• our business prospects and the prospects of our portfolio companies;

• the impact of investments that we expect to make;

• our contractual arrangements and relationships with third parties;

• the dependence of our future success on the general economy and its impact on the industries in which we invest;

• the ability of our portfolio companies to achieve their objectives;

• our expected financings and investments;

• our regulatory structure and tax treatment, including our ability to operate as a business development company and a regulated investment company;

• the adequacy of our cash resources and working capital;

• the timing of cash flows, if any, from the operations of our portfolio companies;

• the ability of our investment adviser to locate suitable investments for us and to monitor and effectively administer our investments; and

• continued access to our Revolving Facility.

You should not place undue reliance on these forward-looking statements. The forward-looking statements made in this quarterly report relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date of this quarterly report. Overview
GSC Investment Corp. is a Maryland corporation that has elected to be treated as a business development company ("BDC") under the Investment Company Act of 1940 (the "1940 Act"). Our investment objectives are to generate current income and capital appreciation through debt and equity investments by primarily investing in middle market companies and select high yield bonds. We intend to file an election to be treated as a regulated investment company ("RIC") under subchapter M of the Internal Revenue Code commencing with our first taxable year as a corporation. We commenced operations on March 23, 2007, and completed our initial public offering ("IPO") on March 28, 2007. We are externally managed and advised by our investment adviser, GSCP (NJ), L.P.
We used the net proceeds of our IPO to purchase approximately $100.7 million in aggregate principal amount of debt investments from GSC Partners CDO Fund III, Limited ("CDO Fund III"), a collateralized loan obligation ("CLO") fund managed by our investment adviser. We used borrowings under our credit facilities to purchase approximately $115.1 million in aggregate principal amount of debt investments in April and May 2007 from CDO Fund III and GSC Partners CDO Fund Limited ("CDO Fund I"), a collateralized debt obligation fund managed by our investment adviser. As of August 31, 2008, our portfolio consisted of $153.8 million of investments in 37 portfolio companies and 2 CLOs.
Our portfolio is comprised primarily of investments in leveraged loans (comprised of both first and second lien term loans) issued by middle market companies and high yield bonds. We seek to create a diversified portfolio by investing up to 5% of our total assets in each investment, although the investment sizes may be more or less than the targeted range. These investments are sourced in both the primary and secondary markets through a network of relationships with commercial and investment banks, commercial finance companies and financial sponsors. The leveraged loans and high yield bonds that we purchase are generally used to finance buyouts, acquisitions, growth, recapitalizations and other types of transactions. Leveraged loans are generally senior debt instruments that rank ahead of subordinated debt of

the portfolio company. Leveraged loans also have the benefit of security interests on the assets of the portfolio company, which may rank ahead of, or be junior to, other security interests. High yield bonds are typically subordinated to leveraged loans and generally unsecured, though a substantial amount of the high yield bonds that we currently own are secured. Substantially all of the debt investments held in our portfolio hold a non-investment grade rating by Moody's Investors Service ("Moody's") and/or Standard & Poor's or, if not rated, would be rated below investment grade if rated. High yield bonds rated below investment grade are commonly referred to as "junk bonds." As part of our long term strategy, we also anticipate purchasing mezzanine debt and making equity investments in middle market companies. Mezzanine debt is typically unsecured and subordinated to senior debt of the portfolio company. For purposes of this quarterly report, we generally use the term "middle market" to refer to companies with annual EBITDA of between $5 million and $50 million. EBITDA represents earnings before net interest expense, income taxes, depreciation and amortization.
While our primary focus is to generate current income and capital appreciation through investments in debt and equity securities of middle market companies and high yield bonds, we intend to invest up to 30% of our total assets in opportunistic investments. Opportunistic investments may include investments in distressed debt, debt and equity securities of public companies, credit default swaps, emerging market debt, and structured finance vehicles, including CLOs. As part of this 30%, we may also invest in debt of middle market companies located outside the U.S. Given our primary investment focus on first and second lien term loans issued by middle market companies and high yield bonds, we believe our opportunistic investments will allow us to supplement our core investments with other investments that are within our investment adviser's expertise that we believe offer attractive yields and/or the potential for capital appreciation. As of August 31, 2008, our investment in the subordinated notes of GSC Investment Corp. CLO 2007, Ltd. ("GSCIC CLO"), a CLO we manage, constitutes 15.2% of our total assets. We do not expect to manage and purchase all of the equity in another CLO transaction in the near future. We may, however, invest in CLO securities issued by other investment managers.
As a BDC, we are required to comply with certain regulatory requirements. For instance, we have to invest at least 70% of our total assets in "qualifying assets," including securities of private U.S. operating companies, public U.S. companies whose securities are not listed on a national securities exchange registered under the Exchange Act (i.e., New York Stock Exchange, American Stock Exchange and The NASDAQ Global Market), U.S. companies whose securities are listed on a securities exchange that have market capitalizations of less than $250 million, cash, cash equivalents, U.S. government securities and high-quality debt investments that mature in one year or less. In addition, we are only allowed to borrow money such that our asset coverage, which, as defined in the 1940 Act, measures the ratio of total assets less total liabilities (excluding borrowings) to total borrowings, equals at least 200% after such borrowing, with certain limited exceptions. The amount of our borrowing will depend on our investment adviser's assessment of market conditions and other factors.
Revenues
We generate revenue in the form of interest income and capital gains on the debt investments that we hold and capital gains, if any, on equity interests that we may acquire. We expect our debt investments, whether in the form of first and second lien term loans, mezzanine debt or high yield bonds, to have terms of up to ten years, and to bear interest at either a fixed or floating rate. Interest on debt will be payable generally either quarterly or semi-annually. In some cases our debt investments may provide for a portion of the interest to be paid-in-kind ("PIK"). To the extent interest is paid-in-kind, it will be payable through the increase of the principal amount of the obligation by the amount of interest due on the then-outstanding aggregate principal amount of such obligation. The principal amount of the debt and any accrued but unpaid interest will generally become due at the maturity date. In addition, we may generate revenue in the form of commitment, origination, structuring or diligence fees, fees for providing managerial assistance or investment management services and possibly consulting fees. Any such fees will be generated in connection with our investments and recognized as earned. We may also invest in preferred equity securities that pay dividends on a current basis.
Pursuant to an agreement with our investment adviser entered into on October 17, 2006, prior to becoming a BDC, we acquired the right to act as investment adviser to CDO Fund III and collect the management fees related thereto from March 20, 2007 until the liquidation of the CDO Fund III assets. We paid our investment adviser a fair market price of $0.1 million for the right to act as investment advisor to CDO Fund III.
On January 22, 2008, we entered into a collateral management agreement with GSCIC CLO pursuant to which we act as its collateral manager and receive a senior collateral management fee of 0.10% and a subordinate collateral management fee of 0.40% of the outstanding principal amount of GSCIC CLO's assets, paid quarterly to the extent of available proceeds. We are also entitled to an incentive management fee equal to 20% of excess cash flow to the extent the GSCIC CLO subordinated notes receive an internal rate of return equal to or greater than 12%.
We recognize interest income on our investment in the subordinated notes of GSCIC CLO using the effective interest method, based on the anticipated yield and the estimated cash flows over the projected life of the investment. Yields are revised when there are changes in actual or estimated cash flows due to changes in prepayments and/or re-investments, credit losses or asset pricing. Changes in estimated yield are recognized as an adjustment to the estimated yield over the remaining life of the investment from the date the estimated yield was changed.
Expenses
Our primary operating expenses include the payment of investment advisory and management fees, professional fees, directors and officers insurance, fees paid to independent directors and administrator expenses, including our allocable portion of our administrator's overhead. Our allocable portion is based on the ratio of our total assets to the total assets administered by our administrator. Our investment advisory and management fees compensate our investment adviser for its work in identifying, evaluating, negotiating, closing and monitoring our investments. We bear all other costs and expenses of our operations and transactions, including those relating to:

• organization;

• calculating our net asset value (including the costs and expenses of any independent valuation firm);

• expenses incurred by our investment adviser payable to third parties, including agents, consultants or other advisers, 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, incurred to finance our investments;

• offerings of our common stock and other securities;

• investment advisory and management fees;

• administration fees;

• fees payable to third parties, including agents, consultants or other advisers, relating to, or associated with, evaluating and making investments;

• transfer agent and custodial fees;

• registration and listing fees;

• taxes;

• independent directors' fees and expenses;

• costs of preparing and filing reports or other documents with the SEC;

• the costs of any reports;

• proxy statements or other notices to stockholders, including printing costs;

• to the extent we are covered by any joint insurance policies, our allocable portion of the insurance premiums for such joint policies;

• direct costs and expenses of administration, including auditor and legal costs; and

• all other expenses incurred by us or our administrator in connection with administering our business.

The amount payable to GSC Group as administrator under the administration agreement is capped to the effect that such amount, together with our other operating expenses, does not exceed an amount equal to 1.5% per annum of our net assets attributable to common stock. In addition, during the initial two year term of the administration agreement, GSC Group has waived our reimbursement obligation under the administration agreement until our total assets exceed $500 million.
Pursuant to the investment advisory and management agreement, we pay GSC Group as investment adviser a quarterly base management fee of 1.75% of the average value of our total assets (other than cash or cash equivalents but including assets purchased with borrowed funds) at the end of the two most recently completed fiscal quarters, and appropriately adjusted for any share issuances or repurchases during the applicable fiscal quarter, and an incentive fee.
The incentive fee has two parts:
• A fee, payable quarterly in arrears, equal to 20% of our pre-incentive fee net investment income, expressed as a rate of return on the value of the net assets at the end of the immediately preceding quarter, that exceeds a 1.875% quarterly (7.5% annualized) hurdle rate measured as of the end of each fiscal quarter. Under this provision, in any fiscal quarter, our investment adviser receives no incentive fee unless our pre-incentive fee net investment income exceeds the hurdle rate of 1.875%. Amounts received as a return of capital are not included in calculating this portion of the incentive fee. Since the hurdle rate is based on net assets, a return of less than the hurdle rate on total assets may still result in an incentive fee.

• A fee, payable at the end of each fiscal year, equal to 20% of our net realized capital gains, if any, computed net of all realized capital losses and unrealized capital depreciation, in each case on a cumulative basis, less the aggregate amount of capital gains incentive fees paid to the investment adviser through such date.

We will defer cash payment of any incentive fee otherwise earned by our investment adviser if, during the most recent four full fiscal quarter period ending on or prior to the date such payment is to be made, the sum of (a) our aggregate distributions to our stockholders and (b) our change in net assets (defined as total assets less liabilities) (before taking into account any incentive fees payable during that period) is less than 7.5% of our net assets at the beginning of such period. These calculations will be appropriately pro rated for the first three fiscal quarters of operation and adjusted for any share issuances or repurchases during the applicable period. Such incentive fee will become payable on the next date on which such test has been satisfied for the most recent four full fiscal quarters. We commenced deferring cash payment of incentive fees during the quarterly period ending August 31, 2007, and have continued to defer such payments through the current quarterly period; we have recorded a payable in respect of such deferred fees in the amount of $1.3 million as of August 31, 2008.
To the extent that any of our leveraged loans are denominated in a currency other than U.S. dollars, we may enter into currency hedging contracts to reduce our exposure to fluctuations in currency exchange rates. We may also enter into interest rate hedging agreements. Such hedging activities, which will be subject to compliance with applicable legal requirements, may include the use of interest rate caps, futures, options and forward contracts. Costs incurred in entering into or settling such contracts will be borne by us.

From the commencement of operations until March 23, 2008, GSC Group reimbursed us for operating expenses to the extent that our total annual operating expenses (other than investment advisory and management fees and interest and credit facility expenses) exceeded an amount equal to 1.55% of our net assets attributable to common stock.

Portfolio and Investment Activity
                      Corporate Debt Portfolio Overview(1)

                                                                    At August 31, 2008          At February 29, 2008
                                                                                    ($ in millions)
Number of investments                                                       44                           43
Number of portfolio companies                                               37                           36
Average investment size                                                    $2.9                         $3.3
Weighted average maturity                                               3.8 years                    3.8 years
Number of industries                                                        23                           23
Average investment per portfolio company                                   $3.5                         $4.0
Non-Performing or delinquent investments                                    1                            -
Fixed rate debt (% of interest bearing portfolio)                       $53.7 (42.0%)                 $57.0 (39.6%)
Weighted average current coupon                                           11.6%                        11.6%
Floating rate debt (% of interest bearing portfolio)                  $74.1 (58.0%)                $86.8 (60.4%)
Weighted average current spread over LIBOR                                 5.7%                         5.6%

(1) Excludes our investment in the subordinated notes of GSCIC CLO and GSC Partners CDO
GP III, LP.

One of our portfolio companies, Atlantis Plastics, filed for bankruptcy on August 10, 2008 and our debt investment in such company is being accounted for on a non-accrual basis. At August 31, 2008, we valued our investment in $6.5 million in aggregate principal amount in the Atlantis Plastics first lien term loan at $3.5 million.
During the three months ended August 31, 2008, we made 4 investments in an aggregate amount of $9.2 million consisting of $6.4 million in new portfolio companies and $2.8 million to existing portfolio companies. Also during the three months ended August 31, 2008, we had $6.0 million in aggregate amount of exits and repayments, resulting in net investments of $3.2 million in aggregate amount for the period.
For the equivalent period in 2007, which was our second quarter of operations and during which we were ramping our portfolio using the proceeds of our IPO and credit facilities, we made 25 investments in an aggregate amount of $40.2 million consisting of $25.5 million to new portfolio companies and $14.7 million to existing portfolio companies. During such period, we also had $47.8 million in aggregate amount of exits and repayments resulting in net repayments of $7.6 million in aggregate amount for the period.
Our portfolio composition at August 31, 2008 and February 29, 2008 was as follows:

                             Portfolio composition

                                                             At August 31, 2008                             At February 29, 2008
                                                   Percentage of         Weighted Average          Percentage of          Weighted Average
                                                  Total Portfolio          Current Yield          Total Portfolio           Current Yield
First lien term loans                                      17.2 %                   7.8 %                   15.3 %                   8.1 %
Second lien term loans                                     32.3                     9.9                     36.1                    10.8
Senior secured notes                                       19.8                    11.6                     18.3                    11.5
Unsecured notes                                            13.7                    12.2                     13.5                    12.2
GSCIC CLO subordinated notes                               16.7                    20.2                     16.7                     8.4
Equity/limited partnership interests                        0.3                     N/A                      0.1                     N/A

Total                                                     100.0 %                  11.9 %                  100.0 %                  10.3 %

Our investment in the subordinated notes of GSCIC CLO represents a first loss position in a portfolio that, at August 31, 2008, was composed of $417.9 million in aggregate principal amount of predominantly senior secured first lien term loans. This investment is subject to unique risks. (See Part I, Item 1A "Risk Factors-Risks related to our investments-Our investment in GSCIC CLO constitutes a leveraged investment in a portfolio of predominantly senior secured first lien term loans and is subject to additional risks and volatility" of our Annual Report on Form 10-K for the fiscal year ended February 29, 2008) and we do not consolidate the GSCIC portfolio on our financial statements. Accordingly, the metrics below do not include the underlying GSCIC CLO portfolio investments. However, at August 31, 2008, no GSCIC CLO portfolio investment was in payment default or delinquent on any payment obligations and over 92% of the GSCIC portfolio investments had a CMR numerical debt score of less than 2.99 and a corporate letter rating of A or B.
GSC Group normally grades all of our investments using an internally developed credit and monitoring rating system ("CMR"). The CMR rating consists of two components: (i) a numerical debt score and (ii) a corporate letter rating. The numerical debt score is based on the objective evaluation of six risk categories: (i) leverage; (ii) seniority in the capital structure;
(iii) fixed charge coverage ratio; (iv) debt service

coverage/liquidity; (v) operating performance; and (vi) business/industry risk. The numerical debt score ranges from 1.00 to 5.00, which can generally be characterized as follows:
• 1.00-2.00 represents investments that hold senior positions in the capital structure and, typically, have low financial leverage and/or strong historical operating performance;

• 2.00-3.00 represents investments that hold relatively senior positions in the capital structure, either senior secured, senior unsecured, or senior subordinate, and have moderate financial leverage and/or are performing at or above expectations;

• 3.00-4.00 represents investments that are junior in the capital structure, have moderate financial leverage and/or are performing at or below expectations; and

• 4.00-5.00 represents investments that are highly leveraged and/or have poor operating performance.

The numerical debt score is designed to produce higher scores for debt positions that are more subordinate in the capital structure. Therefore, second lien term loans, high-yield bonds and mezzanine debt will generally be assigned scores of 2.25 or higher.
The CMR also consists of a corporate letter rating whereby each credit is assigned a letter rating based on several subjective criteria, including perceived financial and operating strength and covenant compliance. The corporate letter ratings range from (A) through (F) and are characterized as follows: (A) equals strong credit; (B) equals satisfactory credit; (C) equals special attention credit; (D) equals payment default risk; (E) equals payment default; and (F) equals restructured equity security.
The CMR distribution of our investments at August 31, 2008 and February 29, 2008 were as follows:

                           Portfolio CMR distribution

                                At August 31, 2008                        At February 29, 2008
                        Investments at       Percentage of        Investments at        Percentage of
Numerical Debt Score      Fair Value        Total Portfolio         Fair Value         Total Portfolio
                                                       ($ in thousands)
1.00 - 1.99            $          7,707                  5.0 %   $         11,863                   6.9 %
2.00 - 2.99                      62,953                 40.9               87,423                  50.6
3.00 - 3.99                      51,400                 33.4               44,459                  25.7
4.00 - 4.99                       5,798                  3.8                    -                     -
5.00                                  -                    -                    -                     -
N/A(1)                           25,916                 16.9               29,092                  16.8

Total                  $        153,774                100.0 %   $        172,837                 100.0 %




                                   At August 31, 2008                        At February 29, 2008
                           Investments at       Percentage of        Investments at        Percentage of
Corporate Letter Rating      Fair Value        Total Portfolio         Fair Value         Total Portfolio
                                                          ($ in thousands)
A                         $          4,875                  3.1 %   $              0                   0.0 %
B                                   88,717                 57.7              112,019                  64.8
C                                   30,765                 20.0               31,726                  18.4
D                                        -                    -                    -                     -
E                                    3,501                  2.3                    -                     -
F                                        -                    -                    -                     -
N/A(1)                              25,916                 16.9               29,092                  16.8

Total                     $        153,774                100.0 %   $        172,837                 100.0 %

(1) Predominantly comprised of our investment in the subordinated notes of GSCIC CLO.

The following table shows the portfolio composition by industry grouping at fair value at August 31, 2008 and February 29, 2008.
Portfolio composition by industry grouping at fair value

. . .