MidCap Financial Investment Corp - Quarter Report: 2006 June (Form 10-Q)

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarter Ended June 30, 2006

¨	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 333-112591

APOLLO INVESTMENT CORPORATION

(Exact name of registrant as specified in its charter)


Maryland		52-2439556
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

9 West 57^th Street, 41st Floor, New York, N.Y.		10019
(Address of principal executive office)		(Zip Code)

(212) 515-3450

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer x Accelerated Filer ¨ Non-Accelerated Filer ¨

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

The number of shares of the registrant’s Common Stock, $.001 par value, outstanding as of August 3, 2006 was 81,605,018.

APOLLO INVESTMENT CORPORATION

FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2006

TABLE OF CONTENTS


		PAGE
PART I	FINANCIAL INFORMATION

Item 1.	FINANCIAL STATEMENTS (unaudited)	3

	Statements of Assets and Liabilities as of June 30, 2006 and March 31, 2006	4

	Statements of Operations for the three months ended June 30, 2006 and June 30, 2005	5

	Statements of Changes in Net Assets for the three months ended June 30, 2006 and the year ended March 31, 2006	6

	Statements of Cash Flows for the three months ended June 30, 2006 and June 30, 2005	7

	Schedule of Investments as of June 30, 2006	8

	Schedule of Investments as of March 31, 2006	14

	Notes to Financial Statements	19

	Report of Independent Registered Public Accounting Firm	27

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34

Item 4.	Controls and Procedures	35

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	35

Item 1A.	Risk Factors	35

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35

Item 3.	Defaults upon Senior Securities	35

Item 4.	Submission of Matters to a Vote of Security Holders	35

Item 5.	Other Information	35

Item 6.	Exhibits	36

	Signatures	37

PART I. FINANCIAL INFORMATION

In this Quarterly Report, “Apollo Investment”, “Company”, “AIC”, “Fund”, “we”, “us” and “our” refer to Apollo Investment Corporation unless the context otherwise states.

Item 1. Financial Statements

APOLLO INVESTMENT CORPORATION

STATEMENTS OF ASSETS AND LIABILITIES

(in thousands, except per share amounts)


	June 30, 2006 (unaudited)			March 31, 2006
Assets
Investments, at fair value (cost - $1,699,287 and $1,520,025, respectively) (1)	$	1,791,450		$	1,556,698
Cash equivalents, at fair value (cost - $711,561 and $898,374, respectively)		711,561			898,374
Cash		3,635			5,506
Foreign currency		444			1,079
Interest receivable*		26,399			24,827
Receivable for investments sold		—			17,261
Receivable for commitment fee		—			812
Dividends receivable		1,662			173
Unrealized appreciation on forward foreign currency contract (see note 7)		144			—
Prepaid expenses and other assets		5,887			6,344

Total assets	$	2,541,182		$	2,511,074


Liabilities
Payable for investments and cash equivalents purchased	$	712,561		$	940,874
Credit facility payable* (see note 7)		535,795			323,852
Management and performance-based incentive fees payable (see note 3)		16,412			12,850
Interest payable		3,158			1,300
Accrued administrative expenses		176			453
Unrealized depreciation on forward foreign currency contract		—			363
Other accrued expenses		798			1,527

Total liabilities	$	1,268,900		$	1,281,219


Net Assets
Common stock, par value $.001 per share, 400,000 and 400,000 common shares authorized, respectively, and 81,605 and 81,192 issued and outstanding, respectively	$	82		$	81
Paid-in capital in excess of par		1,205,943			1,198,137
Distributions in excess of net investment income (see note 2f)		(12,445	)		(7,653	)
Accumulated net realized gain (loss)		(1,994	)		1,014
Net unrealized appreciation		80,696			38,276

Total Net Assets	$	1,272,282		$	1,229,855


Total liabilities and net assets	$	2,541,182		$	2,511,074


Net Asset Value Per Share	$	15.59		$	15.15

(1)	None of our portfolio companies are controlled by or affiliated to the Company as defined by the Investment Company Act of 1940.

Interest receivable includes net unrealized appreciation at June 30, 2006 and March 31, 2006 of $112 and $17 (in 000’s), respectively. Credit facility payable includes net unrealized depreciation totaling $11,731 at June 30, 2006 and net unrealized appreciation totaling $1,949 at March 31, 2006 (in 000’s) (see note 7).

See notes to financial statements.

APOLLO INVESTMENT CORPORATION

STATEMENTS OF OPERATIONS (unaudited)

(in thousands, except per share amounts)


	Three months ended
	June 30, 2006			June 30, 2005*
INVESTMENT INCOME:
Interest	$	49,023		$	26,734
Dividends		6,356			3,484
Other income		482			7,575

Total investment income		55,861			37,793

EXPENSES:
Management fees	$	8,476		$	4,490
Performance-based incentive fees		7,936			6,311
Interest and other credit facility expenses		5,631			498
Administrative services expense		968			312
Other general and administrative expenses		1,118			938

Total expenses		24,129			12,549


Expense offset arrangement (see note 8)		(12	)		—


Net expenses		24,117			12,549

Net investment income	$	31,744		$	25,244


REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, CASH EQUIVALENTS AND FOREIGN CURRENCIES:
Net realized gain (loss):
Investments and cash equivalents		195			3,351
Foreign currencies		(3,203	)		3,439

Net realized gain (loss)		(3,008	)		6,790


Net change in unrealized gain (loss):
Investments and cash equivalents		55,490			(18,045	)
Foreign currency translations		(13,070	)		(429	)

Net change in unrealized gain (loss)		42,420			(18,474	)


Net realized and unrealized gain (loss) from investments, cash equivalents and foreign currency		39,412			(11,684	)


NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS	$	71,156		$	13,560


EARNINGS PER COMMON SHARE (see note 5)	$	0.88		$	0.22

*	Certain amounts have been reclassified to conform to the current period’s presentation.

See notes to financial statements.

APOLLO INVESTMENT CORPORATION

STATEMENTS OF CHANGES IN NET ASSETS

(in thousands, except shares)


	Three months ended			Year ended
	June 30, 2006 (unaudited)			March 31, 2006
Increase in net assets from operations:
Net investment income	$	31,744		$	89,143
Net realized gains (losses)		(3,008	)		11,165
Net change in unrealized gain		42,420			20,079

Net increase in net assets resulting from operations		71,156			120,387


Dividends and distributions to shareholders:		(36,536	)		(102,735	)


Capital share transactions:
Net proceeds from shares sold		—			294,056
Less offering costs of public share offerings		—			(396	)
Reinvestment of dividends		7,807			25,657

Net increase in net assets resulting from capital share transactions		7,807			319,317


Total increase in net assets:		42,427			336,969

Net assets at beginning of period		1,229,855			892,886

Net assets at end of period	$	1,272,282		$	1,229,855


Capital share activity
Shares sold		—			17,250,000
Shares issued from reinvestment of dividends		413,064			1,386,978

Net increase in capital share activity		413,064			18,636,978

See notes to financial statements.

APOLLO INVESTMENT CORPORATION

STATEMENTS OF CASH FLOWS (unaudited)

(in thousands)


	Three months ended
	June 30, 2006			June 30, 2005
Cash Flows from Operating Activities:
Net Increase in Net Assets Resulting from Operations	$	71,156		$	13,560
Adjustments to reconcile net increase:
Purchase of investment securities		(300,995	)		(264,509	)
Proceeds from disposition of investment securities		121,947			24,395
Increase (decrease) from foreign currency transactions		(3,203	)		3,439
Increase in interest and dividends receivable		(2,966	)		(8,363	)
Decrease (increase) in prepaid expenses and other assets		1,269			(3,338	)
Increase in management and performance-based incentive fee payable		3,562			6,309
Increase in interest payable		1,858			—
Decrease in accrued expenses		(1,006	)		(154	)
Increase (decrease) in payable for investments and cash equivalents purchased		(228,332	)		132,233
Decrease (increase) in receivables for securities sold		17,261			(34,949	)
Net change in unrealized (appreciation)/depreciation on investments, cash equivalents, foreign currency translations and other assets and liabilities		(42,420	)		18,480
Net realized loss (gain) on investments and cash equivalents		3,008			(6,790	)

Net Cash Used by Operating Activities		(358,861	)		(119,687	)


Cash Flows from Financing Activities:
Net proceeds from the issuance of common stock		—			—
Offering costs from the issuance of common stock		—			—
Dividends paid in cash		(28,729	)		(15,464	)
Borrowings under credit facility		407,763			—
Repayments under credit facility		(209,500	)		—

Net Cash Provided (Used) by Financing Activities	$	169,534		$	(15,464	)


NET DECREASE IN CASH AND CASH EQUIVALENTS	$	(189,327	)	$	(135,151	)

Effect of exchange rates on cash balances		8			—

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		904,959			878,264


CASH AND CASH EQUIVALENTS, END OF PERIOD	$	715,640		$	743,113


Non-cash financing activities consist of the reinvestment of dividends totaling $7,807 and $3,928, respectively (in thousands).

See notes to financial statements.

APOLLO INVESTMENT CORPORATION

SCHEDULE OF INVESTMENTS (unaudited)

June 30, 2006

(in thousands, except shares)


Portfolio Company (1)	Industry	Par Amount*		Cost		Fair Value (2)
Subordinated Debt/Corporate Notes – 88.2%
Advantage Sales & Marketing, Inc., 12.00%, 3/29/14	Grocery	$	30,157	$	29,568	$	30,157

ALM Media Holdings, Inc., 13.00%, 3/15/13 ¨	Publishing		18,796		18,653		18,796

AMH Holdings II, Inc. (Associated Materials), 13.625%, 12/1/14 ¨	Building Products		46,826		45,896		45,655

Anthony, Inc., 13.50%, 9/1/12 ¨	Manufacturing		9,743		9,623		9,743

API Heat Transfer, Inc., 13.75%, 12/31/12	Manufacturing		19,302		18,997		19,302

Arbonne Intermediate Holdco Inc. (Natural Products Group LLC), 13.50%, 6/19/14	Direct Marketing		50,206		50,082		50,206

Associated Materials, Inc., 0% / 11.25%, 3/1/14	Building Products		58,415		32,730		34,173

Audatex Holdings III, B.V., E+900, 10/13/14	Business Services	€	15,000		18,466		19,659

Brenntag Holding GmbH & Co. KG, E+900, 1/25/16	Chemicals	€	15,070		17,850		19,896

Collect America, Ltd., 13.50%, 8/5/12 ¨	Financial Services	$	36,320		35,653		36,320

Delta Educational Systems, Inc., 13.00%, 5/12/13	Education		13,800		13,302		13,570

DSI Renal Inc., 14.00%, 3/31/14	Healthcare		10,047		10,047		10,047

Eurofresh, Inc., 0% / 14.50%, 1/15/14 ¨	Agriculture		26,504		16,290		15,041

Eurofresh, Inc., 11.50%, 1/15/13 ¨	Agriculture		50,000		50,000		49,500

European Directories (DH5) B.V., 15.735%, 7/1/16	Publishing	€	2,015		2,430		2,641

European Directories (DH7) B.V., E+950, 7/1/15	Publishing	€	14,773		18,036		19,361

FCI International S.A.S., E+875, 11/3/15 (3)	Electronics	€	22,500		27,206		30,016

Fidji Luxembourg (BC2) S.A.R.L. (FCI International S.A.S.), E+1125, 8/3/16 (4)	Electronics	€	17,500		20,999		22,992

FleetPride Corporation, L+575, 6/6/14	Transportation	$	25,000		24,876		24,969

FPC Holdings, Inc. (FleetPride Corporation), 0% / 14.00%, 6/30/15 ¨	Transportation		37,846		24,903		25,031

Hanley Wood LLC, 12.25%, 8/1/2013 ¨	Media		60,000		59,443		60,000

Language Line Holdings, Inc., 0% / 14.125%, 6/15/13	Business Services		27,678		19,104		17,022

Language Line Inc., 11.125%, 6/15/12	Business Services		27,081		26,786		26,641

Latham Manufacturing Corp., 14.00%, 6/30/11	Leisure Equipment		33,870		33,297		33,870

Lexicon Marketing (USA), Inc., 13.25%, 5/11/13	Direct Marketing		28,128		28,128		28,128

LVI Services, Inc., 13.25%, 11/16/12	Environmental		43,000		42,188		43,000

N.E.W. Customer Service Companies Inc., 14.00%, Convertible, 8/17/13	Consumer Services		8,320		8,320		13,681
Playpower Holdings Inc., 15.50%, 11/30/12 ¨	Leisure Equipment		76,029		76,029		76,029

See notes to financial statements.

APOLLO INVESTMENT CORPORATION

SCHEDULE OF INVESTMENTS (unaudited) (continued)

June 30, 2006

(in thousands, except shares)


	Industry	Par Amount*		Cost		Fair Value (2)
Subordinated Debt/Corporate Notes – (continued)
Pro Mach Merger Sub, Inc., 13.75%, 6/15/12	Machinery	$	14,471	$	14,228	$	14,471
QHB Holdings LLC (Quality Home Brands), 13.50%, 12/20/13	Consumer Products		35,000		33,952		35,000

Safety Products Holdings LLC, 11.75%, 1/1/12 ¨	Manufacturing		27,093		26,603		27,499
SCI Holdings, Inc. (Sorenson Communications, Inc.), 13.00%, 11/15/13	Consumer Services		30,356		30,356		30,356

Sigmakalon Holdco B.V., E+1000, 12/31/15	Chemicals	€	47,162		57,296		61,208

Sirona Dental Systems GmbH, E+950, 6/30/15	Healthcare	€	22,395		26,854		29,567

Source Media Holdings Inc., 13.00%, 11/30/12 ¨	Publishing	$	18,240		17,909		18,240

Travelex Global, Ltd., GBP L+950, 10/30/15	Financial Services	£	13,511		24,840		25,802
Tumi Holdings, Inc., L+1100, 12/31/14	Consumer Products	$	13,342		13,342		13,608
T/Y Merger Corp. (TDS Logistics), 14.75%, 2/26/10	Logistics		19,102		18,875		19,102

WDAC Intermediate Corp., 13.75%, 6/1/15	Publishing	€	40,199		53,138		52,353

Total Subordinated Debt/Corporate Notes				$	1,096,295	$	1,122,652

		Shares
Preferred Equity – 3.8%
Delta Educational Systems, Inc., 13.50%, 5/12/14	Education		9,500	$	8,376	$	8,548
DSI Holding Company, Inc. (DSI Renal Inc.), 15.00%, 9/30/14	Healthcare		32,500		31,710		32,500
Gryphon Colleges Corporation (Delta Educational Systems, Inc.), 12.50% (Conv.)	Education		3,325		3,325		3,325
LVI Acquisition Corp. (LVI Services, Inc.), 14.00%	Environmental		1,875		1,875		1,875
Sorenson Communications Holdings, LLC, Class B, 10.00%	Consumer Services		1,943		1,943		1,943

Total Preferred Equity				$	47,229	$	48,191


Common Equity/Partnership Interests – 12.4%
CA Holding, Inc. (Collect America, LTD)	Financial Services		25,000	$	2,500	$	3,026
DTPI Holdings, Inc. (American Asphalt & Grading)	Infrastructure		200,000		2,000		1,272

FSC Holdings Inc. (Hanley Wood LLC)	Media		10,000		10,000		12,411

Garden Fresh Restaurant Holding, LLC	Retail		50,000		5,000		6,130
Gryphon Colleges Corporation (Delta Educational Systems, Inc.)	Education		175		175		175
GS Prysmian Co-Invest L.P. (Prysmian Cables & Systems) (5,6)	Industrial				24,928		84,083

See notes to financial statements.

APOLLO INVESTMENT CORPORATION

SCHEDULE OF INVESTMENTS (unaudited) (continued)

June 30, 2006

(in thousands, except shares/warrants)


	Industry	Shares		Cost		Fair Value (2)
Common Equity/Partnership Interests (continued)

Latham Acquisition Corp.**	Leisure Equipment		33,091	$	3,309	$	3,582

LM Acquisition Ltd. (Lexicon Marketing Inc.)	Direct Marketing		10,000		10,000		13,965

LVI Acquisition Corp. (LVI Services, Inc.)	Environmental		6,250		625		215

MEG Energy Corp. (7)	Oil & Gas		836,000		19,676		20,673

N.E.W. Customer Service Companies, Inc.	Consumer Services		1,105,961		3,415		7,392

Pro Mach Co-Investment, LLC**	Machinery		150,000		1,500		2,177

Sorenson Communications Holdings, LLC Class A	Consumer Services		570,120		57		1,221

T/Y Merger Corp.(TDS Logistics)**	Logistics		250,000		2,500		1,440

Total Common Equity and Partnership Interests				$	85,685	$	157,762

		Warrants
Warrants – 0.3%
DSI Holdings Company, Inc. (DSI Renal Inc.)	Healthcare		5,011,327			$	2,829
Gryphon Colleges Corporation (Delta Educational Systems, Inc.), Common	Education		75	$	59		59
Gryphon Colleges Corporation (Delta Educational Systems, Inc.), Class A-1 Preferred	Education		355		343		343
Gryphon Colleges Corporation (Delta Educational Systems, Inc.), Class B-1 Preferred	Education		807		780		780

Total Warrants				$	1,182	$	4,011

		Par Amount*
Bank Debt/Senior Secured Loans (8) – 36.1%

1st Lien Bank Debt/Senior Secured Loans – 2.9 %

Alliance Mortgage Investments, Inc., 6/1/10	Consumer Finance	$	35,938	$	35,939	$	35,938


2nd Lien Bank Debt/Senior Secured Loans – 33.2%

American Asphalt & Grading Co., 7/1/11	Infrastructure		26,500		26,500		26,368

American Safety Razor, 9/21/12	Consumer Products		11,500		11,500		11,557

Anthony International, 9/1/11	Manufacturing		13,000		12,897		13,000

C.H.I. Overhead Doors, Inc., 10/22/11	Building Products		15,000		15,032		15,225

Clean Earth, Inc., 10/14/11	Environmental		25,000		24,971		25,297

Cygnus Business Media, Inc., 1/13/10	Media		10,000		9,932		9,950

Diam International, 7/1/12***	Consumer Products		20,231		20,203		3,035

See notes to financial statements.

APOLLO INVESTMENT CORPORATION

SCHEDULE OF INVESTMENTS (unaudited) (continued)

June 30, 2006

(in thousands, except shares)


	Industry	Par Amount*		Cost		Fair Value (2)
2nd Lien Bank Debt/Senior Secured Loans (continued)
Diam International, Jr. Revolving Credit, 6/30/11***	Consumer Products	$	1,308	$	1,308	$	1,138

Dr. Leonard’s Healthcare Corp., 7/31/12	Direct Marketing		22,000		22,000		22,055

DX III Holdings Corp. (Deluxe Entertainment Services Group Inc.), 7/28/11	Broadcasting & Entertainment		55,000		53,985		57,200

Garden Fresh Restaurant Corp., 12/22/11	Retail		26,000		25,764		26,000

Healthy Directions, LLC, 8/31/11	Vitamins, Supplements		14,888		14,888		14,962

Natural Products Group LLC, 12/19/13	Direct Marketing		25,000		25,000		25,156

NES Rentals Holdings Inc., 8/17/10	Equipment Rental		19,575		19,575		19,746

N.E.W. Customer Service Companies, 7/1/12	Consumer Services		50,000		50,000		50,625

PGT Industries, Inc., 8/14/12	Buildings & Real Estate		40,000		40,000		40,800

Quality Home Brands Holdings LLC, 6/20/13	Consumer Products		40,000		39,402		40,400

Sorenson Communications, Inc., 5/15/13	Consumer Services		17,000		17,000		17,356

Tumi Holdings, Inc., 6/30/14	Consumer Products		3,000		3,000		3,026

Total 2nd Lien Bank Debt/Senior Secured Loans				$	432,957	$	422,896


Total Bank Debt/Senior Secured Loans				$	468,896	$	458,834


Total Investments				$	1,699,287	$	1,791,450

Cash Equivalents – 55.9%

U.S. Cash Management Bill, 4.85%, 9/28/06	Government	$	720,000	$	711,561	$	711,561

Total Investments & Cash Equivalents - 196.7% (9)				$	2,410,848	$	2,503,011

Liabilities in excess of other assets – (96.7%)							(1,230,729	)


Net Assets – 100.0%						$	1,272,282

See notes to financial statements.

APOLLO INVESTMENT CORPORATION

SCHEDULE OF INVESTMENTS (unaudited) (continued)

June 30, 2006

(in thousands, except warrants)

(1)	None of our portfolio companies is controlled or affiliated as defined by the Investment Company Act of 1940.

(2)	Fair value is determined by or under the direction of the Board of Directors of the Company (see Note 2).

(3)	Includes 27,433 attached warrants.

(4)	Includes 21,336 attached warrants.

(5)	Denominated in Euro (€).

(6)	The Company is the sole Limited Partner in GS Prysmian Co-Invest L.P.

(7)	Denominated in Canadian dollars.

(8)

Represent floating rate instruments that accrue interest at a predetermined spread relative to an index, typically the LIBOR (London Inter-bank Offered Rate), EURIBOR (Euro Inter-bank Offered Rate), GBP LIBOR (London Interbank Offered Rate for British Pounds), or the Prime Rate. At June 30, 2006, the range of interest rates on floating rate bank debt was 11.06% - 14.75%.

(9)	Aggregate gross unrealized appreciation for federal income tax purposes is $108,245; aggregate gross unrealized depreciation for federal income tax purposes is $25,910. Net unrealized appreciation is $82,335 based on a tax cost of $1,709,115.

¨	These securities are exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions that are exempt from registration, normally to qualified institutional buyers.

*	Denominated in USD unless otherwise noted.

**	Non-income producing security

***	Non-accrual status

See notes to financial statements.

APOLLO INVESTMENT CORPORATION

SCHEDULE OF INVESTMENTS (unaudited) (continued)

June 30, 2006


Industry Classification	Percentage at June 30, 2006
Direct Marketing	7.8	%
Consumer Services	6.8	%
Leisure Equipment	6.3	%
Publishing	6.2	%
Consumer Products	6.0	%
Building Products	5.3	%
Industrial	4.7	%
Media	4.6	%
Chemicals	4.5	%
Healthcare	4.2	%
Environmental	3.9	%
Manufacturing	3.9	%
Financial Services	3.6	%
Agriculture	3.6	%
Business Services	3.5	%
Broadcasting & Entertainment	3.2	%
Electronics	3.0	%
Transportation	2.8	%
Buildings & Real Estate	2.3	%
Consumer Finance	2.0	%
Retail	1.8	%
Grocery	1.7	%
Infrastructure	1.6	%
Education	1.5	%
Oil & Gas	1.2	%
Logistics	1.2	%
Equipment Rental	1.1	%
Machinery	0.9	%
Vitamins, Supplements	0.8	%

Total Investments	100.0	%

See notes to financial statements.

APOLLO INVESTMENT CORPORATION

SCHEDULE OF INVESTMENTS

March 31, 2006

(in thousands, except shares)


Portfolio Company (1)	Industry	Par Amount*		Cost		Fair Value (2)
*Subordinated Debt/Corporate Notes – 76.2%*
Advantage Sales & Marketing, Inc., 12.00%, 3/29/14	Grocery	$	30,000	$	29,400	$	30,000

ALM Media Holdings, Inc., 13.00%, 3/15/13 ¨	Publishing		17,649		17,502		17,649

AMH Holdings II, Inc., 13.625%, 12/1/14 ¨	Building Products		46,826		45,882		45,655

Anthony, Inc., 13.50%, 9/1/12 ¨	Manufacturing		9,707		9,584		9,707

API Heat Transfer, Inc., 13.75%, 12/31/12	Manufacturing		19,218		18,906		19,218

Associated Materials, Inc., 0% / 11.25%, 3/1/14	Building Products		58,415		31,496		34,027

Brenntag Holding GmbH & Co. KG, E+900, 1/25/16	Chemicals	€	15,070		17,850		18,875

Collect America, Ltd., 13.50%, 8/5/12 ¨	Financial Services		36,320		35,636		36,320

Eurofresh, Inc., 0% / 14.50%, 1/15/14 ¨	Agriculture		26,504		15,678		15,020

Eurofresh, Inc., 11.50%, 1/15/13 ¨	Agriculture		50,000		50,000		50,375

European Directories (DH5) B.V., 15.735%, 7/1/16	Publishing	€	1,857		2,228		2,315

European Directories (DH7) B.V., E+950, 7/1/15	Publishing	€	14,424		17,590		17,979

FCI International S.A.S., E+875, 11/3/15 (3)	Electronics	€	22,500		27,206		28,249

Fidji Luxembourg (BC2) S.A.R.L., E+1125, 8/3/16 (4)	Electronics	€	17,500		20,999		21,284

Hanley Wood LLC, 12.25%, 8/1/2013 ¨	Media		60,000		59,431		60,000

Language Line Holdings, Inc., 0% / 14.125%, 6/15/13	Business Services		27,678		18,452		14,116

Language Line Inc., 11.125%, 6/15/12	Business Services		27,081		26,776		25,253

Latham Manufacturing Corp., 14.00%, 6/30/11	Leisure Equipment		43,760		42,991		43,760

Lexicon Marketing (USA), Inc., 13.75%, 1/2/12	Direct Marketing		27,647		27,170		27,647

LVI Services, Inc., 13.25%, 11/16/12	Environmental		43,000		42,168		43,000

National Renal Institutes, Inc., 14.00%, 3/31/14	Healthcare		10,000		10,000		10,000

N.E.W. Customer Service Companies Inc., 14.00%, Convertible, 8/17/13	Consumer Services		8,320		8,320		12,316

Playpower Holdings Inc., 15.50%, 11/30/12 ¨	Leisure Equipment		70,560		70,560		70,560

Pro Mach Merger Sub, Inc., 12.50%, 6/15/12	Machinery		19,359		19,021		19,359

Safety Products Holdings LLC, 11.75%, 1/1/12 ¨	Manufacturing		27,093		26,588		27,923

SCI Holdings, Inc., 13.00%, 11/15/13	Consumer Services		29,390		29,390		29,390

See notes to financial statements.

APOLLO INVESTMENT CORPORATION

SCHEDULE OF INVESTMENTS (continued)

March 31, 2006

(in thousands, except shares)


	Industry	Par Amount*		Cost		Fair Value (2)
Subordinated Debt/Corporate Notes – (continued)

Sigmakalon Holdco B.V., E+1000, 12/31/15	Chemicals	€	47,162	$	57,296	$	58,000

Sirona Dental Systems GmbH, E+950, 6/30/15	Healthcare	€	22,096		26,479		27,676

Source Media Holdings Inc., 13.00%, 11/30/12 ¨	Publishing	$	18,240		17,901		18,240

Travelex Global, GBP L+950, 10/30/15	Financial Services	£	13,172		24,223		23,248

Tumi Holdings, Inc., L+1100, 12/31/14	Consumer Products		13,175		13,175		13,439

T/Y Merger Corp., 14.75%, 2/26/10	Logistics		18,826		18,588		18,826

WDAC Intermediate Corp., 13.75%, 6/1/15	Publishing	€	37,613		49,992		47,527

Total Subordinated Debt/Corporate Notes				$	928,478	$	936,953


	Industry	Shares		Cost		Fair Value (2)
Preferred Equity – 3.0%

DSI Holdings Company, Inc., 15.00% (5)	Healthcare		32,500	$	31,687	$	32,500

LVI Acquisition Corp, 14.00%	Environmental		1,875		1,875		1,875

Sorenson Communications Holdings, LLC Class B, 10.00%	Consumer Services		1,943		1,943		1,943

Total Preferred Equity				$	35,505	$	36,318


	Industry	Shares		Cost		Fair Value (2)
Common Equity/Partnership Interests – 8.8%

CA Holding, Inc.	Financial Services		25,000	$	2,500	$	2,969

DTPI Holdings, Inc.	Infrastructure		200,000		2,000		723

FSC Holdings Inc.	Media		10,000		10,000		10,658

Garden Fresh Restaurant Holding, LLC	Retail		50,000		5,000		5,000

GS Prysmian Co-Invest L.P. (6,7)	Industrial				24,928		39,354

Latham Acquisition Corp.**	Leisure Equipment		33,091		3,309		3,518

LM Acquisition Ltd. **	Direct Marketing		10,000		10,000		15,408

LVI Acquisition Corp.	Environmental		6,250		625		812

MEG Energy Corp.	Oil & Gas		836,000		19,676		19,707

N.E.W. Customer Service Companies, Inc.	Consumer Services		1,105,961		3,415		6,620

Pro Mach Co-investment, LLC**	Machinery		150,000		1,500		1,826

Sorenson Communications Holdings, LLC Class A	Consumer Services		570,120		57		852

See notes to financial statements.

APOLLO INVESTMENT CORPORATION

SCHEDULE OF INVESTMENTS (continued)

March 31, 2006

(in thousands, except shares)


	Industry	Shares		Cost		Fair Value (2)
Common Equity/Partnership Interests (continued)
T/Y Merger Corp.**	Logistics		250,000	$	2,500	$	1,398

Total Common Equity and Partnership Interests				$	85,510	$	108,845

		Par Amount*
Bank Debt/Senior Secured Loans (8) – 38.6%
1^st Lien Bank Debt/Senior Secured Loans – 3.0 %

Alliance Mortgage Investments, Inc., 6/1/10	Consumer Finance	$	36,250	$	36,252	$	36,250


2nd Lien Bank Debt/Senior Secured Loans – 35.6%

ALM Media Holdings, Inc., 3/7/11	Publishing	$	27,750	$	27,750	$	27,750

American Asphalt & Grading Co., 7/1/11	Infrastructure		26,500		26,500		26,367

American Safety Razor, 9/21/12	Consumer Products		11,500		11,500		11,586

Anthony International, 9/1/11	Manufacturing		13,000		12,894		13,000

C.H.I. Overhead Doors, Inc., 10/22/11	Building Products		10,000		9,957		10,112

Clean Earth, Inc., 10/14/11	Environmental		25,000		24,970		25,312

Cygnus Business Media, Inc., 1/13/10	Media		10,000		9,928		9,950

Diam International, 7/1/12	Consumer Products		20,000		20,000		17,300

Dr. Leonard’s Healthcare Corp., 7/31/12	Direct Marketing		22,000		22,000		22,055

DX III Holdings Corp., 7/28/11	Broadcasting & Entertainment		55,000		53,936		56,650

Garden Fresh Restaurant Corp., 12/22/11	Retail		25,000		24,757		25,000

Healthy Directions, LLC, 8/31/11	Vitamins, Supplements		14,925		14,925		15,000

Natural Products Group LLC, 8/16/12	Direct Marketing		25,000		24,744		25,063

NES Rentals Holdings Inc., 8/17/10	Equipment Rental		19,638		19,638		19,908

N.E.W. Customer Service Companies, 7/1/12	Consumer Services		50,000		50,000		50,875

PGT Industries, Inc., 8/14/12	Buildings & Real Estate		40,000		40,000		40,900

Sorenson Communications, Inc., 5/15/13	Consumer Services		17,000		17,000		17,432

Survey Sampling International, LLC, 5/7/12	Market Research		7,500		7,483		7,580

Tumi Holdings, Inc., 6/30/14	Consumer Products		3,000		3,000		3,030

See notes to financial statements.

APOLLO INVESTMENT CORPORATION

SCHEDULE OF INVESTMENTS (continued)

March 31, 2006

(in thousands, except shares)


	Industry	Par Amount*		Cost		Fair Value (2)
2nd Lien Bank Debt/Senior Secured Loans (continued)
United Site Services, Inc., 6/30/10	Environmental	$	13,462	$	13,298	$	13,462


Total 2nd Lien Bank Debt/Senior Secured Loans				$	434,280	$	438,332


Total Bank Debt/Senior Secured Loans				$	470,532	$	474,582


Total Investments				$	1,520,025	$	1,556,698


Cash Equivalents – 73.0%
U.S. Cash Management Bill, 4.60%, 4/17/06	Government	$	900,000	$	898,374	$	898,374


Total Investments & Cash Equivalents - 199.6% (9)				$	2,418,399	$	2,455,072

Liabilities in excess of other assets – (99.6%)							(1,225,217	)


Net Assets – 100.0%						$	1,229,855

(1)	None of our portfolio companies is controlled or affiliated as defined by the Investment Company Act of 1940.

(2)	Fair value is determined by or under the direction of the Board of Directors of the Company (see Note 2).

(3)	Includes 27,433 attached warrants

(4)	Includes 21,336 attached warrants

(5)	Includes 5,011,327 detachable warrants

(6)	Denominated in Euro (€)

(7)	The Company is the sole Limited Partner in GS Prysmian Co-Invest L.P.

(8)

Represent floating rate instruments that accrue interest at a predetermined spread relative to an index, typically the LIBOR (London Inter-bank Offer Rate), EURIBOR (Euro Inter-bank Offered Rate), GBP Libor (London Interbank Offer Rate for British Pounds), or the Prime Rate. A t March 31, 2006, the range of interest rates on floating rate investments was 10.47% - 15.98%.

(9)	Aggregate gross unrealized appreciation for federal income tax purposes is $44,670; aggregate gross unrealized depreciation for federal income tax purposes is $16,391. Net unrealized appreciation is $28,279 based on a tax cost of $2,426,793.

¨	These securities are exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions that are exempt from registration, normally to qualified institutional buyers.

*	Denominated in USD unless otherwise noted

**	Non-income producing security.

See notes to financial statements.

APOLLO INVESTMENT CORPORATION

SCHEDULE OF INVESTMENTS (continued)


Industry Classification	Percentage at March 31, 2006
Publishing	8.5	%
Consumer Services	7.7	%
Leisure Equipment	7.6	%
Direct Marketing	5.8	%
Building Products	5.8	%
Environmental	5.4	%
Media	5.2	%
Chemicals	4.9	%
Healthcare	4.5	%
Manufacturing	4.5	%
Agriculture	4.2	%
Financial Services	4.0	%
Broadcasting & Entertainment	3.6	%
Electronics	3.2	%
Consumer Products	2.9	%
Buildings & Real Estate	2.6	%
Business Services	2.5	%
Industrial	2.5	%
Consumer Finance	2.3	%
Retail	1.9	%
Grocery	1.9	%
Infrastructure	1.7	%
Machinery	1.4	%
Logistics	1.3	%
Equipment Rental	1.3	%
Oil & Gas	1.3	%
Vitamins, Supplements	1.0	%
Market Research	0.5	%

Total Investments	100.0	%

See notes to financial statements.

APOLLO INVESTMENT CORPORATION

NOTES TO FINANCIAL STATEMENTS (unaudited)

(in thousands except share and per share amounts)

Note 1. Organization

Apollo Investment Corporation (“Apollo Investment” or the “Company”), a Maryland corporation organized on February 2, 2004, is a closed-end, non-diversified management investment company that has filed an election to be treated as a business development company (“BDC”) under the Investment Company Act of 1940. In addition, for tax purposes we have elected to be treated as a regulated investment company, or RIC, under the Internal Revenue Code of 1986, as amended. Our investment objective is to generate both current income and capital appreciation through debt and equity investments. We invest primarily in middle-market companies in the form of mezzanine and senior secured loans, each of which may include an equity component, and, to a lesser extent, by making direct equity investments in such companies.

On April 8, 2004, Apollo Investment closed its initial public offering and sold 62,000,000 shares of its common stock at a price of $15.00 per share, less an underwriting discount and commissions totaling $0.9375 per share. We commenced operations on April 8, 2004 as we received $870.15 million in total net proceeds from the offering.

Note 2. Significant Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reported period. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ.

Interim financial statements are prepared in accordance with GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 6 or 10 of Regulation S-X, as appropriate. In accordance with Article 6-09 of Regulation S-X under the Exchange Act, we are providing a Statement of Changes in Net Assets in lieu of a Statement of Changes in Stockholders’ Equity. In addition, certain prior period amounts have been reclassified to conform with the current period presentation. In the opinion of management, all adjustments, consisting solely of normal recurring accruals, considered necessary for the fair presentation of financial statements for the interim period, have been included.

The significant accounting policies consistently followed by Apollo Investment are:

(a)	Security transactions are accounted for on the trade date;

Investments for which market quotations are readily available are valued at such market quotations; debt and equity securities that are not publicly traded or whose market prices are not readily available are valued at fair value as determined in good faith by or under the direction of our Board of Directors. Subordinated debt, senior secured debt and other debt securities with maturities greater than 60 days are valued by an independent pricing service or at the mean between the bid and ask prices from at least two brokers or dealers (if available, otherwise by a principal market maker or a primary market dealer). With respect to certain private equity securities, each investment will be valued by independent third party valuation firms using methods that may include comparisons of financial ratios of the portfolio companies that issued such private equity securities to peer companies that are public among other measures and as applicable. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, we will consider the pricing indicated by the external event to corroborate our private equity valuation. Because we expect that there will not be a readily available market value for many of the investments in our portfolio, we expect to value such investments at fair value as determined in good faith by or under the direction of our Board of Directors using a documented valuation policy and a consistently applied valuation process. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may differ significantly from the values that would have been used had a readily available market value existed for such investments, and the differences could be material.

APOLLO INVESTMENT CORPORATION

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)

(in thousands except share and per share amounts)

With respect to our investments for which market quotations are not readily available, our Board of Directors undertakes a multi-step valuation process each quarter, as described below:

(1)

The Company’s quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals responsible for the portfolio investment;

(2)

Preliminary valuation conclusions are then documented and discussed with our senior management;

(3)

Independent valuation firms engaged by our board of directors conduct independent appraisals and review management’s preliminary valuations and their own independent assessment;

(4)

The audit committee of our board of directors reviews the preliminary valuation of our investment adviser and that of the independent valuation firms and responds and supplements the valuation recommendation of the independent valuation firm to reflect any comments; and

(5)

The board of directors discusses valuations and determines the fair value of each investment in our portfolio in good faith based on the input of our investment adviser, the respective independent valuation firms and the audit committee.

The types of factors that we may take into account in fair value pricing our investments include, as relevant, the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings and discounted cash flow, the markets in which the portfolio company does business, comparison to publicly traded securities and other relevant factors.

Determination of fair values involves subjective judgments and estimates. Accordingly, these notes to our financial statements express the uncertainty with respect to the possible effect of such valuations, and any change in such valuations, on our financial statements.

(b)	Investments purchased within 60 days of maturity are valued at cost plus accreted discount, or minus amortized premium, which approximates value;

(c)	Gains or losses on the sale of investments are calculated by using the specific identification method;

(d)

Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis. Origination, closing and/or commitment fees associated with investments in portfolio companies are accreted into interest income over the respective terms of the applicable loans. Upon the prepayment of a loan or debt security, any prepayment penalties and unamortized loan origination, closing and commitment fees are recorded as interest income;

(e)	The Company intends to comply with the applicable provisions of the Internal Revenue Code of 1986, as amended, pertaining to regulated investment companies to make distributions of taxable income sufficient to relieve it from substantially all Federal income and excise taxes;

(f)

Book and tax basis differences relating to stockholder dividends and distributions and other permanent book and tax differences are reclassified to paid-in capital. In addition, the character of income and gains to be distributed is determined in accordance with income tax regulations that may differ from accounting principles generally accepted in the United States of America;

(g)

Dividends and distributions to common stockholders are recorded as of record date. The amount to be paid out as a dividend is determined by the Board of Directors each quarter and is generally based upon the earnings estimated by management. Net realized capital gains, if any, are distributed at least annually.

(h)

The accounting records of the Company are maintained in U.S. dollars. All assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the rate of exchange of such currencies against U.S. dollars on the date of valuation. The Company’s investments in foreign securities may involve certain risks such as foreign exchange restrictions, expropriation, taxation or other political, social or economic risks, all of which could affect the market and/or credit risk of the investment. In addition, changes in the relationship of foreign currencies to the U.S. dollar can significantly affect the value of these investments and therefore the earnings of the Company.

APOLLO INVESTMENT CORPORATION

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)

(in thousands except share and per share amounts)

(i)

The Company may enter into forward exchange contracts in order to hedge against foreign currency risk. These contracts are marked-to-market by recognizing the difference between the contract exchange rate and the current market rate as unrealized appreciation or depreciation. Realized gains or losses are recognized when contracts are settled.

(j)	The Company records origination expenses related to its multi-currency credit facility as prepaid assets. These expenses are deferred and amortized using the straight-line method over the stated life of the facility.

(k)	The Company records registration expenses related to Shelf filings as prepaid assets. These expenses are charged as a reduction of capital upon utilization, in accordance with Section 8.24 of the AICPA Audit and Accounting Guide for Investment Companies.

(l)

Loans are placed on non-accrual status when principal or interest payments are past due 30 days or more or when there is reasonable doubt that principal or interest will be collected. Accrued interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment. Non-accrual loans are restored to accrual status when past due principal and interest is paid and in management’s judgment, are likely to remain current.

Note 3. Agreements

Apollo Investment has an Investment Advisory and Management Agreement with the Investment Adviser, Apollo Investment Management, L.P., under which the Investment Adviser, subject to the overall supervision of Apollo Investment’s Board of Directors, will manage the day-to-day operations of, and provide investment advisory services to, Apollo Investment. For providing these services, the Investment Adviser receives a fee from Apollo Investment, consisting of two components—a base management fee and an incentive fee. The base management fee is determined by taking the average value of Apollo Investment’s gross assets at the end of the two most recently completed calendar quarters calculated at an annual rate of 2.00%. The incentive fee has two parts, as follows: one part is calculated and payable quarterly in arrears based on Apollo Investment’s pre-incentive fee net investment income for the immediately preceding calendar quarter. For this purpose, pre-incentive fee net investment income means 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 or other fees that we receive from portfolio companies) accrued during the calendar quarter, minus Apollo Investment’s operating expenses for the quarter (including the base management fee, any expenses payable under the Administration Agreement, and any interest expense and dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income does not include any realized capital gains computed net of all realized capital losses and unrealized capital depreciation. Pre-incentive fee net investment income, expressed as a rate of return on the value of Apollo Investment’s net assets at the end of the immediately preceding calendar quarter, is compared to the hurdle rate of 1.75% per quarter (7% annualized). Our net investment income used to calculate this part of the incentive fee is also included in the amount of our gross assets used to calculate the 2% base management fee. Apollo Investment pays the Investment Adviser an incentive fee with respect to Apollo Investment’s pre-incentive fee net investment income in each calendar quarter as follows: (1) no incentive fee in any calendar quarter in which Apollo Investment’s pre-incentive fee net investment income does not exceed the hurdle rate; (2) 100% of Apollo Investment’s pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.1875% in any calendar quarter; and (3) 20% of the amount of Apollo Investment’s pre-incentive fee net investment income, if any, that exceeds 2.1875% in any calendar quarter. These calculations are appropriately pro rated for any period of less than three months and adjusted for any share issuances or repurchases during the relevant quarter. The second part of the incentive fee is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Advisory and Management Agreement, as of the termination date), commencing on December 31, 2004, and will equal 20% of Apollo Investment’s cumulative realized capital gains less cumulative realized capital losses, unrealized capital depreciation (unrealized depreciation on a gross investment-by-investment basis at the end of each calendar year) and all capital gains upon which prior performance-based capital gains incentive fee payments were previously made to the advisor.

For the three months ended June 30, 2006 and June 30, 2005, the Investment Adviser received $8,476 and $4,490, respectively, in base investment advisory and management fees and $7,936 and $6,311, respectively, in performance-based net investment income incentive fees from Apollo Investment.

APOLLO INVESTMENT CORPORATION

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)

(in thousands except share and per share amounts)

Apollo Investment has also entered into an Administration Agreement with Apollo Investment Administration, LLC (the “Administrator”) under which the Administrator provides administrative services for Apollo Investment. For providing these services, facilities and personnel, Apollo Investment reimburses the Administrator for Apollo Investment’s allocable portion of overhead and other expenses incurred by Apollo Administration in performing its obligations under the Administration Agreement, including rent and Apollo Investment’s allocable portion of its chief financial officer and chief compliance officer and their respective staffs. The Administrator will also provide on Apollo Investment’s behalf managerial assistance to these portfolio companies to which Apollo Investment is required to provide such assistance.

For the three months ended June 30, 2006 and June 30, 2005, the Administrator was reimbursed $293 and $518, respectively, from Apollo Investment on the $469 and $618, respectively, of expenses accrued under the Administration Agreement.

On April 14, 2005, Apollo Investment entered into an $800,000,000 Senior Secured Revolving Credit Agreement (the “Credit Agreement”), among Apollo Investment, the lenders party thereto and JPMorgan Chase Bank, N.A. (“JPMorgan”), as administrative agent for the lenders. Effective December 29, 2005, lenders provided additional commitments in the amount of $100,000,000, increasing the total facility size to $900,000,000 on the same terms and conditions as the existing commitments. On March 31, 2006, Apollo Investment Corporation amended and restated its $900,000,000 senior secured, multi-currency, revolving credit facility due April 14, 2010. The amended Facility increased total commitments outstanding to $1,250,000,000 and extended the maturity date to April 13, 2011. The amended Facility also permits Apollo to seek additional commitments from new and existing lenders in the future, up to an aggregate amount not to exceed $2,000,000,000. Pricing remains at 100 basis points over LIBOR. The Facility will be used to supplement Apollo’s equity capital to make additional portfolio investments. From time to time, certain of the lenders provide customary commercial and investment banking services to affiliates of Apollo Investment. JPMorgan also serves as custodian and fund accounting agent for Apollo Investment.

Note 4. Net Asset Value Per Share

At June 30, 2006, the Company’s total net assets and net asset value per share were $1,272,282 and $15.59, respectively. This compares to total net assets and net asset value per share at March 31, 2006 of $1,229,855 and $15.15, respectively.

Note 5. Earnings Per Share

The following information sets forth the computation of basic and diluted per share net increase in net assets resulting from operations for the three months ended June 30, 2006 and June 30, 2005, respectively:


	Three months ended June 30, 2006		Three months ended June 30, 2005
Numerator for increase in net assets per share:	$	71,156	$	13,560
Denominator for basic and diluted weighted average shares:		81,201,032		62,557,317

Basic and diluted net increase in net assets per share resulting from operations:	$	0.88	$	0.22

APOLLO INVESTMENT CORPORATION

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)

(in thousands except share and per share amounts)

Note 6. Investments

Investments and cash equivalents consisted of the following as of June 30, 2006 and June 30, 2005, respectively:


	June 30, 2006				June 30, 2005
	Cost		Fair Value		Cost		Fair Value
Subordinated Debt/Corporate Notes	$	1,096,295	$	1,122,652	$	478,890	$	476,326
Preferred Equity		47,229		48,191		—		—
Common Equity/Partnership Interests		85,685		157,762		22,415		21,944
Warrants		1,182		4,011		—		—
Bank Debt/Senior Secured Loans		468,896		458,834		463,371		465,606
Cash Equivalents		711,561		711,561		742,649		742,649

Totals	$	2,410,848	$	2,503,011	$	1,707,325	$	1,706,525

Note 7. Foreign Currency Transactions and Translations

At June 30, 2006, the Company had an open foreign currency contract to sell euro forward and bears the market risk that arises from changes in foreign currency exchange rates. Unrealized appreciation on the contract is reflected in the accompanying financial statements as follows:


Foreign Currency	Local Currency		Cost		Market Value		Settlement Date	Unrealized Appreciation
To Sell: Euro	€	41,000	$	52,796	$	52,652	9/8/06	$	144

At June 30, 2006, the Company had outstanding non-US borrowings on its $1.25 billion multicurrency revolving credit facility denominated in euros, pounds sterling, and Canadian dollars. Unrealized appreciation (depreciation) on these outstanding borrowings is indicated in the table below:


Foreign Currency	Local Currency		Original Borrowing Cost		Current Value		Reset Date	Appreciation (Depreciation)
Euro	€	17,500	$	21,178	$	22,376	7/7/2006	$	(1,198	)
Euro	€	10,090		12,489		12,902	7/11/2006		(413	)
Euro	€	15,000		18,141		19,180	7/20/2006		(1,039	)
Euro	€	25,061		30,246		32,044	7/24/2006		(1,798	)
Euro	€	10,000		12,442		12,786	7/28/2006		(344	)
Euro	€	5,000		6,322		6,393	8/4/2006		(71	)
Euro	€	20,022		24,888		25,601	9/6/2006		(713	)
Pounds Sterling	£	13,000		23,916		24,044	9/7/2006		(128	)
Euro	€	2,500		3,001		3,197	9/16/2006		(196	)
Euro	€	45,525		55,071		58,211	9/20/2006		(3,140	)
Canadian Dollar	C$	23,000		19,684		20,682	9/25/2006		(998	)
Euro	€	22,000		26,437		28,130	9/27/2006		(1,693	)

			$	253,815	$	265,546		$	(11,731	)

APOLLO INVESTMENT CORPORATION

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)

(in thousands except share and per share amounts)

Note 8. Expense Offset Arrangement

The Company benefits from an expense offset arrangement with JPMorgan Chase Bank, N.A. (“custodian bank”) whereby the Company earns credits on any uninvested US dollar cash balances held by the custodian bank. These credits are applied by the custodian bank as a reduction of the monthly custody fees charged to the Company. The total amount of credits earned during the three months ended June 30, 2006 and June 30, 2005 is $12 and $0, respectively.

Note 9. Cash Equivalents

Pending investment in longer-term portfolio holdings, Apollo Investment makes temporary investments in U.S. Treasury bills (of varying maturities) and repurchase agreements as outlined in our prospectus. These temporary investments are deemed cash equivalents by us and are included in our Schedule of Investments. At the end of each fiscal quarter, the Company typically takes proactive steps to prospectively preserve investment flexibility in the next quarter which is assessed against the Company’s total assets at its most recent quarter end. The Company can accomplish this in many ways including its current practice of purchasing U.S. Treasury bills and closing out its position on a net cash basis subsequent to quarter end. The Company may also utilize repurchase agreements or other balance sheet transactions as it deems appropriate for this purpose and these amounts are excluded from total assets for purposes of computing the asset base upon which the management fee is determined. U.S. Treasury bills with maturities of greater than 60 days from the time of purchase are marked-to-market as per our valuation policy. U.S. Treasury bills settle “regular way” on trade date plus one.

Note 10. Repurchase Agreements

The Company enters into repurchase agreements as part of its investment program. The Company’s custodian takes possession of collateral pledged by the counterparty. The collateral is marked-to-market daily to ensure that the value, plus accrued interest, is at least equal to the repurchase price. In the event of default of the obligor to repurchase, the Company has the right to liquidate the collateral and apply the proceeds in satisfaction of the obligation. Under certain circumstances, in the event of default or bankruptcy by the counterparty to the agreement, realization and/or retention of the collateral or proceeds may be subject to legal proceedings. There were no repurchase agreements outstanding at June 30, 2006.

APOLLO INVESTMENT CORPORATION

NOTES TO FINANCIAL STATEMENTS (continued)

(in thousands except share and per share amounts)

Note 11. Financial Highlights

The following is a schedule of financial highlights for the three months ended June 30, 2006 and the year ended March 31, 2006:


	Three months ended June 30, 2006 (unaudited)			Year ended March 31, 2006
Per Share Data:
Net asset value, beginning of period	$	15.15		$	14.27

Net investment income		0.39			1.41
Net realized and unrealized gain (loss)		0.49			0.49

Net increase in net assets resulting from operations		0.88			1.90
Dividends to shareholders (1)		(0.45	)		(1.62	)
Effect of anti-dilution		0.01			0.61
Offering costs		—			(0.01	)

Net asset value at end of period	$	15.59		$	15.15


Per share market value at end of period	$	18.48		$	17.81
Total return (2)		6.23	%		12.94	%
Shares outstanding at end of period		81,605,018			81,191,954

Ratio/Supplemental Data:
Net assets at end of period (in millions)	$	1,272.3		$	1,229.9

Ratio of net investment income to average net assets		2.58	%		9.89	%

Ratio of operating expenses to average net assets*		1.50	%		5.64	%
Ratio of credit facility related expenses to average net assets		0.46	%		1.44	%

Ratio of total expenses to average net assets*		1.96	%		7.08	%

Average debt outstanding	$	418,020		$	325,639	**
Average debt per share	$	5.15		$	5.10
Portfolio turnover ratio		7.5	%		39.2	%

(1)	Dividends and distributions are determined based on taxable income calculated in accordance with income tax regulations which may differ from amounts determined under accounting principles generally accepted in the United States of America.

(2)	Total return is based on the change in market price per share during the respective periods. It also takes into account dividends and distributions, if any, reinvested in accordance with the Company’s dividend reinvestment plan. Total return is not annualized.

For the three months ended June 30, 2006 and the year ended March 31, 2006, incorporating the expense offset arrangement, the ratio of operating expenses to average net assets is 1.50% and 5.63%, respectively, and the ratio of total expenses to average net assets is 1.96% and 7.07%, respectively (see Note 8).

Average debt outstanding and per share is calculated from July 8, 2005 (the date of the Company’s first borrowing from its revolving credit facility) through March 31, 2006, and average debt per share is calculated as average debt outstanding divided by the average shares outstanding during the period (in 000’s).

APOLLO INVESTMENT CORPORATION

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)

(in thousands except share and per share amounts)

Information about our senior securities is shown in the following table as of each year ended March 31 since the Company commenced operations, unless otherwise noted. The “—” indicates information which the SEC expressly does not require to be disclosed for certain types of senior securities.


Class and Year	Total Amount Outstanding (1)		Asset Coverage Per Unit(2)		Involuntary Liquidating Preference Per Unit(3)		Average Market Value Per Unit(4)
Revolving Credit Facility
Fiscal 2007 (as of June 30, 2006)	$	535,795	$	3,375	$	—	N/A
Fiscal 2006	$	323,852	$	4,798	$	—	N/A
Fiscal 2005	$	0	$	0	$	—	N/A

(1)	Total amount of each class of senior securities outstanding at the end of the period presented (in 000’s).

(2)

The asset coverage ratio for a class of senior securities representing indebtedness is calculated as our consolidated total assets, less all liabilities and indebtedness not represented by senior securities, divided by senior securities representing indebtedness. This asset coverage ratio is multiplied by $1,000 to determine the Asset Coverage Per Unit.

(3)	The amount to which such class of senior security would be entitled upon the involuntary liquidation of the issuer in preference to any security junior to it.

(4)	Not applicable, as senior securities are not registered for public trading.

Note 12. Credit Agreement and Borrowings

At March 31, 2006 and under the terms of the amended and restated Credit Agreement, the lenders agreed to extend credit to Apollo Investment in an aggregate principal or face amount not exceeding $1.25 billion at any one time outstanding. The Credit Agreement is a five-year revolving facility (with a stated maturity date of April 14, 2011) and is secured by substantially all of the assets in Apollo Investment’s portfolio, including cash and cash equivalents. Pricing is set at 100 basis points over LIBOR. The Credit Agreement contains affirmative and restrictive covenants, including: (a) periodic financial reporting requirements, (b) maintaining minimum shareholders’ equity of the greater of (i) 40% of the total assets of Apollo Investment and its subsidiaries as at the last day of any fiscal quarter and (ii) the sum of (A) $300 million plus (B) 25% of the net proceeds from the sale of equity interests in Apollo Investment after the closing date of the Credit Agreement, (c) maintaining a ratio of total assets (less total liabilities) to total indebtedness, in each case of Apollo Investment and its subsidiaries, of not less than 2.0:1.0, (d) maintaining minimum liquidity, (e) limitations on the incurrence of additional indebtedness, (f) limitations on liens, (g) limitations on investments (other than in the ordinary course of Apollo Investment’s business), (h) limitations on mergers and disposition of assets (other than in the normal course of Apollo Investment’s business activities) and (i) limitations on the creation or existence of agreements that prohibit liens on properties of Apollo Investment’s subsidiaries. In addition to the asset coverage ratio described in clause (c) of the preceding sentence, borrowings under the Credit Agreement (and the incurrence of certain other permitted debt) are subject to compliance with a borrowing base that applies different advance rates to different types of assets in Apollo Investment’s portfolio. The Credit Agreement currently provides for the ability of Apollo Investment to seek additional commitments from lenders in an aggregate amount of up to $750 million. The Credit Agreement is used to supplement Apollo Investment’s equity capital to make additional portfolio investments and for other general corporate purposes.

At June 30, 2006, the Company had $535,795 (at value) drawn on its $1,250,000 revolving credit facility. The weighted average annual interest cost for the three months ended June 30, 2006 was 4.75%, exclusive of 0.65% for commitment fees and for other prepaid expenses related to establishing the credit facility. This weighted average annual interest cost reflects the average interest cost for all borrowings, including EURIBOR, GBP LIBOR, CAD LIBOR, and USD LIBOR. No amounts were drawn on the facility at June 30, 2005.

The average debt outstanding on the credit facility was $418,020 for the three months ended June 30, 2006. The maximum amount borrowed during this period was $558,998. The remaining amount available under the facility was $714,205 at June 30, 2006.

At June 30, 2006, the Company was in compliance with all financial and operational covenants required by the Credit Agreement.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

Apollo Investment Corporation

We have reviewed the accompanying statements of assets and liabilities of Apollo Investment Corporation (the “Company”) as of June 30, 2006 and March 31, 2006, including the schedules of investments, the related statements of operations and of cash flows for the three-month period ended June 30, 2006 and June 30, 2005 and the statements of changes in net assets for the three-month period ended June 30, 2006 and for the year ended March 31, 2006. These interim financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the statement of assets and liabilities as of March 31, 2006, and the related statements of operations, of cash flows and of changes in net assets for the year then ended, management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of March 31, 2006 and the effectiveness of the Company’s internal control over financial reporting as of March 31, 2006; and in our report dated June 9, 2006, we expressed unqualified opinions thereon. The financial statements and management’s assessment of the effectiveness of internal control over financial reporting referred to above are not presented herein. In our opinion, the information set forth in the accompanying statement of assets and liabilities as of March 31, 2006, is fairly stated in all material respects in relation to the statement of assets and liabilities from which it has been derived.

/s/ PricewaterhouseCoopers LLP

New York, New York

August 7, 2006

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Certain statements in this report that relate to estimates or expectations of our future performance or financial condition may constitute “forward-looking statements” as defined under the Private Securities Litigation Reform Act of 1995. The forward-looking statements involve risks and uncertainties, including, but not limited to, statements as to:

•

our future operating results;

•

our business prospects and the prospects of our portfolio companies;

•

the impact of investments that we expect to make;

•

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;

•

the adequacy of our cash resources and working capital; and

•

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

We may use words such as “anticipates,” “believes,” “expects,” “intends”, “will”, “should,” “may” and similar expressions to identify forward-looking statements. Such statements are based on currently available operating, financial and competitive information and are subject to various risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations. Undue reliance should not be placed on such forward-looking statements, as such statements speak only as of the date on which they are made. Additional information regarding these and other risks and uncertainties is contained in our periodic filings with the Securities and Exchange Commission.

Overview

Apollo Investment was incorporated under the Maryland General Corporation Law in February 2004. We have elected to be treated as a business development company under the Investment Company Act of 1940 (“1940 Act”). As such, we are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70% of our total assets in “qualifying assets,” including securities of private or thinly traded public U.S. companies, cash equivalents, U.S. government securities and high-quality debt investments that mature in one year or less. In addition, for federal income tax purposes we have elected to be treated as a RIC under Subchapter M of the Internal Revenue Code of 1986, as amended. Pursuant to this election and assuming we qualify as a RIC, we generally do not have to pay corporate-level federal income taxes on any income we distribute to our stockholders. On April 8, 2004, we completed our initial public offering as an externally managed, non-diversified, closed-end investment company that elected to be treated as a business development company under the 1940 Act. We commenced operations on April 8, 2004 upon receipt of $870 million in net proceeds from our initial public offering of common stock. On March 22, 2006, the Company closed on its second public offering and sold 17,250,000 shares of its common stock at a price of $17.85 per share, receiving $294 million in total net proceeds from the offering.

Investments

Our level of investment activity can and does vary substantially from period to period depending on many factors, including the amount of debt and equity capital available to middle market companies, the level of merger and acquisition activity for such companies, the general economic environment and the competitive environment for the types of investments we make. Over the last twenty-four months, we believe that the availability of senior debt capital from banks for middle market companies has generally increased and has put downward pressure on interest rate spreads at the same time that base interest rates have risen. We do not expect this increased availability of capital to impair our ability to make longer-term investment allocations with our capital. We remain steadfast with our investment discipline in selectively investing in appropriate risk-reward opportunities within the middle market.

As a business development company, we must not acquire any assets other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets (with certain limited exceptions). If we invest in an issuer that, at the time we make the investment, has outstanding securities as to which a broker or dealer may extend or maintain margin credit or “marginable securities,” these acquired assets cannot normally be treated as qualifying assets. This treatment results from the definition of “eligible portfolio company” under the 1940 Act, which in part looks to whether a company has outstanding securities that are eligible for margin credit. Amendments promulgated in 1998 by the Board of Governors of the Federal Reserve System to Regulation T under the Securities Exchange Act of 1934, as amended, or the Exchange Act, expanded the definition of marginable security to include any non-equity security. These amendments have raised questions as to whether a private company that has outstanding debt securities would qualify as an eligible portfolio company. We note that under applicable self-regulatory organization rules that govern the ability of brokers and dealers to extend margin credit, many non-equity securities issued by private companies may not be effectively marginable.

To address these questions, the SEC proposed amendments to the 1940 Act to expand the definition of eligible portfolio company in a manner that would promote the flow of capital to small, developing and financially troubled companies. These amendments would define eligible portfolio company with reference to whether a company has any class of securities listed on an exchange. We continue to monitor this issue closely and intend to adjust our investment focus as needed to comply with and/or take advantage of these amendments if they are adopted or of any other future administrative position, judicial decision or legislative action.

Our board of directors approved an amendment to our investment policy to eliminate the 5% limitation on investments in foreign securities. This change was implemented as of August 14, 2004 and any such investments are included as non-qualifying assets.

Revenue

We generate revenue primarily in the form of interest income from the debt securities we hold and capital gains, if any, on investment securities that we may acquire in portfolio companies. Our debt investments, whether in the form of mezzanine or senior secured loans, generally have a stated term of five to ten years and bear interest at a fixed rate or a floating rate usually determined on the basis of a benchmark: LIBOR, EURIBOR, GBP LIBOR, or the prime rate. While U.S. subordinated debt and corporate notes typically accrue interest at fixed rates, some of these investments may include zero coupon, payment-in-kind (“PIK”) and/or step bonds that accrue income on a constant yield to call or maturity basis. Interest on debt securities is generally payable quarterly or semiannually. In some cases, some of our investments provide for deferred interest payments or PIK. The principal amount of the debt securities and any accrued but unpaid interest generally becomes due at the maturity date. In addition, we may generate revenue in the form of dividends paid to us on equity investments as well as revenue in the form of commitment, origination, structuring and/or diligence fees, fees for providing managerial assistance and, if applicable, consulting fees, etc.

Expenses

All investment professionals of the investment adviser and their staff, when and to the extent engaged in providing investment advisory and management services to us, and the compensation and routine overhead expenses of that personnel which is allocable to those services are provided and paid for by Apollo Investment Management. We bear all other costs and expenses of our operations and transactions, including those relating to:

•

investment advisory and management fees;

•

expenses incurred by Apollo Investment Management payable to third parties, including agents, consultants or other advisors, in monitoring our financial and legal affairs and in monitoring our investments and performing due diligence on our prospective portfolio companies;

•

calculation of our net asset value (including the cost and expenses of any independent valuation firm);

•

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

•

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

•

interest payable on debt, if any, incurred to finance our investments;

•

offerings of our common stock and other securities;

•

registration and listing 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;

•

taxes;

•

independent directors’ fees and expenses;

•

marketing and distribution-related expenses;

•

the costs of any reports, proxy statements or other notices to stockholders, including printing and postage costs;

•

our allocable portion of the fidelity bond, directors and officers/errors and omissions liability insurance, and any other insurance premiums;

•

organization and offering; and

•

all other expenses incurred by us or Apollo Administration 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 cost of our chief financial officer and chief compliance officer and their respective staffs.

We expect our general and administrative operating expenses related to our ongoing operations to remain generally stable or decline slightly as a percentage of our total assets in future periods. Incentive fees, interest expense and costs relating to future offerings of securities, among others, would be additive.

Portfolio and Investment Activity

During the three months ended June 30, 2006, we invested $286.8 million across 4 new and 5 existing portfolio companies. This compares to investing $250.3 million in 7 new and 4 existing portfolio companies for the three months ended June 30, 2005. Investment sales and pre-payments during the three months ended June 30, 2006 totaled $124.1 million versus $124.5 million for the three months ended June 30, 2005. Of the $124.1 million in net proceeds realized during the quarter, $34.0 million were investment sales of senior loans. The remaining $90.1 million were pre-payments by some of our more successful portfolio companies.

At June 30, 2006, our net portfolio consisted of 48 portfolio companies and was invested 63% in subordinated debt, 3% in preferred equity, 9% in common equity and 25% in senior secured loans versus 36 portfolio companies invested 48% in subordinated debt, 2% in common equity, 46% in senior secured loans, and 4% in cash equivalents at June 30, 2005. Our targeted investment size typically ranges between $20 million and $150 million, although this investment size may vary proportionately as the size of our capital base changes.

The weighted average yields on our subordinated debt portfolio, senior secured loan portfolio and total debt portfolio were 13.6%, 12.7% and 13.3%, respectively, at June 30, 2006 versus 13.6%, 10.0% and 11.8%, respectively, at June 30, 2005.

Senior secured loans and European mezzanine loans typically accrue interest at variable rates determined on the basis of a benchmark: LIBOR, EURIBOR, GBP LIBOR, or the prime rate, with stated maturities at origination that typically range from 5 to 10 years. While subordinated debt issued within the United States will typically accrue interest at fixed rates, some of these investments may include zero-coupon, PIK and/or step bonds that accrue income on a constant yield to call or maturity basis. At June 30, 2006, 55% or $903.8 million of our interest-bearing portfolio is fixed rate debt and 45% or $725.9 million is floating rate debt.

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ. In addition to the discussion below, our critical accounting policies are further described in the notes to the financial statements.

Valuation of Portfolio Investments

As a business development company, we generally invest in illiquid securities including debt and equity securities of middle market companies. Under procedures established by our board of directors, we value investments, including certain subordinated debt, senior secured debt and other debt securities with maturities greater than 60 days, for which market quotations are readily available at such market quotations. We obtain these market values from an independent pricing service or at the mean between the bid and ask prices obtained from at least two brokers or dealers (if available, otherwise by a principal market maker or a primary market dealer). Debt and equity securities that are not publicly traded or whose market prices are not readily available are valued at fair value as determined in good faith by or under the direction of our board of directors. Such determination of fair values may involve subjective judgments and estimates. Investments purchased within 60 days of maturity are valued at cost plus accreted discount, or minus amortized premium, which approximates value. With respect to unquoted securities, our board of directors, together with our independent valuation adviser, values each investment considering, among other measures, discounted cash flow models, comparisons of financial ratios of peer companies that are public and other factors. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, our board will use the pricing indicated by the external event to corroborate and/or assist us in our valuation. Because we expect that there will not be a readily available market for many of the investments in our portfolio, we expect to value many of our portfolio investments at fair value as determined in good faith by or under the direction of our board of directors using a documented valuation policy and a consistently applied valuation process. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may differ significantly from the values that would have been used had a readily available market value existed for such investments, and the differences could be material.

With respect to investments for which market quotations are not readily available, our board of directors has approved a multi-step valuation process each quarter, as described below:

•

Our quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals responsible for the portfolio investment;

•

Preliminary valuation conclusions are then documented and discussed with our senior management;

•

Independent valuation firms engaged by our board of directors conduct independent appraisals and review management’s preliminary valuations and their own independent assessment;

•

For more information, see “Business—Investment selection—Valuation process.”

Revenue Recognition

We record interest income on an accrual basis to the extent that we expect to collect such amounts. For loans and debt securities with contractual PIK interest, which represents contractual interest accrued and added to the loan balance that generally becomes due at maturity, we will not accrue PIK interest if the portfolio company valuation indicates that the PIK interest is not collectible. We do not accrue as a receivable interest on loans and debt securities if we have reason to doubt our ability to collect such interest. Loan origination fees, original issue discount, and market discount are capitalized and then we amortize such amounts as interest income. Upon the prepayment of a loan or debt security, any unamortized loan origination fees are recorded as interest income. We record prepayment premiums on loans and debt securities as interest income when we receive such amounts.

Net Realized Gains or Losses and Net Change in Unrealized Appreciation or Depreciation

We measure realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, but considering unamortized upfront fees and prepayment penalties. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized.

Within the context of these critical accounting policies, we are not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported.

Results of Operations

Results comparisons are for the three months ended June 2006 and June 2005.

Investment Income

For the three months ended June 30, 2006 and June 30, 2005, gross investment income totaled $55.9 million and $37.8 million, respectively. The increase in investment income for the three months ended June 30, 2006 was primarily due to the continued growth and asset mix of our investment portfolio as compared to the year-ago period. Other notable events impacting investment income include a dividend of $4.9 million from a dividend recapitalization of LM Acquisition, Ltd. and a write-off of $0.6 million of accrued interest income on our senior secured position in Diam International. Diam International is now in non-accrual status. Origination, closing and/or commitment fees associated with investments in portfolio companies are accreted into interest income over the respective terms of the applicable loans.

Expenses

Expenses totaled $24.1 million and $12.5 million, respectively, for the three months ended June 30, 2006 and June 30, 2005. Of these totals, $7.9 million and $6.3 million, respectively, were performance-based incentive fees and $5.6 million and $0.5 million, respectively, were interest and other credit facility expenses. Expenses net of performance-based incentive fees, interest, and other credit facility expenses for the three months ended June 30, 2006 and June 30, 2005 were $10.6 million and $5.7 million, respectively. These net expenses consist of base investment advisory and management fees, insurance expenses, administrative services expenses, professional fees, directors’ fees, audit and tax services expenses, and other general and administrative expenses. The increase in expenses was primarily due to an increase in base investment advisory and management fees resulting from the growth of our investment portfolio.

Net Investment Income

The Company’s net investment income totaled $31.7 million and $25.2 million or $0.39 per share and $0.40 per share, respectively, for the three months ended June 30, 2006 and June 30, 2005.

Net Realized Gains/Losses

The Company had investment sales totaling $124.1 million and $124.5 million, respectively, for the three months ended June 30, 2006 and June 30, 2005. Total net realized losses for the three months ended June 30, 2006 were $3.0 million versus total net realized gains for the three months ended June 30, 2005 of $6.8 million. Of the $3.0 million net realized loss, $2.9 million of the loss was attributable to a currency hedge loss on the settlement of our forward Euro contract in June.

Net Unrealized Appreciation (Depreciation) on Investments and Foreign Currency Contracts and Translations

For the three months ended June 30, 2006 and June 30, 2005, the Company’s investments, foreign currencies and other assets and liabilities had a net increase in appreciation of $42.4 million and a net decrease in appreciation of $18.5 million, respectively. At June 30, 2006, net unrealized appreciation totaled $80.7 million, of which $90.8 million was attributable to net unrealized appreciation on our subordinated debt and private equity (after considering the effects of foreign currency borrowing/hedging for our non-U.S. investments) and $10.1 million was attributable to net unrealized depreciation on our bank debt/senior secured debt .

Net Increase in Net Assets From Operations

For the three months ended June 30, 2006 and June 30, 2005, the Company had a net increase in net assets resulting from operations of $71.2 million and $13.6 million, respectively. The net change in net assets from operations per share was $0.88 and $0.22, respectively, for the three months ended June 30, 2006 and June 30, 2005.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s liquidity and capital resources are generated primarily through its senior secured, multi-currency $1.25 billion, five-year credit facility maturing in April 2011 as well as from cash flows from operations, including investment sales and prepayments of senior and subordinated loans and income earned from investments and cash equivalents (which normally comprise of U.S. government securities and other high-quality debt investments that mature in one year or less). At June 30, 2006, the Company has $536 million in borrowings outstanding and $714 million available for its use. In the future, the Company may raise additional equity or debt capital off its shelf registration or may securitize a portion of its investments. It may also further access $750 million of additional credit commitments available under the terms of its current credit facility as the Company’s equity capital base grows. The primary use of funds will be investments in portfolio companies, cash distributions to holders of common stock and for other general corporate purposes.

Contractual Obligations

We have entered into two contracts under which we have future commitments: the investment advisory and management agreement, pursuant to which Apollo Investment Management has agreed to serve as our investment adviser, and the administration agreement, pursuant to which Apollo Administration has agreed to furnish us with the facilities and administrative services necessary to conduct our day-to-day operations and provide on our behalf managerial assistance to those portfolio companies to which we are required to provide such assistance. Payments under the investment advisory and management agreement are equal to (1) a percentage of the value of our gross assets and (2) a two-part incentive fee. Payments under the administration agreement are equal to an amount based upon our allocable portion of Apollo Administration’s overhead in performing its obligations under the administration agreement, including rent, technology systems, insurance and our allocable portion of the costs of our chief financial officer and chief compliance officer and their respective staffs. Either party may terminate each of the investment advisory and management agreement and administration agreement without penalty upon not more than 60 days’ written notice to the other. Please see Note 3 within our financial statements for more information.

Off-Balance Sheet Arrangements

At June 30, 2006, we did not have any off-balance sheet liabilities or other contractual obligations that are reasonably likely to have a current or future material effect on our financial condition, other than the investment advisory and management agreement and the administration agreement.

Dividends

Dividends paid to stockholders for the three months ended June 30, 2006 and June 30, 2005 totaled $36.5 million or $0.45 per share versus $19.4 million or $0.31 per share, respectively. Tax characteristics of all dividends will be reported to shareholders on Form 1099 after the end of the calendar year.

We have elected to be taxed as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986. In order to maintain our status as a regulated investment company, we are required to (1) distribute at least 90% of our investment company taxable income and (2) distribute at least 98% of our income (both ordinary income and net capital gains) to avoid an excise tax. We intend to make distributions to our stockholders on a quarterly basis of substantially all of our taxable net investment income. We also intend to make distributions of net realized capital gains, if any, at least annually.

We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage test for borrowings when applicable to us as a business development company under the Investment Company Act of 1940 and due to provisions in our credit facilities. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of our status as a regulated investment company. We cannot assure stockholders that they will receive any distributions or distributions at a particular level.

With respect to the dividends paid to shareholders, income from origination, structuring, closing, commitment and other upfront fees associated with investments in portfolio companies is treated as taxable income and accordingly, distributed to shareholders. For the three months ended June 30, 2006, upfront fees totaling $2.7 million are being amortized into income over the lives of their respective loans. For the three months ended June 30, 2005, upfront fees totaled $0.4 million.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are subject to financial market risks, including changes in interest rates. During the three months ended June 30, 2006, many of the loans in our portfolio had floating interest rates. These loans are usually based on a floating LIBO rate and typically have durations of one to six months after which they reset to current market interest rates. As the percentage of our mezzanine and other subordinated loans increase as a percentage of our total investments, we expect that more of the loans in our portfolio will have fixed rates. Accordingly, we may hedge against interest rate fluctuations by using standard hedging instruments such as futures, options and forward contracts subject to the requirements of the 1940 Act. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to our portfolio of investments. During the three months ended June 30, 2006, we did not engage in interest rate hedging activities.

Beginning in December 2004 and concomitant with our investment in WDAC Intermediate Corp., we entered into a three-month forward foreign currency contract to hedge our exposure to the currency risk associated with this investment. Our hedging contract continues to roll forward every three months and remains outstanding at June 30, 2006. Realized and unrealized gains on these contracts are represented on our balance sheet and statement of operations, respectively, as of and for the three months ended June 30, 2006. The open contract is further described in footnote 7 within our financial statements included within this Form 10-Q.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

As of June 30, 2006 (the end of the period covered by this report), we, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the 1934 Act). Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed in our periodic SEC filings is recorded, processed, summarized and reported within the time periods specified in the SEC^’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of such possible controls and procedures.

(b) Changes in Internal Controls Over Financial Reporting

Management has not identified any change in the Company’s internal control over financing reporting that occurred during the first quarter of fiscal 2007 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We, Apollo Investment Management and Apollo Investment Administration are not currently subject to any legal proceedings.

Item 1A. Risk Factors

There have been no material changes from risk factors as previously disclosed in our most recent Form 10-K filing.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

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

None.

Item 5. Other Information

None.

Item 6. Exhibits

(a)

Exhibits

Listed below are the exhibits that are filed as part of this report (according to the number assigned to them in Item 601 of Regulation S-K):


3.1(a)		Articles of Amendment (1)

3.1(b)		Articles of Amendment and Restatement (2)

3.2(a)		Bylaws (2)

3.2(b)		Amended and Restated Bylaws (5)

4.1		Form of Stock Certificate (3)

10.1		Investment Advisory Management Agreement between Registrant and Apollo Investment Management, L.P. (2)

10.1(b)		Supplement to the Investment Advisory Management Agreement between Registrant and Apollo Investment Management, L.P. (5)

10.2		Administration Agreement between Registrant and Apollo Investment Administration, LLC (2)

10.3		Dividend Reinvestment Plan (3)

10.4		Custodian Agreement (3)

10.5		License Agreement between the Registrant and Apollo Management, L.P. (2)

10.6		Form of Transfer Agency and Service Agreement (2)

10.7		Amended and Restated Senior Secured Revolving Credit Agreement (4)

22.1		Proxy Statement (6)

31.1*		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

31.2*		Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

32.1*		Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

32.2*		Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

*	Filed herewith.

(1)	Incorporated by reference from the Registrant’s pre-effective Amendment No. 1 to the Registration Statement under the Securities Act of 1933, as amended, on Form N-2, filed on June 20, 2005.

(2)	Incorporated by reference from the Registrant’s pre-effective Amendment No. 3 to the Registration Statement under the Securities Act of 1933, as amended, on Form N-2, filed on April 1, 2004.

(3)	Incorporated by reference from the Registrant’s pre-effective Amendment No. 1 to the Registration Statement under the Securities Act of 1933, as amended, on Form N-2, filed on March 12, 2004.

(4)	Incorporated by reference from the Registrant’s Form 8-K filed on April 4, 2006.

(5)	Incorporated by reference from the Registrant’s Form 10-K filed on June 12, 2006.

(6)	Incorporated by reference from the Registrant’s 14A filed on June 26, 2006.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on August 7, 2006.


APOLLO INVESTMENT CORPORATION

By:		/s/ John J. Hannan

		John J. Hannan
		Chief Executive Officer and Director

By:		/s/ Richard L. Peteka

		Richard L. Peteka
		Chief Financial Officer and Treasurer

MidCap Financial Investment Corp - Quarter Report: 2006 June (Form 10-Q)

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