Edgar Filing: Special Value Continuation Fund, LLC

Unassociated Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT

OF REGISTERED MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number 811-21936

SPECIAL VALUE CONTINUATION FUND, LLC

(Exact Name of Registrant as Specified in Charter)

2951 28TH STREET, SUITE 1000

SANTA MONICA, CALIFORNIA 90405

(Address of Principal Executive Offices) (Zip Code)

ELIZABETH GREENWOOD, SECRETARY

SPECIAL VALUE CONTINUATION FUND, LLC

2951 28TH STREET, SUITE 1000

SANTA MONICA, CALIFORNIA 90405

(Name and Address of Agent for Service)

Registrant's telephone number, including area code: (310) 566-1000

Copies to:

RICHARD T. PRINS, ESQ.

SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP

FOUR TIMES SQUARE

NEW YORK, NEW YORK 10036

Date of fiscal year end: DECEMBER 31, 2010

Date of reporting period: DECEMBER 31, 2010

ITEM 1. reports to stockholders.

Annual Shareholder Report

Special Value Continuation Fund, LLC

(A Delaware Limited Liability Company)

December 31, 2010

Special Value Continuation Fund, LLC

(A Delaware Limited Liability Company)

Annual Shareholder Report

December 31, 2010

Contents

Consolidated Portfolio Asset Allocation (Unaudited)	2

Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm	3
Consolidated Statement of Assets and Liabilities	4
Consolidated Statement of Investments	5
Consolidated Statement of Operations	12
Consolidated Statements of Changes in Net Assets	13
Consolidated Statement of Cash Flows	14
Notes to Consolidated Financial Statements	15
Consolidated Schedule of Changes in Investments in Affiliates	30
Consolidated Schedule of Restricted Securities of Unaffiliated Issuers	31

Supplemental Information (Unaudited)

Consolidating Statement of Assets and Liabilities	32
Consolidating Statement of Operations	33
Directors and Officers	34
Supplemental Tax Information	39

Special Value Continuation Fund, LLC (the “Company”) files a schedule of its investment in Special Value Continuation Partners, LP (the “Partnership”) with the Securities and Exchange Commission (the “SEC”) for the first and third quarters of each fiscal year on Form N-Q. Investments listed in the Consolidated Statement of Investments are held by the Partnership, which also files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The Forms N-Q of the Company and the Partnership are available on the SEC’s website at http://www.sec.gov. The Forms N-Q of the Company and the Partnership may also be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.

A free copy of the proxy voting guidelines of the Company and the Partnership and information regarding how the Company and the Partnership voted proxies relating to portfolio investments during the most recent twelve-month period may be obtained without charge on the SEC’s website at http://www.sec.gov or by calling the advisor of the Company and the Partnership, Tennenbaum Capital Partners, LLC, at (310) 566-1000. Collect calls for this purpose are accepted.0212-0378483 3/3/2011 4:24 PM

Special Value Continuation Fund, LLC

(A Delaware Limited Liability Company)

Consolidated Portfolio Asset Allocation (Unaudited)

December 31, 2010

Industry	Percent of Cash and Investments

Nonferrous Metal (except Aluminum) Production and Processing	10.3%
Wired Telecommunications Carriers	9.3%
Other Electrical Equipment and Component Manufacturing	8.8%
Other Information Services	6.0%
Architectural, Engineering, and Related Services	6.0%
Business Support Services	5.9%
Radio and Television Broadcasting	4.7%
Other Financial Investment Activities	4.0%
Resin, Synthetic Rubber, and Artificial Synthetic Fibers and Filaments Manufacturing	3.7%
Accounting, Tax Preparation, Bookkeeping, and Payroll Services	3.2%
Scheduled Air Transportation	2.9%
Communications Equipment Manufacturing	2.9%
Full-Service Restaurants	2.9%
Other General Merchandise Stores	2.5%
Electric Power Generation, Transmission and Distribution	2.4%
Commercial and Industrial Machinery and Equipment Rental and Leasing	2.3%
Industrial Machinery Manufacturing	2.3%
Book, Periodical, and Music Stores	1.8%
Offices of Real Estate Agents and Brokers	1.6%
Software Publishers	1.6%
Aerospace Product and Parts Manufacturing	1.6%
Gambling Industries	1.5%
Other Professional, Scientific, and Technical Services	1.5%
Metal and Mineral (except Petroleum) Merchant Wholesalers	1.5%
Computer and Peripheral Equipment Manufacturing	1.3%
Support Activities for Mining	1.3%
Oil and Gas Extraction	0.9%
Data Processing, Hosting, and Related Services	0.9%
Semiconductor and Other Electronic Component Manufacturing	0.9%
Other Investment Pools and Funds	0.8%
Machine Shops; Turned Product; and Screw, Nut, and Bolt Manufacturing	0.7%
Depository Credit Intermediation	0.3%
Other Amusement and Recreation Industries	0.0%
Support Activities for Air Transportation	0.0%
Cash and Cash Equivalents	1.7%

Total

100.0%

Ernst & Young LLP

725 South Figueroa Street

Los Angeles, California 90017

Tel: +1 213 977 3200

www.ey.com

Report of Independent Registered Public Accounting Firm

The Shareholders and Board of Directors of

Special Value Continuation Fund, LLC

We have audited the accompanying consolidated statement of assets and liabilities of Special Value Continuation Fund, LLC (a Delaware Limited Liability Company) (the Company), including the consolidated statement of investments, as of December 31, 2010, and the related consolidated statements of operations and cash flows for the year then ended, the consolidated statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the periods indicated. These financial statements and financial highlights are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included verification by examination of securities held by the custodian as of December 31, 2010, and confirmation of securities not held by the custodian by correspondence with others or by other appropriate auditing procedures where replies from others were not received. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the consolidated financial position of Special Value Continuation Fund, LLC at December 31, 2010, the consolidated results of its operations and its cash flows for the year then ended, the consolidated changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the periods indicated, in conformity with U.S. generally accepted accounting principles.

February 15, 2011

Special Value Continuation Fund, LLC

(A Delaware Limited Liability Company)

Consolidated Statement of Assets and Liabilities

December 31, 2010

Assets
Investments, at fair value:
Unaffiliated issuers (cost $390,045,229)	$	347,820,185
Controlled companies (cost $26,711,048)		1,086,031
Other affiliates (cost $74,143,011)		104,128,656
Total investments (cost $490,899,288)		453,034,872

Cash and cash equivalents		7,749,743
Accrued interest income:
Unaffiliated issuers		5,183,557
Other affiliates		212,713
Receivable for investment securities sold		5,261,224
Deferred debt issuance costs		1,577,801
Currency options (cost $607,971)		403,826
Unrealized appreciation on swaps		19,978
Prepaid expenses and other assets		195,444
Total assets		473,639,158

Liabilities
Credit facility payable		50,000,000
Distribution payable		19,700,000
Payable for investment securities purchased		3,938,116
Management and advisory fees payable		565,599
Currency options written (proceeds $129,404)		191,906
Payable to the Investment Manager		92,825
Interest payable		79,602
Accrued expenses and other liabilities		482,130
Total liabilities		75,050,178

Preferred stock
Series Z; $500/share liquidation preference; 400 shares authorized, 47 shares issued and outstanding		23,500
Accumulated dividends on Series Z preferred stock		27
Total Series Z preferred stock		23,527

Preferred equity facility
Series A preferred limited partner interests in Special Value Continuation Partners, LP;
$20,000/interest liquidation preference; 6,700 interests authorized, issued and outstanding		134,000,000
Accumulated dividends on Series A preferred equity facility		377,869
Total preferred limited partner interests		134,377,869

Net assets applicable to common shareholders	$	264,187,584

Composition of net assets applicable to common shareholders
Common stock, $0.001 par value; unlimited shares authorized, 418,955.777 shares
issued and outstanding	$	419
Paid-in capital in excess of par, net of contributed unrealized gains		364,742,957
Accumulated net investment income		307,266
Accumulated net realized losses		(62,845,458	)
Accumulated net unrealized depreciation		(38,017,573	)
Accumulated dividends to Series Z preferred shareholders		(27	)
Net assets applicable to common shareholders	$	264,187,584

Common stock, NAV per share	$	630.59

See accompanying notes.

Special Value Continuation Fund, LLC

(A Delaware Limited Liability Company)

Consolidated Statement of Investments

December 31, 2010

Showing Percentage of Total Cash and Investments of the Company

Investment	Principal Amount		Fair Value		Percent of Cash and Investments

Debt Investments (70.83%)
Bank Debt (36.02%) (1)
Book, Periodical, and Music Stores (1.81%)
Borders Group, Inc., Term Loan, LIBOR + 12.25%, due 4/1/14	$	8,492,090	$	8,322,248		1.81	%

Business Support Services (5.61%)
STG-Fairway Acquisitions, Inc., Senior Secured 1st Lien Term Loan, 13.5%, due 12/30/15	$	25,841,391		25,841,391		5.61	%

Commercial and Industrial Machinery and Equipment Rental and Leasing (2.26%)
AerCap Holdings N.V., 1st Lien Secured Term Loan, 10.25%, due 12/3/15 - (Netherlands)	$	10,411,593		10,411,593		2.26	%

Communications Equipment Manufacturing (2.90%)
Mitel Networks Corporation, 1st Lien Term Loan, LIBOR + 3.25%, due 8/10/14	$	14,701,538		13,378,399		2.90	%

Computer and Peripheral Equipment Manufacturing (1.35%)
Targus Group, 1st Lien Term Loan, LIBOR + 5.75% Cash + 2% PIK, due 11/22/12	$	6,641,757		6,210,043		1.35	%

Electric Power Generation, Transmission and Distribution (2.42%)
La Paloma Generating Company, Residual Bank Debt (3)	$	23,218,322		63,163		0.01	%
Texas Competitive Electric Holdings Company, LLC, B3 Term Loan,
LIBOR + 3.5%, due 10/10/14	$	7,567,585		5,853,270		1.27	%
Texas Competitive Electric Holdings Company, LLC, Delayed Draw Term Loan,
LIBOR + 3.5%, due 10/10/14	$	6,836,079		5,254,286		1.14	%
Total Electric Power Generation, Transmission and Distribution				11,170,719

Machine Shops; Turned Product; and Screw, Nut, and Bolt Manufacturing (0.73%)
Precision Partners Holdings, 1st Lien Delayed Draw Term Loan, LIBOR + 6.5%,
due 10/2/13	$	263,976		223,059		0.05	%
Precision Partners Holdings, 1st Lien Term Loan, LIBOR + 6.5%, due 10/2/13	$	3,715,001		3,139,176		0.68	%
Total Machine Shops; Turned Product; and Screw, Nut, and Bolt Manufacturing				3,362,235

Offices of Real Estate Agents and Brokers (1.64%)
Realogy Corporation, 2nd Lien Term Loan A, 13.5%, due 10/15/17	$	6,891,566		7,550,572		1.64	%

Other Financial Investment Activities (4.02%)
American Capital, Ltd., Senior Secured 1st Lien Term Loan, LIBOR + 5.5%, due 12/31/13	$	8,201,845		8,257,208		1.79	%
Marsico Capital Management, Senior Secured 1st Lien Term Loan,
LIBOR + 5%, due 12/14/14	$	13,535,117		10,261,310		2.23	%
Total Other Financial Investment Activities				18,518,518

Other General Merchandise Stores (2.46%)
Conn Appliances, Inc., Term Loan, LIBOR + 11.5%, due 11/30/14	$	11,340,270		11,340,270		2.46	%

Special Value Continuation Fund, LLC

(A Delaware Limited Liability Company)

Consolidated Statement of Investments (Continued)

December 31, 2010

Showing Percentage of Total Cash and Investments of the Company

Investment	Principal Amount		Fair Value		Percent of Cash and Investments

Debt Investments (continued)
Other Investment Pools and Funds (0.78%)
Vion Holdings II, LLC, Senior Secured Term Loan, LIBOR + 11%, due 2/27/12	$	3,602,178	$	3,602,178		0.78	%

Radio and Television Broadcasting (4.55%)
Encompass Digital Media Group, Inc., 1st Lien Revolver, 13%, due 12/31/14	$	2,343,750		1,062,500		0.23	%
Encompass Digital Media Group, Inc., 1st Lien Term Loan, 13%, due 12/31/14	$	19,212,797		19,885,245		4.32	%
Total Radio and Television Broadcasting				20,947,745

Software Publishers (1.58%)
EAM Software Finance Pty, Ltd., 1st Lien Senior Secured Tranche A Term Loan,
BBSY + 2.25% Cash + 1.5% PIK, due 5/10/13 - (Australia) (4)	AUD	3,062,730		2,859,858		0.62	%
EAM Software Finance Pty, Ltd., 1st Lien Senior Secured Tranche B Term Loan,
BBSY + 2.25% Cash + 1.5% PIK, due 11/10/13 - (Australia) (4)	AUD	4,985,422		4,435,826		0.96	%
Total Software Publishers				7,295,684

Support Activities for Mining (1.34%)
Trico Marine Services, Inc., 1st Lien Term Loan, LIBOR + 15.5%, due 12/31/11	$	2,621,833		2,621,833		0.57	%
Trico Shipping AS, 1st Lien Term Loan A, 13.5%, due 7/1/14 - (Norway)	$	3,431,822		3,380,344		0.73	%
Trico Shipping AS, Priority 1st Lien Term Loan A, 13.5%, due 9/21/11 - (Norway)	$	129,000		129,000		0.03	%
Trico Shipping AS, Priority 1st Lien Term Loan B, 13.5%, due 9/21/11 - (Norway)	$	60,000		60,000		0.01	%
Total Support Activities for Mining				6,191,177

Wired Telecommunications Carriers (2.57%)
Bulgaria Telecom Company AD, 1st Lien Tranche B Term Loan,
EURIBOR + 2.75%, due 8/9/15 - (Netherlands) (4)	€	2,084,507		2,315,621		0.50	%
Integra Telecom Holdings, Inc., 1st Lien Term Loan, LIBOR + 7.25%, due 4/15/15	$	1,980,401		1,996,904		0.43	%
NEF Telecom Company BV, 1st Lien Tranche C Term Loan,
EURIBOR + 3.5%, due 8/9/16 - (Netherlands) (4)	€	4,927,729		4,896,990		1.06	%
NEF Telecom Company BV, 2nd Lien Tranche D Term Loan,
EURIBOR + 5.5%, due 2/16/17 - (Netherlands) (4)	€	2,535,452		2,653,677		0.58	%
Total Wired Telecommunications Carriers				11,863,192

Total Bank Debt (Cost $159,318,746)				166,005,964

Other Corporate Debt Securities (34.81%)
Accounting, Tax Preparation, Bookkeeping, and Payroll Services (3.18%)
NCO Group, Inc., Senior Unsecured Floating Rate Notes, LIBOR + 4.875%, due 11/15/13	$	10,446,000		9,051,041		1.96	%
NCO Group, Inc., Senior Subordinated Notes, 11.875%, due 11/15/14	$	6,773,000		5,621,590		1.22	%
Total Accounting, Tax Preparation, Bookkeeping, and Payroll Services				14,672,631

Special Value Continuation Fund, LLC

(A Delaware Limited Liability Company)

Consolidated Statement of Investments (Continued)

December 31, 2010

Showing Percentage of Total Cash and Investments of the Company

Investment	Principal Amount		Fair Value		Percent of Cash and Investments

Debt Investments (continued)
Aerospace Product and Parts Manufacturing (1.56%)
Hawker Beechcraft, Inc., Senior Unsecured Notes, 8.5%, due 4/1/15	$	7,462,000	$	5,663,882		1.23	%
Hawker Beechcraft, Inc., Senior Unsecured Notes, 8.875% Cash or 9.625% PIK, due 4/1/15	$	1,979,000		1,508,988		0.33	%
Total Aerospace Product and Parts Manufacturing				7,172,870

Architectural, Engineering, and Related Services (3.63%)
Alion Science & Technology Corporation, Senior Notes, 10.25%, due 2/1/15	$	10,985,000		8,678,150		1.88	%
Alion Science & Technology Corporation, Senior Secured Notes, 10% Cash + 2% PIK,
due 11/1/14	$	2,651,940		2,718,238		0.59	%
ESP Holdings, Inc., Junior Unsecured Subordinated Promissory Notes, 18% PIK,
due 3/31/15 (2), (5)	$	5,321,627		5,321,627		1.16	%
Total Architectural, Engineering, and Related Services				16,718,015

Data Processing, Hosting, and Related Services (0.62%)
GXS Worldwide, Inc., Fixed Notes, 9.75%, due 6/15/15	$	2,066,000		2,058,253		0.45	%
Terremark Worldwide, Inc., Senior Secured Notes, 12%, due 6/15/17 (5)	$	703,000		808,450		0.17	%
Total Data Processing, Hosting, and Related Services				2,866,703

Full-Service Restaurants (2.86%)
Real Mex Restaurants, Inc., Senior Secured Notes, 14%, due 1/1/13 (5)	$	12,693,000		13,168,607		2.86	%

Gambling Industries (1.54%)
Harrah's Operating Company, Inc., 2nd Priority Secured Notes, 10%, due 12/15/18	$	7,695,000		7,079,400		1.54	%

Industrial Machinery Manufacturing (1.50%)
GSI Group, Inc., Senior Secured Notes, 12.25% Cash or 13% PIK, due 1/15/14 (5)	$	6,912,000		6,912,000		1.50	%

Metal and Mineral (except Petroleum) Merchant Wholesalers (1.50%)
Edgen Murray Corporation, Senior Secured Notes, 12.25%, due 1/15/15	$	7,839,000		6,917,918		1.50	%

Nonferrous Metal (except Aluminum) Production and Processing (0.88%)
International Wire Group, Inc., Senior Secured Notes, 9.75%, due 4/15/15 (2), (5)	$	4,000,000		4,040,000		0.88	%

Oil and Gas Extraction (0.90%)
Forbes Energy Services, Senior Secured Notes, 11%, due 2/15/15	$	2,904,000		2,850,276		0.62	%
Geokinetics Holdings, Inc., Senior Secured Notes, 9.75%, due 12/15/14	$	1,342,000		1,295,030		0.28	%
Total Oil and Gas Extraction				4,145,306

Other Information Services (3.60%)
IRI Holdco (RW), LLC, Note Receivable, 8%, due 12/12/11 (5)	$	16,585,527		16,585,527		3.60	%

Other Professional, Scientific, and Technical Services (1.51%)
MSX International, Inc., Senior Secured 2nd Lien Notes,
12.5%, due 4/1/12 - (UK/France/Germany) (5)	$	7,884,000		6,977,340		1.51	%

Special Value Continuation Fund, LLC

(A Delaware Limited Liability Company)

Consolidated Statement of Investments (Continued)

December 31, 2010

Showing Percentage of Total Cash and Investments of the Company

Investment	Principal Amount or Shares		Fair Value		Percent of Cash and Investments

Debt Investments (continued)
Resin, Synthetic Rubber, and Artificial Synthetic Fibers and Filaments
Manufacturing (3.67%)
AGY Holding Corporation, Senior Secured 2nd Lien Notes, 11%, due 11/15/14	$	18,536,000	$	16,910,207		3.67	%

Scheduled Air Transportation (2.57%)
United Air Lines, Inc., Aircraft Secured Mortgage (N508UA), 20%, due 8/25/16 (5)	$	3,352,402		4,517,362		0.98	%
United Air Lines, Inc., Aircraft Secured Mortgage (N510UA), 20%, due 9/26/16 (5)	$	532,150		719,200		0.16	%
United Air Lines, Inc., Aircraft Secured Mortgage (N512UA), 20%, due 10/26/16 (5)	$	533,466		723,647		0.16	%
United Air Lines, Inc., Aircraft Secured Mortgage (N530UA), 20%, due 11/25/13 (5)	$	3,015,652		3,801,229		0.82	%
United Air Lines, Inc., Aircraft Secured Mortgage (N536UA), 16%, due 8/21/14 (5)	$	478,139		558,944		0.12	%
United Air Lines, Inc., Aircraft Secured Mortgage (N545UA), 16%, due 7/17/15 (5)	$	580,622		695,004		0.15	%
United Air Lines, Inc., Aircraft Secured Mortgage (N585UA), 20%, due 10/25/16 (5)	$	626,369		849,983		0.18	%
Total Scheduled Air Transportation				11,865,369

Wired Telecommunications Carriers (5.29%)
ITC^DeltaCom, Inc., Senior Secured Notes, 10.5%, due 4/1/16 (5)	$	9,830,000		10,739,275		2.33	%
NEF Telecom Company BV, Mezzanine Term Loan,
EURIBOR + 4.5% Cash + 7.5% PIK, due 8/16/17 - (Netherlands) (4), (5)	€	17,942,492		9,293,508		2.02	%
Zayo Group, LLC, Senior Secured 1st Lien Notes, 10.25%, due 3/15/17	$	3,933,000		4,316,468		0.94	%
Total Wired Telecommunications Carriers				24,349,251

Total Other Corporate Debt Securities (Cost $160,318,329)				160,381,144

Total Debt Investments (Cost $319,637,075)				326,387,108

Equity Securities (27.49%)
Architectural, Engineering, and Related Services (2.32%)
Alion Science & Technology Corporation, Warrants (3)		2,620		135,690		0.03	%
ESP Holdings, Inc., 15% PIK, Preferred Stock (2), (5), (6)		20,297		3,005,832		0.65	%
ESP Holdings, Inc., Common Stock (2), (3), (5), (6)		88,670		7,565,535		1.64	%
Total Architectural, Engineering, and Related Services				10,707,057

Business Support Services (0.26%)
STG-Fairway Holdings, LLC, Class A Units (3), (5)		86,138		1,186,982		0.26	%

Data Processing, Hosting, and Related Services (0.24%)
Anacomp, Inc., Class A Common Stock (2), (3), (5), (8)		1,255,527		1,086,031		0.24	%

Depository Credit Intermediation (0.32%)
Doral Financial Corporation, Common Stock (3)		1,077,794		1,487,356		0.32	%

Industrial Machinery Manufacturing (0.76%)
GSI Group, Inc., Common Stock (3), (5)		328,669		3,477,314		0.76	%

Special Value Continuation Fund, LLC

(A Delaware Limited Liability Company)

Consolidated Statement of Investments (Continued)

December 31, 2010

Showing Percentage of Total Cash and Investments of the Company

Investment	Shares		Fair Value		Percent of Cash and Investments

Equity Securities (continued)
Machine Shops; Turned Product; and Screw, Nut, and Bolt Manufacturing (0.00%)
Precision Holdings, LLC, Class C Membership Interests (3), (5)		29	$	1,681		-

Nonferrous Metal (except Aluminum) Production and Processing (9.43%)
International Wire Group, Inc., Common Stock (2), (5), (6)		1,979,441		43,468,524		9.43	%

Other Amusement and Recreation Industries (0.04%)
Bally Total Fitness Holding Corporation, Common Stock (3), (5)		6,058		152,693		0.03	%
Bally Total Fitness Holding Corporation, Warrants (3), (5)		10,924		52,435		0.01	%
Total Other Amusement and Recreation Industries				205,128

Other Electrical Equipment and Component Manufacturing (8.84%)
EP Management Corporation, Common Stock (2), (5), (6), (7), (9)		1,312,720		40,727,138		8.84	%

Other Information Services (2.43%)
IRI Holdco (RW), LLC, Warrants to Purchase IRI Preferred Stock (3), (5)		4,063,914		11,196,083		2.43	%

Radio and Television Broadcasting (0.18%)
Encompass Digital Media Group, Inc., Common Stock (3), (5)		183,824		842,189		0.18	%

Scheduled Air Transportation (0.37%)
United Air Lines, Inc., Equipment Trust Beneficial Interests (N510UA) (5)		28		311,102		0.07	%
United Air Lines, Inc., Equipment Trust Beneficial Interests (N512UA) (5)		28		307,754		0.07	%
United Air Lines, Inc., Equipment Trust Beneficial Interests (N536UA) (5)		32		375,796		0.08	%
United Air Lines, Inc., Equipment Trust Beneficial Interests (N545UA) (5)		30		357,648		0.08	%
United Air Lines, Inc., Equipment Trust Beneficial Interests (N585UA) (5)		28		338,830		0.07	%
Total Scheduled Air Transportation				1,691,130

Semiconductor and Other Electronic Component Manufacturing (0.86%)
AIP/IS Holdings, LLC, Membership Units (3), (5)		352		3,939,514		0.86	%

Support Activities for Air Transportation (0.01%)
Alabama Aircraft Industries, Inc., Common Stock (3), (5)		164,636		32,927		0.01	%

Wired Telecommunications Carriers (1.43%)
Integra Telecom, Inc., Common Stock (3), (5)		1,274,522		6,495,017		1.41	%
Integra Telecom, Inc., Warrants (3), (5)		346,939		5,100		-
NEF Kamchia Co-Investment Fund, LP Interest - (Cayman Islands) (3), (4), (5)		2,455,500		98,593		0.02	%
Total Wired Telecommunications Carriers				6,598,710

Total Equity Securities (Cost $171,262,213)				126,647,764

Total Investments (Cost $490,899,288) (10)				453,034,872

Special Value Continuation Fund, LLC

(A Delaware Limited Liability Company)

Consolidated Statement of Investments (Continued)

December 31, 2010

Showing Percentage of Total Cash and Investments of the Company

Investment	Principal Amount		Fair Value		Percent of Cash and Investments

Cash and Cash Equivalents (1.68%)
Wells Fargo & Company, Overnight Repurchase Agreement, 0.10%,
Collateralized by Federal Farm Credit Bank Bonds	$	2,000,006	$	2,000,006		0.43	%
General Electric Capital Corporation Company, Commercial Paper, 0.03%, due 1/3/11	$	4,500,000		4,499,993		0.98	%
Cash Denominated in Foreign Currencies	CAD	15,078		15,109		-
Cash Denominated in Foreign Currencies	€	13,022		17,429		-
Cash Denominated in Foreign Currencies	£	35,597		55,574		0.01	%
Cash Denominated in Foreign Currencies	AUD	671,232		686,872		0.15	%
Cash Held on Account at Various Institutions (11)	$	474,760		474,760		0.11	%
Total Cash and Cash Equivalents				7,749,743

Total Cash and Investments			$	460,784,615		100.00	%

Special Value Continuation Fund, LLC

(A Delaware Limited Liability Company)

Consolidated Statement of Investments (Continued)

December 31, 2010

Showing Percentage of Total Cash and Investments of the Company

Notes to Consolidated Statement of Investments:

(1)	Investments in bank debt generally are bought and sold among institutional investors in transactions not subject to registration under the Securities Act of 1933. Such transactions are generally subject to contractual restrictions, such as approval of the agent or borrower.

(2)	Affiliated issuer - as defined under the Investment Company Act of 1940 (ownership of 5% or more of the outstanding voting securities of this issuer).

(3)	Non-income producing security.

(4)	Principal amount denominated in foreign currencies. Amortized cost and fair value converted from foreign currencies to US dollars.

(5)	Restricted security.

(6)	Investment is not a controlling position.

(7)	The Partnership's advisor may demand registration at any time more than 180 days following the first initial public offering of common equity by the issuer.

(8)	Issuer is a controlled company.

(9)	EP Management Corporation declared and paid an $11.04 per share dividend, or $14,492,428 total to the Partnership, in January of 2011.

(10)	Includes investments with an aggregate market value of $21,226,675 that have been segregated to collateralize certain unfunded commitments.

(11)	Includes $283,050 posted as collateral against currency options written.

Aggregate purchases and aggregate sales of investments, other than Government securities, totaled $269,849,738 and $192,419,667, respectively.

Aggregate purchases includes investment assets received as payment in-kind. Aggregate sales includes principal paydowns on debt investments.

The total value of restricted securities and bank debt as of December 31, 2010 was $376,742,385, or 81.76% of total cash and investments of the Company.

Options and swaps at December 31, 2010 were as follows:

Instrument	Notional Amount			Fair Value

Currency Options
Long
AUD Put Option, $0.818975, expires 6/28/11	AUD	461,433		$	2,156
AUD Put Option, $0.818975, expires 12/28/11		430,671			7,877
AUD Put Option, $0.818975, expires 6/27/12		430,671			12,956
AUD Put Option, $0.818975, expires 12/27/12		861,342			35,843
AUD Put Option, $0.818975, expires 5/8/13		885,119			43,888
AUD Put Option, $0.818975, expires 11/6/13		4,984,477			301,106
Short
AUD Call Option, $1.108025, expires 6/28/11		(461,433	)		(3,184	)
AUD Call Option, $1.108025, expires 12/28/11		(430,671	)		(6,723	)
AUD Call Option, $1.108025, expires 6/27/12		(430,671	)		(8,616	)
AUD Call Option, $1.108025, expires 12/27/12		(861,342	)		(20,007	)
AUD Call Option, $1.108025, expires 5/8/13		(885,119	)		(21,945	)
AUD Call Option, $1.108025, expires 11/16/13		(4,984,477	)		(131,431	)
Net Currency Options				$	211,920

Euro/US Dollar Cross-Currency Basis Swap, Pay Euros/Receive USD, Expires 5/16/14	$	6,040,944		$	19,978

See accompanying notes.

Special Value Continuation Fund, LLC

(A Delaware Limited Liability Company)

Consolidated Statement of Operations

Year Ended December 31, 2010

Investment income
Interest income:
Unaffiliated issuers	$	29,158,784
Controlled companies		1,051,064
Other affiliates		2,200,971
Dividend income:
Unaffiliated issuers		280,139
Other affiliates		13,267,785
Other income:
Unaffiliated issuers		1,809,024
Other affiliates		33,445
Total investment income		47,801,212

Operating expenses
Management and advisory fees		6,787,188
Legal fees, professional fees and due diligence expenses		480,026
Amortization of deferred debt issuance costs		440,289
Interest expense		234,582
Commitment fees		218,935
Director fees		181,695
Insurance expense		136,366
Custody fees		85,386
Other operating expenses		330,212
Total expenses		8,894,679

Net investment income		38,906,533

Net realized and unrealized gain
Net realized gain:
Investments in affiliates		10,527,629
Investments in unaffiliated issuers		8,147,980
Net realized gain		18,675,609
Net change in net unrealized appreciation/depreciation		12,945,410
Net realized and unrealized gain		31,621,019

Dividends paid on Series A preferred equity facility		(1,508,341	)
Net change in accumulated dividends on Series A preferred equity facility		(9,532	)
Dividends paid to Series Z preferred shareholders		(3,750	)
Net change in reserve for dividends to Series Z preferred shareholders		1,864

Net increase in net assets applicable to common shareholders
resulting from operations	$	69,007,793

See accompanying notes.

Special Value Continuation Fund, LLC

(A Delaware Limited Liability Company)

Consolidated Statements of Changes in Net Assets

	Year Ended December 31, 2010			Year Ended December 31, 2009

Net assets applicable to common shareholders, beginning of year	$	232,879,791		$	195,745,577

Net investment income		38,906,533			17,932,832
Net realized gain (loss)		18,675,609			(62,643,798	)
Net change in unrealized appreciation/depreciation		12,945,410			98,786,144
Dividends on Series A preferred equity facility		(1,508,341	)		(2,544,220	)
Net change in accumulated dividends on Series A preferred
equity facility		(9,532	)		805,131
Dividends to Series Z preferred shareholders from net
investment income		(3,750	)		-
Net change in reserve for dividends to Series Z preferred
shareholders		1,864			(1,875	)
Net increase in net assets applicable to common shareholders
resulting from operations		69,007,793			52,334,214

Distributions to common shareholders from:
Net investment income		(37,700,000	)		(15,200,000	)

Net assets applicable to common shareholders, end of year
(including accumulated net investment income of $307,266
and $1,158,031, respectively)	$	264,187,584		$	232,879,791

See accompanying notes.

Special Value Continuation Fund, LLC

(A Delaware Limited Liability Company)

Consolidated Statement of Cash Flows

Year Ended December 31, 2010

Operating activities
Net increase in net assets applicable to common shareholders resulting
from operations	$	69,007,793
Adjustments to reconcile net increase in net assets applicable to common
shareholders resulting from operations to net cash used in operating
activities:
Net realized gain		(18,675,609	)
Net change in unrealized appreciation/depreciation		(12,887,856	)
Dividends paid on Series A preferred equity facility		1,508,341
Dividends paid to Series Z preferred shareholders		3,750
Net change in accumulated dividends on Series A preferred equity facility		9,532
Net change in reserve for dividends to Series Z preferred shareholders		(1,864	)
Accretion of original issue discount		(488,138	)
Net accretion of market discount/premium		(1,096,529	)
Income from paid in-kind capitalization		(7,012,011	)
Amortization of deferred debt issuance costs		440,289
Changes in assets and liabilities:
Purchases of investment securities		(262,837,727	)
Proceeds from sales, maturities and paydowns of investments		192,419,667
Increase in accrued interest income - unaffiliated issuers		(1,269,287	)
Decrease in accrued interest income - controlled companies		4,181
Decrease in accrued interest income - other affiliates		141,080
Increase in receivable for investments sold		(3,449,805	)
Increase in prepaid expenses and other assets		(107,146	)
Decrease in payable for investments purchased		(8,811,316	)
Increase in payable to affiliate		92,825
Increase in interest payable		33,547
Decrease in accrued expenses and other liabilities		(14,339	)
Net cash used in operating activities		(52,990,622	)

Financing activities
Proceeds from draws on credit facility		192,000,000
Principal repayments on credit facility		(217,000,000	)
Dividends paid on Series A preferred equity facility		(1,508,341	)
Distributions paid to common shareholders		(24,200,000	)
Dividends paid to Series Z preferred shareholders		(3,750	)
Net cash used in financing activities		(50,712,091	)

Net decrease in cash and cash equivalents		(103,702,713	)
Cash and cash equivalents at beginning of year		111,452,456
Cash and cash equivalents at end of year	$	7,749,743

Supplemental cash flow information:
Interest payments	$	201,035
Tax payments		21,751

See accompanying notes.

Special Value Continuation Fund, LLC

(A Delaware Limited Liability Company)

Notes to Consolidated Financial Statements

December 31, 2010

1. Organization and Nature of Operations

Special Value Continuation Fund, LLC (the “Company”), a Delaware Limited Liability Company, is registered as a nondiversified, closed-end management investment company under the Investment Company Act of 1940 (the “1940 Act”). The Company was established for the purpose of enabling qualified investors to participate indirectly in the investment objectives of Special Value Continuation Partners, LP, a Delaware Limited Partnership (the “Partnership”), of which the Company owns 100% of the common limited partner interests. The Partnership is also registered as a nondiversified, closed-end management investment company under the 1940 Act. The Partnership was formed to acquire a portfolio of investments consisting primarily of bank loans, distressed debt, stressed high yield debt, mezzanine investments and public equities. The stated objective of the Company is to achieve high total returns while minimizing losses.

The Company has elected to be treated as a regulated investment company (“RIC”) for U.S. federal income tax purposes. As a RIC, the Company will not be taxed on its income to the extent that it distributes such income each year and satisfies other applicable income tax requirements. The Partnership has elected to be treated as a partnership for U.S. federal income tax purposes. Investment operations commenced and initial funding was received on July 31, 2006.

These consolidated financial statements include the accounts of the Company and the Partnership. All significant intercompany transactions and balances have been eliminated in the consolidation.

The General Partner of the Partnership is SVOF/MM, LLC (“SVOF/MM”). The managing member of SVOF/MM is Tennenbaum Capital Partners, LLC (“TCP”), which serves as the Investment Manager of both the Company and the Partnership. Babson Capital Management LLC serves as Co-Manager of both the Company and the Partnership. Substantially all of the equity interests in the General Partner are owned directly or indirectly by TCP, Babson Capital Management LLC and employees of TCP.

Company management consists of the Investment Manager and the Board of Directors. Partnership management consists of the General Partner and the Board of Directors. The Investment Manager and the General Partner direct and execute the day-to-day operations of the Company and the Partnership, respectively, subject to oversight from the respective Board of Directors, which sets the broad policies of the Company and performs certain functions required by the 1940 Act in the case of the Partnership. The Board of Directors of the Partnership has delegated investment management of the Partnership’s assets to the Investment Manager and the Co-Manager. Each Board of Directors consists of three persons, two of whom are independent. If the Company or the Partnership has preferred equity interests outstanding, as each currently does, the holders of the preferred interests voting separately as a class will be entitled to elect

Special Value Continuation Fund, LLC

(A Delaware Limited Liability Company)

Notes to Consolidated Financial Statements (Continued)

December 31, 2010

1. Organization and Nature of Operations (continued)

two of the Directors. The remaining directors will be subject to election by holders of the common shares and preferred interests voting together as a single class.

Company Structure

Total capitalization of the consolidated Company is approximately $678.8 million, consisting of approximately $419.0 million of initial contributed common equity, an approximately $9.8 million initial general partner interest (the “GP Interest”) in the Partnership held by SVOF/MM, $134 million of preferred limited partner interests in the Partnership (the “Series A Preferred”), $116 million under a senior secured revolving credit facility issued by the Partnership (the “Senior Facility”) and $23,500 in Series Z preferred shares of the Company. The GP Interest in the Partnership is shown as a minority interest in these consolidated financial statements. The contributed common equity, GP Interest, preferred limited interests and the amount drawn under the Senior Facility are used to purchase Partnership investments and to pay certain fees and expenses of the Partnership and the Company. Most of the cash and investments of the Partnership are included in the collateral for the Senior Facility.

The Company will liquidate and distribute its assets and will be dissolved on June 30, 2016, subject to up to two one-year extensions if requested by the Investment Manager and approved by the outstanding common shares. The Partnership will liquidate and distribute its assets and will be dissolved on June 30, 2016, subject to up to two one-year extensions if requested by the General Partner and approved by SVCF as the holder of the common limited partner interests in the Partnership. However, the Operating Agreement and Partnership Agreement will prohibit liquidation of the Company and the Partnership, respectively, prior to June 30, 2016 if the Series A Preferred are not redeemed in full prior to such liquidation.

Preferred Equity Facility

At December 31, 2010, the Partnership had 6,700 Series A preferred limited partner interests (the “Series A Preferred”) issued and outstanding with a liquidation preference of $20,000 per Preferred Limited Interest. The Series A Preferred are redeemable at the option of the Partnership, subject to certain conditions. Additionally, under certain conditions, the Partnership may be required to either redeem certain of the Series A Preferred or repay indebtedness, at the Partnership’s option. Such conditions would include a failure by the Partnership to maintain adequate collateral as required by its credit facility agreement or by the Statement of Preferences of the Series A Preferred or a failure by the Partnership to maintain sufficient asset coverage as required by the 1940 Act. As of December 31, 2010, the Partnership was in full compliance with such requirements.

Special Value Continuation Fund, LLC

(A Delaware Limited Liability Company)

Notes to Consolidated Financial Statements (Continued)

December 31, 2010

1. Organization and Nature of Operations (continued)

The Series A Preferred accrue dividends at an annual rate equal to LIBOR plus 0.75% or, in the case of any holders of Series A Preferred that are CP Conduits (as defined in the leveraging documents), the higher of (i) LIBOR plus 0.75% or (ii) the CP Conduit’s cost of funds rate plus 0.75%, subject to certain limitations and adjustments.

2. Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The following is a summary of the significant accounting policies of the Company and the Partnership.

Use of Estimates

The preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Although management believes these estimates and assumptions to be reasonable, actual results could differ from those estimates.

Investment Valuation

All of the Company’s investments are generally held by the Partnership. Management values investments held by the Partnership at fair value based upon the principles and methods of valuation set forth in policies adopted by the Partnership’s Board of Directors and in conformity with procedures set forth in the Senior Facility and Statement of Preferences for the Preferred Limited Interest. Fair value is generally defined as the amount for which an investment would be sold in an orderly transaction between market participants at the measurement date.

Investments listed on a recognized exchange or market quotation system, whether U.S. or foreign, are valued for financial reporting purposes as of the last business day of the reporting period using the closing price on the date of valuation. Liquid investments not listed on a recognized exchange or market quotation system are priced by a nationally recognized pricing service or by using quotations from broker-dealers. Investments not priced by a pricing service or for which market quotations are either not readily available or are determined to be unreliable are valued by one or more independent valuation services or, for investments aggregating less than 5% of the total capitalization of the Partnership, by the Investment Manager.

Special Value Continuation Fund, LLC

(A Delaware Limited Liability Company)

Notes to Consolidated Financial Statements (Continued)

December 31, 2010

2. Summary of Significant Accounting Policies (continued)

Fair valuations of investments are determined under guidelines adopted by the Partnership’s Board of Directors, and are subject to their approval. Generally, to increase objectivity in valuing the Partnership’s investments, the Investment Manager will utilize external measures of value, such as public markets or third-party transactions, whenever possible. The Investment Manager’s valuation is not based on long-term work-out value, immediate liquidation value, nor incremental value for potential changes that may take place in the future. The values assigned to investments that are valued by the Investment Manager are based on available information and do not necessarily represent amounts that might ultimately be realized, as these amounts depend on future circumstances and cannot reasonably be determined until the individual investments are actually liquidated. The foregoing policies apply to all investments, including those in companies and groups of affiliated companies aggregating more than 5% of the Company’s assets.

Fair valuations of investments in each asset class are determined using one or more methodologies including the market approach, income approach, or, in the case of recent investments, the cost approach, as appropriate. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets. The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that may be taken into account include, as relevant: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, M&A comparables, our principal market and enterprise values, among other factors.

Investments of the Partnership may be categorized based on the types of inputs used in valuing such investments. The level in the GAAP valuation hierarchy in which an investment falls is based on the lowest level input that is significant to the valuation of the investment in its entirety. Transfers between levels are recognized as of the beginning of the reporting period. At December 31, 2010, the investments of the Partnership were categorized as follows:

Special Value Continuation Fund, LLC

(A Delaware Limited Liability Company)

Notes to Consolidated Financial Statements (Continued)

December 31, 2010

2. Summary of Significant Accounting Policies (continued)

Level		Basis for Determining Fair Value	Bank Debt		Other Corporate Debt		Equity Securities
	1	Quoted prices in active markets for identical assets	$	-	$	7,079,400	$	1,487,356
	2	Other observable market inputs*		52,596,202		103,323,712		3,477,314
	3	Independent third-party pricing sources that employ significant unobservable inputs		113,346,599		49,978,032		117,368,154
	3	Internal valuations with significant unobservable inputs		63,163		-		4,314,940
Total			$	166,005,964	$	160,381,144	$	126,647,764

* For example, quoted prices in inactive markets or quotes for comparable instruments.

Changes in investments categorized as Level 3 during the year ended December 31, 2010 were as follows:

	Independent Third Party Valuation
	Bank Debt		Other Corporate Debt			Equity Securities
Beginning balance	$	45,255,960	$	73,392,113		$	96,160,272
Net realized and unrealized gains (losses)		8,512,039		(6,830,818	)		3,641,603
Net acquisitions and dispositions		59,578,600		(16,583,263	)		(994,890	)
Reclassifications within Level 3†		-		-			18,662,610
Transfers out of Level 3		-		-			(101,441	)
Ending balance	$	113,346,599	$	49,978,032		$	117,368,154

Net change in unrealized gains (losses) during the period on investments still held at period end (included in net realized and unrealized gains/losses, above)	$	7,165,165	$	(8,719,442	)	$	2,884,857

† Comprised of $20,389,788 reclassified from Investment Manager Valuation to Independent Third Party Valuation, and $1,727,178 reclassified from Independent Third Party Valuation to Investment Manager Valuation.

Special Value Continuation Fund, LLC

(A Delaware Limited Liability Company)

Notes to Consolidated Financial Statements (Continued)

December 31, 2010

2. Summary of Significant Accounting Policies (continued)

	Investment Manager Valuation
	Bank Debt			Other Corporate Debt			Equity Securities
Beginning balance	$	211,507		$	793,632		$	20,389,788
Net realized and unrealized gains		140,941			-			1,343,726
Net acquisitions and dispositions		(289,285	)		(793,632	)		1,038,241
Reclassifications within Level 3‡		-			-			(18,662,610	)
Transfers into Level 3		-			-			205,795
Ending balance	$	63,163		$	-		$	4,314,940

Net change in unrealized gains during the period on investments still held at period end (included in net realized and unrealized gains above)	$	140,941		$	-		$	1,913,150

‡ Comprised of $20,389,788 reclassified from Investment Manager Valuation to Independent Third Party Valuation, and $1,727,178 reclassified from Independent Third Party Valuation to Investment Manager Valuation.

During the year ended December 31, 2010, one investment with a beginning-of-period fair value of $914,713 transferred from Level 2 to Level 1 due to increased trading volumes.

Investment Transactions

The Partnership records investment transactions on the trade date, except for private transactions that have conditions to closing, which are recorded on the closing date. The cost of investments purchased is based upon the purchase price plus those professional fees which are specifically identifiable to the investment transaction. Realized gains and losses on investments are recorded based on the specific identification method, which typically allocates the highest cost inventory to the basis of investments sold.

Cash and Cash Equivalents

Cash consists of amounts held in accounts with brokerage firms and the custodian bank. Cash equivalents consist of highly liquid investments with an original maturity of three months or less.

Repurchase Agreements

In connection with transactions in repurchase agreements, it is the Partnership’s policy that its custodian take possession of the underlying collateral, the fair value of which is required to exceed the principal amount of the repurchase transaction, including accrued interest, at all

Special Value Continuation Fund, LLC

(A Delaware Limited Liability Company)

Notes to Consolidated Financial Statements (Continued)

December 31, 2010

2. Summary of Significant Accounting Policies (continued)

times. If the seller defaults, and the fair value of the collateral declines, realization of the collateral by the Partnership may be delayed or limited.

Restricted Investments

The Partnership may invest without limitation in instruments that are subject to legal or contractual restrictions on resale. These instruments generally may be resold to institutional investors in transactions exempt from registration or to the public if the securities are registered. Disposal of these investments may involve time-consuming negotiations and additional expense, and prompt sale at an acceptable price may be difficult. Information regarding restricted investments is included at the end of the Consolidated Statement of Investments. Restricted investments, including any restricted investments in affiliates, are valued in accordance with the investment valuation policies discussed above.

Foreign Investments

The Partnership may invest in instruments traded in foreign countries and denominated in foreign currencies. At December 31, 2010, the Partnership held foreign currency denominated investments comprising approximately 5.9% of the Partnership’s total investments. Such positions were converted at the closing rate in effect at December 31, 2010 and reported in U.S. dollars. Purchases and sales of investments and income and expense items denominated in foreign currencies, when they occur, are translated into U.S. dollars on the respective dates of such transactions. The portion of gains and losses on foreign investments resulting from fluctuations in foreign currencies is included in net realized and unrealized gain or loss from investments.

Investments in foreign companies and securities of foreign governments may involve special risks and considerations not typically associated with investing in U.S. companies and securities of the U.S. government. These risks include, among other things, revaluation of currencies, less reliable information about issuers, different transactions clearance and settlement practices and potential future adverse political and economic developments. Moreover, investments in foreign companies and securities of foreign governments and their markets may be less liquid and their prices more volatile than those of comparable U.S. companies and the U.S. government.

Derivatives

In order to mitigate certain currency exchange and interest rate risks, the Partnership has entered into several swap and option transactions. All derivatives are recognized as either assets or liabilities in the statement of assets and liabilities. The transactions entered into are accounted for using the mark-to-market method with the resulting change in fair value recognized in earnings

Special Value Continuation Fund, LLC

(A Delaware Limited Liability Company)

Notes to Consolidated Financial Statements (Continued)

December 31, 2010

2. Summary of Significant Accounting Policies (continued)

for the current period. Risks may arise upon entering into these contracts from the potential inability of counterparties to meet the terms of their contracts and from unanticipated movements in interest rates and the value of foreign currency relative to the U.S. dollar.

Unrealized gains and losses from derivative transactions during the year ended December 31, 2010 were included in net change in unrealized appreciation/depreciation in the Consolidated Statement of Operations as follows:

Instrument	Location	Unrealized Gain (Loss)
Cross-currency basis swaps	Net change in net unrealized depreciation on investments	$	394,378
Currency options	Net change in net unrealized depreciation on investments		(266,648	)

Valuations of open swap and option transactions at December 31, 2010 were determined as follows:

Instrument	Level		Basis for Determining Fair Value	Aggregate Value
Cross-currency basis swaps		2	Other observable market inputs	$	19,978
Currency options		2	Other observable market inputs		211,920

Debt Issuance Costs

Costs of approximately $3.5 million were incurred in connection with placing the Partnership’s Senior Facility. These costs were deferred and are being amortized on a straight-line basis over eight years, the estimated life of the Senior Facility. The impact of utilizing the straight-line amortization method versus the effective-interest method is not material to the operations of the Company or the Partnership.

Purchase Discounts

The majority of the Partnership’s high yield and distressed debt investments are purchased at a considerable discount to par as a result of the underlying credit risks and financial results of the issuer, as well as general market factors that influence the financial markets as a whole. GAAP generally requires that discounts on the acquisition of corporate (investment grade) bonds, municipal bonds and treasury bonds be amortized using the effective-interest or constant-yield method. However, GAAP also requires the Partnership to consider the collectability of interest when making accruals. Accordingly, when accounting for purchase discounts, the Partnership

Special Value Continuation Fund, LLC

(A Delaware Limited Liability Company)

Notes to Consolidated Financial Statements (Continued)

December 31, 2010

2. Summary of Significant Accounting Policies (continued)

recognizes discount accretion income when it is probable that such amounts will be collected and when such amounts can be estimated.

Income Taxes

The Company intends to comply with the applicable provisions of the Internal Revenue Code of 1986, as amended, pertaining to regulated investment companies and to make distributions of taxable income sufficient to relieve it from substantially all federal income and excise taxes. Accordingly, no provision for income taxes is required in the consolidated financial statements. The Partnership’s income or loss is reported in the partners’ income tax returns. As of December 31, 2010, all tax years of the Company and the Partnership since January 1, 2007 remain subject to examination by federal tax authorities. No such examinations are currently pending.

Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from GAAP. Capital accounts within the financial statements are adjusted at year-end for permanent book and tax differences. At December 31, 2010, the Company reclassified $557,426 in foreign currency losses from accumulated net realized losses to accumulated net investment income, and $21,751 in excise tax expenses from accumulated net investment income to paid-in capital. Temporary differences are primarily attributable to differing book and tax treatments for the timing of the recognition of gains and losses on certain investment transactions and the timing of the deductibility of certain expenses, and will reverse in subsequent periods.

As of December 31, 2010, the tax-basis components of distributable earnings (accumulated deficit) applicable to the common shareholders of the Company and unrealized appreciation (depreciation) and cost of investments (including derivatives) were as follows:

Undistributed ordinary income	$	419,926
Capital loss carryforwards		(62,525,858	)
Unrealized appreciation	$	77,575,726
Unrealized depreciation		(115,686,812	)
Net unrealized depreciation		(38,111,086	)

Cost	$	491,377,855

The Company’s capital loss carryforwards will be used to offset capital gains in succeeding taxable years. $19,133,625, $8,632,349, and $34,759,833 of the carryforwards will expire after 2016, 2017, and 2018, respectively. Distributions and the net change in accumulated

Special Value Continuation Fund, LLC

(A Delaware Limited Liability Company)

Notes to Consolidated Financial Statements (Continued)

December 31, 2010

2. Summary of Significant Accounting Policies (continued)

distributions to holders of the Series A Preferred are treated as distributions of ordinary income for federal tax purposes.

All distributions to common and Series Z shareholders during the years ended December 31, 2010 and 2009 were treated as distributions of ordinary income.

3. Allocations and Distributions

Common distributions are generally based on the estimated taxable earnings of the Company, and are recorded on the ex-dividend date. Distributions to the common shareholders of the Company are generally based on distributions received from the Partnership, less any Company-level expenses and dividends to Series Z preferred shareholders.

Net income and gains of the Partnership are distributed first to the Company until it has received an 8% annual weighted-average return on its undistributed contributed equity, and then to the General Partner until it has received 20% of all cumulative income and gain distributions. 80% of all remaining net income and gain distributions are allocated to the Company, with the remaining 20% allocated to the General Partner. Net investment income or loss, realized gain or loss on investments, and appreciation or depreciation on investments for the period are allocated to the Company and the General Partner in a manner consistent with that used to determine distributions.

The timing of distributions to the Company is determined by the General Partner, which has provided the Investment Manager with certain criteria for such distributions. The timing and amount to be paid by the Company as a distribution to its shareholders are determined by its Board of Directors, which has provided the Investment Manager with criteria for such distributions. Any net long-term capital gains are distributed at least annually. As of December 31, 2010, the Company had declared $160,997,000 in distributions to the common shareholders since inception.

The Company’s Series Z preferred share dividend rate is fixed at 8% per annum.

4. Management and Advisory Fees and Other Expenses

The Investment Manager receives an annual management and advisory fee, payable monthly in arrears, equal to 1.0% of the sum of the maximum amount of the Series A Preferred, the maximum amount available under the Senior Facility, the initial value of the contributed general partnership equity and the initial value of the contributed common equity, subject to reduction by

Special Value Continuation Fund, LLC

(A Delaware Limited Liability Company)

Notes to Consolidated Financial Statements (Continued)

December 31, 2010

4. Management and Advisory Fees and Other Expenses (continued)

the amount of the Senior Facility commitment when the Senior Facility is no longer outstanding, and by the amount of the Series A Preferred when less than $1 million in liquidation preference of preferred securities remains outstanding. In addition to the management fee, the General Partner is entitled to a performance allocation as discussed in Note 3, above. As compensation for its services, the Co-Manager receives a portion of the management fees paid to the Investment Manager. The Co-Manager also receives a portion of any performance allocation paid to the General Partner.

The Company and the Partnership pay all respective expenses incurred in connection with the business of the Company and the Partnership, including fees and expenses of outside contracted services, such as custodian, administrative, legal, audit and tax preparation fees, costs of valuing investments, insurance costs, brokers’ and finders’ fees relating to investments and any other transaction costs associated with the purchase and sale of investments of the Partnership.

5. Senior Secured Revolving Credit Facility

The Partnership has entered into a credit agreement with certain lenders, which provides for a senior secured revolving credit facility (the “Senior Facility”), pursuant to which amounts may be drawn up to $116 million. The Senior Facility matures July 31, 2014, subject to extension by the lenders at the request of the Partnership for one 12-month period.

Advances under the Senior Facility bear interest at LIBOR plus 0.375% per annum, except in the case of loans from CP Conduits, which bear interest at the higher of LIBOR plus 0.375% or the CP Conduit’s cost of funds plus 0.375%, subject to certain limitations. The weighted-average interest rate on outstanding borrowings at December 31, 2010 was 0.64%. In addition to amounts due on outstanding debt, the Senior Facility accrues commitment fees of 0.20% per annum on the unused portion of the Senior Facility, or 0.25% per annum when less than $46.4 million in borrowings are outstanding. The Senior Facility may be terminated, and any outstanding amounts thereunder may become due and payable, should the Partnership fail to satisfy certain financial or other covenants. As of December 31, 2010, the Partnership was in full compliance with such covenants.

6. Commitments, Concentration of Credit Risk and Off-Balance Sheet Risk

The Partnership conducts business with brokers and dealers that are primarily headquartered in New York and Los Angeles and are members of the major securities exchanges. Banking activities are conducted with a firm headquartered in the New York area.

Special Value Continuation Fund, LLC

(A Delaware Limited Liability Company)

Notes to Consolidated Financial Statements (Continued)

December 31, 2010

6. Commitments, Concentration of Credit Risk and Off-Balance Sheet Risk (continued)

In the normal course of business, the Partnership’s investment activities involve executions,

settlement and financing of various transactions resulting in receivables from, and payables to, brokers, dealers and the Partnership’s custodian. These activities may expose the Company and the Partnership to risk in the event that such parties are unable to fulfill contractual obligations. Management does not anticipate any material losses from counterparties with whom it conducts business.

Consistent with standard business practice, the Company and the Partnership enter into contracts that contain a variety of indemnifications. The maximum exposure of the Company and the Partnership under these arrangements is unknown. However, the Company and the Partnership expect the risk of loss to be remote.

The Consolidated Statement of Investments includes certain revolving loan facilities held by the Partnership with aggregate unfunded balances of approximately $11.6 million at December 31, 2010. These instruments are reflected at fair value in the Consolidated Statement of Investments and may be drawn up to the principal amount shown.

7. Related Parties

The Company, the Partnership, the Investment Manager, the General Partner and their members and affiliates may be considered related parties. From time to time, the Partnership advances payments to third parties on behalf of the Company which are reimbursable through deductions from distributions to the Company. At December 31, 2010, the Company had a payable to the Partnership, and the Partnership had a receivable from the Company, in the amount of $54,833, as reflected in the Consolidating Statement of Assets and Liabilities. From time to time, the Investment Manager advances payments to third parties on behalf of the Partnership and receives reimbursement from the Partnership. At December 31, 2010, such reimbursable amounts totaled $92,825, as reflected in the Consolidated Statement of Assets and Liabilities.

8. Series Z Preferred Capital

In addition to the Series A Preferred of the Partnership described in Note 1, the Company had 47 Series Z preferred shares authorized, issued and outstanding as of December 31, 2010. The Series Z preferred shares have a liquidation preference of $500 per share plus accumulated but unpaid dividends and pay dividends at an annual rate equal to 8% of the liquidation preference. The Series Z preferred shares are redeemable at any time at the option of the Company and may only be transferred with the consent of the Company.

Special Value Continuation Fund, LLC

(A Delaware Limited Liability Company)

Notes to Consolidated Financial Statements (Continued)

December 31, 2010

9. Financial Highlights

													July 31, 2006
	Year Ended December 31,												(Inception) to
	2010			2009			2008			2007			December 31, 2006

Per Common Share
Net asset value, beginning of year	$	555.86		$	467.22		$	936.95		$	1,036.13		$	1,000.00

Investment operations:
Net investment income		92.87			42.80			53.75			166.54			48.14
Net realized and unrealized gain (loss)		75.48			86.27			(499.51	)		(28.73	)		62.27
Distributions to minority interestholder from:
Net investment income		-			-			-			(29.74	)		(7.98	)
Net realized gains		-			-			-			(17.76	)		(3.39	)
Returns of capital		-			-			-			(1.30	)		-
Net change in undistributed earnings of minority
interest holder		-			-			7.52			24.89			(9.10	)
Dividends on Series A preferred equity facility		(3.60	)		(6.07	)		(14.21	)		(19.96	)		(3.38	)
Net change in accumulated dividends on Series A
preferred equity facility		(0.02	)		1.92			1.82			0.35			(4.98	)
Dividends to Series Z preferred shareholders from:
Net investment income		(0.01	)		-			(0.01	)		-			-
Net change in reserve for dividends to Series Z
preferred shareholders		-			-			0.01			-			-

Total from investment operations		164.72			124.92			(450.63	)		94.29			81.58

Distributions to common shareholders from:
Net investment income		(89.99	)		(36.28	)		(19.10	)		(117.36	)		(31.90	)
Net realized gains		-			-			-			(71.03	)		(13.55	)
Returns of capital		-			-			-			(5.08	)		-
Total distributions to common shareholders		(89.99	)		(36.28	)		(19.10	)		(193.47	)		(45.45	)

Net asset value, end of year	$	630.59		$	555.86		$	467.22		$	936.95		$	1,036.13

Return on invested assets (1), (2)		20.4	%		19.3	%		(31.7	)%		11.7	%		8.4	%

Gross return to common shareholders (1)		31.4	%		27.3	%		(49.3	)%		11.4	%		10.3	%
Less: Allocation to General Partner of Special Value
Continuation Partners, LP (1)		0.0	%		0.0	%		0.5	%		(2.2	)%		(2.1	)%
Return to common shareholders (1), (3)		31.4	%		27.3	%		(48.8	)%		9.2	%		8.2	%

Special Value Continuation Fund, LLC

(A Delaware Limited Liability Company)

Notes to Consolidated Financial Statements (Continued)

December 31, 2010

9. Financial Highlights (continued)