Welcome to the Gladstone Capital second quarter 2010 earnings conference call. At this time all participants 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, CEO for Gladstone Capital.

This is the quarterly conference call for Gladstone Capital. Our trading symbol is GLAD and certainly thank you all for calling in and listening to this and those who listen to it remotely from wherever over the next couple of months, we’re happy that you’re listening to our conference call. I wish we could talk to you more often, it’s a great deal of fun to get folks on the phone and answer questions and we’ll do our best to answer your questions today. I want to take this opportunity to tell you to visit our website, it’s www.GladstoneCapital.com where you can sign up for email notices and you can receive the information about our company on a timely matter. I know it came out late last night, it was about seven o’clock before it got on the wire but it does come out more frequently and quicker. Please remember that if you’re in the Washington DC area you have an open invitation to come by and visit us here in McLean Virginia. Please stop by and say hello, you’ll see some of the finest people in the business working everyday for you. Now, I need to read this statement on 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 Securities 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 and even though they are based on our current plans and we certainly believe those plans are reasonable there are many factors that may cause our actual results to be materially different from any future results that are expressed or implied by the forward-looking statements including those factors listed under the caption risk factors in our 10K and 10Q filings and in our prospectus that are filed with the Securities & Exchange Commission. Those can be found on our website at www.GladstoneCapital.com and also on the SEC website. The company undertakes no obligation to publically update or revise any forward-looking statements whether as a result of new information, future events or otherwise. Alright, we’ll start this morning with the President, Chip Stelljes. Chip is our Chief Investment Officer, he’s the Chief Investment Officer of all the Gladstone companies and he’ll cover a lot of ground here.

As most of you know the difficult economic environment continues and is still compounded by a difficult lending environment. We are seeing some new investments being made with some investors in the marketplace believing that the worst is behind us but the continued instability of the financial lending market combined with only a few real signs of recovery in the economy continues to make us cautious. We did not close any new investments in the quarter but invested $5.2 million in existing portfolios within the company in the form of additional investments or draws on revolver facilities. During the quarter we received repayments for approximately $23.4 million through the loan sales, payoffs, normal amortization and the pay down of the revolvers. This included the full realization of three investments of [$18.2 million] that will be assets of a small loan, $300,000 on the sale of the syndicated loans worth approximately $300,000. So we had more pay offs than advances resulting in a net decrease of our portfolio of $18.2 million for the quarter. The net proceeds were used to pay down our line of credit. Since the end of the quarter where we made the first installment of $400,000 in new $2 million investment and about $1.2 million in additional investments in existing portfolio companies. Additionally, after the end of the quarter we received $15 million in repayments which included amortization in a $13.5 million repayment from one portfolio company. I do want to note that [inaudible] applied we received all of the related prepayment fees, exit fees and capital gains associated with these realized investments so that’s a very good sign for our investment model. Just so you know the companies where we had exits achieved proceeds representing a hardened 7% of our previous quarter values. So as of…

Most of you out there couldn’t tell it but Chip is getting very excited about the climate today and he’s not one easily excitable. We’ll go now to Gresford and Gresford Gray is our Chief Financial Officer. Gresford, tell us about the financials.

Starting with our balance sheet, at the end of the March quarter we had about $312 million in assets consisting of $292 million in investments at fair value and $20 million in cash and other assets. We borrowed $53 million on our line of credit and had approximately $255 million in net assets. As such, we are less than one-to-one leverage and this is a very good and conservative balance sheet for finance companies which are usually leveraged much higher. We believe that our overall risk profile is low. During the quarter we did not close on any new investments and exited from five companies of which four were payoffs and one was a syndicated loan sale. At quarter end, we had 41 companies in our portfolio and with the Vanacore payoff in April we’re now at 40 companies. In March we entered in to a new $127 million credit facility with KeyBanc, BB&T and ING Capital. Subject to certain terms and conditions the credit facility may be extended up to $202 million through the addition of other committed lenders to the facility. The facility matures in two years on March 31, 2012 and if the facility is not renewed or extended by that date all principle and interest will be due and payable on March 15, 2013. Advances under the credit facility bear interest at 6.5% per year with a commitment fee of 0.5% per year on the drawn amounts. We expect that this credit facility will allow us to increase the rate of our investment activity and grow the size of our investment portfolio. In January, the SEC declared our shelf registration statement effective and as such we’re permitted to issue up to $300 million in debt and equity securities. At our annual stockholders’ meeting in February, stockholders…

I hope all our listeners are reading these press releases and going through the 10Q which we filed with the SEC yesterday. You can access the press release and the 10Q on our website at www.GladstoneCapital.com and also on the SEC website that is at www.SEC.gov. The big news this quarter is we completed our goal of paying down our bank debt and renewing our credit lines. We were awful grateful to the folks at KeyBanc and BB&T Bank and ING Capital for providing the loan to the company. It’s a two year commitment with a one year payout of the principle if we need to do that. It’s really a three year commitment and it’s a good one for us. It will bridge us to the point where we can raise low cost [inaudible] long term debt capital and perhaps some preferred stock over the next two years. We have nearly $100 million available on our line of credit today and are currently working on a number of very good alternatives for long term investing and it just takes a lot to get me excited but I’m looking forward to this summer as a time of rejuvenation for our company as we put new loans and investments on the books. I think we all see now that we’ve gotten through our difficult loans. Those will settle down and I was disappointed of course that our billboard company hasn’t come back as quickly as I’d like to see it come back but they seem to be getting better every month. They are highly dependent on advertising budgets and the budgets are coming back but unfortunately the budgets are coming back slower than we’d like them to come back. I know that this will be a winner down the road. We…

(Operator Instructions) Your first question comes from Vernon Plack – BB&T Capital Markets. Vernon Plack – BB&T Capital Markets: I had a question, I was actually looking for a little more color on the types and the characteristics of the deals that you’re currently viewing and are attracted to. So, perhaps a little more color there please?

The market as you know, one of the negatives that David mentioned as far as our ability to access senior debt is still pretty restricted at the lower end of the middle market. That’s negative for the portfolio but for doing new deals it’s pretty attractive. You don’t end up with a lot of term debt in front of you so your junior debt is further up the balance sheet at lower leverage levels than we’ve seen in the past. At the same time, therefore you’ve probably got more equity going in to those deals. We certainly are seeing improved pricing on junior debt at the smaller end of the middle market or the lower end, you’re not seeing much get sort of priced at sort of less than maybe LIBOR plus 1,000 with a 2% floor. We’re not seeing a lot of things that are getting done that don’t have some level of an equity component to it whether it be a warrant or equity co-invest. You probably remember at the trough of those in ’07 and the beginning of ’08 it was pretty hard to negotiate those type deals. It feels like it’s going to be a good time and we’ll see what we can find. You will probably have five or six deals that we’re actually looking at right now and so I’m optimistic. As David said it’s hard to get overly excited but I’m optimistic we’re going to find some good opportunities. But, that’s what we’re seeing in our marketplace. Vernon Plack – BB&T Capital Markets: Is there any industry focus there or what are some of the industries or sub industries that you’re really attracted to at this point?

We continue to look at mostly the same things we’ve looked at historically. Where we have probably increased our business is we have not been active investors historically in government contractors but as we talk about it around the table here with 30% of our GDP is going to be government, we better get interested in it. So we’re spending some time studying that. I wouldn’t want to tell you anything specific so basically business services, light specialty manufacturing but we are continuing to look at healthcare services. We’ve had good luck there but obviously we’re, as everybody is, sensitive to the reimbursement environment and what’s going to happen through healthcare legislation. But, it’s a big part of the economy and so we continue to look at it and as I said we’ve had good luck with it in the past. Vernon Plack – BB&T Capital Markets: A quick question for you David regarding long term debt, could we expect an announcement on that from you within the next quarter?

I don’t know. We’ve engaged a placement agent, they are working on our behalf. We have had several sessions with insurance companies, I just don’t know. As you probably know better than I do, most of the insurance companies have for at least the last 18 months have said no to everything in the finance sector whether they’re finally now interested in the finance sector I can’t answer but we are able to talk to them which I say one quarter ago you couldn’t even reach them on the telephone, they wouldn’t talk about it. So, I think they’re coming back. Whether we could announce something in the next quarter I don’t know, it’s too early to tell.

Your next question comes from Greg Mason – Stifel Nicolaus & Company. Greg Mason – Stifel Nicolaus & Company: David, can you talk about I think you mentioned $1.2 million this quarter of exit and success fees, I think that’s up from like $500,000 last quarter. What are your expectations for those fees going forward?

It’s hard to say what those fees will be like going forward and here’s the point, the existing amount of fees that are building up in our portfolio as you probably know we don’t do paid in kind so it’s not being added to our portfolio and you can’t see it building it up. But, we do what we call success fees and those do build up on the balance sheet. You don’t see them but we calculate them here. We have a good amount of those and if those loans prepay and if they want to pay off the success fee at that point in time that’s great, if they want to pay it off when they sell the business, that’s fine as well. I just can’t predict when they’re going to pay off and when they’re going to sell their business. As you know, this company follows around most of the LBO funds, most of the LBO funds do sell their businesses eventually so we can collect on those at some point in the future but right now it’s hard to say. I’m hopeful now that the economy is coming back and more and more people are interested in buying businesses that we’ll see a good number of these going forward. We certainly build them in to all of our new transactions so you should see a buildup in warrants or success fees being talked about in the 10K or the 10Q. Greg Mason – Stifel Nicolaus & Company: Do you have an amount of success fees for the total portfolio that is built up or are you able to give us that number, the potential for the total portfolio?

I know we have a memo account, let us go back and look at that and maybe we should be recording that someplace and telling people what it looks like, just to give you an example. It’s not in the Q is it?

No.

But, we have a memo account on that. I’m talking to Gresford our CEO, he tracks all of that and if we have – we should probably start revealing that in our Qs and Ks just so people can see it. It’s no guarantee that we’re going to collect it, it’s just sitting out there as something that might be collected. We’ll take a look at that and see if we can put it in our Q&A section on the website for this quarter that just ended and then we’ll look at putting it in a memo account in the future Qs. Greg Mason – Stifel Nicolaus & Company: Just to dig in to the origination potential, in the press release you said now is the time to become active lenders and you talked about $50 to $70 million of capacity on your credit facility. Do you think you can deploy that by the end of this year or is it a 12 month time frame? I’m just trying to dig down a little further on your expectations?

Well, Chip can answer that better than I can.

I think we can. With the realizations we’ve just gotten in, with the ability we have on the line, I think we’ve got our origination team in place. As you know, we did go through the significant layoffs that a lot of our competitors did so we’ve still got our offices open in Dallas, Atlanta, Chicago, New York and obviously servicing the rest of the east coast. We’ve got almost all of our junior and mid level talent available to do new deals. As David said, we’ve gotten the portfolio settled down and there’s less work we have to do on individual companies. So I think we’re in pretty good shape to do it. The real thing we never want to promise is that we’re just going to book it for the sake of booking because we want to make sure we deliver good quality loans and not making difficult core decisions on loan quality. So part of it’s going to be a function of what we see and we’ll start to see as the year goes on whether that’s a good number but I do feel like that’s a good number and certainly it’s a number we’ve been able to meet in the past with our team. Greg Mason – Stifel Nicolaus & Company: David, have you heard anything from the SBA new about a potential SBIC license?

No, we’re hung up down there on a number of issues and I just don’t know at this point in time whether we’re going to go forward or not. The SBA is a different world today than it was when I ran four of these 10 years ago. Greg Mason – Stifel Nicolaus & Company: Then one final question, can you touch a little bit more on credit quality? As we looked at your internal ratings we looked at the weighted average I think it went from 7.1 down to 5.9. I think you said your straight line average went to 6.3. Was there just a couple of movements and when do you expect the credit quality to kind of stabilize in your portfolio?

Well there was a fact that we changed the rating system and we made the rating system probably more critical than it was before because we felt like there were a couple of things that weren’t being captured in that so we started to capture those so they would jump out at us and give us a better indication of what’s going on. So this round that happened in March 31st may have been a more critical valuation of our portfolio. It’s hard to say, we didn’t go back and risk rate the portfolio at December or any prior period so we didn’t try and spot check that. Gresford, what have you got in terms of that? Any answers to Greg’s question?

Basically Greg, as David mentioned we wanted to do more objective analysis using the qualitative and quantitative factors that went in to the risk rating model. What we expect going forward is we’ll expect the smoothness to continue now. As David said, this quarter with us making the change, you see this modification. Greg Mason – Stifel Nicolaus & Company: One quick follow up on the SBA commentary, you said it is a little surprising that someone of your background isn’t able to secure a new license. Do you think that is a change the SBA is having towards BDCs or what are you seeing there? Can you add a little more color?

I think it’s really me and I don’t like to say this in public but I have not been a big fan of the SBA since I left Allied years ago because it was so difficult. As you know, when I took over American Capital and ran American we never got an SBIC license because I just didn’t want to do that. Money is freeing up now and I am not sure the attraction of the SBA lower cost money is that great. We’ve looked at a couple of situations that if they come through would give us money at nearly – add to the SBA cost of money all the costs that go in to the fact that you’ve got to do all of these extra things. You have to run a different set of books, you have to do different forms, you fill out forms for each time you do a deal and all of that adds to the cost of your business model. If you take that business model and compare it then to say just straight preferred stock, I think we can raise money either in debt or equity at a rate that would be comparable and not have the difficulty of trying to fit everything in to an SBIC model. It’s a great technique for getting started. If you’re a two or three man team and you’re going out to start an investment company it’s wonderful to have them as your partner because it’s just about the only place you can get that kind of capital. But, once you reach a certain stage it’s like all of these government programs, you graduate from it and I would be shocked if Apollo or Aeris ever decided they wanted to have an SBIC and certainly Allied after I left and after they grew a little bit more from where I was they surrendered all of their licenses and they had four different licenses that they surrendered and got all their debt back. When people look at it and you get a certain size it becomes not advantageous to have the SBA. I know a lot of BDCs ran in to the SBA because there really was no other way of getting long term debt so as a result they felt like it was necessary. I am just at a point of inflection here in looking all that we have available to us to think that maybe doing an SBIC is probably not the right thing. Now, we have a license down there, we haven’t prosecuted it perhaps as vigorously as we should and we’ll let you know how we come out on this analysis but I’ve looked at two situations that if either one of those came through I would not go forward on the SBIC license.

Your next question comes from David West – Davenport & Company. David West – Davenport & Company: I just wondered if you could give a little bit more color on the repayment activity and what has been the source of the repayment? Is someone providing refinancing for some of these portfolio companies?

Of the main ones that were realized this quarter with one exception of the sale was [inaudible] and the others were repayments and refinancing which is good news for our model. Those companies had done well, we received our success fees and in a couple of cases prepayment fees and that obviously generates capital that we can put back to work at higher returns. But the majority of it was refinancing but the large payment on was the sale of that company with the warrant gain that Gresford mentioned.

You also know Dave that I think all of those were valued by Standard & Poor’s at a lower number than we actually got when they paid off. Obviously, they were discounting it for the fact that it’s private and of course they paid off at 100% on the dollar. That’s an indication of how conservative Standard & Poor’s is and we don’t begrudge them for being conservative, we run in that mode as well. But, you should know that generally speaking we do collect all of the money under our loans. David West – Davenport & Company: Just to get a better grasp on this, who are the other parties providing the refinance in this market?

In a couple cases the senior lender had enough assets and they stepped up. In the case after the quarter, Vanacore, the equity firm actually decided to take all of the debt off the balance sheet, the junior debt and go with an equity structured balance sheet so they actually wrote an equity check for that. The other ones were just other lenders that came in and again, had enough assets to be able to do it and give them more senior debt pricing.

So they paid off their more expensive debt which would be ours by borrowing from their bank on their revolving line of credit and they were able to do that because they had paid down the revolving line of credit from the time they were acquired. The typical fashion for us is that a business will be bought, it will be loaded up with debt including ours and then over time it pays down the debt and obviously ours is the first one they want to pay off because we are the most expensive. That’s good for us. It proves our model, proves that we selected correctly and that’s going to happen more and more as the capital markets get better. But at the same time there’s still no one out there providing the long term debt to do the new transactions so we’re still in good stead in terms of putting that to work it’s just over time we get paid back.

We did have one issue where our junior lender who was junior to us decided to step up because they liked our loan and they replaced us. Quite frankly, it was a relationship that had been difficult over the years. The company’s performance had somewhat improved and we weren’t necessarily sorry to see that one go. David West – Davenport & Company: Just one other question, on the [Lenmark] loan, the billboard company, I don’t quite understand given what you said that you hadn’t been recognizing income from the past on that. Why was that not put on non-accrual before?

We took over that company and when we took it over we put some of the loans in the category of you pay it if you have the money to pay it. So it really didn’t have to pay it and so as a result we were sitting there not collecting the interest because they were building the company on the inside and making lots of changes. Then, we decided look it’s better to reclassify this, I think it was after nine months of looking at their ability to pay and said we ought to just classify this not as a loan that’s paid when they have money to pay but put it in a non-accrual so we moved it over to that category. That’s why it didn’t have an impact on the earnings of the company and didn’t have an impact on our ability to pay dividends simply because they weren’t paying under the performance based analysis that we put in place. Now, that company has come a long way since the time that we took it over and a lot of that was due to the very aggressive acquisition schedule that they had. They were acquiring lots of smaller billboard companies and also building billboards at a rapid pace and of course they hit the recession head on and started having cancellations of their billboard signs and at the same time had obligations out to continue to build things. It was an unfortunate circumstance. But, we have now sold off some of the extraneous pieces where they were trying to go in to new areas and we’re taking that money and plowing it back in to improving the existing operations. My guess is that it may be six months away but I think that company will come back pretty strong in the next six to eight months.

Your next question comes from Mark Hughes – Lafayette Investments. Mark Hughes – Lafayette Investments: First a comment and then a question, David I appreciate your sensitivity to diluting shareholders and restraining from issuing shares if you can place some long term debt or a preferred issuance. It is certainly appreciated by the shareholders that you’re sensitive to that issue. Then just a question, on the decline in the average asset risk rating, part of it is because you’ve changed how you’re computing the model but is part of it because you’ve made basically no new loans the past six months and the ones that have paid off might have had a higher risk rating than the ones remaining? If that’s the case, what was your internal risk rating of the payoffs, of the loans that have paid off the last six months?

That’s a difficult one. What was the risk rating of the ones that paid off, do you remember guys? Let me take a quick look, we’ve got a schedule here. Mark Hughes – Lafayette Investments: Or just in the general sense, in general were they higher than the average of what’s remaining?

I wouldn’t be able to do that one on queue. It looks like we had two sixes and a seven and where’s the other exit – three sixes and a seven where the four payoffs so they were a little higher perhaps than the average but not much, not material. They look like they’re right in line. Mark Hughes – Lafayette Investments: I would say that speaks very highly for your conservatism them than you’re able to get a price higher than your mark at payoff and on the surface a six or a seven seems very average but if you’re getting paid off above your book on it that seems very commendable.

Oh, I think we’re in good shape today. Mark, you’re probably the only person that complements us for our conservatism. Everybody else calls us too picky and not growing fast enough and all those other things but unfortunately, that’s our nature here.

Your final question comes from John Rogers – Janney Capital Markets. John Rogers – Janney Capital Markets: I have a question for you on the out of period adjustment from the Q. I think you talked about in the Q a reversal of interest income, an adjustment related to professional fees that negatively impacted net investment income by about $0.02 per share. I’m just wondering what that relates to and if you have more detail on that?

I do want to go in to one part of it, we had a law firm that we were doing a work out with and they were sending their bill out but they were sending it to an unknown address and so we never got the bills. The good news about that is after we all found them and we were able to negotiate with them because they were a bit too high and we got them substantially, I think if we had paid them on a current basis we probably wouldn’t have gotten the discount that we got. That was one that kind of slipped and should have been in the prior period but Gresford, why don’t you weigh in on that, you know the numbers behind it much better than I do.

For the interest reversal John, it related to one portfolio company in particular and we were working very closely with that portfolio company throughout fiscal year ’09 on restructuring the loan. As time went on we did an internal analysis and we determined that it was prudent to basically write off that loan based on the financial condition of the company. We did that in the current period FY 2010 and then we basically said look as of 9/30/09 this amount should have also been written off so that’s why it was an out of period adjustment.

That was about $500,000 of the $900,000?

That’s correct.

The others were smaller adjustments. We had the law firm was about $200,000 and some and what were the others?

Those were the two.

That made up about $700,000 of the $900,000 and the others were minor adjustments.

Mr. Gladstone there are no further questions. I’d like to hand the floor back over to you for any closing comments.

Thank you all for calling in and we feel pretty bullish about the future. We’ll talk to you again next quarter and hopefully have a lot of good news. That’s the end of this conference call.

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you all for your participation.