Greg Mason - Stifel Nicolaus Troy Ward - Stifel Nicolaus Henry Coffey - Ferris, Baker Watts Inc. Vernon Plack - BB&T Capital Markets John Stilmar - FBR Capital Markets Kenneth James - Robert W. Baird Daniel Furtado - Jefferies & Company

Greetings ladies and gentlemen and welcome to the Gladstone Capital second quarter 2008 Earnings Call. At this time, all participates are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Mr. David Gladstone, Chairman and CEO of Gladstone Capital. Thank you, Mr. Gladstone, you may now begin.

Well thank you, Jackie and thank all you nice people for showing up this morning. This is the quarterly conference call for Gladstone Capital, NASDAQ trading symbol GLAD. This is our second quarter, we're always happy to talk to shareholders. We enjoy these moments that we have. We wish we had a lot more moments like this and I hope you all will sign up for e-mail notices so you get the information coming directly to you from our company and please remember that you have an open invitation that if you are in the Washington D. C. area, come by and say hello we are in the McLean, Virginia, just outside Washington. We may not have time to meet with you, but certainly we would want to shake your hand and wish you well if you come by and see us. I do need to read statement about forward-looking statements. This conference call may include statements that may constitute forward-looking statements within the meaning of the Securities Act of 1933 and the Security Exchange Act of 1934 including statements with regard to the future performance of the company. These forward-looking statements inherently involve certain risks and uncertainties even though they are based on the current plans and we believe those plans to be reasonable. There are many factors that may cause our actual results to be materially different from any future results that is are expressed or implied by theses forward-looking statements including those factors listed under the caption risk factors that are filed in our 10-K and Q and our prospectus as filed with the Securities and Exchange Commission and can be found on our web site at www.gladstonecapital.com and also on the SEC web site. The company under take no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise. This morning we are going to start something new, a new way of reporting to you as our shareholders so you can hear from some of the people at your firm other than me. Of course I am not going anywhere, but you should know that there are a lot of good talented people here at the company and shareholders should hear from them too. We will start with our production and our pipeline report and hear from our President and Chief Investment Office, Chip Stelljes, so Chip take it away.

Thanks, David. Our production for the second quarter was disappointing with only 20.5 million in new investments closed. While the longer term prospects in our pipeline are strong the continued instability of the financial and lending markets that we are all seeing is making closing new investments more difficult and time consuming. Of the $20 million that we did invest in this quarter, $14 million was to one new portfolio company, the remaining $6 million went to existing portfolio companies in the form of additional investments or draws on their revolvers. We received about $3 million back in the normal amortization and pay downs of revolvers during the quarter for a net production of about $17 million. Some transactions were delayed. We hope we can get back on track to close those deals this quarter. At the end of March-quarter our investment portfolio was valued at about $413 million and on a cost basis of about $442 million and although the portfolio was depreciated, it's still valued at 93% of cost. And, we don't like the lower valuation of the portfolio during the quarter but given especially that it had strong performance that we remain confident that the devaluation is really reflective of the broader market for loans rather than any substantial change in our portfolio and we expect that most of the portfolio to continue paying as agreed with few problems through the third quarter. The record, since inception we have made loans to approximately 126 companies. We have been repaid or exited from 61 of those. The average return of the exits has been about 13% for our syndicated loans and 16% for non-syndicated loans. At the end of the quarter we had two loans that were past due, one, with a cost basis of about $1.6 million…

Okay. Now I'd like to turn to the financial numbers, and for that we will hear from Gresford Gray our CFO. Gresford, go ahead.

Thank, David. Our balance sheet is strong and at quarter-end we had approximately $123 million borrowed on our line of credit and about $301 million in equity. So we have less than 1 to 1 leverage. This is a very conservative balance sheet and the risk profile is low. No w turning to the income statement for the March-quarter, net investment income which is before appreciation, depreciation, gains or losses was about $6.4 million versus $5.7 million for the same quarter last year, an increase of about 12%. On a per share basis, net investment income for the quarter was at about $0.33 per share as compared to $0.47 for the same quarter one year ago. This was a per share decrease of about 30%, attributable to the dilution from share issuances during the quarter or in other words, an additional $7.4 million weighted average shares outstanding as compared to the same period of the prior year. This decline should be removed as the company, as the money from our last public offering is put to work. As all of you know, net investment income is the most important number to us because it is the number that is closest to our taxable income and that taxable income is the income we use to pay our dividends. So this is the one to watch. Now, let's turn to unrealized and realized gains. This is a mixture of appreciation, depreciation, gains and losses. We like to talk about two categories in this section. First, gains and losses because they are cash items and second, we talk about appreciation and depreciation which are noncash items. For the quarter ended March, we have a small capital gain of about $1,000 from proceeds on our interest rate cap agreement and no capital losses. The…

Okay. Thank you, Gresford and thank you for that good report. Both you and Chip did very good. I want to remind the listeners that valuations are really just best guesses of what the loan could be sold for if we had an orderly sale. There are in essence a general valuation. You want to know that the value of the loan, if you wanted to know the true value of a loan you would need to hire an appraisal company to come in and conduct a full appraisal of the company and the loan. That could cost you 5 to $25,000 for each loan that we have for getting a very accurate appraisal. We can't justify spending that much money for shareholders to get a valuation and we would have to do it every quarter. So what we do is we engage Standard & Poor's and they use their more general technique to value the loans and that gives us the values that we are looking for. I think it is reasonably accurate for the portfolio, although I must tell you I was surprised that how much depreciation the folks at S&P came up with this time. They are just following the trends in the general marketplace. So I probably should have expected it. Paid-in-kind or PIK interest, I always mention that, that's the income that you have to accrue for the books and for tax but you don't receive it in cash until much later some times not at all. And, we call this kind of income, phantom income, because the company that is your company doesn't really receive the cash, but has to pay out the noncash income. We have very little of that and this very important point because there are other BDCs that have very…

(Operator Instructions). And your first question is from Greg Mason of Stifel Nicolaus.

Hi, good morning, gentlemen I have a couple of questions and Troy Ward has a question. First on your originations, clearly the language in the conference call and the press release indicates you guys are disappointed having through four months done about $23 million of originations, what's happened? We have been hearing that it's a great time to invest, lots of investment opportunities, what happened to cause you to be disappointed in your originations? Why didn't they come through?

Chip will answer that. He's on the firing line everyday for that.

I think a couple of things happened. First of all timing has changed dramatically. I think number one, a lot of the letters of intent that were signed six months ago had had to be renegotiated based on the availability of capital both equity and debt. So we had some timing differences and some deals that just fell apart. Now that being said we've had a lot of new deals added to the pipelines? Secondly, I think, as we looked at the capital markets and the opportunities, we sort of raised our bar on the kind of returns that we wanted to see, given where our stock was trading and our cost of capital. So, some of the things that we looked at is potentially being attractive, six or eight months ago we decided that they weren't nearly as attractive. We would like to add new ones. I am surprised we didn't close more from a backlog standpoint I'm not surprised from the current dislocation of the market. We are seeing a lot of deals getting re-traded and renegotiated. It is a great time if you can get them closed but this business to me has always been a yearly business, but we have to report on quarter-by-quarter. So, a deal as David said, that should of closed before the quarter closes three days later and it doesn't look like it was a good quarter but on the other hand you have a quarter that now is accretive for a deal that accretive for the entire quarter. So I think it is partially timing, partially market, but I still feel like it is going be a good time to invest. We just to get some of these deals across the finish line.

And Greg, we saw--- This is David Gladstone again. Greg, we saw the some of our good sponsors decided not to go forward in some of their deals. They had priced them at one price and then decided that it wasn't good enough given the current circumstance in the marketplace and given the pricing of the debt, the senior lenders are charging more. We are charging more and it took away from that and some of the sponsors also had their sellers, they couldn't get to the finish line quick enough, would walk from the deal because they were feeling that they weren't getting enough for their company. So there has been a mixture if there. We do have a lot of closing in the pipeline and hopeful that we will make you happy in June. Now we will take the next question. Greg, do you have another one?

Yes, on your credit reimbursement of the incentive fee, can you talk about how that unwinds, what the timing of it is, how do you decide how much you are going to reimburse versus start actually recording that as an expense?

We do this very every quarter and we make this promise every quarter that we are always going to give back enough of the fee to make sure we never have a problem meeting the dividend. So, that said, we give all of the incentive back, fee back right now, because that's what is needed in order to make the dividend. A problem of course in getting out of that circular problem of having to give it back every quarter is the fact that we placed a lot of new shares on the books and those new shares have to be fed with the same amount so that we are paying in dividends has to be paid on each one those. So, every time we raise money we make the bar higher in order for us to get to the incentive comp and the only way to do that is to have some very good capital gains down the road of which we have got a couple that we hope will happen and also, as you know, we don't record on the P&L or the balance sheet. The PIK Income that we have coming in from our success fees, these success fees are exactly like paid-in-kind income, except that we don't accrue them, we don't have to pay them out until we receive the cash. And there's an excess of $3 million or so sitting there and continues to buildup. So somewhere along the way these companies will pay off their loans and or the businesses will be sold and will be cashed out at that point in time and those moneys will come in and given the size of those and the projections that should solve the problem. So, we are waiting for a turn around in the economy and some sales of these businesses in order to generate enough income to work us out of that problem.

Great, and then Troy Ward had one question.

Quickly, David, on FAS 157, obviously this is the first quarter of implementation and of course you are one of the first out with your earnings, in your conversations with S&P can you give us the impression of 157, their interpretation and were you at all surprised with their interpretation.

Actually, our depreciation had nothing to do with 157. As you can imagine, in our company, we have not had a problem with 157 because we don't have the disparity between market and what the internal numbers are coming out simply because Standard & Poor's, an independent third-party is giving us that number and so that number goes into our portfolio. As I understand, the problem in some of the companies and I guess we have all read the article that came out yesterday is that some companies used total enterprise value to value their loans and total enterprise value would be different from a price that might be derived in a market. That disparity is what is probably going to hit a lot of people in the first quarter. Just so you know also Troy, this company was not required to adhere to 157 in the first quarter even though we are adhering to 157 in the first quarter. We didn't have to. We were already there. So as a result, we won't have, it won't change anything for us. And I think, we've had this question several times, is 157 going to change your ways. The answer is no, because we are already adhering to go 157 and have since the inception. You will hear us talk about 157 in the June-quarter for Gladstone Investment gain because we will have to adhere to it for the first time there. That will be the first company that comes up. As you know, many of the companies that have a December 31st year-end are going to report their first quarter and there may be some surprises from some of them.

Great. Thanks for that clarification. Quickly on the credit within the portfolio, we saw several of the investments go from typically from previous quarters maybe a mark of 3 to 4% and we understand the 93% on the whole portfolio is an average and you are going to have some above and below, but it seemed like there was a big grouping in that 12 to 15% mark. Is that, is that just a function of the market and not a, any underlying credit issues?

There is the credit issues are the same as they were in the last couple of quarters. We still have the same two problems that we've had before and I can't explain it other than the fact I think that folks at S&P are becoming very, very conservative given their past performance in some of the sub-prime loan pools and they want to make sure that they hit the mark and quite frankly, they are responding to go a market place that has had very, this quarter ending, the quarter ending March. So from January to March there was a very dramatic change in the senior syndicated loan marketplace in terms of depreciation and pricing that was out there. Virtually no one showed up for a lot of the pricings and enormous number of pools came to marketplace. We probably saw and just guessing of the top of my head now, $4 to $5 billion worth of loan pools that were being liquidated and dumped into the marketplace, driving prices down pretty strong. While I would love to buy some of those, the overall yield was in the 11 or 12% range and we just felt it was unwise for us to load up on those at that time and they were being sold as pools rather than individual loans and those pools have just been bought and sold in the marketplace and I don't know how much more of that is coming. But there is still a lot of hedge funds that have been taken over by their lenders and their portfolios is being liquidated. So we would expect over the next year period a fairly robust amount of loans coming to marketplace and hopefully they'll be some company's be set up to grab those and they're still awfully good loans. They are just being pushed down by the bulk of a number of loans coming to market that don't have enough buyers.

That's great color. Thanks, David.

And Troy, just to mention it, thanks much for all of the write up you did on BDC's, we were impressed with the report that you came out with. Next question?

Thank you. Our next question is coming from Henry Coffey Ferris, Baker Watts Inc.

Yes, David, Henry coffee. How are you? I appreciate a lot of the comments. And some of the stuff you clarified. Basically you have been practicing 157 or market-based accounting since the fund started; right?

That's true and in addition to that, we started looking at 157, our auditors pointed to us I want to say two years ago when it was still in draft form. We made commenting on it and have been adhering with 157 every since.

The, your loan yields which are now sort of in the 10% area, does that improve as you put new loans on the books or is that sort of the benchmark cost for your borrowers right now?

In capital it should improve, the deals we are closing are higher than that. And, so overall you should see an increase although it is incremental you have got a portfolio that's pretty large. So putting another 40 or $50 million on the books at a higher rate is not going to move the needle that much.

And second question, what is your incremental borrowing cost?

I've read it some advisors like 5.9%. About 6%. Yes, about 6%.

And then, in terms of new production for the next couple of quarters, are you willing to put a number out there?

Well, I flog Chip everyday on that and he gives me some numbers but I am not willing to put those out to the public. Thank you, though.

Great. Thank you much.

Next question, please, Jackie.

Thank you. Our next question is comes from Vernon Plack of BB&T Capital Markets. Vernon Plack - BB&T Capital Markets: Hey, good morning. Most of my conversions have been answered, just had one regarding the professional fee expense line. I know that number went up four fold compared to last year and was just hoping maybe to get a little more color on that.

Yes. Professional fees the accounting number in that, and counting and legal words in that, the accounting number didn't go up by that much. It was not that high. So, unless somebody has a different idea, I think that most of it came from---

It was from the stock offerings we did.

Okay. Actually in putting together the stock offerings it went through that number. Vernon Plack - BB&T Capital Markets: Okay.

Every time you raise money these lawyers have to opine and they charge a lot to opine, so it costs us a bit to get these things done. Vernon Plack - BB&T Capital Markets: Okay. Thank you.

Thank you. Our next question is coming from John Stilmar of FBR Capital Markets.

Good morning, David and gentlemen. Thank you very much for taking my question. I am -- don't mean to beat a dead horse but want to go back to Chip's comments earlier with regards to the closing of the pipeline and his answer to the previous question which sort of talked about a six months lead time. Can you talk about, is that typically about a six months lead time and sort of where we are in the pipeline or where we are in sort of the pipeline for when those deals were originally negotiated and secondly, you talked a little bit about sponsors pulling out. There seems to be a pretty strong amount of middle market and mezzanine financed money that's out there still today. Are you seeing that money itself is starting to re-price and multiples are starting to change or what are some of the dynamics there we might think of in changes from last quarter?

While, the marketplace is in flux and it has been in flux and it has been in flux for about six months. And quarter ending March was one in which there were lots of changes going on in the marketplace. Number one, the banks had tightened up dramatically. So that's good for us usually except that when the banks tighten up they offer less money and they charge more. We charge more so when a sponsor is looking to purchase something they now have to drop the price pretty significantly, in order to make the numbers work. A lot of the sellers at that point say to themselves well I understand that your cost Mr. Sponsor has gone up and therefore you want to pay me less, but I am not willing to sell my business for less and one of the two parties then walks away and deal dies. So, that does happen and has happened for deals that were priced as far as the June-quarter of last year some on the turn around. We don't see that happening in the new deals that get priced now because everybody already knows this pricing mechanism that's going on. So the deals that we are closing today are mostly the newer deals that have been priced according to the current market even though the market for a March ending quarter was substantial change in the marketplace again. And, I want to impress upon you that when the down downturn started in June of last year and you saw the quarter ending September it wasn't nearly as bad as everybody thought it was at that point in time. Come December people had started to see that the downturn was bigger than they thought and the realization came very strong in the March-quarter ending '08 and that was sort of the quarter that everybody said to themselves the world has really changed and we need to change the way we were looking at the world and a lot of things were in flux during that period of time. Chip, do you want to add anything to that?

Well a couple of things. One is you are right, the deals are taking closer to long because of the factors that David mentioned. There are some more moving parts. So the gestation period has gotten longer. I think, the answer to your final question sort of there is a good deal of Mez-money but not nearly the amount of Mez money there was prior to August of last year. So I think we are seeing clearly 200 plus type basis point increase in pricing and half a turn to a turn less of leverage in the second lien sort of structure. They may expand back as more mezzanine money comes in. But right now we still that that the pricing and the lower multiples of debt are going to stick with us for a while. So, we are going to do our best to take advantage of that.

The Mezzanine money out there as Chip mentioned is not a lot and you can understand why. About a year or maybe it has been a year and a half ago, we went to the marketplace trying to set up a private fund that would do co-investment with our other funds and given the fact it was yield oriented rather than equity oriented that is more a Mez-fund than equity fund, we found almost no takers. So Mez funds weren't raised in last couple of year simply because they couldn't promise the kind of returns equity funds could and the pension funds and insurance companies that buy those limited partnership interests were not very interested in that type of investing. I don't know that the marketplace has changed any since then, but there's certainly a lot less mezzanine money around than it was three or four years ago.

Wonderful. Thank you guys for that. And, the last question is more of, as we start thinking about market values of securities and there is certainly a market values consider the illiquidity that certainly out there not necessarily the credit risk solely and I think that is your point, David, but how do we as analysts or investors start think or look at different indices. I mean it looks like you had a, only a single-digit pull back in term of your pricing whereas you sort of move up into you the larger single digit or larger markets. The pricing changes have been a little bit more severe. How do, are you experiencing less of sort of the illiquidity discount or how should we as analysts and investors, what kinds of benchmark should we look to kind of think about just sort of general market pricing that can exist as S&P sort of universally thinks about your portfolio.

Yeah, I think S&P, and I don't know this for sure, I am just guessing S&P looking at the general marketplace and then coming in pricing our loans based on the general marketplace. The general marketplace dropped dramatically between January and March this year and there's really no indices you can go look at. There is the indices for senior syndicated loans but it is like the S&P 500, every time some loan is not doing as well or it is very seasoned they take it out and replace it with another one. The index today is about $0.99 and where as if you and it's called, I think index number 10 now that they're working on. If you go back and look at index number five, I think it would be lower than the $0.93 on the dollar that we have, but they replace all of the poorly performing loans in the index with better performing loans and anything that gets to a, has paid down some, they take it out as well. So there is a, not an indices that you can look up that I know out there. There may be some place that is similar but that makes it frustrating for folks like you because you can't anticipate what the folks at S&P might mark our loans to. And quite, frankly, neither can we. So, we were surprised this quarter with the general mark down. I think, I remember the sheet that I looked at when we were in the Board meeting, I think every single loan that we had with the exception of one or two was marked down somewhat, some of them are small amount and some of them larger amount, all the way down they were nothing but read negatives all the way down on the valuations this quarter. And, obviously our portfolio is not doing bad and we don't have that many problems in the portfolio. So, you would expect it not to go down much at all. And, had we've been using our own internal technique probably would have gotten lot less devaluation than S&P put on it. But S&P is reacting to what is going on in the marketplace and the marketplace for senior syndicated loans has been pretty grizzly and that shadow is cast on all of our loans when they come into review it. Any other questions?

No. Thank you so much. I appreciate it.

Okay, next question.

Thank you. Our next question is from Kenneth James of Robert W. Baird.

Hi, good morning.

Good morning.

I think most, everything has been covered but I wanted to see if I can get more color on the success fees. You referenced the $3 million of success fees I am curious maybe how many deals comprises that $3 million. I know you have a $500,000 fee, you're saying you are going to recognize in the second quarter. Pretty much all that size, trying to get a feel for the total number of potential deals it would take to unlock them all?

I don't know the average on. Anybody got guess on where it might be on the success fees, how many loans? I know most of the loans that we have that we negotiate on the small side either have a success fee or some kind of exit fee. So we have money building up. How much it is per loan I haven't done the calculation, let's see if we can run that to ground and maybe post it on our web site for you.

Okay. I was just curious as to what your degree of confidence or expectation as of that $3 million would be recognized not necessarily even this year, but you know over the course of the next six quarter say by the end of FY '09 or is that amount of money that could potentially carry on through even further than that.

Here is the calculus. The calculus that you look at is will the company be sold. These success fees are based on the sponsor who is an LBO fund, selling the business at some point. Right now of course it is not the appropriate time to sell a business. You can't get the top dollar for it, so many of the sponsors are holding on to their companies and not exiting. But, there will be a lot of pressure for them to sell their business because they are limited partnerships and have to return the money at some point in time and it will be a lot of pressure over the next couple of years to sale some of those businesses anyway even if the marketplace is bad. And every time they sell a business the success fee is due and we get paid just like you had a warrant or some other equity ownership in the company. And, I can't predict when that is going to happen. But I know it happens just like clockwork every year, some amount gets sold and so we are counting on that occurring. Do you have any comments on that, Chip? Do you know any?

No, I think if you take all of the senior syndicated loans, all the syndicated loans out, you take most of the senior broadcast and our radio loans out, most of the other transactions are going to have some level of success or exit fee on them. When they will realize as David says, it is very difficult to figure out who's going to sell a company or who is going to refinance their debt and volunteer to repay those exit fees. But they tend to kind of come in when they come in. We would love to recognize them but it wouldn't be the right thing to do. So, we haven’t done it. We will recognize them when they come in.

Okay. Thanks.

Okay. Next question, please.

Thank you. Our next question is coming from Daniel Furtado of Jefferies & Company. Daniel Furtado - Jefferies & Company: Morning, guys. Nothing earth shattering here, I'm just trying to get a handle on the advance rates on the line of credit as well as the spread to LIBOR.

Advance rate you're meaning, I am not sure. Daniel Furtado - Jefferies & Company: What percent of the investment you can fund? Is that an un-secured line where you can fund a 100% of the investment or you've like a 70% advance rate for like senior and 50 for equity or something along those lines.

Yes, its--. It is our line of credit with the bank and how much we can draw down. It is usually based on about 50% loan to value. So, if we put a loan and therefore $1 million, we should be able to borrow $0.5 million. If you remember our problem in our industry is that we can't leverage more than 1 to 1 anyway. So, we set our bank loan up that way. We are in the final stages of negotiating our closing this month with the folks at Deutsche Bank and the other banks that are part of it, so you should see an announcement in the not too distance future with regard to that the line has been renewed. Daniel Furtado - Jefferies & Company: Okay. And then the spread to LIBOR has that changed from previously?

Oh yes. The spread to LIBOR is going to go from about 1.2 to about 2.5. Daniel Furtado - Jefferies & Company: Okay. Perfect. Thank you very much, David.

Okay. Next question.

Thank you. (Operator Instructions).

No other questions?

Thank you, Mr. Gladstone. We did have another question coming from Greg Mason of Stifel Nicolaus.

One final question here, on your interest rate sensitivity analysis that you provide in your Q, is that based on a 1% change on the 3.6% average LIBOR during the quarter or at the 2.7% rate at the end of the quarter? The reason why I am asking is has the change in LIBOR from your average rate of 3.6 down to the current rate 2.7, 2.8 has that impacted your portfolio margins at all?

Yes. This is Gresford. In answer to your first question, what's based on the average LIBOR during the quarter? And for your second question, based on the size of our portfolio, the sensitivity hasn't changed substantially.

And Greg, just so you know, we have floors on many of your loans so they stop at anywhere from 9.5 to 10%. They get hung up at a higher rate even though we are paying less on your line of credit. So the spread is positive for us.

Okay. And when you say they're locked in at 9%, what does that implied for a LIBOR rate lock in.

Well, think about it this way. If we might be charging on a second lien loan LIBOR plus 7, and obviously at LIBOR plus 7 that's 9% today with LIBOR assuming LIBOR was around 2, it's not 2 but it's about 2.7. But, the point being is the minute it drops below the floor of 10%, they still have to pay 10% because that's the minimum they have to pay. And, while our rate is locked into LIBOR, let's say it's 2.5% over LIBOR, we continue to move down in our cost of funds. Am I explaining it correctly or I'm missing something?

No, that makes sense. All right. Thanks, guys.

Any other questions.

Thank you, Mr. Gladstone. There are no further questions at this time.

All right. Thank you all again and I hope to see you in, well end of June. Thanks again.

Ladies and gentlemen that does conclude the teleconference. You may disconnect your lines at this time. Thank you for your participation.