Tableof Contents

 

 

 

**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

| x                                       | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**  |
|-----------------------------------------|--------------------------------------------------------------------------------------------------------------------|
| ** **                              | ** **                                                                                                         |
| **FOR THE QUARTER ENDED JUNE 30, 2008** |
| ** **                              | ** **                                                                                                         |
| o                                       | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |

 

**COMMISSION FILE NUMBER: 000-51233**

 

**GLADSTONE INVESTMENT CORPORATION**

(Exact name of registrant as specified in itscharter)

 

| **DELAWARE**

(State or other jurisdiction of  incorporation or organization) | ** ** | **83-0423116**

(I.R.S. Employer Identification No.) |
|-------------------------------------------------------------------------------|------------|------------------------------------------------------|

** **

**1521 WESTBRANCH DRIVE, SUITE 200**

**MCLEAN, VIRGINIA 22102**

(Address of principal executive office)

** **

**(703) 287-5800**

(Registrant’s telephone number, includingarea code)

 

Indicate by check mark whether theregistrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes ý No o.

 

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

 

Large accelerated filer o  Accelerated filer ý  Non-accelerated filer o Smaller reporting company o.

 

Indicate by check mark whether theregistrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct). Yes o  No ý .

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date. The number ofshares of the issuer’s Common Stock, $0.001 par value, outstanding as of August 6,2008 were 22,080,133.

 

 

 

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Tableof Contents

 

**GLADSTONE INVESTMENT CORPORATION**

 

**TABLEOF CONTENTS**

 
| PART I.  | FINANCIAL INFORMATION                                                                                              |   |
|---------------|--------------------------------------------------------------------------------------------------------------------|--------|
|          |                                                                                                               |   |
| Item 1.       | Financial Statements (Unaudited)                                                                                   |   |
|          |                                                                                                               |   |
|          | Condensed Consolidated Statements of Assets and Liabilities as of  June 30, 2008 and March 31, 2008      |   |
|          | Condensed Consolidated Schedules of Investments as of June 30,  2008 and March 31, 2008                  |   |
|          | Condensed Consolidated Statements of Operations for the three months  ended June 30, 2008 and 2007            |   |
|          | Condensed Consolidated Statements of Changes in Net Assets for the  three months ended June 30, 2008 and 2007 |   |
|          | Condensed Consolidated Statements of Cash Flows for the three months  ended June 30, 2008 and 2007            |   |
|          | Financial  Highlights for the three months ended June 30, 2008 and 2007                                       |   |
|          | Notes to Condensed Consolidated Financial  Statements                                                              |   |
|          |                                                                                                               |   |
| Item 2.       | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                        |   |
|          | Overview                                                                                                           |   |
|          | Results of Operations                                                                                              |   |
|          | Liquidity and Capital Resources                                                                                    |   |
|          |                                                                                                               |   |
| Item 3.       | Quantitative and Qualitative Disclosures  About Market Risk                                                        |   |
|          |                                                                                                               |   |
| Item 4.       | Controls and Procedures                                                                                            |   |
|          |                                                                                                               |   |
| PART II. | OTHER INFORMATION                                                                                                  |   |
|          |                                                                                                               |   |
| Item 1.       | Legal Proceedings                                                                                                  |   |
|          |                                                                                                               |   |
| Item 1A.      | Risk Factors                                                                                                       |   |
|          |                                                                                                               |   |
| Item 2.       | Unregistered Sales of Equity Securities and  Use of Proceeds                                                       |   |
|          |                                                                                                               |   |
| Item 3.       | Defaults Upon Senior Securities                                                                                    |   |
|          |                                                                                                               |   |
| Item 4.       | Submission of Matters to a Vote of Security  Holders                                                               |   |
|          |                                                                                                               |   |
| Item 5.       | Other Information                                                                                                  |   |
|          |                                                                                                               |   |
| Item 6.       | Exhibits                                                                                                           |   |
|          |                                                                                                               |   |
| SIGNATURES    |                                                                                                               |

 

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**GLADSTONE INVESTMENT CORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES**

**(DOLLAR AMOUNTS IN THOUSANDS,EXCEPT PER SHARE AMOUNTS)**

**(UNAUDITED)**

 
| ** **                                                                                                                                                                 | ** ** | **June 30,** | ** ** | **March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------|------------|---------------|------------|
| ** **                                                                                                                                                                 | ** ** | **2008**     | ** ** | **2008**      | ** ** |
| **ASSETS**                                                                                                                                                                 | ** ** | ** **   | ** ** | ** **    | ** ** |
| Non-Control/Non-Affiliate investments (Cost  6/30/08: $149,976; Cost 3/31/08:166,416)                                                                                      |       | $            | 130,764    |          | $          | 142,741 |   |
| Control investments (Cost 6/30/08:  $138,855; Cost 3/31/08: $138,354)                                                                                                      |       | 141,042      |       | 145,407       |       |
| Affiliate investments (Cost 6/30/08:  $52,486; Cost 3/31/08: $46,035)                                                                                                      |       | 48,493       |       | 47,456        |       |
| Total investments at fair value (Cost  6/30/08: $341,317; Cost 3/31/08: $350,805)                                                                                          |       | 320,299      |       | 335,604       |       |
| Cash and cash equivalents                                                                                                                                                  |       | 42,580       |       | 9,360         |       |
| Interest receivable                                                                                                                                                        |       | 1,340        |       | 1,662         |       |
| Prepaid insurance                                                                                                                                                          |       | 37           |       | 91            |       |
| Deferred finance costs                                                                                                                                                     |       | 185          |       | 324           |       |
| Due from Custodian                                                                                                                                                         |       | 2,895        |       | 4,398         |       |
| Due from Adviser (Refer to Note 4)                                                                                                                                         |       | —       |       | 89            |       |
| Other assets                                                                                                                                                               |       | 565          |       | 765           |       |
| **TOTAL ASSETS**                                                                                                                                                           |       | $            | 367,901    |          | $          | 352,293 |   |
|                                                                                                                                                                       |       |         |       |          |       |
| **LIABILITIES**                                                                                                                                                            | ** ** | ** **   | ** ** | ** **    | ** ** |
| Fee due to Administrator (Refer to Note 4)                                                                                                                                 |       | $            | 235        |          | $          | 208 |   |
| Fee due to Adviser (Refer to Note 4)                                                                                                                                       |       | 139          |       | —        |       |
| Borrowings under line of credit                                                                                                                                            |       | 129,285      |       | 144,835       |       |
| Accrued expenses                                                                                                                                                           |       | 385          |       | 716           |       |
| Other liabilities                                                                                                                                                          |       | 101          |       | 89            |       |
| **TOTAL LIABILITIES**                                                                                                                                                      |       | 130,145      |       | 145,848       |       |
| **NET ASSETS**                                                                                                                                                             |       | $            | 237,756    |          | $          | 206,445 |   |
|                                                                                                                                                                       |       |         |       |          |       |
| **ANALYSIS OF NET ASSETS:**                                                                                                                                                | ** ** | ** **   | ** ** | ** **    | ** ** |
| Common stock, $0.001 par value, 100,000,000  shares authorized, 22,080,133 and 16,560,100 shares issued and outstanding at  June 30, 2008 and March 31, 2008, respectively |       | $            | 22         |          | $          | 17 |   |
| Capital in excess of par value                                                                                                                                             |       | 264,819      |       | 224,173       |       |
| Net unrealized depreciation of investment  portfolio                                                                                                                       |       | (21,018      | )          | (15,201       | )          |
| Net unrealized depreciation of derivative                                                                                                                                  |       | (53          | )          | (53           | )          |
| Accumulated net investment loss                                                                                                                                            |       | (6,014       | )          | (2,491        | )          |
| **TOTAL NET ASSETS**                                                                                                                                                       |       | $            | 237,756    |          | $          | 206,445 |   |
| **NET ASSETS PER SHARE**                                                                                                                                                   |       | $            | 10.77      |          | $          | 12.47 |   |

 

*THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OFTHESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.*

 

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**GLADSTONE INVESTMENT CORPORATION**

**CONDENSEDCONSOLIDATED SCHEDULES OF INVESTMENTS**

**AS OF JUNE 30, 2008**

**(DOLLAR AMOUNTS IN THOUSANDS)**

**(UNAUDITED)**

 
| **Company  (1)**                                 | ** **   | **Industry**                                                      | ** **   | **Investment  (2)**                               | ** **   | **Cost**     | ** **   | **Fair  Value** | ** **   |
|--------------------------------------------------|--------------|-------------------------------------------------------------------|--------------|---------------------------------------------------|--------------|--------------|--------------|-----------------|--------------|
|                                             |         |                                                              |         |                                              |         |         |         |            |         |
| **NON-CONTROL/NON-AFFILIATE  INVESTMENTS**       | ** **   | ** **                                                        | ** **   | ** **                                        | ** **   | ** **   | ** **   |
| ***Syndicated  Loans:***                         | *** *** | *** ***                                                      | *** *** | *** ***                                      | *** *** | *** *** | *** *** | *** ***    | *** *** |
| Activant  Solutions, Inc.                        |         | Service - enterprise software and services                        |         | Senior Term Debt (4.7%, Due 5/2013) (3)           |         | $            | 1,733        |            | $            | 1,517 |   |
| Advanced Homecare  Holdings, Inc.                |         | Service - home health nursing services                            |         | Senior Term Debt (6.6%, Due 8/2014) (3)           |         | 2,970        |         | 2,762           |         |
| Aeroflex, Inc.                                   |         | Service - provider of highly specialized electronic  equipment    |         | Senior Term Debt (5.9%, Due 8/2014) (3)           |         | 1,897        |         | 1,866           |         |
| Compsych  Investments Corp.                      |         | Service - employee assistance programs                            |         | Senior Term Debt (5.5%, Due 2/2012) (3) (5)       |         | 3,361        |         | 3,065           |         |
| CRC Health Group,  Inc.                          |         | Service - substance abuse treatment                               |         | Senior Term Debt (5.1%, Due 2/2012) (3)           |         | 7,841        |         | 7,168           |         |
| Critical Homecare  Solutions, Inc.               |         | Service - home therapy and respiratory treatment                  |         | Senior Term Debt (5.7%, Due 1/2012) (3) (5)       |         | 4,476        |         | 4,429           |         |
| Generac  Acquisition Corp.                       |         | Manufacturing - standby power products                            |         | Senior Term Debt (5.2%, Due 11/2013) (3) (5)      |         | 6,868        |         | 5,877           |         |
| Graham Packaging  Holdings Company               |         | Manufacturing - plastic containers                                |         | Senior Term Debt (5.0%, Due 10/2011) (3)          |         | 3,417        |         | 3,149           |         |
| Hargray  Communications Group, Inc.              |         | Service - triple-play (cable, phone, internet)  provider          |         | Senior Term Debt (5.1%, Due 6/2014) (3)           |         | 911          |         | 830             |         |
| HMTBP Acquisition  II Corp.                      |         | Service - aboveground storage tanks                               |         | Senior Term Debt (5.1%, Due 5/2014) (3) (5)       |         | 3,869        |         | 3,549           |         |
| Hudson Products  Holdings, Inc.                  |         | Manufacturing - heat transfer solutions                           |         | Senior Term Debt (5.8%, Due 12/2013) (3)          |         | 6,004        |         | 5,688           |         |
| Huish Detergents,  Inc.                          |         | Manufacturing - household cleaning products                       |         | Senior Term Debt (4.8%, Due 4/2014) (3)           |         | 1,981        |         | 1,792           |         |
| Hyland Software,  Inc.                           |         | Service - provider of enterprise content management  software     |         | Senior Term Debt (5.7%, Due 7/2013) (3)           |         | 3,937        |         | 3,573           |         |
| Interstate  Fibernet, Inc.                       |         | Service - provider of voice and data  telecommunications services |         | Senior Term Debt (6.8%, Due 7/2013) (3)           |         | 9,909        |         | 9,652           |         |
| KIK Custom  Products, Inc.                       |         | Manufacturing - consumer products                                 |         | Senior Term Debt (5.2%, Due 5/2014) (3)           |         | 3,971        |         | 2,978           |         |
| Kronos, Inc.                                     |         | Service - workforce management solutions                          |         | Senior Term Debt (5.1%, Due 6/2014) (3)           |         | 1,966        |         | 1,818           |         |
| Lexicon Marketing  USA, Inc.                     |         | Service - marketing to Hispanic community                         |         | Senior Term Debt (non-accrual) (3) (5)            |         | 2,947        |         | 412             |         |
| Local TV Finance,  LLC                           |         | Service - television station operator                             |         | Senior Term Debt (4.9%, Due 5/2013) (3)           |         | 992          |         | 859             |         |
| LVI Services,  Inc.                              |         | Service - asbestos and mold remediation                           |         | Senior Term Debt (7.9%, Due 11/2010) (3) (5)      |         | 5,967        |         | 4,762           |         |
| MedAssets, Inc.                                  |         | Service - pharmaceuticals and healthcare GPO                      |         | Senior Term Debt (6.7%, Due 10/2013) (3) (5)      |         | 3,994        |         | 3,952           |         |
| Network  Solutions, LLC                          |         | Service - internet domain solutions                               |         | Senior Term Debt (5.2%, Due 3/2014) (3)           |         | 8,803        |         | 7,306           |         |
| Open Solutions,  Inc.                            |         | Service - software outsourcing for financial  institutions        |         | Senior Term Debt (5.1%, Due 1/2014) (3)           |         | 2,670        |         | 2,350           |         |
| Ozburn-Hessey  Holding Co. LLC                   |         | Service - third party logistics                                   |         | Senior Term Debt (6.2%, Due 8/2012) (3)           |         | 7,601        |         | 6,829           |         |
| Pinnacle Foods  Finance, LLC                     |         | Manufacturing - branded food products                             |         | Senior Term Debt (5.4%, Due 4/2014) (3)           |         | 1,965        |         | 1,823           |         |
| PTS Acquisition  Corp.                           |         | Manufacturing - drug delivery and packaging  technologies         |         | Senior Term Debt (5.1%, Due 4/2014) (3)           |         | 6,930        |         | 6,194           |         |
| QTC Acquisition,  Inc.                           |         | Service - outsourced disability evaluations                       |         | Senior Term Debt (4.7%, Due 11/2012) (3)          |         | 1,925        |         | 1,655           |         |
| Radio Systems  Corporation                       |         | Service - design electronic pet containment products              |         | Senior Term Debt (5.2%, Due 9/2013) (3)           |         | 1,886        |         | 1,773           |         |
| Rally Parts, Inc.                                |         | Manufacturing - aftermarket motorcycle parts and  accessories     |         | Senior Term Debt (5.3%, Due 11/2013) (3)          |         | 2,479        |         | 1,970           |         |
| RPG Holdings,  Inc.                              |         | Manufacturing and design - greeting cards                         |         | Senior Term Debt (9.8%, Due 12/2011) (3)          |         | 4,553        |         | 2,048           |         |
| SafeNet, Inc.                                    |         | Service - chip encryption products                                |         | Senior Term Debt (5.5%, Due 4/2014) (3)           |         | 2,972        |         | 2,599           |         |
| SGS  International, Inc.                         |         | Service - digital imaging and graphics                            |         | Senior Term Debt (5.3%, Due 12/2011) (3)          |         | 1,590        |         | 1,458           |         |
| Survey Sampling,  LLC                            |         | Service - telecommunications-based sampling                       |         | Senior Term Debt (8.3%, Due 5/2011) (3) (5)       |         | 2,806        |         | 2,448           |         |
| Triad Laboratory  Alliance, LLC                  |         | Service - regional medical laboratories                           |         | Senior Term Debt (5.9%, Due 12/2011) (3) (5)      |         | 4,887        |         | 4,290           |         |
| Wastequip, Inc.                                  |         | Service - process and transport waste materials                   |         | Senior Term Debt (5.1%, Due 2/2013) (3)           |         | 2,915        |         | 2,375           |         |
| WaveDivision  Holdings, LLC                      |         | Service - cable                                                   |         | Senior Term Debt (5.4%, Due 6/2014) (3) (5)       |         | 1,920        |         | 1,810           |         |
| West Corporation                                 |         | Service - business process outsourcing                            |         | Senior Term Debt (5.1%, Due 10/2013) (3)          |         | 3,348        |         | 3,047           |         |
| *Subtotal  - Syndicated Loans*                   |         |                                                              |         |                                              |         | $            | 138,261      |            | $            | 119,673 |   |
|                                             |         |                                                              |         |                                              |         |         |         |            |         |
| ***Non-syndicated  Loans***                      | *** *** | *** ***                                                      | *** *** | *** ***                                      | *** *** | *** *** | *** *** | *** ***    | *** *** |
| B-Dry, LLC                                       |         | Service - basement waterproofer                                   |         | Revolving Credit Facility (6.7%, Due 10/2008) (7) |         | $            | 750          |            | $            | 729 |   |
| * *                                         |         |                                                              |         | Senior Term Debt (10.0%, Due 5/2014)              |         | 6,715        |         | 6,530           |         |
| * *                                         |         |                                                              |         | Senior Term Debt (10.0%, Due 5/2014)              |         | 3,950        |         | 3,832           |         |
|                                             |         |                                                              |         | Common Stock Warrants (4)                         |         | 300          |         | —          |         |
|                                             |         |                                                              |         |                                              |         | 11,715       |         | 11,091          |         |
| **Total  Non-Control/Non-Affiliate Investments** | ** **   | ** **                                                        | ** **   | **$**                                             | **149,976**  | ** **   | **$**        | **130,764**     | ** **   |

 

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**GLADSTONE INVESTMENT CORPORATION**

**CONDENSED CONSOLIDATED SCHEDULES OFINVESTMENTS**

**AS OF JUNE 30, 2008**

**(DOLLAR AMOUNTS IN THOUSANDS)**

**(UNAUDITED)**

 
| **Company  (1)**                 | ** ** | **Industry**                                                | ** ** | **Investment  (2)**                                      | ** ** | **Cost** | ** **  | **Fair  Value** | ** ** |
|----------------------------------|------------|-------------------------------------------------------------|------------|----------------------------------------------------------|------------|----------|-------------|-----------------|------------|
|                             |       |                                                        |       |                                                     |       |     |        |            |       |
| **CONTROL  INVESTMENTS**         |       |                                                        |       |                                                     |       |     |        |            |       |
| A. Stucki Holding  Corp.         |       | Manufacturing - railroad freight car products               |       | Senior Term Debt (7.0%, Due 3/2012)                      |       | $        | 12,855      |            | $          | 12,855 |   |
|                             |       |                                                        |       | Senior Term Debt (9.2%, Due 3/2012) (6)                  |       | 10,863   |        | 10,863          |       |
|                             |       |                                                        |       | Senior Subordinated Term Debt (13% Due 3/2014)           |       | 5,486    |        | 5,486           |       |
|                             |       |                                                        |       | Preferred Stock (4)                                      |       | 4,387    |        | 4,842           |       |
|                             |       |                                                        |       | Common Stock (4)                                         |       | 130      |        | 9,577           |       |
|                             |       |                                                        |       |                                                     |       | 33,721   |        | 43,623          |       |
|                             |       |                                                        |       |                                                     |       |     |        |            |       |
| Acme Cryogenics,  Inc.           |       | Manufacturing - manifolds and pipes for industrial  gasses  |       | Senior Subordinated Term Debt (11.5% Due 3/2013)         |       | 14,500   |        | 14,500          |       |
|                             |       |                                                        |       | Redeemable Preferred Stock (4)                           |       | 6,984    |        | 7,960           |       |
|                             |       |                                                        |       | Common Stock (4)                                         |       | 1,045    |        | 2,123           |       |
|                             |       |                                                        |       | Common Stock Warrants (4)                                |       | 25       |        | 142             |       |
|                             |       |                                                        |       |                                                     |       | 22,554   |        | 24,725          |       |
| ASH Holdings  Corp.              |       | Retail and Service - school buses and parts                 |       | Revolver (non-accrual, Due 3/2010) (8)                   |       | 1,600    |        | —          |       |
|                             |       |                                                        |       | Senior Subordinated Term Debt (non-accrual, Due  1/2012) |       | 5,250    |        | —          |       |
|                             |       |                                                        |       | Preferred Stock (4)                                      |       | 2,500    |        | —          |       |
|                             |       |                                                        |       | Common Stock Warrants (4)                                |       | 4        |        | —          |       |
|                             |       |                                                        |       |                                                     |       | 9,354    |        | —          |       |
|                             |       |                                                        |       |                                                     |       |     |        |            |       |
| Cavert II Holding  Corp.         |       | Manufacturing - bailing wire                                |       | Revolving Credit Facility (8.0%, Due 10/2010) (9)        |       | 2,700    |        | 2,700           |       |
|                             |       |                                                        |       | Senior Term Debt (8.3%, Due 10/2012)                     |       | 6,175    |        | 6,175           |       |
|                             |       |                                                        |       | Senior Term Debt (10.0%, Due 10/2012) (6)                |       | 3,000    |        | 3,000           |       |
|                             |       |                                                        |       | Senior Subordinated Term Debt (13%, Due 10/2014)         |       | 4,671    |        | 4,671           |       |
|                             |       |                                                        |       | Preferred Stock (4)                                      |       | 4,110    |        | 4,334           |       |
|                             |       |                                                        |       | Common Stock (4)                                         |       | 69       |        | 776             |       |
|                             |       |                                                        |       |                                                     |       | 20,725   |        | 21,656          |       |
|                             |       |                                                        |       |                                                     |       |     |        |            |       |
| Chase II Holdings  Corp.         |       | Manufacturing - traffic doors                               |       | Revolving Credit Facility (6.5% Due 3/2008) (10)         |       | 3,900    |        | 3,900           |       |
|                             |       |                                                        |       | Senior Term Debt (8.8%, Due 3/2011)                      |       | 9,625    |        | 9,625           |       |
|                             |       |                                                        |       | Senior Term Debt (12.0% Due 3/2011) (6)                  |       | 7,800    |        | 7,800           |       |
|                             |       |                                                        |       | Subordinated Term Debt (13.0% Due 3/2013)                |       | 6,168    |        | 6,169           |       |
|                             |       |                                                        |       | Redeemable Preferred Stock (4)                           |       | 6,961    |        | 8,665           |       |
|                             |       |                                                        |       | Common Stock (4)                                         |       | 61       |        | 4,701           |       |
|                             |       |                                                        |       |                                                     |       | 34,515   |        | 40,860          |       |
|                             |       |                                                        |       |                                                     |       |     |        |            |       |
| Quench Holdings  Corp.           |       | Service - sales, installation and service of water  coolers |       | Revolving Credit Facility (6.5%, Due 3/2009) (11)        |       | 1,500    |        | 1,395           |       |
|                             |       |                                                        |       | Senior Term Debt (6.5%, Due 3/2011)                      |       | 4,000    |        | 3,720           |       |
|                             |       |                                                        |       | Senior Subordinated Term Debt (11.5%, Due 3/2011)        |       | 7,775    |        | 3,888           |       |
|                             |       |                                                        |       | Equipment Line Note (12)                                 |       | 1,264    |        | 1,175           |       |
|                             |       |                                                        |       | Preferred Stock (4)                                      |       | 3,000    |        | —          |       |
|                             |       |                                                        |       | Common Stock Warrants (4)                                |       | 447      |        | —          |       |
|                             |       |                                                        |       |                                                     |       | 17,986   |        | 10,178          |       |
| **Total  Control Investments**   |       |                                                        |       |                                                     | ** ** | **$**    | **138,855** | ** **      | **$**      | **141,042** | ** ** |
|                             |       |                                                        |       |                                                     |       |     |        |            |       |
| **AFFILIATE  INVESTMENTS**       |       |                                                        |       |                                                     |       |     |        |            |       |
| Danco Acquisition  Corp.         |       | Manufacturing - machining and sheet metal work              |       | Revolving Credit Facility (9.3%, Due 10/2010) (13)       |       | $        | 1,000       |            | $          | 970 |   |
|                             |       |                                                        |       | Senior Term Debt (9.3%, Due 10/2012)                     |       | 5,325    |        | 5,191           |       |
|                             |       |                                                        |       | Senior Term Debt (11.5%, Due 4/2013)                     |       | 8,557    |        | 8,299           |       |
|                             |       |                                                        |       | Redeemable Preferred Stock (4)                           |       | 2,500    |        | 2,627           |       |
|                             |       |                                                        |       | Common Stock Warrants (4)                                |       | 3        |        | 840             |       |
|                             |       |                                                        |       |                                                     |       | 17,385   |        | 17,927          |       |
|                             |       |                                                        |       |                                                     |       |     |        |            |       |
| Mathey  Investments, Inc.        |       | Manufacturing - pipe-cutting and pipe-fitting  equipment    |       | Revolving Credit Facility (9.0%, Due 3/2011) (14)  (15)  |       | —   |        | —          |       |
|                             |       |                                                        |       | Senior Term Debt (9.0%, Due 3/2013)                      |       | 2,467    |        | 2,461           |       |
|                             |       |                                                        |       | Senior Term Debt (12.0% Due 3/2014) (6)                  |       | 7,280    |        | 7,262           |       |
|                             |       |                                                        |       | Common Stock (4) (16)                                    |       | 500      |        | 545             |       |
|                             |       |                                                        |       | Common Stock Warrants (4) (16)                           |       | 277      |        | 318             |       |
|                             |       |                                                        |       |                                                     |       | 10,524   |        | 10,586          |       |
|                             |       |                                                        |       |                                                     |       |     |        |            |       |
| Noble Logistics,  Inc.           |       | Service - aftermarket auto parts delivery                   |       | Revolving Credit Facility (6.5%, Due 12/2009) (14)       |       | 2,000    |        | 1,840           |       |
|                             |       |                                                        |       | Senior Term Debt (8.5%, Due 12/2011)                     |       | 6,077    |        | 5,591           |       |
|                             |       |                                                        |       | Senior Term Debt (10.5% Due 3/2011) (6)                  |       | 7,000    |        | 6,300           |       |
|                             |       |                                                        |       | Senior Subordinated Term Debt (6.5%, Due 7/2008)         |       | 500      |        | 499             |       |
|                             |       |                                                        |       | Preferred Stock (4)                                      |       | 1,750    |        | —          |       |
|                             |       |                                                        |       | Common Stock (4)                                         |       | 1,500    |        | —          |       |
|                             |       |                                                        |       |                                                     |       | 18,827   |        | 14,230          |       |
|                             |       |                                                        |       |                                                     |       | —   |        | —          |       |
| Tread Corp.                      |       | Service - regional medical laboratories                     |       | Senior Term Debt (12.5%, Due 5/2013) (15)                |       | 5,000    |        | 5,000           |       |
|                             |       |                                                        |       | Preferred Stock (4) (15)                                 |       | 750      |        | 750             |       |
|                             |       |                                                        |       |                                                     |       | 5,750    |        | 5,750           |       |
| **Total  Affiliate Investments** |       |                                                        |       |                                                     | ** ** | **$**    | **52,486**  | ** **      | **$**      | **48,493** | ** ** |
| **Total  Investments**           |       |                                                        |       |                                                     | ** ** | **$**    | **341,317** | ** **      | **$**      | **320,299** | ** ** |

 

5

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| (1)  |   | Certain of the listed  securities are issued by affiliate(s) of the indicated portfolio  company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)  |   | Percentage represents the  weighted average interest rates in effect at June 30, 2008 and due date  represents the contractual maturity date.                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (3)  |   | Marketable securities  are valued based on the indicative bid price, on or near June 30, 2008,  offered by the respective syndication agent’s trading desk, or secondary  desk.                                                                                                                                                                                                                                                                                                                                                                                                         |
| (4)  |   | Security is non-income  producing.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (5)  |   | Valued using  Standard & Poor’s Securities Evaluations, Inc. opinions of  value at June 30, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (6)  |   | Last out tranche of  senior debt, meaning if the portfolio company is liquidated then the holder  of the last out tranche is paid after the senior debt.                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (7)  |   | Total available under  the revolving credit facility is $750 which was fully drawn at June 30,  2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| (8)  |   | Total available under  the revolving credit facility is $2,000 of which $400 remains undrawn at  June 30, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (9)  |   | Total available under  the revolving credit facility is $3,000 of which $300 remains undrawn at  June 30, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (10) |   | Total available under  the revolving credit facility is $4,500 of which $600 remains undrawn at  June 30, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (11) |   | Total available under  the revolving credit facility is $1,500 which was fully drawn at  June 30, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (12) |   | Total available for  future borrowing for the purposes of purchasing equipment is $1,500. The  undrawn amount of $236 may be drawn to purchase additional equipment through  10/31/2010. The interest rate on all amounts drawn on the equipment line note  is 12% except for one draw of $188 whose interest rate is 15%. Each draw on  the equipment line note is subject to its own amortization and maturity,  typically over a period of 20-24 months. At June 30, 2008, the last  amortization payment due under current amounts drawn under the equipment line  note is 11/2009. |
| (13) |   | Total available under  the revolving credit facility is $3,000 of which $2,000 was undrawn at  June 30, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (14) |   | Total available under  the revolving credit facility is $2,000 which was fully drawn at  June 30, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (15) |   | Valued at cost due to  recent acquisition.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |

 

*THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OFTHESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.*

 

6

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Tableof Contents

 

**GLADSTONE INVESTMENT CORPORATION**

**CONDENSEDCONSOLIDATED SCHEDULES OF INVESTMENTS**

**AS OF MARCH 31, 2008**

**(DOLLAR AMOUNTS IN THOUSANDS)**

**(UNAUDITED)**

 
| **Company  (1)**                                 | ** **   | **Industry**                                                      | ** **   | **Investment  (2)**                               | ** **   | **Cost**     | ** **   | **Fair  Value** | *** *** |
|--------------------------------------------------|--------------|-------------------------------------------------------------------|--------------|---------------------------------------------------|--------------|--------------|--------------|-----------------|--------------|
| ** **                                       | *** *** | *** ***                                                      | *** *** | *** ***                                      | *** *** | *** *** | *** *** |
| **NON-CONTROL/NON-AFFILIATE  INVESTMENTS**       | *** *** | *** ***                                                      | *** *** | *** ***                                      | *** *** | *** *** | *** *** |
| ***Syndicated  Loans:***                         | *** *** | *** ***                                                      | *** *** | *** ***                                      | *** *** | *** *** | *** *** | *** ***    | *** *** |
| Activant  Solutions, Inc.                        |         | Service - enterprise software and services                        |         | Senior Term Debt (6.7%, Due 5/2013) (3)           |         | $            | 1,734        |            | $            | 1,478 |   |
| Advanced Homecare  Holdings, Inc.                |         | Service - home health nursing services                            |         | Senior Term Debt (6.4%, Due 8/2014) (3)           |         | 2,978        |         | 2,829           |         |
| Aeroflex, Inc.                                   |         | Service - provider of highly specialized electronic  equipment    |         | Senior Term Debt (6.4%, Due 8/2014) (3)           |         | 1,898        |         | 1,851           |         |
| Compsych  Investments Corp.                      |         | Service - employee assistance programs                            |         | Senior Term Debt (5.5%, Due 2/2012) (3) (5)       |         | 3,421        |         | 2,966           |         |
| CRC Health Group,  Inc.                          |         | Service - substance abuse treatment                               |         | Senior Term Debt (4.9%, Due 2/2012) (3)           |         | 9,878        |         | 8,536           |         |
| Critical Homecare  Solutions, Inc.               |         | Service - home therapy and respiratory treatment                  |         | Senior Term Debt (6.1%, Due 1/2012) (3) (5)       |         | 4,505        |         | 4,480           |         |
| Dealer Computer  Services, Inc.                  |         | Manufacturing & Service - systems for automotive  retailers   |         | Senior Term Debt (6.8%, Due 9/2013) (3)           |         | 1,799        |         | 1,595           |         |
| Generac  Acquisition Corp.                       |         | Manufacturing - standby power products                            |         | Senior Term Debt (7.2%, Due 11/2013) (3) (5)      |         | 6,874        |         | 5,435           |         |
| Graham Packaging  Holdings Company               |         | Manufacturing - plastic containers                                |         | Senior Term Debt (5.9%, Due 10/2011) (3)          |         | 5,420        |         | 4,938           |         |
| Hargray  Communications Group, Inc.              |         | Service - triple-play (cable, phone, internet)  provider          |         | Senior Term Debt (4.9%, Due 6/2014) (3)           |         | 963          |         | 860             |         |
| HMTBP Acquisition  II Corp.                      |         | Service - aboveground storage tanks                               |         | Senior Term Debt (4.9%, Due 5/2014) (3) (5)       |         | 3,879        |         | 3,529           |         |
| Hudson Products  Holdings, Inc.                  |         | Manufacturing - heat transfer solutions                           |         | Senior Term Debt (7.0%, Due 12/2013) (3)          |         | 6,020        |         | 5,283           |         |
| Huish Detergents,  Inc.                          |         | Manufacturing - household cleaning products                       |         | Senior Term Debt (4.7%, Due 4/2014) (3)           |         | 1,986        |         | 1,653           |         |
| Hyland Software,  Inc.                           |         | Service - provider of enterprise content management  software     |         | Senior Term Debt (5.9%, Due 7/2013) (3)           |         | 3,955        |         | 3,671           |         |
| Interstate  Fibernet, Inc.                       |         | Service - provider of voice and data  telecommunications services |         | Senior Term Debt (6.7%, Due 7/2013) (3)           |         | 9,932        |         | 9,676           |         |
| KIK Custom  Products, Inc.                       |         | Manufacturing - consumer products                                 |         | Senior Term Debt (4.9%, Due 5/2014) (3)           |         | 3,981        |         | 2,746           |         |
| Kronos, Inc.                                     |         | Service - workforce management solutions                          |         | Senior Term Debt (5.0%, Due 6/2014) (3)           |         | 1,971        |         | 1,577           |         |
| Lexicon Marketing  USA, Inc.                     |         | Service - marketing to Hispanic community                         |         | Senior Term Debt (non-accrual) (3) (5)            |         | 2,947        |         | 412             |         |
| Local TV Finance,  LLC                           |         | Service - television station operator                             |         | Senior Term Debt (5.2%, Due 5/2013) (3)           |         | 995          |         | 824             |         |
| LVI Services,  Inc.                              |         | Service - asbestos and mold remediation                           |         | Senior Term Debt (7.5%, Due 11/2010) (3) (5)      |         | 6,369        |         | 5,083           |         |
| MedAssets, Inc.                                  |         | Service - pharmaceuticals and healthcare GPO                      |         | Senior Term Debt (5.2%, Due 10/2013) (3) (5)      |         | 4,004        |         | 3,702           |         |
| National Mentor  Holdings, Inc.                  |         | Service - home health care                                        |         | Senior Term Debt (4.8%, Due 6/2013) (3)           |         | 1,968        |         | 1,672           |         |
| Network Solutions,  LLC                          |         | Service - internet domain solutions                               |         | Senior Term Debt (5.2%, Due 3/2014) (3)           |         | 9,196        |         | 7,355           |         |
| NPC International  Inc.                          |         | Service - Pizza Hut franchisee                                    |         | Senior Term Debt (4.7%, Due 5/2013) (3)           |         | 2,895        |         | 2,537           |         |
| Open Solutions,  Inc.                            |         | Service - software outsourcing for financial  institutions        |         | Senior Term Debt (5.8%, Due 1/2014) (3)           |         | 2,678        |         | 2,196           |         |
| Ozburn-Hessey  Holding Co. LLC                   |         | Service - third party logistics                                   |         | Senior Term Debt (6.3%, Due 8/2012) (3)           |         | 7,628        |         | 5,979           |         |
| Pinnacle Foods  Finance, LLC                     |         | Manufacturing - branded food products                             |         | Senior Term Debt (7.4%, Due 4/2014) (3)           |         | 3,971        |         | 3,454           |         |
| PTS Acquisition  Corp.                           |         | Manufacturing - drug delivery and packaging  technologies         |         | Senior Term Debt (7.1%, Due 4/2014) (3)           |         | 6,948        |         | 5,697           |         |
| QTC Acquisition,  Inc.                           |         | Service - outsourced disability evaluations                       |         | Senior Term Debt (5.4%, Due 11/2012) (3)          |         | 1,930        |         | 1,638           |         |
| Radio Systems  Corporation                       |         | Service - design electronic pet containment products              |         | Senior Term Debt (5.5%, Due 9/2013) (3)           |         | 1,966        |         | 1,807           |         |
| Rally Parts, Inc.                                |         | Manufacturing - aftermarket motorcycle parts and  accessories     |         | Senior Term Debt (5.2%, Due 11/2013) (3)          |         | 2,486        |         | 2,074           |         |
| RPG Holdings,  Inc.                              |         | Manufacturing and design - greeting cards                         |         | Senior Term Debt (8.8%, Due 12/2011) (3)          |         | 4,553        |         | 3,869           |         |
| SafeNet, Inc.                                    |         | Service - chip encryption products                                |         | Senior Term Debt (7.1%, Due 4/2014) (3)           |         | 2,980        |         | 2,382           |         |
| SGS  International, Inc.                         |         | Service - digital imaging and graphics                            |         | Senior Term Debt (6.9%, Due 12/2011) (3)          |         | 1,594        |         | 1,430           |         |
| Stolle Machinery  Company                        |         | Manufacturing - can-making equipment and parts                    |         | Senior Term Debt (7.8%, Due 9/2012) (3)           |         | 494          |         | 458             |         |
| Survey Sampling,  LLC                            |         | Service - telecommunications-based sampling                       |         | Senior Term Debt (5.2%, Due 5/2011) (3) (5)       |         | 2,931        |         | 2,527           |         |
| Synagro  Technologies, Inc.                      |         | Service - waste treatment and recycling                           |         | Senior Term Debt (5.1%, Due 3/2014) (3)           |         | 498          |         | 422             |         |
| Triad Laboratory  Alliance, LLC                  |         | Service - regional medical laboratories                           |         | Senior Term Debt (5.9%, Due 12/2011) (3) (5)      |         | 4,900        |         | 4,154           |         |
| United Surgical  Partners International, Inc.    |         | Service - outpatient surgical provider                            |         | Senior Term Debt (5.4%, Due 4/2014) (3)           |         | 1,320        |         | 1,152           |         |
| Wastequip, Inc.                                  |         | Service - process and transport waste materials                   |         | Senior Term Debt (4.9%, Due 2/2013) (3)           |         | 2,922        |         | 2,337           |         |
| WaveDivision  Holdings, LLC                      |         | Service - cable                                                   |         | Senior Term Debt (6.7%, Due 6/2014) (3) (5)       |         | 1,925        |         | 1,814           |         |
| West Corporation                                 |         | Service - business process outsourcing                            |         | Senior Term Debt (5.3%, Due 10/2013) (3)          |         | 3,355        |         | 2,929           |         |
| *Subtotal  - Syndicated Loans*                   |         |                                                              |         |                                              |         | $            | 154,647      |            | $            | 131,007 |   |
|                                             |         |                                                              |         |                                              |         |         |         |            |         |
| ***Non-syndicated  Loans***                      | *** *** | *** ***                                                      | *** *** | *** ***                                      | *** *** | *** *** | *** *** | *** ***    | *** *** |
| B-Dry, LLC                                       |         | Service - basement waterproofer                                   |         | Revolving Credit Facility (7.3%, Due 10/2008) (7) |         | 750          |         | 750             |         |
| * *                                         |         |                                                              |         | Senior Term Debt (10.0%, Due 5/2014)              |         | 6,749        |         | 6,749           |         |
| * *                                         |         |                                                              |         | Senior Term Debt (10.0%, Due 5/2014)              |         | 3,970        |         | 3,970           |         |
|                                             |         |                                                              |         | Common Stock Warrants (4)                         |         | 300          |         | 265             |         |
|                                             |         |                                                              |         |                                              |         | 11,769       |         | 11,734          |         |
| **Total  Non-Control/Non-Affiliate Investments** | ** **   | ** **                                                        | ** **   | **$**                                             | **166,416**  | ** **   | **$**        | **142,741**     | ** **   |

 

 

7

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Tableof Contents

 

**GLADSTONE INVESTMENT CORPORATION**

**CONDENSEDCONSOLIDATED SCHEDULES OF INVESTMENTS**

**AS OF MARCH 31, 2008**

**(DOLLAR AMOUNTS IN THOUSANDS)**

**(UNAUDITED)**

 
| **Company  (1)**                 | ** ** | **Industry**                                                | ** ** | **Investment  (2)**                                      | ** ** | **Cost** | ** **  | **Fair  Value** | ** ** |
|----------------------------------|------------|-------------------------------------------------------------|------------|----------------------------------------------------------|------------|----------|-------------|-----------------|------------|
|                             |       |                                                        |       |                                                     |       |     |        |            |       |
| **CONTROL  INVESTMENTS**         |       |                                                        |       |                                                     |       |     |        |            |       |
| A. Stucki Holding  Corp.         |       | Manufacturing - railroad freight car products               |       | Senior Term Debt (7.6%, Due 3/2012)                      |       | $        | 13,391      |            | $          | 13,391 |   |
|                             |       |                                                        |       | Senior Term Debt (9.8%, Due 3/2012) (6)                  |       | 11,000   |        | 11,000          |       |
|                             |       |                                                        |       | Senior Subordinated Term Debt (13% Due 3/2014)           |       | 5,486    |        | 5,486           |       |
|                             |       |                                                        |       | Preferred Stock (4)                                      |       | 4,387    |        | 4,748           |       |
|                             |       |                                                        |       | Common Stock (4)                                         |       | 130      |        | 10,062          |       |
|                             |       |                                                        |       |                                                     |       | 34,394   |        | 44,687          |       |
|                             |       |                                                        |       |                                                     |       |     |        |            |       |
| Acme Cryogenics,  Inc.           |       | Manufacturing - manifolds and pipes for industrial  gasses  |       | Senior Subordinated Term Debt (11.5% Due 3/2013)         |       | 14,500   |        | 14,500          |       |
|                             |       |                                                        |       | Redeemable Preferred Stock (4)                           |       | 6,984    |        | 7,795           |       |
|                             |       |                                                        |       | Common Stock (4)                                         |       | 1,045    |        | 2,977           |       |
|                             |       |                                                        |       | Common Stock Warrants (4)                                |       | 25       |        | 291             |       |
|                             |       |                                                        |       |                                                     |       | 22,554   |        | 25,563          |       |
|                             |       |                                                        |       |                                                     |       |     |        |            |       |
| ASH Holdings  Corp.              |       | Retail and Service - school buses and parts                 |       | Revolver (non-accrual, Due 3/2010) (8)                   |       | 750      |        | —          |       |
|                             |       |                                                        |       | Senior Subordinated Term Debt (non-accrual, Due  1/2012) |       | 5,250    |        | —          |       |
|                             |       |                                                        |       | Preferred Stock (4)                                      |       | 2,500    |        | —          |       |
|                             |       |                                                        |       | Common Stock Warrants (4)                                |       | 4        |        | —          |       |
|                             |       |                                                        |       |                                                     |       | 8,504    |        | —          |       |
|                             |       |                                                        |       |                                                     |       |     |        |            |       |
| Cavert II Holding  Corp.         |       | Manufacturing - bailing wire                                |       | Revolving Credit Facility (8.0%, Due 10/2010) (9)        |       | 2,400    |        | 2,400           |       |
|                             |       |                                                        |       | Senior Term Debt (8.3%, Due 10/2012)                     |       | 6,338    |        | 6,338           |       |
|                             |       |                                                        |       | Senior Term Debt (10.0%, Due 10/2012) (6)                |       | 3,000    |        | 3,000           |       |
|                             |       |                                                        |       | Senior Subordinated Term Debt (13%, Due 10/2014)         |       | 4,671    |        | 4,671           |       |
|                             |       |                                                        |       | Preferred Stock (4)                                      |       | 4,110    |        | 4,251           |       |
|                             |       |                                                        |       | Common Stock (4)                                         |       | 69       |        | 688             |       |
|                             |       |                                                        |       |                                                     |       | 20,588   |        | 21,348          |       |
|                             |       |                                                        |       |                                                     |       |     |        |            |       |
| Chase II Holdings  Corp.         |       | Manufacturing - traffic doors                               |       | Revolving Credit Facility (7.1% Due 3/2008) (10)         |       | 3,280    |        | 3,280           |       |
|                             |       |                                                        |       | Senior Term Debt (8.8%, Due 3/2011)                      |       | 9,900    |        | 9,900           |       |
|                             |       |                                                        |       | Senior Term Debt (12.0% Due 3/2011) (6)                  |       | 7,840    |        | 7,840           |       |
|                             |       |                                                        |       | Subordinated Term Debt (13.0% Due 3/2013)                |       | 6,168    |        | 6,167           |       |
|                             |       |                                                        |       | Redeemable Preferred Stock (4)                           |       | 6,959    |        | 8,455           |       |
|                             |       |                                                        |       | Common Stock (4)                                         |       | 61       |        | 3,508           |       |
|                             |       |                                                        |       |                                                     |       | 34,208   |        | 39,150          |       |
|                             |       |                                                        |       |                                                     |       |     |        |            |       |
| Quench Holdings  Corp.           |       | Service - sales, installation and service of water  coolers |       | Revolving Credit Facility (7.1%, Due 3/2009) (11)        |       | 1,500    |        | 1,500           |       |
|                             |       |                                                        |       | Senior Term Debt (7.1%, Due 3/2011)                      |       | 4,250    |        | 4,250           |       |
|                             |       |                                                        |       | Senior Subordinated Term Debt (11.5%, Due 3/2011)        |       | 7,820    |        | 7,820           |       |
|                             |       |                                                        |       | Equipment Line Note (12)                                 |       | 1,089    |        | 1,089           |       |
|                             |       |                                                        |       | Preferred Stock (4)                                      |       | 3,000    |        | —          |       |
|                             |       |                                                        |       | Common Stock Warrants (4)                                |       | 447      |        | —          |       |
|                             |       |                                                        |       |                                                     |       | 18,106   |        | 14,659          |       |
| **Total  Control Investments**   |       |                                                        |       |                                                     | ** ** | **$**    | **138,354** | ** **      | **$**      | **145,407** | ** ** |
|                             |       |                                                        |       |                                                     |       |     |        |            |       |
| **AFFILIATE  INVESTMENTS**       |       |                                                        |       |                                                     |       |     |        |            |       |
| Danco Acquisition  Corp.         |       | Manufacturing - machining and sheet metal work              |       | Revolving Credit Facility (9.3%, Due 10/2010) (13)       |       | $        | 600         |            | $          | 600 |   |
|                             |       |                                                        |       | Senior Term Debt (9.3%, Due 10/2012)                     |       | 5,550    |        | 5,550           |       |
|                             |       |                                                        |       | Senior Term Debt (11.5%, Due 4/2013)                     |       | 8,578    |        | 8,577           |       |
|                             |       |                                                        |       | Redeemable Preferred Stock (4)                           |       | 2,500    |        | 2,576           |       |
|                             |       |                                                        |       | Common Stock Warrants (4)                                |       | 3        |        | 1,045           |       |
|                             |       |                                                        |       |                                                     |       | 17,231   |        | 18,348          |       |
|                             |       |                                                        |       |                                                     |       |     |        |            |       |
| Mathey  Investments, Inc.        |       | Manufacturing - pipe-cutting and pipe-fitting  equipment    |       | Revolving Credit Facility (9.0%, Due 3/2011) (15)        |       | —   |        | —          |       |
|                             |       |                                                        |       | Senior Term Debt (9.0%, Due 3/2013) (15)                 |       | 2,500    |        | 2,500           |       |
|                             |       |                                                        |       | Senior Term Debt (12.0% Due 3/2014) (15)                 |       | 7,300    |        | 7,300           |       |
|                             |       |                                                        |       | Common Stock (4) (15)                                    |       | 500      |        | 500             |       |
|                             |       |                                                        |       | Common Stock Warrants (4) (15)                           |       | 277      |        | 277             |       |
|                             |       |                                                        |       |                                                     |       | 10,577   |        | 10,577          |       |
|                             |       |                                                        |       |                                                     |       |     |        |            |       |
| Noble Logistics,  Inc.           |       | Service - aftermarket auto parts delivery                   |       | Revolving Credit Facility (7.1%, Due 12/2009) (14)       |       | 1,900    |        | 1,900           |       |
|                             |       |                                                        |       | Senior Term Debt (8.5%, Due 12/2011)                     |       | 6,077    |        | 6,076           |       |
|                             |       |                                                        |       | Senior Term Debt (10.5% Due 3/2011) (6)                  |       | 7,000    |        | 7,000           |       |
|                             |       |                                                        |       | Preferred Stock (4)                                      |       | 1,750    |        | 2,108           |       |
|                             |       |                                                        |       | Common Stock (4)                                         |       | 1,500    |        | 1,447           |       |
|                             |       |                                                        |       |                                                     |       | 18,227   |        | 18,531          |       |
| **Total  Affiliate Investments** |       |                                                        |       |                                                     | ** ** | **$**    | **46,035**  | ** **      | **$**      | **47,456** | ** ** |
| **Total  Investments**           |       |                                                        |       |                                                     | ** ** | **$**    | **350,805** | ** **      | **$**      | **335,604** | ** ** |

 

 

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| (1)  |   | Certain of the listed  securities are issued by affiliate(s) of the indicated portfolio  company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)  |   | Percentage represents  the weighted average interest rates in effect at March 31, 2008 and due  date represents the contractual maturity date.                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (3)  |   | Marketable securities  are valued based on the indicative bid price, on or near March 31, 2008,  offered by the respective syndication agent’s trading desk, or secondary desk.                                                                                                                                                                                                                                                                                                                                                                                                          |
| (4)  |   | Security is non-income  producing.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (5)  |   | Valued using  Standard & Poor’s Securities Evaluations, Inc. opinions of  value at March 31, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (6)  |   | Last out tranche of  senior debt, meaning if the portfolio company is liquidated then the holder  of the last out tranche is paid after the senior debt.                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (7)  |   | Total available under  the revolving credit facility is $750 which was fully drawn at March 31,  2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| (8)  |   | Total available under  the revolving credit facility is $2,000 of which $1,250 remains undrawn at  March 31, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (9)  |   | Total available under  the revolving credit facility is $3,000 of which $600 remains undrawn at  March 31, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (10) |   | Total available under  the revolving credit facility is $3,500 of which $220 remains undrawn at  March 31, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (11) |   | Total available under  the revolving credit facility is $1,500, which was fully drawn at  March 31, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| (12) |   | Total available for  future borrowing for the purposes of purchasing equipment is $1,500. The  undrawn amount of $411 may be drawn to purchase additional equipment through  10/31/2010. The interest rate on all amounts drawn on the equipment line note  is 12% except for one draw of $188 whose interest rate is 15%. Each draw on  the equipment line note is subject to its own amortization and maturity,  typically over a period of 20-24 months. At March 31, 2008, the  last amortization payment due under current amounts drawn under the equipment  line note is 11/2009. |
| (13) |   | Total available under  the revolving credit facility is $3,000 of which $2,400 was undrawn at  March 31, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (14) |   | Total available under  the revolving credit facility is $2,000 of which $100 was undrawn at  March 31, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (15) |   | Valued at cost due to  recent acquisition.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |

 

*THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OFTHESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.*

 

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**GLADSTONE INVESTMENT CORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(DOLLARAMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)**

**(UNAUDITED)**

 
| ** **                                                                           | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                           | ** ** | **June 30,**           | ** ** |
| ** **                                                                           | ** ** | **2008**               | ** ** | **2007** | ** ** |
| INVESTMENT INCOME                                                                    |       |                   |       |   |   |
| Interest income                                                                      |       |                   |       |   |   |
| Non-Control/Non-Affiliate  investments                                               |       | $                      | 2,324      |   | $ | 3,249 |   |
| Control investments                                                                  |       | 2,569                  |       | 2,565 |   |
| Affiliate investments                                                                |       | 1,111                  |       | 426 |   |
| Cash and cash equivalents                                                            |       | 24                     |       | 54 |   |
| Total interest income                                                                |       | 6,028                  |       | 6,294 |   |
| Other income                                                                         |       | 10                     |       | 6 |   |
| Total investment income                                                              |       | 6,038                  |       | 6,300 |   |
|                                                                                 |       |                   |       |   |   |
| EXPENSES                                                                             |       |                   |       |   |   |
| Base management fee (Refer to Note 4)                                                |       | 426                    |       | 360 |   |
| Loan servicing fee (Refer to Note 4)                                                 |       | 1,254                  |       | 1,194 |   |
| Administration fee (Refer to Note 4)                                                 |       | 235                    |       | 208 |   |
| Interest expense                                                                     |       | 1,102                  |       | 1,414 |   |
| Amortization of deferred finance costs                                               |       | 139                    |       | 210 |   |
| Professional fees                                                                    |       | 131                    |       | 156 |   |
| Stockholder related costs                                                            |       | 100                    |       | 38 |   |
| Insurance expense                                                                    |       | 53                     |       | 63 |   |
| Directors fees                                                                       |       | 47                     |       | 55 |   |
| Taxes and licenses                                                                   |       | 43                     |       | 42 |   |
| General and administrative expenses                                                  |       | 31                     |       | 56 |   |
| Expenses before credit from Adviser                                                  |       | 3,561                  |       | 3,796 |   |
| Credits to base management fee (Refer to  Note 4)                                    |       | (574                   | )          | (384 | ) |
| Total expenses net of credit to base  management fee                                 |       | 2,987                  |       | 3,412 |   |
| NET INVESTMENT INCOME                                                                |       | 3,051                  |       | 2,888 |   |
|                                                                                 |       |                   |       |   |   |
| REALIZED AND UNREALIZED (LOSS) GAIN ON  INVESTMENTS                                  |       |                   |       |   |   |
| Realized loss on sale of  Non-Control/Non-Affiliate investments                      |       | (1,718                 | )          | (48 | ) |
| Net unrealized appreciation (depreciation)  of Non-Control/Non-Affiliate investments |       | 4,465                  |       | (529 | ) |
| Net unrealized (depreciation) appreciation  of Control investments                   |       | (4,867                 | )          | 5,274 |   |
| Net unrealized (depreciation) appreciation  of Affiliate investments                 |       | (5,415                 | )          | 685 |   |
| Net (loss) gain on investments                                                       |       | (7,535                 | )          | 5,382 |   |
|                                                                                 |       |                   |       |   |   |
| NET (DECREASE) INCREASE IN NET ASSETS  RESULTING FROM OPERATIONS                     |       | $                      | (4,484     | ) | $ | 8,270 |   |
|                                                                                 |       |                   |       |   |   |
| NET (DECREASE) INCREASE IN NET ASSETS  RESULTING FROM OPERATIONS PER COMMON SHARE:   |       |                   |       |   |   |
| Basic and Diluted                                                                    |       | $                      | (0.22      | ) | $ | 0.50 |   |
|                                                                                 |       |                   |       |   |   |
| SHARES OF COMMON STOCK OUTSTANDING:                                                  |       |                   |       |   |   |
| Basic and diluted weighted average shares                                            |       | 19,943,346             |       | 16,560,100 |   |

 

*THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OFTHESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.*

 

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**GLADSTONE INVESTMENT CORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS**

**(DOLLARAMOUNTS IN THOUSANDS)**

**(UNAUDITED)**

 
| ** **                                                   | ** ** | **Three Months Ended June 30,** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                   | ** ** | **2008**                        | ** ** | **2007** | ** ** |
| *Operations:*                                                | * *   | * *                        | * *   | * * | * * |
| Net investment income                                        |       | $                               | 3,051      |   | $ | 2,888 |   |
| Realized loss on sale of investments                         |       | (1,718                          | )          | (48 | ) |
| Net unrealized (depreciation) appreciation  of portfolio     |       | (5,817                          | )          | 5,430 |   |
| Net (decrease) increase in net assets from  operations       |       | (4,484                          | )          | 8,270 |   |
|                                                         |       |                            |       |   |   |
| *Capital transactions:*                                      | * *   | * *                        | * *   | * * | * * |
| Issuance of common stock                                     |       | 41,290                          |       | — |   |
| Shelf offering registration costs                            |       | (637                            | )          | (29 | ) |
| Distributions to stockholders                                |       | (4,858                          | )          | (3,726 | ) |
| Increase (decrease) in net assets from capital  transactions |       | 35,795                          |       | (3,755 | ) |
|                                                         |       |                            |       |   |   |
| Total increase in net assets                                 |       | 31,311                          |       | 4,515 |   |
|                                                         |       |                            |       |   |   |
| Net Assets                                                   |       |                            |       |   |   |
| Beginning of period                                          |       | 206,445                         |       | 222,819 |   |
| End of period                                                |       | $                               | 237,756    |   | $ | 227,334 |   |

 

*THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OFTHESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.*

 

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**GLADSTONE INVESTMENT CORPORATION**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(DOLLARAMOUNTS IN THOUSANDS)**

**(UNAUDITED)**

 
| ** **                                                                                                                                         | ** ** | **Three Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                         | ** ** | **2008**                        | ** ** | **2007** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES**                                                                                                           | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Net (decrease) increase in net assets  resulting from operations                                                                                   |       | $                               | (4,484     | ) | $ | 8,270 |   |
| Adjustments to reconcile net (decrease) increase  in net assets resulting from operations to net cash (used in) provided by  operating activities: |       |                            |       |   |   |
| Purchase of investments                                                                                                                            |       | (8,978                          | )          | (72,601 | ) |
| Principal repayments of investments                                                                                                                |       | 3,493                           |       | 21,358 |   |
| Proceeds from the sale of investments                                                                                                              |       | 13,246                          |       | 5,809 |   |
| Net unrealized depreciation (appreciation)  of investment portfolio                                                                                |       | 5,817                           |       | (5,430 | ) |
| Net unrealized depreciation of derivative                                                                                                          |       | —                          |       | — |   |
| Net realized loss on sales of investments                                                                                                          |       | 1,718                           |       | 48 |   |
| Net amortization of premiums and discounts                                                                                                         |       | 9                               |       | 137 |   |
| Amortization of deferred finance costs                                                                                                             |       | 139                             |       | 210 |   |
| Increase (decrease) in interest receivable                                                                                                         |       | 322                             |       | (533 | ) |
| Decrease in due from custodian                                                                                                                     |       | 1,504                           |       | 8,305 |   |
| Decrease (increase) in prepaid assets                                                                                                              |       | 333                             |       | (39 | ) |
| Increase (decrease) in other assets                                                                                                                |       | (79                             | )          | 39 |   |
| Increase in other liabilities                                                                                                                      |       | 11                              |       | 13 |   |
| Increase in administration fee payable to  Administrator (See Note 4)                                                                              |       | 27                              |       | 46 |   |
| Increase in base management fee payable to  Adviser (See Note 4)                                                                                   |       | 236                             |       | 279 |   |
| Increase in loan servicing fee payable to  Adviser (See Note 4)                                                                                    |       | (7                              | )          | 27 |   |
| (Decrease) increase in accrued expenses                                                                                                            |       | (331                            | )          | 230 |   |
| Net cash provided by (used in) operating  activities                                                                                               |       | 12,976                          |       | (33,832 | ) |
|                                                                                                                                               |       |                            |       |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES**                                                                                                           | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Net proceeds from the issuance of common  stock                                                                                                    |       | 40,652                          |       | — |   |
| Borrowings from line of credit                                                                                                                     |       | 52,750                          |       | 89,100 |   |
| Repayments of line of credit                                                                                                                       |       | (68,300                         | )          | (54,700 | ) |
| Distributions paid                                                                                                                                 |       | (4,858                          | )          | (3,726 | ) |
| Other                                                                                                                                              |       | —                          |       | (34 | ) |
| Net cash provided by financing activities                                                                                                          |       | 20,244                          |       | 30,640 |   |
| **NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS**                                                                                          |       | 33,220                          |       | (3,192 | ) |
| **CASH AND CASH EQUIVALENTS, BEGINNING OF  PERIOD**                                                                                                |       | 9,360                           |       | 37,789 |   |
| **CASH AND CASH EQUIVALENTS, END OF PERIOD**                                                                                                       |       | $                               | 42,580     |   | $ | 34,597 |   |

 

*THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OFTHESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.*

 

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**GLADSTONE INVESTMENT CORPORATION**

**FINANCIALHIGHLIGHTS**

**(DOLLARAMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)**

**(UNAUDITED)**

 
| ** **                                                             | ** ** | **Three Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                             | ** ** | **2008**                        | ** ** | **2007** | ** ** |
| Per Share Data (1)                                                     |       |                            |       |   |   |
| Balance at beginning of period                                         |       | $                               | 12.47      |   | $ | 13.46 |   |
|                                                                   |       |                            |       |   |   |
| *Income from investment operations:*                                   | * *   | * *                        | * *   | * * | * * |
| Net investment income (2)                                              |       | 0.15                            |       | 0.17 |   |
| Realized loss on sale of investments (2)                               |       | (0.08                           | )          | — |   |
| Net unrealized (depreciation) appreciation  of investments (2)         |       | (0.29                           | )          | 0.33 |   |
| Total from investment operations                                       |       | (0.22                           | )          | 0.50 |   |
|                                                                   |       |                            |       |   |   |
| *Distributions from:*                                                  | * *   | * *                        | * *   | * * | * * |
| Net investment income                                                  |       | (0.24                           | )          | (0.23 | ) |
| Total distributions (3)                                                |       | (0.24                           | )          | (0.23 | ) |
| Shelf registration offering costs                                      |       | (0.03                           | )          | — |   |
| Effect on distribution of stock rights  offering after record date (4) |       | (1.21                           | )          | — |   |
| Net asset value at end of period                                       |       | $                               | 10.77      |   | $ | 13.73 |   |
|                                                                   |       |                            |       |   |   |
| Per share market value at beginning of  period                         |       | $                               | 9.41       |   | $ | 14.87 |   |
| Per share market value at end of period                                |       | $                               | 6.43       |   | $ | 14.21 |   |
| Total Return (5)                                                       |       | -29.57                          | %          | -2.93 | % |
| Shares outstanding at end of period                                    |       | 22,080,133                      |       | 16,560,100 |   |
|                                                                   |       |                            |       |   |   |
| Statement of Assets and Liabilities Data:                              |       |                            |       |   |   |
| Net assets at end of period                                            |       | $                               | 237,756    |   | $ | 227,334 |   |
| Average net assets (6)                                                 |       | $                               | 242,655    |   | $ | 222,928 |   |
|                                                                   |       |                            |       |   |   |
| Senior Securities Data:                                                |       |                            |       |   |   |
| Borrowings under line of credit                                        |       | $                               | 129,285    |   | $ | 134,400 |   |
| Asset coverage ratio (7)                                               |       | 284                             | %          | 270 | % |
| Asset coverage per unit (8)                                            |       | $                               | 3,670      |   | $ | 3,617 |   |
|                                                                   |       |                            |       |   |   |
| Ratios/Supplemental Data:                                              |       |                            |       |   |   |
| Ratio of expenses to average net assets (9)  (10)                      |       | 5.87                            | %          | 6.81 | % |
| Ratio of net expenses to average net assets  (9) (11)                  |       | 4.93                            | %          | 6.12 | % |
| Ratio of net investment income to average  net assets (9)              |       | 5.03                            | %          | 5.18 | % |

 

----

| (1)  |   | Based  on actual shares outstanding at the end of the corresponding period.                                                                                                                                                                                                                                                                     |
|------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)  |   | Based  on weighted average basic per share data.                                                                                                                                                                                                                                                                                                |
| (3)  |   | Distributions  are determined based on taxable income calculated in accordance with income  tax regulations which may differ from amounts determined under accounting  principles generally accepted in the United States of America.                                                                                                           |
| (4)  |   | The  effect of distributions from the stock rights offering after the record date  represents the effect on net asset value of issuing additional shares after  the record date of a distribution.                                                                                                                                              |
| (5)  |   | Total  return equals the change in the market value of the Company’s common stock  from the beginning of the period taking into account dividends reinvested in  accordance with the terms of our dividend reinvestment plan.                                                                                                              |
| (6)  |   | Calculated  using the average of the ending monthly net assets for the respective  periods.                                                                                                                                                                                                                                                     |
| (7)  |   | As  a business development company, we are generally required to maintain a ratio  of 200% of total assets to total borrowings.                                                                                                                                                                                                                 |
| (8)  |   | Asset  coverage per unit is the ratio of the carrying value of our total  consolidated assets, less all liabilities and indebtedness not represented by  senior securities, to the aggregate amount of senior securities representing  indebtedness. Asset coverage per unit is expressed in terms of dollar amounts  per $100 of indebtedness. |
| (9)  |   | Amounts  are annualized.                                                                                                                                                                                                                                                                                                                        |
| (10) |   | Ratio  of expenses to average net assets is computed using expenses before credit  from the Adviser.                                                                                                                                                                                                                                            |
| (11) |   | Ratio  of net expenses to average net assets is computed using total expenses net of  credits to the management fee.                                                                                                                                                                                                                            |

 

*THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OFTHESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.*

 

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** **

**GLADSTONE INVESTMENT CORPORATION**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(DOLLARAMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA AND AS OTHERWISE INDICATED)**

**JUNE 30, 2008**

**(UNAUDITED)**

 

**NOTE 1. ORGANIZATION**

 

Gladstone InvestmentCorporation (the “Company”) was incorporated under the General Corporation Lawsof the State of Delaware on February 18, 2005, and completed an initialpublic offering on June 22, 2005. The Company is a closed-end,non-diversified management investment company that has elected to be treated asa business development company under the Investment Company Act of 1940, asamended (the “1940 Act”). In addition, the Company has elected to be treatedfor tax purposes as a regulated investment company (“RIC”) under the InternalRevenue Code of 1986, as amended (the “Code”). The Company’s investmentobjectives are to achieve a high level of current income and capital gains byinvesting in debt and equity securities of established private businesses.

 

Gladstone BusinessInvestment, LLC (“Business Investment”) a wholly-owned subsidiary of theCompany, was established on August 11, 2006, for the sole purpose ofowning the Company’s portfolio of investments in connection with theestablishment of its line of credit facility with Deutsche Bank AG. Thefinancial statements of Business Investment are consolidated with those of theCompany.

 

The Company is externallymanaged by Gladstone Management Corporation (the “Adviser”), an unconsolidatedaffiliate of the Company.

 

**NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

*Unaudited Interim Financial Statements*

 

Interim financialstatements of the Company are prepared in accordance with accounting principlesgenerally accepted in the United States of America (“GAAP”) for interimfinancial information and pursuant to the requirements for reporting on Form 10-Qand Article 10 of Regulation S-X. Accordingly, certain disclosuresaccompanying annual financial statements prepared in accordance with GAAP areomitted. In the opinion of management, all adjustments, consisting solely ofnormal recurring accruals, necessary for the fair statement of financialstatements for the interim periods have been included. The current period’sresults of operations are not necessarily indicative of results that ultimatelymay be achieved for the year. The interim financial statements and notesthereto should be read in conjunction with the financial statements and notesthereto included in the Company’s Form 10-K for the fiscal year ended March 31,2008, as filed with the Securities and Exchange Commission (“SEC”) on May 21,2008.

 

The year-end condensedconsolidated balance sheet data was derived from audited financial statements,but does not include all of the disclosures required by GAAP.

 

*Reclassifications*

 

Certainamounts in the prior year’s financial statements have been reclassified toconform to the current year presentation with no effect to net (decrease)increase in net assets resulting from operations.

 

*InvestmentValuation*

 

In September 2006,the Financial Accounting Standards Board issued *Statement of Financial Accounting Standards No. 157—Fair ValueMeasurements* (“SFAS 157”), which, for financial assets, is effectivefor fiscal years beginning after November 15, 2007, with early adoptionpermitted. The Company adopted SFAS 157 on April 1, 2008. In part, SFAS157 defines fair value, establishes a framework for measuring fair value, andexpands disclosures about assets and liabilities measured at fair value. Thenew standard provides a consistent definition of fair value that focuses onexit price in the principal, or most advantageous, market and prioritizes,within a measurement of fair value, the use of market-based inputs overentity-specific inputs. The standard also establishes the following three-levelhierarchy for fair value measurements based upon the transparency of inputs tothe valuation of an asset or liability as of the measurement date.

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

 

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|   |   | · | * * | *Level  2*—inputs  to the valuation methodology include quoted prices for similar assets and  liabilities in active markets, and inputs that are observable for the asset  or liability, either directly or indirectly, for substantially the full term  of the financial instrument. Level 2 inputs are in those markets for which  there are few transactions, the prices are not current, little public  information exists or instances where prices vary substantially over time or  among brokered market makers; and |
|--------|--------|--------|----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   | * * | * *                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   | · | * * | *Level  3*—inputs  to the valuation methodology are unobservable and significant to the fair  value measurement. Unobservable inputs are those inputs that reflect the  Company’s own assumptions that market participants would use to price the  asset or liability based upon the best available information.                                                                                                                                                                                                       |

 

The following tablepresents the financial instruments carried at fair value as of June 30,2008, by caption on the accompanying condensed consolidated statement of assetsand liabilities for each of the three levels of hierarchy established by SFAS157:

 
| ** **                             | ** ** | **As of June 30, 2008** | ** ** |
|----------------------------------------|------------|-------------------------|------------|
| ** **                             | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | **Total Fair Value** | ** ** |
| ** **                             | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | **Reported in Condensed** | ** ** |
| ** **                             | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | **Consolidated Statement of** | ** ** |
| ** **                             | ** ** | **Level 1**             | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Assets and Liabilities** | ** ** |
| Non-Control/Non-Affiliate  investments |       | $                       | —     |   | $ | — |   | $ | 130,764 |   | $ | 130,764 |   |
| Control investments                    |       | —                  |       | — |   | 141,042 |   | 141,042 |   |
| Affiliate investments                  |       | —                  |       | — |   | 48,493 |   | 48,493 |   |
| Total investments at fair value        |       | $                       | —     |   | $ | — |   | $ | 320,299 |   | $ | 320,299 |   |

 

*Changesin Level 3 Fair Value Measurements*

 

The following tableprovides a roll-forward in the changes in fair value from March 31, 2008to June 30, 2008, for all investments for which the Company determines fairvalue using unobservable (Level 3) factors. When a determination is made toclassify a financial instrument within Level 3 of the valuation hierarchy, thedetermination is based upon the significance of the unobservable factors to theoverall fair value measurement. However, Level 3 financial instrumentstypically include, in addition to the unobservable or Level 3 components,observable components (that is, components that are actively quoted and can bevalidated to external sources). Accordingly, the gains and losses in the tablebelow include changes in fair value due in part to observable factors that arepart of the valuation methodology.

 
| **Fair value measurements using unobservable data inputs (Level 3)** | ** ** |
|----------------------------------------------------------------------|------------|
| ** **                                                           | ** ** | **Non-Control/** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                           | ** ** | **Non-Affiliate** | ** ** | **Control** | ** ** | **Affiliate** | ** ** | ** ** | ** ** |
| ** **                                                           | ** ** | **Investments** | ** ** | **Investments** | ** ** | **Investments** | ** ** | **Total** | ** ** |
| Fair value at March 31, 2008                                         |       | $ | 142,741 |   | $ | 145,407 |   | $ | 47,456 |   | $ | 335,604 |   |
| Total realized/unrealized losses (a)                                 |       | 2,747 |   | (4,867 | ) | (5,415 | ) | (7,535 | ) |
| New investments, repayments, settlements net                         |       | (14,724 | ) | 502 |   | 6,452 |   | (7,770 | ) |
| Transfer in (out) of Level 3                                         |       | — |   | — |   | — |   | — |   |
| Fair value as of June 30, 2008                                       |       | $ | 130,764 |   | $ | 141,042 |   | $ | 48,493 |   | $ | 320,299 |   |

 

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(a) Realized/unrealized gains and losses are reported on theaccompanying condensed consolidated statements of operations for the threemonths ended June 30, 2008.

 

As described below, the Company’s adoption of SFAS 157 effective as ofApril 1, 2008 changed its methodology for estimating the fair value of the debtcomponent of its bundled securities in its non-controlled portfoliocompanies.  Applying the Company’s revisedmethodology in accordance with SFAS 157, the Company experienced $5.8 millionof net unrealized depreciation for the three months ended June 30, 2008.  In contrast, had the Company valued itsportfolio companies in accordance with its previous valuation procedures, whichinvolved the determination of a total enterprise value of the issuer and use ofa liquidity waterfall approach for the debt component of its bundled securitiesin its non-controlled portfolio companies, the Company would have experienced$16.8 million of net unrealized depreciation for the quarter, reflecting animprovement in net unrealized depreciation of $11.0 million as a result of theadoption of SFAS 157.

 

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*Investment Valuation Policy*

 

The Company carries itsinvestments at market value to the extent that market quotations are readilyavailable, and otherwise at fair value, as determined in good faith by itsBoard of Directors. In determining the fair value of the Company’s investments,the Adviser has established an investment valuation policy (the “policy”). Thepolicy has been approved by the Company’s Board of Directors and each quarterthe Board of Directors reviews whether the Adviser has applied the policyconsistently, and votes whether or not to accept the recommended valuation ofthe Company’s investment portfolio. The Company has classified these types ofsecurities as Level 1 as defined above.

 

The Company uses generallyaccepted valuation techniques to value its portfolio unless the Company hasspecific information about the value of an investment to determine otherwise.From time to time the Company may accept an appraisal of a business in whichthe Company holds securities. These appraisals are expensive and occurinfrequently but provide a third-party valuation opinion that may differ inresults, techniques and scopes used to value the Company’s investments. Whenthese specific third-party appraisals are engaged or accepted, the Companywould use such appraisals to value the investment the Company has in thatbusiness if it was determined that the appraisals were the best estimate offair value.

 

The policy, which issummarized below, applies to publicly-traded securities, securities for which alimited market exists, and securities for which no market exists.

 

**Publicly-traded securities:** The Company determines the value ofpublicly-traded securities based on the closing price for the security on theexchange or securities market on which it is listed and primarily traded on thevaluation date. To the extent that the Company owns restricted securities thatare not freely tradable, but for which a public market otherwise exists, theCompany will use the market value of that security adjusted for any decrease invalue resulting from the restrictive feature. The Company uses Level 1 inputsfor these types of securities. The Company did not value any of its investmentsusing Level 1 inputs as of June 30, 2008.

 

**Securities for which a limitedmarket exists:**The Company values securities that are not traded on an established secondarysecurities market, but for which a limited market for the security exists, suchas certain participations in, or assignments of, syndicated loans, at thequoted price. Firm bid prices are requested; however, if a firm bid price isunavailable, the Company bases the value of the security upon the indicativebid price offered by the respective originating syndication agent’s tradingdesk, or secondary desk, on or near the valuation date. To the extent that theCompany uses the indicative bid price as a basis for valuing the security, theAdviser may take further steps to consider additional information to validatethat price in accordance with the policy. The Company uses Level 2 inputs forthese types of securities.

 

**Securities for which no marketexists:**Thevaluation methodology for securities for which no market exists falls intothree categories: (1) portfolio investments comprised solely of debtsecurities; (2) portfolio investments in controlled companies comprised ofa bundle of securities, which can include debt and equity securities; and (3) portfolioinvestments in non-controlled companies comprised of a bundle of securities,which can include debt and equity securities. The Company uses Level 3 inputsfor these types of securities.

 

(1)          **Portfolio investments comprisedsolely of debt securities:** The fair value of the Company’s debt securities thatare not publicly traded, or for which a limited market does not exist (“Non-PublicDebt Securities”), and that are issued by portfolio companies where the Companyhas no equity, or equity-like securities, or holds a non-control equityinterest, rely on opinions of value submitted to it by Standard & Poor’sSecurities Evaluations, Inc. (“SPSE”). SPSE will only evaluate the debtportion of the Company’s investments for which the Company specificallyrequests evaluation, and may decline to make requested evaluations for anyreason at its sole discretion. SPSE opinions of value are submitted to theBoard of Directors along with the Adviser’s supplemental assessment andrecommendation regarding valuation of each of these investments.

 

(2)          **Portfolio investments incontrolled companies comprised of a bundle of investments, which can includedebt and equity securities:** For its Non-Public Debt Securities and equity orequity-like securities (e.g. preferred equity, equity, or other equity-likesecurities) that are purchased together as part of a package, where the Companyhas control or could gain control through an option or warrant security, boththe debt and equity securities of the portfolio investment would exit in themergers and acquisition market as the principal market, generally through asale or recapitalization of the portfolio company. Further, the Companybelieves that the in-use premise of value (as defined in SFAS 157), whichassumes the debt and equity securities are sold together, is appropriate asthis would provide maximum proceeds to the seller. As a result, the Companywill continue to use the enterprise value methodology utilizing a liquiditywaterfall approach to determine the fair value of these investments underSFAS 157 if the Company has the ability to initiate a sale of a portfoliocompany as of the measurement date. Under this approach, the Company firstcalculates the total enterprise value of the issuer by incorporating some orall of the following factors to determine the total enterprise value of theissuer: the issuer’s ability to make payments, the earnings of the issuer,recent sales

 

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to third parties ofsimilar securities, the comparison to publicly traded securities, anddiscounted cash flow or other pertinent factors.

 

In gathering the sales tothird parties of similar securities, the Company may reference industrystatistics and use outside experts. Once the total enterprise value of theissuer is estimated, the Company subtracts the value of all the debt securitiesof the issuer; which are valued at the contractual principal balance. Fairvalues of these debt securities are discounted for any shortfall of totalenterprise value over the total debt outstanding for the issuer. Once thevalues for all outstanding senior securities (which include the debtsecurities) have been subtracted from the total enterprise value of the issuer,the remaining amount, if any, is used to determine the value of the issuer’sequity or equity like securities.

 

(3)          **Portfolio investments in non-controlled companies comprised of a bundleof investments, which can include debt and equity securities:**The Company values Non-Public DebtSecurities that are purchased together with equity and equity-like securitiesfrom the same portfolio company, or issuer, for which the Company does notcontrol or cannot gain control as of the measurement date, using a hypotheticalsecondary market as the Company’s principal market. In accordance with SFAS157, the Company determines its fair value of these debt securities ofnon-control investments assuming the sale of an individual debt security usingthe in-exchange premise of value (as defined in SFAS 157). As such, the Companyestimates the fair value of the debt component using estimates of valueprovided by SPSE and its own assumptions in the absence of market observabledata, including synthetic credit ratings, estimated remaining life, currentmarket yield and interest rate spreads of similar securities as of themeasurement date. For equity and equity-like securities of investments forwhich the Company does not control or cannot gain control as of the measurementdate, the Company values the equity portion based on the total enterprise valueof the issuer, which is calculated using a liquidity waterfall approach.

 

Due to the uncertaintyinherent in the valuation process, such estimates of fair value may differsignificantly from the values that would have resulted had a ready market forthe securities existed, and the differences could be material. Additionally,changes in the market environment and other events that may occur over the lifeof the investments may cause the gains or losses ultimately realized on theseinvestments to be different than the valuation currently assigned. There is nosingle standard for determining fair value in good faith, as fair value dependsupon circumstances of each individual case. In general, fair value is theamount that we might reasonably expect to receive upon the current sale of thesecurity in an arms-length transaction in the security’s principal market. TheBoard of Directors is ultimately responsible for setting the fair value anddisclosure of investments in the financial statements.

 

*Interestand Dividend Income Recognition*

 

Interest income, adjustedfor amortization of premiums and acquisition costs and for the accretion ofdiscounts, is recorded on the accrual basis to the extent that such amounts areexpected to be collected. The Company stops accruing interest on itsinvestments when it is determined that interest is no longer collectible. At June 30,2008, one Non-Control/Non-Affiliate investment was on non-accrual with a costbasis of approximately $2.9 million and one Control investment was onnon-accrual with a cost basis of approximately $6.9 million, or an aggregate of2.9% of the cost basis of all loans in our portfolio. Also at March 31,2008, one Non-Control/Non-Affiliate investment was on non-accrual with a costbasis of approximately $2.9 million and one Control investment was onnon-accrual with a cost basis of approximately $6.3 million or an aggregate of3.2% of the cost basis of all loans in our portfolio. Conditional interest, ora success fee, is recorded upon full repayment of a loan investment. To date,the Company has not recorded any conditional interest. Dividend income onpreferred equity securities is accrued to the extent that such amounts areexpected to be collected and that the Company has the option to collect suchamounts in cash. To date, the Company has not accrued any dividend income.

 

*Recent Accounting Pronouncements*

 

In March 2008, theFASB issued SFAS No. 161, *Disclosures aboutDerivative Instruments and Hedging Activities* (“SFAS 161”), which isintended to help investors better understand how derivative instruments andhedging activities affect an entity’s financial position, financial performanceand cash flows through enhanced disclosure requirements. The enhanceddisclosures primarily surround disclosing the objectives and strategies forusing derivative instruments by their underlying risk as well as a tabularformat of the fair values of the derivative instruments and their gains andlosses. SFAS No. 161 is effective for financial statements issued forfiscal years and interim periods beginning after November 15, 2008. TheCompany does not believe the adoption of this pronouncement will have amaterial impact on its results of operations.

 

In December 2007,the FASB issued SFAS No. 141(R), *BusinessCombinations* (“SFAS 141(R)”). SFAS 141(R) establishesprinciples and requirements for how an acquirer recognizes and measures in itsfinancial statements the identifiable assets acquired, the liabilities assumed,any noncontrolling interest in the acquiree and the goodwill acquired.SFAS 141(R) also establishes disclosure requirements to enable theevaluation of the nature and financial effects of the business combination.SFAS 141(R) is effective for fiscal years

 

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beginning after December 15,2008. The Company is currently evaluating the impact of this pronouncement onits consolidated financial statements.

 

In November 2007,the SEC issued Staff Accounting Bulletin No. 109, *Written Loan Commitments Recorded at Fair ValueThrough Earnings* (“SAB 109”). SAB 109 provides guidance onthe accounting for written loan commitments recorded at fair value under GAAP.Specifically, the SAB revises the Staff’s views on incorporating expected netfuture cash flows related to loan servicing activities in the fair valuemeasurement of a written loan commitment. SAB 109, which supersedesSAB 105, *Application of AccountingPrinciples to Loan Commitments*, requires the expected net futurecash flows related to the associated servicing of the loan be included in themeasurement of all written loan commitments that are accounted for at fairvalue through earnings. SAB 109 is effective in fiscal quarters beginningafter December 15, 2007. The Company has evaluated the implications ofSAB 109 and determined that there is no material impact on theconsolidated financial statements.

 

In February 2007,the FASB issued *Statement of Financial AccountingStandards No. 159—The Fair Value Option for Financial Assets and FinancialLiabilities* (“SFAS 159”). Among other requirements, SFAS 159 permitsentities to choose to measure many financial instruments and certain otheritems at fair value. SFAS 159 is effective for the first fiscal year thatbegins after November 15, 2007. The Company adopted SFAS 159 on April 1,2008. Based upon its review, the Company elected not to adopt SFAS 159 forfinancial liabilities that were in its portfolio as of March 31, 2008.However, the Company may elect to apply SFAS 159 to future financialliabilities. The impact on its financials from the potential application ofSFAS 159 to a future liability would depend upon the attributes of the specificfinancial liability. The Company’s adoption of SFAS 159 had no material impacton its condensed consolidated financial statements as of June 30, 2008.

 

**NOTE 3. INVESTMENTS**

 

*Non-Control/Non-Affiliate Investments*

 

AtJune 30, 2008 and March 31, 2008, the Company held investments inNon-Control/Non-Affiliates of approximately $150.0 million and$166.4 million, at cost, respectively. These investments were comprisedprimarily of syndicated loan participations of senior notes of both public andprivate companies and also non-syndicated loan investments where the Companydoes not have a significant ownership interest in the portfolio company. At June 30,2008 and March 31, 2008, the Company’s investments, at cost, inNon-Control/Non-Affiliates represented approximately 63% and 81%, respectively,of the Company’s net assets.

 

*Control and Affiliate Investments*

 

AtJune 30, 2008 and March 31, 2008, the Company had investments inControl and Affiliates, at cost, of approximately $154.0 million and $148.1million, respectively, in revolving credit facilities, senior debt andsubordinated debt. In addition, at June 30, 2008 and March 31, 2008,the Company had invested approximately $37.3 million and $36.6 million,respectively, in preferred and common equity of those companies.

 

AtJune 30, 2008 and March 31, 2008, the Company’s investments inControl investments, at cost, represented approximately 58% and 67%,respectively, of the Company’s net assets. Also at June 30, 2008 and March 31,2008, the Company’s investments, at cost, in Affiliate investments representedapproximately 22% and 23%, respectively, of the Company’s net assets.

 

On May 19, 2008, theCompany invested approximately $5.75 million in Tread Corporation (“Tread”)and its subsidiaries. The investment was comprised of approximately $750 inpreferred stock and $5.0 million of senior second lien debt notes. Tread,based in Roanoke, VA, was founded in 1957 and manufactures products that store,transport and mix the primary ingredients for liquid explosives, which areammonium nitrate and fuel oil.

 

*Investment Concentrations*

 

Approximately73.6% of the aggregate fair value of the Company’s investment portfolio at June 30,2008 consisted of senior debt, approximately 11.4% was senior subordinated debtand approximately 15.0% was preferred and common equity securities. At June 30,2008, the Company had approximately $341 million invested in 47 portfoliocompanies. The following table outlines the Company’s investments by type at June 30,2008 and March 31, 2008:

 

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| ** **                               | ** ** | **June 30, 2008** | ** **  | **March 31, 2008** | ** ** |
|------------------------------------------|------------|-------------------|-------------|--------------------|------------|
| ** **                               | ** ** | **Cost**          | ** **  | **Fair Value**     | ** ** | **Cost** | ** ** | **Fair Value** | ** ** |
| Senior Term Debt                         |       | $                 | 258,402     |               | $          | 235,714 |   | $ | 269,270 |   | $ | 244,878 |   |
| Senior Subordinated Term Debt            |       | 44,349            |        | 35,211             |       | 43,894 |   | 38,644 |   |
| Subordinated Term Debt                   |       | 1,264             |        | 1,175              |       | 1,089 |   | 1,089 |   |
| Preferred & Common Equity Securities |       | 37,302            |        | 48,199             |       | 36,552 |   | 50,993 |   |
| **Total Investments**                    | ** ** | **$**             | **341,317** | ** **         | **$**      | **320,299** | ** ** | **$** | **350,805** | ** ** | **$** | **335,604** | ** ** |

 

Investmentsat fair value consisted of the following industry classifications at June 30,2008 and March 31, 2008:

 
| ** **                                    | ** ** | **June 30,  2008** | ** ** | **March  31, 2008**    | ** ** |
|-----------------------------------------------|------------|--------------------|------------|------------------------|------------|
| ** **                                    | ** ** | ** **         | ** ** | **Percentage  of**     | ** ** | ** ** | ** ** | **Percentage  of** | ** ** |
| ** **                                    | ** ** | **Fair  Value**    | ** ** | **Total  Investments** | ** ** | **Net  Assets** | ** ** | **Fair  Value** | ** ** | **Total  Investments** | ** ** | **Net  Assets** | ** ** |
| Automobile                                    |       | $1,970             |       | 0.6                    | %          | 0.8 | % | $2,074 |   | 0.6 | % | 1.0 | % |
| Beverage, Food  & Tobacco                 |       | 1,823              |       | 0.6                    | %          | 0.8 | % | 3,454 |   | 1.0 | % | 1.7 | % |
| Broadcasting  & Entertainment             |       | 3,498              |       | 1.1                    | %          | 1.5 | % | 3,499 |   | 1.0 | % | 1.7 | % |
| Buildings &  Real Estate                  |       | 11,091             |       | 3.5                    | %          | 4.7 | % | 11,734 |   | 3.5 | % | 5.7 | % |
| Cargo Transport                               |       | 16,606             |       | 5.2                    | %          | 7.0 | % | 20,869 |   | 6.2 | % | 10.1 | % |
| Chemicals,  Plastics & Rubber             |       | 24,725             |       | 7.7                    | %          | 10.4 | % | 25,563 |   | 7.6 | % | 12.4 | % |
| Containers,  Packaging and Glass              |       | 24,805             |       | 7.7                    | %          | 10.4 | % | 26,286 |   | 7.8 | % | 12.7 | % |
| Diversified/Conglomerate  Manufacturing       |       | 58,787             |       | 18.3                   | %          | 24.7 | % | 57,500 |   | 17.1 | % | 27.9 | % |
| Diversified/Conglomerate  Service             |       | 31,415             |       | 9.8                    | %          | 13.2 | % | 30,742 |   | 9.2 | % | 14.9 | % |
| Ecological                                    |       | —             |       | 0.0                    | %          | 0.0 | % | 422 |   | 0.1 | % | 0.2 | % |
| Electronics                                   |       | 9,573              |       | 3.0                    | %          | 4.0 | % | 10,689 |   | 3.2 | % | 5.2 | % |
| Healthcare,  Education and Childcare          |       | 33,929             |       | 10.6                   | %          | 14.3 | % | 37,238 |   | 11.1 | % | 18.0 | % |
| Home & Office  Furnishings                |       | 10,178             |       | 3.2                    | %          | 4.3 | % | 14,659 |   | 4.4 | % | 7.1 | % |
| Machinery                                     |       | 65,776             |       | 20.5                   | %          | 27.7 | % | 66,439 |   | 19.8 | % | 32.2 | % |
| Oil & Gas                                 |       | 5,750              |       | 1.8                    | %          | 2.4 | % | — |   | 0.0 | % | 0.0 | % |
| Personal,  Non-durable Consumer Products      |       | 4,769              |       | 1.5                    | %          | 2.0 | % | 4,399 |   | 1.3 | % | 2.1 | % |
| Personal, Food,  & Miscellaneous Services |       | —             |       | 0.0                    | %          | 0.0 | % | 2,537 |   | 0.8 | % | 1.2 | % |
| Printing &  Publishing                    |       | 3,506              |       | 1.1                    | %          | 1.5 | % | 5,299 |   | 1.6 | % | 2.6 | % |
| Telecommunications                            |       | 12,098             |       | 3.8                    | %          | 5.1 | % | 12,201 |   | 3.7 | % | 5.9 | % |
| **Total  Investments**                        | ** ** | **$320,299**       | ** ** | **100.0**              | **%**      | ** ** | ** ** | **$335,604** | ** ** | **100** | **%** | ** ** | ** ** |

 

Theinvestments at fair value were included in the following geographic regions ofthe United States and Canada at June 30, 2008 and March 31, 2008:

 
| ** **            | ** ** | **June 30, 2008** | ** **  | **March 31, 2008**    | ** ** |
|-----------------------|------------|-------------------|-------------|-----------------------|------------|
| ** **            | ** ** | ** **        | ** **  | **Percentage of**     | ** ** | ** ** | ** ** | **Percentage of** | ** ** |
| ** **            | ** ** | **Fair Value**    | ** **  | **Total Investments** | ** ** | **Net Assets** | ** ** | **Fair Value** | ** ** | **Total Investments** | ** ** | **Net Assets** | ** ** |
|                  |       |              |        |                  |       |   |   |   |   |   |   |   |   |
| Mid-Atlantic          |       | $                 | 127,494     |                  | 39.8       | % | 53.6 | % | $ | 131,883 |   | 39.3 | % | 63.9 | % |
| Midwest               |       | 97,662            |        | 30.5                  | %          | 41.1 | % | 106,811 |   | 31.8 | % | 51.7 | % |
| Northeast             |       | 9,594             |        | 3.0                   | %          | 4.0 | % | 10,718 |   | 3.2 | % | 3.2 | % |
| Southeast             |       | 51,297            |        | 16.0                  | %          | 21.6 | % | 49,780 |   | 14.8 | % | 14.8 | % |
| West                  |       | 34,252            |        | 10.7                  | %          | 14.4 | % | 36,412 |   | 10.9 | % | 10.8 | % |
| **Total Investments** | ** ** | **$**             | **320,299** | ** **            | **100.0**  | **%** | ** ** | ** ** | **$** | **335,604** | ** ** | **100.0** | **%** | ** ** | ** ** |

 

Thegeographic region depicts the location of the headquarters for the Company’sportfolio companies. A portfolio company may have a number of other businesslocations in other geographic regions.

 

*Investment Principal Repayments*

 

Thefollowing table summarizes the contractual principal repayment and maturity ofthe Company’s investment portfolio by fiscal year, assuming no voluntaryprepayments:

 

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| ** **                                     | ** ** | ** **                              | ** ** | **Amount** |
|------------------------------------------------|------------|-----------------------------------------|------------|------------|
| For the remaining nine months ending March 31: |       | 2009                                    |       | $          | 15,782 |
| For the fiscal year ending March 31:           |       | 2010                                    |       | 15,103     |
|                                           |       | 2011                                    |       | 49,167     |
|                                           |       | 2012                                    |       | 45,138     |
|                                           |       | 2013                                    |       | 67,057     |
|                                           |       | Thereafter                              |       | 111,682    |
|                                           | ** ** | **Total contractual repayments**        | ** ** | **$**      | **303,929** |
|                                           |       | Investments in equity securities        |       | 37,302     |
|                                           |       | Unamortized premiums on debt securities |       | 86         |
|                                           | ** ** | **Total**                               | ** ** | **$**      | **341,317** |

 

**NOTE 4. RELATED PARTY TRANSACTIONS**

 

**Investment Advisory and Management Agreement**

 

The Company has enteredinto an investment advisory and management agreement with the Adviser (the “AdvisoryAgreement”), which is controlled by the Company’s chairman and chief executiveofficer. In accordance with the Advisory Agreement, the Company pays theAdviser a fee, as compensation for its services, consisting of a basemanagement fee and an incentive fee.

 

The base management feeis assessed at an annual rate of 2.0% computed on the basis of the averagevalue of the Company’s gross invested assets at the end of the two mostrecently completed quarters, which are total assets less the cash proceeds andcash and cash equivalents from the proceeds of the Company’s initial publicoffering that are not invested in debt and equity securities of portfoliocompanies. Through December 31, 2006, the base management fee was computedand payable quarterly. Beginning on January 1, 2007, the base managementfee was computed and payable quarterly and was assessed at an annual rate of2.0% computed on the basis of the value of the Company’s average gross assetsat the end of the two most recently completed quarters, which are total assets,including investments made with proceeds of borrowings, less any uninvestedcash or cash equivalents resulting from borrowings.

 

On January 9, 2007,the Company’s Board of Directors accepted an unconditional and irrevocablevoluntary waiver from the Adviser to reduce the annual 2.0% base management feeon senior syndicated loan participations to 0.5% to the extent that proceedsresulting from borrowings were used to purchase such syndicated loanparticipations for the quarter ended June 30, 2008.

 

When the Adviser receivesfees from portfolio companies, as discussed in Note 2 under “ServicesProvided to Portfolio Companies,” 50% of certain of these fees are creditedagainst the base management fee that the Company would otherwise be required topay to the Adviser.

 

For the three monthsended June 30, 2008 and 2007, the Company incurred base management fees tothe Adviser of $426 and $360 (after reductions for loan servicing fees receivedby the Adviser), respectively. For the three months ended June 30, 2008,the Company recognized aggregate voluntary and irrevocable credits against thebase management fee of $574, which was comprised of $424 resultingfrom reduced fees on syndicated loan participations and $150 resulting frominvestment banking fees paid to the Adviser during the period. As of June 30,2008, a resulting base management fee credit of $148 was unpaid and is includedas a reduction in fees due to Adviser in the accompanying consolidatedstatements of assets and liabilities. The amount due to Adviser of $139 alsoincludes loan servicing fees due to the Adviser of $287 as discussed below. At March 31, 2008, a base managementfee credit of $384 was unpaid and included in fees due from Adviser in the accompanyingconsolidated statements of assets and liabilities which were offset by loan servicing fees due to theAdviser of $295, resulting in $89 due from the Adviser as discussed below.

 

Inaddition, the Adviser services the loans held by Business Investment, in returnfor which the Adviser receives a 2.0% annual fee based on the monthly aggregatebalance of loans held by Business Investment. Since the Company owns theseloans, all loan servicing fees paid to the Adviser are treated as reductionsagainst the 2.0% base management fee payable to the Adviser. Overall, the basemanagement fee due to the Adviser cannot exceed 2.0% of total assets (asreduced by cash and cash equivalents pledged to creditors) during any givenfiscal year.

 

Forthe three months ended June 30, 2008, the Company recorded loan servicingfees due to the Adviser of $1,254, of which $287 was unpaid at June 30,2008. At March 31, 2008, there were $294 of loan servicing fees due to theAdviser that were included as a credit in fees due from the Adviser in theaccompanying consolidated statements of assets and liabilities, offsetting thebase management fee credit due to the Company from the Adviser at that date.

 

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Theincentive fee consists of two parts: an income-based incentive fee and acapital gains incentive fee. The income-based incentive fee rewards the Adviserif the Company’s quarterly net investment income (before giving effect to anyincentive fee) exceeds 1.75% of our net assets (the “hurdle rate”). The Companywill pay the Adviser an income incentive fee with respect to the Company’spre-incentive fee net investment income in each calendar quarter as follows:

 

·                  no incentive fee in any calendar quarter in which its pre-incentive feenet investment income does not exceed the hurdle rate (7% annualized);

 

·                  100% of the Company’s pre-incentive fee net investment income with respectto that portion of such pre-incentive fee net investment income, if any, thatexceeds the hurdle rate but is less than 2.1875% in any calendar quarter (8.75%annualized); and

 

·                  20% of the amount of the Company’s pre-incentive fee net investmentincome, if any, that exceeds 2.1875% in any calendar quarter (8.75%annualized).

 

Thesecond part of the incentive fee is a capital gains incentive fee that will bedetermined and payable in arrears as of the end of each fiscal year (or upontermination of the Advisory Agreement, as of the termination date), and equals20% of the Company’s realized capital gains as of the end of the fiscal year.In determining the capital gains incentive fee payable to the Adviser, theCompany will calculate the cumulative aggregate realized capital gains andcumulative aggregate realized capital losses since the Company’s inception, andthe aggregate unrealized capital depreciation as of the date of thecalculation, as applicable, with respect to each of the investments in theCompany’s portfolio.

 

Because pre-incentive feenet investment income was below the hurdle rate of 1.75% of net assets, noincome-based incentive fee was recorded for the quarters ended June 30,2008 and 2007, respectively. No capital gains incentive fee was recorded forthe three months ended June 30, 2008 and 2007, respectively as cumulativeunrealized capital depreciation exceeded cumulative realized capital gains netof cumulative realized capital losses for each period.

 

**Administration Agreement**

 

The Company has enteredinto an administration agreement (the “Administration Agreement”) withGladstone Administration, LLC (the “Administrator”), a wholly-owned subsidiaryof the Adviser whereby it pays separately for administrative services. TheAdministration Agreement provides for payments equal to the Company’s allocableportion of its Administrator’s overhead expenses in performing its obligationsunder the Administration Agreement including, but not limited to, rent foremployees of the Administrator, and its allocable portion of the salaries andbenefits expenses of the Company’s chief financial officer, controller, chiefcompliance officer, treasurer and their respective staffs. The Company’sallocable portion of expenses is derived by multiplying the Administrator’stotal allocable expenses by the percentage of the Company’s average totalassets (the total assets at the beginning and end of each quarter) incomparison to the average total assets of all companies managed by the Adviserunder similar agreements. The Company recorded fees to the Administrator on theconsolidated statements of operations of $235 and $208 for the three monthsended June 30, 2008 and 2007, respectively. As of June 30, 2008 and March 31,2008, $235 and $208, respectively, was unpaid and included in the administrationfee payable to Administrator in the accompanying consolidated statements ofassets and liabilities.

 

**License Agreement**

 

The Company has enteredinto a license agreement with the Adviser, pursuant to which the Adviser hasgranted the Company a non-exclusive license to use the name “Gladstone” and theDiamond G trademark. This license agreement required us to pay the Adviser aroyalty fee of $1 per quarter through March 31, 2008. The amount of thefee is negotiated on an annual basis by the Company’s compensation committeeand must be approved by a majority of the Company’s independent directors. Thefee was increased to $10 per quarter effective as of April 1, 2008 and, asa result of the last negotiation, will remain at $10 for the next contract termwhich begins on April 1, 2009. The license arrangement will terminate inthe event that Gladstone Management Corporation is no longer the Company’sAdviser.

 

**NOTE 5. LINE OF CREDIT**

 

Through the Company’swholly-owned subsidiary, Business Investment, the Company has obtained a$200 million revolving credit facility (the “Credit Facility”). On October 19,2006, the Company executed a Purchase and Sale Agreement pursuant to which itagreed to sell certain loans to Business Investment in consideration of amembership interest therein. Simultaneously, Business Investment executed aCredit Agreement (the “Credit Agreement”) with Deutsche Bank AG, New YorkBranch (“Deutsche Bank”), as administrative agent, pursuant to which BusinessInvestment pledged the loans purchased from the Company to secure futureadvances by certain institutional lenders. On March 29, 2007, the Companyincreased its capacity under the Credit Facility from

 

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$100 million to$200 million, such that an additional $50 million would be availablefor borrowing for the succeeding 90 day period after the initial amendmentof the Credit Facility, and the remaining $50 million would be availablethereafter. Availability under the Credit Facility will terminate on October 18,2008, unless extended in the discretion of the lenders, at the request ofBusiness Investment. Interest is payable monthly during the term of the CreditFacility and principal will be payable out of collections on loans purchasedfrom the Company during the period following the date of which availability foradvances has terminated through maturity. The Credit Facility will mature twoyears following the date on which availability for advances has terminated andon such date, all principal, interest and other amounts owing under the CreditFacility will be due and payable. Interest rates charged on the advances underthe facility are based on the rate paid by the lenders on commercial papernotes issued by such lenders to fund some or all of the advances, the LondonInterbank Offered Rate (“LIBOR”), the Prime Rate or the Federal Funds Rate,depending on market conditions, and adjust periodically. Available borrowingsare subject to various constraints imposed under the Credit Agreement, based onthe aggregate loan balance pledged by Business Investment, which varies asloans are added and repaid, regardless of whether such repayments are earlyprepayment or are made as contractually required.

 

The Credit Facilitycontains covenants that require Business Investment to maintain its status as aseparate entity; prohibit certain significant corporate transactions (such asmergers, consolidations, liquidations or dissolutions); and restrict materialchanges to the Company’s credit and collection policies. The facility alsorestricts some of the terms and provisions (including interest rates, terms tomaturity and payments schedules) and limits the borrower and industryconcentrations of loans that are eligible to secure advances. As of June 30,2008, Business Investment was in compliance with all of the facility covenants.As of June 30, 2008, there was $129.3 million of borrowingsoutstanding on the Credit Facility at an interest rate of approximately 2.7%and the remaining borrowing capacity under the Credit Facility wasapproximately $70.7 million.

 

The administrative agentalso requires that any interest or principal payments on pledged loans beremitted directly by the borrower into a lockbox account with the Bank of NewYork as custodian. Deutsche Bank is also the trustee of the account and once amonth remits the collected funds to the Company. At June 30, 2008, theamount due from the custodian was $2.9 million.

 

The Adviser services theloans pledged under the Credit Facility. As a condition to this servicingarrangement, the Company executed a performance guaranty pursuant to which itguaranteed that the Adviser would comply fully with all of its obligationsunder the Credit Facility. The performance guaranty requires the Company tomaintain a minimum net worth of $100 million and to maintain “assetcoverage” with respect to “senior securities representing indebtedness” of atleast 200%, in accordance with Section 18 of the 1940 Act. As of June 30,2008, the Company was in compliance with the covenants under the performanceguaranty.

 

**NOTE 6. INTEREST RATE CAP AGREEMENT**

 

In October 2007, theCompany entered into an interest rate cap agreement that will effectively limitthe interest rate on a portion of the borrowings under the line of creditpursuant to the terms of the Credit Facility. The interest rate cap has anotional amount of $60 million at a cost of $53. At June 30, 2008,the interest rate cap agreement had a fair market value of $0. The Companyrecords changes in the fair market value of the interest rate cap agreementmonthly based on the current market valuation at month end as unrealizeddepreciation or appreciation on derivative on the Company’s consolidatedstatement of operations. The interest rate cap agreement expires in October 2009.The agreement provides that the Company’s floating interest rate or cost offunds on a portion of the portfolio’s borrowings will be capped at 9% when theLIBOR rate is in excess of 9%.

 

The use of a cap involvesrisks that are different from those associated with ordinary portfoliosecurities transactions. Cap agreements may be considered to be illiquid.Although the Company will not enter into any such agreements unless it believesthat the other party to the transaction is creditworthy, the Company does bearthe risk of loss of the amount expected to be received under such agreements inthe event of default or bankruptcy of the agreement counterparty.

 

**NOTE 7. COMMON STOCK**

 

Transactionsin common stock were as follows:

 
| ** **                                     | ** ** | **Shares** | ** ** | **Total value** | ** ** |
|------------------------------------------------|------------|------------|------------|-----------------|------------|
|                                           |       |       |       |            |       |
| Balance at March 31, 2008                 |       | 16,560,100 |       | $               | 224,189    |   |
| Issuance of common stock under rights offering |       | 5,520,033  |       | 40,652          |       |
| Balance at June 30, 2008                  |       | 22,080,133 |       | $               | 264,841    |   |

 

In April 2008, theCompany completed an offering of transferable subscription rights to purchaseadditional shares of common stock (the “Rights Offering”). Pursuant to theRights Offering, the Company sold 5,520,033 shares of its common stock at asubscription

 

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price of $7.48, whichrepresented a purchase price equal to 93% of the weighted average closing priceof the Company’s stock in the last five trading days of the subscriptionperiod. Net proceeds of the offering, after offering expenses borne by theCompany, were approximately $40.7 million and were used to repay a portionof outstanding borrowings under the Company’s line of credit. Should theCompany’s common stock continue to trade below its net asset value per share,the Company may seek to conduct similar offerings in the future in order toraise additional capital, although there can be no assurance that it will besuccessful in its efforts to raise capital in this, or any other, manner.

 

**NOTE 8. NET (DECREASE) INCREASE IN NET ASSETS PER SHARERESULTING FROM OPERATIONS**

 

Thefollowing table sets forth the computation of basic and diluted net (decrease)increase in net assets per share resulting from operations:

 
| ** **                                                                                                 | ** ** | **Three months ended** | ** ** | **Three months ended** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                 | ** ** | **June 30, 2008**      | ** ** | **June 30, 2007**      | ** ** |
|                                                                                                       |       |                             |       |                             |       |
| Numerator for basic and diluted net (decrease) increase in net assets  resulting from operations per share |       | $                                | (4,484     | )                                | $          | 8,270 |   |
|                                                                                                       |       |                             |       |                             |       |
| Denominator for basic and diluted shares                                                                   |       | 19,943,346                       |       | 16,560,100                       |       |
|                                                                                                       |       |                             |       |                             |       |
| Basic and diluted net (decrease) increase in net assets per share  resulting from operations               |       | $                                | (0.22      | )                                | $          | 0.50 |   |

 

**NOTE 9. DIVIDENDS**

 

Thefollowing table lists the per share dividends paid for the three months ended June 30,2008 and 2007:

 
| ** **            | ** ** | ** **       | ** ** | ** **        | ** ** | **Dividend**   | ** ** |
|-----------------------|------------|------------------|------------|-------------------|------------|----------------|------------|
| **Declaration Date**  | ** ** | **Record Date**  | ** ** | **Payment Date**  | ** ** | **Per Share**  | ** ** |
| April 8, 2008         |       | June 21, 2008    |       | June 29, 2008     |       | $              | 0.08       |   |
| April 8, 2008         |       | May 22, 2008     |       | May 31, 2008      |       | $              | 0.08       |   |
| April 8, 2008         |       | April 20, 2008   |       | April 30, 2008    |       | $              | 0.08       |   |
|                  |       |             |       | Total             |       | $              | 0.24       |   |
|                  |       |             |       |              |       |           |       |
|                  | ** ** | ** **       | ** ** | ** **        | ** ** | **Dividend**   | ** ** |
| **Declaration  Date** | ** ** | **Record  Date** | ** ** | **Payment  Date** | ** ** | **Per  Share** | ** ** |
| April 11, 2007        |       | June 21, 2007    |       | June 29, 2007     |       | $              | 0.075      |   |
| April 11, 2007        |       | May 22, 2007     |       | May 31, 2007      |       | $              | 0.075      |   |
| April 11, 2007        |       | April 20, 2007   |       | April 30, 2007    |       | $              | 0.075      |   |
|                  |       |             |       | Total             |       | $              | 0.225      |   |

 

Aggregate dividendsdeclared and paid for three months ended June 30, 2008 and 2007 wereapproximately $4.9 and $3.7 million, respectively, which were declaredbased on an estimate of net investment income for those fiscal years ended.

 

The timing andcharacterization of certain income and capital gains distributions aredetermined annually in accordance with federal tax regulations which may differfrom GAAP. These differences primarily relate to items recognized as income forfinancial statement purposes and realized gains for tax purposes. As a result,net investment income and net realized gain (loss) on investment transactionsfor a reporting period may differ significantly from distributions during suchperiod. Accordingly, the Company may periodically make reclassifications amongcertain of its capital accounts without impacting the net asset value of theCompany.

 

***Section 19(a) Disclosure***

 

The Company’s Board ofDirectors estimates the source of the distributions at the time of theirdeclaration as required by Section 19(a) of the 1940 Act. On amonthly basis, if required under Section 19(a), the Company posts a Section 19(a) noticethrough the Depository Trust Company’s Legal Notice System (“LENS”) and alsosends to its registered stockholders a written Section 19(a) noticealong with the payment of dividends for any payment which includes a dividendestimated to be paid from any other source other than net investment income.The estimates of the source of the distribution are interim estimates based onGAAP that are subject to revision, and the exact character of the distributionsfor tax purposes cannot be determined until the final books and records of the

 

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Company are finalized forthe calendar year. Following the calendar year end, after definitive informationhas been determined by the Company, if the Company has made distributions oftaxable income (or return of capital), the Company will deliver a Form 1099-DIVto its stockholders specifying such amount and the tax characterization of suchamount. Therefore, these estimates are made solely in order to comply with therequirements of Section 19(a) of the 1940 Act and should not berelied upon for tax reporting or any other purposes and could differsignificantly from the actual character of distributions for tax purposes.

 

The following GAAPestimates were made by the Board of Directors during the quarter ended June 30,2008:

 
| **Month Ended** | ** ** | **Ordinary Income** | ** ** | **Return of Capital** | ** ** | **Total Dividend** | ** ** |
|-----------------|------------|---------------------|------------|-----------------------|------------|--------------------|------------|
| June 30, 2008   |       | $                   | 0.080      |                  | $          | —             |       | $ | 0.080 |   |
| May 31, 2008    |       | 0.073               |       | 0.007                 |       | 0.080              |       |
| April 30, 2008  |       | 0.079               |       | 0.001                 |       | 0.080              |       |
|                 |            |                     |            |                       |            |                    |            |  |  |  |

 

Because the Board ofDirectors declares dividends at the beginning of a quarter, it is difficult toestimate how much of the Company’s monthly dividends and distributions, basedon GAAP, will come from ordinary income, capital gains, and returns of capital.Subsequent to the quarter ended June 30, 2008, the following correctionswere made to the above listed estimates for that quarter:

 
| **Month  Ended** | ** ** | **Ordinary  Income** | ** ** | **Return  of Capital** | ** ** | **Total  Dividend** | ** ** |
|------------------|------------|----------------------|------------|------------------------|------------|---------------------|------------|
| June 30, 2008    |       | $                    | 0.045      |                   | $          | 0.035               |       | $ | 0.080 |   |
| May 31, 2008     |       | 0.050                |       | 0.030                  |       | 0.080               |       |
| April 30, 2008   |       | 0.044                |       | 0.036                  |       | 0.080               |       |
|                  |            |                      |            |                        |            |                     |            |  |  |  |

 

For dividends declaredsubsequent to quarter end, the following estimates, based on GAAP, have beenmade pursuant to Section 19(a) of the 1940 Act:

 
| **Month Ended**    | ** ** | **Ordinary Income** | ** ** | **Return of Capital** | ** ** | **Total Dividend** | ** ** |
|--------------------|------------|---------------------|------------|-----------------------|------------|--------------------|------------|
| September 30, 2008 |       | $                   | 0.068      |                  | $          | 0.012              |       | $ | 0.080 |   |
| August 31, 2008    |       | 0.061               |       | 0.019                 |       | 0.080              |       |
| July 31, 2008      |       | 0.062               |       | 0.018                 |       | 0.080              |       |
|                    |            |                     |            |                       |            |                    |            |  |  |  |

 

**NOTE 10. CONTRACTUAL OBLIGATIONS**

 

AtJune 30, 2008, the Company was not a party to any signed investments to befunded.

 

**NOTE 11. SUBSEQUENT EVENTS**

 

On July 9, 2008, the Company’s Board of Directors declaredthe following monthly cash dividends:

 
| ** **           | ** ** | ** **         | ** ** | ** **         | ** ** | **Dividend**  | ** ** |
|----------------------|------------|--------------------|------------|--------------------|------------|---------------|------------|
| **Declaration Date** | ** ** | **Record Date**    | ** ** | **Payment Date**   | ** ** | **Per Share** | ** ** |
| July 9, 2008         |       | September 22, 2008 |       | September 30, 2008 |       | $             | 0.08       |   |
| July 9, 2008         |       | August 21, 2008    |       | August 29, 2008    |       | $             | 0.08       |   |
| July 9, 2008         |       | July 23, 2008      |       | July 31, 2008      |       | $             | 0.08       |   |

 

On July 9, 2008, the Company’s Board of Directorsapproved the renewal of its Advisory Agreement with the Adviser and itsAdministration Agreement with the Administrator through August 31, 2009.

 

On July 25, 2008, the Company, along with all otherparticipant lenders in the syndicated loan (the “Lexicon Loan”) to Lexicon,Inc. (“Lexicon”), entered into a mutual release of Lexicon’s obligations underthe loan.  The mutual release wasexecuted in order to allow Lexicon to sell its assets to a third party in aforeclosure sale.  In connection with themutual release, the Company received a cash payment of $465 on July 30, 2008from Lexicon, which payment constituted the Company’s pro-rata share of theproceeds from the foreclosure sale and the remaining liquid assets ofLexicon.  In addition to the mutualrelease agreement, if the new owner receives equity distributions of 300% ofthe amount of capital it has invested in Lexicon, the Company will be entitledto a portion (initially 29%) of any subsequent equity distributions. 

 

The Company had placed the Lexicon Loan on non-accrualas of December 31, 2007 and had recorded aggregate unrealized depreciation onthe loan in the amount of approximately $2.5 million through June 30,2008.  As of June 30, 2008, the Company’sinvestment was carried on its financial statements at a fair value of$412.  In connection with the mutualrelease described above, the Company will realize a loss on the settlement ofthis syndicated loan for approximately $2.4 million for the three months endingSeptember 30, 2008 and an offsetting $2.4 million reduction in net unrealizeddepreciation.  As a result, the Companydoes not expect the release to have any significant net impact on its resultsof operations for the three months ending September 30, 2008.

 

 

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**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS.**

 

**All statements containedherein, other than historical facts, may constitute “forward-lookingstatements.” These statements may relate to, among other things, future eventsor our future performance or financial condition. In some cases, you canidentify forward-looking statements by terminology such as “may,” “might,” “believe,”“will,” “provided,” “anticipate,” “future,” “could,” “growth,” “plan,” “intend,”“expect,” “should,” “would,” “if,” “seek,” “possible,” “potential,” “likely” orthe negative of such terms or comparable terminology. These forward-lookingstatements involve known and unknown risks, uncertainties and other factorsthat may cause our actual results, levels of activity, performance orachievements to be materially different from any future results, levels ofactivity, performance or achievements expressed or implied by suchforward-looking statements. We caution readers not to place undue reliance onany such forward-looking statements. We undertake no obligation to publiclyupdate or revise any forward-looking statements, whether as a result of new information,future events or otherwise, after the date of this Form 10-Q**.

 

**Thefollowing analysis of our financial condition and results of operations shouldbe read in conjunction with our consolidated financial statements and the notesthereto contained elsewhere in this report and our annual report on Form 10-Kfor the fiscal year ended March 31, 2008.**

 

**OVERVIEW**

 

We were incorporatedunder the General Corporation Laws of the State of Delaware on February 18,2005. We were primarily established for the purpose of investing insubordinated loans, mezzanine debt, preferred stock and warrants to purchasecommon stock of small and medium-sized companies in connection with buyouts andother recapitalizations. We also invest in senior secured loans, common stock andsenior and subordinated syndicated loans. Our investment objective is togenerate both current income and capital gains through these debt and equityinstruments. We operate as a closed-end, non-diversified management investmentcompany, and have elected to be treated as a business development company underthe 1940 Act.

 

**Critical Accounting Policies**

 

Thepreparation of financial statements and related disclosures in conformity withaccounting principles generally accepted in the United States (“GAAP”) requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities, and disclosure of contingent assets and liabilitiesat the date of the financial statements, and revenues and expenses during theperiod reported. Actual results could differ materially from those estimates.We have identified our investment valuation process, which was modified duringthe quarter ended June 30, 2008 and is presented below, as our mostcritical accounting policy.

 

***Investment Valuation***

 

The most significantestimate inherent in the preparation of our condensed consolidated financialstatements is the valuation of investments and the related amounts ofunrealized appreciation and depreciation of investments recorded.

 

General ValuationPolicy:  We value our investments inaccordance with the requirements of the 1940 Act.  As discussed more fully below, we valuesecurities for which market quotations are readily available at their marketvalue.  We value all other securities andassets at fair value as determined in good faith by our Board of Directors.

 

In September 2006,the Financial Accounting Standards Board issued *Statement of Financial Accounting Standards No. 157—Fair ValueMeasurements* (“SFAS 157”), which, for financial assets, is effectivefor fiscal years beginning after November 15, 2007, with early adoptionpermitted. We adopted SFAS 157 on April 1, 2008. In part, SFAS 157 definesfair value, establishes a framework for measuring fair value, and expandsdisclosures about assets and liabilities measured at fair value. The newstandard provides a consistent definition of fair value that focuses on exitprice in the principal, or most advantageous, market and prioritizes, within ameasurement of fair value, the use of market-based inputs over entity-specificinputs. The standard also establishes the following three-level hierarchy forfair value measurements based upon the transparency of inputs to the valuationof an asset or liability as of the measurement date.

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

 

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|   |   | · | * * | *Level  2*—inputs  to the valuation methodology include quoted prices for similar assets and  liabilities in active markets, and inputs that are observable for the asset  or liability, either directly or indirectly, for substantially the full term  of the financial instrument. Level 2 inputs are in those markets for which  there are few transactions, the prices are not current, little public  information exists or instances where prices vary substantially over time or  among brokered market makers; and |
|--------|--------|--------|----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   | * * | * *                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   | · | * * | *Level  3*—inputs  to the valuation methodology are unobservable and significant to the fair  value measurement. Unobservable inputs are those inputs that reflect the  Company’s own assumptions that market participants would use to price the  asset or liability based upon the best available information.                                                                                                                                                                                                       |

 

The following tablepresents the financial instruments carried at fair value as of June 30,2008, by caption on the accompanying condensed consolidated statement of assetsand liabilities for each of the three levels of hierarchy established by SFAS157:

 
| ** **                             | ** ** | **As of June 30, 2008** | ** ** |
|----------------------------------------|------------|-------------------------|------------|
| ** **                             | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | **Total Fair Value** | ** ** |
| ** **                             | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | **Reported in Condensed** | ** ** |
| ** **                             | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | **Consolidated Statement of** | ** ** |
| ** **                             | ** ** | **Level 1**             | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Assets and Liabilities** | ** ** |
| Non-Control/Non-Affiliate  investments |       | $                       | —     |   | $ | — |   | $ | 130,764 |   | $ | 130,764 |   |
| Control investments                    |       | —                  |       | — |   | 141,042 |   | 141,042 |   |
| Affiliate investments                  |       | —                  |       | — |   | 48,493 |   | 48,493 |   |
| Total investments at fair value        |       | $                       | —     |   | $ | — |   | $ | 320,299 |   | $ | 320,299 |   |

 

*Changesin Level 3 Fair Value Measurements*

 

The following tableprovides a roll-forward in the changes in fair value from March 31, 2008to June 30, 2008, for all investments for which the Company determinesfair value using unobservable (Level 3) factors. When a determination is madeto classify a financial instrument within Level 3 of the valuation hierarchy,the determination is based upon the significance of the unobservable factors tothe overall fair value measurement. However, Level 3 financial instrumentstypically include, in addition to the unobservable or Level 3 components,observable components (that is, components that are actively quoted and can bevalidated to external sources). Accordingly, the gains and losses in the tablebelow include changes in fair value due in part to observable factors that arepart of the valuation methodology.

 
| **Fair value measurements using unobservable data inputs (Level 3)** | ** ** |
|----------------------------------------------------------------------|------------|
| ** **                                                           | ** ** | **Non-Control/** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                           | ** ** | **Non-Affiliate** | ** ** | **Control** | ** ** | **Affiliate** | ** ** | ** ** | ** ** |
| ** **                                                           | ** ** | **Investments** | ** ** | **Investments** | ** ** | **Investments** | ** ** | **Total** | ** ** |
| Fair value at March 31, 2008                                         |       | $ | 142,741 |   | $ | 145,407 |   | $ | 47,456 |   | $ | 335,604 |   |
| Total realized/unrealized losses (a)                                 |       | 2,747 |   | (4,867 | ) | (5,415 | ) | (7,535 | ) |
| New investments, repayments, settlements net                         |       | (14,724 | ) | 502 |   | 6,452 |   | (7,770 | ) |
| Transfer in (out) of Level 3                                         |       | — |   | — |   | — |   | — |   |
| Fair value as of June 30, 2008                                       |       | $ | 130,764 |   | $ | 141,042 |   | $ | 48,493 |   | $ | 320,299 |   |

 

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| (a) |   | Realized/unrealized gains and losses are reported on  the accompanying condensed consolidated statements of operations for the  three months ended June 30, 2008. |
|-----|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Asdescribed below, the Company’s adoption of SFAS 157 effective as of April 1,2008 changed its methodology for estimating the fair value of the debtcomponent of its bundled securities in its non-controlled portfoliocompanies.  Applying the Company’srevised methodology in accordance with SFAS 157, the Company experienced $5.8million of net unrealized depreciation for the three months ended June 30,2008.  In contrast, had the Companyvalued its portfolio companies in accordance with its previous valuationprocedures, which involved the determination of a total enterprise value of theissuer and use of a liquidity waterfall approach for the debt component of itsbundled securities in its non-controlled portfolio companies, the Company wouldhave experienced $16.8 million of net unrealized depreciation for the quarter,reflecting an improvement in net unrealized depreciation of $11.0 million as aresult of the adoption of SFAS 157.

 

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*InvestmentValuation Policy*

 

We carry our investmentsat market value to the extent that market quotations are readily available, andotherwise at fair value, as determined in good faith by its Board of Directors.In determining the fair value of the Company’s investments, the Adviser hasestablished an investment valuation policy (the “policy”).  The policy has been approved by the Company’sBoard of Directors and each quarter the Board of Directors reviews whether theAdviser has applied the policy consistently, and votes whether or not to acceptthe recommended valuation of the Company’s investment portfolio.

 

We use generally acceptedvaluation techniques to value our portfolio unless we have specific informationabout the value of an investment to determine otherwise. From time to time wemay accept an appraisal of a business in which we hold securities. Theseappraisals are expensive and occur infrequently but provide a third-partyvaluation opinion that may differ in results, techniques and scopes used tovalue our investments.  When thesespecific third-party appraisals are engaged or accepted, we would use suchappraisals to value the investment we have in that business if we determinedthat the appraisals were the best estimate of fair value.

 

The policy, which issummarized below, applies to the following categories of securities:

 

·                  Publicly-traded securities;

·                  Securities for which a limited market exists; and

·                  Securities for which no market exists.

 

*Valuation Methods:*

 

**Publicly-traded securities:** We determine the value ofpublicly-traded securities based on the closing price for the security on theexchange or securities market on which it is listed and primarily traded on thevaluation date. To the extent that we own restricted securities that are notfreely tradable, but for which a public market otherwise exists, we will usethe market value of that security adjusted for any decrease in value resultingfrom the restrictive feature. We use Level 1 inputs for these types ofsecurities. We did not value any of our investments using Level 1 inputs as of June 30,2008.

 

**Securities for which a limitedmarket exists:**Wevalue securities that are not traded on an established secondary securitiesmarket, but for which a limited market for the security exists, such as certainparticipations in, or assignments of, syndicated loans, at the quoted bidprice.  Firm bid prices are requested;however, if a firm bid price is unavailable, we base the value of the securityupon the indicative bid price offered by the respective originating syndicationagent’s trading desk, or secondary desk, on or near the valuation date.  To the extent that we use the indicative bidprice as a basis for valuing the security, our Adviser may take further stepsto consider additional information to validate that price in accordance withthe policy. We use Level 2 inputs for these types of securities.

 

**Securities for which no marketexists:** Thevaluation methodology for securities for which no market exists falls intothree categories: (1) portfolio investments comprised solely of debtsecurities; (2) portfolio investments in controlled companies comprised ofa bundle of securities, which can include debt and equity securities; and (3) portfolioinvestments in non-controlled companies comprised of a bundle of securities,which can include debt and equity securities. We use Level 3 inputs for these types of securities.

 

(1)          **Portfolio investments comprisedsolely of debt securities:** Debt securities that are not publicly traded on anestablished securities market, or for which a limited market does not exist (“Non-PublicDebt Securities”), and that are issued by portfolio companies where we have noequity, or equity-like securities, are fair valued in accordance with the termsof the policy, which utilizes opinions of value submitted to us by Standard &Poor’s Securities Evaluations, Inc. (“SPSE”).

 

In the case of Non-PublicDebt Securities, we have engaged SPSE to submit opinions of value for our debtsecurities that are issued by portfolio companies in which we own no equity, orequity-like securities.  SPSE’s opinionsof value are based on the valuations prepared by our portfolio management teamas described below.  We request that SPSEalso evaluate and assign values to success fees (conditional interest includedin some loan securities) when we determine that the probability of receiving asuccess fee on a given loan is above 6-8%, a threshold of significance. SPSEwill only evaluate the debt portion of our investments for which wespecifically request evaluation, and may decline to make requested evaluationsfor any reason at its sole discretion. Upon completing our collection of datawith respect to the investments (which may include the information describedbelow under “Credit Information,” the risk ratings of the loans described belowunder “Loan Grading and Risk Rating” and the factors described hereunder), thisvaluation data is forwarded to SPSE for review and analysis. SPSE makes itsindependent assessment of the data that we have assembled and assesses itsindependent data to form an opinion as to what they consider to be the marketvalues for the securities. With regard to its work, SPSE has issued thefollowing paragraph:

 

SPSE provides evaluatedprice opinions which are reflective of what SPSE believes the bid side of themarket would be for each loan after careful review and analysis of descriptive,market and credit information. Each price reflects SPSE’s best judgment basedupon careful examination of a variety of market factors. Because of fluctuationin the market and in other factors beyond its control, SPSE cannot guaranteethese evaluations. The evaluations reflect the market prices, or estimatesthereof, on the date specified. The prices are based on comparable marketprices for similar securities. Market information 

 

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has been obtained fromreputable secondary market sources. Although these sources are consideredreliable, SPSE cannot guarantee their accuracy.

 

SPSE opinions of value ofour debt securities that are issued by portfolio companies where we have noequity, or equity-like securities are submitted to our Board of Directors alongwith our Adviser’s supplemental assessment and recommendation regardingvaluation of each of these investments. Our Adviser generally accepts theopinion of value given by SPSE, however, in certain limited circumstances, suchas when our Adviser may learn new information regarding an investment betweenthe time of submission to SPSE and the date of the Board assessment, ourAdviser’s conclusions as to value may differ from the opinion of valuedelivered by SPSE. Our Board of Directors then reviews whether our Adviser hasfollowed its established procedures for determinations of fair value, and votesto accept or reject the recommended valuation of our investment portfolio. OurAdviser and our management recommended, and the Board of Directors voted toaccept, the opinions of value delivered by SPSE on the loans in our portfolioas denoted on the Schedule of Investments as of June 30, 2008 included inour accompanying consolidated financial statements.

 

Because there is a delaybetween when we close an investment and when the investment can be evaluated bySPSE, new loans are not valued immediately by SPSE; rather, management makesits own determination about the value of these investments in accordance withour valuation policy using the methods described herein.

 

(2)          **Portfolio investments incontrolled companies comprised of a bundle of investments, which can includedebt and equity securities:** For our Non-Public Debt Securities and equity orequity-like securities (e.g. preferred equity, equity, or other equity-likesecurities) that are purchased together as part of a package, where the we havecontrol or could gain control through an option or warrant security, both thedebt and equity securities of the portfolio investment would exit in themergers and acquisition market as the principal market, generally through asale or recapitalization of the portfolio company. Further, we believe that thein-use premise of value (as defined in SFAS 157), which assumes the debtand equity securities are sold together, is appropriate as this would providemaximum proceeds to the seller. As a result, we will continue to use theenterprise value methodology utilizing a liquidity waterfall approach todetermine the fair value of these investments under SFAS 157 if we havethe ability to initiate a sale of a portfolio company as of the measurementdate. Under this approach, we first calculate the total enterprise value of theissuer by incorporating some or all of the following factors:

 

·                  the issuer’s ability to make payments;

·                  the earnings of the issuer;

·                  recent sales to third parties of similar securities;

·                  the comparison to publicly traded securities; and

·                  discounted cash flow or other pertinent factors.

 

In gathering the sales tothird parties of similar securities, we may reference industry statistics anduse outside experts. Once we have estimated the total enterprise value of theissuer, we subtract the value of all the debt securities of the issuer; whichare valued at the contractual principal balance. Fair values of these debtsecurities are discounted for any shortfall of total enterprise value over thetotal debt outstanding for the issuer. Once the values for all outstandingsenior securities (which include the debt securities) have been subtracted fromthe total enterprise value of the issuer, the remaining amount, if any, is usedto determine the value of the issuer’s equity or equity like securities.

 

(3)     **Portfolio investments innon-controlled companies comprised of a bundle of investments, which caninclude debt and equity securities:** We value Non-Public Debt Securities that arepurchased together with equity and equity-like securities from the sameportfolio company, or issuer, for which the we do not control or cannot gaincontrol as of the measurement date, using a hypothetical secondary market asthe Company’s principal market.  Inaccordance with SFAS 157, the Company determines its fair value of these debtsecurities of non-control investments assuming the sale of an individual debtsecurity using the in-exchange premise of value (as defined in SFAS 157). Assuch, the Company estimates the fair value of the debt component usingestimates of value provided by SPSE and its own assumptions in the absence ofmarket observable data, including synthetic credit ratings, estimated remaininglife, current market yield and interest rate spreads of similar securities asof the measurement date. For equity and equity-like securities of investmentsfor which the Company does not control or cannot gain control as of themeasurement date, the Company values the equity portion based on the totalenterprise value of the issuer, which is calculated using a liquidity waterfallapproach.

 

Due to the uncertaintyinherent in the valuation process, such estimates of fair value may differsignificantly from the values that would have been obtained had a ready marketfor the securities existed, and the differences could be material.Additionally, changes in the market environment and other events that may occurover the life of the investments may cause the gains or losses ultimatelyrealized on these investments to be different than the valuations currentlyassigned. There is no single standard for determining fair value in good faith,as fair value depends upon circumstances of each individual case. In general,fair value is the 

 

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amount that we mightreasonably expect to receive upon the current sale of the security in anarms-length transaction in the security’s principal market.

 

*ValuationConsiderations: *From time to time, depending on certaincircumstances, the Adviser may use the following valuation considerations,including but not limited to:

 

·                  the risk rating of the security (see “Loan Gradingand Risk Rating”);

·                  the cost basis and the type of the security;

·                  the nature and realizable value of the collateral;

·                  the portfolio company’s ability to make payments anddiscounted cash flow;

·                  reports from portfolio company senior management andboard meetings;

·                  reported values of similar securities of theportfolio company or comparable companies;

·                  changes in the economy affecting the portfolio company;and

·                  other third-party appraisals of the portfoliocompanies.

 

*CreditInformation:*  Our Adviser monitors a wide variety of keycredit statistics that provide information regarding our portfolio companies tohelp us assess credit quality and portfolio performance. We and our Adviserparticipate in the periodic board meetings of our portfolio companies in whichwe hold control and affiliate investments and also require them to provideannual audited and monthly unaudited financial statements. Using thesestatements and board discussions, our Adviser calculates and evaluates thecredit statistics.

 

*LoanGrading and Risk Rating:*  As part of our valuationprocedures above, we risk rate all of our investments in debt securities. Forsyndicated loans that have been rated by a NRSRO (as defined in Rule 2a-7under the 1940 Act), we use the NRSRO’s risk rating for such security. For allother debt securities, we use a proprietary risk rating system. Our risk ratingsystem uses a scale of 0 to 10, with 10 being the lowest probability ofdefault. This system is used to estimate the probability of default on debtsecurities and the probability of loss if there is a default. These types ofsystems are referred to as risk rating systems and are used by banks and ratingagencies. The risk rating system covers both qualitative and quantitativeaspects of the business and the securities we hold.

 

For the debt securitiesfor which we do not use a third-party NRSRO risk rating, we seek to have ourrisk rating system mirror the risk rating systems of major risk ratingorganizations, such as those provided by a NRSRO. While we seek to mirror theNRSRO systems, we cannot provide any assurance that our risk rating system willprovide the same risk rating as a NRSRO for these securities. The followingchart is an estimate of the relationship of our risk rating system to thedesignations used by two NRSROs as they risk rate debt securities of majorcompanies. Because our system rates debt securities of companies that areunrated by any NRSRO, there can be no assurance that the correlation to theNRSRO set out below is accurate. We believe our risk rating would besignificantly higher than a typical NRSRO risk rating because the risk ratingof the typical NRSRO is designed for larger businesses. However, our riskrating has been designed to risk rate the securities of smaller businesses thatare not rated by a typical NRSRO. Therefore, when we use our risk rating onlarger business securities, the risk rating is higher than a typical NRSROrating. The primary difference between our risk rating and the rating of atypical NRSRO is that our risk rating uses more quantitative determinants andincludes qualitative determinants that we believe are not used in the NRSROrating. It is our understanding that most debt securities of medium-sizedcompanies do not exceed the grade of BBB on a NRSRO scale, so there would be nodebt securities in the middle market that would meet the definition of AAA, AAor A. Therefore, our scale begins with the designation 10 as the best riskrating which may be equivalent to a BBB from a NRSRO, however, no assurance canbe given that a 10 on our scale is equal to a BBB on a NRSRO scale.

 
| **Company’s  System** | ** ** | **First  NRSRO** | ** ** | **Second  NRSRO** | ** ** | **Gladstone Capital’s Description(a)**                                                           |
|----------------------------|------------|------------------|------------|-------------------|------------|-------------------------------------------------------------------------------------------------------|
| **>10**                 |       | Baa2             |       | BBB               |       | Probability of Default  (PD) during the next ten years is 4% and the Expected Loss (EL) is 1% or less |
| **10**                     |       | Baa3             |       | BBB-              |       | PD is 5% and the EL is  1% to 2%                                                                      |
| **9**                      |       | Ba1              |       | BB+               |       | PD is 10% and the EL is  2% to 3%                                                                     |
| **8**                      |       | Ba2              |       | BB                |       | PD is 16% and the EL is  3% to 4%                                                                     |
| **7**                      |       | Ba3              |       | BB-               |       | PD is 17.8% and the EL  is 4% to 5%                                                                   |
| **6**                      |       | B1               |       | B+                |       | PD is 22% and the EL is  5% to 6.5%                                                                   |
| **5**                      |       | B2               |       | B                 |       | PD is 25% and the EL is  6.5% to 8%                                                                   |
| **4**                      |       | B3               |       | B-                |       | PD is 27% and the EL is  8% to 10%                                                                    |
| **3**                      |       | Caa1             |       | CCC+              |       | PD is 30% and the EL is  10% to 13.3%                                                                 |
| **2**                      |       | Caa2             |       | CCC               |       | PD is 35% and the EL is  13.3% to 16.7%                                                               |
| **1**                      |       | Caa3             |       | CC                |       | PD is 65% and the EL is  16.7% to 20%                                                                 |
| **0**                      |       | N/a              |       | D                 |       | PD is 85% or there is a  payment of default and the EL is greater than 20%                            |

 

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| (a) | * * | *The  default rates set forth are for a ten year term debt security. If a debt  security is less than ten years, then the PD is adjusted to a lower  percentage for the shorter period, which may move the security higher on our  risk rating scale.* |
|-----|----------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

The above scale gives anindication of the probability of default and the magnitude of the loss if thereis a default. Our policy is to stop accruing interest on an investment if we determinethat interest is no longer collectible. At June 30, 2008 and March 30,2008, two investments were on non-accrual for an aggregate, at cost, ofapproximately $9.8 million and $9.2 million, at cost, respectively.Additionally, we do not risk rate our equity securities.

 

The following table liststhe risk ratings for all non-syndicated loans in our portfolio at June 30,2008 and March 31, 2008, representing approximately 53% and 51%,respectively, of all loans in our portfolio at the end of each period:

 
| **Rating**       | ** ** | **June 30, 2008** | ** ** | **March 31, 2008** | ** ** |
|------------------|------------|------------------------|------------|-------------------------|------------|
| Highest          |       | 8.0                    |       | 7.0                     |       |
| Average          |       | 5.5                    |       | 5.5                     |       |
| Weighted Average |       | 5.2                    |       | 5.1                     |       |
| Lowest           |       | 2.0                    |       | 1.0                     |       |

 

                The following table lists the risk ratings forsyndicated loans in our portfolio that were not rated by a NRSRO at June 30,2008 and March 31, 2008, representing approximately 14% and 13%,respectively, of all loans in our portfolio at the end of each period:

 
| **Rating**       | ** ** | **June 30, 2008** | ** ** | **March 31, 2008** | ** ** |
|------------------|------------|------------------------|------------|-------------------------|------------|
| Highest          |       | 9.0                    |       | 9.0                     |       |
| Average          |       | 7.2                    |       | 7.1                     |       |
| Weighted Average |       | 7.4                    |       | 7.3                     |       |
| Lowest           |       | 1.0                    |       | 1.0                     |       |

 

For syndicated loans thatare currently rated by a NRSRO, we risk rate such loans in accordance with therisk rating systems of major risk rating organizations, such as those providedby a NRSRO. The following table lists the risk ratings for all syndicated loansin our portfolio that were rated by a NRSRO at June 30, 2008 and March 31,2008, representing approximately 40% and 36%, respectively, of all loans in ourportfolio at the end of each period:

 
| **Rating**       | ** ** | **June 30, 2008** | ** ** | **March 31, 2008** | ** ** |
|------------------|------------|------------------------|------------|-------------------------|------------|
| Highest          |       | BB/Ba2                 |       | BB/Ba2                  |       |
| Average          |       | B+/B1                  |       | B+/B1                   |       |
| Weighted Average |       | B/B2                   |       | B+/B1                   |       |
| Lowest           |       | CC/B2                  |       | CCC+/B2                 |       |

 

**TaxStatus**

 

We intend to continue toqualify for treatment as a RIC under Subtitle A, Chapter 1 ofSubchapter M of the Internal Revenue Code of 1986, as amended (the “Code”).As a RIC, we are not subject to federal income tax on the portion of ourtaxable income and gains distributed to stockholders. To qualify as a RIC, weare required to distribute to stockholders at least 90% of investment companytaxable income, as defined by the Code. It is our policy to pay out as adividend up to 100% of those amounts.

 

In an effort to avoidcertain excise taxes imposed on RICs, we currently intend to distribute duringeach calendar year, an amount at least equal the sum of (1) 98% of ourordinary income for the calendar year, (2) 98% of our capital gains inexcess of capital losses for the one-year period ending on October 31 ofthe calendar year, and (3) any ordinary income and net capital gains forpreceding years that were not distributed during such years.

 

**Revenue Recognition**

 

*Interest and Dividend IncomeRecognition*

 

Interest income isrecorded on the accrual basis to the extent that such amounts are expected tobe collected. We will stop accruing interest on investments when it isdetermined that interest is no longer collectible.  At June 30, 2008, oneNon-Control/Non-Affiliate investment was on non-accrual with a cost basis ofapproximately $2.9 million or 1.0% of the cost basis of all loans in ourportfolio. Also at June 30, 2008, one Control investment was onnon-accrual with a cost basis of approximately $6.9 million or 2.3% of thecost basis of all loans in our portfolio. At March 31, 2008, one Non-Control/Non-Affiliate investment was onnon-accrual with a cost basis of approximately $2.9 million or 0.9% of thecost basis of all loans in our portfolio. Also at March 31, 2008, oneControl investment 

 

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was on non-accrual with acost basis of approximately $6.0 million or 1.9% of the cost basis of allloans in our portfolio.  Conditionalinterest, or a success fee, is recorded when earned upon full repayment of aloan investment. To date we have not recorded any conditional interest.Dividend income on preferred equity securities is accrued to the extent thatsuch amounts are expected to be collected and that we have the option tocollect such amounts in cash. To date, we have not accrued any dividend income.

 

*Services Provided to PortfolioCompanies*

 

As a business developmentcompany under the 1940 Act, we are required to make available significantmanagerial assistance to our portfolio companies. We provide these servicesthrough our Adviser, who provides these services on our behalf through itsofficers who are also our officers. Currently, neither we nor our Advisercharges a fee for managerial assistance, however, if our Adviser does receivefees for such managerial assistance, our Adviser will credit the managerialassistance fees to the base management fee due from us to our Adviser.

 

Our Adviser receives feesfor the other services it provides to our portfolio companies. These other feesare typically non-recurring, are recognized as revenue when earned and aregenerally paid directly to our Adviser by the borrower or potential borrowerupon the closing of the investment. The services our Adviser provides to ourportfolio companies vary by investment, but generally include a broad array ofservices such as investment banking services, arranging bank and equityfinancing, structuring financing from multiple lenders and investors, reviewingexisting credit facilities, restructuring existing investments, raising equityand debt capital, turnaround management, merger and acquisition services andrecruiting new management personnel. When our Adviser receives fees for theseservices, 50% of certain of those fees are voluntarily credited against thebase management fee that we pay to our Adviser. Any services of this naturesubsequent to the closing would typically generate a separate fee at the timeof completion.

 

Our Adviser also receivesfees for monitoring and reviewing portfolio company investments. These fees arerecurring and are generally paid annually or quarterly in advance to ourAdviser throughout the life of the investment. Fees of this nature are recordedas revenue by our Adviser when earned and are not credited against the basemanagement fee.

 

We may receive fees forthe origination and closing services we provide to portfolio companies throughour Adviser. These fees are paid directly to us and are recognized as revenueupon closing of the originated investment and are reported as fee income in theconsolidated statements of operations.

 

**Recent Accounting Pronouncements**

 

Refer to footnote 2 inthe accompanying condensed consolidated financial statements for a summary ofall recently issued accounting pronouncements.

 

**RESULTS OF OPERATIONS (dollaramounts in thousands)**

 

*Comparison of the three months ended June 30, 2008 tothe three months ended June 30, 2007*

 

**Investment Income**

 

Total investment incomefor the three months ended June 30, 2008 decreased $262 to $6,038 comparedto investment income for the three months ended June 30, 2007 of$6,300.  The annualized weighted averageyield on our portfolio of investments, excluding cash and cash equivalents, was7.79% for the three months ended June 30, 2008, compared to 9.10% for thethree months ended June 30, 2007. The decrease in the annualized weighted average yield primarily resultedfrom a reduction in the average LIBOR, which was approximately 2.7% for thethree months ended June 30, 2008, compared to 5.3% in the prior yearperiod, which was partially offset by the increase in the overall size of theinvestment portfolio compared to the prior year period.

 

Interest income fromNon-Control/Non-Affiliate investments decreased $925 to $2,324 for the threemonths ended June 30, 2008 compared to $3,249 for the three months ended June 30,2007.  This decrease was the result of anoverall decrease in the number of Non-Control/Non-Affiliate investments held atJune 30, 2008 compared to the prior year period, primarily due to the saleof nine syndicated loans during the quarter ended June 30, 2008.

 

Interest income fromControl investments increased $4 to $2,569 for the three months ended June 30,2008 compared to $2,565 for the three months ended June 30, 2007.  Despite the addition of one new Controlinvestment during the quarter ended June 30, 2008, the non-accrual statusof another Control investment offset the interest income from the additionalControl investment.

 

Interest income fromAffiliate investments increased $685 to $1,111 for the three months ended June 30,2008 compared to $426 for the three months ended June 30, 2007.  The increase was a result of one newAffiliate investment made during the three months ended 

 

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June 30, 2008compared to the prior year period and additional Affiliate investments held at June 30,2008 compared to the prior year period.

 

Interest income from cashand equivalents decreased $30 to $24 for the three months ended June 30,2008 compared to $54 for the three months ended June 30, 2007.  This decrease is the result of having lesscash on hand in our interest bearing accounts and the fact that we used themajority of the proceeds from sales and repayments on outstanding loans duringthe quarter to pay down our line of credit.

 

Other income increased $4to $10 for the three months ended June 30, 2008 compared to $6 for thethree months ended June 30, 2007. Other income is comprised of loan amendment fees that are amortized overthe remaining lives of the respective loans and other miscellaneous incomeamounts.

 

**Operating Expenses**

 

Total operating expenses,excluding any voluntary and irrevocable credits to the base management fee, forthe three months ended June 30, 2008 decreased $235 to $3,561 compared to$3,796 for the three months ended June 30, 2007.

 

Loan servicing fees forthe three months ended June 30, 2008 increased $60 to $1,254 as comparedto $1,194 for the three months ended June 30, 2007.  These fees were incurred in connection with aloan servicing agreement between Business Investment and our Adviser, which isbased on the size of the portfolio. These fees were reduced against the amount of the base management feedue to our Adviser. The increase in loan servicing fees is the result of anincrease in the portfolio of loans being serviced by our Adviser as compared tothe three months ended June 30, 2007.

 

For the three monthsended June 30, 2008, we incurred base management fees of $426 afterreductions for loan servicing fees of $1,254, for a gross base management fee(including loan servicing fees) of $1,680. For the three months ended June 30, 2007, we incurred basemanagement fees of $360 after reductions for loan servicing fees of $1,194 fora gross base management fee (including loan servicing fees) of $1,554.  The increase in our gross base management feeof $126 results from the growth of our portfolio from the prior year period.

 

We also receivedaggregate credits against our base management fee of $574 which were comprisedof $424 resulting from reduced fees on syndicated loan participations and $150resulting from investment banking fees paid to our Adviser during the threemonths ended June 30, 2008.  For thethree months ended June 30, 2007, we received credits against our basemanagement fee of $384 which was comprised of $295 resulting from reduced feeson syndicated loan participations and $89 resulting from investment bankingfees paid to our Adviser during the period.

 

Administration feesincreased $27 to $235 for the three months ended June 30, 2008 compared to$208 for the three months ended June 30, 2007.  This fee consists of our allocable portion ofour Administrator’s rent and other overhead expenses, and our allocable portionof the salaries and benefits of our chief financial officer, chief complianceofficer, treasurer, and their respective staffs.  Our allocable portion of expenses is derivedby multiplying the percentage of our average assets (the assets at thebeginning and ending of each quarter) in comparison to the average assets ofall companies managed by our Adviser that are under similar administrationagreements with our Administrator. The increase was mainly attributable to thepersonnel growth of our Administrator as well as an increase in the generaloverhead expenses incurred by our Administrator on our behalf.

 

Interest expensedecreased $312 to $1,102 for the three months ended June 30, 2008 comparedto $1,414 for the three months ended June 30, 2007.  The decrease was directly attributable to thedecrease of borrowings under our credit facility during the period.  The reduced borrowings were primarilyachieved by using the net proceeds of the Rights Offering towards paying downthe credit facility.  The decrease ininterest expense was also due to the use of the majority of the proceeds fromsales and repayments on outstanding loans during the quarter ended June 30,2008 to pay down our credit facility.

 

Deferred finance costamortization decreased $71 to $139 for the three months ended June 30,2008 compared to $210 for the three months ended June 30, 2007.  The decrease is attributable to realizing thefull amortization of costs incurred in connection with the credit facilityagreement.  Fewer costs were incurredduring the renewal of our credit facility during our fiscal year 2008 versusfiscal year 2007, the initial execution of our credit facility and thus, lessamortized during the three month ended June 30, 2008 as compared to thethree months ended June 30, 2007.

 

Professional feesdecreased $25 to $131 for the three months ended June 30, 2008 as comparedto $156 for the three months ended June 30, 2007.  Professional fees primarily consist of legalfees and audit and accounting fees.  Thedecrease is mainly related to the timing of our general audit accruals and thereduction in our general legal expenses.

 

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Stockholder related costsincreased $62 to $100 for the three months ended June 30, 2008 compared to$38 for the three months ended June 30, 2007.  Stockholder related costs consist of theamortization of annual Nasdaq listing fees, transfer agent fees, annual reportprinting and distribution costs, costs associated with SEC filings and pressrelease costs.  The increase wasprimarily attributable to the increase in proxy solicitation and annual report printingfees.

 

Insurance expense decreased$10 to $53 for the three months ended June 30, 2008 compared to $63 forthe three months ended June 30, 2007. Insurance expense consists of the amortization of the directors andofficers insurance policy and professional liability policy premiums. Thedecrease is due to a reduction in the premiums for directors and officersinsurance for the current policy period.

 

Directors’ fees decreased$8 to $47 for the three months ended June 30, 2008 compared to $55 for thethree months ended June 30, 2007. Directors’ fees consist of the amortization of the directors’ annualstipend and individual meeting fees.

 

Taxes and licensesexpenses were flat for the three months ended June 30, 2008 at $43compared to $42 for the three months ended June 30, 2007.

 

General andadministrative expenses decreased $25 to $31 for three months ended June 30,2008 compared to $56 for the three months ended June 30, 2007.  General and administrative expenses consistprimarily of direct expenses such as travel related specifically to ourportfolio companies, loan evaluation services for our portfolio companies andbackup servicer expenses.  The decreaseis primarily due to the decrease in travel, loan evaluation services and backupservicer expenses as compared to the prior year period.

 

**Realized and Unrealized (Loss) Gainon Investments**

 

For the three monthsended June 30, 2008, we recognized a net loss on the sale of nine loanparticipations in the aggregate amount of $1.7 million and we recorded netunrealized depreciation of investments in the aggregate amount of $5.8million.  At June 30, 2007, werecognized a net loss on the sale of four loan participations aggregating $48and we recorded net unrealized appreciation of investments in the aggregateamount of $5.4 million.  The increase inrealized losses is attributable to liquidity needed to invest in potentiallyhigher yielding investments, which caused us to sell certain loanparticipations.

 

At June 30, 2008,the fair value of our investment portfolio was less than the cost basis of ourportfolio by $21.0 million, representing net unrealized depreciation ofapproximately $5.8 million for the quarter. At June 30, 2007, the fairvalue of our investment portfolio was greater than the cost basis of ourportfolio by $1.8 million representing net unrealized appreciation of $5.4million for the quarter.  The unrealizeddepreciation during the quarter ended June 30, 2008 is mainly attributableto the decrease in fair value on our portfolio, most notably in the followinginvestments:  Quench, Noble Logistics,and RPG Holdings.  We believe that ouraggregate investment portfolio was valued at a depreciated value due primarilyto the general instability of the loan markets, offset by the use of a modifiedvaluation procedure for our non-control/non-affiliate investments in which werecognized net unrealized appreciation of $4.5 million.  Previously, we valued the debt portion ofbundled debt and equity investments in non-controlled companies in accordancewith board approved valuation policies, which valued the debt securities at thecontractual principal balance. Consistent with the Board of Director’s ongoing review and analysis ofappropriate valuation policies, and in conjunction with our adoption of SFAS157 on April 1, 2008, the Board of Directors modified our valuationprocedures so that the debt portion of bundled investments in non-controlledcompanies is valued by SPSE, which change had a positive impact on netunrealized appreciation in the amount of $11.0 million.

 

Although our investmentportfolio has depreciated, our entire portfolio was fair valued at 94% of costas of June 30, 2008.  The unrealizeddepreciation of our investments does not have an impact on our current abilityto pay distributions to stockholders.

 

**Derivative**

 

For the three monthsended June 30, 2008, the fair market value of our interest rate capagreements purchased in October 2007 and February 2008 remained flat.

 

**Net (Decrease) Increase in Net Assetsfrom Operations**

 

For the three monthsended June 30, 2008, we realized a net decrease in net assets resultingfrom operations of $4.5 million as a result of the factors discussed above. Ournet (decrease) increase in net assets from operations per basic and dilutedweighted average common share for the quarters ended June 30, 2008 and2007 were ($0.22) and $0.50, respectively. For the three months ended June 30, 2007, we realized anet increase in net assets resulting from operations of $8.2 million or $0.50per basic and diluted weighted average common share. We will continue to incur base managementfees which are likely to increase as our investment portfolio grows, and we maybegin to incur incentive fees.  Ouradministrative expenses payable to our Administrator are also likely to grow 

 

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during future periods asour average assets grow in comparison to our average assets at June 30,2008 and as the expenses incurred by our Administrator to support ouroperations increase.

 

**LIQUIDITY AND CAPITAL RESOURCES (dollar amounts inthousands, unless otherwise indicated)**

 

**Operating Activities**

 

Netcash provided by operating activities for the three months ended June 30,2008 was approximately $13.0 million and consisted primarily of the sale ofexisting portfolio investments, net unrealized depreciation of our investments,and principal repayments, offset by the purchase of one new control investment.  Net cash used inoperating activities for the three months ended June 30, 2007 wasapproximately $33.9 million and consisted primarily of the purchase of newinvestments, offset by quarterly income, principal loan repayments and adecrease in the amount due from our custodian.

 

Asummary of our investment activity for the three months ended June 30,2008 and June 30, 2007 is as follows:

 
| ** **        | ** ** | ** **          | ** ** | ** **               | ** ** | ** **           | ** ** | **Loss**        | ** ** |
|-------------------|------------|---------------------|------------|--------------------------|------------|----------------------|------------|-----------------|------------|
| **Quarter Ended** | ** ** | **New Investments** | ** ** | **Principal Repayments** | ** ** | **Investments Sold** | ** ** | **on Disposal** | ** ** |
| June 30, 2008     |       | $                   | 8,978      |                     | $          | 3,493                |       | $               | 13,246     |   | $ | (1,718 | ) |
|                   |            |                     |            |                          |            |                      |            |                 |            |  |  |  |  |

 
| ** **        | ** ** | ** **          | ** ** | ** **               | ** ** | ** **           | ** ** | **Loss**        | ** ** |
|-------------------|------------|---------------------|------------|--------------------------|------------|----------------------|------------|-----------------|------------|
| **Quarter Ended** | ** ** | **New Investments** | ** ** | **Principal Repayments** | ** ** | **Investments Sold** | ** ** | **on Disposal** | ** ** |
| June 30, 2007     |       | $                   | 72,601     |                     | $          | 21,358               |       | $               | 5,809      |   | $ | (48 | ) |
|                   |            |                     |            |                          |            |                      |            |                 |            |  |  |  |  |

 

Thefollowing table summarizes the contractual principal repayment and maturity ofour investment portfolio by fiscal year, assuming no voluntary prepayments:

 
| ** **                                     | ** ** | ** **                              | ** ** | **Amount** |
|------------------------------------------------|------------|-----------------------------------------|------------|------------|
| For the remaining nine months ending March 31: |       | 2009                                    |       | $          | 15,782 |
| For the fiscal year ending March 31:           |       | 2010                                    |       | 15,103     |
|                                           |       | 2011                                    |       | 49,167     |
|                                           |       | 2012                                    |       | 45,138     |
|                                           |       | 2013                                    |       | 67,057     |
|                                           |       | Thereafter                              |       | 111,682    |
|                                           | ** ** | **Total contractual repayments**        | ** ** | **$**      | **303,929** |
|                                           |       | Investments in equity securities        |       | 37,302     |
|                                           |       | Unamortized premiums on debt securities |       | 86         |
|                                           | ** ** | **Total**                               | ** ** | **$**      | **341,317** |

 

**Financing Activities**

 

During the three monthsended June 30, 2008, net cash provided by financing activities wasapproximately $20.2 million, which primarily consisted of the Rights Offering(defined below) for net proceeds of $40.7 million, partially offset by netrepayments under our credit facility of $15.6 million. During thethree months ended June 30, 2007, we recorded net borrowings under ourcredit facility of $34.4 million which were used to purchase new investments.

 

*Issuanceof Equity*

 

During fiscal year 2008,we filed a registration statement on Form N-2 (File No. 333-147185)(the “Registration Statement”) with the SEC, which permits us to issue, throughone or more transactions, up to an aggregate of $300 million insecurities, consisting of common stock, preferred stock, subscription rightsand/or debt securities of which to date we have issued $41.3 million in commonstock, which leaves a remaining capacity of $258.7 million. To date, we haveincurred approximately $638 of costs in connection with the RegistrationStatement.

 

We anticipate issuingequity securities to obtain additional capital in the future. However, wecannot determine the terms of any future equity issuances or whether we will beable to issue equity on terms favorable to us, or at all. Additionally, whenour common stock is trading below net asset value, we will have regulatoryconstraints under the 1940 Act on our ability to obtain additional capital inthis 

 

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manner. At June 30,2008, our stock was trading at $6.43, representing a 40% discount to our netasset value of $10.77 per share. Generally, the 1940 Act provides that we maynot issue stock for a price below net asset value per share, without firstobtaining the approval of our stockholders and our independent directors.

 

We raised additionalcapital within these regulatory constraints in April 2008 through anoffering of transferable subscription rights to purchase additional shares ofcommon stock (the “Rights Offering”). Pursuant to the Rights Offering completed during April 2008, wesold 5,520,033 shares of our common stock at a subscription price of $7.48,which represented a purchase price equal to 93% of the weighted average closingprice of our stock in the last five trading days of the subscription period.Net proceeds of the offering, after offering expenses borne by us, wereapproximately $40.7 million and were used to repay outstanding borrowingsunder our line of credit. Should our common stock continue to trade below itsnet asset value per share, we may seek to conduct similar offerings in thefuture in order to raise additional capital, although there can be no assurancethat we will be successful in our efforts to raise capital in this, or anyother, manner.

 

**Dividends**

 

In order to qualify as aRIC, we are required, under Subchapter M of the Code, to distribute at least90% of our ordinary income and short-term capital gains to our stockholders onan annual basis. In accordance with these requirements, we declared and paidmonthly cash dividends of $0.08 per common share for April, May and June 2008.In July 2008, our Board of Directors declared a monthly dividend of $0.08per common share for each of July, August, and September 2008.

 

For the three monthsended June 30, 2008, our dividends payment of approximately $4.9 millionexceeded our net investment income (including net realized losses) byapproximately $1.7 million. We declared these dividends based on our estimatesof net investment income for the fiscal year. Our investment pace continues tobe slower than expected in our third year of operations and, consequently, ournet investment income was lower than our original estimates.

 

**Revolving Credit Facility**

 

On October 19, 2006,through our wholly-owned subsidiary, Business Investment, we initially obtaineda $100 million revolving credit facility (the “Credit Facility”) and weexecuted a purchase and sale agreement pursuant to which we agreed to sellcertain loans to Business Investment in consideration for a membership interesttherein. Simultaneously, Business Investment executed a credit agreement (the “CreditAgreement”) with Deutsche Bank AG, New York Branch (“Deutsche Bank”), asadministrative agent, and others, pursuant to which Business Investment pledgedthe loans purchased from us to secure future advances by certain institutionallenders. Availability under the Credit Facility was originally scheduled toterminate on October 18, 2007, however, on that date we amended andextended the Credit Facility such that availability under the Credit Facilitywill terminate on October 16, 2008, unless extended in the discretion ofthe lenders at the request of Business Investment. Interest is payable monthlyduring the term of the Credit Facility and principal is payable out ofcollections on loans purchased from us during the period following the date ofwhich availability for advances has terminated through maturity. The CreditFacility will mature two years following the date on which availability foradvances has terminated and on such date, all principal, interest and otheramounts owing under the Credit Facility will be due and payable. Interest ratescharged on the advances under the facility are based on the rate paid by thelenders on commercial paper notes issued by such lenders to fund some or all ofthe advances, the London Interbank Offered Rate (“LIBOR”), the Prime Rate orthe Federal Funds Rate, depending on market conditions, and adjustperiodically.

 

On March 29, 2007,we increased our borrowing capacity under the Credit Facility from$100 million to $200 million. As of June 30, 2008, there was anoutstanding principal balance of $129.3 million under the Credit Facilityat an interest rate of approximately 2.7%. Available borrowings are subject tovarious constraints imposed under the Credit Agreement, based on the aggregateloan balance pledged by Business Investment, which varies as loans are addedand repaid, regardless of whether such repayments are early prepayment or aremade as contractually required. At June 30, 2008, the remaining borrowingcapacity available under the Credit Facility was approximately$70.7 million. We intend to negotiate to renew the Credit Facility.  In the event that we are not able to renew orrefinance the Credit Facility once it matures, this could have a materialadverse impact on our liquidity and ability to fund new investments, whichcould force us to liquidate a portion of our investments on terms that may notbe favorable to us.

 

The Credit Facility containscovenants that require Business Investment to maintain its status as a separateentity; prohibit certain significant corporate transactions (such as mergers,consolidations, liquidations or dissolutions); and restrict material changes toour credit and collection policies. The facility also restricts some of theterms and provisions (including interest rates, terms to maturity and paymentsschedules) and limits the borrower and industry concentrations of loans thatare eligible to secure advances. As of June 30, 2008, Business Investmentwas in compliance with all of the facility covenants. We currently intend tosecuritize some or all of the loans held by Business Investment and if we areable to do so, we will use the proceeds from the securitization, if any, to paydown any amounts then outstanding under the revolving credit facility.

 

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The administrative agentalso requires that any interest or principal payments on pledged loans beremitted directly by the borrower into lockbox accounts controlled by DeutscheBank. Once a month, Deutsche Bank remits the collected funds to the Companyafter payment of any interest and expenses provided for under the CreditAgreement.

 

Our Adviser services theloans pledged under the Credit Facility. As a condition to this servicingarrangement, we executed a performance guaranty pursuant to which we guaranteedthat our Adviser would comply fully with all of its obligations under theCredit Facility. The performance guaranty requires us to maintain a minimum networth of $100 million and to maintain “asset coverage” with respect to “seniorsecurities representing indebtedness” of at least 200%, in accordance with Section 18of the 1940 Act. As of June 30, 2008, we were in compliance with ourcovenants under the performance guaranty.

 

**Contractual Obligations andOff-Balance Sheet Arrangements**

 

We did not have anysigned investments to be funded or any off-balance sheet arrangements asdefined in Item 303(a)(4)(ii) of SEC Regulation S-K as of June 30,2008.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK.**

 

We are subject tofinancial market risks, including changes in interest rates.  We estimatethat ultimately approximately 20% of the loans in our portfolio will be made atfixed rates and approximately 80% will be made at variable rates.  Currently, our portfolio consists of thefollowing breakdown in relation to all outstanding debt:

 
|   | 57  | % | variable rates               |   |
|--------|-----|---|------------------------------|--------|
|   | 24  | % | variable rates with a  floor |   |
|   | 19  | % | fixed rates                  |   |
|   | 100 | % | total                        |   |

 

There have been nomaterial changes in the quantitative and qualitative market risk disclosuresfor the three months ended June 30, 2008 from those disclosed in ourAnnual Report on Form 10-K for the fiscal year ended March 31, 2008,as filed with the SEC on May 21, 2008.

 

**ITEM 4. CONTROLS AND PROCEDURES.**

 

Asof June 30, 2008, we, including our Chief Executive Officer and ChiefFinancial Officer, evaluated the effectiveness of the design and operation ofour disclosure controls and procedures. Based on that evaluation, ourmanagement, including the Chief Executive Officer and Chief Financial Officer,concluded that our disclosure controls and procedures were effective in timelyalerting management, including the Chief Executive Officer and Chief FinancialOfficer, of material information about us required to be included in periodicSecurities and Exchange Commission filings. However, in evaluating thedisclosure controls and procedures, management recognized that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, andmanagement necessarily was required to apply its judgment in evaluating thecost-benefit relationship of possible controls and procedures.

 

Therehave been no changes in our internal control over financial reporting thatoccurred during the quarter ended June 30, 2008 that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

 

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**PART II—OTHERINFORMATION**

 

**ITEM 1.  LEGALPROCEEDINGS.**

 

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

 

**ITEM 1A. RISK FACTORS.**

 

Ourbusiness is subject to certain risks and events that, if they occur, couldadversely affect our financial condition and results of operations and thetrading price of our common stock.  In connection with our preparation ofthis quarterly report, management has reviewed and considered these riskfactors and has determined that the following risk factor should be read inconnection with the existing risk factors disclosed in our Annual Report on Form 10-Kfor the fiscal year ended March 31, 2008 as filed with the SEC on May 21,2008.

 

*We may not be able to extend orrenew our credit facility on terms reasonably acceptable to us, if at all.*

 

We are reliant on ourcredit facility, which is scheduled to mature on October 19, 2008, inorder to be able to continue to obtain capital to finance our loans.  In the event that we are not able to renewour facility on terms reasonably acceptable to us, if at all, we may not beable to finance new investments and may be forced to liquidate a portion of ourinvestments at terms that may not be favorable to us.  This could ultimately have a material adverseeffect on our business, financial condition and results of operations.

 

**ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.**

 

                Not applicable.

 

**ITEM 3. DEFAULTS UPON SENIOR SECURITIES.**

 

                Not applicable.

 

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.**

 

                Not applicable

 

**ITEM 5.  OTHERINFORMATION.**

 

                Not applicable

 

**ITEM 6. EXHIBITS**

 

                See the exhibit index.

 

**SIGNATURE**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
| ** ** | **GLADSTONE INVESTMENT CORPORATION** |
|------------|--------------------------------------|
|       |                                 |   |
|       | By:                                  | /s/  Mark Perrigo |
|       |                                 | Mark  Perrigo |
| * *   | * *                             | *Chief Financial Officer* |

 

Date:August 6, 2008

 

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**EXHIBIT INDEX**

 
| **Exhibit** | ** ** | **Description**                                                                                                                                                                                                                                                                                            |
|-------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1         |       | Amended  and Restated Certificate of Incorporation, incorporated by reference to  Exhibit a.2 to Pre-Effective Amendment No. 1 to the Registration  Statement on Form N-2 (File No. 333-123699), filed May 13,  2005.                                                             |
| 3.2         |       | Amended  and Restated Bylaws, incorporated by reference to Exhibit b.2 to  Pre-Effective Amendment No. 3 to the Registration Statement on  Form N-2 (File No. 333-123699), filed June 21, 2005.                                                                                   |
| 3.3         |       | First  Amendment to Amended and Restated Bylaws, incorporated by reference to  Exhibit 99.1 to the Company’s Current Report on Form 8-K (File  No. 814-00704), filed on July 10, 2007.                                                                                            |
| 4.1         |       | Specimen  Stock Certificate, incorporated by reference to Exhibit 99.1 to  Pre-Effective Amendment No. 3 to the Registration Statement on  Form N-2 (File No. 333-123699), filed June 21, 2005.                                                                                   |
| 10.1        |       | Investment Advisory and  Management Agreement between the Company and Gladstone Management  Corporation, dated June 22, 2005 and incorporated by reference to  Exhibit 10.1 to the Company’s Annual Report on Form 10-K, filed on  June 14, 2006 (renewed on June 23, 2008). |
| 10.2        |       | Administration  Agreement between the Company and Gladstone Administration, LLC, dated  June 22, 2005 and incorporated by reference to Exhibit 10.2 to the  Company’s Annual Report on Form 10-K, filed June 14, 2006 (renewed  on June 23, 2008).                           |
| 11          |       | Computation  of Per Share Earnings (included in the notes to the unaudited condensed  consolidated 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.                                                                                                                                                                                                 |

 

Allother exhibits for which provision is made in the applicable regulations of theSecurities and Exchange Commission are not required under the relatedinstruction or are inapplicable and therefore have been omitted.

 

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