“Non-Public Debt Securities”), and that are issued by portfolio companies in which we have no equity or equity-like securities, are fair valued utilizing opinions of value submitted to us by Standard & Poor’s Securities Evaluations, Inc. (“SPSE”). We may also submit paid-in-kind (“PIK”) interest to SPSE for its evaluation when it is determined that PIK interest is likely to be received.

(B)

Portfolio investments in controlled companies comprised of a bundle of investments, which can include debt and equity securities: The fair value of these investments is determined based on the total enterprise value (“TEV”) of the portfolio company, or issuer, utilizing a liquidity waterfall approach under ASC 820 for our Non-Public Debt Securities and equity or equity-like securities (e.g., preferred equity, common equity or other equity-like securities) that are purchased together as part of a package, where we have control or could gain control through an option or warrant security; both the debt and equity securities of the portfolio investment would exit in the mergers and acquisitions market as the principal market, generally through a sale of the portfolio company. We manage our risk related to these investments at the aggregated issuer level and generally exit the debt and equity securities together. Applying the liquidity waterfall approach to all of the investments of an issuer, we first calculate the TEV of the issuer by incorporating some or all of the following factors:

•

the issuer’s ability to make payments;

•

the earnings of the issuer;

•

recent sales to third parties of similar securities;

•

the comparison to publicly traded securities; and

•

DCF or other pertinent factors.

In gathering the sales to third parties of similar securities, we may reference industry statistics and use outside experts. TEV is only an estimate of value and may not be the value received in an actual sale. Once we have estimated the TEV of the issuer, we will subtract the value of all the debt securities of the issuer, which are valued at the contractual principal balance. Fair values of these debt securities are discounted for any shortfall of TEV over the total debt outstanding for the issuer. Once the values for all outstanding senior securities, which include all the debt securities, have been subtracted from the TEV of the issuer, the remaining amount, if any, is used to determine the value of the issuer’s equity or equity-like securities. If, in the Adviser’s judgment, the liquidity waterfall approach does not accurately reflect the value of the debt component, the Adviser may recommend that we use a valuation by SPSE, or, if that is unavailable, a DCF valuation technique.

(C)

Portfolio investments in non-controlled companies comprised of a bundle of investments, which can include debt and equity securities: We value Non-Public Debt Securities that are purchased together with equity or equity-like securities from the same portfolio company, or issuer, for which we do not control or cannot gain control as of the measurement date, using a hypothetical secondary market as our principal market. In accordance with ASC 820 (as amended by the FASB’s Accounting Standards Update No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”),” (“ASU 2011-04”)), we have defined our “unit of account” at the investment level (either debt or equity) and as such determine our fair value of these non-control investments assuming the sale of an individual security using the standalone premise of value. As such, we estimate the fair value of the debt component using estimates of value provided by SPSE and our own assumptions in the absence of observable market data, including synthetic credit ratings, estimated remaining life, current market yield and interest rate spreads of similar securities as of the measurement date. For equity or equity-like securities of investments for which we do not control or cannot gain control as of the measurement date, we estimate the fair value of the equity based on factors such as the overall value of the issuer, the relative fair value of other units of account, including debt, or other relative value approaches. Consideration is also given to capital structure and other contractual obligations that may impact the fair value of the equity. Furthermore, we may utilize comparable values of similar companies, recent investments and indices with similar structures and risk characteristics or DCF valuation techniques and, in the absence of other observable market data, our own assumptions.

(D)

Portfolio investments comprised of non-publicly traded, non-control equity securities of other funds: We generally value any uninvested capital of the non-control fund at par value and value any invested capital at the value provided by the non-control fund.

Due to the uncertainty inherent in the valuation process, such estimates of fair value may differ significantly and materially from the values that would have been obtained had a ready market for the securities existed. Additionally, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned. There is no single standard for determining fair value in good faith, as fair value depends upon circumstances of each individual case. In general, fair value is the amount that we might reasonably expect to receive upon the current sale of the security in an orderly transaction between market participants at the measurement date.

Refer to Note 3—Investments for additional information regarding fair value measurements and our application of ASC 820.

Interest Income Recognition

Interest income, adjusted for amortization of premiums and acquisition costs, the accretion of discounts and the amortization of amendment fees, is recorded on the accrual basis to the extent that such amounts are expected to be collected. Generally, when a loan becomes 90 days or more past due, or if our qualitative assessment indicates that the debtor is unable to service its debt or other obligations, we will place the loan on non-accrual status and cease recognizing interest income on that loan until the borrower has demonstrated the ability and intent to pay contractual amounts due. However, we remain contractually entitled to this interest. Interest payments received on non-accrual loans may be recognized as income or applied to the cost basis, depending upon management’s judgment. Generally, non-accrual loans are restored to accrual status when past due principal and interest are paid and, in management’s judgment, are likely to remain current, or due to a restructuring such that the interest income is deemed to be collectable. At June 30, 2012, eight portfolio companies were either fully or partially on non-accrual with an aggregate debt cost basis of $62.4 million, or 16.3% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of $5.3 million, or 1.9% of the fair value of all debt investments in our portfolio. At September 30, 2011, eight portfolio companies were on non-accrual with an aggregate debt cost basis of $41.1 million, or 11.0% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of $5.3 million, or 1.8% of the fair value of all debt investments in our portfolio.

As of June 30, 2012 and September 30, 2011, we had 25 and 27 original issue discount (“OID”) loans, respectively, primarily from the syndicated loans in our portfolio. We recorded OID income of $0.1 million and $0.3 million for the three and nine months ended June 30, 2012, respectively, as compared to $64 and $117 for the three and nine months ended June 30, 2011, respectively. The unamortized balance of OID investments as of June 30, 2012 and September 30, 2011 totaled $1.3 million and $1.5 million, respectively.

As of June 30, 2012, we had one investment that bore PIK interest and as of September 30, 2011, we had no investments that bore PIK interest. PIK interest, computed at the contractual rate specified in a loan agreement, is added to the principal balance of a loan and recorded as income. To maintain our status as a RIC, this non-cash source of income must be paid out to common stockholders in the form of distributions, even though we have not yet collected the cash. We recorded $6 of PIK income during the three and nine months ended June 30, 2012, as compared to $4 and $12 for the three and nine months ended June 30, 2011, respectively.

We also transfer past due interest to the principal balance as stipulated in certain loan amendments with portfolio companies. There were no such transfers during the three and nine months ended June 30, 2012. We transferred past due interest to the principal balance of $0 and $0.2 million for the three and nine months ended June 30, 2011, respectively.

Other Income Recognition

We generally record success fees upon receipt of cash. Success fees are contractually due upon a change of control in a portfolio company and are recorded in other income in our accompanying Condensed Consolidated Statements of Operations. We recorded $2.8 million of success fess during the nine months ended June 30, 2012, which resulted mainly from our exits of Global Materials Technologies, Inc, RCS Management Holding Co, and Northern Contours, Inc. We recorded $0.6 million of success fees during the nine months ended June 30, 2011, which resulted from our exits of Pinnacle Treatment Centers, Inc. and Interfilm Holdings, Inc.

NOTE 3. INVESTMENTS

ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about assets and liabilities measured at fair value. ASC 820 provides a consistent definition of fair value that focuses on exit price in the principal, or most advantageous, market and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs. ASC 820 also establishes the following three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.

•

Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets;

•

Level 2 — inputs to the valuation methodology include quoted prices for similar assets and liabilities in active or inactive markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 2 inputs are in those markets for which there are few transactions, the prices are not current, little public information exists or instances where prices vary substantially over time or among brokered market makers; and

•

Level 3— inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs are those inputs that reflect assumptions that market participants would use when pricing the asset or liability and can include our own assumptions based upon the best available information.

We transfer investments in and out of Level 1, 2 and 3 securities as of the beginning balance sheet date, based on changes in the use of observable and unobservable inputs utilized to perform the valuation for the period. During the nine months ended June 30, 2012 and 2011, there were no transfers in or out of Level 1, 2 and 3.

The following table presents the investments carried at fair value as of June 30, 2012 and September 30, 2011, by caption on our accompanying Condensed Consolidated Statements of Assets and Liabilities and by security type, all of which are valued using Level 3 inputs:


	Total Recurring Fair Value Measurements Reported in Condensed Consolidated Statements of Assets and Liabilities Using Significant Unobservable Inputs (Level 3)
	June 30, 2012		September 30, 2011
Non-Control/Non-Affiliate Investments
Senior term debt	$	164,662	$	182,002
Senior subordinated term debt		91,218		72,182
Preferred equity		609		566
Common equity/equivalents		4,266		2,552

Total Non-Control/Non-Affiliate Investments	$	260,755	$	257,302


Control Investments
Senior term debt	$	11,746	$	18,143
Senior subordinated term debt		18,987		19,966
Common equity/equivalents		7,099		7,536

Total Control Investments	$	37,832	$	45,645

Total Investments at Fair Value	$	298,587	$	302,947

In accordance with ASU 2011-04, which was effective for us beginning January 1, 2012, the following table provides quantitative information about our Level 3 fair value measurements of our investments as of June 30, 2012. In addition to the techniques and inputs noted in the table below, according to our valuation policy, we may also use other valuation techniques and methodologies when determining our fair value measurements. The below table is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to our fair value measurements. The weighted average calculations in the table below are based on the principal balances for all debt related calculations and on the cost basis for all equity related calculations for the particular input.


	Quantitative Information about Level 3 Fair Value Measurements

	Fair Value as of June 30, 2012			Valuation Techniques/ Methodologies	Unobservable Input	Range /Weighted Average
Non-syndicated debt only investments	$	105,567	^(A)	SPSE ^(B)	EBITDA ^(C) Risk Ratings ^(D)	($310) - $15,332 / $5,168 2.0 - 10.0 / 6.0
Syndicated debt only investments		89,412		Market Quotes	IBP ^(E)	87.0% - 100.5% / 98.4%
Bundled debt and equity investments		101,445		SPSE ^(B)	EBITDA ^(C) Risk Ratings ^(D)	($1,141) - $4,840 / $2,383 3.0 - 7.0 / 4.9
				TEV	EBITDA multiples ^(C) EBITDA ^(C)	4.5 - 9.5 / 5.7 ($1,141) - $13,166 / $6,705
Other investments		2,163

Total Fair Value for Level 3 Investments	$	298,587

^(A)	Includes a new non-syndicated debt only investment which was valued at cost, as it was determined that the price paid during the three months ended June 30, 2012, best represents fair value as of June 30, 2012.

^(B)

SPSE makes an independent assessment of the data we submit to them (which includes the financial and operational performance, as well as our internally assessed risk ratings of the portfolio companies – see footnote (C) below) and its own independent data to form an opinion as to what they consider to be the market values for our securities. With regard to its work, SPSE has stated that the data submitted to us is regarded as proprietary in nature.

^(C)

Earnings before interest expense, taxes, depreciation and amortization (“EBITDA”) is an unobservable input which is generally based on the most recently available trailing twelve month financial statements submitted to us from the portfolio companies. EBITDA multiples, generally indexed, represent our estimation of where market participants might price these investments. For our bundled debt and equity investments, the EBITDA and EBITDA multiples impact the TEV fair value determination and the value of the issuer’s debt, equity, or equity-like securities are valued in accordance with our liquidity waterfall approach.

^(D)

As part of our valuation procedures, we risk rate all of our investments in debt securities. We use the Nationally Recognized Statistical Rating Organization’s risk rating system for generally all of syndicated loans and a proprietary risk rating system for all other debt securities. Our risk rating system uses a scale of 0 to 10, with 10 being the lowest probability of default. The risk rating system covers both qualitative and quantitative aspects of the portfolio company business and the securities we hold.

^(E)

We generally base the value of our syndicated debt securities on the IBP offered by the respective originating syndication agent’s trading desk, or secondary desk, on or near the valuation date. These bid prices are non-binding and are generally based on the underlying company performance and security characteristics, as well as other market conditions and credit risk factors.

Portfolio company’s EBITDA and EBITDA multiples are the significant unobservable inputs generally included in our internally assessed TEV models used to value our proprietary debt and equity investments. Holding all other factors constant, increases (decreases) in the EBITDA and/or the EBITDA multiples inputs would result in a higher (lower) fair value measurement. Per our valuation policy, we generally use an indexed EBITDA multiple. EBITDA and EBITDA multiple inputs do not have to directionally correlate since EBITDA is a company performance metric and EBITDA multiples can be influenced by market, industry, size and other factors.

Changes in Level 3 Fair Value Measurements of Investments

The following tables provide the changes in fair value, broken out by security type, during the three and nine-month periods ended June 30, 2012 and 2011 for all investments for which we determine fair value using unobservable (Level 3) factors. When a determination is made to classify a financial instrument within Level 3 of the valuation hierarchy, such determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, Level 3 financial instruments typically include, in addition to the unobservable, or Level 3, inputs, observable inputs (that is, components that are actively quoted and can be validated to external sources). In these cases, we categorize all of the inputs as the lowest level input within the hierarchy. Accordingly, the gains and losses in the tables below include changes in fair value, due in part to observable factors that are part of the valuation methodology.

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

Periods ended June 30, 2012:


Three months ended June 30, 2012:	Senior Term Debt			Senior Subordinated Term Debt			Preferred Equity			Common Equity/ Equivalents			Total
Fair value as of March 31, 2012	$	180,000		$	95,697		$	595		$	11,875		$	288,167
Total gains or losses
Net realized gain ^(a)		87			34			—			—			121
Net unrealized depreciation ^(b)		(6,411	)		(2,003	)		(1,186	)		(1,510	)		(11,110	)
Reversal of prior period net (appreciation) depreciation on realization ^(b)		(108	)		96			—			—			(12	)
New investments, repayments and settlements ^(c)
Issuances/originations		13,945			20,500			1,200			1,000			36,645
Settlements/repayments		(11,105	)		(4,119	)		—			—			(15,224	)

Fair value as of June 30, 2012	$	176,408		$	110,205		$	609		$	11,365		$	298,587


Nine months ended June 30, 2012:	Senior Term Debt			Senior Subordinated Term Debt			Preferred Equity			Common Equity/ Equivalents		Total
Fair value as of September 30, 2011	$	200,145		$	92,148		$	566		$	10,088	$	302,947
Total gains or losses
Net realized (loss) gain ^(a)		(8,276	)		34			—			—		(8,242	)
Net unrealized (depreciation) appreciation^(b)		(21,539	)		(4,032	)		(2,758	)		277		(28,052	)
Reversal of prior period net depreciation on realization ^(b)		11,463			541			—			—		12,004
New investments, repayments and settlements ^(c)
Issuances/originations		30,633			31,820			2,801			1,000		66,254
Settlements/repayments		(29,559	)		(10,306	)		—			—		(39,865	)
Sales		(6,459	)		—			—			—		(6,459	)

Fair value as of June 30, 2012	$	176,408		$	110,205		$	609		$	11,365	$	298,587

Periods ended June 30, 2011:


Three months ended June 30, 2011:	Senior Term Debt			Senior Subordinated Term Debt			Preferred Equity		Common Equity/ Equivalents			Total
Fair value as of March 31, 2011	$	173,602		$	76,599		$	537	$	6,375		$	257,113
Total gains or losses
Net unrealized (depreciation) appreciation^(b)		(16,849	)		(1,053	)		14		(901	)		(18,789	)
New investments, repayments and settlements ^(c)
Issuances/originations		52,691			12,785			—		750			66,226
Settlements/repayments		(5,163	)		(108	)		—		—			(5,271	)

Fair value as of June 30, 2011	$	204,281		$	88,223		$	551	$	6,224		$	299,279


Nine months ended June 30, 2011:	Senior Term Debt			Senior Subordinated Term Debt			Preferred Equity			Common Equity/ Equivalents			Total
Fair value as of September 30, 2010	$	172,596		$	81,899		$	386		$	2,228		$	257,109
Total gains or losses
Net realized gain (loss) ^(a)		177			(14	)		—			—			163
Net unrealized (depreciation) appreciation^(b)		(34,067	)		(2,892	)		(210	)		2,073			(35,096	)
Reversal of prior period net (appreciation) depreciation on realization ^(b)		(191	)		731			—			(247	)		293
New investments, repayments and settlements ^(c)
Issuances/originations		99,633			15,907			375			2,947			118,862
Settlements/repayments		(33,867	)		(7,408	)		—			—			(41,275	)
Sales		—			—			—			(777	)		(777	)

Fair value as of June 30, 2011	$	204,281		$	88,223		$	551		$	6,224		$	299,279

^(a)	Included in net realized gain (loss) on Non-Control/Non-Affiliate and Control investments on our accompanying Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2012 and 2011.

^(b)	Included in net unrealized (depreciation) appreciation on Non-Control/Non-Affiliate and Control investments on our accompanying Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2012 and 2011.

^(c)	Includes increases in the cost basis of investments resulting from new portfolio investments, the amortization of discounts, premiums and closing fees as well as decreases in the cost basis of investments resulting from principal repayments or sales.

Non-Syndicated Investments

As of June 30, 2012 and September 30, 2011, we held 33 and 35 non-syndicated investments with an aggregate fair value of $207.9 million and $212.3 million, respectively. During the nine months ended June 30, 2012, we added three new non-syndicated investments, with an aggregate fair value of $29.4 million at June 30, 2012, we sold two non-syndicated investments for combined gross proceeds of $6.5 million and three non-syndicated investments paid off early, for which we received aggregate principal payments of $12.9 million. Additionally, during the nine months ended June 30, 2012, we funded $19.2 million to existing non-syndicated portfolio companies through revolver draws, add-on investments, or new securities, while scheduled and unscheduled principal payments totaled $22.6 from existing non-syndicated portfolio companies . The following significant non-syndicated investment transactions occurred during the nine months ended June 30, 2012:

•

Sunshine Media Holdings—Effective October 1, 2011, we restructured Sunshine Media Holdings (“Sunshine”) by reducing the interest rates on its line of credit, senior term debt and LOT senior term debt to preserve capital at the portfolio company to further enable Sunshine to invest in new and existing initiatives. In addition, we funded $2.8 million through additional preferred equity investments and $3.6 million through additional line of credit draws to Sunshine for the nine months ended June 30, 2012. We placed our investment in Sunshine’s LOT senior term debt on non-accrual status effective January 1, 2012 and the remaining senior term debt and revolver investments on non-accrual status effective April 1, 2012.

•

KMBQ Corporation—In November 2011, we invested $1.6 million in Ohana Media Group (“Ohana”) to facilitate its purchase of certain of KMBQ Corporation’s (“KMBQ”) assets out of receivership. In connection with this transaction, we received net proceeds of $1.2 million and recorded a realized loss during the three months ended December 31, 2011 totaling $1.0 million. Ohana replaced KMBQ on our Condensed Consolidated Schedule of Investments as a Non-Control/Non-Affiliate investment at December 31, 2011.

•

Newhall Holdings, Inc.—In December 2011, we sold our investments in Newhall Holdings, Inc. (“Newhall”) for net proceeds of $3.3 million, which resulted in a realized loss of $7.4 million recorded in the three months ended December 31, 2011.

•

Viapack, Inc.—Effective January 1, 2012, we restructured our investment in Viapack, Inc. (“Viapack”) by reducing the interest rates on its line of credit, senior real estate term debt and senior term debt to preserve capital at the portfolio company to enable it to invest in existing initiatives. In addition, we funded $2.1 million to Viapack through additional draws on its line of credit for the nine months ended June 30, 2012. We placed our investment in Viapack’s LOT senior term debt on non-accrual status effective January 1, 2012.

•

Francis Drilling Fluids, Ltd.—In May 2012, we invested $16.0 million in Francis Drilling Fluids, Ltd. (“Francis”) through a combination of debt and equity. Francis, headquartered in Crowley, Louisiana, is a logistics network provider of warehousing, transportation and energy field services for oil and natural gas drilling to oilfields and exploration and production customers.

•

POP Radio, L.P. —In May 2012, we invested $12.0 million in POP Radio, L.P. (“POP”) through senior and senior subordinated term debt. POP, headquartered in Salt Lake City, Utah, is an advertiser-supported in-store radio network provider to retailers.

Syndicated Investments

We had a total of 22 and 24 syndicate loans with an aggregate fair value of $90.7 million as of June 30, 2012 and September 30, 2011, respectively. During the nine months ended June 30, 2012, we had four early payoffs of syndicated investments for a combined total of $10.3 million and added two new syndicated investments for a combined total of $15.5 million. In addition, we had one add-on investment to an existing syndicate investment during the nine months ended June 30, 2012 for $2.0 million.

Investment Concentrations

As of June 30, 2012, our investment portfolio consisted of loans to 55 companies located in 28 states across 21 different industries with an aggregate fair value of $298.6 million. As of June 30, 2012, there were 22 syndicated investments totaling $90.4 million at cost and $90.7 million at fair value, or 22.9% and 30.4% of the total aggregate portfolio, respectively.

The following table outlines our investments by security type as of June 30, 2012 and September 30, 2011:


	June 30, 2012								September 30, 2011
	Cost				Fair Value				Cost				Fair Value
Senior term debt	$	252,831	64.1	%	$	176,408	59.1	%	$	266,491	69.6	%	$	200,145	66.1	%
Senior subordinated term debt		128,688	32.6			110,205	36.9			107,140	28.0			92,148	30.4
Common equity/equivalents		11,799	3.0			11,365	3.8			7,999	2.1			10,088	3.3
Preferred equity		1,184	0.3			609	0.2			1,185	0.3			566	0.2

Total Investments	$	394,502	100.0	%	$	298,587	100.0	%	$	382,815	100.0	%	$	302,947	100.0	%

Investments at fair value consisted of the following industry classifications at June 30, 2012 and September 30, 2011:


	June 30, 2012					September 30, 2011
Industry Classification	Fair Value		Percentage of Total Investments			Fair Value		Percentage of Total Investments
Electronics	$	53,661		18.0	%	$	45,752		15.1	%
Healthcare, education & childcare		32,948		11.0			34,106		11.3
Mining, steel, iron & non-precious metals		31,147		10.4			33,734		11.1
Broadcast (TV & radio)		25,323		8.5			22,146		7.3
Automobile		24,911		8.3			25,768		8.5
Retail stores		19,260		6.5			19,340		6.4
Oil and Gas		17,892		6.0			1,916		0.6
Aerospace & defense		15,998		5.4			10,003		3.3
Printing & publishing		11,183		3.7			17,623		5.8
Textiles & leather		9,801		3.3			9,626		3.2
Personal & non-durable consumer products		8,356		2.8			6,962		2.3
Machinery		7,526		2.5			8,696		2.9
Beverage, food & tobacco		7,276		2.4			7,332		2.4
Personal, food and miscellaneous services		7,275		2.4			7,635		2.5
Diversified/conglomerate manufacturing		6,901		2.3			8,790		2.9
Buildings & real estate		5,911		2.0			10,275		3.4
Leisure, amusement, movies & entertainment		5,564		1.9			6,607		2.2
Home & office furnishings		3,608		1.2			9,715		3.2
Telecommunications		2,079		0.7			7,842		2.6
Other ^(A)		1,967		0.7			2,215		0.7
Diversified/conglomerate service		—		—			3,810		1.3
Diversified natural resources, precious metals & minerals		—		—			3,054		1.0

Total Investments	$	298,587		100.0	%	$	302,947		100.0	%

^(A)	No individual industry within this category exceeds 1%.

The investments at fair value were included in the following geographic regions of the U.S. at June 30, 2012 and September 30, 2011:


	June 30, 2012					September 30, 2011
Geographic Region	Fair Value		Percent of Total Investments			Fair Value		Percentage of Total Investments
Midwest	$	128,409		43.0	%	$	144,292		47.6	%
West		80,766		27.0			70,862		23.4
South		57,900		19.4			52,265		17.3
Northeast		23,752		8.0			28,158		9.3
Other—non U.S.		7,760		2.6			7,370		2.4

Total Investments	$	298,587		100.0	%	$	302,947		100.0	%

The geographic region reflects the location of the headquarters of our portfolio companies. A portfolio company may have a number of other business locations in other geographic regions.

Investment Principal Repayments

The following table summarizes the contractual principal repayments and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, at June 30, 2012:


		Amount
For the remaining three months ending September 30:	2012	$	13,819
For the fiscal year ending September 30:	2013		116,114
	2014		57,649
	2015		28,538
	2016		75,452
	Thereafter		91,207

	Total contractual repayments	$	382,779
	Investments in equity securities		12,983
	Adjustments to cost basis on debt securities		(1,260	)

	Total cost basis of investments held at June 30, 2012:	$	394,502

Receivables from Portfolio Companies

Receivables from portfolio companies represent non-recurring costs that we incurred on behalf of portfolio companies and are included in other assets on our accompanying Condensed Consolidated Statements of Assets and Liabilities. We maintain an allowance for uncollectible receivables from portfolio companies, which is determined based on historical experience and management’s expectations of future losses. We charge the accounts receivable to the established provision when collection efforts have been exhausted and the receivables are deemed uncollectible. As of June 30, 2012 and September 30, 2011, we had gross receivables from portfolio companies of $0.7 million and $0.8 million, respectively. The allowance for uncollectible receivables was $0.4 million as of June 30, 2012 and September 30, 2011. In addition, we recorded an allowance for uncollectible interest receivable of $21and $65 as of June 30, 2012 and September 30, 2011, respectively.

NOTE 4. RELATED PARTY TRANSACTIONS

Loans to Former Employees

We have outstanding loans to certain employees of the Adviser, each of whom was a joint employee of the Adviser (or our previous adviser, Gladstone Capital Advisers, Inc.) and us at the time the loans were originally provided. The loans were extended to such employees to allow them to exercise options granted under the Amended and Restated 2001 Equity Incentive Plan, which has since been terminated. The loans require the quarterly payment of interest at the market rate in effect at the date of issuance, have varying terms not exceeding ten years and have been recorded as a reduction of net assets. The loans are evidenced by full recourse notes that are due upon maturity or 60 days following termination of employment, and the shares of common stock purchased with the proceeds of the loans are posted as collateral. We received $0.3 million and $2.1 million of principal repayments during the nine months ended June 30, 2012 and 2011, respectively. Additionally, one employee redeemed 39,082 common shares (20,000 in December 2011 and 19,082 in January 2012) to pay off $0.3 million of principal on his outstanding loans during the six months ended March 31, 2012. There were no redemptions of common shares held by employees during the quarter ended June 30, 2012. We recognized interest income from all employee loans of $62 and $0.2 million for the three and nine months ended June 30, 2012, respectively, and $0.1 million and $0.3 million for the three and nine months ended June 30, 2011, respectively. Refer to Note 7–Common Stock for additional information related to these transactions.

Investment Advisory and Management Agreement

We entered into an investment advisory and management agreement with our Adviser (the “Advisory Agreement”). Our Adviser is controlled by our chairman and chief executive officer. In accordance with the Advisory Agreement, we pay the Adviser certain fees as compensation for its services, such fees consisting of a base management fee and an incentive fee. On July 10, 2012, our Board of Directors approved the renewal of the Advisory Agreement through August 31, 2013.

The following table summarizes the management fees, incentive fees and associated credits reflected in our accompanying Condensed Consolidated Statements of Operations:


	Three Months Ended June 30,						Nine Months Ended June 30
	2012			2011			2012			2011
Average total assets subject to base management fee	$	312,200		$	290,200		$	310,300		$	277,600
Multiplied by prorated annual base management fee of 2.0%		0.5	%		0.5	%		1.5	%		1.5	%

Base management fee ^(A)	$	1,561		$	1,451		$	4,655		$	4,164
Reduction for loan servicing fees		(867	)		(814	)		(2,690	)		(2,413	)

Adjusted base management fee		694			637			1,965			1,751
Credit for fees received by Adviser from the portfolio companies		(280	)		(77	)		(333	)		(77	)
Fee reduction for the voluntary, irrevocable waiver of 2.0% fee on senior syndicated loans to 0.5% per annum		(102	)		(117	)		(345	)		(250	)

Net base management fee	$	312		$	443		$	1,287		$	1,424

Incentive fee ^(A)		1,217			1,133			3,556			3,395
Credit from voluntary, irrevocable waiver issued by Adviser’s board of directors		—			—			(278	)		(21	)

Net incentive fee	$	1,217		$	1,133		$	3,278		$	3,374

Credit for fees received by Adviser from the portfolio companies		(280	)		(77	)		(333	)		(77	)
Fee reduction for the voluntary, irrevocable waiver of 2.0% fee on senior syndicated loans to 0.5% per annum		(102	)		(117	)		(345	)		(250	)
Incentive fee credit		—			—			(278	)		(21	)

Credit to base management and incentive fees from Adviser ^(A)	$	(382	)	$	(194	)	$	(956	)	$	(348	)

^(A)	Reflected as a line item on our Condensed Consolidated Statements of Operations.

Base Management Fee

The base management fee is payable quarterly and assessed at an annual rate of 2.0%, computed on the basis of the value of our average total assets at the end of the two most recently-completed quarters. Average total assets is defined as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued at the end of the applicable quarters within the respective periods and adjusted appropriately for any share issuances or repurchases during the periods. In addition, the following three items are adjustments to the base management fee calculation:

•

Loan Servicing Fees

The Adviser also services the loans held by Business Loan, in return for which it receives a 1.5% annual fee, based on the monthly aggregate outstanding balance of loans pledged under our line of credit. Since we own these loans, all loan servicing fees paid to the Adviser are treated as reductions directly against the 2.0% base management fee under the Advisory Agreement.

•

Senior Syndicated Loan Fee Waiver

Our Board of Directors accepted an unconditional and irrevocable voluntary waiver from the Adviser to reduce the annual 2.0% base management fee on senior syndicated loan participations to 0.5%, to the extent that proceeds resulting from borrowings were used to purchase such senior syndicated loan participations, for the nine months ended June 30, 2012 and 2011.

•

Portfolio Company Fees

Under the Advisory Agreement, the Adviser has also provided, and continues to provide, managerial assistance and other services to our portfolio companies and may receive fees for services other than managerial assistance. 50% of certain of these fees, and 100% of other fees are credited against the base management fee that we would otherwise be required to pay to the Adviser.

Incentive Fee

The incentive fee consists of two parts: an income-based incentive fee and a capital gains-based incentive fee. The income-based incentive fee rewards the Adviser if our quarterly net investment income (before giving effect to any incentive fee) exceeds 1.75% of our net assets (the “hurdle rate”). We will pay the Adviser an income-based incentive fee with respect to our pre-incentive fee net investment income in each calendar quarter as follows:

•

no incentive fee in any calendar quarter in which our pre-incentive fee net investment income does not exceed the hurdle rate (7.0% annualized);

•

100% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.1875% in any calendar quarter (8.75% annualized); and

•

20% of the amount of our pre-incentive fee net investment income, if any, that exceeds 2.1875% in any calendar quarter (8.75% annualized).

Our Board of Directors accepted an unconditional and irrevocable voluntary waiver from the Adviser to reduce the income-based incentive fee to the extent net investment income did not cover all distributions to common stockholders for the nine months ended June 30, 2012 and 2011.

The second part of the incentive fee is a capital gains-based incentive fee that will be determined and payable in arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement, as of the termination date) and equals 20% of our realized capital gains as of the end of the fiscal year. In determining the capital gains-based incentive fee payable to the Adviser, we will calculate the cumulative aggregate realized capital gains and cumulative aggregate realized capital losses since our inception, and the aggregate unrealized capital depreciation as of the date of the calculation, as applicable, with respect to each of the investments in our portfolio. For this purpose, cumulative aggregate realized capital gains, if any, equals the sum of the differences between the net sales price of each investment, when sold, and the original cost of such investment since our inception. Cumulative aggregate realized capital losses equals the sum of the amounts by which the net sales price of each investment, when sold, is less than the original cost of such investment since our inception. Aggregate unrealized capital depreciation equals the sum of the difference, if negative, between the valuation of each investment as of the applicable calculation date and the original cost of such investment. At the end of the applicable year, the amount of capital gains that serves as the basis for our calculation of the capital gains-based incentive fee equals the cumulative aggregate realized capital gains less cumulative aggregate realized capital losses, less aggregate unrealized capital depreciation, with respect to our portfolio of investments. If this number is positive at the end of such year, then the capital gains-based incentive fee for such year equals 20% of such amount, less the aggregate amount of any capital gains-based incentive fees paid in respect of our portfolio in all prior years. No capital gains-based incentive fee has been recorded since our inception through June 30, 2012, as cumulative unrealized capital depreciation has exceeded cumulative realized capital gains net of cumulative realized capital losses.

Additionally, in accordance with GAAP, a capital gains-based incentive fee accrual is calculated using the aggregate cumulative realized capital gains and losses and aggregate cumulative unrealized capital depreciation included in the calculation of the capital gains-based incentive fee plus the aggregate cumulative unrealized capital appreciation. If such amount is positive at the end of a period, then GAAP requires us to record a capital gains-based incentive fee equal to 20% of such amount, less the aggregate amount of actual capital gains-based incentive fees paid in all prior years. If such amount is negative, then there is no accrual for such year. GAAP requires that the capital gains-based incentive fee accrual consider the cumulative aggregate unrealized capital appreciation in the calculation, as a capital gains-based incentive fee would be payable if such unrealized capital appreciation were realized. There can be no assurance that such unrealized capital appreciation will be realized in the future. No GAAP accrual for a capital gains-based incentive fee has been recorded since our inception through June 30, 2012.

As a BDC, we make available significant managerial assistance to our portfolio companies and provide other services to such portfolio companies. Although neither we nor our Adviser receive fees in connection with managerial assistance, the Adviser provides other services to our portfolio companies and receives fees for these other services.

Administration Agreement

We have entered into an administration agreement (the “Administration Agreement”) with Gladstone Administration, LLC (the “Administrator”), an affiliate of ours and of the Adviser, whereby we pay separately for administrative services. The Administration Agreement provides for payments equal to our allocable portion of the Administrator’s overhead expenses in performing its obligations under the Administration Agreement, including, but not limited to, rent and the salaries and benefits expenses of our chief financial officer and treasurer, chief compliance officer, internal counsel and their respective staffs. Our allocable portion of administrative expenses is generally derived by multiplying the Administrator’s total allocable expenses by the percentage of our total assets at the beginning of the quarter in comparison to the total assets at the beginning of the quarter of all companies managed by the Adviser under similar agreements. On July 10, 2012, our Board of Directors approved the renewal of the Administration Agreement through August 31, 2013.

Related Party Fees Due

Amounts due to related parties on our accompanying Condensed Consolidated Statements of Assets and Liabilities were as follows:


	As of June 30, 2012			As of September 30, 2011
Base management fee due to Adviser	$	312	&nb

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company