Related Party Transactions and Outside Related Director Information

Gladstone Investment Corporation (GAIN)

6/30/2006 Proxy Information

Advisory and Management Agreement

The Company has entered into the Advisory Agreement with the Adviser, pursuant to which the Adviser is responsible for managing the Company’s investments and day-to-day operations. Specifically, these responsibilities include: managing the investment and reinvestment of the Company’s assets, including identifying, evaluating, and structuring such investments; continuously reviewing, supervising and administering the Company’s investment program to determine in its discretion the securities to be purchased or sold and the portion of the Company’s assets to be held uninvested; offering to provide significant managerial assistance to the issuers of securities in which the Company is invested as required by the Investment Company Act; arranging debt financing for the Company; providing the Company with all required records concerning the Adviser’s efforts on behalf of the Company; and providing regular reports to the Company’s Board concerning the Adviser’s activities on behalf of the Company. In return for providing such services, the Advisory Agreement provides for a base management fee, to be assessed through March 31, 2006 at an annual rate of 2% computed on the basis of the Company’s gross invested assets, which are total assets less the cash and cash equivalent investments from the net proceeds of the Company’s initial public offering that are not invested in debt and equity securities of portfolio companies (the “Reduced Fee Basis”). The Advisory Agreement provides that, subsequent to March 31, 2006, the base management fee is assessed at an annual rate of 2% computed on the basis of the Company’s gross assets, which are total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings. However, the Adviser has agreed to a voluntary waiver which provides that it will continue to assess the base management fee on the Reduced Fee Basis through June 30, 2006. From the Company’s inception through December 31, 2005, the base management fee was payable monthly in arrears and calculated based on the value of the Company’s gross invested assets as of the end of each month. Thereafter, the fee has and will be determined and payable on a quarterly basis. Based upon an analysis of publicly available information, the Board believes that these fees are reasonable in light of the specialized investment program of the Company and in line with the customary external fees paid in the industry for mezzanine fund and subordinated debt funds that are externally managed and have in place an equity incentive plan.

Administration Agreement

The Company entered into the Administration Agreement with the Administrator, pursuant to which Gladstone Administration furnishes the Company with office facilities, equipment and clerical, bookkeeping and regulatory compliance services at such facilities and performs, or oversees the performance of the Company’s required administrative services. Such required administrative services include, among other things, being responsible for the financial records which we are required to maintain and preparing reports to our stockholders and reports filed with the SEC.

Under the Administration Agreement, the Company pays separately for its allocable portion of the Administrator’s overhead expenses in performing its obligations, including rent, and the Company’s allocable portion of the salaries and benefits expenses of its Chief Financial Officer, Chief Compliance Officer and Controller and their respective staffs. Based on an analysis of publicly available information, the Board believes that the terms and the fees payable under both the Advisory Agreement and the Administration Agreement are similar to those of the agreements of other business development companies that do not have equity incentive plans with their external investment advisers.

David Gladstone, Terry Lee Brubaker, and George Stelljes III are all officers and directors of the Adviser and managers of the Administrator, and Harry Brill and Gary Gerson are officers of the Adviser. David Gladstone is the controlling stockholder of the Adviser, which is the sole member of the Administrator. Although the Company believes that the terms of the Advisory Agreement and the Administration Agreement are no less favorable to the Company than those that could be obtained from unaffiliated third parties in arms’ length transactions, the Adviser, its officers and its directors have a material interest in the terms of these agreements.


In our certificate of incorporation and bylaws, we have agreed to indemnify certain officers and directors by providing, among other things, that we will indemnify such officer or director, under the circumstances and to the extent provided for therein, for expenses, damages, judgments, fines and settlements he or she may be required to pay in actions or proceedings which he or she is or may be made a party by reason of his or her position as our director, officer or other agent, to the fullest extent permitted under Delaware law and our bylaws. Notwithstanding the foregoing, the indemnification provisions shall not protect any officer or director from liability to us or our stockholders as a result of any action that would constitute willful misfeasance, bad faith or gross negligence in the performance of such officer’s or director’s duties, or reckless disregard of his or her obligations and duties.