**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

** **

**FORM 10-Q**

** **
| **x**      | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------|------------|-----------------------------------------------------------------------------------------------|
|       |       |                                                                                          |
| ** ** | ** ** | **FOR THE  QUARTER ENDED JUNE 30, 2007**                                                      |
| ** ** | ** ** | ** **                                                                                    |
| **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 its charter)

 

 

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

 

**1521WESTBRANCH DRIVE, SUITE 200MCLEAN, VIRGINIA 22102**(Address of principal executive office)

** **

**(703) 287-5800**

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months and (2) has been subject tosuch filing requirements for the past 90 days. Yes x   No o.

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act. (Check one):

Large acceleratedfiler o  Accelerated filer x  Non-accelerated filer o

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12 b-2 of the Exchange Act).

Yes oNo x

Indicate the number of shares outstanding of each ofthe issuer’s classes of common stock, as of the latest practicable date. Thenumber of shares of the issuer’s Common Stock, $0.001 par value, outstanding asof July 30, 2007 was 16,560,100.

 

----

 

**GLADSTONEINVESTMENT CORPORATION**

**TABLE OF CONTENTS**
| PART I.       |   | FINANCIAL INFORMATION                                                                           |   |   |
|---------------|--------|-------------------------------------------------------------------------------------------------|--------|--------|
|          |   |                                                                                            |   |
| Item 1.       |   | Financial Statements (Unaudited)                                                                |   |   |
|          |   |                                                                                            |   |   |
|          |   | Consolidated Statements of Assets and Liabilities as  of June 30, 2007 and March 31, 2007       |   |   |
|          |   | Consolidated Schedule of Investments as of June 30, 2007                                        |   |   |
|          |   | Consolidated Schedule of Investments as of March 31,  2007                                      |   |   |
|          |   | Consolidated Statements of Operations for the three  months ended June 30, 2007 and 2006        |   |   |
|          |   | Consolidated Statements of Changes in Net Assets for three  months ended June 30, 2007 and 2006 |   |   |
|          |   | Consolidated Statements of Cash Flows for the three  months ended June 30, 2007 and 2006        |   |   |
|          |   | Financial Highlights for the three months ended June  30, 2007 and 2006                         |   |   |
|          |   | Notes to Consolidated Financial Statements                                                      |   |   |
|          |   |                                                                                            |   |   |
| Item 2.       |   | Management’s Discussion and Analysis of Financial  Condition and Results of Operations     |   |   |
|          |   | Overview                                                                                        |   |   |
|          |   | Results of Operations                                                                           |   |   |
|          |   | Liquidity and Capital Resources                                                                 |   |   |
|          |   |                                                                                            |   |   |
| Item 3.       |   | Quantitative and Qualitative Disclosures About Market  Risk                                     |   |   |
|          |   |                                                                                            |   |   |
| Item 4.       |   | Controls and Procedures                                                                         |   |   |
|          |   |                                                                                            |   |   |
| PART II. |   | OTHER  INFORMATION                                                                              |   |   |
|          |   |                                                                                            |   |   |
| Item  1.      |   | Legal  Proceedings                                                                              |   |   |
|          |   |                                                                                            |   |   |
| Item 1A. |   | Risk Factors                                                                                    |   |   |
|          |   |                                                                                            |   |   |
| Item 2.       |   | Unregistered Sales of Equity Securities and Use of  Proceeds                                    |   |   |
|          |   |                                                                                            |   |   |
| Item 3.       |   | Defaults Upon Senior Securities                                                                 |   |   |
|          |   |                                                                                            |   |   |
| Item 4.       |   | Submission of Matters to a Vote of Security Holders                                             |   |   |
|          |   |                                                                                            |   |   |
| Item  5.      |   | Other  Information                                                                              |   |   |
|          |   |                                                                                            |   |   |
| Item 6.       |   | Exhibits                                                                                        |   |   |
|          |   |                                                                                            |   |   |
| SIGNATURES    |   |                                                                                            |   |   |

 

 

1

----

 

**GLADSTONEINVESTMENT CORPORATIONCONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES(UNAUDITED)**
| ** **                                                                                                   | ** ** | **June 30,** | ** **  | **March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|-------------------|-------------|--------------------|------------|
| ** **                                                                                                   | ** ** | **2007**          | ** **  | **2007**           | ** ** |
|                                                                                                         |       |              |        |               |       |
| ASSETS                                                                                                       |       |              |        |               |       |
| Non-Control/Non-Affiliate  investments (Cost 6/30/07:$186,296,045; 3/31/07:$138,567,741)                     |       | $                 | 185,368,271 |               | $          | 138,168,612 |   |
| Control investments  (Cost 6/30/07: $116,322,372; 3/31/07: $116,302,372)                                     |       | 118,310,360       |        | 113,016,491        |       |
| Affiliate investments  (Cost 6/30/07: $17,250,000; 3/31/07: $19,750,000)                                     |       | 17,947,445        |        | 19,762,500         |       |
| Total investments at  fair value (Cost 6/30/07: $319,868,417; 3/31/07: $274,620,113)                         |       | 321,626,076       |        | 270,947,603        |       |
| Cash and cash  equivalents                                                                                   |       | 34,596,442        |        | 37,788,941         |       |
| Interest receivable                                                                                          |       | 1,839,196         |        | 1,306,090          |       |
| Prepaid insurance                                                                                            |       | 24,553            |        | 83,819             |       |
| Deferred finance costs                                                                                       |       | 423,120           |        | 627,960            |       |
| Due from Custodian                                                                                           |       | 4,391,158         |        | 12,694,985         |       |
| Due from Adviser                                                                                             |       | —            |        | 20,383             |       |
| Other assets                                                                                                 |       | 179,030           |        | 120,434            |       |
| TOTAL ASSETS                                                                                                 |       | $                 | 363,079,575 |               | $          | 323,590,215 |   |
|                                                                                                         |       |              |        |               |       |
| LIABILITIES                                                                                                  |       |              |        |               |       |
| Due to Administrator                                                                                         |       | $                 | 207,814     |               | $          | 162,244 |   |
| Due to Adviser                                                                                               |       | 286,561           |        | —             |       |
| Borrowings under line  of credit                                                                             |       | 134,400,000       |        | 100,000,000        |       |
| Accrued expenses                                                                                             |       | 752,602           |        | 523,698            |       |
| Other liabilities                                                                                            |       | 98,406            |        | 85,764             |       |
| Total Liabilities                                                                                            |       | 135,745,383       |        | 100,771,706        |       |
| NET ASSETS                                                                                                   |       | $                 | 227,334,192 |               | $          | 222,818,509 |   |
|                                                                                                         |       |              |        |               |       |
| ANALYSIS OF NET ASSETS:                                                                                      |       |              |        |               |       |
| Common stock, $0.001  par value, 100,000,000 shares authorized and 16,560,100 shares issued and  outstanding |       | $                 | 16,560      |               | $          | 16,560 |   |
| Capital in excess of  par value                                                                              |       | 230,067,811       |        | 230,096,572        |       |
| Net unrealized  appreciation (depreciation) of investment portfolio                                          |       | 1,757,659         |        | (3,672,510         | )          |
| Distributions in excess  of net investment income                                                            |       | (4,507,838        | )           | (3,622,113         | )          |
| Total Net Assets                                                                                             |       | $                 | 227,334,192 |               | $          | 222,818,509 |   |
| Net assets per share                                                                                         |       | $                 | 13.73       |               | $          | 13.46 |   |

 

*THE ACCOMPANYING NOTES ARE ANINTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.*

2

----

 

**GLADSTONE INVESTMENTCORPORATIONCONSOLIDATED SCHEDULE OF INVESTMENTS**

**JUNE 30, 2007**

**(UNAUDITED)**
| **Company (1)**                      | ** ** | **Industry**                                                  | ** ** | **Investment (2)**                       | ** ** | **Cost**   | ** ** | **Fair Value** |
|-------------------------------------------|------------|---------------------------------------------------------------|------------|-----------------------------------------------|------------|------------|------------|---------------------|
|                                      |       |                                                          |       |                                          |       |       |       |                |
| **NON-CONTROL/NON-AFFILIATE INVESTMENTS** |       |                                                          |       |                                          |       |       |       |                |
| ** **                                |       |                                                          |       |                                          |       |       |       |                |
| ***Syndicated Loans:***                   |       |                                                          |       |                                          |       |       |       |                |
| * *                                  |       |                                                          |       |                                          |       |       |       |                |
| ACS Media, LLC                            |       | Service - directory advertising                               |       | Senior Term Debt (7.9%, Due 11/2013) (3)      |       | $          | 4,818,185  |                | $ | 4,795,192 |
|                                      |       |                                                          |       |                                          |       |       |       |                |
| Activant                                  |       | Service - enterprise software and services                    |       | Senior Term Debt (7.4%, Due 5/2013) (3)       |       | 3,744,596  |       | 3,709,627           |
|                                      |       |                                                          |       |                                          |       |       |       |                |
| American Safety Razor Company Inc.        |       | Manufacturing - razors and blades                             |       | Senior Term Debt (7.9%, Due 7/2013) (3)       |       | 1,487,309  |       | 1,486,856           |
|                                      |       |                                                          |       |                                          |       |       |       |                |
| Aspect Software, Inc.                     |       | Service - call center software                                |       | Senior Term Debt (8.4%, Due 7/2011) (3)       |       | 2,980,932  |       | 2,992,388           |
|                                      |       |                                                          |       |                                          |       |       |       |                |
| Brock Holdings II, Inc.                   |       | Service - industrial specialty maintenance                    |       | Senior Term Debt (7.4%, Due 8/2013) (3) (5)   |       | 2,994,702  |       | 2,992,500           |
|                                      |       |                                                          |       |                                          |       |       |       |                |
| Compsych Investments Corp.                |       | Service - independent employee assistance programs            |       | Senior Term Debt (8.1%, Due 2/2012) (3) (5)   |       | 3,624,445  |       | 3,628,050           |
|                                      |       |                                                          |       |                                          |       |       |       |                |
| CRC Health Group, Inc.                    |       | Service - substance abuse treatment                           |       | Senior Term Debt (7.6%, Due 2/2012) (3)       |       | 9,955,202  |       | 9,950,818           |
|                                      |       |                                                          |       |                                          |       |       |       |                |
| Critical Homecare Solutions, Inc.         |       | Service - home therapy and respiratory treatment              |       | Senior Term Debt (8.6%, Due 1/2012) (3) (5)   |       | 3,947,139  |       | 3,950,000           |
|                                      |       |                                                          |       |                                          |       |       |       |                |
| CST Industries Acquisition, Inc.          |       | Manufacturing - metal storage units                           |       | Senior Term Debt (8.1%, Due 8/2013) (3)       |       | 994,369    |       | 997,463             |
|                                      |       |                                                          |       |                                          |       |       |       |                |
| Dealer Computer Services, Inc.            |       | Manufacturing & ervice - systems for automotive retailers |       | Senior Term Debt (7.4%, Due 9/2013) (3)       |       | 1,954,865  |       | 1,953,286           |
|                                      |       |                                                          |       |                                          |       |       |       |                |
| Generac Acquisition Corp.                 |       | Manufacturing - standby power products                        |       | Senior Term Debt (7.9%, Due 11/2013) (5)      |       | 4,967,404  |       | 4,851,000           |
|                                      |       |                                                          |       |                                          |       |       |       |                |
| Graham Packaging Holdings Company         |       | Manufacturing - plastic containers                            |       | Senior Term Debt (7.6%, Due 11/2013)          |       | 10,473,750 |       | 10,486,842          |
|                                      |       |                                                          |       |                                          |       |       |       |                |
| HMTBP Acquisition II Corp.                |       | Service - aboveground storage tanks                           |       | Senior Term Debt (7.6%, Due 11/2013)          |       | 3,990,000  |       | 3,990,000           |
|                                      |       |                                                          |       |                                          |       |       |       |                |
| Hudson Products Holdings, Inc.            |       | Manufacturing - heat transfer solutions                       |       | Senior Term Debt (8.4%, Due 12/2013) (3)      |       | 6,065,392  |       | 6,063,684           |
|                                      |       |                                                          |       |                                          |       |       |       |                |
| Huish Detergents, Inc.                    |       | Manufacturing - household cleaning products                   |       | Senior Term Debt (7.3%, Due 4/2014) (3)       |       | 2,000,000  |       | 1,985,000           |
|                                      |       |                                                          |       |                                          |       |       |       |                |
| J. Crew Operating Corp.                   |       | Retail - apparel                                              |       | Senior Term Debt (7.1%, Due 5/2013) (3)       |       | 1,230,450  |       | 1,228,070           |
|                                      |       |                                                          |       |                                          |       |       |       |                |
| KIK Custom Products, Inc.                 |       | Manufacturing - consumer products                             |       | Senior Term Debt (7.6%, Due 5/2014) (3)       |       | 1,000,000  |       | 985,000             |
|                                      |       |                                                          |       |                                          |       |       |       |                |
| Kronos, Inc.                              |       | Service - workforce management solutions                      |       | Senior Term Debt (7.6%, Due 6/14) (3)         |       | 2,000,000  |       | 1,992,500           |
|                                      |       |                                                          |       |                                          |       |       |       |                |
| Lexicon Marketing USA, Inc.               |       | Service - marketing to Hispanic community                     |       | Senior Term Debt (7.8%, Due 5/2012) (3) (5)   |       | 2,947,745  |       | 2,941,844           |
|                                      |       |                                                          |       |                                          |       |       |       |                |
| Local TV Finance, LLC                     |       | Service - television station operator                         |       | Senior Term Debt (7.4%, Due 5/2013) (3)       |       | 1,000,000  |       | 996,250             |
|                                      |       |                                                          |       |                                          |       |       |       |                |
| LVI Services, Inc.                        |       | Service - asbestos and mold remediation                       |       | Senior Term Debt (10.4%, Due 11/2010) (3) (5) |       | 6,422,593  |       | 6,362,484           |
|                                      |       |                                                          |       |                                          |       |       |       |                |
| MedAssets, Inc.                           |       | Service - pharmaceuticals and healthcare GPO                  |       | Senior Term Debt (7.8%, Due 10/2013) (3) (5)  |       | 3,484,788  |       | 3,478,147           |
|                                      |       |                                                          |       |                                          |       |       |       |                |
| MediMedia USA, LLC                        |       | Service - healthcare and pharmeceutical marketing             |       | Senior Term Debt (7.6%, Due 10/2013) (3)      |       | 2,248,019  |       | 2,241,499           |
|                                      |       |                                                          |       |                                          |       |       |       |                |
| Mitchell International, Inc.              |       | Service - automobile insurance claims processing              |       | Senior Term Debt (7.4%, Due 3/2014) (3) (5)   |       | 1,000,250  |       | 997,500             |
|                                      |       |                                                          |       |                                          |       |       |       |                |
| National Mentor Holdings, Inc.            |       | Service - home health care                                    |       | Senior Term Debt (7.2%, Due 6/2013) (3)       |       | 1,986,979  |       | 1,990,790           |
|                                      |       |                                                          |       |                                          |       |       |       |                |
| Network Solutions, LLC                    |       | Service - internet domain solutions                           |       | Senior Term Debt (7.9%, Due 3/2014) (3)       |       | 10,000,000 |       | 9,950,000           |
|                                      |       |                                                          |       |                                          |       |       |       |                |
| NPC International Inc.                    |       | Service - Pizza Hut franchisee                                |       | Senior Term Debt (7.1%, Due 5/2013) (3)       |       | 3,016,872  |       | 2,995,367           |
|                                      |       |                                                          |       |                                          |       |       |       |                |
| Open Solutions, Inc.                      |       | Service - software outsourcing for financial institutions     |       | Senior Term Debt (7.5%, Due 1/2014) (3)       |       | 2,511,814  |       | 2,484,836           |
|                                      |       |                                                          |       |                                          |       |       |       |                |
| Ozburn-Hessey Holding Co. LLC             |       | Service - third party logistics                               |       | Senior Term Debt (8.6%, Due 8/2012) (3)       |       | 7,718,949  |       | 7,678,040           |
|                                      |       |                                                          |       |                                          |       |       |       |                |
| Pinnacle Foods Finance, LLC               |       | Manufacturing - branded food products                         |       | Senior Term Debt (8.1%, Due 4/2014) (3)       |       | 4,001,318  |       | 4,000,000           |
|                                      |       |                                                          |       |                                          |       |       |       |                |
| PTS Acquisition Corp.                     |       | Manufacturing - drug delivery and packaging technologies      |       | Senior Term Debt (7.6%, Due 4/2014) (3)       |       | 7,000,000  |       | 6,991,250           |
|                                      |       |                                                          |       |                                          |       |       |       |                |
| QTC Acquisition, Inc.                     |       | Service - outsourced disability evaluations                   |       | Senior Term Debt (7.6%, Due 11/2012) (3)      |       | 2,001,820  |       | 2,000,000           |
|                                      |       |                                                          |       |                                          |       |       |       |                |
| Radio Systems Corporation                 |       | Service - design electronic pet containment products          |       | Senior Term Debt (8.1%, Due 9/2013) (3)       |       | 1,984,482  |       | 1,999,888           |
|                                      |       |                                                          |       |                                          |       |       |       |                |
| Rally Parts, Inc.                         |       | Manufacturing - aftermarket motorcycle parts and accessories  |       | Senior Term Debt (7.9%, Due 11/2013) (3)      |       | 2,503,516  |       | 2,487,500           |
|                                      |       |                                                          |       |                                          |       |       |       |                |
| RPG Holdings, Inc.                        |       | Manufacturing and design - greeting cards                     |       | Senior Term Debt (9.1%, Due 12/2011) (3)      |       | 4,553,126  |       | 4,278,958           |
|                                      |       |                                                          |       |                                          |       |       |       |                |
| SafeNet, Inc.                             |       | Service - chip encryption products                            |       | Senior Term Debt (7.9%, Due 4/2014) (3)       |       | 3,001,528  |       | 2,970,000           |
|                                      |       |                                                          |       |                                          |       |       |       |                |
| SGS International, Inc.                   |       | Service - digital imaging and graphics                        |       | Senior Term Debt (7.9%, Due 12/2011) (3)      |       | 1,607,478  |       | 1,600,627           |
|                                      |       |                                                          |       |                                          |       |       |       |                |
| Stolle Machinery Company                  |       | Manufacturing - can-making equipment and parts                |       | Senior Term Debt (7.9%, Due 9/2012) (3)       |       | 498,760    |       | 501,231             |
|                                           |            |                                                               |            |                                               |            |            |            |                     |  |  |

 

3

----

** **
| **Company (1)**                                        | ** ** | **Industry**                                              | ** ** | **Investment (2)**                                | ** ** | **Cost**   | ** **      | **Fair Value** |
|--------------------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------------|------------|------------|-----------------|----------------|
|                                                   |       |                                                      |       |                                              |       |       |            |           |
| **NON-CONTROL/NON-AFFILIATE  INVESTMENTS (Continued)** |       |                                                      |       |                                              |       |       |            |           |
| ** **                                             |       |                                                      |       |                                              |       |       |            |           |
| Survey Sampling, LLC                                   |       | Service - telecommunications-based sampling               |       | Senior Term Debt (7.9%, Due 5/2011) (3) (5)       |       | $          | 3,245,858       |           | $ | 3,212,324 |
|                                                   |       |                                                      |       |                                              |       |       |            |           |
| Synagro Technologies, Inc.                             |       | Service - waste treatment and recycling                   |       | Senior Term Debt (7.4%, Due 3/2014) (3)           |       | 502,349    |            | 500,000        |
|                                                   |       |                                                      |       |                                              |       |       |            |           |
| Triad Laboratory Alliance,  LLC                        |       | Service - regional medical laboratories                   |       | Senior Term Debt (8.6%, Due 12/2011) (3) (5)      |       | 4,940,191  |            | 4,875,750      |
|                                                   |       |                                                      |       |                                              |       |       |            |           |
| US Investigative Services,  Inc.                       |       | Service - background investigations                       |       | Senior Term Debt (8.1%, Due 9/2012) (3)           |       | 10,892,705 |            | 10,828,384     |
|                                                   |       |                                                      |       |                                              |       |       |            |           |
| United Surgical Partners  International, Inc.          |       | Service - outpatient surgical provider                    |       | Senior Term Debt (7.4%, Due 4/2014) (3)           |       | 1,326,290  |            | 1,319,659      |
|                                                   |       |                                                      |       |                                              |       |       |            |           |
| Wastequip, Inc.                                        |       | Service - process and transport waste materials           |       | Senior Term Debt (7.6%, Due 2/2013) (3)           |       | 2,936,555  |            | 2,947,567      |
|                                                   |       |                                                      |       |                                              |       |       |            |           |
| WaveDivision Holdings, LLC                             |       | Service - cable                                           |       | Senior Term Debt (7.9%, Due 6/2014) (3) (5)       |       | 1,925,274  |            | 1,920,000      |
|                                                   |       |                                                      |       |                                              |       |       |            |           |
| West Corporation                                       |       | Service - business process outsourcing                    |       | Senior Term Debt (7.8%, Due 10/2013) (3)          |       | 11,458,046 |            | 11,430,100     |
|                                                   |       |                                                      |       |                                              |       |       |            |           |
| *Subtotal - Syndicated  Loans*                         |       |                                                      |       |                                              |       | $          | 174,946,045     |           | $ | 174,018,271 |
|                                                   |       |                                                      |       |                                              |       |       |            |           |
| ***Non-syndicated loans***                             |       |                                                      |       |                                              |       |       |            |           |
| * *                                               |       |                                                      |       |                                              |       |       |            |           |
| B-Dry, LLC                                             |       | Service - basement waterproofer                           |       | Senior Term Debt (10.2%, Due 11/2007) (6)         |       | 250,000    |            | 250,000        |
| * *                                               |       |                                                      |       | Senior Term Debt (10.2%, Due 5/2014) (6)          |       | 10,800,000 |            | 10,800,000     |
|                                                   |       |                                                      |       | Common Stock Warrants (4) (6)                     |       | 300,000    |            | 300,000        |
|                                                   |       |                                                      |       |                                              |       | 11,350,000 |            | 11,350,000     |
|                                                   |       |                                                      |       |                                              |       |       |            |           |
| **Total  Non-Control/Non-Affiliate Investments**       | ** ** | ** **                                                | ** ** | ** **                                        | ** ** | **$**      | **186,296,045** | ** **     | **$** | **185,368,271** |
| * *                                               |       |                                                      |       |                                              |       |       |            |           |
| **CONTROL INVESTMENTS**                                |       |                                                      |       |                                              |       |       |            |           |
|                                                   |       |                                                      |       |                                              |       |       |            |           |
| A. Stucki Company                                      |       | Manufacturing - railroad cars and accessories             |       | Senior Term Debt (9.8% Due 3/2012)                |       | $          | 15,000,000      |           | $ | 15,000,000 |
|                                                   |       |                                                      |       | Senior Term Debt (12.1% Due 3/2012)               |       | 11,000,000 |            | 11,000,000     |
|                                                   |       |                                                      |       | Senior Subordinated Term Debt (13% Due 3/2014)    |       | 5,485,760  |            | 5,485,760      |
|                                                   |       |                                                      |       | Preferred Stock (4)                               |       | 4,386,686  |            | 4,483,794      |
|                                                   |       |                                                      |       | Common Stock (4)                                  |       | 129,956    |            | 3,989,352      |
|                                                   |       |                                                      |       |                                              |       | 36,002,402 |            | 39,958,906     |
|                                                   |       |                                                      |       |                                              |       |       |            |           |
| Acme Cryogenics Corporation                            |       | Manufacturing - manifolds and pipes for industrial gasses |       | Senior Subordinated Term Debt (11.5% Due 3/2013)  |       | 14,500,000 |            | 14,500,000     |
|                                                   |       |                                                      |       | Redeemable Preferred Stock                        |       | 6,983,785  |            | 7,254,898      |
|                                                   |       |                                                      |       | Common Stock                                      |       | 1,045,181  |            | 3,821,983      |
|                                                   |       |                                                      |       | Common Stock Warrants (4)                         |       | 24,686     |            | 141,420        |
|                                                   |       |                                                      |       |                                              |       | 22,553,652 |            | 25,718,301     |
|                                                   |       |                                                      |       |                                              |       |       |            |           |
| Chase II Holdings Corp.                                |       | Manufacturing - traffic doors                             |       | Revolving Credit Facility (9.8% Due 3/2008) (7)   |       | 2,380,000  |            | 2,380,000      |
|                                                   |       |                                                      |       | Senior Term Debt (9.8%, Due 3/2011)               |       | 10,725,000 |            | 10,725,000     |
|                                                   |       |                                                      |       | Senior Term Debt (12.0% Due 3/2011)               |       | 7,960,000  |            | 7,960,000      |
|                                                   |       |                                                      |       | Subordinated Term Debt (13% Due 3/2013)           |       | 6,167,810  |            | 6,167,810      |
|                                                   |       |                                                      |       | Redeemable Preferred Stock (4)                    |       | 6,960,806  |            | 4,245,986      |
|                                                   |       |                                                      |       | Common Stock Warrants (4)                         |       | 61,384     |            | —         |
|                                                   |       |                                                      |       |                                              |       | 34,255,000 |            | 31,478,796     |
|                                                   |       |                                                      |       |                                              |       |       |            |           |
| Hailey Transport  Corporation                          |       | Retail and Service - school buses and parts               |       | Senior Subordinated Term Debt (12.0%, Due 1/2012) |       | 4,000,000  |            | 4,000,000      |
|                                                   |       |                                                      |       | Preferred Stock (4)                               |       | 2,500,000  |            | 133,154        |
|                                                   |       |                                                      |       |                                              |       | 6,500,000  |            | 4,133,154      |
|                                                   |       |                                                      |       |                                              |       |       |            |           |
| Quench Holdings Corp.                                  |       | Service - sales, installation and service                 |       | Revolving Credit Facility (9.3%, Due 3/2009) (8)  |       | 1,050,000  |            | 1,050,000      |
|                                                   |       | of water coolers                                          |       | Senior Term Debt (9.3%, Due 3/2011)               |       | 4,750,000  |            | 4,750,000      |
|                                                   |       |                                                      |       | Subordinated Term Debt (11.5%, Due 3/2011)        |       | 7,955,000  |            | 7,955,000      |
|                                                   |       |                                                      |       | Common Stock (4)                                  |       | 3,256,318  |            | 3,266,203      |
|                                                   |       |                                                      |       |                                              |       | 17,011,318 |            | 17,021,203     |
|                                                   |       |                                                      |       |                                              |       |       |            |           |
| **Total Control Investments**                          | ** ** | ** **                                                | ** ** | ** **                                        | ** ** | **$**      | **116,322,372** | ** **     | **$** | **118,310,360** |
| ** **                                             | ** ** | ** **                                                | ** ** | ** **                                        | ** ** | ** ** | ** **      | ** **     |
| **AFFILIATE INVESTMENTS**                              |       |                                                      |       |                                              |       |       |            |           |
|                                                   |       |                                                      |       |                                              |       |       |            |           |
| Noble Logistics, Inc.                                  |       | Service - aftermarket auto parts delivery                 |       | Revolving Credit Facility (9.3%, Due 12/2009) (9) |       | $          | —          |           | $ | — |
|                                                   |       |                                                      |       | Senior Term Debt (9.3%, Due 12/2011)              |       | 7,000,000  |            | 7,000,000      |
|                                                   |       |                                                      |       | Senior Term Debt (11.3% Due 3/2011)               |       | 7,000,000  |            | 7,000,000      |
|                                                   |       |                                                      |       | Preferred Stock (4)                               |       | 1,750,000  |            | 1,897,431      |
|                                                   |       |                                                      |       | Common Stock (4)                                  |       | 1,500,000  |            | 2,050,014      |
|                                                   |       |                                                      |       |                                              |       | 17,250,000 |            | 17,947,445     |
|                                                   |       |                                                      |       |                                              |       |       |            |           |
| **Total Affiliate  Investments**                       | ** ** | ** **                                                | ** ** | ** **                                        | ** ** | **$**      | **17,250,000**  | ** **     | **$** | **17,947,445** |
|                                                   |       |                                                      |       |                                              |       |       |            |           |
| **Total Investments**                                  | ** ** | ** **                                                | ** ** | ** **                                        | ** ** | **$**      | **319,868,417** | ** **     | **$** | **321,626,076** |

----

(1)                Certain of thelisted securities are issued by affiliate(s) of the indicated portfoliocompany.

(2)                Percentagerepresents the weighted average interest rates in effect at June 30, 2007 anddue date represents the contractual maturity date.

(3)                Marketablesecurities are valued based on the indicative bid price, as of June 30, 2007,from the respective originating syndication agent’s trading desk.

(4)                Security isnon-income producing.

(5)                Valued usingStandard & Poor’s Securities Evaluations, Inc. opinions of value at June30, 2007.

(6)                Fair value is equal to costdue to recent acquisition.

(7)                Total available under therevolving credit facility is $3,500,000, of which $1,120,000 remains undrawn atJune 30, 2007.

(8)                Total availableunder the revolving credit facility is $1,500,000, of which $450,000 remainsundrawn at June 30, 2007.

(9)                Total available under therevolving credit facility is $2,000,000.

*THEACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIALSTATEMENTS.*

 

4

----

 

**GLADSTONE INVESTMENTCORPORATIONCONSOLIDATED SCHEDULE OF INVESTMENTS**

**March31, 2007(UNAUDITED)**
| **Company (1)**                             | ** ** | **Industry**                                                   | ** ** | **Investment (2)**                            | ** ** | **Cost**  | ** ** | **Fair Value** |
|---------------------------------------------|------------|----------------------------------------------------------------|------------|-----------------------------------------------|------------|-----------|------------|----------------|
|                                        |       |                                                           |       |                                          |       |      |       |           |
| **NON-CONTROL/NON-AFFILIATE INVESTMENTS**   |       |                                                           |       |                                          |       |      |       |           |
| ** **                                  |       |                                                           |       |                                          |       |      |       |           |
| ACS Media, LLC                              |       | Service - directory advertising                                |       | Senior Term Debt (7.9%, Due 11/2013) (3)      |       | $         | 4,857,421  |           | $ | 4,857,822 |
|                                        |       |                                                           |       |                                          |       |      |       |           |
| Activant                                    |       | Service - enterprise software and services                     |       | Senior Term Debt (7.4%, Due 5/2013) (3)       |       | 3,745,496 |       | 3,714,281      |
|                                        |       |                                                           |       |                                          |       |      |       |           |
| American Safety Razor Company Inc.          |       | Manufacturing - razors and blades                              |       | Senior Term Debt (7.9%, Due 7/2013) (3)       |       | 1,491,154 |       | 1,492,472      |
|                                        |       |                                                           |       |                                          |       |      |       |           |
| Aramark Corp.                               |       | Service - vending services                                     |       | Senior Term Debt (7.5%, Due 1/2014) (10)      |       | 921,289   |       | 925,895        |
|                                        |       |                                                           |       | Letter of Credit (5.3%, Due 1/2014) (10)      |       | 65,841    |       | 66,170         |
|                                        |       |                                                           |       |                                          |       |      |       |           |
| Aspect Software, Inc.                       |       | Service - call center software                                 |       | Senior Term Debt (8.4%, Due 7/2011) (3)       |       | 2,988,647 |       | 2,999,925      |
|                                        |       |                                                           |       |                                          |       |      |       |           |
| Brock Holdings II, Inc.                     |       | Service - industrial specialty maintenance                     |       | Senior Term Debt (7.3%, Due 8/2013) (3) (5)   |       | 3,000,000 |       | 3,003,750      |
|                                        |       |                                                           |       |                                          |       |      |       |           |
| Compsych Investments Corp.                  |       | Service - independent employee assistance programs             |       | Senior Term Debt (8.1%, Due 2/2012) (3) (5)   |       | 3,875,254 |       | 3,879,300      |
|                                        |       |                                                           |       |                                          |       |      |       |           |
| CRC Health Group, Inc.                      |       | Service - substance abuse treatment                            |       | Senior Term Debt (7.9%, Due 2/2012) (3)       |       | 9,993,754 |       | 10,010,307     |
|                                        |       |                                                           |       |                                          |       |      |       |           |
| Critical Homecare Solutions, Inc.           |       | Service - home therapy and respiratory treatment               |       | Senior Term Debt (8.6%, Due 1/2012) (3) (5)   |       | 2,000,000 |       | 2,000,000      |
|                                        |       |                                                           |       |                                          |       |      |       |           |
| CST Industries Acquisition, Inc.            |       | Manufacturing - metal storage units                            |       | Senior Term Debt (8.5%, Due 8/2013) (3)       |       | 996,946   |       | 999,975        |
|                                        |       |                                                           |       |                                          |       |      |       |           |
| Dealer Computer Services, Inc.              |       | Manufacturing & Service - systems for automotive retailers |       | Senior Term Debt (7.4%, Due 9/2013) (3)       |       | 1,042,760 |       | 1,044,063      |
|                                        |       |                                                           |       |                                          |       |      |       |           |
| Dresser Holdings, Inc.                      |       | Manufacturing - oilfield & energy products                 |       | Senior Term Debt (8.1%, Due 10/2013) (3)      |       | 3,868,905 |       | 3,851,943      |
|                                        |       |                                                           |       |                                          |       |      |       |           |
| Generac Acquisition Corp.                   |       | Manufacturing - standby power products                         |       | Senior Term Debt (7.9%, Due 11/2013) (5)      |       | 2,593,800 |       | 2,611,957      |
|                                        |       |                                                           |       |                                          |       |      |       |           |
| Hudson Products Holdings, Inc.              |       | Manufacturing - heat transfer solutions                        |       | Senior Term Debt (8.1%, Due 12/2013) (3)      |       | 2,358,550 |       | 2,363,866      |
|                                        |       |                                                           |       |                                          |       |      |       |           |
| IPC Information Systems, LLC                |       | Manufacturing - specialized telephony systems                  |       | Senior Term Debt (7.9%, Due 9/2013) (3)       |       | 263,045   |       | 262,319        |
|                                        |       |                                                           |       |                                          |       |      |       |           |
| J. Crew Operating Corp.                     |       | Retail - apparel                                               |       | Senior Term Debt (7.2%, Due 5/2013) (3)       |       | 1,405,990 |       | 1,407,018      |
|                                        |       |                                                           |       |                                          |       |      |       |           |
| Latham Manufacturing Corp.                  |       | Manufacturing - swimming pool components accessories           |       | Senior Term Debt (8.5%, Due 6/2012) (3)       |       | 2,427,162 |       | 2,375,520      |
|                                        |       |                                                           |       |                                          |       |      |       |           |
| Lexicon Marketing USA, Inc.                 |       | Service - marketing to Hispanic community                      |       | Senior Term Debt (7.8%, Due 5/2012) (3) (5)   |       | 2,971,543 |       | 3,006,325      |
|                                        |       |                                                           |       |                                          |       |      |       |           |
| LVI Services, Inc.                          |       | Service - asbestos and mold remediation                        |       | Senior Term Debt (10.3%, Due 11/2010) (3) (5) |       | 6,440,352 |       | 6,330,492      |
|                                        |       |                                                           |       |                                          |       |      |       |           |
| Madison River Capital LLC                   |       | Service - communications and information                       |       | Senior Term Debt (7.6%, Due 7/2012) (3)       |       | 5,727,708 |       | 5,702,357      |
|                                        |       |                                                           |       |                                          |       |      |       |           |
| Maidenform, Inc.                            |       | Manufacturing - intimate apparel                               |       | Senior Term Debt (7.1%, Due 5/2010) (3)       |       | 2,569,252 |       | 2,573,084      |
|                                        |       |                                                           |       |                                          |       |      |       |           |
| MedAssets, Inc.                             |       | Service - pharmaceuticals and healthcare GPO                   |       | Senior Term Debt (7.8%, Due 10/2013) (3) (5)  |       | 3,493,734 |       | 3,504,342      |
|                                        |       |                                                           |       |                                          |       |      |       |           |
| MediMedia USA, LLC                          |       | Service - healthcare and pharmeceutical marketing              |       | Senior Term Debt (7.9%, Due 10/2013) (3)      |       | 1,185,613 |       | 1,180,462      |
|                                        |       |                                                           |       |                                          |       |      |       |           |
| National Mentor Holdings, Inc.              |       | Service - home health care                                     |       | Senior Term Debt (7.4%, Due 6/2013) (3)       |       | 1,987,027 |       | 1,985,825      |
|                                        |       |                                                           |       |                                          |       |      |       |           |
| NPC International Inc.                      |       | Service - Pizza Hut franchisee                                 |       | Senior Term Debt (7.1%, Due 5/2013) (3)       |       | 3,017,479 |       | 2,995,367      |
|                                        |       |                                                           |       |                                          |       |      |       |           |
| Nutro Products, Inc.                        |       | Manufacturing - pet food                                       |       | Senior Term Debt (7.4%, Due 4/2012) (3)       |       | 2,442,961 |       | 2,421,809      |
|                                        |       |                                                           |       |                                          |       |      |       |           |
| Open Solutions, Inc.                        |       | Service - software outsourcing for financial institutions      |       | Senior Term Debt (7.5%, Due 1/2014) (3)       |       | 2,518,294 |       | 2,506,250      |
|                                        |       |                                                           |       |                                          |       |      |       |           |
| Ozburn-Hessey Holding Co. LLC               |       | Service - third party logistics                                |       | Senior Term Debt (8.6%, Due 8/2012) (3)       |       | 7,764,943 |       | 7,711,178      |
|                                        |       |                                                           |       |                                          |       |      |       |           |
| Patriot Media & Communications CNJ, LLC |       | Service - telecommunications                                   |       | Senior Term Debt (7.4%, Due 3/2013) (3)       |       | 4,147,228 |       | 4,105,476      |
|                                        |       |                                                           |       |                                          |       |      |       |           |
| QTC Acquisition, Inc.                       |       | Service - outsourced disability evaluations                    |       | Senior Term Debt (8.1%, Due 11/2012) (3)      |       | 1,996,592 |       | 1,997,199      |
|                                        |       |                                                           |       |                                          |       |      |       |           |
| Radio Systems Corporation                   |       | Service - design electronic pet containment products           |       | Senior Term Debt (8.1%, Due 9/2013) (3)       |       | 1,989,421 |       | 1,999,950      |
|                                        |       |                                                           |       |                                          |       |      |       |           |
| Rally Parts, Inc.                           |       | Manufacturing - aftermarket motorcycle parts and accessories   |       | Senior Term Debt (7.9%, Due 11/2013) (3)      |       | 1,313,285 |       | 1,319,792      |
|                                        |       |                                                           |       |                                          |       |      |       |           |
| RPG Holdings, Inc.                          |       | Manufacturing and design - greeting cards                      |       | Senior Term Debt (8.9%, Due 12/2011) (3)      |       | 5,001,100 |       | 4,900,000      |
|                                        |       |                                                           |       |                                          |       |      |       |           |
| SGS International, Inc.                     |       | Service - digital imaging and graphics                         |       | Senior Term Debt (7.9%, Due 12/2011) (3)      |       | 1,611,921 |       | 1,616,724      |
|                                        |       |                                                           |       |                                          |       |      |       |           |
| Stolle Machinery Company                    |       | Manufacturing - can-making equipment and parts                 |       | Senior Term Debt (7.9%, Due 9/2012) (3)       |       | 500,100   |       | 502,491        |
|                                             |            |                                                                |            |                                               |            |           |            |                |  |  |

 

5

----

** **
| **Company (1)**                                        | ** ** | **Industry**                                              | ** ** | **Investment (2)**                                       | ** ** | **Cost**   | ** **      | **Fair Value** |
|--------------------------------------------------------|------------|-----------------------------------------------------------|------------|----------------------------------------------------------|------------|------------|-----------------|----------------|
|                                                   |       |                                                      |       |                                                     |       |       |            |           |
| **NON-CONTROL/NON-AFFILIATE  INVESTMENTS (Continued)** |       |                                                      |       |                                                     |       |       |            |           |
| ** **                                             |       |                                                      |       |                                                     |       |       |            |           |
| Survey Sampling, LLC                                   |       | Service - telecommunications-based sampling               |       | Senior Term Debt (7.9%, Due 5/2011) (3)                  |       | 3,309,714  |            | 3,282,178      |
|                                                   |       |                                                      |       |                                                     |       |       |            |           |
| Triad Laboratory Alliance,  LLC                        |       | Service - regional medical laboratories                   |       | Senior Term Debt (8.6%, Due 12/2011) (3) (5)             |       | 4,953,549  |            | 4,912,813      |
|                                                   |       |                                                      |       |                                                     |       |       |            |           |
| US Investigative Services,  Inc.                       |       | Service - background investigations                       |       | Senior Term Debt (7.9%, Due 9/2012) (3)                  |       | 10,923,253 |            | 10,910,191     |
|                                                   |       |                                                      |       |                                                     |       |       |            |           |
| Wastequip, Inc.                                        |       | Service - process and transport waste materials           |       | Senior Term Debt (7.6%, Due 2/2013) (3)                  |       | 2,066,465  |            | 2,081,963      |
|                                                   |       |                                                      |       |                                                     |       |       |            |           |
| WaveDivision Holdings, LLC                             |       | Service - cable                                           |       | Senior Term Debt (7.8%, Due 6/2014) (3)                  |       | 1,925,440  |            | 1,929,600      |
|                                                   |       |                                                      |       |                                                     |       |       |            |           |
| West Corporation                                       |       | Service - business process outsourcing                    |       | Senior Term Debt (7.8%, Due 10/2013) (3)                 |       | 10,814,753 |            | 10,826,161     |
|                                                   |       |                                                      |       |                                                     |       |       |            |           |
| **Total  Non-Control/Non-Affiliate Investments**       | ** ** | ** **                                                | ** ** | ** **                                               | ** ** | **$**      | **138,567,741** | ** **     | **$** | **138,168,612** |
| * *                                               |       |                                                      |       |                                                     |       |       |            |           |
| **CONTROL INVESTMENTS**                                |       |                                                      |       |                                                     |       |       |            |           |
|                                                   |       |                                                      |       |                                                     |       |       |            |           |
| A. Stucki Company                                      |       | Manufacturing - railroad cars and accessories             |       | Senior Term Debt (9.8% Due 3/2012) (6)                   |       | 15,000,000 |            | 15,000,000     |
|                                                   |       |                                                      |       | Senior Term Debt (12.1% Due 3/2012) (6)                  |       | 11,000,000 |            | 11,000,000     |
|                                                   |       |                                                      |       | Senior Subordinated Term Debt (13% Due 3/2014) (6)       |       | 5,485,760  |            | 5,485,760      |
|                                                   |       |                                                      |       | Preferred Stock (4) (6)                                  |       | 4,386,686  |            | 4,386,686      |
|                                                   |       |                                                      |       | Common Stock (4) (6)                                     |       | 129,956    |            | 129,956        |
|                                                   |       |                                                      |       |                                                     |       | 36,002,402 |            | 36,002,402     |
|                                                   |       |                                                      |       |                                                     |       |       |            |           |
| Acme Cryogenics Corporation                            |       | Manufacturing - manifolds and pipes for industrial gasses |       | Senior Subordinated Term Debt (11.5% Due 3/2013) (5) (6) |       | $          | 14,500,000      |           | $ | 14,481,875 |
|                                                   |       |                                                      |       | Redeemable Preferred Stock (4) (6)                       |       | 6,983,785  |            | 6,983,785      |
|                                                   |       |                                                      |       | Common Stock (4) (6)                                     |       | 1,045,181  |            | 1,045,181      |
|                                                   |       |                                                      |       | Common Stock Warrants (4) (6)                            |       | 24,686     |            | 24,686         |
|                                                   |       |                                                      |       |                                                     |       | 22,553,652 |            | 22,535,527     |
|                                                   |       |                                                      |       |                                                     |       |       |            |           |
| Chase II Holdings Corp.                                |       | Manufacturing - traffic doors                             |       | Revolving Credit Facility (9.8% Due 3/2008) (7)          |       | 1,900,000  |            | 1,900,000      |
|                                                   |       |                                                      |       | Senior Term Debt (9.8%, Due 3/2011) (5)                  |       | 11,000,000 |            | 11,000,000     |
|                                                   |       |                                                      |       | Senior Term Debt (12.0% Due 3/2011) (5)                  |       | 8,000,000  |            | 8,000,000      |
|                                                   |       |                                                      |       | Subordinated Term Debt (13% Due 3/2013) (5)              |       | 6,167,810  |            | 6,167,810      |
|                                                   |       |                                                      |       | Redeemable Preferred Stock (4)                           |       | 6,960,806  |            | 3,120,070      |
|                                                   |       |                                                      |       | Common Stock Warrants (4)                                |       | 61,384     |            | —         |
|                                                   |       |                                                      |       |                                                     |       | 34,090,000 |            | 30,187,880     |
|                                                   |       |                                                      |       |                                                     |       |       |            |           |
| Hailey Transport  Corporation                          |       | Retail and Service - school buses and parts               |       | Senior Subordinated Term Debt (12.0%, Due 1/2012) (5)    |       | 4,000,000  |            | 4,000,000      |
|                                                   |       |                                                      |       | Preferred Stock (4)                                      |       | 2,500,000  |            | 3,184,874      |
|                                                   |       |                                                      |       |                                                     |       | 6,500,000  |            | 7,184,874      |
|                                                   |       |                                                      |       |                                                     |       |       |            |           |
| Quench Holdings Corp.                                  |       | Service - sales, installation and service                 |       | Revolving Credit Facility (9.3%, Due 3/2009) (5) (8)     |       | 1,900,000  |            | 1,900,000      |
|                                                   |       | of water coolers                                          |       | Senior Term Debt (9.3%, Due 3/2011) (5)                  |       | 4,000,000  |            | 4,000,000      |
|                                                   |       |                                                      |       | Subordinated Term Debt (11.5%, Due 3/2011) (5)           |       | 8,000,000  |            | 8,000,000      |
|                                                   |       |                                                      |       | Common Stock (4)                                         |       | 3,256,318  |            | 3,205,808      |
|                                                   |       |                                                      |       |                                                     |       | 17,156,318 |            | 17,105,808     |
|                                                   |       |                                                      |       |                                                     |       |       |            |           |
| **Total Control Investments**                          | ** ** | ** **                                                | ** ** | ** **                                               | ** ** | **$**      | **116,302,372** | ** **     | **$** | **113,016,491** |
| ** **                                             | ** ** | ** **                                                | ** ** | ** **                                               | ** ** | ** ** | ** **      | ** **     |
| **AFFILIATE INVESTMENTS**                              |       |                                                      |       |                                                     |       |       |            |           |
|                                                   |       |                                                      |       |                                                     |       |       |            |           |
| Noble Logistics, Inc.                                  |       | Service - aftermarket auto parts delivery                 |       | Revolving Credit Facility (9.3%, Due 12/2009) (5) (9)    |       | $          | 2,000,000       |           | $ | 1,995,000 |
|                                                   |       |                                                      |       | Senior Term Debt (9.3%, Due 12/2011) (5) (6)             |       | 7,000,000  |            | 7,008,750      |
|                                                   |       |                                                      |       | Senior Term Debt (11.3% Due 3/2011) (5) (6)              |       | 7,000,000  |            | 7,008,750      |
|                                                   |       |                                                      |       | Senior Subordinated Term Debt (12.3% Due 8/2007) (5) (6) |       | 500,000    |            | 500,000        |
|                                                   |       |                                                      |       | Preferred Stock (4) (6)                                  |       | 1,750,000  |            | 1,750,000      |
|                                                   |       |                                                      |       | Common Stock (4) (6)                                     |       | 1,500,000  |            | 1,500,000      |
|                                                   |       |                                                      |       |                                                     |       | 19,750,000 |            | 19,762,500     |
|                                                   |       |                                                      |       |                                                     |       |       |            |           |
| **Total Affiliate  Investments**                       | ** ** | ** **                                                | ** ** | ** **                                               | ** ** | **$**      | **19,750,000**  | ** **     | **$** | **19,762,500** |
|                                                   |       |                                                      |       |                                                     |       |       |            |           |
| **Total Investments**                                  | ** ** | ** **                                                | ** ** | ** **                                               | ** ** | **$**      | **274,620,113** | ** **     | **$** | **270,947,603** |

----

(1)                Certain of the listedsecurities are issued by affiliate(s) of the indicated portfolio company.

(2)                Percentage represents theweighted average interest rates in effect at March 31, 2007 and due daterepresents the contractual maturity date.

(3)                Marketable securities arevalued based on the indicative bid price, as of March 31, 2007, from therespective originating syndication agent’s trading desk.

(4)                Security is non-incomeproducing.

(5)                Valued using Standard &Poor’s Securities Evaluations, Inc. opinions of value at March 31, 2007.

(6)                Fair value is equal to costdue to recent acquisition.

(7)                Total available under therevolving credit facility is $3,500,000 of which $1,600,000 remains undrawn asof March 31, 2007.

(8)                Total available under therevolving credit facility is $2,000,000, of which $100,000 remains undrawn atMarch 31, 2007.

(9)                Total available under therevolving credit facility is $2,000,000, which was fully drawn at March 31,2007.

(10)           Subsequent to March 31, 2007,the investment in the portfolio company was sold at the fair value reflectedherein.

*THE ACCOMPANYING NOTES ARE ANINTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.*

 

6

----

 

**GLADSTONE INVESTMENTCORPORATIONCONSOLIDATED STATEMENTS OF OPERATIONS**

**(UNAUDITED)**
| ** **                                                              | ** ** | **Three months ended** | ** ** | **Three months ended** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                              | ** ** | **June 30, 2007**      | ** ** | **June 30, 2006**      | ** ** |
|                                                                    |       |                             |       |                             |       |
| INVESTMENT INCOME                                                       |       |                             |       |                             |       |
| Interest income                                                         |       |                             |       |                             |       |
| Non-Control/Non-Affiliate  investments                                  |       | $                                | 3,248,555  |                             | $          | 1,964,480 |   |
| Control  investments                                                    |       | 2,564,992                        |       | 1,190,302                        |       |
| Affiliate  investments                                                  |       | 426,563                          |       | —                           |       |
| Cash and cash  equivalents                                              |       | 53,692                           |       | 708,340                          |       |
| Total interest  income                                                  |       | 6,293,802                        |       | 3,863,122                        |       |
| Other income                                                            |       | 6,127                            |       | 316                              |       |
| Total investment  income                                                |       | 6,299,929                        |       | 3,863,438                        |       |
|                                                                    |       |                             |       |                             |       |
| EXPENSES                                                                |       |                             |       |                             |       |
| Base management  fee                                                    |       | 359,689                          |       | 801,309                          |       |
| Loan servicing  fee                                                     |       | 1,194,418                        |       | —                           |       |
| Administration  fee                                                     |       | 207,814                          |       | 115,389                          |       |
| Interest expense                                                        |       | 1,414,262                        |       | —                           |       |
| Amortization of  deferred finance costs                                 |       | 209,840                          |       | —                           |       |
| Professional  fees                                                      |       | 155,666                          |       | 79,748                           |       |
| Stockholder  related costs                                              |       | 37,889                           |       | 93,766                           |       |
| Insurance  expense                                                      |       | 62,941                           |       | 72,611                           |       |
| Directors fees                                                          |       | 54,800                           |       | 43,250                           |       |
| Taxes and  licenses                                                     |       | 41,807                           |       | 57,107                           |       |
| General and  administrative expenses                                    |       | 56,134                           |       | 19,094                           |       |
| Expenses before  credit from Adviser                                    |       | 3,795,260                        |       | 1,282,274                        |       |
| Credits to base  management fee (Refer to Note 4)                       |       | (383,875                         | )          | —                           |       |
| Total expenses  net of credit to management fee                         |       | 3,411,385                        |       | 1,282,274                        |       |
| NET INVESTMENT INCOME                                                   |       | 2,888,544                        |       | 2,581,164                        |       |
|                                                                    |       |                             |       |                             |       |
| REALIZED AND UNREALIZED  GAIN (LOSS) ON INVESTMENTS                     |       |                             |       |                             |       |
| Realized (loss)  gain on sale of Non-Control/Non-Affiliate investments  |       | (48,247                          | )          | 3,273                            |       |
| Net unrealized  depreciation of Non-Control/Non-Affiliate investments   |       | (528,645                         | )          | (1,139,711                       | )          |
| Net unrealized  appreciation (depreciation) of Control Investments      |       | 5,273,869                        |       | (167,678                         | )          |
| Net unrealized  appreciation of Affiliate Investments                   |       | 684,945                          |       | —                           |       |
| Net gain (loss)  on investments                                         |       | 5,381,922                        |       | (1,304,116                       | )          |
|                                                                    |       |                             |       |                             |       |
|                                                                    |       |                             |       |                             |       |
| NET INCREASE IN NET  ASSETS RESULTING FROM OPERATIONS                   |       | $                                | 8,270,466  |                             | $          | 1,277,048 |   |
|                                                                    |       |                             |       |                             |       |
| NET INCREASE IN NET  ASSETS RESULTING FROM OPERATIONS PER COMMON SHARE: |       |                             |       |                             |       |
| Basic and  Diluted                                                      |       | $                                | 0.50       |                             | $          | 0.08 |   |
|                                                                    |       |                             |       |                             |       |
| SHARES OF COMMON STOCK  OUTSTANDING:                                    |       |                             |       |                             |       |
| Basic and  diluted weighted average shares                              |       | 16,560,100                       |       | 16,560,100                       |       |

 

*THE ACCOMPANYING NOTES ARE ANINTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.*

7

----

**GLADSTONE INVESTMENT CORPORATIONCONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS**

**(UNAUDITED)**
| ** **                                              | ** ** | **Three months ended** | ** **  | **Three months ended** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|-------------|----------------------------------|------------|
| ** **                                              | ** ** | **June 30, 2007**      | ** **  | **June 30, 2006**      | ** ** |
| *Operations:*                                           |       |                             |        |                             |       |
| Net investment income                                   |       | $                                | 2,888,544   |                             | $          | 2,581,164 |   |
| Realized (loss) gain on sale of investments             |       | (48,247                          | )           | 3,273                            |       |
| Unrealized appreciation (depreciation) of portfolio     |       | 5,430,169                        |        | (1,307,389                       | )          |
| Increase in net  assets from operations                 |       | 8,270,466                        |        | 1,277,048                        |       |
|                                                    |       |                             |        |                             |       |
| *Capital  transactions:*                                |       |                             |        |                             |       |
| Issuance of common stock                                |       | —                           |        | —                           |       |
| Shelf offering costs                                    |       | (28,761                          | )           | —                           |       |
| Dividends from net investment income                    |       | (3,726,022                       | )           | (3,477,621                       | )          |
| Total decrease in net assets from capital  transactions |       | (3,754,783                       | )           | (3,477,621                       | )          |
|                                                    |       |                             |        |                             |       |
| Total increase  (decrease) in net assets                |       | 4,515,683                        |        | (2,200,573                       | )          |
|                                                    |       |                             |        |                             |       |
| Net Assets                                              |       |                             |        |                             |       |
| Beginning of period                                     |       | 222,818,509                      |        | 229,841,697                      |       |
| End of period                                           |       | $                                | 227,334,192 |                             | $          | 227,641,124 |   |

 

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

8

----

**GLADSTONE INVESTMENT CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**
| ** **                                                                                                               | ** ** | **Three months ended** | ** ** | **Three months ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                               | ** ** | **June 30, 2007**      | ** ** | **June 30, 2006**      | ** ** |
|                                                                                                                     |       |                             |       |                             |       |
| **CASH  FLOWS FROM OPERATING ACTIVITIES**                                                                                |       |                             |       |                             |       |
| ** **                                                                                                               |       |                             |       |                             |       |
| Net increase in net assets resulting from operations                                                                     |       | $                                | 8,270,466  |                             | $          | 1,277,048 |   |
| Adjustments to reconcile net increase in net assets resulting  from operations to net cash used in operating activities: |       |                             |       |                             |       |
|                                                                                                                     |       |                             |       |                             |       |
| Purchase of investments                                                                                                  |       | (72,601,227                      | )          | (33,665,549                      | )          |
| Principal repayments of investments                                                                                      |       | 21,358,187                       |       | 874,222                          |       |
| Proceeds from the sale of investments                                                                                    |       | 5,809,471                        |       | 15,551,727                       |       |
| Net unrealized (appreciation) depreciation of  investment portfolio                                                      |       | (5,430,169                       | )          | 1,307,389                        |       |
| Net realized loss (gain) on sales of investments                                                                         |       | 48,247                           |       | (3,273                           | )          |
| Net amortization of premiums and discounts                                                                               |       | 137,018                          |       | 37,656                           |       |
| Amortization of deferred finance costs                                                                                   |       | 209,840                          |       | —                           |       |
| Increase in interest receivable                                                                                          |       | (533,106                         | )          | (150,429                         | )          |
| Increase in due from custodian                                                                                           |       | 8,303,827                        |       | —                           |       |
| Increase in prepaid assets                                                                                               |       | (38,616                          | )          | (36,138                          | )          |
| Decrease in other assets                                                                                                 |       | 39,286                           |       | 85,611                           |       |
| Increase (decrease) in other liabilities                                                                                 |       | 12,642                           |       | (314                             | )          |
| Increase in administration fee payable to  Administrator                                                                 |       | 45,570                           |       | 5,387                            |       |
| Increase in base management fee payable to Adviser                                                                       |       | 279,493                          |       | 1,035,860                        |       |
| Increase in loan servicing fee payable to Adviser                                                                        |       | 27,451                           |       | —                           |       |
| Increase in accounts payable                                                                                             |       | —                           |       | 11,583                           |       |
| Increase (decrease) in accrued expenses                                                                                  |       | 228,904                          |       | (242,155                         | )          |
| Net cash used in operating activities                                                                                    |       | (33,832,716                      | )          | (13,911,375                      | )          |
|                                                                                                                     |       |                             |       |                             |       |
| **CASH  FLOWS FROM FINANCING ACTIVITIES**                                                                                |       |                             |       |                             |       |
| ** **                                                                                                               |       |                             |       |                             |       |
| Borrowings from line of credit                                                                                           |       | 89,100,000                       |       | —                           |       |
| Repayments of line of credit                                                                                             |       | (54,700,000                      | )          | —                           |       |
| Deferred finance costs                                                                                                   |       | (5,000                           | )          | —                           |       |
| Shelf offering registration costs                                                                                        |       | (28,761                          | )          | —                           |       |
| Distributions paid                                                                                                       |       | (3,726,022                       | )          | (3,477,621                       | )          |
| Net cash provided by (used in) financing activities                                                                      |       | 30,640,217                       |       | (3,477,621                       | )          |
|                                                                                                                     |       |                             |       |                             |       |
| **NET  DECREASE IN CASH AND CASH EQUIVALENTS (1)**                                                                       |       | (3,192,499                       | )          | (17,388,996                      | )          |
| **CASH  AND CASH EQUIVALENTS, BEGINNING OF PERIOD**                                                                      |       | 37,788,941                       |       | 75,672,605                       |       |
| **CASH  AND CASH EQUIVALENTS, END OF PERIOD**                                                                            |       | $                                | 34,596,442 |                             | $          | 58,283,609 |   |

----

(1)             Cashand cash equivalents consist of demand deposits and highly liquid investmentswith original maturities of three months or less when purchased.

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

 

9

----

 

**GLADSTONE INVESTMENT CORPORATIONFINANCIAL HIGHLIGHTS**

**(UNAUDITED)**
| ** **                                                     | ** ** | **Three months ended** | ** **  | **Three months ended** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------|-------------|----------------------------------|------------|
| ** **                                                     | ** ** | **June 30, 2007**      | ** **  | **June 30, 2006**      | ** ** |
| Per Share Data (1)                                             |       |                             |        |                             |       |
| Balance at  beginning of period                                |       | $                                | 13.46       |                             | $          | 13.88 |   |
|                                                           |       |                             |        |                             |       |
| *Income  from investment operations:*                          |       |                             |        |                             |       |
| Net investment  income (2)                                     |       | 0.17                             |        | 0.16                             |       |
| Realized (loss)  gain on sale of investments (2)               |       | —                           |        | —                           |       |
| Net unrealized  appreciation (depreciation) of investments (2) |       | 0.33                             |        | (0.08                            | )          |
| Total from investment  operations                              |       | 0.50                             |        | 0.08                             |       |
| Distributions                                                  |       | (0.23                            | )           | (0.21                            | )          |
| Net asset value at end  of period                              |       | $                                | 13.73       |                             | $          | 13.75 |   |
|                                                           |       |                             |        |                             |       |
| Per share market value  at beginning of period                 |       | $                                | 14.87       |                             | $          | 14.90 |   |
| Per share market value  at end of period                       |       | 14.21                            |        | 15.00                            |       |
| Total Return (3)                                               |       | -2.93                            | %           | 2.13                             | %          |
| Shares outstanding at  end of period                           |       | 16,560,100                       |        | 16,560,100                       |       |
|                                                           |       |                             |        |                             |       |
| Ratios/Supplemental  Data                                      |       |                             |        |                             |       |
| Net assets at end of  period                                   |       | $                                | 227,334,192 |                             | $          | 227,641,124 |   |
| Average net assets (4)                                         |       | $                                | 222,928,553 |                             | $          | 227,718,666 |   |
| Ratio of expenses to  average net assets (5) (6)               |       | 6.81                             | %           | 2.25                             | %          |
| Ratio of net expenses  to average net assets (5) (7)           |       | 6.12                             | %           | 2.25                             | %          |
| Ratio of net investment income to average net assets (5)       |       | 5.18                             | %           | 4.53                             | %          |

----

(1)             Based on actualshares outstanding at the end of the corresponding period.

(2)             Based on weightedaverage basic per share data.

(3)             Total return equalsthe change in the market value of the Company’s common stock from the beginningof the period taking into account dividends reinvested in accordance with theterms of our dividend reinvestment plan.

(4)             Calculatedusing the average of the ending monthly net assets for the respective periods.

(5)             Amountsare annualized.

(6)           Ratioof expenses to average net assets is computed using expenses before credit fromthe Adviser.

(7)           Ratioof net expenses to average net assets is computed using total expenses net ofcredits to the management fee.

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

 

10

----

**GLADSTONEINVESTMENT CORPORATION**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2007(UNAUDITED)**

NOTE 1. ORGANIZATION

GladstoneInvestment Corporation (the “Company”) was incorporated under the GeneralCorporation Laws of the State of Delaware on February 18, 2005 and completed aninitial public offering on June 22, 2005.  The Company is a closed-end, non-diversified management investmentcompany that has elected to be treated as a business development company underthe Investment Company Act of 1940, as amended (the “1940 Act”). In addition,the Company has elected to be treated for tax purposes as a regulatedinvestment company (“RIC”) under the Internal Revenue Code of 1986, as amended(the “Code”). The Company’s investment objectives are to achieve a high levelof current income and capital gains by investing in debt and equity securitiesof established private businesses.

Gladstone BusinessInvestment, LLC (“Business Investment”), a wholly-owned subsidiary of theCompany, was established on August 11, 2006 for the sole purpose of owning theCompany’s portfolio of investments in connection with the establishment of itsline of credit facility with Deutsche Bank AG. The financial statements of Business Investment are consolidated withthose of the Company.

The Company isexternally managed by Gladstone Management Corporation (“GMC” or the “Adviser”),an unconsolidated affiliate of the Company.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

*Unaudited Interim FinancialStatements*

Interim financial statements of the Company areprepared in accordance with accounting principles generally accepted in theUnited States of America (“GAAP”) for interim financial information andpursuant to the requirements for reporting on Form 10-Q and Article 10 of RegulationS-X. Accordingly, certain disclosures accompanying annual financial statementsprepared in accordance with GAAP are omitted. In the opinion of management, alladjustments, consisting solely of normal recurring accruals, necessary for thefair statement of financial statements for the interim periods have beenincluded. The current period’s results of operations are not necessarilyindicative of results that ultimately may be achieved for the year.  The interim financial statements and notesthereto should be read in conjunction with the financial statements and notesthereto included in the Company’s Form 10-K for the fiscal year ended March 31,2007, as filed with the Securities and Exchange Commission (“SEC”) on May 31,2007.

*Basisof Presentation*

The accompanyingconsolidated financial statements include the accounts of the Company and itswholly-owned subsidiaries. All significant intercompany balances andtransactions have been eliminated.

*Consolidation*

Under Article 6 of Regulation S-X under the Securities Act of 1933, asamended, and the authoritative accounting guidance provided by the AICPA Auditand Accounting Guide for Investment Companies, the Company is not permitted toconsolidate any subsidiary or other entity that is not an investment company.

*Useof Estimates*

The consolidatedfinancial statements have been prepared in accordance with GAAP that requiremanagement to make estimates and assumptions that affect the amounts reportedin the financial statements and accompanying notes. Actual results may differfrom those estimates.

11

----

*Cashand Cash Equivalents*

The Companyconsiders all short-term, highly liquid investments that are both readilyconvertible to cash and have a maturity of three months or less at the time ofpurchase to be cash equivalents. Items classified as cash equivalents includetemporary investments in U.S. Treasury bills and can also include commercialpaper and money-market funds. All of the Company’s cash at June 30, 2007 wasdeposited with two financial institutions, and the Company’s balances exceedfederally insurable limits. The Company seeks to mitigate this risk bydepositing funds with major financial institutions.

*Classificationof Investments*

The 1940 Act requires classification of the Company’s investments byits respective level of control.  Asdefined in the 1940 Act, “Control Investments” are investments in thoseportfolio companies that the Company is deemed to “Control”.  “Affiliate Investments” are investments inthose portfolio companies that are “Affiliated Companies” of the Company, asdefined in the 1940 Act, other than Control Investments.  “Non-Control/Non-Affiliate Investments” arethose that are neither Control Investments nor Affiliate Investments.  In general, the 1940 Act prescribes that theCompany has control over a portfolio company if it owns greater than 25% of thevoting securities of the portfolio company. The Company is deemed to be an affiliate of a portfolio company if itowns between 5% and 25% of the voting securities of such portfolio company orhas one or more seats on the affiliated company’s board of directors.  However, if the Company holds 50% or morecontractual representation on a portfolio company’s board of directors, theCompany will be deemed to have control over the portfolio company.

*InvestmentValuation*

The Companycarries its investments at fair value, as determined by its Board ofDirectors.  Securities that are publiclytraded are valued at the closing price on the valuation date.  Securities for which a limited market exists,such as certain participations in syndicated loans, are valued at theindicative bid price on or near the valuation date from the respectiveoriginating syndication agent’s trading desk. Debt and equity securities that are not publicly traded, or for which alimited market does not exist, are valued at fair value. The Company’s Board ofDirectors has established a valuation policy and consistently applied valuationprocedures used to determine the fair value of these securities quarterly.

The procedures forthe determination of value of the Company’s debt securities that that are notpublicly traded and that are issued to portfolio companies where the Companyhas no equity, or equity-like securities, rely on the opinions of valuesubmitted to us by Standard & Poor’s Securities Evaluations, Inc. (“SPSE”).The Company may also submit paid in kind (“PIK”) interest to SPSE for valuationwhen it is determined the PIK interest is likely to be received. SPSE will onlyevaluate the debt portion of the Company’s investments for which the Companyspecifically requests evaluation, and may decline to make requested evaluationsfor any reason at its sole discretion. SPSE opinions of value are submitted to the Board of Directors alongwith the Adviser’s supplemental assessment and recommendation regardingvaluation of each of these investments. Lastly, the Company adds any amortizedoriginal issue discount (“OID”) interest to the fair value, unless adversefactors lead to a determination of a lesser valuation.

The fair value ofconvertible debt, equity, success or exit fees or other equity-like securitiesis determined based on the collateral, the enterprise value of the issuer, theissuer’s ability to make payments, the earnings of the issuer, recent sales tothird parties of similar securities, the comparison to publicly tradedsecurities, discounted cash flow or other pertinent factors. In gathering thesales to third parties of similar securities, the Company may referenceindustry statistics and use outside experts.

Debt securitiesthat are issued to portfolio companies where the Company has equity, orequity-like securities are valued at cost, if there is adequate totalenterprise value determined when valuing the Company’s equity securities of theportfolio company. Fair values are discounted for any shortfall of totalenterprise value over the total debt outstanding for the borrower.

The Board ofDirectors then reviews whether the Adviser has followed its establishedprocedures for determinations of fair value, and votes whether or not toaccept  the recommended valuation of theCompany’s investment portfolio.

Due to theuncertainty inherent in the valuation process, such estimates of fair value maydiffer significantly from the values that would have resulted had a readymarket 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.  Because there is a delaybetween when the Company closes an investment and when the investment can beevaluated by SPSE, new investments are not valued immediately by SPSE; rather,the Adviser makes its own determination about the recommended value of theseinvestments in accordance with the Company’s valuation policy without the inputof SPSE during the specific quarter in which the investment is made.  Because SPSE does not currently performindependent valuations of mortgage loans or equity 

12

----

securities for theCompany, the Adviser also determines a recommendation for the fair value ofthese investments, if any, without the input of SPSE.  The Adviser considers a number of qualitativeand quantitative factors in current market conditions when performingvaluations.  The Board of Directors thendetermines whether or not to accept the Adviser’s recommendations for theaggregate valuation of the Company’s portfolio of investments.  The Board of Directors is ultimatelyresponsible for setting the fair value and disclosure of investments in thefinancial statements.

*Interestand Dividend Income Recognition*

Interest income, adjusted for amortization of premiums and acquisitioncosts and for the accretion of discounts, is recorded on the accrual basis tothe extent that such amounts are expected to be collected. The Company stopsaccruing interest on its investments when it is determined that interest is nolonger collectible.  There were nouncollectible accounts at June 30, 2007. Conditional interest or a success fee is recorded upon full repayment ofa loan investment. Dividend income on preferred equity securities is accrued tothe extent that such amounts are expected to be collected and that the Companyhas the option to collect such amounts in cash. To date, the Company has not accrued any dividend income.

*ServicesProvided to Portfolio Companies*

The 1940 Actrequires that a business development company make available managerialassistance to its portfolio companies by providing significant guidance andcounsel concerning the management, operations, or business objectives andpolicies of the respective portfolio company. The Company provides these andother services to portfolio companies through its Adviser.   Currently, neither the Company nor theAdviser receives fees in connection with managerial assistance.

The Adviserreceives fees for other services it provides to portfolio companies.  These other fees are typically non-recurring,are recognized as revenue when earned and are generally paid directly to theAdviser by the borrower or potential borrower upon closing of theinvestment.  The services the Adviserprovides to portfolio companies vary by investment, but generally include abroad array of services, such as investment banking services, arranging bankand equity financing, structuring financing from multiple lenders andinvestors, reviewing existing credit facilities, restructuring existinginvestments, raising equity and debt capital, turnaround management, merger andacquisition services and recruiting new management personnel.  When the Adviser receives fees for theseservices, 50% of certain of those fees are credited against the base managementfee due to the Adviser from the Company. Any services of this nature subsequent to the closing would typicallygenerate a separate fee at the time of completion.

The Adviser alsoreceives fees for monitoring and reviewing portfolio company investments.  These fees are recurring and are generallypaid annually or quarterly in advance to the Adviser throughout the life of theinvestment.  Fees of this nature arerecorded as revenue by the Adviser when earned and are not credited against thebase management fees.

The Company mayreceive fees for the origination and closing services it provides to portfoliocompanies through its Adviser. These fees are paid directly to the Company andare recognized as revenue upon closing of the originated investment and arereported as fee income in the consolidated statements of operations.

*RealizedGain or Loss and Unrealized Appreciation or Depreciation of PortfolioInvestments*

Realized gain or loss is recognized when an investment is disposed ofand is computed as the difference between the Company’s cost basis in theinvestment at the disposition date and the net proceeds received from suchdisposition.  Unrealized appreciation ordepreciation displays the difference between the fair market value of theinvestment and the cost basis of such investment.

*Federal Income Taxes*

The Company intends to continue to qualify fortreatment as a RIC under subchapter M of the Code. As a RIC, the Company willnot be subject to federal income tax on the portion of its taxable income andgains distributed to stockholders. To qualify as a RIC, the Company is requiredto distribute at least 90% of its investment company taxable income, as definedby the Code. The Company intends to distribute at least 90% of its ordinaryincome, and as a result, no income tax provisions have been recorded. TheCompany may, but does not intend to, pay out a return of capital.

In June 2006, theFinancial Accounting Standards Board (“FASB”) issued FASB InterpretationNo. 48, “*Accounting for Uncertainty inIncome Taxes—an interpretation of FASB Statement No. 109,”* (“FIN48”), which clarifies the accounting for uncertainty in income taxes recognizedin an enterprise’s financial statements in accordance with SFAS No. 109, “*Accounting for Income Taxes*.” FIN 48 iseffective as of the beginning of an entity’s first fiscal year that beginsafter December 15, 2006. The Company adopted this Interpretation onApril 1, 2007. The adoption of FIN 48 did not have an impact on theCompany’s consolidated financial statements.

13

----

*Recent Accounting Pronouncements*

In February 2007,the FASB issued Statement of Financial Accounting Standards No. 159, *The Fair Value Option for Financial Assets and Financial Liabilities*(“SFAS 159”). SFAS 159 allows entities to measure at fairvalue many financial instruments and certain other assets and liabilities thatare not otherwise required to be measured at fair value. SFAS 159 is effective for fiscal years beginning after November 15,2007. The Company is currently evaluating the impact of this pronouncement onits consolidated financial statements.

In September 2006,the FASB issued Statement of Financial Accounting Standards No. 157, *Fair Value Measurements* (“SFAS 157”).  SFAS 157 defines fair value, establishes aframework for measuring fair value in GAAP and expands disclosures about fairvalue measurements.  SFAS 157 is effective for financial statements issuedfor fiscal years beginning after November 15, 2007, and interim periods withinthose fiscal years.  The Company is required to adopt the provisions ofSFAS 157 beginning with the fiscal year ended March 31, 2009.  The Companyis currently evaluating the impact of this pronouncement on its consolidatedfinancial statements.

In September 2006,the SEC issued Staff Accounting Bulletin No. 108 (“SAB 108”). SAB 108addresses how the effects of prior year uncorrected misstatements should beconsidered when quantifying misstatements in current year financial statementsand requires registrants to consider the effect of all carry over and reversingeffects of prior year misstatements when quantifying errors in current yearfinancial statements. SAB 108 does not change the SEC’s previous guidance inSAB No. 99, “*Materiality*,”on evaluating the materiality of misstatements. A registrant applying the newguidance for the first time that identifies material errors in existence at thebeginning of the first fiscal year ending after November 15, 2006, maycorrect those errors through a one-time cumulative effect adjustment tobeginning-of-year retained earnings. The cumulative effect alternative isavailable only if the application of the new guidance results in a conclusionthat a material error exists as of the beginning of the first fiscal yearending after November 15, 2006, and those misstatements were determined tobe immaterial based on a proper application of the registrant’s previous methodfor quantifying misstatements. The adoption of SAB 108 did not have an impacton the Company’s consolidated financial statements.

In February 2006, the FASB issued SFAS No. 155, *“Accounting for Certain Hybrid Financial Instruments,an amendment of FASB statements No. 133 and 140”* (“SFAS No. 155”).SFAS No. 155 allows financial instruments that have embedded derivativesto be accounted for as a whole (eliminating the need to bifurcate thederivative from its host) as long as the entire instrument is valued on a fairvalue basis. The statement also resolves and clarifies other specific SFASNo. 133 and SFAS No. 140 related issues. SFAS No. 155 iseffective for all financial instruments acquired or issued after the beginningof an entity’s first fiscal year that begins after September 15, 2006. TheCompany adopted SFAS No. 155 on April 1, 2007 and the adoption did nothave an impact on the Company’s consolidated financial statements.

NOTE 3. INVESTMENTS

*Non-Control/Non-Affiliate Investments*

At June 30, 2007 and March 31, 2007, the Company held investments inNon-Control/Non-Affiliates of approximately $186.3 million and $138.6 million,at cost, respectively. These investments are comprised primarily of syndicatedloan participations of senior notes of both public and private companies andalso non-syndicated loan investments where the Company does not have asignificant ownership interest in the portfolio company.  At June 30, 2007 and March 31, 2007, the Company’sinvestments, at cost, in Non-Control/Non-Affiliates represented approximately82% and 62%, respectively, of the Company’s net assets.

In Mayand June of 2007, the Company invested approximately $11.4 million in B-Dry,LLC (“B-Dry”), including $11.1 million of senior loans and $0.3 million ofwarrants to purchase membership interests in B-Dry.  B-Dry, founded in Akron, OH in 1958, is theoldest basement waterproofer in the country and utilizes its patented technologyto solve basement water problems.

*Control and Affiliate Investments*

At June 30, 2007,the Company had investments of approximately $105.0 million, at cost,  in revolving credit facilities, senior debtand subordinated debt of six portfolio companies.  In addition, at June30, 2007, the Company had invested approximately $28.6 million in preferred andcommon equity of those companies.

14

----

 

At June 30, 2007 and March 31, 2007, the Company’s investments in Controlinvestments, at cost, represented approximately 51% and 52%, respectively, ofthe Company’s net assets.  Also at June30, 2007 and March 31, 2007, the Company’s investments, at cost, in Affiliateinvestments represented approximately 8% and 9%, respectively, of the Company’snet assets

*InvestmentConcentrations*

Approximately78% of the aggregate  value of theCompany’s investment portfolio at June 30, 2007 consisted of senior debt, approximately8% was senior subordinated debt, approximately 4% was subordinated debt andapproximately 10% was preferred and common equity securities.  At June 30, 2007, the Company hadapproximately $320 million invested in 53 portfolio companies.  The following table outlines the Company’sinvestments by type at June 30, 2007 and March 31, 2007:

 
| ** **                                | ** ** | **June 30, 2007** | ** **  | **March 31, 2007** | ** ** |
|-------------------------------------------|------------|-----------------------------|-------------|------------------------------|------------|
| ** **                                | ** ** | **Cost**                    | ** **  | **Fair Value**          | ** ** | **Cost** | ** ** | **Fair Value** | ** ** |
| Senior Term Debt                          |       | $                           | 252,861,045 |                         | $          | 251,933,271 |   | $ | 207,367,741 |   | $ | 206,981,112 |   |
| Senior Subordinated  Term Debt            |       | 23,985,760                  |        | 23,985,760                   |       | 24,485,760 |   | 24,467,635 |   |
| Subordinated Term Debt                    |       | 14,122,810                  |        | 14,122,810                   |       | 14,167,810 |   | 14,167,810 |   |
| Preferred & Common  Equity Securities |       | 28,898,802                  |        | 31,584,235                   |       | 28,598,802 |   | 25,331,046 |   |
| Total Investments                         |       | $                           | 319,868,417 |                         | $          | 321,626,076 |   | $ | 274,620,113 |   | $ | 270,947,603 |   |

 

Investments at fair value consisted of the followingindustry classifications at June 30, 2007 and March 31, 2007:

 
| ** **                                    | ** ** | **June 30, 2007** | ** **  | **March 31, 2007** | ** ** |
|-----------------------------------------------|------------|-----------------------------|-------------|------------------------------|------------|
| ** **                                    | ** ** | ** **                  | ** **  | **Percentage of**       | ** ** | ** ** | ** ** | **Percentage of** | ** ** |
| ** **                                    | ** ** | **Fair  Value**             | ** **  | **Total  Investments**       | ** ** | **Net  Assets** | ** ** | **Fair  Value** | ** ** | **Total  Investments** | ** ** | **Net  Assets** | ** ** |
|                                          |       |                        |        |                         |       |   |   |   |   |   |   |   |   |
| Automobile                                    |       | $                           | 6,620,654   |                         | 2.1        | % | 2.9 | % | $ | 8,504,666 |   | 3.1 | % | 3.8 | % |
| Beverage, Food &  Tobacco                 |       | 4,000,000                   |        | 1.2                          | %          | 1.8 | % | 3,413,874 |   | 1.3 | % | 1.5 | % |
| Buildings & Real  Estate                  |       | 14,342,500                  |        | 4.5                          | %          | 6.3 | % | 3,003,750 |   | 1.1 | % | 1.3 | % |
| Cargo Transport                               |       | 20,895,013                  |        | 6.5                          | %          | 9.2 | % | 21,844,463 |   | 8.1 | % | 9.8 | % |
| Chemicals, Plastics  & Rubber             |       | 25,718,301                  |        | 8.0                          | %          | 11.3 | % | 22,535,527 |   | 8.3 | % | 10.1 | % |
| Containers, Packaging  and Glass              |       | 11,484,305                  |        | 3.6                          | %          | 5.1 | % | 999,975 |   | 0.4 | % | 0.4 | % |
| Diversified/Conglomerate  Manufacturing       |       | 31,478,796                  |        | 9.8                          | %          | 13.8 | % | 32,563,400 |   | 12.0 | % | 14.6 | % |
| Diversified/Conglomerate  Service             |       | 43,969,144                  |        | 13.7                         | %          | 19.3 | % | 27,374,081 |   | 10.1 | % | 12.3 | % |
| Ecological                                    |       | 500,000                     |        | 0.2                          | %          | 0.2 | % | — |   | — |   | — |   |
| Electronics                                   |       | 13,622,801                  |        | 4.2                          | %          | 6.0 | % | 6,758,294 |   | 2.5 | % | 3.0 | % |
| Healthcare, Education  and Childcare          |       | 41,126,308                  |        | 12.8                         | %          | 18.1 | % | 31,296,111 |   | 11.6 | % | 14.0 | % |
| Home & Office  Furnishings                |       | 17,021,203                  |        | 5.3                          | %          | 7.5 | % | 17,105,808 |   | 6.3 | % | 7.7 | % |
| Machinery                                     |       | 49,301,137                  |        | 15.3                         | %          | 21.7 | % | 41,480,716 |   | 15.3 | % | 18.6 | % |
| Oil & Gas                                 |       | —                      |        | —                       |       | — |   | 3,851,943 |   | 1.4 | % | 1.7 | % |
| Personal, Non-durable  Consumer Products      |       | 4,456,856                   |        | 1.4                          | %          | 2.0 | % | 1,492,472 |   | 0.6 | % | 0.7 | % |
| Personal, Food, &  Miscellaneous Services |       | 16,816,139                  |        | 5.2                          | %          | 7.4 | % | 16,905,483 |   | 6.2 | % | 7.6 | % |
| Printing, Publishing,  Broadcasting           |       | 15,832,526                  |        | 4.9                          | %          | 7.0 | % | 18,590,084 |   | 6.9 | % | 8.3 | % |
| Retail Stores                                 |       | 1,228,070                   |        | 0.4                          | %          | 0.5 | % | 1,407,018 |   | 0.5 | % | 0.6 | % |
| Telecommunications                            |       | 3,212,323                   |        | 0.9                          | %          | 1.4 | % | 9,246,854 |   | 3.4 | % | 4.1 | % |
| Textiles & Leather                        |       | —                      |        | —                       |       | — |   | 2,573,084 |   | 0.9 | % | 1.2 | % |
| Total Investments                             |       | $                           | 321,626,076 |                         | 100        | % |   |   | $ | 270,947,603 |   | 100 | % |   |   |

 

The investments at fair value consisted of thefollowing geographic regions of the United States and Canada at June 30, 2007and March 31, 2007:

15

----

 
| ** **        | ** ** | **June 30, 2007** | ** **  | **March 31, 2007** | ** ** |
|-------------------|------------|-----------------------------|-------------|------------------------------|------------|
| ** **        | ** ** | ** **                  | ** **  | **Percentage of**       | ** ** | ** ** | ** ** | **Percentage of** | ** ** |
| ** **        | ** ** | **Fair  Value**             | ** **  | **Total  Investments**       | ** ** | **Net  Assets** | ** ** | **Fair  Value** | ** ** | **Total  Investments** | ** ** | **Net  Assets** | ** ** |
|              |       |                        |        |                         |       |   |   |   |   |   |   |   |   |
| Mid-Atlantic      |       | $                           | 143,715,411 |                         | 44.7       | % | 63.2 | % | $ | 94,257,169 |   | 34.8 | % | 42.3 | % |
| Midwest           |       | 97,373,875                  |        | 30.3                         | %          | 42.8 | % | 88,508,725 |   | 32.7 | % | 39.7 | % |
| Northeast         |       | 12,672,838                  |        | 3.9                          | %          | 5.6 | % | 14,879,654 |   | 5.5 | % | 6.7 | % |
| Southeast         |       | 31,457,086                  |        | 9.8                          | %          | 13.8 | % | 36,357,555 |   | 13.4 | % | 16.3 | % |
| West              |       | 35,421,866                  |        | 11.0                         | %          | 15.6 | % | 36,944,500 |   | 13.6 | % | 16.6 | % |
| Canada            |       | 985,000                     |        | 0.3                          | %          | 0.4 | % | — |   | 0.0 | % | 0.0 | % |
| Total Investments |       | $                           | 321,626,076 |                         | 100.0      | % |   |   | $ | 270,947,603 |   | 100.0 | % |   |   |

 

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

*Investment Principal Amortization*

The following tablesummarizes the contractual principal amortization and maturity of the Company’sinvestment portfolio by fiscal year, assuming no voluntary prepayments:

| Fiscal Year Ended March 31, | ** ** | ** **  | ** **      | **Amount** | ** ** |
|-------------------------------------------------|------------|-------------|-----------------|------------|------------|
|                                            |       |        |            |
| 2008                                            |       | $           | 8,916,361       |       |
| 2009                                            |       | 9,881,115   |            |
| 2010                                            |       | 9,576,865   |            |
| 2011                                            |       | 50,649,610  |            |
| 2012                                            |       | 43,380,812  |            |
| Thereafter                                      |       | 168,055,388 |            |
| **Total  contractual repayments**               | ** ** | **$**       | **290,460,151** | ** ** |
|                                            |       |        |            |
| Investments in  equity securities               |       | $           | 28,898,802      |       |
| Unamortized  premiums on debt securities        |       | 509,464     |            |
| **Total**                                       | ** ** | **$**       | **319,868,417** | ** ** |

 

NOTE 4. RELATED PARTY TRANSACTIONS

**Investment Advisory and ManagementAgreement**

The Company has entered into an investment advisoryand management agreement with the Adviser (the “Advisory Agreement”), which iscontrolled by the Company’s chairman and chief executive officer. In accordancewith the Advisory Agreement, the Company pays the Adviser fees, as compensationfor its services, consisting of a base management fee and an incentive fee.

The base management fee is computed and payablequarterly and is assessed at an annual rate of 2.0% and was initially computedon the basis of the average value of the Company’s gross invested assets at theend of the two most recently completed quarters, which were total assets lessthe cash proceeds and cash and cash equivalents from the proceeds of theCompany’s initial public offering that were not invested in debt and equitysecurities of portfolio companies. Beginning on January 1, 2007, the base management fee is computed on thebasis of the value of the Company’s average gross assets at the end of the twomost recently completed quarters, which are total assets, including investmentsmade with proceeds of borrowings, less any uninvested cash or cash equivalentsresulting from borrowings.  This newcalculation was originally scheduled to begin in periods after March 31, 2006;however, the Company’s Board of Directors accepted voluntary waivers from theAdviser that allowed the initial calculation of the base management fee to beeffective through December 31, 2006.

On April 11, 2007, the Company’s Board of Directorsaccepted a voluntary waiver from the Adviser to reduce the annual 2.0% basemanagement fee on senior syndicated loan participations to 0.5% to the extentthat proceeds resulting from borrowings were used to purchase such syndicatedloan participations.  This waiver remainsin effect and was applied during the three months ended June 30, 2007.

16

----

When the Adviser receives fees from portfoliocompanies, as discussed in Note 2 under “Services Provided to PortfolioCompanies,” 50% of certain of these fees are credited against the basemanagement fee that the Company would otherwise be required to pay to theAdviser.

For the three months ended June 30, 2007 and 2006, theCompany incurred base management fees to the Adviser of $359,689 (afterreductions for loan servicing fees) and $801,309, respectively.  For the three months ended June 30, 2007, theCompany recognized aggregate credits against the base management fee of $383,875which is comprised of $293,000 resulting from reduced fees on syndicated loanparticipations and $90,875 resulting from investment banking fees paid to theAdviser during the period.  As of June30, 2007, a resulting base management fee credit of $24,186 was unpaid and isincluded as a reduction in fees due to Adviser in the accompanying consolidatedstatements of assets and liabilities. The amount due to Adviser of $286,561 also includes loan servicing feesdue to the Adviser of $310,747 as discussed below.  At March 31, 2007, a base management feecredit of $303,679 was unpaid and included in fees due from Adviser in theaccompanying consolidated statements of assets and liabilities which was offsetby loan servicing fees due to the Adviser of $283,296, resulting in $20,383 duefrom the Adviser as discussed below.

In addition, the Adviser services the loans held byBusiness Investment, in return for which the Adviser receives a 2.0% annual feebased on the monthly aggregate balance of loans held by BusinessInvestment.  Since the Company owns theseloans, all loan servicing fees paid to the Adviser are treated as reductionsagainst the 2.0% base management fee payable to the Adviser.  Overall, the management fee due to theAdviser cannot exceed 2.0% of total assets (as reduced by cash and cashequivalents pledged to creditors) during any given fiscal year.

For the three months ended June 30, 2007, the Companyrecorded loan servicing fees to the Adviser of $1,194,418, of which $310,747was unpaid at June 30, 2007.  At March31, 2007 there were $283,296 of loan servicing fees due to the adviser that areincluded as a credit in fees due from the Adviser in the accompanyingconsolidated statements of assets and liabilities, offsetting the basemanagement fee credit due to the Company from the Adviser at that date.

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

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

·             100% of the Company’s pre-incentive fee net investmentincome with respect to that portion of such pre-incentive fee net investmentincome, if any, that exceeds the hurdle rate but is less than 2.1875% in anycalendar 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).

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

Because pre-incentive feenet investment income was below the hurdle rate of 1.75% of net assets, noincome-based incentive fee was recorded for the three months ended June 30,2007 or the three months ended June 30, 2006.

**Administration Agreement**

The Company has entered into an administrationagreement (the “Administration Agreement”) with Gladstone Administration, LLC (“GladstoneAdministration” or the “Administrator”), a wholly-owned subsidiary of theAdviser. Under the Administration Agreement, the Company pays separately foradministrative services.  TheAdministration Agreement provides for payments equal to the Company’s allocableportion of the Administrator’s overhead expenses in performing its obligationsunder the Administration Agreement, including but not limited to, rent foremployees of the Administrator and 

17

----

the allocable portion of salaries and benefitsexpenses of the Company’s chief financial officer, controller, chief complianceofficer, treasurer and their respective staffs.   The Company recorded fees to theAdministrator on the consolidated statements of operations of $207,814 and$115,389 for the three months ended June 30, 2007 and 2006, respectively. As ofJune 30, 2007 and March 31, 2007, $207,814 and $162,244, respectively, wasunpaid and included in the administration fee payable to Administrator in theaccompanying consolidated statements of assets and liabilities.

**Purchase of Investmentsfrom Affiliate**

During April 2007, the Company purchased from itsaffiliate, Gladstone Capital Corporation (“Gladstone Capital”), certain of itsinvestments in syndicated loan participations at market value for approximately$9.7 million.  These purchases reflect the settlement of transactionsinitiated in March 2007.  An independentbroker was engaged to execute these transactions between the Company andGladstone Capital. The independent broker accepted the quotes from therespective agent bank for each syndicated loan and then executed thesetransactions between the Company and Gladstone Capital.

NOTE 5. LINE OF CREDIT

Through the Company’s wholly-owned subsidiary, Business Investment, theCompany has obtained a $200 million revolving credit facility (the “CreditFacility”).  On October 19, 2006, theCompany executed a Purchase and Sale Agreement pursuant to which it agreed tosell certain loans to Business Investment in consideration of a membershipinterest therein.  Simultaneously,Business Investment executed a Credit Agreement (the “Credit Agreement”) withDeutsche Bank AG, New York Branch (“Deutsche Bank”), as administrative agent,pursuant to which Business Investment pledged the loans purchased from theCompany to secure future advances by certain institutional lenders. On March29, 2007, the Company increased its capacity under the Credit Facility from$100 million to $200 million. Availability under the Credit Facility will terminate on October 18,2007, unless extended in the discretion of the lenders at the request ofBusiness Investment. Interest is payable monthly during the term of the CreditFacility and principal is payable out of collections on loans purchased fromthe Company during the period following the date of which availability foradvances has terminated through maturity. The Credit Facility will mature two years following the date on whichavailability for advances has terminated and on such date, all principal,interest and other amounts owing under the Credit Facility will be due andpayable.  Interest rates charged on theadvances under the facility are based on the rate paid by the lenders oncommercial paper notes issued by such lenders to fund some or all of theadvances, the London Interbank Offered Rate (“LIBOR”), the Prime Rate or theFederal Funds Rate, depending on market conditions, and adjustperiodically.  Available borrowings aresubject to various constraints imposed under the Credit Agreement, based on theaggregate loan balance pledged by Business Investment, which varies as loansare added and repaid, regardless of whether such repayments are early prepaymentor are made as contractually required.

The Credit Facility contains covenants that require Business Investmentto maintain its status as a separate entity; prohibit certain significantcorporate transactions (such as mergers, consolidations, liquidations ordissolutions); and restrict material changes to the Company’s credit andcollection policies.  The facility alsorestricts some of the terms and provisions (including interest rates, terms tomaturity and payments schedules) and limits the borrower and industryconcentrations of loans that are eligible to secure advances.  As of June 30, 2007, Business Investment wasin compliance with all of the facility covenants.  As of June 30, 2007 there were $134.4 millionof borrowings outstanding under the Credit Facility at an interest rate ofapproximately 5.33% and the remaining borrowing capacity under the CreditFacility was approximately $66 million.

The administrative agent also requires that any interest or principalpayments on pledged loans be remitted directly by the borrower into a lockboxaccount with the Bank of New York as custodian. Deutsche Bank is also the trustee of the account and once a month remitsthe collected funds to the Company. At June 30, 2007, the amount due from thecustodian was $4,391,158.

The Adviser services the loans pledged under the Credit Facility. As a condition to this servicing arrangement, the Company executed aperformance guaranty pursuant to which it guaranteed that the Adviser wouldcomply fully with all of its obligations under the Credit Facility. Theperformance guaranty requires the Company to maintain a minimum net worth of$100 million and to maintain “asset coverage” with respect to “seniorsecurities representing indebtedness” of at least 200%, in accordance withSection 18 of the 1940 Act. As of June 30, 2007, the Company was incompliance with the covenants under the performance guaranty.

18

----

NOTE 6. COMMON STOCK

As of June 30, 2007 and March 31, 2007, 100,000,000shares of $0.001 par value common stock were authorized and 16,560,100 shareswere outstanding.

NOTE 7. INCREASE IN NET ASSETS PER SHARE RESULTINGFROM OPERATIONS

The following table sets forth the computation ofbasic and diluted net increase in net assets per share resulting fromoperations:
| ** **                                                                                       | ** ** | **Three months ended** | ** ** | **Three months ended** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                                                       | ** ** | **June 30, 2007**      | ** ** | **June 30, 2006**      | ** ** |
|                                                                                             |       |                             |       |                             |       |
| Numerator for  basic and diluted net increase in net assets resulting from operations per  share |       | $                                | 8,270,466  |                             | $          | 1,277,048 |   |
|                                                                                             |       |                             |       |                             |       |
| Denominator for  basic and diluted shares                                                        |       | 16,560,100                       |       | 16,560,100                       |       |
|                                                                                             |       |                             |       |                             |       |
| Basic and  diluted net increase in net assets per share resulting from operations                |       | $                                | 0.50       |                             | $          | 0.08 |   |

 

NOTE 8. DIVIDENDS

The Company is requiredto pay out as a dividend 90% of its ordinary income and realized net short-termcapital gains in excess of realized net short-term capital losses, if any, foreach taxable year in order to maintain its status as a RIC under Subtitle A,Chapter 1 of Subchapter M of the Code. It is the policy of the Company to payout as a dividend up to 100% of those amounts. The amount to be paid outmonthly as a dividend is determined by the Board of Directors each quarter andis based on the annual earnings estimated by the management of the Company.Based on that estimate, three monthly dividends are declared each quarter.  At year-end the Company may pay a bonusdividend, in addition to the monthly dividends, to ensure that it has paid outat least 90% of its ordinary income and realized net short-term capital gainsfor the year. Long-term capital gains are composed of success fees, prepaymentfees and gains from the sale of securities held for one year or more. TheCompany intends to retain long-term capital gains from the sale of securities,if any, and not pay them out as dividends, however, the Board of Directors maydecide to declare and pay out capital gains during any fiscal year.  If the Company decides to retain long-termcapital gains, the portion of the retained capital gains will be subject to 35%tax.  The Company currently pays amonthly dividend.  The taxcharacteristics of all dividends will be reported to stockholders on Form 1099at the end of each calendar year.  TheCompany’s Board of Directors declared the following monthly dividends for thethree months ended June 30, 2007 and 2006:

**Fiscal Year 2008**
| **Declaration Date** | ** ** | **Record Date** | ** ** | **Payment Date** | ** ** | **Dividend  per Share** | ** ** |
|---------------------------|------------|----------------------|------------|-----------------------|------------|------------------------------|------------|
| April 11, 2007            |       | June  21, 2007       |       | June  29, 2007        |       | $                            | 0.075      |   |
| April 11, 2007            |       | May  22, 2007        |       | May  31, 2007         |       | $                            | 0.075      |   |
| April 11, 2007            |       | April  20, 2007      |       | April  30, 2007       |       | $                            | 0.075      |   |

 

**Fiscal Year 2007**

 
| **Declaration Date** | ** ** | **Record Date** | ** ** | **Payment Date** | ** ** | **Dividend  per Share** | ** ** |
|---------------------------|------------|----------------------|------------|-----------------------|------------|------------------------------|------------|
| April 11, 2006            |       | June  22, 2006       |       | June  30, 2006        |       | $                            | 0.07       |   |
| April 11, 2006            |       | May  22, 2006        |       | May  31, 2006         |       | $                            | 0.07       |   |
| April 11, 2006            |       | April 20, 2006       |       | April 28, 2006        |       | $                            | 0.07       |   |

 

19

----

NOTE 9. CONTRACTUAL OBLIGATIONS

As of June 30, 2007, theCompany was a party to signed and non-binding term sheets for five allocationsof syndicated loan participations for approximately $9.7 million.  The future scheduled contractual payments at June30, 2007 were as follows:
| ** **                       | ** ** | ** ** | ** ** | **Payment Due by Period** | ** ** |
|----------------------------------|------------|------------|------------|------------------------------------------|------------|
| **Contractual Obligations** | ** ** | **Total**  | ** ** | **Less than  1 Year**          | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More than  5 Years** | ** ** |
| Investments                      |       | 9,688,000  |       | 9,688,000                                |       | — |   | — |   | — |   |
| Total                            |       | $          | 9,688,000  |                                     | $          | 9,688,000 |   | $ | — |   | $ | — |   | $ | — |   |
|                                  |            |            |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |

 

In July 2007, all of theinvestment purchase obligations summarized above were funded.

NOTE 10. SUBSEQUENTEVENTS

*LoanParticipations*

In July 2007, the Companypurchased additional loan participations of 2  new and 5 existing portfoliocompanies of approximately $11.3 million.

*Dividends*

On July 10, 2007, theCompany’s Board of Directors declared the following monthly dividends:
| **Declaration Date** | ** ** | **Record Date** | ** ** | **Payment Date** | ** ** | **Dividend  per Share** | ** ** |
|---------------------------|------------|----------------------|------------|-----------------------|------------|------------------------------|------------|
| July 10, 2007             |       | July  23, 2007       |       | July  31, 2007        |       | $                            | 0.075      |   |
| July 10, 2007             |       | August  23, 2007     |       | August  31, 2007      |       | $                            | 0.075      |   |
| July 10, 2007             |       | September 20, 2007   |       | September 28, 2007    |       | $                            | 0.075      |   |

 

20

----

**ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS.**

**All statements contained herein, other than historicalfacts, may constitute “forward-looking statements.” These statements may relateto, among other things, future events or our future performance or financialcondition. In some cases, you can identify forward-looking statements byterminology such as “may,” “might,” “believe,” “will,” “provided,” “anticipate,”“future,” “could,” “growth,” “plan,” “intend,” “expect,” “should,” “would,” “if,”“seek,” “possible,” “potential,” “likely” or the negative of such terms orcomparable terminology. These forward-looking statements involve known andunknown risks, uncertainties and other factors that may cause our actual results,levels of activity, performance or achievements to be materially different fromany future results, levels of activity, performance or achievements expressedor implied by such forward-looking statements. Such factors include, amongothers: (1) our future operating results as we are a company with a limitedoperating history; (2) the loss of one or more of our executive officers, inparticular, David Gladstone, George Stelljes III, or Terry Lee Brubaker; (3)the impact of the investments that we make and the ability of these investmentsto achieve their objectives; (4) our contractual relationships with thirdparties; (5) the adequacy of our cash resources and working capital; (6) ourability to obtain future financing, if at all; and (7) those factors listedunder the caption “Risk Factors” of the Company’s Annual Report on Form 10-Kdated March 31, 2007, as filed with the Securities and Exchange Commission onMay 31, 2007. We caution readers not to place undue reliance on any suchforward-looking statements, which speak only as of the date made. We undertakeno obligation to publicly update or revise any forward-looking statements,whether as a result of new information, future events or otherwise, after thedate of this Form 10-Q.**

*The following analysis of ourfinancial condition and results of operations should be read in conjunctionwith our consolidated financial statements and the notes thereto containedelsewhere in this report and our annual report on Form 10-K for the fiscal yearended March 31, 2007.*

**OVERVIEW**

Wewere incorporated under the General Corporation Laws of the State of Delawareon February 18, 2005. On June 22, 2005 we completed an initial public offeringand commenced operations.  We wereprimarily established for the purpose of investing in subordinated loans,mezzanine debt, preferred stock and warrants to purchase common stock of smalland medium-sized companies in connection with buyouts and otherrecapitalizations. We also invest in senior secured loans and common stock andin senior and subordinated syndicated loans. Our investment objective is togenerate both current income and capital gains through these debt and equityinstruments. We operate as a closed-end, non-diversified management investmentcompany and have elected to be treated as a business development company (“BDC”)under the Investment Company Act of 1940, as amended (the “1940 Act”).

**Our Investment Strategy**

We seek to achievereturns from current income from senior, subordinated and mezzanine debt, andcapital gains from preferred stock and warrants to purchase common stock thatwe purchase in connection with buyouts and recapitalizations of small andmid-sized companies with established management teams.  Our investmentsgenerally range between $10 million and $30 million each, although thisinvestment size may vary proportionately as the size of our capital basechanges. We invest either by ourselves or jointly with other buyout fundsand/or management of the portfolio company, depending on the opportunity. If weare participating in an investment with one or more co-investors, then ourinvestment is likely to be smaller than if we were to be investing alone.

We expect that our targetportfolio over time will include mostly subordinated loans, mezzanine debt,preferred stock, and warrants to buy common stock. Structurally, subordinatedloans and mezzanine loans usually rank lower in priority of payment to seniordebt, such as senior bank debt, and may be unsecured. However, subordinateddebt and mezzanine loans rank senior to common and preferred equity in aborrower’s capital structure. Typically, subordinated debt and mezzanine loanshave elements of both debt and equity instruments, offering returns in the formof interest payments associated with senior debt, while providing lenders anopportunity to participate in the capital appreciation of a borrower, if any,through an equity position. Due to its higher risk profile and often lessrestrictive covenants as compared to senior debt, mezzanine debt generally earnsa higher return than senior secured debt. Any warrants associated withmezzanine loans are typically detachable, which allows lenders to receiverepayment of their principal on an agreed amortization schedule while retainingtheir equity interest in the borrower. Mezzanine debt also may include a “put”feature, which permits the holder to sell its equity interest back to theborrower at a price determined through a pre-determined formula.

21

----

*Non-Control/Non-Affiliate Investments*

Following thecompletion of our initial public offering in June 2005, we began investing suchproceeds in senior secured syndicated loans because these investments typicallymay be originated more quickly than investments in small businesses that areundergoing a buyout or recapitalization. We employed this strategy in order tomore quickly invest our initial capital to generate current income, and havecontinued this strategy in order to build a portfolio that may be securitizedin the future to obtain financing to pay down borrowings and invest inadditional buyout and recapitalization investments.  At June 30, 2007, we had investments in 46such syndicated loans.  There can be noguarantee that we will be able to successfully securitize any loans in ourportfolio.

Seniorsecured syndicated loans typically involve a number of banks or other financialinstitutions and are generally more marketable than loans that are notsyndicated. In order to invest in certain senior secured syndicated loans, wemay purchase these investments at a premium or discount. We amortize premiumsand discounts over the contractual life of the investment. In the event that aninvestment is sold prior to its contractual maturity date, we recognize a losson any unamortized premium or a gain on any unamortized discount.

At June 30, 2007 and March 31, 2007, we held investments inNon-Control/Non-Affiliates of approximately $186.3 million and $138.6 million,at cost, respectively.  These investmentsare comprised primarily of syndicated loan participations of senior notes ofboth public and private companies and also non-syndicated loan investmentswhere we do not have a significant ownership interest in the portfoliocompany.  We expect to continuepurchasing syndicated loans using borrowings from our credit facility.

In Mayand June of 2007, we invested approximately $11.4 million in B-Dry, LLC (“B-Dry”),including $11.1 million of senior loans and $0.3 million of warrants topurchase membership interests in B-Dry. B-Dry, founded in Akron, OH in 1958, is the oldest basement waterprooferin the country and utilizes its patented technology to solve basement waterproblems.

*Control and Affiliate Investments*

At June30, 2007, we had investments of approximately $105.0 million, at cost, inrevolving credit facilities, senior debt and subordinated debt of six portfoliocompanies.  In addition, at June 30, 2007, we had invested approximately$28.6 million in preferred and common equity of those companies. Theseinvestments are the result of buyout and recapitalization transactions andrepresent our primary investment focus.

Approximately78% of the aggregate  value of ourinvestment portfolio at June 30, 2007 was comprised of senior debt,approximately 8% was senior subordinated debt, approximately 4% wassubordinated debt and approximately 10% was preferred and common equitysecurities.  At June 30, 2007, we hadapproximately $320 million invested in 53 portfolio companies.  The following table outlines our investmentsby type at June 30, 2007 and March 31, 2007:

 
| ** **                                | ** ** | **June 30, 2007** | ** **  | **March 31, 2007** | ** ** |
|-------------------------------------------|------------|-----------------------------|-------------|------------------------------|------------|
| ** **                                | ** ** | **Cost**                    | ** **  | **Fair Value**          | ** ** | **Cost** | ** ** | **Fair Value** | ** ** |
| Senior Term Debt                          |       | $                           | 252,861,045 |                         | $          | 251,933,271 |   | $ | 207,367,741 |   | $ | 206,981,112 |   |
| Senior  Subordinated Term Debt            |       | 23,985,760                  |        | 23,985,760                   |       | 24,485,760 |   | 24,467,635 |   |
| Subordinated  Term Debt                   |       | 14,122,810                  |        | 14,122,810                   |       | 14,167,810 |   | 14,167,810 |   |
| Preferred &  Common Equity Securities |       | 28,898,802                  |        | 31,584,235                   |       | 28,598,802 |   | 25,331,046 |   |
| Total Investments                         |       | $                           | 319,868,417 |                         | $          | 321,626,076 |   | $ | 274,620,113 |   | $ | 270,947,603 |   |

 

22

----

Investments at fair valueconsisted of the following industry classifications at June 30, 2007 and March31, 2007:

 
| ** **                                    | ** ** | **June 30, 2007** | ** **  | **March 31, 2007** | ** ** |
|-----------------------------------------------|------------|-----------------------------|-------------|------------------------------|------------|
| ** **                                    | ** ** | ** **                  | ** **  | **Percentage of**       | ** ** | ** ** | ** ** | **Percentage of** | ** ** |
| ** **                                    | ** ** | **Fair  Value**             | ** **  | **Total  Investments**       | ** ** | **Net  Assets** | ** ** | **Fair  Value** | ** ** | **Total  Investments** | ** ** | **Net  Assets** | ** ** |
|                                          |       |                        |        |                         |       |   |   |   |   |   |   |   |   |
| Automobile                                    |       | $                           | 6,620,654   |                         | 2.1        | % | 2.9 | % | $ | 8,504,666 |   | 3.1 | % | 3.8 | % |
| Beverage, Food  & Tobacco                 |       | 4,000,000                   |        | 1.2                          | %          | 1.8 | % | 3,413,874 |   | 1.3 | % | 1.5 | % |
| Buildings &  Real Estate                  |       | 14,342,500                  |        | 4.5                          | %          | 6.3 | % | 3,003,750 |   | 1.1 | % | 1.3 | % |
| Cargo Transport                               |       | 20,895,013                  |        | 6.5                          | %          | 9.2 | % | 21,844,463 |   | 8.1 | % | 9.8 | % |
| Chemicals,  Plastics & Rubber             |       | 25,718,301                  |        | 8.0                          | %          | 11.3 | % | 22,535,527 |   | 8.3 | % | 10.1 | % |
| Containers,  Packaging and Glass              |       | 11,484,305                  |        | 3.6                          | %          | 5.1 | % | 999,975 |   | 0.4 | % | 0.4 | % |
| Diversified/Conglomerate  Manufacturing       |       | 31,478,796                  |        | 9.8                          | %          | 13.8 | % | 32,563,400 |   | 12.0 | % | 14.6 | % |
| Diversified/Conglomerate  Service             |       | 43,969,144                  |        | 13.7                         | %          | 19.3 | % | 27,374,081 |   | 10.1 | % | 12.3 | % |
| Ecological                                    |       | 500,000                     |        | 0.2                          | %          | 0.2 | % | — |   | — |   | — |   |
| Electronics                                   |       | 13,622,801                  |        | 4.2                          | %          | 6.0 | % | 6,758,294 |   | 2.5 | % | 3.0 | % |
| Healthcare,  Education and Childcare          |       | 41,126,308                  |        | 12.8                         | %          | 18.1 | % | 31,296,111 |   | 11.6 | % | 14.0 | % |
| Home &  Office Furnishings                |       | 17,021,203                  |        | 5.3                          | %          | 7.5 | % | 17,105,808 |   | 6.3 | % | 7.7 | % |
| Machinery                                     |       | 49,301,137                  |        | 15.3                         | %          | 21.7 | % | 41,480,716 |   | 15.3 | % | 18.6 | % |
| Oil & Gas                                 |       | —                      |        | —                       |       | — |   | 3,851,943 |   | 1.4 | % | 1.7 | % |
| Personal,  Non-durable Consumer Products      |       | 4,456,856                   |        | 1.4                          | %          | 2.0 | % | 1,492,472 |   | 0.6 | % | 0.7 | % |
| Personal, Food,  & Miscellaneous Services |       | 16,816,139                  |        | 5.2                          | %          | 7.4 | % | 16,905,483 |   | 6.2 | % | 7.6 | % |
| Printing,  Publishing, Broadcasting           |       | 15,832,526                  |        | 4.9                          | %          | 7.0 | % | 18,590,084 |   | 6.9 | % | 8.3 | % |
| Retail Stores                                 |       | 1,228,070                   |        | 0.4                          | %          | 0.5 | % | 1,407,018 |   | 0.5 | % | 0.6 | % |
| Telecommunications                            |       | 3,212,323                   |        | 0.9                          | %          | 1.4 | % | 9,246,854 |   | 3.4 | % | 4.1 | % |
| Textiles &  Leather                       |       | —                      |        | —                       |       | — |   | 2,573,084 |   | 0.9 | % | 1.2 | % |
| Total Investments                             |       | $                           | 321,626,076 |                         | 100        | % |   |   | $ | 270,947,603 |   | 100 | % |   |   |

 

Theinvestments at fair value consisted of the following geographic regions of theUnited States and Canada at June 30, 2007 and March 31, 2007:

 
| ** **        | ** ** | **June 30, 2007** | ** **  | **March 31, 2007** | ** ** |
|-------------------|------------|-----------------------------|-------------|------------------------------|------------|
| ** **        | ** ** | ** **                  | ** **  | **Percentage of**       | ** ** | ** ** | ** ** | **Percentage of** | ** ** |
| ** **        | ** ** | **Fair  Value**             | ** **  | **Total  Investments**       | ** ** | **Net  Assets** | ** ** | **Fair  Value** | ** ** | **Total  Investments** | ** ** | **Net  Assets** | ** ** |
|              |       |                        |        |                         |       |   |   |   |   |   |   |   |   |
| Mid-Atlantic      |       | $                           | 143,715,411 |                         | 44.7       | % | 63.2 | % | $ | 94,257,169 |   | 34.8 | % | 42.3 | % |
| Midwest           |       | 97,373,875                  |        | 30.3                         | %          | 42.8 | % | 88,508,725 |   | 32.7 | % | 39.7 | % |
| Northeast         |       | 12,672,838                  |        | 3.9                          | %          | 5.6 | % | 14,879,654 |   | 5.5 | % | 6.7 | % |
| Southeast         |       | 31,457,086                  |        | 9.8                          | %          | 13.8 | % | 36,357,555 |   | 13.4 | % | 16.3 | % |
| West              |       | 35,421,866                  |        | 11.0                         | %          | 15.6 | % | 36,944,500 |   | 13.6 | % | 16.6 | % |
| Canada            |       | 985,000                     |        | 0.3                          | %          | 0.4 | % | — |   | 0.0 | % | 0.0 | % |
| Total Investments |       | $                           | 321,626,076 |                         | 100.0      | % |   |   | $ | 270,947,603 |   | 100.0 | % |   |   |

 

Thegeographic region depicts the location of the headquarters for the Company’sportfolio companies.  A portfolio companymay have a number of other business locations in other geographic regions.

**Our Adviser and Administrator**

OurAdviser is led by a management team which has extensive experience in our linesof business.  Our Adviser also has awholly-owned subsidiary, Gladstone Administration, LLC (the “Administrator”),which employs our chief financial officer, chief compliance officer,controller, treasurer and their respective staffs.  All of our executive officers are officers ordirectors, or both, of our Adviser.

OurAdviser also provides investment advisory and administrative services to ouraffiliates Gladstone Commercial Corporation, a publicly traded real estateinvestment trust; Gladstone Capital Corporation, a publicly traded registeredinvestment company; and Gladstone Land Corporation, an agricultural real estatecompany owned by Mr. Gladstone.  All ofour directors and executive officers serve as either directors or executiveofficers, or both, of Gladstone Commercial Corporation and Gladstone CapitalCorporation.  In the future, our Advisermay provide investment advisory and administrative services to other funds,both public and private, of which it is the sponsor.

23

----

Wehave been externally managed by our Adviser pursuant to an investment advisoryand administrative agreement since our inception.  Our Adviser was organized as a corporationunder the laws of the State of Delaware on July 2, 2002, and is a registeredinvestment adviser under the 1940 Act. Our Adviser is headquartered in McLean, Virginia, a suburb ofWashington, D.C., and also has offices in the states of New York, Illinois,Pennsylvania, New Jersey, Texas and Washington.

**Investment Advisory andManagement Agreement**

Pursuant to the investment advisory and managementagreement (the “Advisory Agreement”) with our Adviser we pay our Adviser fees,as compensation for its services, consisting of a base management fee and anincentive fee.

The base management fee is computed and payable quarterlyand is assessed at an annual rate of 2.0% and was initially computed on thebasis of the average value of our gross invested assets at the end of the twomost recently completed quarters, which were total assets less the cashproceeds and cash and cash equivalent investments from the proceeds of ourinitial public offering that were not invested in debt and equity securities ofportfolio companies. Beginning on January 1, 2007, the base management fee isassessed at an annual rate of 2.0% computed on the basis of the average valueof our gross assets at the end of the two most recently completed quarters,which are total assets, including investments made with proceeds of borrowings,less any uninvested cash or cash equivalents resulting from borrowings. This new calculation was originally scheduled to begin in periods after March31, 2006; however, our Board of Directors accepted voluntary waivers from ourAdviser that allowed the initial calculation of the base management fee to beeffective through December 31, 2006.

On April 11, 2007, our Board of Directors accepted avoluntary waiver from the Adviser to reduce the annual 2.0% base management feeon senior syndicated loan participations to 0.5% to the extent that proceedsresulting from borrowings were used to purchase such syndicated loanparticipations.  This waiver remains ineffect and was applied during  the threemonths ended June 30, 2007.

When our Adviser receives fees from our portfoliocompanies, such as investment banking fees, structuring fees or executiverecruiting services fees, 50% of certain of these fees will be creditedagainst the base management fee that we would otherwise be required to pay toour Adviser.

In addition, our Adviser services the loans held byGladstone Business Investment, LLC (“Business Investment”), in return for whichthe Adviser receives a 2.0% annual fee based on the monthly aggregate balanceof loans held by Business Investment.  Since we own these loans, all loanservicing fees paid to our Adviser are treated as reductions against the 2.0%base management fee.  Overall, the base management fee due to our Advisercannot exceed 2.0% of total assets (as reduced by cash and cash equivalentspledged to creditors) during any given fiscal year.

The incentive fee consists of two parts: anincome-based incentive fee and a capital gains incentive fee. The income-basedincentive fee rewards our Adviser if our quarterly net investment income(before giving effect to any incentive fee) exceeds 1.75% of our net assets(the “hurdle rate”). We pay our Adviser an income incentive fee with respect toour pre-incentive fee net investment income in each calendar quarter asfollows:

·                                          no incentivefee in any calendar quarter in which our pre-incentive fee net investmentincome does not exceed the hurdle rate (7% annualized);

·                                          100% of ourpre-incentive fee net investment income with respect to that portion of suchpre-incentive fee net investment income, if any, that exceeds the hurdle ratebut is less than 2.1875% in any calendar quarter (8.75% annualized); and

·                                          20% of theamount of our pre-incentive fee net investment income, if any, that exceeds2.1875% in any calendar quarter (8.75% annualized).

The second part of the incentive fee is a capitalgains incentive fee that is determined and payable in arrears as of the end ofeach fiscal year (or upon termination of the Advisory Agreement, as of thetermination date), and equals 20% of our realized capital gains as of the endof the fiscal year. In determining the capital gains incentive fee payable toour Adviser, we calculate the cumulative aggregate realized capital gains andcumulative aggregate realized capital losses since our inception, and theaggregate unrealized capital depreciation as of the date of the calculation, asapplicable, with respect to each of the investments in our portfolio.

24

----

**Administration Agreement**

We have entered into an administration agreement withour Administrator (the “Administration Agreement”) whereby we pay separatelyfor administrative services. The Administration Agreement provides for paymentsequal to our allocable portion of our Administrator’s overhead expenses inperforming its obligations under the Administration Agreement including, butnot limited to, rent for employees of our Administrator, and our allocableportion of the salaries and benefits expenses of our chief financial officer,controller, chief compliance officer, treasurer and their respective staffs.

**Critical Accounting Policies**

The preparation of financial statements and relateddisclosures in conformity with accounting principles generally accepted in theUnited States (“GAAP”) requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities, and disclosure ofcontingent assets and liabilities at the date of the financial statements, andrevenues and expenses during the period reported. Actual results could differmaterially from those estimates. Our accounting policies are more fullydescribed in the “Notes to Consolidated Financial Statements” containedelsewhere in this report. We have identified our investment valuation processas our most critical accounting policy.

**Investment Valuation**

The most significantestimate inherent in the preparation of our consolidated financial statementsis the valuation of investments and the related amounts of unrealizedappreciation and depreciation of investments recorded.

*General Valuation Policy:*Using procedures established by our Board of Directors, we value our investmentportfolio each quarter. We carry our investments at fair value, as determinedin good faith by or under the direction of our Board of Directors. Securitiesthat are publicly traded, if any, are valued at the closing price of theexchange or securities market on which they are listed on the valuation date.Securities that are not traded on a public exchange or securities market, butfor which a limited market exists and that have been rated by a nationallyrecognized statistical rating organizations (“NRSRO”), (such as certain participationsin syndicated loans) are valued at the indicative bid price offered by therespective originating syndication agent’s desk on or near the valuation date.

Debt and equitysecurities that are not publicly traded, for which a limited market does notexist, or for which a limited market exists but that have not been rated by aNRSRO (or for which we have various degrees of trading restrictions) are valuedat fair value as determined in good faith by or under the direction of ourBoard of Directors.  In making the goodfaith determination of the value of these securities, we start with the costbasis of the security, which includes the amortized OID and PIK interest, ifany.  We then apply the methods set outbelow in “Valuation Methods.”  Members ofour Adviser’s portfolio management team prepare the valuations of ourinvestments in portfolio companies using the most recent portfolio companyfinancial statements and forecasts. These individuals also consult with portfolio company senior managementand ownership to obtain further updates on the portfolio company’s performance,including information such as industry trends, new product development, andother operational issues.  Due to theuncertainty inherent in the valuation process, such estimates of fair value maydiffer significantly from the values that would have been obtained had a readymarket 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 single standard for determiningfair value in good faith, as fair value depends upon circumstances of eachindividual case.  In general, fair valueis the amount that we might reasonably expect to receive upon the current saleof the security.

At June 30, 2007, weengaged Standard and Poor’s Securities Evaluations, Inc. (“SPSE”) to submitopinions of value for our debt securities that are issued to portfoliocompanies where we have no equity, or equity-like securities.  We request that SPSE also evaluate and assignvalues to success fees (conditional interest included in some loan securities)when we determine that the probability of receiving a success fee on a givenloan is above 6-8%, a threshold of significance.  We may also submit paid in kind (“PIK”)interest to SPSE for valuation when it is determined the PIK interest is likelyto be received. SPSE will only evaluate the debt portion of our investments forwhich we specifically request evaluation, and may decline to make requestedevaluations for any reason at its sole discretion.  We also add any amortized original issuediscount (“OID”) interest to the fair value, unless adverse factors lead to adetermination of a lesser valuation. Upon completing our collection of data with respect to the investments(including the information described under “Credit Information,” the riskratings of the loans described under “Loan Grading and Risk Rating” and thefactors described under “Valuation Methods”), this valuation data is forwardedto SPSE for review and analysis.  SPSEmakes its independent assessment of the data that we have assembled and assessesits independent data to form an opinion as to what they consider to be themarket values for the securities.  Withregard to its work, SPSE has issued the following paragraph:

25

----

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

SPSE opinions of value ofour debt securities that are issued to portfolio companies where we have noequity, or equity-like securities are submitted to our Board of Directors alongwith our Adviser’s supplemental assessment and recommendation regardingvaluation of each of these investments. Our Adviser generally accepts theopinion of value given by SPSE, however in certain limited circumstances, suchas when our Adviser  may learn newinformation regarding an investment between the time of submission to SPSE andthe 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 then reviews whetherour Adviser has followed its established procedures for determinations of fairvalue, and votes to accept or reject the recommended valuation of our investmentportfolio.  Our Adviser and ourmanagement recommended, and the Board of Directors voted to accept, theopinions of value delivered by SPSE on the loans in our portfolio as denoted onthe Schedule of Investments as of June 30, 2007 included in our consolidatedfinancial statements.

Because there is a delaybetween when we close an investment and when the investment can be evaluated bySPSE, new loans are not valued immediately by SPSE; rather, management  makes its own determination about the value ofthese investments in accordance with our valuation policy.  Because SPSE does not provide values for ourequity securities, our Adviser determines the fair value of these investmentsusing valuation policies approved by our Board of Directors.

*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 ourAdviser participate in the periodic board meetings of our portfolio companiesin which we hold control and affiliate investments and also require them toprovide annual audited and monthly unaudited 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 we risk rate all of our investments in debtsecurities. For syndicated loans that have been rated by a NRSRO (as defined inRule 2a-7 under the 1940 Act), we use the NRSRO’s risk rating for such security. For all other debt securities, weuse a proprietary risk rating system. Our risk rating system uses a scale of 0to 10, with 10 being the lowest probability of default. This system is used toestimate the probability of default on debt securities and the probability ofloss if there is a default. These types of systems are referred to as riskrating systems and are used by banks and rating agencies. The risk ratingsystem covers both qualitative and quantitative aspects of the business and thesecurities we hold.

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

26

----

 
| **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%                                                                      |
| **4**                      |       | B3               |       | B-                |       | PD is 27 and the EL is 8 to 10%                                                                       |
| **3**                      |       | Caa1             |       | CCC+              |       | PD is 30 and the EL is 10.0 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 Default and the EL is  greater than 20%                                |

----

(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 probability of default is adjusted to a lower percentage for theshorter period, which may move the security higher on our risk rating scale.*

The above scale gives anindication of the probability of default and the magnitude of the loss if thereis a default.  Our policy is to stopaccruing interest on an investment if we determine that interest is no longercollectible.  At June 30, 2007 and March31, 2007, no payments were past due on any of our debt securities.  Additionally, we do not risk rate our equitysecurities.

The following table liststhe risk ratings for all non-syndicated loans in our portfolio at June 30, 2007and March 31, 2007, representing approximately 40% and 44%, respectively, ofall loans in our portfolio:

| Rating           | ** ** | **June 30, 2007** | ** ** | **March 31, 2007** | ** ** |
|------------------|------------|-----------------------------|------------|------------------------------|------------|
| Highest          |       | 8.0                         |       | 8.0                          |       |
| Average          |       | 6.1                         |       | 5.7                          |       |
| Weighted Average |       | 5.5                         |       | 5.0                          |       |
| Lowest           |       | 3.0                         |       | 2.0                          |       |

 

The following table liststhe risk ratings for syndicated loans in our portfolio that are not currentlyrated by an NRSRO at June 30, 2007 and March 31, 2007, representing approximately14% of all loans in our portfolio at the end of each period:

| Rating           | ** ** | **June 30, 2007** | ** ** | **March 31, 2007** | ** ** |
|------------------|------------|-----------------------------|------------|------------------------------|------------|
| Highest          |       | 8.0                         |       | 8.0                          |       |
| Average          |       | 7.5                         |       | 7.2                          |       |
| Weighted Average |       | 7.6                         |       | 7.3                          |       |
| Lowest           |       | 6.0                         |       | 6.0                          |       |

 

For syndicated loans thatare currently rated by an NRSRO, we risk rate such loans in accordance with therisk rating systems of major risk rating organizations such as those providedby a NRSRO. The following table lists the risk ratings for  all syndicated loans in our portfolio that arecurrently rated by an NRSRO at June 30, 2007 and March 31, 2007, representingapproximately 47% and 42%, respectively, of all loans in our portfolio:

| Rating           | ** ** | **June 30, 2007** | ** ** | **March 31, 2007** | ** ** |
|------------------|------------|-----------------------------|------------|------------------------------|------------|
| Highest          |       | BB/Ba2                      |       | BB-/Ba2                      |       |
| Average          |       | B+/B1                       |       | B+/B1                        |       |
| Weighted Average |       | B+/B1                       |       | B+/B1                        |       |
| Lowest           |       | B/B1                        |       | B/B2                         |       |

 

*Valuation Methods:*  We determine the value of publicly-tradeddebt securities based on the closing price for the security on the exchange orsecurities market on which it is listed on the valuation date.  We value debt securities that are notpublicly traded, but for which a limited market for the security exists, suchas certain participations in syndicated loans, at the indicative bid priceoffered by the respective originating syndication agent’s trading desk on ornear the valuation date.  At June 30,2007, none of the debt securities in our portfolio were publicly traded andthere was a limited market for 46 debt securities in our portfolio. At March31, 2007, none of the debt securities in our portfolio were publicly traded andthere was a limited market for 42 debt securities in our portfolio.

27

----

Debt securities that areissued to portfolio companies where we have an equity, or equity-like interestthat are not publicly traded, for which there is no market, or for which thereis a market but the securities have not been rated by a NRSRO, are valued atcost, if there is adequate total enterprise value determined when valuing ourequity holdings in the borrower. Fair values are discounted for any shortfallof total enterprise value over the total debt outstanding for the borrower.

Debt securities that arenot publicly traded and that are issued to portfolio companies where we have noequity, or equity-like securities, for which there is no market, or for whichthere is a market but the securities have not been rated by a NRSRO, we beginwith the risk rating designation of the security as described above.  Using this risk rating designation, we seekto determine the value of the security as if we intended currently to sell thesecurity and consider some or all of the following factors:

·                  the cost basisand the type of the security;

·                  the nature andrealizable value of the collateral;

·                  the portfoliocompany’s ability to make payments and discounted cash flow;

·                  reports fromportfolio company senior management and board meetings;

·                  reported valuesof similar securities of the portfolio company or comparable companies; and

·                  changes in theeconomy affecting the portfolio company.

We value convertibledebt, equity, success or exit fees or other equity-like securities for whichthere is a market based on the market prices for such securities, even if thatmarket is not robust.  At June 30, 2007and March 31, 2007, there was no market for any of the equity securities weowned.  To value convertible debt,equity, success or exit fees or other equity-like securities for which nomarket exists, we use the same information we would use for a debt securityvaluation described above, except risk-rating, as well as standard valuationtechniques used by major valuation firms to value the equity securities ofprivate companies.  These valuationtechniques also include discounted cash flow of the expected sale price in thefuture, valuation of the securities based on recent sales to third parties incomparable transactions, or a review of similar companies that are publiclytraded and the market multiple of their equity securities. In gathering thesales to third parties of similar securities, we may reference industrystatistics and use outside experts.  AtJune 30, 2007 we had $28.9 million invested, at cost, in equity securitiescompared to our debt portfolio with a cost basis of $291.0 million.  At March 31, 2007, we had $28.6  million invested, at cost, in equitysecurities compared to our debt portfolio with a cost basis of $246.0 million.

At June 30, 2007,we had total unrealized appreciation of approximately $1.8 million, which wasprimarily comprised of net unrealized appreciation of our equity investments inour Control and Affiliate investments. At March 31, 2007, we had total unrealized depreciation of approximately$3.7 million, which was primarily comprised of net unrealized depreciation ofour preferred and common stock in Chase II Holdings Corp.

**Tax Status**

*Federal Income Taxes*

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

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

**Revenue Recognition**

*Interest and Dividend  Income Recognition*

Interest income isrecorded on the accrual basis to the extent that such amounts are expected tobe collected. We will stop accruing interest on investments when it isdetermined that interest is no longer collectible. There were no uncollectibleaccounts at June 30, 2007 or March 31, 2007. Conditional interest, or a successfee, is recorded when earned upon full repayment of a loan investment. To datewe have not recorded any conditional interest. Dividend income on preferred equity securities is accrued to the extentthat such amounts are expected to be collected and that we have the option tocollect such amounts in cash.  To date,we have not accrued any dividend income.

28

----

*Services Provided to Portfolio Companies*

The1940 Act requires that a business development company make available managerialassistance to its portfolio companies by providing significant guidance andcounsel concerning the management, operations, or business objectives and policiesof the respective portfolio company. We provide these and other services toportfolio companies through our Adviser. Currently, neither we nor our Adviserreceive fees in connection with managerial assistance.

OurAdviser receives fees for the other services it provides to portfoliocompanies.  These other fees aretypically non-recurring, are recognized as revenue when earned and aregenerally paid directly to our Adviser by the borrower or potential borrowerupon the closing of the investment. The services our Adviser provides vary byinvestment, but generally include a broad array of services such as investmentbanking services, arranging bank and equity financing, structuring financingfrom multiple lenders and investors, reviewing existing credit facilities,restructuring existing investments, raising equity and debt capital, turnaroundmanagement, merger and acquisition services and recruiting new managementpersonnel.  When our Adviser receivesfees for these services, 50% of certain of those fees are credited against thebase management fee due to the Adviser from us. Any services of this naturesubsequent to the closing would typically generate a separate fee at the timeof completion.

OurAdviser also receives fees for monitoring and reviewing portfolio companyinvestments.  These fees are recurringand are generally paid annually or quarterly in advance to our Adviserthroughout the life of the investment. Fees of this nature are recorded as revenue when earned by our Adviserand are not credited 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 and are recognized as revenue uponclosing of the originated investment.

**RESULTS OF OPERATIONS**

*Three months ended June 30, 2007compared to the three months ended June 30, 2006*

**Investment Income**

Investment income for the three months ended June 30,2007 increased $2,436,491 to $6,299,929 compared to investment income of$3,863,438 for the three months ended June 30, 2006.

Interest income from Non-Control/Non-Affiliateinvestments increased $1,284,075 to $3,248,555 for the three months ended June30, 2007 compared to $1,964,480 for the three months ended June 30, 2006.  This increase was mainly the result ofapproximately $72 million of additional Non-Control/Non-Affiliate investmentsat June 30, 2007 compared to the prior year period.

Interest income from Control investments was$2,564,992 for the three months ended June 30, 2007 representing interest onour loan investments to our Control affiliates compared to interest income of$1,190,302 for the three months ended June 30, 2006.  The increase of $1,374,690 is directlyattributable to the addition of two Control investments compared to the prioryear period.

Interest income from Affiliate investments was$426,563 for the three months ended June 30, 2007 representing interest on ourloan investments to our Non-Control affiliates. At June 30, 2006, we had notyet invested in any Affiliate investments.

Interest income from cash and equivalents decreased$654,648 to $53,692 for the three months ended June 30, 2007 from $708,340 forthe three months ended June 30, 2006. This decrease is the result of the complete investment of the proceedsof our initial public offering in Control, Affiliate andNon-Control/Non-Affiliate investments. At June 30, 2006 we had approximately $40 million of cash equivalentsinvested in treasury securities and at June 30, 2007 we had no investments intreasury securities as all of the proceeds from our initial public offering hadbeen invested.

The weighted average yield on our portfolio ofinvestments, excluding cash and cash equivalents, was 9.10% for the threemonths ended June 30, 2007 and 8.77% for the three months ended June 30,2006.  This increase is largely theresult of rising interest rates and the increase in our investments innon-syndicated loans that typically bear higher interest rates than those ofsyndicated loans.

29

----

**Operating Expenses**

Operating expenses for the three months ended June 30,2007 were $3,795,260 compared to $1,282,274 for the three months ended June 30,2006, representing an overall increase of $2,512,986.

For the threemonths ended June 30, 2007, we incurred a base management fee of $359,689 afterreductions for loan servicing fees received by our Adviser of $1,194,418. Wealso received credits against our base management fee of $383,875 which iscomprised of $293,000 resulting from reduced fees on syndicated loan participationsand $90,875 resulting from investment banking fees paid to the Adviser duringthe period, resulting in a net management fee credit of $24,186 for the threemonths ended June 30, 2007. For the three months ended June 30, 2006, weincurred a base management fee of $801,309. The gross base management feesbefore the reductions for loan servicing fees of $1,554,107, increased in thecurrent period due to the growth of the investment portfolio as compared to thesame period of the prior year, however, the increase was partially offset bycredits against the management fee of $359,689 in the current fiscal quarter ofwhich there were none in the prior year quarter. The base management fee iscurrently computed quarterly as described under “Investment Advisory andManagement Agreement.”

Loan servicingfees of $1,194,418 were incurred for the three months ended June 30, 2007.  These fees were incurred in connection with aloan servicing agreement between Business Investment and our Adviser, which is basedon the size of the aggregate outstanding loan portfolio.  These fees reduced the amount of themanagement fee due to our Adviser as noted above.

The administration fee payable to our Administratorwas $207,814 for the three months ended June 30, 2007 compared to $115,389 forthe three months ended June 30, 2006.This fee consists of our allocable portion of our Administrator’s rent andother overhead expenses, and our allocable portion of the salaries and benefitsof our chief financial officer, chief compliance officer, treasurer, controllerand their respective staffs. Our allocable portion of expenses is derived bymultiplying the percentage of our average assets (the assets at the beginningand ending of each quarter) in comparison to the average assets of allcompanies managed by our Adviser.  Theincrease was mainly attributable to the personnel growth of our Administrator.

Directors’ fees for the three months ended June 30,2007 and 2006 were $54,800 and  $43,250,respectively.  Directors’ fees consist ofthe amortization of the directors’ annual stipend and individual meetingfees.  The increase is due to fewercommittee meetings held in the prior year quarter.

Insurance expense for the three months ended June 30,2007 was $62,941 compared to $72,611 for the three months ended June 30,2006.  Insurance expense consists of theamortization of the directors and officers insurance policy and professionalliability policy premiums.

Professional fees for the three months ended June 30,2007 were $155,666, an increase of $75,918 over the professional fees for thethree months ended June 30, 2006 of $79,748. Professional fees primarily consist of legal fees and audit andaccounting fees.  The increase is mainlydue to an increase in audit fees related to our compliance with Sarbanes-Oxleyregulations, tax fees for our prior period tax returns and direct consultingand legal fees incurred on potential investments that were not executed.

Stockholder related costs decreased $55,877 for thethree months ended June 30, 2007 to $37,889 from $93,766 in the three monthsended June 30, 2006.  Stockholder relatedcosts consist of the amortization of annual Nasdaq listing fees, transfer agentfees, annual report printing fees, Securities and Exchange Commission (“SEC”)filing fees and press release costs.  Thedecrease is primarily related to the timing of annual report and proxy printingcost accruals when compared to the prior year period.

Interest expense for thethree months ended was $1,414,262 and resulted from borrowings on our creditfacility during the three months ended June 30, 2007, which were used tofinance our investment purchases during the quarter.

30

----

 

Deferred finance costamortization for the three months ended June 30, 2007 was $209,840 and isdirectly attributable to the amortization of the capitalized finance costsassociated with our credit facility.

Taxes and licensesexpense for the three months ended June 30, 2007 was $41,807 and was primarilycomprised of franchise taxes due to the state of Delaware and other feessurrounding state and regulatory licensing, registration and other corporatefiling fees.  The decrease of $15,300compared to the prior year period is the result of the timing of the accrualsof the franchise tax to the state of Delaware compared to the prior year.

Other expenses for the three months ended June 30,2007 were $56,134 compared to $19,094 for the three months ended June 30,2006.  Other expenses consist primarilyof direct expenses such as travel related specifically to our portfoliocompanies, loan evaluation services for our portfolio companies and backupservicer expenses.  The overall increaseof $37,040 is mainly due to the increase in direct expenses as the overall sizeof our investment portfolio grew from the prior year period.

**Realizedand Unrealized Loss on Investments**

For the three months ended June 30, 2007, werecognized a net loss on the sale of four loan participations aggregating$48,247 and we recorded net unrealized appreciation of investments in theaggregate amount of $5,430,169.  The netunrealized appreciation of our investments for the three months ended June 30,2007 was primarily related to an increase in market value of our equityinvestments of our Control and Affiliate investments over the three monthperiod compared to their fair market value at March 31, 2007.

**NetIncrease in Net Assets from Operations**

Overall, we realized a net increase in net assetsresulting from operations of $8,270,466 for the three months ended June 30,2007 as a result of the factors discussed above. Our net increase in net assetsfrom operations per basic and diluted weighted average common share for thethree months ended June 30, 2007 was $0.50 compared to $0.08 for the threemonths ended June 30, 2006.

We will continue to incurbase management fees which are likely to increase as our investment portfoliogrows, and we may begin to incur incentive fees. Our administrative expensespayable to our Administrator are also likely to grow during future periods asour average assets increase and as the expenses incurred by our Administratorto support our operations grow.

**LIQUIDITY AND CAPITAL RESOURCES**

**Operating Activities**

Net cash used in operating activities for the threemonths ended June 30, 2007 was approximately $33.8 million and consistedprimarily of the purchase of investments and the net unrealized appreciation ofour investments,  offset by repaymentsand sales of existing portfolio investments and an increase in amounts due fromcustodian.

A summary of our investment activity for the threemonths ended June 30, 2007 and June 30, 2006 is as follows:
| **Quarter Ended** | ** ** | **New Investments** | ** ** | **Principal Repayments** | ** ** | **Investments Sold** | ** ** | **Loss on Disposal** | ** ** |
|------------------------|------------|--------------------------|------------|-------------------------------|------------|---------------------------|------------|--------------------------------|------------|
|                   |       |                     |       |                          |       |                      |       |                           |       |
| June 30, 2007          |       | $                        | 72,601,227 |                          | $          | 21,358,187                |       | $                              | 5,809,471  |   | $ | (48,247 | ) |
|                        |            |                          |            |                               |            |                           |            |                                |            |  |  |  |  |

 
| **Quarter Ended** | ** ** | **New Investments** | ** ** | **Principal Repayments** | ** ** | **Investments Sold** | ** ** | **Gain on Disposal** | ** ** |
|------------------------|------------|--------------------------|------------|-------------------------------|------------|---------------------------|------------|--------------------------------|------------|
|                   |       |                     |       |                          |       |                      |       |                           |       |
| June 30, 2006          |       | $                        | 33,665,549 |                          | $          | 874,222                   |       | $                              | 15,548,454 |   | $ | 3,273 |   |
|                        |            |                          |            |                               |            |                           |            |                                |            |  |  |  |  |

 

31

----

The following tablesummarizes the contractual principal amortization and maturity of ourinvestment portfolio by fiscal year:

| Fiscal Year Ended March 31, | ** ** | **Amount**  | ** **      |
|-------------------------------------------------|------------|-------------|-----------------|
|                                            |       |        |            |
| 2008                                            |       | $           | 8,916,361       |   |
| 2009                                            |       | 9,881,115   |            |
| 2010                                            |       | 9,576,865   |            |
| 2011                                            |       | 50,649,610  |            |
| 2012                                            |       | 43,380,812  |            |
| Thereafter                                      |       | 168,055,388 |            |
| **Total  contractual repayments**               | ** ** | **$**       | **290,460,151** | ** ** |
|                                            |       |        |            |
| Investments in  equity securities               |       | $           | 28,898,802      |   |
| Unamortized  premiums on debt securities        |       | 509,464     |            |
| **Total**                                       | ** ** | **$**       | **319,868,417** | ** ** |

 

**Financing Activities**

During the three monthsended June 30, 2007, we recorded net borrowings under our credit facility of$34.4 million which were used to purchase new investments.

We anticipate issuingadditional equity securities to obtain additional capital in the future. Theterms of the future equity issuances cannot be determined and there can be noassurances that the equity markets will be available to us on terms we deemfavorable.  On October 13, 2006 we fileda registration statement with the SEC (as amended on December 22, 2006) that,if and when declared effective, would permit us to issue, through one or moretransactions, up to an aggregate of $100 million in securities, consisting ofcommon stock, preferred stock and/or debt securities.  To date we have incurred approximately$161,000 of costs in connection with this registration statement.

For the three months ended June 30, 2007, ourdividends paid of $3,726,022 exceeded our net investment income (includingrealized losses) by $885,725.  We declaredthese dividends based on our estimates of net investment income for the fiscalyear.  Our investment pace continues tobe slower than expected in our second year of operations and, consequently, ournet investment income was lower than our original estimates.

**Revolving Credit Facility**

OnOctober 19, 2006, through our wholly-owned subsidiary, Business Investment, weinitially obtained a $100 million revolving credit facility (the “CreditFacility”).  On October 19, 2006, we executed a purchase and sale agreementpursuant to 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 institutionallenders. Availability under the Credit Facility will terminate on October18, 2007, unless extended in the discretion of the lenders at the request ofBusiness Investment. Interest is payable monthly during the term of the CreditFacility and principal is payable out of collections on loans purchased from usduring the period following the date of which availability for advances hasterminated through maturity.  The CreditFacility will mature two years following the date on which availability foradvances has terminated and on such date, all principal, interest and other amountsowing under the Credit Facility will be due and payable.  Interest rates charged on the advances underthe facility are based on the rate paid by the lenders on commercial papernotes issued by such lenders to fund some or all of the advances, the LondonInterbank Offered Rate (“LIBOR”), the Prime Rate or the Federal Funds Rate,depending on market conditions, and adjusts periodically.  On March 29,2007, we increased our borrowing capacity under the Credit Facility from $100million to $200 million.  As of June 30,2007, there was an outstanding principal balance of $134.4 million under theCredit Facility at an interest rate of approximately 5.33%. 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.  AtJune 30, 2007, the remaining borrowing capacity available under the CreditFacility was approximately $66 million.  If we request a renewal of theCredit Facility, any such renewal would be granted in the discretion of thelenders and there can be no guarantee that we will be able to renew the CreditFacility on terms that are 

32

----

favorableto us, if at all.  In the event that we are not able to renew or refinancethe Credit Facility this could have a material adverse impact on our liquidityand ability to fund new investments.

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.  Asof June 30, 2007, Business Investment was in compliance with all of thefacility covenants.  We currently intend to securitize some or all of theloans held by Business Investment and if we are able to do so, we will use theproceeds from the securitization to pay down any amounts then outstanding underthe revolving credit facility.

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 acondition to this servicing arrangement, we executed a performance guarantypursuant to which we guaranteed that our Adviser would comply fully with all ofits obligations under the Credit Facility. The performance guaranty requires usto maintain a minimum net worth of $100 million and to maintain “asset coverage”with respect to “senior securities representing indebtedness” of at least 200%,in accordance with Section 18 of the 1940 Act. As of June 30, 2007, wewere in compliance with our covenants under the performance guaranty.

**Dividends**

In order to qualify as aRIC and to avoid corporate level tax on the income we distribute to ourstockholders, we are required, under Subchapter M of the Code, to distribute atleast 90% of our ordinary income and realized net short-term capital gains toour stockholders on an annual basis. In accordance with these requirements, wedeclared the following dividends:
| **Declaration Date** | ** ** | **Record Date** | ** ** | **Payment Date** | ** ** | **Dividend per Share** |
|---------------------------|------------|----------------------|------------|-----------------------|------------|----------------------------------|
| July 10, 2007             |       | September 20, 2007   |       | September 28, 2007    |       | $                                | 0.075 |
| July 10, 2007             |       | August 23, 2007      |       | August 31, 2007       |       | $                                | 0.075 |
| July 10, 2007             |       | July 23, 2007        |       | July 31, 2007         |       | $                                | 0.075 |
| April 11, 2007            |       | June 21, 2007        |       | June 29, 2007         |       | $                                | 0.075 |
| April 11, 2007            |       | May 22, 2007         |       | May 31, 2007          |       | $                                | 0.075 |
| April 11, 2007            |       | April 20, 2007       |       | April 30, 2007        |       | $                                | 0.075 |
| January 10, 2007          |       | March 22, 2007       |       | March 30, 2007        |       | $                                | 0.075 |
| January 10, 2007          |       | February 20, 2007    |       | February 28, 2007     |       | $                                | 0.075 |
| January 10, 2007          |       | January 23, 2007     |       | January 31, 2007      |       | $                                | 0.075 |
| October 10, 2006          |       | December 20, 2006    |       | December 29, 2006     |       | $                                | 0.07 |
| October 10, 2006          |       | November 21, 2006    |       | November 30, 2006     |       | $                                | 0.07 |
| October 10, 2006          |       | October 23, 2006     |       | October 31, 2006      |       | $                                | 0.07 |
| July 11, 2006             |       | September 21, 2006   |       | September 29, 2006    |       | $                                | 0.07 |
| July 11, 2006             |       | August 21, 2006      |       | August 31, 2006       |       | $                                | 0.07 |
| July 11, 2006             |       | July 19, 2006        |       | July 31, 2006         |       | $                                | 0.07 |
| April 11, 2006            |       | June 22, 2006        |       | June 30, 2006         |       | $                                | 0.07 |
| April 11, 2006            |       | May 22, 2006         |       | May 31, 2006          |       | $                                | 0.07 |
| April 11, 2006            |       | April 20, 2006       |       | April 28, 2006        |       | $                                | 0.07 |
| January 10, 2006          |       | March 17, 2006       |       | March 31, 2006        |       | $                                | 0.07 |
| January 10, 2006          |       | February 16, 2006    |       | February 28, 2006     |       | $                                | 0.07 |
| January 10, 2006          |       | January 23, 2006     |       | January 31, 2006      |       | $                                | 0.07 |
| October 7, 2005           |       | December 21, 2005    |       | December 31, 2005     |       | $                                | 0.04 |
| October 7, 2005           |       | November 21, 2005    |       | November 30, 2005     |       | $                                | 0.04 |
| October 7, 2005           |       | October 21, 2005     |       | October 30, 2005      |       | $                                | 0.04 |
| July 7, 2005              |       | September 22, 2005   |       | September 30, 2005    |       | $                                | 0.02 |
| July 7, 2005              |       | August 23, 2005      |       | August 31, 2005       |       | $                                | 0.02 |
| July 7, 2005              |       | July 21, 2005        |       | July 29, 2005         |       | $                                | 0.02 |

 

33

----

**Contractual Obligations andOff-Balance Sheet Arrangements**

As of June 30,2007, we were a party to signed and non-binding term sheets for fiveallocations of syndicate loan participations for approximately $9.7million.  The future scheduledcontractual payments at June 30, 2007 were as follows:
| ** **                       | ** ** | ** ** | ** ** | **Payment Due by Period** | ** ** |
|----------------------------------|------------|------------|------------|------------------------------------------|------------|
| **Contractual Obligations** | ** ** | **Total**  | ** ** | **Less than 1 Year**      | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More than  5 Years** | ** ** |
| Investments                      |       | 9,688,000  |       | 9,688,000                                |       | — |   | — |   | — |   |
| Total                            |       | $          | 9,688,000  |                                     | $          | 9,688,000 |   | $ | — |   | $ | — |   | $ | — |   |
|                                  |            |            |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |

 

In July 2007, all of the investment purchaseobligations summarized above were funded. See Note 10 “Subsequent Events” inour consolidated financial statements for further information.

We did not have any significant off-balance sheetarrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K as of June30, 2007.

**ITEM3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.**

We are subject to financial market risks, includingchanges in interest rates. General interest rate fluctuations may have asubstantial negative impact on our investments and investment opportunitiesand, accordingly have a material adverse effect on our investment objectivesand our rate of return on invested capital. Currently, approximately 65% of ourinvestment portfolio, at cost, is comprised of loans at variable rates andapproximately 11% of our investment portfolio, at cost, is in loans at variablerates with a floor.   In addition, anincrease in interest rates would make it more expensive to use debt for ourfinancing needs, if any.

We expect to continue toborrow funds to finance future lending activities as we have fully invested theproceeds of our initial public offering. These future borrowings may be atfixed or variable rates. For example, interest rates charged on the advancesunder our credit facility are based on the rate paid by the lenders oncommercial paper notes issued by such lenders to fund some or all of theadvances, LIBOR, the Prime Rate or the Federal Funds Rate, depending on marketconditions, and adjust periodically.  Asof June 30, 2007, there was an outstanding principal balance of $134.4 millionunder the credit facility.

To illustrate the potential impact of changes ininterest rates on our net increase in net assets resulting from operations, wehave performed the following analysis, which assumes that our balance sheetremains constant. Under this analysis, a hypothetical increase in the one monthLIBOR by 1.0% would increase our net increase in net assets resulting fromoperations by approximately $1.1 million or 7.4%, over the next twelve months,compared to the net increase in net assets resulting from operations for twelvemonths ended June 30, 2007. A hypothetical decrease in the one month LIBOR by1.0% would decrease our net increase in net assets resulting from operations byapproximately $1.3 million or 6.6%, over the next twelve months, compared tothe net increase in net assets from operations for the twelve months ended June30, 2007. Although management believes that this analysis is indicative of ourexisting interest rate sensitivity, it does not adjust for potential changes incredit quality, size and composition of our investment portfolio and otherbusiness developments that could affect net increase in net assets resultingfrom operations. Accordingly, no assurances can be given that actual resultswould not differ materially from the results under this hypothetical analysis.

In the event that wesecuritize a portion of our loan portfolio, we believe that we will likely berequired to enter into further hedging arrangements in the future with respectto securitized loans.  While hedgingactivities may mitigate our exposure to adverse fluctuations in interest rates,certain hedging transactions that we may enter into in the future, such asinterest rate swap agreements, may also limit our ability to participate in thebenefits of lower interest rates with respect to our portfolio of investments.

We may also experience risk associated with investingin securities of companies with foreign operations. At June 30, 2007, we hadapproximately $1.0 million invested in a syndicate loan participation of aportfolio company headquartered in Ontario, Canada.  Although we currently do not anticipateinvesting in debt or equity of foreign companies, some potential portfolio companiesmay have operations located outside the United States. These risks include, butare not limited to, fluctuations in foreign currency exchange rates, impositionof foreign taxes, changes in exportation regulations and political and socialinstability.

34

----

**ITEM4.   CONTROLS AND PROCEDURES.**

As of June 30, 2007, 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 controlover financial reporting that occurred during the quarter ended June 30, 2007that have materially affected, or are reasonably likely to materially affect,our internal control over financial reporting.

 

35

----

 

**PARTII—OTHER INFORMATION**

**ITEM1. LEGAL PROCEEDINGS.**

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

**ITEM1A. RISK FACTORS.**

Our business is subjectto certain risks and events that, if they occur, could adversely affect ourfinancial condition and results of operations and the trading price of ourcommon stock. For a discussion of these risks, please refer to the “RiskFactors” sections of our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2007, filed by us with the Securities and Exchange Commission on May31, 2007.

**ITEM2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.**

Not applicable.

**ITEM3. DEFAULTS UPON SENIOR SECURITIES.**

Not applicable.

**ITEM4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.**

Not applicable.

**ITEM5. OTHER INFORMATION.**

Not applicable

**ITEM 6. EXHIBITS**

See the exhibit index.

36

----

**SIGNATURE**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.
|            | ** ** | **GLADSTONE INVESTMENT CORPORATION** |
|------------|------------|--------------------------------------|
| ** ** | ** ** | ** **                           | ** ** | ** ** |
| ** ** | ** ** | ** **                           | ** ** | ** ** |
|       |       | By:                                  |   |  /s/ HARRY BRILL |   |
|       |       |                                 |   | Harry Brill |
|       |       |                                 |   | Chief Financial Officer |

 

**Date: August 1, 2007**

 

37

----

 

**EXHIBIT INDEX**
| Exhibit | ** ** | **Description**                                                                                                                                                                                                                     |
|---------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1     |       | Amended and Restated Certificate of Incorporation,  incorporated by reference to Exhibit a.2 to Pre-Effective Amendment  No. 1 to the Registration Statement on Form N-2 (File  No. 333-123699), filed May 13, 2005. |
|    |       |                                                                                                                                                                                                                                |
| 3.2     |       | Amended and Restated Bylaws, incorporated by  reference to Exhibit b.2 to Pre-Effective Amendment No. 3 to the Registration  Statement on Form N-2 (File No. 333-123699), filed June 21, 2005.                                      |
|    |       |                                                                                                                                                                                                                                |
| 3.3     |       | First Amendment to Amended and Restated Bylaws,  incorporated by reference to Exhibit 99.1 to the Company’s Current Report on  Form 8-K (File No. 814-00704), filed on July 10, 2007.                                          |
|    |       |                                                                                                                                                                                                                                |
| 4.1     |       | Specimen Stock Certificate, incorporated by  reference to Exhibit 99.d to Pre-Effective Amendment No. 3 to the  Registration Statement on Form N-2 (File No. 333-123699), filed June 21,  2005.                                     |
|    |       |                                                                                                                                                                                                                                |
| 11      |       | Computation of Per Share Earnings (included in the  notes to the unaudited financial statements contained in this report).                                                                                                          |
|    |       |                                                                                                                                                                                                                                |
| 31.1    |       | Certification of Chief Executive Officer pursuant to  section 302 of The Sarbanes-Oxley Act of 2002.                                                                                                                                |
|    |       |                                                                                                                                                                                                                                |
| 31.2    |       | Certification of Chief Financial Officer pursuant to  section 302 of The Sarbanes-Oxley Act of 2002.                                                                                                                                |
|    |       |                                                                                                                                                                                                                                |
| 32.1    |       | Certification of Chief Executive Officer pursuant to  section 906 of The Sarbanes-Oxley Act of 2002.                                                                                                                                |
|    |       |                                                                                                                                                                                                                                |
| 32.2    |       | Certification of Chief Financial Officer pursuant to  section 906 of The Sarbanes-Oxley Act of 2002.                                                                                                                                |

 

All other exhibits for which provision is made in theapplicable regulations of the Securities and Exchange Commission are notrequired under the related instruction or are inapplicable and therefore havebeen omitted.

 

39

----