##### Table of Contents



---

---

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 SEPTEMBER 30, 2003.
|                                         
|o                                         |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER: 0-50363

GLADSTONE COMMERCIAL CORPORATION(Exact name of registrant as specified in its charter)

|                                                                        |  |                                                
|----------------------------------------------------------------------- |  | -----------------------------------------------
|MARYLAND
(State or other jurisdiction of
incorporation or organization) |  | 02-0681276
(I.R.S. Employer Identification No.)

1616 ANDERSON ROAD, SUITE 208
MCLEAN, VIRGINIA 22102
(Address of principal executive office)

(703) 286-7000
(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 o.

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes x    No o.

Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date. The number of shares of the
issuers Common Stock, $0.001 par value, outstanding as of November 4, 2003 was
7,642,000.



---

---





---

TABLE OF CONTENTS



|                                                                                               |                                       |  |  |  |  |  |  | 
|---------------------------------------------------------------------------------------------- | ------------------------------------- |  |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION                                                                
|Item 1  Consolidated Financial Statements                                                    
|                                                                                               | CONSOLIDATED BALANCE SHEETS          
|                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS
|                                                                                               | CONSOLIDATED STATEMENT OF CASH FLOWS 
|                                                                                               | NOTES TO FINANCIAL STATEMENTS        
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
|                                                                                               | Overview                             
|                                                                                               | Results of Operations                
|                                                                                               | Liquidity and Capital Resources      
|Item 3. Quantitative and Qualitative Disclosure About Market Risk                             
|Item 4. Controls and Procedures                                                               
|PART II  OTHER INFORMATION                                                                   
|Item 1. Legal Proceedings                                                                     
|Item 2. Changes in Securities and Use of Proceeds                                             
|Item 3. Defaults Upon Senior Securities                                                       
|Item 4. Submission of Matters to a Vote of Security Holders                                   
|Item 5. Other Information.                                                                    
|Item 6. Exhibits and Reports on Form 8-K.                                                     
|SIGNATURE                                                                                     
|Exhibit Index                                                                                 
|Exhibit 31.1                                                                                  
|Exhibit 31.2                                                                                  
|Exhibit 32.1                                                                                  
|Exhibit 32.2                                                                                  



---



##### Table of Contents



GLADSTONE COMMERCIAL CORPORATION
TABLE OF CONTENTS

|           |  |                                                                                                                                                            
|---------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|PART I     |  | FINANCIAL INFORMATION                                                                                                                                      
|          
|Item 1     |  | Consolidated Financial Statements (Unaudited)                                                                                                              
|          
|           |  | Consolidated Balance Sheets as of September 30, 2003 and June 30, 2003                                                                                     
|           |  | Consolidated Statement of Operations for the three months ended
September 30, 2003 and for the Period   February 14, 2003 (inception) to September 30, 2003
|           |  | Consolidated Statement of Cash Flows for the Period February 14, 2003
(inception) to September 30, 2003                                                    
|           |  | Notes to Financial Statements                                                                                                                              
|          
|Item 2     |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                      
|          
|           |  | Overview                                                                                                                                                   
|           |  | Results of Operations                                                                                                                                      
|           |  | Liquidity and Capital Resources                                                                                                                            
|          
|Item 3     |  | Quantitative and Qualitative Disclosure About Market Risk                                                                                                  
|          
|Item 4     |  | Controls and Procedures                                                                                                                                    
|          
|PART II    |  | OTHER INFORMATION                                                                                                                                          
|          
|Item 1     |  | Legal Proceedings                                                                                                                                          
|          
|Item 2     |  | Changes in Securities and Use of Proceeds                                                                                                                  
|          
|Item 3     |  | Defaults Upon Senior Securities                                                                                                                            
|          
|Item 4     |  | Submission of Matters to a Vote of Security Holders                                                                                                        
|          
|Item 5     |  | Other Information                                                                                                                                          
|          
|Item 6     |  | Exhibits and Reports on Form 8-K                                                                                                                           
|          
|Signatures | 





---



##### Table of Contents









PART I  FINANCIAL INFORMATION

Gladstone Commercial Corporation

Item 1  Consolidated Financial Statements

(Unaudited)

September 30, 2003

CONTENTS

Consolidated Balance Sheets

Consolidated Statements of Operations

Consolidated Statement of Cash Flows

Notes to Financial Statements





---



##### Table of Contents






GLADSTONE COMMERCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

|                                                                                                                               |                                            |   |               |             |          |   |         |         | 
|------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | - | ------------- | ----------- | -------- | - | ------- | ------- | 
|                                                                                                                               |                                            |   | (Unaudited)   |             |          |   |        
|                                                                                                                               |                                            |   | September 30, |             | June 30,
|                                                                                                                               |                                            |   | 2003          |             | 2003    
|                                                                                                                               |                                            |   |               |             |         
|ASSETS                                                                                                                         |                                            |   |               |             |          |   |         |        
|Cash and cash equivalents                                                                                                      |                                            | $ | 104,892,431   |             |          | $ | 29,615  |        
|Prepaid assets                                                                                                                 |                                            |   | 267,058       |             |          |   |        |        
|Deferred offering costs                                                                                                        |                                            |   |              |             |          |   | 298,815 |        
|                                                                                                                               |                                            |   |               |             |          |   |         |        
|                                                                                                                               | Total Assets                               |   | $             | 105,159,489 |          |   | $       | 328,430 | 
|                                                                                                                               |                                            |   |               |             |          |   |         |        
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                           |                                            |   |               |             |          |   |         |        
|Liabilities
Due to Adviser                                                                                                     |                                            | $ | 41,203        |             |          | $ |        |        
|Accounts payable                                                                                                               |                                            |   |              |             |          |   | 287,084 |        
|                                                                                                                               |                                            |   |               |             |          |   |         |        
|                                                                                                                               | Total Liabilities                          |   |               | 41,203      |          |   |         | 287,084 | 
|                                                                                                                               |                                            |   |               |             |          |   |         |        
|Stockholders Equity                                                                                                           |                                            |   |               |             |          |   |         |        
|Common stock, $0.001 par value, 20,000,000 shares authorized,
7,642,000 and 52,000 shares issued and outstanding,
respectively |                                            |   | 7,642         |             |          |   | 52      |        
|Additional paid in capital                                                                                                     |                                            |   | 105,225,506   |             |          |   | 51,948  |        
|Retained deficit                                                                                                               |                                            |   | (114,862      | )           |          |   | (10,654 | )      
|                                                                                                                               |                                            |   |               |             |          |   |         |        
|                                                                                                                               | Total Stockholders Equity                 |   |               | 105,118,286 |          |   |         | 41,346  | 
|                                                                                                                               |                                            |   |               |             |          |   |         |        
|                                                                                                                               | Total Liabilities and Stockholders Equity |   | $             | 105,159,489 |          |   | $       | 328,430 | 
|                                                                                                                               |                                            |   |               |             |          |   |         |        

The accompanying notes are an integral part of these financial statements.





---



##### Table of Contents






GLADSTONE COMMERCIAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

|                                                      |                                |   |                    |         |                    |   |                |         | 
|----------------------------------------------------- | ------------------------------ | - | ------------------ | ------- | ------------------ | - | -------------- | ------- | 
|                                                      |                                |   |                    |         |                    |   | For the Period
|                                                      |                                |   | For the three      |         | February 14, 2003 
|                                                      |                                |   | months ended       |         | (Inception) to    
|                                                      |                                |   | September 30, 2003 |         | September 30, 2003
|                                                      |                                |   |                    |         |                   
|OPERATING REVENUES:                                   |                                | $ |                   |         |                    | $ |               |        
|                                                     
|OPERATING EXPENSES:                                   |                                |   |                    |         |                    |   |                |        
|Management advisory fee                               |                                |   | 124,096            |         |                    |   | 124,096        |        
|Insurance                                             |                                |   | 50,506             |         |                    |   | 50,506         |        
|Directors fees                                        |                                |   | 12,333             |         |                    |   | 12,333         |        
|Professional fees                                     |                                |   | 5,000              |         |                    |   | 10,000         |        
|Organizational costs                                  |                                |   |                   |         |                    |   | 5,549          |        
|General and administrative                            |                                |   | 3,805              |         |                    |   | 3,910          |        
|                                                      |                                |   |                    |         |                    |   |                |        
|                                                      | Total expenses from operations |   |                    | 195,740 |                    |   |                | 206,394 | 
|                                                      |                                |   |                    |         |                    |   |                |        
|Net loss from operations                              |                                |   | (195,740           | )       |                    |   | (206,394       | )      
|                                                      |                                |   |                    |         |                    |   |                |        
|INTEREST INCOME                                       |                                |   | 91,532             |         |                    |   | 91,532         |        
|                                                      |                                |   |                    |         |                    |   |                |        
|NET LOSS                                              |                                | $ | (104,208           | )       |                    | $ | (114,862       | )      
|                                                      |                                |   |                    |         |                    |   |                |        
|Basic and diluted loss per share                      |                                | $ | (0.03              | )       |                    | $ | (0.08          | )      
|                                                      |                                |   |                    |         |                    |   |                |        
|Weighted average basic and
diluted shares outstanding |                                |   | 3,547,297          |         |                    |   | 1,448,482      |        
|                                                      |                                |   |                    |         |                    |   |                |        

The accompanying notes are an integral part of these financial statements.





---



##### Table of Contents






GLADSTONE COMMERCIAL CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS
For the Period February 14, 2003 (Inception) to September 30, 2003

(Unaudited)

|                                               |                                       |   |             |             |  
|---------------------------------------------- | ------------------------------------- | - | ----------- | ----------- | -
|Cash flows from operating activities:          |                                       |   |             |            
|                                               | Net loss                              |   | $           | (114,862    | )
|                                               | Increase in prepaid expenses          |   |             | (267,058    | )
|                                               | Increase in due to Adviser            |   |             | 41,203      |  
|                                               |                                       |   |             |            
|                                               | Net cash used by operating activities |   |             | (340,717    | )
|                                               |                                       |   |             |            
|Cash flows from financing activities:          |                                       |   |             |            
|                                               | Proceeds from share issuance, net     |   |             | 105,233,148 |  
|                                               |                                       |   |             |            
|Net increase in cash and cash equivalents      |                                       |   | 104,892,431 |            
|                                               |                                       |   |             |            
|Cash and cash equivalents, beginning of period |                                       |   |            |            
|Cash and cash equivalents, end of period       |                                       | $ | 104,892,431 |            
|                                               |                                       |   |             |            

The accompanying notes are an integral part of these financial statements





---



##### Table of Contents






GLADSTONE COMMERCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS

1.     Organization

Gladstone Commercial Corporation, a Maryland corporation, (the Company)
was formed on February 14, 2003 under the General Corporation Law of Maryland
for the purpose of engaging in the business of investing in and owning property
connected therewith net leased to creditworthy corporations and other
creditworthy entities. Subject to certain restrictions and limitations, the
business of the Company will be managed by Gladstone Management Corporation
(the Adviser).

On February 15, 2003, the sole stockholder purchased 52,000 shares of
common stock (the Shares) for $52,000 and was admitted as the initial
stockholder of the Company.

On August 18, 2003, the Company closed its initial public offering and
sold 6,600,000 shares of its common stock and on September 17, 2003, the
underwriters purchased an additional 990,000 shares of common stock, both sales
at $15.00 per share less an underwriting discount of $1.05 per share and
offering expense of $699,352 for total net proceeds to the Company of
$105,181,148.

2.     Summary of Significant Accounting Policies

Basis of presentation

On May 28, 2003,
  the Company completed the formation of a subsidiary, Gladstone Commercial Limited
  Partnership (the Operating Partnership). The Operating Partnership
  currently has approximately $50,100 of cash, but the Company anticipates that
  it will conduct substantially all of its operations through the Operating Partnership.
  As the Company currently owns all of the general and limited partnership interests
  of the Operating Partnership, the financial position and results of operations
  of the Operating Partnership are consolidated with those of the Company.

Interim financial information

Interim financial statements of the Company are prepared in accordance
with generally accepted accounting principles (GAAP) for interim financial
information and pursuant to the requirements for reporting on Form 10-Q and
Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying
annual financial statements prepared in accordance with GAAP are omitted. All
adjustments, consisting solely of normal recurring accruals, necessary for the
fair statement of financial statements for the interim period have been
included. Certain prior period amounts may have been reclassified to conform
to current year presentation.

Investments in real estate

The Company intends to use the net proceeds of the Offering to make
investments in real estate. The Company will record investments in real estate
at cost and will capitalize improvements and replacements when they extend the
useful life or improve the efficiency of the asset. The Company will expense
costs of repairs and maintenance as incurred. The Company will compute
depreciation using the straight-line method over the estimated useful life of
40 years for buildings and improvements, five to seven years for equipment and
fixtures and the shorter of the useful life or the remaining lease term for
tenant improvements and leasehold interests.

The Company will account for its acquisitions of investments in real
estate in accordance with Statement of Financial Accounting Standards No. 141,
Business Combinations, which requires the fair value of the real estate
acquired to be allocated to the acquired tangible assets, consisting of land,
building and tenant improvements, and identified intangible assets and
liabilities, consisting of the value of above-market and below-market leases,
other value of in-place leases and value of tenant relationships, based in each
case on their fair values.

The Company will allocate purchase price to the fair value of the tangible
assets of an acquired property





---



##### Table of Contents



(which includes the land, building, and tenant
improvements) to be determined by valuing the property as if it were vacant.
The as-if-vacant value will be allocated to land, building, and tenant
improvements based on managements determination of the relative fair values of
these assets.

Above-market and below-market in-place lease values for owned properties
will be recorded based on the present value (using an interest rate which
reflects the risks associated with the leases acquired) of the difference
between (i) the contractual amounts to be paid pursuant to the in-place leases
and (ii) managements estimate of fair market lease rates for the corresponding
in-place leases, measured over a period equal to the remaining non-cancelable
term of the lease. The capitalized above-market lease values will be amortized
as a reduction of rental income over the remaining non-cancelable terms of the
respective leases. The capitalized below-market lease values (presented in the
accompanying balance sheet as value of assumed lease obligations) will be
amortized as an increase to rental income over the initial term and any
fixed-rate renewal periods in the respective leases. Since the Companys
strategy will to a large degree involve sale-leaseback transactions with newly
originated leases at market rates, the above-market and below-market in-place
lease values are not expected to be significant for many of the transactions
the Company will ultimately enter into.

The total amount
  of other intangible assets acquired will be further allocated to in-place lease
  values and customer relationship intangible values based on managements
  evaluation of the specific characteristics of each tenants lease and the
  Companys overall relationship with that respective tenant. Characteristics
  to be considered by management in allocating these values include the nature
  and extent of the Companys existing business relationships with the tenant,
  growth prospects for developing new business with the tenant, the tenants
  credit quality and expectations of lease renewals (including those existing
  under the terms of the lease agreement), among other factors.

Managements
  estimates of value are expected to be made using methods similar to those used
  by independent appraisers (e.g., discounted cash flow analysis). Factors to
  be considered by management in its analysis include an estimate of carrying
  costs during hypothetical expected lease-up periods considering current market
  conditions, and costs to execute similar leases. The Company will also consider
  information obtained about each property as a result of its pre-acquisition
  due diligence, marketing and leasing activities in estimating the fair value
  of the tangible and intangible assets acquired. In estimating carrying costs,
  management will also include real estate taxes, insurance and other operating
  expenses and estimates of lost rentals at market rates during the expected lease-up
  periods, which are expected to primarily range from six to 18 months, depending
  on specific local market conditions. Management will also estimate costs to
  execute similar leases including leasing commissions, legal and other related
  expenses to the extent that such costs are not already incurred in connection
  with a new lease origination as part of the transaction.

The value of in-place
  leases will be amortized to expense over the initial term of the respective
  leases, which are primarily expected to range from ten to 20 years. The
  value of customer relationship intangibles will be amortized to expense over
  the initial term and any renewal periods in the respective leases, but in no
  event will the amortization period for intangible assets exceed the remaining
  depreciable life of the building.

Should a tenant terminate
  its lease, the unamortized portion of the in-place lease value (including above
  and below market lease values, lease origination costs, and lease-up carrying
  costs) and customer relationship intangibles will be charged to earnings.

Cash and cash equivalents

The Company considers
  all short-term, highly liquid investments that are both readily convertible
  to cash and have a maturity of generally three months or less at the time of
  purchase to be cash equivalents. Items classified as cash equivalents include
  commercial paper, money-market funds, and U.S. Treasury bills, and are carried
  at amortized cost. All of the Companys cash and cash equivalents at September 30,
  2003 were held in the custody of one financial institution, and which balance
  at times may exceed federally insurable limits. The Company mitigates this risk
  by depositing funds with major financial institutions.





---



##### Table of Contents



Deferred offering costs

Costs incurred prior to the Offering were deferred at June 30, 2003 and
were charged to stockholders equity upon completion of the Offering.

Organizational costs

The Company expenses organizational costs (primarily filing fees and legal
expenses) as incurred.

Income taxes

At the earliest date possible, the Company intends to qualify as a real
estate investment trust under the Internal Revenue Code of 1986, and
accordingly will not be subject to Federal Income taxes on amounts distributed
to stockholders (except income from foreclosure property), provided it
distributes at least 90% of its real estate investment trust taxable income to
its stockholders and meets certain other conditions.

Stock Options

The Company accounts for the issuance of stock options under our 2003 Equity Incentive Plan in
accordance with APB Opinion No. 25, Accounting for Stock Issued to Employee. In this regard, these
options have been granted to individuals who are our officers and who would qualify as leased employees under FIN 44, Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25.

Use of estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.

New Accounting Pronouncements

SFAS 149

In April 2003, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003, and hedging
relationships designated after June 30, 2003, except for those provisions of
SFAS No. 149 which relate to SFAS No. 133 Implementation Issues that have been
effective for fiscal quarters that began prior to June 15, 2003. The Company
does not expect the adoption of SFAS 149 to have a material impact on the
Companys consolidated financial statements.

SFAS 150

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
SFAS No. 150 establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. SFAS No. 150 requires that an issuer classify a financial instrument
that is within its scope as a liability (or as an asset in some circumstances).
SFAS No. 150 is effective for financial instruments entered into or modified
after May 31, 2003. The Company does not expect the adoption of SFAS No. 150 to
have a material impact on the Companys consolidated financial statements.

FIN 45

In November 2002, the FASB published Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. FIN 45 requires that a guarantor
recognize a liability for the fair value of an obligation assumed under a
guarantee and also discusses additional disclosures to be made in the interim
and annual financial statements of the guarantor regarding obligations under
certain guarantees. The initial measurement and recognition requirements of





---



##### Table of Contents



FIN 45 are effective prospectively for guarantees issued or modified after December
31, 2002. The adoption did
not have an impact on the Companys consolidated financial statements at
September 30, 2003.

FIN 46

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities. This standard clarifies the application of
Accounting Research Bulletin No. 51, Consolidated Financial Statements, and
addresses consolidation by business enterprises of variable interest entities
(more commonly known as Special Purpose Entities or SPEs). FIN 46 requires
existing unconsolidated variable interest entities to be consolidated by their
primary beneficiaries if the entities do not effectively disperse risk among
the parties involved. FIN 46 also enhances the disclosure requirements related
to variable interest entities. This statement is effective for variable
interest entities created or in which an enterprise obtains an interest after
January 31, 2003. In October 2003, the FASB issued FIN 46-6, which deferred
the implementation until after the fourth quarter of 2003 for entities created
prior to January 31, 2003. At September 30, 2003, the Company has not invested in any SPEs. The Company does not expect the adoption of FIN 46
to have a material impact on the Companys consolidated financial statements.

3.     Management Advisory Fee

The Company has entered into an agreement with the Companys Adviser in
which the Adviser will be responsible for managing the Company on a day-to-day
basis and for identifying, evaluating, negotiating and consummating investment
transactions consistent with the Companys criteria. In exchange for such
services, the Company will reimburse the Adviser for certain expenses. The
Company will reimburse the Adviser for its pro-rata share of the payroll and
related benefit expenses on an employee-by-employee basis, based on the
percentage of each employees time devoted to Company matters. The Company
will also reimburse the Adviser for general overhead expenses multiplied by the
ratio of hours worked by Adviser employees on Company matters to the total
hours worked by Adviser employees. Through September 30, 2003, the Company has
incurred $124,096 in management advisory fees, of which $41,203 was unpaid at
September 30, 2003.

4.     Stock Options

In December 2002, the FASB approved the issuance of SFAS No. 148
Accounting for Stock-Based Compensation  Transition and Disclosure. The
statement amended SFAS No. 123 Accounting for Stock-Based Compensation to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock based employee compensation.
Furthermore, SFAS No. 148 amended the disclosure requirements of SFAS No. 123
to require more prominent disclosures in both annual and interim financial
statements about the method and related effect on results of accounting for
stock-based employee compensation, effective for fiscal year and interim
periods beginning after December 15, 2002.





---



##### Table of Contents



The following tables summarizes the Companys operating results as if the
Company elected to account for its stock-based compensation under the fair
value provisions of SFAS No. 123, Accounting for Stock-Based Compensation,
for the three months ended September 30, 2003 and the period from February 14,
2003 (inception) to September 30, 2003:

|                                                                                    |  |                    |          |                    |  |                   |          |  
|----------------------------------------------------------------------------------- |  | ------------------ | -------- | ------------------ |  | ----------------- | -------- | -
|                                                                                    |  |                    |          |                    |  | February 14, 2003
|                                                                                    |  | Three months ended |          | (Inception) to    
|                                                                                    |  | September 30, 2003 |          | September 30, 2003
|                                                                                    |  |                    |          |                   
|Net Loss, as reported                                                               |  | $                  | (104,208 | )                  |  | $                 | (114,862 | )
|                                                                                   
|Less: Stock-based compensation expense
determined under the fair value based method |  | $                  | (53,819  | )                  |  | $                 | (53,819  | )
|                                                                                   
|Net Loss, pro-forma                                                                 |  | $                  | (158,027 | )                  |  | $                 | (168,681 | )
|                                                                                   
|Basic, as reported                                                                  |  | $                  | (0.03    | )                  |  | $                 | (0.08    | )
|Basic, pro-forma                                                                    |  | $                  | (0.04    | )                  |  | $                 | (0.12    | )
|                                                                                   
|Diluted, as reported                                                                |  | $                  | (0.03    | )                  |  | $                 | (0.08    | )
|Diluted, pro-forma                                                                  |  | $                  | (0.04    | )                  |  | $                 | (0.12    | )

Due to the Companys net loss, the incremental shares have an anti-dilutive
effect for the periods ended September 30, 2003. As a result, diluted loss per
average common share is equal to the basic loss per average common share for
the periods ended September 30, 2003.

The stock-based compensation expense under the fair value method, as reported
in the above table, was computed using the Black-Scholes option-pricing model
and the following assumptions: dividend yield of five percent, risk-free
interest rate of 2.24%, expected volatility factor of 0.1839, and expected
lives of three years.

5.     Earnings Per Common Share

The following table sets for the computation of basic and diluted decrease in
stockholders equity from operations per share for the three months ended
September 30, 2003 and from the period February 14, 2003 (inception) through
September 30, 2003:

|                                                          |  |                    |           |                    |  |                   |           |  
|--------------------------------------------------------- |  | ------------------ | --------- | ------------------ |  | ----------------- | --------- | -
|                                                          |  |                    |           |                    |  | February 14, 2003
|                                                          |  | Three months ended |           | (Inception) to    
|                                                          |  | September 30, 2003 |           | September 30, 2003
|                                                          |  |                    |           |                   
|Net Loss                                                  |  | $                  | (104,208  | )                  |  | $                 | (114,862  | )
|                                                         
|Denominator for basic and diluted
weighted average shares |  |                    | 3,547,297 |                    |  |                   | 1,448,482 |  
|                                                         
|Basic and diluted loss per common share                   |  | $                  | (0.03     | )                  |  | $                 | (0.08     | )
|                                                          |  |                    |           |                    |  |                   |           |  

Due to the Companys net loss, the incremental shares, related to stock
options, have an anti-dilutive effect for the periods ended September 30, 2003
and as a result diluted loss per average common share is equal to the basic
loss per average common share for the periods ended September 30, 2003.





---



##### Table of Contents






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

Forward-Looking Statements

Some of the statements in this Quarterly Report on Form 10-Q constitute
forward-looking statements under Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
including statements made with respect to possible or assumed future results of
our business, financial condition, liquidity, results of operations, plans and
objectives. When we use the words believe, expect, anticipate, estimate
or similar expressions, we intend to identify forward-looking statements. You
should not place undue reliance on these forward-looking statements. Statements
regarding the following subjects are forward-looking by their nature:



| |  |  | our business strategy;                              
| | - |  | ----------------------------------------------------
| |  |  | pending transactions;                               
| |  |  | our projected operating results;                    
| |  |  | our ability to obtain future financing arrangements;
| |  |  | estimates relating to our future distributions;     
| |  |  | our understanding of our competition;               
| |  |  | market trends;                                      
| |  |  | projected capital expenditures; and                 
| |  |  | use of the proceeds of our initial public offering. 

These statements involve known and unknown risks, uncertainties and other
factors that may cause results, levels of activity, growth, performance, tax
consequences or achievements to be materially different from any future
results, levels of activity, growth, performance, tax consequences or
achievements expressed or implied by such forward-looking statements. Such
factors include, among other things, those listed below, as well as those
further set forth under the heading Risk Factors in our prospectus dated
August 12, 2003 as filed with the SEC on August 13, 2003.

The forward-looking statements are based on our beliefs, assumptions and
expectations of our future performance, taking into account all information
currently available to us. Although we believe that these beliefs, assumptions
and expectations are reasonable, we cannot guarantee future results, levels of
activity, performance, growth or achievements. These beliefs, assumptions and
expectations can change as a result of many possible events or factors, not all
of which are known to us. If a change occurs, our business, financial
condition, liquidity and results of operations may vary materially from those
expressed in our forward-looking statements. You should carefully consider
these risks before you make an investment decision with respect to our common
stock, along with the following factors that could cause actual results to vary
from our forward-looking statements:



| |  |  | general volatility of the capital markets and the market price of our
common stock;  
| | - |  | -------------------------------------------------------------------------------------
| |  |  | risks associated with negotiation of consummation of pending and future
transactions;
| |  |  | changes in our business strategy;                                                    
| |  |  | availability, terms and deployment of capital;                                       
| |  |  | availability of qualified personnel;                                                 
| |  |  | changes in our industry, interest rates or the general economy; and                  
| |  |  | the degree and nature of our competition.                                            

We are under no duty to update any of the forward-looking statements after the
date of this Form 10-Q to conform such statements to actual results.





---



##### Table of Contents






Overview

We were incorporated under the General Corporation Law of the State of
Maryland on February 14, 2003 primarily for the purpose of investing in and
owning net leased industrial and commercial real property and selectively
making long-term industrial and commercial mortgage loans. We expect that a
large portion of our tenants and borrowers will be small and medium-sized
businesses that have significant buyout fund ownership and will be well
capitalized, with equity constituting between 20% and 40% of their permanent
capital. We expect that other tenants and borrowers will be family-owned
businesses that have built significant equity from paying down the mortgage
loans securing their real estate or through the appreciation in the value of
their real estate. We will seek to enter into triple net leases having terms of
approximately 15 years, with rent increases built into the leases. Under a
triple net lease, the tenant is required to pay all operating, maintenance and
insurance costs and real estate taxes with respect to the leased property.
Although we have not yet purchased any properties or made any mortgage loans,
we are actively communicating with buyout funds, real estate brokers and other
third parties to locate properties for potential acquisition or mortgage
financing.

We will conduct substantially all of our activities through, and
substantially all of our properties will be held directly or indirectly by,
Gladstone Commercial Limited Partnership, a Delaware limited partnership formed
on May 28, 2003, which we refer to as our Operating Partnership. We control
our Operating Partnership as its sole general partner, and, through our wholly
owned subsidiary Gladstone Commercial Partners, LLC, we also own all limited
partnership units of our Operating Partnership. We expect our Operating
Partnership to issue limited partnership units from time to time in exchange
for industrial and commercial real property. By structuring our acquisitions in
this manner, the sellers of the real estate will generally be able to defer the
realization of gains until they redeem the limited partnership units. Limited
partners who hold limited partnership units in our Operating Partnership will
be entitled to redeem these units for cash or, at our election, shares of our
common stock on a one-for-one basis at any time after the first anniversary of
the completion of our initial public offering. Whenever we issue common stock
for cash, we will be obligated to contribute any net proceeds we receive from
the sale of the stock to our Operating Partnership and our Operating
Partnership will, in turn, be obligated to issue an equivalent number of
limited partnership units to us. Our Operating Partnership will distribute the
income it generates from its operations to us and its limited partners on a pro
rata basis. We will, in turn, distribute the amounts we receive from our
Operating Partnership to our stockholders in the form of quarterly cash
distributions. We intend to qualify as a REIT for federal tax purposes, thereby
generally avoiding federal and state income taxes on the distributions we make
to our stockholders.

Critical Accounting Policies

Management believes our most critical accounting policies are the
accounting for lease revenues (including straight-line rent), provision for
loans losses, the regular evaluation of whether the value of a real estate
asset has been impaired and the accounting for our derivatives and hedging
activities, if any. Each of these items involves estimates that require
management to make judgments that are subjective in nature. Management relies
on its experience, collects historical data and current market data, and
analyzes these assumptions in order to arrive at what it believes to be
reasonable estimates. Under different conditions or assumptions, materially
different amounts could be reported related to the accounting policies
described below. In addition, application of these accounting policies involves
the exercise of judgments on the use of assumptions as to future uncertainties
and, as a result, actual results could materially differ from these estimates.

Revenue Recognition

Our revenues, which will be comprised largely of rental income, will
include rents that each tenant pays in accordance with the terms of its
respective lease reported on a straight-line basis over the initial term of the
lease. Since our leases may provide for rental increases at specified
intervals, straight-line basis accounting will require us to record as an
asset, and include in revenues, unbilled rent that we will only receive if the
tenant makes all rent payments required through the expiration of the initial
term of the lease. Accordingly, our management must determine, in its judgment,
to what extent the unbilled rent receivable





---



##### Table of Contents



applicable to each specific tenant
is collectible. We will review unbilled rent receivable on a quarterly basis
and take into consideration the tenants payment history, the financial
condition of the tenant, business conditions in the industry in which the
tenant operates and economic conditions in the area in which the property is
located. In the event that the collectability of unbilled rent with respect to
any given tenant is in doubt, we would be required to record an increase in our
allowance for uncollectible accounts or record a direct write-off of the
specific rent receivable, which would have an adverse effect on our net income
for the year in which the reserve is increased or the direct write-off is
recorded and would decrease our total assets and stockholders equity.

Investments in Real Estate

We will record investments in real estate at cost and we will capitalize
improvements and replacements when they extend the useful life or improve the
efficiency of the asset. We will expense costs of repairs and maintenance as
incurred. We will compute depreciation using the straight-line method over the
estimated useful life of 40 years for buildings and improvements, five to seven
years for equipment and fixtures and the shorter of the useful life or the
remaining lease term for tenant improvements and leasehold interests.

We will be required to make subjective assessments as to the useful lives
of our properties for purposes of determining the amount of depreciation to
record on an annual basis with respect to our investments in real estate. These
assessments will have a direct impact on our net income because, if we were to
shorten the expected useful lives of our investments in real estate, we would
depreciate these investments over fewer years, resulting in more depreciation
expense and lower net income on an annual basis.

We have adopted SFAS 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, which establishes a single accounting model for the
impairment or disposal of long-lived assets including discontinued operations.
SFAS 144 requires that the operations related to properties that have been sold
or that we intend to sell be presented as discontinued operations in the
statement of operations for all periods presented, and properties we intend to
sell be designated as held for sale on our balance sheet.

When circumstances such as adverse market conditions indicate a possible
impairment of the value of a property, we will review the recoverability of the
propertys carrying value. The review of recoverability will be based on our
estimate of the future undiscounted cash flows, excluding interest charges,
expected to result from the propertys use and eventual disposition. Our
forecast of these cash flows will consider factors such as expected future
operating income, market and other applicable trends and residual value, as
well as the effects of leasing demand, competition and other factors. If
impairment exists due to the inability to recover the carrying value of a
property, an impairment loss will be recorded to the extent that the carrying
value exceeds the estimated fair value of the property. We will be required to
make subjective assessments as to whether there are impairments in the values
of our investments in real estate.

Purchase Price Allocation

We will record above-market and below-market in-place lease values for
owned properties based on the present value (using an interest rate which
reflects the risks associated with the leases acquired) of the difference
between (i) the contractual amounts to be paid pursuant to the in-place leases
and (ii) managements estimate of fair market lease rates for the corresponding
in-place leases, measured over a period equal to the remaining non-cancelable
term of the lease. We will amortize the capitalized above-market lease values
as a reduction of rental income over the remaining non-cancelable terms of the
respective leases. We will amortize the capitalized below-market lease values
(presented in the accompanying balance sheet as value of assumed lease
obligations) as an increase to rental income over the initial term and any
fixed-rate renewal periods in the respective leases. Since our strategy will to
a large degree involve sale-leaseback transactions with newly originated leases
at market rates, we do not expect the above-market and below-market in-place
lease values to be significant for many of the transactions we will ultimately
enter into.





---



##### Table of Contents



The total amount of other intangible assets acquired will be further
allocated to in-place lease values and customer relationship intangible values
based on managements evaluation of the specific characteristics of each
tenants lease and our overall relationship with that respective tenant.
Characteristics to be considered by management in allocating these values
include the nature and extent of our existing business relationships with the
tenant, growth prospects for developing new business with the tenant, the
tenants credit quality and expectations of lease renewals (including those
existing under the terms of the lease agreement), among other factors.

Managements estimates of value are expected to be made using methods
similar to those used by independent appraisers (e.g., discounted cash flow
analysis). Factors to be considered by management in its analysis include an
estimate of carrying costs during hypothetical expected lease-up periods
considering current market conditions, and costs to execute similar leases. We
will also consider information obtained about each property as a result of our
pre-acquisition due diligence, marketing and leasing activities in estimating
the fair value of the tangible and intangible assets acquired. In estimating
carrying costs, management will also include real estate taxes, insurance and
other operating expenses and estimates of lost rentals at market rates during
the expected lease-up periods, which we expect to primarily range from six to
eighteen months, depending on specific local market conditions. Management will
also estimate costs to execute similar leases including leasing commissions,
legal and other related expenses to the extent that such costs are not already
incurred in connection with a new lease origination as part of the transaction.

We will amortize the value of in-place leases to expense over the initial
term of the respective leases, which we primarily expect to range from ten to
twenty years. The value of customer relationship intangibles will be amortized
to expense over the initial term and any renewal periods in the respective
leases, but in no event will the amortization period for intangible assets
exceed the remaining depreciable life of the building.

Should a tenant
terminate its lease, the unamortized portion of the in-place lease value (including above and below market lease values, lease origination costs, and lease-up carrying costs) and
customer relationship intangibles will be charged to earnings.

Accounting for Derivative Financial Investments and Hedging Activities

We will account for our derivative and hedging activities, if any, using
SFAS 133, Accounting for Derivative Instruments and Hedging Activities, as
amended by SFAS 137 and SFAS 149, which requires all derivative instruments to
be carried at fair value on the balance sheet.

Derivative instruments designated in a hedge relationship to mitigate
exposure to variability in expected future cash flows, or other types of
forecasted transactions, will be considered cash flow hedges. We will formally
document all relationships between hedging instruments and hedged items, as
well as our risk-management objective and strategy for undertaking each hedge
transaction. We will periodically review the effectiveness of each hedging
transaction, which involves estimating future cash flows. Cash flow hedges will
be accounted for by recording the fair value of the derivative instrument on
the balance sheet as either an asset or liability, with a corresponding amount
recorded in other comprehensive income within stockholders equity. Amounts
will be reclassified from other comprehensive income to the income statement in
the period or periods the hedged forecasted transaction affects earnings.
Derivative instruments designated in a hedge relationship to mitigate exposure
to changes in the fair value of an asset, liability, or firm commitment
attributable to a particular risk, such as interest rate risk, will be
considered fair value hedges under SFAS 133. We are not currently a party to
any derivatives contract.





---



##### Table of Contents



Provision for Loan Losses

Our accounting policies require that we reflect in our financial
statements an allowance for estimated credit losses with respect to mortgage
loans we have made based upon our evaluation of known and inherent risks
associated with our private lending assets. While we have not yet made any
mortgage loans and therefore have not experienced any actual losses in
connection with our lending investments, management considers it prudent, once
we have made mortgage loans, to reflect provisions for loan losses on a
portfolio basis based upon our assessment of general market conditions, our
internal risk management policies and credit risk rating system, industry loss
experience, our assessment of the likelihood of delinquencies or defaults, and
the value of the collateral underlying our investments. Actual losses, if any,
could ultimately differ from these estimates.

Income Taxes

Our financial results generally do not reflect provisions for current or
deferred income taxes. Management believes that we will operate in a manner
that will allow us to be taxed as a REIT and, as a result, we do not expect to
pay substantial corporate-level income taxes. Many of the requirements for REIT
qualification, however, are highly technical and complex. If we were to fail to
meet these requirements, we would be subject to federal income tax which could
have a material adverse impact on our results of operations and amounts
available for distributions to our stockholders.

Stock Based Compensation

We intend to apply the intrinsic value method to account for the issuance
of stock options under our 2003 Equity Incentive Plan in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees, where appropriate.
In this regard, it is currently anticipated that a substantial portion of these
options will be granted to individuals who are our officers and who would
qualify as leased employees under FIN 44, Accounting for Certain Transactions
involving Stock Compensation, an interpretation of APB Opinion No. 25.
Accordingly, because the grants are expected to be at exercise prices that
represent fair value of the stock at date of grant, we do not currently
anticipate that we will record any expense related to the issuance of these
options under the intrinsic value method. If the actual terms vary from the
expected, the impact to our compensation expense could differ.

Relationships and Related Transactions

Advisory Agreement

We have entered into an advisory agreement with our Adviser, Gladstone
Management Corporation, pursuant to which our Adviser will be responsible for
managing our business on a day-to-day basis and for identifying, evaluating,
negotiating and consummating investment transactions consistent with our
investment criteria. In return for providing such services, we have agreed to
reimburse our Adviser for certain expenses it incurs related to its management
of our activities on the following bases:



| |  |  | reimbursement on a dollar-for-dollar basis for all expenses
incurred by our Adviser for our direct benefit (for example,
organizational and offering expenses, legal, accounting, tax and
consulting fees), which we currently estimate will be approximately
$1.3 million during the first twelve months following the completion of
our initial public offering (including approximately $1 million of
expenses incurred in connection with the offering) and $300,000
annually thereafter;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | reimbursement on a dollar-for-dollar basis for all additional fees
charged by third parties that are directly related to our business (for
example, real estate brokerage fees, mortgage placement fees, lease-up
fees and transaction structuring fees), which we currently are unable
to estimate;                                                                                                                                                                                         
|
| |  |  | reimbursement for our pro rata share of our Advisers employee
payroll and benefits expenses, on an employee-by-employee basis, based
on the percentage of each employees time devoted to our matters. We
currently estimate that reimbursement of payroll and benefits will be
approximately                                                                                                                                                                                               





---



##### Table of Contents





| |   |  | $425,000 in the twelve months following our offering; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | reimbursement for our pro rata portion of all other expenses of our
Adviser (overhead expenses), based on the percentage of total hours
worked by our Advisers personnel that are spent on our matters.
However, we will only be required to reimburse our Adviser for overhead
if the amount of payroll and benefits expenses reimbursed to our
Adviser, as described above, is less than 2.0% of our average invested
assets. In such case, we will only be required to reimburse our Adviser
for our share of its overhead expenses up to the point that overhead
expenses and payroll and benefits expenses, on a combined basis, equal
2.0% of our average invested assets. We currently estimate that
reimbursement of overhead expenses will be approximately $275,000 in
the twelve months following our initial public offering.

The estimated reimbursements set forth above are based on our current
expectations regarding operating expenses of our Adviser and the proportion of
our Advisers time we believe will be spent on matters relating to our
business. To the extent that our Advisers operating expenses are greater than
we anticipate, or if our Adviser allocates a greater percentage of its time to
our business, our actual reimbursements to the Adviser could be materially
greater than currently projected.

Each of our officers is an officer of our Adviser. Our chairman and chief
executive officer David Gladstone, our president and chief operating officer,
Terry Brubaker, and our chief financial officer, Harry Brill, are also
directors of our Adviser. David Gladstone is the controlling stockholder of our
Adviser. The advisory agreement was not negotiated at arms-length, although we
believe that its terms are no less favorable to us than those that we could
obtain from an unaffiliated third party in an arms-length transaction.




Results of Operations

For the three months ended September 30, 2003 and the period from February 14,
2003 (inception) through September 30, 2003

Revenues

Because we have not yet entered into any real estate transactions, we did
not earn revenues from operations for the three months ended September 30, 2003
or for the period from inception through September 30, 2003.

Expenses

Operating expense for the three months ended September 30, 2003 and for
the period from inception through September 30, 2003 were $195,740 and
$206,394, respectively. Operating expenses mainly consist of the management
advisory fee, insurance expense, directors fees, organizational costs and
professional fees. The management advisory fee consists of the reimbursement
of expenses, including direct allocation of employee salaries and benefits as
well as general overhead costs to our Adviser in accordance with the terms of
the advisory agreement. For both the quarter and period ended September 30,
2003, the management advisory fees were $124,096.

We also incurred insurance expense of $50,506 for both the three months
ended September 30, 2003 and for the period from inception through September
30, 2003 for directors and officers insurance, as well as general insurance.
Directors fees of $12,333 were expensed for the quarter ended September 30,
2003 and for the period from inception through September 30, 2003, and
professional fees of $5,000 and $10,000 were expensed for the quarter ended
September 30, 2003 and for the period from inception through September 30,
2003, respectively. For the period from inception through September 30, 2003,
we also incurred organization costs of $5,549 in connection with the
organization of the Company. General and administrative expenses were $3,805
and $3,910 for the three months ended September 30, 2003 and the period from
inception through September 30, 2003, respectively.





---



##### Table of Contents



Because we have only recently begun our operations, we do not believe that
our current level of operating expenses is indicative of our operation expenses
in the future. As we begin entering into real estate investments, we expect our
operating expenses to increase and that ultimately our management advisory fee
will be approximately 2% of our invested assets.

Interest Income

During both the three months ended September 30, 2003 and for the period
from inception through September 30, 2003, the Company earned interest income
on cash and cash equivalents of $91,532. This interest represents the interest
earned on the investment of the net proceeds from our initial public offering
in short-term investment grade securities, primarily U.S. Treasury Bills, from
August 15, 2003 through September 30, 2003. As we begin to acquire our real
estate investment portfolio, we anticipate that the interest earned on cash and
cash equivalents will decrease.

Net Loss

For the three months ended September 30, 2003 and for the period from
inception through September 30, 2003, we incurred a net loss of $104,208 and
$114,862, respectively. Based on the weighted average common shares
outstanding of 3,551,451 and 1,448,482 for the three months ended September 30,
2003 and for the period from inception though September 30, 2003, respectively,
the basic and diluted loss per common share was $0.03 for the three months
ended September 30, 2003 and $0.08 for the period from inception through
September 30, 2003.




Liquidity and Capital Resources

At September 30, 2003, we had no investments in real estate. At September
30, 2003, we had approximately $104.9 million in cash and cash equivalents
which are available to make investments and fund our continuing operations.
Those funds were predominantly raised though our initial public offering.

Net cash used by operating activities was $340,717, consisting primarily
of the payment of the management advisory fee and the purchase of insurance
policies.

Net cash provided by financing activities was $105,233,148 for the period
from inception through September 30, 2003. These amounts consisted mainly of
the proceeds from the initial public offering that closed on August 13, 2003 (
including $13,810,510 that was received on September 17, 2003 in connection
with the closing of the underwriters over-allotment option) partially offset
by our subsequent payment of the direct offering costs.

Subsequent to September 30, 2003, we entered into signed commitment
letters for the potential acquisition of real properties with an aggregate
purchase price of $11.8 million. We currently anticipate that these
investments will close on or around December 31, 2003. However, each of these
potential investments is subject to certain terms and conditions, including the
successful completion of our due diligence investigations, prior to closing.
Accordingly there can be no assurance that we will not discover facts during
the course of our due diligence that would render one or more of these
investments imprudent. As a result, there can be no assurance that we will
consummate any of these transactions.





---



##### Table of Contents






Item 3.  Quantitative and Qualitative Disclosure About Market Risk

Market risk includes risks that arise from changes in interest rates,
foreign currency exchange rates, commodity prices, equity prices and other
market changes that affect market sensitive instruments. The primary risk that
we believe we will be exposed to is interest rate risk.

In the future, we may be exposed to the effects of interest rate changes
primarily as a result of long-term debt used to maintain liquidity and fund
expansion of our real estate investment portfolio and operations. Our interest
rate risk management objectives are to limit the impact of interest rate
changes on earnings and cash flows and to lower overall borrowing costs. To
achieve this objective, we will borrow primarily at fixed rates or variable
rates with the lowest margins available and, in some cases, with the ability to
convert variable rates to fixed rates. We may also enter into derivative
financial instruments such as interest rate swaps and caps in order to mitigate
the interest rate risk on a related financial instrument. We will not enter
into derivative or interest rate transactions for speculative purposes.

In addition to changes in interest rates, the value of our real estate is
subject to fluctuations based on changes in local and regional economic
conditions and changes in the creditworthiness of lessees, all of which may
affect our ability to refinance debt if necessary.




Item 4.  Controls and Procedures

As of September 30, 2003, our management, including the chief executive
officer and chief financial officer, evaluated the effectiveness of the design
and operation of our disclosure controls and procedures. Based on that
evaluation, management, including the chief executive officer and chief
financial officer, concluded that the disclosure controls and procedures were
effective in timely alerting management of material information about the
Company required to be included in our periodic Securities and Exchange
Commission filings. However, while evaluating the disclosure controls and
procedures, management recognized that any controls and procedures, no matter
how well designed and operated can provide only reasonable assurance of
achieving the desired control objectives, and management necessarily was
required to apply judgment in evaluating the cost-benefit relationship of
possible controls and procedures.

There were no significant changes in internal controls for the period
ended September 30, 2003.





---



##### Table of Contents






PART II  OTHER INFORMATION




Item 1. Legal Proceedings

Neither we nor any of our subsidiaries are currently subject to any material
legal proceedings, nor, to our knowledge, is any material legal proceeding
threatened against us or our subsidiaries.




Item 2. Changes in Securities and Use of Proceeds

On February 15, 2003, we issued and sold 52,000 shares of common stock for an
aggregate purchase price of $52,000 to David Gladstone, our chairman and chief
executive officer. We issued these shares to Mr. Gladstone in reliance upon
exemption from registration provided by Section 4(2) under the Securities Act
and Rule 506 promulgated thereunder.

On August 12, 2003, our registration statements on Form S-11 (SEC File Nos.
333-106024 and 333-107897) for the initial public offering of 6,600,000 shares
of common stock, par value $0.001 per share, became effective. All 6,600,000
shares were sold upon completion of the initial public offering at an aggregate
public offering price of $99,000,000, reflecting an offering price of $15 per
share. Ferris, Baker Watts, Incorporated, Jefferies & Company, Inc., J.J.B.
Hillard, W.L. Lyons, Inc. and Stifel, Nicolaus & Company, Incorporated acted as
underwriters for the initial public offering.

In connection with the initial public offering, we registered and offered the
underwriters an option to purchase an additional 990,000 shares of common stock
solely to cover over-allotments. The underwriters exercised this option in
full on September 17, 2003. The gross proceeds from the exercise of this
option were $14,850,000.

Underwriting discounts and commissions for the shares sold in the initial
public offering (including the shares sold upon the exercise of the
over-allotment option) totaled $7,969,500. In connection with the initial
public offering, we incurred expenses of approximately $700,000. None of these
expenses were paid directly or indirectly to our directors, officers or
associates, or to persons owning 10% or more of our common stock or other
affiliates. After deducting underwriting discounts and commissions and other
expenses, we receive net proceeds of approximately $105.2 million from the
initial public offering.

The primary purpose of the initial public offering was to obtain capital with
which to invest in and own net leased industrial and commercial real property
and selectively make long-term industrial and commercial mortgage loans. To
date, we have not made any such investments. Accordingly, substantially all of
the net proceeds we received from the initial public offering have been
invested in short-term , investment grade, interest-bearing instruments.




Item 3. Defaults Upon Senior Securities

Not applicable.




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

Not applicable.





---



##### Table of Contents






Item 5. Other Information.

Not applicable.




Item 6. Exhibits and Reports on Form 8-K.

(a)  ExhibitsSee Exhibit Index.

(b)  Reports on Form 8-KNot applicable.





---



##### Table of Contents






SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

| |                                                                
| | ---------------------------------------------------------------
| | GLADSTONE COMMERCIAL CORPORATION                               
|
| | By:  /s/ Harry BrillHarry Brill
        Chief Financial Officer
|
| | Date:  November 10, 2003                                       





---



##### Table of Contents






Exhibit Index

|        |                                                                                                                                                                                                                                                                                  
|------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit | Description of Document                                                                                                                                                                                                                                                          
|        |                                                                                                                                                                                                                                                                                  
|3.1    | Amended and Restated Articles of Incorporation of the Registrant,
incorporated by reference to the Registration Statement on Form S-11
(File No. 333-106024), file June 11, 2003                                                                                                 
|3.2    | Bylaws of the Registrant, incorporated by
reference to the Registrant, incorporated
by reference to the Registration Statement
on Form S-11 (File No. 333-106024), file
June 11, 2003                                                                                            
|10.1   | Amended and Restated Advisory Agreement
between the Registrant and Gladstone
Management Corporation, dated August 7,
2003, incorporated by reference to the
Pre-Effective Amendment No. 2 to the
Registration Statement on Form S-11 (File
No. 333-106024), filed August 8, 2003.
|10.2   | 2003 Equity Incentive Plan, as amended,
incorporated by reference to the
Pre-Effective Amendment No. 1 to the
Registration Statement on Form S-11 (File
No. 333-106024), filed July 22, 2003.                                                                                    
|10.3   | Agreement of Limited Partnership of
Gladstone Commercial Limited Partnership,
dated July 17, 2003, incorporated by
reference to the Pre-Effective Amendment
No. 1 to the Registration Statement on Form
S-11 (File No. 333-106024), filed July 22,
2003.                         
|11      | Computation of Per Share Increase in
Stockholder Equity from Operations
(included in the notes to the unaudited
financial statements contained in this
report.)                                                                                                                 
|31.1    | Certification of Chief Executive Officer
pursuant to Section 302 of The
Sarbanes-Oxley Act of 2002.                                                                                                                                                                              
|31.2    | Certification of Chief Financial Officer
pursuant to Section 302 of The
Sarbanes-Oxley Act of 2002                                                                                                                                                                               
|32.1    | Certification of Chief Executive Officer
pursuant to Section 906 of The
Sarbanes-Oxley Act of 2002                                                                                                                                                                               
|32.2    | Certification of Chief Financial Officer
pursuant to Section 906 of The
Sarbanes-Oxley Act of 2002                                                                                                                                                                               



| |  |  Previously filed.
| |  | -------------------