** **

**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 DECEMBER 31,  2007** |
| ** **                                   |
| o                                            | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**COMMISSIONFILE NUMBER: 000-51233**

 

**GLADSTONE INVESTMENT CORPORATION**

(Exact name of registrant as specified in itscharter)

 
| **DELAWARE**

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

(I.R.S. Employer  Identification No.) |
|--------------------------------------------------------------------------------------------------------------|-------------------------------------------------------|
| ** **                                                                                                   |
| **1521  WESTBRANCH DRIVE, SUITE 200**

**MCLEAN,  VIRGINIA 22102**

(Address of principal  executive office) |
| ** **                                                                                                   |
| **(703) 287-5800**

(Registrant’s telephone  number, including area code)                          |

 

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

 

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

 

Large accelerated filer o        Accelerated filer x        Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12 b-2 of the Exchange Act).  Yes o   No x

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date. The number ofshares of the issuer’s Common Stock, $0.001 par value, outstanding as of January 30,2008 was 16,560,100.

 

 

 

----

 

**GLADSTONEINVESTMENT CORPORATION**

 

**TABLE OFCONTENTS**

 
| PART I.  | FINANCIAL INFORMATION                                                                                       |   |
|---------------|-------------------------------------------------------------------------------------------------------------|--------|
|          |                                                                                                        |   |
| Item  1.      | Financial Statements (Unaudited)                                                                            |   |
|          |                                                                                                        |   |
|          | Consolidated Statements of Assets and Liabilities as  of December 31, 2007 and March 31, 2007     |   |
|          | Consolidated Schedule of Investments as of  December 31, 2007                                          |   |
|          | Consolidated Schedule of Investments as of  March 31, 2007                                             |   |
|          | Consolidated Statements of Operations for the three  months ended December 31, 2007 and 2006           |   |
|          | Consolidated Statements of Operations for the nine  months ended December 31, 2007 and 2006            |   |
|          | Consolidated Statements of Changes in Net Assets for  the nine months ended December 31, 2007 and 2006 |   |
|          | Consolidated Statements of Cash Flows for the nine  months ended December 31, 2007 and 2006            |   |
|          | Financial Highlights for the three months ended  December 31, 2007 and 2006                            |   |
|          | Financial Highlights for the nine months ended  December 31, 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 CORPORATION**

**CONSOLIDATEDSTATEMENTS OF ASSETS AND LIABILITIES**

**(UNAUDITED)**

** **
| ** **                                                                                                  | ** ** | **December 31,** | ** **  | **March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|-----------------------|-------------|--------------------|------------|
| ** **                                                                                                  | ** ** | **2007**              | ** **  | **2007**           | ** ** |
|                                                                                                        |       |                  |        |               |       |
| ASSETS                                                                                                      |       |                  |        |               |       |
| Non-Control/Non-Affiliate  investments (Cost 12/31/07:$185,137,185; 3/31/07:$138,567,741)                   |       | $                     | 174,066,264 |               | $          | 138,168,612 |   |
| Control investments (Cost  12/31/07: $136,536,484; 3/31/07: $116,302,372)                                   |       | 143,192,123           |        | 113,016,491        |       |
| Affiliate investments  (Cost 12/31/07: $34,454,244; 3/31/07: $19,750,000)                                   |       | 34,772,730            |        | 19,762,500         |       |
| Total investments at fair  value (Cost 12/31/07: $356,127,913; 3/31/07: $274,620,113)                       |       | 352,031,117           |        | 270,947,603        |       |
| Cash and cash equivalents                                                                                   |       | 13,288,669            |        | 37,788,941         |       |
| Interest receivable                                                                                         |       | 1,965,776             |        | 1,306,090          |       |
| Prepaid insurance                                                                                           |       | 123,943               |        | 83,819             |       |
| Deferred finance costs                                                                                      |       | 462,210               |        | 627,960            |       |
| Due from Custodian                                                                                          |       | 3,412,644             |        | 12,694,985         |       |
| Due from Adviser (Refer to  Note 4)                                                                         |       | 253,684               |        | 20,383             |       |
| Other assets                                                                                                |       | 490,463               |        | 120,434            |       |
| TOTAL ASSETS                                                                                                |       | $                     | 372,028,506 |               | $          | 323,590,215 |   |
|                                                                                                        |       |                  |        |               |       |
| LIABILITIES                                                                                                 |       |                  |        |               |       |
| Due to Administrator  (Refer to Note 4)                                                                     |       | $                     | 211,159     |               | $          | 162,244 |   |
| Borrowings under line of  credit                                                                            |       | 150,462,500           |        | 100,000,000        |       |
| Accrued expenses                                                                                            |       | 910,800               |        | 523,698            |       |
| Other liabilities                                                                                           |       | 71,205                |        | 85,764             |       |
| Total Liabilities                                                                                           |       | 151,655,664           |        | 100,771,706        |       |
| NET ASSETS                                                                                                  |       | $                     | 220,372,842 |               | $          | 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                                                                             |       | 230,065,064           |        | 230,096,572        |       |
| Net unrealized  depreciation of investment portfolio                                                        |       | (4,096,797            | )           | (3,672,510         | )          |
| Net unrealized  appreciation of derivative                                                                  |       | 5,000                 |        | —             |       |
| Distributions in excess of  net investment income                                                           |       | (5,616,985            | )           | (3,622,113         | )          |
| Total Net Assets                                                                                            |       | $                     | 220,372,842 |               | $          | 222,818,509 |   |
| Net assets per share                                                                                        |       | $                     | 13.31       |               | $          | 13.46 |   |

 

 

*THEACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.*

 

2

----

 

**GLADSTONEINVESTMENT CORPORATION**

**CONSOLIDATEDSCHEDULE OF INVESTMENTS**

**DECEMBER31, 2007**

**(UNAUDITED)**

** **
| **Company  (1)**                                   | ** **   | **Industry**                                                           | ** **   | **Investment  (2)**                                     | ** **   | **Cost**     | ** **   | **Fair  Value** |
|----------------------------------------------------|--------------|------------------------------------------------------------------------|--------------|---------------------------------------------------------|--------------|--------------|--------------|-----------------|
|                                               |         |                                                                   |         |                                                    |         |         |         |            |
| **NON-CONTROL/NON-AFFILIATE  INVESTMENTS**         | ** **   | ** **                                                             | ** **   | ** **                                              | ** **   | ** **   | ** **   | ** **      |
| ** **                                         | ** **   | ** **                                                             | ** **   | ** **                                              | ** **   | ** **   | ** **   | ** **      |
| ***Syndicated Loans:***                            | *** *** | *** ***                                                           | *** *** | *** ***                                            | *** *** | *** *** | *** *** | *** ***    |
| * *                                           | * *     | * *                                                               | * *     | * *                                                | * *     | * *     | * *     | * *        |
| Activant  Solutions, Inc.                     |         | Service - enterprise  software and services                            |         | Senior Term Debt (7.0%,  Due 5/2013) (3)           |         | $            | 3,742,795    |            | $ | 3,490,866 |
|                                               |         |                                                                   |         |                                                    |         |         |         |            |
| Advanced Homecare  Holdings, Inc.             |         | Service - home health  nursing services                                |         | Senior Term Debt (8.6%,  Due 8/2014) (3)           |         | 2,985,000    |         | 2,895,450       |
|                                               |         |                                                                   |         |                                                    |         |         |         |            |
| Aeroflex, Inc.                                |         | Service - provider of  highly specialized electronic equipment         |         | Senior Term Debt (8.1%,  Due 8/2014) (3)           |         | 1,904,784    |         | 1,920,000       |
|                                               |         |                                                                   |         |                                                    |         |         |         |            |
| American  Safety Razor Company Inc.                |         | Manufacturing - razors and  blades                                     |         | Senior Term Debt (7.4%,  Due 7/2013) (3)           |         | 1,479,619    |         | 1,433,175       |
|                                               |         |                                                                   |         |                                                    |         |         |         |            |
| Aspect  Software, Inc.                        |         | Service - call center  software                                        |         | Senior Term Debt (7.9%,  Due 7/2011) (3)           |         | 2,655,159    |         | 2,559,330       |
|                                               |         |                                                                   |         |                                                    |         |         |         |            |
| Brock Holdings  II, Inc.                      |         | Service - industrial  specialty maintenance                            |         | Senior Term Debt (7.1%,  Due 8/2013) (3) (5)  |         | 2,979,524    |         | 2,880,731       |
|                                               |         |                                                                   |         |                                                    |         |         |         |            |
| Compsych Investments  Corp.                        |         | Service - employee  assistance programs                                |         | Senior Term Debt (7.6%,  Due 2/2012) (3) (5)  |         | 3,505,231    |         | 3,343,939       |
|                                               |         |                                                                   |         |                                                    |         |         |         |            |
| CRC Health  Group, Inc.                       |         | Service - substance  abuse treatment                                   |         | Senior Term Debt (7.4%,  Due 2/2012) (3)           |         | 9,906,751    |         | 9,369,254       |
|                                               |         |                                                                   |         |                                                    |         |         |         |            |
| Critical Homecare  Solutions, Inc.            |         | Service - home therapy  and respiratory treatment                      |         | Senior Term Debt (8.2%,  Due 1/2012) (3) (5)  |         | 4,534,045    |         | 4,486,680       |
|                                               |         |                                                                   |         |                                                    |         |         |         |            |
| CST Industries  Acquisition, Inc.             |         | Manufacturing - metal  storage units                                   |         | Senior Term Debt (7.9%,  Due 8/2013) (3)           |         | 989,216      |         | 957,875         |
|                                               |         |                                                                   |         |                                                    |         |         |         |            |
| Dealer Computer  Services, Inc.               |         | Manufacturing &  Service - systems for automotive retailers   |         | Senior Term Debt (6.8%,  Due 9/2013) (3)           |         | 1,860,095    |         | 1,783,560       |
|                                               |         |                                                                   |         |                                                    |         |         |         |            |
| Generac Acquisition  Corp.                         |         | Manufacturing - standby  power products                                |         | Senior Term Debt (7.7%,  Due 11/2013) (3) (5) |         | 6,944,412    |         | 6,185,500       |
|                                               |         |                                                                   |         |                                                    |         |         |         |            |
| Graham  Packaging Holdings Company                 |         | Manufacturing - plastic  containers                                    |         | Senior Term Debt (7.5%,  Due 10/2011) (3)          |         | 5,433,813    |         | 5,216,460       |
|                                               |         |                                                                   |         |                                                    |         |         |         |            |
| Hargray  Communications Group, Inc.           |         | Service - triple-play  (cable, phone, internet) provider               |         | Senior Term Debt (7.1%,  Due 6/2014) (3)           |         | 963,258      |         | 932,542         |
|                                               |         |                                                                   |         |                                                    |         |         |         |            |
| HMTBP Acquisition II  Corp.                        |         | Service - aboveground  storage tanks                                   |         | Senior Term Debt (7.1%,  Due 5/2014) (3) (5)  |         | 3,905,000    |         | 3,748,120       |
|                                               |         |                                                                   |         |                                                    |         |         |         |            |
| Hudson Products  Holdings, Inc.               |         | Manufacturing - heat  transfer solutions                               |         | Senior Term Debt (7.9%, Due 12/2013)  (3)          |         | 6,036,234    |         | 5,837,641       |
|                                               |         |                                                                   |         |                                                    |         |         |         |            |
| Huish  Detergents, Inc.                       |         | Manufacturing -  household cleaning products                           |         | Senior Term Debt (6.8%,  Due 4/2014) (3)           |         | 1,991,129    |         | 1,721,350       |
|                                               |         |                                                                   |         |                                                    |         |         |         |            |
| Hyland  Software, Inc.                        |         | Service - provider of  enterprise content management software          |         | Senior Term Debt (7.7%,  Due 7/2013) (3)           |         | 3,953,747    |         | 3,870,300       |
|                                               |         |                                                                   |         |                                                    |         |         |         |            |
| Interstate  Fibernet, Inc.                    |         | Service - provider of  voice and data telecommunications services      |         | Senior Term Debt (8.8%,  Due 7/2013) (3)           |         | 9,954,851    |         | 9,700,000       |
|                                               |         |                                                                   |         |                                                    |         |         |         |            |
| J. Crew Operating Corp.                            |         | Retail - apparel                                                       |         | Senior Term Debt (6.8%,  Due 5/2013) (3)           |         | 879,372      |         | 850,877         |
|                                               |         |                                                                   |         |                                                    |         |         |         |            |
| KIK Custom  Products, Inc.                    |         | Manufacturing - consumer  products                                     |         | Senior Term Debt (7.1%,  Due 5/2014) (3)           |         | 3,990,934    |         | 3,481,275       |
|                                               |         |                                                                   |         |                                                    |         |         |         |            |
| Kronos, Inc.                                  |         | Service - workforce  management solutions                              |         | Senior Term Debt (7.1%,  Due 6/2014) (3)           |         | 1,975,714    |         | 1,847,293       |
|                                               |         |                                                                   |         |                                                    |         |         |         |            |
| Lexicon Marketing  USA, Inc.                  |         | Service - marketing to  Hispanic community                             |         | Senior Term Debt (non  accrual) (3) (5)            |         | 2,947,515    |         | 1,384,397       |
|                                               |         |                                                                   |         |                                                    |         |         |         |            |
| Local TV Finance, LLC                              |         | Service - television  station operator                                 |         | Senior Term Debt (7.3%,  Due 5/2013) (3)           |         | 997,651      |         | 927,838         |
|                                               |         |                                                                   |         |                                                    |         |         |         |            |
| LVI Services, Inc.                            |         | Service - asbestos and  mold remediation                               |         | Senior Term Debt (9.6%,  Due 11/2010) (3) (5) |         | 6,387,074    |         | 5,987,800       |
|                                               |         |                                                                   |         |                                                    |         |         |         |            |
| MedAssets, Inc.                               |         | Service -  pharmaceuticals and healthcare GPO                          |         | Senior Term Debt (7.4%,  Due 10/2013) (3) (5) |         | 4,014,447    |         | 3,872,112       |
|                                               |         |                                                                   |         |                                                    |         |         |         |            |
| MediMedia USA, LLC                                 |         | Service - healthcare and  pharmaceutical marketing                     |         | Senior Term Debt (7.2%,  Due 10/2013) (3)          |         | 2,235,580    |         | 2,133,000       |
|                                               |         |                                                                   |         |                                                    |         |         |         |            |
| Mitchell  International, Inc.                 |         | Service - automobile  insurance claims processing                      |         | Senior Term Debt (6.8%,  Due 3/2014) (3) (5)  |         | 995,046      |         | 913,100         |
|                                               |         |                                                                   |         |                                                    |         |         |         |            |
| National Mentor  Holdings, Inc.               |         | Service - home health  care                                            |         | Senior Term Debt (6.7%,  Due 6/2013) (3)           |         | 1,972,709    |         | 1,848,422       |
|                                               |         |                                                                   |         |                                                    |         |         |         |            |
| Network Solutions, LLC                             |         | Service - internet  domain solutions                                   |         | Senior Term Debt (7.3%,  Due 3/2014) (3)           |         | 9,195,640    |         | 8,619,417       |
|                                               |         |                                                                   |         |                                                    |         |         |         |            |
| NPC International Inc.                             |         | Service - Pizza Hut  franchisee                                        |         | Senior Term Debt (6.6%,  Due 5/2013) (3)           |         | 2,895,543    |         | 2,695,380       |
|                                               |         |                                                                   |         |                                                    |         |         |         |            |
| Open  Solutions, Inc.                         |         | Service - software  outsourcing for financial institutions             |         | Senior Term Debt (7.3%,  Due 1/2014) (3)           |         | 2,691,994    |         | 2,488,408       |
|                                               |         |                                                                   |         |                                                    |         |         |         |            |
| Ozburn-Hessey Holding  Co. LLC                     |         | Service - third party  logistics                                       |         | Senior Term Debt (8.4%,  Due 8/2012) (3)           |         | 7,655,938    |         | 6,909,764       |
|                                               |         |                                                                   |         |                                                    |         |         |         |            |
| Pinnacle Foods Finance,  LLC                       |         | Manufacturing - branded  food products                                 |         | Senior Term Debt (7.9%,  Due 4/2014) (3)           |         | 3,981,220    |         | 3,790,950       |
|                                               |         |                                                                   |         |                                                    |         |         |         |            |
| PTS Acquisition Corp.                              |         | Manufacturing - drug  delivery and packaging technologies              |         | Senior Term Debt (7.1%,  Due 4/2014) (3)           |         | 6,965,000    |         | 6,477,450       |
|                                               |         |                                                                   |         |                                                    |         |         |         |            |
| QTC  Acquisition, Inc.                        |         | Service - outsourced  disability evaluations                           |         | Senior Term Debt (7.1%,  Due 11/2012) (3)          |         | 1,992,830    |         | 1,835,775       |
|                                               |         |                                                                   |         |                                                    |         |         |         |            |
| Radio Systems  Corporation                         |         | Service - design  electronic pet containment products                  |         | Senior Term Debt (7.7%,  Due 9/2013) (3)           |         | 1,974,524    |         | 1,935,500       |
|                                               |         |                                                                   |         |                                                    |         |         |         |            |
| Rally Parts, Inc.                             |         | Manufacturing -  aftermarket motorcycle parts and accessories          |         | Senior Term Debt (7.3%,  Due 11/2013) (3)          |         | 2,492,563    |         | 2,277,000       |
|                                               |         |                                                                   |         |                                                    |         |         |         |            |
| RPG Holdings, Inc.                            |         | Manufacturing and design  - greeting cards                             |         | Senior Term Debt (8.7%,  Due 12/2011) (3)          |         | 4,553,010    |         | 4,051,354       |
|                                               |         |                                                                   |         |                                                    |         |         |         |            |
| SafeNet, Inc.                                 |         | Service - chip  encryption products                                    |         | Senior Term Debt (7.7%,  Due 4/2014) (3)           |         | 2,987,284    |         | 2,716,350       |
|                                               |         |                                                                   |         |                                                    |         |         |         |            |
| SGS  International, Inc.                      |         | Service - digital  imaging and graphics                                |         | Senior Term Debt (7.2%,  Due 12/2011) (3)          |         | 1,598,592    |         | 1,552,689       |
|                                               |         |                                                                   |         |                                                    |         |         |         |            |
| Specialized  Technology Resources, Inc.       |         | Service &  Manufacturing - consumer product quality assurance |         | Senior Term Debt (7.3%,  Due 6/2014) (3)           |         | 1,493,535    |         | 1,436,530       |
|                                               |         |                                                                   |         |                                                    |         |         |         |            |
| Stolle Machinery Company                           |         | Manufacturing -  can-making equipment and parts                        |         | Senior Term Debt (7.9%,  Due 9/2012) (3)           |         | 496,693      |         | 485,100         |
|                                               |         |                                                                   |         |                                                    |         |         |         |            |
| Survey Sampling, LLC                               |         | Service -  telecommunications-based sampling                           |         | Senior Term Debt (7.3%,  Due 5/2011) (3) (5)  |         | 3,036,046    |         | 2,856,541       |
|                                               |         |                                                                   |         |                                                    |         |         |         |            |
| Synagro  Technologies, Inc.                   |         | Service - waste treatment  and recycling                               |         | Senior Term Debt (6.9%,  Due 3/2014) (3)           |         | 499,675      |         | 478,844         |
|                                               |         |                                                                   |         |                                                    |         |         |         |            |
| Triad Laboratory  Alliance, LLC                    |         | Service - regional  medical laboratories                               |         | Senior Term Debt (8.1%,  Due 12/2011) (3) (5) |         | 4,913,475    |         | 4,655,000       |
|                                               |         |                                                                   |         |                                                    |         |         |         |            |
| United  Surgical Partners International, Inc. |         | Service - outpatient  surgical provider                                |         | Senior Term Debt (7.3%,  Due 4/2014) (3)           |         | 1,320,000    |         | 1,240,800       |
|                                               |         |                                                                   |         |                                                    |         |         |         |            |
| Wastequip, Inc.                               |         | Service - process and  transport waste materials                       |         | Senior Term Debt (7.4%,  Due 2/2013) (3)           |         | 2,929,215    |         | 2,753,462       |
|                                                    |              |                                                                        |              |                                                         |              |              |              |                 |  |  |

 

3

----

 
| **Company  (1)**                                | ** **   | **Industry**                                                 | ** **   | **Investment  (2)**                                                | ** **   | **Cost**     | ** **      | **Fair  Value** |
|-------------------------------------------------|--------------|--------------------------------------------------------------|--------------|--------------------------------------------------------------------|--------------|--------------|-----------------|-----------------|
|                                            |         |                                                         |         |                                                               |         |         |            |            |
| ** **                                      | ** **   | ** **                                                   | ** **   | ** **                                                         | ** **   | ** **   | ** **      | ** **      |
| ** **                                      | ** **   | ** **                                                   | ** **   | ** **                                                         | ** **   | ** **   | ** **      | ** **      |
| WaveDivision Holdings,  LLC                     |         | Service - cable                                              |         | Senior Term Debt (7.6%,  Due 6/2014) (3) (5)             |         | 1,924,897    |            | 1,896,000       |
|                                            |         |                                                         |         |                                                               |         |         |            |            |
| West Corporation                                |         | Service - business  process outsourcing                      |         | Senior Term Debt (6.9%,  Due 10/2013) (3)                     |         | 6,372,806    |            | 6,054,168       |
|                                            |         |                                                         |         |                                                               |         |         |            |            |
| *Subtotal  - Syndicated Loans*                  |         |                                                         |         |                                                               |         | $            | 174,091,185     |            | $ | 162,785,369 |
|                                            |         |                                                         |         |                                                               |         |         |            |            |
| ***Non-syndicated Loans***                      | *** *** | *** ***                                                 | *** *** | *** ***                                                       | *** *** | *** *** | *** ***    | *** ***    |
| * *                                        | * *     | * *                                                     | * *     | * *                                                           | * *     | * *     | * *        | * *        |
| B-Dry, LLC                                      |         | Service - basement  waterproofer                             |         | Revolving Credit  Facility (9.5%, Due 10/2008) (12)           |         | —       |            | —          |
| * *                                        |         |                                                         |         | Senior Term Debt (10.1%,  Due 5/2014)                         |         | 10,746,000   |            | 10,746,000      |
|                                            |         |                                                         |         | Common Stock Warrants  (4)                                         |         | 300,000      |            | 534,895         |
|                                            |         |                                                         |         |                                                               |         | 11,046,000   |            | 11,280,895      |
|                                            |         |                                                         |         |                                                               |         |         |            |            |
| **Total Non-Control/Non-Affiliate Investments** |         | ** **                                                   |         | ** **                                                         | ** **   | **$**        | **185,137,185** | ** **      | **$** | **174,066,264** |
|                                            |         |                                                         |         |                                                               |         |         |            |            |
| **CONTROL  INVESTMENTS**                        | ** **   | ** **                                                   | ** **   | ** **                                                         | ** **   | ** **   | ** **      | ** **      |
|                                            |         |                                                         |         |                                                               |         |         |            |            |
| A. Stucki Holding Corp.                         |         | Manufacturing - railroad  freight car products               |         | Senior Term Debt (9.7%  Due 3/2012)                           |         | $            | 13,927,500      |            | $ | 13,927,500 |
|                                            |         |                                                         |         | Senior Term Debt (12.0%  Due 3/2012) (6)                      |         | 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    |            | 4,660,704       |
|                                            |         |                                                         |         | Common Stock (4)                                                   |         | 129,956      |            | 9,573,296       |
|                                            |         |                                                         |         |                                                               |         | 34,929,902   |            | 44,647,260      |
|                                            |         |                                                         |         |                                                               |         |         |            |            |
| Acme  Cryogenics, Inc.                     |         | 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 (4)                                    |         | 6,983,785    |            | 7,619,468       |
|                                            |         |                                                         |         | Common Stock (4)                                                   |         | 1,045,181    |            | 2,122,761       |
|                                            |         |                                                         |         | Common Stock Warrants  (4)                                         |         | 24,686       |            | 142,179         |
|                                            |         |                                                         |         |                                                               |         | 22,553,652   |            | 24,384,408      |
|                                            |         |                                                         |         |                                                               |         |         |            |            |
| ASH Holdings Corp.                              |         | Retail and Service -  school buses and parts                 |         | Senior Subordinated Term  Debt (12.0%, Due 1/2012)                 |         | 4,768,936    |            | —          |
|                                            |         |                                                         |         | Preferred Stock (4)                                                |         | 2,500,000    |            | —          |
|                                            |         |                                                         |         | Common Stock Warrants  (4)                                         |         | 3,680        |            | —          |
|                                            |         |                                                         |         |                                                               |         | 7,272,616    |            | —          |
|                                            |         |                                                         |         |                                                               |         |         |            |            |
| Cavert II Holding Corp.                         |         | Manufacturing - bailing  wire                                |         | Revolving Credit  Facility (9.2%, Due 10/2010) (10) (14) |         | 2,100,000    |            | 2,100,000       |
|                                            |         |                                                         |         | Senior Term Debt (9.5%,  Due 10/2012) (14)                    |         | 6,500,000    |            | 6,500,000       |
|                                            |         |                                                         |         | Senior Term Debt (11.2%,  Due 10/2012) (6) (14)          |         | 3,000,000    |            | 3,000,000       |
|                                            |         |                                                         |         | Senior Subordinated Term  Debt (13%, Due 10/2014) (14)             |         | 4,670,678    |            | 4,670,678       |
|                                            |         |                                                         |         | Preferred Stock  (4) (14)                                     |         | 4,110,196    |            | 4,110,196       |
|                                            |         |                                                         |         | Common Stock  (4) (14)                                        |         | 69,126       |            | 69,126          |
|                                            |         |                                                         |         |                                                               |         | 20,450,000   |            | 20,450,000      |
|                                            |         |                                                         |         |                                                               |         |         |            |            |
| Chase II Holdings Corp.                         |         | Manufacturing - traffic  doors                               |         | Revolving Credit  Facility (9.2% Due 3/2008) (7)              |         | 2,280,000    |            | 2,280,000       |
|                                            |         |                                                         |         | Senior Term Debt (9.7%,  Due 3/2011)                          |         | 10,175,000   |            | 10,175,000      |
|                                            |         |                                                         |         | Senior Term Debt (12.0%  Due 3/2011) (6)                      |         | 7,880,000    |            | 7,880,000       |
|                                            |         |                                                         |         | Subordinated Term Debt  (13.0% Due 3/2013)                    |         | 6,167,810    |            | 6,167,810       |
|                                            |         |                                                         |         | Redeemable Preferred  Stock (4)                                    |         | 6,960,806    |            | 8,263,144       |
|                                            |         |                                                         |         | Common Stock (4)                                                   |         | 61,384       |            | 1,719,603       |
|                                            |         |                                                         |         |                                                               |         | 33,525,000   |            | 36,485,557      |
|                                            |         |                                                         |         |                                                               |         |         |            |            |
| Quench Holdings Corp.                           |         | Service - sales,  installation and service

of water coolers |         | Revolving Credit  Facility (9.2%, Due 3/2009) (8)             |         | 1,500,000    |            | 1,500,000       |
|                                            |         |                                                         |         | Senior Term Debt (9.2%,  Due 3/2011)                          |         | 4,500,000    |            | 4,500,000       |
|                                            |         |                                                         |         | Senior Subordinated Term  Debt (11.5%, Due 3/2011)                 |         | 7,865,000    |            | 7,865,000       |
|                                            |         |                                                         |         | Equipment Line Note (13)                                           |         | 493,421      |            | 493,421         |
|                                            |         |                                                         |         | Common Stock (4)                                                   |         | 3,446,893    |            | 2,866,477       |
|                                            |         |                                                         |         |                                                               |         | 17,805,314   |            | 17,224,898      |
|                                            |         |                                                         |         |                                                               |         |         |            |            |
| **Total  Control Investments**                  |         |                                                         | ** **   | ** **                                                         | ** **   | **$**        | **136,536,484** | ** **      | **$** | **143,192,123** |
|                                            |         |                                                         |         |                                                               |         |         |            |            |
| **AFFILIATE  INVESTMENTS**                      | ** **   | ** **                                                   | ** **   | ** **                                                         | ** **   | ** **   | ** **      | ** **      |
|                                            |         |                                                         |         |                                                               |         |         |            |            |
| Danco Acquisition Corp.                         |         | Manufacturing -  machining and sheet metal work              |         | Revolving Credit  Facility (9.2%, Due 10/2010) (14)                |         | $            | —          |            | $ | — |
|                                            |         |                                                         |         | Senior Term Debt (9.3%,  Due 10/2012) (14)                    |         | 5,775,000    |            | 5,775,000       |
|                                            |         |                                                         |         | Senior Term Debt (11.5%,  Due 4/2013) (14)                    |         | 8,599,687    |            | 8,599,687       |
|                                            |         |                                                         |         | Redeemable Preferred  Stock (4) (14)                          |         | 2,500,000    |            | 2,500,000       |
|                                            |         |                                                         |         | Common Stock Warrants  (4) (14)                               |         | 2,500        |            | 2,500           |
|                                            |         |                                                         |         |                                                               |         | 16,877,187   |            | 16,877,187      |
|                                            |         |                                                         |         |                                                               |         |         |            |            |
| Noble Logistics, Inc.                      |         | Service - aftermarket  auto parts delivery                   |         | Revolving Credit  Facility (9.2%, Due 12/2009) (9)            |         | 900,000      |            | 900,000         |
|                                            |         |                                                         |         | Senior Term Debt (9.2%,  Due 12/2011)                         |         | 6,427,058    |            | 6,427,057       |
|                                            |         |                                                         |         | Senior Term Debt (11.2%  Due 3/2011) (6)                      |         | 7,000,000    |            | 7,000,000       |
|                                            |         |                                                         |         | Preferred Stock (4)                                                |         | 1,750,000    |            | 2,012,500       |
|                                            |         |                                                         |         | Common Stock (4)                                                   |         | 1,500,000    |            | 1,555,986       |
|                                            |         |                                                         |         |                                                               |         | 17,577,058   |            | 17,895,543      |
|                                            |         |                                                         |         |                                                               |         |         |            |            |
| **Total  Affiliate Investments**                |         | ** **                                                   |         | ** **                                                         | ** **   | **$**        | **34,454,244**  | ** **      | **$** | **34,772,730** |
|                                            |         |                                                         |         |                                                               |         |         |            |            |
| **Total  Investments**                          |         | ** **                                                   |         | ** **                                                         | ** **   | **$**        | **356,127,913** | ** **      | **$** | **352,031,117** |

 

4

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----

 

(1)                  Certain of the listed securities areissued by affiliate(s) of the indicated portfolio company.

(2)                  Percentage represents the weighted averageinterest rates in effect at December 31, 2007 and due date represents thecontractual maturity date.

(3)                  Marketable securities are valued based onthe indicative bid price, as of December 31, 2007, from the respectivesyndication agent’s trading desk.

(4)                  Security is non-income producing.

(5)                  Valued using Standard & Poor’sSecurities Evaluations, Inc. opinions of value at December 31, 2007.

(6)                  Last out tranche of senior debt, meaningif the portfolio company is liquidated then the holder of the last out trancheis paid after the senior debt.

(7)                  Total available under the revolving creditfacility is $3,500,000, of which $1,220,000 remains undrawn atDecember 31, 2007.

(8)                  Total available under the revolving creditfacility is $1,500,000 which was fully drawn at December 31, 2007.

(9)                  Total available under the revolving creditfacility is $2,000,000, of which $1,100,000 remains undrawn atDecember 31, 2007.

(10)            Total available under the revolving creditfacility is $3,000,000, of which $900,000 remains undrawn at December 31,2007.

(11)            Total available under the revolving creditfacility is $3,000,000, which remains undrawn at December 31, 2007.

(12)            Total available under the revolving creditfacility is $750,000, which remains undrawn at December 31, 2007.

(13)            Total available for future borrowing forthe purposes of purchasing equipment is $1,500,000.  The undrawn amount of $1,006,579 may be drawnto purchase additional equipment through 10/24/2010.  The interest rate on all amounts drawn on theequipment line note is 12% except for one draw of $188,181 whose interest rateis 15%.  Each draw on the equipment linenote is subject to its own amortization and maturity, typically over a periodof 20-24 months.  At December 31,2007, the last amortization payment due under current amounts drawn under theequipment line note is 11/2009.

(14)            Valued at cost due to recent acquisition.

 

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

 

5

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**GLADSTONE INVESTMENT CORPORATION**

**CONSOLIDATED SCHEDULE OF INVESTMENTS**

**March 31, 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  pharmaceutical 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      |       |
|                                                  |            |                                                                         |            |                                                   |            |           |            |                |            |  |  |

 

 

6

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| 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         |   |
| 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)             |            | 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, Inc.                       |       | 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)(11)             |            | 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(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 of water coolers   |   | Revolving Credit Facility  (9.3%, Due 3/2009)(5)(8)     |            | 1,900,000  |       | 1,900,000       |   |
|                                             |       |                                                             |   | 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       |   |
|                                                  |            |                                                                  |        |                                                              |                 |            |            |                 |        |  |  |  |  |

 

7

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|                            |       |                                          |       | 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)(11)          |           | 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 listed securities are issued by affiliate(s) of  the indicated portfolio company.                                                                   |
|------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)  |   | Percentage represents the weighted average interest rates in effect at  March 31, 2007 and due date represents the contractual maturity date.                      |
| (3)  |   | Marketable securities are valued based on the indicative bid price, as  of March 31, 2007, from the respective originating syndication agent’s  trading desk. |
| (4)  |   | Security is non-income producing.                                                                                                                                       |
| (5)  |   | Valued using Standard & Poor’s Securities  Evaluations, Inc. opinions of value at March 31, 2007.                                               |
| (6)  |   | Fair value is equal to cost due to recent acquisition.                                                                                                                  |
| (7)  |   | Total available under the revolving credit facility is $3,500,000 of  which $1,600,000 remains undrawn as of March 31, 2007.                                       |
| (8)  |   | Total available under the revolving credit facility is $2,000,000, of  which $100,000 remains undrawn at March 31, 2007.                                           |
| (9)  |   | Total available under the revolving 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 reflected herein.                                                |
| (11) |   | Last out tranche of senior debt, meaning if the portfolio company is  liquidated then the holder of the last out tranche is paid after the senior  debt.                |

 

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

 

 

8

----

 

**GLADSTONEINVESTMENT CORPORATION**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(UNAUDITED)**

** **
| ** **                                                              | ** ** | **Three months ended**     | ** ** | **Three months ended**     | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                                              | ** ** | **December 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|                                                                    |       |                       |       |                       |       |
| INVESTMENT INCOME                                                       |       |                       |       |                       |       |
| Interest income                                                         |       |                       |       |                       |       |
| Non-Control/Non-Affiliate investments                                   |       | $                          | 3,891,918  |                       | $          | 2,586,171 |   |
| Control investments                                                     |       | 2,865,843                  |       | 1,264,451                  |       |
| Affiliate investments                                                   |       | 700,494                    |       | 114,668                    |       |
| Cash and cash equivalents                                               |       | 79,502                     |       | 332,586                    |       |
| Total interest income                                                   |       | 7,537,757                  |       | 4,297,876                  |       |
| Other income                                                            |       | 6,244                      |       | 1,492                      |       |
| Total investment income                                                 |       | 7,544,001                  |       | 4,299,368                  |       |
|                                                                    |       |                       |       |                       |       |
| EXPENSES                                                                |       |                       |       |                       |       |
| Base management fee (Refer to Note 4)                                   |       | 497,632                    |       | 551,235                    |       |
| Loan servicing fee (Refer to Note 4)                                    |       | 1,287,013                  |       | 508,691                    |       |
| Administration fee (Refer to Note 4)                                    |       | 211,159                    |       | 124,101                    |       |
| Interest expense                                                        |       | 2,381,227                  |       | 68,748                     |       |
| Amortization of deferred finance costs                                  |       | 169,329                    |       | 91,392                     |       |
| Professional fees                                                       |       | 90,255                     |       | 186,537                    |       |
| Stockholder related costs                                               |       | 25,083                     |       | 28,643                     |       |
| Insurance expense                                                       |       | 46,719                     |       | 60,696                     |       |
| Directors fees                                                          |       | 54,709                     |       | 54,800                     |       |
| Taxes and licenses                                                      |       | 41,886                     |       | 41,550                     |       |
| General and administrative expenses                                     |       | 38,644                     |       | 60,132                     |       |
| Expenses before credit from Adviser                                     |       | 4,843,656                  |       | 1,776,525                  |       |
| Credits to base management fee (Refer to Note 4)                        |       | (1,045,881                 | )          | (375,225                   | )          |
| Total expenses net of credit to base management fee                     |       | 3,797,775                  |       | 1,401,300                  |       |
| NET INVESTMENT INCOME                                                   |       | 3,746,226                  |       | 2,898,068                  |       |
|                                                                    |       |                       |       |                       |       |
| REALIZED AND UNREALIZED  GAIN (LOSS) ON INVESTMENTS                     |       |                       |       |                       |       |
| Realized loss on sale of Non-Control/Non-Affiliate investments          |       | (146,034                   | )          | (2,283                     | )          |
| Net unrealized depreciation of Non-Control/Non-Affiliate investments    |       | (2,835,448                 | )          | (52,814                    | )          |
| Net unrealized appreciation (depreciation) of Control investments       |       | 4,487,562                  |       | (158,428                   | )          |
| Net unrealized depreciation of Affiliate investments                    |       | (148,387                   | )          | —                     |       |
| Net unrealized appreciation derivative                                  |       | 5,000                      |       | —                     |       |
| Net gain (loss) on investments                                          |       | 1,362,693                  |       | (213,525                   | )          |
|                                                                    |       |                       |       |                       |       |
| NET INCREASE IN NET ASSETS  RESULTING FROM OPERATIONS                   |       | $                          | 5,108,919  |                       | $          | 2,684,543 |   |
|                                                                    |       |                       |       |                       |       |
| NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS PER COMMON  SHARE: |       |                       |       |                       |       |
| Basic and Diluted                                                       |       | $                          | 0.31       |                       | $          | 0.16 |   |
|                                                                    |       |                       |       |                       |       |
| SHARES OF COMMON STOCK  OUTSTANDING:                                    |       |                       |       |                       |       |
| Basic and diluted weighted average shares                               |       | 16,560,100                 |       | 16,560,100                 |       |

 

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

 

9

----

 

**GLADSTONEINVESTMENT CORPORATION**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(UNAUDITED)**

** **
| ** **                                                               | ** ** | **Nine months ended**      | ** ** | **Nine months ended**      | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                                               | ** ** | **December 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|                                                                     |       |                       |       |                       |       |
| INVESTMENT INCOME                                                        |       |                       |       |                       |       |
| Interest income                                                          |       |                       |       |                       |       |
| Non-Control/Non-Affiliate investments                                    |       | $                          | 11,220,467 |                       | $          | 6,938,026 |   |
| Control investments                                                      |       | 8,043,247                  |       | 3,711,056                  |       |
| Affiliate investments                                                    |       | 1,501,944                  |       | 114,668                    |       |
| Cash and cash equivalents                                                |       | 193,613                    |       | 1,610,506                  |       |
| Total interest income                                                    |       | 20,959,271                 |       | 12,374,256                 |       |
| Other income                                                             |       | 40,828                     |       | 2,478                      |       |
| Total investment income                                                  |       | 21,000,099                 |       | 12,376,734                 |       |
|                                                                     |       |                       |       |                       |       |
| EXPENSES                                                                 |       |                       |       |                       |       |
| Base management fee (Refer to Note 4)                                    |       | 1,309,951                  |       | 2,214,437                  |       |
| Loan servicing fee (Refer to Note 4)                                     |       | 3,741,082                  |       | 508,691                    |       |
| Administration fee (Refer to Note 4)                                     |       | 646,740                    |       | 364,351                    |       |
| Interest expense                                                         |       | 5,818,564                  |       | 68,748                     |       |
| Amortization of deferred finance costs                                   |       | 595,532                    |       | 91,392                     |       |
| Professional fees                                                        |       | 356,176                    |       | 354,325                    |       |
| Stockholder related costs                                                |       | 220,312                    |       | 187,509                    |       |
| Insurance expense                                                        |       | 182,789                    |       | 200,933                    |       |
| Directors fees                                                           |       | 176,981                    |       | 154,300                    |       |
| Taxes and licenses                                                       |       | 125,018                    |       | 139,994                    |       |
| General and administrative expenses                                      |       | 130,121                    |       | 104,161                    |       |
| Expenses before credit from Adviser                                      |       | 13,303,266                 |       | 4,388,841                  |       |
| Credits to base management fee (Refer to Note 4)                         |       | (1,932,475                 | )          | (375,225                   | )          |
| Total expenses net of credit to base management fee                      |       | 11,370,791                 |       | 4,013,616                  |       |
| NET INVESTMENT INCOME                                                    |       | 9,629,308                  |       | 8,363,118                  |       |
|                                                                     |       |                       |       |                       |       |
| REALIZED AND UNREALIZED  GAIN (LOSS) ON INVESTMENTS                      |       |                       |       |                       |       |
| Realized loss on sale of Non-Control/Non-Affiliate investments           |       | (197,712                   | )          | (944                       | )          |
| Net unrealized depreciation of Non-Control/Non-Affiliate investments     |       | (10,671,793                | )          | (1,189,598                 | )          |
| Net unrealized appreciation (depreciation) of Control investments        |       | 9,941,521                  |       | (362,941                   | )          |
| Net unrealized appreciation of Affiliate investments                     |       | 305,986                    |       | —                     |       |
| Net unrealized appreciation derivative                                   |       | 5,000                      |       | —                     |       |
| Net loss on investments                                                  |       | (616,998                   | )          | (1,553,483                 | )          |
|                                                                     |       |                       |       |                       |       |
| NET INCREASE IN NET ASSETS  RESULTING FROM OPERATIONS                    |       | $                          | 9,012,310  |                       | $          | 6,809,635 |   |
|                                                                     |       |                       |       |                       |       |
| NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS PER   COMMON SHARE: |       |                       |       |                       |       |
| Basic and Diluted                                                        |       | $                          | 0.54       |                       | $          | 0.41 |   |
|                                                                     |       |                       |       |                       |       |
| SHARES OF COMMON STOCK  OUTSTANDING:                                     |       |                       |       |                       |       |
| Basic and diluted weighted average shares                                |       | 16,560,100                 |       | 16,560,100                 |       |

 

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

 

10

----

 

**GLADSTONEINVESTMENT CORPORATION**

**CONSOLIDATEDSTATEMENTS OF CHANGES IN NET ASSETS**

**(UNAUDITED)**

** **
| ** **                                             | ** ** | **Nine months ended**      | ** **  | **Nine months ended**      | ** ** |
|--------------------------------------------------------|------------|----------------------------|-------------|----------------------------|------------|
| ** **                                             | ** ** | **December 31, 2007** | ** **  | **December 31, 2006** | ** ** |
| *Operations:*                                          | * *   | * *                   | * *    | * *                   | * *   |
| Net investment income                                  |       | $                          | 9,629,308   |                       | $          | 8,363,118 |   |
| Realized loss on sale of investments                   |       | (197,712                   | )           | (944                       | )          |
| Net unrealized depreciation of portfolio               |       | (424,286                   | )           | (1,552,539                 | )          |
| Unrealized appreciation of derivative                  |       | 5,000                      |        | —                     |       |
| Net increase in net assets  from operations            |       | 9,012,310                  |        | 6,809,635                  |       |
|                                                   |       |                       |        |                       |       |
| *Capital transactions:*                                | * *   | * *                   | * *    | * *                   | * *   |
| Shelf offering registration costs                      |       | (31,508                    | )           | (132,707                   | )          |
| Dividends                                              |       | (11,426,469                | )           | (10,432,869                | )          |
| Total decrease in net assets from capital transactions |       | (11,457,977                | )           | (10,565,576                | )          |
|                                                   |       |                       |        |                       |       |
| Total decrease in net  assets                          |       | (2,445,667                 | )           | (3,755,941                 | )          |
|                                                   |       |                       |        |                       |       |
| Net Assets                                             |       |                       |        |                       |       |
| Beginning of period                                    |       | 222,818,509                |        | 229,841,697                |       |
| End of period                                          |       | $                          | 220,372,842 |                       | $          | 226,085,756 |   |

 

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

 

11

----

 

**GLADSTONEINVESTMENT CORPORATION**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

** **
| ** **                                                                                                               | ** ** | **Nine months ended**      | ** ** | **Nine months ended**      | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                                                                                               | ** ** | **December 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|                                                                                                                     |       |                       |       |                       |       |
| **CASH FLOWS FROM OPERATING  ACTIVITIES**                                                                                | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| ** **                                                                                                               | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| Net increase in net assets resulting from operations                                                                     |       | $                          | 9,012,310  |                       | $          | 6,809,635 |   |
| Adjustments to reconcile net increase in net assets resulting from  operations to net cash used in operating activities: |       |                       |       |                       |       |
| Purchase of investments                                                                                                  |       | (157,334,750               | )          | (118,850,626               | )          |
| Principal repayments of investments                                                                                      |       | 59,723,249                 |       | 10,448,688                 |       |
| Proceeds from the sale of investments                                                                                    |       | 15,696,641                 |       | 19,589,945                 |       |
| Net unrealized depreciation of investment portfolio                                                                      |       | 424,286                    |       | 1,552,539                  |       |
| Net unrealized appreciation of derivative                                                                                |       | (5,000                     | )          | —                     |       |
| Net realized loss on sales of investments                                                                                |       | 197,712                    |       | 944                        |       |
| Net amortization of premiums and discounts                                                                               |       | 209,348                    |       | 124,748                    |       |
| Amortization of deferred finance costs                                                                                   |       | 595,532                    |       | 91,392                     |       |
| Increase in interest receivable                                                                                          |       | (659,686                   | )          | (683,317                   | )          |
| Decrease (increase) in due from custodian                                                                                |       | 9,282,341                  |       | (2,798,620                 | )          |
| Increase in prepaid assets                                                                                               |       | (255,307                   | )          | (67,993                    | )          |
| Increase in other assets                                                                                                 |       | (149,846                   | )          | (22,429                    | )          |
| (Decrease) increase in other liabilities                                                                                 |       | (14,559                    | )          | 38,042                     |       |
| Increase in administration fee payable to Administrator (See Note 4)                                                     |       | 48,915                     |       | 410,561                    |       |
| (Decrease) increase in base management fee payable to Adviser (See  Note 4)                                         |       | (244,570                   | )          | 14,099                     |       |
| Increase in loan servicing fee payable to Adviser (See Note 4)                                                           |       | 11,269                     |       | 231,211                    |       |
| Increase in accrued expenses                                                                                             |       | 387,102                    |       | 445,833                    |       |
| Net cash used in operating activities                                                                                    |       | (63,075,013                | )          | (82,665,348                | )          |
|                                                                                                                     |       |                       |       |                       |       |
| **CASH FLOWS FROM FINANCING  ACTIVITIES**                                                                                | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| ** **                                                                                                               | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| Borrowings from line of credit                                                                                           |       | 196,350,000                |       | 23,500,000                 |       |
| Repayments of line of credit                                                                                             |       | (145,887,500               | )          | (3,500,000                 | )          |
| Deferred finance costs                                                                                                   |       | (429,782                   | )          | (550,739                   | )          |
| Shelf offering registration costs                                                                                        |       | (31,508                    | )          | (132,707                   | )          |
| Distributions paid                                                                                                       |       | (11,426,469                | )          | (10,432,869                | )          |
| Net cash provided by financing activities                                                                                |       | 38,574,741                 |       | 8,883,685                  |       |
|                                                                                                                     |       |                       |       |                       |       |
| **NET DECREASE IN CASH AND CASH  EQUIVALENTS (1)**                                                                       |       | (24,500,272                | )          | (73,781,663                | )          |
| **CASH AND CASH EQUIVALENTS,  BEGINNING OF PERIOD**                                                                      |       | 37,788,941                 |       | 75,672,605                 |       |
| **CASH AND CASH EQUIVALENTS, END  OF PERIOD**                                                                            |       | $                          | 13,288,669 |                       | $          | 1,890,942 |   |

 

----

(1)                  Cash and cashequivalents consist of demand deposits and highly liquid investments withoriginal maturities of three months or less when purchased.

 

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

 

12

----

 

**GLADSTONEINVESTMENT CORPORATION**

**FINANCIALHIGHLIGHTS**

**(UNAUDITED)**

** **
| ** **                                                    | ** ** | **Three months ended**     | ** **  | **Three months ended**     | ** ** |
|---------------------------------------------------------------|------------|----------------------------|-------------|----------------------------|------------|
| ** **                                                    | ** ** | **December 31, 2007** | ** **  | **December 31, 2006** | ** ** |
| Per Share Data (1)                                            |       |                       |        |                       |       |
| Balance at beginning of period                                |       | $                          | 13.24       |                       | $          | 13.71 |   |
|                                                          |       |                       |        |                       |       |
| *Income from investment operations:*                          | * *   | * *                   | * *    | * *                   | * *   |
| Net investment income (2)                                     |       | 0.23                       |        | 0.18                       |       |
| Realized loss on sale of investments (2)                      |       | (0.01                      | )           | —                     |       |
| Net unrealized appreciation (depreciation) of investments (2) |       | 0.09                       |        | (0.02                      | )          |
| Net unrealized appreciation of derivative (2)                 |       | —                     |        | —                     |       |
| Total from investment operations                              |       | 0.31                       |        | 0.16                       |       |
| Distributions                                                 |       | (0.24                      | )           | (0.21                      | )          |
| Net asset value at end of period                              |       | $                          | 13.31       |                       | $          | 13.65 |   |
|                                                          |       |                       |        |                       |       |
| Per share market value at beginning of period                 |       | $                          | 12.84       |                       | $          | 14.46 |   |
| Per share market value at end of period                       |       | 9.81                       |        | 15.31                      |       |
| Total Return (3)                                              |       | (21.93                     | )%          | 7.38                       | %          |
| Shares outstanding at end of period                           |       | 16,560,100                 |        | 16,560,100                 |       |
|                                                          |       |                       |        |                       |       |
| Ratios/Supplemental Data                                      |       |                       |        |                       |       |
| Net assets at end of period                                   |       | $                          | 220,372,842 |                       | $          | 226,085,756 |   |
| Average net assets (4)                                        |       | $                          | 218,176,005 |                       | $          | 225,338,878 |   |
| Ratio of expenses to average net assets (5) (6)          |       | 8.88                       | %           | 3.15                       | %          |
| Ratio of net expenses to average net assets (5) (7)      |       | 6.96                       | %           | 2.49                       | %          |
| Ratio of net investment income to average net assets (5)      |       | 6.87                       | %           | 5.14                       | %          |

 

----

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

(2)                  Based onweighted average basic per share data.

(3)                  Total returnequals the change in the market value of the Company’s common stock from thebeginning of the period taking into account dividends reinvested in accordancewith the terms of our dividend reinvestment plan. Total return does not takeinto account dividends that may be characterized as a return of capital. Forfurther information on estimated character of our dividends please refer toNote 9.

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

(5)                  Amounts areannualized.

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

(7)                  Ratio of netexpenses to average net assets is computed using total expenses net of creditsto the management fee.

 

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

 

13

----

 

**GLADSTONEINVESTMENT CORPORATION**

**FINANCIALHIGHLIGHTS**

**(UNAUDITED)**

** **
| ** **                                               | ** ** | **Nine months ended**      | ** **  | **Nine months ended**      | ** ** |
|----------------------------------------------------------|------------|----------------------------|-------------|----------------------------|------------|
| ** **                                               | ** ** | **December 31, 2007** | ** **  | **December 31, 2006** | ** ** |
| Per Share Data (1)                                       |       |                       |        |                       |       |
| Balance at beginning of period                           |       | $                          | 13.46       |                       | $          | 13.88 |   |
|                                                     |       |                       |        |                       |       |
| *Income from investment operations:*                     | * *   | * *                   | * *    | * *                   | * *   |
| Net investment income (2)                                |       | 0.58                       |        | 0.51                       |       |
| Realized loss on sale of investments (2)                 |       | (0.01                      | )           | —                     |       |
| Net unrealized depreciation of investments (2)           |       | (0.03                      | )           | (0.11                      | )          |
| Net unrealized appreciation of derivative (2)            |       | —                     |        | —                     |       |
| Total from investment operations                         |       | 0.54                       |        | 0.40                       |       |
| Distributions                                            |       | (0.69                      | )           | (0.63                      | )          |
| Net asset value at end of period                         |       | $                          | 13.31       |                       | $          | 13.65 |   |
|                                                     |       |                       |        |                       |       |
| Per share market value at beginning of period            |       | $                          | 14.87       |                       | $          | 14.90 |   |
| Per share market value at end of period                  |       | 9.81                       |        | 15.31                      |       |
| Total Return (3)                                         |       | (30.31                     | )%          | 7.28                       | %          |
| Shares outstanding at end of period                      |       | 16,560,100                 |        | 16,560,100                 |       |
|                                                     |       |                       |        |                       |       |
| Ratios/Supplemental Data                                 |       |                       |        |                       |       |
| Net assets at end of period                              |       | $                          | 220,372,842 |                       | $          | 226,085,756 |   |
| Average net assets (4)                                   |       | $                          | 221,452,960 |                       | $          | 226,399,367 |   |
| Ratio of expenses to average net assets (5) (6)     |       | 8.01                       | %           | 2.59                       | %          |
| Ratio of net expenses to average net assets (5) (7) |       | 6.85                       | %           | 2.36                       | %          |
| Ratio of net investment income to average net assets (5) |       | 5.80                       | %           | 4.93                       | %          |

 

----

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

(2)                  Based onweighted average basic per share data.

(3)                  Total returnequals the change in the market value of the Company’s common stock from thebeginning of the period taking into account dividends reinvested in accordancewith the terms of our dividend reinvestment plan. Total return does not takeinto account dividends that may be characterized as a return of capital. Forfurther information on estimated character of our dividends please refer toNote 9.

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

(5)                  Amounts areannualized.

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

(7)                  Ratio of netexpenses to average net assets is computed using total expenses net of creditsto the management fee.

 

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

 

14

----

 

**GLADSTONE INVESTMENT CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2007**

**(UNAUDITED)**

 

**NOTE 1.ORGANIZATION**

 

                GladstoneInvestment Corporation (the “Company”) was incorporated under the GeneralCorporation Laws of the State of Delaware on February 18, 2005 andcompleted an initial public offering on June 22, 2005. The Company is aclosed-end, non-diversified management investment company that has elected tobe treated as a business development company under the Investment Company Act of1940, as amended (the “1940 Act”). In addition, the Company has elected to betreated for tax purposes as a regulated investment company (“RIC”) under theInternal Revenue Code of 1986, as amended (the “Code”). The Company’sinvestment objectives are to achieve a high level of current income and capitalgains by investing in debt and equity securities of established privatebusinesses.

 

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

 

                Interim financialstatements of the Company are prepared in accordance with accounting principlesgenerally accepted in the United States of America (“GAAP”) for interimfinancial information and pursuant to the requirements for reporting on Form 10-Qand Article 10 of Regulation S-X. Accordingly, certain disclosuresaccompanying annual financial statements prepared in accordance with GAAP areomitted. In the opinion of management, all adjustments, consisting solely ofnormal recurring accruals, necessary for the fair statement of financialstatements for the interim periods have been included. The current period’sresults of operations are not necessarily indicative of results that ultimatelymay be achieved for the year. The interim financial statements and notesthereto should be read in conjunction with the financial statements and notesthereto included in the Company’s Form 10-K for the fiscal year ended March 31,2007, as filed with the Securities and Exchange Commission (“SEC”) on May 31,2007.

 

*Basis of 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 6of Regulation S-X under the Securities Act of 1933, as amended, and theauthoritative accounting guidance provided by the AICPA Audit and AccountingGuide for Investment Companies, the Company is not permitted to consolidate anysubsidiary or other entity that is not an investment company.

 

*Use of 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.

 

*Cash and 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 include 

 

 

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temporary investments in U.S. Treasury bills and can also includecommercial paper and money-market funds. All of the Company’s cash at December 31,2007 was deposited with two financial institutions, and the Company’s balancesexceed federally insurable limits. The Company seeks to mitigate this risk bydepositing funds with major financial institutions.

 

*Classification of Investments*

 

                The 1940 Actrequires classification of the Company’s investments by its respective level ofcontrol. As defined in the 1940 Act, “Control investments” are investments inthose portfolio companies that the Company is deemed to “Control.” “Affiliateinvestments” are investments in those portfolio companies that are “Affiliatedcompanies” of the Company, as defined in the 1940 Act, other than Controlinvestments. “Non-Control/Non-Affiliate investments” are those that are neitherControl investments nor Affiliate investments. In general, the 1940 Actprescribes that the Company has control over a portfolio company if it ownsgreater than 25% of the voting securities of the portfolio company. The Companyis deemed to be an affiliate of a portfolio company if it owns between 5% and25% of the voting securities of such portfolio company or has one or more seatson the affiliated company’s board of directors. However, if the Company holds50% or more contractual representation on a portfolio company’s board ofdirectors, the Company will be deemed to have control over the portfoliocompany.

 

*Investment Valuation*

 

                The Company carries its investments at fair value, asdetermined by its Board of Directors. Securities that are publicly traded arevalued at the closing price on the valuation date. Securities for which alimited market exists, such as certain participations in syndicated loans, arevalued at the indicative bid price on or near the valuation date from therespective originating syndication agent’s trading desk. Debt and equitysecurities that are not publicly traded, or for which a limited market does notexist, are valued at fair value based on the Company’s valuation policy. TheCompany’s Board of Directors has established a valuation policy andconsistently applied valuation procedures used to determine the fair value ofthese securities quarterly.

 

                The procedures for the determination of the fairvalue of the Company’s debt securities that that are not publicly traded andthat are issued by portfolio companies where the Company has no equity, orequity-like securities, rely on the opinions of value submitted to it byStandard & Poor’s Securities Evaluations, Inc. (“SPSE”). TheCompany 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 tothe Board of Directors along with the Adviser’s supplemental assessment andrecommendation regarding valuation of each of these investments.

 

                The fair value of convertible debt, equity, successor exit fees or other equity-like securities is determined based on thecollateral, the enterprise value of the issuer, the issuer’s ability to makepayments, the earnings of the issuer, recent sales to third parties of similarsecurities, the comparison to publicly traded securities, discounted cash flowor other pertinent factors. In gathering the sales to third parties of similarsecurities, the Company may reference industry statistics and use outsideexperts.

 

                Debt securities that are issued by portfoliocompanies where the Company has equity or equity-like securities are valued atcost, if there is adequate total enterprise value determined when valuing theCompany’s equity securities of the portfolio company. Fair values arediscounted for any shortfall of total enterprise value over the total debtoutstanding for the borrower.

 

                The Board of Directors then reviews whether theAdviser has followed its established procedures for determinations of fairvalue, and votes whether or not to accept the recommended valuation of theCompany’s investment portfolio.

 

                Due to the uncertainty inherent in the valuationprocess, such estimates of fair value may differ significantly from the valuesthat would have resulted had a ready market for the securities existed, and thedifferences could be material. Additionally, changes in the market environmentand other events that may occur over the life of the investments may cause thegains or losses ultimately realized on these investments to be different thanthe valuation currently assigned. Because there is a delay between when theCompany closes an investment and when the investment can be evaluated by SPSE,new investments are not valued immediately by SPSE; rather, the Adviser makesits own determination about the recommended value of these investments inaccordance with the Company’s valuation policy without the input of SPSE duringthe specific quarter in which the investment is made. Because SPSE does notcurrently perform independent valuations of mortgage loans or equity securitiesfor the Company, the Adviser also determines a recommendation for the fairvalue of these investments, 

 

 

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if any, without the inputof SPSE. The Adviser considers a number of qualitative and quantitative factorsin current market conditions when performing valuations. The Board of Directorsthen determines whether or not to accept the Adviser’s recommendations for theaggregate valuation of the Company’s portfolio of investments. The Board ofDirectors is ultimately responsible for setting the fair value and disclosureof investments in the financial statements.

 

*Interest and Dividend Income Recognition*

 

                Interest income,adjusted for amortization of premiums and acquisition costs and for theaccretion of discounts, is recorded on the accrual basis to the extent thatsuch amounts are expected to be collected. The Company stops accruing intereston its investments when it is determined that interest is no longercollectible. At December 31, 2007, one Non-Control/Non-Affiliateinvestment was on non-accrual with a cost basis of approximately$2.9 million at December 31, 2007, or less than 1% of the cost basisof all loans in the Company’s portfolio. Conditional interest, or a successfee, is recorded upon full repayment of a loan investment. To date, the Companyhas 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 the Company has theoption to collect such amounts in cash. To date, the Company has not accruedany dividend income.

 

*Services Provided 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, neitherthe Company nor the Adviser receives fees in connection with managerialassistance.

 

                The Adviserreceives fees for other services it provides to the Company’s portfoliocompanies. These other fees are typically non-recurring, are recognized asrevenue when earned and are generally paid directly to the Adviser by theborrower or potential borrower upon closing of the investment. The services theAdviser provides to portfolio companies vary by investment, but generally includea broad 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 Adviserreceives fees for these services, 50% of certain of those fees are voluntarilycredited against the base management fee and the loan servicing fee that theCompany pays to its Adviser. Any services of this nature subsequent to theclosing would typically generate a separate fee at the time of completion.

 

                The Adviser alsoreceives fees for monitoring and reviewing portfolio company investments. Thesefees are recurring and are generally paid annually or quarterly in advance tothe Adviser throughout the life of the investment. Fees of this nature arerecorded as revenue by the Adviser when earned and are not credited against thebase management fee.

 

                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.

 

*Realized Gain or Loss and Unrealized Appreciation orDepreciation of Portfolio Investments*

 

                Realized gain orloss is recognized when an investment is disposed of and is computed as thedifference between the Company’s cost basis in the investment at thedisposition date and the net proceeds received from such disposition.Unrealized appreciation or depreciation displays the difference between thefair market value of the investment and the cost basis of such investment.

 

*Deferred Finance Costs*

 

                Costs associatedwith the Company’s line of credit facility with Deutsche Bank AG are deferredand amortized over the life of the credit facility, generally for a period ofone year.

 

*Federal Income Taxes*

 

                The Companyintends to continue to qualify for treatment as a RIC under subchapter M of theCode. As a RIC, the Company will not be subject to federal income tax on theportion of its taxable income and gains distributed to stockholders. To qualifyas a RIC, the Company is required to distribute at least 90% of its investmentcompany taxable income, as defined 

 

 

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by the Code. The Company intends to distribute at least 90% of itsordinary income, and as a result, no income tax provisions have been recorded.The Company may, but does not intend to, pay out a return of capital.

 

                In June 2006,the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48,*Accounting for Uncertainty in IncomeTaxes—an interpretation of FASB Statement No. 109,* (“FIN 48”),which clarifies the accounting for uncertainty in income taxes recognized in anenterprise’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 on April 1,2007. The adoption of FIN 48 did not have an impact on the Company’s consolidatedfinancial statements.

 

*Recent Accounting Pronouncements*

 

                In December 2007, the FASB issued SFAS No. 141(R) *Business Combinations* (“SFAS 141(R)”). SFAS 141(R) establishesprinciples and requirements for how an acquirer recognizes and measures in itsfinancial statements the identifiable assets acquired, the liabilities assumed,any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141(R) alsoestablishes disclosure requirements to enable the evaluation of the nature andfinancial effects of the business combination. SFAS 141(R) is effectivefor fiscal years beginning after December 15, 2008.  The Company iscurrently evaluating the impact of this pronouncement on its consolidatedfinancial statements.

 

                In December 2007, the FASBissued SFAS No. 160, *NoncontrollingInterest in Consolidated Financial Statements*(“SFAS 160”)*.*This Statement amends Accounting Research Bulletin 51 toestablish accounting and reporting standards for the noncontrolling(minority) interest in a subsidiary and for the deconsolidation of asubsidiary. It clarifies that a noncontrolling interest in a subsidiary is anownership interest in the consolidated entity that should be reported as equityin the consolidated financial statements.  SFAS 160 is effective forinterim periods beginning on or after December 15, 2008.  The Companyis currently evaluating the impact of this pronouncement on its consolidatedfinancial statements.

 

                In November 2007,  the SEC  issued  Staff Accounting  Bulletin No. 109, * Written Loan Commitments  Recorded at Fair Value Through  Earnings* (“SAB 109”). SAB 109 provides guidance on the accounting for written loancommitments recorded at fair value under GAAP. Specifically, the SAB revisesthe Staff’s views on incorporating expected net future cash flows related toloan servicing activities in the fair value measurement of a written loancommitment.  SAB 109, which  supersedes SAB  105,  *Application  of Accounting  Principles  to Loan Commitments*, requires the  expected  net future  cash  flows related to the associated servicing of the loan be included in the measurement of all written loancommitments that are accounted for at fair value through earnings. SAB 109 is effective in fiscal quarters beginning after December 15,2007. The Company is currently evaluating the impact of this pronouncement onits consolidated financial statements.

 

                In February 2007,the FASB issued Statement of Financial Accounting Standards No. 159, *The Fair Value Option for Financial Assets andFinancial Liabilities* (“SFAS 159”). SFAS 159 allowsentities to measure at fair value many financial instruments and certain otherassets and liabilities that are not otherwise required to be measured at fairvalue. 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 a framework for measuring fairvalue in GAAP and expands disclosures about fair value measurements.SFAS 157 is effective for financial statements issued for fiscal yearsbeginning after November 15, 2007, and interim periods within those fiscalyears. The Company is required to adopt the provisions of SFAS 157beginning with the fiscal year ended March 31, 2009. The Company iscurrently evaluating the impact of this pronouncement on its consolidatedfinancial statements.

 

**NOTE 3. INVESTMENTS**

 

*Non-Control/Non-Affiliate Investments*

 

                At December 31,2007 and March 31, 2007, the Company held investments inNon-Control/Non-Affiliates of approximately $185.1 million and$138.6 million, at cost, respectively. These investments are comprisedprimarily of syndicated loan participations of senior notes of both public andprivate companies and also non-syndicated loan investments where the Companydoes not have a significant ownership interest in the portfolio company. At December 31,2007 and March 31, 2007, the Company’s investments, at cost, inNon-Control/Non-Affiliates represented approximately 84% and 62%, respectively,of the Company’s net assets.

 

 

 

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*Control andAffiliate Investments*

 

                At December 31,2007, the Company had investments of approximately $135.5 million, at cost, inrevolving credit facilities, senior debt and subordinated debt of eightportfolio companies. In addition, at December 31, 2007, the Company hadinvested approximately $35.5 million in preferred and common equity ofthose companies.

 

                At December 31,2007 and March 31, 2007, the Company’s investments in Control investments,at cost, represented approximately 62% and 52%, respectively, of the Company’snet assets. Also at December 31, 2007 and March 31, 2007, theCompany’s investments, at cost, in Affiliate investments representedapproximately 16% and 9%, respectively, of the Company’s net assets.

 

*Investment Concentrations*

 

                Approximately 75%of the aggregate fair value of the Company’s investment portfolio at December 31,2007 consisted of senior debt, approximately 11% was senior subordinated debtand approximately 14% was preferred and common equity securities. At December 31,2007, the Company had approximately $356 million invested in 59 portfoliocompanies. The following table outlines the Company’s investments by type at December 31,2007 and March 31, 2007:

 
| ** **                                     | ** ** | **December 31,  2007** | ** **  | **March 31,  2007** | ** ** |
|------------------------------------------------|------------|-----------------------------|-------------|--------------------------|------------|
|                                           | ** ** | **Cost**                    | ** **  | **Fair  Value**          | ** ** | **Cost** | ** ** | **Fair  Value** | ** ** |
| Senior Term Debt                               |       | $                           | 276,401,429 |                     | $          | 265,095,613 |   | $ | 207,367,741 |   | $ | 206,981,112 |   |
| Senior Subordinated Term  Debt                 |       | 43,458,184                  |        | 38,689,248               |       | 24,485,760 |   | 24,467,635 |   |
| Subordinated Term Debt                         |       | 493,421                     |        | 493,421                  |       | 14,167,810 |   | 14,167,810 |   |
| Preferred &  Common Equity Securities |       | 35,774,879                  |        | 47,752,835               |       | 28,598,802 |   | 25,331,046 |   |
| Total Investments                              |       | $                           | 356,127,913 |                     | $          | 352,031,117 |   | $ | 274,620,113 |   | $ | 270,947,603 |   |

 

 

                Investments atfair value consisted of the following industry classifications at December 31,2007 and March 31, 2007:

 
| ** **                                        | ** ** | **December 31, 2007** | ** **  | **March 31, 2007** | ** ** |            |
|---------------------------------------------------|------------|----------------------------|-------------|-------------------------|------------|-----------------|
| ** **                                        | ** ** | ** **                 | ** **  | **Percentage of**       | ** ** | ** **      | ** ** | **Percentage of** | ** ** |   |
|                                              | ** ** | **Fair  Value**            | ** **  | **Total  Investments**  | ** ** | **Net  Assets** | ** ** | **Fair  Value** | ** ** | **Total  Investments** | ** ** | **Net  Assets** | ** ** |
|                                              |       |                       |        |                    |       |            |   |   |   |   |   |   |   |
| Automobile                                        |       | $                          | 2,277,000   |                    | 0.6        | %               | 1.0 | % | $ | 8,504,666 |   | 3.1 | % | 3.8 | % |
| Beverage, Food &  Tobacco                |       | 3,790,950                  |        | 1.1                     | %          | 1.7             | % | 3,413,874 |   | 1.3 | % | 1.5 | % |
| Broadcasting &  Entertainment            |       | 3,756,380                  |        | 1.1                     | %          | 1.7             | % | — |   | — |   | — |   |
| Buildings & Real  Estate                 |       | 14,161,626                 |        | 4.0                     | %          | 6.4             | % | 3,003,750 |   | 1.1 | % | 1.3 | % |
| Cargo Transport                                   |       | 20,649,005                 |        | 5.9                     | %          | 9.4             | % | 21,844,463 |   | 8.1 | % | 9.8 | % |
| Chemicals,  Plastics & Rubber            |       | 24,384,408                 |        | 6.9                     | %          | 11.1            | % | 22,535,527 |   | 8.3 | % | 10.1 | % |
| Containers, Packaging and  Glass                  |       | 26,624,335                 |        | 7.6                     | %          | 12.1            | % | 999,975 |   | 0.4 | % | 0.4 | % |
| Diversified/Conglomerate Manufacturing            |       | 53,362,744                 |        | 15.2                    | %          | 24.2            | % | 32,563,400 |   | 12.0 | % | 14.6 | % |
| Diversified/Conglomerate  Service                 |       | 37,677,977                 |        | 10.7                    | %          | 17.1            | % | 27,374,081 |   | 10.1 | % | 12.3 | % |
| Ecological                                        |       | 478,844                    |        | 0.1                     | %          | 0.2             | % | — |   | — |   | — |   |
| Electronics                                       |       | 14,606,669                 |        | 4.1                     | %          | 6.6             | % | 6,758,294 |   | 2.5 | % | 3.0 | % |
| Healthcare, Education and  Childcare              |       | 41,409,279                 |        | 11.8                    | %          | 18.8            | % | 31,296,111 |   | 11.6 | % | 14.0 | % |
| Home & Office  Furnishings               |       | 17,224,898                 |        | 4.9                     | %          | 7.8             | % | 17,105,808 |   | 6.3 | % | 7.7 | % |
| Machinery                                         |       | 58,592,031                 |        | 16.6                    | %          | 26.6            | % | 41,480,716 |   | 15.3 | % | 18.6 | % |
| Oil & Gas                                |       | —                     |        | —                  |       | —          |   | 3,851,943 |   | 1.4 | % | 1.7 | % |
| Personal, Non-durable Consumer Products           |       | 7,761,955                  |        | 2.2                     | %          | 3.5             | % | 1,492,472 |   | 0.6 | % | 0.7 | % |
| Personal, Food, & Miscellaneous Services |       | 4,128,555                  |        | 1.2                     | %          | 1.9             | % | 16,905,483 |   | 6.2 | % | 7.6 | % |
| Printing &  Publishing                   |       | 7,737,043                  |        | 2.2                     | %          | 3.5             | % | 18,590,084 |   | 6.9 | % | 8.3 | % |
| Retail Stores                                     |       | 850,877                    |        | 0.2                     | %          | 0.4             | % | 1,407,018 |   | 0.5 | % | 0.6 | % |
| Telecommunications                                |       | 12,556,541                 |        | 3.5                     | %          | 5.7             | % | 9,246,854 |   | 3.4 | % | 4.1 | % |
| Textiles &  Leather                      |       | —                     |        | —                  |       | —          |   | 2,573,084 |   | 0.9 | % | 1.2 | % |
| Total Investments                                 |       | $                          | 352,031,117 |                    | 100        | %               |   |   | $ | 270,947,603 |   | 100 | % |   |   |
|                                                   |            |                            |             |                         |            |                 |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

 

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                The investments atfair value were included in the following geographic regions of the UnitedStates and Canada at December 31, 2007 and March 31, 2007:

 
| ** **        | ** ** | **December 31, 2007** | ** **  | **March 31, 2007** | ** ** |
|-------------------|------------|----------------------------|-------------|-------------------------|------------|
| ** **        | ** ** | ** **                 | ** **  | **Percentage of**       | ** ** | ** ** | ** ** | **Percentage of** | ** ** |
| ** **        | ** ** | **Fair Value**             | ** **  | **Total Investments**   | ** ** | **Net Assets** | ** ** | **Fair Value** | ** ** | **Total Investments** | ** ** | **Net Assets** | ** ** |
|              |       |                       |        |                    |       |   |   |   |   |   |   |   |   |
| Mid-Atlantic      |       | $                          | 142,295,775 |                    | 40.4       | % | 64.6 | % | $ | 94,257,169 |   | 34.8 | % | 42.3 | % |
| Midwest           |       | 103,158,224                |        | 29.3                    | %          | 46.8 | % | 88,508,725 |   | 32.7 | % | 39.7 | % |
| Northeast         |       | 11,910,369                 |        | 3.4                     | %          | 5.4 | % | 14,879,654 |   | 5.5 | % | 6.7 | % |
| Southeast         |       | 50,935,445                 |        | 14.5                    | %          | 23.1 | % | 36,357,555 |   | 13.4 | % | 16.3 | % |
| West              |       | 40,250,029                 |        | 11.4                    | %          | 18.3 | % | 36,944,500 |   | 13.6 | % | 16.6 | % |
| Canada            |       | 3,481,275                  |        | 1.0                     | %          | 1.6 | % | — |   | — |   | — |   |
| Total Investments |       | $                          | 352,031,117 |                    | 100.0      | % |   |   | $ | 270,947,603 |   | 100.0 | % |   |   |

 

 

                The geographicregion depicts the location of the headquarters for the Company’s portfoliocompanies. A portfolio company may have a number of other business locations inother geographic regions.

 

*Investment Principal Repayments*

 

                The followingtable summarizes the contractual principal repayment and maturity of theCompany’s investment portfolio by fiscal year, assuming no voluntaryprepayments:

 

| **Fiscal Year Ended  March 31,**    | ** ** | **Amount**  | ** **      |
|------------------------------------------|------------|-------------|-----------------|
| 2008                                     |       | $           | 4,939,252       |   |
| 2009                                     |       | 11,970,117  |            |
| 2010                                     |       | 11,800,388  |            |
| 2011                                     |       | 49,713,185  |            |
| 2012                                     |       | 50,072,850  |            |
| Thereafter                               |       | 191,677,039 |            |
| **Total contractual repayments**         | ** ** | **$**       | **320,172,831** | ** ** |
| Investments in equity  securities        |       | $           | 35,774,879      |   |
| Unamortized premiums on  debt securities |       | 180,203     |            |
| **Total**                                | ** ** | **$**       | **356,127,913** | ** ** |

 

**NOTE 4. RELATED PARTY TRANSACTIONS**

 

**Investment Advisory and Management Agreement**

 

                The Company hasentered into an investment advisory and management agreement with the Adviser(the “Advisory Agreement”), which is controlled by the Company’s chairman andchief executive officer. In accordance with the Advisory Agreement, the Companypays the Adviser fees, as compensation for its services, consisting of a basemanagement fee and an incentive fee.

 

                The basemanagement fee is computed and payable quarterly and is assessed at an annualrate of 2.0%. The base management fee was initially computed on the basis ofthe average value of the Company’s gross invested assets at the end of the twomost recently completed quarters, which were total assets less the cashproceeds and cash and cash equivalents from the proceeds of the Company’sinitial public offering that were not invested in debt and equity securities ofportfolio companies. Beginning on January 1, 2007, the base management feeis computed on the basis of the value of the Company’s average gross assets atthe end of the two most recently completed quarters, which are total assets,including investments made with proceeds of borrowings, less any uninvestedcash or cash equivalents resulting from borrowings. This new calculation wasoriginally scheduled to begin in periods after March 31, 2006; however,the Company’s Board of Directors accepted voluntary waivers from the Adviserthat allowed the initial calculation of the base management fee to be effectivethrough December 31, 2006.

 

                On April 11,2007, the Company’s Board of Directors accepted a voluntary waiver from theAdviser to reduce the annual 2.0% base management fee on senior syndicated loanparticipations to 0.5% to the extent that proceeds resulting from 

 

 

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borrowings were used to purchase such syndicated loan participations.This waiver remains in effect and was applied during the three and nine monthsended December 31, 2007.

 

                When the Adviserreceives fees from portfolio companies, as discussed in Note 2 under“Services Provided to Portfolio Companies,” 50% of certain of these fees arevoluntarily credited against the base management fee that the Company wouldotherwise be required to pay to the Adviser.

 

                For the three months ended December 31,2007 and 2006, the Company incurred base management fees to the Adviser of$497,632 and $551,235 (after reductions for loan servicing fees received by theAdviser), respectively. For the nine months ended December 31, 2007 and2006, the Company incurred base management fees to the Adviser of $1,309,951and $2,214,437 (after reductions for loan servicing fees received by theAdviser), respectively. For the three months ended December 31, 2007, theCompany recognized aggregate credits against the base management fee of$1,045,881, which was comprised of $509,555 resulting from reduced feeson syndicated loan participations and $536,326 resulting from investmentbanking fees paid to the Adviser during the period.  For the nine months ended December 31,2007, the Company recognized aggregate credits against the base management feeof $1,932,475, which is comprised of $1,244,024 resulting from reduced fees onsyndicated loan participations and $688,451 resulting from investment bankingfees paid to the Adviser during the period. For the threeand nine months ended December 31, 2006, the Company recognized aggregatecredits against the base management fee of $375,225 resulting from investmentbanking fees paid to the Adviser during the respective periods.  As of December 31, 2007, a resultingbase management fee credit of $548,249 was unpaid and is included as areduction in fees due from Adviser in the accompanying consolidated statementsof assets and liabilities. The amount due from Adviser of $253,684 alsoincludes loan servicing fees due to the Adviser of $294,565 as discussed below.At March 31, 2007, a base management fee credit of $303,679 was unpaid andincluded in fees due from Adviser in the accompanying consolidated statementsof assets and liabilities which was offset by loan servicing fees due to theAdviser of $283,296, resulting in $20,383 due from the Adviser as discussedbelow.

 

                In addition, theAdviser services the loans held by Business Investment, in return for which theAdviser receives a 2.0% annual fee based on the monthly aggregate balance ofloans held by Business Investment. Since the Company owns these loans, all loanservicing fees paid to the Adviser are treated as reductions against the 2.0%base management fee payable to the Adviser. Overall, the base management feedue to the Adviser cannot exceed 2.0% of total assets (as reduced by cash andcash equivalents pledged to creditors) during any given fiscal year.

 

                For the three andnine months ended December 31, 2007, the Company recorded loan servicingfees to the Adviser of $1,287,013 and $3,741,082, respectively, of which$294,565 was unpaid at December 31, 2007. For the three and nine monthsended December 31, 2006, the Company recorded loan servicing fees to theAdviser of $508,691.  At March 31,2007 there were $283,296 of loan servicing fees due to the Adviser that wereincluded 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 anycalendar quarter in which its pre-incentive fee net investment income does notexceed the hurdle rate (7% annualized);

 

·                  100% of the Company’spre-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 the amount of theCompany’s pre-incentive fee net investment income, if any, that exceeds 2.1875%in any calendar quarter (8.75% annualized).

 

                The second part ofthe incentive fee is a capital gains incentive fee that will be determined andpayable in arrears as of the end of each fiscal year (or upon termination ofthe Advisory Agreement, as of the termination date), and equals 20% of theCompany’s realized capital gains as of the end of the fiscal year. Indetermining the capital gains incentive fee payable to the Adviser, the Companywill calculate the cumulative aggregate realized capital gains and cumulativeaggregate realized capital losses since the Company’s inception, and theaggregate unrealized capital depreciation as of the date of the calculation, asapplicable, with respect to each of the investments in the Company’s portfolio.

 

 

 

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                Becausepre-incentive fee net investment income was below the hurdle rate of 1.75% ofnet assets, no income-based incentive fee was recorded for any of the three ornine months ended December 31, 2007 or December 31, 2006.

 

**Administration Agreement**

 

                The Company hasentered into an administration agreement (the “Administration Agreement”) withGladstone Administration, LLC (“Gladstone Administration” or the“Administrator”), a wholly-owned subsidiary of the Adviser. Under theAdministration Agreement, the Company pays separately for administrativeservices. The Administration Agreement provides for payments equal to theCompany’s allocable portion of the Administrator’s overhead expenses inperforming its obligations under the Administration Agreement, including butnot limited to, rent for employees of the Administrator and the allocableportion of salaries and benefits expenses of the Company’s chief financialofficer, controller, chief compliance officer, treasurer and their respectivestaffs. The Company recorded Administration fees on the consolidated statementsof operations of $211,159 and $124,101 for the three months ended December 31,2007 and 2006, respectively. The Company recorded Administration fees on theconsolidated statements of operations of $646,740 and $364,351 for the ninemonths ended December 31, 2007 and 2006, respectively. As of December 31,2007 and March 31, 2007, $211,159 and $162,244, respectively, was unpaidand included in the administration fee due to the Administrator in theaccompanying consolidated statements of assets and liabilities.

 

**Purchase of Investments from Affiliate**

 

                During April 2007,the Company purchased from its affiliate, Gladstone Capital Corporation (“GladstoneCapital”), certain of its investments in syndicated loan participations atmarket value for approximately $9.7 million. These purchases reflect thesettlement of transactions initiated in March 2007. An independent brokerwas engaged to execute these transactions between the Company and GladstoneCapital. The independent broker accepted the quotes from the respective agentbank for each syndicated loan and then executed these transactions between theCompany and Gladstone Capital.

 

**NOTE 5. LINE OF CREDIT**

 

                Through the Company’swholly-owned subsidiary, Business Investment, the Company has obtained a$200 million revolving credit facility (the “Credit Facility”). On October 19,2006, the Company executed a Purchase and Sale Agreement pursuant to which itagreed to sell certain loans to Business Investment in consideration of amembership interest therein. Simultaneously, Business Investment executed aCredit Agreement (the “Credit Agreement”) with Deutsche Bank AG, New YorkBranch (“Deutsche Bank”), as administrative agent, pursuant to which BusinessInvestment pledged the loans purchased from the Company to secure futureadvances by certain institutional lenders. On March 29, 2007, the Companyincreased its capacity under the Credit Facility from $100 million to$200 million. Availability under the Credit Facility was originallyscheduled to terminate on October 18, 2007, however, on that date theCompany amended and extended the Credit Facility such that availability underthe Credit facility will terminate on October 16, 2008, unless extended inthe discretion of the lenders at the request of Business Investment. Interestis payable monthly during the term of the Credit Facility and principal ispayable out of collections on loans purchased from the Company during theperiod following the date of which availability for advances has terminatedthrough maturity. The Credit Facility will mature two years following the dateon which availability for advances has terminated and on such date, allprincipal, interest and other amounts owing under the Credit Facility will bedue and payable. Interest rates charged on the advances under the facility arebased on the rate paid by the lenders on commercial paper notes issued by suchlenders to fund some or all of the advances, the London Interbank Offered Rate(“LIBOR”), the Prime Rate or the Federal Funds Rate, depending on marketconditions, and adjust periodically. Available borrowings are subject tovarious constraints imposed under the Credit Agreement, based on the aggregateloan balance pledged by Business Investment, which varies as loans are addedand repaid, regardless of whether such repayments are early prepayment or aremade as contractually required. The weighted average borrowings outstandingunder the Credit Facility for the nine months ended December 31, 2007 were$116.8 million at an annualized weighted average annual interest cost of 7.32%,which is computed by using the annual stated interest rate plus commitment andother fees plus the amortization of deferred financing fees divided by theweighted average debt outstanding. Because the Company only had borrowings outstanding for two weeks duringthe nine months ended December 31, 2006, the weighted average borrowingsoutstanding and respective annualized interest cost calculations are notreflective of the Company’s actual cost of debt and as such, are not presentedherein.

 

                The CreditFacility contains covenants that require Business Investment to maintain itsstatus as a separate entity; prohibit certain significant corporatetransactions (such as mergers, consolidations, liquidations or dissolutions);and restrict material changes to the Company’s credit and collection policies.The facility also restricts some of the terms and provisions 

 

 

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(including interest rates, terms to maturity and payments schedules)and limits the borrower and industry concentrations of loans that are eligibleto secure advances. As of December 31, 2007, Business Investment was incompliance with all of the facility covenants. As of December 31, 2007there were $150.5 million of borrowings outstanding under the CreditFacility at an interest rate of approximately 5.36% and the remaining borrowingcapacity under the Credit Facility was approximately $49.5 million.

 

                The administrativeagent also requires that any interest or principal payments on pledged loans beremitted directly by the borrower into a lockbox account with the Bank of NewYork as custodian. Deutsche Bank is also the trustee of the account and once amonth remits the collected funds to the Company. At December 31, 2007, theamount due from the custodian was $3.4 million.

 

                The Adviserservices the loans pledged under the Credit Facility. As a condition to thisservicing arrangement, the Company executed a performance guaranty pursuant towhich it guaranteed that the Adviser would comply fully with all of itsobligations under the Credit Facility. The performance guaranty requires theCompany to 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 December 31,2007, the Company was in compliance with the covenants under the performanceguaranty.

 

**NOTE 6. INTEREST RATE CAP AGREEMENT**

 

                In October 2007, theCompany entered into an interest rate cap agreement that will effectively limitthe interest rate on a portion of the borrowings under the line of creditpursuant to the terms of the Credit Facility. The interest rate cap has anotional amount of $20 million at a cost of $15,000. At December 31,2007, the interest rate cap agreement had a fair market value of $20,000.  The Company records changes in the fairmarket value of the interest rate cap agreement monthly based on the currentmarket valuation at month end as unrealized depreciation or appreciation onderivative on the Company’s consolidated statement of operations.  The interest rate cap agreement expires in October 2008.The agreement provides that the Company’s floating interest rate or cost offunds on a portion of the portfolio’s borrowings will be capped at 9% when theLIBOR rate is in excess of 9%.

 

                The use of a cap involves risksthat are different from those associated with ordinary portfolio securitiestransactions.  Cap agreements may beconsidered to be illiquid.  Although theCompany will not enter into any such agreements unless it believes that theother party to the transaction is creditworthy, the Company does bear the riskof loss of the amount expected to be received under such agreements in theevent of default or bankruptcy of the agreement counterparty.

 

**NOTE 7. COMMON STOCK**

 

                As of December 31,2007 and March 31, 2007, 100,000,000 shares of $0.001 par value commonstock were authorized and 16,560,100 shares were outstanding.

 

**NOTE 8. INCREASE IN NET ASSETS PER SHARE RESULTINGFROM OPERATIONS**

 

                The followingtable sets forth the computation of basic and diluted net increase in netassets per share resulting from operations:

 
| ** **                                                                                                 | ** ** | **Three months ended**     | ** ** | **Three months ended**     | ** ** | **Nine months ended**      | ** ** | **Nine months ended**      | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                                                                                 | ** ** | **December 31, 2007** | ** ** | **December 31, 2006** | ** ** | **December 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|                                                                                                       |       |                       |       |                       |       |                       |       |                       |       |
| Numerator for basic and diluted net (decrease) increase in net assets  resulting from operations per share |       | $                          | 5,108,919  |                       | $          | 2,684,543                  |       | $                          | 9,012,310  |   | $ | 6,809,635 |   |
|                                                                                                       |       |                       |       |                       |       |                       |       |                       |       |
| Denominator for basic and  diluted shares                                                                  |       | 16,560,100                 |       | 16,560,100                 |       | 16,560,100                 |       | 16,560,100                 |       |
|                                                                                                       |       |                       |       |                       |       |                       |       |                       |       |
| Basic and diluted net increase in net assets per share resulting from  operations                          |       | $                          | 0.31       |                       | $          | 0.16                       |       | $                          | 0.54       |   | $ | 0.41 |   |

 

 

 

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** **

**NOTE 9. DIVIDENDS**

 

                The Company isrequired to pay out as a dividend 90% of its ordinary income and realized netshort-term capital gains in excess of realized net short-term capital losses,if any, for each taxable year in order to maintain its status as a RIC underSubtitle A, Chapter 1 of Subchapter M of the Code. It is the policy of theCompany to pay out as a dividend up to 100% of those amounts. The amount to bepaid out monthly as a dividend is determined by the Board of Directors eachquarter and is based on the annual earnings estimated by the management of theCompany. Based on that estimate, three monthly dividends are declared eachquarter. At year-end the Company may pay a bonus dividend, in addition to themonthly dividends, to ensure that it has paid out at least 90% of its ordinaryincome and realized net short-term capital gains for the year. Long-termcapital gains are composed of success fees, prepayment fees and gains from thesale of securities held for one year or more. The Company intends to retainlong-term capital gains from the sale of securities, if any, and not pay themout as dividends, however, the Board of Directors may decide to declare and payout capital gains during any fiscal year. If the Company decides to retainlong-term capital gains, the portion of the retained capital gains will besubject to 35% tax. The Company currently pays a monthly dividend. The taxcharacteristics of all dividends will be reported to stockholders on Form 1099at the end of each calendar year. The Company’s Board of Directors declared thefollowing monthly dividends for the nine months ended December 31, 2007and 2006:

 

**Fiscal Year2008**

 
| **Declaration Date** | ** ** | **Record Date**         | ** ** | **Payment Date**        | ** ** | **Dividend per Share** | ** ** |
|----------------------|------------|-------------------------|------------|-------------------------|------------|------------------------|------------|
| October 9, 2007 |       | December 20, 2007  |       | December 31, 2007  |       | $                      | 0.08       |   |
| October 9, 2007 |       | November 21, 2007  |       | November 30, 2007  |       | $                      | 0.08       |   |
| October 9, 2007 |       | October 23, 2007   |       | October 31, 2007   |       | $                      | 0.08       |   |
| 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      |   |

 

**Fiscal Year 2007**

 
| **Declaration Date**  | ** ** | **Record Date**         | ** ** | **Payment Date**        | ** ** | **Dividend  per Share** | ** ** |
|-----------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|
| 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       |   |

 

                The Company’sBoard of Directors estimates the source of the distributions listed above atthe time of their declaration as required by Section 19(a) of the1940 Act. The following estimates were made by the Board of Directors duringthe quarter ended December 31, 2007:

 

| **Month Ended**        | ** ** | **Ordinary Income** | ** ** | **Return of Capital** | ** ** | **Total Dividend** | ** ** |
|------------------------|------------|---------------------|------------|-----------------------|------------|--------------------|------------|
| December 31, 2007 |       | $                   | 0.080      |                  | $          | —             |       | $ | 0.080 |   |
| November 30, 2007 |       | 0.080               |       | —                |       | 0.080              |       |
| October 31, 2007  |       | 0.080               |       | —                |       | 0.080              |       |
|                        |            |                     |            |                       |            |                    |            |  |  |  |

 

                Because the Boardof Directors declares dividends at the beginning of a quarter, it is difficultto estimate how much of the Company’s monthly dividends and distributions willcome from ordinary income, capital gains, and returns of capital. Subsequent toquarter end, the following corrections were made to the above listed estimates:

 

| **Month Ended**        | ** ** | **Ordinary Income** | ** ** | **Return of Capital** | ** ** | **Total Dividend** | ** ** |
|------------------------|------------|---------------------|------------|-----------------------|------------|--------------------|------------|
| December 31, 2007 |       | $                   | 0.070      |                  | $          | 0.010              |       | $ | 0.080 |   |
| November 30, 2007 |       | 0.079               |       | 0.001                 |       | 0.080              |       |
| October 31, 2007  |       | 0.068               |       | 0.012                 |       | 0.080              |       |
|                        |            |                     |            |                       |            |                    |            |  |  |  |

 

 

 

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                For dividendsdeclared subsequent to quarter end, the following estimates have been madepursuant to Section 19(a) of the 1940 Act:

 

| **Month Ended**        | ** ** | **Ordinary Income** | ** ** | **Return of Capital** | ** ** | **Total Dividend** | ** ** |
|------------------------|------------|---------------------|------------|-----------------------|------------|--------------------|------------|
| March 31, 2008    |       | $                   | 0.064      |                  | $          | 0.016              |       | $ | 0.080 |   |
| February 29, 2008 |       | 0.067               |       | 0.013                 |       | 0.080              |       |
| January 31, 2008  |       | 0.080               |       | —                |       | 0.080              |       |
|                        |            |                     |            |                       |            |                    |            |  |  |  |

 

                On a monthlybasis, if required under Section 19(a), the Company posts a Section 19(a) noticethrough the Depository Trust Company’s Legal Notice System (“LENS”) and alsosends to its registered stockholders a written Section 19(a) noticealong with the payment of dividends for any payment which includes a dividendestimated to be paid from any other source other than net investment income.The estimates of the source of the distribution provided above and in the Company’s19(a) notices are interim estimates based on GAAP that are subject torevision, and the exact character of the distributions for tax purposes yearcannot be determined until the final books and records of the Company arefinalized for the calendar year. These estimates are made solely in order tocomply with the requirements of Section 19(a) of 1940 Act and shouldnot be relied upon for tax reporting or any other purposes. Following thecalendar year end, after definitive information has been determined by theCompany, if the Company has made distributions of taxable income (or return ofcapital), the Company will deliver a Form 1099-DIV to its stockholdersspecifying such amount and the tax characterization of such amount.

 

**NOTE 10. CONTRACTUAL OBLIGATIONS**

 

                As ofDecmeber 31, 2007, the Company was a party to a signed and non-bindingterm sheet for a buyout investment of approximately $23 million. Thefuture scheduled contractual payments at December 31, 2007 were asfollows:

 
| ** **                  | ** ** | ** ** | ** ** | **Payment  Due by Period** | ** ** |
|-----------------------------|------------|------------|------------|----------------------------|------------|
| **Contractual Obligations** | ** ** | **Total**  | ** ** | **Less than 1 Year**       | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More than 5 Years** | ** ** |
| Investments                 |       | 23,000,000 |       | 23,000,000                 |       |   |   |   |   |   |   |
| Total                       |       | $          | 23,000,000 |                       | $          | 23,000,000 |   | $ | — |   | $ | — |   | $ | — |   |
|                             |            |            |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |

 

                As of January 30,2008, the above investment had not yet been funded.

 

**NOTE 11. SUBSEQUENT EVENTS**

 

*Dividends*

 

                On  January 8, 2008, the Company’s Board ofDirectors declared the following monthly dividends:

 
| **Declaration Date** | ** ** | **Record Date**        | ** ** | **Payment Date**       | ** ** | **Dividend  per Share** | ** ** |
|----------------------|------------|------------------------|------------|------------------------|------------|-------------------------|------------|
| January 8, 2008 |       | January 23, 2008  |       | January 31, 2008  |       | $                       | 0.08       |   |
| January 8, 2008 |       | February 21, 2008 |       | February 29, 2008 |       | $                       | 0.08       |   |
| January 8, 2008 |       | March 21, 2008    |       | March 31, 2008    |       | $                       | 0.08       |   |

 

 

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**ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS.**

 

**                Allstatements contained herein, other than historical facts, may constitute“forward-looking statements.” These statements may relate to, among otherthings, future events or our future performance or financial condition. In somecases, you can identify forward-looking statements by terminology such as“may,” “might,” “believe,” “will,” “provided,” “anticipate,” “future,” “could,”“growth,” “plan,” “intend,” “expect,” “should,” “would,” “if,” “seek,”“possible,” “potential,” “likely” or the negative of such terms or comparableterminology. These forward-looking statements involve known and unknown risks,uncertainties and other factors that may cause our actual results, levels ofactivity, performance or achievements to be materially different from anyfuture results, levels of activity, performance or achievements expressed orimplied by such forward-looking statements. Such factors include, among others:(1) our future operating results as we are a company with a limited operatinghistory; (2) the loss of one or more of our executive officers, inparticular, David Gladstone, George Stelljes III, or Terry Lee Brubaker; (3) theimpact of the investments that we make and the ability of these investments toachieve 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 factorslisted under the caption “Risk Factors” of this Quarterly Report on Form 10-Q.We caution readers not to place undue reliance on any such forward-lookingstatements, which speak only as of the date made. We undertake no obligation topublicly update or revise any forward-looking statements, whether as a resultof new information, future events or otherwise, after the date of this Form 10-Q.**

 

*                Thefollowing analysis of our financial condition and results of operations shouldbe read in conjunction with our consolidated financial statements and the notesthereto contained elsewhere in this report and our annual report on Form 10-Kfor the fiscal year ended March 31, 2007.*

 

**OVERVIEW**

 

                We wereincorporated under the General Corporation Laws of the State of Delaware on February 18,2005. On June 22, 2005 we completed an initial public offering andcommenced operations. We were primarily established for the purpose ofinvesting in subordinated loans, mezzanine debt, preferred stock and warrantsto purchase common stock of small and medium-sized companies in connection withbuyouts and other recapitalizations. We also invest in senior secured loans andcommon stock and senior and subordinated syndicated loans. Our investmentobjective is to generate both current income and capital gains through thesedebt and equity instruments. We operate as a closed-end, non-diversifiedmanagement investment company and have elected to be treated as a businessdevelopment company (“BDC”) under the Investment Company Act of 1940, asamended (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 acquire 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, althoughthis investment size may vary proportionately as the size of our capital basechanges. We intend to invest either by ourselves or jointly with other buyoutfunds and/or management of the portfolio company, depending on the opportunity.If we are participating in an investment with one or more co-investors, thenour investment is likely to be smaller than if we were investing alone.

                We expect that ourtarget portfolio over time will include mostly subordinated loans, mezzaninedebt, preferred stock, and warrants to buy common stock. Structurally,subordinated loans and mezzanine loans usually rank lower in priority ofpayment to senior debt, such as senior bank debt, and may be unsecured.However, subordinated debt and mezzanine loans rank senior to common andpreferred equity in a borrower’s capital structure. Typically, subordinateddebt and mezzanine loans have elements of both debt and equity instruments,offering returns in the form of interest payments associated with senior debt,while providing lenders an opportunity to participate in the capitalappreciation of a borrower, if any, through an equity position. Due to itshigher risk profile and often less restrictive covenants as compared to seniordebt, mezzanine debt generally earns a higher return than senior secured debt.Any warrants associated with mezzanine loans are typically detachable, whichallows lenders to receive repayment of their principal on an agreedamortization schedule while retaining their equity interest in the borrower.Mezzanine debt also may include a “put” feature, which permits the holder tosell its equity interest back to the borrower at a price determined through apre-determined formula.

 

 

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*Non-Control/Non-Affiliate Investments*

 

 

                We invested asubstantial portion of the proceeds of our initial public offering in seniorsecured syndicated loans, since these investments typically may be originatedmore quickly than investments in companies undergoing a buyout orrecapitalization. We employed this strategy in order to quickly invest ourinitial capital to generate current income, and have continued this strategy inorder to build a portfolio that may be potentially securitized in the future toobtain financing to pay down borrowings and invest in additional buyout andrecapitalization investments. At December 31, 2007, we had investments in50 such syndicated loans. There can be no guarantee that we will be able tosuccessfully securitize any loans in our portfolio.

 

                Senior securedsyndicated 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 December 31,2007 and March 31, 2007, we held investments in Non-Control/Non-Affiliatesof approximately $185.1 million and $138.6 million, at cost,respectively. These investments were comprised primarily of syndicated loanparticipations of senior notes of both public and private companies as well asnon-syndicated loan investments where we do not have a significant ownershipinterest in the portfolio company. We expect to continue purchasing syndicatedloans using borrowings from our credit facility.

 

*Control and Affiliate Investments*

 

                At December 31,2007, we had investments of approximately $135.5 million, at cost, inrevolving credit facilities, senior debt and subordinated debt of eightportfolio companies. In addition, at December 31, 2007, we had investedapproximately $35.5 million in preferred and common equity of thosecompanies. These investments are the result of buyout and recapitalizationtransactions and represent our primary investment focus.

 

*Investment Concentrations*

 

                Approximately 75%of the aggregate fair value of our investment portfolio at December 31,2007 was comprised of senior debt, approximately 11% was senior subordinateddebt and approximately 14% was preferred and common equity securities. At December 31,2007, we had approximately $356 million invested in 59 portfoliocompanies. The following table outlines our investments by type at December 31,2007 and March 31, 2007:

 
| ** **                                     | ** ** | ** **                 | ** **  | ** **              | ** ** | ** **  | ** ** | ** **      | ** **  |
|------------------------------------------------|------------|----------------------------|-------------|-------------------------|------------|-------------|------------|-----------------|-------------|
| ** **                                     | ** ** | **December 31, 2007** | ** **  | **March 31, 2007** | ** ** |
|                                           | ** ** | **Cost**                   | ** **  | **Fair  Value**         | ** ** | **Cost**    | ** ** | **Fair  Value** | ** **  |
| Senior Term Debt                               |       | $                          | 276,401,429 |                    | $          | 265,095,613 |       | $               | 207,367,741 |   | $ | 206,981,112 |   |
| Senior Subordinated Term  Debt                 |       | 43,458,184                 |        | 38,689,248              |       | 24,485,760  |       | 24,467,635      |        |
| Subordinated Term Debt                         |       | 493,421                    |        | 493,421                 |       | 14,167,810  |       | 14,167,810      |        |
| Preferred &  Common Equity Securities |       | 35,774,879                 |        | 47,752,835              |       | 28,598,802  |       | 25,331,046      |        |
| Total Investments                              |       | $                          | 356,127,913 |                    | $          | 352,031,117 |       | $               | 274,620,113 |   | $ | 270,947,603 |   |

 

 

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Investments at fair value consisted of the following industryclassifications at December 31, 2007 and March 31, 2007:

 
|                                              | ** ** | **December 31, 2007** | ** **  | **March 31, 2007** | ** ** |
|---------------------------------------------------|------------|----------------------------|-------------|-------------------------|------------|
|                                              | ** ** | ** **                 | ** **  | **Percentage of**       | ** ** | ** ** | ** ** | **Percentage of** | ** ** |
|                                              | ** ** | **Fair  Value**            | ** **  | **Total  Investments**  | ** ** | **Net  Assets** | ** ** | **Fair  Value** | ** ** | **Total  Investments** | ** ** | **Net  Assets** | ** ** |
|                                              |       |                       |        |                    |       |   |   |   |   |   |   |   |   |
| Automobile                                        |       | $                          | 2,277,000   |                    | 0.6        | % | 1.0 | % | $ | 8,504,666 |   | 3.1 | % | 3.8 | % |
| Beverage, Food &  Tobacco                |       | 3,790,950                  |        | 1.1                     | %          | 1.7 | % | 3,413,874 |   | 1.3 | % | 1.5 | % |
| Broadcasting &  Entertainment            |       | 3,756,380                  |        | 1.1                     | %          | 1.7 | % | — |   | — |   | — |   |
| Buildings & Real  Estate                 |       | 14,161,626                 |        | 4.0                     | %          | 6.4 | % | 3,003,750 |   | 1.1 | % | 1.3 | % |
| Cargo Transport                                   |       | 20,649,005                 |        | 5.9                     | %          | 9.4 | % | 21,844,463 |   | 8.1 | % | 9.8 | % |
| Chemicals,  Plastics & Rubber            |       | 24,384,408                 |        | 6.9                     | %          | 11.1 | % | 22,535,527 |   | 8.3 | % | 10.1 | % |
| Containers, Packaging and  Glass                  |       | 26,624,335                 |        | 7.6                     | %          | 12.1 | % | 999,975 |   | 0.4 | % | 0.4 | % |
| Diversified/Conglomerate Manufacturing            |       | 53,362,744                 |        | 15.2                    | %          | 24.2 | % | 32,563,400 |   | 12.0 | % | 14.6 | % |
| Diversified/Conglomerate  Service                 |       | 37,677,977                 |        | 10.7                    | %          | 17.1 | % | 27,374,081 |   | 10.1 | % | 12.3 | % |
| Ecological                                        |       | 478,844                    |        | 0.1                     | %          | 0.2 | % | — |   | — |   | — |   |
| Electronics                                       |       | 14,606,669                 |        | 4.1                     | %          | 6.6 | % | 6,758,294 |   | 2.5 | % | 3.0 | % |
| Healthcare, Education and  Childcare              |       | 41,409,279                 |        | 11.8                    | %          | 18.8 | % | 31,296,111 |   | 11.6 | % | 14.0 | % |
| Home & Office  Furnishings               |       | 17,224,898                 |        | 4.9                     | %          | 7.8 | % | 17,105,808 |   | 6.3 | % | 7.7 | % |
| Machinery                                         |       | 58,592,031                 |        | 16.6                    | %          | 26.6 | % | 41,480,716 |   | 15.3 | % | 18.6 | % |
| Oil & Gas                                |       | —                     |        | —                  |       | — |   | 3,851,943 |   | 1.4 | % | 1.7 | % |
| Personal, Non-durable Consumer Products           |       | 7,761,955                  |        | 2.2                     | %          | 3.5 | % | 1,492,472 |   | 0.6 | % | 0.7 | % |
| Personal, Food, & Miscellaneous Services |       | 4,128,555                  |        | 1.2                     | %          | 1.9 | % | 16,905,483 |   | 6.2 | % | 7.6 | % |
| Printing &  Publishing                   |       | 7,737,043                  |        | 2.2                     | %          | 3.5 | % | 18,590,084 |   | 6.9 | % | 8.3 | % |
| Retail Stores                                     |       | 850,877                    |        | 0.2                     | %          | 0.4 | % | 1,407,018 |   | 0.5 | % | 0.6 | % |
| Telecommunications                                |       | 12,556,541                 |        | 3.5                     | %          | 5.7 | % | 9,246,854 |   | 3.4 | % | 4.1 | % |
| Textiles &  Leather                      |       | —                     |        | —                  |       | — |   | 2,573,084 |   | 0.9 | % | 1.2 | % |
| Total Investments                                 |       | $                          | 352,031,117 |                    | 100        | % |   |   | $ | 270,947,603 |   | 100 | % |   |   |

 

 

                The investments atfair value were included in the following geographic regions of the UnitedStates and Canada at December 31, 2007 and March 31, 2007:

 
| ** **        | ** ** | **December 31, 2007** | ** **  | **March 31, 2007** | ** ** |
|-------------------|------------|----------------------------|-------------|-------------------------|------------|
| ** **        | ** ** | ** **                 | ** **  | **Percentage of**       | ** ** | ** ** | ** ** | **Percentage of** | ** ** |
| ** **        | ** ** | **Fair Value**             | ** **  | **Total Investments**   | ** ** | **Net Assets** | ** ** | **Fair Value** | ** ** | **Total Investments** | ** ** | **Net Assets** | ** ** |
|              |       |                       |        |                    |       |   |   |   |   |   |   |   |   |
| Mid-Atlantic      |       | $                          | 142,295,775 |                    | 40.4       | % | 64.6 | % | $ | 94,257,169 |   | 34.8 | % | 42.3 | % |
| Midwest           |       | 103,158,224                |        | 29.3                    | %          | 46.8 | % | 88,508,725 |   | 32.7 | % | 39.7 | % |
| Northeast         |       | 11,910,369                 |        | 3.4                     | %          | 5.4 | % | 14,879,654 |   | 5.5 | % | 6.7 | % |
| Southeast         |       | 50,935,445                 |        | 14.5                    | %          | 23.1 | % | 36,357,555 |   | 13.4 | % | 16.3 | % |
| West              |       | 40,250,029                 |        | 11.4                    | %          | 18.3 | % | 36,944,500 |   | 13.6 | % | 16.6 | % |
| Canada            |       | 3,481,275                  |        | 1.0                     | %          | 1.6 | % | — |   | — |   | — |   |
| Total Investments |       | $                          | 352,031,117 |                    | 100.0      | % |   |   | $ | 270,947,603 |   | 100.0 | % |   |   |

 

 

                The geographicregion depicts the location of the headquarters for the Company’s portfoliocompanies. A portfolio company may have a number of other business locations inother geographic regions.

 

**Our Adviser and Administrator**

 

                Our Adviser is ledby a management team which has extensive experience in our lines of business.Our Adviser also has a wholly-owned subsidiary, Gladstone Administration, LLC(the “Administrator”), which employs our chief financial officer, chiefcompliance officer, controller, treasurer and their respective staffs. All ofour executive officers are officers or directors, or both, of our Adviser andour Administrator.

 

                Our Adviser alsoprovides investment advisory and administrative services to our affiliatesGladstone Commercial Corporation, a publicly traded real estate investmenttrust; Gladstone Capital Corporation, a publicly traded registered investmentcompany; and Gladstone Land Corporation, an agricultural real estate companyowned by Mr. Gladstone. All of our directors and executive officers serveas either directors or executive officers, or both, of Gladstone CommercialCorporation and Gladstone Capital Corporation. In the future, our Adviser mayprovide investment advisory and administrative services to other funds, bothpublic and private, of which it is the sponsor.

 

                We have beenexternally managed by our Adviser pursuant to an investment advisory andmanagement agreement (the “Advisory Agreement”) since our inception. OurAdviser was organized as a corporation under the laws of the State of 

 

 

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Delaware on July 2, 2002, and is a registered investment adviserunder the 1940 Act. Our Adviser is headquartered in McLean, Virginia, a suburbof Washington, D.C., and also has offices in the states of New York, Illinois,Pennsylvania, New Jersey, Texas and Washington.

 

**Investment Advisory and Management Agreement**

 

                Pursuant to theAdvisory Agreement we pay our Adviser fees, as compensation for its services,consisting of a base management fee and an incentive fee.

 

                The basemanagement fee is computed and payable quarterly and is assessed at an annualrate of 2.0%. The base management fee was initially computed on the basis ofthe average value of our gross invested assets at the end of the two mostrecently completed quarters, which were total assets less the cash proceeds andcash and cash equivalent investments from the proceeds of our initial publicoffering that were not invested in debt and equity securities of portfoliocompanies. 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. Thisnew calculation was originally scheduled to begin in periods after March 31,2006; 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 a voluntary waiver from the Adviser toreduce the annual 2.0% base management fee on senior syndicated loanparticipations to 0.5% to the extent that proceeds resulting from borrowingswere used to purchase such syndicated loan participations. This waiver remainsin effect and was applied during the three and nine months ended December 31,2007.

 

                When our Adviserreceives fees from our portfolio companies, such as investment banking fees,structuring fees or executive recruiting services fees, 50% of certain of thesefees will voluntarily be credited against the base management fee that we wouldotherwise be required to pay to our Adviser.

 

                In addition, ourAdviser services the loans held by Gladstone Business Investment, LLC(“Business Investment”), in return for which the Adviser receives a 2.0% annualfee based on the monthly aggregate balance of loans held by BusinessInvestment. Since we own these loans, all loan servicing fees paid to ourAdviser are treated as reductions against the 2.0% base management fee.Overall, the base management fee due to our Adviser cannot exceed 2.0% of totalassets (as reduced by cash and cash equivalents pledged to creditors) duringany given fiscal year.

 

                The incentive feeconsists of two parts: an income-based incentive fee and a capital gainsincentive fee. The income-based incentive fee rewards our Adviser if ourquarterly net investment income (before giving effect to any incentive fee)exceeds 1.75% of our net assets (the “hurdle rate”). We pay our Adviser anincome incentive fee with respect to our pre-incentive fee net investmentincome in each calendar quarter as follows:

 

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

 

·                  100% of our pre-incentive fee net investment income with respect to thatportion of such pre-incentive fee net investment income, if any, that exceedsthe hurdle rate but is less than 2.1875% in any calendar quarter (8.75%annualized); and

 

·                  20% of the amount of our pre-incentive fee net investment income, if any,that exceeds 2.1875% in any calendar quarter (8.75% annualized).

 

                The second part ofthe incentive fee is a capital gains incentive fee that is determined andpayable in arrears as of the end of each fiscal year (or upon termination ofthe Advisory Agreement, as of the termination date), and equals 20% of ourrealized capital gains as of the end of the fiscal year. In determining thecapital gains incentive fee payable to our Adviser, we calculate the cumulativeaggregate realized capital gains and cumulative aggregate realized capitallosses since our inception, and the aggregate unrealized capital depreciationas of the date of the calculation, as applicable, with respect to each of theinvestments in our portfolio.

 

** **

 

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**Administration Agreement**

 

                We have enteredinto an administration agreement with our Administrator (the “AdministrationAgreement”) whereby we pay separately for administrative services. TheAdministration Agreement provides for payments equal to our allocable portionof our Administrator’s overhead expenses in performing its obligations underthe Administration Agreement including, but not limited to, rent for employeesof our Administrator, and our allocable portion of the salaries and benefitsexpenses of our chief financial officer, controller, chief compliance officer,treasurer and their respective staffs. Our allocable portion of expenses isderived by multiplying our Administrator’s total allocable expenses by thepercentage of our average total assets (the total assets at the beginning andend of each quarter) in comparison to the average total assets of all companiesmanaged by our Adviser under similar agreements.

 

**Critical Accounting Policies**

 

                The preparation offinancial statements and related disclosures in conformity with accountingprinciples generally accepted in the United States (“GAAP”) requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities, and disclosure of contingent assets and liabilities at thedate of the financial statements, and revenues and expenses during the periodreported. Actual results could differ materially from those estimates. Ouraccounting policies are more fully described in the “Notes to ConsolidatedFinancial Statements” contained elsewhere in this report. We have identifiedour investment valuation process as our most critical accounting policy.

 

**                InvestmentValuation**

 

                The most significant estimate inherent in thepreparation of our consolidated financial statements is the valuation of investmentsand the related amounts of unrealized appreciation and depreciation ofinvestments recorded.

 

*                General Valuation Policy:* Using procedures established by our Board of Directors, we value ourinvestment portfolio each quarter. We carry our investments at fair value, asdetermined in good faith by or under the direction of our Board of Directors.Securities that are publicly traded, if any, are valued at the closing price ofthe exchange 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 are valued at the indicative bid priceoffered by the respective originating syndication agent’s desk on or near thevaluation date.

 

                Debt and equity securities that are not publiclytraded and for which a limited market does not exist are valued at fair valueas determined in good faith by or under the direction of our Board ofDirectors. In making the good faith determination of the value of thesesecurities, we start with the cost basis of the security, which includes paidin kind (“PIK”) interest, if any. We then apply the methods set out below in“Valuation Methods.” Members of our Adviser’s portfolio management team preparethe valuations of our investments in portfolio companies using the most recentportfolio company financial statements and forecasts. These individuals alsoconsult with portfolio company senior management and ownership to obtainfurther updates on the portfolio company’s performance, including informationsuch as industry trends, new product development, and other operational issues.Due to the uncertainty inherent in the valuation process, such estimates offair value may differ significantly from the values that would have beenobtained had a ready market for the securities existed, and the differencescould be material. Additionally, changes in the market environment and otherevents that may occur over the life of the investments may cause the gains orlosses ultimately realized on these investments to be different than thevaluations currently assigned. There is no single standard for determining fairvalue in good faith, as fair value depends upon circumstances of eachindividual case. In general, fair value is the amount that we might reasonablyexpect to receive upon the current sale of the security.

 

                At December 31, 2007, we engaged Standard andPoor’s Securities Evaluations, Inc. (“SPSE”) to submit opinions of valuefor our debt securities that are issued to portfolio companies where we have noequity, or equity-like securities.  Inaddition, securities that are not traded on a public exchange or securitiesmarket, but for which a limited market exists and that have not been rated by anationally recognized statistical rating organization, or NRSRO (such ascertain participations in syndicated loans) are also submitted to SPSE foropinions of value, along with the indicative bid price offered by thesyndication agent’s desk on or near the valuation date. We submit non-NRSROrated securities to SPSE as part of our Board’s further consideration ofwhether market quotations are readily available, valid and reliable and, ifthere are discrepancies between the indicative bid price offered by thesyndication agent’s desk and the opinion of value from SPSE, we determinewhether it is more appropriate for the alternative method of valuationprescribed by the 1940 Act—fair value as determined in good faith by the Boardof Directors—to be implemented.  Werequest that SPSE also evaluate and assign values to success fees (conditionalinterest included in some loan securities) when we determine that theprobability of receiving a success fee on a given loan is above 6-8%, athreshold of significance. We may also submit PIK interest to SPSE forvaluation when it is determined the PIK interest is likely to be received. SPSEwill only evaluate the debt portion of our investments for which wespecifically request evaluation, and may decline to make requested evaluationsfor any reason at its 

 

 

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sole discretion. Uponcompleting our collection of data with respect to the investments (includingthe information described under “Credit Information,” the risk ratings of theloans described under “Loan Grading and Risk Rating” and the factors describedunder “Valuation Methods”), this valuation data is forwarded to SPSE for reviewand analysis. SPSE makes its independent assessment of the data that we haveassembled and assesses its independent data to form an opinion as to what theyconsider to be the market values for the securities. With regard to its work,SPSE has issued the following paragraph:

 

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

 

                SPSE opinions of value of our debt securities thatare issued by portfolio companies where we have no equity, or equity-likesecurities are submitted to our Board of Directors along with our Adviser’ssupplemental assessment and recommendation regarding valuation of each of theseinvestments. Our Adviser generally accepts the opinion of value given by SPSE,however, in certain limited circumstances, such as when our Adviser may learnnew information regarding an investment between the time of submission to SPSEand the date of the Board assessment, our Adviser’s conclusions as to value maydiffer from the opinion of value delivered by SPSE. Our Board of Directors thenreviews whether our Adviser has followed its established procedures fordeterminations of fair value, and votes to accept or reject the recommendedvaluation of our investment portfolio. Our Adviser and our managementrecommended, and the Board of Directors voted to accept, the opinions of valuedelivered by SPSE on the loans in our portfolio as denoted on the Schedule ofInvestments as of December 31, 2007 included in our consolidated financialstatements.

 

                Because there is a delay between when we close aninvestment and when the investment can be evaluated by SPSE, new loans are notvalued immediately by SPSE; rather, management makes its own determinationabout the value of these investments in accordance with our valuation policy.Because SPSE does not provide values for our equity securities, our Adviserdetermines the recommended fair value of these investments using valuationpolicies approved by our Board of Directors.

 

*                Credit Information:* Our Adviser monitors a wide variety of key credit statistics thatprovide information regarding our portfolio companies to help us assess creditquality and portfolio performance. We and our Adviser participate in theperiodic board meetings of our portfolio companies in which we hold control andaffiliate investments and also require them to provide annual audited andmonthly unaudited financial statements. Using these statements and boarddiscussions, our Adviser calculates and evaluates the credit statistics.

 

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

 

                For the debt securities for which we do not use athird-party NRSRO risk rating, we seek to have our risk rating system mirrorthe risk rating systems of major risk rating organizations, such as thoseprovided by a NRSRO. While we seek to mirror the NRSRO systems, we cannotprovide any assurance that our risk rating system will provide the same riskrating as a NRSRO for these securities. The following chart is an estimate ofthe relationship of our risk rating system to the designations used by twoNRSROs as they risk rate debt securities of major companies. Because our systemrates debt securities of companies that are unrated by any NRSRO, there can beno assurance that the correlation to the NRSRO set out below is accurate. Webelieve our risk rating would be significantly higher than a typical NRSRO riskrating because the risk rating of the typical NRSRO is designed for largerbusinesses. However, our risk rating has been designed to risk rate thesecurities of smaller businesses that are not rated by a typical NRSRO.Therefore, when we use our risk rating on larger business securities, the riskrating is higher than a typical NRSRO rating. The primary difference betweenour risk rating and the rating of a typical NRSRO is that our risk rating usesmore quantitative determinants and includes qualitative determinants that webelieve are not used in the NRSRO rating. It is our understanding that mostdebt securities of medium-sized companies do not exceed the grade of BBB on aNRSRO scale, so there would be no debt securities in the 

 

 

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middle market that wouldmeet the definition of AAA, AA or A. Therefore, our scale begins with thedesignation 10 as the best risk rating which may be equivalent to a BBB from aNRSRO, however, no assurance can be given that a 10 on our scale is equal to aBBB on a NRSRO scale.

 
| **Company’s  System** | ** ** | **First  NRSRO** | ** ** | **Second  NRSRO** | ** ** | **Gladstone Investment’s Description(a)**                                                        |
|----------------------------|------------|------------------|------------|-------------------|------------|-------------------------------------------------------------------------------------------------------|
| **>10**                 |       | Baa2             |       | BBB               |       | Probability of Default  (PD) during the next ten years is 4% and the Expected Loss (EL) is 1% or less |
| **10**                     |       | Baa3             |       | BBB-              |       | PD is 5 and the EL is 1  to 2%                                                                        |
| **9**                      |       | Ba1              |       | BB+               |       | PD is 10 and the EL is  2 to 3%                                                                       |
| **8**                      |       | Ba2              |       | BB                |       | PD is 16 and the EL is  3 to 4%                                                                       |
| **7**                      |       | Ba3              |       | BB-               |       | PD is 17.8 and the EL  is 4 to 5%                                                                     |
| **6**                      |       | B1               |       | B+                |       | PD is 22 and the EL is  5 to 6.5%                                                                     |
| **5**                      |       | B2               |       | B                 |       | PD is 25 and the EL is  6.5 to 8%                                                                     |
| **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%                                |

 

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(a)*                                 **The default rates setforth are for a ten year term debt security. If a debt security is less thanten years, then the probability of default is adjusted to a lower percentagefor the shorter period, which may move the security higher on our risk ratingscale.*

 

                The above scale gives an indication of theprobability of default and the magnitude of the loss if there is a default. Ourpolicy is to stop accruing interest on an investment if we determine thatinterest is no longer collectible. At December 31, 2007, one investmentwas on non-accrual and at March 31, 2007 there were no investments onnon-accrual. Additionally, we do not risk rate our equity securities.

 

                The following table lists the risk ratings for allnon-syndicated loans in our portfolio at December 31, 2007 and March 31,2007, representing approximately 46% and 44%, respectively, of all loans in ourportfolio at the end of each period:

 

| **Rating**       | ** ** | **December 31, 2007** | ** ** | **March 31, 2007** | ** ** |
|------------------|------------|----------------------------|------------|-------------------------|------------|
| Highest          |       | 7.0                        |       | 8.0                     |       |
| Average          |       | 5.4                        |       | 5.7                     |       |
| Weighted Average |       | 5.0                        |       | 5.0                     |       |
| Lowest           |       | 1.0                        |       | 2.0                     |       |

 

                The following table lists the risk ratings forsyndicated loans in our portfolio that were not rated by an NRSRO at December 31,2007 and March 31, 2007, representing approximately 14%, respectively, ofall loans in our portfolio at the end of each period:

 

| **Rating**       | ** ** | **December 31, 2007** | ** ** | **March 31, 2007** | ** ** |
|------------------|------------|----------------------------|------------|-------------------------|------------|
| Highest          |       | 9.0                        |       | 8.0                     |       |
| Average          |       | 7.0                        |       | 7.2                     |       |
| Weighted Average |       | 7.2                        |       | 7.3                     |       |
| Lowest           |       | 1.0                        |       | 6.0                     |       |

 

                For syndicated loans that are currently rated by anNRSRO, we risk rate such loans in accordance with the risk rating systems ofmajor risk rating organizations, such as those provided by a NRSRO. Thefollowing table lists the risk ratings for all syndicated loans in ourportfolio that were rated by an NRSRO at December 31, 2007 and March 31,2007, representing approximately 40% and 42%, respectively, of all loans in ourportfolio at the end of each period:

 

| **Rating**       | ** ** | **December 31, 2007** | ** ** | **March 31, 2007** | ** ** |
|------------------|------------|----------------------------|------------|-------------------------|------------|
| Highest          |       | BB/Ba2                     |       | BB-/Ba2                 |       |
| Average          |       | B+/B                       | 1          | B+/B                    | 1          |
| Weighted Average |       | B+/B                       | 1          | B+/B                    | 1          |
| Lowest           |       | CCC+/B                     | 2          | B/B2                    |       |

 

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*                Valuation Methods:* We determine the value of publicly-traded debt securities based on theclosing price for the security on the exchange or securities market on which itis listed on the valuation date. We value debt securities that are not publiclytraded, but for which a limited market for the security exists, such as certainparticipations in syndicated loans, at the indicative bid price offered by therespective originating syndication agent’s trading desk on or near thevaluation date. At December 31, 2007, none of the debt securities in ourportfolio were publicly traded and there was a limited market for 50 debtsecurities in our portfolio. At March 31, 2007, none of the debtsecurities in our portfolio were publicly traded and there was a limited marketfor 42 debt securities in our portfolio.

 

                Debt securities that are issued by portfoliocompanies where we have an equity, or equity-like interest that are not publiclytraded and for which there is no market are valued at cost, if there isadequate total enterprise value determined when valuing our equity holdings inthe borrower. Fair values are discounted for any shortfall of total enterprisevalue over the total debt outstanding for the borrower.

 

                Debt securities that are not publicly traded and thatare issued by portfolio companies for which there is no market we determine thevalue of the security as if we currently intended to sell the security andconsider some or all of the following factors:

 

·             the risk rating of thesecurity;

 

·             the cost basis and thetype of the security;

 

·             the nature andrealizable value of the collateral;

 

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

 

·             reports from portfoliocompany senior management and board meetings;

 

·             reported values ofsimilar securities of the portfolio company or comparable companies; and

 

·             changes in the economyaffecting the portfolio company.

 

                We value convertible debt, equity, success or exitfees or other equity-like securities for which there is a market based on themarket prices for such securities, even if that market is not robust. At December 31,2007 and March 31, 2007, there was no market for any of the equity securitieswe owned. To value convertible debt, equity, success or exit fees or otherequity-like securities for which no market exists, we use the same informationwe would use for a debt security valuation described above, except risk-rating,as well as standard valuation techniques used by major valuation firms to valuethe equity securities of private companies. These valuation techniques alsoinclude discounted cash flow of the expected sale price in the future,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 industry statisticsand use outside experts. At December 31, 2007 we had $35.8 millioninvested, at cost, in equity securities compared to our debt portfolio with acost basis of $320.3 million. At March 31, 2007, we had$28.6 million invested, at cost, in equity securities compared to our debtportfolio with a cost basis of $246.0 million.

 

                At December 31,2007, we had total unrealized depreciation of approximately $4.1 million,which was primarily comprised of $11.1 million net unrealized depreciationof our Non-Control/Non-Affiliate investments, offset by approximately$7.0 million of net appreciation of our Control and Affiliate investments.The syndicated loan market continued to be extremely volatile during thequarter ended December 31, 2007 and, as a result, certain of oursyndicated loan investments experienced significant declines in fair marketvalue. At March 31, 2007, we had total unrealized depreciation ofapproximately $3.7 million, which was primarily comprised of netunrealized depreciation of our preferred and common stock in Chase II HoldingsCorp.

 

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**                TaxStatus**

 

*                FederalIncome 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%of our ordinary income for the calendar year, (2) 98% of our capital gainsin excess of capital losses for the one-year period ending on October 31of the calendar year, and (3) any ordinary income and net capital gainsfor preceding years that were not distributed during such years.

 

**                RevenueRecognition**

 

*                Interestand 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. At December 31, 2007,one Non-Control/Non-Affiliate investment was on non-accrual with a cost basisof approximately $2.9 million at December 31, 2007, or less than 1%of the cost basis of all loans in our portfolio. There were no accounts onnon-accrual at March 31, 2007. Conditional interest, or a success fee, isrecorded when earned upon full repayment of a loan investment. To date we havenot recorded any conditional interest. Dividend income on preferred equitysecurities is accrued to the extent that such amounts are expected to becollected and that we have the option to collect such amounts in cash. To date,we have not accrued any dividend income.

 

*                ServicesProvided to Portfolio Companies*

 

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

 

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

 

                Our Adviser alsoreceives fees for monitoring and reviewing portfolio company investments. Thesefees are recurring and are generally paid annually or quarterly in advance toour Adviser throughout the life of the investment. Fees of this nature arerecorded as revenue by our Adviser when earned and are not credited against thebase management fee.

 

                We may receivefees for the origination and closing services we provide to portfolio companiesthrough our Adviser. These fees are paid directly to us and are recognized asrevenue upon closing of the originated investment and are reported as feeincome in the consolidated statements of operations.

 

**                RecentAccounting Pronouncements**

 

                In December 2007, the FASB issued SFAS No. 141(R) *Business Combinations* (“SFAS 141(R)”). SFAS 141(R) establishesprinciples and requirements for how an acquirer recognizes and measures in itsfinancial statements the identifiable assets acquired, the liabilities assumed,any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141(R) alsoestablishes disclosure requirements to enable the evaluation of the nature andfinancial effects of the business combination. SFAS 141(R) is effectivefor fiscal years beginning after December 15, 2008.  We are currently

 

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evaluating the impact ofthis pronouncement on our consolidated financial statements.

 

                In December 2007, the FASB issued SFAS No. 160,*Noncontrolling Interest in ConsolidatedFinancial Statements*(“SFAS160”)*.*This Statementamends Accounting Research Bulletin 51 to establish accounting and reportingstandards for the noncontrolling (minority) interest in a subsidiary andfor the deconsolidation of a subsidiary. It clarifies that a noncontrollinginterest in a subsidiary is an ownership interest in the consolidated entitythat should be reported as equity in the consolidated financial statements. SFAS 160 is effective for interim periods beginning on or after December 15,2008.  We are currently evaluating the impact of this pronouncement on ourconsolidated financial statements.

 

                In November 2007,  the SEC  issued  Staff Accounting  Bulletin No. 109, * Written Loan Commitments  Recorded at Fair Value Through  Earnings* (“SAB 109”). SAB 109 provides guidance on the accounting for written loancommitments recorded at fair value under GAAP. Specifically, the SAB revisesthe Staff’s views on incorporating expected net future cash flows related toloan servicing activities in the fair value measurement of a written loancommitment.  SAB 109, which  supersedes SAB  105,  *Application  of Accounting  Principles  to Loan Commitments*, requires the  expected  net future  cash  flows related to the associated servicing of the loan be included in the measurement of all written loancommitments that are accounted for at fair value through earnings. SAB 109 is effective in fiscal quarters beginning after December 15,2007. We arecurrently evaluating the impact of this pronouncement on our consolidatedfinancial statements.

 

                In February 2007, the FASBissued Statement of Financial Accounting Standards No. 159, *The Fair Value Option for Financial Assets andFinancial Liabilities* (“SFAS 159”). SFAS 159 allowsentities to measure at fair value many financial instruments and certain otherassets and liabilities that are not otherwise required to be measured at fairvalue. SFAS 159 is effective for fiscal years beginning after November 15,2007 We are currentlyevaluating the impact of this pronouncement on our consolidated financialstatements.

 

                In September 2006, the FASBissued Statement of Financial Accounting Standards No. 157, *Fair Value Measurements* (“SFAS 157”).SFAS 157 defines fair value, establishes a framework for measuring fairvalue in GAAP and expands disclosures about fair value measurements.SFAS 157 is effective for financial statements issued for fiscal yearsbeginning after November 15, 2007, and interim periods within those fiscalyears. The Company is required to adopt the provisions of SFAS 157beginning with the fiscal year ended March 31, 2009. We are currently evaluating the impact ofthis pronouncement on our consolidated financial statements.

 

**RESULTS OF OPERATIONS**

 

*Threemonths ended December 31, 2007 compared to the three months ended December 31,2006*

 

**InvestmentIncome**

 

                Investment incomefor the three months ended December 31, 2007 increased $3,244,633 to$7,544,001, compared to investment income of $4,299,368 for the three monthsended December 31, 2006.

 

                Interest incomefrom Non-Control/Non-Affiliate investments increased $1,305,747 to $3,891,918for the three months ended December 31, 2007, compared to $2,586,171 forthe three months ended December 31, 2006. This increase was mainly theresult of approximately $43 million of additionalNon-Control/Non-Affiliate investments at December 31, 2007 compared to theprior year period.

 

                Interest incomefrom Control investments was $2,865,843 for the three months ended December 31,2007, representing interest on our loan investments to our Control affiliates,compared to interest income of $1,264,451 for the three months ended December 31,2006. The increase of $1,601,392 is directly attributable to the addition oftwo Control investments compared to the prior year period.

 

                Interest incomefrom Affiliate investments was $700,494 for the three months ended December 31,2007, representing interest on our loan investments to our Non-Controlaffiliates, compared to interest income of $114,668 for the three months ended December 31,2006. The increase of $585,826 is mainly the result of recognizing a fullquarter of interest income from our Affiliate investment that was purchased atthe end of the prior year period, as well as the acquisition of anotherAffiliate investment.

 

                Interest incomefrom cash and equivalents decreased $253,084 to $79,502 for the three monthsended December 31, 2007 from $332,586 for the three months ended December 31,2006. This decrease was the result of the complete investment 

 

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of the proceeds of our initial public offering in Control, Affiliateand Non-Control/Non-Affiliate investments. At December 31, 2007 we had noinvestments in treasury securities as all of the proceeds from our initialpublic offering had been invested

 

                Other income forthe three months ended December 31, 2007 was $6,244 compared to $1,492 forthe three months ended December 31, 2006. Other income is primarilycomprised of loan amendment fees that are received from portfolio companies andare amortized over the remaining life of the respective loans. The increase of$4,752 over the prior year quarter is primarily due to the receipt of additionalamendment fees during the period.

 

                The weightedaverage yield on our portfolio of investments, excluding cash and cashequivalents, was 9.05% for the three months ended December 31, 2007 and9.41% for the three months ended December 31, 2006. This decrease islargely the result of declining interest rates due to the volatility in thelending marketplace.

 

**Operating Expenses**

 

                Operating expensesfor the three months ended December 31, 2007 were $3,797,775 compared to$1,401,300 for the three months ended December 31, 2006, representing anoverall increase of $2,396,475.

 

                For the threemonths ended December 31, 2007, we incurred a base management fee of$497,632, after reductions for loan servicing fees of $1,287,013, for a grossbase management fee (including loan servicing fees) of $1,784,645.  For the three months ended December 31,2006, we incurred a base management fee of $551,235, after reductions for loanservicing fees of $508,691, for a gross base management fee (including loanservicing fees) of $1,059,926.  Theincrease in our gross base management fee of $724,719 results from the growthof our portfolio from the prior year period. The base management fee is computed quarterly as described under“—Investment Advisory and Management Agreement.”

 

                We also receivedaggregate credits against our base management fee of  $1,045,881, which were comprised of $509,555resulting from reduced fees on syndicated loan participations and $536,326resulting from investment banking fees paid to our Adviser during three monthsended December 31, 2007.  Wereceived aggregate credits of $375,225 against our base management fee for thethree months ended December 31, 2006 resulting from investment bankingfees paid to our Adviser during the quarter.

 

                Loan servicingfees of $1,287,013 were incurred for the three months ended December 31,2007. These fees were incurred in connection with a loan servicing agreementbetween Business Investment and our Adviser in connection with our creditfacility established in October 2006, which is based on the size of theaggregate outstanding loan portfolio. These fees reduced the amount of themanagement fee due to our Adviser as noted above.  The increase in loan servicing fees of$778,322 compared to the prior year quarter is the result of an increase in theportfolio of loans being serviced by our Adviser as well as the recognition ofa full quarter of loan servicing fees in the current year, compared to apartial quarter in the prior year.

 

                The administrationfee payable to our Administrator was $211,159 for the three months ended December 31,2007 compared to $124,101 for the three months ended December 31, 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. The increase of $87,058 was mainlyattributable to the personnel growth of our Administrator as well as anincrease in the general overhead expenses incurred by our Administrator.

 

                Interest expensefor the three months ended December 31, 2007 was $2,381,227 compared to$68,748 of interest expense for the three months ended December 31, 2006.The increase resulted from greater borrowings outstanding on our creditfacility during the quarter, compared to the prior year quarter.  We established our credit facility in October 2006and did not have any borrowings outstanding until December 2006, resultingin only one month of interest expense.

 

                Deferred financecost amortization for the three months ended December 31, 2007 was$169,329 compared to $91,392 for the three months ended December 31,2006.  The increase of $77,937 isprimarily attributable to an extra month of amortization in the current quarteras the prior year quarter began amortizating these costs in November 2006.  Further, the total deferred finance costssubject to amortization were greater in the current year due to amendment andrenewal fees for the credit facility.

 

                Professional feesfor the three months ended December 31, 2007 were $90,255, a decrease of$96,282 over the professional fees for the three months ended December 31,2006 of $186,537. Professional fees primarily consist of legal fees 

 

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and audit and accounting fees. The decrease is mainly due to in thetiming of audit fees billed, partially in connection with  our compliance with Sarbanes-Oxleyregulations incurred during the prior year period, partially offset byincreased general legal fees for the quarter.

 

                Stockholderrelated costs were $25,083 for the three months ended December 31, 2007,compared to $28,643 for the three months ended December 31, 2006.Stockholder related costs consist of the amortization of annual Nasdaq listingfees, transfer agent fees, annual report printing fees, Securities and ExchangeCommission (“SEC”) filing fees and press release costs.

 

                Insurance expensefor the three months ended December 31, 2007 was $46,719 compared to$60,696 for the three months ended December 31, 2006. Insurance expenseconsists of the amortization of the directors and officers insurance policy andprofessional liability policy premiums. The decrease is due to a reduction inthe premiums for directors and officers insurance for the current policyperiod.

 

                Directors’ feesfor the three months ended December 31, 2007 and 2006 were $54,709 and$54,800, respectively. Directors’ fees consist of the amortization of thedirectors’ annual stipend and individual meeting fees.

 

                Taxes and licensesexpense for the three months ended December 31, 2007 was $41,886 ascompared to $41,550 for the three months ended December 31, 2006.  Taxes and licenses expense primarilycomprised of franchise taxes due to the state of Delaware and other feessurrounding state and regulatory licensing, registration and other corporatefiling fees.

 

                General andadministrative expenses for the three months ended December 31, 2007 were$38,644 compared to $60,132 for the three months ended December 31, 2006.General and administrative expenses consist primarily of direct expenses suchas travel related specifically to our portfolio companies, loan evaluationservices for our portfolio companies and backup servicer expenses. The overalldecrease of $21,488 is mainly due to the decrease in direct investment expensesincurred on investments that were not funded. Typically when an investment funds, these direct expenses are reimbursedto us at closing by the portfolio company

 

**Realized and Unrealized Loss on Investments**

 

                For the threemonths ended December 31, 2007, we recognized a net loss of $146,034resulting from the partial sale of two of our syndicated loans at a discountduring the three months ended December 31, 2007. We recorded netunrealized appreciation of investments in the aggregate amount of $1,503,727.The net unrealized appreciation of our investments for the three months ended December 31,2007 was primarily related to the net appreciation of approximately $4.3million of our Control investments, offset by a decline in market value of oursyndicated loan portfolio of approximately $2.8 million from the previousquarter as the result of continued market volatility.

 

**NetIncrease in Net Assets from Operations**

 

                Overall, we realizeda net increase in net assets resulting from operations of $5,108,919 for thethree months ended December 31, 2007 as a result of the factors discussedabove. Our net increase in net assets from operations per basic and dilutedweighted average common share for the three months ended December 31, 2007was $0.31 compared to a net increase in net assets resulting from operationsper share of $0.16 for the three months ended December 31, 2006.

 

*Nine months ended December 31, 2007 compared tothe nine months ended December 31, 2006*

 

**InvestmentIncome**

 

                Investment incomefor the nine months ended December 31, 2007 increased $8,623,365 to$21,000,099, compared to investment income of $12,376,734 for the nine monthsended December 31, 2006.

 

                Interest incomefrom Non-Control/Non-Affiliate investments increased $4,282,441 to $11,220,467for the nine months ended December 31, 2007, compared to $6,938,026 forthe nine months ended December 31, 2006. This increase was mainly theresult of approximately $43 million of additionalNon-Control/Non-Affiliate investments at December 31, 2007 compared to theprior year period.

 

                Interest incomefrom Control investments was $8,043,247 for the nine months ended December 31,2007, representing interest on our loan investments to our Control affiliates,compared to interest income of $3,711,056 for the nine 

 

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months ended December 31, 2006. The increase of $4,332,191 isdirectly attributable to the addition of two Control investments compared tothe prior year period.

 

                Interest incomefrom Affiliate investments was $1,501,944 for the nine months ended December 31,2007, representing interest on our loan investments to our Non-Controlaffiliates, compared to interest income of $114,668 for the nine months ended December 31,2007. The increase of $1,387,276 is mainly the result of recognizing ninemonths of interest income from our Affiliate investment that was purchased atthe end of the prior year period and the purchase of another Affiliateinvestment during the nine months ended December 31, 2007, which alsogenerated an increase in interest income from Affiliate investments.

 

                Interest incomefrom cash and equivalents decreased $1,416,893 to $193,613 for the nine monthsended December 31, 2007 from $1,610,506 for the nine months ended December 31,2006. This decrease was the result of the complete investment of the proceedsof our initial public offering in Control, Affiliate andNon-Control/Non-Affiliate investments. At December 31, 2007 we had noinvestments in treasury securities as all of the proceeds from our initialpublic offering had been invested.

 

                Other income forthe nine months ended December 31, 2007 was $40,828 compared to $2,478 forthe three months ended December 31, 2006. Other income is primarilycomprised of loan amendment fees that are received from portfolio companies andare amortized over the remaining life of the respective loans. The increase of$38,350 from the prior year period is primarily due to the repayment of twoloans which resulted in the full recognition of the unamortized fees and thereceipt of additional amendment fees during the period.

 

                The weightedaverage yield on our portfolio of investments, excluding cash and cashequivalents, was 9.05% for the nine months ended December 31, 2007 and10.03% for the nine months ended December 31, 2006. This decrease islargely the result of declining interest rates from the volatility in thelending marketplace.

 

**Operating Expenses**

 

                Operating expensesfor the nine months ended December 31, 2007 were $11,370,791, compared to$4,013,616 for the nine months ended December 31, 2006, representing anoverall increase of $7,357,175.

 

                For the ninemonths ended December 31, 2007, we incurred base management fees of$1,309,951, after reductions for loan servicing fees of $3,741,082, for a grossbase management fee (including loan servicing fees) of $5,051,033.  For the nine months ended December 31,2006, we incurred base management fees of $2,214,437, after reductions for loanservicing fees of $508,691, for a gross base management fee (including loanservicing fees) of $2,723,128.  Theincrease in our gross base management fee of $2,327,905 results from the growthof our portfolio from the respective prior year periods.  The base management fee is computed quarterlyas described under “—Investment Advisory and Management Agreement.”

 

                We also receivedaggregate credits against our base management fee of  $1,932,475 which were comprised of $1,244,024resulting from reduced fees on syndicated loan participations and $688,451resulting from investment banking fees paid to our Adviser during the ninemonths ended December 31, 2007.  Wereceived aggregate credits of $375,225 against our base management fee for thenine months ended December 31, 2006 resulting from investment banking feespaid to our Adviser during the quarter.

 

                Loan servicingfees of $3,741,082 were incurred for the nine months ended December 31,2007. These fees were incurred in connection with a loan servicing agreementbetween Business Investment and our Adviser in connection with our creditfacility established in October 2006, which is based on the size of theaggregate outstanding loan portfolio. These fees reduced the amount of themanagement fee due to our Adviser as noted above.  The increase in loan servicing fees of$3,232,391 compared to the prior year period is the result of an increase inthe portfolio of loans being serviced by our Adviser as well as the recognitionof a full quarter of loan servicing fees in the current year, compared to onlytwo months in the prior year period.

 

                The administrationfee payable to our Administrator was $646,740 for the nine months ended December 31,2007, compared to $364,351 for the nine months ended December 31, 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 that are under similar administrationagreements with our Administrator. The increase $282,389 was mainlyattributable to the personnel growth of our Administrator as well as anincrease in the general overhead expenses incurred by our Administrator.

 

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                Interest expensefor the nine months ended December 31, 2007 was $5,818,564, compared to$68,748 of interest expense for the nine months ended December 31, 2006.The increase resulted from greater borrowings outstanding on our creditfacility during the period, compared to the prior year period.  We established our credit facility in October 2006and did not have any borrowings outstanding until December 2006, resultingin only one month of interest expense.

 

                Deferred financecost amortization for the nine months ended December 31, 2007 was $595,532as compared to $91,392 for the nine months ended December 31, 2006.  The increase of $504,140 is primarilyattributable to nine months of amortization as the prior year period beganamortizing these costs in November 2006.

 

                Professional feesfor the nine months ended December 31, 2007 were $356,176, compared to theprofessional fees for the nine months ended December 31, 2006 of $354,325.Professional fees primarily consist of legal fees and audit and accountingfees.  Slight increases in our generallegal fees were offset by decreases in our accounting and audit fees related toour compliance with Sarbanes-Oxley regulations incurred during the prior yearperiod.

 

                Stockholderrelated costs increased $32,803 for the nine months ended December 31,2007 to $220,312 from $187,509 in the nine months ended December 31, 2006.Stockholder related costs consist of the amortization of annual Nasdaq listingfees, transfer agent fees, annual report printing fees, SEC filing fees andpress release costs. The increase is primarily attributed to additionalexpenses incurred related to the solicitation of stockholder proxy votes forour annual meeting of stockholders in August 2007.

 

                Insurance expensefor the nine months ended December 31, 2007 was $182,789 compared to$200,933 for the nine months ended December 31, 2006. Insurance expenseconsists of the amortization of the directors and officers insurance policy andprofessional liability policy premiums. The decrease of $18,144 is due to a reduction in the premiums fordirectors and officers insurance for the current policy period.

 

                Directors’ feesfor the nine months ended December 31, 2007 and 2006 were $176,981 and$154,300, respectively. Directors’ fees consist of the amortization of thedirectors’ annual stipend and individual meeting fees. The increase is due tofewer committee meetings held in the prior year period.

 

                Taxes and licensesexpense for the nine months ended December 31, 2007 was $125,018 and wasprimarily comprised of franchise taxes due to the state of Delaware and otherfees surrounding state and regulatory licensing, registration and othercorporate filing fees. The decrease of $14,976 compared to the prior yearperiod expense of $139,994 was the result of the timing of the accruals of thefranchise tax to the state of Delaware in the prior year.

 

                General andadministrative expenses for the nine months ended December 31, 2007 were$130,121 compared to $104,161 for the nine months ended December 31, 2006.General and administrative expenses consist primarily of direct expenses suchas travel related specifically to our portfolio companies, loan evaluationservices for our portfolio companies and backup servicer expenses. The overallincrease of $25,960 is mainly due to the increase in direct expenses as theoverall size of our investment portfolio grew from the prior year period.

 

**Realizedand Unrealized Loss on Investments**

 

                For the ninemonths ended December 31, 2007, we recognized a net loss on the sale ofseven syndicated loan participations aggregating $197,712 and we recorded netunrealized depreciation of investments in the aggregate amount of $424,286. Thenet unrealized depreciation of our investments for the nine months ended December 31,2007 was primarily related to a decrease in the fair market value of oursyndicated loan portfolio of approximately $10.9 million offset by an increasein our Control and Affiliate investments of approximately $10.2 million, whencompared to their respective fair market values at March 31, 2007.  Our non-syndicated Non-Control/Non-Affiliateinvestments also recognized unrealized gains of approximately $0.2 millionduring the nine months ended December 31, 2007.

 

**Net Increasein Net Assets from Operations**

 

                Overall, werealized a net increase in net assets resulting from operations of $9,012,310for the nine months ended December 31, 2007 as a result of the factorsdiscussed above. Our net increase in net assets from operations per basic anddiluted weighted average common share for the nine months ended December 31,2007 was $0.54, compared to $0.41 for the nine months ended December 31,2006.

 

                We will continueto incur base management fees which are likely to increase as our investmentportfolio grows, and we may begin to incur incentive fees. Our administrativeexpenses payable to our Administrator are also likely to grow during futureperiods as our average assets increase and as the expenses incurred by ourAdministrator to support our operations grow.

 

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**LIQUIDITYAND CAPITAL RESOURCES**

 

**Operating Activities**

 

                Net cash used inoperating activities for the nine months ended December 31, 2007 wasapproximately $63.1 million and consisted primarily of the purchase ofinvestments and the net unrealized depreciation of our investments, offset byrepayments and sales of existing portfolio investments and an increase inamounts due from custodian.

 

                A summary of ourinvestment activity for the nine months ended December 31, 2007 and December 31,2006 is as follows:

 
| ** **              | ** ** | ** **          | ** **  | ** **               | ** ** | ** **           | ** ** | **Net Gain/(Loss)** | ** ** |
|-------------------------|------------|---------------------|-------------|--------------------------|------------|----------------------|------------|---------------------|------------|
| **Quarter Ended**       | ** ** | **New Investments** | ** **  | **Principal Repayments** | ** ** | **Investments Sold** | ** ** | **on Disposal**     | ** ** |
|                    |       |                |        |                     |       |                 |       |                |       |
| June 30, 2007      |       | $                   | 72,601,227  |                     | $          | 21,358,187           |       | $                   | 5,809,471  |   | $ | (48,247 | ) |
| September 30, 2007 |       | 41,182,856          |        | 16,947,989               |       | —               |       | (3,431              | )          |
| December 31, 2007  |       | 43,550,667          |        | 21,417,073               |       | 9,887,170            |       | (146,034            | )          |
| Total fiscal year 2008  |       | $                   | 157,334,750 |                     | $          | 59,723,249           |       | $                   | 15,696,641 |   | $ | (197,712 | ) |
|                         |            |                     |             |                          |            |                      |            |                     |            |  |  |  |  |  |

 

| ** **              | ** ** | ** **          | ** **  | ** **               | ** ** | ** **           | ** ** | **Net Gain/(Loss)** | ** ** |
|-------------------------|------------|---------------------|-------------|--------------------------|------------|----------------------|------------|---------------------|------------|
| **Quarter Ended**       | ** ** | **New Investments** | ** **  | **Principal Repayments** | ** ** | **Investments Sold** | ** ** | **on Disposal**     | ** ** |
| ** **              | ** ** | ** **          | ** **  | ** **               | ** ** | ** **           | ** ** | ** **          |       |
| June 30, 2006      |       | $                   | 33,665,549  |                     | $          | 874,222              |       | $                   | 15,551,727 |   | $ | 3,273 |   |
| September 30, 2006 |       | 15,812,230          |        | 5,964,245                |       | 997,502              |       | (1,934              | )          |
| December 31, 2006  |       | 69,372,847          |        | 3,610,221                |       | 3,040,716            |       | (2,283              | )          |
| Total fiscal year 2007  |       | $                   | 118,850,626 |                     | $          | 10,448,688           |       | $                   | 19,589,945 |   | $ | (944 | ) |

 

 

                The followingtable summarizes the contractual principal repayment and maturity of ourinvestment portfolio by fiscal year, assuming no voluntary prepayments:

 

| **Fiscal Year Ended March 31,**    | ** ** | **Amount**  |
|-----------------------------------------|------------|-------------|
| 2008                                    |       | $           | 4,939,252 |
| 2009                                    |       | 11,970,117  |
| 2010                                    |       | 11,800,388  |
| 2011                                    |       | 49,713,185  |
| 2012                                    |       | 50,072,850  |
| Thereafter                              |       | 191,677,039 |
| **Total contractual repayments**        |       | $           | 320,172,831 |
| Investments in equity securities        |       | $           | 35,774,879 |
| Unamortized premiums on debt securities |       | 180,203     |
| **Total**                               |       | $           | 356,127,913 |

 

**Financing Activities**

 

                During the ninemonths ended December 31, 2007, we recorded net borrowings under ourcredit facility of $50.5 million, which were used to purchase newinvestments.

 

                For the ninemonths ended December 31, 2007, our dividends paid of $11,426,469 exceededour net investment income (including net realized losses) by $1,994,873. As aresult, we estimate that $9,431,596, or $0.57 per share, of our dividendsdeclared and paid to stockholders during the period were paid from ordinaryincome and $1,994,873, or $0.12 per share, of these dividends represented areturn of capital to stockholders. We declared these dividends based on ourestimates of net investment income for the fiscal year. Our investment pacecontinues to be slower than expected in our third year of operations and,consequently, our net investment income was lower than our original estimates.

 

                We anticipatecontinuing to borrow funds and, from time to time, issuing securities to obtainadditional capital in the future. The terms of the future equity issuancescannot be determined and there can be no assurances that the equity marketswill be available to us on terms we deem favorable, if at all. To this end, wehave an effective registration statement on file with the SEC that permits usto issue, through one or more transactions, up to an aggregate of$300 million in securities, 

 

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which may consist of common stock, preferred stock, subscription rightsand/or debt securities. To date we have incurred approximately $358,000 ofcosts in connection with this registration statement.

 

**Revolving Credit Facility**

 

                On October 19,2006, through our wholly-owned subsidiary, Business Investment, we initiallyobtained a $100 million revolving credit facility (the “Credit Facility”).On October 19, 2006, we executed a purchase and sale agreement pursuant towhich we agreed to sell certain loans to Business Investment in considerationfor a membership interest therein. Simultaneously, Business Investment executeda credit agreement (the “Credit Agreement”) with Deutsche Bank AG, New YorkBranch (“Deutsche Bank”), as administrative agent, and others, pursuant towhich Business Investment pledged the loans purchased from us to secure futureadvances by certain institutional lenders. Availability under the CreditFacility was originally scheduled to terminate on October 18, 2007,however, on that date we amended and extended the Credit Facility such thatavailability under the Credit Facility will terminate on October 16, 2008,unless extended in the discretion of the lenders at the request of BusinessInvestment. Interest is payable monthly during the term of the Credit Facilityand principal is payable out of collections on loans purchased from us duringthe period following the date of which availability for advances has terminatedthrough maturity. The Credit Facility will mature two years following the dateon which availability for advances has terminated and on such date, allprincipal, interest and other amounts owing under the Credit Facility will bedue and payable. Interest rates charged on the advances under the facility arebased on the rate paid by the lenders on commercial paper notes issued by suchlenders to fund some or all of the advances, the London Interbank Offered Rate(“LIBOR”), the Prime Rate or the Federal Funds Rate, depending on marketconditions, and adjusts periodically. On March 29, 2007, we increased ourborrowing capacity under the Credit Facility from $100 million to$200 million. As of December 31, 2007, there was an outstandingprincipal balance of $150.5 million under the Credit Facility at an interestrate of approximately 5.36%. Available borrowings are subject to variousconstraints imposed under the Credit Agreement, based on the aggregate loanbalance pledged by Business Investment, which varies as loans are added andrepaid, regardless of whether such repayments are early prepayment or are madeas contractually required. At December 31, 2007, the remaining borrowing capacityavailable under the Credit Facility was approximately $49.5 million.

 

                The CreditFacility contains covenants that require Business Investment to maintain itsstatus as a separate entity; prohibit certain significant corporatetransactions (such as mergers, consolidations, liquidations or dissolutions);and restrict material changes to our credit and collection policies. Thefacility also restricts some of the terms and provisions (including interestrates, terms to maturity and payments schedules) and limits the borrower andindustry concentrations of loans that are eligible to secure advances. As of December 31,2007, Business Investment was in compliance with all of the facility covenants.We currently intend to securitize some or all of the loans held by BusinessInvestment and if we are able to do so, we will use the proceeds from thesecuritization to pay down any amounts then outstanding under the revolvingcredit facility.

 

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

 

                Our Adviserservices the loans pledged under the Credit Facility. As a condition to thisservicing arrangement, we executed a performance guaranty pursuant to which weguaranteed that our Adviser would comply fully with all of its obligationsunder the Credit Facility. The performance guaranty requires us to maintain aminimum net worth of $100 million and to maintain “asset coverage” withrespect to “senior securities representing indebtedness” of at least 200%, inaccordance with Section 18 of the 1940 Act. As of December 31, 2007,we were in compliance with our covenants under the performance guaranty.

 

**Dividends**

 

                In order toqualify as a RIC and to avoid corporate level tax on the income we distributeto our stockholders, we are required, under Subchapter M of the Code, todistribute at least 90% of our ordinary income and realized net short-termcapital gains to our stockholders on an annual basis. In accordance with theserequirements, we declared the following dividends:

 
| **Declaration Date**  | ** ** | **Record Date**        | ** ** | **Payment  Date**      | ** ** | **Dividend  per Share** |
|-----------------------|------------|------------------------|------------|------------------------|------------|-------------------------|
| January 8,  2008 |       | March 21,  2008   |       | March 31,  2008   |       | $                       | 0.08 |
| January 8, 2008  |       | February 21, 2008 |       | February 29, 2008 |       | $                       | 0.08 |
| January 8, 2008  |       | January 23, 2008  |       | January 31, 2008  |       | $                       | 0.08 |

 

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| October 9, 2007  |   | December 20, 2007  |   | December 31, 2007  |   | $ | 0.08  |
|-----------------------|--------|-------------------------|--------|-------------------------|--------|---|-------|
| October 9, 2007  |   | November 21, 2007  |   | November 30, 2007  |   | $ | 0.08  |
| October 9, 2007  |   | October 23, 2007   |   | October 31, 2007   |   | $ | 0.08  |
| 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  |

 

**Contractual Obligations and Off-Balance SheetArrangements**

 

                As of December 31,2007, we were a party to a signed and non-binding term sheet for a buyoutinvestment of approximately $23 million. The future scheduled contractualpayments at December 31, 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                 |       | 23,000,000 |       | 23,000,000                |       | $ | — |   | $ | — |   | $ | — |   |
| Total                       |       | $          | 23,000,000 |                      | $          | 23,000,000 |   | $ | — |   | $ | — |   | $ | — |   |
|                             |            |            |            |                           |            |  |  |  |  |  |  |  |  |  |  |  |

 

                As of January 30,2008, the above investment had not yet funded.

 

                We did not haveany significant off-balance sheet arrangements as defined in Item 303(a)(4)(ii) ofSEC Regulation S-K as of December 31, 2007.

 

**ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.**

 

                We are subject tofinancial market risks, including changes in interest rates. General interestrate fluctuations may have a substantial negative impact on our investments andinvestment opportunities and, accordingly have a material adverse effect on ourinvestment objectives and our rate of return on invested capital. Currently,approximately 58% of our investment portfolio, at cost, is comprised of loansat variable rates and approximately 17% of our investment portfolio, at cost,is in loans at variable rates with a floor. In addition, an increase ininterest rates would make it more expensive to use debt for our financingneeds, if any.

 

                We expect tocontinue to borrow funds to finance future lending activities as we have fullyinvested the proceeds of our initial public offering. These future borrowingsmay be at fixed or variable rates. For example, interest rates charged on theadvances under 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. As of December 31, 2007, there was anoutstanding principal balance of $150.5 million under the credit facility.

 

                In October 2007,we entered into an interest rate cap agreement in order to fulfill anobligation under our line of credit to enter into certain hedging transactionsin connection with our borrowings under the line of credit. We purchased thisinterest rate cap agreement with a notional amount of $20 million for aone-time, up-front payment of $15,000. The interest rate cap agreement entitlesus to receive payments, if any, equal to the amount by which interest paymentson the current 

 

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notional amount at one month LIBOR exceed the payments on the currentnotional amount at 9%. The cap expires in October 2008. This interest ratecap agreement effectively caps our interest payments on our line of creditborrowing, up to the notional amount of the interest rate cap, at 9%. Thismitigates our exposure to increases in interest rates on our borrowings on ourline of credit, which are at variable rates.

 

                To illustrate thepotential impact of changes in interest rates on our net increase in net assetsresulting from operations, we have performed the following analysis, whichassumes that our balance sheet remains constant and no further actions beyondthe interest rate cap agreement are taken to alter our existing interest ratesensitivity. 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 $1.2 million, or 12.5%, over the next twelvemonths, compared to the net increase in net assets resulting from operationsfor the twelve months ended December 31, 2007. A hypothetical decrease inthe one month LIBOR by 1.0% would decrease our net increase in net assetsresulting from operations by approximately $0.9 million, or 9.9%, over thenext twelve months, compared to the net increase in net assets from operationsfor the twelve months ended December 31, 2007. Although managementbelieves that this analysis is indicative of our existing interest rate sensitivity,it does not adjust for potential changes in credit quality, size andcomposition of our investment portfolio and other business developments thatcould affect net increase in net assets resulting from operations. Accordingly,no assurances can be given that actual results would not differ materially fromthe results under this hypothetical analysis.

 

                In the event thatwe securitize a portion of our loan portfolio, we believe that we will likelybe required to enter into further hedging arrangements in the future withrespect to securitized loans. While hedging activities may mitigate ourexposure to adverse fluctuations in interest rates, certain hedgingtransactions that we may enter into in the future, such as interest rate swapagreements, may also limit our ability to participate in the benefits of lowerinterest rates with respect to our portfolio of investments.

 

                We may alsoexperience risk associated with investing in securities of companies withforeign operations. At December 31, 2007, we had approximately$4.0 million invested, at cost, in a syndicated loan participation of aportfolio company headquartered in Ontario, Canada. Although we currently donot anticipate additional investments in debt or equity of foreign companies,some potential portfolio companies may have operations located outside theUnited States. These risks include, but are not limited to, fluctuations inforeign currency exchange rates, imposition of foreign taxes, changes inexportation regulations and political and social instability.

 

**ITEM 4.CONTROLS AND PROCEDURES.**

 

                As of December 31,2007, we, including our Chief Executive Officer and Chief Financial Officer,evaluated the effectiveness of the design and operation of our disclosurecontrols and procedures. Based on that evaluation, our management, includingthe Chief Executive Officer and Chief Financial Officer, concluded that ourdisclosure controls and procedures were effective in timely alertingmanagement, including the Chief Executive Officer and Chief Financial Officer,of material information about us required to be included in periodic Securitiesand Exchange Commission filings. However, in evaluating the disclosure controlsand procedures, management recognized that any controls and procedures, nomatter how well designed and operated, can provide only reasonable assurance ofachieving the desired control objectives, and management necessarily wasrequired to apply its judgment in evaluating the cost-benefit relationship ofpossible controls and procedures.

 

                There have been nochanges in our internal control over financial reporting that occurred duringthe quarter ended December 31, 2007 that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

**PART II—OTHER INFORMATION**

 

**ITEM1.  LEGAL PROCEEDINGS.**

 

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

 

**ITEM 1A.RISK FACTORS.**

 

                Our business issubject to certain risks and events that, if they occur, could adversely affectour financial condition and results of operations and the trading price of ourcommon stock.  For a discussion of these risks, pleaserefer to the “Risk 

 

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Factors” sectionsof our Registration Statement on Form N-2, as amended, filed by us withthe Securities and Exchange Commission on December 19, 2007.

 

**ITEM2.  UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS.**

 

                Not applicable.

 

**ITEM3.  DEFAULTS UPON SENIOR SECURITIES.**

 

                Not applicable.

 

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

 

                Notapplicable

 

**ITEM5.  OTHER INFORMATION.**

 

                Not applicable

 

**ITEM6.  EXHIBITS**

 

                See the exhibitindex.

 

**SIGNATURE**

 

                Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
| ** ** | **GLADSTONE INVESTMENT CORPORATION** |
|------------|--------------------------------------|
|       |                                 |   |
|       | By:                                  | /s/ HARRY BRILL |
|       |                                 | Harry Brill |
|       |                                 | *Chief Financial Officer* |

 

Date: January 31, 2008

 

**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 exhibitsfor which provision is made in the applicable regulations of the Securities andExchange Commission are not required under the related instruction or areinapplicable and therefore have been omitted.

 

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