What is athe quorum requirement?

A quorum of stockholders is necessary to hold a valid meeting. A quorum will be present if at least a majority of the outstanding shares are represented by stockholders present at the meeting or by proxy. On the record date, there were ~~7,672,000~~8,565,264 shares outstanding and entitled to vote. Thus ~~3,836,001~~4,282,633 shares must be represented by stockholders present at the meeting or by proxy to have a quorum.

Your shares will be counted towards the quorum only if you submit a valid proxy (or one is submitted on your behalf by your broker, bank or other nominee) or if you vote in person at the meeting. Abstentions and broker non-votes will be counted towards the quorum requirement. If there is no quorum, a majority of the votes present at the meeting may adjourn the meeting to another date.

~~How many votes are needed to approve each proposal?~~


	~~• Proposal I:~~	To elect three directors to hold office until the 2009 Annual Meeting of Stockholders and one director to serve until the 2008 Annual Meeting of Stockholders, each nominee for election as a director must receive a “For” vote from the majority of shares present and entitled to vote, either in person or by proxy. Broker non-votes will have no effect.

	~~• Proposal II:~~	To approve an amended and restated investment advisory agreement with Gladstone Management Corporation and an administration agreement with Gladstone Administration, LLC we must receive a “For” vote from the majority of shares present and voting. Abstentions and broker non-votes will have no effect.

	~~• Proposal III:~~	To ratify the selection of PricewaterhouseCoopers LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2006, we must receive a “For” vote from the majority of shares present and voting. Abstentions and broker non-votes will have no effect.

~~How are votes counted?~~

Votes will be counted by the inspector of election appointed for the meeting, who will separately count “For” and “Withhold” and, with respect to proposals other than the election of directors, “Against” votes,

abstentions and broker non-votes. Abstentions will be counted towards the vote total for each proposal, and will have the same effect as “Against” votes. Broker non-votes have no effect and will not be counted towards the vote total for any proposal.

If your shares are held by your broker as your nominee (that is, in “street name”), you will need to obtain a proxy form from the institution that holds your shares and follow the instructions included on that form regarding how to instruct your broker to vote your shares. If you do not give instructions to your broker, your broker can vote your shares with respect to “discretionary” items, but not with respect to “non-discretionary” items. Discretionary items are proposals considered routine under the rules of the New York Stock Exchange on which your broker may vote shares held in street name in the absence of your voting instructions including the election of directors. On non-discretionary items, if any, for which you do not give your broker instructions, the shares will be treated as broker non-votes.

How can I find out the results of the voting at the annual meeting?

Preliminary voting results will be announced at the ~~Annual Meeting.~~annual meeting. Final voting results will be published in our quarterly report onForm 10-Q for the second quarter of ~~2006.~~2007.

~~Who is paying for this proxy solicitation?~~

We will pay for the entire cost of soliciting proxies. In addition to these mailed proxy materials, our directors and employees and Georgeson Shareholder Communications Company may also solicit proxies in person, by telephone, or by other means of communication. Directors and employees will not be paid any additional compensation for soliciting proxies, but Georgeson will be paid its customary fee of approximately $6,500 plus~~out-of~~-pocket expenses for its basic solicitation services, which include review of proxy materials, dissemination of broker search cards, distribution of proxy materials, solicitation of ADP, brokers, banks and institutional holders, and delivery of executed proxies. We may also reimburse brokerage firms, banks and other agents for the cost of forwarding proxy materials to beneficial owners.

~~If I share my residence with another stockholder, how many copies of the Annual Report and Proxy Statement should I receive?~~

The Securities and Exchange Commission has adopted a rule concerning the delivery of disclosure documents. The rule allows us to send a single set of any annual report, proxy statement, proxy statement combined with a prospectus, or information statement to any household at which two or more stockholders reside if they share the same last name or we reasonably believe they are members of the same family. This procedure is referred to as “Householding.” This rule benefits both you and us. It reduces the volume of duplicate information received at your household and helps us reduce expenses. Each stockholder subject to Householding will continue to receive a separate proxy card or voting instruction card.

We will deliver promptly, upon written or oral request, a separate copy of the Annual Report or Proxy Statement, as applicable, to a stockholder at a shared address to which a single copy of the document was previously delivered. If you received a single set of disclosure documents for this year, but you would prefer to receive your own copy, you may direct requests for separate copies to our Investor Relations Manager at 1521 Westbranch Drive, Suite 200, McLean, Virginia, 22102 or call our toll-free investor relations line at~~1-866-366-5745.~~ ~~If you are a stockholder that receives multiple copies of our proxy materials, you may request Householding by contacting us in the same manner and requesting a householding consent.~~

~~What if I consent to have one set of materials mailed now, but change my mind later?~~

~~Call or write to us to cancel the Householding instructions for yourself. You will then be sent a separate Annual Report and Proxy Statement within 30 days of receipt of your instruction.~~

~~The reason I receive multiple sets of materials is because some of the stock belongs to my children. What happens when they move out and no longer live in my household?~~PROPOSAL 1

~~When there is an address change for one of the members of the household, materials will be sent directly to the stockholder at his or her new address.~~

~~When are stockholder proposals due for next year’s annual meeting?~~

To be considered for inclusion in next year’s proxy materials, your proposal must be submitted in writing by November 24, 2006, to our Secretary at the address set forth on the cover of this proxy statement. If you wish to submit a proposal that is not to be included in next year’s proxy materials or nominate a director, you must do so not later than the close of business on March 25, 2007 nor earlier than the close of business on February 23, 2007. You are also advised to review our Bylaws, which contain additional requirements about advance notice of stockholder proposals and director nominations.

~~PROPOSAL I~~

ELECTION OF DIRECTORS

Our Board of Directors is divided into three classes. Each class consists, as nearly as possible, of one-third of the total number of directors, and each class has a three-year term. Vacancies on ~~our~~the Board ~~of Directors~~ may be filled only by persons elected by a majority of the remaining directors. A director elected by ~~our~~the Board ~~of Directors~~ to fill a vacancy in a class, including any vacancies created by an increase in the number of directors, shall serve for the remainder of the full term of that class and until the director’s successor is elected and qualified. ~~This includes vacancies created by an increase in the number of directors.~~

~~Our~~

The Board of Directors presently has nine members. There are threedirectors in the class whose term of office expires in 2006. Mr. Gerard Mead was elected by our Board of Directors in December 2005, based on the recommendation of the Ethics, Nominating and Corporate Governance committee of the Board of Directors, to fill a vacancy created by an increase in the number of directors whose terms expire in 2008. Although Mr. Mead’s directorship is not scheduled to be voted on by stockholders until the 2008 Annual Meeting, the Board of Directors deemed it in our best interests and in the best interests of our stockholders to give our stockholders the earliest possible opportunity to vote on Mr. Mead’s election.2007. Each of the ~~remaining~~ nominees listed below is currently a director of the Company who was ~~recommended to the Board of Directors by our CEO to fill a vacancy on the Board of Directors in August 2003 immediately prior to our initial public offering, and is standing for election~~previously elected by the ~~stockholders for the first time.~~stockholders. If elected at the ~~Annual Meeting,~~annual meeting, each of these nominees would serve until the ~~2009 Annual Meeting (in the case of Mr. Mead, the 2008 Annual Meeting)~~2010 annual meeting and until his ~~or her~~ successor is elected and has qualified, or, if sooner, until the director’s death, resignation or removal.

~~Nominees~~ It is our policy to encourage directors and nominees for ~~Election for a three-year term expiring at~~director to attend the ~~2009~~annual meeting. Twoof our directors attended the 2006 Annual Meeting

of Stockholders.

~~David A.R. Dullum.~~ ~~Mr. Dullum, age 58, has served as~~

Directors are elected by a director since August 2003. From 1995 to the present, Mr. Dullum has been a partner of New England Partners, a venture capital firm focused on investments in small and medium-sized business in the Mid-Atlantic and New England regions. From 1976 to 1990, Mr. Dullum was the managing general partner of Frontenac Company, a Chicago-based venture capital firm. Mr. Dullum is also a director of Gladstone Capital Corporation and Gladstone Investment Corporation. Mr. Dullum holds an MBA from Stanford Graduate School of Business and a BME from the Georgia Institute of Technology.

~~Maurice W. Coulon.~~ Mr. Coulon, age 63, has served as a director since August 2003. Since 2000, Mr. Coulon has been a private investor in real estate. From 1991 through his retirement in 2000, Mr. Coulon served as director of portfolio management for the Morgan Stanley Real Estate Fund. From 1980 to 1991, Mr. Coulon served as senior vice president of asset management for the Boston Company Real Estate Counsel, Inc. Mr. Coulon was a founderplurality of the National Association of Real Estate Investment Managers and is a past president of the National Council of Real Estate Investment Fiduciaries. Mr. Coulon is also a director of Gladstone Capital Corporation and Gladstone Investment Corporation. Mr. Coulon holds an MBA from Harvard University and a BSE from the University of Missouri.

~~Terry Lee Brubaker.~~ Mr. Brubaker, age 62, has served as our chief operating officer, secretary and a director since our inception, and as president since our inception through April 2004, when he assumed the duties of vice chairman. Mr. Brubaker also serves as the vice chairman, chief operating officer and a director of Gladstone Management Corporation. Mr. Brubaker has served as the secretary and a director of Gladstone Capital Corporation since May 2001. He also served as president of Gladstone Capital Corporation from May 2001 through April 2004, when he assumed the duties of vice chairman. In March 1999, Mr. Brubaker founded and, until May 1, 2003, served as chairman of Heads Up Systems, a company providing processing industries with leading edge technology. From 1996 to 1999, Mr. Brubaker served as vice president of the paper group for the American Forest & Paper Association. From 1992 to 1995, Mr. Brubaker served as president of Interstate Resources, a pulp and paper company. From 1991 to 1992, Mr. Brubaker served as president of IRI, a radiation measurement equipment manufacturer. From 1981 to 1991, Mr. Brubaker held several management positions at James River Corporation, a forest and paper company, including vice president of strategic planning from 1981 to 1982, group vice president of the Groveton Group and Premium

Printing Papers from 1982 to 1990 and vice president of human resources development in 1991. From 1976 to 1981, Mr. Brubaker was strategic planning manager and marketing manager of white papers at Boise Cascade. Previously, Mr. Brubaker was a senior engagement manager at McKinsey & Company from 1972 to 1976. Prior to 1972, Mr. Brubaker was a U.S. Navy fighter pilot. Mr. Brubaker holds an MBA from the Harvard Business School and a BSE from Princeton University.

~~Nominee for Election for a two-year term expiring at the 2008 Annual Meeting~~

~~Gerard Mead.~~ Mr. Mead, age 62, has served as a director since December 2005. Mr. Mead is also the founder and chairman of Gerard Mead Capital Management, a firm which he founded in 2003 that provides investment management services to pension funds, endowments, insurance companies, and high net worth individuals. From 1966 to 2003 Mr. Mead was employed by the Bethlehem Steel Corporation, where he held a series of engineering, corporate finance and investment positions with increasing management responsibility. From 1987 to 2003 Mr. Mead served as chairman and pension fund manager of the Pension Trust of Bethlehem Steel Corporation and Subsidiary Companies. From 1972 to 1987 he served successively as investment analyst, director of investment research, and trustee of the Pension Trust, during which time he was also a corporate finance analyst and investor relations contact for institutional investors of Bethlehem Steel. Prior to that time Mr. Mead was a steel plan engineer. Mr. Mead is also a director of Gladstone Capital Corporation and Gladstone Investment Corporation. Mr. Mead holds an MBA from the Harvard Business School and a BSCE from Lehigh University.

~~THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF~~

~~EACH NAMED NOMINEE.~~

~~PROPOSAL II~~

~~APPROVAL OF AMENDED AND RESTATED INVESTMENT~~

~~ADVISORY AGREEMENT AND ADMINISTRATION AGREEMENT~~

We are asking our stockholders to approve an amended and restated investment advisory agreement, or the “Proposed Agreement,” between us and Gladstone Management Corporation, who we refer to throughout this proxy statement as our “Adviser.” We desire to enter into the Proposed Agreement to provide what we consider to be more appropriate incentives to reward our management than those currently provided under our existing 2003 Equity Incentive Plan, as amended, or the “2003 Plan.” The Proposed Agreement provides for an annual base management fee equal to 2% of our total stockholders’ equity (less the recorded value of any preferred stock) and an incentive fee based on our funds from operations, or “FFO,” which would reward the Adviser if our quarterly FFO (before giving effect to any incentive fee) exceeds 1.75% (7% annualized) of our total stockholders’ equity (less the recorded value of any preferred stock). For additional information concerning the fees under the Proposed Agreement, see~~“The Proposed Agreement and the Administration Agreement — Advisory, Administrative and Incentive Fees.”~~

We are also asking our stockholders to approve an administration agreement, referred to in this proxy statement as the “Administration Agreement,” with Gladstone Administration, LLC, or the “Administrator.” Currently, we have an Investment Advisory and Administrative Agreement with the Adviser, which we refer to in this proxy statement as the “Existing Agreement.” Under the Existing Agreement, the Adviser provides both advisory and administrative services to us. If Proposal II is approved, the administrative services currently performed by the Adviser under the Existing Agreement would be performed by the Administrator, a wholly-owned subsidiary of the Adviser, under the terms of the Administration Agreement.

~~As explained in more detail below under~~~~“Considerations of Our Board of Directors,”~~our Board of Directors believes that the compensation structure under the Proposed Agreement, which provides for a fixed fee and an incentive fee, will be more likely to incentivize managers to accomplish long-term goals consistent with the best interests of our stockholders than the cost based advisory agreement and equity incentive structure currently provided under the Existing Agreement. In addition, a similar incentive structure is currently being used by our affiliate Gladstone Investment Corporation, and has been approved by the

stockholders of our affiliate Gladstone Capital Corporation, which affiliates are also externally managed by our Adviser. We believe that the similarity of these fee structures and their emphasis on increasing earnings and payment of dividends to our stockholders will lead to greater management efficiency. Further, as similarly structured base management fees are being used by other externally managed real estate investment trusts, or “REITs,” the base management fee structure will also be familiar to analysts who evaluate our industry. In addition, as the use of incentive fees in lieu of equity incentive plans has become more predominant among our competitors, we believe that the proposed compensation structure will likely enable us and the Adviser to compete more effectively for the services of talented professionals.

~~If our stockholders approve Proposal II, we will seek the agreement~~votes of the holders of outstanding options to terminate or exercise their outstanding options. We anticipate that we will seek such agreement through the delivery of a tender offer to our officers and directors and to the employees of the Adviser who hold outstanding options, who we refer to collectively as the “Optionees.” Any such tender offer would seek the agreement of the Optionees to amend the terms of their options by accelerating the expiration date of the options to December 31, 2006. In connection with seeking such agreement from the Optionees, we intend to accelerate the vesting of all unvested options held by the Optionees in full. We further expect that any such tender offer would be conditioned on its acceptance by all Optionees so that the vesting and termination provisions of all options would be amended uniformly in accordance with the terms of the offer. In the case that all of the Optionees accept the terms of such tender offer, any option holders who choose to exercise would be able to publicly resell their shares without restriction.

Once all of the outstanding options are either exercised or terminated, we will terminate the 2003 Plan and would then enter into the Proposed Agreement with the Adviser and the Administration Agreement with the Administrator. As described in greater detail below, the combined fees payable under the Proposed Agreement (including incentive fees) and the Administration Agreement may be higher than those payable under the Existing Agreement. However, because of the termination of the 2003 Plan and the termination or exercise of all outstanding options, any future appreciation in our stock price would inure to our stockholders at large, rather than to the option holders, and our stockholders would no longer face the dilutive effect of options under the 2003 Plan.

~~The same individuals who currently manage our portfolio would continue to manage our portfolio under the Proposed Agreement. Although ourday-to~~-day operations and administration, record keeping and regulatory compliance functions would be provided separately under the Administration Agreement with Gladstone Administration, there is no expectation that our stockholders would notice any change or diminution in services because of this organizational separation.

The Proposed Agreement and the Administration Agreement are attached as Appendices A and B, respectively, to this proxy statement. At a meeting of our Board of Directors held on January 10, 2006, the Board of Directors unanimously voted to approve the Proposed Agreement with the Adviser and the Administration Agreement with the Administrator.

The affirmative vote of a majority of the votes cast at the meeting is required to approve Proposal II. Under our Bylaws, the vote of the holders of a “majority” means the vote of the holders of the more than 50% of the outstanding shares of our common stock present at the meeting or represented by proxy, if the holders of more than 50% of the outstanding shares of our common stock are present or represented by proxy.

~~Current Investment Advisory and Administrative Arrangements~~

Under the Existing Agreement, the Adviser provides both advisory and administrative services to us. The Existing Agreement was approved by our Board of Directors on August 12, 2003, prior to our initial public offering. Under the Existing Agreement, we compensate our Adviser through reimbursement of our portion of the Adviser’s payroll, benefits and general overhead expenses, on the following bases:


	•	Reimbursement on a dollar-for-dollar basis for all expenses incurred by our Adviser for our direct benefit (including, but not limited to organizational and offering expenses, legal, accounting, tax and consulting fees);


	•	Reimbursement on a dollar-for-dollar basis for all additional fees charged by third parties that are directly related to our business (including, but not limited to real estate brokerage fees, mortgage placement fees,~~lease-up~~ ~~fees and transaction structuring fees);~~

	•	Reimbursement for our pro rata share of our Adviser’s employee payroll and benefits expenses, on an employee-by-employee basis, based on the percentage of each employee’s time devoted to our matters.

	•	Reimbursement for our pro rata portion of all other expenses of our Adviser, or “overhead expenses,” based on the percentage of total hours worked by our Adviser’s personnel that are spent on our matters. However, under the Existing Agreement we are only required to reimburse our Adviser for overhead if the amount of payroll and benefits expenses reimbursed to our Adviser, as described above, is less than 2.0% of our average invested assets. In such case, we will only be required to reimburse our Adviser for our share of its overhead expenses up to the point that overhead expenses and payroll and benefits expenses, on a combined basis, equal 2.0% of our average invested assets.

Under the Existing Agreement, the Adviser provides the following services: (A) finds, evaluates, presents and recommends to us a continuing series of real estate opportunities consistent with our investment policies and objectives; (B) advises us and acts on our behalf with respect to the negotiation, acquisition, financing, refinancing, holding, leasing and disposition of real estate investments; (C) enters into contracts to purchase real estate and makes mortgage loans on our behalf in compliance with our investment procedures, objectives and policies, subject to approval of our Board of Directors, where required; and (D) provides us with all required records, and regular reports to our Board of Directors, concerning the Adviser’s efforts on our behalf.

~~In addition to these advisory services, the Adviser also manages ourday-to~~-day operations and administration, record keeping and regulatory compliance functions. The Adviser pays for all (i) costs and expenses incurred by it in rendering services to us, including salaries and other employee benefits of the Adviser’s employees who provide services to us, and (ii) the cost of office space, equipment, services and similar items required for our~~day-to~~-day operations. We are required to pay all of our operating expenses, except those borne by the Adviser. During the fiscal year ended December 31, 2005, we paid total fees of $2,118,040 to the Adviser under the Existing Agreement.

If our stockholders approve Proposal II, the Proposed and Administration Agreements will go into effect on the later of: (i) January 1, 2007; or (ii) the first day of the first fiscal quarter beginning after the last of our outstanding stock options is either exercised or terminated. The Existing Agreement will terminate upon the effective date of the Proposed and Administration Agreements.

~~Our 2003 Equity Incentive Plan~~

As discussed in more detail below, under the 2003 Plan, we have the ability to grant to our officers, directors and employees (including the officers, directors and employees of the Adviser) certain equity incentive awards, such as options to purchase our common stock. This equity incentive plan provides performance-based compensation to our officers and directors and to the employees of the Adviser, and has historically been the method by which we have sought to provide incentives to those personnel.

Table 1 below shows certain information regarding all options granted to the Optionees who have served as our officers, directors or employees of us and our Adviser from our inception through December 31, 2005. The table shows the estimated total value to all individuals that have received option grants under the 2003 Plan. The values are derived from the assumptions set out below and are based on the guidelines prescribed by proxy rules adopted by the SEC for the purpose of valuing options when calculating executive compensation. These values are not the values used for financial accounting purposes.

If our stock were to appreciate at the rates prescribed by the SEC rules for the life of the options, and the Optionees held their options until their expiration dates, exercised the options, and sold the acquired shares in the market, then the total amounts set forth in the table below would inure to the Optionees. The same result generally would occur if the Optionees exercised their options and held the underlying stock until the scheduled expiration dates of the options. To the extent that Optionees exercise their options and sell the

~~underlying shares prior to the expiration dates of the options, a portion of this appreciation would inure to our stockholders at large.~~

You should note that, as of December 31, 2005, a total of 30,000 of the options included in the table below had already been exercised by the Optionees, which has the effect of cutting off the potential future appreciation in the value of these options. Nevertheless, these Optionees continue to hold the shares acquired on such exercises and, as a result, continue to benefit from future appreciation in the value of our stock. Additionally, a total of 27,500 of the options included in the table below expired unexercised following the separation of three Optionees from employment with us, and therefore no value may be realized by those Optionees with respect to such options.

~~TABLE 1: OPTION GRANTS SINCE INCEPTION~~

Potential Realizable Value at
Number of Average Assumed Annual Rates of Stock Price
Securities Exercise or Appreciation for Option Term(1)
Underlying Base Price Expiration
Calendar Year of Grant Options Granted ($/Share) Year 5% ($) 10% ($)

2003 629,000 $ 15.00 2013 $ 5,943,242.89 $ 15,061,344.37
2004 280,000 $ 16.22 2014 $ 2,855,461.46 $ 7,236,299.98
2005 64,500 $ 15.47 2015 $ 627,501.63 $ 1,590,212.32
Total 973,500 $ 15.40 — $ 9,426,205.98 $ 23,887,856.68

~~(1)~~

The potential realizable value is based on the term of the option at the time of its grant (10 years). It is calculated by assuming that the stock price on the date of the grant appreciates at the indicated annual rate, compounded annually for the entire term of the option and that the option is exercised and the underlying shares sold on the last day of its term for the appreciated stock price. The amounts represent certain assumed rates of appreciation only, in accordance with the rules of the SEC, and do not reflect our estimate or projection of future stock price performance. Actual gains, if any, are dependent on the actual future performance of our common stock and no gain to the Optionee is possible unless the stock price increases over the option term.

Table 2 below sets forth certain information regarding all options exercised since our inception, and options held as of December 31, 2005, by the Optionees. The table shows the aggregate value that has been realized upon such exercises by the Optionees since our inception, and the aggregate value of~~in-the-money options (i.e., options with exercise prices less than the market price) held by the Optionees as of December 31, 2005.~~

~~TABLE 2: AGGREGATE OPTION EXERCISES SINCE INCEPTION~~

~~AND AGGREGATE VALUE OF OPTIONS AT DECEMBER 31, 2005~~

Number of Securities
Underlying Value of Unexercised In-the-
Unexercised Options Money Options at December 31,
at December 31, 2005 2005 ($)(2)
Value Realized
Shares Acquired on Exercise ($)(1) Vested Unvested Vested Unvested(3)

30,000 $ 47,500 744,250 171,750 $ 893,127.50 $ 111,892.50


~~(1)~~	~~Value realized is calculated at the closing market price on the date of exercise, net of option exercise price, but before any tax liabilities or transaction costs.~~

~~(2)~~	~~The value of unexercised options is calculated at the closing market price on December 31, 2005 less the exercise price.“In-the-money” options are those with an exercise price that is less than the closing market price on December 31, 2005.~~

~~(3)~~	Unvested options generally may be exercised by the optionholder, but the shares underlying the options may not be resold until the shares vest according to the vesting schedule of the options. If the Proposed

Agreement is approved and the 2003 Plan is terminated, we anticipate that we will seek agreement from the Optionees to exercise or terminate their options within a limited period of time, and in conjunction therewith, we intend to accelerate the vesting period of unvested options. Accordingly, when stockholders are considering Proposal II, they should be aware that a substantial number of the unvested~~in-the-money options set forth in the table above could become vested if the Proposed Agreement is adopted.~~

~~The Proposed Agreement and the Administration Agreement~~

~~Advisory, Administrative and Incentive Fees.~~ There are important differences between the fees payable to the Adviser and the Administrator under the Proposed and Administration Agreements, or the “Proposed Fees,” and the fees that are currently payable to our Adviser under the Existing Agreement. Under the Existing Agreement, we currently compensate the Adviser through reimbursement of our portion of the Adviser’s payroll, benefits and general overhead expenses. This reimbursement is generally subject to a combined annual management fee limitation of 2.0% of our average invested assets (which is nearly the same as total assets) for the year, with certain exceptions described above under~~“Current Investment Advisory and Administrative Arrangements.”~~ Under the Proposed Agreement, we would pay the Adviser a base management fee of 2.0% of our total stockholders’ equity (less the recorded value of any preferred stock, and adjusted to exclude the effect of any unrealized gains, losses or other items that do not affect realized net income). We would pay separately for administrative services under the Administration Agreement, which payments would be equal to our allocable portion of the Administrator’s overhead expenses in performing its obligations under the Administration Agreement, including rent for the space occupied by the Administrator, and our allocable portion of the salaries and benefits expenses of our chief financial officer, treasurer, chief compliance officer and controller and their respective staffs. As a result, the Proposed Fees (including the incentive fee described below) may be higher than those payable under the Existing Agreement, however, we believe that the termination of the 2003 Plan and its dilutive effect on our stockholders will offset any higher fees. The differences in the fees payable to our Adviser under the Existing Agreement and the Proposed Fees are explained in more detail below under~~“Additional Expense Information.”~~

The Proposed Agreement also includes incentive fees that we would pay to our Adviser if our performance reaches certain benchmarks. These incentive fees are intended to provide an additional incentive for our Adviser to achieve targeted levels of FFO and to increase distributions to our stockholders. This incentive fee compensation to the Adviser is proposed to replace our current equity incentive plan and outstanding stock options, which would be terminated if our stockholders approve the Proposed Agreement. The incentive fee will be calculated and payable quarterly in arrears based on our “pre-incentive fee FFO” (as defined below) for the immediately preceding calendar quarter. For this purpose, pre-incentive fee FFO means FFO accrued by us during the calendar quarter. FFO is calculated after taking into account all operating expenses for the quarter, including the base management fee (less any rebate of fees received by the Adviser), expenses payable under the Administration Agreement and any interest expense (but excluding the incentive fee) and any other operating expenses. Pre-incentive fee FFO includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with payment in kind interest and zero coupon securities), accrued income and rents that we have not yet received in cash. Pre-incentive FFO will also include any realized capital gains and realized capital losses, less any dividend paid on any issued and outstanding preferred stock, but will not include any unrealized capital appreciation or depreciation.

FFO is a relative non-GAAP (Generally Accepted Accounting Principles in the United States) supplemental measure of operating performance of an equity REIT developed by the National Association of Real Estate Investment Trusts, or “NAREIT,” in order to recognize that income-producing real estate historically has not depreciated on the basis determined under GAAP. FFO, as defined by NAREIT, is net income or net loss (computed in accordance with GAAP), excluding gains or losses from sales of property, plus depreciation and amortization of real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. FFO does not represent cash flows from operating activities in accordance with GAAP (which, unlike FFO, generally reflects all cash effects of transactions and other events in the determination of net income or net loss), and should not be considered an alternative to either net income or net loss as an

~~indication of our performance or to cash flow from operations as a measure of liquidity or ability to make distributions.~~

Pre-incentive fee FFO, expressed as a rate of return on our total stockholders’ equity as reflected on our balance sheet (less the recorded value of any preferred stock, and adjusted to exclude the effect of any unrealized gains, losses or other items that do not affect realized net income) at the end of the immediately preceding calendar quarter, will be compared to a “hurdle rate” of 1.75% per quarter (7% annualized). Because the hurdle rate is fixed and has been based in relation to current interest rates, if interest rates rise, it would become easier for our pre-incentive fee FFO to exceed the hurdle rate and, as a result, more likely that the Adviser will receive an income incentive fee than if interest rates on our investments remained constant or decreased. We will pay the Adviser an incentive fee with respect to our pre-incentive fee FFO in each calendar quarter as follows:


	•	~~no incentive fee in any calendar quarter in which pre-incentive fee FFO does not exceed the hurdle rate (1.75% per calendar quarter);~~

	•	~~100% of our pre-incentive fee FFO with respect to that portion of such FFO, if any, that exceeds the 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 FFO, if any, that exceeds 2.1875% in any calendar quarter (8.75% annualized).~~

These calculations will be appropriately pro rated for any period of less than three months and adjusted for any share issuances or repurchases during the current quarter. We refer to the portion of the incentive fee payable on 100% of our pre-incentive fee FFO, if any, that exceeds the hurdle rate but is less than 2.1875% as the “catch up.” The “catch up” provision is intended to provide the Adviser with an incentive fee of 20% on all of our pre-incentive fee FFO that does not exceed 2.1875% once the hurdle rate has been surpassed.

~~The base management fee and total stockholders’ equity will be calculated using GAAP and FFO will be calculated using the definition adopted by NAREIT.~~

~~Example of Quarterly Incentive Fee Calculation~~¹


	*~~Alternative 1~~*


	~~Assumptions:~~


	~~Total Stockholders’ Equity less issued and outstanding preferred stock = 100%~~
	~~FFO (including rents, interest, dividends and fees, after paying base management fee, administrative fee, interest and other operating expenses) = 1.5% (6% annualized)~~
	~~Hurdle rate = 1.75% (7% annualized)~~
	~~Pre-incentive fee FFO (FFO less preferred stock dividends) = 1% (4% annualized)~~
	~~Pre-incentive FFO does not exceed the hurdle rate, therefore there is no incentive fee.~~


	*~~Alternative 2~~*


	~~Assumptions:~~


	~~Total Stockholders’ Equity less issued and outstanding preferred stock = 100%~~
	~~FFO (including rents, interest, dividends and fees, after paying base management fee, administrative~~
	~~fee, interest and other operating expenses) = 2.5% (10% annualized)~~
	~~Hurdle rate = 1.75% (7% annualized)~~
	~~Pre-incentive fee FFO (FFO less preferred stock dividends) = 2% (8% annualized)~~
	~~Pre-incentive fee FFO exceeds the hurdle rate, therefore there is an incentive fee payable to the Adviser.~~
	~~Incentive Fee = 100% × “Catch Up” + the greater of 0% AND (20% × (pre-incentive fee FFO~~
	~~minus 2.1875%) = .25% (1% annualized).~~

~~= 100% × (2.50% - 0.50%) - 1.75%~~
~~= 100% × (2.00% - 1.75%)~~
~~= 100% × 0.25%~~
~~= 0.25%~~


	*~~Alternative 3~~*


	~~Assumptions:~~


	~~Total Stockholders’ Equity less issued and outstanding preferred stock = 100%~~
	~~FFO (including rents, interest, dividends and fees, after paying base management fee, administrative~~
	~~fee, interest and other operating expenses) = 3.5% (14% annualized)~~
	~~Hurdle rate = 1.75% (7% annualized)~~
	~~Pre-incentive fee FFO (FFO less preferred stock dividends) = 3% (12% annualized)~~
	~~Pre-incentive fee FFO exceeds the hurdle rate, therefore there is an incentive fee payable to the Adviser.~~
	~~Incentive Fee = 100% × “Catch Up” + the greater of 0% AND (20% × (pre-incentive fee FFO~~
	~~minus 2.1875%) = 0.6% (2.4% annualized)~~


	~~= (100% x 2.1875% - 1.75) + the greater of 0% and (20% x (3.00% — 2.1875%)~~
	~~= (100% × 0.4375%) + (20% × 0.8125%)~~
	~~= (0.4375% + 0.1625%)~~
	~~= 0.6%~~


¹	The hypothetical amount of pre-incentive fee FFO shown in these examples is based on a percentage of total stockholders’ equity (less the recorded value of preferred stock, and adjusted to exclude the effect of any unrealized gains, losses or other items that do not affect realized net income) of $100 million.

~~Additional Expense Information~~

The table below provides a comparison of the expenses under the Existing Agreement and the Proposed and Administration Agreements. The fees and expenses table below is required by SEC regulations to assist investors in understanding the various costs and expenses associated with their investments. The fees and expenses table presents:


	•	~~fees and expenses incurred under the Existing Agreement for the fiscal year ended December 31, 2005;~~

	•	a pro forma presentation of the fees and expenses under the Existing Agreement for the fiscal year ended December 31, 2005 if we had elected to account for our stock-based compensation under the fair value provisions of SFAS No. 123(R) for the fiscal year ended December 31, 2005; and

	•	a pro forma presentation of the fees and expenses under the Proposed and Administration Agreements as if the Proposed and Administration Agreements had been in effect, and as if the 2003 Plan had not been in effect, for the fiscal year ended December 31, 2005.

The fees and expenses table is intended to assist you in understanding these fees and expenses, and should not be considered a representation of past or future expenses or annual rates of return. Actual expenses or annual rates of return may be more or less than those used for purposes of the fee table and example. All information presented below is unaudited and is based on unaudited financial information as of and for the year ended December 31, 2005. Further, stockholders should note that the amount of expense that we would have incurred for the fiscal year ended December 31, 2005 if we had elected to account for our stock-based compensation under SFAS No. 123(R), as shown in the pro forma presentation below under “Pro Forma

~~SFAS 123(R),” is calculated by a different method and bears no relationship to the amounts included in Table 1 under “~~~~Our 2003 Equity Incentive Plan.~~”

Fees and Expenses Current Pro Forma Pro Forma

(Existing SFAS 123(R) (Proposed and
Agreement) Administration
Agreements)
Annual Expenses(as a percentage of total stockholders’ equity)(1)

Base Management Fees 2.14 % 2.14 % 2.00 %
Administrative Fees(2) N/A N/A 0.21 %
2003 Equity Incentive Plan(3) N/A 0.19 % N/A
Interest Payments on Borrowed Funds(4) 2.47 % 2.47 % 2.47 %
Other Expenses(5) 5.28 % 5.28 % 5.28 %
Total Annual Expenses (excluding incentive fees) 9.89 % 10.08 % 9.96 %
Incentive Fee(6) N/A N/A 1.01 %
Total Annual Expenses (including incentive fees) 9.89 % 10.08 % 10.97 %


~~(1)~~	~~Total stockholders’ equity equals total stockholders’ equity as reported in the Company’s financial statements for the fiscal year ended December 31, 2005.~~

~~(2)~~	Pro Forma (Proposed and Administration Agreements) administrative fees represent the amount of administrative fees that we would have paid to the Administrator had the Administration Agreement been in effect for the fiscal year ended December 31, 2005. Pro Forma (Proposed and Administration Agreements) administrative fees are determined using the aggregate cost of the salaries and benefits paid to our chief financial officer, chief compliance officer and controller and their respective staffs, as well as the rental expense of our McLean, Virginia office attributable to these personnel, multiplied by a fraction which is equal to the ratio of our total assets to the total assets of all companies managed by the Adviser, for the fiscal year ended December 31, 2005.

~~(3)~~	Under the revised SFAS No. 123(R) approved by the Financial Accounting Standards Board in December 2004, “Share-Based Payment,” we began expensing the value of stock options granted as compensation expense in January of 2006. The Pro Forma (SFAS 123(R)) amount represents the compensation expense that we would have incurred had we elected to account for its stock-based compensation under the fair value provisions of SFAS No. 123(R) for the fiscal year ended December 31, 2005. If our stockholders approve Proposal II, our 2003 Plan will be terminated and no new options will be granted under the plan. We anticipate that we will seek agreement from the Optionees to exercise or terminate their options within a limited period of time, and at the expiration of that period the 2003 Plan and all options remaining outstanding under the plan will terminate. The Proposed and Administration Agreements will not become effective until all stock options are exercised or terminated and the 2003 Plan is terminated.

~~(4)~~	As of December 31, 2005, we had aggregate outstanding borrowings of $43,560,000 under our revolving credit facilities. The percentage reflected in the table above is the total amount of interest paid during the fiscal year ended December 31, 2005 as a percentage of total stockholders’ equity.

~~(5)~~	~~“Other Expenses” are based on amounts incurred for the fiscal year ended December 31, 2005.~~

~~(6)~~	~~The Pro Forma (Proposed and Administration Agreements) Incentive Fee is calculated pursuant to the formula described above under~~~~“The Proposed Agreement and Administration Agreement — Advisory, Administrative and Incentive Fees”~~ ~~as applied to our actual results of operations during the fiscal year ended December 31, 2005 as follows:~~


	•	~~For the quarter ended March 31, 2005, our pre-incentive fee FFO would have been approximately $1,035,560, resulting in an incentive fee of $0 for the quarter;~~

	•	~~For the quarter ended June 30, 2005, our pre-incentive fee FFO would have been approximately $1,824,304, resulting in an incentive fee of $53,782 for the quarter; and~~


	•	~~For the quarter ended September 30, 2005, our pre-incentive fee FFO would have been approximately $2,337,327 resulting in an incentive fee of $467,465 for the quarter; and~~

	•	~~For the quarter ended December 31, 2005, our pre-incentive fee FFO would have been approximately $2,375,348, resulting in an incentive fee of $475,070 for the quarter.~~


	~~Obligations Under Proposed and Administration Agreements~~

~~Messrs. Gladstone, Brubaker and Stelljes will continue to be primarily responsible for theday-to~~-day management of our portfolio under the Proposed Agreement, and the same employees of the Adviser who currently assist our officers in the management of our portfolio will continue to do so if our stockholders approve the Proposed Agreement. Under the Proposed Agreement, the Adviser will continue to: (A) find, evaluate, present and recommend to us a continuing series of real estate opportunities consistent with our investment policies and objectives; (B) advise us and act on our behalf with respect to the negotiation, acquisition, financing, refinancing, holding, leasing and disposition of real estate investments; (C) enter into contracts to purchase real estate and make mortgage loans on our behalf in compliance with our investment procedures, objectives and policies, subject to approval of our Board of Directors, where required; and (D) provide us with all required records, and regular reports to our Board of Directors, concerning the Adviser’s efforts on our behalf.

The administrative services that the Adviser currently performs for us under the Existing Agreement will be performed separately by the Administrator under the Administration Agreement. This is largely an organizational change, and we do not expect that we or our stockholders would notice any change or diminution in services because of the separation. The Administrator will manage our~~day-to~~-day operations and administration, record keeping and regulatory compliance functions. As with the Existing Agreement, under the Proposed Agreement the Adviser (or the Administrator) would continue to pay for all (i) costs and expenses incurred by it in rendering services to us, including salaries and other employee benefits of its employees who provide us services, and (ii) costs of office space, equipment, services and similar items required for our~~day-to-day operations.~~

If our stockholders approve Proposal II, we anticipate that we will seek agreement from the Optionees to exercise or terminate their options within a limited period of time, and at the expiration of that period the 2003 Plan and all options remaining outstanding under the plan will terminate. The Proposed and Administration Agreements will not be implemented until all stock options are exercised or terminated and the 2003 Plan is terminated. Further, as long as the Proposed Agreement is in effect, we will not implement any future equity incentive plans.

~~Payment of the Adviser’s and Our expenses.~~ All investment professionals of the Adviser and its staff, when and to the extent engaged in providing investment advisory and management services, and the compensation and routine overhead expenses of such personnel allocable to such services, will be provided and paid for by the Adviser. We will bear all other costs and expenses of our operations and transactions, including those relating to: calculation of our total stockholders’ equity (including the cost and expenses of any independent valuation firm); expenses incurred by the Adviser or the Administrator payable to third parties, including agents, consultants or other advisors (such as independent valuation firms, accountants and legal counsel), in monitoring our financial and legal affairs and in monitoring our investments and performing due diligence on our prospective portfolio companies; interest payable on debt, if any, and dividends payable on preferred stock, if any, incurred to finance our investments; offerings of our debt, our preferred shares, our common stock and other securities; investment advisory fees; fees payable to third parties, including agents, consultants or other advisors, relating to, or associated with, evaluating and making investments; transfer agent and custodial fees; registration fees; listing fees; taxes; independent directors’ fees and expenses; costs of preparing and filing reports or other documents of the SEC; the costs of any reports, proxy statements or other notices to stockholders, including printing costs; our allocable portion of the fidelity bond, directors and officers and errors and omissions liability insurance, and any other insurance premiums; direct costs and expenses of administration, including auditor and legal costs; and all other expenses incurred by us, by the Adviser, or by the Administrator in connection with administering our business, such as our allocable portion of overhead

~~under the Administration Agreement, including rent, and our allocable portion of the costs of our chief compliance officer, chief financial officer and controller and their respective staffs.~~

~~Duration and termination.~~ The Proposed Agreement and the Administration Agreement were each approved by our Board of Directors on January 10, 2006. Unless terminated earlier as described below, these agreements will continue in effect for a period of two years from their respective effective dates. Each of these agreements will remain in effect from year to year thereafter if approved annually by our Board of Directors or by the affirmative vote of the holders of a majority of our outstanding voting securities, including, in either case, approval by a majority of our independent directors. Neither of the Proposed or Administration Agreements may be assigned without our consent and the consent of the Adviser or the Administrator, as applicable. Each of the Proposed and Administration Agreements may be terminated by either party without penalty upon 60 days’ written notice to the other.

~~Indemnification.~~ Each of the Proposed and Administration Agreements provide that, absent willful misfeasance, bad faith or gross negligence in the performance of their duties or by reason of the reckless disregard of their duties and obligations, the Adviser, the Administrator and their respective officers, managers, agents, employees, controlling persons, members and any other person or entity affiliated with them are entitled to indemnification from us for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of the Adviser’s or the Administrator’s services under the Proposed or Administration Agreements or otherwise as an investment adviser of ours.

~~Considerations of Our Board of Directors~~

Our Board of Directors approved the Proposed and Administration Agreements at a meeting held on January 10, 2006. In its consideration of the agreements, the Board of Directors focused on information it had received relating to, among other things: the reasonableness of the Proposed Fees (including the incentive fee under the Proposed Agreement), the experience of the Adviser’s personnel, the potential for additional attractive investments resulting from synergies with other funds to be managed by the Adviser, and the advantage of terminating our equity incentive plan in favor of the incentive fee arrangement under the Proposed Agreement. Our Board of Directors considered the investment advisory and incentive fees under the Proposed Agreement and the administrative fees under the Administration Agreement, and information on fees charged by other investment advisers and administrators for comparable services, and determined that the proposed fees were reasonable in relation to the services to be provided by the Adviser and the Administrator.

In recommending that we continue to use the Adviser as our investment adviser, and that we engage the Administrator to perform our administrative services, our Board of Directors considered the fact that the advisory and administrative team of the Adviser and the Administrator are expected to be in all material respects, for at least the next year, the same as the current team responsible for our management and administration, and the fact that our investment objectives are consistent with the investment selection process employed by the Adviser. In connection with its final deliberations, our Board of Directors reviewed and discussed additional materials provided by the Adviser and the Administrator in response to the Board’s request, including information regarding the services to be performed; the prior experience of the personnel of the Adviser in connection with the types of investments we propose to make, including such personnel’s extensive network of contacts; the size of the respective staff of the Adviser and the Administrator; anticipated changes in the current personnel of the Adviser and Administrator; the compensation of such personnel; the written plan for allocating investment opportunities among the Adviser’s current and future clients; the operations of the Adviser and the Administrator; and the organizational capability and financial condition of the Adviser, as evidenced by the Adviser’s level of service to us and to our affiliates, Gladstone Capital Corporation and Gladstone Investment Corporation. Our Board of Directors also relied upon comparisons of the services to be rendered and the amounts to be paid under the Proposed and Administration Agreements with those of other REITs that are externally managed, which are relatively new. The Board also reviewed the other investment advisory and administrative contracts that the Adviser has with our affiliates, Gladstone Capital Corporation and Gladstone Investment Corporation, which have entered into or anticipate entering

~~into agreements with the Adviser on similar terms and conditions. When evaluating comparisons, the Board of Directors considered, among other things:~~


	•	~~the high quality and extensive level of the advisory and other services that we expect the Adviser’s team to continue to provide to us;~~

	•	~~the fact that our projected operating expenses and expense ratio are equal to or lower than those of other REITs with similar contracts and similar investment objectives; and~~

	•	~~the difficulty of obtaining similar services from other third party service providers.~~

Because we have a short operating history and owned no real estate prior to our August 2003, initial public offering, our Board of Directors was not able to identify a peer group of other similar triple-net REITs that have recently completed initial public offerings which the Board believes would provide a meaningful comparison to our performance. Our Board of Directors further believes that, because we are essentially a~~start-up,~~ comparing our performance with the performance of the more established companies in the S&P 500 would likewise not provide a useful comparison for our stockholders. Therefore, the Board of Directors did not rely on either of these measures to evaluate the Adviser’s performance, but instead relied on the items described above.

The Board of Directors acknowledged that the Proposed Fees are expected to exceed the costs incurred by the Adviser and the Administrator in providing services to us. However, the board did not attempt to quantify the level of profits of the Adviser or Administrator because of its high satisfaction with the Adviser’s performance to date. The Proposed Agreement does not provide for any reduction in fees in the event that the Adviser experiences any economies of scale in the provision of management services to us, as it is not expected that the Adviser will realize any economies of scale in buying real estate as might be realized if the Adviser were purchasing publicly traded securities. Our Board of Directors also considered the fact that the Administrator allocates the costs of providing administrative services to the Adviser’s externally managed funds on a pro-rata basis and, therefore, to the extent the Administrator recognizes economies of scale in providing administrative services to the Adviser’s externally managed funds, those economies of scale will also be indirectly recognized by us under the Administration Agreement. Thus, to the extent that the Administrator’s costs decrease, those reductions will be passed through indirectly to us in the form of a reduced administration fee.

~~In its consideration of the incentive fee included in the Proposed Agreement, our Board of Directors focused on information it had received relating to, among other things:~~


	•	the fact that the Proposed Agreement provides for a fee structure similar to those of other REITs with similar contracts and similar investment objectives, and that the Proposed Agreement provides for fees that are reasonable in comparison to other REITs in light of the fact that, under the Proposed Agreement, we will have no equity incentive plan;

	•	~~the fact that an incentive fee arrangement is more appropriate to an externally managed fund (like us) than is a stock option program;~~

	•	~~the fact that stockholders increasingly demand strong fund performance and are willing to reward managers for meeting those goals;~~

	•	the fact that the utility of a stock option plan to reward fund management has been curtailed by recent regulations that prohibit executive officers from borrowing from an issuer to finance the exercise of their stock options;

	•	~~the concern that stock options may incentivize managers (and directors who receive stock options) to manage a fund for short-run returns rather than long-term goals;~~

	•	~~the fact that incentive fees are the predominant method used by other externally managed REITs with whom we and the Adviser compete for talented professionals;~~


	•	the fact that the use of incentive fees is now becoming prevalent among externally managed REITs and is a compensation structure that is both understood and expected by analysts who evaluate us and our stock; and

	•	the expectation that we and our stockholders would benefit from the removal of the dilutive effects associated with stock options, and the avoidance of the accounting charges related to stock options that will soon be required to be recognized as non-cash expense by us under recently adopted accounting rules.

Based on the information reviewed by, and the ensuing discussions of, our Board of Directors, the Board, including a majority of the independent directors, concluded that the Proposed Fees, including the incentive fee, were reasonable in relation to the services to be provided by the Adviser and the Administrator. Based on its review and discussion, the Board approved the Proposed Agreement and the Administration Agreement as being in the best interests of our stockholders. The Board then directed that the Proposed Agreement and the Administration Agreement be submitted to stockholders for approval with the Board’s recommendation that our stockholders vote to approve the Proposed Agreement and the Administration Agreement.

~~Termination of the Equity Incentive Plan and Exercise of Existing Stock Options~~

If our stockholders approve Proposal II, and we are successful in our efforts to have all outstanding options exercised or terminated, we will terminate the 2003 Plan and no further options will be granted under the 2003 Plan. Once the 2003 Plan is terminated, we anticipate that we will seek agreement from all Optionees to exercise or terminate their outstanding options within a limited period of time. We anticipate that we will seek such agreement through the delivery of a tender offer to Optionees. Any such tender offer would seek the agreement of the Optionees to amend the terms of their options by accelerating the expiration date of the options to December 31, 2006. In connection with seeking such agreement from the Optionees, we intend to accelerate the vesting of all unvested options held by the Optionees in full. We further anticipate that any such tender offer would be conditioned on its acceptance by all Optionees so that the vesting and termination provisions of all options would be amended uniformly in accordance with the terms of the offer. In the case that all of the Optionees accept the terms of such tender offer, any option holders who choose to exercise would be able to publicly resell their shares without restriction.

If this proposal is approved, we will execute the Proposed Agreement with the Adviser and the Administration Agreement with the Administrator on the later of (i) January 1, 2007, or (ii) the first day of the first fiscal quarter following the date that all existing stock options are exercised or terminated. The Proposed Agreement and the Administration Agreement will not become effective as long as the 2003 Plan is in effect or as long as there are any outstanding stock options. While it is expected that the Proposed Agreement and the Administration Agreement will be executed and go into effect on January 1, 2007, until the Proposed Agreement and the Administration Agreement are executed and all stock options have been exercised or terminated, the Existing Agreement will remain in place. Once the Proposed Agreement and Administration Agreement are executed, the Existing Agreement will terminate.

~~Certain Risks Related to Approval of the Proposed and Administration Agreements~~

~~Stockholders voting on Proposal II should give careful consideration to the following risks when deciding whether or not to approve the Proposed and Administration Agreements.~~


	~~If our stockholders approve the Proposed and Administration Agreements, it could have a material adverse effect on our results of operations.~~

While we expect that the base management fee under the Proposed Agreement and payments under the Administration Agreement collectively would approximate the level of payments that we have historically made to our Adviser under the Existing Agreement, we believe that, if our performance reaches the performance benchmarks set forth in the Proposed Agreement, the incentive fees provided for under the Proposed Agreement will likely have the effect of increasing our total operating expenses. The incentive fee compensation to our Adviser is intended to replace our 2003 Plan, and we believe that our stockholders will

experience benefits as a result of our termination of the 2003 Plan and the associated elimination of outstanding options, including the removal of the dilutive effects of the options and the avoidance of non-cash charges related to stock options under recently adopted accounting rules. Nevertheless, the benefits experienced by our stockholders as a result of the termination of the 2003 Plan may be outweighed by the additional payments that we incur under the Proposed Agreement, which could have a material adverse impact on our results of operations and reduce the amount of cash available to make distributions to our stockholders.


	If our stockholders approve the Proposed and Administration Agreements, it is likely that a significant number of shares of stock issuable upon exercise of stock options will be sold in the public market, which could have an adverse impact on the price of our common stock.

If our stockholders approve the Proposed and Administration Agreements, we currently intend to terminate our 2003 Plan. Additionally, we do not intend to implement the Proposed and Administration Agreements until all outstanding options under the 2003 Plan have been terminated or exercised. Therefore, if our stockholders approve Proposal II, we intend to seek agreement from the Optionees to exercise or terminate their outstanding options within a limited period of time. In connection with seeking such agreement from the Optionees, we may also accelerate the vesting of all outstanding unvested stock options. We also intend to file a registration statement on Form ~~S-8~~ covering the issuance of shares upon exercise of these options. If these events occur, a significant number of the shares currently issuable upon exercise of outstanding options will become eligible for sale in the public market at or near the same time. The sale of a substantial number of such shares, or even the availability of such shares for sale, could have a material adverse effect on the price of our common stock.

~~Other Information About the Proposed and Administration Agreements~~

If approved by our stockholders, the Proposed and Administration Agreements will remain in full force and effect for two years from their effective dates, and will automatically renew for successive annual periods thereafter, but only so long as such continuance is specifically approved at least annually by both (i) our Board of Directors or by the vote of a majority of our outstanding voting securities, and (ii) the vote of a majority of our independent directors.

The Adviser’s services under the Proposed Agreement, and the Administrator’s services under the Administration Agreement, will not be exclusive to us. The Adviser currently provides advisory services to our affiliates, Gladstone Investment Corporation and Gladstone Capital Corporation, and the Administrator currently provides administrative services to Gladstone Investment Corporation. Both the Adviser and the Administrator will be free to render services to other clients. Each of the Proposed Agreement and the Administration Agreement may be terminated at any time and without penalty upon at least 60 days’ prior written notice.

~~Information About the Adviser and the Administrator~~


	*~~The Adviser~~*

The Adviser, Gladstone Management Corporation, is a registered investment adviser under the Investment Advisers Act of 1940, as amended, and is incorporated under the laws of Delaware. Its principal business address is 1521 Westbranch Drive, Suite 200, McLean, VA 22102.

The Adviser is controlled by David Gladstone, the chairman of our Board of Directors and our chief executive officer. Mr. Gladstone is also the chairman of the board of directors and chief executive officer of the Adviser. Terry Lee Brubaker, our vice chairman, secretary, director and chief operating officer, is a member of the board of directors of the Adviser and its vice chairman, chief operating officer, and secretary. George Stelljes III, our president, chief investment officer and a director, is also a member of the board of directors of the Adviser and its president and chief investment officer. Harry Brill, our chief financial officer and treasurer, is also chief financial officer and treasurer of the Adviser.

The Adviser provides investment advisory services to Gladstone Investment Corporation and Gladstone Capital Corporation, both of which are investment companies that have elected to be treated as business development companies under the Investment Company Act of 1940, as amended, and for each of which Mr. Gladstone serves as the chief executive officer and chairman of the board of directors. In the future, the Adviser may provide investment advisory and administrative services to other funds, both public and private, of which it is the sponsor.


	*~~The Administrator~~*

The Administrator, Gladstone Administration, LLC, is a wholly-owned subsidiary of the Adviser incorporated under the laws of Delaware. Its principal business address is 1521 Westbranch Drive, Suite 200, McLean, VA 22102. The Administrator is also controlled by David Gladstone through his control of the Adviser. Messrs. Gladstone, Brubaker and Stelljes are managers of the Administrator.

The Administrator provides administrative services to Gladstone Investment Corporation pursuant to an agreement similar to the Administration Agreement. The Administrator also performs the administrative obligations of the Adviser under the Adviser’s current investment advisory agreement with Gladstone Capital Corporation. Upon the effectiveness of an amended and restated investment advisory agreement recently approved by the stockholders of Gladstone Capital Corporation, the Administrator will provide administrative services directly to Gladstone Capital Corporation under an administration agreement between the Administrator and Gladstone Capital, as further described in the table below under~~“Relationship of Our Affiliates with the Adviser and the Administrator.”~~ ~~In the future, the Adviser may provide investment advisory and administrative services to other funds, both public and private, of which it is the sponsor.~~


	*~~Relationship of Our Affiliates with the Adviser and the Administrator~~*

~~The table below describes the compensation paid to the Adviser and the Administrator by Gladstone Investment Corporation and Gladstone Capital Corporation for advisory and administrative services.~~

Total Assets at
Fund December 31, 2005 Rate of Compensation to Gladstone Management Corporation

(Unaudited)
Gladstone Investment Corporation $ 230,956,388 Gladstone Investment pays the Adviser a base management fee and a two-part incentive fee for investment advisory services. The base management fee is charged at an annual rate of 2% of Gladstone Investment’s “gross assets,” which is defined as its total assets, less cash and cash equivalents that are not invested in debt or equity securities of its portfolio companies in accordance with its investment objectives. The incentive fee consists of a quarterly income-based incentive fee and a capital gains incentive fee. The income-based incentive fee is calculated on the basis of “pre-incentive fee net investment income,” which is interest income, dividend income, and any other income, including any other fees (other than fees for providing managerial assistance) such as commitment, origination, structuring, diligence and consulting fees, and other fees that Gladstone Investment receives from its portfolio companies, minus its operating expenses. No incentive fee is charged for any calendar quarter in which pre-incentive fee net investment income does not exceed a quarterly hurdle rate of 1.75% (7% annualized). Gladstone Investment also pays 100% of any pre-incentive fee net investment income that exceeds the hurdle rate but is less than 2.1875% in any calendar quarter, and 20% of any pre-incentive fee net investment income that exceeds 2.1875% in any calendar quarter.
The Adviser has agreed to charge the base management fee on a reduced basis from the effective date of the investment advisory and management agreement, June 22, 2005, through March 31, 2006. For this initial period, the annual 2% base management fee will be charged on the basis of “gross invested assets” rather than gross assets. “Gross invested assets” is defined as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings.
Gladstone Investment also pays Gladstone Administration for its allocable portion of Gladstone Administration’s overhead, including rent, and its allocable portion of the costs of Gladstone Investment’s chief compliance officer, chief financial officer and controller and their respective staffs.

Total Assets at
Fund December 31, 2005 Rate of Compensation to Gladstone Management Corporation

(Unaudited)
During the period from June 22, 2005 (the effective date of the advisory agreement) through December 31, 2005, Gladstone Investment made payments to the Adviser of $357,630 and payments of $178,469 to Gladstone Administration for administrative services.

Gladstone Capital Corporation $ 212,106,143 Gladstone Capital pays the Adviser an annual advisory fee of 1.25% of its total assets (as reduced by cash and cash equivalents pledged to creditors), payable in quarterly increments of 0.3125%, and an annual administrative fee of 0.75% of its total assets (as reduced by cash and cash equivalents pledged to creditors), payable in quarterly increments of 0.1875%.
On December 2, 2005, the stockholders of Gladstone Capital approved an amended and restated investment advisory agreement between Gladstone Capital and the Adviser. The amended and restated agreement will become effective on the later of (i) October 1, 2006; or (ii) the first day of the first fiscal quarter beginning after the last of Gladstone Capital’s outstanding stock options is either terminated or exercised. If and when the amended and restated agreement becomes effective, Gladstone Capital will pay the Adviser a base management fee and a two-part incentive fee for investment advisory services. The base management fee will be charged at an annual rate of 2% of Gladstone Capital’s “gross assets,” which is defined as its total assets, less cash and cash equivalents that are not invested in debt or equity securities of its portfolio companies in accordance with its investment objectives. The incentive fee consists of a quarterly income-based incentive fee and a capital gains incentive fee. The income-based incentive fee will be calculated on the basis of “pre-incentive fee net investment income,” which is interest income, dividend income, and any other income, including any other fees (other than fees for providing managerial assistance) such as commitment, origination, structuring, diligence and consulting fees, and other fees that Gladstone Capital receives from its portfolio companies, minus its operating expenses. No incentive fee will be charged for any calendar quarter in which pre- incentive fee net investment income does not exceed a quarterly hurdle rate of 1.75% (7% annualized). Gladstone Capital also pays 100% of any pre-incentive fee net investment income that exceeds the hurdle rate but is less than 2.1875% in any calendar quarter, and 20% of any pre-incentive fee net investment income that exceeds 2.1875% in any calendar quarter.


	~~Total Assets at~~
~~Fund~~	~~December 31, 2005~~	~~Rate of Compensation to Gladstone Management Corporation~~

	~~(Unaudited)~~
		Under the amended and restated agreement, Gladstone Capital will also pay Gladstone Administration for its allocable portion of Gladstone Administration’s overhead, including rent, and its allocable portion of the costs of Gladstone Capital’s chief compliance officer, chief financial officer and controller and their respective staffs.
		~~During the twelve months ended December 31, 2005, Gladstone Capital made aggregate payments to the Adviser of $2,694,633 under its existing agreement.~~

~~THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF PROPOSAL II.~~

~~PROPOSAL III~~

~~RATIFICATION OF SELECTION OF INDEPENDENT REGISTERED~~

~~PUBLIC ACCOUNTING FIRM~~

The audit committee of the Board has selected PricewaterhouseCoopers LLP, or “PWC,” as our principal accountants to audit our financial statements for the fiscal year ending December 31, 2006 and has further directed that management submit the selection of the independent registered public accounting firm for ratification by our stockholders at the Annual Meeting. PWC has audited our financial statements since our fiscal period ending December 31, 2003. Representatives of PWC are expected to be present at the Annual Meeting, will have an opportunity to make a statement if they so desire and will be available to respond to appropriate questions.

Neither our bylaws nor our other governing documents or law require stockholder ratification of the selection of PWC as our independent registered public accounting firm. However, the audit committee is submitting the selection of PWC to the stockholders for ratification as a matter of good corporate practice. If the stockholders fail to ratify the selection, the audit committee will reconsider whether or not to retain that firm. Even if the selection is ratified, the audit committee, in its discretion, may direct the appointment of a different independent registered public accounting firm at any time during the year if it determines that such a change would be in the best interests of us and our stockholders.

~~The affirmative vote of the holders of the~~ shares present in person or represented by proxy and entitled to vote on the election of directors. The three nominees receiving the highest number of affirmative votes will be elected.Shares represented by executed proxies will be voted, if authority to do so is not withheld, for the election of the threenominees named below. If any nominee becomes unavailable for election as a result of an unexpected occurrence, your shares will be voted for the election of a substitute nominee proposed by our management. Each person nominated for election has agreed to serve if elected. Our management has no reason to believe that any nominee will be unable to serve.

The following is a brief biography of each nominee and each director whose term will continue after the annual meeting.

Nominees for Election for a Three-year Term Expiring at the 2010 Annual Meeting will be required to ratify the selection of PWC. Abstentions and broker non-votes will be considered present and entitled to vote for the purpose of determining whether a quorum exists, although they will not be counted for any purpose in determining whether this matter has been approved.

~~Independent Registered Public Accounting Firm Fees~~

~~The following table represents aggregate fees billed to us for the fiscal years ended December 31, 2004 and December 31, 2005 by PWC, our principal independent registered public accounting firm.~~

2004 2005

Audit Fees $ 280,000 $ 245,422
Audit-related Fees(1) $ 22,500 $ 0
Tax Fees $ 19,214 $ 63,844
All Other Fees $ 0

$ 321,714 $ 309,266


~~(1)~~	~~Consists of fees charged for the audit of tenant financial information related to certain real estate acquisitions during the fiscal year ended December 31, 2004.~~

~~All fees described above were approved by the Audit Committee.~~

~~Pre-Approval Policies and Procedures~~

The audit committee has adopted a policy and procedures for the pre-approval of audit and non-audit services rendered by our independent registered public accounting firm, PWC. The policy generally pre-approves specified services in the defined categories of audit services, audit-related services, and tax services up to specified amounts. Pre-approval may also be given as part of the audit committee’s approval of the scope of the engagement of the independent registered public accounting firm or on an individual explicit case-by-case basis before the independent registered public accounting firm is engaged to provide each service. The pre-approval of services may be delegated to one or more of the audit committee’s members, but the decision must be reported to the full audit committee at its next scheduled meeting.

The audit committee has determined that the rendering of the services other than audit services by PWC is compatible with maintaining the principal independent registered public accounting firm’s independence.

~~THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF PROPOSAL III.~~

~~CERTAIN ADDITIONAL INFORMATION ABOUT OUR MANAGEMENT~~

~~Our Board of Directors and Executive Officers~~

As stated above, our Board of Directors is divided into three classes. Each class consists of three directors, and each class has a three-year term. Vacancies on the Board of Directors may be filled only by persons elected by a majority of the remaining directors. A director elected by the Board of Directors to fill a vacancy in a class shall serve for the remainder of the full term of that class, and until the director’s successor is elected and qualified. This includes vacancies created by an increase in the number of directors. We encourage directors and nominees for director to attend the Annual Meeting. Three of our directors attended the 2005 Annual Meeting of Stockholders. The Board of Directors presently has nine members. There are three directors in the class whose term of office expires in 2006 and one director in the class whose term expires in 2008 being considered for election.


	*~~Nominees for Election for a three-year term expiring at the 2009 Annual Meeting~~*


~~David A.R. Dullum~~	~~Maurice W. Coulon~~	~~Terry Lee Brubaker~~


	*~~Nominee for Election for a two-year term expiring at the 2008 Annual Meeting~~*

~~Gerard Mead~~

~~Biographical information for Messrs. Dullum, Coulon, Brubaker and Mead is detailed on pages 7-8 of this proxy statement.~~


	*~~Directors Continuing in Office Until the 2007 Annual Meeting~~*

David Gladstone. Mr. Gladstone, age ~~63,~~64, is our founder and has served as ~~our~~ chief executive officer and chairman of the Board of Directors since our inception. He also founded and has served as chief executive officer and chairman of the Board of Directors of Gladstone Capital Corporation, Gladstone Investment Corporation and ~~of the Adviser.~~Gladstone Management Corporation. Prior to founding the Company, Mr. Gladstone served as either chairman or vice chairman of the Board of Directors of American Capital Strategies (NASDAQ: ACAS), a publicly traded leveraged buyout fund and mezzanine debt finance company, from June 1997 to August 2001. From 1974 to February 1997, Mr. Gladstone held various positions, including chairman and chief executive officer, with Allied Capital Corporation (NASDAQ: ALD), Allied Capital Corporation II, Allied Capital Lending Corporation and Allied ~~Capital Advisers,~~Capitals Advisors, Inc., a registered investment adviser that managed the Allied companies. The Allied companies were the largest group of publicly-traded mezzanine debt funds in the United States and were managers of two private venture capital limited partnerships. From 1991 to 1997, Mr. Gladstone served either as chairman of the Board of Directors or president of Allied Capital Commercial Corporation, a publicly traded REIT that invested in real estate loans to small and medium-sized businesses, managed by Allied Capital Advisors, Inc. He managed the growth of Allied Capital Commercial from no

assets at the time of its initial public offering to $385 million in assets at the time it merged into Allied Capital Corporation in 1997. From 1992 to 1997, Mr. Gladstone served as a director, president and chief executive officer of Business Mortgage Investors, a privately held mortgage REIT managed by Allied Capital Advisors, which invested in loans to small and medium-sized businesses. Mr. Gladstone is also a past director of Capital Automotive REIT, a real estate investment trust that purchases and

net leases real estate to automobile dealerships. Mr. Gladstone served as a director of The Riggs National Corporation (the parent of Riggs Bank) from 1993 to May 1997 and of Riggs Bank from 1991 to 1993. He served as a trustee of the George Washington University and currently is trustee emeritus. He is a past member of the Listings and Hearings Committee of the National Association of Securities Dealers, Inc. He is a past member of the Advisory committee to Women’s Growth Capital Fund, a venture capital firm that finances women-owned small businesses. Mr. Gladstone was the founder and managing member of The Capital Investors, LLC, a group of angel investors, and is currently a member emeritus. He is also the chairman and owner of Gladstone Land Corporation, a privately held company that has substantial farmland holdings in agriculture real estate in California. Mr. Gladstone holds an MBA from the Harvard Business School, an MA from American University and a BA from the University of Virginia. Mr. Gladstone has co-authored two books on financing for small and medium-sized businesses,Venture Capital HandbookandVenture Capital Investing.

Paul W. Adelgren. Mr. Adelgren, age ~~63,~~64, has ~~served us a~~been our director since August 2003. From 1997 to the present, Mr. Adelgren has served as the pastor of Missionary Alliance Church. From 1991 to 1997, Mr. Adelgren was pastor of New Life Alliance Church. From 1988 to 1991, Mr. Adelgren was a vice president for finance and materials of Williams & Watts, Inc., a logistics management and procurement business located in Fairfield, NJ. Prior to Joining Williams & Watts, Mr. Adelgren served in the United States Navy, ~~for 23 years,~~ where he served in a number of capacities, including as the director of the Strategic Submarine Support Department, ~~at SPCC,~~ as ~~the Executive Officer~~an executive officer at the Naval Supply Center ~~Charleston, SC,~~ and as the ~~Director~~director of the Joint Uniform Military Pay ~~System at the~~System. He is a retired Navy ~~Finance Center.~~Captain. Mr. Adelgren ishas also been a director of Gladstone Capital Corporation since January 2003, and a director of Gladstone Investment ~~Corporation.~~Corporation since June 2005. Mr. Adelgren holds an MBA from Harvard University and a BA from the University of Kansas.

John H. Outland. Mr. Outland, age ~~60,~~61, has ~~served as a~~been our director since December 2003. From March 2004 to ~~present,~~June 2006, he ~~has~~ served as vice president of Genworth ~~Financial.~~Financial, Inc. From 2002 to March 2004, Mr. Outland served as a managing director for 1789 Capital Advisors, where he provided market and transaction structure analysis and advice on a consulting basis for multifamily commercial mortgage purchase programs. From 1999 to 2001, Mr. Outland served as vice president of mortgage-backed securities at Financial Guaranty Insurance Company where he was team leader for bond insurance transactions, responsible for sourcing business, coordinating credit, loan files, due diligence and legal review processes, and negotiating structure and business issues. From 1993 to 1999, Mr. Outland was senior vice president for Citicorp Mortgage Securities, Inc., where he securitized non-conforming mortgage product. From 1989 to 1993, Mr. Outland was vice president of real estate and mortgage finance for Nomura Securities International, Inc., where he performed due diligence on and negotiated the financing of commercial mortgage packages in preparation for securitization. Mr. Outland ishas also been a director of Gladstone Capital Corporation since December 2003, and a director of Gladstone Investment ~~Corporation.~~Corporation since June 2005. Mr. Outland holds an MBA from Harvard Business School and a bachelor’s degree in Chemical Engineering from Georgia Institute of Technology.


	*~~Directors Continuing in Office until the 2008 Annual Meeting~~*

THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF

EACH NAMED NOMINEE.

Directors Continuing in Office Until the 2008 Annual Meeting

Michela A. English. Ms. English, age ~~56,~~57, has served as aour director since August 2003. Ms. English is ~~currently~~President and CEO of Fight for Children, a ~~private investor.~~non-profit charitable organization focused on providing high quality education and health care services to underserved youth in Washington, D.C. Ms. English has also been a director of

Gladstone Capital Corporation since June 2002, and a director of Gladstone Investment Corporation since June 2005. From March 1996 to March 2004, Ms. English held several positions with Discovery Communications, Inc., including president of Discovery Consumer Products, president of Discovery Enterprises Worldwide and president of Discovery.com. From 1991 to 1996, Ms. English served as senior vice president of the National Geographic Society and was a member of the National Geographic Society’s Board of Trustees and Education Foundation Board. Prior to 1991, Ms. English served as vice president, corporate planning and business development for Marriott Corporation and as a senior engagement manager for McKinsey & Company. Ms. English ~~is a~~currently serves as director of the Educational Testing Service (ETS), as a director of D.C. Preparatory Academy, and as a member of the Virginia Institute of Marine Science ~~Council and~~Council. Ms. English is an emeritus member of the board of Sweet Briar College. ~~Ms. English is also a director of Gladstone Capital Corporation~~

~~and Gladstone Investment Corporation.~~ Ms. English holds a Bachelor of Arts in International Affairs from Sweet Briar College and a Master of Public and Private Management degree from Yale University’s School of Management.

Anthony W. Parker. Mr. Parker, age ~~60,~~61, has served as aour director since August 2003. Mr. Parker has also been a director of Gladstone Capital Corporation since August 2001, and a director of Gladstone Investment Corporation since June 2005. In 1997, Mr. Parker founded Medical Funding Corporation, a company which purchases medical receivables, and has served as its chairman from inception to the present. In the summer of 2000, Medical Funding Corporation purchased a Snelling Personnel Agency franchise in Washington, D.C. which provides full staffing services for the local business community. From 1992 to 1996, Mr. Parker was chairman of, and a 50 percent stock holder of, Capitol Resource Funding, Inc., ~~or “CRF,”~~ a commercial finance company with offices in Dana Point, California and Arlington, Virginia. Mr. Parker practiced corporate and tax law for over 15 years — from 1980 to 1983 at Verner, Liipfert, Bernhard & McPherson, and from 1983 to 1992 in private practice. Mr. Parker is currently the sole shareholder of Parker & Associates, P.C., a law firm. From 1973 to 1977 Mr. Parker served as executive assistant to the administrator of the U.S. Small Business Administration. Mr. Parker ~~is also a director of Gladstone Capital Corporation and Gladstone Investment Corporation. Mr. Parker~~ received his J.D. and Masters in Tax Law from Georgetown Law Center and his undergraduate degree from Harvard College.


	*~~Executive Officers Who Are Not Directors~~*

~~George Stelljes III.~~Gerard Mead. Mr. ~~Stelljes,~~Mead, age ~~44,~~63, has served as our ~~executive vice president~~director since January 2006. Mr. Mead also has been a director of Gladstone Investment Corporation and ~~chief investment officer since our inception. He also served as the executive vice president and chief investment officer of~~ Gladstone Capital Corporation since ~~September 2002,~~January 2006. Mr. Mead is Chairman of Gerard Mead Capital Management which he founded in 2003, a firm which provides investment management services to pension funds, endowments, insurance companies, and ~~assumed~~high net worth individuals. From 1966 to 2003 Mr. Mead was employed by the ~~duties~~Bethlehem Steel Corporation, where he held a series of ~~president~~engineering, corporate finance and investment positions with increasing management responsibility. From 1987 to 2003 Mr. Mead served as Chairman and Pension Fund Manager of ~~Gladstone Capital~~the Pension Trust of Bethlehem Steel Corporation ~~in April 2004. Mr. Stelljes~~and Subsidiary Companies. From 1972 to 1987 he served successively as Investment Analyst, Director of Investment Research, and Trustee of the Pension Trust, during which time he was also a Corporate Finance Analyst and Investor Relations Contact for Institutional Investors of Bethlehem Steel. Prior to that time Mr. Mead was a steel plant engineer. Mr. Mead holds an MBA degree from the Harvard Business School and a BSCE from Lehigh University.

Directors Continuing in Office Until the 2009 Annual Meeting

David A.R. Dullum. Mr. Dullum, age 59, has served as our director since August 2003. From 1995 to the present, Mr. Dullum has been a partner of New England Partners, a venture capital firm focused on investments in small and medium-sized business in the Mid-Atlantic and New England regions. Mr. Dullum is also the president and a director of Harbor Acquisition Corporation, an operating business with emphasis in the consumer and industrial sectors. Mr. Dullum also serves as a director of Simkar Corporation, a manufacturer of industrial and consumer lighting products and Fetco Home Decor, Inc., a designer and manufacturer of home decor products.

Mr. Dullum has also been a director of Gladstone Capital Corporation ~~from~~since August 2001, and a director of Gladstone Investment Corporation since June 2005. From 1976 to ~~September 2002~~1990, Mr. Dullum was a managing general partner of Frontenac Company, a Chicago-based venture capital firm. Mr. Dullum holds an MBA from Stanford Graduate School of Business and ~~then rejoined~~a BME from the ~~board~~Georgia Institute of ~~directors in July~~Technology.

Maurice W. Coulon. Mr. Coulon, age 65, has served as our director since August 2003. Mr. ~~Stelljes~~Coulon has also been a director of Gladstone Capital Corporation since August 2003, and a director of Gladstone Investment Corporation since June 2005. Since 2000, Mr. Coulon has been a private investor in real estate. From 1991 through his retirement in 2000, Mr. Coulon served as director of portfolio management for the Morgan Stanley Real Estate Fund. From 1980 to 1991, Mr. Coulon served as senior vice president of asset management for the Boston Company Real Estate Counsel, Inc. Mr. Coulon was a founder of the National Association of Real Estate Investment Managers and is a past president of the National Council of Real Estate Investment Fiduciaries. Mr. Coulon holds an MBA from Harvard University and a BSE from the University of Missouri.

Terry Lee Brubaker. Mr. Brubaker, age 63, has served as our president, chief operating officer, secretary and a director since our inception. Mr. Brubaker has also served as the chief operating officer, secretary and director of Gladstone Management Corporation since its inception. He also served as president of Gladstone Management from its inception until assuming the duties of vice chairman in February 2006. Mr. Brubaker has served as the chief ~~investment~~operating officer, secretary and a director of Gladstone Capital Corporation since May 2001. He also served as president of Gladstone Capital Corporation from May 2001 through April 2004, when he assumed the duties of vice chairman. Mr. Brubaker has also been the vice chairman, chief operating officer, secretary and a director of Gladstone Investment Corporation since its inception in June 2005. In March 1999, Mr. Brubaker founded and, ~~serves as president, chief investment officer and a director of the Adviser. Prior to joining us, Mr. Stelljes~~until May 1, 2003, served as chairman of Heads Up Systems, a ~~managing member of St. John’s Capital, a vehicle used to make private equity investments.~~company providing processing industries with leading edge technology. From 1999 to 2001, Mr. Stelljes was a co-founder and managing member of Camden Partners, a private equity firm which finances high growth companies in communications, education, healthcare and business services sectors. From 19971996 to 1999, Mr. Stelljes was a managing director and partner of Columbia Capital, a venture capital firm focused on investments in communications and information technology. From 1989 to 1997, Mr. Stelljes held seven various positions, including executiveBrubaker served as vice president and principal, with Allied Capital and its affiliates. Mr. Stelljes currently serves as a general partner and investment committee member of Patriot Capital, a private equity fund and on the board of Intrepid Capital Management, a money management firm. He is also a former board member and regional president of the ~~National Association~~paper group for the American Forest & Paper Association. From 1992 to 1995, Mr. Brubaker served as president of ~~Small Business Investment Companies.~~Interstate Resources, a pulp and paper company. From 1991 to 1992, Mr. ~~Stelljes~~Brubaker served as president of IRI, a radiation measurement equipment manufacturer. From 1981 to 1991, Mr. Brubaker held several management positions at James River Corporation, a forest and paper company, including vice president of strategic planning from 1981 to 1982, group vice president of the Groveton Group and Premium Printing Papers from 1982 to 1990 and vice president of human resources development in 1991. From 1976 to 1981, Mr. Brubaker was strategic planning manager and marketing manager of white papers at Boise Cascade. Previously, Mr. Brubaker was a senior engagement manager at McKinsey & Company from 1972 to 1976. Prior to 1972, Mr. Brubaker was a U.S. Navy fighter pilot. Mr. Brubaker holds an MBA from the ~~University of Virginia~~Harvard Business School and a ~~BA in Economics~~BSE from ~~Vanderbilt~~Princeton University.

~~Harry Brill.~~ ~~Mr. Brill, age 59, has been our treasurer and chief financial officer since our inception in 2003. Mr. Brill has also served as treasurer and chief financial officer~~

INFORMATION REGARDING THE BOARD OF DIRECTORS AND CORPORATE GOVERNANCE

Independence of ~~Gladstone Capital Corporation since May 2001, and as treasurer and chief financial officer~~The Board of Gladstone Investment Corporation since June 2005. Mr. Brill is also the treasurer and chief financial officer of the Adviser. From 1995 to April 2001, Mr. Brill served as a personal financial advisor. From 1975 to 1995, Mr. Brill held various positions, including treasurer, chief accounting officer and controller with Allied Capital Corporation, where Mr. Brill was responsible for all of the accounting work for Allied Capital and its family of funds. Mr. Brill received his degree in accounting from Ben Franklin University.Directors


	*~~Independence Of The Board Of Directors~~*

As required under ~~the~~The Nasdaq Stock Market ~~or “Nasdaq,”~~(“NASDAQ”) listing standards, a majority of the members of a listed company’s Board of Directors must qualify as “independent,” as affirmatively determined by the Board of Directors. The Board ~~of Directors~~ consults with our chief compliance officer and chief financial officer to ensure that the Board’s determinations ~~of the Board of Directors~~ are consistent with ~~all~~ relevant securities and other laws and regulations regarding the definition of “independent,” including those set forth in pertinent listing standards of ~~the Nasdaq,~~NASDAQ as in effect time to time.

Consistent with these considerations, after review of all relevant transactions or relationships between each director, or any of his or her family members, and us, our senior management and our independent ~~registered public accounting firm, our~~auditors, the Board ~~of Directors~~has affirmatively ~~has~~ determined that ~~all of our~~the following seven directors are independent directors within the meaning of the applicable ~~Nasdaq~~NASDAQ listing ~~standards except~~standards: Messrs. Adelgren, Coulon, Dullum, Mead, Outland, Parker and

Ms. English. In making this determination, the Board found that none of the these directors or nominees for director had a material or other disqualifying relationship with us. Mr. Gladstone, the chairman of the our Board of Directors and chief executive officer and Mr. Brubaker, our president, chief operating officer and ~~secretary. As required under applicable Nasdaq listing standards, in fiscal 2005 our~~secretary, are not independent directors ~~met one time in a regularly scheduled executive session at~~by virtue of their employment by our affiliate Gladstone Management Corporation, which ~~only independent directors were present.~~

~~Meetings Of The Board Of Directors~~we refer to as our “Adviser.”

~~Our~~

The Board of Directors met ~~four~~five times during the last fiscal year. Each ~~director~~Board member attended 75% or more of the aggregate of the meetings of the Board ~~of Directors~~ and of the committees on which he or ~~she~~she served that were held during the period for which he or ~~she~~she was a director or committee member.

~~Stockholder Communications With The Board Of Directors~~

~~Our Board has adopted a formal process by~~As required under applicable NASDAQ listing standards, which ~~our stockholders may communicate with the Board or any~~require regularly scheduled meetings of ~~its directors. Persons interested in communicating with the Board of Directors with their concerns or issues may address correspondence to the Board of Directors, to a particular director, or to the~~ independent directors, ~~generally,~~ in ~~care of Gladstone Commercial Corporation, Attention: Investor Relations Manager,~~fiscal 2006 our independent directors met five times in regularly scheduled executive sessions at ~~1521 Westbranch Drive, Suite 200, McLean, Virginia 22102. This information is also contained on our website at www.GladstoneCommercial.com.~~which only independent directors were present.

Information Regarding Committees of the Board of Directors

Our Board of Directors has four committees: an Audit Committee, a Compensation Committee, an Executive Committee and an Ethics, Nominating and Corporate Governance ~~Committee, an Audit Committee and a Compensation~~ Committee. The following table shows the current composition of each of the committees of the Board of Directors:

~~Ethics, Nominating and~~

Ethics, Nominating and

Name

~~Executive~~

Audit

Compensation

Executive

Corporate Governance

~~Audit~~

~~Compensation~~

Paul W. Adelgren**

Terry Lee Brubaker

~~Terry Lee Brubaker~~

Maurice W. Coulon

David A.R. Dullum

Michela A. English

David Gladstone

John H. Outland

Anthony W. Parker

Gerard Mead


*		Committee Chairperson


**		Lead Independent Director

Below is a description of each committee of the Board of Directors. All committees other than the Executive Committee have the authority to engage legal counsel or other experts or consultants, as they deem appropriate to carry out their responsibilities. The Board of Directors has determined that each member of each committee meets the applicable NASDAQ rules and regulations regarding “independence” and that each member is free of any relationship that would interfere with his or her individual exercise of independent judgment with regard to us (other than with respect to the Executive Committee, for which there are no applicable independence requirements).

The Audit Committee

The Audit Committee of the Board of Directors oversees our corporate accounting and financial reporting process. For this purpose, the Audit Committee performs several functions. The Audit Committee evaluates the performance of and assesses the qualifications of the independent registered public accounting firms; determines and approves the engagement of the independent registered public accounting firms; determines whether to retain or terminate the existing independent registered public accounting firm or to appoint and engage a new independent

registered public accounting firm; reviews and approves the retention of the independent registered public accounting firm to perform any proposed permissible non-audit services; monitors the rotation of partners of the independent registered public accounting firm on our audit engagement team as required by law; confers with management and the independent registered public accounting firm regarding the effectiveness of internal controls over financial reporting; establishes procedures, as required under applicable law, for the receipt, retention and treatment of complaints received by us regarding accounting, internal accounting controls or auditing matters and the confidential and anonymous submission by employees of concerns regarding questionable accounting or auditing matters; and meets to review our annual audited financial statements and quarterly financial statements with management and the independent registered public accounting firm, including reviewing our disclosures under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” During fiscal 2006, the Audit Committee was comprised of Messrs. Parker (Chairman) and Dullum and Ms. English. Messrs. Adelgren and Coulon served as alternate members of the Audit Committee. Alternate members of the Audit Committee serve and participate in meetings of the Audit Committee only in the event of an absence of a regular member of the Audit Committee. The Audit Committee met eight times during the last fiscal year. The Audit Committee has adopted a written charter that is available to stockholders on our website atwww.GladstoneCommercial.com.

The Board of Directors reviews the NASDAQlisting standards definition of independence for audit committee members and has determined that all members and alternate members of our Audit Committee are independent (as independence is currently defined in Rule 4350(d)(2)(A)(i) and (ii) of the NASDAQlisting standards). The Board of Directors has also determined that each member (including alternate members) of the Audit Committee qualifies as an “audit committee financial expert,” as defined in applicable SEC rules. The Board made a qualitative assessment of the members’ level of knowledge and experience based on a number of factors, including formal education and experience. The Board has also unanimously determined that all Audit Committee members and alternate members are financially literate under current NASDAQ rules and that at least one member has financial management expertise. In addition to our Audit Committee, Mr. Dullum also serves on the audit committee of Harbor Acquisition Corporation and Messrs. Dullum and Parker and Ms. English also serve on the audit committees of Gladstone Investment Corporation and Gladstone Capital Corporation. Our Audit Committee’s alternate members, Messrs. Adelgren and Coulon, also serve as alternate members on the audit committees of Gladstone Investment Corporation and Gladstone Capital Corporation. The Board of Directors has determined that this simultaneous service does not impair the respective directors’ ability to effectively serve on our Audit Committee.

Our Board of Directors annually reviews the Nasdaq listing standards definition of independence for Audit Committee members and has determined that all members and alternate members of our Audit Committee are independent (as independence is currently defined in Rule 4350(d)( 2)(A)(i) and (ii) of the Nasdaq listing standards). No members of the Audit Committee received any compensation from us during the last fiscal year other than directors’ fees. Our Board of Directors has determined that all members and alternate members of the Audit Committee qualify as “audit committee financial experts,” as defined in applicable SEC rules, and that all Audit Committee members and alternate members are financially literate under current Nasdaq listing standards.

Relationship with Independent Registered Public Accounting Firm

The Audit Committee of the Board of Directors has selected PricewaterhouseCoopers LLP, or “PwC,” as our independent registered public accounting firm to audit our financial statements for the fiscal year ending December 31, 2007. Representatives of PwC are expected to be present at the Annual Meeting, will have an opportunity to make a statement if they so desire and will be available to respond to appropriate questions.

Pre-Approval Policies and Procedures

The Audit Committee has adopted a policy and procedures for the pre-approval of audit and non-audit services rendered by our independent registered public accounting firm, PwC. The policy generally pre-approves specified services in the defined categories of audit services, audit-related services, and tax services up to specified amounts. Pre-approval may also be given as part of the Audit Committee’s approval of the scope of the engagement of the independent registered public accounting firm or on an individual explicitcase-by-case basis before the independent registered public accounting firm is engaged to provide each service. The pre-approval of services may be delegated to one or more of the Audit Committee’s members, but the decision must be reported to the full Audit Committee at its next scheduled meeting.

The Audit Committee has determined that the rendering of the services other than audit services by PwC is compatible with maintaining the independent registered public accounting firm’s independence.

REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS¹

The following is the report of the Audit Committee with respect to the Company’s audited financial statements for the fiscal year ended December 31, 2006.

The Audit Committee has reviewed and discussed the Company’s audited financial statements with management and PricewaterhouseCoopers LLP, the Company’s independent registered public accounting firm, with and without management present. The Audit Committee included in its review results of the independent registered public accounting firm’s examinations, the Company’s internal controls, and the quality of the Company’s financial reporting. The Audit Committee also reviewed the Company’s procedures and internal control processes designed to ensure full, fair and adequate financial reporting and disclosures, including procedures for certifications by the Company’s chief executive officer and chief financial officer that are required in periodic reports filed by the Company with the Securities and Exchange Commission. The Audit Committee further reviewed with the independent registered public accounting firm their opinion on management’s assessment of the effectiveness of the internal control over financial reporting of the Company, and their opinion on the effectiveness of the internal control over financial reporting of the Company. The Audit Committee is satisfied that the Company’s internal control system is adequate and that the Company employs appropriate accounting and auditing procedures.

The Audit Committee also has discussed with PricewaterhouseCoopers LLP matters relating to the independent registered public accounting firm’s judgments about the quality, as well as the acceptability, of the Company’s accounting principles as applied in its financial reporting as required by Statement of Auditing Standards No. 61, as amended (AICPA,Professional Standards, Vol. 1. AU section 380), as adopted by the Public Company Accounting Oversight Board (“PCAOB”) in Rule 3200T.The Audit Committee has also received the written disclosures and the letter from the independent accountants required by the Independence Standards Board Standard No. 1, (Independence Discussions with Audit Committees), as adopted by the PCAOB in Rule 3600T and has discussed with the independent accountants the independent accountant’s independence (Communications with Audit Committees). The Audit Committee received a letter from PricewaterhouseCoopers LLP confirming their independence and discussed it with them. The Audit Committee discussed and reviewed with PricewaterhouseCoopers LLP the Company’s critical accounting policies and practices, internal controls, other material written communications to management, and the scope of PricewaterhouseCoopers LLP’s audits and all fees paid to PricewaterhouseCoopers LLP during the fiscal year. The Audit Committee adopted guidelines requiring review and pre-approval by the Audit Committee of audit and non-audit services performed by PricewaterhouseCoopers LLP for the Company. The Audit Committee has reviewed and considered the compatibility of PricewaterhouseCoopers

LLP’s performance of non-audit services with the maintenance of PricewaterhouseCoopers’ independence as the Company’s independent registered public accounting firm.

Based on the Audit Committee’s review and discussions referred to above, the Audit Committee recommended to the Board of Directors that the Company’s audited financial statements be included in the Company’s Annual Report onForm 10-K for the fiscal year ended December 31, 2006 for filing with the Securities and Exchange Commission. In addition, the Audit Committee has engaged PricewaterhouseCoopers LLP to serve as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2007.

Submitted by the Audit Committee
Anthony W. Parker, Chairperson
Michela A. English
David A. R. Dullum


¹		The ~~Executive Committee~~material in this report is not “soliciting material,” is not deemed “filed” with the SEC, and is not to be incorporated by reference into any of our filings under the 1933 Act or the Securities Exchange Act of 1934, as amended (the “1934 Act”), whether made before or after the date hereof and irrespective of any general incorporation language contained in such filing.

Compensation Committee

The Compensation Committee operates pursuant to a written charter and conducts periodic reviews of the amended and restated investment advisory agreement (the “Current Advisory Agreement”) with the Adviser and the administration agreement (the “Administration Agreement”) with Gladstone Administration, LLC, or the “Administrator,” which our stockholders approved at our 2006 Annual Meeting of Stockholders. The committee reviews these agreements to evaluate whether the fees paid to the respective parties under the agreements are in the best interests of us and our stockholders. The committee considers in such periodic reviews, among other things, whether the salaries and bonuses paid to its executive officers by the Adviser and the Administrator are consistent with our compensation philosophies and the performance of the Adviser and the Administrator are reasonable in relation to the nature and quality of services performed, and whether the provisions of the Current Advisory and Administration Agreements are being satisfactorily performed. Since its effectiveness on January 1, 2007, the Compensation Committee also reviews and considers all incentive fees payable to the Adviser under the Current Advisory Agreement.

Through fiscal year 2006, the Compensation Committee also monitored the performance of the Adviser under the terms of our investment advisory and administration agreement that was in effect through December 31, 2006 (the “Former Advisory Agreement”) and also administered our 2003 Equity Incentive Plan, as amended, or the “2003 Plan,” which was terminated on December 31, 2006 in connection with the implementation of the Current Advisory Agreement and the Administration Agreement.

During the last fiscal year, the Compensation Committee was comprised of Messrs. Coulon (Chairperson), Outland and Mead. All members of our Compensation Committee are independent (as independence is currently defined in Rule 4200(a)(15) of the NASDAQ listing standards). The Compensation Committee met four times during the last fiscal year.

Commencing this year, the Compensation Committee also began to review with management our Compensation Discussion and Analysis and to consider whether to recommend that it be included inproxy statements and other filings.

Compensation Committee Interlocks and Insider Participation

During the last fiscal year, the Compensation Committee consisted of Messrs. Coulon, Outland and Mead, each of whom is an independent director under NASDAQ rules. During the fiscal year ended December 31, 2006, none of our executive officers served as members of the compensation committee or as directors of another entity, one of whose executive officers served on the Compensation Committee.

REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS²

The Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis (“CD&A”) contained in this proxy statement. Based on this review and discussion, the Compensation Committee has recommended to the Board of Directors that the CD&A be included in this proxy statement and incorporated into our Annual Report onForm 10-K for the fiscal year ended December 31, 2006.

Submitted by the Compensation Committee
Maurice W. Coulon, Chairperson
John H. Outland
Gerard Mead


²		The material in this report is not “soliciting material,” is not deemed “filed” with the SEC, and is not to be incorporated by reference into any of our filings under the 1933 Act or the 1934 Act, whether made before or after the date hereof and irrespective of any general incorporation language contained in such filing.

The Executive Committee

The Executive Committee, which is comprised of Messrs. Gladstone (Chairman), Brubaker and Parker, has the authority to exercise all powers of our Board of Directors except for actions that must be taken by a majority of independent directors or the

full Board of Directors under ~~Maryland General Corporation Law.~~applicable rules and regulations. The Executive Committee did not meet during the last fiscal year.


	*~~The Ethics, Nominating and Corporate Governance Committee~~*

The Ethics, Nominating and Corporate Governance Committee

The Ethics, Nominating and Corporate Governance Committee of the Board of Directors is responsible for identifying, reviewing and evaluating candidates to serve as our directors (consistent with criteria approved by the Board), reviewing and evaluating incumbent directors, recommending to the Board for selection candidates for election to the Board of Directors, making recommendations to the Board regarding the membership of the committees of the Board, assessing the performance of the Board, and developing our corporate governance principles. Our Ethics, Nominating and Corporate Governance Committee charter can be found on our website at www.GladstoneCommercial.com. ~~Two directors comprise the Ethics, Nominating and Corporate Governance Committee: Messrs. Adelgren (Chairman) and Coulon. All members~~Membership of the Ethics, Nominating and Corporate Governance Committee ~~are~~is comprised of Messrs. Adelgren (Chairperson) and Coulon. Each member of the Ethics, Nominating and Corporate Governance Committee is independent (as independence is currently defined in Rule 4200(a)(15) of the ~~Nasdaq~~NASDAQ listing standards). The Ethics, Nominating and Corporate Governance Committee met four times during the last fiscal year.


	~~Qualifications for Director Candidates~~

Qualifications for Director Candidates

The Ethics, Nominating and Corporate Governance Committee believes that candidates for director should have certain minimum qualifications, including being able to read and understand basic financial statements, being over 21 years of age and having the highest personal integrity and ethics. The Ethics, Nominating and Corporate Governance Committee also intends to consider such factors as possessing relevant expertise upon which to be able to offer advice and guidance to management, having sufficient time to devote to our affairs, demonstrated excellence in his or her field, having the ability to exercise sound business judgment and having the commitment to rigorously represent the long-term interests of our stockholders. However, the Ethics, Nominating and Corporate Governance Committee retains the right to modify these qualifications from time to time. Candidates for director nominees are reviewed in the context of the current composition of the Board, our operating requirements and the long-term interests of our stockholders. In conducting this assessment, the Ethics, Nominating and Corporate Governance Committee considers diversity, age, skills, and such other factors as it deems appropriate given our current needs and the current needs of the Board, to maintain a balance of knowledge, experience and capability. In the case of incumbent directors whose terms of office are set to expire, the Ethics, Nominating and Corporate Governance Committee reviews such directors’ overall service to us during their term, including the number of meetings attended, level of participation, quality of performance, and any other relationships and transactions that might impair such directors’ independence. In the case of new director candidates, the Ethics, Nominating and Corporate Governance Committee also determines whether the nominee must be independent for ~~Nasdaq~~NASDAQ purposes, which determination is based upon applicable ~~Nasdaq~~NASDAQ listing standards, applicable SEC rules and regulations and the advice of counsel, if necessary. The Ethics, Nominating and Corporate Governance Committee then uses its network of contacts to compile a list of potential candidates, but may also engage, if it deems appropriate, a professional search firm. The Ethics, Nominating and Corporate Governance Committee conducts any appropriate and necessary inquiries into the backgrounds and qualifications of possible candidates after considering the function and needs of the Board. The Ethics, Nominating and Corporate Governance Committee meets to discuss and consider such candidates’ qualifications and then selects a nominee for recommendation to the Board by majority vote. To date, the Ethics, Nominating and Corporate Governance Committee has not paid a fee to any third party to assist in the process of identifying or evaluating director candidates. ~~To date,~~

Stockholder Recommendation of Director Candidates to the Ethics, Nominating and Corporate Governance Committee ~~has not rejected a timely director nominee from a stockholder or stockholders holding more than 5% of our voting stock.~~


	~~Stockholder Recommendation of Director Candidates to the Ethics, Nominating and Corporate Governance Committee~~

The Ethics, Nominating and Corporate Governance Committee will consider director candidates recommended by stockholders. The Ethics, Nominating and Corporate Governance Committee does not

intend to alter the manner in which it evaluates candidates, including the minimum criteria set forth above, based on whether the candidate was recommended by a stockholder or not. Stockholders who wish to recommend individuals for consideration by the Ethics, Nominating and Corporate Governance Committee to become nominees for election to the Board may do so by delivering a written recommendation to the Ethics, Nominating and Corporate Governance Committee at the address set forth on the cover page of this proxy statement. Recommendations for individuals to be considered for nomination at the ~~2007~~2008 Annual Meeting must be received by November 24, ~~2006.~~2007. Recommendations received after November 24, ~~2006~~2007 will be considered for nomination at the ~~2008~~2009 Annual Meeting. Submissions must include the full name of the proposed nominee, a description of the proposed nominee’s business experience for at least the previous five years, complete biographical information, a description of the proposed nominee’s qualifications as a director and a representation that the nominating stockholder is a beneficial or record owner of our stock. Any such submission must be accompanied by the written consent of the proposed nominee to be named as a nominee and to serve as a director if elected. To date, the Ethics, Nominating and Corporate Governance

Committee has not received or rejected a timely director nominee proposal from a stockholder or stockholders holding more than 5% of our voting stock.


	~~Code of Ethics~~

Stockholder Communications with the Board of Directors

Our Board has adopted a formal process by which our stockholders may communicate with the Board or any of its directors. Persons interested in communicating with the Board of Directors with their concerns or issues may address correspondence to the Board of Directors, to a particular director, or to the independent directors generally, in care of Gladstone Commercial Corporation, Attention: Investor Relations Manager, at 1521 Westbranch Drive, Suite 200, McLean, Virginia 22102. This information is also contained on our website at www.GladstoneCommercial.com.

Code of Ethics

We have adopted the Gladstone Commercial Corporation Code of Business Conduct and Ethics that applies to all of our officers and directors and to the employees of ~~our Adviser.~~the Adviser and the Administrator. The Ethics, Nominating and Corporate Governance Committee reviews, approves and recommends to our Board of Directors any changes to the Code of Business Conduct and Ethics. They also review any violations of the Code of Ethics and make recommendations to the Board of Directors on those violations. The Code of Business Conduct and Ethics is available on our website at www.GladstoneCommercial.com. If we make any substantive amendments to the Code of Business Conduct and Ethics or grant any waiver from a provision of the Code to any executive officer or director, we will promptly disclose the nature of the amendment or waiver on our website.


	*~~The Audit Committee~~*

Independent Registered Public Accounting Firm Fees

The ~~Audit Committee of~~following table represents aggregate fees billed to us for the ~~Board of Directors oversees~~fiscal years ended December 31, 2005 and December 31, 2006 by PwC, our corporate accounting and financial reporting process. For this purpose, the Audit Committee performs several functions. The Audit Committee evaluates the performance of and assesses the qualifications of theprincipal independent registered public accounting firms; determines and approves the engagement of the independent registered public accounting firms; determines whether to retain or terminate the existing independent registered public accounting firm or to appoint and engage a new independent registered public accounting firm; reviews and approves the retention of the independent registered public accounting firm to perform any proposed permissible non-audit services; monitors the rotation of partners of the independent registered public accounting firm on our audit engagement team as requiredfirm.

2005 2006

Audit Fees $ 245,422 $ 395,801
Audit-related Fees $ 0 $ 0
Tax Fees $ 63,844 $ 172,772
All Other Fees $ 0 17,592

$ 309,266 $ 586,165

All fees described above were approved by law; confers with management and the independent registered public accounting firm regarding the effectiveness of internal controls over financial reporting; establishes procedures, as required under applicable law, for the receipt, retention and treatment of complaints received by us regarding accounting, internal accounting controls or auditing matters and the confidential and anonymous submission by employees of concerns regarding questionable accounting or auditing matters; and meets to review our annual audited financial statements and quarterly financial statements with management and the independent registered public accounting firm, including reviewing our disclosures under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” During fiscal 2005, three directors comprised the Audit Committee: Messrs. Parker (Chairman) and Dullum and Ms. English. The Audit Committee met seven times during the last fiscal year. In July 2005, the Board appointed Messrs. Adelgren and Coulon to serve as alternate members of the Audit Committee. Alternate members of the Audit Committee serve and participate in meetings of the Audit Committee only in the event of an absence of a regular member of the Audit Committee.
~~Our Board of Directors annually reviews the Nasdaq listing standards definition of independence for Audit Committee members~~
Pre-Approval Policies and has determined that all members and alternate members of our Audit Committee are independent (as independence is currently defined in Rule 4350(d)(2)(A)(i) and (ii) of the Nasdaq listing standards). No members of the Audit Committee received any compensation from us during the last fiscal year other than directors’ fees. Our Board of Directors has determined that all members and
30
alternate members of the Audit Committee qualify as “audit committee financial experts,” as defined in applicable SEC rules, and that all Audit Committee members and alternate members are financially literate under current Nasdaq listing standards.Procedures
~~Relationship with Independent Registered Public Accounting Firm~~
The Audit Committee of the Board of Directors has selected PricewaterhouseCoopers, LLP, or “PWC,” as our independent registered public accounting firm to audit our financial statements for the fiscal year ending December 31, 2006. Representatives of PWC are expected to be present at the Annual Meeting, will have an opportunity to make a statement if they so desire and will be available to respond to appropriate questions.
~~Pre-Approval Policies and Procedures~~
The Audit Committee has adopted a policy and procedures for the pre-approval of audit and non-audit services rendered by our independent registered public accounting firm, ~~PWC.~~PwC. The policy generally pre-approves specified services in the defined categories of audit services, audit-related services, and tax services up to specified amounts. Pre-approval may also be given as part of the ~~Audit Committee’s~~audit committee’s approval of the scope of the engagement of the independent registered public accounting firm or on an individual explicitcase-by-case basis before the independent registered public accounting firm is engaged to provide each service. The pre-approval of services may be delegated to one or more of the ~~Audit Committee’s~~audit committee’s members, but the decision must be reported to the full ~~Audit Committee~~audit committee at its next scheduled meeting.

15

The Audit Committee has determined that the rendering of the services other than audit services by ~~PWC~~PwC is compatible with maintaining the principal independent registered public accounting firm’s independence.

~~REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS~~¹Executive Officers Who Are Not Directors

George Stelljes III. Mr. Stelljes, age 45, has served as our executive vice president and chief investment officer since our inception. He also served as the executive vice president and chief investment officer of Gladstone Capital Corporation since September 2002, and assumed the duties of president of Gladstone Capital Corporation in April 2004. Mr. Stelljes was also a director of Gladstone Capital Corporation from August 2001 to September 2002 and then rejoined the board of directors in July 2003. Mr. Stelljes has also served as the president, chief investment officer and a director of Gladstone Investment Corporation since its inception in June 2005. Mr. Stelljes has served as chief investment officer and as a director of Gladstone Management Corporation since May 2003. He also served as executive vice president of Gladstone Management Corporation until February 2006, when he assumed the duties of president. Prior to joining us, Mr. Stelljes served as a managing member of St. John’s Capital, a vehicle used to make private equity investments. From 1999 to 2001, Mr. Stelljes was a co-founder and managing member of Camden Partners, a private equity firm which finances high growth companies in communications, education, healthcare and business services sectors. From 1997 to 1999, Mr. Stelljes was a managing director and partner of Columbia Capital, a venture capital firm focused on investments in communications and information technology. From 1989 to 1997, Mr. Stelljes held seven various positions, including executive vice president and principal, with Allied Capital and its affiliates. Mr. Stelljes currently serves as a general partner and investment committee member of Patriot Capital, a private equity fund and on the board of Intrepid Capital Management, a money management firm. He is also a former board member and regional president of the National Association of Small Business Investment Companies. Mr. Stelljes holds an MBA from the University of Virginia and a BA in Economics from Vanderbilt University.

Harry Brill. Mr. Brill, age 60, has been our chief financial officer since our inception in 2003 and our treasurer from that time until April 2006. Mr. Brill has also served as chief financial officer of Gladstone Capital Corporation since its inception in 2001 and served as treasurer from inception through April 2006. Mr. Brill has also served as chief financial officer of Gladstone Investment Corporation since June 2005 and as treasurer from June 2005 to April 2006. Mr. Brill has also served as chief financial officer of Gladstone Management Corporation since its inception. From 1995 to April 2001, Mr. Brill served as a personal financial advisor. From 1975 to 1995, Mr. Brill held various positions, including treasurer, chief accounting officer and controller with Allied Capital Corporation, where Mr. Brill was responsible for all of the accounting work for Allied Capital and its family of funds. Mr. Brill received his degree in accounting from Ben Franklin University.

Gary Gerson. Mr. Gerson, age 42, has served as our treasurer since April 2006. Mr. Gerson has also served as treasurer for Gladstone Capital Corporation and Gladstone Investment Corporation since April 2006, and of Gladstone Management Corporation since May 2006. From 2004 to early 2006 Mr. Gerson was Assistant Vice President of Finance at the Bozzuto Group, a real estate developer, manager and owner, where he was responsible for the financing of multi-family and for-sale residential projects. From 1995 to 2004 he held various finance positions, including Director of Finance from 2000 to 2004, at PG&E National Energy Group where he led, and assisted in, the financing of power generation assets. Mr. Gerson holds an MBA from the Yale School of Management, a B.S. in mechanical engineering from the U.S. Naval Academy, and is a CFA charter holder.

SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following istable sets forth certain information regarding the ~~report~~ownership of our common stock as of March 15, 2007 by: (i) each director and nominee for director; (ii) each of the ~~Audit Committee~~executive officers named in the Summary Compensation Table; (iii) all of our executive officers and directors as a group; and (iv) all those known by us to be beneficial owners of more than five percent of its common stock. Except as otherwise noted, the address of the individuals below is c/o Gladstone Commercial Corporation, 1521 Westbranch Drive, Suite 200, McLean, VA 22102.

Beneficial Ownership(1)
Number of
Percent of

Beneficial Owner
Shares Total

Compensated Persons and Directors:

David Gladstone 351,616 4.10
Terry Lee Brubaker(2) 81,574 *
George Stelljes III(3) 129,022 1.50
Harry Brill 10,390 *
Gary Gerson(4) 352 *
Anthony W. Parker 10,952 *
David A.R. Dullum 0 *
Michela A. English 2,194 *
Paul Adelgren 1,000 *
Maurice W. Coulon 1,000 *
John H. Outland 1,000 *
Gerard Mead 1,015 *
All executive officers and directors as a group (12 persons) 590,115 6.89
Other Stockholders:

Avenir Corporation(5)
1725 K Street, NW Suite 401
Washington, DC 20006. 879,361 10.27
Prudential Financial, Inc.(6)
751 Broad Street
Newark, NJ 07102. 483,500 5.64
Persons associated with CF Advisors, LLC(7)
666 5th Avenue 34th Floor
New York, NY 10103. 486,133 5.67
Ferris, Baker Watts, Inc.(8)
100 Light Street
Baltimore, MD 21202 808,776 9.44
* Less than 1%
(1) This table is based upon information supplied by officers, directors and principal stockholders. Unless otherwise indicated in the footnotes to this table and subject to community property laws where applicable, we believe that each of the stockholders named in this table has sole voting and sole investment power with respect to the shares indicated as beneficially owned. Applicable percentages are based on 8,565,264 shares of common stock outstanding on March 15, 2007, adjusted as required by rules promulgated by the SEC.

17


(2)		Includes 13,024 shares owned by Mr. Brubaker’s spouse with respect to which Mr. Brubaker disclaims beneficial ownership. 62,130 of these shares are pledged to secure indebtedness incurred for their acquisition. Mr. Brubaker retains voting power with respect to these pledged shares.

(3)		120,400 of these shares are pledged to secure indebtedness incurred for their acquisition. Mr. Stelljes retains voting power with respect to these pledged shares.

(4)		Includes 252 shares owned by Mr. Gerson’s spouse with respect to which Mr. Gerson disclaims beneficial ownership.

(5)		This information has been obtained from a Schedule 13G/A filed by Avenir Corporation on February 9, 2007.

(6)		This information has been obtained from a Schedule 13G/A filed by Prudential Financial, Inc. (“Prudential”) on February 9, 2007 and a Schedule 13G filed by Jennison Associates LLC (“Jennison”) on February 13, 2007. According to Prudential’s filing, Prudential has sole voting power over 141,500 shares and shared investment power over 342,000 shares that it holds for its own benefit or for the benefit of its clients by its separate accounts, externally managed accounts, registered investment companies or other affiliates. However, on the above mentioned Schedule 13G filed by Jennison, an indirect subsidiary of Prudential, Jennison disclosed that it has sole voting and indirect investment power with respect to 483,500 of these shares.

(7)		This information has been obtained from a Schedule 13G/A filed jointly by CF Advisors, LLC, A. Alex Porter, Paul Orlin, Geoffrey Hulme and Jonathan W. Friedland on February 14, 2007, according to which CF Advisors, LLC shares voting and investment power with Messrs. Porter, Orlin, Hulme and Friedland with respect to these shares.

(8)		This information has been obtained from a Schedule 13G/A filed by Ferris, Baker Watts, Inc. on January 11, 2007 according to which it has sole voting and dispositive power over 5 shares and shared voting and dispositive power over 808,771 shares in its capacity as an investment adviser.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the 1934 Act requires our directors and executive officers, and persons who own more than ten percent of a registered class of our equity securities, to file with ~~respect~~the SEC initial reports of ownership and reports of changes in ownership of common stock and our other equity securities. Officers, directors and greater than ten percent stockholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file.

To our knowledge, based solely on a review of the ~~Company’s audited financial statements for~~copies of such reports furnished to us and written representations that no other reports were required, during the fiscal year ended December 31, ~~2005.~~2007, all Section 16(a) filing requirements applicable to our officers, directors and greater than ten percent beneficial owners were complied with except that (i) three reports, covering an aggregate of eight transactions, were filed late by Mr. Dullum and (ii) one report, covering four transactions, was filed late by Mr. Brubaker.

~~The Audit Committee has reviewed~~

EXECUTIVE COMPENSATION

Compensation Discussion and discussed the Company’s audited financial statements with management and PricewaterhouseCoopers LLP, the Company’s independent registered public accounting firm, with and without management present. The Audit Committee included in its review results of the independent registered public accounting firm’s examinations, the Company’s internal controls, and the quality of the Company’s financial reporting. The Audit Committee also reviewed the Company’s procedures and internal control processes designed to ensure full, fair and adequate financial reporting and disclosures, including procedures for certifications by the Company’sAnalysis

Our chief executive officer, ~~and~~chief operating officer, chief investment officer, chief financial officer ~~that~~and treasurer are required in periodic reports filed by the Company with the Securities and Exchange Commission. The Audit Committee further reviewed with the independent registered accounting firm their opinion on management’s assessment of the effectiveness of the internal control over financial reporting of the Company, and their opinion on the effectiveness of the internal control over financial reporting of the Company. The Audit Committee is satisfied that the Company’s internal control system is adequate and that the Company employs appropriate accounting and auditing procedures.

LLP during the fiscal year. The Audit Committee adopted guidelines requiring review and pre-approval by the Audit Committee of audit and non-audit services performed by PricewaterhouseCoopers LLP for the Company. The Audit Committee has reviewed and considered the compatibility of PricewaterhouseCoopers LLP’s performance of non-audit services with the maintenance of PricewaterhouseCoopers’ independence as the Company’s independent registered public accounting firm.

Based on the Audit Committee’s review and discussions referred to above, the Audit Committee recommended to the Board of Directors that the Company’s audited financial statements be included in the Company’s Annual Report on Form ~~10-K~~ for the fiscal year ended December 31, 2005 for filing with the Securities and Exchange Commission. In addition, the Audit Committee has engaged PricewaterhouseCoopers LLP to serve as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2006.


	~~Submitted by the Audit Committee~~
	~~Anthony Parker, Chairperson~~
	~~Michela English~~
	~~David A. R. Dullum~~


¹	The material in this report is not “soliciting material,” is not deemed “filed” with the SEC, and is not to be incorporated by reference into any of our filings under the 1933 Act or the Securities Exchange Act of 1934, as amended (the “1934 Act”), whether made before or after the date hereof and irrespective of any general incorporation language contained in such filing.

~~Compensation Committee~~

The Compensation Committee of the Board of Directors reviews and approves our overall compensation strategy and policies. During the past fiscal year, the Compensation Committee reviewed and approved corporate performance goals and objectives relevant to the compensation of our executive officers and other senior management, monitored the performancesalaried employees of the Adviser ~~under~~and the Administrator, which are affiliates of ours. The Adviser and the Administrator pay the salaries and other employee benefits of the persons in their respective organizations who render services for us. These services have been and continue to be provided pursuant to the terms of ~~our advisory agreement with~~ the Adviser, recommended to the Board for approval the compensation and other terms of employment of our chief executive officer; recommended to the Board for approval the compensation and other terms of employment of the other executive officers; and, during the last fiscal year, administered our 2003 Plan. During the last fiscal year, three directors comprised the Compensation Committee: Messrs. Dullum (Chairman), Parker and Outland. Effective January 10, 2006, the Compensation Committee consists of Messrs. Coulon (Chairman), Outland and Mead. All members of our Compensation Committee are independent (as independence is currently defined in Rule 4200(a)(15) of the Nasdaq listing standards). The Compensation Committee met four times during the last fiscal year.Former


	*~~Compensation Committee Interlocks and Insider Participation~~*

~~During the last fiscal year, the Compensation Committee consisted of Messrs Parker, Dullum and Outland, each of whom is an independent director under Nasdaq rules. During the fiscal year ended~~Advisory Agreement (through December 31, ~~2005, none of our executive officers served as members of the compensation committee or as directors of another entity, one of whose executive officers served on the Compensation Committee.~~

~~REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS~~

~~ON EXECUTIVE COMPENSATION~~²

The Compensation Committee (the “Committee”) is responsible for the oversight of the Company’s executive compensation program. In this regard, the role of the Committee is to assess all components of the total compensation of the Company’s executives to ensure that total compensation reflects the Company’s key strategic priorities of attracting, retaining and rewarding executives who effectively work to achieve the Company’s business and investment objectives. The Committee’s charter reflects this responsibility,2006) and the ~~Committee~~Current Advisory Agreement and the Board of Directors periodically review and revise the charter. The Committee’s membership is determined by the Board of Directors and is composed entirely of independent directors. The Committee meets at scheduled times during the year, and it may also consider and take action by written

consent. The Committee Chairman reports on Committee actions and recommendations at meetings of the Board of Directors. Although it has not done so to date, the Committee has the authority to engage the services of outside advisers, experts and others to assist in fulfilling its responsibilities.Administration Agreement (since January 1, 2007), as applicable. The current total compensation plan for ~~the Company’s~~our executive officers consists of base salaries and bonuses.

Advisory and Administrative Arrangement Compensation Changes

Former Advisory and Administrative Arrangements

From our initial public offering through December 31, 2006, we compensated the Adviser for both advisory and administrative services rendered to us through reimbursement of our portion of the Adviser’s payroll, benefits and general overhead expenses, on the following ~~elements:~~bases:


	•	~~Base salary paid~~Reimbursement on adollar-for-dollar basis for all expenses incurred by our Adviser for our direct benefit (including, but not limited to ~~executive officers by the Adviser;~~organizational and offering expenses, legal, accounting, tax and consulting fees);

	•	~~Bonuses paid~~Reimbursement on adollar-for-dollar basis for all additional fees charged by third parties that were directly related to ~~executive officers~~our business (including, but not limited to real estate brokerage fees, mortgage placement fees,lease-up fees and transaction structuring fees);

	•	Reimbursement for our pro rata share of our Adviser’s employee payroll and benefits expenses, on anemployee-by-employee basis, based on the percentage of each employee’s time devoted to our matters; and

	•	Reimbursement for our pro rata portion of all other expenses of our Adviser, or “overhead expenses,” based on the percentage of total hours worked by our Adviser’s personnel that were spent on our matters. However, under the Former Advisory Agreement we were only required to reimburse our Adviser for overhead if the amount of payroll and benefits expenses reimbursed to our Adviser, as described above, was less than 2.0% of our average invested assets. In such case, we would only be required to reimburse our Adviser for our share of its overhead expenses up to the point that overhead expenses and payroll and benefits expenses, on a combined basis, equaled 2.0% of our average invested assets.

Considerations of Our Board of Directors in Changing Advisory and Administrative Arrangement Compensation

During 2005, our Board of Directors reevaluated the compensation arrangements between the Adviser and each of Gladstone Capital Corporation and the Company. In particular, the Board considered whether a revised advisory agreement containing a fixed management fee and an incentive fee, similar to the arrangements in place for Gladstone Investment Corporation, would provide more appropriate incentives to management to accomplish long-term goals consistent with the best interests of our stockholders than the cost based advisory agreement and equity incentive structure which was provided under the then existing advisory agreements.

Our Board of Directors approved the Current Advisory and Administration Agreements at a meeting held on January 10, 2006. In its consideration of the agreements, the Board of Directors focused on information it had received relating to, among other things:


	•	the reasonableness of the fees which would be payable to the Adviser and the Administrator under the Current Advisory and Administration Agreements (the “Current Fees”) (including the incentive fee under the Current Advisory Agreement);

	•	the experience of the Adviser’s personnel;


£	o	Fee paid previously with preliminary materials.

£	o	Check box if any part of the fee is offset as provided by Exchange ActRule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.


	1. ~~To elect three directors to hold office until the 2009 Annual Meeting of Stockholders and one director to hold office until the 2008 Annual Meeting of Stockholders;~~

8.	2. ~~To approve an amended and restated investment advisory agreement with Gladstone Management Corporation and an administration agreement with Gladstone Administration, LLC;~~

	3. To ratify the selection by the Audit Committee of the Board of Directors of PricewaterhouseCoopers LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2006; and

	4. ~~To transact such other business as may properly come before the meeting or any adjournment or postponement thereof.~~Filing Party:


	~~By Order of the Board of Directors~~

9.
	~~Terry Brubaker~~
	~~Secretary~~Date Filed:


	~~Submitted by the Compensation Committee~~
	~~David A. R. Dullum, Chairperson~~
	~~John H. Outland~~
	~~Anthony W. Parker~~


Name and							All Other
Principal Position	Year		Salary ($)		Bonus ($)		Compensation ($)		Total ($)
(a)	(b)		(c)		(d)		(i)		(j)

David Gladstone, Chief Executive Officer(1)		2006	$	68,833	$	0	$	2,065	$	70,898
Harry Brill, Chief Financial Officer(2)		2006	$	29,954	$	5,230	$	1,069	$	36,253
Terry Lee Brubaker, Chief Operating Officer and Secretary(3)		2006	$	71,838	$	94,756	$	2,646	$	169,240
George Stelljes III, Chief Investment Officer(4)		2006	$	81,656	$	109,592	$	2,700	$	193,948
Gary Gerson, Treasurer(5)		2006	$	109,469	$	18,450	$	1,945	$	129,864


þ	No fee required.

o	Fee computed on table below per Exchange ActRules 14a-6(i)(1) and0-11.


			(1	)	1.	Title of each class of securities to which transaction applies:




(2	)	7.	Form, Schedule or Registration Statement No.:



(3	)		~~Filing Party:~~



(4	)		~~Date Filed:~~


	~~• Proposal I:~~	~~To elect three directors to serve until the 2009 Annual Meeting of Stockholders and one director to serve until the 2008 Annual Meeting of Stockholders;~~

	~~• Proposal II:~~	~~To approve an amended and restated investment advisory agreement with Gladstone Management Corporation and an administration agreement with Gladstone Administration, LLC; and~~

	~~• Proposal III:~~	To approve the selection by the Audit Committee of the Board of Directors of PricewaterhouseCoopers LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2006.


	~~Beneficial Owner: Shares Registered in the Name of a Broker or Bank~~


	•	To vote in person, come to the ~~Annual Meeting~~annual meeting and we will give you a ballot when you arrive.

	•	To vote using the proxy card, simply complete, sign and date the enclosed proxy card and return it promptly in the envelope provided. If you return your signed proxy card to us before the ~~Annual Meeting,~~annual meeting, we will vote your shares as you direct.


	•	You may submit another properly completed proxy card with a later date.

	•	You may send a timely written notice that you are revoking your proxy to Gladstone Commercial Corporation’s Secretary at 1521 Westbranch Drive, Suite 200, McLean, Virginia 22102.

	•	You may attend the ~~Annual Meeting~~annual meeting and vote in person.Simply attending the meeting will not, by itself, revoke your proxy.


							Potential Realizable Value at
	Number of		Average				Assumed Annual Rates of Stock Price
	Securities		Exercise or				Appreciation for Option Term(1)
	Underlying		Base Price		Expiration
Calendar Year of Grant	Options Granted		($/Share)		Year		5% ($)		10% ($)

2003		629,000	$	15.00		2013	$	5,943,242.89	$	15,061,344.37
2004		280,000	$	16.22		2014	$	2,855,461.46	$	7,236,299.98
2005		64,500	$	15.47		2015	$	627,501.63	$	1,590,212.32
Total		973,500	$	15.40		—	$	9,426,205.98	$	23,887,856.68


			(1	)	6.	Amount Previously Paid:


			Number of Securities
			Underlying				Value of Unexercised In-the-
			Unexercised Options				Money Options at December 31,
			at December 31, 2005				2005 ($)(2)
	Value Realized
Shares Acquired on Exercise	($)(1)		Vested		Unvested		Vested		Unvested(3)

30,000	$	47,500		744,250		171,750	$	893,127.50	$	111,892.50


	~~= 100% × (2.50% - 0.50%) - 1.75%~~
	~~= 100% × (2.00% - 1.75%)~~
	~~= 100% × 0.25%~~
	~~= 0.25%~~


Fees and Expenses		Current			Pro Forma			Pro Forma

		(Existing			SFAS 123(R)			(Proposed and
		Agreement)						Administration
								Agreements)
Annual Expenses(as a percentage of total stockholders’ equity)(1)
	Base Management Fees		2.14	%		2.14	%		2.00	%
	Administrative Fees(2)		N/A			N/A			0.21	%
	2003 Equity Incentive Plan(3)		N/A			0.19	%		N/A
	Interest Payments on Borrowed Funds(4)		2.47	%		2.47	%		2.47	%
	Other Expenses(5)		5.28	%		5.28	%		5.28	%
Total Annual Expenses (excluding incentive fees)			9.89	%		10.08	%		9.96	%
	Incentive Fee(6)		N/A			N/A			1.01	%
Total Annual Expenses (including incentive fees)			9.89	%		10.08	%		10.97	%


	Total Assets at
Fund	December 31, 2005		Rate of Compensation to Gladstone Management Corporation

	(Unaudited)
Gladstone Investment Corporation	$	230,956,388	Gladstone Investment pays the Adviser a base management fee and a two-part incentive fee for investment advisory services. The base management fee is charged at an annual rate of 2% of Gladstone Investment’s “gross assets,” which is defined as its total assets, less cash and cash equivalents that are not invested in debt or equity securities of its portfolio companies in accordance with its investment objectives. The incentive fee consists of a quarterly income-based incentive fee and a capital gains incentive fee. The income-based incentive fee is calculated on the basis of “pre-incentive fee net investment income,” which is interest income, dividend income, and any other income, including any other fees (other than fees for providing managerial assistance) such as commitment, origination, structuring, diligence and consulting fees, and other fees that Gladstone Investment receives from its portfolio companies, minus its operating expenses. No incentive fee is charged for any calendar quarter in which pre-incentive fee net investment income does not exceed a quarterly hurdle rate of 1.75% (7% annualized). Gladstone Investment also pays 100% of any pre-incentive fee net investment income that exceeds the hurdle rate but is less than 2.1875% in any calendar quarter, and 20% of any pre-incentive fee net investment income that exceeds 2.1875% in any calendar quarter.
			The Adviser has agreed to charge the base management fee on a reduced basis from the effective date of the investment advisory and management agreement, June 22, 2005, through March 31, 2006. For this initial period, the annual 2% base management fee will be charged on the basis of “gross invested assets” rather than gross assets. “Gross invested assets” is defined as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings.
			Gladstone Investment also pays Gladstone Administration for its allocable portion of Gladstone Administration’s overhead, including rent, and its allocable portion of the costs of Gladstone Investment’s chief compliance officer, chief financial officer and controller and their respective staffs.


	2004		2005

Audit Fees	$	280,000	$	245,422
Audit-related Fees(1)	$	22,500	$	0
Tax Fees	$	19,214	$	63,844
All Other Fees	$	0

	$	321,714	$	309,266


	~~Relationship with Independent Registered Public Accounting Firm~~


	Beneficial Ownership(1)
	Number of		Percent of
Beneficial Owner	Shares		Total

Compensated Persons and Directors:
David Gladstone		351,616		4.10
Terry Lee Brubaker(2)		81,574		*
George Stelljes III(3)		129,022		1.50
Harry Brill		10,390		*
Gary Gerson(4)		352		*
Anthony W. Parker		10,952		*
David A.R. Dullum		0		*
Michela A. English		2,194		*
Paul Adelgren		1,000		*
Maurice W. Coulon		1,000		*
John H. Outland		1,000		*
Gerard Mead		1,015		*
All executive officers and directors as a group (12 persons)		590,115		6.89
Other Stockholders:
Avenir Corporation(5) 1725 K Street, NW Suite 401 Washington, DC 20006.		879,361		10.27
Prudential Financial, Inc.(6) 751 Broad Street Newark, NJ 07102.		483,500		5.64
Persons associated with CF Advisors, LLC(7) 666 5th Avenue 34th Floor New York, NY 10103.		486,133		5.67
Ferris, Baker Watts, Inc.(8) 100 Light Street Baltimore, MD 21202		808,776		9.44


*		Less than 1%

(1)		This table is based upon information supplied by officers, directors and principal stockholders. Unless otherwise indicated in the footnotes to this table and subject to community property laws where applicable, we believe that each of the stockholders named in this table has sole voting and sole investment power with respect to the shares indicated as beneficially owned. Applicable percentages are based on 8,565,264 shares of common stock outstanding on March 15, 2007, adjusted as required by rules promulgated by the SEC.


	•	the potential for additional attractive investments resulting from synergies with other funds to be managed by the Adviser; and

	•	~~Long-term~~the advantage of terminating our equity incentive ~~compensation~~plan in favor of the ~~form~~incentive fee arrangement under the Current Advisory Agreement.


	•	the fact that the Current Advisory Agreement would provide for a fee structure similar to those of other externally managed REITs with similar contracts and similar investment objectives, and that the Current Advisory Agreement would provide for fees that would be reasonable in comparison to other externally managed REITs in light of the fact that, under the Current Advisory Agreement, we would not have an equity incentive plan;

	•	the fact that similarity of the fee structure between Gladstone Capital Corporation, Gladstone Investment Corporation and the Company and their emphasis on increasing earnings and payment of dividends to stockholders would likely lead to greater management efficiency;

	•	the fact that the Current Advisory Agreement would provide for a fee structure similar to those of other REITs with similar contracts and similar investment objectives, and that the Current Advisory Agreement would provide for fees that would be reasonable in comparison to other REITs in light of the fact that, under the Current Advisory Agreement, we would not have an equity incentive plan;

	•	the fact that an incentive fee arrangement is more appropriate to an externally managed company than is a stock option program;

	•	the fact that stockholders increasingly demand strong fund performance and are willing to reward managers for meeting those goals;

	•	the fact that the utility of a stock option plan to reward fund management has been curtailed by regulations that prohibit executive officers from borrowing from an issuer to finance the exercise of their stock options;

	•	the concern that stock options ~~granted~~may incentivize managers (and directors who receive stock options) to manage for short-run returns rather than long-term goals;

	•	the fact that incentive fees are the predominant method used by other externally managed REITs with whom we and the ~~Company~~Adviser compete for talented professionals;

	•	the fact that the use of incentive fees is now becoming prevalent among externally managed REITs and is a compensation structure that is both understood and expected by analysts who evaluate us and our stock; and

	•	the expectation that we and our stockholders would benefit from the removal of the dilutive effects associated with stock options, and the avoidance of the accounting charges related to stock options that would soon be required to be recognized as non-cash expense by us under ~~the Company’s 2003 Equity Incentive Plan (the “2003 Plan”).~~recently adopted accounting rules.


	•	ensuring that base salary paid to ~~the Company’s~~our executive officers ~~a portion of which the Company bears through reimbursement of the Adviser pursuant to the advisory agreement,~~ is competitive with other leading ~~financial services~~ companies with which ~~the Company competes~~we compete for talented investment professionals;

	•	ensuring that bonuses paid to ~~the Company’s~~our executive officers ~~a portion of which the Company bears through reimbursement of the Adviser pursuant to the advisory agreement,~~ are sufficient to provide motivation to achieve ~~the Company’s~~our principal business and investment goals and to bring total compensation to competitive levels; and

	•	providing ~~significant equity-based~~ incentives to ensure that ~~the Company’s~~our executive officers are motivated over the long term to achieve ~~the Company’s~~our business and investment objectives.


	•	the pay practices of the Adviser in relation to those of leading financial services companies with which the Adviser competes to attract and retain talented investment professionals;

	•	the amount of the fees paid to the Adviser in relation to ~~the Company’s~~our size and the composition and performance of ~~the Company’s~~our investments;

	•	the Adviser’s ability to hire, train, supervise and manage new employees as needed to effectively manage ~~the Company’s~~our future growth;

	•	the success of the Adviser in generating appropriate investment opportunities;

	•	rates charged to other investment entities by advisers performing similar services;

	•	additional revenues realized by the Adviser and its affiliates through their relationship with ~~the Company,~~us, whether paid by ~~the Company~~us or by others with whom ~~the Company does~~we do business;

	•	the value of ~~the Company’s~~our assets each quarter;

	•	the quality and extent of service and advice furnished by the Adviser and the performance of ~~the Company’s~~our investment portfolio;

	•	the quality of ~~the Company’s~~our portfolio relative to the investments generated by the Adviser for its other clients; and

	•	the extent to which ~~bonus expenses under the advisory agreement reflect~~ the Adviser’s ~~achievement of the Company’s~~performance helped us to achieve our principal business and investment objectives of generating income for ~~the Company’s~~our stockholders in the form of quarterly cash distributions that grow over time and increasing the value of ~~the Company’s~~our common stock.


	•	no incentive fee in any calendar quarter in which pre-incentive fee FFO does not exceed the hurdle rate (1.75% per calendar quarter);

	•	100% of our pre-incentive fee FFO with respect to that portion of such FFO, if any, that exceeds the 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 FFO, if any, that exceeds 2.1875% in any calendar quarter (8.75% annualized).


(1)		Represents approximately 34% of Mr. Gladstone’s total compensation for the fiscal year ended December 31, 2006 (as Mr. Gladstone devoted approximately 34% of his time to our matters during the fiscal year ended December 31, 2006). Mr. Gladstone’s current annual base salary from the Adviser is $200,000.

(2)		Represents approximately 21% of Mr. Brill’s total compensation for the fiscal year ended December 31, 2006 (as Mr. Brill devoted approximately 21% of his time to our matters during the fiscal year ended December 31, 2006). Mr. Brill’s current annual base salary from the Administrator is $143,170.


(3)		Represents approximately 28% of Mr. Brubaker’s total compensation for the fiscal year ended December 31, 2006 (as Mr. Brubaker devoted approximately 28% of his time to our matters during the fiscal year ended December 31, 2006). Mr. Brubaker’s current annual base salary from the Adviser is $300,000.

(4)		Represents approximately 31% of Mr. Stelljes’ total compensation for the fiscal year ended December 31, 2006 (as Mr. Stelljes devoted approximately 31% of his time to our matters during the fiscal year ended December 31, 2006). Mr. Stelljes’ current annual base salary from the Adviser is $300,000.

(5)		Represents approximately 89% of Mr. Gerson’s total compensation for the fiscal year ended December 31, 2006 (as Mr. Gerson devoted approximately 89% of his time to our matters during the fiscal year ended December 31, 2006). Mr. Gerson’s current annual base salary from the Administrator is $136,661.


										Securities
Name and								Other Annual		Underlying		All Other
Principal Position		Year		Salary ($)		Bonus ($)		Compensation ($)		Options		Compensation ($)

David Gladstone			2005	$	70,333	$	0	$	2,110		0
	Chief Executive Officer(1)		2004	$	88,833	$	0	$	0		0	$	0
			2003	$	44,500	$	0	$	1,335		200,000	$	0

Terry Lee Brubaker			2005	$	34,737	$	37,868.00	$	921.37		0	$	0
	President, Chief Operating Officer		2004	$	28,511	$	0	$	0		30,000	$	0
	and Secretary(2)		2003	$	14,234	$	0	$	427		100,000	$	0

George Stelljes III			2005	$	71,146	$	75,712.67	$	1,863.65		0	$	0
	Executive Vice President		2004	$	61,636	$	0	$	0		30,000	$	0
	and Chief Investment Officer(3)		2003	$	17,417	$	0	$	522		100,000	$	0


~~(1)~~	Represents approximately 35% of Mr. Gladstone’s total salary for the fiscal year ended December 31, 2005 (as Mr. Gladstone devoted approximately 35% of his time to our matters during the fiscal year ended December 31, 2005); approximately 44% of Mr. Gladstone’s total salary for the fiscal year ended December 31, 2004 (as Mr. Gladstone devoted approximately 44% of his time to our matters during the fiscal year ended December 31, 2004); and approximately 45% of Mr. Gladstone’s total salary for six months ended December 31, 2003 (as Mr. Gladstone devoted approximately 45% of his time to our matters during the six months ended December 31, 2003). No amounts were paid to Mr. Gladstone in respect of any services rendered to us prior to July 1, 2003. Mr. Gladstone’s current base annual salary from the Adviser is $200,000.

~~(2)~~	Represents approximately 15% of Mr. Brubaker’s total salary for the fiscal year ended December 31, 2005 (as Mr. Brubaker devoted approximately 15% of his time to our matters during the fiscal year ended December 31, 2005); approximately 13% of Mr. Brubaker’s total salary for the fiscal year ended December 31, 2004 (as Mr. Brubaker devoted approximately 13% of his time to our matters during the fiscal year ended December 31, 2004); and approximately 14% of Mr. Brubaker’s total salary for the six months ended December 31, 2003 (as Mr. Brubaker devoted approximately 14% of his time to our matters during the six months ended December 31, 2003). No amounts were paid to Mr. Brubaker in respect of services rendered to us prior to July 1, 2003. Mr. Brubaker’s current base annual salary from the Adviser is $235,000.

~~(3)~~	Represents approximately 30% of Mr. Stelljes’ total salary for the fiscal year ended December 31, 2005 (as Mr. Stelljes devoted approximately 30% of his time to our matters during the fiscal year ended December 31, 2005); approximately 28% of Mr. Stelljes’ total salary for the fiscal year ended December 31, 2004 (as Mr. Stelljes devoted approximately 28% of his time to our matters during the fiscal year ended December 31, 2004); and approximately 17% of Mr. Stelljes’ total salary for the six months ended December 31, 2003 (as Mr. Stelljes devoted approximately 17% of his time to our matters during the six months ended December 31, 2003). No amounts were paid to Mr. Stelljes in respect of services rendered to us prior to July 1, 2003. Mr. Stelljes’ current base annual salary from the Adviser is $235,000.

~~(4)~~	Represents approximately 25% of Mr. Brill’s total salary for the fiscal year ended December 31, 2005 (as Mr. Brill devoted approximately 25% of his time to our matters during the fiscal year ended December 31, 2005); approximately 29% of Mr. Brill’s total salary for the fiscal year ended December 31, 2004 (as Mr. Brill devoted approximately 29% of his time to our matters during the fiscal year ended December 31, 2004); and approximately 25% of Mr. Brill’s total salary for the six months ended December 31, 2003 (as Mr. Brill devoted approximately 25% of his time to our matters during the six months ended December 31, 2003). No amounts were paid to Mr. Brill in respect of any services rendered to us prior to July 1, 2003. Mr. Brill’s current base annual salary from the Adviser is $135,000.


~~(1)~~	~~Value realized is calculated as the closing market price on the date of exercise, net of option exercise price, but before any tax liabilities or transaction costs.~~

~~(2)~~	The value of unexercised options is calculated as the closing market price on December 31, 2005, less the exercise price. “In-the-money” options are those with an exercise price that is less than the closing market price on December 31, 2005.


	Number of
	Shares
	Acquired		Value Realized
	on Exercise		on Exercise
Name	(#)		($)
(a)	(b)		(c)

David Gladstone		200,000	$	1,094,587
Harry Brill		35,000	$	157,000
Terry Lee Brubaker		130,000	$	645,827
George Stelljes III		130,000	$	618,203
Gary Gerson		0	$	0


	Fees Earned or
	Paid in
Name	Cash ($)		Total ($)
(a)	(b)		(h)

Paul W. Adelgren	$	17,000	$	17,000
Maurice W. Coulon	$	18,000	$	18,000
David A.R. Dullum	$	24,000	$	24,000
Michela A. English	$	24,000	$	24,000
Gerard Mead	$	17,000	$	17,000
John H. Outland	$	17,000	$	17,000
Anthony W. Parker	$	23,000	$	23,000

~~Appropriate~~Aggregate number of securities to which transaction applies: