1287032--9/28/2006--PROSPECT_ENERGY

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Potential writedowns or losses with respect to three portfolio investments that are on our credit watch list, or on other portfolio investments, existing and to be made in the future could adversely affect our results of operations, cash flows, dividend level, net asset value and stock price. Risks Relating To Our Business And Structure We are dependent upon Prospect Management s key management personnel for our future success. Our Investment Adviser and its senior management have limited experience managing a business development company under the 1940 Act. We are a relatively new company with limited operating history. If our primary investments are deemed not to be qualifying assets, we could lose our status as a business development company or be precluded from investing according to our current business plan. Our financial condition and results of operations will depend on our ability to manage our future growth effectively. We operate in a highly competitive market for investment opportunities. Regulations governing our operation as a business development company affect our ability to raise, and the way in which we raise, additional capital. If we fail to qualify as a RIC, we will have to pay corporate-level taxes on our income and our income available for distribution would be reduced. We may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income. If we issue senior securities, including debt, you will be exposed to additional risks, including the typical risks associated with leverage. Changes in interest rates may affect our cost of capital and net investment income. We need to raise additional capital to grow because we must distribute most of our income. Most of our portfolio investments are recorded at fair value as determined in good faith by our board of directors and, as a result, there is uncertainty as to the value of our portfolio investments. The lack of liquidity in our investments may adversely affect our business. We may experience fluctuations in our quarterly results. Potential conflicts of interest could impact our investment returns. Changes in laws or regulations governing our operations may adversely affect our business. Risks Related To Our Investments We may not realize gains or income from our investments. Our portfolio is concentrated in a limited number of portfolio companies in the energy industry, which subjects us to a risk of significant loss if any of these companies defaults on its obligations under any of the securities that we hold or if the energy industry experiences a downturn. The energy industry is subject to many risks. Our investments in prospective portfolio companies may be risky, and you could lose all or part of your investment. Economic recessions or downturns could impair our portfolio companies and harm our operating results. Our portfolio companies may incur debt or issue equity securities that rank equally with, or senior to, our investments in such companies. We may not be able to fully realize the value of the collateral securing our debt investments. Our incentive fee could induce Prospect Management to make speculative investments. We have not yet identified all of the potential investments for our portfolio. Our investments in foreign securities may involve significant risks in addition to the risks inherent in U.S. investments. We may employ hedging techniques to mitigate certain risks, but it may not be possible to hedge fully or perfectly against such risks. Changes in interest rates may affect our cost of capital and net investment income. Risks Relating To Our Common Stock There is a risk that you may not receive dividends or that our dividends may not grow or may decline over time. Provisions of the Maryland General Corporation Law and of our charter and bylaws could deter takeover attempts and have an adverse impact on the price of our common stock. Investing in our common stocks may involve a high degree of risk. The market price of our common stock may fluctuate significantly. We may allocate the net proceeds from any offering in ways with which you may not agree. Sales of substantial amounts of our common stock in the public market may have an adverse effect on the market price of our common stock.

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1287032--9/28/2006--PROSPECT_ENERGY_CORP