UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTER ENDED JUNE 30, 2003.

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER: 814-00237

GLADSTONE CAPITAL CORPORATION

(Exact name of registrant as specified in its charter)

MARYLAND		54-2040781
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1616 ANDERSON ROAD, SUITE 208
MCLEAN, VIRGINIA 22102

(Address of principal executive office)

(703) 286-7000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes ý No o.

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

Yes ý No o.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. The number of shares of the issuer’s Common Stock, $0.001 par value, outstanding as of August 8, 2003 was 10,071,844.

GLADSTONE CAPITAL CORPORATION

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Consolidated Balance Sheets as of June 30, 2003 and September 30, 2002
	Schedule of Investments as of June 30, 2003 and September 30, 2002
	Consolidated Statements of Operations for the three months ended June 30, 2003 and June 30, 2002
	Consolidated Statements of Operations for the nine months ended June 30, 2003 and June 30, 2002
	Consolidated Statements of Stockholders’ Equity for the nine months ended June 30, 2003 and June 30, 2002
	Consolidated Statements of Cash Flows for the nine months ended June 30, 2003 and June 30, 2002
	Financial Highlights for the three and nine months ended June 30, 2003 and June 30, 2002
	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 Disclosure About Market Risk

Item 4.	Controls and Procedures

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings

Item 2.	Changes in Securities and Use of Proceeds

Item 3.	Defaults Upon Senior Securities

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

Item 5.	Other Information

Item 6.	Exhibits and Reports on Form 8-K

SIGNATURES

PART I—FINANCIAL INFORMATION

Gladstone Capital Corporation

Consolidated Financial Statements

(Unaudited)

June 30, 2003

CONTENTS

Consolidated Balance Sheets

Schedule of Investments

Consolidated Statements of Operations

Consolidated Statements of Stockholders’ Equity

Consolidated Statements of Cash Flows

Financial Highlights

Notes to Consolidated Financial Statements

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED BALANCE SHEETS

	June 30, 2003			September 30, 2002
	(Unaudited)
ASSETS
Investments at fair value (Cost 6/30/2003: $104,977,557; 9/30/2002: $79,718,354)	$	104,975,144		$	79,718,354
Cash and cash equivalents	27,066,673			51,930,529
Cash and cash equivalents pledged as collateral	65,006,677			39,998,799
Interest receivable – investments in debt securities	1,088,168			685,274
Interest receivable – cash and cash equivalents	—			4,389
Interest receivable – officers	109,736			109,874
Prepaid assets	1,432,593			357,955
Other assets	178,445			116,865

TOTAL ASSETS	$	199,857,436		$	172,922,039

LIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES
Accounts payable	$	330,269		$	—
Dividends payable	2,920,835			2,115,087
Accrued expenses and deferred liabilities	1,547,310			944,960
Repurchase agreement	63,706,000			39,198,719

Total Liabilities	$	68,504,414		$	42,258,766

STOCKHOLDERS’ EQUITY
Common stock, $0.001 par value, 50,000,000 shares authorized and 10,071,844 shares issued and outstanding	$	10,072		$	10,072
Capital in excess of par value	140,266,684			140,266,684
Notes receivable – officers	(8,983,796		)	(8,983,796		)
Net unrealized depreciation on investments	(2,413		)	—
Undistributed/(overdistributed) net investment income	62,475			(629,687		)

Total Stockholders’ Equity	$	131,353,022		$	130,663,273

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	199,857,436		$	172,922,039

SEE ACCOMPANYING NOTES.

GLADSTONE CAPITAL CORPORATION

SCHEDULE OF INVESTMENTS

AS OF JUNE 30, 2003

(UNAUDITED)

COMPANY(1)	INDUSTRY	INVESTMENT	COST		FAIR VALUE

America’s Water Heater Rentals, LLC	Water heater rentals and servicing	Senior Term Debt (2)(4)	$	12,000,000	$	12,015,000

ARI Holdings, Inc.	Manufacturing auto parts	Junior Subordinated Term Debt (3)	8,565,416		8,565,416

Coyne International Enterprises Corp.	Industrial services	Senior Term Debt (2)(3)(4)	20,334,866		20,233,192

Finn Corporation	Manufacturing landscape equipment	Senior Subordinated Term Debt (4)	10,500,000		10,479,000
		Common Stock Warrants for 2% ownership		37,000		431,111

Fugate & Associates, Inc.	Imaging supplies	Senior Term Debt	2,000,000		2,000,000
		Senior Term Debt	3,500,000		3,500,000

Home Care Supply, Inc.	Medical equipment rental	Senior Term Debt (2)(4)(5)	18,000,000		18,405,900

Inca Metal Products Corp. Kingway Acquisition, Inc. Clymer Acquisition, Inc.	Material handling and storage products	Senior Term Debt (2)(4)	5,850,000		5,191,875

Kozy Shack Enterprises, Inc.	Food production and sales	Senior Term Debt (2)(4)	2,400,000		2,406,000

Marcal Paper Mills, Inc.	Manufacturing paper products	Senior Subordinated Term Debt (2)(4)	7,150,000		7,114,250
		First Mortgage Debt (3)	9,140,275		9,140,275

Wing Stop Restaurants International, Inc.	Restaurant – fast food	Senior Term Debt (4)	2,000,000		1,997,500
Wing Stop Restaurants International, Inc.	Restaurant – fast food	Senior Term Debt (4)	3,500,000		3,495,625

Totals			$	104,977,557	$	104,975,144

(1) We do not “Control,” and are not an “Affiliate” of, any of our portfolio companies, each as defined in the Investment Company Act of 1940, as amended (the “1940 Act”). In general, under the 1940 Act, we would “Control” a portfolio company if we owned 25% or more of its voting securities and would be an “Affiliate” of a portfolio company if we owned 5% or more of its voting securities.

(2) Last Out Tranche of senior debt, meaning if the company is liquidated then the holder of the Last Out Tranche is paid after the senior debt.

(3) Has some paid in kind (PIK) interest. Refer to Note 2 “Summary of Significant Accounting Policies” of Form 10-K for the fiscal year ended September 30, 2002.

(4) Fair value was based on valuation prepared and provided by Standard & Poor’s Loan Evaluation Services.

(5) Includes a success fee with a fair value of $473,400.

SEE ACCOMPANYING NOTES.

GLADSTONE CAPITAL CORPORATION

SCHEDULE OF INVESTMENTS

AS OF SEPTEMBER 30, 2002

COMPANY(1)	INDUSTRY	INVESTMENT	COST		FAIR VALUE

ARI Holdings, Inc.	Manufacturing auto parts	Junior Subordinated Term Debt (3)	$	8,250,803	$	8,250,803

Coyne International Enterprises Corp.	Uniform cleaning and rental	Senior Term Debt (2)(3)	16,054,268		16,054,268

Finn Corporation	Manufacturing landscape equipment	Senior Subordinated Term Debt	10,500,000		10,500,000
		Common Stock Warrants for 2% ownership	37,000		37,000

Home Care Supply, Inc.	Medical equipment rental	Senior Term Debt (2)	18,000,000		18,000,000

Inca Metal Products Corporation	Manufacturing material handling products	Senior Term Debt (2)	6,000,000		6,000,000

Kozy Shack Enterprises, Inc.	Food production and sales	Senior Term Debt (2)	4,300,000		4,300,000

Marcal Paper Mills, Inc.	Manufacturing paper products	Senior Term Debt (2)	7,500,000		7,500,000
		First Mortgage Debt (3)	9,076,283		9,076,283

Totals			$	79,718,354	$	79,718,354

(2) Last Out Tranche of senior debt, meaning if the company is liquidated then the holder of the Last Out Tranche is paid after the senior debt.

(3) Has some paid in kind (PIK) interest. Refer to Note 2 “Summary of Significant Accounting Policies” of Form 10-K for the fiscal year ended September 30, 2002.

SEE ACCOMPANYING NOTES.

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENT OF OPERATIONS

(UNAUDITED)

	Three Months Ended June 30, 2003		Three Months Ended June 30, 2002
INVESTMENT INCOME
Interest income – investments	$	3,684,284	$	1,808,834
Interest income – cash and cash equivalents	79,073		351,726
Interest income – notes receivable from officers	109,737		108,691
Managerial assistance fees	125,000		645,898
Other income	61,650		—
Total Investment Income	$	4,059,744	$	2,915,149

EXPENSES
Salaries and benefits	$	493,901	$	364,253
Rent	54,899		36,095
Professional fees	101,211		119,322
Directors fees	20,290		7,000
Insurance	71,883		49,802
Stockholder related costs	12,227		7,210
Financing fees	62,355		—
General and administrative	127,242		106,893
Total Expenses	$	944,008	$	690,575

NET INVESTMENT INCOME	$	3,115,736	$	2,224,574

Net unrealized depreciation on investments	(744,837)		—

NET INCREASE IN STOCKHOLDERS’ EQUITY RESULTING FROM OPERATIONS	$	2,370,899	$	2,224,574

NET INCREASE IN STOCKHOLDERS’ EQUITY RESULTING FROM OPERATIONS PER COMMON SHARE
Basic	$	0.24	$	0.22
Diluted	$	0.23	$	0.22

WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING
Basic	10,071,844		10,071,844
Diluted	10,256,790		10,201,052

SEE ACCOMPANYING NOTES.

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENT OF OPERATIONS

(UNAUDITED)

	Nine Months Ended June 30, 2003			Nine Months Ended June 30, 2002
INVESTMENT INCOME
Interest income – investments	$		9,887,909	$	3,735,461
Interest income – cash and cash equivalents	390,577			1,360,811
Interest income – notes receivable from officers	329,078			323,518
Managerial assistance fees	483,000			1,286,809
Other income	63,906			47,500
Total Investment Income	$		11,154,470	$	6,754,099

EXPENSES
Salaries and benefits	$		1,405,002	$	968,595
Rent	164,044			83,375
Professional fees	302,478			334,804
Directors fees	54,647			14,000
Insurance	216,724			147,466
Stockholder related costs	123,659			78,472
Financing fees	62,355			—
General and administrative	378,079			297,351
Total Expenses	$		2,706,988	$	1,924,063

NET INVESTMENT INCOME	$		8,447,482	$	4,830,036

Net unrealized depreciation on investments	(2,413)			—

NET INCREASE IN STOCKHOLDERS’ EQUITY RESULTING FROM OPERATIONS	$	8,445,069		$	4,830,036

NET INCREASE IN STOCKHOLDERS’ EQUITY RESULTING FROM OPERATIONS PER COMMON SHARE
Basic	$		0.84	$	0.48
Diluted	$		0.83	$	0.47

WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING
Basic	10,071,844			10,071,844
Diluted	10,160,350			10,176,944

SEE ACCOMPANYING NOTES.

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

	Common Stock			Capital in Excess of Par Value			Notes Receivable From Sale of Common Stock			Un/(Over) Distributed Net Investment Income			Unrealized Appreciation (Depreciation) of Investments			Total Stockholders’ Equity



	Shares	Amount

For the Nine Months Ended June 30, 2002:

Balance at September 30, 2001	10,060,178	$	10,060	$	140,131,778		$	(8,800,050	)	$	(92,644	)	$	—		$	131,249,144

Employee Stock Option Exercise	11,666	12		185,878			(185,890		)							—

Offering Costs				(50,972		)										(50,972		)

Repayment of Principal on Notes Receivable							1,485									1,485

Net Investment Income										4,830,036						4,830,036

Net Unrealized Appreciation (Depreciation) of Investments													—			—

Distributions Declared ($0.60 per common share)										(6,038,557		)				(6,038,557		)

Balance at June 30, 2002	10,071,844	$	10,072	$	140,266,684		$	(8,984,455	)	$	(1,301,165	)	$	—		$	129,991,136

For the Nine Months Ended June 30, 2003:

Balance at September 30, 2002	10,071,844	$	10,072	$	140,266,684		$	(8,983,796	)	$	(629,687	)	$	—		$	130,663,273

Net Investment Income										8,447,482						8,447,482

Net Unrealized Depreciation of Investments													(2,413		)	(2,413		)

Distributions Declared ($0.77 per common share)										(7,755,320		)				(7,755,320		)

Balance at June 30, 2003	10,071,844	$	10,072	$	140,266,684		$	(8,983,796	)	$	62,475		$	(2,413	)	$	131,353,022

SEE ACCOMPANYING NOTES.

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

	Nine Months Ended June 30, 2003			Nine Months Ended June 30, 2002
CASH FLOWS FROM OPERATING ACTIVITIES
Net increase in stockholders’ equity resulting from operations	$	8,445,069		$	4,830,036
Adjustments to reconcile net increase in stockholders’ equity resulting from operations to net cash provided by (used in) operating activities:
Depreciation	21,236			—
Net unrealized depreciation	2,413			—
Increase in interest receivable	(398,367		)	(591,034		)
Increase in other assets	(1,686		)	(206,730		)
Increase in accrued expenses and deferred liabilities	602,350			93,679
Decrease in prepaid assets	77,355			119,480
Increase in accounts payable	330,269			160,524
Increase in investment balance due to payment in kind interest	(659,203		)	(220,786		)
Net Cash Provided by Operating Activities	$	8,419,436		$	4,185,169

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of furniture and equipment	$	(81,127	)	$	—
Purchase of investments	(27,000,000		)	(65,787,389		)
Principal repayments on investments	2,400,000			—
Proceeds from repurchase agreements	166,621,973			4,900,000
Repayment of repurchase agreements	(142,114,693		)	—
Increase in other liabilities	—			98,596
Net Cash (Used in) Investing Activities	$	(173,847	)	$	(60,788,793	)

CASH FLOWS FROM FINANCING ACTIVITIES

Offering costs	$	—		$	(50,971	)
Prepaid financing fees	(1,151,993		)	—
Increase (decrease) in accrued offering costs	—			(590,382		)
Repayment of principal on notes receivable --officers	—			1,485
Distributions paid	(6,949,574		)	(3,923,471		)
Net Cash (Used in) Financing Activities	$	(8,101,567	)	$	(4,563,339	)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	$	144,022		$	(61,166,963	)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD (1)	$	91,929,328		$	131,824,080

CASH AND CASH EQUIVALENTS, END OF PERIOD (Note 9)	$	92,073,350		$	70,657,117

NON-CASH FINANCING ACTIVITIES
Notes receivable issued in exchange for common stock associated with the exercise of employee stock options	$	—		$	185,890

(1) Cash and cash equivalents consist of demand deposits and highly liquid investments with original maturities of three months or less.

SEE ACCOMPANYING NOTES.

GLADSTONE CAPITAL CORPORATION

FINANCIAL HIGHLIGHTS

(UNAUDITED)

	Three Months Ended June 30, 2003			Three Months Ended June 30, 2002
Per Share Data(1)
Net asset value at beginning of period	$	13.09		$	12.91
Net investment income	0.31			0.22
Net unrealized (loss)/gain on investments	(0.07		)	0
Distributions from net investment income	(0.29		)	(0.21		)
Net asset value at end of period	$	13.04		$	12.92

Per share market value at beginning of period	$	16.18		$	17.80
Per share market value at end of period	20.48			18.05
Total Return(2)(3)	28.37		%	2.58		%
Shares outstanding at end of period	10,071,844			10,071,844

Ratios/Supplemental Data
Net assets at end of period	$	131,353,022		$	129,991,136
Average net assets	$	132,823,516		$	130,560,626
Ratio of operating expenses to average net assets – annualized	2.86		%	2.12		%
Ratio of net investment income to average net assets – annualized	7.18		%	6.82		%

	Nine Months Ended June 30, 2003			Nine Months Ended June 30, 2002
Per Share Data(1)
Net asset value at beginning of period	$	12.97		$	13.05
Net investment income	0.84			0.48
Net unrealized (loss)/gain on investments	0			0
Distributions from net investment income	(0.77		)	(0.60		)
Offering costs	0			(0.01		)
Effect of anti-dilution	0			(0.01		)
Net asset value at end of period	$	13.04		$	12.91

Per share market value at beginning of period	$	16.88		$	16.38
Per share market value at end of period	20.48			18.05
Total Return(2)(3)	25.89		%	13.86		%
Shares outstanding at end of period	10,071,844			10,071,844

Ratios/Supplemental Data
Net assets at end of period	$	131,353,022		$	129,991,136
Average net assets	$	132,170,641		$	130,888,323
Ratio of operating expenses to average net assets – annualized	2.74		%	1.96		%
Ratio of net investment income to average net assets – annualized	8.54		%	4.92		%

(1) Basic per share data.

(2) Amounts were not annualized for the results of the three and nine month periods ended June 30, 2003 and June 30, 2002.

(3) Total return equals the change of the ending market value over the beginning market value plus distributions divided by the beginning market value.

SEE ACCOMPANYING NOTES.

GLADSTONE CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2003

(UNAUDITED)

NOTE 1. UNAUDITED INTERIM FINANCIAL STATEMENTS

Interim financial statements of Gladstone Capital Corporation (the “Company”) are prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with GAAP are omitted. In the opinion of management, all adjustments, consisting solely of normal recurring accruals, necessary for the fair statement of financial statements for the interim periods have been included. Certain prior period amounts have been reclassified to conform to current year presentation. The current period’s results of operations are not necessarily indicative of results that ultimately may be achieved for the year. The interim financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended September 30, 2002, as filed with the Securities and Exchange Commission.

NOTE 2. ORGANIZATION

The Company was incorporated under the General Corporation Laws of the State of Maryland on May 30, 2001 as a closed-end investment company. The Company has elected to be treated as a business development company, or BDC, under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, the Company has elected to be treated for tax purposes as a regulated investment company, or RIC, under the Internal Revenue Code of 1986, as amended (the “Code”). The Company’s investment objectives are to achieve a high level of current income by investing in debt and equity securities of established private businesses.

Gladstone Advisers, Inc., a wholly-owned subsidiary of the Company, conducts the daily administrative operations of the Company. The financial statements of this subsidiary are consolidated with those of the Company.

Gladstone Business Loan LLC, a wholly-owned subsidiary of the Company, was established on February 3, 2003 for the purpose of owning the Company’s portfolio of loan investments. The financial statements of the subsidiary are consolidated with those of the Company.

NOTE 3. STOCK OPTIONS

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

The following tables set forth the pro-forma effect of fair value option accounting for the three and nine months ended June 30, 2003 and June 30, 2002:

	Three Months Ended June 30, 2003					Three Months Ended June 30, 2002

Increase in stockholders’ equity from operations, as reported	$		2,370,899			$	2,224,574

Deduct: total stock-based employee compensation expense determined under fair value method for all awards	(684,573				)	(24,875			)

Pro-forma increase in stockholders’ equity from operations	$			1,686,326		$		2,199,699

Increase in stockholders’ equity from operations per share
Basic, as reported	$	0.24				$		0.22
Basic, pro-forma	$	0.17				$		0.22

Diluted, as reported	$	0.23				$		0.22
Diluted, pro-forma	$	0.16				$		0.22

	Nine Months Ended June 30, 2003			Nine Months Ended June 30, 2002

Increase in stockholders’ equity from operations, as reported	$	8,445,069		$	4,830,036

Deduct: total stock-based employee compensation expense determined under fair value method for all awards	(2,053,718		)	(8,292		)

Pro-forma increase in stockholders’ equity from operations	$	6,391,351		$	4,821,744

Increase in stockholders’ equity from operations per share
Basic, as reported	$	0.84		$	0.48
Basic, pro-forma	$	0.63		$	0.48

Diluted, as reported	$	0.83		$	0.47
Diluted, pro-forma	$	0.63		$	0.48

NOTE 4. INCREASE IN STOCKHOLDERS’ EQUITY FROM OPERATIONS PER SHARE

The following tables set forth the computation of basic and diluted increase in stockholders’ equity from operations per share for the three and nine months ended June 30, 2003 and June 30, 2002:

	Three Months Ended June 30, 2003		Three Months Ended June 30, 2002

Numerator for basic and diluted increase in stockholders’ equity from operations per share	$	2,370,899	$	2,224,574

Denominator for basic weighted average shares	10,071,844		10,071,844

Dilutive potential shares	184,946		129,208

Denominator for diluted weighted average shares	10,256,790		10,201,052

Employee stock options	931,664		711,664

Basic net increase in stockholders’ equity from operations per common share	0.24		0.22
Diluted net increase in stockholders’ equity from operations per common share	0.23		0.22

	Nine Months Ended June 30, 2003		Nine Months Ended June 30, 2002

Numerator for basic and diluted increase in stockholders’ equity from operations per share	$	8,445,069	$	4,830,036

Denominator for basic weighted average shares	10,071,844		10,071,844

Dilutive potential shares	88,506		105,100

Denominator for diluted weighted average shares	10,160,350		10,176,944

Employee stock options	931,664		711,664

Basic net increase in stockholders’ equity from operations per common share	0.84		0.48
Diluted net increase in stockholders’ equity from operations per common share	0.83		0.47

NOTE 5. DIVIDENDS

The Company is required to pay out as a dividend 90% of its ordinary income and short-term capital gains for each taxable year in order to maintain its status as a RIC under Subtitle A, Chapter 1 of Subchapter M of the Code. It is the policy of the Company to pay out as a dividend up to 100% of those amounts. The amount to be paid out as a dividend is determined by the Board of Directors each quarter and is based on the annual earnings estimated by the management of the Company. Based on that estimate, a dividend is declared each quarter. At year-end the Company may pay a bonus dividend, in addition to the quarterly dividends, to ensure that it has paid out at least 90% of its ordinary income and short-term capital gains for the year. The Company has a policy of retaining long-term capital gains, if any, and not paying them out as dividends.

On July 7, 2003, The Company paid a dividend of $0.29 per share on its common stock to stockholders of record as of June 30, 2003. On April 7, 2003, the Company paid a dividend of $0.25 per share on its common stock to stockholders of record as of March 31, 2003 and on January 7, 2003, the Company paid a dividend of $0.23 per share on its common stock to its stockholders of record as of December 31, 2002. On July 8, 2002, the Company paid a dividend of $0.21 per share on its common stock to stockholders of record as of June 28, 2002. On April 8, 2002, the Company paid a dividend of $0.21 per share on its common stock to its stockholders of record as of March 28, 2002 and on January 15, 2002, the Company paid a dividend of $0.18 per share on its common stock to its stockholders of record as of December 31, 2001.

NOTE 6. INVESTMENT VALUATION

The Company carries its investments at fair value, as determined by its Board of Directors. Securities that are publicly traded are valued at the closing price on the valuation date. Debt and equity securities that are not publicly traded are valued at fair value as determined in good faith by the Board of Directors. Beginning in March 2003, the Company engaged Standard & Poor’s Loan Evaluation Service (S&P) to perform independent valuations of its investments. The Board of Directors uses the recommended valuations as prepared by S&P as a component of the foundation for the final fair value determination. In making such determination, the Board of Directors values non-convertible debt securities at cost plus amortized original issue discount plus PIK interest, if any, unless adverse factors lead to a determination of a lesser valuation. In valuing convertible debt, equity, success fees or other equity like securities, the Board of Directors determines the fair value based on the collateral, the issuer’s ability to make payments, the earnings of the issuer, sales to third parties of similar securities, the comparison to publicly traded securities, discounted cash flow and other pertinent factors. Due to the uncertainty inherent in the valuation process, such estimates of fair value may differ significantly from the values that would have resulted had a ready market for the securities existed, and the differences could be material. Additionally, changes in the market environment and other events that may occur over the life of the investments may cause the gains ultimately realized on these investments to be different than the valuation currently assigned.

NOTE 7. LOAN AND MANAGERIAL ASSISTANCE FEES

The 1940 Act requires that a business development company make available managerial assistance to its portfolio companies. The Company provides managerial assistance to its portfolio companies through its wholly-owned subsidiary, Gladstone Advisers, Inc. The Company receives fee income for managerial assistance it renders to portfolio companies in connection with its investments. Such fees are normally paid at the closing of the Company’s investments and are generally non-recurring. These managerial assistance services vary by investment, but generally consist of reviewing existing credit facilities, arranging bank financing, arranging equity financing, structuring financing from multiple lenders, structuring financing from equity investors, restructuring existing loans, raising equity and debt capital, and providing general financial advice. These fees totaled $125,000 for the three months ended June 30, 2003 and $483,000 for the nine months ended June 30, 2003, $645,898 for the three months ended June 30, 2002 and $1,286,809 for the nine months ended June 30, 2002.

From time to time, the Company will be invited to participate as a co-lender in a transaction. Where the Company does not provide significant managerial assistance services in connection with its investment, loan fees paid to the Company in such situations will be deferred and amortized over the life of the loan.

NOTE 8. PAYMENT IN KIND INTEREST

The Company has loans in its portfolio, which contain a payment in kind (“PIK”) provision. The PIK interest is added to the principal balance of the loan and recorded as income. To maintain the Company’s status as a RIC (as discussed in Note 5, above), this non-cash source of income must be paid out to stockholders in the form of dividends, even though the Company has not yet collected the cash. For the three months ended June 30, 2003 and June 30, 2002, the Company recorded PIK income of $232,572 and $124,280 respectively and for the nine months ended June 30, 2003 and June 30, 2002, PIK income of $667,648 and $254,738 respectively. At June 30, 2003 and September 30, 2002 the Company had accrued on its balance sheet, a total in PIK income of $1,052,084 and $400,490 respectively. The Company does not have any original issue discount income.

NOTE 9. REPURCHASE AGREEMENT

A repurchase agreement involves the purchase by an investor, such as the Company, of a specified security and the simultaneous agreement by the seller to repurchase it at an agreed upon future date and at a price which is greater than the purchase price by an amount that reflects an agreed-upon interest rate. Such interest rate is effective for the period of time during which the investor’s money is invested in the arrangement and is related to current market interest rates rather than the coupon rate on the purchased security. The Company requires the continual maintenance by its custodian or the correspondent in its account with the Federal Reserve/Treasury Book Entry System of underlying securities in an amount at least equal to the repurchase price. If the seller were to default on its repurchase obligation, the Company might suffer a loss to the extent that the proceeds from the sale of the underlying securities were less than the repurchase price. A seller’s bankruptcy could delay or prevent a sale of the underlying securities.

On June 30, 2003, the Company entered into a Repurchase Agreement with UBS Paine Webber for $63,706,000, which was settled on July 1, 2003. The Repurchase Agreement was recorded at cost and was fully collateralized by a United States Treasury Bill with a fair value of $65,080,000 and a carrying value of $65,006,677 that matures on August 21, 2003. The interest rate on the Repurchase Agreement was 0.82%. On September 30, 2002, the Company entered into a Repurchase Agreement with UBS Paine Webber for $39,198,719, which agreement was settled on October 1, 2002. The Repurchase Agreement was recorded at cost and was fully collateralized by a United States Treasury Bill with a fair value of $40,004,000 and a carrying value of $39,998,799 that matured on October 1, 2002. The interest rate on the Repurchase Agreement was 1.85%. In the future the Company plans to use a similar form of repurchase agreements as an investment option or in order to satisfy certain asset diversification requirements and maintain the Company’s status as a RIC.

NOTE 10. CONTRACTUAL OBLIGATIONS

The Company occupies its McLean, Virginia office space pursuant to a license agreement scheduled to expire on October 31, 2003. The Company’s New York City office facility has a service agreement scheduled to expire August 31, 2003 and the Company has entered into a new service agreement through August 31, 2004.

	Payment due by period
Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years	More than 5 years
Office Lease Obligations	$	104,413	$	66,673	$	37,740	—	—
Total	$	104,413	$	66,673	$	37,740	—	—

NOTE 11. DEFERRED COMPENSATION PLAN

The Company has adopted a deferred compensation plan (the “Plan”) effective January 1, 2002. The Plan permits an employee to defer the lesser of 75% of his or her total compensation or the applicable Internal Revenue Service (“IRS”) limit. The employees are eligible to participate in the Plan upon completion of 1,000 hours of service within the first six months of employment or after one year of service. The service requirement is waived for those employees who were employed as of January 1, 2002. The Company has funded $23,569 in contributions to the Plan that were recorded for the fiscal year ended September 30, 2002. The Company has received a determination letter from the IRS concurring that the deferred compensation plan satisfies the qualification requirements of the Code.

NOTE 12. POTENTIAL LOAN SALE

The Company during April 2003 agreed to sell its Inca Metal Products Corp., Kingway Acquisition Inc., Clymer Acquisitions, Inc. note to American Capital Strategies and was expected to complete the sale in May 2003. However, the senior lender would only approve the sale if a portion of its loan was also acquired. The Company offered to buy a portion of the senior lenders loan to satisfy the condition, but American Capital Strategies then declined to buy the Company’s loan. The Company is unsure the transaction will now occur.

NOTE 13. GLADSTONE BUSINESS LOAN LLC

On May 19, 2003, Gladstone Business Loan LLC entered into a credit agreement with CIBC World Markets Corp. to provide the Company with a $100 million revolving credit facility. This will enable the Company to securitize existing loans in order to be able to obtain additional lending funds.

NOTE 14. SUBSEQUENT EVENT

In July 2003, ARI Holdings, Inc. repaid its entire loan of approximately $8.6 million which included approximately $600,000 of accrued PIK interest.

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

All statements contained herein, other than historical facts, may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements may relate to, among other things, future events or our future performance or financial condition. In some cases, 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” or the negative of such terms or comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others: (1) adverse changes in interest rates; (2) our failure or inability to establish or maintain referral arrangements with leveraged buyout funds and venture capital funds to generate loan opportunities; (3) the loss of one or more of our executive officers, in particular David Gladstone or Terry Lee Brubaker; (4) our inability to establish or maintain a credit facility on terms reasonably acceptable to us, if at all; (5) our inability to successfully securitize our loan portfolio on terms reasonably acceptable to us, if at all; (6) the decision of our competitors to aggressively seek to make senior and subordinated loans to small and medium-sized businesses on terms more favorable than we intend to provide; and (7) those factors listed under the caption “Risk Factors” of the Annual Report on Form 10-K as filed with the Securities and Exchange Commission on December 11, 2002. We caution readers not to place undue reliance on any such forward-looking statements, which are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Form 10-Q.

The following analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the notes thereto contained elsewhere in this report.

OVERVIEW

We were incorporated under the General Corporation Laws of the State of Maryland on May 30, 2001. Our investment objectives are to achieve a high level of current income by investing in debt securities, consisting primarily of senior term debts, senior subordinated term debts and junior subordinated term debts, of established private businesses that are backed by leveraged buyout funds, venture capital funds or others. In some instances some of the senior term debts may be “last out tranches” meaning our debt is part of the senior term debt but is paid last from those payments coming to the senior term debt holders if the borrower is liquidated. We also provide first and second mortgage debt secured by business real estate. We normally do not provide revolving lines of credit. In addition, we may acquire existing loans made by others if those loans meet our profile. We also seek to provide our stockholders with long-term capital growth through the appreciation in the value of warrants, success fees or other equity-type instruments that we may receive when we provide debt. We operate as a closed-end, non-diversified management investment company, and have elected to be treated as a business development company under the 1940 Act.

We seek out small and medium-sized businesses that meet certain criteria, including (1) the potential for growth in cash flow, (2) adequate assets for loan collateral, (3) experienced management teams with a significant ownership interest in the borrower, (4) profitable operations based on the borrower’s cash flow, (5) reasonable capitalization of the borrower (usually by leveraged buyout funds or venture capital funds) and (6) the potential to realize appreciation and gain liquidity in our equity position, if any. We anticipate that liquidity in our equity position will be achieved through a merger or acquisition of the borrower, a public offering by the borrower or by exercise of our right to require the borrower to buy back its warrants. We lend to borrowers that need funds to finance growth, restructure their balance sheets or effect a change of control.

Our loans typically range from $5 million to $15 million, mature in no more than seven years and accrue interest at a fixed or variable rate that exceeds the prime rate. A number of our loans have a provision that calls for some portion of the interest payments to be deferred and added to the principal balance so that the interest is paid, together with the principal, at maturity. This form of deferred interest is often called “paid-in-kind” or “PIK” interest, and, when earned, we record PIK interest as interest income and add the PIK interest to the principal balance of the loans. The amount of PIK interest accrued and on our books as of June 30, 2003 was approximately $1.1 million.

Because our loans will generally be subordinated debt of private companies who typically cannot or will not expend the resources to have their debt securities rated by a credit rating agency, we expect that most, if not all, of the debt securities we acquire will be unrated. We cannot accurately predict what ratings these loans might receive if they were in fact rated, and therefore we cannot determine whether or not they could be considered to be “investment grade” quality.

To the extent possible, our loans generally are collateralized by a security interest in the borrower’s assets. Interest payments are generally made monthly or quarterly (except to the extent of any PIK interest) with amortization of principal generally being deferred for several years. The principal amount of the loans and any accrued but unpaid interest generally become due at maturity at five to seven years. When we receive a warrant to purchase stock in a borrower in connection with a loan, the warrant will typically have an exercise price equal to the fair value of the portfolio company’s common stock at the time of the loan and entitle us to purchase a modest percentage of the borrower’s stock.

In addition, as a business development company under the 1940 Act, we are required to make available significant managerial assistance to our portfolio companies. We provide these services, for which we receive fees, through our wholly owned subsidiary, Gladstone Advisers, Inc. Such fees are typically paid in part at the time a prospective portfolio company signs a non-binding term sheet with us, with the remainder paid at the closing of the investments. These fees are generally non-recurring, however in some instances they may have a recurring component. The specific services we provide vary by portfolio company, but generally consist of reviewing existing credit facilities, arranging bank financing, arranging equity financing, structuring financing from multiple lenders, structuring financing from equity investors, restructuring existing loans, raising equity and debt capital and providing general financial advice. We record these fees as managerial assistance fee revenue in the period in which the fees are earned.

Our business plan calls for managerial assistance fee revenue to equal or exceed our operating expenses (excluding interest expense). During the quarter and nine months ended June 30, 2003, the Company recorded managerial assistance fee revenue of $125,000 and $483,000, respectively, stemming from a new investment during the quarter. However, during the quarter and nine months ended June 30, 2003, operating expenses (excluding interest expense) exceeded managerial assistance fee revenue by approximately $819,000 and $2.2 million, respectively. Because we typically generate managerial assistance fee revenue only when we make new loans, our relatively slow pace of loans during the quarter and nine months ended June 30, 2003 led to this shortfall. In the future, we will need to make loans at a faster pace in order to meet this objective. However, we believe that, as the economic environment improves, we will be able to make sufficient new investments so that over time our managerial assistance fee revenue will equal or exceed our operating expenses (excluding interest expense), although there can be no guarantee that we will be able to do so.

Prior to making an investment, we ordinarily enter into a non-binding term sheet with the potential borrower. These non-binding term sheets are generally subject to a number of conditions, including but not limited to the satisfactory completion of our due diligence investigations of the potential borrower’s business and reaching agreement on the legal documentation for the loan. Typically, upon execution of the non-binding term sheet, the potential borrower pays us a non-refundable fee for our services rendered through the date of the non-binding term sheet. Where the fee paid is non-refundable, we recognize this as management fee revenue upon execution of the non-binding term sheet.

In the event that we expend significant effort in considering and negotiating a potential investment that ultimately is not consummated, we generally will seek reimbursement from the proposed borrower for our reasonable expenses incurred in connection with the proposed transaction. Any amounts collected are recognized as “other income” in the quarter in which such reimbursement is received. Also, in the event that we have incurred significant legal fees in connection with the transaction, we will typically also seek reimbursement for these expenses from the proposed borrower. However, there can be no guarantee that we will be successful in collecting any such reimbursements.

The only significant continuing revenue associated with the investments we have already closed is interest paid and, potentially, capital gains received in connection with the liquidation of any associated equity interest (e.g., warrants). While in some instances we may also receive on-going managerial assistance fee revenue in connection with a consummated investment, any such amounts have been, and in the future are expected to be, insignificant.

The general economic climate during the fiscal year ended September 30, 2002 and the quarter and nine months ended June 30, 2003 was unfavorable. Many businesses saw their sales and business prospects decline during this time. Consequently, many of these companies were forced to lay off employees and engage in other cost cutting measures. As a result of the difficult business climate, we determined it prudent to proceed cautiously in making loans during the 2002 fiscal year and in the quarter and nine months ended June 30, 2003. Since our initial public offering in August 2001, we have made 15 different loans to, or investments in, 11 companies for a total of approximately $115.5 million (including the maximum aggregate amount outstanding under an $8 million line of credit in favor of one of our portfolio companies, that has subsequently been retired). This was below our objective set at the beginning of the 2002 fiscal year.

In spite of the economic environment, we are earnestly working toward the consummation of more investments. These prospective loans are subject to, among other things, the satisfactory completion of our due diligence investigation of each borrower, acceptance of terms and structure and necessary consents. With respect to each prospective loan, we will only agree to provide the loan if, among other things, the results of our due diligence investigations are satisfactory, the terms and conditions of the loan are acceptable and all necessary consents are received. Our management has initiated its due diligence investigations of the potential borrowers, however we can not assure you that we will not discover facts in the course of completing our due diligence that would render a particular investment imprudent or that any of these loans will actually be made.

The Company is making strides to be able to continue funding new investments once the initial funds are placed. The Company through its wholly-owned subsidiary entered into a credit agreement with CIBC World Markets Corp to provide the Company with a $100 million revolving credit line facility. This is the first step toward securitizing the Company’s loans for long-term funding.

Dividend History

The Company is classified as a registered investment company (RIC), and in order to qualify as a RIC and to avoid corporate level tax on the income distributed to stockholders, we are required, in accordance with Subchapter M of the Code, to distribute at least 90% of our ordinary income and short-term capital gains to our stockholders on an annual basis. In compliance with these requirements, we declared and paid quarterly cash dividends as follows:

Quarter Ended	Date Paid	Dividend Per Share		Type of Income
June 30, 2003	July 7, 2003	$	0.29	Ordinary*
March 31, 2003	April 7, 2003	$	0.25	Ordinary*
December 31, 2002	January 1, 2003	$	0.23	Ordinary*
September 30, 2002	October 7, 2002	$	0.21	Ordinary
June 30, 2002	July 8, 2003	$	0.21	Ordinary
March 31, 2002	April 8, 2003	$	0.21	Ordinary

*Estimated and may be redefined at year end

Critical Accounting Policies

Our accounting policies are more fully described in the “Notes to Financial Statements” contained elsewhere in this report. As disclosed in the “Notes to Financial Statements”, the preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the period reported. Actual results could differ from those estimates.

The most critical accounting policy is that of the valuation of the investment portfolios. Please refer to the “Investment Valuation” section below for a discussion of the investment valuation process.

Investment Valuation

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

We value our investment portfolio each quarter. Members of our portfolio management team prepare the portfolio company valuations using the most recent portfolio company financial statements and forecasts. These individuals also consult with the respective principal who originated the portfolio investment to obtain further updates on the portfolio company’s performance, including information such as industry trends, new product development, and other operational issues. As of March 31, 2003, the Company engaged Standard & Poor’s Loan Evaluation Service (S&P) to help evaluate the value of the majority of its loan securities. This quarter, the Company expanded the S&P engagement to include evaluations on success fees (conditional interest included in some loan securities). The Company and S&P will only evaluate the value of a success fee if the probability of receiving the success fee on a given loan was above 6-8%, a threshold of significance, in which case a value would be assigned. Upon completing the data collection, the valuation data is presented to S&P. S&P makes its independent assessment of the data and assesses its own data to determine market values for the securities. With regard to its work, S&P has issued the following paragraph:

S&P provides evaluated price opinions which are reflective of what S&P believes the bid side of the market would be for each loan after careful review and analysis of descriptive, market and credit information. Each price reflects S&P’s best judgment based upon careful examination of a variety of market factors. Because of fluctuation in the market and in other factors beyond its control, S&P cannot guarantee these evaluations. The evaluations reflect the market prices, or estimate thereof, on the date specified. The prices are based on comparable market prices for similar securities. Market information has been obtained from reputable secondary market sources. Although these sources are considered reliable, S&P cannot guarantee their accuracy.

With the Company assessment and S&P value estimates as a backdrop, the Company’s Board votes to accept or not accept the analyses and values recommended presented by the Company and S&P. At June 30, 2003, the board elected to accept the valuations recommended by S&P on those loans as denoted on the Schedule of Investments in the Consolidated Financial Statements. Because there is a lag between when we close a loan and when we can get the loan evaluated by S&P, new loans are not valued immediately by S&P; rather, the board makes its own determination about the value of the loan in accordance with the Company’s valuation policy. Since S&P does not provide values for mortgage loans or equity securities, the directors determine fair value of these using the following policy:

General Valuation Policy: We carry our investments at fair value, as determined by our Board of Directors. Securities that are publicly traded, if any, are valued at the closing price on the valuation date. Debt and equity securities that are not publicly traded or for which we have various degrees of trading restrictions, are valued at fair value as determined in good faith by our Board of Directors. In making the good faith determination of the securities, we start with the cost basis of the security, which includes the amortized original issue discount, success fee (defined interest) and PIK interest, if any. We then apply the methods set out below in Valuation Methods. Due to the uncertainty inherent in the valuation process, such estimates of fair value may differ significantly from the values that would have been obtained had a ready market for the securities existed, and the differences could be material. Additionally, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned. No single standard for determining fair value in good faith exists since fair value depends upon circumstances of each individual case. In general, fair value is the amount that the company might reasonably expect to receive upon the current sale of the security.

Credit Information: We monitor a wide variety of key credit statistics that provide information regarding our portfolio companies to help us assess credit quality and portfolio performance. We require our portfolio companies to provide annual audited and monthly, unaudited financial statements. Using these statements, we calculate and evaluate the credit statistics. For purposes of analyzing the financial performance of our portfolio companies, we may make certain adjustments to their cash flow statements to reflect the pro forma results of a company consistent with a change of control transaction, to reflect anticipated cost savings resulting from a merger or restructuring, costs related to new product development, compensation to previous owners, and other acquisition or restructuring related items.

Loan Grading and Risk Rating: As of December 31, 2002 we expanded the scale of our loan grading system from one that had a scale of 1 to 4, to a scale that uses 0 to 10. This system is used to estimate the probability of default on our debt securities and the probability of loss if there is a default. These types of systems are referred to as risk rating systems and are used by banks and rating agencies. We risk rate each of our debt securities. The risk rating system covers both qualitative and quantitative aspects of the business and the securities we hold.

We seek to have our risk rating system mirror the risk rating systems of major risk rating organizations such as those provided by nationally recognized statistical rating organizations (“NRSRO”) as defined in Rule 2a-7 under the 1940 Act. While we seek to mirror the NRSRO systems, we cannot provide any assurance that our risk rating system provides the same risk rating as a NRSRO. The following chart is an estimate of the relationship of our risk rating system to the designations used by two NRSROs as they risk rate debt securities of major companies. Because we have established our system to rate debt securities of companies that are unrated by any NRSRO there can be no assurance that the correlation to the NRSRO set out below is accurate. It is our understanding that most debt securities of middle market companies do not exceed the grade of BBB on a NRSRO scale; so there would be no debt securities in the middle market that would meet the definition of AAA, AA or A. Therefore, our scale begins with the designation BBB as the best risk rating.

Company’s System	First NRSRO	Second NRSRO	Gladstone Capital’s Description(a)
>10	Baa2	BBB	Probability of Default (PD) during the next ten years is 4% and the Expected Loss (EL) is 1% or less
10	Ba3	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 22.0% and the EL is 5% to 6.5%
5	B2	B	PD is 25% and the EL is 6.5% to 8%
4	B3	B-	PD is 27% and the EL is 8% to 10%
3	Caa1	CCC+	PD is 30% and the EL is 10.0% to 13.3%
2	Caa2	CCC	PD is 35% and the EL is 13.3% to 16.7%
1	Caa3	CC	PD is 65% and the EL is 16.7% to 20%
0	N/a	D	PD is 85% or there is a Payment Default: and the EL is greater than 20%

(a) the default rates set here are for a ten year term debt, if the company’s debt security is less than ten years then the probability of default is adjusted to a lower percentage for the shorter period which may move the security higher on the company’s risk rating scale.

At September 30, 2002, all debt investments were grade 3 under the 1-to-4 loan grading system. The rating of 3 on the 1-4 system means that the portfolio companies were performing as agreed and they have paid on time. Using the expanded scale, at December 31, 2002, March 31, 2003, and June 30, 2003 the average, weighted average and highest rated loan and lowest rated loan were as follows:

Rating	December 31, 2002	March 31, 2003	June 30, 2003
Average	7.5	7.7	7.7
Weighted Average	7.5	7.7	7.6
Highest	9.0	9.0	9.0
Lowest	6.0	6.0	6.0

The above scale gives an indication of the probability of default and the magnitude of the loss if there is a default using the expanded risk rating scale.

Our policy is to stop accruing interest on an investment if we determine that interest is no longer collectible. To date we have not placed any investments on non-accrual. At June 30, 2003 and September 30, 2002, no payments were past due on any of our debt securities. We do not risk rate our equity securities.

Valuation Methods: For debt securities, we first determine if there is a market for the debt security. If there is a market, then we will determine the value based on the market prices for the security, even if that market is not robust. At June 30, 2003 and September 30, 2002 there was no market for any of the debt securities in our portfolio. If there is no market for the debt securities, then we begin with the risk rating designation of the security described above. Using the risk rating designation above, we seek to determine the value of the security as if we intended to sell the security in a current sale. To determine the current sale price of the security, we may use some or all of the following items: financial standing of the issuer of the security, comparison of the business and financial plan of the issuer with actual results, the cost of the security, the size of the security held as it relates to the liquidity of the market for such securities, contractual restrictions on the disposition of the security, pending public offering of the issuer of the security, pending reorganization activity affecting the issuer such as mergers or debt restructuring, reported prices of similar securities of the issuer or comparable issuers, ability of the issuer to obtain needed financing, changes in the economy affecting the issuer, recent purchases or sale of a security of the issuer, pricing by other buyers or sellers of similar securities, financial statements of the borrower, the type of security, cost at date of purchase, size of holding, discount from market value of unrestricted securities of the same class at the time of purchase, special reports prepared by analysts, information as to any transactions or offers with respect to the security, existence of merger proposals or tender offers affecting the securities, the collateral, the issuer’s ability to make payments, the current and forecasted earnings of the issuer, sales to third parties of similar securities, statistical ratios compared to lending standards, statistical ratios compared to other similar securities and other pertinent factors.

For equity securities, we first determine if there is any market for the equity security. If there is a market, then we determine the value based on the market prices for the security, even if that market is not robust. At June 30, 2003 and September 30, 2002 there was no market for any of the equity securities we owned. If there is no market for the equity securities, then we use the same information we would use for a debt security valuation described above, as well as standard valuation techniques used by major valuation firms to value the equity securities of private companies. These valuation techniques consist of: discounted cash flow of the expected sales price in the future, the value of the securities based on the recent sale of comparable transactions and a review of similar companies that are publicly traded and the market multiple of their equity securities. At June 30, 2003 we had $37,000 invested, at cost, in equity securities compared to our debt portfolio with a cost basis of $104,940,557.

At June 30, 2003 we determined that the probability of our receiving the success fee on one of our loans was at a point that an appreciated value should be used. To determine this value S&P estimated the probability of the payment and discounted the value over time. The Home Care Supply, Inc. senior loan has an appreciation of $473,400 in its value as a result of the value applied to the success fee. Further, the value of our warrants in Finn Corporation has an appreciation of $394,111 for the quarter ended June 30, 2003. This appreciation totaling $867,511 offset depreciation of $869,924.

Our new risk rating system is more detailed than our prior system. Due to the more detailed nature of the risk rating system there is the likelihood that future valuations will change more frequently. S&P determines what a loan might trade at if it was publicly traded, which also adds volatility to our valuations.

Managerial Assistance Fees

The 1940 Act requires that a business development company make available managerial assistance to its portfolio companies. We provide managerial assistance to our portfolio companies in connection with our investments through our wholly owned subsidiary, Gladstone Advisers, Inc. and receive fees for our managerial assistance services. These fees are normally paid at the closing of our investments in our portfolio companies, are generally non-recurring and are recognized as revenue when earned. The managerial assistance services we provide vary by investment, but generally consist of reviewing existing credit facilities, arranging bank financing, arranging equity financing, structuring financing from multiple lenders, structuring financing from equity investors, restructuring existing loans, raising equity and debt capital, and providing general financial advice. From time to time, we are invited to participate as a co-lender in a transaction. In the event that we do not provide significant managerial assistance services in connection with our investment, loan fees paid to us in such situations are deferred and amortized over the life of the loan.

RESULTS OF OPERATIONS

Comparison of the three months ended June 30, 2003 to the three months ended June 30, 2002

Investment Income

Investment income for the three months ended June 30, 2003 was approximately $4.1 million as compared to $2.9 million for the three months ended June 30, 2002. This increase was primarily a result of increased interest income from new investments.

Interest income from our investments in debt securities of private companies was approximately $3.7 million for the three months ended June 30, 2003 as compared to $1.8 million for the three months ended June 30, 2002. This increase was primarily a result of the increase in new investments of $49.0 million.

The weighted average yield on our portfolio for the three months ended June 30, 2003 was 13.24% (without giving effect to PIK interest) and 14.0% (after giving effect to PIK interest). The weighted average yield for the three months ended June 30, 2002 was 14.26% (without giving effect to PIK interest) and 15.25% (after giving effect to PIK interest). The yields were computed based on the cost value of the portfolio.

Interest income from invested cash and cash equivalents for the three months ended June 30, 2003 was approximately $79,000, as compared to $352,000 for the three months ended June 30, 2002. This decrease was primarily a result of the $49.0 million of new investments made between June 30, 2002 and June 30, 2003.

For the three months ended June 30, 2003, we recorded approximately $110,000 in interest income from loans to our employees in connection with the exercise of employee stock options, which was consistent with approximately $109,000 in interest income from such loans for the three months ended June 30, 2002.

Managerial assistance fees were $125,000 for the three months ended June 30, 2003, as compared to $646,000 for the three months ended June 30, 2002. This decrease was the result of new investments of $5.5 million closing during the quarter as compared to new investments of $24.5 million with related fees during the three months ended June 30, 2002.

Operating Expenses

Operating expenses for the three months ended June 30, 2003 were approximately $944,000, as compared to approximately $691,000 for the three months ended June 30, 2002. This increase was primarily a result of additional employees, new office space and operating expenses related to the increase in staff and overall operations.

Salaries and benefits for the three months ended June 30, 2003 were approximately $494,000, as compared to approximately $364,000 for the three months ended June 30, 2002. This increase was a result of an increase in employees in the current quarter as compared to the prior year quarter.

Rent expense for the three months ended June 30, 2003 was approximately $55,000, as compared to approximately $36,000 for the three months ended June 30, 2002. This increase was primarily a result of new office space acquired in September 2002.

Professional fees, consisting primarily of legal and audit fees, for the three months ended June 30, 2003 were approximately $101,000, as compared to approximately $119,000 for the three months ended June 30, 2002. This decrease was primarily a result of a decline in legal fees which were slightly tempered by due diligence fees associated with the line of credit.

Directors’ fees for the three months ended June 30, 2003 were approximately $20,000, as compared to approximately $7,000 for the three months ended June 30, 2002. This increase was primarily a result of the accounting for the annual directors fee pro rated over the 2003 fiscal year.

Insurance expense for the three months ended June 30, 2002 was approximately $72,000, as compared to approximately $50,000 for the three months ended June 30, 2002. The majority of this increase is due to an increase in directors’ and officers’ insurance premiums.

Stockholder related costs for the three months ended June 30, 2003 were approximately $12,000, as compared to approximately $7,000 for the three months ended June 30, 2002. The increase was attributable to increased filing fees.

Financing fees were incurred for the first time during the three months ended June 30, 2003. These fees of approximately $62,000 represent the related service fees associated with the warehouse line of credit, backup service and the amortization of deferred financing costs.

General and administrative expenses, consisting primarily of office operations, travel and data communications expenses for the three months ended June 30, 2003 were approximately $127,000, as compared to approximately $107,000 for the three months ended June 30, 2002. This increase was primarily a result of the related expenses of new employees and increased operations.

We believe that our current level of operating expenses is not necessarily indicative of our future operating expenses. We estimate that over time, as we continue to more fully deploy the proceeds of our initial public offering, our operating expenses will be approximately two percent of our net assets.

Net Increase in Stockholders’ Equity from Operations

As a result of the investment income and operating expenses described above, we had net increase in stockholders’ equity from operations of approximately $2.4 million for the three months ended June 30, 2003. Based on a weighted-average of 10,071,844 (basic) and 10,256,790 (diluted) shares outstanding, our net increase in stockholders’ equity from operations per common share for the three months ended June 30, 2003 was $0.24 (basic) and $0.23 (diluted).

For the three months ended June 30, 2002, we had net increase in stockholders’ equity from operations of approximately $2.2 million. Based on a weighted-average of 10,071,844 (basic) and 10,201,052 (diluted) shares outstanding, our net increase in stockholders’ equity from operations per common share for the three months ended June 30, 2002 was $0.22 (basic) and $0.22 (diluted).

Net increase in stockholders’ equity from operations includes approximately $745,000 of net unrealized depreciation for the quarter ended June 30, 2003 due to the fair values of the investment portfolios based on recommendations prepared by Standard & Poor’s. Majority of the depreciation occurred from depreciation of $658,000 associated with the loan we hold in the Inca/Kingway/Clymer Company. We would have depreciated that note in the quarter ending March 31, 2003 except we had an agreement from American Capital Strategies to purchase the note. Since then American Capital Strategies has declined to purchase the note and we have depreciated the note this quarter even though the note is paying as agreed. There was no unrealized appreciation or depreciation for the quarter ended June 30, 2002.

Comparison of the nine months ended June 30, 2003 to the nine months ended June 30, 2002

Investment Income

Investment income for the nine months ended June 30, 2003 was approximately $11.1 million as compared to $6.8 million for the nine months ended June 30, 2002. This increase was primarily a result of increased interest income from investments.

Interest income from our investments in debt securities of private companies was approximately $9.9 million for the nine months ended June 30, 2003 as compared to $3.7 million for the nine months ended June 30, 2002. This increase was primarily a result of the increase in new investments of $49.0 million.

The weighted average yield on our portfolio for the nine months ended June 30, 2003 was 13.48% (without giving effect to PIK interest) and 14.34% (after giving effect to PIK interest). The weighted average yield for the nine months ended June 30, 2002 was 15.42% (without giving effect to PIK interest) and 15.18% (after giving effect to PIK interest). The weighted average yield is computed based on the cost basis of the investment portfolio.

Interest income from invested cash and cash equivalents for the nine months ended June 30, 2003 was approximately $391,000, as compared to $1.4 million for the nine months ended June 30, 2002. This decrease was primarily a result of the $49.0 million of new investments made between June 30, 2002 and June 30, 2003.

For the nine months ended June 30, 2003, we recorded approximately $329,000 in interest income from loans to our employees in connection with the exercise of employee stock options, which was consistent with approximately $324,000 in interest income from such loans for the nine months ended June 30, 2002.

Managerial assistance fees were $483,000 for the nine months ended June 30, 2003, as compared to $1.3 million for the nine months ended June 30, 2002. This decrease was the result of three new investment closings during the nine months ended June 30, 2003 as compared to five new investment closings during the nine months ended June 30, 2002 with related fees.

Operating Expenses

Operating expenses for the nine months ended June 30, 2003 were approximately $2.7 million, as compared to approximately $1.9 million for the nine months ended June 30, 2002. This increase was primarily a result of new employees, new office space and operating expenses related to the increase in staff and overall operations.

Salaries and benefits for the nine months ended June 30, 2003 were approximately $1.4 million, as compared to approximately $969,000 for the nine months ended June 30, 2002. This increase was a result of the hiring of new employees.

Rent expense for the nine months ended June 30, 2003 was approximately $164,000, as compared to approximately $83,000 for the nine months ended June 30, 2002. This increase was primarily a result of new office space acquired in September 2002.

Professional fees, consisting primarily of legal and audit fees, for the nine months ended June 30, 2003 were approximately $302,000, as compared to approximately $335,000 for the nine months ended June 30, 2002. This decrease was primarily a result of a decrease in legal fees.

Directors’ fees for the nine months ended June 30, 2003 were approximately $55,000, as compared to approximately $14,000 for the nine months ended June 30, 2002. This increase was primarily a result of the accounting for the annual directors fee pro rated over the 2003 fiscal year.

Insurance expense for the nine months ended June 30, 2003 was approximately $217,000, as compared to approximately $147,000 for the nine months ended June 30, 2002. This increase was mainly attributable to an increase in directors’ and officers’ insurance premiums.

Stockholder related costs for the nine months ended June 30, 2003 were approximately $124,000, as compared to $78,000 for the nine months ended June 30, 2002. This increase is due to costs associated with the printing of the annual report, the annual stockholders’ meeting, and an increase in filing fees.

Financing fees were incurred for the first time during the nine months ended June 30, 2003. These fees of approximately $62,000 represent the related service fees associated with the warehouse line of credit, backup service, and the amortization of deferred financing charges.

General and administrative expenses, consisting primarily of office operations, travel and data communications related expenses for the nine months ended June 30, 2003 were approximately $378,000, as compared to approximately $297,000 for the nine months ended June 30, 2002. This increase was primarily a result of the related expenses to new employees and increased operations.

Net Increase in Stockholders’ Equity from Operations

As a result of the investment income and operating expenses described above, we had net increase in stockholders’ equity from operations of approximately $8.4 million for the nine months ended June 30, 2003. Based on a weighted-average of 10,071,844 (basic) and 10,160,350 (diluted) shares outstanding, our net increase in stockholders’ equity from operations per common share for the nine months ended June 30, 2003 was $0.84 (basic) and $0.83 (diluted).

For the nine months ended June 30, 2002, we had net increase in stockholders’ equity from operations of approximately $4.8 million. Based on a weighted-average of 10,071,844 (basic) and 10,176,944 (diluted) shares outstanding, our net increase in stockholders’ equity from operations per common share for the nine months ended June 30, 2002 was $0.48 (basic) and $0.47 (diluted).

Net increase in stockholders’ equity from operations includes approximately $2,000 of net unrealized depreciation for the nine months ended June 30, 2003 due to the fair values of the investment portfolios based on recommendations prepared by Standard & Poor’s. There was no unrealized appreciation or depreciation for the nine months ended June 30, 2002.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2003, we had investments in debt securities of, or loans to, 10 private companies, totaling approximately $105.0 million of total investment assets. This number includes approximately $1.1 million in accrued PIK interest, which as described in “Overview,” is added to the carrying value of our investments.

In January 2003, we closed a $5.5 million investment in Wing Stop Restaurants International, Inc., a franchiser of fast food chicken restaurants. The investment consisted of a loan with added income from a success fee if the business is successful. In February 2003 we closed and funded a loan for $12 million to America’s Water Heater Rentals, LLC.

In April 2003, we closed a $5.5 million investment in Fugate and Associates, Inc., an imaging supply company. The investment consisted of a loan with added income from a success fee if the business is successful.

The following table summarizes the contractual principal amortization and maturity of our investment portfolio by fiscal year:

Fiscal Year	Amount
2003	$	704,167
2004	$	11,232,084
2005	$	12,056,943
2006	$	13,586,997
2007	$	33,647,366
Thereafter	$	33,750,000
Total	$	104,977,557

In July 2003, ARI Holdings, Inc. repaid its entire outstanding balance of approximately $8.6 million plus accrued interest and PIK for the outstanding days in July.

Cash provided by operating activities for the nine months ended June 30, 2003, consisting primarily of the items described in “Results of Operations,” was approximately $8.4 million. Net cash used in investing activities was approximately $174,000 during the nine months ended June 30, 2003. The net cash used in investing activities consisted of net proceeds of $24.5 million from the repurchase agreement and repayment of $2.4 million investment principal from our portfolio companies. Partially offsetting the cash provided by investing activities was the $27.0 million of new investments. Net cash used in financing activities was approximately $8.1 million for the nine months ended June 30, 2003 and consisted of the payment of dividends and charges incurred to establish the warehouse line of credit.

During the nine months ended June 30, 2003, cash and cash equivalents increased from approximately $91.9 million at the beginning of the period to approximately $92.1 million at the end of the period. The increase of approximately $0.2 million was mainly the result of the net proceeds from the repurchase agreement.

On June 30, 2003, we entered into a repurchase agreement with UBS Paine Webber for approximately $63.7 million. The repurchase agreement was fully collateralized by a United States treasury bill with a fair value of approximately $65.0 million that matured on August 21, 2003. The interest rate on the repurchase agreement was 0.82%. This repurchase agreement was reflected on our balance sheet as of June 30, 2003 as an increase in cash and cash equivalents pledged to creditors of $65.0 million, along with a corresponding liability for approximately the same amount. The repurchase agreement was settled on July 1, 2003. In the future, we plan to use a similar form of repurchase agreement as an investment option or in order to satisfy certain asset diversification requirements and maintain our status as a RIC.

In order to qualify as a regulated investment company and to avoid corporate level tax on the income we distribute to our stockholders, we are required, under Subchapter M of the Code, to distribute at least 90% of our ordinary income and short-term capital gains to our stockholders on an annual basis. In accordance with these requirements, we declared and paid quarterly cash dividends of $0.29 for the quarter ended June 30, 2003, $0.25 for the quarter ended March 31, 2003 and $0.23 for the quarter ended December 31, 2002.

We anticipate borrowing funds and issuing additional equity securities to obtain additional capital once the proceeds of our initial public offering have been fully invested. To this end, we have filed with the Securities and Exchange Commission (“SEC”) a registration statement that would permit us to issue, through one or more transactions, up to an aggregate of $75 million in our securities, which may consist of shares of our common stock, preferred stock, or debt securities. On March 19, 2003, the SEC declared the registration statement effective, and we currently have no immediate plans to issue any securities under the registration statement.

On May 19, 2003, the Company, through its wholly-owned subsidiary, entered into a credit agreement with CIBC World Markets Corp. to provide the Company with a $100 million revolving credit line facility. To date, the Company has not drawn down on the credit facility.

In addition to borrowing funds and issuing additional securities, we also intend to pursue a strategy of securitizing our loan portfolio in approximately one to two years. We may use the cash we receive upon the sale of interests in our loans to repay bank borrowings and make additional loans. We can not provide assurance that this securitization strategy will be successful.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We are subject to financial market risks, including changes in interest rates. We expect that ultimately approximately 50% of the loans in our portfolio will be made at fixed rates, with approximately 50% made at variable rates; however, to date all of our loans have been made at fixed rates.

We expect to borrow funds to finance future lending activities after we have substantially fully invested the proceeds of our initial public offering. These future borrowings may be at fixed rates or variable rates. To date, we have not borrowed any funds.

We expect to hedge against interest rate fluctuations in the future by using standard hedging instruments such as futures, options and forward contracts. While hedging activities may insulate us against adverse fluctuations in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to our portfolio of investments.

ITEM 4. CONTROLS AND PROCEDURES.

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

There have been no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2003, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II–OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

Neither the Company nor its subsidiaries are currently subject to any material legal proceeding, nor, to the Company’s knowledge, is any material legal proceeding threatened against the Company or its subsidiaries.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

Not applicable.

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

Not applicable.

ITEM 5. OTHER INFORMATION.

Not applicable.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS

See the exhibit index.

(b) REPORTS ON FORM 8-K

On May 12, 2003, the Company filed a Current Report on Form 8-K to indicate it had issued a press release announcing its financial results for the quarter ended March 31, 2003.

On June 12, 2003, the Company filed a Current Report on Form 8-K to indicate it had issued a press release announcing the declaration of the third quarter of fiscal year 2003 dividend.

SIGNATURE

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

	GLADSTONE CAPITAL CORPORATION

	By:	/s/ HARRY BRILL

	Harry Brill
	Chief Financial Officer and Treasurer

Date: August 14, 2003

EXHIBIT INDEX

Exhibit		Description

3.1		Articles of Amendment and Restatement of the Articles 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. 333-63700), filed July 27, 2001.

3.2		By-laws, incorporated by reference to Exhibit b to Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-63700), filed July 27, 2001.

10.1		Credit Agreement dated as of May 19, 2003 between Gladstone Business Loan, LLC and CIBC World Markets Corporation.

11		Computation of Per Share Increase in Stockholders’ Equity from Operations (included in the notes to the unaudited financial statements contained in this report).

31.1		Certification of Chief Executive Officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.