Table of 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 SEPTEMBER 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**                                                    | ** ** | **83-0423116**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer Identification No.) |

 

**1521 WESTBRANCH DRIVE, SUITE 200**

**MCLEAN, VIRGINIA 22102**

(Address of principal executive office)

 

**(703) 287-5800**

(Registrant’s telephone number, 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 x No o.

 

Indicate by check mark whether theregistrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “accelerated filer,” and “smaller reporting company” in Rule12 b-2 of the Exchange Act.

 

Large accelerated filer o  Accelerated filer x  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 x .

 

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 October 31,2008 were 22,080,133.

 

 

 

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Table of Contents

 

**GLADSTONE INVESTMENT CORPORATION**

 

**TABLE OF CONTENTS**

 
| PART I.  | FINANCIAL INFORMATION                                                                                                  |   |
|---------------|------------------------------------------------------------------------------------------------------------------------|--------|
|          |                                                                                                                   |   |
| Item 1.       | Financial Statements (Unaudited)                                                                                       |   |
|          |                                                                                                                   |   |
|          | Condensed Consolidated Statements of Assets  and Liabilities as of September 30, 2008 and March 31, 2008     | 3      |
|          | Condensed Consolidated Schedules of  Investments as of September 30, 2008 and March 31, 2008                 | 4      |
|          | Condensed  Consolidated Statements of Operations for the three and six months ended  September 30, 2008 and 2007  | 10     |
|          | Condensed  Consolidated Statements of Changes in Net Assets for the six months ended  September 30, 2008 and 2007 | 11     |
|          | Condensed  Consolidated Statements of Cash Flows for the six months ended  September 30, 2008 and 2007            | 12     |
|          | Financial Highlights for the three and six  months ended September 30, 2008 and 2007                              | 13     |
|          | Notes to  Condensed Consolidated Financial Statements                                                                  | 14     |
|          |                                                                                                                   |   |
| Item 2.       | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                            | 26     |
|          | Overview                                                                                                               | 26     |
|          | Results of  Operations                                                                                                 | 32     |
|          | Liquidity and  Capital Resources                                                                                       | 38     |
|          |                                                                                                                   |   |
| Item 3.       | Quantitative and Qualitative Disclosures  About Market Risk                                                            | 41     |
|          |                                                                                                                   |   |
| Item 4.       | Controls and Procedures                                                                                                | 41     |
|          |                                                                                                                   |   |
| PART II. | OTHER INFORMATION                                                                                                      |   |
|          |                                                                                                                   |   |
| Item 1.       | Legal Proceedings                                                                                                      | 41     |
|          |                                                                                                                   |   |
| Item 1A.      | Risk Factors                                                                                                           | 41     |
|          |                                                                                                                   |   |
| Item 2.       | Unregistered Sales of Equity Securities and  Use of Proceeds                                                           | 42     |
|          |                                                                                                                   |   |
| Item 3.       | Defaults Upon Senior Securities                                                                                        | 42     |
|          |                                                                                                                   |   |
| Item 4.       | Submission of Matters to a Vote of Security  Holders                                                                   | 42     |
|          |                                                                                                                   |   |
| Item 5.       | Other Information                                                                                                      | 43     |
|          |                                                                                                                   |   |
| Item 6.       | Exhibits                                                                                                               | 43     |
|          |                                                                                                                   |   |
| SIGNATURES    | 43                                                                                                                     |

 

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Table of Contents

 

**GLADSTONE INVESTMENT CORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES**

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

**(UNAUDITED)**

 
| ** **                                                                                                                                                                                | ** ** | **September 30,** | ** ** | **March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|--------------------|------------|
| ** **                                                                                                                                                                                | ** ** | **2008**               | ** ** | **2008**           | ** ** |
| **ASSETS**                                                                                                                                                                                |       |                   |       |               |       |
| Non-Control/Non-Affiliate investments (Cost  9/30/08: $139,536; Cost 3/31/08:$166,416)                                                                                                    |       | $                      | 115,133    |               | $          | 142,739 |   |
| Control investments (Cost 9/30/08:  $144,221; Cost 3/31/08: $138,354)                                                                                                                     |       | 157,246                |       | 145,407            |       |
| Affiliate investments (Cost 9/30/08:  $63,846; Cost 3/31/08: $46,035)                                                                                                                     |       | 53,877                 |       | 47,458             |       |
| Total investments at fair value (Cost  9/30/08: $347,603; Cost 3/31/08: $350,805)                                                                                                         |       | 326,256                |       | 335,604            |       |
| Cash and cash equivalents                                                                                                                                                                 |       | 33,900                 |       | 9,360              |       |
| Interest receivable                                                                                                                                                                       |       | 1,353                  |       | 1,662              |       |
| Prepaid insurance                                                                                                                                                                         |       | 204                    |       | 90                 |       |
| Deferred finance costs                                                                                                                                                                    |       | 46                     |       | 324                |       |
| Due from Custodian                                                                                                                                                                        |       | 3,048                  |       | 4,399              |       |
| Due from Adviser (Refer to Note 4)                                                                                                                                                        |       | —                 |       | 89                 |       |
| Other assets                                                                                                                                                                              |       | 456                    |       | 765                |       |
| **TOTAL ASSETS**                                                                                                                                                                          |       | $                      | 365,263    |               | $          | 352,293 |   |
|                                                                                                                                                                                      |       |                   |       |               |       |
| **LIABILITIES**                                                                                                                                                                           |       |                   |       |               |       |
| Fee due to Administrator (Refer to Note 4)                                                                                                                                                |       | $                      | 212        |               | $          | 208 |   |
| Fee due to Adviser (Refer to Note 4)                                                                                                                                                      |       | 27                     |       | —             |       |
| Borrowings under line of credit                                                                                                                                                           |       | 130,965                |       | 144,835            |       |
| Accrued expenses                                                                                                                                                                          |       | 549                    |       | 716                |       |
| Other liabilities                                                                                                                                                                         |       | 102                    |       | 89                 |       |
| **TOTAL LIABILITIES**                                                                                                                                                                     |       | 131,855                |       | 145,848            |       |
| **NET ASSETS**                                                                                                                                                                            |       | $                      | 233,408    |               | $          | 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  September 30, 2008 and March 31, 2008, respectively |       | $                      | 22         |               | $          | 17 |   |
| Capital in excess of par value                                                                                                                                                            |       | 264,814                |       | 224,173            |       |
| Net unrealized depreciation of investment  portfolio                                                                                                                                      |       | (21,346                | )          | (15,201            | )          |
| Net unrealized depreciation of derivative                                                                                                                                                 |       | (53                    | )          | (53                | )          |
| Accumulated net investment loss                                                                                                                                                           |       | (10,029                | )          | (2,491             | )          |
| **TOTAL NET ASSETS**                                                                                                                                                                      |       | $                      | 233,408    |               | $          | 206,445 |   |
| ** **                                                                                                                                                                                |       |                   |       |               |       |   |   |
| **NET ASSETS PER SHARE**                                                                                                                                                                  |       | $                      | 10.57      |               | $          | 12.47 |   |

 

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

 

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Table of Contents

 

**GLADSTONE INVESTMENT CORPORATION**

**CONDENSEDCONSOLIDATED SCHEDULES OF INVESTMENTS**

**AS OF SEPTEMBER 30, 2008**

**(DOLLAR AMOUNTS IN THOUSANDS)**

**(UNAUDITED)**

 
| **Company  (1)**                                 | ** **   | **Industry**                                                      | ** **   | **Investment (2)**                                             | ** **   | **Cost**     | ** **   | **Fair  Value** | ** **   |
|--------------------------------------------------|--------------|-------------------------------------------------------------------|--------------|----------------------------------------------------------------|--------------|--------------|--------------|-----------------|--------------|
|                                             |         |                                                              |         |                                                           |         |         |         |            |         |
| **NON-CONTROL/NON-AFFILIATE  INVESTMENTS**       | ** **   | ** **                                                        | ** **   | ** **                                                     | ** **   | ** **   | ** **   |
| ***Senior  Syndicated Loans:***                  | *** *** | *** ***                                                      | *** *** | *** ***                                                   | *** *** | *** *** | *** *** | *** ***    | *** *** |
| Activant Solutions, Inc.                    |         | Service - enterprise software and services                        |         | Senior Term Debt (4.8%, Due 5/2013) (3)                        |         | $            | 1,673        |            | $            | 1,332 |   |
| Advanced Homecare Holdings, Inc.            |         | Service - home health nursing services                            |         | Senior Term Debt (7.5%, Due 8/2014) (3)                        |         | 2,962        |         | 2,607           |         |
| Aeroflex, Inc.                              |         | Service - provider of highly specialized  electronic equipment    |         | Senior Term Debt (6.1%, Due 8/2014) (3)                        |         | 1,895        |         | 1,782           |         |
| Compsych Investments Corp.                       |         | Service - employee assistance programs                            |         | Senior Term Debt (6.5%, Due 2/2012) (3), (5)                   |         | 3,277        |         | 2,940           |         |
| CRC Health Group, Inc.                      |         | Service - substance abuse treatment                               |         | Senior Term Debt (6.0%, Due 2/2012) (3)                        |         | 7,838        |         | 6,350           |         |
| Critical Homecare Solutions, Inc.           |         | Service - home therapy and respiratory treatment                  |         | Senior Term Debt (6.5%, Due 1/2012) (3), (5)                   |         | 4,447        |         | 4,178           |         |
| Generac Acquisition Corp.                        |         | Manufacturing - standby power products                            |         | Senior Term Debt (5.3%, Due 11/2013) (3), (5)                  |         | 6,868        |         | 4,743           |         |
| Graham Packaging Holdings Company                |         | Manufacturing - plastic containers                                |         | Senior Term Debt (5.1%, Due 10/2011) (3)                       |         | 3,408        |         | 2,999           |         |
| Hargray Communications Group, Inc.          |         | Service - triple-play (cable, phone, internet)  provider          |         | Senior Term Debt (6.0%, Due 6/2014) (3)                        |         | 897          |         | 783             |         |
| HMTBP Acquisition II Corp.                       |         | Service - aboveground storage tanks                               |         | Senior Term Debt (5.8%, Due 5/2014) (3), (5)                   |         | 3,858        |         | 3,549           |         |
| Huish Detergents, Inc.                      |         | Manufacturing - household cleaning products                       |         | Senior Term Debt (5.8%, Due 4/2014) (3)                        |         | 1,976        |         | 1,699           |         |
| Hyland Software, Inc.                       |         | Service - provider of enterprise content  management software     |         | Senior Term Debt (5.6%, Due 7/2013) (3)                        |         | 3,929        |         | 3,564           |         |
| Interstate Fibernet, Inc.                   |         | Service - provider of voice and data  telecommunications services |         | Senior Term Debt (7.8%, Due 7/2013) (3)                        |         | 9,886        |         | 8,635           |         |
| KIK Custom Products, Inc.                   |         | Manufacturing - consumer products                                 |         | Senior Term Debt (5.5%, Due 5/2014) (3)                        |         | 3,961        |         | 2,732           |         |
| Kronos, Inc.                                |         | Service - workforce management solutions                          |         | Senior Term Debt (6.0%, Due 6/2014) (3)                        |         | 1,961        |         | 1,706           |         |
| Local TV Finance, LLC                            |         | Service - television station operator                             |         | Senior Term Debt (4.9%, Due 5/2013) (3)                        |         | 990          |         | 839             |         |
| LVI Services, Inc.                          |         | Service - asbestos and mold remediation                           |         | Senior Term Debt (8.6%, Due 11/2010) (3), (5)                  |         | 5,950        |         | 4,275           |         |
| MedAssets, Inc.                             |         | Service - pharmaceuticals and healthcare GPO                      |         | Senior Term Debt (7.5%, Due 10/2013) (3), (5)                  |         | 3,983        |         | 3,703           |         |
| Network Solutions, LLC                           |         | Service - internet domain solutions                               |         | Senior Term Debt (5.2%, Due 3/2014) (3)                        |         | 8,673        |         | 6,764           |         |
| Open Solutions, Inc.                        |         | Service - software outsourcing for financial  institutions        |         | Senior Term Debt (5.1%, Due 1/2014) (3)                        |         | 2,670        |         | 1,806           |         |
| Ozburn-Hessey Holding Co. LLC                    |         | Service - third party logistics                                   |         | Senior Term Debt (6.6%, Due 8/2012) (3)                        |         | 7,575        |         | 6,469           |         |
| Pinnacle Foods Finance, LLC                      |         | Manufacturing - branded food products                             |         | Senior Term Debt (5.4%, Due 4/2014) (3)                        |         | 1,960        |         | 1,705           |         |
| PTS Acquisition Corp.                            |         | Manufacturing - drug delivery and packaging  technologies         |         | Senior Term Debt (6.0%, Due 4/2014) (3)                        |         | 6,912        |         | 6,360           |         |
| QTC Acquisition, Inc.                       |         | Service - outsourced disability evaluations                       |         | Senior Term Debt (6.0%, Due 11/2012) (3)                       |         | 1,919        |         | 1,649           |         |
| Radio Systems Corporation                        |         | Service - design electronic pet containment  products             |         | Senior Term Debt (5.6%, Due 9/2013) (3)                        |         | 1,881        |         | 1,768           |         |
| Rally Parts, Inc.                           |         | Manufacturing - aftermarket motorcycle parts and  accessories     |         | Senior Term Debt (6.3%, Due 11/2013) (3)                       |         | 2,472        |         | 1,548           |         |
| RPG Holdings, Inc.                          |         | Manufacturing and design - greeting cards                         |         | Senior Term Debt (non-accrual) (3)                             |         | 4,553        |         | 2,048           |         |
| SafeNet, Inc.                               |         | Service - chip encryption products                                |         | Senior Term Debt (5.8%, Due 4/2014) (3)                        |         | 2,964        |         | 2,252           |         |
| SGS International, Inc.                     |         | Service - digital imaging and graphics                            |         | Senior Term Debt (6.3%, Due 12/2011) (3)                       |         | 1,476        |         | 1,353           |         |
| Survey Sampling, LLC                             |         | Service - telecommunications-based sampling                       |         | Senior Term Debt (9.0%, Due 5/2011) (3), (5)                   |         | 2,702        |         | 2,331           |         |
| Triad Laboratory Alliance, LLC                   |         | Service - regional medical laboratories                           |         | Senior Term Debt (7.3%, Due 12/2011) (3), (5)                  |         | 4,143        |         | 3,677           |         |
| Wastequip, Inc.                             |         | Service - process and transport waste materials                   |         | Senior Term Debt (6.0%, Due 2/2013) (3)                        |         | 2,907        |         | 2,180           |         |
| WaveDivision Holdings, LLC                       |         | Service - cable                                                   |         | Senior Term Debt (5.8%, Due 6/2014) (3), (5)                   |         | 1,915        |         | 1,796           |         |
| West Corporation                                 |         | Service - business process outsourcing                            |         | Senior Term Debt (5.8%, Due 10/2013) (3)                       |         | 3,340        |         | 2,538           |         |
| ***Subtotal -  Senior Syndicated Loans***        |         |                                                              |         |                                                           |         | $            | 127,821      |            | $            | 104,660 |   |
| * *                                         | * *     | * *                                                          | * *     | * *                                                       | * *     | * *     | * *     | * *        | * *     |
| ***Non-Syndicated  Loans***                      | *** *** | *** ***                                                      | *** *** | * *                                                       | *** *** | *** *** | *** *** | *** ***    | *** *** |
| B-Dry, LLC                                       |         | Service - basement waterproofer                                   |         | Revolving Credit Facility, $-0- available (6.7%,  Due 10/2009) |         | $            | 750          |            | $            | 688 |   |
|                                             |         |                                                              |         | Senior Term Debt (10.0%, Due 5/2014) (5)                       |         | 6,715        |         | 6,161           |         |
|                                             |         |                                                              |         | Senior Term Debt (10.0%, Due 5/2014) (5)                       |         | 3,950        |         | 3,624           |         |
|                                             |         |                                                              |         | Common Stock Warrants (4)                                      |         | 300          |         | —          |         |
|                                             |         |                                                              |         |                                                           |         | 11,715       |         | 10,473          |         |
|                                             |         |                                                              |         |                                                           |         |         |         |            |         |
| **Total Non-Control/Non-Affiliate  Investments** | ** **   |                                                              | ** **   | **$**                                                          | **139,536**  | ** **   | **$**        | **115,133**     | ** **   |

 

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Table of Contents

 

**GLADSTONE INVESTMENT CORPORATION**

**CONDENSED CONSOLIDATED SCHEDULES OFINVESTMENTS**

**AS OF SEPTEMBER 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)                            |       | $           | 12,319     |            | $          | 12,319 |   |
|                       |       |                                                       |        | Senior Term Debt (9.2%, Due 3/2012) (6)                        |       | 10,725      |       | 10,725          |       |
|                       |       |                                                       |        | Senior Subordinated Term Debt (13%, Due 3/2014)                |       | 8,586       |       | 8,586           |       |
|                       |       |                                                       |        | Preferred Stock (4)                                            |       | 4,387       |       | 4,938           |       |
|                       |       |                                                       |        | Common Stock (4)                                               |       | 130         |       | 12,438          |       |
|                       |       |                                                       |        |                                                           |       | 36,147      |       | 49,006          |       |
|                       |       |                                                       |        |                                                           |       |        |       |            |       |
| 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       |       | 7,873           |       |
|                       |       |                                                       |        | Common Stock (4)                                               |       | 1,045       |       | —          |       |
|                       |       |                                                       |        | Common Stock Warrants (4)                                      |       | 25          |       | —          |       |
|                       |       |                                                       |        |                                                           |       | 22,554      |       | 22,373          |       |
|                       |       |                                                       |        |                                                           |       |        |       |            |       |
| ASH Holdings Corp.         |       | Retail and Service - school buses and parts                |        | Revolver, $400 available (non-accrual, Due 3/2010)             |       | 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, $300 available (8.0%,  Due 10/2010) |       | 2,700       |       | 2,700           |       |
|                       |       |                                                       |        | Senior Term Debt (8.3%, Due 10/2012)                           |       | 6,012       |       | 6,013           |       |
|                       |       |                                                       |        | Senior Term Debt (10.0%, Due 10/2012) (6)                      |       | 3,000       |       | 3,000           |       |
|                       |       |                                                       |        | Senior Subordinated Term Debt (13%, Due 10/2014)               |       | 4,670       |       | 4,671           |       |
|                       |       |                                                       |        | Preferred Stock (4)                                            |       | 4,110       |       | 4,416           |       |
|                       |       |                                                       |        | Common Stock (4)                                               |       | 69          |       | 1,407           |       |
|                       |       |                                                       |        |                                                           |       | 20,561      |       | 22,207          |       |
|                       |       |                                                       |        |                                                           |       |        |       |            |       |
| Chase II Holdings Corp.    |       | Manufacturing - traffic doors                              |        | Revolving Credit Facility, $605 available (6.5%,  Due 3/2008)  |       | 3,895       |       | 3,895           |       |
|                       |       |                                                       |        | Senior Term Debt (8.8%, Due 3/2011)                            |       | 9,350       |       | 9,350           |       |
|                       |       |                                                       |        | Senior Term Debt (12.0%, Due 3/2011) (6)                       |       | 7,760       |       | 7,760           |       |
|                       |       |                                                       |        | Senior Subordinated Term Debt (13.0%, Due 3/2013)              |       | 6,168       |       | 6,168           |       |
|                       |       |                                                       |        | Redeemable Preferred Stock (4)                                 |       | 6,961       |       | 8,877           |       |
|                       |       |                                                       |        | Common Stock (4)                                               |       | 61          |       | 6,200           |       |
|                       |       |                                                       |        |                                                           |       | 34,195      |       | 42,250          |       |
|                       |       |                                                       |        |                                                           |       |        |       |            |       |
| Galaxy Tool Holding Corp.  |       | Manufacturing - aerospace and plastics                     |        | Senior Subordinated Term Debt (13.5%, Due 8/2013)  (7)         |       | 17,250      |       | 17,250          |       |
|                       |       |                                                       |        | Preferred Stock (4), (7)                                       |       | 4,112       |       | 4,112           |       |
|                       |       |                                                       |        | Common Stock (4), (7)                                          |       | 48          |       | 48              |       |
|                       |       |                                                       |        |                                                           |       | 21,410      |       | 21,410          |       |
|                       |       |                                                       |        |                                                           |       |        |       |            |       |
| Total Control  Investments | ** ** | **$**                                                      | **144,221** | ** **                                                     | **$**      | **157,246** | ** ** |

 

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Table of Contents

 

**GLADSTONE INVESTMENT CORPORATION**

**CONDENSED CONSOLIDATED SCHEDULES OFINVESTMENTS**

**AS OF SEPTEMBER 30, 2008**

**(DOLLAR AMOUNTS IN THOUSANDS)**

**(UNAUDITED)**

 
| **Company (1)**                 | ** ** | **Industry**                                                | ** ** | **Investment (2)**                                               | ** ** | **Cost**   | ** **  | **Fair  Value** | ** ** |
|---------------------------------|------------|-------------------------------------------------------------|------------|------------------------------------------------------------------|------------|------------|-------------|-----------------|------------|
| ** **                      | ** ** | ** **                                                  | ** ** | ** **                                                       | ** ** | ** ** | ** **  | ** **      | ** ** |
| **AFFILIATE INVESTMENTS**       |       |                                                        |       |                                                             |       |       |        |
| Danco Acquisition Corp.         |       | Manufacturing - machining and sheet metal work              |       | Revolving Credit Facility, $2,600 available (9.3%,  Due 10/2010) |       | $          | 400         |            | $          | 378 |   |
|                            |       |                                                        |       | Senior Term Debt (9.3%, Due 10/2012) (5)                         |       | 5,325      |        | 5,059           |       |
|                            |       |                                                        |       | Senior Term Debt (11.5%, Due 4/2013) (5)                         |       | 9,157      |        | 8,653           |       |
|                            |       |                                                        |       | Redeemable Preferred Stock (4)                                   |       | 2,500      |        | 2,678           |       |
|                            |       |                                                        |       | Common Stock Warrants (4)                                        |       | 3          |        | 871             |       |
|                            |       |                                                        |       |                                                             |       | 17,385     |        | 17,639          |       |
|                            |       |                                                        |       |                                                             |       |       |        |            |       |
| Mathey Investments, Inc.   |       | Manufacturing - pipe-cutting and pipe-fitting  equipment    |       | Revolving Credit Facility, $2,000 available (9.0%,  Due 3/2011)  |       | —     |        | —          |       |
|                            |       |                                                        |       | Senior Term Debt (9.0%, Due 3/2013) (5)                          |       | 2,437      |        | 2,413           |       |
|                            |       |                                                        |       | Senior Term Debt (12.0%, Due 3/2014) (5), (6)                    |       | 7,263      |        | 7,191           |       |
|                            |       |                                                        |       | Common Stock (4)                                                 |       | 500        |        | 520             |       |
|                            |       |                                                        |       | Common Stock Warrants (4)                                        |       | 277        |        | 303             |       |
|                            |       |                                                        |       |                                                             |       | 10,477     |        | 10,427          |       |
|                            |       |                                                        |       |                                                             |       |       |        |            |       |
| Noble Logistics, Inc.      |       | Service - aftermarket auto parts delivery                   |       | Revolving Credit Facility, $-0- available (8.5%,  Due 12/2009)   |       | 2,000      |        | 1,740           |       |
|                            |       |                                                        |       | Senior Term Debt (10.5%, Due 12/2011) (5)                        |       | 5,902      |        | 5,135           |       |
|                            |       |                                                        |       | Senior Term Debt (12.5%, Due 3/2011) (5), (6)                    |       | 7,000      |        | 5,880           |       |
|                            |       |                                                        |       | Senior Subordinated Term Debt (12.5%, Due 7/2008)  (5)           |       | 500        |        | 498             |       |
|                            |       |                                                        |       | Preferred Stock (4)                                              |       | 1,932      |        | —          |       |
|                            |       |                                                        |       | Common Stock (4)                                                 |       | 1,500      |        | —          |       |
|                            |       |                                                        |       |                                                             |       | 18,834     |        | 13,253          |       |
|                            |       |                                                        |       |                                                             |       |       |        |            |       |
| Quench Holdings Corp.           |       | Service - sales, installation and service of water  coolers |       | Senior Subordinated Term Debt (10.0%, Due 8/2013)  (5)           |       | 8,000      |        | 4,400           |       |
|                            |       |                                                        |       | Preferred Stock (4)                                              |       | 2,950      |        | 2,379           |       |
|                            |       |                                                        |       | Common Stock Warrants (4)                                        |       | 447        |        | —          |       |
|                            |       |                                                        |       |                                                             |       | 11,397     |        | 6,779           |       |
|                            |       |                                                        |       |                                                             |       |       |        |            |       |
| Tread Corp.                     |       | Service - regional medical laboratories                     |       | Senior Term Debt (12.5%, Due 5/2013) (5)                         |       | 5,000      |        | 4,938           |       |
|                            |       |                                                        |       | Preferred Stock (4)                                              |       | 750        |        | 772             |       |
|                            |       |                                                        |       | Common Stock Warrants (4)                                        |       | 3          |        | 69              |       |
|                            |       |                                                        |       |                                                             |       | 5,753      |        | 5,779           |       |
| ** **                      | ** ** | ** **                                                  | ** ** |                                                             | ** ** | ** ** | ** **  | ** **      | ** ** |
| **Total Affiliate Investments** | ** ** | ** **                                                  | ** ** |                                                             | ** ** | **$**      | **63,846**  | ** **      | **$**      | **53,877** | ** ** |
| ** **                      | ** ** | ** **                                                  | ** ** |                                                             | ** ** | ** ** | ** **  | ** **      | ** ** |
| **Total Investments**           | ** ** | ** **                                                  | ** ** |                                                             | ** ** | **$**      | **347,603** | ** **      | **$**      | **326,256** | ** ** |

 

----

| (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  September 30, 2008, and due date represents the contractual maturity  date.                                                                |
| (3) |   | Marketable  securities, such as syndicated loans, are valued based on the indicative bid  price on or near September 30, 2008, offered by the respective  syndication agent’s trading desk, or secondary desk. |
| (4) |   | Security  is non-income producing.                                                                                                                                                                                       |
| (5) |   | Fair  value based on opinions of value submitted by Standard & Poor’s  Securities Evaluations, Inc. at September 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) |   | Valued  at cost due to recent acquisition.                                                                                                                                                                               |

 

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

 

6

----

Table of 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**        |       |                                                                 |       |                                                           |        |       |       |
| ***Senior  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)                        |        | 2,977      |       | 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      |       | 2,965           |   |
| 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)                   |        | 3,878      |       | 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      |       | 1,652           |   |
| 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)                       |        | 3,357      |       | 2,929           |   |
| *Subtotal – Senior Syndicated  Loans*        |       |                                                                 |       |                                                           |        | $          | 154,647    |            | $      | 131,005 |   |
| * *                                          |       |                                                                 |       |                                                           |        |       |       |            |   |
| ***Non-Syndicated  Loans***                       |       |                                                                 |       |                                                           |        |       |       |            |   |
| B-Dry, LLC                                        |       | Service - basement waterproofer                                      |       | Revolving Credit Facility, $-0- available (7.3%,  Due 10/2008) |        | 750        |       | 750             |   |
| * *                                          |       |                                                                 |       | Senior Term Debt (10.0%, Due 5/2014)                           |        | 6,749      |       | 6,749           |   |
| * *                                          |       |                                                                 |       | Senior Term Debt (10.0%, Due 5/2014)                           |        | 3,970      |       | 3,970           |   |
|                                              |       |                                                                 |       | Common Stock Warrants (4)                                      |        | 300        |       | 265             |   |
|                                              |       |                                                                 |       |                                                           |        | 11,769     |       | 11,734          |   |
| **Total Non-Control/Non-Affiliate  Investments**  | ** ** |                                                                 | ** ** | **$**                                                          | **166,416** | ** ** | **$**      | **142,739**     |   |

 

7

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Table of 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, $1,250 available (non-accrual, Due  3/2010)          |       | 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, $600 available (8.0%,  Due 10/2010) |       | 2,400      |        | 2,400           |       |
|                          |       |                                                        |       | Senior Term Debt (8.3%, Due 10/2012)                           |       | 6,337      |        | 6,337           |       |
|                          |       |                                                        |       | 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      |        | 4,252           |       |
|                          |       |                                                        |       | Common Stock (4)                                               |       | 69         |        | 688             |       |
|                          |       |                                                        |       |                                                           |       | 20,587     |        | 21,348          |       |
|                          |       |                                                        |       |                                                           |       |       |        |            |       |
| Chase II Holdings Corp.       |       | Manufacturing - traffic doors                               |       | Revolving Credit Facility, $220 available (7.1%,  Due 3/2008)  |       | 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           |       |
|                          |       |                                                        |       | Senior Subordinated Term Debt (13.0%, Due 3/2013)              |       | 6,168      |        | 6,168           |       |
|                          |       |                                                        |       | Redeemable Preferred Stock (4)                                 |       | 6,961      |        | 8,455           |       |
|                          |       |                                                        |       | Common Stock (4)                                               |       | 61         |        | 3,508           |       |
|                          |       |                                                        |       |                                                           |       | 34,210     |        | 39,151          |       |
|                          |       |                                                        |       |                                                           |       |       |        |            |       |
| Quench Holdings Corp.         |       | Service - sales, installation and service of water  coolers |       | Revolving Credit Facility, $-0- available (7.1%,  Due 3/2009)  |       | 1,500      |        | 1,500           |       |
|                          |       |                                                        |       | Senior Term Debt (7.1%, Due 3/2011)                            |       | 4,250      |        | 4,250           |       |
|                          |       |                                                        |       | Senior Subordinated Term Debt (11.5%, Due 3/2011)              |       | 7,820      |        | 7,820           |       |
|                          |       |                                                        |       | Equipment Line Note (7)                                        |       | 1,088      |        | 1,088           |       |
|                          |       |                                                        |       | Preferred Stock (4)                                            |       | 3,000      |        | —          |       |
|                          |       |                                                        |       | Common Stock Warrants (4)                                      |       | 447        |        | —          |       |
|                          |       |                                                        |       |                                                           |       | 18,105     |        | 14,658          |       |
| ** **                    | ** ** | ** **                                                  | ** ** |                                                           | ** ** | ** ** | ** **  | ** **      | ** ** |
| **Total Control Investments** | ** ** | ** **                                                  | ** ** |                                                           | ** ** | **$**      | **138,354** | ** **      | **$**      | **145,407** | ** ** |

 

8

----

Table of 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** | ** ** |
|---------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------------------|------------|------------|-------------|-----------------|------------|
| ** **                      | ** ** | ** **                                               | ** ** | ** **                                                          | ** ** | ** ** | ** **  | ** **      | ** ** |
| **AFFILIATE INVESTMENTS**       |       |                                                     |       |                                                                |       |       |        |
| Danco Acquisition Corp.         |       | Manufacturing - machining and sheet metal work           |       | Revolving Credit Facility, $2,400 available (9.3%,  Due 10/2010)    |       | $          | 600         |            | $          | 600 |   |
|                            |       |                                                     |       | Senior Term Debt (9.3%, Due 10/2012)                                |       | 5,550      |        | 5,550           |       |
|                            |       |                                                     |       | Senior Term Debt (11.5%, Due 4/2013)                                |       | 8,578      |        | 8,578           |       |
|                            |       |                                                     |       | Redeemable Preferred Stock (4)                                      |       | 2,500      |        | 2,576           |       |
|                            |       |                                                     |       | Common Stock Warrants (4)                                           |       | 3          |        | 1,045           |       |
|                            |       |                                                     |       |                                                                |       | 17,231     |        | 18,349          |       |
|                            |       |                                                     |       |                                                                |       |       |        |            |       |
| Mathey Investments, Inc.   |       | Manufacturing - pipe-cutting and pipe-fitting  equipment |       | Revolving Credit Facility, $2,000 available (9.0%,  Due 3/2011) (8) |       | —     |        | —          |       |
|                            | ** ** | ** **                                               |       | Senior Term Debt (9.0%, Due 3/2013) (8)                             |       | 2,500      |        | 2,500           |       |
|                            |       |                                                     |       | Senior Term Debt (12.0%, Due 3/2014) (8)                            |       | 7,300      |        | 7,300           |       |
|                            |       |                                                     |       | Common Stock (4), (8)                                               |       | 500        |        | 500             |       |
|                            |       |                                                     |       | Common Stock Warrants (4), (8)                                      |       | 277        |        | 277             |       |
|                            |       |                                                     |       |                                                                |       | 10,577     |        | 10,577          |       |
|                            |       |                                                     |       |                                                                |       |       |        |            |       |
| Noble Logistics, Inc.      |       | Service - aftermarket auto parts delivery                |       | Revolving Credit Facility, $100 available (7.1%,  Due 12/2009)      |       | 1,900      |        | 1,900           |       |
|                            |       |                                                     |       | Senior Term Debt (8.5%, Due 12/2011)                                |       | 6,077      |        | 6,077           |       |
|                            |       |                                                     |       | Senior Term Debt (10.5%, Due 3/2011) (6)                            |       | 7,000      |        | 7,000           |       |
|                            |       |                                                     |       | Preferred Stock (4)                                                 |       | 1,750      |        | 2,108           |       |
|                            |       |                                                     |       | Common Stock (4)                                                    |       | 1,500      |        | 1,447           |       |
|                            |       |                                                     |       |                                                                |       | 18,227     |        | 18,532          |       |
| **Total Affiliate Investments** | ** ** | ** **                                               | ** ** |                                                                | ** ** | **$**      | **46,035**  | ** **      | **$**      | **47,458** | ** ** |
| ** **                      | ** ** | ** **                                               | ** ** |                                                                | ** ** | ** ** | ** **  | ** **      | ** ** |
| **Total Investments**           | ** ** | ** **                                               | ** ** |                                                                | ** ** | **$**      | **350,805** | ** **      | **$**      | **335,604** | ** ** |

 

----

| (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, such as syndicated loans, 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) |   | Fair  value based on opinions of value submitted by Standard & Poor’s  Securities Evaluations, Inc. 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 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. |
| (8) |   | 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**

**(DOLLAR AMOUNTS INTHOUSANDS, EXCEPT PER SHARE AMOUNTS)**

**(UNAUDITED)**

 
| ** **                                                                         | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                         | ** ** | **September 30,**           | ** ** | **September 30,**         | ** ** |
| ** **                                                                         | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| INVESTMENT INCOME                                                                  |       |                             |       |                           |       |   |   |   |   |
| Interest income                                                                    |       |                             |       |                           |       |   |   |   |   |
| Non-Control/Non-Affiliate investments                                              |       | $                                | 2,134      |                           | $          | 4,080 |   | $ | 4,458 |   | $ | 7,329 |   |
| Control investments                                                                |       | 2,735                            |       | 2,612                          |       | 5,304 |   | 5,177 |   |
| Affiliate investments                                                              |       | 1,349                            |       | 375                            |       | 2,460 |   | 801 |   |
| Cash and cash equivalents                                                          |       | 22                               |       | 61                             |       | 46 |   | 114 |   |
| Total interest income                                                              |       | 6,240                            |       | 7,128                          |       | 12,268 |   | 13,421 |   |
| Other income                                                                       |       | 576                              |       | 28                             |       | 586 |   | 35 |   |
| Total investment income                                                            |       | 6,816                            |       | 7,156                          |       | 12,854 |   | 13,456 |   |
|                                                                               |       |                             |       |                           |       |   |   |   |   |
| EXPENSES                                                                           |       |                             |       |                           |       |   |   |   |   |
| Loan servicing fee (Refer to Note 4)                                               |       | 1,258                            |       | 1,260                          |       | 2,511 |   | 2,454 |   |
| Base management fee (Refer to Note 4)                                              |       | 435                              |       | 453                            |       | 861 |   | 812 |   |
| Administration fee (Refer to Note 4)                                               |       | 212                              |       | 228                            |       | 447 |   | 436 |   |
| Interest expense                                                                   |       | 1,084                            |       | 2,023                          |       | 2,186 |   | 3,438 |   |
| Amortization of deferred finance costs                                             |       | 140                              |       | 216                            |       | 278 |   | 426 |   |
| Professional fees                                                                  |       | 183                              |       | 110                            |       | 314 |   | 266 |   |
| Stockholder related costs                                                          |       | 200                              |       | 157                            |       | 301 |   | 195 |   |
| Insurance expense                                                                  |       | 55                               |       | 73                             |       | 108 |   | 136 |   |
| Directors fees                                                                     |       | 48                               |       | 68                             |       | 95 |   | 122 |   |
| Taxes and licenses                                                                 |       | 24                               |       | 41                             |       | 67 |   | 83 |   |
| General and administrative expenses                                                |       | 90                               |       | 35                             |       | 122 |   | 92 |   |
| Expenses before credit from Adviser                                                |       | 3,729                            |       | 4,664                          |       | 7,290 |   | 8,460 |   |
| Credits to base management fee (Refer to  Note 4)                                  |       | (696                             | )          | (503                           | )          | (1,270 | ) | (887 | ) |
| Total expenses net of credit to base  management fee                               |       | 3,033                            |       | 4,161                          |       | 6,020 |   | 7,573 |   |
| NET INVESTMENT INCOME                                                              |       | 3,783                            |       | 2,995                          |       | 6,834 |   | 5,883 |   |
|                                                                               |       |                             |       |                           |       |   |   |   |   |
| REALIZED AND UNREALIZED (LOSS) GAIN ON  INVESTMENTS                                |       |                             |       |                           |       |   |   |   |   |
| Realized loss on sale of  Non-Control/Non-Affiliate investments                    |       | (2,498                           | )          | (3                             | )          | (4,215 | ) | (52 | ) |
| Net unrealized depreciation of  Non-Control/Non-Affiliate investments              |       | (5,191                           | )          | (7,308                         | )          | (726 | ) | (7,836 | ) |
| Net unrealized appreciation of Control  investments                                |       | 10,840                           |       | 180                            |       | 5,973 |   | 5,454 |   |
| Net unrealized (depreciation) appreciation  of Affiliate investments               |       | (5,978                           | )          | (231                           | )          | (11,393 | ) | 454 |   |
| Net loss on investments                                                            |       | (2,827                           | )          | (7,362                         | )          | (10,361 | ) | (1,980 | ) |
|                                                                               |       |                             |       |                           |       |   |   |   |   |
| NET INCREASE (DECREASE) IN NET ASSETS RESULTING  FROM OPERATIONS                   |       | $                                | 956        |                           | $          | (4,367 | ) | $ | (3,527 | ) | $ | 3,903 |   |
|                                                                               |       |                             |       |                           |       |   |   |   |   |
| NET INCREASE (DECREASE) IN NET ASSETS  RESULTING FROM OPERATIONS PER COMMON SHARE: |       |                             |       |                           |       |   |   |   |   |
| Basic and Diluted                                                                  |       | $                                | 0.04       |                           | $          | (0.26 | ) | $ | (0.17 | ) | $ | 0.24 |   |
|                                                                               |       |                             |       |                           |       |   |   |   |   |
| SHARES OF COMMON STOCK OUTSTANDING:                                                |       |                             |       |                           |       |   |   |   |   |
| Basic and diluted weighted average shares                                          |       | 22,080,133                       |       | 16,560,100                     |       | 21,011,740 |   | 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)**

 
| ** **                                                   | ** ** | **Six Months Ended September 30,** | ** ** |
|--------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                   | ** ** | **2008**                                               | ** ** | **2007** | ** ** |
| Operations:                                                  |       |                                                   |       |   |   |
| Net investment income                                        |       | $                                                      | 6,834      |   | $ | 5,883 |   |
| Realized loss on sale of investments                         |       | (4,215                                                 | )          | (52 | ) |
| Net unrealized depreciation of portfolio                     |       | (6,146                                                 | )          | (1,928 | ) |
| Net (decrease) increase in net assets from  operations       |       | (3,527                                                 | )          | 3,903 |   |
|                                                         |       |                                                   |       |   |   |
| Capital transactions:                                        |       |                                                   |       |   |   |
| Issuance of common stock                                     |       | 41,290                                                 |       | — |   |
| Shelf offering registration costs                            |       | (643                                                   | )          | (31 | ) |
| Distributions to stockholders                                |       | (10,157                                                | )          | (7,452 | ) |
| Increase (decrease) in net assets from  capital transactions |       | 30,490                                                 |       | (7,483 | ) |
|                                                         |       |                                                   |       |   |   |
| Total increase (decrease) in net assets                      |       | 26,963                                                 |       | (3,580 | ) |
|                                                         |       |                                                   |       |   |   |
| Net Assets                                                   |       |                                                   |       |   |   |
| Beginning of period                                          |       | 206,445                                                |       | 222,818 |   |
| End of period                                                |       | $                                                      | 233,408    |   | $ | 219,238 |   |

 

*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)**

 
| ** **                                                                                                                                         | ** ** | **Six Months Ended September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                                                                                         | ** ** | **2008**                                               | ** ** | **2007** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES**                                                                                                          |       |                                                   |       |   |   |
| Net (decrease) increase in net assets  resulting from operations                                                                                   |       | $                                                      | (3,527     | ) | $ | 3,903 |   |
| Adjustments to reconcile net (decrease) increase  in net assets resulting from operations to net cash provided by (used in)  operating activities: |       |                                                   |       |   |   |
| Purchase of investments                                                                                                                            |       | (36,612                                                | )          | (113,784 | ) |
| Principal repayments of investments                                                                                                                |       | 22,284                                                 |       | 38,306 |   |
| Proceeds from the sale of investments                                                                                                              |       | 13,296                                                 |       | 5,809 |   |
| Net unrealized depreciation of investment  portfolio                                                                                               |       | 6,146                                                  |       | 1,928 |   |
| Net realized loss on sales of investments                                                                                                          |       | 4,215                                                  |       | 52 |   |
| Net amortization of premiums and discounts                                                                                                         |       | 19                                                     |       | 218 |   |
| Amortization of deferred finance costs                                                                                                             |       | 278                                                    |       | 426 |   |
| Decrease (increase) in interest receivable                                                                                                         |       | 309                                                    |       | (695 | ) |
| Decrease in due from custodian                                                                                                                     |       | 1,351                                                  |       | 10,258 |   |
| Increase in prepaid insurance                                                                                                                      |       | (114                                                   | )          | (164 | ) |
| Decrease (increase) in other assets                                                                                                                |       | 309                                                    |       | (195 | ) |
| Increase (decrease) in other liabilities                                                                                                           |       | 13                                                     |       | (16 | ) |
| Increase in administration fee payable to  Administrator (See Note 4)                                                                              |       | 4                                                      |       | 66 |   |
| Increase in base management fee payable to  Adviser (See Note 4)                                                                                   |       | 123                                                    |       | 254 |   |
| Decrease in loan servicing fee payable to  Adviser (See Note 4)                                                                                    |       | (7                                                     | )          | (6 | ) |
| (Decrease) increase in accrued expenses                                                                                                            |       | (167                                                   | )          | 496 |   |
| Net cash provided by (used in) operating  activities                                                                                               |       | 7,920                                                  |       | (53,144 | ) |
|                                                                                                                                               |       |                                                   |       |   |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES**                                                                                                          |       |                                                   |       |   |   |
| Net proceeds from the issuance of common  stock                                                                                                    |       | 40,647                                                 |       | — |   |
| Borrowings from line of credit                                                                                                                     |       | 129,000                                                |       | 147,100 |   |
| Repayments of line of credit                                                                                                                       |       | (142,870                                               | )          | (101,050 | ) |
| Deferred finance costs                                                                                                                             |       | —                                                 |       | (22 | ) |
| Shelf offering registration costs                                                                                                                  |       | —                                                 |       | (32 | ) |
| Distributions paid                                                                                                                                 |       | (10,157                                                | )          | (7,452 | ) |
| Net cash provided by financing activities                                                                                                          |       | 16,620                                                 |       | 38,544 |   |
|                                                                                                                                               |       |                                                   |       |   |   |
| **NET  INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS**                                                                                          |       | 24,540                                                 |       | (14,600 | ) |
|                                                                                                                                               |       |                                                   |       |   |   |
| **CASH AND  CASH EQUIVALENTS, BEGINNING OF PERIOD**                                                                                                |       | 9,360                                                  |       | 37,789 |   |
|                                                                                                                                               |       |                                                   |       |   |   |
| **CASH AND  CASH EQUIVALENTS, END OF PERIOD**                                                                                                      |       | $                                                      | 33,900     |   | $ | 23,189 |   |

 

*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 September 30,** | ** ** | **Six Months Ended September 30,** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                             | ** ** | **2008**                                                 | ** ** | **2007**                                               | ** ** | **2008** | ** ** | **2007** | ** ** |
| Per Share Data (1)                                                     |       |                                                     |       |                                                   |       |   |   |   |   |
| Balance at beginning of period                                         |       | $                                                        | 10.77      |                                                   | $          | 13.73 |   | $ | 12.47 |   | $ | 13.46 |   |
|                                                                   |       |                                                     |       |                                                   |       |   |   |   |   |
| *Income  from investment operations:*                                  |       |                                                     |       |                                                   |       |   |   |   |   |
| Net investment income (2)                                              |       | 0.17                                                     |       | 0.18                                                   |       | 0.33 |   | 0.35 |   |
| Realized loss on sale of investments (2)                               |       | (0.11                                                    | )          | —                                                 |       | (0.20 | ) | — |   |
| Net unrealized depreciation of investments (2)                         |       | (0.02                                                    | )          | (0.44                                                  | )          | (0.30 | ) | (0.12 | ) |
| Total from investment operations                                       |       | 0.04                                                     |       | (0.26                                                  | )          | (0.17 | ) | 0.23 |   |
|                                                                   |       |                                                     |       |                                                   |       |   |   |   |   |
| *Distributions  from:*                                                 |       |                                                     |       |                                                   |       |   |   |   |   |
| Net investment income                                                  |       | (0.24                                                    | )          | (0.23                                                  | )          | (0.48 | ) | (0.45 | ) |
| Total distributions (3)                                                |       | (0.24                                                    | )          | (0.23                                                  | )          | (0.48 | ) | (0.45 | ) |
|                                                                   |       |                                                     |       |                                                   |       |   |   |   |   |
| Rights offering costs                                                  |       | —                                                   |       | —                                                 |       | (0.03 | ) | — |   |
| Effect of distribution of stock rights  offering after record date (4) |       | —                                                   |       | —                                                 |       | (1.22 | ) | — |   |
| Net asset value at end of period                                       |       | $                                                        | 10.57      |                                                   | $          | 13.24 |   | $ | 10.57 |   | $ | 13.24 |   |
|                                                                   |       |                                                     |       |                                                   |       |   |   |   |   |
| Per share market value at beginning of  period                         |       | $                                                        | 6.38       |                                                   | $          | 14.21 |   | $ | 9.32 |   | $ | 14.87 |   |
| Per share market value at end of period                                |       | $                                                        | 6.88       |                                                   | $          | 12.84 |   | $ | 6.88 |   | $ | 12.84 |   |
| Total return (5)                                                       |       | 14.79                                                    | %          | -8.04                                                  | %          | -21.39 | % | -10.73 | % |
| Shares outstanding at end of period                                    |       | 22,080,133                                               |       | 16,560,100                                             |       | 22,080,133 |   | 16,560,100 |   |
|                                                                   |       |                                                     |       |                                                   |       |   |   |   |   |
| Statement of Assets and Liabilities Data:                              |       |                                                     |       |                                                   |       |   |   |   |   |
| Net assets at end of period                                            |       | $                                                        | 233,408    |                                                   | $          | 219,238 |   | $ | 233,408 |   | $ | 219,238 |   |
| Average net assets (6)                                                 |       | $                                                        | 234,165    |                                                   | $          | 223,254 |   | $ | 238,410 |   | $ | 223,091 |   |
|                                                                   |       |                                                     |       |                                                   |       |   |   |   |   |
| Senior Securities Data:                                                |       |                                                     |       |                                                   |       |   |   |   |   |
| Borrowings under line of credit                                        |       | $                                                        | 130,965    |                                                   | $          | 146,050 |   | $ | 130,965 |   | $ | 146,050 |   |
| Asset coverage ratio (7)                                               |       | 279                                                      | %          | 251                                                    | %          | 279 | % | 251 | % |
| Asset coverage per unit (8)                                            |       | $                                                        | 3,644      |                                                   | $          | 3,653 |   | $ | 3,644 |   | $ | 3,653 |   |
|                                                                   |       |                                                     |       |                                                   |       |   |   |   |   |
| Ratios/Supplemental Data:                                              |       |                                                     |       |                                                   |       |   |   |   |   |
| Ratio of expenses to average net assets (9), (10)                      |       | 6.37                                                     | %          | 8.36                                                   | %          | 6.11 | % | 7.58 | % |
| Ratio of net expenses to average net assets  (9), (11)                 |       | 5.18                                                     | %          | 7.46                                                   | %          | 5.05 | % | 6.79 | % |
| Ratio of net investment income to average  net assets (9)              |       | 6.46                                                     | %          | 5.37                                                   | %          | 5.73 | % | 5.27 | % |
|                                                                        |            |                                                          |            |                                                        |            |  |  |  |  |  |  |  |  |  |

 

----

| (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**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

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

**SEPTEMBER 30, 2008**

**(UNAUDITED)**

 

**NOTE 1. ORGANIZATION**

 

GladstoneInvestment Corporation (the “Company”) was incorporated under the GeneralCorporation Laws of the State of Delaware on February 18, 2005, andcompleted an initial public offering on June 22, 2005. The Company is aclosed-end, non-diversified management investment company that has elected tobe treated as a business development company under the Investment Company Actof 1940, as amended (the “1940 Act”). In addition, the Company has elected tobe treated for tax purposes as a regulated investment company (“RIC”) under theInternal Revenue Code of 1986, as amended (the “Code”). The Company’sinvestment objectives are to achieve a high level of current income and capitalgains by investing in debt and equity securities of established privatebusinesses.

 

GladstoneBusiness Investment, LLC (“Business Investment”) a wholly-owned subsidiaryof the Company, was established on August 11, 2006, for the sole purposeof owning 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.

 

TheCompany is externally managed by Gladstone Management Corporation (the “Adviser”),an unconsolidated affiliate of the Company.

 

**NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

 

*Unaudited Interim Financial Statements*

 

Interimfinancial statements of the Company are prepared in accordance with accountingprinciples generally accepted in the United States of America (“GAAP”) forinterim financial information and pursuant to the requirements for reporting onForm 10-Q and Article 10 of Regulation S-X. Accordingly, certaindisclosures accompanying annual financial statements prepared in accordancewith GAAP are omitted. In the opinion of management, all adjustments,consisting solely of normal recurring accruals, necessary for the fairstatement of financial statements for the interim periods have been included.The current period’s results of operations are not necessarily indicative ofresults that ultimately may be achieved for the year. The interim financialstatements and notes thereto should be read in conjunction with the financialstatements and notes thereto included in the Company’s Form 10-K for thefiscal year ended March 31, 2008, as filed with the Securities andExchange Commission (“SEC”) on May 21, 2008.

 

Theyear-end condensed consolidated balance sheet data was derived from auditedfinancial statements, but does not include all of the disclosures required byGAAP.

 

*Reclassifications*

 

Certain amounts in the prior year’s financialstatements have been reclassified to conform to the current year presentationwith no effect to net increase (decrease) in net assets resulting fromoperations.

 

*Investment Valuation*

 

InSeptember 2006, the Financial Accounting Standards Board issued *Statement of Financial Accounting Standards No. 157—FairValue Measurements* (“SFAS 157”), which, for financial assets, iseffective for fiscal years beginning after November 15, 2007, with earlyadoption permitted. The Company adopted SFAS 157 on April 1, 2008. Inpart, SFAS 157 defines fair value, establishes a framework for measuring fairvalue, and expands disclosures about assets and liabilities measured at fairvalue. The new standard provides a consistent definition of fair value thatfocuses on exit price in the principal, or most advantageous, market andprioritizes, within a measurement of fair value, the use of market-based inputsover entity-specific inputs. The standard also establishes the followingthree-level hierarchy for fair value measurements based upon the transparencyof inputs to the valuation of an asset or liability as of the measurement date.

 

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

* *

·                 *Level 2*— inputs to the valuation methodology include quoted prices for similarassets and liabilities in active markets, and inputs that are observable forthe asset or liability, either directly or indirectly, for substantially thefull term of the financial instrument. Level 2 inputs are in those markets forwhich there are few transactions, the prices are not current, little publicinformation exists or instances where prices vary substantially over time oramong brokered market makers; and

* *

·                 *Level 3*— inputs to the valuation methodology are unobservable and significantto the fair value measurement. Unobservable inputs are those inputs thatreflect the Company’s own assumptions that market participants would use toprice the asset or liability based upon the best available information.

 

Thefollowing table presents the financial instruments carried at fair value as of September 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 September 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 |       | $                                                | —     |   | $ | — |   | $ | 115,133 |   | $ | 115,133 |   |
| Control investments                   |       | —                                           |       | — |   | 157,246 |   | 157,246 |   |
| Affiliate investments                 |       | —                                           |       | — |   | 53,877 |   | 53,877 |   |
| Total investments at fair value       |       | $                                                | —     |   | $ | — |   | $ | 326,256 |   | $ | 326,256 |   |

 

*Changes in Level 3 Fair Value Measurements*

 

Thefollowing table provides a roll-forward in the changes in fair value during thesix-month period from March 31, 2008 to September 30, 2008, and forthe three-month period from June 30, 2008 through September 30, 2008for all investments for which the Company determines fair value usingunobservable (Level 3) factors. When a determination is made to classify afinancial 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 unobservabledata inputs (Level 3)**

 
| ** **                                         | ** ** | **Non-Control/**  | ** ** | ** **      | ** ** | ** **      | ** ** | ** ** | ** ** |
|----------------------------------------------------|------------|-------------------|------------|-----------------|------------|-----------------|------------|------------|------------|
| ** **                                         | ** ** | **Non-Affiliate** | ** ** | **Control**     | ** ** | **Affiliate**   | ** ** | ** ** | ** ** |
| ** **                                         | ** ** | **Investments**   | ** ** | **Investments** | ** ** | **Investments** | ** ** | **Total**  | ** ** |
| **Six  months ended September 30, 2008:**     |       |              |       |            |       |            |       |       |       |
| Fair value at March 31, 2008                  |       | $                 | 142,739    |            | $          | 145,407         |       | $          | 47,458     |   | $ | 335,604 |   |
| Total realized/unrealized (losses) gains  (a)      |       | (4,941            | )          | 5,973           |       | (11,393         | )          | (10,361    | )          |
| New investments, repayments, and  settlements, net |       | (22,665           | )          | 5,866           |       | 17,812          |       | 1,013      |       |
| Transfers in (out) of Level 3                      |       | —            |       | —          |       | —          |       | —     |       |
| Fair value as of September 30, 2008           |       | $                 | 115,133    |            | $          | 157,246         |       | $          | 53,877     |   | $ | 326,256 |   |
|                                               |       |              |       |            |       |            |       |       |       |
| **Three  months ended September 30, 2008:**   |       |              |       |            |       |            |       |       |       |
| Fair value at June 30, 2008                   |       | $                 | 130,764    |            | $          | 141,042         |       | $          | 48,493     |   | $ | 320,299 |   |
| Total realized/unrealized (losses) gains  (a)      |       | (7,689            | )          | 10,840          |       | (5,978          | )          | (2,827     | )          |
| New investments, repayments, and  settlements, net |       | (7,942            | )          | 5,364           |       | 11,362          |       | 8,784      |       |
| Transfers in (out) of Level 3                      |       | —            |       | —          |       | —          |       | —     |       |
| Fair value as of September 30, 2008           |       | $                 | 115,133    |            | $          | 157,246         |       | $          | 53,877     |   | $ | 326,256 |   |

 

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(a) Realized/unrealizedgains and losses are reported on the accompanying condensed consolidatedstatements of operations for the three and six months ended September 30,2008.

 

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*InvestmentValuation Policy*

 

TheCompany carries its investments at market value to the extent that marketquotations are readily available, and otherwise at fair value, as determined ingood faith by its Board of Directors. In determining the fair value of theCompany’s investments, the Adviser has established an investment valuationpolicy (the “policy”). The policy has been approved by the Company’s Board ofDirectors, and each quarter the Board of Directors reviews whether the Adviserhas applied the policy consistently and votes whether or not to accept therecommended valuation of the Company’s investment portfolio.

 

TheCompany uses generally accepted valuation techniques to value its portfoliounless the Company has specific information about the value of an investment todetermine otherwise. From time to time the Company may accept an appraisal of abusiness in which the Company holds securities. These appraisals are expensiveand occur infrequently but provide a third-party valuation opinion that maydiffer in results, techniques and scopes used to value the Company’sinvestments. When these specific third-party valuations are engaged oraccepted, the Company would use such appraisals to value the investment theCompany has in that business if it was determined that the appraisals were thebest estimate of fair value.

 

Thepolicy, which is summarized below, applies to publicly-traded securities,securities for which a limited market exists, and securities for which nomarket exists.

 

**Publicly-tradedsecurities:** TheCompany determines the value of publicly-traded securities based on the closingprice for the security on the exchange or securities market on which it islisted and primarily traded on the valuation date. To the extent that theCompany owns restricted securities that are not freely tradable, but for whicha public market otherwise exists, the Company will use the market value of thatsecurity adjusted for any decrease in value resulting from the restrictivefeature. The Company uses Level 1 inputs for these types of securities. TheCompany did not value any of its investments using Level 1 inputs as of September 30,2008.

 

**Securitiesfor which a limited market exists:** The Company values securities that are not traded on an establishedsecondary securities market, but for which a limited market for the securityexists, such as certain participations in, or assignments of, syndicated loans,at the quoted price. Firm bid prices are requested; however, if a firm bidprice is unavailable, the Company bases the value of the security upon theindicative bid price offered by the respective originating syndication agent’strading desk, or secondary desk, on or near the valuation date. To the extentthat the Company uses the indicative bid price as a basis for valuing thesecurity, the Adviser may take further steps to consider additional informationto validate that price in accordance with the policy. The Company uses Level 2or 3 inputs for these types of securities, as applicable.  The Company did not value any securitiesusing Level 2 inputs during the quarter ended September 30, 2008.

 

**Securitiesfor which no market exists:** The valuation methodology for securities for which no market existsfalls into three categories: (1) portfolio investments comprised solely ofdebt securities; (2) portfolio investments in controlled companiescomprised of a bundle of securities, which can include debt and equitysecurities; and (3) portfolio investments in non-controlled companiescomprised of a bundle of securities, which can include debt and equitysecurities. The Company uses Level 3 inputs for these types of securities.

 

(1)         **Portfolio investments comprisedsolely of debt securities:**The fair value of the Company’s debt securities that are not publicly traded,or for which a limited market does not exist (“Non-Public Debt Securities”),and that are issued by portfolio companies where the Company has no equity, orequity-like securities, or holds a non-control equity interest, rely onopinions of value submitted to it by Standard & Poor’s SecuritiesEvaluations, Inc. (“SPSE”). SPSE will only evaluate the debt portion ofthe Company’s investments for which the Company specifically requestsevaluation, and may decline to make requested evaluations for any reason at itssole discretion. SPSE opinions of value are submitted to the Board of Directorsalong with the Adviser’s supplemental assessment and recommendation regarding valuationof 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 or equity-like securities (e.g.preferred equity, equity, or other equity-like securities) that are purchasedtogether as part of a package, where the Company has control or could gaincontrol through an option or warrant security, both the debt and equitysecurities of the portfolio investment would exit in the mergers andacquisition market as the principal market, generally through a sale orrecapitalization of the portfolio company. Further, the Company believes thatthe in-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, the Company will continue to usethe enterprise value methodology utilizing a liquidity waterfall approach todetermine the fair value of these investments under SFAS 157 if theCompany has the ability to initiate a sale of a portfolio company as of themeasurement date. Under this approach, the Company first calculates the totalenterprise value of the issuer by incorporating some or all of the followingfactors to determine the total enterprise value of the issuer: the issuer’sability to make payments, the earnings of 

 

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theissuer, recent sales to third parties of similar securities, the comparison topublicly traded securities, and discounted cash flow or other pertinentfactors.

 

Ingathering the sales to third parties of similar securities, the Company mayreference industry statistics and use outside experts. Once the totalenterprise value of the issuer is estimated, the Company subtracts the value ofall the debt securities of the issuer; which are valued at the contractual principalbalance. Fair values of these debt securities are discounted for any shortfallof total enterprise value over the total debt outstanding for the issuer. Oncethe values 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 Debt Securitiesthat are purchased together with equity and equity-like securities from thesame portfolio company, or issuer, for which the Company does not control orcannot gain control as of the measurement date, using a hypothetical secondarymarket as the Company’s principal market. In accordance with SFAS 157, theCompany determines its fair value of these debt securities of non-controlinvestments assuming the sale of an individual debt security using thein-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.

 

Dueto the uncertainty inherent in the valuation process, such estimates of fairvalue may differ significantly from the values that would have resulted had aready market for 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 valuation 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 amount that we might reasonably expect to receive upon thecurrent sale of the security in an arms-length transaction in the security’sprincipal market. The Board of Directors is ultimately responsible for settingthe fair value and disclosure of investments in the financial statements.

 

Asof September 30, 2008, the investment portfolio that was valued usingthird-party valuation opinions was approximately $158.6 million, or 49% of thefair value of the Company’s total portfolio investments.

 

*Interest and Dividend Income Recognition*

 

Interestincome, adjusted for amortization of premiums and acquisition costs and for theaccretion of discounts, is recorded on the accrual basis to the extent thatsuch amounts are expected to be collected. The Company stops accruing intereston its investments when it is determined that interest is no longercollectible. At September 30, 2008, one Non-Control/Non-Affiliateinvestment was on non-accrual with a cost basis of approximately$4.6 million and one Control investment was on non-accrual with a costbasis of approximately $6.9 million, or an aggregate of 3.7% of the cost basisof all loans in our portfolio. At March 31, 2008, one Non-Control/Non-Affiliateinvestment was on non-accrual with a cost basis of approximately$2.9 million and one Control investment was on non-accrual with a costbasis of approximately $6.0 million, or an aggregate of 2.8% of the cost basisof all loans in our portfolio. Conditional interest, or a success fee, isrecorded upon full repayment of a loan investment. To date, the Company has notrecorded any conditional interest. Dividend income on preferred equitysecurities is accrued to the extent that such amounts are expected to becollected and that the Company has the option to collect such amounts in cash.To date, the Company has not accrued any dividend income.

 

*ServicesProvided to Portfolio Companies*

 

Asa business development company under the 1940 Act, the Company is required tomake available significant managerial assistance to its portfolio companies.The Company provides these services through its Adviser, who provides theseservices on the Company’s behalf through its officers, who are also the Company’sofficers. Currently, neither the Company nor its Adviser charges a fee formanagerial assistance; however, if the Adviser does receive fees for suchmanagerial assistance, it will credit the managerial assistance fees to thebase management fee due from the Company to its Adviser.

 

TheAdviser receives fees for the other services it provides to the Company’sportfolio companies. These other fees are typically non-recurring, arerecognized as revenue when earned and are generally paid directly to the Adviserby the borrower or potential borrower upon the closing of the investment. Theservices the Adviser provides to the Company’s portfolio companies vary byinvestment, but generally include a broad array of services such as investmentbanking services, arranging bank and equity 

 

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financing,structuring financing from multiple lenders and investors, reviewing existingcredit facilities, restructuring existing investments, raising equity and debtcapital, turnaround management, merger and acquisition services and recruitingnew management personnel. When the Adviser receives fees for these services,50% of certain of those fees are voluntarily credited against the basemanagement fee that the Company pays to its Adviser. Any services of thisnature subsequent to the closing would typically generate a separate fee at thetime of completion.

 

TheAdviser also receives fees for monitoring and reviewing portfolio companyinvestments. These fees are recurring and are generally paid annually orquarterly in advance to the Adviser throughout the life of the investment. Feesof this nature are recorded as revenue by the Adviser when earned and are notcredited against the base management fee.

 

TheCompany may receive fees for the origination and closing services the Companyprovides to portfolio companies through the Adviser. These fees are paiddirectly to the Company and are recognized as revenue upon closing of theoriginated investment and are reported as fee income in the consolidatedstatements of operations.

 

*RecentAccounting Pronouncements*

 

InMarch 2008, the FASB issued SFAS No. 161, *Disclosuresabout Derivative Instruments and Hedging Activities* (“SFAS 161”),which is intended to help investors better understand how derivativeinstruments and hedging activities affect an entity’s financial position,financial performance and cash flows through enhanced disclosure requirements.The enhanced disclosures include 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.

 

InDecember 2007, the FASB issued SFAS No. 141(R), *Business Combinations* (“SFAS 141(R)”).SFAS 141(R) establishes principles and requirements for how anacquirer recognizes and measures in its financial statements the identifiableassets acquired, the liabilities assumed, any noncontrolling interest in theacquiree and the goodwill acquired. SFAS 141(R) also establishesdisclosure requirements to enable the evaluation of the nature and financialeffects of the business combination. SFAS 141(R) is effective forfiscal years beginning after December 15, 2008. TheCompany is currently evaluating the impact of this pronouncement on itsconsolidated financial statements.

 

**NOTE 3. INVESTMENTS**

 

*Non-Control/Non-Affiliate Investments*

 

At September 30, 2008 and March 31, 2008, the Company heldinvestments in Non-Control/Non-Affiliates of approximately $139.5 millionand $166.4 million, at cost, respectively. These investments werecomprised primarily of syndicated loan participations of senior notes ofprivate companies and also non-syndicated loan investments where the Companydoes not have a significant ownership interest in the portfolio company.Included in the Non-Control/Non-Affiliate investments, at both September 30,2008 and March 31, 2008, the Company had invested approximately $300 incommon stock warrants of one Non-Control/Non-Affiliate company.  At September 30, 2008 and March 31,2008, the Company’s investments, at cost, in Non-Control/Non-Affiliatesrepresented approximately 60% and 81%, respectively, of the Company’s netassets.

 

*Control and Affiliate Investments*

 

At September 30, 2008 and March 31, 2008, the Company hadinvestments in Control and Affiliates, at cost, of approximately $166.8 millionand $148.1 million, respectively, in revolving credit facilities, senior debtand subordinated debt. In addition, at September 30, 2008 and March 31,2008, the Company had invested approximately $41.3 million and$36.6 million, respectively, in preferred and common equity of thosecompanies.

 

At September 30, 2008 and March 31, 2008, the Company’sinvestments in Control investments, at cost, represented approximately 62% and67%, respectively, of the Company’s net assets. Also at September 30, 2008and March 31, 2008, the Company’s investments in Affiliate investmentsrepresented approximately 27% and 22%, respectively, of the Company’s netassets.

 

OnMay 19, 2008, the Company invested approximately $5.75 million inTread Corporation (“Tread”) and its subsidiaries. The investment was comprisedof approximately $750 in preferred stock, $5.0 million of senior secondlien debt notes and a nominal amount in convertible common stock warrants.Tread, based in Roanoke, VA, was founded in 1957 and manufactures products thatstore, transport and mix the primary ingredients for liquid explosives, whichare ammonium nitrate and fuel oil.

 

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OnAugust 22, 2008, the Company invested approximately $21.4 million inGalaxy Tool Holding Corporation (“Galaxy”) and its subsidiaries.  The investment was comprised of approximately$4.1 million and $48 in preferred stock and common stock, respectively, and$17.25 million in a senior second lien debt note.  Galaxy, based in Winfield, KS, was founded in1985 and is a manufacturer of specialized tooling for the aerospace industry,as well as blow and injection molds for the plastics industry.

 

On August 29, 2008, the Company restructured its investment withQuench USA, LLC (“Quench”), reaching a settlement on the revolving creditfacility and the Term A senior subordinated debt, and increasing the Term Bsenior subordinated debt to $8.0 million. In the restructuring, approximately $617 of dividends were received,$567 of which were recorded as ordinary income. The remaining $50 reduced the Company’s basis in Quench.  Furthermore, due to a decrease in the Company’sownership percentage in the investment, Quench has been reclassified in thesefinancial statements as an “Affiliate” investment, along with all unrealizedgains and losses and interest income associated with the investment since thedate of the restructuring.

 

On September 11, 2008, the Company invested approximately $3.1million in A. Stucki (“Stucki”) in the form of additional debt to the existingsenior subordinated term debt for Stucki’s acquisition of the assets of AlcoSpring Industries, Inc.  Alco Springs, located in Chicago, IL, is oneof the last independent manufacturers of hot wound springs for thetransportation and heavy equipment industries.  This investment carriesthe same terms as the original senior subordinated term debt facility. TheCompany’s equity securities and ownership did not change as a result ofthis transaction.

 

*Investment Concentrations*

 

Approximately 63.3% of the aggregate fair value of the Company’sinvestment portfolio at September 30, 2008 consisted of senior term debt,approximately 19.0% was senior subordinated term debt and approximately 17.7%was preferred and common equity securities. At September 30, 2008, theCompany had an aggregate of approximately $347.6 million, at cost, invested in46 portfolio companies. The following table outlines the Company’s investmentsby type at September 30, 2008 and March 31, 2008:

 
| ** **                                     | ** ** | **September 30, 2008** | ** **  | **March 31, 2008** | ** ** |
|------------------------------------------------|------------|----------------------------------|-------------|------------------------------|------------|
| ** **                                     | ** ** | **Cost**                         | ** **  | **Fair Value**          | ** ** | **Cost** | ** ** | **Fair Value** | ** ** |
| Senior Term Debt                               |       | $                                | 234,082     |                         | $          | 206,400 |   | $ | 269,270 |   | $ | 244,878 |   |
| Senior Subordinated Term Debt                  |       | 71,924                           |        | 61,952                       |       | 43,894 |   | 38,644 |   |
| Subordinated Term Debt                         |       | —                           |        | —                       |       | 1,089 |   | 1,089 |   |
| Preferred & Common Equity  Securities |       | 41,597                           |        | 57,904                       |       | 36,552 |   | 50,993 |   |
| **Total Investments**                          | ** ** | **$**                            | **347,603** | ** **                   | **$**      | **326,256** | ** ** | **$** | **350,805** | ** ** | **$** | **335,604** | ** ** |

 

Investments at fair value consisted of the following industryclassifications at September 30, 2008 and March 31, 2008:

 
| ** **                                | ** ** | **September 30, 2008** | ** **  | **March 31, 2008** | ** ** |
|-------------------------------------------|------------|----------------------------------|-------------|------------------------------|------------|
| ** **                                | ** ** | ** **                       | ** **  | **Percentage of**       | ** ** | ** ** | ** ** | **Percentage of** | ** ** |
| ** **                                | ** ** | **Fair Value**              | ** **  | **Total Investments**   | ** ** | **Net Assets** | ** ** | **Fair Value** | ** ** | **Total Investments** | ** ** | **Net Assets** | ** ** |
| Aerospace and Defense                     |       | $                                | 21,410      |                         | 6.6        | % | 9.2 | % | $ | — |   | 0.0 | % | 0.0 | % |
| Automobile                                |       | 1,548                            |        | 0.5                          | %          | 0.7 | % | 2,074 |   | 0.6 | % | 1.0 | % |
| Beverage, Food and Tobacco                |       | 1,705                            |        | 0.5                          | %          | 0.7 | % | 3,454 |   | 1.0 | % | 1.7 | % |
| Broadcasting and Entertainment            |       | 3,418                            |        | 1.0                          | %          | 1.5 | % | 3,499 |   | 1.1 | % | 1.7 | % |
| Buildings and Real Estate                 |       | 10,473                           |        | 3.2                          | %          | 4.5 | % | 11,734 |   | 3.5 | % | 5.7 | % |
| Cargo Transport                           |       | 15,433                           |        | 4.7                          | %          | 6.6 | % | 20,869 |   | 6.2 | % | 10.1 | % |
| Chemicals, Plastics and Rubber            |       | 22,373                           |        | 6.9                          | %          | 9.6 | % | 25,563 |   | 7.6 | % | 12.4 | % |
| Containers, Packaging and Glass           |       | 25,206                           |        | 7.7                          | %          | 10.8 | % | 26,286 |   | 7.8 | % | 12.7 | % |
| Diversified/Conglomerate Manufacturing    |       | 59,889                           |        | 18.3                         | %          | 25.7 | % | 57,500 |   | 17.1 | % | 27.9 | % |
| Diversified/Conglomerate Service          |       | 28,965                           |        | 8.9                          | %          | 12.4 | % | 30,742 |   | 9.2 | % | 14.9 | % |
| Ecological                                |       | —                           |        | 0.0                          | %          | 0.0 | % | 422 |   | 0.1 | % | 0.2 | % |
| Electronics                               |       | 8,840                            |        | 2.7                          | %          | 3.8 | % | 10,689 |   | 3.2 | % | 5.2 | % |
| Healthcare, Education and Childcare       |       | 38,243                           |        | 11.7                         | %          | 16.4 | % | 37,238 |   | 11.1 | % | 18.0 | % |
| Home and Office Furnishings               |       | —                           |        | 0.0                          | %          | 0.0 | % | 14,658 |   | 4.4 | % | 7.1 | % |
| Machinery                                 |       | 64,176                           |        | 19.7                         | %          | 27.5 | % | 66,439 |   | 19.8 | % | 32.2 | % |
| Oil and Gas                               |       | 5,779                            |        | 1.8                          | %          | 2.5 | % | — |   | 0.0 | % | 0.0 | % |
| Personal, Food and Miscellaneous Services |       | 4,431                            |        | 1.4                          | %          | 1.9 | % | 6,936 |   | 2.1 | % | 3.4 | % |
| Printing and Publishing                   |       | 3,401                            |        | 1.0                          | %          | 1.5 | % | 5,299 |   | 1.6 | % | 2.6 | % |
| Telecommunications                        |       | 10,966                           |        | 3.4                          | %          | 4.7 | % | 12,202 |   | 3.6 | % | 5.9 | % |
| **Total Investments**                     | ** ** | **$**                            | **326,256** | ** **                   | **100.0**  | **%** | ** ** | ** ** | **$** | **335,604** |   | **100.0** | % |   |   |

 

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The investments at fair value were included in the following geographicregions of the United States and Canada at September 30, 2008 and March 31,2008:

 
| ** **            | ** ** | **September 30, 2008** | ** **  | **March 31, 2008** | ** ** |
|-----------------------|------------|----------------------------------|-------------|------------------------------|------------|
| ** **            | ** ** | ** **                       | ** **  | **Percentage of**       | ** ** | ** ** | ** ** | **Percentage of** | ** ** |
| ** **            | ** ** | **Fair Value**              | ** **  | **Total Investments**   | ** ** | **Net Assets** | ** ** | **Fair Value** | ** ** | **Total Investments** | ** ** | **Net Assets** | ** ** |
| Mid-Atlantic          |       | $                                | 124,725     |                         | 38.2       | % | 53.4 | % | $ | 131,883 |   | 39.3 | % | 63.9 | % |
| Midwest               |       | 111,509                          |        | 34.2                         | %          | 47.8 | % | 106,811 |   | 31.8 | % | 51.7 | % |
| Northeast             |       | 8,575                            |        | 2.6                          | %          | 3.7 | % | 10,718 |   | 3.2 | % | 5.2 | % |
| Southeast             |       | 49,434                           |        | 15.2                         | %          | 21.2 | % | 49,780 |   | 14.8 | % | 24.1 | % |
| West                  |       | 32,013                           |        | 9.8                          | %          | 13.7 | % | 36,412 |   | 10.9 | % | 17.6 | % |
| **Total Investments** | ** ** | **$**                            | **326,256** | ** **                   | **100.0**  | **%** | ** ** | ** ** | **$** | **335,604** |   | **100.0** | % |   |   |

 

The geographic region depicts the location of the headquarters for theCompany’s portfolio companies. A portfolio company may have a number of otherbusiness locations in other geographic regions.

 

*Investment Principal Repayments*

 

The following table summarizes thecontractual principal repayment and maturity of the Company’s investmentportfolio by fiscal year, assuming no voluntary prepayments:

 
| ** **                                          | ** ** | ** **                              | ** ** | **Amount** | ** **  |
|-----------------------------------------------------|------------|-----------------------------------------|------------|------------|-------------|
| For the remaining six months ending  March 31: |       | 2009                                    |       | $          | 8,872       |   |
| For the fiscal year ending March 31:           |       | 2010                                    |       | 13,621     |        |
|                                                |       | 2011                                    |       | 39,354     |        |
|                                                |       | 2012                                    |       | 58,800     |        |
|                                                |       | 2013                                    |       | 52,854     |        |
|                                                |       | Thereafter                              |       | 132,447    |        |
| ** **                                          | ** ** | **Total contractual repayments**        | ** ** | **$**      | **305,948** | ** ** |
|                                                |       | Investments in equity securities        |       | 41,597     |        |
|                                                |       | Unamortized premiums on debt securities |       | 58         |        |
| ** **                                          | ** ** | **Total**                               | ** ** | **$**      | **347,603** | ** ** |

 

**NOTE 4. RELATED PARTY TRANSACTIONS**

 

**Investment Advisory and Management Agreement**

 

TheCompany has entered into an investment advisory and management agreement withthe Adviser (the “Advisory Agreement”), which is controlled by the Company’schairman and chief executive officer. In accordance with the AdvisoryAgreement, the Company pays the Adviser fees as compensation for its services,consisting of a base management fee and an incentive fee.

 

ThroughDecember 31, 2006, the base management fee was computed and payablequarterly and was assessed at an annual rate of 2.0% computed on the basis ofthe average value of the Company’s gross invested assets at the end of the twomost recently completed quarters, which were total assets less the cashproceeds and cash and cash equivalents from the proceeds of the Company’sinitial public offering that were not invested in debt and equity securities ofportfolio companies. Beginning on January 1, 2007, the base management feewas computed and payable quarterly and was assessed at an annual rate of 2.0%computed on the basis of the value of the Company’s average gross assets at theend 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.

 

OnJanuary 9, 2007, the Company’s Board of Directors accepted anunconditional and irrevocable voluntary waiver from the Adviser to reduce theannual 2.0% base management fee on senior syndicated loan participations to0.5%, to the extent that proceeds resulting from borrowings were used topurchase such syndicated loan participations, for the quarter ended September 30,2008.

 

On July 9, 2008, the Company’s Board of Directors approved therenewal of its Advisory Agreement with the Adviser through August 31,2009.

 

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Whenthe Adviser receives fees from portfolio companies, as discussed in Note 2under “Services Provided to Portfolio Companies,” 50% of certain of these feesare credited against the base management fee that the Company would otherwisebe required to pay to the Adviser.

 

Thefollowing tables summarize the management fees and associated credits reflectedin the accompanying consolidated statements of operations:

 
| ** **                                                                                                  | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                  | ** ** | **September 30,**           | ** ** | **September 30,**         | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                                                                  | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Base management fee**                                                                                     |       | $                                | 435        |                           | $          | 453 |   | $ | 861 |   | $ | 812 |   |
|                                                                                                        |       |                             |       |                           |       |   |   |   |   |
| Credits to base management fee from  Adviser:                                                               |       |                             |       |                           |       |   |   |   |   |
| Credit for investment advisory fees  received by Adviser                                                    |       | (313                             | )          | (61                            | )          | (463 | ) | (735 | ) |
| Fee reduction for the voluntary,  irrevocable waiver of 2% fee on senior syndicated loans to 0.5% per annum |       | (383                             | )          | (442                           | )          | (807 | ) | (152 | ) |
| **Credit to base management fee from Adviser**                                                              |       | (696                             | )          | (503                           | )          | (1,270 | ) | (887 | ) |
|                                                                                                        |       |                             |       |                           |       |   |   |   |   |
| **Net base management fee**                                                                                 | ** ** | **$**                            | **(261**   | **)**                          | **$**      | **(50** | **)** | **$** | **(409** | **)** | **$** | **(75** | **)** |

 

AtSeptember 30, 2008, a resulting base management fee credit of $261 wasunpaid and is included as a reduction in the Fee due to Adviser line item inthe accompanying condensed consolidated statements of assets andliabilities.  The Fee due to Adviser of$27 also includes loan servicing fees of $288, as discussed below.  At March 31, 2008, a base management feecredit of $384 was unpaid and included in fees due to Adviser in theaccompanying condensed consolidated statement of assets and liabilities.  The amount due from Adviser of $89 alsoincludes a loan servicing fee of $295.

 

In addition, the Adviser services the loans held by BusinessInvestment, in return for which the Adviser receives a 2.0% annual fee based onthe monthly aggregate balance of loans held by Business Investment. Since theCompany owns these loans, all loan servicing fees paid to the Adviser aretreated as reductions against the 2.0% base management fee payable to theAdviser. Overall, the base management fee due to the Adviser cannot exceed 2.0%of total assets (as reduced by cash and cash equivalents pledged to creditors)during any given fiscal year.

 

For the three and six months ended September 30, 2008, the Companyrecorded loan servicing fees due to the Adviser of $1,258 and $2,511,respectively.  At September 30,2008, the Company owed $288 of unpaid loan servicing fees to the Adviser, whichare netted and recorded in Fee due to Adviser. At March 31, 2008, there were $295 of loan servicing fees due tothe Adviser that were included as a credit in fees Due from Adviser in theaccompanying consolidated statements of assets and liabilities, offsetting thebase management fee credit due to the Company from the Adviser at that date.

 

The incentive fee consists of two parts: an income-based incentive feeand a capital gains incentive fee. The income-based incentive fee rewards theAdviser if the Company’s quarterly net investment income (before giving effectto any incentive fee) exceeds 1.75% of our net assets (the “hurdle rate”). TheCompany will pay the Adviser an income incentive fee with respect to theCompany’s pre-incentive fee net investment income in each calendar quarter asfollows:

 

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

 

·                  100% of the Company’s pre-incentive fee netinvestment income with respect to that portion of such pre-incentive fee netinvestment income, if any, that exceeds the hurdle rate but is less than2.1875% in any calendar quarter (8.75% annualized); and

 

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

 

The second part of the incentive fee is a capital gains incentive feethat will be determined and payable in arrears as of the end of each fiscalyear (or upon termination of the Advisory Agreement, as of the terminationdate), and equals 20% of the Company’s realized capital gains as of the end ofthe fiscal year. In determining the capital gains incentive fee payable to theAdviser, the Company will calculate the cumulative aggregate realized capitalgains and cumulative aggregate realized capital losses since the 

 

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Company’s inception, and the aggregate unrealized capital depreciationas of the date of the calculation, as applicable, with respect to each of theinvestments in the Company’s portfolio.

 

Becausepre-incentive fee net investment income was below the hurdle rate of 1.75% ofnet assets, no income-based incentive fee was recorded for the three monthsended September 30, 2008 or 2007. No capital gains incentive fee wasrecorded for the three months ended September 30, 2008 or 2007, ascumulative unrealized capital depreciation exceeded cumulative realized capitalgains net of cumulative realized capital losses for each period.

 

**Administration Agreement**

 

TheCompany has entered into an administration agreement (the “AdministrationAgreement”) with Gladstone Administration, LLC (the “Administrator”), awholly-owned subsidiary of the Adviser whereby it pays separately foradministrative services. The Administration Agreement provides for paymentsequal to the Company’s allocable portion of its Administrator’s overheadexpenses in performing its obligations under the Administration Agreementincluding, but not limited to, rent for employees of the Administrator, and itsallocable portion of the salaries and benefits expenses of the Company’s chieffinancial officer, controller, chief compliance officer, treasurer and their respectivestaffs. The Company’s allocable portion of expenses is derived by multiplyingthe Administrator’s total allocable expenses by the percentage of the Company’saverage total assets (the total assets at the beginning and end of eachquarter) in comparison to the average total assets of all companies managed bythe Adviser under similar agreements.

 

TheCompany recorded fees to the Administrator on the consolidated statements ofoperations of $212 and $447 for the three and six months ended September 30,2008, respectively, as compared to administration fees of $228 and $436,respectively, for the three and six months ended September 30, 2007. As ofSeptember 30, 2008 and March 31, 2008, $212 and $208, respectively,was unpaid and included in Fee due to Administrator in the accompanyingconsolidated statements of assets and liabilities.

 

On July 9, 2008, the Company’s Board of Directors approved therenewal of its Administration Agreement with the Administrator through August 31,2009.

 

**LicenseAgreement**

 

TheCompany has entered into a license agreement with the Adviser, pursuant towhich the Adviser has granted the Company a non-exclusive license to use thename “Gladstone” and the Diamond G trademark. This license agreement requiredus to pay the Adviser a royalty fee of $10 per quarter through March 31,2009. The amount of the fee is negotiated on an annual basis by the Company’scompensation committee and must be approved by a majority of the Company’sindependent directors. The fee was increased to $10 per quarter effective as ofApril 1, 2008 and, as a result of the last negotiation, will remain at $10for the next contract term which begins on April 1, 2009. The licensearrangement will terminate in the event that Gladstone Management Corporationis no longer the Company’s investment adviser.

 

**NOTE 5. LINE OF CREDIT**

 

Throughthe Company’s wholly-owned subsidiary, Business Investment, the Company hadobtained a $200 million revolving credit facility (the “Credit Facility”).On October 19, 2006, the Company executed a Purchase and Sale Agreementpursuant to which it agreed to sell certain loans to Business Investment inconsideration of a membership interest therein. Simultaneously, BusinessInvestment executed a Credit Agreement (the “Credit Agreement”) with DeutscheBank AG, New York Branch (“Deutsche Bank”), as administrative agent, pursuantto which Business Investment pledged the loans purchased from the Company tosecure future advances by certain institutional lenders. On March 29,2007, the Company increased its capacity under the Credit Facility from $100 millionto $200 million, such that an additional $50 million would beavailable for borrowing for the succeeding 90 day period after the initialamendment of the Credit Facility, and the remaining $50 million would beavailable thereafter. Availability under the Credit Facility was originallyscheduled to terminate on October 18, 2007; however, on that date weamended and extended the Credit Facility such that availability under theCredit Facility terminated on October 16, 2008.

 

OnOctober 16, 2008 the Company further renewed its credit facility arrangedby Deutsche Bank, A.G.  See Note 11Subsequent Events for further information. Interest is payable monthly duringthe term of the Credit Facility and principal will be payable out ofcollections on loans purchased from the Company during the period following thedate of which availability for advances has terminated through maturity.Interest rates charged on the advances under the facility are based on the ratepaid by the lenders on commercial paper notes issued by such lenders to fundsome or all of the advances, the London Interbank Offered Rate (“LIBOR”), thePrime Rate or the Federal Funds Rate, depending on market conditions, andadjust periodically. Available borrowings are subject to various constraintsimposed under the Credit Agreement, based on the aggregate loan balance pledgedby Business Investment, which varies as loans are added and repaid, regardlessof whether such repayments are early prepayment or are made as contractuallyrequired.

 

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TheCredit Facility contains covenants that require Business Investment to maintainits status as a separate entity; prohibit certain significant corporate transactions(such as mergers, consolidations, liquidations or dissolutions); and restrictmaterial changes to the Company’s credit and collection policies. The facilityalso restricts some of the terms and provisions (including interest rates,terms to maturity and payments schedules) and limits the borrower and industryconcentrations of loans that are eligible to secure advances. As of September 30,2008, Business Investment was in compliance with all of the facility covenants.As of September 30, 2008, there was $131.0 million of borrowingsoutstanding on the Credit Facility at an interest rate of approximately 3.9%and the remaining borrowing capacity under the Credit Facility wasapproximately $69.0 million.

 

Theadministrative agent also requires that any interest or principal payments onpledged loans be remitted directly by the borrower into a lockbox account withthe Bank of New York as custodian. Deutsche Bank is also the trustee of theaccount and once a month remits the collected funds to the Company. At September 30,2008, the amount due from the custodian was approximately $3.0 million.

 

TheAdviser services the loans pledged under the Credit Facility. As a condition tothis servicing arrangement, the Company executed a performance guarantypursuant to which it guaranteed that the Adviser would comply fully with all ofits obligations under the Credit Facility. The performance guaranty requiresthe Company to maintain a minimum net worth of $100 million and tomaintain “asset coverage” with respect to “senior securities representingindebtedness” of at least 200%, in accordance with Section 18 of the 1940Act. As of September 30, 2008, the Company was in compliance with thecovenants under the performance guaranty.

 

**NOTE 6. INTEREST RATE CAP AGREEMENT**

 

InOctober 2007, the Company entered into an interest rate cap agreement thatwill effectively limit the interest rate on a portion of the borrowings underthe line of credit pursuant to the terms of the Credit Facility. The interestrate cap has a notional amount of $60 million at a cost of $53. TheCompany records changes in the fair market value of the interest rate capagreement monthly based on the current market valuation at month end asunrealized depreciation or appreciation on derivative on the Company’sconsolidated statement of operations. The interest rate cap agreement expiresin October 2009. The agreement provides that the Company’s floatinginterest rate or cost of funds on a portion of the portfolio’s borrowings willbe capped at 9% when the LIBOR rate is in excess of 9%. At September 30,2008, the interest rate cap agreement had a nominal fair market value.

 

Theuse of a cap involves risks that are different from those associated withordinary portfolio securities transactions. Cap agreements may be considered tobe illiquid. Although the Company will not enter into any such agreementsunless it believes that the other party to the transaction is creditworthy, theCompany does bear the risk of loss of the amount expected to be received under suchagreements in the event of default or bankruptcy of the agreement counterparty.

 

**NOTE 7. COMMON STOCK**

 
| ** **                                      | ** ** | **Shares** | ** ** | **Total Value** | ** ** |
|-------------------------------------------------|------------|------------|------------|----------------------|------------|
| Balance at March 31, 2008                  |       | 16,560,100 |       | $                    | 224,190    |   |
| Issuance of common stock under rights  offering |       | 5,520,033  |       | 40,646               |       |
| Balance at September 30, 2008              |       | 22,080,133 |       | $                    | 264,836    |   |

 

InApril 2008, the Company completed an offering of transferable subscriptionrights to purchase additional shares of common stock (the “Rights Offering”).Pursuant to the Rights Offering, the Company sold 5,520,033 shares of itscommon stock at a subscription 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.

 

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**NOTE 8. NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS PERCOMMON SHARE**

 

The following table sets forth the computation of basic and diluted netincrease (decrease) in net assets per common share resulting from operations:

 
| ** **                                                                                                 | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                 | ** ** | **September 30,**           | ** ** | **September 30,**         | ** ** |
| ** **                                                                                                 | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Numerator for basic and diluted net  increase (decrease) in net assets resulting from operations per share |       | $                                | 956        |                           | $          | (4,367 | ) | $ | (3,527 | ) | $ | 3,903 |   |
| Denominator for basic and diluted shares                                                                   |       | 22,080,133                       |       | 16,560,100                     |       | 21,011,740 |   | 16,560,100 |   |
| Basic and diluted net increase (decrease)  in net assets resulting from operations per share               |       | $                                | 0.04       |                           | $          | (0.26 | ) | $ | (0.17 | ) | $ | 0.24 |   |

 

**NOTE 9. DIVIDENDS**

 

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

 
| **Fiscal Year 2009** |   |   |   |   |
|----------------------|--------|--------|--------|--------|

 
| **Record Date**    | ** ** | **Payment Date**    | ** ** | **Dividend Per Share** | ** ** |
|-------------------------|------------|--------------------------|------------|----------------------------------|------------|
| September 22, 2008 |       | September 30,  2008 |       | $                                | 0.08       |   |
| August 21, 2008    |       | August 29,  2008    |       | 0.08                             |       |
| July 23, 2008      |       | July 31,  2008      |       | 0.08                             |       |
| June 20, 2008      |       | June 30  2008       |       | 0.08                             |       |
| May 21 2008        |       | May 30,  2008       |       | 0.08                             |       |
| April 22, 2008     |       | April 30,  2008     |       | 0.08                             |       |
| ** **              | ** ** | **Total**                | ** ** | **$**                            | **0.48**   | ** ** |

 
| **Fiscal Year 2008** |   |   |   |   |   |
|----------------------|--------|--------|--------|--------|--------|

 
| **Record Date**    | ** ** | **Payment Date**    | ** ** | **Dividend Per Share** | ** ** |
|-------------------------|------------|--------------------------|------------|----------------------------------|------------|
| September 20, 2007 |       | September 28,  2007 |       | $                                | 0.075      |   |
| August 23, 2007    |       | August 31,  2007    |       | 0.075                            |       |
| July 23, 2007      |       | July 31,  2007      |       | 0.075                            |       |
| June 21, 2007      |       | June 29,  2007      |       | 0.075                            |       |
| May 22, 2007       |       | May 31,  2007       |       | 0.075                            |       |
| April 20, 2007     |       | April 30,  2007     |       | 0.075                            |       |
| ** **              | ** ** | **Total**                | ** ** | **$**                            | **0.45**   |   |

 

Aggregatedividends declared and paid for the three months ended September 30, 2008and 2007 were approximately $5.3 million and $3.7 million, respectively.  Aggregate dividends declared for the sixmonths ended September 30, 2008 and 2007 were approximately $10.2 millionand $7.4 million, respectively.  Alldividends were declared based on estimates of net investment income for therespective fiscal years.

 

Thetiming and characterization of certain income and capital gains distributionsare determined annually in accordance with federal tax regulations which maydiffer from GAAP. These differences primarily relate to items recognized asincome for financial statement purposes and realized gains for tax purposes. Asa result, net investment income and net realized gain (loss) on investmenttransactions for a reporting period may differ significantly from distributionsduring such period. Accordingly, the Company may periodically makereclassifications among certain of its capital accounts without impacting thenet asset value of the Company.

 

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

 

TheCompany’s Board of Directors estimates the source of the distributions at thetime of their declaration as required by Section 19(a) of the 1940Act. On a monthly basis, if required under Section 19(a), the Companyposts a Section 19(a) notice through the Depository Trust Company’sLegal Notice System (“LENS”) and also sends to its registered stockholders awritten 

 

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Section 19(a) noticealong with the payment of dividends for any payment which includes a dividend estimatedto be paid from any other source other than net investment income. Theestimates of the source of the distribution are interim estimates based on GAAPthat are subject to revision, and the exact character of the distributions fortax purposes cannot be determined until the final books and records of theCompany are finalized for the calendar year. Following the calendar year end,after definitive information has been determined by the Company, if the Companyhas made distributions of taxable income (or return of capital), the Companywill deliver a Form 1099-DIV to its stockholders specifying such amountand the tax characterization of such amount. Therefore, these estimates aremade solely in order to comply with the requirements of Section 19(a) ofthe 1940 Act and should not be relied upon for tax reporting or any otherpurposes and could differ significantly from the actual character ofdistributions for tax purposes.

 

Thefollowing GAAP estimates were made by the Board of Directors during the quarterended September 30, 2008:

 
| **Month Ended**    | ** ** | **Ordinary Income** | ** ** | **Return of Capital** | ** ** | **Total Dividend** | ** ** |
|-------------------------|------------|--------------------------|------------|---------------------------------|------------|-------------------------|------------|
| September 30, 2008 |       | $                        | 0.067      |                            | $          | 0.013                   |       | $ | 0.080 |   |
| August 31, 2008    |       | 0.061                    |       | 0.019                           |       | 0.080                   |       |
| July 31, 2008      |       | 0.062                    |       | 0.018                           |       | 0.080                   |       |
|                         |            |                          |            |                                 |            |                         |            |  |  |  |

 

Becausethe Board of Directors declares dividends at the beginning of a quarter, it isdifficult to estimate how much of the Company’s monthly dividends anddistributions, based on GAAP, will come from ordinary income, capital gains,and returns of capital. Subsequent to the quarter ended September 30,2008, the following corrections were made to the above listed estimates forthat quarter:

 
| **Month Ended**    | ** ** | **Ordinary Income** | ** ** | **Return of Capital** | ** ** | **Total Dividend** | ** ** |
|-------------------------|------------|--------------------------|------------|---------------------------------|------------|-------------------------|------------|
| September 30, 2008 |       | $                        | 0.067      |                            | $          | 0.013                   |       | $ | 0.080 |   |
| August 31, 2008    |       | 0.050                    |       | 0.030                           |       | 0.080                   |       |
| July 31, 2008      |       | 0.055                    |       | 0.025                           |       | 0.080                   |       |
|                         |            |                          |            |                                 |            |                         |            |  |  |  |

 

Fordividends declared subsequent to quarter end, the following estimates, based onGAAP, have been made pursuant to Section 19(a) of the 1940 Act:

 
| **Month Ended**   | ** ** | **Ordinary Income** | ** ** | **Return of Capital** | ** ** | **Total Dividend** | ** ** |
|------------------------|------------|--------------------------|------------|---------------------------------|------------|-------------------------|------------|
| December 31, 2008 |       | $                        | 0.068      |                            | $          | 0.012                   |       | $ | 0.080 |   |
| November 30, 2008 |       | 0.051                    |       | 0.029                           |       | 0.080                   |       |
| October 31, 2008  |       | 0.047                    |       | 0.033                           |       | 0.080                   |       |
|                        |            |                          |            |                                 |            |                         |            |  |  |  |

 

**NOTE 10. CONTRACTUAL OBLIGATIONS**

 

At September 30, 2008, the Company was not a party to any signedinvestments to be funded.

 

**NOTE 11. SUBSEQUENT EVENTS**

 

***Dividends Declared***

 

On October 7, 2008, the Company’sBoard of Directors declared the following monthly cash dividends:

 
| **Record Date**   | ** ** | **Payment Date**   | ** ** | **Dividend Per Share** | ** ** |
|------------------------|------------|-------------------------|------------|----------------------------------|------------|
| October 23, 2008  |       | October 31,  2008  |       | $                                | 0.08       |   |
| November 19, 2008 |       | November 28,  2008 |       | 0.08                             |       |
| December 22, 2008 |       | December 31,  2008 |       | 0.08                             |       |
|                        |            |                         |            |                                  |            |  |

 

***Amendment to Credit Facility***

 

OnOctober 16, 2008, the Company, through Business Investment, amended andrenewed its credit facility arranged by Deutsche Bank. BusinessInvestment, the Adviser, Deutsche Bank and certain other parties listed fromtime to time as committed lenders entered into the credit agreement for thefacility, which matures on April 16, 2009, and provides GladstoneInvestment with a revolving credit facility of $125 million. Any advances underthe credit facility will generally bear interest at the commercial paper rateplus 3.5% per annum, with a commitment fee of 0.75% per annum on the undrawnamounts. There was no fee in connection with this renewal.

 

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**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL 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 can identifyforward-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” or thenegative 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 publicly updateor revise any forward-looking statements, whether as a result of newinformation, future events or otherwise, after the date of this Form 10-Q**.

 

**The following analysis of our financial condition and resultsof operations should be read in conjunction with our consolidated financialstatements and the notes thereto contained elsewhere in this report and ourannual report on Form 10-K for the fiscal year ended March 31, 2008.**

 

**OVERVIEW**

 

Wewere incorporated under the General Corporation Laws of the State of Delawareon February 18, 2005. We were primarily established for the purpose ofinvesting in subordinated loans, mezzanine debt, preferred stock and warrantsto purchase common stock of small and medium-sized companies in connection withbuyouts and other recapitalizations. We also invest in senior secured loans,common stock and senior and subordinated syndicated loans. Our investmentobjective is to generate both current income and capital gains through thesedebt and equity instruments. We operate as a closed-end, non-diversifiedmanagement investment company, and have elected to be treated as a businessdevelopment company under the Investment Company Act of 1940 (the “Act”).

 

**Critical Accounting Policies**

 

The preparation of financial statements and related disclosures inconformity with accounting principles generally accepted in the United States (“GAAP”)requires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities, and disclosure of contingent assets andliabilities at the date of the financial statements, and revenues and expensesduring the period reported. Actual results could differ materially from thoseestimates. We have identified our investment valuation process, which ispresented below, as our most critical accounting policy.

 

***Investment Valuation***

 

Themost significant estimate inherent in the preparation of our condensedconsolidated financial statements is the valuation of investments and therelated amounts of unrealized appreciation and depreciation of investmentsrecorded.

 

GeneralValuation Policy:  We value ourinvestments in accordance 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.

 

InSeptember 2006, the Financial Accounting Standards Board issued *Statement of Financial Accounting Standards No. 157—FairValue Measurements* (“SFAS 157”), which, for financial assets, iseffective for fiscal years beginning after November 15, 2007, with earlyadoption permitted. We 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, withina 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;                                                                                                                                                                                                                                 |
|--------|----------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |     |                                                                                                                                                                                                                                                                                                                                                                           |
| · | * * | *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 |

 

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|   |     | 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 our own assumptions that market participants would use to price the  asset or liability based upon the best available information. |

 

Thefollowing table presents the financial instruments carried at fair value as of September 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 September 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 |       | $                                                | —     |   | $ | — |   | $ | 115,133 |   | $ | 115,133 |   |
| Control investments                   |       | —                                           |       | — |   | 157,246 |   | 157,246 |   |
| Affiliate investments                 |       | —                                           |       | — |   | 53,877 |   | 53,877 |   |
| Total investments at fair value       |       | $                                                | —     |   | $ | — |   | $ | 326,256 |   | $ | 326,256 |   |

 

*Changes in Level 3 Fair Value Measurements*

 

Thefollowing table provides a roll-forward in the changes in fair value from March 31,2008 to September 30, 2008, for all investments for which we determinefair 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**  | ** ** |
| **Six months ended September 30, 2008:**      |       |              |       |            |       |            |       |       |       |
| Fair value at March 31, 2008                  |       | $                 | 142,739    |            | $          | 145,407         |       | $          | 47,458     |   | $ | 335,604 |   |
| Total realized/unrealized losses (a)               |       | (4,941            | )          | 5,973           |       | (11,393         | )          | (10,361    | )          |
| New investments, repayments, and  settlements, net |       | (22,665           | )          | 5,866           |       | 17,812          |       | 1,013      |       |
| Transfers in (out) of Level 3                      |       | —            |       | —          |       | —          |       | —     |       |
| Fair value as of September 30, 2008           |       | $                 | 115,133    |            | $          | 157,246         |       | $          | 53,877     |   | $ | 326,256 |   |
|                                               |       |              |       |            |       |            |       |       |       |
| **Three months ended September 30, 2008:**    |       |              |       |            |       |            |       |       |       |
| Fair value at June 30, 2008                   |       | $                 | 130,764    |            | $          | 141,042         |       | $          | 48,493     |   | $ | 320,299 |   |
| Total realized/unrealized losses (a)               |       | (7,689            | )          | 10,840          |       | (5,978          | )          | (2,827     | )          |
| New investments, repayments, and  settlements, net |       | (7,942            | )          | 5,364           |       | 11,362          |       | 8,784      |       |
| Transfers in (out) of Level 3                      |       | —            |       | —          |       | —          |       | —     |       |
| Fair value as of September 30, 2008           |       | $                 | 115,133    |            | $          | 157,246         |       | $          | 53,877     |   | $ | 326,256 |   |

 

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

 

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*Investment Valuation Policy*

 

Wecarry our investments at market value to the extent that market quotations arereadily available, and otherwise at fair value, as determined in good faith byour Board of Directors. In determining the fair value of our investments, ourAdviser has established an investment valuation policy (the “policy”). Thepolicy has been approved by our Board of Directors and each quarter the Boardof Directors reviews whether our Adviser has applied the policy consistently,and votes whether or not to accept the recommended valuation of our investmentportfolio.

 

Weuse generally accepted valuation techniques to value our portfolio unless wehave specific information about the value of an investment to determineotherwise. From time to time we may accept an appraisal of a business in whichwe hold securities. These appraisals are expensive and occur infrequently butprovide a third-party valuation opinion that may differ in results, techniquesand scopes used to value our investments. When these specific third-partyvaluations are engaged or accepted, we would use such appraisals to value theinvestment we have in that business if we determined that the appraisals werethe best estimate of fair value.

 

Thepolicy, which is summarized below, applies to the following categories ofsecurities:

 

•                 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 of publicly-traded securities based on theclosing price for the security on the exchange or securities market on which itis listed and primarily traded on the valuation date. To the extent that we ownrestricted securities that are not freely tradable, but for which a publicmarket otherwise exists, we will use the market value of that security adjustedfor any decrease in value resulting from the restrictive feature. We use Level1 inputs for these types of securities. We did not value any of our investmentsusing Level 1 inputs as of September 30, 2008.

 

**Securities for which a limited market exists:**We value securities that are not traded on anestablished secondary securities market, but for which a limited market for thesecurity exists, such as certain participations in, or assignments of,syndicated loans, at the quoted bid price. 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 theextent that we use the indicative bid price as a basis for valuing the security,our Adviser may take further steps to consider additional information tovalidate that price in accordance with the policy. We use Level 2 or 3 inputsfor these types of securities, as applicable. We did not value any securitiesusing Level 2 inputs during the quarter ended September 30, 2008.

 

**Securities for which no market exists:** The valuation methodology for securities forwhich no market exists falls into three categories: (1) portfolioinvestments comprised solely of debt securities; (2) portfolio investmentsin controlled companies comprised of a bundle of securities, which can includedebt and equity securities; and (3) portfolio investments innon-controlled companies comprised of a bundle of securities, which can includedebt and equity securities. We use Level 3 inputs for these types ofsecurities.

 

(1)         **Portfolio investments comprisedsolely of debt securities:**Debt securities that are not publicly traded on an established securitiesmarket, or for which a limited market does not exist (“Non-Public DebtSecurities”), 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-Public Debt Securities, we haveengaged SPSE to submit opinions of value for our debt securities that areissued by portfolio companies in which we own no equity, or equity-likesecurities. SPSE’s opinions of value are based on the valuations prepared byour portfolio management team as described below. We request that SPSE alsoevaluate and assign values to success fees (conditional interest included insome 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 evaluated price opinions which arereflective of what SPSE believes the bid side of the market would be for eachloan after careful review and analysis of descriptive, market and creditinformation. Each price reflects SPSE’s 

 

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best judgment based upon careful examination of avariety of market factors. Because of fluctuation in the market and in otherfactors beyond its control, SPSE cannot guarantee these evaluations. Theevaluations reflect the market prices, or estimates thereof, on the datespecified. The prices are based on comparable market prices for similarsecurities. Market information has been obtained from reputable secondarymarket sources. Although these sources are considered reliable, SPSE cannotguarantee their accuracy.

 

SPSE opinions of value of our debt securities thatare issued by portfolio companies where we have no equity, or equity-likesecurities are submitted to our Board of Directors along with our Adviser’ssupplemental assessment and recommendation regarding valuation of each of theseinvestments. Our Adviser generally accepts the opinion of value given by SPSE,however, in certain limited circumstances, such as when our Adviser may learnnew information regarding an investment between the time of submission to SPSEand the date of the Board assessment, our Adviser’s conclusions as to value maydiffer from the opinion of value delivered by SPSE. Our Board of Directors thenreviews whether our Adviser has followed its established procedures fordeterminations of fair value, and votes to accept or reject the recommendedvaluation of our investment portfolio. Our Adviser and our managementrecommended, and the Board of Directors voted to accept, the opinions of valuedelivered by SPSE on the loans in our portfolio as denoted on the Schedule ofInvestments as of September 30, 2008 included in our accompanyingconsolidated financial statements.

 

Because there is a delay between when we close aninvestment and when the investment can be evaluated by SPSE, new loans are notvalued immediately by SPSE; rather, management makes its own determinationabout the value of these investments in accordance with our valuation policyusing 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 or equity-like securities (e.g.preferred equity, equity, or other equity-like securities) that are purchasedtogether as part of a package, where the we have control or could gain controlthrough an option or warrant security, both the debt and equity securities ofthe portfolio investment would exit in the mergers and acquisition market asthe principal market, generally through a sale or recapitalization of theportfolio company. Further, we believe that the in-use premise of value (asdefined in SFAS 157), which assumes the debt and equity securities aresold together, is appropriate as this would provide maximum proceeds to the seller.As a result, we will continue to use the enterprise value methodology utilizinga liquidity waterfall approach to determine the fair value of these investmentsunder SFAS 157 if we have the ability to initiate a sale of a portfoliocompany as of the measurement date. Under this approach, we first calculate thetotal enterprise value of the issuer by incorporating some or all of thefollowing factors:

 

•                 the issuer’s ability to make payments;

•                 the earnings of the issuer;

•                 recent sales to third parties of similarsecurities;

•                 the comparison to publicly traded securities;and

•                 discounted cash flow or other pertinentfactors.

 

In gathering the sales to third parties of similarsecurities, we may reference industry statistics and use outside experts. Oncewe have estimated the total enterprise value of the issuer, we subtract thevalue of all the debt securities of the issuer; which are valued at thecontractual principal balance. Fair values of these debt securities arediscounted for any shortfall of total enterprise value over the total debtoutstanding for the issuer. Once the values for all outstanding seniorsecurities (which include the debt securities) have been subtracted from thetotal enterprise value of the issuer, the remaining amount, if any, is used todetermine 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 are purchased together withequity and equity-like securities from the same portfolio company, or issuer,for which the we do not control or cannot gain control as of the measurementdate, using a hypothetical secondary market as our principal market. Inaccordance with SFAS 157, we determine the fair value of these debt securitiesof non-control investments assuming the sale of an individual debt securityusing the in-exchange premise of value (as defined in SFAS 157). As such, weestimate the fair value of the debt component using estimates of value providedby SPSE and our own assumptions in the absence of market observable data,including synthetic credit ratings, estimated remaining life, current marketyield and interest rate spreads of similar securities as of the measurementdate. For equity and equity-like securities of investments for which we do notcontrol or cannot gain control as of the measurement date, we value the equityportion based on the total enterprise value of the issuer, which is calculatedusing a liquidity waterfall approach.

 

Due to the uncertainty inherent in the valuationprocess, such estimates of fair value may differ significantly from the valuesthat would have been obtained had a ready market for the securities existed,and the differences could be material. Additionally, changes in the marketenvironment and other events that may occur over the life of the investmentsmay cause the gains or losses ultimately realized on these investments to bedifferent than the valuations currently assigned. There is no 

 

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single standard for determining fair value in goodfaith, as fair value depends upon circumstances of each individual case. Ingeneral, fair value is the amount that we might reasonably expect to receiveupon the current sale of the security in an arms-length transaction in thesecurity’s principal market.

 

Asof September 30, 2008, the investment portfolio that was valued usingthird-party valuation opinions was approximately $158.6 million, or 49% of thefair value of the Company’s total portfolio investments.

 

*Valuation Considerations: *From time to time, depending on certain circumstances, the Adviser mayuse the following valuation considerations, including but not limited to:

 

•                 the risk rating of thesecurity (see “Loan Grading and Risk Rating”);

•                 the cost basis and thetype of the security;

•                 the nature and realizablevalue of the collateral;

•                 the portfolio company’sability to make payments and discounted cash flow;

•                 reports from portfoliocompany senior management and board meetings;

•                 reported values of similarsecurities of the portfolio company or comparable companies;

•                 changes in the economyaffecting the portfolio company; and

•                 other third-partyappraisals of the portfolio companies.

 

*Credit Information:*  OurAdviser monitors a wide variety of key credit statistics that provideinformation regarding our portfolio companies to help us assess credit qualityand portfolio performance. We and our Adviser participate in the periodic boardmeetings of our portfolio companies in which we hold control and affiliateinvestments and also require them to provide annual audited and monthlyunaudited financial statements. Using these statements and board discussions,our Adviser calculates and evaluates the credit statistics.

 

*Loan Grading and Risk Rating:*  Aspart of our valuation procedures above, we risk rate all of our investments indebt securities. For syndicated loans that have been rated by a NRSRO (asdefined in Rule 2a-7 under the 1940 Act), we use the NRSRO’s risk ratingfor such security. For all other debt securities, we use a proprietary riskrating system. Our risk rating system uses a scale of 0 to 10, with 10 beingthe lowest probability of default. This system is used to estimate theprobability of default on debt securities and the probability of loss if thereis a default. These types of systems are referred to as risk rating systems andare used by banks and rating agencies. The risk rating system covers bothqualitative and quantitative aspects of the business and the securities wehold.

 

Forthe debt securities for which we do not use a third-party NRSRO risk rating, weseek to have our risk rating system mirror the risk rating systems of majorrisk rating organizations, such as those provided by a NRSRO. While we seek tomirror the NRSRO systems, we cannot provide any assurance that our risk ratingsystem will provide the same risk rating as a NRSRO for these securities. Thefollowing chart is an estimate of the relationship of our risk rating system tothe designations 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 Investment’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%                                                                    |

 

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| **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.* |
|-----|----------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Theabove scale gives an indication of the probability of default and the magnitudeof the loss if there is a default. Our policy is to stop accruing interest onan investment if we determine that interest is no longer collectible. At September 30,2008 and March 31, 2008, two investments were on non-accrual for anaggregate, at cost, of approximately $11.5 million and $8.9 million,respectively. Additionally, we do not risk rate our equity securities.

 

Thefollowing table lists the risk ratings for all non-syndicated loans in ourportfolio at September 30, 2008 and March 31, 2008, representingapproximately 58% and 51%, respectively, of all loans in our portfolio at theend of each period:

 
| **Rating**       | ** ** | **September 30, 2008** | ** ** | **March 31, 2008** |
|------------------|------------|----------------------------------|------------|------------------------------|
| Highest          |       | 8.0                              |       | 7.0                          |
| Average          |       | 5.4                              |       | 5.5                          |
| Weighted Average |       | 5.1                              |       | 5.1                          |
| Lowest           |       | 2.0                              |       | 1.0                          |

 

Thefollowing table lists the risk ratings for syndicated loans in our portfoliothat were not rated by a NRSRO at September 30, 2008 and March 31,2008, representing approximately 12% and 13%, respectively, of all loans in ourportfolio at the end of each period:

 
| **Rating**       | ** ** | **September 30, 2008** | ** ** | **March 31, 2008** |
|------------------|------------|----------------------------------|------------|------------------------------|
| Highest          |       | 10.0                             |       | 9.0                          |
| Average          |       | 8.2                              |       | 7.1                          |
| Weighted Average |       | 8.2                              |       | 7.3                          |
| Lowest           |       | 7.0                              |       | 1.0                          |

 

Forsyndicated loans that are currently rated by a NRSRO, we risk rate such loansin accordance with the risk rating systems of major risk rating organizations,such as those provided by a NRSRO. The following table lists the risk ratingsfor all syndicated loans in our portfolio that were rated by a NRSRO at September 30,2008 and March 31, 2008, representing approximately 30% and 36%,respectively, of all loans in our portfolio at the end of each period:

 
| **Rating**       | ** ** | **September 30, 2008** | ** ** | **March 31, 2008** |
|------------------|------------|----------------------------------|------------|------------------------------|
| Highest          |       | BB/Ba2                           |       | BB/Ba2                       |
| Average          |       | B+/B1                            |       | B+/B1                        |
| Weighted Average |       | B/B2                             |       | B+/B1                        |
| Lowest           |       | CCC+/Caa2                        |       | CCC+/B2                      |

 

**Tax Status**

 

Weintend to continue to qualify for treatment as a RIC under Subtitle A,Chapter 1 of Subchapter M of the Internal Revenue Code of 1986, asamended (the “Code”). As a RIC, we are not subject to federal income tax on theportion of our taxable income and gains distributed to stockholders. To qualifyas a RIC, we are required to distribute to stockholders at least 90% ofinvestment company taxable income, as defined by the Code. It is our policy topay out as a dividend up to 100% of those amounts.

 

Inan effort to avoid certain excise taxes imposed on RICs, we currently intend todistribute during each calendar year, an amount at least equal the sum of (1) 98%of our ordinary income for the calendar year, (2) 98% of our capital gainsin excess of capital losses for the one-year period ending on October 31of the calendar year, and (3) any ordinary income and net capital gainsfor preceding years that were not distributed during such years.

 

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**Revenue Recognition**

 

*Interest and Dividend IncomeRecognition*

 

Interestincome is recorded on the accrual basis to the extent that such amounts areexpected to be collected. We will stop accruing interest on investments when itis determined that interest is no longer collectible. At September 30,2008, one Non-Control/Non-Affiliate investment was on non-accrual with a costbasis of approximately $4.6 million, or 1.5% of the cost basis of allloans in our portfolio, and one Control investment was on non-accrual with acost basis of approximately $6.9 million, or 2.2% of the cost basis of allloans in our portfolio. At March 31, 2008, one Non-Control/Non-Affiliateinvestment was on non-accrual with a cost basis of approximately$2.9 million, or 0.9% of the cost basis of all loans in our portfolio, andone Control investment was on non-accrual with a cost basis of approximately$6.0 million, or 1.9% of the cost basis of all loans in our portfolio.Conditional interest, or a success fee, is recorded when earned upon fullrepayment of a loan investment. To date we have not recorded any conditionalinterest. Dividend income on preferred equity securities is accrued to theextent that such amounts are expected to be collected and that we have theoption to collect such amounts in cash. To date, we have not accrued anydividend income.

 

*Services Provided to PortfolioCompanies*

 

Asa business development company under the 1940 Act, we are required to makeavailable significant managerial assistance to our portfolio companies. Weprovide these services through our Adviser, who provides these services on ourbehalf through its officers who are also our officers. Currently, neither wenor our Adviser charges a fee for managerial assistance, however, if ourAdviser does receive fees for such managerial assistance, our Adviser willcredit the managerial assistance fees to the base management fee due from us toour Adviser.

 

OurAdviser receives fees for the other services it provides to our portfolio companies.These other fees are typically non-recurring, are recognized as revenue whenearned and are generally paid directly to our Adviser by the borrower orpotential borrower upon the closing of the investment. The services our Adviserprovides to our portfolio companies vary by investment, but generally include abroad array of services such as investment banking services, arranging bank andequity financing, structuring financing from multiple lenders and investors,reviewing existing credit facilities, restructuring existing investments,raising equity and debt capital, turnaround management, merger and acquisitionservices and recruiting new management personnel. When our Adviser receivesfees for these services, 50% of certain of those fees are voluntarily creditedagainst the base management fee that we pay to our Adviser. Any services ofthis nature subsequent to the closing would typically generate a separate feeat the time of completion.

 

OurAdviser also receives fees for monitoring and reviewing portfolio companyinvestments. These fees are recurring and are generally paid annually orquarterly in advance to our Adviser throughout the life of the investment. Feesof this nature are recorded as revenue by our Adviser when earned and are notcredited against the base management fee.

 

Wemay receive fees for the origination and closing services we provide toportfolio companies through our Adviser. These fees are paid directly to us andare recognized as revenue upon closing of the originated investment and arereported as fee income in the consolidated statements of operations.

 

**Recent Accounting Pronouncements**

 

Referto footnote 2 in the accompanying condensed consolidated financial statementsfor a summary of all recently issued accounting pronouncements.

 

**RESULTS OF OPERATIONS(dollar amounts in thousands, unless otherwise indicated)**

 

***Comparison of thethree months ended September 30, 2008 to the three months ended September 30,2007***

 

**Investment Income**

 

Totalinvestment income for the three months ended September 30, 2008 was$6,816, as compared to $7,156 for the three months ended September 30,2007.

 

Interest income from our investments in debt securities of privatecompanies was $6,218 for the three months ended September 30, 2008, ascompared to $7,067 for the comparable prior year period. The level of interestincome from investments is directly related to the balance, at cost, of theinterest-bearing investment portfolio outstanding during the period multipliedby the weighted average yield. The weighted average yield varies from period toperiod based on the current stated interest rate on interest-bearinginvestments and the amounts of loans for which interest is not accruing. Interestincome from our investments decreased $849, or 12.0%, during the three monthsended September 30, 2008 as compared to the prior year period. This changewas due to the 

 

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decrease in the weighted average yield of our portfolio, attributablemainly to a reduction in the average LIBOR during the comparable time period,which was approximately 2.6% for the three months ended September 30,2008, compared to 5.3% in the prior year period.

 

Interestincome from Non-Control/Non-Affiliate investments was $2,134 for the threemonths ended September 30, 2008, as compared to $4,080 for the comparableprior year period. This decreasewas the result of an overall decrease in the number ofNon-Control/Non-Affiliate investments held at September 30, 2008 comparedto the prior year period, primarily due to sales and settlements of syndicatedloans during the quarter. This decrease was further emphasized by drops inLIBOR, due to the instability and tightening of the credit markets.

 

Interestincome from Control investments was $2,735 for the three months ended September 30,2008, as compared to $2,612 for the comparable prior year period. The increase of $123 is attributable to theaddition of one new Control investment during the quarter ended September 30,2008, while the status change of another Control investment as non-accrual,ASH, and the reclassification of Quench as an Affiliate investment partiallyoffset this increase from the prior year period.

 

Interestincome from Affiliate investments was $1,349 for the three months ended September 30,2008, as compared to $375 for the comparable prior year period. The increase was a result of threeadditional Affiliate investments held during the quarter ending September 30,2008 when compared to the prior year period, as well the change inreclassification of Quench as an Affiliate investment.

 

The interest-bearing investment portfolio had an average cost basis ofapproximately $294.4 million for the three months ended September 30,2008, as compared to an average cost basis of approximately $301.6 million forthe three months ended September 30, 2007. The following table lists theinterest income from investments for the five largest portfolio companiesduring the respective periods:

 

**Three months ended September 30, 2008**

 
| ** **                          | ** ** | **Interest** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|--------------|------------|------------|------------|
| **Company**                         | ** ** | **Income**   | ** ** | **%**      | ** ** |
| Chase II Holdings Corp.             |       | $            | 720        |       | 11.6       | % |
| A. Stucki Holding Corp.             |       | 677          |       | 10.9       | %          |
| Noble Logistics, Inc.          |       | 426          |       | 6.9        | %          |
| Acme Cryogenics, Inc.          |       | 414          |       | 6.7        | %          |
| Cavert II Holding Corp.             |       | 405          |       | 6.4        | %          |
| **Subtotal**                        |       | $            | 2,642      |       | 42.5       | % |
| Other companies                     |       | 3,576        |       | 57.5       | %          |
| **Total portfolio interest income** |       | $            | 6,218      |       | 100.0      | % |

 

**Three months ended September 30, 2007**

 
| ** **                           | ** ** | **Interest** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|--------------|------------|------------|------------|
| **Company**                          | ** ** | **Income**   | ** ** | **%**      | ** ** |
| A. Stucki  Holding Corp.             |       | $            | 894        |       | 12.7       | % |
| Chase II  Holdings Corp.             |       | 781          |       | 11.1       | %          |
| Acme  Cryogenics, Inc.          |       | 426          |       | 6.0        | %          |
| Quench  Holdings Corp.               |       | 376          |       | 5.3        | %          |
| Noble  Logistics, Inc.          |       | 375          |       | 5.3        | %          |
| **Subtotal**                         |       | $            | 2,852      |       | 40.4       | % |
| Other  companies                     |       | 4,215        |       | 59.6       | %          |
| **Total  portfolio interest income** |       | $            | 7,067      |       | 100.0      | % |

 

Theannualized weighted average yield on our portfolio of investments, excludingcash and cash equivalents, was 7.98% for the three months ended September 30,2008, compared to 9.08% for the three months ended September 30, 2007. Thedecrease in the annualized weighted average yield resulted primarily from areduction in the average LIBOR, due to the instability and tightening of thecredit markets. This decrease was accentuated by a slight decrease in theoverall size of the investment portfolio compared to the prior year period.

 

Interestincome from cash and cash equivalents was $22 for the three months ended September 30,2008, as compared to $61 for the comparable prior year period. This decrease is a result of lower interestrates offered by banks, as this income is derived mainly from interest earnedon overnight sweeps of cash held at financial institutions, in addition to ususing the proceeds from repayments on outstanding loans during the quarter topay down our line of credit.

 

Otherincome was $576 for the three months ended September 30, 2008, as comparedto $28 for the comparable prior year period. This increase is due to $567 of dividendsreceived on the restructuring of one of our Control investments (Quench) beingrecognized as income. The remainder of these dividends received in excess ofthe gain recognized on the restructuring, approximately $50, reduced our equitybasis in the investment. The residual balance in other income is comprised ofloan amendment fees that are amortized over the remaining lives of therespective loans and other miscellaneous income amounts.

 

**Operating Expenses**

 

Totaloperating expenses, excluding any voluntary and irrevocable credits to the basemanagement fee, were $3,729 for the three months ended September 30, 2008,as compared to $4,664 for the comparable prior year period.

 

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Loanservicing fees of $1,258 were incurred for the three months ended September 30,2008, as compared to $1,260 for the comparable prior year period. 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 amountof the base management fee due to our Adviser. The consistency in loanservicing fees is the result of similar balances in our portfolio of loansbeing serviced by our Adviser during the prior year period.

 

Base management fees for the three months ended September 30, 2008were $435, as compared to $453 for the comparable prior year period. The basemanagement fee is computed quarterly, as described under “*InvestmentAdvisory and Management Agreement*” in Note 4 of the condensedconsolidated financial statements, and is summarized in the table below:

 
| ** **                                                                     | ** ** | **Three months ended** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                     | ** ** | **September 30,**           | ** ** | **September 30,** | ** ** |
| ** **                                                                     | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| **Base management fee**                                                        |       | $                                | 435        |   | $ | 453 |   |
|                                                                           |       |                             |       |   |   |
| Credits to base management fee from  Adviser:                                  |       |                             |       |   |   |
| Credit for investment advisory fees  received by Adviser                       |       | (313                             | )          | (61 | ) |
| Fee reduction for the waiver of 2% fee on  senior syndicated loans to 0.5% (1) |       | (383                             | )          | (442 | ) |
| **Credit to base management fee from Adviser**                                 |       | (696                             | )          | (503 | ) |
|                                                                           |       |                             |       |   |   |
| **Net base management fee**                                                    | ** ** | **$**                            | **(261**   | **)** | **$** | **(50** | **)** |

 

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(1)                   Our Adviservoluntarily waived, for the three months ended March 31, 2008 and 2007,the annual 2.0% base management fee to 0.5% for senior syndicated loanparticipations.

 

Administrationfees were $212 for the three months ended September 30, 2008, as comparedto $228 for the comparable prior year period. This fee consists of our allocable portionof our Administrator’s rent and other overhead expenses, and our allocableportion of the salaries and benefits of our chief financial officer, chiefcompliance officer, treasurer, and their respective staffs. Our allocableportion of expenses is derived by multiplying the percentage of our averageassets (the assets at the beginning and ending of each quarter) in comparisonto the average assets of all companies managed by our Adviser that are undersimilar administration agreements with our Administrator. The slight decreasewas attributable to a decrease in our total assets in relation to the otherfunds serviced by our Administrator.

 

Interestexpense was $1,084 for the three months ended September 30, 2008, ascompared to $2,023 for the comparable prior year period. The decline was a direct result ofdecreased borrowings under our credit facility during the period, as themajority of the proceeds from repayments on outstanding loans during thequarter ended September 30, 2008 were used to pay down our creditfacility.

 

Amortizationof deferred finance costs were $140 for the three months ended September 30,2008, as compared to $216 for the comparable prior year period. The decrease is attributable to realizingthe full amortization of costs incurred in connection with the credit facilityagreement.

 

Professionalfees were $183 for the three months ended September 30, 2008, as comparedto $110 for the comparable prior year period. Professional fees primarily consist oflegal fees and audit and accounting fees. The increase is primarily due todirect consulting and legal fees incurred on potential investments as well asincreases in general legal expenses.

 

Stockholderrelated costs were $200 for the three months ended September 30, 2008, ascompared to $157 for the comparable prior year period. 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 press releasecosts. The increase was primarily attributable to the increase in proxysolicitation and annual report printing fees.

 

Insuranceexpense was $55 for the three months ended September 30, 2008, as comparedto $73 for the comparable prior year period. Insurance expense consists of theamortization of the directors and officers insurance policy and professionalliability policy premiums. The decrease is due to a reduction in the premiumsfor directors and officers insurance for the current policy period.

 

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Directors’fees were $48 for the three months ended September 30, 2008, as comparedto $68 for the comparable prior year period. Directors’ fees consist of the amortizationof the directors’ annual stipend and individual meeting fees. The decrease isdue to the timing of committee meetings in which fewer were held in the currentquarter.

 

Taxes and licenses expense was $24 for the three months ended September 30,2008, as compared to $41 for the comparable prior year period and consistprimarily of franchise taxes due to the state of Delaware and other feessurrounding state and regulatory licensing, registration and other corporatefiling fees.

 

Generaland administrative expenses were $90 for three months ended September 30,2008, as compared to $35 for the comparable prior year period. 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 increase is mainly due to prior periodcapitalized costs relating to potential investments that were not executed andwere thus expensed in the current quarter.

 

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

 

Forthe three months ended September 30, 2008, we realized a net loss of $2.5million, mostly attributable to the settlement of Lexicon, on sale of Non-Control/Non-Affiliateinvestments. We also recorded net unrealized depreciation of investments in theaggregate amount of $329. For the three months ending September 30, 2007,we recognized a net loss of $3 resulting from additional legal expenses incurredin connection with the sale of one of our senior syndicated loans during thefirst quarter. We recorded net unrealized depreciation of investments in theaggregate amount of $7.4 million.

 

AtSeptember 30, 2008, the fair value of our investment portfolio was lessthan the cost basis of our portfolio by $21.3 million, representing netunrealized depreciation of approximately $329 for the quarter. At September 30,2007, the fair value of our investment portfolio was less than the cost basisof our portfolio by $5.6 million representing net unrealized depreciation of$7.4 million for the quarter. The unrealized depreciation during the quarterended September 30, 2008, while nominal overall, included declines in themarket value of certain investments including Acme Cryogenics, B-Dry, NobleLogistics, Generac, Open Solutions, and Rally Parts. Most of the declines wereattributable to our senior syndicated loans and the debt portions of ourbuyouts, which were offset by increases in the fair value of the equity incertain of our Control and Affiliate investments, including A. Stucki, CavertWire, Chase Industries, and Quench. Additionally, the impact of the adoption ofSFAS 157 on April 1, 2008 included a modification of 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. Previously, we valuedthe debt portion of bundled debt and equity investments in non-controlledcompanies in accordance with board approved valuation policies, which valuedthe debt securities at the contractual principal balance.

 

Althoughour investment portfolio has depreciated, our entire portfolio was fair valuedat 94% of cost as of September 30, 2008. The unrealized depreciation ofour investments does not have an impact on our current ability to paydistributions to stockholders.

 

**Derivatives**

 

Forthe three months ended September 30, 2008 and 2007, the fair market valueof our interest rate cap agreements purchased in October 2007 and February 2008remained flat.

 

**Net Increase (Decrease) in NetAssets from Operations**

 

Forthe three months ended September 30, 2008, we recorded a net increase innet assets resulting from operations of $956 as a result of the factorsdiscussed above. Our net increase (decrease) in net assets from operations perbasic and diluted weighted average common share for the quarters ended September 30,2008 and 2007 were $0.04 and ($0.26), respectively. For the three months ended September 30,2007, we recorded a net decrease in net assets resulting from operationsof $4.4 million. We willcontinue to incur base management fees which are likely to increase as ourinvestment portfolio grows, and we may begin to incur incentive fees. Ouradministrative expenses payable to our Administrator are also likely to growduring future periods as our average assets grow in comparison to our averageassets at June 30, 2008 and as the expenses incurred by our Administratorto support our operations increase.

 

***Six months ended September 30,2008 compared to the six months ended September 30, 2007***

 

**Investment Income**

 

Investment income for the six months ended September 30, 2008 was$12,854, as compared to investment income of $13,456 for the six months ended September 30,2008.

 

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Interest income from our investments in debt securities of privatecompanies was $12,222 for the six months ended September 30, 2008, ascompared to $13,307 for the comparable prior year period. The level of interestincome from investments is directly related to the balance, at cost, of theinterest-bearing investment portfolio outstanding during the period multipliedby the weighted average yield. The weighted average yield varies from period toperiod based on the current stated interest rate on interest-bearinginvestments and the amounts of loans for which interest is not accruing. Interestincome from our investments decreased $1.1 million, or 0.8%, during the sixmonths ended September 30, 2008 compared to the prior year period, as thecost basis of our outstanding loans remained relatively comparable between thetwo periods.

 

Interest income from Non-Control/Non-Affiliate investments was $4,458for the six months ended September 30, 2008, as compared to $7,329 for thecomparable prior year period. This decrease was mainly the result of an overalldecrease in the balance of Non-Control/Non-Affiliate investments held duringthe six months ended September 30, 2008 as compared to the prior yearperiod. Drops in LIBOR, due to the instability and tightening of the creditmarkets, during the current six months accentuated this decrease.

 

Interest income from Control investments was $5,304 for the six monthsended September 30, 2008, as compared to $5,177 for the comparable prioryear period. The addition of two Control investments over the prior year perioddrove this increase and helped to offset the impact of lower interest rates andthe reclassification of Quench as an Affiliate investment.

 

Interest income from Affiliate investments was $2,460 for the sixmonths ended September 30, 2008, as compared to $801 for the comparableprior year period. This increase is attributable to interest earned on threeadditional Affiliate investments held during the six months ended September 30,2008 that were not held during the prior year period, as well as thereclassification of Quench as an Affiliate investment.

 

The interest-bearing investment portfolio had an average cost basis ofapproximately $300.0 million for the six months ended September 30, 2008,as compared to an average cost basis of $279.1 million for the six months endedSeptember 30, 2007. The following table lists the interest income frominvestments for the five largest portfolio companies during the respectiveperiods:

 

**Six months ended September 30, 2008**

 
| ** **                          | ** ** | **Interest** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|--------------|------------|------------|------------|
| **Company**                         | ** ** | **Income**   | ** ** | **%**      | ** ** |
| Chase II Holdings Corp.             |       | $            | 1,429      |       | 11.7       | % |
| A. Stucki Holding Corp.             |       | 1,346        |       | 11.0       | %          |
| Acme Cryogenics, Inc.          |       | 848          |       | 6.9        | %          |
| Cavert II Holding Corp.             |       | 826          |       | 6.8        | %          |
| Danco Acquisition Corp.             |       | 809          |       | 6.6        | %          |
| **Subtotal**                        |       | $            | 5,258      |       | 43.0       | % |
| Other companies                     |       | 6,964        |       | 57.0       | %          |
| **Total portfolio interest income** |       | $            | 12,222     |       | 100.0      | % |

 

**Six months ended September 30, 2007**

 
| ** **                          | ** ** | **Interest** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|--------------|------------|------------|------------|
| **Company**                         | ** ** | **Income**   | ** ** | **%**      | ** ** |
| A. Stucki Holding Corp.             |       | $            | 1,782      |       | 13.4       | % |
| Chase II Holdings Corp.             |       | 1,547        |       | 11.6       | %          |
| Acme Cryogenics, Inc.          |       | 848          |       | 6.4        | %          |
| Noble Logistics, Inc.          |       | 802          |       | 6.0        | %          |
| Quench Holdings Corp.               |       | 745          |       | 5.6        | %          |
| **Subtotal**                        |       | $            | 5,724      |       | 43.0       | % |
| Other companies                     |       | 7,583        |       | 57.0       | %          |
| **Total portfolio interest income** |       | $            | 13,307     |       | 100.0      | % |

 

The annualized weighted average yield on our portfolio of investments,excluding cash and cash equivalents, was 7.81% for the six months ended September 30,2008 and 9.12% for the six months ended September 30, 2007. This decreaseis largely the result of declining interest rates. This has been offset, tosome extent, by the increase in the size of our portfolio of investments innon-syndicated loans that typically bear higher interest rates than those ofsyndicated loans.

 

Interest income from cash and equivalents was $46 for the six monthsended September 30, 2008, as compared to $114 for the comparable prioryear period. This decrease is a result of lower interest rates offeredby banks, as this income is derived mainly from interest earned on overnightsweeps of cash held at financial institutions, in addition to our use of theproceeds from repayments on outstanding loans during the quarter to pay downour line of credit.

 

Other income was $586 for the six months ended September 30, 2008,as compared to $35 for the comparable prior year period. Other income isnormally comprised of loan amendment fees that are received from portfoliocompanies and are amortized over the remaining life of the respective loans. However,in the current period, we recognized as ordinary income $567 of dividendsreceived on the restructuring of one of our Control investments (Quench). Anadditional $50 of dividends that were received was recorded as a reduction ofour basis in the investment. The residual balance in other income iscomprised of loan amendment fees that are amortized over the remaining lives ofthe respective loans and other miscellaneous income amounts.

 

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**Operating Expenses**

 

Operating expenses, excluding any voluntary and irrevocable credits tothe base management fee, were $7,290 for the six months ended September 30,2008, compared to $8,460 for the comparable prior year period.

 

Loan servicing fees of $2,511 were incurred for the six months ended September 30,2008, as compared to $2,454 for the comparable prior year period. These feeswere incurred in connection with a loan servicing agreement between BusinessInvestment and our Adviser in connection with our credit facility establishedin October 2006, which is based on the size of the aggregate outstandingloan portfolio. These fees reduced the amount of the management fee due to ourAdviser as noted above. Loan servicing fees for the six months ending September 30,2008 remained steady when compared to the prior year period in conjunction withcomparable loan portfolio balances for the two periods.

 

Base management fees were $861 for the six months ended September 30,2008, as compared to $812 for the comparable prior year period. The basemanagement fee is computed quarterly as described under “*InvestmentAdvisory and Management Agreement*” in Note 4 of the condensedconsolidated financial statements, and is summarized in the table below:

 
| ** **                                                                     | ** ** | **Six months ended** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                     | ** ** | **September 30,**         | ** ** | **September 30,** | ** ** |
| ** **                                                                     | ** ** | **2008**                       | ** ** | **2007** | ** ** |
| **Base management fee**                                                        |       | $                              | 861        |   | $ | 812 |   |
|                                                                           |       |                           |       |   |   |
| Credits to base management fee from  Adviser:                                  |       |                           |       |   |   |
| Credit for investment advisory fees  received by Adviser                       |       | (463                           | )          | (735 | ) |
| Fee reduction for the waiver of 2% fee on  senior syndicated loans to 0.5% (1) |       | (807                           | )          | (152 | ) |
| **Credit to base management fee from Adviser**                                 |       | (1,270                         | )          | (887 | ) |
|                                                                           |       |                           |       |   |   |
| **Net base management fee**                                                    | ** ** | **$**                          | **(409**   | **)** | **$** | **(75** | **)** |

 

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(1)           The board of ourAdviser voluntarily waived, for the six months ended March 31, 2008 and2007, the annual 2.0% base management fee to 0.5% for senior syndicated loanparticipations.

 

The administration fee payable to our Administrator was $447 for thesix months ended September 30, 2008, as compared to $436 for thecomparable prior year period. This fee consists of our allocable portion of ourAdministrator’s rent and other overhead expenses, and our allocable portion ofthe salaries and benefits of our chief financial officer, chief complianceofficer, treasurer, controller and their respective staffs. Our allocableportion of expenses is derived by multiplying the percentage of our averageassets (the assets at the beginning and ending of each quarter) in comparisonto the average assets of all companies managed by our Adviser that are undersimilar administration agreements with our Administrator. The increase wasmainly attributable to the personnel growth of our Administrator when comparedto the prior year period; however, this was somewhat offset by a decrease inour total assets in relation to the other funds serviced by our Administrator.

 

Interest expense for the six months ended September 30, 2008 was$2,186, as compared to $3,438 for the comparable prior year period. Interestexpense results from borrowings on our credit facility, which were used tofinance our investment purchases during the period. Interest expense decreasedfor the current six months due to less borrowings on our credit facilitythroughout the six months ended September 30, 2008 when compared to theprior year period, as the majority of the proceeds from repayments onoutstanding loans and our rights offering were used to pay down the outstandingbalance.

 

Amortization of deferred finance costs was $278 for the six monthsended September 30, 2008, as compared to $426 for the comparable prioryear period. These costs are directly attributable to the amortization of thecapitalized finance costs associated with our credit facility that wasestablished in October 2006.

 

Professional fees were $314 for the six months ended September 30,2008, as compared to $266 for the comparable prior year period. Professionalfees primarily consist of legal, fees and audit and accounting fees. Theincrease is mainly due to an increase in direct consulting and legal feesincurred on potential investments, as well as a slight increase in audit feesfor the same comparable periods.

 

Stockholder related costs were $301 for the six months ended September 30,2008, as compared to $195 for the comparable prior year period. Stockholderrelated costs consist of the amortization of annual Nasdaq listing fees,transfer agent fees, annual report printing fees, SEC filing fees and pressrelease costs. The increase is primarily attributed to additional expensesincurred related to the solicitation of stockholder proxy votes for our annualmeeting of stockholders in August 2008.

 

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Insurance expense was $108 for the six months ended September 30,2008, as compared to $136 for the comparable prior year period. Insuranceexpense consists of the amortization of the directors and officers insurancepolicy and professional liability policy premiums, and the decrease is directlyattributable to a reduction in these premiums for the current policy period.

 

Directors’ fees were $95 for the six months ended September 30,2008, as compared to $122 for the comparable prior year period. Directors’ feesconsist of the amortization of the directors’ annual stipend and individualmeeting fees. The decrease is due to fewer committee meetings held in thecurrent year period.

 

Taxes and licenses expense was $67 for the six months ended September 30,2008, as compared to $83 for the comparable prior year period. These expensesconsist primarily of franchise taxes due to the state of Delaware and otherfees surrounding state and regulatory licensing, registration and othercorporate filing fees.

 

General and administrative expenses were $122 for the six months ended September 30,2008, as compared to $92 for the comparable prior year period. General andadministrative expenses consist primarily of direct expenses such as travelrelated specifically to our portfolio companies, loan evaluation services forour portfolio companies and backup servicer expenses. The overall increase ismainly due to capitalized costs incurred in relation to potential investmentsthat were not executed and were thus expensed in the current period.

 

**Realized and Unrealized Loss on Investments**

 

For the six months ended September 30, 2008, we recognized a netloss on the sale of nine syndicated loan participations and the write off ofanother senior syndicate loan for an aggregate net loss on sale ofnon-control/non-affiliate investments of $4.2 million, and we recorded netunrealized depreciation of investments in the aggregate amount of $6.1 million.For the six months ended September 30, 2007, we recognized a net loss of$52 resulting from additional legal expenses incurred in connection with thesale of one of our senior syndicated loans during the first quarter of fiscalyear 2008. We recorded net unrealized depreciation of investments in theaggregate of $1.9 million for the six months ended September 30, 2007. Theunrealized depreciation during the six months ended September 30, 2008,included declines in the market value of certain loan portions of ourinvestments, including Acme Cryogenics, B-Dry, Noble Logistics, Quench,Generac, Open Solutions, and Rally Parts. Additionally, the impact of the adoptionof SFAS 157 during the six months ended September 30, 2008 included amodification of our valuation procedures so that the debt portion of bundledinvestments in non-controlled companies is valued by SPSE, which change had apositive impact on net unrealized appreciation in the amount of $11.0 million.Previously, we valued the debt portion of bundled debt and equity investmentsin non-controlled companies in accordance with board approved valuationpolicies, which valued the debt securities at the contractual principalbalance.

 

**Derivatives**

 

Forthe six months ended September 30, 2008 and 2007, the fair market value ofour interest rate cap agreements purchased in October 2007 and February 2008remained flat.

 

**Net (Decrease) Increase in Net Assets fromOperations**

 

Overall, we realized a net decrease in net assets resulting fromoperations of $3,527 for the six months ended September 30, 2008 as aresult of the factors discussed above. Our net (decrease) increase in netassets from operations per basic and diluted weighted average common share forthe six months ended September 30, 2008 and 2007 was ($0.17) and $0.24,respectively. For the six months ended September 30, 2007, we realized anet increase in net assets resulting from operations of $3,903.

 

We will continue to incur base management fees which are likely toincrease as our investment portfolio grows, and we may begin to incur incentivefees. Our administrative expenses payable to our Administrator are also likelyto grow during future periods as our average assets increase and as theexpenses incurred by our Administrator to support our operations grow.

 

**LIQUIDITY AND CAPITALRESOURCES (dollar amounts in thousands, unless otherwise indicated)**

 

**Operating Activities**

 

Net cash provided by operating activities for the six months ended September 30,2008 was approximately $7.9 million and consisted primarily of principal loanrepayments, net unrealized depreciation of our investments, and the sale ofexisting portfolio investments, offset by the purchase of one new controlinvestment and one new affiliate investment. Net cashused in operating activities for the six months ended September 30, 2007was approximately $53.1 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.

 

A summary of our investment activity for the six months ended September 30,2008 and September 30, 2007 is as follows:

 

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| **Quarter Ended**  | ** ** | **New Investments** | ** ** | **Principal Repayments** | ** ** | **Investments Sold** | ** ** | **Realized Losses** | ** ** |
|-------------------------|------------|--------------------------|------------|-------------------------------|------------|---------------------------|------------|--------------------------|------------|
| June 30, 2008      |       | $                        | 8,980      |                          | $          | 3,493                     |       | $                        | 13,246     |   | $ | (1,717 | ) |
| September 30, 2008 |       | 27,632                   |       | 18,791                        |       | 50                        |       | (2,498                   | )          |
| **Total**               |       | $                        | 36,612     |                          | $          | 22,284                    |       | $                        | 13,296     |   | $ | (4,215 | ) |
|                    |       |                     |       |                          |       |                      |       |                     |       |
| **Quarter Ended**  | ** ** | **New Investments** | ** ** | **Principal Repayments** | ** ** | **Investments Sold** | ** ** | **Realized Losses** | ** ** |
| June 30, 2007      |       | $                        | 72,601     |                          | $          | 21,358                    |       | $                        | 5,809      |   | $ | (49 | ) |
| September 30, 2007 |       | 41,183                   |       | 16,948                        |       | —                    |       | (3                       | )          |
| **Total**               |       | $                        | 113,784    |                          | $          | 38,306                    |       | $                        | 5,809      |   | $ | (52 | ) |

 

The following table summarizes the contractual principal repayment andmaturity of our investment portfolio by fiscal year, assuming no voluntary prepayments:

 
| ** **                                         | ** ** | ** **                              | ** ** | **Amount** |        |
|----------------------------------------------------|------------|-----------------------------------------|------------|------------|-------------|
| For the remaining six months ending March 31: |       | 2009                                    |       | $          | 8,872       |   |
| For the fiscal year ending March 31:          |       | 2010                                    |       | 13,621     |        |
|                                               |       | 2011                                    |       | 39,354     |        |
|                                               |       | 2012                                    |       | 58,800     |        |
|                                               |       | 2013                                    |       | 52,854     |        |
|                                               |       | Thereafter                              |       | 132,447    |        |
| ** **                                         | ** ** | **Total  contractual repayments**       | ** ** | **$**      | **305,948** |   |
|                                               |       | Investments in equity securities        |       | 41,597     |        |
|                                               |       | Unamortized premiums on debt securities |       | 58         |        |
| ** **                                         | ** ** | **Total**                               | ** ** | **$**      | **347,603** |   |

 

**Financing Activities**

 

Duringthe six months ended September 30, 2008, net cash provided by financingactivities was approximately $16.6 million, which primarily consisted of theRights Offering (defined below) for net proceeds of $40.6 million, partiallyoffset by net repayments under our credit facility of $13.9 million anddividends paid of $10.2 million. During the six months ended September 30,2007, we recorded net borrowings under our credit facility of $46.1 millionwhich were used to purchase new investments.

 

*Issuance of Equity*

 

Duringfiscal 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 incommon stock, which leaves a remaining capacity of $258.7 million. To date, wehave incurred approximately $642 of costs in connection with the RegistrationStatement.

 

Weanticipate issuing equity securities to obtain additional capital in thefuture. However, we cannot determine the terms of any future equity issuancesor whether we will be able to issue equity on terms favorable to us, or at all.Additionally, when our common stock is trading below net asset value, we willhave regulatory constraints under the 1940 Act on our ability to obtainadditional capital in this manner. At September 30, 2008, our stock wastrading at $6.88, representing a 35% discount to our net asset value of $10.57per share. Generally, the 1940 Act provides that we may not issue stock for aprice below net asset value per share, without first obtaining the approval ofour stockholders and our independent directors or through a rights offering.

 

Weraised additional capital within these regulatory constraints in April 2008through an offering of transferable subscription rights to purchase additionalshares of common stock (the “Rights Offering”). Pursuant to the Rights Offeringcompleted during April 2008, we sold 5,520,033 shares of our common stockat a subscription price of $7.48, which represented a purchase price equal to93% of the weighted average closing price of our stock in the last five tradingdays of the subscription period. Net proceeds of the offering, after offeringexpenses borne by us, were approximately $40.7 million and were used torepay outstanding borrowings under our line of credit. Should our common stockcontinue to trade below its net asset value per share, we may seek to conductsimilar offerings in the future in order to raise additional capital, althoughthere can be no assurance that we will be successful in our efforts to raisecapital. However, during our annual stockholders meeting on August 7,2008, our 

 

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stockholders approved a proposal that now allows us to sell shares ofour common stock at a price below our then current net asset value per shareshould we choose to do so. This proposal is in effect until our next annualstockholders meeting.

 

*Future Capital Resources*

 

During our annual stockholders meeting on August 7, 2008, ourstockholders approved a proposal that allows us to  issue long-term rights,  including warrants to purchase shares of ourcommon stock at an exercise price per share that will not be less than thegreater of the market value or net asset valued of our common stock at a timesuch rights may be issued.

 

**Dividends**

 

Inorder to qualify as a RIC, we are required, under Subchapter M of the Code, todistribute at least 90% of our ordinary income and short-term capital gains toour stockholders on an annual basis. In accordance with these requirements, wedeclared and paid monthly cash dividends of $0.08 per common share for July, August andSeptember 2008. In October 2008, our Board of Directors declared amonthly dividend of $0.08 per common share for each of October, November, and December 2008.

 

Forthe three months ended September 30, 2008, our dividends payment ofapproximately $5.3 million exceeded our net investment income (including netrealized losses) by approximately $4.0 million. We declared these dividendsbased on our estimates of net investment income for the fiscal year. Ourinvestment pace continues to be slower than expected in our third year ofoperations and, consequently, our net investment income was lower than ouroriginal estimates.

 

**Revolving Credit Facility**

 

OnOctober 19, 2006, through our wholly-owned subsidiary, BusinessInvestment, we initially obtained a $100 million revolving credit facility(the “Credit Facility”), and we executed a purchase and sale agreement pursuantto which we agreed to sell certain loans to Business Investment inconsideration for a membership interest therein. Simultaneously, BusinessInvestment executed a credit agreement (the “Credit Agreement”) with DeutscheBank AG, New York Branch (“Deutsche Bank”), as administrative agent, andothers, pursuant to which Business Investment pledged the loans purchased fromus to secure future advances by certain institutional lenders. Availabilityunder the Credit Facility was subsequently amended and extended such that theborrowing capacity was raised to $200 million.

 

OnOctober 16, 2008, the Credit Facility was further amended and extendedsuch that the borrowing capacity was reduced to $125 million and availabilityunder the Credit Facility was extended to April 16, 2009. Any advancesunder the Credit Facility will generally bear interest at the commercial paperrate plus 3.5% per annum, with a commitment fee of 0.75% per annum on theundrawn amounts. There was no fee in connection with this renewal.

 

Availableborrowings are subject to various constraints imposed under the CreditAgreement, based on the aggregate loan balance pledged by Business Investment,which varies as loans are added and repaid, regardless of whether suchrepayments are early prepayment or are made as contractually required. Interestis payable monthly during the term of the Credit Facility and principal ispayable out of collections on loans purchased from us during the periodfollowing the date of which availability for advances has terminated throughmaturity. Interest rates charged on the advances under the facility are basedon the rate paid by the lenders on commercial paper notes issued by suchlenders to fund some or all of the advances, the London Interbank Offered Rate(“LIBOR”), the Prime Rate or the Federal Funds Rate, depending on marketconditions, and adjust periodically.

 

TheCredit Facility contains covenants that require Business Investment to maintainits status as a separate entity; prohibit certain significant corporatetransactions (such as mergers, consolidations, liquidations or dissolutions);and restrict material changes to our credit and collection policies. Thefacility also restricts some of the terms and provisions (including interestrates, terms to maturity and payments schedules) and limits the borrower andindustry concentrations of loans that are eligible to secure advances. As of September 30,2008 and through the date of our Credit Facility amendment on October 16,2008, Business Investment was in compliance with all of the facility covenants.

 

Theadministrative agent also requires that any interest or principal payments onpledged loans be remitted directly by the borrower into lockbox accountscontrolled by Deutsche Bank. Once a month, Deutsche Bank remits the collectedfunds to the Company after payment of any interest and expenses provided forunder the Credit Agreement.

 

OurAdviser services the loans pledged under the Credit Facility. As a condition tothis servicing arrangement, we executed a performance guaranty pursuant towhich we guaranteed that our Adviser would comply fully with all of itsobligations under the Credit Facility. The performance guaranty requires us 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 September 30,2008 and October 16, 2008, we were in compliance with our covenants underthe performance guaranty.

 

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ThroughNovember 4, 2008, the date of this filing, the remaining borrowingcapacity available under the credit facility was approximately $1.0 million,and there was an outstanding principal balance of 117.3 million at an interestrate of approximately 3.9%.

 

**Contractual Obligations and Off-Balance Sheet Arrangements**

 

Wedid not have any signed investments to be funded or any off-balance sheetarrangements as defined in Item 303(a)(4)(ii) of SECRegulation S-K as of September 30, 2008.

 

**ITEM 3. QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.**

 

Weare subject to financial market risks, including changes in interest rates. We estimate that ultimately approximately 20% of the loans in ourportfolio will be made at fixed rates and approximately 80% will be made atvariable rates. Currently, our portfolio consists of the following breakdown inrelation to all outstanding debt:

 
| 52  | % | variable rates              |
|-----|---|-----------------------------|
| 29  | % | variable rates with a floor |
| 19  | % | fixed rates                 |
| 100 | % | total                       |

 

Therehave been no material changes in the quantitative and qualitative market riskdisclosures for the six months ended September 30, 2008 from thosedisclosed in our Annual 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 ANDPROCEDURES.**

 

As of September 30, 2008, we, including our Chief ExecutiveOfficer and Chief Financial Officer, evaluated the effectiveness of the designand operation of our disclosure controls and procedures. Based on thatevaluation, our management, including the Chief Executive Officer and ChiefFinancial Officer, concluded that our disclosure controls and procedures wereeffective in timely alerting management, including the Chief Executive Officerand Chief Financial Officer, of material information about us required to beincluded in periodic Securities and Exchange Commission filings. However, inevaluating the disclosure controls and procedures, management recognized thatany controls and procedures, no matter how well designed and operated, canprovide only reasonable assurance of achieving the desired control objectives,and management necessarily was required to apply its judgment in evaluating thecost-benefit relationship of possible controls and procedures.

 

There have been no changes in our internal control over financialreporting that occurred during the quarter ended September 30, 2008 thathave materially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

**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 oursubsidiaries.

 

**ITEM 1A. RISKFACTORS.**

 

Our business is subject to certain risks and events that, if theyoccur, could adversely affect our financial condition and results of operationsand the trading price of our common stock. In connection with our preparationof this quarterly report, management has reviewed and considered these riskfactors and has determined that the following risk factors should be read inconnection with the existing risk factors in our Annual Report on Form 10-Kfor the fiscal year ended March 31, 2008 as filed with the SEC on May 21,2008.

 

**The current state of the economyand the capital markets increases the possibility of adverse effects on ourfinancial position and results of operations. Continued economic adversitycould impair our portfolio companies’ financial positions and operating resultsand affect the industries in which we invest, which could, in turn, harm ouroperating results. Continued adversity in the capital markets could impact ourability to raise capital and reduce our volume of new investments.**

 

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##### ***The United States has entered into an economic downturn. Theeconomic downturn generally and the disruptions in the capital markets inparticular have decreased liquidity and increased our cost of debt and equitycapital. The longer these conditions persist, the greater the probability thatthese factors could have an adverse effect on our operations and financialresults. Many of the companies in which we have made or will make investmentsmay be susceptible to the economic downturn, which may affect the ability ofone of our portfolio companies to repay our loans or engage in a liquidityevent, such as a sale, recapitalization or initial public offering. An economicdownturn could also disproportionately impact some of the industries in whichwe invest, causing us to be more vulnerable to losses in our portfolio,therefore the number of our non-performing assets are likely to increase andthe fair market value of our portfolio is likely to decrease during theseperiods. The economic downturn may also decrease the value of collateralsecuring some of our loans as well as the value of our equity investments whichwould decrease our ability to borrow under our credit facility or raise equitycapital thereby reducing our ability to make new investments.***

##### *** ***

**We may experience fluctuations in our quarterly and annual resultsbased on the impact of inflation in the United States.**

 

Themajority of our portfolio companies are in industries that are directlyimpacted by inflation, such as manufacturing and consumer goods and services. Ourportfolio companies may not be able to pass on to customers increases in theircosts of production which could greatly affect their operating results,impacting their ability to repay our loans. In addition, any projected futuredecreases in our portfolio companies’ operating results due to inflation couldadversely impact the fair value of those investments. Any decreases in the fairvalue of our investments could result in future realized and unrealized lossesand therefore reduce our net assets resulting from operations.

 

**Higher taxation of our portfolio companies may impactour quarterly and annual operating results.**

 

Theeconomic downturn’s adverse affect on federal, states’, and municipalities’revenues may induce these government entities to raise various state and localtaxes to make up for lost revenues. Additional taxation may have an adverseaffect on our portfolio companies’ earnings and reduce their ability to repayour loans to them thus affecting our quarterly and annual operating results.

 

**ITEM 2. UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS.**

 

 Notapplicable.

 

**ITEM 3. DEFAULTS UPONSENIOR SECURITIES.**

 

 Notapplicable.

 

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

 

On August 7, 2008, we held our Annual Meeting of Stockholders inMclean, Virginia. Stockholders voted and approved the following matters:

 

1. Election of Directors: Stockholderselected directors, each of whom will serve for a three year term expiring atthe 2011 Annual Meeting of Stockholders, or until his or her successor iselected and qualified. Votes were cast as follows:

 
| ** **                | ** ** | **FOR**    | ** ** | **WITHHELD** | ** ** |
|---------------------------|------------|------------|------------|--------------|------------|
| Michela A. English        |       | 19,496,713 |       | 823,018      |       |
| Anthony W. Parker         |       | 19,507,247 |       | 812,484      |       |
| Gerard Mead               |       | 19,507,222 |       | 812,509      |       |
| George Stelljes, III |       | 17,799,473 |       | 2,250,258    |       |

 

The following directors are continuing directors of the Company fortheir respective terms — Maurice W. Colon, Terry Lee Brubaker, David A.R.Dullum, Paul W. Adelgen, John H. Outland and David Gladstone.

 

2. Approval to authorize us to offer and issuelong-term rights, including warrants, to purchase shares of our common stock atan exercise price per share that will not be less than the greater of themarket value or net asset value of our common stock at the time such rights areissued. Votes were cast as follows:

 
| **FOR**    | ** ** | **AGAINST** | ** ** | **ABSTAIN** | ** ** | **BROKER NON-VOTES** | ** ** |
|------------|------------|-------------|------------|-------------|------------|---------------------------|------------|
| 13,873,457 |       | 895,312     |       | 194,111     |       | 5,356,851                 |       |

 

3. Approval to authorize us to sell shares ofour common stock at a price below our then current net asset value per share.Votes were cast as follows:

 

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| **FOR**    | ** ** | **AGAINST** | ** ** | **ABSTAIN** | ** ** | **BROKER NON-VOTES** | ** ** |
|------------|------------|-------------|------------|-------------|------------|---------------------------|------------|
| 11,441,280 |       | 3,288,369   |       | 233,231     |       | 5,536,851                 |       |

 

4. Ratification of the selection ofPricewaterhouseCoopers LLP to serve as our independent registered publicaccounting firm for the fiscal year ending March 31, 2009. Votes were castas follows:

 
| **FOR**    | ** ** | **AGAINST** | ** ** | **ABSTAIN** | ** ** |
|------------|------------|-------------|------------|-------------|------------|
| 19,975,066 |       | 210,501     |       | 134,165     |       |

 

**ITEM 5. OTHERINFORMATION.**

 

 Notapplicable

 

**ITEM 6. EXHIBITS**

 

 Seethe exhibit index.

 

**SIGNATURE**

 

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

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

 

Date: November 4, 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  September 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  September 21, 2005.                                                                                             |
| 10.1        |       | Investment Advisory and Management Agreement between the Company and  Gladstone Management Corporation, dated September 22, 2005 and  incorporated by reference to Exhibit 10.1 to the Company’s Annual Report  on Form 10-K, filed on September 14, 2006 (renewed on  September 23, 2008). |
| 10.2        |       | Administration Agreement between the Company and Gladstone  Administration, LLC, dated September 22, 2005 and incorporated by  reference to Exhibit 10.2 to the Company’s Annual Report on  Form 10-K, filed September 14, 2006 (renewed on September 23,  2008).                           |
| 10.3        |       | Amended and Restated Credit Agreement by and among Gladstone Business  Investment LLC, Deutsche Bank AG and certain other parties, dated as of  October 16, 2008, incorporated by reference to Exhibit 10.1 to the  Current Report on Form 8-K (File No. 814-00704) filed on  October 16, 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.                                                                                                                                                                                                                 |

 

All other exhibits for which provision is made in the applicableregulations of the Securities and Exchange Commission are not required underthe related instruction or are inapplicable and therefore have been omitted.

 

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