Welcome to the Hercules Technology Growth Capital, Q1 2008 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to DeDe Sheel. Please go ahead.

Thank you, operator, and good afternoon everyone. On the call today are Manuel Henriquez, Hercules Co-Founder, Chairman and CEO; and David Lund, CFO. Our first quarter 2009 financial results were released just after today's market close. They can be accessed from the Company's website, at herculestech.com, or htgc.com. We have arranged for a tape replay of today's call, which will be available through our website or by using the telephone numbers and pass code provided in today's earnings release. I would like to call your attention to the Safe Harbor disclosure in our earnings release regarding forward-looking information. Today's conference call may include forward-looking statements and projections. We ask that you refer to our most recent filings with the SEC for important risk factors that could cause actual results to differ materially from these projections. We do not take any obligations to update our forward-looking statements unless required by law. To obtain copies of our latest SEC filings, please visit sec.gov or visit our website at herculestech.com. I would now like to turn the call over to Manuel Henriquez, Hercules Co-Founder, Chairman and CEO. Manuel?

Thank you, DeDe, and good afternoon everybody and thank you for joining us today on the call. Well, after very a tough first quarter of the year, we are very proud to release today our financial performance and our strong earnings we had in this quarter despite and otherwise a challenging in the ventures market. I wanted to emphasize at the beginning of this call that the success of Hercules continues to be upon the professionals we have in this organization who continue to work extremely hard in all the challenging marketplace and I will like to strongly emphasize the achievements that we've accomplished here are squarely because of their contributions to the organization and their hard work. I am very pleased with the financial performance. I think that it demonstrates Hercules continuous capability as an organization and our capabilities in understanding of the asset class by which we operate and invest in. Many, many people have asked us many questions regarding the venture capital marketplace, which I will elaborate during this call and currently expand upon that during our question-and-answer session at the end of this call. But first, let me turn briefly to our operations and speak to the high level on multiple different fronts of our achievements as a company, achievements of the marketplace, our liquidity, our asset quality and our overall strategic directions and initiatives that we are contemplating and pursuing. First to our operations, revenues grew year-over-year by 31% despite and otherwise challenging market. In addition to that net investment income or more commonly purchased NII also saw a record number at $0.35 per share. This despite and otherwise challenging market as we said earlier. In addition to that we have seen a growing spread on our yield spreads in our underlying investments with our…

Thank you, Manuel. As Manuel indicated, we are very pleased with our financial performance for the first quarter of 2009. Despite the current challenging market, we believe our results for the quarter were outstanding. Today I'd like to cover in detail three aspects of Hercules performance for the quarter; continued strong NII achievements, high level of credit quality and liquidity and capital resources. During q-and-a Manuel and I will happy to answer to any questions that I do not address here in the next section. First I will touch on Q1 operating results. Year-over-year we had growth in investment income, NII and net interest margin as evidenced by achieving in excess of $20 million of investment income for the quarter. We feel the performance of our investment strategy is impressive in this challenging credit environment. The effective yield on our debt investments during the quarter was 15.6%, which is higher than the preceding quarter yield of 49.9%, primarily due to higher income from acceleration of fees and interest from early loan repayments and as our team continues to renegotiate harder terms with our loan amendments. Quarter-over-quarter, we were able to reduce our cost of debt from $5.5 million $to 4.4 million by decreasing our average balance outstanding from $245 million to $194 million through the repayment of the Citibank credit facility. We expect further reduction in our cost of debt in the second quarter due to continued reduction in the weighted average balance outstanding and a lower cost debt due to the elimination of high cost Citibank credit facility. Operating expenses decreased over the previous quarter by approximately $750,000 as a result of the reduction in force we completed during the first quarter and our ongoing efforts to manage our expenses, as evidenced by our low efficiency ratio of approximately…

Thank you. (Operator instructions). The first question comes from John Hecht with JMP Securities.

Good afternoon, guys. Congratulations on a very successful quarter given the current environment?

Thanks, John.

On the liquidity side if I add up the numbers correctly and David I think you referred to some of this you have north of 70 million in capacity; plus your cash flow of 25 to 35 of principal payments per quarter. With that kind of capacity and now are seen attractive from the term basis lending environment, do you expect to may be get a little bit more active or you kind of continue to just -- the real opportunities out there as a percent of sales, which is very few. How do you pursue this marketplace right now?

Well, a couple of clarification. The market is full of opportunities. It doesn't necessarily make them all attractive opportunities and there needs to be a really a discrimination on credit quality in the marketplace itself. We are still seeing leverage at underlying perspective companies still being a little too high. We still think that pricing of the underlying middle market companies is not reflective of the inherent risk that we, at least Hercules deem to exist. I know some of other BDCs out there feel the market is incredibly attractive and ripe with opportunities. We are more cautious about that. We think there are opportunities out there. But we do not feel that we should weigh in with both feet right now. We really feel strongly that we are going to take a more slow and steady approach and let the summer cycle through to ensure that we are in actually in a upside recovery on this economy before we start using up all our liquidity. We feel however very strongly the fourth quarter will represent a very attractive investment opportunity as well as even a high liquidity position in our balance sheet to pursue those opportunities.

Okay. You talked historically about potential additions to the Foothill indicate that you have been talking any potential new creditors?

I really have to report that truly a --- I guess a remarkable achievement was the repayment of Citibank and Deutsche Bank line one month earlier but more importantly reinforcing what Hercules has been saying all long that our ability to generate liquidity is I think grossly underestimated or misunderstood in the marketplace. We as an organization, marshalling our resources just proved that we are able to take a $135 million commitment of which we had approximately $130 million outstanding and payback in five months. I find it to be fairly unprecedented any BDC out there can generate that kind of liquidity at such short period of time. We did that while improving credit quality, increasing or widening yield spreads, which has translated into obviously higher effective yield in higher and increasing net interest margin. I think it's quite important. That achievement has allowed us to re-circle back lenders who were previously engaged or had expressed an interest in working with Hercules are now becoming much more involved in their due diligence are possibly joining a syndicate with adjusting Well Fargo facility, or creating a separate standalone credit facilities. I am encouraged on that front most so than I've ever been for the last nine months to be able to make that statement. There is nothing completely done yet. We are very encouraged by the exchange of discussions that we've been having, and we are beyond in assets due diligence, and we are frankly just down to discussing ultimate size of the deal and conditions by which the deal will be put together.

The final question is, if I remember you had, and David might have referred to one of these one numbers as well. You had I think somewhere in the mid to high teens of spillover dividend from the last year. Then obviously, you are trending more in the Q1 of this year. You did refer to potential special dividend in Q4 of this year. Can you just maybe refresh us what your total carryover is now and what the timing of the last year's carry over or payments what have to be before you engage in an excise tax situation?

Our spillover from 2008 is $0.18 per share. So, obviously, depending upon what happens through the course of 2009, we can't tell you today what will happen in terms of the dividends or something. However, right now, we've got $0.18 of spillover from 2008.

John, as Dave just referred to, these spillover is something that we clear want and anticipate distributing. However, our cost to purchase and liquidity continues to be that we want to be watchful for our portfolio. We have about I would say, 25% to 30% of our portfolio is in the midst of will be the midst of closing subsequent equity rounds of financing's, and I would feel a lot better once that financing is completed by some of our portfolio companies. Which means that, we basically crossed the chasm in 2009 with the majority or substantially all of our companies receiving rounds of financing. We have some large events in our portfolio. There are contingent events that are outside of our control and the company's control. We have two specific life sciences companies that are in the process of completing of what's called Phase III clinical trials. These clinical trails if successful would be very significant value unlocking event. If those trails are for example not favorable, it means that it could be a challenging situation, so we are looking for those situation to see what happens, and we expect to have clarity on that in the June to July timeframe where they are expected to get FDA clinical trial approval. I want to be clear though. We are not saying nor are we expecting to see losses on that. However, I need to caution people as we continue to do and be prudent, that we are in a business where our underlying portfolio companies often times have milestones that they'll need to achieve in order to garner the next round of financing or unlock the next stage of value creation they embark.

Sp, with that, it's fair to think that, late summer, early fall, your companies will then recapitalize the venture capital community, and you'll have good visibility into the success of the FDA approvals for those companies, so we could get into more thorough discussion at that point with respect to the dividend plans?

Absolutely. I think that as the year progresses, the clarity on the dividend, the fifth dividend. We were originally talking about the fifth dividend, will become much more salient. I think that we will have greater confidence or visibility as we complete the second quarter. That is a significant milestone for some of these companies. Again, a lot of these companies are well capitalized through 2009, but they have some binary events that are outside their control, investor's control and our control.

The next question comes from Greg Mason with Stifel Nicolaus.

Could you talk about what percentage of your portfolio is going to need new rounds of financing in 2009?

I think that that number right now is hovering around the 30% to 35% for the remainder of 2009, and that's heavily weighted more so into completion of Q2 itself. We have seen acceleration however. A lot of our companies rather than waiting for third quarter to close a new round of equity capital, they are being more cautious and closing it today, which we think is obviously the a prudent thing to do. So, on an aggregate basis, probably 30% for the remainder of the year. A lot of that I think is more heavy weighed towards Q2.

Then when you discussed a strategic alternatives of buying portfolios, can you give us some color on where you are looking, is that US VC, may be expanding European VC or even potentially expanding into the middle of market?

We find ourselves in a very fortuitous position right now with the delevering of our balance and access to liquidity that we have, and our continued credit performance. We are looking at multiple different portfolios that maybe purchased in aggregate or we may selectively buy some of the portfolios. I won't elaborate more than that because it wouldn't be wise for me to do that since these conversations are ongoing. I will share this that we are struggling with a lot of the credit qualities on some of these underlying portfolios that we are seeing that when you superimpose the Hercules' underwriting requirements and yields, they are falling materially short of what we would deem to be adequate investments. We are also finding ourselves that some of these portfolios that we are evaluating have some investment opportunities that we had previously looked at, and passed on, so we are scratching our heads a little bit, when we actually passed on that to find ourselves with the possibility of acquiring portfolio through investors that we passed on for credit quality or pricing. So it is really a tricky thing. It hinges around ultimate credit quality and yields that we are going to get. We are not interested in looking at portfolios that merely going to churn out 50% yield for example. Our hurdle rates are, and those returns are quite higher than that, and that is making a lot of portfolios who may be okay, not very attractive targets for us to acquire because of the yield spreads that we are looking for.

Next question comes from Robert Napoli with Piper Jaffray.

Nice job by paying back the debts. That way you did a nice show of liquidity, and I appreciate your feedback on the banks becoming more interested. Are you seeing more numbers of banks? Are you talking to banks that you haven't talked to before? How are they talking about pricing today? Are they getting any less strict on pricing or not?

To answer the first two part of your question, the old ones returned, and some new one circling. We are engaged in much more conversation. So, it's a little bit of both, but primarily it's more of folks that we have spoken to in the past that have I think reconciled the reservations they may have had in underlying asset that we invested, mini-venture stage companies, where, there continues to be the schism or not believing that a non-cash flow positive company could actually amortize itself down and payback capital. I think we have approving the venture stage companies frankly seem to be outperforming the lower middle market companies out there, which in it by itself is an irony. So, I think that has served us to validate the underlying collateral pool asset class with these commercial banks who are contemplating entering the warehouse credit facility in marketplace, and the Citibank, Deutsche Bank payback has not gone unnoticed.

Now you say in your press release if I am reading this right, and I missed some of your opening comments, but no non-binding term sheets outstanding. So, are you going to, and I know you are looking at portfolios, but do you not intend to originate much at all organically for the very near-term?

No. I wouldn't say that. I think that the Q1in particular was clearly tied to our positioning that we discussed in the fourth quarter, during the earnings call that we had in the first quarter, and that was, until we felt strongly and comfortably that we could fully payback the Citibank, Deutsche Bank line, we have opted to preserve capital and ensure liquidity to achieve that end. So, we have opted only to provide capital to existing portfolio companies or renew just the credit facilities to our portfolio companies and less so on embarking on new commitments. I feel that that decision even to this day was a right one. I think that we've seen yields widened since the first quarter till today, and we are still seeing greater yield spreads going on in the marketplace today. However, we are still seeing that the terms by which Hercules believes that credit facility should be extended to certain companies is not quite where it should be, and other BDCs out there are much more eager to originate deals at 13%, 15% yields, while we are much more cognizant of leverage and net spreads that we've achieved in our underwriting. We believe that we are going to continue to sustain our SBA portfolio on a fully invested basis, and so that will probably indicate investment activities between $10 to $15 million a quarter, and potentially de novo invested opportunities. If we find something that's extremely attractive, that may accelerate that. However, we are not eager to be extremely active in the second quarter and lesser in the third quarter, which is historically our slowest quarter anyway. We are positioning ourselves for the fourth quarter, which we feel strongly will be a very attractive quarter if the trends that we are seeing emerging in the marketplace continue going in the direction that they are.

What are your target yields? When we talked about portfolio purchases, are you looking for unlevered yields totaling 20%?

In excess of that.

How do you get there? What percentage by the warrant and what percentage by cash?

That's all cash. We are not a big believer in some of these lower middle market portfolios, equity or warrant positions that they hold. We think that a lot of these portfolios are possibly over valued from what we are seeing in the marketplace from what we would consider to be fair value underwriting standards. I mean, some folks are carrying investments at 10 to 12 times EBITDA, when we feel that the valuation is more like five times EBITDA in an enterprise value. So, there is a fairly horrific disconnect between what we think is prudence and valuation with what the enterprise value-to-debt coverages on some of these companies are, and that's causing us some pause evaluating or consideration in buying some of these portfolios. It doesn't make these portfolios necessarily bad. It just doesn't achieve the returns that we think that we deserve or mitigate the risk that we think that they have in those portfolios.

(Operator instructions) Moving on to Henry Coffey with Sterne, Agee. Henry Coffey - Sterne, Agee & Leach: Good afternoon everyone and let me add my congratulations on an absolutely amazing accomplishment frankly.

Thank you, Henry. Henry Coffey - Sterne, Agee & Leach: We all get to watch banks, and I think most of us know how unstable they can be. As you look forward, and obviously you are in discussion with banks, and you've got your Wells relationship. As you look to structure your new borrowing or your new leverage capacity, how are you viewing the role the banks are playing in the equation, and how are you viewing the role of SBA place in the equation. Is one sort of permanent debt and the other is sort of interim debt or do you think the banks will ever be able to reenter your lives as the source of a sort of permanent financing against your assets?

I think Henry we are going to be looking for the banks do more long-term financing. For instance Wells Fargo was a two year deal with an extension to it.

You mean an automatic extension? Ferris, Baker Watts: You mean an automatic extension?

Yes and our election with the banks. So, we are looking for more long-term facilities with these organizations, and certainly, we want to leverage the SBA because of the increased amount of $225 million. That gives us a considerable amount of access to capital that we can use over a course of the next seven to ten years.

I think that we tend to be little more conservative than we probably should be, but we needed to really highlight something that's quite important that happened earlier this week, and this is a material development. The SBA issued guidance this week on the methodologies or procedures by which to now gain access to the $450 million new leverage which is approved by the Congress in the stimulus package, and more importantly to that, we now have clarity as to the methodologies and procedures by which we need to then apply for the second SBA license for the full $225 million which David alluded to, which both are now underway on our behalf. Meaning, Hercules will be filing the necessary paper works to achieve both of those endpoints in the near future. That clarity did not exist until earlier this week.

Are they going to allow companies to do the full three to one leverage or they are just hoping nobody asked for that? Ferris, Baker Watts: Are they going to allow companies to do the full three to one leverage or they are just hoping nobody asked for that?

Yes. Really I think, they've talked about three to one, but they've kind of hinted that they really going to be working on a two to one.

So, if you look at potential liquidity that maybe coming online for us, deducting the contributed equity capital that we to place into the SBA, we could have a total $170 million of total additional liquidity, that would come online by increasing the SBA facility to 150, and then approaching the $225 million.

Could you build a permanent business around that? That sounds like a pretty stable source of funding versus the banks. They will be begging at your door in two years and then trying to put you out of business in other ways Citibank and Deutsche Bank did? Ferris, Baker Watts: Could you build a permanent business around that? That sounds like a pretty stable source of funding versus the banks. They will be begging at your door in two years and then trying to put you out of business in other ways Citibank and Deutsche Bank did?

In fairness to the bank, unfortunately, the contraction of banking was nothing attributed to us. We clearly are looking, and Wells Fargo has been a fantastic partner thus far and working with us. As you saw and heard David's overview, I am extremely grateful and frankly, Wells Fargo recognize the credit quality of Hercules that, they felt very comfortable lowering the tangible net worth covenant from the high of $360 million tangible net worth covenant to now a covenant that doesn't really cause me any problems to reach $250 million before any risk to the covenant being tripped exist. I think that is a very good sign of a partnership with Wells Fargo. I think it reflects on the quality of the Hercules team and the credit underwriting standards that they have the confidence to lower the tangible net worth covenant.

That is obviously a major step forward and an indication from them about how active they really want you to use the money? Ferris, Baker Watts: That is obviously a major step forward and an indication from them about how active they really want you to use the money?

We actually expect to grow our relation with Wells Fargo beyond the $50 million we have with them today. That is certainly part of the long-term strategies of partnership with them. Now, really more to your point or salient to your point is, its absolutely clear that Hercules wants to grow with the SBA as a partner reflecting 10 years fixed cost of capital that is extremely stable, and one that is reliable enough that we don't have to go to the amalgamations that we went through or gyrations we went through with the existing banking crisis that we just are finally coming out of. So the SBA continues to be a fantastic partner and the SBA's staff has been very, very accommodating in working with Hercules.

Do you have the resources in the non-SBA part of your business to put the capital into the SBA part that would allow you to build that leverage or how would you get money into your SBIC? Ferris, Baker Watts: Do you have the resources in the non-SBA part of your business to put the capital into the SBA part that would allow you to build that leverage or how would you get money into your SBIC?

As David said in his overview, we are currently [flugged and] not building significant liquidity. We have anywhere between $25 million to $35 million a quarter in normal cash flows that come in. Then we anticipate clearly $5 million to $10 million of early payoff that happened during the quarter as well. By taking the position on being conservative with our balance sheet over the next four to five months, meaning, during the summer periods of time, we will have ample liquidity to more than satisfy the regulatory capital contributions, which are approximately $37 million to fund the full SBA leverage. So, it's a non issue.

David, you mentioned and I think I missed the numbers; it was three loans on non-accruals for a total 0.8% of loans at cost? Ferris, Baker Watts: David, you mentioned and I think I missed the numbers; it was three loans on non-accruals for a total 0.8% of loans at cost?

That's correct.

Thank you for all that and obviously an excellent job and congratulations to everyone. Ferris, Baker Watts: Thank you for all that and obviously an excellent job and congratulations to everyone.

We go back to Greg Mason with Stifel Nicolaus.

I just have a couple of quick modeling questions. Could you quantify what level of interest and fees were generated this quarter from your portfolio access looking for more of an ongoing run-rate for interest and fees?

Why don't we do this, why don't we actually follow that up with you after the call, and we'll that schedule for you. Obviously, we didn't bring that into this room. So that we can prepare for the call back, you want to know specifically, how much of the interest recognized in the first quarter?

Was from accelerated fees and interest? So we'll follow up with that Greg.

Number two. Did you have to give anything to Wells for the minimum net worth covenant relief?

No. There were no fees, no give ups, no nothing. This was just a mutual agreement that based on the performance of Hercules we were able to adjust the covenant.

Then what are the borrowing fees now associated with just the Wells facility going forward?

The borrowing fees that we have were fixed. We paid 0.75 basis points at the beginning of the relationship with them. So there are no ongoing fees except for a non-use fee.

The facility then is tiered and declines in the second year?

Yes. It drops down to 0.30 for non-use fee.

Okay. One last question. With the stock buyback, can you guys give us some color on what you are thinking with the stock running here lately, does that still make sense in your minds at these levels?

Obviously, I'm not going to give you the answer in terms of what are the parameters by which we would engage in a stock buyback, but clearly, I think that the [simpler way of] saying is that, at 30% dividend yield, 25% dividend yield or etcetera dividend yield is, we feel inadequate, it is better served to retire the stock than to continue to pay out if there is a dividend yield on that stock. So, clearly, we are not going to share what those pricing parameters are or thresholds that we'll embark on other than to say that, clearly a 30% dividend yield, a 25% dividend yield on a stock, we feel is probably an area which we don't think is deserved given our credit performance and our continued widening yield spreads and NII growth that we are seeing.

At this time there are no further questions.

Thank you operator. I want to remind everybody that on June, 3 in our Boston office, we will be hosting our annual shareholder meeting. Please feel free to attend if you would like. Also, as we historically do after every earnings call, if any investor would like to have a meeting scheduled with us, Dave and I would be scheduled to be on the road over the course of the next two to four weeks subject to schedules. If you have an interest in anyone of the cities that we plan on visiting which are Boston, Philadelphia, Baltimore or Chicago, and any other city where investors would like us to visit, we'll see if we can get it on the schedule. Again, thank you very much for everybody's participation, and thank you for continuing to be one of our shareholders, and for listening to the Hercules story. Thank you very much.

That does conclude today's conference. Thank you for participation today.