POS 8C

As filed with the Securities and Exchange Commission on June 18, 2008

Securities Act File No. 333-137856

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-2

(Check appropriate box or boxes)

o   REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

o   Pre-Effective Amendment No.  

þ   Post-Effective Amendment No. 4

PATRIOT CAPITAL FUNDING, INC.

(Exact name of registrant as specified in charter)

274 Riverside Avenue

Westport, CT 06880

(Address of principal executive offices)

Registrant’s telephone number, including area code:

(203) 429-2700

Richard P. Buckanavage

President and Chief Executive Officer

Patriot Capital Funding, Inc.

274 Riverside Avenue

Westport, CT 06880

(Name and address of agent for service)

COPIES TO:

Steven B. Boehm, Esq.
Harry S. Pangas, Esq.
Sutherland Asbill & Brennan LLP
1275 Pennsylvania Avenue, N.W.
Washington, DC 20004
(202) 383-0100
(202) 637-3593 — Facsimile

Approximate date of proposed public offering:  As soon as practicable after the effective date of this Registration Statement.

If any securities being registered on this form will be offered on a delayed or continuous basis in reliance on Rule 415 under the Securities Act of 1933, other than securities offered in connection with a dividend reinvestment plan, check the following box.  þ

It is proposed that this filing will become effective (check appropriate box)
þ when declared effective pursuant to section 8(c)

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

Subject to Completion, dated          , 2008

PROSPECTUS

13,330,000 Shares

Common Stock

This prospectus relates to the offer, from time to time, in one or more offerings, of up to 13,330,000 shares of our common stock by us. The shares of common stock may be offered at prices and terms to be described in one or more supplements to this prospectus.

We are a specialty finance company that provides customized financing solutions to small- to mid-sized companies. Our ability to invest across a company’s capital structure, from senior secured loans to equity securities, allows us to offer companies a comprehensive suite of financing solutions, including “one-stop” financing.

Our investment objective is to generate both current cash income and capital appreciation. We are an internally managed closed-end, non-diversified investment company that has elected to be treated as a business development company under the Investment Company Act of 1940.

Our common stock is traded on The Nasdaq Global Select Market under the symbol “PCAP.” The last reported sale price for our common stock on June 16, 2008 was $9.12 per share.

This prospectus contains important information you should know before investing in our common stock. Please read it before you invest and keep it for future reference. We file annual, quarterly and current reports, proxy statements and other information about us with the Securities and Exchange Commission. This information is available free of charge by contacting us at 274 Riverside Avenue, Westport, Connecticut 06880 or by telephone at (203) 429-2700 or on our website at www.patcapfunding.com. The Securities and Exchange Commission also maintains a website at www.sec.gov that contains such information.

Investing in our common stock involves risks, including the risk of leverage.

See “Risk Factors” beginning on page 9.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The date of this prospectus is           , 2008.

You should rely only on the information contained in this prospectus or any accompanying supplement to this prospectus. We have not authorized any other person to provide you with different information from that contained in this prospectus or any accompanying supplement to this prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. This prospectus and any accompanying prospectus supplement do not constitute an offer to sell, or a solicitation of an offer to buy, any shares of our common stock by any person in any jurisdiction where it is unlawful for that person to make such an offer or solicitation or to any person in any jurisdiction to whom it is unlawful to make such an offer or solicitation. The information contained in this prospectus and any accompanying prospectus supplement is complete and accurate only as of the date on their covers, regardless of the time of their delivery or sale of our common stock.

TABLE OF CONTENTS

Prospectus Summary	1
Fees and Expenses	5
Selected Consolidated Financial and Other Data	6
Selected Consolidated Quarterly Financial Data	8
Risk Factors	9
Special Note Regarding Forward-Looking Statements	20
Use of Proceeds	21
Price Range of Common Stock and Distributions	22
Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Senior Securities	40
Business	41
Portfolio Companies	49
Management	57
Executive Compensation	63
Certain Relationships	75
Control Persons and Principal Stockholders	76
Determination of Net Asset Value	78
Dividend Reinvestment Plan	81
Material U.S. Federal Income Tax Considerations	82
Description of Our Securities	88
Regulation	91
Plan of Distribution	94
Custodian, Transfer and Dividend Paying Agent and Registrar	95
Brokerage Allocation and Other Practices	95
Legal Matters	95
Independent Registered Public Accounting Firm	95
Available Information	95
Privacy Notice	96
Index to Consolidated Financial Statements	F-1

PROSPECTUS SUMMARY

This summary highlights some of the information in this prospectus and may not contain all of the information that is important to you. You should read the entire prospectus carefully, including “Risk Factors.”

Unless otherwise noted, the terms “we,” “us,” “our” and “Patriot Capital Funding” refer to Patriot Capital Funding, Inc. and its wholly-owned subsidiary, Patriot Capital Funding LLC I.

Business

Overview

We are a specialty finance company that provides customized financing solutions to small- to mid-sized companies. Since we commenced investment operations in 2003, we have originated $543 million of investments, primarily in transactions initiated by private equity sponsors. We typically make investments of $3 million to $25 million in companies with $10 million to $100 million in annual revenues that operate in diverse industry sectors. Our investments are principally in the form of senior secured loans, junior secured loans, and subordinated debt investments, which may include an equity component. In addition, we make equity co-investments of generally less than $3 million and, to a lesser extent, investments in broadly syndicated loans. We also offer a financial product that we refer to as “one-stop” financing, which typically includes a revolving line of credit, one or more senior secured term loans and a subordinated debt investment.

Our investment objective is to generate both current cash income and capital appreciation. We seek to meet this objective by:

•  Delivering a comprehensive suite of customized financing solutions in a responsive and efficient manner.  Our goal is to provide a comprehensive suite of customized financing solutions in a responsive and efficient manner to private equity sponsors in connection with their proposed investments in small- to mid-sized companies. Our ability to provide financing across all levels of a company’s capital structure appeals to private equity sponsors that typically seek to rely on a limited number of third party financing sources for their investment transactions in order to facilitate and ensure the timely closing of such transactions. We believe our ability to provide a comprehensive suite of customized financing solutions sets us apart from other lenders that focus on providing a limited number of financing solutions.

•  Capitalizing on our strong private equity sponsor relationships.  We are committed to establishing, building and maintaining our private equity sponsor relationships. Our marketing efforts are focused on building and maintaining relationships with private equity sponsors that routinely make investments in the small- to mid-sized companies that we target. We believe that our relationships with private equity sponsors provide us with, in addition to potential investment opportunities, other significant benefits, including an additional layer of due diligence and additional monitoring capabilities. Private equity sponsors also provide our portfolio companies with significant benefits, including strategic guidance, an additional potential source of capital and operational expertise. We have assembled a management team that has developed an extensive network of private equity sponsor relationships in our target market over the last 15 years. We believe that our management team’s relationships with these private equity sponsors will provide us with significant investment opportunities.

•  Employing disciplined underwriting policies and maintaining rigorous portfolio monitoring.  We have an extensive investment underwriting and monitoring process. We conduct a thorough analysis of each potential portfolio company and its prospects, competitive position, financial performance and industry dynamics. We stress the importance of credit and risk analysis in our underwriting process. We believe that our continued adherence to this disciplined process will permit us to mitigate loan losses, to continue to generate a stable and diversified revenue stream of current

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income from our debt investments and provide us with the ability to make distributions to our stockholders.

•  Leveraging the skills of our experienced management team.   Our management team is led by our president and chief executive officer, Richard P. Buckanavage, and our chief investment officer, Timothy W. Hassler, who combined have more than 35 years of experience lending to, and investing in, small- and mid-sized companies. The members of our management team have broad investment backgrounds, with prior experience at specialty finance companies, middle market commercial banks and other financial services companies. We believe that the experience and contacts of our management team will continue to allow us to effectively implement the key aspects of our business strategy.

As of March 31, 2008, we had debt investments in 32 portfolio companies with an aggregate fair value of $339.9 million, and warrants to purchase shares of common stock in three of our portfolio companies and equity investments (other than warrants) in 18 portfolio companies with a fair value of $12.1 million. For the three month period ended March 31, 2008, the weighted average yield on all of our outstanding debt investments was approximately 12.2%.

We are an internally managed, non-diversified closed-end investment company that has elected to be treated as a business development company under the Investment Company Act of 1940, or the “1940 Act.” As a business development company, we are required to comply with numerous regulatory requirements. We finance our investments using debt and equity. However, our ability to use debt and equity is limited in certain significant respects. See “Regulation.” We have elected to be treated for federal income tax purposes as a regulated investment company, or “RIC” under Subchapter M of the Internal Revenue Code, or “Code.” See “Material U.S. Federal Income Tax Considerations.” As a RIC, we generally will not have to pay corporate-level federal income taxes on any net ordinary income or capital gains that we distribute to our stockholders as dividends if we meet certain source-of-income, income distribution and asset diversification requirements.

Our principal executive offices are located at 274 Riverside Avenue, Westport, Connecticut 06880 and our telephone number is (203) 429-2700. We maintain a website on the Internet at www.patcapfunding.com. Information contained in our website is not incorporated by reference into this prospectus, and you should not consider that information to be part of this prospectus.

Current Market Conditions

Over the past year, the debt and equity capital markets have been subject to substantial volatility and instability as concerns about the value of securities relating to subprime mortgages have spread to many, often unrelated, sectors of the markets. These events, along with a deterioration of the housing market, have led to worsening economic conditions, which have reduced the availability of debt and equity capital for the market as a whole and financial firms in particular. If these conditions worsen or make us unable to access these markets, we may have to curtail growth in our investment portfolio. See “Management’s Discussion and Analysis of Financial Condition and Result of Operations — Current Market Conditions.”

Dividend Reinvestment Plan

We have adopted an “opt-out” dividend reinvestment plan for our stockholders. As a result, if we declare a dividend, stockholders’ cash dividends will be automatically reinvested in additional shares of our common stock, unless they specifically “opt out” of the dividend reinvestment plan so as to receive cash dividends. Stockholders who receive distributions in the form of stock generally will be subject to the same federal, state and local tax consequences as stockholders who elect to receive their distributions in cash. See “Dividend Reinvestment Plan.”

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Taxation

We have elected to be treated for federal income tax purposes as a RIC. As a RIC, we generally will not pay corporate-level federal income taxes on any net ordinary income or capital gains that we distribute to our stockholders as dividends. To obtain and maintain our RIC tax treatment, we must meet specified source-of-income and asset diversification requirements and distribute annually at least 90% of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any. See “Material U.S. Federal Income Tax Considerations.”

Use of Proceeds

We intend to use the net proceeds from selling shares of common stock for general corporate purposes, which includes investing in debt and equity securities, repayment of indebtedness and other general corporate purposes. The supplement to this prospectus relating to an offering will more fully identify the use of proceeds from such offering.

Leverage

We borrow funds to make investments. We use this practice, which is known as “leverage,” to attempt to increase returns to our common stockholders. However, leverage involves significant risks. See “Risk Factors.” As a business development company under the 1940 Act, we are only generally allowed to borrow amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowing. The amount of leverage that we employ will depend on our assessment of market conditions and other factors at the time of any proposed borrowing.

Distributions

We intend to continue to pay quarterly dividends to our stockholders. Our quarterly dividends, if any, will be determined by our board of directors. See “Price Range of Common Stock and Distributions.”

Risk Factors

Investing in our common stock involves a number of significant risks relating to our business and our investment objective that you should consider before purchasing shares of our common stock, including:

•  Because we intend to distribute substantially all of our income to our stockholders in connection with our election to be treated as a RIC, we will continue to need additional capital to finance our growth. If additional funds are unavailable or not available on favorable terms, our ability to grow will be impaired.

•  Regulations governing our operation as a business development company will affect our ability to, and the way in which we, raise additional capital.

•  Many of our portfolio companies may be susceptible to economic slowdowns or recessions and may be unable to repay our debt investments during these periods.

•  Because there is generally no established market for which to value most of our investments, our board of directors’ determination of the value of our investments may differ materially from the values that a ready market or third party would attribute to these investments.

•  We make loans to and invest in primarily privately owned small- to mid-sized companies. These activities may involve a high degree of business and financial risk.

•  We also may borrow funds to make these loans and investments to the extent permitted under the 1940 Act. Borrowings, also known as leverage, magnify the potential for gain and loss on amounts we invest and, therefore, increase the risks to you of investing in our common stock.

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•  If we fail to maintain our eligibility for RIC tax benefits, we could become subject to federal income tax on all of our income, which would have a material adverse effect on our financial performance.

See “Risk Factors” beginning on page 9 and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in shares of our common stock.

Certain Anti-Takeover Provisions

Our restated certificate of incorporation and restated bylaws, as well as certain statutory and regulatory requirements, contain certain provisions that may have the effect of discouraging a third party from making an acquisition proposal for us. These anti-takeover provisions may inhibit a change in control in circumstances that could give the holders of our common stock the opportunity to realize a premium over the market price for our common stock. See “Description of Our Securities.”

General Information

We are required to file periodic reports, proxy statements and other information with the Securities and Exchange Commission, or the “SEC.” This information is available at the SEC’s public reference room in Washington, D.C. and on the SEC’s website at http://www.sec.gov. You may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330.

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FEES AND EXPENSES

The following table is intended to assist you in understanding the costs and expenses that an investor in our common stock will bear directly or indirectly. We caution you that some of the percentages indicated in the table below are estimates and may vary. Except where the context suggests otherwise, whenever this prospectus contains a reference to fees or expenses paid by “you,” “us” or “Patriot Capital Funding,” or that “we” will pay fees or expenses, stockholders will indirectly bear such fees or expenses as investors in us.

Stockholder Transaction Expenses:
Sales load (as a percentage of offering price)	—	(1)
Dividend reinvestment plan expenses	None	(2)
Annual Expenses (as a percentage of net assets attributable to common stock):
Operating expenses	4.6%	(3)
Interest payments on borrowed funds	3.9%	(4)
Acquired fund fees	None	(5)
Total annual expenses	8.5%	(6)

(1)	In the event that the shares of common stock to which this prospectus relates are sold to or through underwriters, a corresponding prospectus supplement will disclose the applicable sales load.
(2)	The expenses of administering our dividend reinvestment plan are included in operating expenses.
(3)	Operating expenses represent our estimated annual operating expenses, excluding interest payments on borrowed funds (which includes the amortization of debt issuance costs).
(4)	Interest payments on borrowed funds represent our estimated annual interest payments on borrowed funds.
(5)	As of March 31, 2008, we had no investments in any acquired funds.
(6)	The total annual expenses are the sum of operating expenses and interest payments on borrowed funds. “Total annual expenses” as a percentage of net assets attributable to common stock are higher than the total annual expenses percentage would be for a company that is not leveraged. We borrow money to leverage our net assets and increase our total assets. The SEC requires that “Total annual expenses” percentage be calculated as a percentage of net assets, rather than the total assets, which includes assets that have been funded with borrowed money. If the “Total annual expenses” percentage were calculated instead as a percentage of total assets, our “Total annual expenses” would be 4.9% of total assets.

Example

The following example demonstrates the projected dollar amount of total cumulative expenses that would be incurred over various periods with respect to a hypothetical investment in our common stock. In calculating the following expense amounts, we have assumed we would have no additional leverage and that our annual operating expenses would remain at the levels set forth in the table above.

	1 Year		3 Years		5 Years		10 Years
You would pay the following expenses on a $1,000 investment, assuming a 5% annual return	$	124	$	275	$	416	$	728

While the example assumes, as required by the SEC, a 5% annual return, our performance will vary and may result in a return greater or less than 5%. In addition, while the example assumes reinvestment of all dividends at net asset value, participants in our dividend reinvestment plan will receive a number of shares of our common stock, determined by dividing the total dollar amount of the dividend payable to a participant either by (i) the market price per share of our common stock at the close of trading on the dividend payment date in the event that we use newly issued shares to satisfy the share requirements of the divided reinvestment plan or (ii) the average purchase price of all shares of common stock purchased by the administrator of the dividend reinvestment plan in the event that shares are purchased in the open market to satisfy the share requirements of the dividend reinvestment plan, which may be at, above or below net asset value. See “Dividend Reinvestment Plan” for additional information regarding our dividend reinvestment plan.

This example and the expenses in the table above should not be considered a representation of our future expenses. Actual expenses (including the cost of debt, if any, and other expenses) may be greater or less than those shown.

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

You should read this selected consolidated financial data in conjunction with our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included elsewhere in this prospectus. The selected consolidated financial data at and for the fiscal years ended December 31, 2007, 2006, 2005, 2004 and 2003 have been derived from our audited financial statements after consideration of the change in presentation described more fully in footnote(5) to this table. The selected consolidated financial data at and for the three months ended March 31, 2008 and 2007 have been derived from unaudited financial data, but in the opinion of management, reflects all adjustments (consisting only of normal recurring adjustments) that are necessary to present fairly the results for such interim periods. Interim results at and for the three months ended March 31, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. Certain reclassifications have been made to the prior period financial information to conform to the current period presentation. We were formed on November 4, 2002, and made our first investment on November 21, 2003.

	Three Months Ended March 31,						Year Ended December 31,
	2008			2007			2007			2006			2005			2004			2003
Income Statement Data:
Investment Income:
Interest income	$	10,991,222		$	8,198,181		$	37,147,275		$	25,387,709		$	13,035,673		$	4,616,665		$	253,755
Fees		213,608			394,855			1,280,361			270,176			366,830			241,870			5,274
Other investment income		39,855			384,287			534,901			848,449			46,839			—			—
Total Investment Income		11,244,685			8,977,323			38,962,537			26,506,334			13,449,342			4,858,535			259,029
Expenses:
Compensation expense		1,498,175			1,219,533			5,410,075			3,877,525			2,481,761			1,326,576			835,600
Consulting fees(1)		—			—			—			—			554,796			1,000,000			916,666
Interest(2)		2,059,523			1,506,212			7,421,596			4,332,582			3,517,989			1,504,998			201,331
Professional fees		262,527			307,627			887,021			1,045,613			730,550			192,938			290,822
Prepayment penalty(3)		—			—			—			—			3,395,335			—			—
General and administrative		638,560			598,673			2,498,724			2,229,970			1,041,030			227,208			164,032
Total Expenses		4,458,785			3,632,045			16,217,416			11,485,690			11,721,461			4,251,720			2,408,451
Net investment income (loss)		6,785,900			5,345,278			22,745,121			15,020,644			1,727,881			606,815			(2,149,422	)
Net realized gain (loss) on investments		(89,550	)		6,167			91,601			(3,262,966	)		—			—			—
Net unrealized appreciation (depreciation) on investments		(9,851,274	)		85,100			(3,637,706	)		3,817,931			(2,965,175	)		(876,021	)		—
Net unrealized gain (loss) on interest rate swap		(752,851	)		(63,328	)		(775,326	)		12,961			—			—			—
Net income (loss)	$	(3,907,775	)	$	5,373,217		$	18,423,690		$	15,588,570		$	(1,237,294	)	$	(269,206	)	$	(2,149,422	)

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	Three Months Ended March 31,						Year Ended December 31,
	2008			2007			2007			2006			2005			2004			2003
Earnings (loss) per share, basic	$	(0.19	)	$	0.31		$	0.99		$	1.10		$	(0.17	)	$	(0.07	)	$	(0.56	)
Earnings (loss) per share, diluted	$	(0.19	)	$	0.30		$	0.98		$	1.10		$	(0.17	)	$	(0.07	)	$	(0.56	)
Weighted average shares outstanding, basic		20,650,455			17,532,896			18,670,904			14,145,200			7,253,632			3,847,902			3,847,902
Weighted average shares outstanding, diluted		20,650,455			17,724,026			18,830,213			14,237,952			7,253,632			3,847,902			3,847,902
Balance Sheet Data:
Total investments(5)	$	351,946,400		$	272,262,089		$	384,725,753		$	257,812,235		$	138,302,852		$	65,766,667		$	28,822,915
Total assets		365,023,302			284,521,194			398,378,808			271,086,364			151,007,186			72,201,700			35,252,082
Total debt outstanding		143,000,000			80,373,000			164,900,000			98,380,000			21,650,000			42,645,458			9,400,000
Stockholder’s equity		211,057,322			195,978,685			221,597,684			164,108,629			127,152,365			27,311,918			24,531,124
Net asset value per common share	$	10.22		$	10.75		$	10.73		$	10.37		$	10.48		$	7.10		$	6.38
Other Data:
Weighted average yield on debt investments(4)		12.2	%		12.4	%		12.4	%		13.4	%		13.5	%		12.6	%		11.2	%
Number of portfolio companies		34			25			36			26			15			9			3
Number of employees		14			11			14			11			9			6			5

(1)	On July 27, 2005, we terminated the consulting agreements pursuant to which we incurred these fees.
(2)	Our capital structure at December 31, 2004 reflected a higher percentage of leverage than we are permitted to maintain as a business development company. We used a portion of the net proceeds we received from our initial public offering to repay all of our outstanding indebtedness, including the $3.4 million prepayment penalty, at the time of our initial public offering. We are generally only allowed to borrow amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowing.
(3)	The prepayment penalty was incurred in connection with the repayment in full and termination of our $120.0 million financing agreement.
(4)	Computed using actual interest income earned for the fiscal year, including amortization of deferred financing fees and original issue discount, divided by the weighted average fair value of debt investments.
(5)	Effective January 1, 2008, we adopted Statement of Financial Standards No. 157 — Fair Value Measurements, or SFAS 157. In accordance with that standard, we changed our presentation for all periods presented to net unearned fees against the associated debt investments, except for amounts represented by administrative fees or unearned fees in instances where the fair value of the underlying investment is zero which were reclassed to accounts payable, accrued expenses and other. Prior to the adoption of SFAS 157 on January 1, 2008, we reported unearned fees as a single line item on the Consolidated Balance Sheets and Consolidated Schedule of Investments. This change in presentation had no impact on the overall net cost or fair value of our investment portfolio and had no impact on our financial position or results of operations.

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SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA

The following tables set forth certain quarterly financial information for each of the thirteen quarters through the quarter ended March 31, 2008. This information was derived from unaudited financial data, but in the opinion of management, reflects all adjustments (consisting only of normal recurring adjustments) that are necessary to present fairly the results for such interim periods. Results for any quarter are not necessarily indicative of results for the full year or for any future quarter.

	Year Ended
	December 31, 2008			Year Ended December 31, 2007
	Quarter			Quarter			Quarter			Quarter		Quarter
	Ended			Ended			Ended			Ended		Ended
	March 31			December 31			September 30			June 30		March 31
	(Unaudited)			(Unaudited)
Total Investment Income	$	11,244,685		$	11,142,679		$	9,752,882		$	9,089,653	$	8,977,323
Net Investment Income		6,785,900			6,507,150			5,500,985			5,391,708		5,345,278
Net Realized and Unrealized Gains (Losses) on Investments and Interest Rate Swaps		(10,693,675	)		(3,146,414	)		(1,494,112	)		291,156		27,939
Net Income (Loss)		(3,907,775	)		3,360,736			4,006,873			5,682,864		5,373,217
Net Income (Loss) Per Share, Basic	$	(0.19	)	$	0.16		$	0.22		$	0.31	$	0.31
Net Income (Loss) Per Share, Diluted	$	(0.19	)	$	0.16		$	0.22		$	0.31	$	0.30
Weighted Average Shares Outstanding, Basic		20,650,455			20,589,650			18,284,737			18,246,987		17,532,896
Weighted Average Shares Outstanding, Diluted		20,650,455			20,748,959			18,476,049			18,466,510		17,724,026

	Year Ended December 31, 2006
	Quarter		Quarter			Quarter		Quarter
	Ended		Ended			Ended		Ended
	December 31		September 30			June 30		March 31
	(Unaudited)
Total Investment Income	$	7,595,548	$	6,879,633		$	5,807,865	$	6,223,288
Net Investment Income		4,119,939		4,096,455			3,094,715		3,709,535
Net Realized and Unrealized Gains (Losses) on Investments and Interest Rate Swaps		402,445		(569,280	)		1,489,896		(755,135	)
Net Income		4,522,384		3,527,175			4,584,611		2,954,400
Net Income Per Share, Basic	$	0.29	$	0.22		$	0.36	$	0.24
Net Income Per Share, Diluted	$	0.28	$	0.22		$	0.36	$	0.24
Weighted Average Shares Outstanding, Basic		15,815,485		15,781,525			12,788,727		12,136,655
Weighted Average Shares Outstanding, Diluted		15,908,237		15,836,416			12,788,727		12,136,655

	Year Ended December 31, 2005
	Quarter		Quarter			Quarter			Quarter
	Ended		Ended			Ended			Ended
	December 31		September 30			June 30			March 31
	(Unaudited)
Total Investment Income	$	4,550,480	$	3,733,675		$	2,826,950		$	2,338,237
Net Investment Income (Loss)		2,865,350		(1,886,469	)		478,232			270,768
Net Realized and Unrealized Gains (Losses) on Investments and Interest Rate Swaps		115,860		(3,761,046	)		(170,450	)		850,461
Net Income (Loss)		2,981,210		(5,647,515	)		307,782			1,121,229
Net Income (Loss) Per Share, Basic and Diluted	$	0.25	$	(0.62	)	$	0.08		$	0.29
Weighted Average Shares Outstanding, Basic and Diluted		12,119,313		9,088,353			3,847,902			3,847,902

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RISK FACTORS

Investing in our common stock involves a number of significant risks. We cannot assure you that we will achieve our investment objective. In addition to the other information contained in this prospectus, you should consider carefully the following information before making an investment in our common stock. The risks set out below are not the only risks we face. Additional risks and uncertainties not presently known to us or not presently deemed material by us may also impair our operations and performance. If any of the following events occur, our business, financial condition and results of operations could be materially adversely affected. In such case, our net asset value and the trading price of our common stock could decline, and you may lose all or part of your investment.

Risks Relating to Our Business and Structure

Because we intend to distribute substantially all of our income to our stockholders in connection with our election to be treated as a RIC, we will continue to need additional capital to finance our growth. If additional funds are unavailable or not available on favorable terms, our ability to grow will be impaired.

In order to qualify for the tax benefits available to RICs and to avoid payment of excise taxes, we intend to distribute to our stockholders substantially all of our annual taxable income, except for certain net capital gains that we may retain for investment, pay applicable income taxes with respect thereto, and elect to treat as deemed distributions to our stockholders. As a business development company, we generally are required to meet a coverage ratio of total assets, less liabilities and indebtedness not represented by senior securities, to total senior securities, which includes all of our borrowings and any preferred stock we may issue in the future, of at least 200%. This requirement limits the amount that we may borrow. Because we will continue to need capital to grow our investment portfolio, this limitation may prevent us from incurring debt and require us to raise additional equity at a time when it may be disadvantageous to do so. While we expect to be able to borrow and to issue additional debt and equity securities, we cannot assure you that debt and equity financing will be available to us on favorable terms, or at all. In addition, as a business development company, we generally are not permitted to issue equity securities priced below net asset value without stockholder approval. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Current Market Conditions” for a discussion of a proposal we are submitting to our stockholders to allow us to issue shares of our common stock below net asset value. If additional funds are not available to us, we could be forced to curtail or cease new investment activities, and our net asset value could decline.

We commenced investment operations in 2003 and, as a result, have a limited operating history.

We commenced investment operations in 2003. As a result, we have limited financial information on which you can evaluate an investment in us or our prior performance. We are subject to all of the business risks and uncertainties associated with any new business, including the risks that we will not achieve our investment objective and that the value of your investment could decline substantially.

Economic recessions or downturns could impair our portfolio companies and harm our operating results.

Many of our portfolio companies may be susceptible to economic slowdowns or recessions and may be unable to repay our debt investments during these periods. Therefore, our non-performing assets are likely to increase and the value of our portfolio is likely to decrease during these periods. Adverse economic conditions also may decrease the value of collateral securing some of our debt investments and the value of our equity investments. Economic slowdowns or recessions could lead to financial losses in our portfolio and a decrease in revenues, net income and assets. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events could prevent us from increasing investments and harm our operating results.

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Regulations governing our operation as a business development company will affect our ability to, and the way in which we, raise additional capital.

Our business will require capital in addition to the proceeds of this offering. We may acquire additional capital from the following sources:

Senior Securities and Other Indebtedness.  We may issue debt securities or preferred stock and/or borrow money from banks or other financial institutions, which we refer to collectively as senior securities, up to the maximum amount permitted by the 1940 Act. If we issue senior securities, including debt or preferred stock, we will be exposed to additional risks, including the following:

•  Under the provisions of the 1940 Act, we are permitted, as a business development company, to issue senior securities only in amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after each issuance of senior securities. If the value of our assets declines, we may be unable to satisfy this test. If that happens, we may be required to sell a portion of our investments and, depending on the nature of our leverage, repay a portion of our debt at a time when such sales and/or repayments may be disadvantageous.

•  Any amounts that we use to service our debt or make payments on preferred stock will not be available for dividends to our common stockholders.

•  It is likely that any senior securities or other indebtedness we issue will be governed by an indenture or other instrument containing covenants restricting our operating flexibility. Additionally, some of these securities or other indebtedness may be rated by rating agencies, and in obtaining a rating for such securities and other indebtedness, we may be required to abide by operating and investment guidelines that further restrict operating and financial flexibility.

•  We and, indirectly, our stockholders will bear the cost of issuing and servicing such securities and other indebtedness.

•  Preferred stock or any convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our common stock, including separate voting rights and could delay or prevent a transaction or a change in control to the detriment of the holders of our common stock.

Additional Common Stock.  We are not generally able to issue and sell our common stock at a price below net asset value per share, except in connection with a rights offering to our existing stockholders or with the consent of the majority of our common stockholders. We may, however, sell our common stock, warrants, options or rights to acquire our common stock, at a price below the current net asset value of the common stock if our board of directors determines that such sale is in our best interests and that of our stockholders, and our stockholders approve such sale. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Current Market Conditions” for a discussion of a proposal we are submitting to our stockholders to allow us to issue shares of our common stock below net asset value. In any such case, the price at which our securities are to be issued and sold may not be less than a price which, in the determination of our board of directors, closely approximates the market value of such securities (less any distributing commission or discount). We may also make rights offerings to our stockholders at prices per share less than the net asset value per share, subject to applicable requirements of the 1940 Act. If we raise additional funds by issuing more common stock or senior securities convertible into, or exchangeable for, our common stock, the percentage ownership of our stockholders at that time would decrease and they may experience dilution. Moreover, we can offer no assurance that we will be able to issue and sell additional equity securities in the future, on favorable terms or at all.

Securitization of Loans.  In addition to issuing securities to raise capital, we will continue to seek to securitize our loans to generate cash for funding new investments. To securitize loans, we would generally create a wholly-owned subsidiary and contribute a pool of loans to the subsidiary. This could include the sale of interests in the subsidiary on a non-recourse basis to purchasers who we would expect to be willing to accept a lower interest rate to invest in investment grade loan pools, and we would retain a portion of the

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equity in the securitized pool of loans. An inability to successfully securitize our loan portfolio could limit our ability to grow our business, fully execute our business strategy and adversely affect our earnings, if any. Moreover, the successful securitization of our loan portfolio might expose us to losses as the residual loans in which we do not sell interests will tend to be those that are riskier and more apt to generate losses. We have entered into a second amended and restated securitization revolving credit facility.

We are dependent upon our key investment personnel for our future success.

We depend on the diligence, skill and network of business contacts of the investment professionals we employ for the sourcing, evaluation, negotiation, structuring and monitoring of our investments. Our future success will also depend, to a significant extent, on the continued service and coordination of our senior management team, particularly, Richard P. Buckanavage, our president and chief executive officer, and Timothy W. Hassler, our chief investment officer. The departure of Mr. Buckanavage, Mr. Hassler or any member of our senior management team could have a material adverse effect on our ability to achieve our investment objective. In addition, if both Messrs. Buckanavage and Hassler cease to be employed by us, the lender under our second amended and restated securitization revolving credit facility could, absent a waiver or cure, terminate the facility.

Our success depends on attracting and retaining qualified personnel in a competitive environment.

We have recently experienced increased competition in attracting and retaining qualified personnel, particularly investment professionals, and we may be unable to maintain or grow our business if we cannot attract and retain such personnel. Our ability to attract and retain personnel with the requisite credentials, experience and skills depends on several factors including, but not limited to, our ability to offer competitive wages, benefits and professional growth opportunities. Many of the entities, including investment funds (such as private equity funds and mezzanine funds) and traditional financial services companies, with which we compete for experienced personnel have greater resources than we have.

This competitive environment for qualified personnel may require us to take certain measures to ensure that we are able to attract and retain experienced personnel. Such measures may include increasing the attractiveness of our overall compensation packages, altering the structure of our compensation packages through the use of additional forms of compensation, or other steps. The inability to attract and retain experienced personnel could have a material adverse effect on our business.

Our management team has limited experience managing a business development company.

The 1940 Act imposes numerous constraints on the operations of business development companies. For example, business development companies are required to invest at least 70% of their total assets primarily in securities of “eligible portfolio companies” (as defined under the 1940 Act), cash, cash equivalents, U.S. government securities and other high quality debt investments that mature in one year or less. Our management team’s limited experience in managing a portfolio of assets under such constraints may hinder our ability to take advantage of attractive investment opportunities and, as a result, achieve our investment objective. Furthermore, any failure to comply with the requirements imposed on business development companies by the 1940 Act could cause the SEC to bring an enforcement action against us. If we do not remain a business development company, we might be regulated as a registered closed-end investment company under the 1940 Act, which would further decrease our operating flexibility.

Our business model depends to a significant extent upon strong referral relationships with private equity sponsors, and our inability to maintain or develop these relationships, or the failure of these relationships to generate investment opportunities, could adversely affect our business.

We expect that members of our management team will maintain their relationships with private equity sponsors, and we will rely to a significant extent upon these relationships to provide us with potential investment opportunities. If our management team fails to maintain its existing relationships or develop new relationships with other sponsors or sources of investment opportunities, we will not be able to grow our

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investment portfolio. In addition, individuals with whom members of our management team have relationships are not obligated to provide us with investment opportunities, and, therefore, there is no assurance that such relationships will generate investment opportunities for us.

We operate in a highly competitive market for investment opportunities.

We compete for investments with other business development companies and other investment funds (including private equity funds and mezzanine funds), as well as traditional financial services companies such as commercial banks and other sources of funding. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. For example, some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments. These characteristics could allow our competitors to consider a wider variety of investments, establish more relationships and offer better pricing and more flexible structuring than us. We may lose investment opportunities if we do not match our competitors’ pricing, terms and structure. If we are forced to match our competitors’ pricing, terms and structure, we may not be able to achieve acceptable returns on our investments or may bear substantial risk of capital loss. Furthermore, many of our competitors have greater experience operating under, or are not subject to, the regulatory restrictions that the 1940 Act imposes on us as a business development company.

We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations. Also, as a result of this competition, we may not be able to take advantage of attractive investment opportunities from time to time, and we cannot assure you that we will continue to be able to identify and make investments that are consistent with our investment objective.

The agreements governing our second amended and restated securitization revolving credit facility contain various covenants that, among other things, limit our discretion in operating our business and provide for certain minimum financial covenants.

We have entered into a second amended and restated securitization revolving credit facility or “Second Amended Securitization Facility.” The agreements governing this facility contain customary default provisions such as the termination or departure of both Messrs. Buckanavage and Hassler, a material adverse change in our business and the failure to maintain certain minimum loan quality and performance standards. An event of default under the facility would result, among other things, in termination of the availability of further funds under the facility and an accelerated maturity date for all amounts outstanding under the facility, which would likely disrupt our business and, potentially, the portfolio companies whose loans we financed through the facility. This could reduce our revenues and, by delaying any cash payment allowed to us under the facility until the lender has been paid in full, reduce our liquidity and cash flow and impair our ability to grow our business and maintain our status as a RIC. If we default under certain provisions, the facility also limits our ability to declare dividends. Each loan origination under the facility is subject to the satisfaction of certain conditions. We cannot assure you that we will be able to borrow funds under the facility at any particular time or at all.

We will be subject to corporate-level income tax if we fail to maintain our status as a RIC under Subchapter M of the Code.

To maintain our status as a RIC under the Code, we must meet the following annual distribution, income source and asset diversification requirements.

•  The annual distribution requirement for a RIC will be satisfied if we distribute to our stockholders on an annual basis at least 90% of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any. Because we use debt financing, we are subject to certain asset coverage ratio requirements under the 1940 Act and financial covenants under loan and credit agreements that could, under certain circumstances, restrict us from making

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distributions necessary to satisfy the distribution requirement. If we are unable to obtain cash from other sources, we could fail to qualify as a RIC and thus become subject to corporate-level income tax.

•  The income source requirement will be satisfied if we obtain at least 90% of our income for each year from dividends, interest, gains from the sale of stock or securities or similar sources.

•  The asset diversification requirement will be satisfied if we meet certain asset diversification requirements at the end of each quarter of our taxable year. Failure to meet those requirements may result in our having to dispose of certain investments quickly or delay the closing of new investments in order to prevent the loss of RIC status and could result in a loss of business. Because most of our investments will be in private companies, and therefore will be relatively illiquid, any such dispositions could be made at disadvantageous prices and could result in substantial losses.

If we fail to qualify as a RIC for any reason and are subject to corporate income tax, the resulting corporate taxes could substantially reduce our net assets, the amount of income available for distribution and the amount of our distributions.

We may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income.

For federal income tax purposes, we will include in income certain amounts that we have not yet received in cash, such as original issue discount, which may arise if we receive warrants in connection with the origination of a loan or possibly in other circumstances, contractual payment-in-kind, or PIK, interest or dividends, which represents contractually deferred interest added to the loan balance that is generally due at the end of the loan term or contractually deferred dividends added to our equity investment in the portfolio company. Such original issue discount or contractual payment-in-kind arrangements will result in the recognition of income before we receive any corresponding cash payments. We also may be required to include in income certain other amounts that we will not receive in cash.

Since, in certain cases, we may recognize income before or without receiving cash representing such income, we may have difficulty meeting the annual distribution requirement necessary to maintain our status as a RIC under the Code. Accordingly, we may have to sell some of our investments at times and/or at prices we would not consider advantageous, raise additional debt or equity capital or reduce new investment originations for this purpose. If we are not able to obtain cash from other sources, we may fail to qualify as a RIC and thus become subject to corporate-level income tax. For additional discussion regarding the tax implications of a RIC, see “Material U.S. Federal Income Tax Considerations — Taxation as a RIC.”

We borrow money, which magnifies the potential for gain or loss on amounts invested and may increase the risk of investing in us.

Borrowings, also known as leverage, magnify the potential for gain or loss on amounts invested and, therefore, increase the risks associated with investing in us. We borrow from and issue senior debt securities to banks and other lenders. Holders of these senior securities have fixed dollar claims on our assets that are superior to the claims of our common stockholders. If the value of our assets increases, then leveraging would cause the net asset value attributable to our common stock to increase more sharply than it would have had we not leveraged. Conversely, if the value of our assets decreases, leveraging would cause the net asset value to decline more sharply than it otherwise would have had we not leveraged. Similarly, any increase in our income in excess of interest payable on the borrowed funds would cause our net income to increase more than it would without the leverage, while any decrease in our income would cause net income to decline more sharply than it would have had we not borrowed. Such a decline could negatively affect our ability to make common stock dividend payments. Leverage is generally considered a speculative investment technique.

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At March 31, 2008, we had $143.0 million of indebtedness outstanding, which had a weighted average annualized interest cost of 5.4% for the quarter ended March 31, 2008. In order for us to cover these annualized interest payments on indebtedness, we must achieve annual returns on our assets of at least 0.8%.

Illustration.  The following table illustrates the effect of leverage on returns from an investment in our common stock assuming various annual returns, net of expenses. The calculations in the table below are hypothetical and actual returns may be higher or lower than those appearing below. The calculation assumes (i) $365.0 million in total assets, (ii) a weighted average cost of funds of 5.4%, (iii) $143.0 million in debt outstanding and (iv) $211.1 million in stockholders’ equity.

Assumed Return on Our Portfolio
(net of expenses)

	–10%			–5%			0%			5%		10%
Corresponding return to stockholder		(20.9	)%		(12.3	)%		(3.7	)%		5.0%		13.6%

Changes in interest rates may affect our cost of capital and net investment income.

Because we borrow to fund our investments, a portion of our income is dependent upon the difference between the interest rate at which we borrow funds and the interest rate at which we invest these funds. A portion of our investments will have fixed interest rates, while a portion of our borrowings will likely have floating interest rates. As a result, a significant change in market interest rates could have a material adverse effect on our net investment income. In periods of rising interest rates, our cost of funds could increase, which would reduce our net investment income. We may hedge against interest rate fluctuations by using standard hedging instruments such as futures, options and forward contracts, subject to applicable legal requirements, including without limitation, all necessary registrations (or exemptions from registration) with the Commodity Futures Trading Commission. These activities may limit our ability to participate in the benefits of lower interest rates with respect to the hedged portfolio. Adverse developments resulting from changes in interest rates or hedging transactions could have a material adverse effect on our business, financial condition and results of operations. Also, we have limited experience in entering into hedging transactions, and we will initially have to rely on outside parties with respect to the use of such financial instruments or develop such expertise internally.

A significant portion of our investment portfolio is and will continue to be recorded at fair value as determined in good faith by our board of directors and, as a result, there is and will continue to be uncertainty as to the value of our portfolio investments.

Under the 1940 Act, we are required to carry our portfolio investments at market value or, if there is no readily available market value, at fair value as determined by our board of directors. We are not permitted to maintain a general reserve for anticipated losses. Instead, we are required by the 1940 Act to specifically value each individual investment and record an unrealized loss for any asset we believe has decreased in value. Typically there is not a public market for the securities of the privately-held companies in which we have invested and will generally continue to invest. As a result, we value our investments in privately-held companies on a quarterly basis based on a determination of their fair value made in good faith and in accordance with the written guidelines established by our board of directors. The types of factors that may be considered in determining the fair value of our investments include the nature and realizable value of any collateral, the portfolio company’s earnings and its ability to make payments on its indebtedness, the markets in which the portfolio company does business, comparison to publicly traded companies, discounted cash flow and other relevant factors. Because such valuations, and particularly valuations of private securities and private companies, are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our determinations of fair value may differ materially from the values that would have been used if a ready market for these securities existed. Our net asset value could be adversely affected if our determinations regarding the fair value of our investments were materially higher than the values that we ultimately realize upon the disposal of such securities.

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The lack of liquidity in our investments may adversely affect our business.

We generally make investments in private companies. Substantially all of these securities are subject to legal and other restrictions on resale or are otherwise less liquid than publicly traded securities. The illiquidity of our investments may make it difficult for us to sell such investments if the need arises. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we had previously recorded our investments. We may also face other restrictions on our ability to liquidate an investment in a portfolio company to the extent that we have material non-public information regarding such portfolio company.

We may experience fluctuations in our quarterly results.

We could experience fluctuations in our quarterly operating results due to a number of factors, including our ability to make investments in companies that meet our investment criteria, the interest rate payable on the debt securities we acquire, the level of our expenses, prepayments of our debt securities, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our markets and general economic conditions. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods.

Our financial condition and results of operations will depend on our ability to manage growth effectively.

Our ability to achieve our investment objective will depend on our ability to grow, which will depend, in turn, on our management team’s ability to identify, evaluate and monitor, and our ability to finance and make appropriate investments in, companies that meet our investment criteria.

Accomplishing this result on a cost-effective basis will be largely a function of our management team’s handling of the investment process, its ability to provide competent, attentive and efficient services and our access to financing on acceptable terms. In addition to monitoring the performance of our existing investments, members of our management team and our investment professionals may also be called upon to provide managerial assistance to our portfolio companies. These demands on their time may distract them or slow the rate of investment. In order to grow, we will need to hire, train, supervise and manage new employees. However, we cannot assure you that any such employees will contribute to the success of our business. Any failure to manage our future growth effectively could have a material adverse effect on our business, financial condition and results of operations.

Changes in laws or regulations governing our operations may adversely affect our business.

We and our portfolio companies are subject to local, state and federal laws and regulations. These laws and regulations, as well as their interpretation, may be changed from time to time. Accordingly, any change in these laws or regulations could have a material adverse affect on our business.

Our board of directors may change our operating policies and strategies without prior notice or stockholder approval, the effects of which may be adverse.

Our board of directors has the authority to modify or waive our current operating policies and strategies without prior notice and without stockholder approval. We cannot predict the effect any changes to our current operating policies and strategies would have on our business, operating results and value of our stock. However, the effects might be adverse, which could negatively impact our ability to pay dividends and cause you to lose all or part of your investment.

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Risks Related to Our Investments

Our investments in portfolio companies may be risky, and we could lose all or part of our investment.

Investing in small- to mid-sized companies involves a number of significant risks. Among other things, these companies:

•  may have limited financial resources and may be unable to meet their obligations under their debt instruments that we hold, which may be accompanied by a deterioration in the value of any collateral and a reduction in the likelihood of us realizing any guarantees that we may have obtained in connection with our investment;

•  may have shorter operating histories, narrower product lines and smaller market shares than larger businesses, which tend to render them more vulnerable to competitors’ actions and market conditions, as well as general economic downturns;

•  are more likely to depend on the management talents and efforts of a small group of persons; therefore, the death, disability, resignation or termination of one or more of these persons could have a material adverse impact on our portfolio company and, in turn, on us;

•  generally have less predictable operating results, may from time to time be parties to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence, and may require substantial additional capital to support their operations, finance expansion or maintain their competitive position. In addition, our executive officers and directors may, in the ordinary course of business, be named as defendants in litigation arising from our investments in the portfolio companies; and

•  generally have less publicly available information about their businesses, operations and financial condition. We are required to rely on the ability of our management team and investment professionals to obtain adequate information to evaluate the potential returns from investing in these companies. If we are unable to uncover all material information about these companies, we may not make a fully informed investment decision, and may lose all or part of our investment.

Our portfolio is and may continue to be concentrated in a limited number of portfolio companies and industries, which will subject us to a risk of significant loss if any of these companies defaults on its obligations under any of its debt instruments or by a downturn in the particular industry.

Our portfolio is and may continue to be concentrated in a limited number of portfolio companies and industries. At March 31, 2008, our investments in two portfolio companies represented approximately 13.0% of our total investments at fair value. Beyond the asset diversification requirements associated with our qualification as a RIC, we do not have fixed guidelines for diversification, and while we are not targeting any specific industries, our investments are, and could continue to be, concentrated in relatively few industries. As a result, the aggregate returns we realize may be significantly adversely affected if a small number of investments perform poorly or if we need to write down the value of any one investment. Additionally, a downturn in any particular industry in which we are invested could also significantly impact the aggregate returns we realize.

Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in such companies.

We invest primarily in senior secured loans, junior secured loans and subordinated debt issued by small- to mid-sized companies. Our portfolio companies may have, or may be permitted to incur, other debt that ranks equally with, or senior to, the debt in which we invest. By their terms, such debt instruments may entitle the holders to receive payment of interest or principal on or before the dates on which we are entitled to receive payments with respect to the debt instruments in which we invest. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders of debt instruments ranking senior to our investment in that portfolio company would typically be entitled to receive

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payment in full before we receive any distribution. After repaying such senior creditors, such portfolio company may not have any remaining assets to use for repaying its obligation to us. In the case of debt ranking equally with debt instruments in which we invest, we would have to share on an equal basis any distributions with other creditors holding such debt in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company.

Second priority liens on collateral securing loans that we make to our portfolio companies may be subject to control by senior creditors with first priority liens. If there is a default, the value of the collateral may not be sufficient to repay in full both the first priority creditors and us.

Certain loans that we make to portfolio companies may be secured on a second priority basis by the same collateral securing senior secured debt of such companies. The first priority liens on the collateral will secure the portfolio company’s obligations under any outstanding senior debt and may secure certain other future debt that may be permitted to be incurred by the portfolio company under the agreements governing the loans. The holders of obligations secured by the first priority liens on the collateral will generally control the liquidation of and be entitled to receive proceeds from any realization of the collateral to repay their obligations in full before us. In addition, the value of the collateral in the event of liquidation will depend on market and economic conditions, the availability of buyers and other factors. There can be no assurance that the proceeds, if any, from the sale or sales of all of the collateral would be sufficient to satisfy the loan obligations secured by the second priority liens after payment in full of all obligations secured by the first priority liens on the collateral. If such proceeds are not sufficient to repay amounts outstanding under the loan obligations secured by the second priority liens, then we, to the extent not repaid from the proceeds of the sale of the collateral, will only have an unsecured claim against the portfolio company’s remaining assets, if any.

The rights we may have with respect to the collateral securing the loans we make to our portfolio companies with senior debt outstanding may also be limited pursuant to the terms of one or more intercreditor agreements that we enter into with the holders of senior debt. Under such an intercreditor agreement, at any time that obligations that have the benefit of the first priority liens are outstanding, any of the following actions that may be taken in respect of the collateral will be at the direction of the holders of the obligations secured by the first priority liens: the ability to cause the commencement of enforcement proceedings against the collateral; the ability to control the conduct of such proceedings; the approval of amendments to collateral documents; releases of liens on the collateral; and waivers of past defaults under collateral documents. We may not have the ability to control or direct such actions, even if our rights are adversely affected.

There may be circumstances where our debt investments could be subordinated to claims of other creditors or we could be subject to lender liability claims.

Even though we may have structured certain of our investments as senior loans, if one of our portfolio companies were to go bankrupt, depending on the facts and circumstances, including the extent to which we actually provided managerial assistance to that portfolio company, a bankruptcy court might recharacterize our debt investment and subordinate all or a portion of our claim to that of other creditors. We may also be subject to lender liability claims for actions taken by us with respect to a borrower’s business or instances where we exercise control over the borrower. It is possible that we could become subject to a lender’s liability claim, including as a result of actions taken in rendering significant managerial assistance.

We may not control any of our portfolio companies.

We may not control any of our portfolio companies, even though we may have board representation or board observation rights and our debt agreements may contain certain restrictive covenants. As a result, we are subject to the risk that a portfolio company in which we invest may make business decisions with which we disagree and the management of such company, as representatives of the equity stockholders, may take risks or otherwise act in ways that do not serve our interests as debt investors.

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Defaults by our portfolio companies will harm our operating results.

A portfolio company’s failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially, termination of its loans and foreclosure on its secured assets, which could trigger cross-defaults under other agreements and jeopardize the portfolio company’s ability to meet its obligations under the debt investments that we hold. We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting portfolio company.

Prepayments of our debt investments by our portfolio companies could adversely impact our results of operations and reduce our return on equity.

We are subject to the risk that the investments we make in our portfolio companies may be repaid prior to maturity. When this occurs, we will generally reinvest these proceeds in temporary investments, pending their future investment in new portfolio companies. These temporary investments will typically have substantially lower yields than the debt being prepaid and we could experience significant delays in reinvesting these amounts. Any future investment in a new portfolio company may also be at lower yields than the debt that was repaid. As a result, our results of operations could be materially adversely affected if one or more of our portfolio companies elects to prepay amounts owed to us. Additionally, prepayments could negatively impact our return on equity, which could result in a decline in the market price of our common stock.

We may not realize gains from our equity investments.

Certain investments that we have made in the past and may make in the future include warrants or other equity securities. In addition, we may from time to time make non-control, equity co-investments in companies in conjunction with private equity sponsors. Our goal is ultimately to realize gains upon our disposition of such equity interests. However, the equity interests we receive may not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from our equity interests, and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses we experience. We also may be unable to realize any value if a portfolio company does not have a liquidity event, such as a sale of the business, recapitalization or public offering, which would allow us to sell the underlying equity interests.

Risks Relating to this Offering

There is a risk that you may not receive dividends or that our dividends may not grow over time.

We intend to continue to make distributions on a quarterly basis to our stockholders. We cannot assure you that we will achieve investment results that will allow us to make a specified level of cash distributions or year-to-year increases in cash distributions. In addition, due to the asset coverage test applicable to us as a business development company, we may be limited in our ability to make distributions.

Investing in our shares may involve an above average degree of risk.

The investments we make in accordance with our investment objective may result in a higher amount of risk than alternative investment options and volatility or loss of principal. Our investments in portfolio companies may be highly speculative and aggressive, and therefore, an investment in our shares may not be suitable for someone with lower risk tolerance.

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The market price of our common stock may fluctuate significantly.

The market price and liquidity of the market for shares of our common stock may be significantly affected by numerous factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include:

•  significant volatility in the market price and trading volume of securities of business development companies or other companies in our sector, which are not necessarily related to the operating performance of these companies;

•  changes in regulatory policies, tax guidelines or accounting pronouncements, particularly with respect to RICs or business development companies;

•  loss of RIC status;

•  changes in earnings or variations in operating results;

•  changes in the value of our portfolio of investments;

•  any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts;

•  departure of our key personnel;

•  operating performance of companies comparable to us;

•  general economic trends and other external factors; and

•  loss of a major funding source.

Terrorist attacks, acts of war or national disasters may affect any market for our common stock, impact the businesses in which we invest and harm our business, operating results and financial condition.

Terrorist acts, acts of war or national disasters may disrupt our operations, as well as the operations of the businesses in which we invest. Such acts have created, and continue to create, economic and political uncertainties and have contributed to global economic instability. Future terrorist activities, military or security operations, or natural disasters could further weaken the domestic/global economies and create additional uncertainties, which may negatively impact the businesses in which we invest directly or indirectly and, in turn, could have a material adverse impact on our business, operating results and financial condition. Losses from terrorist attacks and natural disasters are generally uninsurable.

Certain provisions of our restated certificate of incorporation and restated bylaws as well as the Delaware General Corporation Law could deter takeover attempts and have an adverse impact on the price of our common stock.

Our restated certificate of incorporation and our restated bylaws as well as the Delaware General Corporation Law contain provisions that may have the effect of discouraging a third party from making an acquisition proposal for us. These anti-takeover provisions may inhibit a change in control in circumstances that could give the holders of our common stock the opportunity to realize a premium over the market price for our common stock.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements in this prospectus and the accompanying prospectus supplement, if any, may constitute forward-looking statements because they relate to future events or our future performance or financial condition. These forward-looking statements may include statements as to:

•  our future operating results;

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

•  the impact of the investments that we expect to make;

•  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.

In addition, words such as “anticipate,” “believe,” “expect” and “intend” indicate a forward-looking statement, although not all forward-looking statements include these words. The forward-looking statements contained in this prospectus and the accompanying prospectus supplement involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth in “Risk Factors” and elsewhere in this prospectus and any accompanying prospectus supplement. Other factors that could cause actual results to differ materially include:

•  changes in the economy;

•  risks associated with possible disruption in our operations or the economy; and

•  future changes in laws or regulations and conditions in our operating areas.

We have based the forward-looking statements included in this prospectus and will base the forward-looking statements included in any accompanying prospectus supplement on information available to us on the date of this prospectus and any accompanying prospectus supplement, as appropriate, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

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USE OF PROCEEDS

We intend to use the net proceeds from selling shares of common stock for general corporate purposes, which include investing in debt and equity securities, repayment of indebtedness and other general corporate purposes. The supplement to this prospectus relating to an offering will more fully identify the use of proceeds from such offering.

We anticipate that substantially all of the net proceeds from any offering of our shares of common stock will be used as described above within twelve months, but in no event longer than two years. Pending such uses and investments, we will invest the net proceeds primarily in cash, cash equivalents, U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment.

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PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS

Our common stock is traded on The Nasdaq Global Select Market under the symbol “PCAP.” The following table sets forth, for each fiscal quarter since our initial public offering on July 28, 2005, the range of high and low closing prices of our common stock as reported on The Nasdaq Global Select Market, the closing sales price as a percentage of our net asset value (NAV) and the dividends declared by us for each fiscal quarter. The stock quotations are interdealer quotations and do not include markups, markdowns or commissions.

										Premium
							Premium			(Discount)
			Closing Sales				of High			of Low
			Price				Sales Price			Sales Price
	NAV(1)		High		Low		to NAV(2)			to NAV(2)
Fiscal 2005
Third Quarter (from July 28, 2005)	$	10.50	$	14.33	$	13.72		36	%		31	%
Fourth Quarter	$	10.48	$	13.56	$	10.77		29	%		3	%
Fiscal 2006
First Quarter	$	10.44	$	13.07	$	12.07		25	%		16	%
Second Quarter	$	10.46	$	12.85	$	10.66		23	%		2	%
Third Quarter	$	10.38	$	13.35	$	10.54		29	%		2	%
Fourth Quarter	$	10.37	$	14.90	$	13.33		44	%		28	%
Fiscal 2007
First Quarter	$	10.75	$	14.57	$	13.15		36	%		22	%
Second Quarter	$	10.76	$	15.65	$	14.04		45	%		30	%
Third Quarter	$	10.67	$	15.24	$	12.13		43	%		14	%
Fourth Quarter	$	10.73	$	13.35	$	10.09		24	%		(6	)%
Fiscal 2008
First Quarter	$	10.22	$	11.61	$	9.57		14	%		(6	)%
Second Quarter (through June 16, 2008)		*	$	10.99	$	9.09		*			*

(1)	Net asset value per share is determined as of the last day in the relevant quarter and therefore may not reflect the net asset value per share on the date of the high and low sales prices. The net asset values shown are based on outstanding shares at the end of each period.
(2)	Calculated as the respective high or low closing sales price divided by NAV.
*	Not presently determinable for this period.

The last reported price for our common stock on June 16, 2008 was $9.12 per share. As of June 16, 2008, we had 23 stockholders of record. In addition, we believe we had approximately 16,000 beneficial owners, whose shares of common stock are held in the names of brokers, dealers and clearing agencies.

Shares of business development companies may trade at a market price that is less than the value of the net assets attributable to those shares. At times our shares of common stock have traded in excess of net asset value and at times our shares of common stock have traded at a discount to the net assets attributable to those shares. The possibility that our shares of common stock will trade at a discount from net asset value or at premiums that are unsustainable over the long term are separate and distinct from the risk that our net asset value will decrease. It is not possible to predict whether the shares offered hereby will trade at, above, or below net asset value.

We intend to distribute quarterly dividends to our stockholders. Our quarterly dividends, if any, will be determined by our board of directors. We have elected to be taxed as a RIC under Subchapter M of the Code. As long as we qualify for RIC tax benefits, we will not be taxed on our investment company taxable income or realized net capital gains, to the extent that such taxable income or gains are distributed, or

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deemed to be distributed, to stockholders on a timely basis. Our Second Amended Securitization Facility limits our ability to declare dividends if we default under certain provisions.

As a business development company that has elected to be treated as a RIC, we are required to (1) distribute, with respect to each taxable year, at least 90% of our investment company taxable income in order to deduct any amounts (including net capital gains) distributed (or deemed distributed) to stockholders and (2) distribute, with respect to each calendar year, (actually or on a deemed basis) at least 98% of our income (both ordinary income and net capital gains) to avoid an excise tax. We will incur corporate-level tax on any taxable income or gains earned or realized in a taxable year and not distributed with respect to such year.

The following table summarizes our dividends declared to date:

					Cash
					Dividend
Date Declared	Record Date		Payment Date		Per Share
2005
November 8, 2005		November 30, 2005		December 30, 2005	$	0.27
September 7, 2005		September 30, 2005		October 31, 2005	$	0.16
Total — 2005					$	0.43
2006
November 10, 2006		December 15, 2006		January 17, 2007	$	0.31
August 7, 2006		September 15, 2006		October 17, 2006	$	0.31
May 9, 2006		June 2, 2006		July 17, 2006	$	0.29
February 28, 2006		March 21, 2006		April 11, 2006	$	0.29
Total — 2006					$	1.20
2007
November 1, 2007		December 14, 2007		January 16, 2008	$	0.33
August 2, 2007		September 14, 2007		October 17, 2007	$	0.32
April 30, 2007		June 15, 2007		July 17, 2007	$	0.32
February 23, 2007		March 15, 2007		April 18, 2007	$	0.32
Total — 2007					$	1.29
2008
February 27, 2008		March 14, 2008		April 16, 2008	$	0.33
May 2, 2008		June 5, 2008		July 16, 2008	$	0.33

Prior to becoming a business development company on July 27, 2005, we did not make distributions to our stockholders. See Note 11. “Income Taxes” to our consolidated financial statements included elsewhere in this prospectus for information regarding the tax characterization of our dividends.

We have adopted an “opt-out” dividend reinvestment plan for our common stockholders. As a result, if we declare a dividend, then stockholders’ cash dividends will be automatically reinvested in additional shares of our common stock, unless they specifically “opt-out” of the dividend reinvestment plan so as to receive cash dividends. See “Dividend Reinvestment Plan.”

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The information in this section contains forward-looking statements that involve risks and uncertainties. Please see “Risk Factors” and “Special Note Regarding Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements. You should read the following discussion in conjunction with the consolidated financial statements and related notes and other financial information appearing elsewhere in this prospectus.

General

We are a specialty finance company that provides customized financing solutions to small- to mid-sized companies. Our ability to invest across a company’s capital structure, from senior secured loans to equity securities, allows us to offer a comprehensive suite of financing solutions, including “one-stop” financing. In August 2005, we completed an initial public offering of shares of our common stock for net proceeds (including underwriters’ exercise of their over-allotment) of approximately $106.1 million. On July 27, 2005, we elected to be treated as a business development company under the 1940 Act. We have also elected to be treated as a RIC under Subchapter M of the Code. Pursuant to this election, we generally will not have to pay corporate-level taxes on any income or gains we distribute (actually or as a deemed dividend) to our stockholders as dividends, provided that we satisfy certain requirements.

Since we commenced investment operations in 2003, our business had been conducted through two separate entities, Patriot Capital Funding, Inc. and Wilton Funding, LLC. Patriot Capital Funding, Inc. originated, arranged and serviced the investments made by Wilton Funding, LLC, which invested in debt instruments and warrants of U.S.-based companies. For such services, Patriot Capital Funding, Inc. was entitled to receive placement fees and servicing fees from Wilton Funding, LLC’s portfolio companies and investment origination fees and asset management fees from Wilton Funding, LLC. On July 27, 2005, Wilton Funding, LLC merged with and into Patriot Capital Funding, Inc. and then we effected a stock split. Upon completion of the merger and stock split, we had 3,847,902 shares of common stock outstanding prior to shares issued in the initial public offering. Prior to the completion of the initial public offering, Compass Group Investments, Inc. beneficially owned all of our outstanding shares of stock.

The discussion herein of our financial statements reflect the combined operations of Patriot Capital Funding, Inc. and Wilton Funding, LLC prior to the merger and our consolidated results of our operations thereafter.

Current Market Conditions

The debt and equity capital markets in the United States have been severely impacted by significant write-offs in the financial services sector relating to subprime mortgages and the re-pricing of credit risk in the broadly syndicated loan market, among other things. These events, along with the deterioration of the housing market, have led to worsening general economic conditions, which have impacted the broader capital and credit markets and have reduced the availability of debt and equity capital for the market as a whole and financial firms in particular. In the past, we were able to access the capital and credit markets to finance our investment activities. However, due to the current turmoil in the debt markets and uncertainty in the equity capital markets, we cannot assure you that debt or equity capital will be available to us on favorable terms, or at all. As an example, because our common stock has traded at a price below our current net asset value per share over the last several months and we are not generally able under the 1940 Act to sell our common stock at a price below net asset value per share, without stockholder approval, we have been and may continue to be limited in our ability to raise equity capital. These conditions may limit our ability to grow our investment portfolio.

In light of such conditions, we are seeking stockholder approval of two proposals at our 2008 Annual Meeting of Stockholders that will provide us with additional means to raise capital in the current environment. The first proposal would allow us, in one or more public or private offerings of our common stock, to sell or otherwise issue shares of our common stock at a price below our then current net asset

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value. If approved, the authorization would be effective for a period expiring on the earlier of the anniversary of the date of our 2008 Annual Meeting of Stockholders and the date of our 2009 Annual Meeting of Stockholders, which is expected to be held in June 2009. The second proposal would give us the ability to issue warrants, options or rights to subscribe to, convert to, or purchase shares of our common stock, which may include convertible preferred stock and convertible debentures. There can be no assurance that our stockholders will approve these proposals. If we receive stockholder approval to sell shares of our common stock below net asset value, any sale of common stock at a price below net asset value would result in immediate dilution with regard to our dividends and net asset value, and other aspects of our common stock to our existing stockholders. If we receive stockholder approval to issue warrants, options or rights to subscribe to, convert to or purchase shares of common stock, any issuance and exercise of such warrants, options or rights could be dilutive with regard to dividends and our net asset value, and other economic aspects of the common stock to our existing stockholders.

Portfolio Composition

Our primary business is lending to and investing in small- to mid-sized businesses through investments in senior secured loans, junior secured loans, subordinated debt investments and equity-based investments, including warrants. The fair value of our portfolio was $351.9 million and $384.7 million at March 31, 2008 and December 31, 2007, respectively.

Total portfolio investment activity as of and for the three months ended March 31, 2008 and the year ended December 31, 2007, respectively, was as follows:

	March 31, 2008			December 31, 2007
Beginning portfolio at fair value	$	384,725,753		$	257,812,235
Investments in debt securities		5,141,406			191,391,250
Investments in equity securities		—			8,925,000
Investment repayments		(19,441,899	)		(67,332,023	)
Increase in payment-in-kind interest/dividends		1,453,912			3,928,159
Sale of investments		(10,437,500	)		(5,374,749	)
Change in unearned revenue		356,002			(986,413	)
Decrease in fair value of investments		(9,851,274	)		(3,637,706	)
Ending portfolio at fair value	$	351,946,400		$	384,725,753

The level of investment activity for investments funded and principal repayments for our investments can vary substantially from period to period depending on the number and size of investments that we make and many other factors, including the amount of debt and equity capital available to small- to mid-sized 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.

As of March 31, 2008 and December 31, 2007, the composition of our portfolio at fair value was as follows:

	March 31, 2008					December 31, 2007
	Investments at		Percentage of			Investments at		Percentage of
	Fair Value		Total Portfolio			Fair Value		Total Portfolio
Senior secured revolving lines of credit	$	17,094,250		4.9	%	$	14,841,169		3.9	%
Senior secured term loans		155,139,919		44.1			174,367,981		45.3
Junior secured term loans		71,256,327		20.2			84,583,227		22.0
Senior subordinated debt		96,375,977		27.4			97,468,645		25.3
Investments in equity securities		12,079,927		3.4			13,464,731		3.5
Totals	$	351,946,400		100.0	%	$	384,725,753		100.0	%

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For the three months ended March 31, 2008 and the year ended December 31, 2007, the weighted average yield on all of our outstanding debt investments was approximately 12.2% and 12.4%, respectively. The weighted average balance of our debt investment portfolio during the three months ended March 31, 2008 was $362.5 million, up from $342.1 million during the fourth quarter of 2007. Yields are computed using actual interest income earned for the year (annualized for the three months ended March 31, 2008), including amortization of loan fees and original issue discount, divided by the weighted average fair value balance of debt investments. As of March 31, 2008 and December 31, 2007, $136.0 million and $138.0 million, respectively, of our portfolio investments at fair value were at fixed interest rates, which represented approximately 39% and 36%, respectively, of our total portfolio of investments at fair value. We generally structure our subordinated debt investments at fixed rates while many of our senior secured and junior secured loans are, and will be, at variable rates.

Since 2006, we, through our special purpose subsidiary, entered into five interest rate swap agreements. Our swap agreements have a fixed rate range of 4.8% to 5.2% on an initial notional amount of $34.8 million. The swap agreements expire five years from issuance. The swaps were put into place to hedge against changes in variable interest payments on a portion of our outstanding borrowings. For the three months ended March 31, 2008 and 2007, net unrealized depreciation attributed to the swaps was approximately $753,000 and $63,000, respectively. 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 rates with respect to the outstanding borrowings. At March 31, 2008 and December 31, 2007, we did not hold any derivative financial instruments for hedging purposes.

At March 31, 2008 and December 31, 2007, our equity investments consisted of common and preferred stock, LLC membership interests and warrants to acquire equity interests in certain of our portfolio companies. Warrants to acquire equity interests allow us to participate in the potential appreciation in the value of the portfolio company, while minimizing the amount of upfront cost to us.

The composition of our investment portfolio by industry sector, using Moody’s Industry Classifications, excluding unearned income, as of March 31, 2008 and December 31, 2007 at cost and fair value was as follows:

	March 31, 2008										December 31, 2007
	Cost		%(1)			Fair Value		%(1)			Cost		%(1)			Fair Value		%(1)
Machinery	$	53,022,930		14.5	%	$	49,903,263		14.2	%	$	52,844,315		13.6	%	$	54,030,773		14.0	%
Personal & Nondurable Consumer Products		50,860,827		13.9			51,155,027		14.5			51,070,705		13.2			51,280,805		13.3
Automobile		34,197,014		9.4			32,808,011		9.3			34,044,318		8.8			33,957,022		8.8
Electronics		33,728,611		9.2			33,672,204		9.6			42,296,015		10.9			42,470,710		11.0
Health Care, Education & Childcare		33,068,953		9.1			32,903,253		9.3			33,686,998		8.7			33,779,798		8.8
Metals & Minerals		22,991,125		6.3			21,638,125		6.2			22,972,190		5.9			22,972,190		6.0
Grocery		22,906,173		6.3			22,918,589		6.5			23,149,458		6.0			23,287,658		6.1
Printing & Publishing		19,538,140		5.3			15,533,347		4.4			19,172,972		4.9			16,303,220		4.2
Textiles & Leather		13,025,390		3.6			13,324,570		3.8			12,970,522		3.3			13,077,422		3.4
Ecological		12,264,553		3.4			11,064,603		3.1			15,593,790		4.0			14,393,840		3.7
Chemicals, Plastic & Rubber		11,179,640		3.1			11,176,392		3.2			10,733,851		2.8			10,730,842		2.8
Retail Stores		10,968,634		3.0			10,981,234		3.1			10,656,911		2.7			10,637,911		2.8
Mining, Steel, Iron & Nonprecious Metals		10,558,561		2.9			10,546,800		3.0			10,796,410		2.8			10,785,664		2.8
Housewares & Durable Consumer Products		10,135,626		2.8			9,637,088		2.7			9,673,177		2.5			9,686,477		2.5
Diversified/Conglomerate Service		9,676,365		2.6			9,293,165		2.6			9,516,840		2.4			9,245,940		2.4
Insurance		5,000,000		1.4			3,750,000		1.1			5,000,000		1.3			4,500,000		1.2
Buildings & Real Estate		4,907,194		1.3			4,907,194		1.4			4,780,826		1.2			4,780,826		1.2
Oil & Gas		3,838,335		1.0			3,838,335		1.1			3,837,555		1.0			3,837,555		1.0
Personal, Food & Miscellaneous Services		3,000,000		0.8			2,730,000		0.8			3,000,000		0.8			2,910,000		0.8
Aerospace & Defense		463,168		0.1			165,200		0.1			463,168		0.1			161,600		0.1
Beverage, Food & Tobacco		—		—			—		—			9,000,000		2.3			9,000,000		2.3
Containers, Packaging & Glass		—		—			—		—			2,985,000		0.8			2,895,500		0.8
Total	$	365,331,239		100.0	%	$	351,946,400		100.0	%	$	388,245,021		100.0	%	$	384,725,753		100.0	%

(1) Represents percentage of total portfolio.

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At March 31, 2008 and December 31, 2007, our two largest investments represented approximately 13% and 12%, respectively, of the total investment portfolio at fair value. Investment income, consisting of interest, dividends, fees, the recognition of gains on equity interests, and the recognition of unamortized deferred financing fees received from portfolio companies on the repayment of their debt investment, the sale of the debt investment or reduction of available credit under the debt investment, can fluctuate dramatically upon repayment of an investment or sale of an equity interest. Revenue recognition in any given period can be highly concentrated among several portfolio companies. During the three months ended March 31, 2008 and the year ended December 31, 2007, we did not record investment income from any portfolio company in excess of 10.0% of total investment income.

Portfolio Asset Quality

We utilize a standard investment rating system for our entire portfolio of debt investments. Investment Rating 1 is used for investments that exceed expectations and/or a capital gain is expected. Investment Rating 2 is used for investments that are generally performing in accordance with expectations. Investment Rating 3 is used for performing investments that require closer monitoring. Investment Rating 4 is used for investments performing below expectations where a higher risk of loss exists. Investment Rating 5 is used for investments performing significantly below expectations where we expect a loss.

The following table shows the distribution of our investments on the 1 to 5 investment rating scale at fair value as of March 31, 2008 and December 31, 2007:

	March 31, 2008					December 31, 2007
	Investments at		Percentage of			Investments at		Percentage of
Investment Rating	Fair Value		Total Portfolio			Fair Value		Total Portfolio
1	$	54,495,792		16.0	%	$	46,466,323		12.5	%
2		219,131,432		64.5			252,730,493		68.1
3		37,316,165		11.0			57,510,986		15.5
4		28,923,084		8.5			14,553,220		3.9
5		—		—			—		—
Totals	$	339,866,473		100.0	%	$	371,261,022		100.0	%

In the event that the United States economy enters into a prolonged recession, it is possible that the financial results of small- to mid-sized companies, similar to those in which we invest, could experience deterioration, which could ultimately lead to difficulty in meeting debt service requirements and an increase in defaults. While we are not seeing signs of an overall, broad deterioration in our portfolio company results at this time, we can provide no assurance that the performance of certain of our portfolio companies will not be negatively impacted by these economic or other conditions which could have a negative impact on our future results.

Loans and Debt Securities on Non-Accrual Status

At March 31, 2008 and December 31, 2007, none of our loans or debt securities were on non-accrual status.

Results of Operations

The principal measure of our financial performance is net income (loss), which includes net investment income (loss), net realized gain (loss) and net unrealized appreciation (depreciation). Net investment income (loss) is the difference between our income from interest, dividends, fees, and other investment income and our operating expenses. Net realized gain (loss) on investments is the difference between the proceeds received from dispositions of portfolio investments and their stated cost. Net unrealized appreciation (depreciation) on interest rate swaps is the net change in the fair value of our outstanding swap

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agreements. Net unrealized appreciation (depreciation) on investments is the net change in the fair value of our investment portfolio.

Comparison for the three months ended March 31, 2008 and 2007

Total Investment Income

Total investment income included interest and dividend income on our investments, fee income and other investment income. Fee income consists principally of loan and arrangement fees, annual administrative fees, unused fees, prepayment fees, amendment fees, equity structuring fees and waiver fees. Other investment income consists primarily of the accelerated recognition of deferred financing fees received from our portfolio companies on the repayment of the outstanding investment, the sale of the investment or reduction of available credit.

Total investment income for the three months ended March 31, 2008 and 2007, was $11.2 million and $9.0 million, respectively. For the three months ended March 31, 2008, this amount consisted of interest income of $53,000 from cash and cash equivalents, $11.0 million of interest and dividend income from portfolio investments (which included $1.5 million in payment-in-kind or PIK interest and dividends), $214,000 in fee income and $40,000 in other investment income. For the three months ended March 31, 2007, this amount consisted of interest income of $79,000 from cash and cash equivalents, $8.1 million of interest and dividend income from portfolio investments (which included $841,000 in payment-in-kind or PIK interest and dividends), $395,000 in fee income and $384,000 in other investment income.

During the quarter ended March 31, 2008, the primary reason behind the increase in total investment income was an increase in interest income due to the increase in the weighted average fair value balance of our investment portfolio, partially offset by a decrease in the weighted average yield of our investments. During the three months ended March 31, 2008, the weighted average fair value balance outstanding of our interest-bearing investment portfolio was approximately $362.5 million as compared to approximately $265.5 million during the three months ended March 31, 2007. The weighted average yield decreased as a result of a shift in our portfolio mix towards more senior secured investments and an overall decrease in market interest rates.

Expenses

Expenses included compensation expense, interest on our outstanding indebtedness, professional fees, and general and administrative expenses.

Expenses for the three months ended March 31, 2008 and 2007, were $4.5 million and $3.6 million, respectively. Expenses increased for the three months ended March 31, 2008 as compared to the three months ended March 31, 2007 by approximately $827,000, primarily as a result of higher compensation expense which increased by $279,000, higher interest expense which increased by $553,000, and higher general and administrative expenses which increased by $40,000, offset by lower professional fees of $45,000. The higher compensation expense was attributable to an increase in non-cash stock option compensation of $23,000 due to granting of additional stock options in 2007 and 2008, and increased compensation expense associated with increased bonus accruals and higher salaries for new and existing employees. The increase in interest expense was attributable to an increase in weighted average borrowings outstanding, which were approximately $152.7 million during the three months ended March 31, 2008, as compared to $84.9 million during the three months ended March 31, 2007. Such borrowings were used primarily to fund investments. The decrease in professional fees expense is primarily due to decreases in the fees we incurred in 2008 as compared to 2007 related to compliance with Section 404 of the Sarbanes-Oxley Act of 2002.

Realized Gain (Loss) on Sale of Investments

Net realized gain (loss) on the sale of investments is the difference between the proceeds received from dispositions of portfolio investments and their stated cost. During the three months ended March 31,

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2008, we sold one investment in which we realized a loss of $90,000. During the three months ended March 31, 2007, we sold one investment in which we realized a gain of $6,000.

Net Change in Unrealized Appreciation or Depreciation on Investments

We determine the value of each investment in our portfolio on a quarterly basis, and changes in value result in unrealized appreciation or depreciation being recognized in our statement of operations. Value, as defined in Section 2(a)(41) of the Investment Company Act of 1940, is (i) the market price for those securities for which a market quotation is readily available and (ii) for all other securities and assets, fair value is as determined in good faith by the board of directors. Since there is typically no readily available market value for the investments in our portfolio, we value substantially all of our portfolio investments at fair value as determined in good faith by the board of directors pursuant to our valuation policy and a consistently applied valuation process. At March 31, 2008 and December 31, 2007, portfolio investments recorded at fair value represented 96.4% and 96.6%, respectively, of our total assets. Because of the inherent uncertainty of estimating the fair value of investments that do not have a readily available market value, the fair value of our investments determined in good faith by the board of directors may differ significantly from the values that would have been used had a ready market existed for the investments, and the differences could be material.

Net unrealized appreciation (depreciation) on investments is the net change in the fair value of our investment portfolio during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized. During the three months ended March 31, 2008 and 2007, we recorded net unrealized appreciation (depreciation) of ($9.9 million) and $85,000, respectively, on our investments. For 2008, a portion of our net unrealized depreciation, approximately $1.2 million, resulted from quoted market prices on our syndicated loan portfolio as a result of disruption in the financial credit markets for broadly syndicated loans; approximately $4.2 million, resulted from an increase in the number of our portfolio companies requiring closer monitoring or performing below expectations; and approximately $4.5 million, resulted from the adoption of the Financial Accounting Standards Board’s Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”).

We believe that the majority of the $4.5 million of unrealized depreciation attributable to the adoption of SFAS 157 will ultimately be reversed when we exit these investments. We invest primarily in illiquid assets with the intention to hold these assets to settlement or maturity. This is in contrast to the premise under SFAS 157 that assets generally should be valued on the basis of their current market value and, if no market exists, on the basis that they are sold in a hypothetical market at the end of each quarter. We have not historically exited our investments through the individual sale of such investments rather we have typically exited our investments through a sale of the portfolio company or through a recapitalization of the portfolio company. Our belief that the majority of the $4.5 million of unrealized deprecation attributable to SFAS 157 will ultimately be reversed is supported by the fact that all such unrealized depreciation related to investments we rated 1 or 2 under our investment rating system at March 31, 2008.

Also, sustained market disruptions in the large corporate leverage loan market could continue to have a downward impact on the amount of unrealized depreciation we record on our syndicated loans.

Net Unrealized Depreciation on Interest Rate Swaps

Net unrealized depreciation on interest rate swaps represents the change in value of the swap agreements. For the three months ended March 31, 2008 and 2007, we recorded an unrealized depreciation of approximately $753,000 and $63,000, respectively, on our interest rate swap agreements. The 2008 unrealized depreciation in the value of our interest rate swap agreements resulted from the volatility and corresponding reduction in variable interest rates during the period.

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Net Income (Loss)

Net loss was $3.9 million for the quarter ended March 31, 2008 as compared to net income of $5.4 million for the quarter ended March 31, 2007. The net loss for the three months ended March 31, 2008 principally related to recording unrealized depreciation of $9.9 million on our investments and unrealized depreciation of $753,000 on our interest rate swap agreements.

Comparison of the year ended December 31, 2007 and December 31, 2006

Total Investment Income

Total investment income included interest and dividend income on our investments, fee income and other investment income. Fee income consists principally of loan and arrangement fees, annual administrative fees, unused fees, prepayment fees, amendment fees, equity structuring fees and waiver fees. Other investment income consists primarily of the accelerated recognition of deferred financing fees received from our portfolio companies on the repayment of the entire outstanding investment, the sale of the investment or reduction of available credit.

Total investment income for the years ended December 31, 2007 and December 31, 2006 was $39.0 million and $26.5 million, respectively. For the year ended December 31, 2007, this amount consisted of interest income of $255,000 from cash and cash equivalents, $36.9 million of interest and dividend income from portfolio investments (which included $3.9 million in payment-in-kind or PIK interest and dividends), $1.3 million in fee income and $535,000 in other investment income. For the year ended December 31, 2006, this amount primarily consisted of interest income of $423,000 from cash and cash equivalents, $25.0 million of interest and dividend income from portfolio investments (which included $2.4 million in payment-in-kind or PIK interest and dividends), $270,000 in fee income and $848,000 in other investment income.

During the year ended December 31, 2007, the primary reason behind the increase in total investment income was an increase in interest income due to the increase in the size of our investment portfolio, and an increase in fee income due to an increase in prepayment penalties and structuring fees as well as higher fees, partially offset by a decrease in the weighted average yield on our investments. During the year ended December 31, 2007, the weighted average fair value balance outstanding of our interest-bearing investment portfolio was approximately $298.5 million as compared to approximately $192.5 million during the year ended December 31, 2006. The weighted average yield decreased as a result of a shift in our portfolio mix towards more senior secured investments and an overall decrease in market interest rates.

Expenses

Expenses included compensation expense, interest on our outstanding indebtedness, professional fees, and general and administrative expenses.

Expenses for the years ended December 31, 2007 and 2006 were $16.2 million and $11.5 million, respectively. Expenses increased for the year ended December 31, 2007 as compared to the year ended December 31, 2006 primarily as a result of increased compensation expense in the amount of $1.5 million, increased interest expense in the amount of $3.1 million and increased general and administrative expense in the amount of $269,000. Those increases were offset by lower professional fees expense in the amount of $159,000. The higher compensation expense is due to the increase in salaries of existing employees, higher bonus accruals and the addition of new employees during the year. We expect to hire additional employees as needed in the future as our investment activities grow. The higher interest expense is attributable to an increase in the weighted average borrowings outstanding, which were approximately $106.0 million in 2007 as compared to $55.3 million in 2006, and an increase in interest rates on our outstanding indebtedness during the third and fourth quarters of 2007. Such borrowings were primarily used to fund investments. The increase in general and administrative expenses is primarily a result of higher costs for benefits and travel attributable to the increase in employees and computer software expense. The decrease in professional fees

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expense is primarily due to decreases in the fees we incurred in 2006 related to our initial compliance with Section 404 of the Sarbanes-Oxley Act of 2002.

Realized Gain (Loss) on Sale of Investments

Net realized gain (loss) on sale of investments is the difference between the proceeds received from dispositions of portfolio investments and their stated cost. During the year ended December 31, 2007, we realized gains of $92,000, principally due to the sale of equity warrants from one of our portfolio investments. During the year ended December 31, 2006, we sold our investment in Interstate Highway Sign Corporation and realized a net loss of $3.3 million.

Net Change in Unrealized Appreciation or Depreciation on Investments

We determine the value of each investment in our portfolio on a quarterly basis, and changes in value result in unrealized appreciation or depreciation being recognized in our statement of operations. Value, as defined in Section 2(a)(41) of the 1940 Act, is (i) the market price for those securities for which a market quotation is readily available and (ii) for all other securities and assets, fair value as determined in good faith by our board of directors. Since there is typically no readily available market value for the investments in our portfolio, we value substantially all of our portfolio investments at fair value as determined in good faith by our board of directors pursuant to our valuation policy and a consistently applied valuation process. At December 31, 2007 and 2006, portfolio investments recorded at fair value were approximately 96.6% and 95.1% of our total assets, respectively. Because of the inherent uncertainty of determining the fair value of investments that do not have a readily available market, the fair value of our investments determined in good faith by the board of directors may differ significantly from the values that would have been used had a ready market existed for the investments, and the differences could be material.

Net unrealized appreciation (depreciation) on investments is the net change in the fair value of our investment portfolio during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains and losses are realized. During the year ended December 31, 2007, we recorded net unrealized depreciation of $3.6 million on our investments and during the year ended December 31, 2006, we recorded net unrealized appreciation of $3.8 million on our investments, which primarily related to one investment which was sold during the year at a realized loss of $3.3 million. A substantial portion of the unrealized depreciation recorded during 2007 resulted from an increase in the number of our portfolio companies requiring closer monitoring or performing below expectations and, to a lesser extent, from quoted market prices below par on our syndicated loan portfolio as a result of disruption in the financial and credit markets for large syndicated loans. Sustained market disruptions in the large corporate leverage loan market could continue to have a downward impact on the amount of unrealized depreciation we record on our syndicated loans.

Unrealized Appreciation (Depreciation) on Interest Rate Swaps

Net unrealized depreciation on interest rate swaps represents the change in value of our swap agreements. For the year ended December 31, 2007, we recorded an unrealized depreciation of approximately $775,000 on our interest rate swap agreements as compared to $13,000 in unrealized appreciation in the comparable period in 2006. The 2007 unrealized depreciation in the value of our interest rate swap agreements resulted from the volatility in interest rates during the year.

Net Income from Operations

Net income was $18.4 million for the year ended December 31, 2007 as compared to $15.6 million for the year ended December 31, 2006. The $2.8 million increase in net income was primarily a result of an increase in investment income of $12.5 million in 2007, partially offset by an increase in operating expenses in the amount of $4.7 million in 2007 and an increase in net realized and unrealized loss in the amount of $4.9 million.

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Comparison of the year ended December 31, 2006 and December 31, 2005

Total Investment Income

Total investment income included interest and dividend income on our investments, fee income and other investment income. Fee income consists principally of loan and arrangement fees, annual administrative fees, unused fees, prepayment fees, amendment fees, equity structuring fees and waiver fees. Other investment income consists primarily of the accelerated recognition of deferred financing fees received from our portfolio companies on the repayment of the entire outstanding investment, the sale of the investment or reduction of available credit.

Total investment income for the years ended December 31, 2006 and December 31, 2005 was $26.5 million and $13.4 million, respectively. For the year ended December 31, 2006, this amount consisted of interest income of $423,000 from cash and cash equivalents, $25.0 million of interest and dividend income from portfolio investments (which included $2.4 million in payment-in-kind or PIK interest and dividends), $270,000 in fee income and $848,000 in other investment income. For the year ended December 31, 2005, this amount primarily consisted of interest income of $131,000 from cash and cash equivalents, $12.9 million of interest income from portfolio investments (which included $1.8 million in payment-in-kind or PIK interest), $367,000 in fee income and $47,000 in other investment income.

The increase in our total investment income for the year ended December 31, 2006 as compared to the year ended December 31, 2005 is primarily attributable to an increase in the weighted average fair value balance outstanding of our interest-bearing investment portfolio during the year ended December 31, 2006. During the year ended December 31, 2006, the weighted average fair value balance outstanding of our interest-bearing investment portfolio was approximately $192.5 million as compared to approximately $95.4 million during the year ended December 31, 2005.

Expenses

Expenses included compensation expense, consulting fees, interest on our outstanding indebtedness, professional fees, a prepayment penalty associated with the repayment of the outstanding balance under our $120.0 million financing agreement, and general and administrative expenses.

Expenses for the years ended December 31, 2006 and 2005 were $11.5 million and $11.7 million, respectively. Expenses decreased for the year ended December 31, 2006 as compared to the year ended December 31, 2005 primarily as a result of incurring a $3.4 million prepayment penalty in 2005 from the repayment of the outstanding balance under our $120.0 million financing agreement and the termination of consulting agreements on July 27, 2005. Those decreases were offset by higher compensation expense in the amount of $1.4 million, $506,000 of which related to non-cash stock option compensation as a result of our adoption of Statement of Financial Accounting Standards No. 123R, “Share-Based Payment,” on January 1, 2006, higher interest expense in the amount of $815,000, increased professional fees in the amount of $315,000, and higher general and administrative expenses in the amount of $1.2 million. The higher compensation expense was attributable to the increase in the number of personnel due to increased investment activities and increased bonus accruals primarily due to our entry into employment agreements with certain of our executive officers during the latter part of the year ended December 31, 2005. We expect to hire additional employees as needed in the future as our investment activities grow. The higher interest expense is attributable to an increase in the borrowings outstanding. Such borrowings are primarily used to fund investments. The increased professional fees are a result of higher costs attributable to being a public company. The increase in general and administrative costs is primarily due to increases in the following: insurance, directors’ fees, investor relations and franchise taxes.

We incurred consulting fees in the amount of $555,000 for the year ended December 31, 2005, payable to two entities affiliated with Compass Group Investments, Inc. These consulting arrangements were terminated on July 27, 2005.

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Realized Gain (Loss) on Sale of Investments

Net realized gain (loss) on sale of investments is the difference between the proceeds received from dispositions of portfolio investments and their stated cost. During the year ended December 31, 2006, we sold our investment in Interstate Highway Sign Corporation and realized a net loss of $3.3 million. We also realized a capital gain of $8,000 on the sale of our investment in Intergraph Corporation in 2006. We did not realize any gains or losses on the sale of our portfolio investments during the year ended December 31, 2005.

Net Change in Unrealized Appreciation or Depreciation on Investments

We determine the value of each investment in our portfolio on a quarterly basis, and changes in value result in unrealized appreciation or depreciation being recognized in our statement of operations. Value, as defined in Section 2(a)(41) of the 1940 Act, is (i) the market price for those securities for which a market quotation is readily available and (ii) for all other securities and assets, fair value as determined in good faith by our board of directors. Since there is typically no readily available market value for the investments in our portfolio, we value substantially all of our portfolio investments at fair value as determined in good faith by our board of directors pursuant to our valuation policy and a consistently applied valuation process. At December 31, 2006 and 2005, portfolio investments recorded at fair value were approximately 95.1% and 91.6% of our total assets, respectively. Because of the inherent uncertainty of determining the fair value of investments that do not have a readily available market, the fair value of our investments determined in good faith by the board of directors may differ significantly from the values that would have been used had a ready market existed for the investments, and the differences could be material.

Net unrealized appreciation (depreciation) on investments is the net change in the fair value of our investment portfolio. During the year ended December 31, 2006, we recorded net unrealized appreciation of $3.8 million on our investments, which primarily related to one investment which was sold during the year at a realized loss of $3.3 million. During the year ended December 31, 2005, we recorded net unrealized depreciation of $3.0 million on our investments, which primarily related to the aforementioned investment we sold in 2006.

Unrealized Appreciation on Interest Rate Swaps

Net unrealized depreciation on interest rate swaps represents the change in value of the swap agreements. For the year ended December 31, 2006, we recorded an unrealized appreciation of approximately $13,000 on our interest rate swap agreements. We did not have any swap agreements in 2005.

Net Income from Operations

Net income was $15.6 million for the year ended December 31, 2006 as compared to net loss of $1.2 million for the year ended December 31, 2005. The $16.8 million increase in net income was primarily a result of an increase in investment income of $13.1 million in 2006, a decrease in operating expenses of $236,000 and a net increase in net realized and unrealized gain in the amount of $3.5 million.

Financial Condition, Liquidity and Capital Resources

Cash, Cash Equivalents and Restricted Cash

At March 31, 2008 and December 31, 2007, we had $1.3 million and $789,000, respectively, in cash and cash equivalents. In addition, at March 31, 2008 and December 31, 2007, we had $9.1 million and $10.5 million, respectively, in restricted cash which we maintained in accordance with the terms of our Second Amended Securitization Facility. A portion of these funds were released to us on April 14, 2008 and January 14, 2008.

For the three months ended March 31, 2008, net cash provided by operating activities totaled $3.2 million, compared to net cash provided by operating activities of $3.9 million for the comparable 2007

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period. Cash provided by (used for) investing activities totaled $24.6 million and ($13.8) million for the three months ended March 31, 2008 and 2007, respectively. This change was principally due to lower investment originations in 2008 of $52.1 million, and lower loan repayments and amortization of $18.7 million, offset by an increase in proceeds from investment sales of $5.0 million. Cash provided by (used for) financing activities totaled ($27.3) million and $10.4 million in the three months ended March 31, 2008 and 2007, respectively. This change was principally due to a net decrease of $3.9 million in our net borrowings, a decrease in sale of common stock of $31.7 million, and an increase of $2.4 million in dividends paid.

Liquidity and Capital Resources

On January 26, 2007, the Company closed a shelf offering of 2,370,000 shares of common stock and received gross proceeds of $33.7 million less underwriters’ commissions and discounts, and fees of approximately $2.0 million. In addition, on October 2, 2007, we closed a shelf offering of 2,300,000 shares of common stock and received gross proceeds of $30.5 million less underwriters’ commissions and discounts, and fees of approximately $1.6 million.

Although we expect that cash on hand, borrowing availability, and cash generated from operations to be adequate to meet our cash needs at our current level of operations, we may face difficultly in obtaining new debt and equity financing as a result of the current turmoil in the credit markets and uncertainty in the capital markets, which could limit our ability to grow. In this regard, because our common stock has occasionally traded at a price below our current net asset value per share over the last several months and we are limited in our ability to sell our common stock at a price below net asset value per share, we have been and may continue to be limited in our ability to raise equity capital. See “— Current Market Conditions.” In addition, our securitization revolving credit facility contains certain requirements, including, but not limited to, minimum diversity, rating and yield, and limitations on loan size. These requirements may limit our ability to fund certain new originations with advances under the facility, in which case we will seek to fund originations using new debt or equity financings, which may or may not be available on favorable terms, if at all.

In order to satisfy the requirements applicable to RICs under Subchapter M of the Code, we intend to continue distributing to our stockholders substantially all of our taxable income. Taxable income generally differs from net income (loss) for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation until realized. Taxable income includes cash fees collected and non-cash items, such as PIK interest and dividends. Cash collections of income resulting from PIK interest generally occur upon the repayment of the loans or debt securities that include such items and cash collections of income resulting from PIK dividends occur upon the sale of the equity security received in connection therewith. Non-cash taxable income is reduced by non-cash expenses, such as realized losses and depreciation and amortization expense. See “— Regulated Investment Company Status and Dividends.”

In addition, as a business development company, we generally are required to meet a coverage ratio of total assets less liabilities and indebtedness not represented by senior securities, to total senior securities, which includes all of our borrowings and any preferred stock we may issue in the future, of at least 200%. This requirement limits the amount that we may borrow. As of March 31, 2008, this ratio was 248%. To fund growth in our investment portfolio in the future, we anticipate needing to raise additional capital from various sources, including the equity markets and the securitization or other debt-related markets, which may or may not be available on favorable terms, if at all.

Borrowings

Securitization Revolving Credit Facility.  On September 18, 2006, we, through a wholly-owned, bankruptcy remote, special purpose subsidiary of ours, entered into an amended and restated securitization revolving credit facility (the “Securitization Facility “), with an entity affiliated with BMO Capital Markets Corp. On May 2, 2007, we amended our Securitization Facility and lowered the interest rate payable on

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any outstanding balances under the Securitization Facility during the period of time we are permitted to make draws. The amendment also reduced or eliminated certain restrictions pertaining to certain loan covenants. On August 31, 2007, we amended the Securitization Facility (the “Amended Securitization Facility”) and increased its borrowing capacity by $35 million. The amendment also extended the commitment termination date by an additional 364-day period to July 22, 2010 and also reduced or eliminated certain restrictions pertaining to certain loan covenants. The Amended Securitization Facility allows our special purpose subsidiary to borrow up to $175 million ($140.0 million prior to August 31, 2007) through the issuance of notes to a multi-seller commercial paper conduit administered by the affiliated entity. The Amended Securitization Facility is secured by all of the loans held by our special purpose subsidiary. The Amended Securitization Facility bears interest at the commercial paper rate plus 1.0% (1.35% prior to May 2, 2007) and allows our special purpose subsidiary to make draws under the Amended Securitization Facility until July 22, 2010 (July 23, 2009 prior to August 31, 2007), unless extended prior to such date for an additional 364-day period with the consent of the lender. If the Amended Securitization Facility is not extended, any principal amounts then outstanding will be amortized over a 24-month period following July 23, 2010 and interest will accrue on outstanding borrowings under the facility at the prime rate plus 2.0%. The Amended Securitization Facility provides for the payment to the lender of a monthly fee equal to 0.25% per annum on the unused amount of the Amended Securitization Facility. We can use the proceeds of the Amended Securitization Facility to fund our loan origination activities and for general corporate purposes. Each loan origination under the Amended Securitization Facility will be subject to the satisfaction of certain conditions. We cannot assure you that we will be able to borrow funds under the Amended Securitization Facility at any particular time or at all. As of March 31, 2008, $143.0 million was outstanding under the Amended Securitization Facility. At March 31, 2008, the interest rate was 4.1%.

The predecessor securitization revolving credit facility to the Securitization Facility: (i) allowed our special purpose subsidiary to make draws under the Securitization Facility until July 24, 2008, unless extended prior to such date for an additional 364-day period with the consent of the lender thereto; (ii) bore interest at the commercial paper rate plus 1.75%; (iii) provided that in the event that the Securitization Facility was not extended, any principal amounts then outstanding would be amortized over a 24-month period following July 24, 2008 and interest would accrue on outstanding borrowings under the Securitization Facility at the prime rate plus 2.0%; and (iv) contained more stringent restrictions regarding certain loan concentrations. On April 11, 2008, we entered into an amended and restated securitization revolving credit facility with an entity affiliated with BMO Capital Markets Corp. and Branch Banking and Trust Company. See — “Recent Developments.”

Since 2006, we, through our special purpose subsidiary, entered into five interest rate swap agreements. The swap agreements have a fixed rate range of 4.8% to 5.2% on an initial notional amount of $34.8 million. The swap agreements expire five years from issuance. The swaps were put into place to hedge against changes in variable interest payments on a portion of our outstanding borrowings. 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 rates with respect to the outstanding borrowings.

Regulated Investment Company Status and Dividends

Effective August 1, 2005, we elected to be treated as a RIC under Subchapter M of the Code. As long as we qualify as a RIC, we will not be taxed on our investment company taxable income or realized net capital gains, to the extent that such taxable income or gains are distributed, or deemed to be distributed, to stockholders on a timely basis.

Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation until realized. Dividends declared and paid by us in a year may differ from taxable income for that year as such dividends may include the distribution of current year taxable income or the distribution of prior year taxable income carried forward into and distributed in the current year. Distributions also may include returns of capital.

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To obtain and maintain RIC tax treatment, we must, among other things, distribute, with respect to each taxable year, at least 90% of our investment company taxable income (i.e., our net ordinary income and our realized net short-term capital gains in excess of realized net long-term capital losses, if any). In order to avoid certain excise taxes imposed on RICs, we currently intend to distribute, with respect to each calendar year, an amount at least equal to the sum of (1) 98% of our ordinary income for the calendar year, (2) 98% of our capital gains in excess of capital losses for the one-year period ending on October 31 of the calendar year and (3) any ordinary income and net capital gains for preceding years that were not distributed during such years. We intend to make distributions to our stockholders on a quarterly basis of substantially all of our annual taxable income (which includes our taxable interest and fee income). We currently intend to retain for investment some or all of our net taxable capital gains (i.e., realized net long-term capital gains in excess of realized net short-term capital losses) and treat such amounts as deemed distributions to our stockholders. If we do this, our stockholders will be treated as if they received actual distributions of the capital gains we retained and then reinvested the net after-tax proceeds in our common stock. Our stockholders also may be eligible to claim tax credits (or, in certain circumstances, tax refunds) equal to their allocable share of the tax we paid on the capital gains deemed distributed to them. During the three months ended March 31, 2008 and 2007, we realized capital gain (loss) of approximately ($90,000) and $6,000, respectively. In addition, at March 31, 2008, the Company has a net capital loss carryforward of $3.2 million to offset net capital gains until December 31, 2013. To the extent our taxable earnings for a fiscal tax year fall below the total amount of our dividends for that fiscal year, a portion of those dividend distributions may be deemed a return of capital to our stockholders.

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 applicable to us as a business development company under the 1940 Act and due to provisions in our amended and restated securitization revolving credit facility. If we do not distribute at least a certain percentage of our taxable income annually, we will suffer adverse tax consequences, including possible loss of our status as a RIC. We cannot assure stockholders that they will receive any distributions or distributions at a particular level.

Off-Balance Sheet Arrangements

We are party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio companies. These instruments include commitments to extend credit and involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. We attempt to limit our credit risk by conducting extensive due diligence, negotiating appropriate financial covenants and obtaining collateral where necessary. As of March 31, 2008, we had unused commitments to extend credit to our portfolio companies of $26.1 million, which are not reflected on our balance sheet.

In connection with our amended and restated securitization revolving credit facility, our consolidated special purpose subsidiary may be required under certain circumstances to enter into interest rate swap agreements or other interest rate hedging transactions. We have agreed to guarantee the payment of certain swap breakage costs that may be payable by our special purpose subsidiary in connection with any such interest rate swap agreements or other interest rate hedging transactions. At March 31, 2008, we had five interest rate swap agreements outstanding.

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Contractual Obligations

The following table reflects a summary of our contractual cash obligations and other commercial commitments as of March 31, 2008:

	Payments Due by Period
											More than
Contractual Obligations	2008		2009		2010		2011		2012		5 Years
Long-term debt obligations(1)	$	—	$	29,792,000	$	71,500,000	$	41,708,000	$	—	$	—
Capital lease obligations		—		—		—		—		—		—
Operating lease obligations		193,000		241,000		247,000		21,000		—		—
Purchase obligations		—		—		—		—		—		—
Other long-term liabilities reflected on the balance sheet under GAAP		—		—		—		—		—		—
Unused lending commitments(2)		26,100,000		—		—		—		—		—
Total	$	26,293,000	$	30,033,000	$	71,747,000	$	41,729,000	$	—		—

(1) Our Second Amended Securitization Facility permits draws under the facility until April 11, 2011, unless extended prior to such date for an additional 364-day period with the consent of the lender. If the facility is not extended, any principal amounts then outstanding will be amortized over a 24-month period following April 11, 2011 and interest will accrue on outstanding borrowings under the facility at the commercial paper rate plus 1.75% on up to $175 million of outstanding borrowings and the LIBOR rate plus 1.75% on up to $50 million of outstanding borrowings. See “— Recent Developments.”

Recent Developments

On April 2, 2008, we amended our senior and subordinated debt investments in Encore Legal Solutions Inc. (“Encore”). Concurrent with a $1.0 million subordinated debt pay down received from Encore on April 2, 2008, the remaining subordinated debt cost balance of approximately $5.2 million was converted into an equity investment. At March 31, 2008, the fair value balance of the subordinated debt was approximately $3.7 million before the pay down and conversion. After the conversion, we had a 30% equity ownership interest in Encore.

On April 11, 2008, we entered into a Second Amended Securitization Facility with an entity affiliated with BMO Capital Markets Corp. and Branch Banking and Trust Company. The Second Amended Securitization Facility amends and restates our Amended Securitization Facility. The Amended Securitization Facility was amended and restated to, among other things: (i) increase the borrowing capacity from $175 million to $225 million; (ii) extend the date until which we are allowed to make draws under the facility from July 22, 2010 to April 11, 2011 (unless extended prior to such date for an additional 364-day period with the consent of the lenders thereto); (iii) increase the interest rate payable under the facility from the commercial paper rate plus 1.00% to the commercial paper rate plus 1.75% on up to $175 million of outstanding borrowings and the LIBOR rate plus 1.75% on up to $50 million of outstanding borrowings; and (iv) increase the unused commitment fee from 0.25% per annum to 0.30% per annum. Similar to the Amended Securitization Facility, the Second Amended Securitization Facility contains restrictions pertaining to the geographic and industry concentrations of funded loans, maximum size of funded loans, interest rate payment frequency of funded loans, maturity dates of funded loans, minimum yields on funded loans and minimum equity requirements. These restrictions may affect the amount of notes our special purpose subsidiary may issue from time to time. The Second Amended Securitization Facility also contains certain requirements relating to portfolio performance, including required minimum portfolio yield and limitations on delinquencies and charge-offs, violation of which could result in the early termination of the Second Amended Securitization Facility. Each loan origination under the Second Amended Securitization Facility is subject to the satisfaction of certain conditions.

On May 2, 2008, the board of directors declared a cash dividend of $0.33 per share, payable on July 16, 2008 to stockholders of record as of the close of business on June 5, 2008. Such cash dividend is payable on total shares issued and outstanding on the record date.

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Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the period reported. On an ongoing basis, our management evaluates its estimates and assumptions, which are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates. Changes in our estimates and assumptions could materially impact our results of operations and financial condition.

Valuation of Portfolio Investments

The most significant estimate inherent in the preparation of our financial statements is the valuation of investments and the related amounts of unrealized appreciation and depreciation of investments recorded.

Under SFAS 157, we principally utilize the market approach to estimate the fair value of our investments where there is not a readily available market and we also utilize the income approach to estimate the fair value of our debt investments. Under the market approach, we estimate the enterprise value of the portfolio companies in which we invest. There is no one methodology to estimate enterprise value and, in fact, for any one portfolio company, enterprise value is best expressed as a range of fair values, from which we derive a single estimate of enterprise value. To estimate the enterprise value of a portfolio company, we analyze various factors, including the portfolio company’s historical and projected financial results. We generally require portfolio companies to provide annual audited and quarterly and monthly unaudited financial statements, as well as annual projections for the upcoming fiscal year. Typically, private companies are valued based on multiples of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), cash flows, net income, revenues, or in limited cases, book value.

Under the income approach, we generally prepare and analyze discounted cash flow models based on our projections of the future free cash flows of the business. We also use bond yield models to determine the present value of the future cash flow streams of our debt investments. We review various sources of transactional data, including private mergers and acquisitions involving debt investments with similar characteristics, and assess the information in the valuation process.

The fair value of our investments at March 31, 2008, and December 31, 2007 was determined in good faith by our board of directors. Duff & Phelps, LLC, an independent valuation firm (“Duff & Phelps”), provided third party valuation consulting services to us which consisted of certain mutually agreed upon limited procedures that we engaged them to perform. At March 31, 2008 and at December 31, 2007, we asked Duff & Phelps to perform the limited procedures on investments in 8 and 15 portfolio companies, respectively, comprising approximately 31% and 49% of the total investments at fair value, respectively. Upon completion of their limited procedures, Duff & Phelps concluded that the fair value of those investments subjected to the limited procedures did not appear to be unreasonable. Our board of directors is solely responsible for the valuation of our portfolio investments at fair value as determined in good faith pursuant to our valuation policy and consistently applied valuation process.

Fee Income Recognition

We receive a variety of fees in the ordinary course of our business, including arrangement fees and loan fees. We account for our fee income in accordance with Emerging Issues Task Force Issue 00-21 “Accounting for Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). EITF 00-21 addresses certain aspects of a company’s accounting for arrangements containing multiple revenue-generating activities. In some arrangements, the different revenue-generating activities (deliverables) are sufficiently separable and there exists sufficient evidence of their fair values to separately account for some or all of the deliverables (i.e., there are separate units of accounting). EITF 00-21 states that the total consideration received for the arrangement be allocated to each unit based upon each unit’s relative fair value. In other arrangements, some or all of the deliverables are not independently functional, or there is

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not sufficient evidence of their fair values to account for them separately. In determining fair value of various fee income we receive, we will first rely on data compiled through our investment and syndication activities and secondly on independent third party data. The timing of revenue recognition for a given unit of accounting depends on the nature of the deliverable(s) in that accounting unit (and the corresponding revenue recognition model) and whether the general conditions for revenue recognition have been met. Fee income for which fair value cannot be reasonably ascertained is recognized using the interest method in accordance with Statement of Financial Accounting Standards No. 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases,” (“SFAS No. 91”). We have historically recognized fee income in accordance with SFAS No. 91. In addition, we capitalize and offset direct loan origination costs against the origination fees received and only defer the net fee.

Payment-in-Kind or PIK Interest and Dividends

We include in income certain amounts that we have not yet received in cash, such as contractual payment-in-kind or PIK interest or dividends, which represents either contractually deferred interest added to the loan balance that is generally due at the end of the loan term or contractually deferred dividends added to our equity investment in the portfolio company. We will cease accruing PIK interest if we do not expect the portfolio company to be able to pay all principal and interest due, and we will cease accruing PIK dividends if we do not expect the portfolio company to be able to make PIK dividend payments in the future. In certain cases, a portfolio company makes principal payments on its loan prior to making payments to reduce the PIK loan balances and, therefore, the PIK portion of a portfolio company’s loan can increase while the total outstanding amount of the loan to that portfolio company may stay the same or decrease. Accrued PIK interest and dividends represented $5.9 million or 1.7% of our portfolio of investments at fair value as of March 31, 2008 and $4.7 million or 1.2% of our portfolio of investments at fair value as of December 31, 2007. The net increase in loan and equity balances as a result of contracted PIK arrangements are separately identified on our statements of cash flows.

PIK related activity for the three months ended March 31, 2008 was as follows:

	Three Months Ended
	March 31, 2008
Beginning PIK balance	$	4,714,356
PIK interest and dividends earned during the period		1,453,912
PIK receipts during the period		(255,463	)
Ending PIK balance	$	5,912,805

Interest and Dividend Income Recognition

Interest income is recorded on an accrual basis to the extent that such amounts are expected to be collected. When a loan or debt security becomes 90 days or more past due, or if we otherwise do not expect the debtor to be able to service its debt or other obligations, we will generally place the loan or debt security on non-accrual status and cease recognizing interest income on that loan or debt security until the borrower has demonstrated the ability and intent to pay contractual amounts due. At March 31, 2008 and December 31, 2007, none of our loans and debt securities were greater than 90 days past due or on non-accrual.

Dividend income on preferred equity securities is recorded on an accrual basis to the extent that such amounts are expected to be collected. Dividend income on common equity securities is recorded on the record date for private companies and the ex-dividend date for publicly traded companies.

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SENIOR SECURITIES

Information about our senior securities is shown in the following tables as of the applicable fiscal year ended December 31, unless otherwise noted. The report of our independent registered public accounting firm on the senior securities table as of December 31, 2007, is attached as an exhibit to the registration statement of which this prospectus is a part. The “—” indicates information which the SEC expressly does not require to be disclosed for certain types of senior securities.

	Total Amount
	Outstanding				Involuntary
	Exclusive of		Asset		Liquidating		Average
	Treasury		Coverage		Preference		Market Value
Class and Year	Securities(1)		per Unit(2)		per Unit(3)		per Unit(4)
Securitization Revolving Credit Facility
2008 (as of March 31, unaudited)	$	143,000,000	$	2,476		—		N/A
2007	$	164,900,000	$	2,344		—		N/A
2006		98,380,000		2,668		—		N/A
2005		21,650,000		6,873		—		N/A
2004		—		—		—		—
2003		—		—		—		—
Financing Agreement
2008 (as of March 31, unaudited)		—		—		—		—
2007		—		—		—		—
2006		—		—		—		—
2005		—		—		—		—
2004		41,645,458		1,640		—		N/A
2003		7,800,000		3,610		—		N/A
Revolving Credit Agreement
2008 (as of March 31, unaudited)		—		—		—		—
2007		—		—		—		—
2006		—		—		—		—
2005		—		—		—		—
2004		600,000		1,640		—		N/A
2003		1,200,000		3,610		—		N/A
Demand Note
2008 (as of March 31, unaudited)		—		—		—		—
2007		—		—		—		—
2006		—		—		—		—
2005		—		—		—		—
2004		400,000		1,640		—		N/A
2003		400,000		3,610		—		N/A

(1)	Total amount of each class of senior securities outstanding at the end of the period presented.
(2)	The asset coverage ratio for a class of senior securities representing indebtedness is calculated as our total assets, less all liabilities and indebtedness not represented by senior securities, divided by senior securities representing indebtedness. Asset coverage per unit is expressed in terms of dollar amounts per $1,000 of indebtedness.
(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.

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BUSINESS

General

We are a specialty finance company that provides customized financing solutions to small- to mid-sized companies. Our ability to invest across a company’s capital structure, from senior secured loans to equity securities, allows us to offer a comprehensive suite of financing solutions, including “one-stop” financings. Our “one-stop” financing typically includes a revolving line of credit, one or more senior secured term loans and a subordinated debt investment. We also make equity co-investments of generally less than $2.0 million and investments in broadly syndicated loans. We primarily finance privately-held companies in transactions initiated by private equity sponsors.

Our investment objective is to generate both current cash income and capital appreciation. To accomplish this objective, we seek to provide our stockholders with current income primarily from the interest on our debt investments and related origination fees, and to enable our stockholders to participate in the capital appreciation and potential long-term growth of our portfolio companies through warrants and other equity interests we acquire.

Since we commenced investment operations in 2003, we have originated $543 million of investment commitments, primarily in transactions initiated by private equity sponsors. We typically make investments of $3 million to $20 million in companies with $10 million to $100 million in annual revenues that operate in diverse industry sectors. As of March 31, 2008, we had debt investments in 32 portfolio companies with an aggregate fair value of $339.9 million, and warrants to purchase shares of common stock in three portfolio companies and equity investments (other than warrants) in 18 portfolio companies with an aggregate fair value of $12.1 million.

As of March 31, 2008, senior secured revolving lines of credit, senior secured term loans, junior secured term loans, senior subordinated debt and equity investments comprised approximately 4.9%, 44.1%, 20.2%, 27.4%, and 3.4%, respectively, of our investment portfolio at fair value. Approximately 62.6% of our investments at fair value at March 31, 2008 were originated in connection with our “one-stop” financing. As of March 31, 2008, the weighted average yield on all of our outstanding debt investments was approximately 12.2%.

We are a closed-end, non-diversified investment company that has elected to be treated as a business development company under the Investment Company Act of 1940, or the 1940 Act. We are internally managed by our executive officers under the supervision of our board of directors. As a result, we do not pay investment advisory fees, but instead we incur the operating costs associated with employing investment and portfolio management professionals.

As a business development company, we are required to comply with numerous regulatory requirements. We finance our investments using debt and equity. However, our ability to use debt and equity is limited in certain significant respects. See “Regulation.” We have elected to be treated for federal income tax purposes as a regulated investment company, or RIC, under Subchapter M of the Internal Revenue Code, or the Code. See “Material U.S. Federal Income Tax Considerations.” As a RIC, we generally will not have to pay corporate-level federal income taxes on any net ordinary income or capital gains that we distribute to our stockholders as dividends if we meet certain source-of-income, income distribution and asset diversification requirements.

Corporate History and Information

We were founded in November 2002 by Richard P. Buckanavage, our president and chief executive officer, Timothy W. Hassler, our chief investment officer, and Compass Group Investments, Inc., a private investment firm providing capital to middle market companies. Prior to our founding, Mr. Buckanavage was a managing director and the head of debt sales at GE Capital Markets, Inc. and Mr. Hassler was a director in the capital markets division of U.S. Bank National Association. Messrs. Buckanavage and Hassler have more than 35 years of combined experience lending to, and investing in, small- and mid-sized companies.

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We commenced investment operations in 2003, and, prior to our initial public offering, we conducted our business through two separate entities, Patriot Capital Funding, Inc. and Wilton Funding, LLC. Patriot Capital Funding, Inc. originated, arranged and serviced the investments made by Wilton Funding, LLC, which invested in debt instruments and warrants of U.S.-based companies. On July 27, 2005, Wilton Funding, LLC merged with and into Patriot Capital Funding, Inc.

Our principal executive offices are located at 274 Riverside Avenue, Westport, Connecticut 06880 and our telephone number is (203) 429-2700. We maintain a website on the Internet at www.patcapfunding.com. Information contained on our website is not incorporated by reference into this prospectus and you should not consider information contained on our website to be part of this prospectus.

Our Target Market

We believe that the size of the small- to mid-sized company market is significant and underserved. Despite the size of this market, we believe that broad-based consolidation in the financial services industry has substantially reduced the number of financial institutions lending to the companies that we target. We believe that this trend toward greater concentration of assets in larger banks and financial institutions has reduced the availability of debt capital to small- to mid-sized companies from such financing sources.

In our experience, lending to small- to mid-sized companies generally requires a greater dedication of a lender’s time and personnel resources as compared to lending to larger companies. Small- to mid-sized companies generally do not have publicly traded equity or debt securities, and public information about such businesses is typically limited. In addition, lenders to small- to mid-sized companies have to more actively monitor their investments and may need to become more directly involved in overseeing their operations. We believe that these factors have caused many large financial institutions with high cost structures to focus their lending activities on larger companies. To the extent that regional banks lend to small- to mid-sized companies, our experience is that these institutions tend to focus on senior financing and, as a result, do not provide a comprehensive suite of customized financing solutions to small- to mid-sized companies or the private equity sponsors investing in this market.

These trends have, in our view, created a large, underserved market of small- to mid-sized companies with significant financing needs. Because we primarily provide capital to this target market in transactions initiated by private equity sponsors, we consider the private equity sponsor community to be an integral gateway to the market in which we operate. We generally target the sponsors of private equity funds with less than $250 million in assets that are focused on making investments in companies with $10 million to $100 million in annual revenues. We expect that private equity sponsors will continue to be active investors in our target market and they will seek debt financing to support their investments, which should provide opportunities for us to continue to partner with such firms.

Our Business Strategy

Our investment objective is to generate both current cash income and capital appreciation through debt and equity investments in small- to mid-sized companies. We have adopted the following business strategy to achieve our investment objective:

•  Deliver a comprehensive suite of customized financing solutions in a responsive and efficient manner.  Our goal is to provide a comprehensive suite of customized financing solutions in a responsive and efficient manner to private equity sponsors in connection with their proposed investments in small- to mid-sized companies. Private equity sponsors with whom we work require a high level of creativity and knowledge in structuring investment transactions. Our ability to provide financing across all levels of a company’s capital structure appeals to private equity sponsors that typically seek to rely on a limited number of third party financing sources for their investment transactions in order to facilitate and ensure the timely closing of such transactions. We believe our ability to provide a comprehensive suite of customized financing solutions sets us apart from other lenders that focus on providing a limited number of financing solutions.

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•  Capitalize on our strong private equity sponsor relationships.  We are committed to establishing, building and maintaining our private equity sponsor relationships. Our marketing efforts are focused on building and maintaining relationships with private equity sponsors that routinely make investments in the small- to mid-sized companies that we target. We believe that our relationships with private equity sponsors provide us with, in addition to potential investment opportunities, other significant benefits, including an additional layer of due diligence and additional monitoring capabilities. Private equity sponsors also provide our portfolio companies with significant benefits, including strategic guidance, an additional potential source of capital and operational expertise. We have assembled a management team that has developed an extensive network of private equity sponsor relationships in our target market over the last 15 years. We believe that our management team’s relationships with these private equity sponsors will provide us with significant investment opportunities.

•  Employ disciplined underwriting policies and maintain rigorous portfolio monitoring.  We have an extensive investment underwriting and monitoring process. We conduct a thorough analysis of each potential portfolio company and its prospects, competitive position, financial performance and industry dynamics. We stress the importance of credit and risk analysis in our underwriting process. We believe that our continued adherence to this disciplined process will permit us to mitigate loan losses, to continue to generate a stable and diversified revenue stream of current income from our debt investments and provide us with the ability to make distributions to our stockholders.

•  Leverage the skills of our experienced management team.  Our management team is led by our president and chief executive officer, Mr. Buckanavage, and our chief investment officer, Mr. Hassler, who combined have more than 35 years of experience in lending to, and investing in, small and mid-sized companies. The members of our management team have broad investment backgrounds, with prior experience at specialty finance companies, middle market commercial banks and other financial services companies. We believe that the experience and contacts of our management team will continue to allow us to effectively implement the key aspects of our business strategy.

Investment Selection

Our management team has identified the following investment criteria and guidelines that it believes are important in evaluating prospective portfolio companies. Our management team uses these criteria and guidelines in evaluating investment opportunities for us. However, not all of these criteria and guidelines were, or will be, met in connection with each of our investments.

•  Established companies with positive cash flow.  We seek to invest in established companies with sound historical financial performance. We typically focus on companies with a history of profitability on an operating cash flow basis and that generate minimum annual EBITDA of $2 million. We do not intend to invest in start-up companies or companies with speculative business plans.

•  Strong competitive position in industry.  We analyze the strengths and weaknesses of target companies relative to their competitors. The factors we consider include relative product pricing, product quality, customer loyalty, substitution risk, switching costs, patent protection, brand positioning and capitalization. We seek to invest in companies that have developed leading positions within their respective markets, are well positioned to capitalize on growth opportunities and operate businesses or in industries with significant barriers to entry. We seek companies that demonstrate advantages when compared to their competitors, which may help to protect their market position and profitability.

•  Experienced management team.  We seek to invest in companies that have experienced management teams. We also seek to invest in companies that have proper incentives in place, including having significant equity interests, to motivate management to act in concert with our interests as investors.

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•  Diversified customer and supplier base.  We generally seek to invest in companies that have a diversified customer and supplier base. Companies with a diversified customer and supplier base are generally better able to endure economic downturns, industry consolidation, changing business preferences and other factors that may negatively impact their customers, suppliers and competitors.

•  Private equity sponsorship.  We generally seek to invest in companies in conjunction with private equity sponsors who have proven capabilities in building value. We believe that a private equity sponsor can serve as a committed partner and advisor that will actively work with the company and its management team to meet company goals and create value. We assess a private equity sponsor’s commitment to a portfolio company by, among other things, the capital contribution it has made or will make in the portfolio company.

•  Exit strategy.  We seek to invest in companies that we believe will provide a steady stream of cash flow to repay our debt investments and reinvest in their respective businesses. We expect that the primary means by which we exit our debt investments will be through the repayment of our investment by internally generated cash flow. In addition, we will seek to invest in companies whose business models and expected future cash flows may provide alternate methods of repaying our investment, such as through a strategic acquisition by other industry participants, an initial public offering, a recapitalization or another capital market transaction.

Underwriting Process and Investment Approval

An initial evaluation of each potential investment is performed by one of our investment professionals. To the extent a potential investment appears to meet our investment criteria, a pre-screening memorandum is prepared and presented to the investment committee detailing some or all of the following information:

•  Transaction description;

•  Company description, including product or service analysis, market position, market dynamics, customer and supplier analysis and evaluation of management;

•  Quantitative and qualitative analysis of historical financial performance and financial projections;

•  Competitive landscape;

•  Business strengths and weaknesses;

•  On-site visits with management and relevant employees;

•  Quantitative and qualitative private equity sponsor analysis; and

•  Potential investment structures, senior and total leverage multiples and investment pricing terms.

If the investment committee votes to proceed, we submit a non-binding proposal to the prospective private equity sponsor and/or potential portfolio company. Once the private equity sponsor and/or potential portfolio company agree to the terms and conditions outlined in our financing proposal, we commence our full due diligence assessment, including:

•  Initial or additional on-site visits with management and relevant employees;

•  Review of historical and projected financial statements, including reports from third-party forensic accountants;

•  Interviews with customers and suppliers;

•  Research on products and services, market dynamics and competitive landscape;

•  Management background checks;

•  Review of material contracts;

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•  Review by legal, environmental or other industry consultants, if applicable; and

•  Financial sponsor diligence, including portfolio company and lender reference checks.

Upon completion of a satisfactory due diligence review, a full investment memorandum is prepared and distributed to the investment committee for final approval of the proposed investment. The investment committee is able to request additional due diligence or modify the financing structure or terms of the proposed investment. The approval of the investment committee is required before we proceed with any investment. Upon receipt of such approvals, we proceed to document and, upon satisfaction of applicable closing conditions, fund the investment.

Our investment committee consists of our president and chief executive officer, Mr. Buckanavage, our chief investment officer, Mr. Hassler, our executive vice president and chief compliance officer, Clifford L. Wells, and our executive vice president and managing director, Matthew R. Colucci.

All actions described above that require the approval of our investment committee must be approved by each member of our investment committee at a meeting at which at least a majority of the members of our investment committee is present.

We use substantially the same process as described above in connection with making investments in broadly syndicated loans, except that we generally rely on the arranger banks’ efforts in gathering certain information about the prospective borrower in connection with our due diligence assessment and frequently have less input regarding investment structures and investment pricing terms.

Investments

We seek to continue to grow and manage a diversified portfolio that includes senior secured loans, junior secured loans, subordinated debt investments and equity investments. We generally target investments of approximately $3 million to $25 million in companies with annual revenues generally ranging between $10 million and $100 million. Our ability to invest across a company’s capital structure, from senior secured loans to equity securities, allows us to offer companies a comprehensive suite of financing solutions, including “one stop” financing. Our “one-stop” financing typically includes a revolving line of credit, one or more senior secured term loans and a subordinated debt investment. Our loans may include both debt and equity components. The debt instruments provide for returns in the form of interest payments, including payment-in-kind or PIK interest, while the equity instruments, such as warrants and non-control, equity co-investments, provide us with an opportunity to participate in the capital appreciation of the portfolio company and, to a lesser extent, returns in the form of dividend payments, including payment-in-kind or PIK dividends.

Debt Investments

We tailor the terms of our debt investments to the facts and circumstances of the transaction and prospective portfolio company, negotiating a structure that seeks to protect our rights and manage our risk while creating incentives for the portfolio company to achieve its business plan. For example, we seek to limit the downside risks of our investments by:

•  negotiating covenants that are designed to protect our investments while affording our portfolio companies as much flexibility in managing their businesses as possible. Such restrictions may include affirmative and negative covenants, default penalties, lien protection, change of control provisions and board rights; and

•  requiring a total return on our investments (including both interest and potential equity appreciation) that compensates us for credit risk.

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Senior Secured Loans

Our senior secured loans generally have terms of 4 to 7 years, provide for a variable or fixed interest rate and are secured by a first priority security interest in all existing and future assets of the borrower. We generally only invest in senior secured loans of a portfolio company in conjunction with an investment in a junior secured loan, subordinated debt investment or a “one-stop” financing, including revolving lines of credit, term loans and acquisition lines of credit.

Junior Secured Loans

Our junior secured loans generally have terms of 5 to 7.5 years, provide for a variable or fixed interest rate and are secured by a second priority security interest in all existing and future assets of the borrower. We may invest in junior secured loans, such as “last out” senior notes or second lien notes, on a stand-alone basis, or in conjunction with a senior secured loan, a subordinated debt investment or a “one-stop” financing.

Subordinated Debt

Our subordinated debt investments generally have terms of 5 to 7.5 years and provide for a fixed interest rate. A portion of our subordinated debt investments may be secured by a second priority security interest in the assets of the borrower. We may make subordinated debt investments on a stand-alone basis, or in conjunction with a senior secured loan, a junior secured loan or a “one-stop” financing. Our subordinated debt investments often include an equity component, such as warrants to purchase common stock in the portfolio company, and payment-in-kind, or PIK, interest, which represents contractual interest accrued and added to the principal that generally becomes due at maturity.

“One-Stop” Financing

Our “one-stop” financing typically includes a revolving line of credit, one or more senior secured term loans and a subordinated debt investment. We believe our ability to provide “one-stop” financing sets us apart from other lenders who focus on only one or two layers of the capital structure. Subsequent to our closing of a “one-stop” financing, we may seek to exit lower yielding tranches of the financing by arranging for replacement financing by another lender.

Syndicated Loans

In addition to the investments described above, we also make investments in broadly syndicated loans. A syndicated loan is a loan that is provided by a group of lenders and is structured, arranged and administered by one or several commercial or investment banks known as arrangers. Our syndicated loans generally have terms of 4 to 7.5 years, provide for a variable or fixed interest rate and are secured by a first or second priority security interest in all existing and future assets of the borrower.

Equity Investments

When we provide a “one-stop” financing or when we make a subordinated debt investment, we may acquire warrants to purchase common stock or other equity interests in the portfolio company. The warrants we receive in connection with these investments generally are detachable and require only a nominal cost to exercise. In addition, we may from time to time make non-control, equity co-investments, which we generally expect to be less than $2.0 million in companies in conjunction with private equity sponsors. We generally seek to structure our equity investments, such as warrants and direct equity co-investments, to provide us with minority rights provisions and event-driven puts. We also seek to obtain registration rights in connection with these investments, which may include demand and “piggyback” registration rights. Certain equity investments include payment-in-kind of PIK dividends, which represent contractually deferred dividends added to our equity investment.

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Portfolio Management

We generally employ several methods of evaluating and monitoring the performance of our portfolio companies, which, depending on the particular investment, may include the following specific processes, procedures and reports:

•  Monthly review of actual financial performance versus the corresponding period of the prior year and financial projections;

•  Monthly review of borrowing base, if applicable;

•  Quarterly review of operating results, covenant compliance, and general business performance, including the preparation of a portfolio monitoring report which is distributed to members of our investment committee;

•  Periodic face-to-face meetings with management teams and private equity sponsors of portfolio companies; and

•  Attendance at portfolio company board meetings through board seats or observation rights.

In connection with the monitoring of our portfolio companies, each debt investment we hold is rated based upon the following five-level numeric investment rating system:

•  Investment Rating 1 — Investment that exceeds expectations and/or capital gain expected;

•  Investment Rating 2 — Investment generally performing in accordance with expectations;

•  Investment Rating 3 — Investment that requires closer monitoring;

•  Investment Rating 4 — Investment performing below expectations where a higher risk of loss exists; and

•  Investment Rating 5 — Investment performing significantly below expectations where we expect a loss.

The following table shows the distribution of our debt investments on the 1 to 5 investment rating scale at fair value as of March 31, 2008 and December 31, 2007:

	March 31, 2008					December 31, 2007
	Investments at		Percentage of			Investments at		Percentage of
Investment Rating	Fair Value		Total Portfolio			Fair Value		Total Portfolio
1	$	54,495,792		16.0	%	$	46,466,323		12.5	%
2		219,131,432		64.5			252,730,493		68.1
3		37,316,165		11.0			57,510,986		15.5
4		28,923,084		8.5			14,553,220		3.9
5		—		—			—		—
Totals	$	339,866,473		100.0	%	$	371,261,022		100.0	%

In the event that we determine that an investment is underperforming, or circumstances suggest that the risk associated with a particular investment has significantly increased, we undertake more aggressive monitoring of the affected portfolio company. While our investment rating system identifies the relative risk for each investment, the rating alone does not dictate the scope and/or frequency of any monitoring that we perform. The frequency of our monitoring of an investment is determined by a number of factors, including, but not limited to, the trends in the financial performance of the portfolio company, the investment structure and the type of collateral securing our investment, if any.

47

Managerial Assistance

As a business development company, we offer, and must provide upon request, managerial assistance to certain of our portfolio companies. This assistance will typically involve, among other things, monitoring the operations of our portfolio companies, participating in board and management meetings, consulting with and advising officers of portfolio companies and providing other organizational and financial guidance. We may receive fees for these services.

Competition

We compete for investments with a number of business development companies and other investment funds (including private equity funds and mezzanine funds), as well as traditional financial services companies such as commercial banks and other sources of financing. Many of these entities have greater financial and managerial resources than we do. We believe we compete with these entities primarily on the basis of our willingness to make smaller investments, the experience and contacts of our management team, our responsive and efficient investment analysis and decision-making processes, our comprehensive suite of customized financing solutions and the investment terms we offer. We do not seek to compete primarily on the interest rates we offer to potential portfolio companies, and we believe that some of our competitors make senior secured loans, junior secured loans and subordinated debt investments with interest rates that are comparable to or lower than the rates we offer. For additional information concerning the competitive risks we face, see “Risk Factors — Risks Relating to Our Business and Structure — We operate in a highly competitive market for investment opportunities.”

Employees

At March 31, 2008, we had 14 employees, including investment and portfolio management professionals and operations.

Properties

We do not own any real estate materially important to our operation. Currently, we lease office space in Westport, Connecticut for our corporate headquarters.

Legal Proceedings

Although we may, from time to time, be involved in litigation arising out of our operations in the normal course of business or otherwise, we are currently not a party to any pending material legal proceedings.

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PORTFOLIO COMPANIES

The following table sets forth certain information as of March 31, 2008 for each portfolio company in which we had a debt or equity investment. Other than these investments, our only relationships with our portfolio companies are the managerial assistance we may separately provide to our portfolio companies, which services would be ancillary to our investments, and the board observer or participation rights we may receive.

			Percentage
Name and Address of	Nature of Its	Title of Securities	of Class			Cost of		Fair Value of
Portfolio Company	Principal Business	Held by Us	Held(1)			Investment		Investment(2)
ADAPCO, Inc. 550 Aero Lane Sanford, FL 32771	Distributor of specialty chemical and contract application services	Revolving Line of Credit(4) Senior Secured Term Loan A(4)				$	2,979,269 8,785,284	$	2,979,269 8,085,334
		Common Stock		<5	%		500,000		—
Aircraft Fasteners International, LLC P.O. Box 66249 Los Angeles, CA 90066-0249	Distributor of fasteners and related hardware for use in aerospace, electronics and defense industries	Senior Secured Term Loan(4) Junior Secured Term Loan(5) Convertible Preferred Stock(5)		<5	%		6,634,895 5,151,778 258,329		6,488,895 5,015,778 399,287
Allied Defense Group, Inc. 8000 Towers Crescent Drive Suite 260 Vienna, VA 22182	Diversified defense company	Common Stock		<5	%		463,168		165,200
Arrowhead General Insurance Agency, Inc. 701 B Street, Suite 2100 San Diego, CA 92101	Insurance agency and program specialist	Junior Secured Term Loan(4)					5,000,000		3,750,000
Aylward Enterprises, LLC 401 Industrial Drive New Bern, NC 28562	Manufacturer of packaging equipment	Revolving Line of Credit(4) Senior Secured Term Loan A(4)					3,634,298 8,080,949		3,634,298 8,080,949
		Senior Subordinated Debt(5)					6,441,259		4,558,259
		Subordinated Member Note(5)					142,632		—
		Membership Interest		>5% and <25%			1,250,000		—
Borga, Inc. 300 West Peach Street Fowler, CA 93625	Manufacturer of pre-fabricated metal building systems	Senior Secured Term Loan A(4)					1,045,276		1,045,276
		Senior Secured Term Loan B(4)					1,694,153		1,694,153
		Senior Secured Term Loan C(4)(5)					7,807,371		7,807,371
		Warrants to Purchase Common Stock		<5	%		11,761		—
Caleel + Hayden, LLC 600 W. Bayaud Denver, CO 80223	Provider of proprietary branded professional skincare and cosmetic products to physicians and spa communities	Junior Secured Term Loan B(4) Senior Subordinated Debt(4)(5)					10,725,908 6,178,321		10,725,908 6,178,321
		Common Stock		<5	%		750,000		1,137,000

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			Percentage
Name and Address of	Nature of Its	Title of Securities	of Class			Cost of		Fair Value of
Portfolio Company	Principal Business	Held by Us	Held(1)			Investment		Investment(2)
Cheeseworks, Inc. 247 Margaret King Avenue Ringwood, New Jersey 07045	Distributor of specialty cheese and food products	Revolving Line of Credit(4) Senior Secured Term Loan(4)				$	4,991,252 10,141,173	$	4,991,252 10,141,173
Copperhead Chemical Company, Inc. 2 River Road Tamaqua, PA 18252	Manufacturer of bulk pharmaceuticals	Senior Subordinated Debt(4)(5)					3,536,303		3,536,303
CS Operating, LLC 1260 Brittmoore Road Houston, TX 77043	Provider of maintenance, repair and replacement of HVAC, electrical, plumbing and foundation repair	Revolving Line of Credit Senior Secured Term Loan A(4) Senior Subordinated Debt(4)(5)					193,234 2,206,004 2,507,956		193,234 2,206,004 2,507,956
Custom Direct, Inc.(6) 1802 Fashion Court Joppa, MD 21085	Direct marketer of checks and other financial products and services	Junior Secured Term Loan(4)					2,000,000		1,550,000
Dover Saddlery, Inc. 525 Great Road PO Box 1100 Littleton, MA 01460	Equestrian products catalog retailer	Common Stock		<5	%		148,200		160,800
Employbridge Holding Company(3)(6) 1040 Crown Pointe Parkway Atlanta, GA 30338	A provider of specialized staffing services	Junior Secured Term Loan(4)					3,000,000		2,730,000
Encore Legal Solutions, Inc. 10200 Grogan’s Mill Road, Suite 350 The Woodlands, TX 77380	Legal document management services	Junior Secured Term Loan A(4)(5) Junior Secured Term Loan B(4)(5)					3,966,964 7,217,806		3,966,964 6,295,806
		Senior Subordinated Debt(4)(5)					6,120,537		3,720,577
		Warrants to Purchase Common Stock		<5	%		232,833		—
EXL Acquisition Corp. 490 Wanda Park Boulevard Mt. Pleasant, SC 29464	Manufacturer of lab testing supplies	Senior Secured Term Loan A(4) Senior Secured Term Loan B(4)					4,373,473 4,709,231		4,305,473 4,635,630
		Senior Secured Term Loan C(4)					2,894,241		2,848,841
		Senior Secured Term Loan D(4)					6,822,796		6,822,796
		Common Stock — Class A		<5	%		2,475		139,500
		Common Stock — Class B(5)		<5	%		260,314		261,681

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			Percentage
Name and Address of	Nature of Its	Title of Securities	of Class			Cost of		Fair Value of
Portfolio Company	Principal Business	Held by Us	Held(1)			Investment		Investment(2)
Fairchild Industrial Products, Co.	Manufacturer of industrial controls and	Senior Secured Term Loan A(4)				$	2,231,651	$	2,231,651
3920 West Point Blvd. Winston-Salem, NC 27103	power transmission products	Senior Secured Term Loan B(4)					4,852,766		4,852,766
		Senior Subordinated Debt					5,405,807		5,405,807
		Preferred Stock — Class A(5)		<5	%		334,259		334,259
		Common Stock — Class B		<5	%		121,598		327,900
Fischbein, LLC 151 Walker Road Statesville, NC 28625	Designer and manufacturer of packaging equipment	Senior Subordinated Debt(4)(5) Membership Interest — Class A		>25	%		4,229,968 2,800,000		4,357,968 4,172,000
Impact Products, LLC 2840 Centennial Road Toledo, OH 43617	Distributor of janitorial supplies	Junior Secured Term Loan(4)					8,887,181		7,949,181
		Senior Subordinated Debt(4)(5)					5,511,641		5,246,648
Innovative Concepts in Entertainment, Inc. 10123 Main Street	Manufacturer of coin operated games	Junior Secured Term Loan A(4)					4,032,875		4,032,875
Clarence, NY 14031		Junior Secured Term Loan B(4)					3,512,065		3,512,065
		Junior Secured Term Loan C(4)					3,883,181		3,883,181
Keltner Enterprises, LLC(3) 2829 South Scenic Way Springfield, MO 65807	Distributor of automotive oils, chemicals and parts	Senior Subordinated Debt(4)					3,838,335		3,838,335
KTPS Holdings, LLC P.O. Box 75157 Colorado Springs, CO 80970	Manufacturer and distributor of specialty pet products	Revolving Line of Credit(4) Senior Secured Term Loan A(4)					483,631 5,785,770		483,631 5,785,770
		Senior Secured Term Loan B(4)					1,957,137		1,957,137
		Junior Secured Term Loan(4)(5)					4,068,832		4,068,832
		Membership Interest — Class A		>5% and <25%			730,020		778,770
		Membership Interest — Common		>5% and <25%			—		250,500
L.A. Spas, Inc. 1311 N. Blue Gum Street Anaheim, CA 92806	Manufacturer of above ground spas	Senior Subordinated Debt(4)(5) Warrants to Purchase Common Stock		<5	%		7,640,089 3,248		7,640,089 —
LHC Holdings Corp. 601 North Congress Avenue, Suite 424  Delray Beach, FL 33445	Provider of home healthcare services	Senior Secured Term Loan A(4)					4,918,951		4,918,951
		Senior Subordinated Debt					4,509,922		4,509,922
		Membership Interest		<5	%		125,000		109,100

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			Percentage
Name and Address of	Nature of Its	Title of Securities	of Class			Cost of		Fair Value of
Portfolio Company	Principal Business	Held by Us	Held(1)			Investment		Investment(2)
Mac & Massey Holdings, LLC 101 Great Southwest Parkway Atlanta, GA 30336	Broker and distributor of ingredients to manufacturers of food products	Senior Subordinated Debt(5) Common Stock		<5	%	$	7,526,464 247,284	$	7,526,464 259,700
Metrologic Instruments, Inc.(6)	Manufacturer of imaging and scanning equipment	Senior Secured Term Loan(4)					990,000		900,900
90 Coles Road Blackwood, NJ 08012-4683		Junior Secured Term Loan					1,000,000		875,000
Northwestern Management	Provider of dental	Senior Secured Term					5,835,379		5,835,379
Services, LLC	services	Loan A(4)
951 Broken Sound		Senior Secured Term
Parkway		Loan B(4)					1,234,149		1,234,149
Suite 185
Boca Raton, FL 33487
		Junior Secured Term Loan(5)					2,747,272		2,747,272
		Common Stock		<5	%		500,000		397,500
Nupla Corporation 11912 Sheldon Street Sun Valley, CA 91352	Manufacturer and marketer of professional high-grade fiberglass-handled striking and digging tools	Revolving Line of Credit(4) Senior Secured Term Loan A(4) Senior Subordinated Debt(5)					1,033,650 5,559,194 3,010,144		1,033,650 5,467,194 2,926,144
		Preferred Stock(5)		>5% and <25%			507,638		210,100
		Common Stock		>5% and <25%			25,000		—
Prince Mineral Company, Inc. One Prince Plaza PO Box 1009 Quincy, IL 62306	Manufacturer of pigments	Junior Secured Term Loan(4) Senior Subordinated Debt(4)(5)					11,185,465 11,805,660		10,153,465 11,484,660
Quartermaster, Inc. 17600 Fabrica Way	Retailer of uniforms and tactical equipment to law	Revolving Line of Credit(4)					974,234		974,234
Cerritos, CA 90703	enforcement and security professionals	Senior Secured Term Loan A(4)					4,014,646		4,014,646
		Senior Secured Term Loan B(4)					2,538,642		2,538,642
		Senior Secured Term Loan C(4)					3,292,912		3,292,912
R-O-M Corporation 6800 East 163rd Street Belton, MO 64012	Manufacturer of doors, ramps and bulk heads for fire trucks and food	Senior Secured Term Loan A(4)					7,165,017		7,028,017
	transportation	Senior Secured Term Loan B(4)					8,342,067		8,182,067
		Senior Subordinated Debt(5)					8,996,588		8,996,588

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			Percentage
Name and Address of	Nature of Its	Title of Securities	of Class			Cost of		Fair Value of
Portfolio Company	Principal Business	Held by Us	Held(1)			Investment		Investment(2)
Sidump’r Trailer Company 53577 Highway 20	Manufacturer of side dump trailers	Revolving Line of Credit				$	1,978,657	$	1,978,657
Plainview, Nebraska 68769		Senior Secured Term Loan A(4)					2,030,387		2,030,387
		Senior Secured Term Loan B(4)					2,296,151		2,296,151
		Senior Secured Term Loan C(4)(5)					3,224,144		2,296,144
		Senior Subordinated Debt(4)					75,000		—
		Preferred Stock(5)		<5	%		88,978		—
		Common Stock		<5	%		25		—
Smart, LLC Raritan Plaza I, 9th Floor	Provider of tuition management services	Revolving Line of Credit(4)					826,025		826,025
Edison, NJ 08837		Senior Secured Term Loan A(4)					3,653,999		3,653,999
		Senior Secured Term Loan B(4)(5)					3,696,341		3,696,341
		Convertible Subordinated Note		>5% and <25%			500,000		500,000
		Membership Interest — Class B		>5% qnd <25%			1,000,000		616,800
Sport Helmets Holdings, LLC(3) 4635 Crossroad Park Drive Liverpool, NY 13088	Manufacturer of protective headgear	Senior Secured Term Loan A Senior Secured Term Loan B Senior Subordinated Debt(5) Common Stock		>5% and <25%			4,434,846 7,388,891 7,954,740 2,000,000		4,434,846 7,388,891 7,954,740 1,907,200
Vince & Associates Clinic Research, LLC(3)	Provider of clinical testing services	Senior Secured Term Loan(4)(5)					7,211,084		7,211,084
10103 Metcalf Overland Park, KS 66212		Senior Subordinated Debt(5) Convertible Preferred Stock		>5% and <25%			5,487,196 500,000		5,487,196 452,700
Total investments						$	365,331,239	$	351,946,400

(1)	In the case of warrants to purchase equity securities or convertible securities, represents percentage of class of underlying equity securities issuable upon exercise of warrants or upon conversion of convertible securities.
(2)	The fair value of all investments outstanding on March 31, 2008 was determined by our board of directors.
(3)	An affiliate of the listed portfolio company is also a borrower under this investment.
(4)	Pledged as collateral under our Amended Securitization Facility. See Note 4 to Consolidated Financial Statements.
(5)	Amount includes payment-in-kind (PIK) interest or dividends.
(6)	Syndicated investment which has been originated by another financial institution and broadly distributed.

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Description of Portfolio Companies

Set forth below is a brief description of each of our portfolio companies as of March 31, 2008.

ADAPCO, Inc. — Sanford, Florida-based ADAPCO, Inc. is a distributor of specialty chemical and contract application services in the vector disease control field.

Aircraft Fasteners International, LLC —Marina Del Ray, California-based Aircraft Fasteners International, LLC is a master stocking distributor specializing in self-locking nuts, threaded inserts, and related high performance hardware for the aerospace, electronics and defense industries.

Allied Defense Group, Inc. — Vienna, Virginia-based Allied Defense Group, Inc. owns and manages a portfolio of defense and security businesses in the following niches: ordnance and manufacturing, environmental security and safety, electronic security, and software training and simulation.

Arrowhead General Insurance Agency, Inc. — San Diego, California-based Arrowhead General Insurance, Inc. is a privately held general insurance agency and program specialist.

Aylward Enterprises, LLC — New Bern, North Carolina-based Aylward Enterprises, LLC is a packaging equipment manufacturer for the pharmaceutical, over the counter products, and nutraceuticals industries. Aylward is widely recognized as the worldwide innovation leader in solid-dosage filling machinery for the bottle and blister formats.

Borga, Inc. — Fowler, California-based Borga, Inc. is a manufacturer of pre-fabricated metal building systems and components for the agricultural, commercial and industrial markets.

Caleel & Hayden, LLC — Denver, Colorado-based Caleel & Hayden serves more than 5,400 dermatologists, cosmetic surgeons, licensed aestheticians, spas and salons domestically and internationally and select specialty retailers in the U.S. The company’s brands include glominerals, mineral fusion, glotherapeutics and glospa, which were developed by C&H and Cellex-C and Lycon Wax, which are sold under exclusive distribution agreements in the United States and select international markets.

Cheeseworks, Inc. — Ringwood, New Jersey-based Cheese Works, Inc. sells a wide variety of high-end imported and domestic cheeses complemented by a broad offering of specialty food products.

Copperhead Chemical Company, Inc. — Tamaqua, Pennsylvania-based Copperhead Chemical Company, Inc. is a manufacturer of nitroglycerin for pharmaceutical products (used in the treatment of angina and congestive heart failure) and a manufacturer of explosive materials for use in propellants, fuel additives and munitions applications.

CS Operating, LLC — Houston, Texas-based CS Operating, LLC is a provider of residential services including foundation repair, HVAC maintenance, repair and replacement and plumbing repair services.

Custom Direct, Inc. — Joppa, Maryland-based Custom Direct, Inc. is a direct marketer of checks and other financial products and services.

Dover Saddlery, Inc. — Littleton, Massachusetts-based Dover Saddlery, Inc. is a supplier of English equestrian saddles, tack and riding apparel, and has the largest English equestrian catalog in the United States. Dover Saddlery, Inc. also serves the equestrian market through retail stores and its website, and has recently expanded into the western riding market through the acquisition of the catalog assets of a western riding catalog company.

Employbridge Holding Company — Atlanta, Georgia-based Employbridge Holding Company is a provider of specialized staffing services.

Encore Legal Solutions, Inc. — Houston, Texas-based Encore Legal Solutions, Inc. offers a variety of outsourcing services to law firms and corporate counsel, including reprographics, document preparation, scanning, coding and indexing, electronic data discovery, on-line document storage, as well as trial consulting and trial exhibit production.

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EXL Acquisition Corp. — the holding company of Mount Pleasant, South Carolina-based Environmental Express, Inc., a manufacturer and marketer of consumable environmental lab testing equipment and supplies.

Fairchild Industrial Products, Co. — Winston-Salem, North Carolina-based Fairchild Industrial Products, Co. is a designer and manufacturer of pneumatic and electro-pneumatic industrial control products.

Fischbein, LLC — Statesville, North Carolina-based Fischbein, LLC designs, manufactures and provides bag packaging equipment and complete systems to a worldwide customer base, specific to their applications.

Impact Products, LLC — Toledo, Ohio-based Impact Products, LLC is a manufacturer and distributor of non-chemical cleaning, maintenance and safety products.

Innovative Concepts in Entertainment, Inc. — Clarence, New York-based Innovative Concepts in Entertainment, Inc. is a manufacturer, marketer, and distributor of coin operated games.

Keltner Enterprises, LLC — Springfield, Missouri-based Keltner Enterprises, LLC is a distributor of automotive oils, chemicals and parts to auto parts retailers, oil distributors, grocery distributors, car and truck dealerships and other customers.

KTPS Holdings, LLC — Colorado Springs, Colorado-based KTPS Holdings LLC consists of two operating companies, both of which are leading manufacturers and distributors of specialty pet products. Its operating companies include Ray Allen Manufacturing LLC, a leading manufacturer and direct marketer of canine training equipment and accessories to the working-dog industry; and K&H Manufacturing LLC, a leading manufacturer and distributor of specialty pet products.

L.A. Spas, Inc. — Anaheim, California-based L.A. Spas, Inc. is a designer, manufacturer and marketer of high quality above ground spas, spa supplies and related products.

LHC Holdings Corp. — Delray Beach, Florida-based LHC Holdings Corp. is a provider of home healthcare services.

Mac & Massey Holdings, LLC — Atlanta, Georgia-based Mac & Massey LLC consists of two operating companies, both of which are leaders in the market for food ingredients. Its operating companies include Macsource LLC, a leading distributor of ingredients to the food manufacturing industry; and Massey-Fair Industrial Inc., a broker of food ingredients.

Metrologic Instruments, Inc. — Blackwood, New Jersey-based Metrologic Instruments, Inc. is a manufacturer of imaging and scanning equipment.

Northwestern Management Services, LLC — Boca Raton, Florida-based Northwestern Management Services, Inc. (d/b/a “Gentle Dental Group”) is a network of eleven modern, retail-driven, full service general and multi-specialty dental practices. The company provides convenient, high quality general preventative and restorative care, specialty dental services (including endodontic, periodontic, oral and maxillofacial surgery, prosthodontic, pediatric and orthodontic treatment), and cosmetic treatment all within the group’s own facilities.

Nupla Corporation — Sun Valley, California-based Nupla Corporation has been a leading US manufacturer of specialized, industrial-grade striking, digging and cutting tools for over 50 years. Its products include over 1,500 hand tool products, including shovels, rakes, hoes, axes, metal-head hammers and soft-faced hammers, as well as replacement handles for all of these tools.

Prince Mineral Company, Inc. — Quincy, Illinois-based Prince Mineral Company, Inc. is a producer of specialty mineral products with a particular focus on naturally occurring minerals and pigment applications. Prince Mineral Company, Inc. services a variety of industries and its products are used in bricks, cement, glass, steel and numerous other materials.

Quartermaster, Inc. — Cerritos, California-based Quartermaster, Inc. is a direct supplier of uniforms and tactical equipment to law enforcement and security professionals. Quartermaster, Inc. sells its products

55

through its catalog, website, national accounts with security guard companies, two retail stores in Southern California and one retail store in Las Vegas, Nevada.

R-O-M Corporation — Kansas City, Missouri-based R-O-M Corporation is a designer, supplier and manufacturer of innovative niche products for the fire safety and food transportation industries. R-O-M Corporation’s products includes R-O-M Robinson Shutters^tm roll-up doors for emergency apparatus and service vehicles; LoadMaker^tm, Generation II^tm and Center ZoneMaker^tm insulated bulkhead systems for the foodservice industry; RoadwarrioR^tm and SidekicK^tm safety walkramp systems for the food distribution industry; and LinksGuard^tm security chain closures for building security.

Sidump’r Trailer Company — Plainview, Nebraska-based Sidump’r Trailer Company is a manufacturer of proprietary, patented, bi-directional side dump trailers.

Smart, LLC — Edison, New Jersey-based Smart, LLC is a provider of tuition management services to private schools through out the U.S.

Sport Helmets Holdings, LLC — Liverpool, New York-based Sport Helmets Holdings, LLC is a manufacturer of protective headgear.

Vince & Associates Clinic Research, Inc. — Overland Park, Kansas-based Vince & Associates Clinical Research is an independent provider of clinical trial services to the global pharmaceutical and biotechnology industry.

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MANAGEMENT

Our business and affairs are managed under the direction of our board of directors. Our board of directors elects our officers, who serve at the discretion of the board of directors.

Day-to-day management of our portfolio is the responsibility of our investment committee. As a result, our investment committee must approve the acquisition and disposition of all of our investments. All such actions must be approved by each member of our investment committee at a meeting at which at least a majority of the members of our investment committee is present. See “— Additional Portfolio Management Information.”

Board of Directors and Executive Officers

Under our restated certificate of incorporation, our directors are divided into three classes. Each class of directors holds office for a three-year term. At each annual meeting of our stockholders, the successors to the class of directors whose terms expire at such meeting will be elected to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election. This classification of our board of directors may have the effect of delaying or preventing a change in control of our management. Each director holds office for the term to which he or she is elected and until his or her successor is duly elected and qualifies. Our restated certificate of incorporation permits the board of directors to elect directors to fill vacancies that are created either through an increase in the number of directors or due to the resignation, removal or death of any director.

Directors

Information regarding our board of directors is set forth below. We have divided the directors into two groups — independent directors and interested directors. Interested directors are “interested persons” of Patriot Capital Funding as defined in Section 2(a)(19) of the 1940 Act.

Independent Directors

Name	Age		Position		Director Since		Expiration of Term
Mel P. Melsheimer		68		Chairman		2005		2009
Steven Drogin		64		Director		2005		2009
Richard A. Sebastiao		60		Director		2005		2009
Dennis C. O’Dowd		59		Director		2005		2010

Interested Directors

Name	Age	Position	Director Since	Expiration of Term
Richard P. Buckanavage	44	Director, President and Chief Executive Officer	2003	2008
Timothy W. Hassler	39	Director, Chief Investment Officer	2002	2008

The address for each director is c/o Patriot Capital Funding, Inc., 274 Riverside Avenue,
Westport, CT 06880.

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Executive Officers

The following persons serve as our executive officers in the following capacities:

Name	Age	Position
Richard P. Buckanavage	44	President and Chief Executive Officer
Timothy W. Hassler	39	Chief Investment Officer
William E. Alvarez, Jr.	54	Executive Vice President, Chief Financial Officer and Secretary
Clifford L. Wells	52	Executive Vice President and Chief Compliance Officer
Matthew R. Colucci	36	Executive Vice President and Managing Director

The address for each executive officer is c/o Patriot Capital Funding, Inc., 274 Riverside Avenue, Westport, CT 06880.

Biographical Information

Independent Directors

Steven Drogin has been a member of our board of directors since June 2005. He retired from KPMG LLP in 2003 where he worked for 38 years and served as an audit partner since 1976. From 1992 until he retired, Mr. Drogin was a member of KPMG’s Financial Services Practice. Mr. Drogin is a Certified Public Accountant (“CPA”) and a member of the American Institute of Certified Public Accountants and the New York State Society of CPAs (“NYSSCPA”). He has served on several of NYSSCPA’s committees. From 1990 to 1992, he was the Chairman of the NYSSCPA’s Leasing and Financial Services Companies Committee.

Mel P. Melsheimer has been a member of our board of directors since June 2005. Since August 2006, he has served as chairman of our board of directors. Since January 7, 2005, Mr. Melsheimer has been president and director of Linkhorn Capital Advisors, Inc., an entity which is a managing member of Masters Capital Nanotechnology, LLC, a venture capital general partner. From February 1997 to December 2004, Mr. Melsheimer served as the president, chief operating officer and chief financial officer of Harris & Harris Group, Inc., a publicly traded business development company. During his tenure at Harris & Harris Group, Mr. Melsheimer also served as the chief compliance officer, the treasurer and a managing director. From March 1994 to February 1997, he served as a consultant to Harris & Harris Group or as an officer and a director to one of its portfolio companies. From November 1992 to February 1994, he served as executive vice president, chief operating officer and secretary of Dairy Holdings, Inc., a privately-held dairy company.

Richard A. Sebastiao has been a member of our board of directors since June 2005. In December 1989, he founded RAS Management Advisors, Inc. and its predecessors (“RAS Management”), a crisis management and turnaround firm, and served as its president from such time until January 2008. While president of RAS Management, Mr. Sebastiao also served, on an interim basis, as the chief restructuring officer and/or chief executive officer and a director of several entities which retained RAS Management in connection with their restructurings. In January 2008, he sold substantially all of the assets of RAS Management to RAS Management Advisors, LLC, an entity newly formed by certain former associates of RAS Management to carry on the business formerly conducted by RAS Management and has served as a consultant to such newly formed entity since such time. Since February 2003, Mr. Sebastiao has also served on the board of directors of ATC Associates, Inc., an environmental consulting firm. Since December 2005, he has served on the board of directors of CDI Holding Corp., a holding company for a regional chain of drug stores and convenience stores. Mr. Sebastiao is a member of the Turnaround Management Association and the American Bankruptcy Institute.

Dennis C. O’Dowd has been a member of our board of directors since June 2005. He has been a financial and business consultant since 1980 and maintains an active portfolio in timber and real estate. From 1983 to 2000, Mr. O’Dowd also served in various capacities, including chief executive officer, of the

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U.S. branch and related financial and investment companies of Creditanstalt Bankverein, an Austrian-based financial institution, which later merged with Bank Austria. Prior to joining Creditanstalt Bankverein, Mr. O’Dowd worked at Nederlandsche Middenstandsbank from 1979 to 1983, Fidelity Bank from 1977 to 1979 and he began his banking career at Chemical Bank in 1970.

Interested Directors

Messrs. Buckanavage and Hassler are interested persons of Patriot Capital Funding under the 1940 Act because they are also officers of Patriot Capital Funding.

Richard P. Buckanavage has been a member of our board of directors since June 2003 and our president and chief executive officer since May 2005. Prior to joining Patriot Capital Funding, Mr. Buckanavage was a managing director and the head of debt sales at GE Capital Markets, Inc. from 1999 to 2003 where he was responsible for all domestic debt syndication and private placement activities. From 1995 to 1999, Mr. Buckanavage was a senior vice president and midwest region manager for Creditanstalt Corporate Finance, Inc. (“CCFI”). During that time, he was also a senior investment officer at Creditanstalt Small Business Investment Corporation (“CSBIC”), CCFI’s private equity unit that originated and managed a portfolio of non-controlling equity investments. CCFI and CSBIC were a “one-stop” capital source that focused on making investments in middle market companies in conjunction with private equity sponsors. In his capacities at CCFI and CSBIC, Mr. Buckanavage managed a portfolio of senior secured loans, subordinated debt and equity investments in excess of $1.2 billion. While at CSBIC, Mr. Buckanavage was also a member of the board of directors of several of CSBIC’s portfolio companies. His professional experience also includes various business development and portfolio management roles in the leveraged finance groups at Bank of America, and Fleet Bank and its predecessors.

Timothy W. Hassler has been a member of our board of directors since November 2002. He has served as our chief investment officer since March 2008. Prior to such time, he had served as our chief operating officer and chief compliance officer from May 2005 to March 2008. Prior to joining Patriot Capital Funding, Mr. Hassler was a director in the capital markets division of U.S. Bank National Association and its predecessors from 1999 to 2002. During that time, he focused on originating, structuring and negotiating senior debt and junior capital investments for middle market leveraged transactions in the manufacturing, distribution, and food and agribusiness industries. From 1991 to 1999, Mr. Hassler worked in a middle market lending group of U.S. Bank National Association and its predecessors, where he was a relationship manager for a more than $200 million portfolio of middle market loans outstanding, with over $500 million of commitments. In this capacity, he was responsible for new business development, portfolio management and underwriting. Mr. Hassler began his career in the training program of U.S. Bank National Association and its predecessors in 1990.

Executive Officers

The biographical information for Richard P. Buckanavage, our president and chief executive officer, and Timothy W. Hassler, our chief operating officer and chief compliance officer, are set forth above under “— Interested Directors.”

William E. Alvarez, Jr. serves as our executive vice president, chief financial officer and secretary. Prior to joining Patriot Capital Funding in December 2004, Mr. Alvarez was an executive financial consultant at Trans-Lux Corporation, a public media and communication company, from February 2003 to December 2004. During that period, he was responsible for operations restructuring, SEC reporting and compliance with the Sarbanes-Oxley Act of 2002. From 2001 to 2003, Mr. Alvarez was employed by Bond Technologies, Inc., a privately-held professional technology consulting services firm, as chief financial officer. From 1998 to 2001, Mr. Alvarez was employed by Dynax Solutions, Inc., a privately-held professional technology consulting services firm, as chief financial officer. Prior to 1998, Mr. Alvarez held financial officer positions with other companies. Mr. Alvarez began his career at Deloitte & Touche, LLP where he was primarily responsible for servicing financial services companies. Mr. Alvarez is a Certified Public Accountant.

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Clifford L. Wells has served as our executive vice president since May 2005 and our chief compliance officer since March 2008. He had previously served as our chief investment officer from May 2005 until March 2008. Prior to joining Patriot Capital Funding in 2004, Mr. Wells was senior vice president — credit risk/portfolio management at the US branch of Abbey National Treasury Services from 2002 to 2004. In that role, he provided credit analysis for middle market leveraged transactions, managed risks associated with a portfolio of distressed assets and provided day-to-day risk management of an oil and natural gas portfolio of nearly $1 billion. From 1996 to 2002, Mr. Wells served as senior vice president and northeast/mid-atlantic region manager for Creditanstalt Corporate Finance, Inc., a “one-stop” capital source that focused on making investments in middle market companies in conjunction with private equity sponsors, where he was responsible for all facets of the deal process including sourcing, structuring, closing and managing of senior and junior capital opportunities for middle market cash-flow transactions. He was also involved in implementing appropriate strategies for a portfolio of underperforming investments. His professional background also includes lending positions with Heller Financial, Inc., US West Financial Services, Inc. and GATX Capital Corporation. He started his career as an auditor with Arthur Andersen & Company. Mr. Wells is a Certified Public Accountant.

Matthew R. Colucci has served as our executive vice president since December 2003 and a managing director since April 2006. Prior to joining Patriot Capital Funding in December 2003, Mr. Colucci was a vice president in GE’s Merchant Banking Group (and with its predecessor, Heller Financial, Inc.) from 1998 to 2003. During that period, he was responsible for originating, structuring, underwriting and monitoring both senior and junior capital investments in middle market leveraged transactions. From 1996 to 1998, Mr. Colucci was a senior associate in the Corporate Finance Group of Bayerische Landesbank, a German commercial bank. He began his career in 1994 as a bond analyst for The Aetna Casualty & Surety Company.

Committees of the Board of Directors

Our board of directors has the following committees:

Audit Committee

The audit committee is responsible for selecting our independent accountants, reviewing the plans, scope and results of the audit engagement with our independent accountants, reviewing the independence of our independent accountants and reviewing the adequacy of our internal accounting controls. The audit committee met five times during 2007. The members of the audit committee are Messrs. Melsheimer, Sebastiao and Drogin, each of whom is independent for purposes of the 1940 Act and The Nasdaq Global Select Market corporate governance listing standards. Mr. Melsheimer serves as the chairman of the audit committee. Our board of directors has determined that Mr. Melsheimer is an “audit committee financial expert” as defined under SEC rules.

Compensation Committee

The compensation committee determines the total compensation for each of our executive officers including the amount of salary and bonus for each of our executive officers. The compensation committee met twice during 2007. The members of the compensation committee are Messrs. Sebastiao, O’Dowd and Drogin, each of whom is independent for purposes of the 1940 Act and The Nasdaq Global Select Market corporate governance listing standards. Mr. O’Dowd serves as the chairman of the compensation committee. See “Executive Compensation-Compensation Discussion and Analysis” for additional information regarding the compensation committee.

Nominating and Corporate Governance Committee

The nominating and corporate governance committee is responsible for identifying, researching and nominating directors for election by our stockholders, selecting nominees to fill vacancies on our board of directors or a committee of the board and overseeing the evaluation of the board of directors and our

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management. The nominating and corporate governance committee met once in 2007. In February 2008, the nominating and corporate governance committee met to discuss, among other things, nominating the directors for election by our stockholders at our 2008 annual meeting of stockholders. The members of the nominating and corporate governance committee are Messrs. Melsheimer, O’Dowd and Drogin, each of whom is independent for purposes of the 1940 Act and the Nasdaq Global Select Market corporate governance listing standards. Mr. Drogin serves as the chairman of the nominating and corporate governance committee.

The nominating and corporate governance committee will consider qualified director nominees recommended by stockholders when such recommendations are submitted in accordance with our restated bylaws and any other applicable law, rule or regulation regarding director nominations. Stockholders may submit candidates for nomination for our board of directors by writing to: Board of Directors, Patriot Capital Funding, Inc. 274 Riverside Avenue, Westport, CT 06880. When submitting a nomination to us for consideration, a stockholder must provide certain information about each person whom the stockholder proposes to nominate for election as a director, including: (i) the name, age, business address and residence address of the person; (ii) the principal occupation or employment or the person; (iii) the class or series and number of shares of our capital stock owned beneficially or of record by the persons; and (iv) any other information relating to the person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Exchange Act, and the rules and regulations promulgated thereunder. Such notice must be accompanied by the proposed nominee’s written consent to be named as a nominee and to serve as a director if elected.

In evaluating director nominees, the nominating and corporate governance committee considers the following facts:

•  the appropriate size and composition of our board of directors;

•  our needs with respect to the particular talents and experience of our directors;

•  the knowledge, skills and experience of nominees in light of prevailing business conditions and the knowledge, skills and experience already possessed by other members of our board of directors;

•  the capacity and desire to serve as a member of our board of directors and to represent the balance, best interests of our stockholders as a whole;

•  experience with accounting rules and practices; and

•  the desire to balance the considerable benefit of continuity with the periodic addition of the fresh perspective provided by new members.

The nominating and corporate governance committee’s goal is to assemble a board of directors that brings us a variety of perspectives and skills derived from high quality business and professional experience.

Other than the foregoing there are no stated minimum criteria for director nominees, although the nominating and corporate governance committee may also consider such other factors as it may deem are in our best interests and those of our stockholders. The nominating and corporate governance committee also believes it appropriate for certain key members of our management to participate as members of the board of directors.

The nominating and corporate governance committee identifies nominees by first evaluating the current members of the board of directors willing to continue in service. Current members of the board of directors with skills and experience that are relevant to our business and who are willing to continue in service are considered for re-nomination, balancing the value of continuity of service by existing members of the board of directors with that of obtaining a new perspective. If any member of the board of directors does not wish to continue in service or if the nominating and corporate governance committee or the board of directors decides not to re-nominate a member for re-election, the nominating and corporate governance committee identifies the desired skills and experience of a new nominee in light of the criteria above. Current members

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of the nominating and corporate governance committee and board of directors are polled for suggestions as to individuals meeting the criteria of the nominating and corporate governance committee. Research may also be performed to identify qualified individuals. We have not engaged third parties to identify or evaluate or assist in identifying potential nominees to the board of directors.

Valuation Committee

The valuation committee is responsible for reviewing and approving for submission to our board of directors, in good faith, the fair value of all of our debt and equity securities for which current market values are not readily available. The valuation committee met four times during 2007. The members of the valuation committee are Messrs. O’Dowd, Melsheimer and Sebastiao, each of whom is independent for purposes of the 1940 Act and The Nasdaq Global Select Market corporate governance listing standards. Mr. Sebastiao serves as the chairman of the valuation committee.

Executive Committee

The executive committee exercises those rights, powers, and authority that the board of directors from time to time grants to it, except where action by the full board is required by statute, an order of the SEC or our restated certificate of incorporation or restated bylaws. The members of the executive committee are Messrs. Buckanavage, Hassler and O’Dowd. The executive committee did not meet during 2007.

Additional Portfolio Management Information

Our investment committee reviews and approves our investments. All such actions must be approved by each member of our investment committee at a meeting at which at least a majority of the members of our investment committee is present. The four members of our investment committee are our president and chief executive officer, Mr. Buckanavage; our chief investment officer, Mr. Hassler; our executive vice president and chief compliance officer, Mr. Wells; and our executive vice president and managing director, Mr. Colucci. See “— Board of Directors and Executive Officers — Biographical Information,” for further information about the business experience of each executive officer on our investment committee. The compensation of each executive officer on the investment committee is determined by the compensation committee of our board of directors. The executive officers on the investment committee are compensated in the form of annual salaries, annual cash bonuses and stock options. See “Executive Compensation.” Because each of the executive officers on our investment committee only provide services to us, there will be no conflicts of interest with respect to their management of other accounts or investment vehicles.

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EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

Throughout this section, we refer to our chief executive officer and chief financial officer, as well as the other individuals included in the Summary Compensation Table on page 72 herein, as the “named executive officers.”

Overview of Compensation Program

The compensation committee of our board of directors is responsible for establishing and evaluating our policies governing the compensation of our executive officers, including our named executive officers. The compensation committee ensures that the total compensation paid to our executive officers is fair, reasonable and competitive.

Compensation Objectives

Our executive compensation programs are designed to achieve the following objectives:

•  Attract and retain talented and experienced executive officers in the highly competitive business development company/private equity industries;

•  Motivate and reward executive officers whose knowledge, skills, performance and private equity sponsor relationships are critical to our success;

•  Align the interests of our executive officers and stockholders by motivating executive officers to increase stockholder value, including dividends payable in connection with ownership of common stock, and rewarding executive officers when stockholder value increases;

•  Compensate our executive officers to manage our business to meet our long-range goals;

•  Ensure fairness among the executive officers by recognizing the contributions each executive officer makes to our success; and

•  Provide a competitive compensation package which is weighted towards pay for performance.

Role of Others in Compensation Decisions

The compensation committee makes all of the decisions with respect to the compensation received by our executive officers. The compensation committee meets outside the presence of all of our executive officers to consider appropriate compensation for our president and chief executive officer, including his salary, annual cash bonus and grants of long-term equity incentive awards. For all other executive officers, the compensation committee meets outside the presence of all executive officers except for our president and chief executive officer. Our president and chief executive officer annually reviews each other executive officer’s performance with the compensation committee and makes recommendations to the compensation committee with respect to the appropriate base salary, annual cash bonus and grants of long-term equity incentive awards for all executive officers, excluding himself. Based in part on these recommendations from our president and chief executive officer and other considerations, the compensation committee approves the annual compensation package of our executive officers other than our president and chief executive officer.

Although the compensation committee had not previously retained a compensation consultant to review our policies and procedures with respect to executive compensation, it has recently made the decision to engage a compensation consultant sometime during 2008 to study the level and structure of compensation paid to our named executive officers as compared to other internally managed business development companies, private equity firms and specialty finance companies (both public and private) and, upon a review of such study, the compensation committee may revise our compensation program for our named executive officers. In addition, the compensation committee has informally considered the competitive market practices with respect to the salaries and total compensation paid by other internally managed

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business development companies to their executive officers. In this regard, the compensation committee has periodically reviewed annual reports on Form 10-K and proxy statements of other internally managed business development companies.

2007 Executive Compensation Components

For the fiscal year ended December 31, 2007, the principal components of compensation for our named executive officers were:

•  Annual base salary;

•  Annual cash bonus;

•  Long-term equity incentive compensation; and

•  Other benefits.

Base Salary

Base salary is designed to attract and retain experienced executive officers who will advance the achievement of our goals. While the initial base salary for our executive officers was determined by an assessment of competitive market levels and is included as part of the employment agreement we have or had with each of our named executive officers, the factors used in determining increases in base salary include individual performance, changes in role and/or responsibility and changes in the competitive market environment. The compensation committee determines the base salary for each executive officer on an annual basis.

Annual Cash Incentive Bonus

The annual cash bonus is designed to reward those executive officers that have achieved certain corporate and individual performance objectives and have helped to contribute to the achievement of certain of our long-term objectives. The annual cash bonus is determined by the compensation committee on a discretionary basis. For 2007, each named executive officer was eligible for bonuses ranging from 25% to 175% of their base salary, pursuant to employment agreements between us and the named executive officer. The compensation committee, in its sole discretion, may award bonuses that exceed these ranges if it believes that the performance of the named executive officer during the given year merits such a bonus.

Long-Term Equity Incentive Compensation

We award long-term equity incentive awards to executive officers, including the named executive officers, as part of our total compensation package. These awards are consistent with our pay for performance principles and align the interests of the executive officers to the interests of our stockholders. The compensation committee reviews and approves the amount of each award to be granted to each named executive officer. Long-term equity incentive awards are made pursuant to the Patriot Capital Funding, Inc. Amended Stock Option Plan, which we refer to as our stock option plan.

Our long-term equity incentive is currently in the form of options to acquire our common stock. Stock option awards provide our executive officers with the right to purchase shares of our common stock at a fixed exercise price for a period of up to ten years under the stock option plan. Stock options are granted under the stock option plan at a price not less than the prevailing market value at the time of grant and will have realizable value only if our stock price increases. Stock options are earned on the basis of continued service to us and vest over a period of three years from the grant date.

The compensation committee will determine the amount and features of the stock options, if any, to be awarded to executive officers. The compensation committee will evaluate a number of criteria, including the past service of each such executive officer to us, the present and potential contributions of such executive officer to our success and such other factors as the compensation committee shall deem relevant in connection with accomplishing the purposes of the stock option plan, including the executive officer’s

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current stock holdings, years of service, position with us and other factors. The compensation committee will not apply a formula assigning specific weights to any of these factors when making its determination.

On March 25, 2008, we received an exemptive order from the SEC to permit us to issue restricted shares of our common stock under an employee restricted stock plan as part of the compensation packages for certain of our employees, including our named executive officers. We will seek stockholder approval of the restricted stock plan at our 2008 annual meeting of stockholders. We believe that the particular characteristics of our business, the dependence we have on key personnel to conduct our business effectively and the highly competitive environment in which we operate require the use of equity-based compensation for our personnel in the form of restricted stock.

In particular, we believe restricted stock motivates performance that is more consistent with the type of return expectations that we have established for our stockholders. In this regard, as a business development company that has elected to be treated as a regulated investment company under the Code, we are required to (i) distribute, with respect to each taxable year, at least 90% of our investment company taxable income in order to deduct any amounts (including net capital gains) distributed (or deemed distributed) to stockholders and (ii) distribute, with respect to each calendar year, (actually or on a deemed basis) at least 98% of our income (both ordinary income and net capital gains) to avoid an excise tax. We will incur corporate-level tax on any taxable income or gains earned or realized in a taxable year and not distributed with respect to such year. As a result, because we intend to distribute substantially all of our income to our stockholders in connection with our election to be treated as a regulated investment company, the shares of our common stock will appreciate modestly over time since earnings are distributed currently and not accumulated. Thus, the primary return for our stockholders is in the form of current income through the payment of dividends rather than capital appreciation through a rising stock price. This recurring distribution requires a methodical asset acquisition approach and active monitoring and management of our investment portfolio over time. A meaningful part of our employee base is dedicated to the maintenance of asset values and expansion of this recurring revenue to support and grow dividends.

The implications of our business model for the analysis of using restricted stock versus using other forms of equity-based compensation, such as stock options, are relatively clear. Restricted stock has value upon grant while the value of stock options is dependent on stock price increases over the strike price. Holders of restricted stock, over time, become owners of the stock with a vested interest in value maintenance and, importantly in our case, the income stream from the payment of dividends. These interests are completely aligned with those of our stockholders. Stock option holders only earn compensation if the stock price increases and do not benefit from dividends or valuation protection, two concepts that have high priority for our stockholders.

Other Benefits

Retirement Benefits

We maintain a 401(k) plan in which all full-time employees, including our named executive officers, who are at least 21 years of age and have one year of service are eligible to participate. We provide this plan to help our employees save some portion of their cash compensation for retirement in a tax efficient manner. We do not provide an option for our employees to invest in our stock in the 401(k) plan.

In 2007, we contributed up to 4% (1% of which was discretionary) of the lesser of (i) each participant’s eligible compensation for the year and (ii) $225,000, to each participant’s plan account on the participant’s behalf, which was fully vested at the time of the contribution. The compensation committee makes the determination of whether to provide the 1% discretionary contribution to a participant’s plan account on the participant’s behalf.

Health and Welfare Benefits

All full-time employees, including our named executive officers, may participate in our health and welfare benefit programs, including medical, dental and vision care coverage, term life and disability

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insurance. In addition, we paid the premiums during 2007 for whole life and disability insurance for Messrs. Buckanavage and Hassler, and term life and group disability insurance for Messrs. Alvarez, Colucci and Wells.

Employment Agreements, Severance Benefits and Change in Control Provisions

We have employment agreements in effect with all of our named executive officers, other than Mr. Wells. We had an employment agreement with Mr. Wells that expired un-renewed in December 2007. We entered into these agreements with our named executive officers to ensure that they would perform their respective roles with us for an extended period of time. In addition, we also considered the critical nature of each of their positions and our need to retain them when we committed to these agreements.

The terms “good reason,” “cause” and “change in control” are defined in the employment agreements of our named executive officers and are summarized below.

“Good reason” means that, without the named executive officer’s written consent, any of the following events occurs:

•  a material reduction in the duties and responsibilities of the executive;

•  a material and adverse change in the executive’s titles or offices with us;

•  a reduction in the executive’s salary or bonus opportunity, as prescribed by the employment agreement, unless we are implementing an overall general salary reduction affecting all employees;

•  a requirement that the executive be relocated more than 50 miles from our office; or

•  the failure of a purchaser of Patriot Capital Funding or the successor to the obligations of the employment agreement to honor the terms of the employment agreement.

“Cause” refers to:

•  the executive’s willful and continued failure to perform substantially his duties with us after a written demand for substantial performance is delivered by us;

•  the executive’s willfully engaging in illegal conduct or gross misconduct materially injurious to us;

•  the executive’s ineligibility to serve as an executive officer pursuant to Section 9 of the 1940 Act; or

•  the executive’s conviction of a felony or crime of moral turpitude.

“Change in Control” includes a variety of events, including significant changes in our stock ownership, a merger and consolidation of us, and the sale and disposition of all or substantially all of our assets.

Employment Agreements with Messrs. Buckanavage and Hassler

In August 2005, we entered into employment agreements with Messrs. Buckanavage and Hassler that provide for a three-year term. Pursuant to the employment agreements, if the executive officer’s employment is terminated by such executive officer without “good reason” (as defined above) or due to death or a disability, the executive officer or his beneficiary would be entitled to receive, among other things, his accrued but unpaid base salary, bonuses, reimbursable expenses and benefits. In addition, if the executive officer’s employment is terminated due to death or disability, the executive officer or his beneficiary will be entitled to receive an amount equal to a pro rata portion (based on length of service during the year in which the executive officer terminated employment) of his average bonus during the term of the agreement, paid in a lump sum. Furthermore, in the case of termination of employment due to death, the executive officer’s beneficiary will be entitled to an amount equal to between one and one and one-half times the sum of his annual base salary in the current year and his average bonus during the term of the agreement, paid in a lump sum.

If either of Messrs. Buckanavage and Hassler terminates his employment for good reason, or if we terminate his employment other than for “cause” (as defined above), he will be entitled to receive, among

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other things, an amount equal to between one and one and one-half times the sum of his annual base salary in the then current year and his average bonus during the term of the agreement, paid over one to one and one-half years in monthly installments. In addition, the executive officer will be entitled to receive an amount equal to a pro rata portion (based on length of service during the year in which the executive officer terminated employment) of his average bonus during the term of the agreement. Moreover, he will be entitled to receive his accrued but unpaid base salary, bonuses, reimbursable expenses and benefits. He will also be entitled to receive benefits under any group health and life insurance for up to one and one-half years after termination. Finally, the executive officer’s options shall become fully vested upon termination.

If the executive officer terminates his employment for any reason in the seven month period after a “change in control” (as defined above), the executive officer will be entitled to receive the amounts and benefits set forth in the immediately preceding paragraph. If the executive officer terminates his employment for good reason (for this purpose only, the term good reason has a slightly modified meaning under the employment agreements), or if we terminate the executive officer’s employment without cause within one year following a change in control, the executive officer will be entitled to receive an amount equal to three times the sum of his annual base salary in the then current year and his average bonus during the term of the agreement, paid over three years in monthly installments. In addition, the executive officer will be entitled to receive an amount equal to a pro rata portion (based on length of service during the year in which the executive officer terminated employment) of his average bonus during the term of the agreement. Moreover, the executive officer will be entitled to receive his accrued but unpaid base salary, bonuses, reimbursable expenses and benefits. The executive officer will also be entitled to receive benefits under any group health and life insurance for up to three years after termination. In addition, upon change in control, regardless of whether the executive officer terminates employment, the executive officer’s options will become fully vested.

For a period of one year after an executive officer’s termination of employment for any reason, each of the above-described employment agreements prohibit such executive officer from soliciting any of our employees, portfolio companies and certain prospective clients. For this same time period, each of the above-described employment agreements also prohibit each of the executive officers from engaging in any business activity that competes with us within certain geographic boundaries. The employment agreements also require that each of the executive officers protect our confidential information. Finally, each executive officer will be required to enter into an agreement with us that provides for a general release of all legal claims that are or may be held by each such executive officer against us in order for such officer to receive any severance and change in control payments pursuant to the employment agreements.

Employment Agreements with Messrs. Alvarez and Colucci

In August 2007, we entered into a two-year employment agreement with Mr. Alvarez. In December 2005, we entered into a three-year employment agreement with Mr. Colucci.

Pursuant to the employment agreements, if the executive officer’s employment is terminated by such executive officer without “good reason” (as defined above) or due to death or a disability, the executive officer or his beneficiary would be entitled to receive, among other things, his accrued but unpaid base salary, bonuses, reimbursable expenses and benefits. In addition, if the executive officer’s employment is terminated due to death or a disability, the executive officer or his beneficiary will be entitled to receive an amount equal to a pro rata portion (based on length of service during the year in which the executive officer terminated employment) of his average bonus for the prior two years, in the case of Mr. Alvarez, or his average bonus during the term of the agreement, in the case of Mr. Colucci, in each case paid in a lump sum. Furthermore, in the case of termination of employment due to death, the executive officer’s beneficiary will be entitled to an amount equal to one-half of the sum of his annual base salary in the current year and his average bonus during the term of the agreement, paid in a lump sum.

If the executive officer’s employment is terminated for good reason, or if we terminate his employment other than for “cause” (as defined above), he will be entitled to receive, among other things, an amount equal to the sum of, in the case of Mr. Alvarez, his annual base salary in the then current year and his average bonus for the prior two years, paid in equal monthly installments, or in the case of Mr. Colucci, his

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annual base salary in the then current year and his average bonus during the term of the agreement, paid in equal monthly installments, except that the first six months of installments will be paid in a single lump sum six months after Mr. Colucci’s termination of employment, and the remaining installments paid monthly thereafter. In addition, the officer will be entitled to receive a lump sum amount equal to a pro rata portion (based on length of service during the year in which the executive officer terminated employment) of his average bonus during the term of the agreement. Moreover, each officer will be entitled to receive his accrued but unpaid base salary, bonuses, reimbursable expenses and benefits. Mr. Alvarez will also be entitled to receive employer paid benefits under any group health and life insurance for up to 12 months after termination and Mr. Colucci will be entitled to receive such benefits for up to 18 months after termination. Finally, the executive officer’s options shall become fully vested upon termination.

For a period of one year after an executive officer’s termination of employment for any reason, each of the above-described employment agreements prohibit such executive officer from soliciting any of our employees, portfolio companies and certain prospective clients. For this same time period, each of the above-described employment agreements also prohibit each of the executive officers from engaging in any business activity that competes with us within certain geographic boundaries. The employment agreements also require that each of the executive officers protect our confidential information. Finally, each executive officer will be required to enter into an agreement with us that provides for a general release of all legal claims that are or may be held by each such executive officer against us in order for such officer to receive any severance and change in control payments pursuant to the employment agreements.

Severance Benefits and Change in Control Provisions

The rationale behind providing a severance package in certain events is to attract talented executive officers who are assured that they will not be financially injured if they physically relocate and/or leave another job to join us but are forced out through no fault of their own and to insure that our business is operated and governed for our stockholders by a management team, and under the direction of a board of directors, who are not financially motivated to frustrate the execution of a change-in-control transaction.

The table below summarizes the maximum termination and change in control amounts that would be payable to our named executive officers under each of their employment agreements if the employment agreement of each had terminated on December 31, 2007. The table does not include the dollar value of vested but unexercised stock options as of December 31, 2007. The footnotes to the table describe the assumptions used in estimating the amounts set forth in the table. Because the payments to be made to a named executive officer depend on several factors, the actual amounts to be paid out upon a named executive officer’s termination of employment can only be determined at the time of the named executive officer’s separation from us.

									Termination
					Termination				by Us Within
					for Good		Termination		1 Year of
					Reason by		by Named		Change in
					Named		Executive		Control
					Executive		Officer		Without
					Officer or		Within Seven		Cause or
					We Terminate		Months		by Named
	Termination		Termination		Employment		After a		Executive
	Due to		Due to		Other Than for		Change in		Officer for
Name	Disability		Death		Cause		Control		Good Reason
Richard P. Buckanavage	$	496,667	$	1,562,085	$	1,874,852	$	1,874,852	$	2,523,950
William E. Alvarez, Jr.	$	211,250	$	668,195	$	722,856		n/a		n/a
Timothy W. Hassler	$	453,333	$	1,431,666	$	1,736,945	$	1,736,945	$	2,336,041
Matthew R. Colucci	$	258,333	$	625,000	$	872,423		n/a		n/a

(1)	Assumes that the amount of the accrued, but unpaid bonus is equal to the average bonus paid during the term of the employment agreement for each named executive officer.
(2)	For stock options, the dollar value is calculated for “in-the-money” options by multiplying the number of options that vest upon the change in control by the difference between $10.09, the closing price of our common stock on December 31, 2007, and the option exercise price.

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Impact of Regulatory Requirements

We are an internally managed closed-end, investment company that has elected to be treated as a business development company under the 1940 Act. The 1940 Act places significant limitations on the structure of our compensation programs. For example, the 1940 Act prohibits us from simultaneously maintaining a stock option plan (or other form of equity compensation) and a profit sharing arrangement. Because we have adopted a stock option plan, we are limited as to the type of compensation arrangements that can be utilized in order to attract, retain and motivate employees.

Tax Deductibility of Executive Compensation

Limitations on deductibility of compensation may occur under Section 162(m) of the Code which generally limits the tax deductibility of compensation paid by a public company to its chief executive officer and certain other highly compensated executive officers to $1 million in the year the compensation becomes taxable to the executive officer. There is an exception to the limit on deductibility for performance-based compensation that meets certain requirements.

Although deductibility of compensation is preferred, tax deductibility is not a primary objective of our compensation programs. We believe that achieving our compensation objectives set forth above is more important than the benefit of tax deductibility and we reserve the right to maintain flexibility in how we compensate our executive officers that may result in limiting the deductibility of amounts of compensation from time to time.

2007 Compensation Determination

We believe that the total compensation paid to our named executive officers for the fiscal year ended December 31, 2007 achieves the overall objectives of our executive compensation program. In accordance with our overall objectives, executive compensation for 2007 was competitive with other similarly-sized, internally managed business development companies and was weighted more heavily to pay for performance.

Determination of Annual Base Salary

The compensation committee annually reviews the base salary for each of our executive officers, including our named executive officers, and determines whether or not to increase it in its sole discretion. Increases to base salary are awarded to recognize an executive officer for assuming additional responsibilities and his related performance, to address changes in the external competitive market for a given position and to achieve an appropriate competitive level due to a promotion to a more senior position.

Mr. Buckanavage was paid an annual base salary of $379,167 for 2007, an increase of 12% over his 2006 annual base salary. This increase was made to recognize Mr. Buckanavage’s leadership which enabled us to achieve the majority of our operational and financial objectives in 2006.

Mr. Alvarez was paid an annual base salary of $241,667 for 2007, an increase of 21% over his 2006 annual base salary. This increase was made to reward Mr. Alvarez for his contributions toward achievement of our financial objectives which included oversight of a growing finance and accounting department. The increase also reflects the competitive employment environment for finance and accounting professionals with significant experience in 1940 Act and business development company accounting and finance regulations and procedures.

Mr. Hassler was paid an annual base salary of $350,000 for 2007, an increase of 3% over his 2006 annual base salary. This increase recognizes Mr. Hassler’s contributions toward the achievement of our overall objectives and his specific contributions managing our debt funding relationships and our loan administration process.

Mr. Colucci was paid an annual base salary of $196,875 for 2007, an increase of 10% over his 2006 annual base salary. This increase recognizes Mr. Colucci’s contribution toward achieving the majority of our

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investment growth targets and portfolio credit metrics. His contacts and relationships in the private equity community were significant contributors to the overall investment team’s success.

Mr. Wells was paid an annual base salary of $220,500 for 2007, an increase of 7% over his 2006 annual base salary. This increase was made to reward Mr. Wells for his continued efforts managing critical aspects of our portfolio underwriting and management process. His oversight contributed to the achievement of our portfolio credit metric targets.

Determination of Annual Cash Incentive Bonus

We have employment agreements in effect with each of our named executive officers, other than Mr. Wells. We had an employment agreement with Mr. Wells that expired un-renewed in December 2007. Each of these employment agreements provide or provided that each of our named executive officers is entitled to receive a discretionary annual cash bonus determined by the compensation committee. The bonus ranges for each of our named executive officers is presented below as well as the actual percentage of bonuses paid as compared to the salary paid in 2007 for each of our named executive officers. The compensation committee, in its sole discretion, may award bonuses that exceed these ranges if it believes that the performance of the named executive officer during the given year merits such a bonus.

							Actual % of
	Base Performance			Highest Performance			2007 Salary
Named Executive Officer	% of 2007 Salary			% of 2007 Salary			Awarded
Richard P. Buckanavage		50	%		175	%		175	%
William E. Alvarez, Jr.		50	%		125	%		105	%
Timothy W. Hassler		50	%		175	%		168	%
Matthew R. Colucci		50	%		150	%		170	%
Clifford L. Wells		25	%		75	%		90	%

The compensation committee considered performance achievements in the determination of bonuses for fiscal 2007, including company performance, based upon a comparison of actual performance to budgeted performance, and the personal performance of each individual. The performance goals used for determining the bonuses for named executive officers included, among other, the following:

•  Maintaining appropriate dividend payouts to stockholders;

•  Maintaining the highest ethical standards, internal controls and adherence to regulatory requirements;

•  Maintaining portfolio credit quality and improving overall portfolio performance; and

•  Maintaining a diversified portfolio, including the extent to which our portfolio of investments is concentrated within particular industries.

Mr. Buckanavage was paid an annual cash bonus of $675,000 for 2007, an increase of 45% over his 2006 annual cash bonus. This increase reflects Mr. Buckanavage’s leadership in 2007 which enabled us to achieve the majority of our operational and financial objectives, two successful follow-on equity offerings, the prudent deployment of the proceeds from those offerings, and the resulting growth in distributions paid to our shareholders.

Mr. Alvarez was paid an annual cash bonus of $287,500 for 2007, an increase of 113% over his 2006 annual cash bonus. This increase reflects Mr. Alvarez’s role leading our finance accounting department in an increasingly more complex regulatory environment. The increase is also reflected of the competitive employment environment for finance and accounting professionals with deep understanding of 1940 Act and business development accounting regulations and procedures.

Mr. Hassler was paid an annual cash bonus of $587,500 for 2007, an increase of 39% over his 2006 annual cash bonus. This increase rewards Mr. Hassler for his contributions to the achievement of certain of

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our financial objectives primarily related to his initiatives to increase the commitment under, and lower the cost of, our existing debt facility.

Mr. Colucci was paid an annual cash bonus of $375,000 for 2007, an increase of 67% over his 2006 annual cash bonus. This increase recognizes Mr. Colucci’s efforts leading our investment staff that exceeded 2006 capital deployment growth by nearly 20% in 2007 and resulted in net portfolio growth by December 31, 2007 of almost 80% as compared to December 31, 2006.

Mr. Wells was paid an annual cash bonus of $200,000 for 2007, an increase of 74% over his 2006 annual cash bonus. This increase reflects Mr. Wells’ substantial contributions in the area of portfolio underwriting and valuation. The increase also rewards him for leading our syndicated debt initiative that he commenced in late 2006.

Determination of Long-Term Equity Incentive Compensation

The named executive officers’ employment agreements entitle them to participate in our stock option plan. See “Grants of Plan-Based Award Tables” below for information regarding the grant of stock options to our named executive officers in 2007. On February 23, 2007, we awarded the following number of options to our named executive officers: 50,031 to Mr. Buckanavage; 45,100 to Mr. Hassler; 34,250 to Mr. Colucci; 27,300 to Mr. Alvarez; and 15,500 to Mr. Wells. These options were issued with an exercise price equal to $14.38, which was the closing price of our common stock on the Nasdaq Global Select Market on such date. The options vest over three years at a rate of 1/36th per month.

On February 27, 2008, we awarded the following number of options to our named executive officers: 170,000 to Mr. Buckanavage; 160,000 to Mr. Hassler; 130,000 to Mr. Colucci; 75,000 to Mr. Alvarez; and 72,500 to Mr. Wells. These options were issued with an exercise price of $10.91 per share, which was the closing price of our common stock on the Nasdaq Global Select market on such date. The options vest over three years at a rate of 1/36th per month.

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Summary Compensation Table

The following table sets forth compensation that we paid during the fiscal years ended December 31, 2007 and 2006 to our named executive officers in each capacity in which each named executive officer served. Certain of our named executive officers served as both officers and directors.

Name and Principal									All Other
Position	Year		Salary		Bonus		Option Awards(1)		Compensation(2)		Total
Richard P. Buckanavage		2007	$	379,167	$	675,000	$	232,539	$	42,797	$	1,329,503
President, Chief		2006	$	339,583	$	465,000	$	186,072	$	39,756	$	1,030,411
Executive Officer
and Director
William E. Alvarez, Jr.		2007	$	241,667	$	287,500	$	29,612	$	11,867	$	570,646
Executive Vice		2006	$	200,000	$	135,000	$	18,239	$	11,379	$	364,618
President, Chief
Financial Officer
and Secretary
Timothy W. Hassler		2007	$	350,000	$	587,500	$	231,183	$	39,896	$	1,208,579
Chief Investment		2006	$	339,583	$	422,500	$	186,072	$	38,992	$	987,147
Officer and Director(3)
Matthew R. Colucci		2007	$	216,667	$	375,000	$	111,731	$	10,204	$	713,602
Executive Vice		2006	$	196,875	$	225,000	$	82,092	$	9,810	$	513,777
President and
Managing Director
Clifford L. Wells		2007	$	220,500	$	200,000	$	27,220	$	13,397	$	461,117
Executive Vice		2006	$	206,333	$	115,000	$	18,239	$	12,533	$	352,105
President and Chief
Compliance Officer(4)

(1)	The amounts in this column reflect the dollar value recognized for financial statement reporting purposes with respect to the fiscal year in accordance with FAS 123(R) of awards pursuant to our stock option plan and thus include amounts from awards granted in and prior to 2007. Assumptions used in the calculation of this amount for the fiscal year ended December 31, 2007 are included in Note 2 to our audited financial statements for the fiscal year ended December 31, 2007 included elsewhere in this prospectus. The assumptions used in the calculation of this amount for the fiscal year ended December 31, 2006 are included in Note 2 to our audited financial statements for the fiscal year ended December 31, 2006 included in our Annual Report on Form 10-K filed with the SEC on March 6, 2007.
(2)	The amounts in this column represent employer contributions to our 401(k) retirement plan for each of the named executives. For the year ended December 31, 2007, these amounts represented: whole life and disability insurance premiums for Messrs. Buckanavage and Hassler in the amount of $33,797 and $30,896, respectively; and term life and disability insurance premiums for Messrs. Alvarez, Colucci and Wells in the amount of $2,867, $1,204 and $4,397 respectively, paid in each case by us. For the year ended December 31, 2006, these amounts represented: whole life and disability insurance premiums for Messrs.  Buckanavage and Hassler in the amount of $30,956 and $30,192, respectively; and term life and disability insurance premiums for Messrs. Alvarez, Colucci and Wells in the amount of $2,579, $1,010 and $3,733 respectively, paid in each case by us.
(3)	Mr. Hassler served as our chief operating officer and chief compliance officer from May 2005 until March 26, 2008, when, in connection with an internal reorganization of the responsibilities of our executive officers, the board of directors appointed Mr. Wells as our chief compliance officer. Mr. Hassler was appointed to serve as our chief investment officer.
(4)	Mr. Wells served as chief investment officer from May 2005 until March 26, 2008, when, in connection with an internal reorganization of the responsibilities of our executive officers, the board of directors appointed Mr. Hassler as our chief investment officer. Mr. Wells was appointed to serve as our chief compliance officer.

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Grants of Plan-Based Award Tables

The following table presents information regarding the stock options awarded to our named executive officers during the fiscal year ended December 31, 2007.

									All Other
									Option
									Awards;				Grant Date
									Number of				Fair Value of
			Estimated Future Payouts Under						Securities		Exercise or Base		Stock and
			Non-Equity Incentive Plan Awards						Underlying		Price of Option		Option
Name	Grant Date		Threshold		Target		Maximum		Options		Awards		Awards(2)
Richard P. Buckanavage		02/23/2007		—		—		—		50,031	$	14.38	$	49,531
William E. Alvarez, Jr.		02/23/2007		—		—		—		27,300	$	14.38	$	27,027
Timothy W. Hassler		02/23/2007		—		—		—		45,100	$	14.38	$	44,649
Matthew R. Colucci		02/23/2007		—		—		—		34,250	$	14.38	$	33,908
Clifford L. Wells		02/23/2007		—		—		—		15,500	$	14.38	$	15,345

(1)	The options granted vest equally, on a monthly basis, over three years from the date of grant. The exercise price of $14.38 represented the closing price of our common stock on the Nasdaq Global Select Market on February 23, 2007, the date of grant.
(2)	Represents the fair value of each stock option as of the date it was granted, computed in accordance with FAS 123(R). The Black-Scholes pricing option model used the following assumptions for the 2007 grants: annual dividend rate of 8.3%, risk-free interest rate of 4.7%, expected volatility of 20%, and the expected life of the options of 6.5 years.

Outstanding Equity Awards at Fiscal Year-End

The following table presents the stock option awards outstanding as of December 31, 2007 for each of our named executive officers.

	Option Awards
	Number of			Number of
	Securities			Securities
	Underlying			Underlying
	Unexercised			Unexercised		Option		Option
	Options			Options		Exercise		Expiration
Name	Exercisable			Unexercisable		Price		Date
Richard P. Buckanavage		335,437	(1)		167,719	$	14.00		07/27/2015
		137,500	(2)		137,500	$	10.97		06/26/2016
		13,898	(3)		36,134	$	14.38		02/23/2017
William E. Alvarez, Jr.		31,307	(1)		15,654	$	14.00		07/27/2015
		16,250	(2)		16,250	$	10.97		06/26/2016
		7,583	(3)		19,717	$	14.38		02/23/2017
Timothy W. Hassler		335,437	(1)		167,719	$	14.00		07/27/2015
		137,500	(2)		137,500	$	10.97		06/26/2016
		12,528	(3)		32,572	$	14.38		02/23/2017
Matthew R. Colucci		134,175	(1)		67,087	$	14.00		07/27/2015
		85,000	(2)		85,000	$	10.97		06/26/2016
		9,514	(3)		24,736	$	14.38		02/23/2017
Clifford L.Wells		31,307	(1)		15,654	$	14.00		07/27/2015
		16,250	(2)		16,250	$	10.97		06/26/2016
		4,306	(3)		11,194	$	14.38		02/23/2017

(1) Options awarded on July 28, 2005 vest over three years, with one-third of such options vesting on each of the first three anniversaries of the grant date. The exercise price of $14.00 was equivalent to the offering price of our common shares in our initial public offering on July 28, 2005.

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(2)	Options awarded on June 26, 2006 vest equally, on a monthly basis, over three years from the date of grant. The exercise price of $10.97 represents the closing price of our common stock on the Nasdaq Global Select Market on June 26, 2006, the date of the grant.
(3)	Options awarded on February 23, 2007 vest equally, on a monthly basis, over three years from the date of grant. The exercise price of $14.38 represents the closing price of our common stock on the Nasdaq Global Select Market on February 23, 2007, the date of the grant.

Option Exercises and Stock Vested

None of our named executive officers exercised any stock options during the fiscal year ended December 31, 2007.

Director Compensation

The following table sets forth compensation that we paid during the fiscal year ended December 31, 2007, to our directors. We do not separately compensate directors who are employees for their service as a director.

			Fees
			Earned or
			Paid		All Other
Name	Year		in Cash		Compensation		Total
Steven Drogin		2007	$	55,500		—	$	55,500
Mel P. Melsheimer		2007	$	70,750		—	$	70,750
Dennis C. O’Dowd		2007	$	55,000		—	$	55,000
Richard A. Sebastiao		2007	$	59,750		—	$	59,750

2007 Board Fees

The chairman of our board of directors and our independent directors received an annual fee of $28,000 and $18,000, respectively. The chairman of our board of directors and our independent directors also received $3,500 in connection with attending each board meeting. In addition, each member of the audit committee, compensation committee, nominating and corporate governance committee and valuation committee, other than the chairman of such committee, received $1,500 in connection with attending each committee meeting. Each chairman of such committees received $2,500 in connection with attending each committee meeting. Also, any independent director requested to participate in a meeting of the executive committee received $2,500 in connection with participating in each such meeting.

2008 Board Fees

The fees we pay our independent directors will be the same as the fees we paid our directors in 2007 except that the chairman of our board of directors and our independent directors will receive $4,000 in connection with attending each board meeting in 2008 (as opposed to $3,500 which was the amount paid from the date of our initial public offering in 2005 through the end of 2007).

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CERTAIN RELATIONSHIPS

We were capitalized by affiliates of Compass Group Investments, Inc., which provided us with $30.1 million of equity capital, a $400,000 demand note and a $2.0 million secured revolving line of credit.

Prior to our initial public offering, Compass Group Investments, Inc. beneficially owned 100% of our equity interests. As of June   , 2008, Compass Group Investments, Inc. beneficially owned 5.0% of our outstanding shares of common stock through an indirect subsidiary, Wilton Funding Holdings, LLC.

Prior to our initial public offering, Kilgore Consulting CPM LLC, an entity affiliated with Compass Group Investments, Inc., provided consulting services to us. Pursuant to the consulting agreement, Kilgore Consulting regularly analyzed the viability and performance of certain investments and advised us with respect to the suitability of additional investment opportunities. Under the consulting agreement, we paid Kilgore Consulting an annual fee of $500,000 for such consulting services. Pursuant to the consulting agreement, we elected to defer the payment of such consulting fees until the later of January 1, 2006 or the termination of the agreement. This consulting agreement was terminated on July 27, 2005. We used a portion of the net proceeds we received in our initial public offering to pay all accrued but unpaid consulting fees owed under the consulting agreement at the time of its termination.

Prior to our initial public offering, Philan LLC, an entity affiliated with Compass Group Investments, Inc., provided consulting services to us. Pursuant to the consulting agreement, Philan LLC analyzed our business and assisted us in developing and planning the implementation of operating and internal growth strategies. Under the consulting agreement, we paid Philan LLC an annual fee of $500,000 for such consulting services. This consulting agreement was terminated on July 27, 2005. We used a portion of the net proceeds we received in our initial public offering to pay all accrued but unpaid consulting fees owed under the consulting agreement at the time of its termination.

On February 11, 2003, we entered into a $2.0 million revolving credit agreement with an entity affiliated with Compass Group Investments, Inc. On July 12, 2005, we repaid all outstanding borrowings under this revolving credit agreement and terminated the revolving credit agreement in conjunction with such repayment.

In November 2002, we entered into an informal arrangement with The Compass International LLC, the entity formerly providing investment advisory services to Compass Group Investments, Inc., under which we occupied space at Compass International’s offices located in Westport, Connecticut in exchange for allowing Compass International to use certain of our administrative personnel. In October 2005, we entered into a lease agreement for new office space in Westport, Connecticut with an unaffiliated third-party. As a result, we terminated our informal arrangement with Compass International on October 1, 2005.

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CONTROL PERSONS AND PRINCIPAL STOCKHOLDERS

The following table sets forth certain information with respect to the beneficial ownership of shares of our common stock as of May 31, 2008. Beneficial ownership has been determined in accordance with Rule 13d-3 of the Securities Exchange Act of 1934. In accordance with such rule, a person shall be deemed to be the beneficial owner of a security if that person has the right to acquire such security within 60 days of May 31, 2008 through the exercise of any option.

	Shares Beneficially Owned
Name	Number(1)			Percentage(2)
Compass Group Investments, Inc.(2)		1,031,929			4.98	%
The Belvedere Building 69 Pitts Bay Road Pembroke, Bermuda
Interested Directors:
Richard P. Buckanavage		640,106	(4)		3.09	%
Timothy W. Hassler		632,172	(4)		3.05	%
Independent Directors:
Steven Drogin		2,285			*
Mel P. Melsheimer		11,000			*
Dennis O’Dowd		2,000			*
Richard A. Sebastiao		8,125			*
Executive Officers:
William E. Alvarez, Jr.		80,869	(4)		*
Matthew R. Colucci		290,685	(4)		1.40	%
Clifford L. Wells		73,764	(4)		*
All Directors and Officers as a Group(6)		1,741,006	(5)		8.41	%

 *    Less than 1.0%

(1)	Based on a total of 20,702,485 shares of our common stock issued and outstanding on May 31, 2008.
(2)	Wilton Funding Holdings, LLC is the record holder of all of these shares. Wilton Funding Holdings, LLC is indirectly owned and controlled by Compass Group Investments, Inc. As a result, Compass Group Investments, Inc. may be deemed to beneficially own the shares held by Wilton Funding Holdings, LLC.
	Compass Wilton Partners, LP is the sole member of Wilton Funding Holdings, LLC; Concorde Wilton Holdings, LP is the principal limited partner of Compass Wilton Partners, LP; and Navco Management, Inc. is the general partner of Compass Wilton Partners, LP and Concorde Wilton Holdings, LP, and, as a result, each of Compass Wilton Partners, LP, Concorde Wilton Holdings, LP and Navco Management, Inc. may be deemed to beneficially own the shares of common stock held by Wilton Funding Holdings, LLC. Compass Group Investments, Inc. is the sole limited partner of Concorde Wilton Holdings, LP.
	Arthur Coady is a director of Navco Management, Inc. and, as a result, may be deemed to beneficially own the shares of common stock held by Wilton Funding Holdings, LLC.
	Arthur Coady and each of the entities discussed herein disclaims beneficial ownership of the shares of common stock referred to herein, except to the extent of their pecuniary interest therein.
	The address for Arthur Coady and all of the entities discussed herein is c/o Compass Group Investments, Inc., Bayside Executive Park, West Bay Street and Blake Road, Nassau Bahamas. Information regarding the share ownership was obtained from the Schedule 13G filed by Compass Group Investments, Inc. on August 16, 2006.
(3)	Includes shares of our common stock issuable upon the exercise of options exercisable within 60 days of May 31, 2008 as follows: Richard P. Buckanavage (573,646 shares), Timothy W. Hassler (569,928 shares), William E. Alvarez, Jr. (77,185 shares), Matthew R. Colucci (282,988 shares) and Clifford L. Wells (71,264 shares).
(4)	Includes 1,575,011 shares of our common stock issuable upon the exercise of options exercisable within 60 days of May 31, 2008.
(5)	The address for all officers and directors is c/o Patriot Capital Funding, Inc., 274 Riverside Avenue, Westport, CT 06880.

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The following table sets forth, as of May 31, 2008, the dollar range of our equity securities beneficially owned by each of our directors and our executive officers.

	Dollar Range of Equity
	Securities Beneficially
Interested Directors	Owned(1)(2)(3)
Richard P. Buckanavage		over $1,000,000
Timothy W. Hassler		over $1,000,000
Independent Directors
Steven Drogin		$10,001-$50,000
Mel P. Melsheimer		$100,001-$500,000
Richard A. Sebastiao		$50,001-$100,000
Dennis C. O’Dowd		$10,001-$50,000
Executive Officers
William E. Alvarez, Jr.		$500,001-$1,000,000
Clifford L. Wells		$500,001-$1,000,000
Matthew R. Colucci		over $1,000,000

(1)	Beneficial ownership has been determined in accordance with Rule 16a-1(a)(2) of the Securities Exchange Act of 1934.
(2)	The dollar range of equities securities beneficially owned by our directors is based on the closing price of $10.17 for our common stock on May 30, 2008 on The Nasdaq Global Select Market.
(3)	The dollar range of equity securities beneficially owned are: none, $1-$10,000, $10,001-$50,000, $50,001-$100,000, $100,001-$500,000, $500,001-$1,000,000, or over $1,000,000.

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DETERMINATION OF NET ASSET VALUE

Quarterly Net Asset Value Determinations

We determine the net asset value per share of our common stock on a quarterly basis. We disclose these net asset values in the periodic reports we file with the SEC. The net asset value per share is equal to the value of our total assets minus liabilities and any preferred stock outstanding divided by the total number of shares of common stock outstanding.

Value, as defined in Section 2(a)(41) of the 1940 Act, is (i) the market price for those securities for which a market quotation is readily available and (ii) for all other securities and assets, fair value as is determined in good faith by the board of directors. Since there will typically be no readily available market value for the investments in our portfolio, we value substantially all of our portfolio investments at fair value as determined in good faith by our board of directors pursuant to a valuation policy and a consistently applied valuation process. Because of the inherent uncertainty in determining the fair value of investments that do not have a readily available market value, the fair value of our investments determined in good faith by our board of directors may differ significantly from the values that would have been used had a ready market existed for the investments, and the differences could be material.

In September 2006, the Financial Accounting Standards Board issued Statement of Financial Standards No. 157 — Fair Value Measurements, or SFAS 157, which is effective for fiscal years beginning after November 15, 2007, with early adoption permitted. SFAS 157 defines fair value as the price at which an asset could be exchanged in a current transaction between knowledgeable, willing parties. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligator, not the amount that would be paid to settle the liability with the creditor. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation techniques are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the investments or market and the investments’ complexity.

Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by SFAS 157 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:

Level 1 — Unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data at the measurement date for substantially the full term of the assets or liabilities.

Level 3 — Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

Concurrent with our adoption of SFAS 157, effective January 1, 2008, we augmented the valuation techniques we use to estimate the fair value of our debt investments where there is not a readily available market value (Level 3). Prior to January 1, 2008, we estimated the fair value of our Level 3 debt investments by first estimating the enterprise value of the portfolio company which issued the debt investment. To estimate the enterprise value of a portfolio company, we analyzed various factors, including the portfolio companies historical and projected financial results. Typically, private companies are valued based on multiples of EBITDA (Earning Before Interest, Taxes, Depreciation and Amortization), cash flow, net income, revenues or, in limited instances, book value.

In estimating a multiple to use for valuation purposes, we looked to private merger and acquisition statistics, discounted public trading multiples or industry practices. In some cases, the best valuation

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methodology may have been a discounted cash flow analysis based on future projections. If a portfolio company was distressed, a liquidation analysis may have provided the best indication of enterprise value.

If there was adequate enterprise value to support the repayment of our debt, the fair value of the Level 3 loan or debt security normally corresponded to cost plus the amortized original issue discount unless the borrower’s condition or other factors lead to a determination of fair value at a different amount.

Beginning on January 1, 2008, we also introduced a bond-yield model to value these investments based on the present value of expected cash flows. The primary inputs into the model are market interest rates for debt with similar characteristics and an adjustment for the portfolio company’s credit risk. The credit risk component of the valuation considers several factors including financial performance, business outlook, debt priority and collateral position.

The fair value of our investments at March 31, 2008, and December 31, 2007 was determined in good faith by our board of directors. Duff & Phelps, LLC, an independent valuation firm, provided third party valuation consulting services to the Company which consisted of certain mutually agreed upon limited procedures that we engaged them to perform. At March 31, 2008 and at December 31, 2007, we asked Duff & Phelps to perform the limited procedures on investments in 8 and 15 portfolio companies, respectively, comprising approximately 31% and 49% of the total investments at fair value, respectively. Upon completion of their limited procedures, Duff & Phelps concluded that the fair value of those investments subjected to the limited procedures did not appear to be unreasonable. Our Board of Directors is solely responsible for the valuation of our portfolio investments at fair value as determined in good faith pursuant to our valuation policy and consistently applied valuation process.

Our board of directors undertakes a multi-step valuation process each quarter in connection with determining the fair value of our investments:

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

•  Valuation conclusions are then documented and discussed with our investment committee;

•  The valuation committee of our board of directors reviews the valuation conclusions presented by management; and

•  Duff & Phelps, LLC, an independent valuation firm engaged by us, performs certain mutually agreed upon limited procedures that we have engaged them to perform on a selection of our portfolio company valuation conclusions;

•  Our board of directors solely determines the fair value of each investment in our portfolio in good faith.

Determination of the fair value involves subjective judgments and estimates not susceptible to substantiation by auditing procedures. Accordingly, under current auditing standards, the notes to our financial statements refer to the uncertainty with respect to the possible effect of such valuations, and any change in such valuations, on our financial statements.

Determinations in Connection with Offerings

In connection with any offering of shares of our common stock, our board of directors or a committee thereof is required to make the determination that we are not selling shares of our common stock at a price below the then current net asset value of our common stock at the time at which the sale is made. Our board of directors considers the following factors, among others, in making such determination:

•  the net asset value of our common stock disclosed in the most recent periodic report we filed with the SEC;

•  our management’s assessment of whether any material change in the net asset value of our common stock has occurred (including through the realization of gains on the sale of our portfolio securities)

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from the period beginning on the date of the most recently disclosed net asset value of our common stock to the period ending two days prior to the date of the sale of our common stock; and

•  the magnitude of the difference between (i) the net asset value of our common stock disclosed in the most recent periodic report we filed with the SEC and our management’s assessment of any material change in the net asset value of our common stock since the date of the most recently disclosed net asset value of our common stock, and (ii) the offering price of the shares of our common stock in the proposed offering.

Importantly, this determination does not require that we calculate the net asset value of our common stock in connection with each offering of shares of our common stock, but instead it involves the determination by our board of directors or a committee thereof that we are not selling shares of our common stock at a price below the then current net asset value of our common stock at the time at which the sale is made.

Moreover, to the extent that there is even a remote possibility that we may (i) issue shares of our common stock at a price below the then current net asset value of our common stock at the time at which the sale is made or (ii) trigger the undertaking (which we are required to provide in certain registration statements we may file from time to time with the SEC) to suspend the offering of shares of our common stock pursuant to any such registration statement if the net asset value of our common stock fluctuates by certain amounts in certain circumstances until the prospectus included in such registration statement is amended, our board of directors will elect, in the case of clause (i) above, either to postpone the offering until such time that there is no longer the possibility of the occurrence of such event or to undertake to determine the net asset value of our common stock within two days prior to any such sale to ensure that such sale will not be below our then current net asset value, and, in the case of clause (ii) above, to comply with such undertaking or to undertake to determine the net asset value of our common stock to ensure that such undertaking has not been triggered.

These processes and procedures are part of our compliance policies and procedures. Records will be made contemporaneously with all determinations described in this section and these records will be maintained with other records we are required to maintain under the 1940 Act.

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DIVIDEND REINVESTMENT PLAN

We have adopted a dividend reinvestment plan that provides for reinvestment of our distributions on behalf of our stockholders, unless a stockholder elects to receive cash. As a result, if our board of directors authorizes, and we declare, a cash dividend, then our stockholders who have not “opted out” of our dividend reinvestment plan will have their cash dividends automatically reinvested in additional shares of our common stock, rather than receiving the cash dividends. We have the option to satisfy the share requirements of the dividend reinvestment plan through the issuance of new shares of our common stock or through open market purchases of our common stock by the administrator of the dividend reinvestment plan. The number of newly issued shares to be issued to a stockholder is determined by dividing the total dollar amount of the dividend payable to such stockholder by the market price per share of our common stock at the close of regular trading on The Nasdaq Global Select Market on the dividend payment date. Shares purchased in open market transactions by the administrator of the dividend reinvestment plan will be allocated to a stockholder based upon the average purchase price, excluding any brokerage charges or other chargers, of all shares of common stock purchased with respect to the dividend.

No action will be required on the part of a registered stockholder to have their cash dividend reinvested in shares of our common stock. A registered stockholder may elect to receive an entire dividend in cash by notifying American Stock Transfer & Trust Company, the plan administrator and our transfer agent and registrar, in writing so that such notice is received by the plan administrator no later than the record date for dividends to stockholders. The plan administrator will set up an account for shares acquired through the plan for each stockholder who has not elected to receive dividends in cash and hold such shares in non-certificated form. Upon request by a stockholder participating in the plan, received in writing not less than 10 days prior to the record date, the plan administrator will, instead of crediting shares to the participant’s account, issue a certificate registered in the participant’s name for the number of whole shares of our common stock and a check for any fractional share.

Those stockholders whose shares are held by a broker or other financial intermediary may receive dividends in cash by notifying their broker or other financial intermediary of their election.

There are no brokerage charges or other charges to stockholders who participate in the plan. The plan administrator’s fees under the plan are paid by us. If a participant elects by written notice to the plan administrator to have the plan administrator sell part or all of the shares held by the plan administrator in the participant’s account and remit the proceeds to the participant, the plan administrator is authorized to deduct a $15.00 transaction fee plus a $0.10 per share brokerage commissions from the proceeds.

Stockholders who receive dividends in the form of stock generally are subject to the same federal, state and local tax consequences as are stockholders who elect to receive their dividends in cash. A stockholder’s basis for determining gain or loss upon the sale of stock received in a dividend from us will be equal to the total dollar amount of the dividend payable to the stockholder. Any stock received in a dividend will have a holding period for tax purposes commencing on the day following the day on which the shares are credited to the U.S. stockholder’s account.

Participants may terminate their accounts under the plan by notifying the plan administrator via its website at www.investpower.com, by filling out the transaction request form located at the bottom of their statement and sending it to the plan administrator at P.O. Box 922, Wall Street Station, New York, NY 10269-0560 or by calling the plan administrator’s at 1-877-366-6442.

The plan may be terminated by us upon notice in writing mailed to each participant at least 30 days prior to any record date for the payment of any dividend by us. All correspondence concerning the plan should be directed to the plan administrator by mail at 59 Maiden Lane, New York, NY 10038 or by telephone at 1-718-921-8200.

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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

The following discussion is a general summary of the material U.S. federal income tax considerations applicable to us and to an investment in our shares. This summary does not purport to be a complete description of the income tax considerations applicable to such an investment. For example, we have not described tax consequences that may be relevant to certain types of holders subject to special treatment under U.S. federal income tax laws, including stockholders subject to the alternative minimum tax, tax-exempt organizations, insurance companies, dealers in securities, pension plans and trusts, and financial institutions. This summary assumes that investors hold our common stock as capital assets (within the meaning of the Code). The discussion is based upon the Code, Treasury regulations, and administrative and judicial interpretations, each as of the date of this prospectus and all of which are subject to change, possibly retroactively, which could affect the continuing validity of this discussion. We have not sought and will not seek any ruling from the Internal Revenue Service regarding this offering. This summary does not discuss any aspects of U.S. estate or gift tax or foreign, state or local tax. It does not discuss the special treatment under U.S. federal income tax laws that could result if we invested in tax-exempt securities or certain other investment assets.

A “U.S. stockholder” generally is a beneficial owner of shares of our common stock who is for U.S. federal income tax purposes:

•  A citizen or individual resident of the United States;

•  A corporation or other entity treated as a corporation, for U.S. federal income tax purposes, created or organized in or under the laws of the United States or any political subdivision thereof; or

•  A trust if (1) a court in the United States has primary supervision over its administration and one or more U.S. persons have authority to control all substantial decisions of such trust or (2) such trust validly elects to be treated as a U.S. person for federal income tax purposes.

•  An estate, the income of which is subject to U.S. federal income taxation regardless of its source.

A “Non-U.S. stockholder” is a beneficial owner of shares of our common stock that is not a U.S. stockholder.

If a partnership (including an entity treated as a partnership for U.S. federal income tax purposes) holds shares of our common stock, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. A prospective stockholder that is a partner of a partnership holding shares of our common stock should consult his, her or its tax advisors with respect to the purchase, ownership and disposition of shares of our common stock.

Tax matters are very complicated and the tax consequences to an investor of an investment in our shares will depend on the facts of his, her or its particular situation. We encourage investors to consult their own tax advisors regarding the specific consequences of such an investment, including tax reporting requirements, the applicability of federal, state, local and foreign tax laws, eligibility for the benefits of any applicable tax treaty and the effect of any possible changes in the tax laws.

Election to be Taxed as a RIC

As a business development company, we have elected to be treated as a RIC under Subchapter M of the Code. As a RIC, we generally will not have to pay corporate-level federal income taxes on any net ordinary income or capital gains that we distribute to our stockholders as dividends. To qualify as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements (as described below). In addition, in order to maintain RIC tax treatment, we must distribute to our stockholders, for each taxable year, at least 90% of our “investment company taxable income,” which is generally our net ordinary income plus the excess of realized net short-term capital gains over realized net long-term capital losses (the “Annual Distribution Requirement”).

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Conversion to RIC Status

Effective as of August 1, 2005, we have elected to be treated as a RIC under Subchapter M of the Code. Prior to that date, we were taxed as a regular corporation under Subchapter C of the Code (a “C corporation”). As of the effective date of that election, we held assets (including intangible assets not reflected on the balance sheet, such as goodwill) that had “built-in gain,” which are assets whose fair market value as of the effective date of the election exceeded their tax basis. In general, a corporation that converts to taxation as a RIC must pay corporate level tax on any of the net built-in gains it recognizes during the 10-year period beginning on the effective date of its election to be treated as a RIC. Alternatively, the corporation may elect to recognize all of its built-in gain at the time of its conversion and pay tax on the built-in gain at that time. We did not make this election. As a result, any such corporate level tax will be payable at the time the built-in gains are recognized (which generally will be the years in which the built-in gain assets are sold in a taxable transaction). The amount of this tax will vary depending on the assets that are actually sold by us in this 10-year period, the actual amount of net built-in gain or loss present in those assets as of the effective date of our election to be treated as a RIC, and effective tax rates. Recognized built-in gains that are ordinary in character and the excess of realized net short-term capital gains over realized net long-term capital losses will be included in our investment company taxable income, and generally we must distribute annually at least 90% of any such amounts (net of corporate taxes we pay on those gains) in order to be eligible for RIC tax treatment. Any such amount distributed likely will be taxable to stockholders as ordinary income. Built-in gains (net of taxes) that are recognized within the 10-year period and that are long-term capital gains likely will also be distributed (or deemed distributed) annually to our stockholders. Any such amount distributed (or deemed distributed) likely will be taxable to stockholders as capital gains.

Although C corporations converting to RIC status are required to distribute, prior to the end of their first taxable year as a RIC, any earnings and profits attributable to their C corporation taxable years, we had no such earnings and profits and therefore did not need to make any such distribution.

Taxation as a RIC

If we:

•  Qualify as a RIC; and

•  Satisfy the Annual Distribution Requirement,

then we will not be subject to federal income tax on the portion of our investment company taxable income and net capital gain (i.e., realized net long-term capital gains in excess of realized net short-term capital losses) we distribute to stockholders. We will be subject to U.S. federal income tax at the regular corporate rates on any income or capital gains not distributed (or deemed distributed) to our stockholders.

We will be subject to a 4% nondeductible federal excise tax on certain undistributed income unless we distribute in a timely manner an amount at least equal to the sum of (1) 98% of our net ordinary income for each calendar year, (2) 98% of our capital gain net income for the one-year period ending October 31 in that calendar year and (3) any income recognized, but not distributed, in preceding years (the “Excise Tax Avoidance Requirement”). We currently intend to make sufficient distributions each taxable year to satisfy the Excise Tax Avoidance Requirement.

In order to qualify as a business development company treated as a RIC for federal income tax purposes, we must, among other things:

•  Have in effect an election to be treated as a business development company under the 1940 Act at all times during each taxable year;

•  Derive in each taxable year at least 90% of our gross income from (a) dividends, interest, payments with respect to certain securities loans, gains from the sale of stock or other securities, or other income derived with respect to our business of investing in such stock or securities and (b) net

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income derived from an interest in a “qualified publicly traded partnership” (the “90% Income Test”); and

•  Diversify our holdings so that at the end of each quarter of the taxable year:

•  At least 50% of the value of our assets consists of cash, cash equivalents, U.S. Government securities, securities of other RICs, and other securities if such other securities of any one issuer do not represent more than 5% of the value of our assets or more than 10% of the outstanding voting securities of the issuer; and

•  No more than 25% of the value of our assets is invested in (a) the securities, other than U.S. Government securities or securities of other RICs, of one issuer, (b) securities of two or more issuers that are controlled, as determined under applicable tax rules, by us and that are engaged in the same or similar or related trades or businesses or (c) securities of one of more “qualified publicly traded partnerships” (the “Diversification Tests”).

We may be required to recognize taxable income in circumstances in which we do not receive cash. For example, if we hold debt obligations that are treated under applicable tax rules as having original issue discount (such as debt instruments with payment-in-kind interest or, in certain cases, increasing interest rates or issued with warrants), we must include in income each year a portion of the original issue discount that accrues over the life of the obligation, regardless of whether cash representing such income is received by us in the same taxable year. Because any original issue discount accrued will be included in our investment company taxable income for the year of accrual, we may be required to make a distribution to our stockholders in order to satisfy the Annual Distribution Requirement, even though we will not have received any corresponding cash amount.

Gain or loss realized on warrants acquired by us, as well as any loss attributable to the lapse of such warrants, generally will be treated as a capital gain or loss. Such gain or loss generally will be long-term or short-term depending on how long we held a particular warrant.

We are authorized to borrow funds and to sell assets in order to satisfy distribution requirements. However, under the 1940 Act, we are not permitted to make distributions to our stockholders while our debt obligations and other senior securities are outstanding unless certain “asset coverage” tests are met. See “Regulation — Senior Securities.” Moreover, our ability to dispose of assets to meet our distribution requirements may be limited by (1) the illiquid nature of our portfolio and/or (2) other requirements relating to our status as a RIC, including the Diversification Tests. If we dispose of assets in order to meet the Annual Distribution Requirement or the Excise Tax Avoidance Requirement, we may make such dispositions at times that, from an investment standpoint, are not advantageous.

The remainder of this discussion assumes that we qualify as a RIC and have satisfied the Annual Distribution Requirement.

Taxation of U.S. Stockholders

Distributions by us generally are taxable to U.S. stockholders as ordinary income or capital gains. Distributions of our “investment company taxable income” (which is, generally, our net ordinary income plus realized net short-term capital gains in excess of realized net long-term capital losses) will be taxable as ordinary income to U.S. stockholders to the extent of our current or accumulated earnings and profits, whether paid in cash or reinvested in additional common stock. To the extent such distributions paid by us to non-corporate stockholders (including individuals) are attributable to dividends from U.S. corporations and certain qualified foreign corporations, such distributions (“Qualifying Dividends”) may be eligible for a current maximum tax rate of 15%. In this regard, it is anticipated that distributions paid by us will generally not be attributable to dividends and, therefore, generally will not qualify for the 15% maximum rate applicable to Qualifying Dividends. Distributions prior to January 1, 2011 of our net capital gains (which is generally our realized net long-term capital gains in excess of realized net short-term capital losses) properly designated by us as “capital gain dividends” will be taxable to a U.S. stockholder as long-term capital gains

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at a maximum rate of 15% in the case of individuals, trusts or estates, regardless of the U.S. stockholder’s holding period for his, her or its common stock and regardless of whether paid in cash or reinvested in additional common stock. Distributions in excess of our earnings and profits first will reduce a U.S. stockholder’s adjusted tax basis in such stockholder’s common stock and, after the adjusted basis is reduced to zero, will constitute capital gains to such U.S. stockholder.

We currently intend to retain some or all of our realized net long-term capital gains in excess of realized net short-term capital losses, but to designate the retained net capital gain as a “deemed distribution.” In that case, among other consequences, we will pay tax on the retained amount, each U.S. stockholder will be required to include his, her or its share of the deemed distribution in income as if it had been actually distributed to the U.S. stockholder, and the U.S. stockholder will be entitled to claim a credit equal to his, her or its allocable share of the tax paid thereon by us. The amount of the deemed distribution net of such tax will be added to the U.S. stockholder’s cost basis for his, her or its common stock. In order to utilize the deemed distribution approach, we must provide written notice to our stockholders prior to the expiration of 60 days after the close of the relevant taxable year. We cannot treat any of our investment company taxable income as a “deemed distribution.” We may, in the future, make actual distributions to our stockholders of all realized net long-term capital gains in excess of realized net short-term capital losses.

For purposes of determining (1) whether the Annual Distribution Requirement is satisfied for any year and (2) the amount of capital gain dividends paid for that year, we may, under certain circumstances, elect to treat a dividend that is paid during the following taxable year as if it had been paid during the taxable year in question. If we make such an election, the U.S. stockholder will still be treated as receiving the dividend in the taxable year in which the distribution is made. However, any dividend declared by us in October, November or December of any calendar year, payable to stockholders of record on a specified date in such a month and actually paid during January of the following year, will be treated as if it had been received by our U.S. stockholders on December 31 of the year in which the dividend was declared.

If an investor purchases shares of our common stock shortly before the record date of a distribution, the price of the shares will include the value of the distribution and the investor will be subject to tax on the distribution even though economically it may represent a return of his, her or its investment.

A stockholder generally will recognize taxable gain or loss if the stockholder sells or otherwise disposes of his, her or its shares of our common stock. The amount of gain or loss will be measured by the difference between such stockholder’s adjusted tax basis in the common stock sold and the amount of the proceeds received in exchange. Any gain arising from such sale or disposition generally will be treated as long-term capital gain or loss if the stockholder has held his, her or its shares for more than one year. Otherwise, it will be classified as short-term capital gain or loss. However, any capital loss arising from the sale or disposition of shares of our common stock held for six months or less will be treated as long-term capital loss to the extent of the amount of capital gain dividends received, or undistributed capital gain deemed received, with respect to such shares. In addition, all or a portion of any loss recognized upon a disposition of shares of our common stock may be disallowed if other shares of our common stock are purchased (whether through reinvestment of distributions or otherwise) within 30 days before or after the disposition.

In general, individual U.S. stockholders currently are subject to a maximum federal income tax rate of 15% on their net capital gain (i.e., the excess of realized net long-term capital gains over realized net short-term capital losses) recognized prior to January 1, 2011, including any long-term capital gain derived from an investment in our shares. Such rate is lower than the maximum rate on ordinary income currently payable by individuals. Corporate U.S. stockholders currently are subject to federal income tax on net capital gain at the maximum 35% rate also applied to ordinary income. Non-corporate stockholders with net capital losses for a year (i.e., capital losses in excess of capital gains) generally may deduct up to $3,000 of such losses against their ordinary income each year; any net capital losses of a non-corporate stockholder in excess of $3,000 generally may be carried forward and used in subsequent years as provided in the Code. Corporate stockholders generally may not deduct any net capital losses for a year, but may carryback such losses for three years or carry forward such losses for five years.

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We will send to each of our U.S. stockholders, as promptly as possible after the end of each calendar year, a notice detailing, on a per share and per distribution basis, the amounts includible in such U.S. stockholder’s taxable income for such year as ordinary income and as long-term capital gain. In addition, the federal tax status of each year’s distributions generally will be reported to the Internal Revenue Service (including the amount of dividends, if any, eligible for the current 15% maximum rate). Dividends paid by us generally will not be eligible for the dividends-received deduction or the preferential tax rate applicable to Qualifying Dividends since our income generally will not consist of dividends. Distributions may also be subject to additional state, local and foreign taxes depending on a U.S. stockholder’s particular situation.

We may be required to withhold federal income tax (“backup withholding”) currently at a rate of 28% from all distributions to any non-corporate U.S. stockholder (1) who fails to furnish us with a correct taxpayer identification number or a certificate that such stockholder is exempt from backup withholding, or (2) with respect to whom the IRS notifies us that such stockholder has failed to properly report certain interest and dividend income to the IRS and to respond to notices to that effect. An individual’s taxpayer identification number is his or her social security number. Any amount withheld under backup withholding is allowed as a credit against the U.S. stockholder’s federal income tax liability, provided that proper information is provided to the IRS.

Taxation of Non-U.S. Stockholders

Whether an investment in the shares is appropriate for a Non-U.S. stockholder will depend upon that person’s particular circumstances. An investment in the shares by a Non-U.S. stockholder may have adverse tax consequences. Non-U.S. stockholders should consult their tax advisers before investing in our common stock.

Distributions of our “investment company taxable income” to Non-U.S. stockholders (including interest income and realized net short-term capital gains in excess of realized long-term capital losses, which generally would be free of withholding if paid to Non-U.S. stockholders directly) will be subject to withholding of federal tax at a 30% rate (or lower rate provided by an applicable treaty) to the extent of our current and accumulated earnings and profits unless an applicable exception applies. If the distributions are effectively connected with a U.S. trade or business of the Non-U.S. stockholder, and, if an income tax treaty applies, attributable to a permanent establishment in the United States, we will not be required to withhold federal tax if the Non-U.S. stockholder complies with applicable certification and disclosure requirements, although the distributions will be subject to federal income tax at the rates applicable to U.S. persons. Special certification requirements apply to a Non-U.S. stockholder that is a foreign partnership or a foreign trust, and such entities are urged to consult their own tax advisors.

Actual or deemed distributions of our net capital gains to a Non-U.S. stockholder, and gains realized by a Non-U.S. stockholder upon the sale of our common stock, will not be subject to federal withholding tax and generally will not be subject to federal income tax unless the distributions or gains, as the case may be, are effectively connected with a U.S. trade or business of the Non-U.S. stockholder and, if an income tax treaty applies, are attributable to a permanent establishment maintained by the Non-U.S. stockholder in the United States.

If we distribute our net capital gains in the form of deemed rather than actual distributions, a Non-U.S. stockholder will be entitled to a federal income tax credit or tax refund equal to the stockholder’s allocable share of the tax we pay on the capital gains deemed to have been distributed. In order to obtain the refund, the Non-U.S. stockholder must obtain a U.S. taxpayer identification number and file a federal income tax return even if the Non-U.S. stockholder would not otherwise be required to obtain a U.S. taxpayer identification number or file a federal income tax return. For a corporate Non-U.S. stockholder, distributions (both actual and deemed), and gains realized upon the sale of our common stock that are effectively connected to a U.S. trade or business may, under certain circumstances, be subject to an additional “branch profits tax” at a 30% rate (or at a lower rate if provided for by an applicable treaty). Accordingly, investment in the shares may not be appropriate for a Non-U.S. stockholder.

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A Non-U.S. stockholder who is a non-resident alien individual, and who is otherwise subject to withholding of federal tax, may be subject to information reporting and backup withholding of federal income tax on dividends unless the Non-U.S. stockholder provides us or the dividend paying agent with an IRS Form W-8BEN (or an acceptable substitute form) or otherwise meets documentary evidence requirements for establishing that it is a Non-U.S. stockholder or otherwise establishes an exemption from backup withholding.

Non-U.S. persons should consult their own tax advisors with respect to the U.S. federal income tax and withholding tax, and state, local and foreign tax consequences of an investment in the shares.

Failure to Qualify as a RIC

If we were unable to qualify for treatment as a RIC, we would be subject to tax on all of our taxable income at regular corporate rates, regardless of whether we make any distributions to our stockholders. Distributions would not be required, and any distributions would be taxable to our stockholders as ordinary dividend income eligible for the current 15% maximum rate to the extent of our current and accumulated earnings and profits. Subject to certain limitations under the Code, corporate distributees would be eligible for the dividends-received deduction. Distributions in excess of our current and accumulated earnings and profits would be treated first as a return of capital to the extent of the stockholder’s tax basis, and any remaining distributions would be treated as a capital gain.

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DESCRIPTION OF OUR SECURITIES

The following description is based on relevant portions of the Delaware General Corporation Law, our restated certificate of incorporation and our restated bylaws. This summary is not necessarily complete, and we refer you to the Delaware General Corporation Law, our restated certificate of incorporation and our restated bylaws for a more detailed description of the provisions summarized below.

Stock

Our authorized capital stock consists of 49,000,000 shares of common stock, par value $0.01 per share, and 1,000,000 shares of preferred stock, par value of $0.01 per share. Our common stock trades on The Nasdaq Global Select Market under the ticker symbol “PCAP.” As of May 31, 2008 3,644,677 shares of our common stock have been reserved for issuance under our stock option plan. Under Delaware law, our stockholders generally will not be personally liable for our debts or obligations.

Set forth below is a chart describing the outstanding classes of our securities as of May 31, 2008:

					Amount Outstanding
			Amount Held by Us or		Exclusive of Amount
Title of Class	Amount Authorized		for Our Account		In Previous Column
Common stock		49,000,000		—		20,702,485
Preferred stock		1,000,000		—		—

Common Stock

Under the terms of our restated certificate of incorporation, all shares of our common stock have equal rights as to earnings, assets, dividends and voting and, when they are issued, will be duly authorized, validly issued, fully paid and nonassessable. Distributions may be paid to the holders of our common stock if, as and when authorized by our board of directors and declared by us out of funds legally available therefor. Shares of our common stock have no preemptive, exchange, conversion or redemption rights and are freely transferable, except where their transfer is restricted by federal and state securities laws or by contract. In the event of our liquidation, dissolution or winding up, each share of our common stock would be entitled to share ratably in all of our assets that are legally available for distribution after we pay all debts and other liabilities and subject to any preferential rights of holders of our preferred stock, if any preferred stock is outstanding at such time. Each share of our common stock is entitled to one vote on all matters submitted to a vote of stockholders, including the election of directors. Except as provided with respect to any other class or series of stock, the holders of our common stock possess exclusive voting power. There is no cumulative voting in the election of directors, which means that holders of a majority of the outstanding shares of common stock will be able to elect all of our directors, and holders of less than a majority of such shares will be unable to elect any director.

Preferred Stock

Under the terms of our restated certificate of incorporation, our board of directors is authorized to issue shares of preferred stock in one or more series without stockholder approval. Except as otherwise provided in the 1940 Act, the board has discretion to determine the rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences of each series of preferred stock.

Every issuance of preferred stock will be required to comply with the requirements of the 1940 Act. The 1940 Act requires, among other things, that (1) immediately after issuance and before any dividend or other distribution is made with respect to our common stock and before any purchase of common stock is made, such preferred stock together with all other senior securities must not exceed an amount equal to 50% of our total assets after deducting the amount of such dividend, distribution or purchase price, as the case may be, and (2) the holders of shares of preferred stock, if any are issued, must be entitled as a class to elect two directors at all times and to elect a majority of the directors if dividends on such preferred stock are in arrears by two years or more. Certain matters under the 1940 Act require the separate vote of the holders of any issued and outstanding preferred stock. We believe that the availability for issuance of preferred stock will provide us with increased flexibility in structuring future financings and acquisitions.

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Limitation on Liability of Directors and Officers; Indemnification and Advance of Expenses

Under our restated certificate of incorporation, we fully indemnify any person who was or is involved in any actual or threatened action, suit or proceeding (whether civil, criminal, administrative or investigative) by reason of the fact that such person is or was one of our directors or officers or is or was serving at our request as a director or officer of another corporation, partnership, limited liability company, joint venture, trust or other enterprise, including service with respect to an employee benefit plan, against expenses (including attorney’s fees), judgments, fines and amounts paid or to be paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding. Our restated certificate of incorporation also provides that our directors are not personally liable for monetary damages to us for breaches of their fiduciary duty as directors, except for a breach of their duty of loyalty to us or our stockholders, for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, for authorization of illegal dividends or redemptions or for any transaction from which the director derived an improper personal benefit. So long as we are regulated under the 1940 Act, the above indemnification and limitation of liability will be limited by the 1940 Act or by any valid rule, regulation or order of the SEC thereunder. The 1940 Act provides, among other things, that a company may not indemnify any director or officer against liability to it or its stockholders to which he or she might otherwise be subject by reason of his or her willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office unless a determination is made by final decision of a court, by vote of a majority of a quorum of directors who are disinterested, non-party directors or by independent legal counsel that the liability for which indemnification is sought did not arise out of the foregoing conduct.

Delaware law also provides that indemnification permitted under the law shall not be deemed exclusive of any other rights to which the directors and officers may be entitled under the corporation’s bylaws, any agreement, a vote of stockholders or otherwise.

Our restated certificate of incorporation permits us to secure insurance on behalf of any person who is or was or has agreed to become a director or officer of Patriot Capital Funding or is or was serving at our request as a director or officer of another enterprise for any liability arising out of his or her actions, regardless of whether the Delaware General Corporation Law would permit indemnification. We have obtained liability insurance for our officers and directors.

Delaware Law and Certain Certificate of Incorporation And Bylaw Provisions; Anti-Takeover Measures

We are subject to the provisions of Section 203 of the General Corporation Law of Delaware. In general, the statute prohibits a publicly held Delaware corporation from engaging in a “business combination” with “interested stockholders” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. A “business combination” includes certain mergers, asset sales and other transactions resulting in a financial benefit to the interested stockholder. Subject to exceptions, an “interested stockholder” is a person who, together with his, her or its affiliates and associates, owns, or within three years did own, 15% or more of the corporation’s voting stock.

Our restated certificate of incorporation and restated bylaws provide that:

•  our board of directors is divided into three classes, as nearly equal in size as possible, with staggered three-year terms;

•  directors may be removed only for cause by the affirmative vote of the holders of two-thirds of the shares of our capital stock entitled to vote; and

•  any vacancy on the board of directors, however the vacancy occurs, including a vacancy due to an enlargement of the board, may only be filled by vote of the directors then in office.

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The classification of our board of directors and the limitations on removal of directors and filling of vacancies could have the effect of making it more difficult for a third party to acquire us, or of discouraging a third party from acquiring us.

Our restated certificate of incorporation and restated bylaws also provide that:

•  any action required or permitted to be taken by the stockholders at an annual meeting or special meeting of stockholders may only be taken if it is properly brought before such meeting and may not be taken by written action in lieu of a meeting; and

•  special meetings of the stockholders may only be called by our board of directors, chairman, or president and chief executive officer.

Our restated bylaws provides that, in order for any matter to be considered “properly brought” before a meeting, a stockholder must comply with requirements regarding advance notice to us. These provisions could delay until the next stockholders’ meeting stockholder actions which are favored by the holders of a majority of our outstanding voting securities. These provisions may also discourage another person or entity from making a tender offer for our common stock, because such person or entity, even if it acquired a majority of our outstanding voting securities, would be able to take action as a stockholder (such as electing new directors or approving a merger) only at a duly called stockholders meeting, and not by written consent.

Our restated certificate of incorporation also authorizes the issuance of 1,000,000 shares of preferred stock, which our board of directors may generally issue without stockholder approval. See “— Stock — Preferred Stock.”

Delaware’s corporation law provides generally that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a corporation’s certificate of incorporation or bylaws, unless a corporation’s certificate of incorporation or bylaws requires a greater percentage. Under our restated bylaws, the affirmative vote of the holders of at least 662/3% of the shares of our capital stock entitled to vote is required to amend or repeal any of the provisions of our restated bylaws. Moreover, our restated bylaws provide that generally, a majority of the shares of our capital stock issued and outstanding and entitled to vote will be able to amend our restated certificate of incorporation. However, the vote of at least 662/3% of the shares of our capital stock then outstanding and entitled to vote in the election of directors, voting together as a single class, will be required to amend or repeal any provision of the restated certificate of incorporation pertaining to the board of directors, limitation of liability, indemnification, stockholder action or amendments to the restated certificate of incorporation. The stockholder vote with respect to our restated certificate of incorporation or restated bylaws would be in addition to any separate class vote that might in the future be required under the terms of any series preferred stock that might be outstanding at the time any such changes are submitted to stockholders. In addition, our restated certificate of incorporation permits our board of directors to amend or repeal our restated bylaws by a majority vote.

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REGULATION

We have elected to be regulated as a business development company under the 1940 Act. The 1940 Act contains prohibitions and restrictions relating to transactions between business development companies and their affiliates, principal underwriters and affiliates of those affiliates or underwriters. The 1940 Act requires that a majority of the directors be persons other than “interested persons,” as that term is defined in the 1940 Act. In addition, the 1940 Act provides that we may not change the nature of our business so as to cease to be, or to withdraw our election as, a business development company unless approved by a majority of our outstanding voting securities.

Qualifying Assets

Under the 1940 Act, a business development company may not acquire any asset other than assets of the type listed in Section 55(a) of the 1940 Act, which are referred to as qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company’s total assets. The principal categories of qualifying assets relevant to our business are any of the following:

(1) Securities purchased in transactions not involving any public offering from the issuer of such securities, which issuer (subject to certain limited exceptions) is an eligible portfolio company, or from any person who is, or has been during the preceding 13 months, an affiliated person of an eligible portfolio company, or from any other person, subject to such rules as may be prescribed by the SEC. An eligible portfolio company is defined in the 1940 Act as any issuer which:

(a) is organized under the laws of, and has its principal place of business in, the United States;

(b) is not an investment company (other than a small business investment company wholly owned by the business development company) or a company that would be an investment company but for certain exclusions under the 1940 Act; and

(c) satisfies any of the following:

(i) does not have any class of securities listed on a national securities exchange; or

(ii) has a class of securities listed on a national securities exchange, but has an aggregate market value of outstanding voting and non-voting common equity of less than $250 million;

(iii) is controlled by a business development company or a group of companies including a business development company and the business development company has an affiliated person who is a director of the eligible portfolio company; or

(iv) is a small and solvent company having total assets of not more than $4 million and capital and surplus of not less than $2 million.

(2) Securities of any eligible portfolio company which we control.

(3) Securities purchased in a private transaction from a U.S. issuer that is not an investment company or from an affiliated person of the issuer, or in transactions incident thereto, if the issuer is in bankruptcy and subject to reorganization or if the issuer, immediately prior to the purchase of its securities was unable to meet its obligations as they came due without material assistance other than conventional lending or financing arrangements.

(4) Securities of an eligible portfolio company purchased from any person in a private transaction if there is no ready market for such securities and we already own 60% of the outstanding equity of the eligible portfolio company.

(5) Securities received in exchange for or distributed on or with respect to securities described in (1) through (4) above, or pursuant to the exercise of warrants or rights relating to such securities.

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(6) Cash, cash equivalents, U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment.

In addition, a business development company must have been organized and have its principal place of business in the United States and must be operated for the purpose of making investments in the types of securities described in (1), (2) or (3) above.

Managerial Assistance to Portfolio Companies

In order to count portfolio securities as qualifying assets for the purpose of the 70% test, we must either control the issuer of the securities or must offer to make available to the issuer of the securities (other than small and solvent companies described above) significant managerial assistance; except that, where we purchase such securities in conjunction with one or more other persons acting together, one of the other persons in the group may make available such managerial assistance. Making available managerial assistance means, among other things, any arrangement whereby the business development company, through its directors, officers or employees, offers to provide, and, if accepted, does so provide, significant guidance and counsel concerning the management, operations or business objectives and policies of a portfolio company.

Temporary Investments

Pending investment in other types of “qualifying assets,” as described above, our investments may consist of cash, cash equivalents, U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment, which we refer to, collectively, as temporary investments, so that 70% of our assets are qualifying assets. Typically, we will invest in U.S. Treasury bills or in repurchase agreements, provided that such agreements are fully collateralized by cash or securities issued by the U.S. Government or its agencies. A repurchase agreement involves the purchase by an investor, such as us, of a specified security and the simultaneous agreement by the seller to repurchase it at an agreed-upon future date and at a price which is greater than the purchase price by an amount that reflects an agreed-upon interest rate. There is no percentage restriction on the proportion of our assets that may be invested in such repurchase agreements. However, if more than 25% of our total assets constitute repurchase agreements from a single counterparty, we would not meet the Diversification Tests in order to qualify as a RIC for federal income tax purposes. Thus, we do not intend to enter into repurchase agreements with a single counterparty in excess of this limit. Our management team will monitor the creditworthiness of the counterparties with which we enter into repurchase agreement transactions.

Common Stock

We are not generally able to issue and sell our common stock at a price below net asset value per share. We may, however, sell our common stock, warrants, options or rights to acquire our common stock, at a price below the current net asset value of the common stock if our board of directors determines that such sale is in our best interests and that of our stockholders, and our stockholders approve such sale. In any such case, the price at which our securities are to be issued and sold may not be less than a price which, in the determination of our board of directors, closely approximates the market value of such securities (less any distributing commission or discount). See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Current Market Conditions.” We may also make rights offerings to our stockholders at prices per share less than the net asset value per share, subject to applicable requirements of the 1940 Act. See “Risk Factors — Risks Relating to Our Business and Structure — Regulations governing our operation as a business development company will affect our ability to, and the way in which we, raise additional capital.”

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Senior Securities

We are permitted, under specified conditions, to issue multiple classes of debt and one class of stock senior to our common stock if our asset coverage, as defined in the 1940 Act, is at least equal to 200% immediately after each such issuance. In addition, while any senior securities remain outstanding, we must make provisions to prohibit any distribution to our stockholders or the repurchase of such securities or shares unless we meet the applicable asset coverage ratios at the time of the distribution or repurchase. We may also borrow amounts up to 5% of the value of our total assets for temporary or emergency purposes without regard to asset coverage. See “Risk Factors — Risks Relating to Our Business and Structure — Regulations governing our operation as a business development company will affect our ability to, and the way in which we, raise additional capital.”

Code of Ethics

We have adopted a code of ethics pursuant to Rule 17j-1 under the 1940 Act that establishes procedures for personal investments and restricts certain personal securities transactions. Personnel subject to the code may invest in securities for their personal investment accounts, including securities that may be purchased or held by us, so long as such investments are made in accordance with the code’s requirements. For information on how to obtain a copy of the code of ethics, see “Available Information.”

Proxy Voting Policies and Procedures

We vote proxies relating to our portfolio securities in the best interest of our stockholders. We review on a case-by-case basis each proposal submitted to a stockholder vote to determine its impact on the portfolio securities held by us. Although we generally vote against proposals that may have a negative impact on our portfolio securities, we may vote for such a proposal if there exists compelling long-term reasons to do so.

Our proxy voting decisions are made by the investment professionals who are responsible for monitoring each of our investments. To ensure that our vote is not the product of a conflict of interest, we require that: (i) anyone involved in the decision making process disclose to our chief compliance officer any potential conflict that he or she is aware of and any contact that he or she has had with any interested party regarding a proxy vote; and (ii) employees involved in the decision making process or vote administration are prohibited from revealing how we intend to vote on a proposal in order to reduce any attempted influence from interested parties.

Stockholders may obtain information regarding how we voted proxies with respect to our portfolio securities by making a written request for proxy voting information to: Chief Compliance Officer, Patriot Capital Funding, Inc., 274 Riverside Avenue, Westport, CT 06880.

Other

We may also be prohibited under the 1940 Act from knowingly participating in certain transactions with our affiliates without the prior approval of our board of directors who are not interested persons and, in some cases, prior approval by the SEC.

We will be periodically examined by the SEC for compliance with the 1940 Act.

We are required to provide and maintain a bond issued by a reputable fidelity insurance company to protect us against larceny and embezzlement. Furthermore, as a business development company, we are prohibited from protecting any director or officer against any liability to us or our stockholders arising from willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person’s office.

We are required to adopt and implement written policies and procedures reasonably designed to prevent violation of the federal securities laws, review these policies and procedures annually for their adequacy and the effectiveness of their implementation, and to designate a chief compliance officer to be responsible for administering the policies and procedures.

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PLAN OF DISTRIBUTION

We may offer, from time to time, up to 13,330,000 shares of our common stock. We may sell the shares of our common stock through underwriters, broker-dealers or agents or through a combination of any such methods of sale. Shares of our common stock may also be sold “at-the-market” to or through a market maker or into an existing trading market for shares, on an exchange or otherwise. Any underwriter or agent involved in the offer and sale of the shares of our common stock will be named in the applicable prospectus supplement.

The distribution of the shares of our common stock may be effected from time to time in one or more transactions at a fixed price or prices, which may be changed, at prevailing market prices at the time of sale, at prices related to such prevailing market prices, or at negotiated prices. We also may, from time to time, authorize dealers or agents to offer and sell these securities upon such terms and conditions as may be set forth in the applicable prospectus supplement.

In connection with the sale of the shares of our common stock, underwriters or agents may receive compensation from us or from purchasers of the shares of our common stock, for whom they may act as agents, in the form of discounts, concessions or commissions. Underwriters may sell shares of our common stock to or through dealers and such dealers may receive compensation in the form of discounts, concessions or commissions from the underwriters and/or commissions from the purchasers for whom they may act as agents. Underwriters, dealers and agents that participate in the distribution of shares of our common stock may be deemed to be underwriters under the Securities Act, and any discounts and commissions they receive from us and any profit realized by them on the resale of shares of our common stock may be deemed to be underwriting discounts and commissions under the Securities Act. Any such underwriter or agent will be identified and any such compensation received from us will be described in the applicable prospectus supplement.

Any common stock sold pursuant to a prospectus supplement will be quoted on The Nasdaq Global Select Market, or another exchange on which the common stock is traded.

Under agreements into which we may enter, underwriters, dealers and agents who participate in the distribution of shares of our common stock may be entitled to indemnification by us against certain liabilities, including liabilities under the Securities Act. Underwriters, dealers and agents may engage in transactions with, or perform services for, us in the ordinary course of business.

If so indicated in the applicable prospectus supplement, we will authorize underwriters or other persons acting as our agents to solicit offers by certain institutions to purchase shares of our common stock from us pursuant to contracts providing for payment and delivery on a future date. Institutions with which such contracts may be made include commercial and savings banks, insurance companies, pension funds, investment companies, educational and charitable institutions and others, but in all cases such institutions must be approved by us. The obligations of any purchaser under any such contract will be subject to the condition that the purchase of shares of our common stock shall not at the time of delivery be prohibited under the laws of the jurisdiction to which such purchaser is subject. The underwriters and such other agents will not have any responsibility in respect of the validity or performance of such contracts. Such contracts will be subject only to those conditions set forth in the prospectus supplement, and the prospectus supplement will set forth the commission payable for solicitation of such contracts.

The maximum commission or discount to be received by any member of The Financial Industry Regulatory Authority or independent broker-dealer will not be greater than 10% for the sale of any securities being registered and 0.5% for due diligence.

In order to comply with the securities laws of certain states, if applicable, shares of our common stock offered hereby will be sold in such jurisdictions only through registered or licensed brokers or dealers.

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CUSTODIAN, TRANSFER AND DIVIDEND PAYING AGENT AND REGISTRAR

Wells Fargo Bank, National Association acts as the custodian under our Second Amended Securitization Facility. The address of Wells Fargo Bank, National Association is Sixth and Marquette Avenue, Minneapolis, MN 55479. American Stock Transfer & Trust Company acts as our transfer agent, dividend paying agent and registrar. The principal business address of our transfer agent is 59 Maiden Lane, New York, NY 10038, telephone number: 1-800-937-5449.

BROKERAGE ALLOCATION AND OTHER PRACTICES

Since we will generally acquire and dispose of our investments in privately negotiated transactions, we will infrequently use brokers in the normal course of our business. Our management team will be primarily responsible for the execution of the publicly traded securities portion of our portfolio transactions and the allocation of brokerage commissions. We do not expect to execute transactions through any particular broker or dealer, but will seek to obtain the best net results for us, taking into account such factors as price (including the applicable brokerage commission or dealer spread), size of order, difficulty of execution, and operational facilities of the firm and the firm’s risk and skill in positioning blocks of securities. While we will generally seek reasonably competitive trade execution costs, we will not necessarily pay the lowest spread or commission available. Subject to applicable legal requirements, we may select a broker based partly upon brokerage or research services provided to us. In return for such services, we may pay a higher commission than other brokers would charge if we determine in good faith that such commission is reasonable in relation to the services provided.

LEGAL MATTERS

Certain legal matters regarding the shares of common stock offered hereby will be passed upon for us by Sutherland Asbill & Brennan LLP, Washington, D.C. Certain legal matters will be passed upon for underwriters, if any, by the counsel named in the prospectus supplement.

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The consolidated financial statements as of December 31, 2007 and 2006, and schedule of Senior Securities have been included herein in reliance upon the report of Grant Thornton LLP, an independent registered public accounting firm, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing.

AVAILABLE INFORMATION

We have filed with the SEC a registration statement on Form N-2, together with all amendments and related exhibits, under the Securities Act, with respect to our shares of common stock offered by this prospectus. The registration statement contains additional information about us and our shares of common stock being offered by this prospectus.

We file with or submit to the SEC annual, quarterly and current periodic reports, proxy statements and other information meeting the informational requirements of the Exchange Act. You may inspect and copy these reports, proxy statements and other information, as well as the registration statement and related exhibits and schedules, at the Public Reference Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information filed electronically by us with the SEC which are available on the SEC’s website at http://www.sec.gov. Copies of these reports, proxy and information statements and other information may be obtained, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, 100 F Street, N.E., Washington, D.C. 20549.

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PRIVACY NOTICE

We are committed to protecting your privacy. This privacy notice, which is required by state and federal law, explains the privacy policies of Patriot Capital Funding and its affiliated companies. This notice supersedes any other privacy notice you may have received from Patriot Capital Funding, and its terms apply both to our current stockholders and to former stockholders as well.

We will safeguard, according to strict standards of security and confidentiality, all information we receive about you. With regard to this information, we maintain physical, electronic, and procedural safeguards that comply with federal and state standards.

The only information we collect from you is your name, address, and number of shares you hold.

This information is used only so that we can service your account, send you annual reports and other information about us, and send you proxy statements or other information required by law.

We do not share stockholder information with any non-affiliated third party except as described below.

•  The People and Companies that Make Up Patriot Capital Funding.  It is our policy that only our authorized employees who need to know your personal information will have access to it. Our personnel who violate our privacy policy are subject to disciplinary action.

•  Service Providers.  We may disclose customer information to companies that provide services on our behalf, such as record keeping, processing your trades, and mailing you information. These companies are required to protect your information and use it solely for the purpose for which they received it.

•  Courts and Government Officials.  If required by law, we may disclose customer information in accordance with a court order or at the request of government regulators. Only that information required by law, subpoena, or court order will be disclosed.

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Documents	Page
Consolidated Balance Sheets at March 31, 2008 (unaudited) and December 31, 2007		F-2
Consolidated Statements of Operations for the three months ended March 31, 2008 and 2007 (unaudited)		F-3
Consolidated Statement of Changes in Net Assets for the three months ended March 31, 2008 and 2007 (unaudited)		F-4
Consolidated Statements of Cash Flows for the three months ended March 31, 2008 and 2007 (unaudited)		F-5
Consolidated Schedule of Investments as of March 31, 2008 (unaudited)		F-6
Consolidated Schedule of Investments as of December 31, 2007		F-9
Notes to Consolidated Financial Statements (unaudited)		F-12
Report of Independent Registered Public Accounting Firm		F-24
Consolidated Balance Sheets at December 31, 2007 and 2006		F-25
Consolidated Statements of Operations for the years ended December 31, 2007, 2006 and 2005		F-26
Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005		F-27
Consolidated Statements of Changes in Net Assets for the years ended December 31, 2007, 2006 and 2005		F-28
Consolidated Schedule of Investments at December 31, 2007 and 2006		F-29
Notes to Consolidated Financial Statements		F-34
Report of Independent Registered Public Accounting Firm		F-53
Schedule of Investments in and Advances to Affiliates		F-54

F-1

PART I.  FINANCIAL INFORMATION

Item 1.   Financial Statements

PATRIOT CAPITAL FUNDING, INC.

Consolidated Balance Sheets

	March 31,			December 31,
	2008			2007
	(unaudited)
ASSETS
Investments at fair value:
Non-control/non-affiliate investments (cost of $270,937,995 — 2008, $294,686,727 — 2007)	$	260,051,446		$	290,225,759
Affiliate investments (cost of $87,363,276 — 2008, $86,577,905 — 2007)		83,364,986			85,171,605
Control investments (cost of $7,029,968 — 2008, $6,980,389 — 2007,)		8,529,968			9,328,389
Total investments		351,946,400			384,725,753
Cash and cash equivalents		1,311,750			789,451
Restricted cash		9,062,021			10,487,202
Interest receivable		1,377,674			1,758,954
Other assets		1,325,457			617,448
TOTAL ASSETS	$	365,023,302		$	398,378,808
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Borrowings	$	143,000,000		$	164,900,000
Interest payable		517,602			821,124
Dividends payable		6,814,650			6,814,650
Accounts payable, accrued expenses and other		3,633,728			4,245,350
TOTAL LIABILITIES		153,965,980			176,781,124
COMMITMENTS (Note 7)
STOCKHOLDERS’ EQUITY
Preferred stock, $.01 par value, 1,000,000 shares authorized; no shares issued and outstanding		—			—
Common stock, $.01 par value, 49,000,000 shares authorized; 20,650,455 shares issued and outstanding at March 31, 2008, and December 31, 2007		206,504			206,504
Paid-in capital		233,904,656			233,722,593
Accumulated net investment loss		(1,912,061	)		(1,912,061	)
Distributions in excess of net investment income		(2,853,401	)		(2,824,651	)
Net realized loss on investments		(3,260,915	)		(3,171,365	)
Net unrealized depreciation on interest rate swaps		(1,515,216	)		(762,365	)
Net unrealized depreciation on investments		(13,512,245	)		(3,660,971	)
TOTAL STOCKHOLDERS’ EQUITY		211,057,322			221,597,684
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	365,023,302		$	398,378,808
NET ASSET VALUE PER COMMON SHARE	$	10.22		$	10.73

See Notes to Consolidated Financial Statements.

F-2

PATRIOT CAPITAL FUNDING, INC.

Consolidated Statements of Operations

(unaudited)

	Three Months Ended
	March 31,
	2008			2007
INVESTMENT INCOME
Interest and dividends:
Non-control/non-affiliate investments	$	8,298,333		$	7,578,948
Affiliate investments		2,514,423			619,233
Control investments		178,466			—
Total interest and dividend income		10,991,222			8,198,181
Fees:
Non-control/non-affiliate investments		168,697			381,626
Affiliate investments		38,661			13,229
Control investments		6,250			—
Total fee income		213,608			394,855
Other investment income — non-control/non-affiliate investments		39,855			384,287
Total Investment Income		11,244,685			8,977,323
EXPENSES
Compensation expense		1,498,175			1,219,533
Interest expense		2,059,523			1,506,212
Professional fees		262,527			307,627
General and administrative expense		638,560			598,673
Total Expenses		4,458,785			3,632,045
Net Investment Income		6,785,900			5,345,278
NET REALIZED GAIN (LOSS) AND NET UNREALIZED APPRECIATION (DEPRECIATION)
Net realized gain (loss) on investments — non-control/non-affiliate		(89,550	)		6,167
Net unrealized depreciation on investments — non-control/non-affiliate		(6,411,284	)		(68,100	)
Net unrealized appreciation (depreciation) on investments — affiliate		(2,591,990	)		153,200
Net unrealized depreciation on investments — control		(848,000	)		—
Net unrealized depreciation on interest rate swaps		(752,851	)		(63,328	)
Net Realized Gain (Loss) and Net Unrealized Appreciation (Depreciation)		(10,693,675	)		27,939
NET INCOME (LOSS)	$	(3,907,775	)	$	5,373,217
Earnings (loss) per share, basic	$	(0.19	)	$	0.31
Earnings (loss) per share, diluted	$	(0.19	)	$	0.30
Weighted average shares outstanding, basic		20,650,455			17,532,896
Weighted average shares outstanding, diluted		20,650,455			17,724,026

See Notes to Consolidated Financial Statements.

F-3

PATRIOT CAPITAL FUNDING, INC.

Consolidated Statements of Changes in Net Assets

(unaudited)

	Three Months Ended
	March 31,
	2008			2007
Operations:
Net investment income	$	6,785,900		$	5,345,278
Net realized gain (loss) on investments		(89,550	)		6,167
Net unrealized appreciation (depreciation) on investments		(9,851,274	)		85,100
Net unrealized depreciation on interest rate swaps		(752,851	)		(63,328	)
Net increase (decrease) in net assets from operations		(3,907,775	)		5,373,217
Stockholder transactions:
Distributions to stockholders from net investment income		(6,785,900	)		(5,345,278	)
Distributions in excess of net investment income		(28,750	)		(486,247	)
Net decrease in net assets from stockholder distributions		(6,814,650	)		(5,831,525	)
Capital share transactions:
Issuance of common stock		—			31,718,816
Issuance of common stock under dividend reinvestment plan		—			450,766
Stock option compensation		182,063			158,782
Net increase in net assets from capital share transactions		182,063			32,328,364
Total increase (decrease) in net assets		(10,540,362	)		31,870,056
Net assets at beginning of period		221,597,684			164,108,629
Net assets at end of period	$	211,057,322		$	195,978,685
Net asset value per common share	$	10.22		$	10.75
Common shares outstanding at end of period		20,650,455			18,223,517

See Notes to Consolidated Financial Statements.

F-4

PATRIOT CAPITAL FUNDING, INC.

Consolidated Statements of Cash Flows

(unaudited)

	Three Months Ended
	March 31,
	2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(3,907,775	)	$	5,373,217
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
Depreciation and amortization		98,111			107,010
Change in interest receivable		381,280			67,059
Realized (gain) loss on sale of investments		89,550			(6,167	)
Change in unrealized (appreciation) depreciation on investments		9,851,274			(85,100	)
Unrealized depreciation on interest rate swaps		752,851			63,328
Payment-in-kind interest and dividends		(1,453,912	)		(840,698	)
Stock-based compensation expense		182,063			158,782
Change in unearned income		(356,002	)		263,790
Change in interest payable		(303,522	)		(47,091	)
Change in other assets		(16,195	)		202,031
Change in accounts payable, accrued expenses and other		(2,126,838	)		(1,307,841	)
Net cash provided by operating activities		3,190,885			3,948,320
CASH FLOWS FROM INVESTING ACTIVITIES:
Funded investments		(5,141,406	)		(57,286,250	)
Principal repayments on investments		19,441,899			38,154,654
Proceeds from sale of investments		10,347,950			5,349,917
Purchases of furniture and equipment		(3,927	)		—
Net cash provided by (used for) investing activities		24,644,516			(13,781,679	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings		6,052,500			55,550,000
Repayments on borrowings		(27,952,500	)		(73,557,000	)
Net proceeds from sale of common stock		—			31,718,816
Dividends paid		(6,814,650	)		(4,454,053	)
Deferred offering costs		(23,633	)		—
Decrease in restricted cash		1,425,181			1,142,982
Net cash provided by (used for) financing activities		(27,313,102	)		10,400,745
NET INCREASE IN CASH AND CASH EQUIVALENTS		522,299			567,386
CASH AND CASH EQUIVALENTS AT:
Beginning of Period		789,451			4,211,643
End of Period	$	1,311,750		$	4,779,029
Supplemental information:
Interest paid	$	2,363,045		$	1,553,303
Non-cash financing activities:
Dividends reinvested in common stock	$	—		$	450,766
Dividends declared but not paid		6,814,650			5,831,525

See Notes to Consolidated Financial Statements.

F-5

PATRIOT CAPITAL FUNDING, INC.

Consolidated Schedule of Investments

March 31, 2008

(unaudited)

Company(1)	Company
(Industry)	Description	Investment	Principal		Cost		Value
Control investments:
Fischbein, LLC (Machinery)	Designer and manufacturer of packaging equipment	Senior Subordinated Debt (16.5%, Due 5/13) (2) (3) Membership Interest — Class A (4)	$	4,260,082	$	4,229,968 2,800,000	$	4,357,968 4,172,000
Total Control investments (represents 2.4% of total investments at fair value)					$	7,029,968	$	8,529,968
Affiliate investments:
Aylward Enterprises, LLC (5) (Machinery)	Manufacturer of packaging equipment	Revolving Line of Credit (7.5%, Due 2/12) (3) Senior Secured Term Loan A (8.8%, Due 2/12) (3) Senior Subordinated Debt (22.0%, Due 8/12) (2) Subordinated Member Note (8.0%, Due 2/13) (2) Membership Interest (4)	$	3,700,000 8,199,063 6,525,623 142,632	$	3,634,298 8,080,949 6,441,259 142,632 1,250,000	$	3,634,298 8,080,949 4,558,259 — —
KTPS Holdings, LLC (Textiles & Leather)	Manufacturer and distributor of specialty pet products	Revolving Line of Credit (7.0%, Due 1/12) (3) Senior Secured Term Loan A (6.3%, Due 1/12) (3) Senior Secured Term Loan B (12.0%, Due 1/12) (3)		500,000 5,850,000 1,980,000		483,631 5,785,770 1,957,137		483,631 5,785,770 1,957,137
		Junior Secured Term Loan (15.0%, Due 3/12) (2) (3)		4,112,832		4,068,832		4,068,832
		Membership Interest — Class A (4)				730,020		778,700
		Membership Interest — Common (4)				—		250,500
Nupla Corporation (Home & Office Furnishings, Housewares & Durable Consumer Products)	Manufacturer and marketer of professional high-grade fiberglass-handled striking and digging tools	Revolving Line of Credit (6.7%, Due 9/12) (3) Senior Secured Term Loan A (6.6%, Due 9/12) (3) Senior Subordinated Debt (14.0%, Due 3/13) (2) Preferred Stock (2) Common Stock (4)		1,050,000 5,606,250 3,034,956		1,033,650 5,559,194 3,010,144 507,638 25,000		1,033,650 5,467,194 2,926,144 210,100 —
Smart, LLC (5) (Diversified/Conglomerate Service)	Provider of tuition management services	Revolving Line of Credit (7.8%, Due 8/11) (3) Senior Secured Term Loan A (8.1%, Due 6/11) (3) Senior Secured Term Loan B (16.5%, Due 2/12) (2) (3) Convertible Subordinated Note (22.0%, Due 8/12) Membership Interest — Class B (4)		870,000 3,693,750 3,736,431 500,000		826,025 3,653,999 3,696,341 500,000 1,000,000		826,025 3,653,999 3,696,341 500,000 616,800
Sport Helmets Holdings, LLC (5) (Personal & Nondurable Consumer Products)	Manufacturer of protective headgear	Senior Secured Term Loan A (6.8%, Due 12/13) Senior Secured Term Loan B (7.3%, Due 12/13) Senior Subordinated Debt (15.0%, Due 6/14) (2) Common Stock (4)		4,500,000 7,500,000 8,072,086		4,434,846 7,388,891 7,954,740 2,000,000		4,434,846 7,388,891 7,954,740 1,907,200
Vince & Associates Clinic Research, Inc. (Healthcare, Education & Childcare)	Provider of clinical testing services	Senior Secured Term Loan (6.6%, Due 11/12) (2) (3) Senior Subordinated Debt (15.0%, Due 5/13) (2) Convertible Preferred Stock (4)		7,312,500 5,563,538		7,211,084 5,487,196 500,000		7,211,084 5,487,196 452,700
Total Affiliate investments (represents 23.7% of total investments at fair value)					$	87,363,276	$	83,364,986
Non-control/non-affiliate investments:
ADAPCO, Inc. (Ecological)	Distributor of specialty chemicals and contract application services	Revolving Line of Credit (9.5%, Due 7/11) (3) Senior Secured Term Loan A (12.8%, Due 6/11) (3) Common Stock (4)	$	3,000,000 8,849,375	$	2,979,269 8,785,284 500,000	$	2,979,269 8,085,334 —
Aircraft Fasteners International, LLC (Machinery)	Distributor of fasteners and related hardware for use in aerospace, electronics and defense industries	Senior Secured Term Loan (6.8%, Due 11/12) (3) Junior Secured Term Loan (14.0%, Due 5/13) (2) (3) Convertible Preferred Stock (2)		6,732,000 5,226,289		6,634,895 5,151,778 258,329		6,488,895 5,015,778 399,287
Allied Defense Group, Inc. (Aerospace & Defense)	Diversified defense company	Common Stock (4)				463,168		165,200
Arrowhead General Insurance Agency, Inc. (6) (Insurance)	Insurance agency and program specialist	Junior Secured Term Loan (10.0%, Due 2/13) (3)		5,000,000		5,000,000		3,750,000
Borga, Inc. (Mining, Steel, Iron & Nonprecious Metals)	Manufacturer of pre-fabricated metal building systems	Senior Secured Term Loan A (6.7%, Due 3/09) (3) Senior Secured Term Loan B (9.5%, Due 5/10) (3) Senior Secured Term Loan C (16.0%, Due 5/10) (2) (3) Common Stock Warrants (4)		1,054,000 1,721,000 7,873,398		1,045,276 1,694,153 7,807,371 11,761		1,045,276 1,694,153 7,807,371 —
Caleel + Hayden, LLC (5) (Personal & Nondurable Consumer Products)	Provider of proprietary branded professional skincare and cosmetic products to physicians and spa communities	Junior Secured Term Loan B (6.9%, Due 11/11) (3) Senior Subordinated Debt (14.5%, Due 11/12) (2) (3) Common Stock (4)		10,852,187 6,250,000		10,725,908 6,178,321 750,000		10,725,908 6,178,321 1,137,000

F-6

Company(1)	Company
(Industry)	Description	Investment	Principal		Cost		Value
Cheeseworks, Inc. (Grocery)	Distributor of specialty cheese and food products	Revolving Line of Credit (5.6%, Due 6/11) (3) Senior Secured Term Loan (8.7%, Due 6/11) (3)		5,080,219 10,264,966		4,991,252 10,141,173		4,991,252 10,141,173
CS Operating, LLC (5) (Buildings & Real Estate)	Provider of maintenance, repair and replacement of HVAC, electrical, plumbing, and foundation repair	Revolving Line of Credit (7.4%, Due 1/13) (3) Senior Secured Term Loan A (7.9%, Due 7/12) (3) Senior Subordinated Debt (14.5%, Due 1/13) (2) (3)		200,000 2,237,500 2,543,300		193,234 2,206,004 2,507,956		193,234 2,206,004 2,507,956
Copperhead Chemical Company, Inc. (Chemicals, Plastics & Rubber)	Manufacturer of bulk pharmaceuticals	Senior Subordinated Debt (15.3%, Due 1/13) (2) (3)		3,570,112		3,536,303		3,536,303
Custom Direct, Inc. (6) (Printing & Publishing)	Direct marketer of checks and other financial products and services	Junior Secured Term Loan (8.7%, Due 12/14) (3)		2,000,000		2,000,000		1,550,000
Dover Saddlery, Inc. (Retail Stores)	Equestrian products catalog retailer	Common Stock (4)				148,200		160,800
Employbridge Holding Company (5) (6) (Personal, Food & Miscellaneous Services)	A provider of specialized staffing services	Junior Secured Term Loan (9.7%, Due 10/13) (3)		3,000,000		3,000,000		2,730,000
Encore Legal Solutions, Inc. (Printing & Publishing)	Legal document management services	Junior Secured Term Loan A (8.3%, Due 6/10) (2) (3) Junior Secured Term Loan B (10.4%, Due 6/10) (2) (3) Senior Subordinated Debt (15.0%, Due 6/10) (2) (3) Common Stock Warrants (4)		3,987,873 7,267,900 6,154,438		3,966,964 7,217,806 6,120,537 232,833		3,966,964 6,295,806 3,720,577 —
EXL Acquisition Corp. (Electronics)	Manufacturer of lab testing supplies	Senior Secured Term Loan A (5.9%, Due 3/11) (3) Senior Secured Term Loan B (6.3%, Due 3/12) (3) Senior Secured Term Loan C (6.8%, Due 3/12) (3) Senior Secured Term Loan D (15.0%, Due 3/12) (3) Common Stock — Class A (4) Common Stock — Class B (2)		4,406,659 4,765,771 2,939,415 6,893,099		4,373,473 4,709,231 2,894,241 6,822,796 2,475 260,314		4,305,473 4,635,630 2,848,841 6,822,796 139,500 261,681
Fairchild Industrial Products, Co. (Electronics)	Manufacturer of industrial controls and power transmission products	Senior Secured Term Loan A (6.5%, Due 7/10) (3) Senior Secured Term Loan B (8.2%, Due 7/11) (3) Senior Subordinated Debt (14.8%, Due 7/11) (2) Preferred Stock — Class A (2) Common Stock — Class B (4)		2,252,500 4,621,875 5,460,000		2,231,651 4,582,766 5,405,807 334,259 121,598		2,231,651 4,582,766 5,405,807 334,259 327,900
Impact Products, LLC (Machinery)	Distributor of janitorial supplies	Junior Secured Term Loan (7.4%, Due 9/12) (3) Senior Subordinated Debt (13.5%, Due 9/12) (2) (3)		8,950,000 5,547,993		8,887,181 5,511,641		7,949,181 5,246,648
Innovative Concepts in Entertainment, Inc. (Personal & Nondurable Consumer Products)	Manufacturer of coin operated games	Junior Secured Term Loan A (7.2%, Due 2/11) (3) Junior Secured Term Loan B (7.6%, Due 2/11) (3) Junior Secured Term Loan C (13.0%, Due 8/11) (3)		4,050,000 3,528,000 3,900,000		4,032,875 3,512,065 3,883,181		4,032,875 3,512,065 3,883,181
Keltner Enterprises, LLC (5) (Oil & Gas)	Distributor of automotive oils, chemicals and parts	Senior Subordinated Debt (14.0%, Due 12/11) (3)		3,850,000		3,838,335		3,838,335
L.A. Spas, Inc. (Chemicals, Plastics & Rubber)	Manufacturer of above ground spas	Senior Subordinated Debt (17.5%, Due 1/10) (2) (3) Common Stock Warrants (4)		7,680,391		7,640,089 3,248		7,640,089 —
LHC Holdings Corp. (Healthcare, Education & Childcare)	Provider of home healthcare services	Senior Secured Term Loan A (8.8%, Due 11/12) (3) Senior Subordinated Debt (14.5%, Due 5/13) Membership Interest (4)		4,978,875 4,565,000		4,918,951 4,509,922 125,000		4,918,951 4,509,922 109,100
Mac & Massey Holdings, LLC (Grocery)	Broker and distributor of ingredients to manufacturers of food products	Senior Subordinated Debt (16.5%, Due 2/13) (2) Common Stock (4)		7,560,495		7,526,464 247,284		7,526,464 259,700
Metrologic Instruments, Inc. (6) (Electronics)	Manufacturer of imaging and scanning equipment	Senior Secured Term Loan (5.7%, Due 4/14) (3) Junior Secured Term Loan (9.0%, Due 12/15)		990,000 1,000,000		990,000 1,000,000		900,900 875,000
Northwestern Management Services, LLC (Healthcare, Education & Childcare)	Provider of dental services	Senior Secured Term Loan A (7.1%, Due 12/12) (3) Senior Secured Term Loan B (7.6%, Due 12/12) (3) Junior Secured Term Loan (15.0%, Due 6/13) (2) Common Stock (4)		5,895,000 1,246,875 2,775,063		5,835,379 1,234,149 2,747,272 500,000		5,835,379 1,234,149 2,747,272 397,500
Prince Mineral Company, Inc. (Metals & Minerals)	Manufacturer of pigments	Junior Secured Term Loan (8.3%, Due 12/12) (3) Senior Subordinated Debt (14.0%, Due 7/13) (2) (3)		11,350,000 11,943,272		11,185,465 11,805,660		10,153,465 11,484,660

F-7

Company(1)	Company
(Industry)	Description	Investment	Principal		Cost		Value
Quartermaster, Inc. (Retail Stores)	Retailer of uniforms and tactical equipment to law enforcement and security professionals	Revolving Line of Credit (7.5%, Due 12/10) (3) Senior Secured Term Loan A (9.3%, Due 12/10) (3) Senior Secured Term Loan B (10.6%, Due 12/10) (3) Senior Secured Term Loan C (15.0%, Due 12/11) (2) (3)		1,000,000 4,057,500 2,562,500 3,323,081		974,234 4,014,646 2,538,642 3,292,912		974,234 4,014,646 2,538,642 3,292,912
R-O-M Corporation (Automobile)	Manufacturer of doors, ramps and bulk heads for fire trucks and food transportation	Senior Secured Term Loan A (5.6%, Due 2/13) (3) Senior Secured Term Loan B (6.8%, Due 5/13) (3) Senior Subordinated Debt (15.0%, Due 8/13) (2)		7,240,000 8,443,125 9,100,000		7,165,017 8,342,067 8,996,588		7,028,017 8,182,067 8,996,588
Sidump’r Trailer Company, Inc. (Automobile)	Manufacturer of side dump trailers	Revolving Line of Credit (7.8%, Due 1/11) (3) Senior Secured Term Loan A (6.3%, Due 1/11) (3) Senior Secured Term Loan B (9.3%, Due 1/11) (3) Senior Secured Term Loan C (15.0%, Due 7/11) (2) (3) Senior Subordinated Debt (12.0%, Due 1/12) (3) Preferred Stock (2) Common Stock (4)		2,000,000 2,047,500 2,320,625 3,254,631 75,000		1,978,657 2,030,387 2,296,151 3,224,144 75,000 88,978 25		1,978,657 2,030,387 2,296,151 2,296,144 — — —
Total Non-control/non-affiliate investments (represents 73.9% of total investments at fair value)					$	270,937,995	$	260,051,446
Total Investments					$	365,331,239	$	351,946,400

(1)	Affiliate investments are generally defined under the Investment Company Act of 1940, as amended (the “1940 Act”) as companies in which the Company owns at least 5% but not more than 25% of the voting securities of the company. Control investments are generally defined under the 1940 Act as companies in which the Company owns more than 25% of the voting securities of the company or has greater than 50% representation on its board.
(2)	Amount includes payment-in-kind (PIK) interest or dividends.
(3)	Pledged as collateral under the Company’s Securitization Facility. See Note 4 to Consolidated Financial Statements.
(4)	Non-income producing.
(5)	Some of the investments listed are issued by an affiliate of the listed portfolio company.
(6)	Syndicated investment which has been originated by another financial institution and broadly distributed.

See Notes to Consolidated Financial Statements

F-8

PATRIOT CAPITAL FUNDING, INC.

Consolidated Schedule of Investments

December 31, 2007

Company(1)	Company
(Industry)	Description	Investment	Principal		Cost		Value
Control investments:
Fischbein, LLC (Machinery)	Designer and manufacturer of packaging equipment	Senior Subordinated Debt (16.5%, Due 5/13) (2) (3) Membership Interest — Class A (4)	$	4,211,988	$	4,180,389 2,800,000	$	4,180,389 5,148,000
Total Control investments (represents 2.4% of total investments at fair value)					$	6,980,389	$	9,328,389
Affiliate investments:
Aylward Enterprises, LLC(5) (Machinery)	Manufacturer of packaging equipment	Revolving Line of Credit (8.7%, Due 2/12) (3) Senior Secured Term Loan A (9.5%, Due 2/12) (3) Senior Subordinated Debt (14.5%, Due 8/12) (2) Membership Interest (4)	$	3,700,000 8,292,188 6,424,702	$	3,630,012 8,162,724 6,335,464 1,250,000	$	3,630,012 8,162,724 6,335,464 —
KTPS Holdings, LLC (Textiles & Leather)	Manufacturer and distributor of specialty pet products	Revolving Line of Credit (8.2%, Due 1/12) (3) Senior Secured Term Loan A (8.4%, Due 1/12) (3) Senior Secured Term Loan B (12.0%, Due 1/12) (3) Junior Secured Term Loan (15.0%, Due 3/12) (2) (3) Membership Interest — Class A (4) Membership Interest — Common (4)		300,000 6,012,500 1,985,000 4,081,878		282,562 5,941,886 1,960,952 4,035,122 730,020 19,980		282,562 5,941,886 1,960,952 4,035,122 769,000 87,90
Nupla Corporation (Home & Office Furnishings, Housewares & Durable Consumer Products)	Manufacturer and marketer of professional high-grade fiberglass-handled striking and digging tools	Revolving Line of Credit (9.5%, Due 9/12) (3) Senior Secured Term Loan A (8.8%, Due 9/12) (3) Senior Subordinated Debt (14.0%, Due 3/13) (2) Preferred Stock (2) Common Stock (4)		550,000 5,678,125 3,019,688		532,725 5,628,411 2,993,614 493,427 25,000		532,725 5,628,411 2,993,614 493,427 38,300
Smart, LLC(5) (Diversified/Conglo merate Service)	Provider of tuition management services	Revolving Line of Credit (12.3%, Due 8/11) (3) Senior Secured Term Loan A (12.3%, Due 8/11) (3) Senior Secured Term Loan B (19.0%, Due 2/12) (2) (3) Convertible Subordinated Note (22.0%, Due 8/12) Membership Interest — Class B (4)		870,000 3,862,500 3,668,965 250,000		822,799 3,817,733 3,626,308 250,000 1,000,000		822,799 3,817,733 3,626,308 250,000 729,100
Sport Helmets Holdings, LLC(5) (Personal & Nondurable Consumer Products)	Manufacturer of protective headgear	Senior Secured Term Loan A (9.0%, Due 12/13) Senior Secured Term Loan B (9.5%, Due 12/13) Senior Subordinated Debt (15.0%, Due 6/14) (2) Common Stock (4)		4,500,000 7,500,000 8,011,333		4,431,440 7,385,336 7,889,250 2,000,000		4,431,440 7,385,336 7,889,250 1,901,500
Vince & Associates Clinic Research, Inc. (Healthcare, Education & Childcare)	Provider of clinical testing services	Senior Secured Term Loan (10.0%, Due 11/12) (2) (3) Senior Subordinated Debt (15.0%, Due 5/13) (2) Convertible Preferred Stock (4)		7,500,000 5,521,561		7,391,657 5,441,483 500,000		7,391,657 5,441,483 592,900
Total Affiliate investments (represents 22.1% of total investments at fair value)					$	86,577,905	$	85,171,605
Non-control/non-affiliate investments:
ADAPCO, Inc. (Ecological)	Distributor of specialty chemicals and contract application services	Revolving Line of Credit (9.0%, Due 7/11) (3) Senior Secured Term Loan A (10.5%, Due 6/11) (3) Common Stock (4)	$	2,200,000 13,016,250	$	2,177,697 12,916,093 500,000	$	2,177,697 12,216,143 —
Aircraft Fasteners International, LLC (Machinery)	Distributor of fasteners and related hardware for use in aerospace, electronics and defense industries	Senior Secured Term Loan (8.3%, Due 11/12) (3) Junior Secured Term Loan (14.0%, Due 5/13) (2) (3) Convertible Preferred Stock (2)		6,800,000 5,200,000		6,697,869 5,121,815 253,342		6,697,869 5,121,815 341,800
Allied Defense Group, Inc. (Aerospace & Defense)	Diversified defense company	Common Stock (4)				463,168		161,600
Arrowhead General Insurance Agency, Inc.(6) (Insurance)	Insurance agency and program specialist	Junior Secured Term Loan (12.1%, Due 2/13) (3)		5,000,000		5,000,000		4,500,000
Borga, Inc. (Mining, Steel, Iron & Nonprecious Metals)	Manufacturer of pre-fabricated metal building systems	Senior Secured Term Loan A (8.8%, Due 3/09) (3) Senior Secured Term Loan B (11.8%, Due 5/10) (3) Senior Secured Term Loan C (16.0%, Due 5/10) (2) (3) Common Stock Warrants (4)		1,321,000 1,785,250 7,794,323		1,309,581 1,755,679 7,720,404 10,746		1,309,581 1,755,679 7,720,404 —
Caleel + Hayden, LLC(5) (Personal & Nondurable Consumer Products)	Provider of proprietary branded professional skincare and cosmetic products to physicians and spa communities	Junior Secured Term Loan B (9.6%, Due 11/11) (3) Senior Subordinated Debt (14.5%, Due 11/12) (2) (3) Common Stock (4)		10,879,062 6,250,000		10,745,564 6,174,425 750,000		10,745,564 6,174,425 1,058,600

F-9

Company(1)	Company
(Industry)	Description	Investment	Principal		Cost		Value
Cheeseworks, Inc. (Grocery)	Distributor of specialty cheese and food products	Revolving Line of Credit (7.6%, Due 6/11) (3) Senior Secured Term Loan (10.7%, Due 6/11) (3)		5,080,219 10,648,560		4,984,386 10,512,576		4,984,386 10,512,576
CS Operating, LLC(5) (Buildings & Real Estate)	Provider of maintenance, repair and replacement of HVAC, electrical, plumbing, and foundation repair	Senior Secured Term Loan A (9.1%, Due 7/12) (3) Senior Subordinated Debt (14.5%, Due 1/13) (2) (3)		2,325,000 2,527,328		2,290,500 2,490,326		2,290,500 2,490,326
Copperhead Chemical Company, Inc. (Chemicals, Plastics & Rubber)	Manufacturer of bulk pharmaceuticals	Senior Subordinated Debt (15.3%, Due 1/13) (2) (3)		3,540,943		3,505,378		3,505,378
Custom Direct, Inc.(6) (Printing & Publishing)	Direct marketer of checks and other financial products and services	Junior Secured Term Loan (10.8%, Due 12/14) (3)		2,000,000		2,000,000		1,750,000
Dover Saddlery, Inc. (Retail Stores)	Equestrian products catalog retailer	Common Stock (4)				148,200		129,200
Eight O’Clock Coffee Company(6) (Beverage, Food & Tobacco)	Manufacturer, distributor, and marketer of coffee	Junior Secured Term Loan (11.4%, Due 7/13) (3)		9,000,000		9,000,000		9,000,000
Employbridge Holding Company(5)(6) (Personal, Food & Miscellaneous Services)	A provider of specialized staffing services	Junior Secured Term Loan (11.8%, Due 10/13)(3)		3,000,000		3,000,000		2,910,000
Encore Legal Solutions, Inc. (Printing & Publishing)	Legal document management services	Junior Secured Term Loan A (10.7%, Due 6/10) (2) (3) Junior Secured Term Loan B (10.8%, Due 6/10) (2) (3) Senior Subordinated Debt (15.0%, Due 6/10) (2) (3) Common Stock Warrants (4)		3,949,437 7,193,143 5,926,861		3,925,802 7,138,192 5,889,187 219,791		3,925,802 7,138,192 3,489,226 —
EXL Acquisition Corp. (Electronics)	Manufacturer of lab testing supplies	Senior Secured Term Loan A (8.4%, Due 3/11) (3) Senior Secured Term Loan B (8.9%, Due 3/12) (3) Senior Secured Term Loan C (9.4%, Due 3/12) (3) Senior Secured Term Loan D (15.0%, Due 3/12) (3) Common Stock — Class A (4) Common Stock — Class B (2)		4,800,000 4,851,840 2,992,500 7,000,000		4,761,933 4,792,326 2,944,981 6,925,241 2,475 254,057		4,761,933 4,792,326 2,944,981 6,925,241 123,900 255,325
Fairchild Industrial Products, Co. (Electronics)	Manufacturer of industrial controls and power transmission products	Senior Secured Term Loan A (8.3%, Due 7/10) (3) Senior Secured Term Loan B (10.0%, Due 7/11) (3) Senior Subordinated Debt (14.8%, Due 7/11) (2) Preferred Stock — Class A (2) Common Stock — Class B (4)		5,580,000 9,325,000 5,460,000		5,531,331 9,239,973 5,401,721 327,879 121,598		5,531,331 9,239,973 5,401,721 327,879 293,200
Impact Products, LLC (Machinery)	Distributor of janitorial supplies	Junior Secured Term Loan (9.5%, Due 9/12) (3) Senior Subordinated Debt (13.5%, Due 9/12) (2)(3)		8,968,750 5,547,996		8,903,106 5,509,594		8,903,106 5,509,594
Innovative Concepts in Entertainment, Inc. (Personal & Nondurable Consumer Products)	Manufacturer of coin operated games	Junior Secured Term Loan A (9.0%, Due 2/11) (3) Junior Secured Term Loan B (9.5%, Due 2/11) (3) Junior Secured Term Loan C (13.0%, Due 8/11)(3)		4,312,500 3,537,000 3,900,000		4,292,854 3,519,896 3,881,940		4,292,854 3,519,896 3,881,940
Keltner Enterprises, LLC(5) (Oil & Gas)	Distributor of automotive oils, chemicals and parts	Senior Subordinated Debt (14.0%, Due 12/11) (3)		3,850,000		3,837,555		3,837,555
L.A. Spas, Inc. (Chemicals, Plastics & Rubber)	Manufacturer of above ground spas	Senior Subordinated Debt (15.5%, Due 1/10) (2) (3) Common Stock Warrants (4)		7,271,249		7,225,464 3,009		7,225,464 —
LHC Holdings Corp. (Healthcare, Education & Childcare)	Provider of home healthcare services	Revolving Line of Credit (8.8%, Due 11/12) (3) Senior Secured Term Loan A (8.8%, Due 11/12) (3) Senior Subordinated Debt (14.5%, Due 5/13) Membership Interest (4)		300,000 5,100,000 4,565,000		287,369 5,035,888 4,507,250 125,000		287,369 5,035,888 4,507,250 120,500
Mac & Massey Holdings, LLC (Grocery)	Broker and distributor of ingredients to manufacturers of food products	Senior Subordinated Debt (16.5%, Due 2/13) (2) Common Stock (4)		7,438,280		7,402,496 250,000		7,402,496 388,200
Metrologic Instruments, Inc.(6) (Electronics)	Manufacturer of imaging and scanning equipment	Senior Secured Term Loan (7.8%, Due 4/14) (3) Junior Secured Term Loan (11.1%, Due 12/15)		992,500 1,000,000		992,500 1,000,000		942,900 930,000

F-10

Company(1)	Company
(Industry)	Description	Investment	Principal		Cost		Value
Nice-Pak Products, Inc.(6) (Containers, Packaging & Glass)	Manufacturer of pre-moistened wipes	Senior Secured Term Loan (8.5%, Due 6/14) (3)		2,985,000		2,985,000		2,895,500
Northwestern Management Services, LLC (Healthcare, Education & Childcare)	Provider of dental services	Senior Secured Term Loan A (8.9%, Due 12/12) (3) Senior Secured Term Loan B (9.4%, Due 12/12) (3) Junior Secured Term Loan (15.0%, Due 6/13) (2) Common Stock (4)		6,000,000 1,250,000 2,754,125		5,936,612 1,236,744 2,724,995 500,000		5,936,612 1,236,744 2,724,995 504,400
Prince Mineral Company, Inc. (Metals & Minerals)	Manufacturer of pigments	Junior Secured Term Loan (9.9%, Due 12/12) (3) Senior Subordinated Debt (14.0%, Due 7/13) (2) (3)		11,375,000 11,913,159		11,203,941 11,768,249		11,203,941 11,768,249
Quartermaster, Inc. (Retail Stores)	Retailer of uniforms and tactical equipment to law enforcement and security professionals	Revolving Line of Credit (9.5%, Due 12/10) (3) Senior Secured Term Loan A (9.4%, Due 12/10) (3) Senior Secured Term Loan B (10.6%, Due 12/10) (3) Senior Secured Term Loan C (15.0%, Due 12/11) (2) (3)		500,000 4,276,250 2,568,750 3,298,069		471,887 4,228,116 2,542,846 3,265,862		471,887 4,228,116 2,542,846 3,265,862
R-O-M Corporation (Automobile)	Manufacturer of doors, ramps and bulk heads for fire trucks and food transportation	Senior Secured Term Loan A (8.0%, Due 2/13) (3) Senior Secured Term Loan B (9.3%, Due 5/13) (3) Senior Subordinated Debt (15.0%, Due 8/13) (2)		7,440,000 8,464,500 9,100,000		7,359,023 8,359,596 8,991,761		7,359,023 8,359,596 8,991,761
Sidump’r Trailer Company, Inc. (Automobile)	Manufacturer of side dump trailers	Revolving Line of Credit (9.8%, Due 1/11) (3) Senior Secured Term Loan A (8.5%, Due 1/11) (3) Senior Secured Term Loan B (11.5%, Due 1/11) (3) Senior Secured Term Loan C (15.0%, Due 7/11) (2) (3) Senior Subordinated Debt (12.0%, Due 1/12) (3) Preferred Stock (2) Common Stock (4)		1,675,000 2,047,500 2,320,625 3,230,074 75,000		1,651,732 2,028,320 2,294,336 3,197,254 75,000 87,271 25		1,651,732 2,028,320 2,294,336 3,197,254 75,000 — —
Total Non-control/ non-affiliate investments (represents 75.5% of total investments at fair value)					$	294,686,727	$	290,225,759
Total Investments					$	388,245,021	$	384,725,753

(1)	Affiliate investments are generally defined under the Investment Company Act of 1940, as amended (the “1940 Act”) as companies in which the Company owns at least 5% but not more than 25% of the voting securities of the company. Control investments are generally defined under the 1940 Act as companies in which the Company owns more than 25% of the voting securities of the company or has greater than 50% representation on its board.
(2)	Amount includes payment-in-kind (PIK) interest or dividends.
(3)	Pledged as collateral under the Company’s Securitization Facility. See Note 4 to Consolidated Financial Statements.
(4)	Non-income producing.
(5)	Some of the investments listed are issued by an affiliate of the listed portfolio company.
(6)	Syndicated investment which has been originated by another financial institution and broadly distributed.
(7)	Effective January 1, 2008, we adopted Statement of Financial Standards No. 157 — Fair Value Measurements, or SFAS 157. In accordance with that standard, we changed our presentation for all periods presented to net unearned fees against the associated debt investments, except for amounts represented by administrative fees or unearned fees in instances where the fair value of the underlying investment is zero which were reclassed to accounts payable, accrued expenses and other. Prior to the adoption of SFAS 157 on January 1, 2008, we reported unearned fees as a single line item on the Consolidated Balance Sheets and Consolidated Schedule of Investments. This change in presentation had no impact on the overall net cost or fair value of our investment portfolio and had no impact on our financial position or results of operations.

See Notes to Consolidated Financial Statements

F-11

PATRIOT CAPITAL FUNDING, INC.

Notes to Consolidated Financial Statements

(unaudited)

Note 1.   Description of Business and Basis of Presentation

Description of Business

Patriot Capital Funding, Inc. (the “Company”) is a specialty finance company that provides customized financing solutions to small- to mid-sized companies. The Company typically invests in companies with annual revenues between $10 million and $100 million, and companies which operate in diverse industry sectors. Investments usually take the form of senior secured loans, junior secured loans and subordinated debt investments — which may contain equity or equity-related instruments. The Company also offers “one-stop” financing, which typically includes a revolving credit line, one or more senior secured term loans and a subordinated debt investment.

The Company has elected to be treated as a business development company under the Investment Company Act of 1940, as amended. In addition, the Company has also previously elected to be treated as a regulated investment company (“RIC”) under the Internal Revenue Code of 1986, as amended (the “Code”).

Basis of Presentation

The accompanying financial statements reflect the consolidated accounts of the Company and its special purpose financing subsidiary, Patriot Capital Funding, LLC I, (see Note 4) with all significant intercompany balances eliminated. The financial results of the Company’s portfolio investments are not consolidated in the Company’s financial statements.

Interim financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Regulation S-X. Accordingly, certain disclosures accompanying annual consolidated financial statements prepared in accordance with GAAP are omitted. 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 periods have been included. The results of operations for the current period are not necessarily indicative of results that ultimately may be achieved for the year. The interim unaudited financial statements and notes thereto should be read in conjunction with the December 31, 2007 financial statements and notes thereto included in the Company’s Form 10-K as filed with the SEC.

Recent Accounting Pronouncements

In March 2008, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” (“SFAS 161”). SFAS 161 requires specific disclosures regarding the location and amounts of derivative instruments in the Company’s financial statements; how derivative instruments and related hedged items are accounted for; and how derivative instruments and related hedged items affect the Company’s financial position, financial performance, and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Early application is permitted. Because SFAS 161 impacts the Company’s disclosure and not its accounting treatment for derivative instruments and related hedged items, the Company’s adoption of SFAS 161 will not impact the results of operations or financial condition.

Interest, Dividends, Fees, and Other Investment Income

Interest and dividend income is recognized as revenue when earned according to the terms of the investment, and when in the opinion of management, it is collectible. Premiums paid and discounts obtained, including discounts in the form of fees, are amortized into interest income over the estimated life

F-12

PATRIOT CAPITAL FUNDING, INC.

Notes to Consolidated Financial Statements

(unaudited) — (Continued)

of the investment using the interest method. Fees consist principally of loan and arrangement fees, annual administrative fees, unused fees, prepayment fees, amendment fees, equity structuring fees and waiver fees. Equity structuring fees are recognized as earned, which is generally when the investment transaction closes. Other investment income consists principally of the recognition of unamortized deferred financing fees received from portfolio companies on the repayment of their debt investment, the sale of the debt investment or a reduction of available credit under the debt investment.

Federal Income Taxes

The Company has elected to be treated as a RIC under the Code. The Company’s RIC tax year was initially filed on a July 31 basis. The Company’s policy is to comply with the requirements of the Code that are applicable to RICs and to distribute substantially all of its taxable income to its stockholders. Therefore, no federal income tax provision is included in the accompanying financial statements. On February 11, 2008, the Company was granted permission by the Internal Revenue Service to change its RIC tax year from July 31, to December 31, effective on December 31, 2007. Accordingly, the Company will prepare a short period tax return from August 1, 2007 through December 31, 2007, and will file on a calendar year basis for 2008 and thereafter.

Dividends Paid

Distributions to stockholders are recorded on the declaration date. The Company is required to pay out to its shareholders at least 90% of its net ordinary income and net realized short-term capital gains in excess of net realized long-term capital losses for each taxable year in order to be eligible for the tax benefits allowed to a RIC under Subchapter M of the Code. It is the policy of the Company to pay out as a dividend all or substantially all of those amounts. The amount to be paid out as a dividend is determined by the Board of Directors each quarter and is based on management’s estimate of the Company’s annual taxable income. Based on that, a dividend is declared and paid each quarter. At its tax year-end the Company may pay a bonus distribution, in addition to the quarterly distributions, to ensure that it has paid out at least 90% of its net ordinary taxable income and net realized short-term capital gains in excess of net realized long-term capital losses for the year.

Distributions which exceed net investment income and net realized capital gains for financial reporting purposes but not for tax purposes are reported as distributions in excess of net investment income and net realized capital gains, respectively. To the extent that they exceed net investment income and net realized gains for tax purposes, they are reported as distributions of paid-in capital (i.e., return of capital).

Reclassifications

Certain prior period amounts have been reclassified to the current presentation.

Note 2.   Investments

As described below (see Note 3), effective January 1, 2008, the Company adopted Statement of Financial Standards No. 157 — Fair Value Measurements, or SFAS 157. In accordance with that standard, the Company changed its presentation for all periods presented to net unearned fees against the associated debt investments. Prior to the adoption of SFAS 157 on January 1, 2008, the Company reported unearned fees as a single line item on the Consolidated Balance Sheets and Consolidated Schedule of Investments. This change in presentation had no impact on the overall net cost or fair value of the Company’s investment portfolio and had no impact on the Company’s financial position or results of operations.

F-13

PATRIOT CAPITAL FUNDING, INC.

Notes to Consolidated Financial Statements

(unaudited) — (Continued)

At March 31, 2008 and December 31, 2007, investments consisted of the following:

	March 31,				December 31,
	2008				2007
	Cost		Fair Value		Cost		Fair Value
Investments in debt securities	$	352,471,109	$	339,866,473	$	375,410,033	$	371,261,022
Investments in equity securities		12,860,130		12,079,927		12,834,988		13,464,731
Total	$	365,331,239	$	351,946,400	$	388,245,021	$	384,725,753

At March 31, 2008 and December 31, 2007, $136.0 million and $138.0 million, respectively, of the Company’s portfolio investments at fair value were at fixed rates, which represented approximately 39% and 36%, respectively, of the Company’s total portfolio of investments at fair value. The Company generally structures its subordinated debt at fixed rates, while most of its senior secured and junior secured loans are at variable rates determined on the basis of a benchmark LIBOR or prime rate. The Company’s loans generally have stated maturities ranging from 4 to 7.5 years.

At March 31, 2008 and December 31, 2007, the Company had equity investments and warrant positions designed to provide the Company with an opportunity for an enhanced internal rate of return. These instruments generally do not produce a current return, but are held for potential investment appreciation and capital gains.

During the three months ended March 31, 2008, the Company realized a loss of $90,000 on the sale of one portfolio debt investment, and during the three months ended March 31, 2007, the Company realized a gain of $6,000 on the sale of one portfolio debt investment. During the three months ended March 31, 2008 and 2007, the Company recorded unrealized appreciation (depreciation) of ($9.9 million) and $85,000, respectively.

The composition of the Company’s investments as of March 31, 2008 and December 31, 2007 at cost and fair value was as follows:

	March 31,										December 31,
	2008										2007
	Cost		%(1)			Fair Value		%(1)			Cost		%(1)			Fair Value		%(1)
Senior Secured Debt	$	174,673,220		47.8	%	$	172,234,169		48.9	%	$	190,048,200		49.0	%	$	189,209,150		49.2	%
Junior Secured Debt		76,379,327		20.9			71,256,327		20.3			85,493,227		22.0			84,583,227		22.0
Subordinated Debt		101,418,562		27.8			96,375,977		27.4			99,868,606		25.7			97,468,645		25.3
Warrants / Equity		12,860,130		3.5			12,079,927		3.4			12,834,988		3.3			13,464,731		3.5
Total	$	365,331,239		100.0	%	$	351,946,400		100.0	%	$	388,245,021		100.0	%	$	384,725,753		100.0	%

(1) Represents percentage of total portfolio.

F-14

PATRIOT CAPITAL FUNDING, INC.

Notes to Consolidated Financial Statements

(unaudited) — (Continued)

The composition of the Company’s investment portfolio by industry sector, using Moody’s Industry Classifications as of March 31, 2008 and December 31, 2007 at cost and fair value was as follows:

	March 31,										December 31,
	2008										2007
	Cost		%(1)			Fair Value		%(1)			Cost		%(1)			Fair Value		%(1)
Machinery	$	53,022,930		14.5	%	$	49,903,263		14.2	%	$	52,844,315		13.6	%	$	54,030,773		14.0	%
Personal & Nondurable Consumer Products		50,860,827		13.9			51,155,027		14.5			51,070,705		13.2			51,280,805		13.3
Automobile		34,197,014		9.4			32,808,011		9.3			34,044,318		8.8			33,957,022		8.8
Electronics		33,728,611		9.2			33,672,204		9.6			42,296,015		10.9			42,470,710		11.0
Health Care, Education & Childcare		33,068,953		9.1			32,903,253		9.3			33,686,998		8.7			33,779,798		8.8
Metals & Minerals		22,991,125		6.3			21,638,125		6.2			22,972,190		5.9			22,972,190		6.0
Grocery		22,906,173		6.3			22,918,589		6.5			23,149,458		6.0			23,287,658		6.1
Printing & Publishing		19,538,140		5.3			15,533,347		4.4			19,172,972		4.9			16,303,220		4.2
Textiles & Leather		13,025,390		3.6			13,324,570		3.8			12,970,522		3.3			13,077,422		3.4
Ecological		12,264,553		3.4			11,064,603		3.1			15,593,790		4.0			14,393,840		3.7
Chemicals, Plastic & Rubber		11,179,640		3.1			11,176,392		3.2			10,733,851		2.8			10,730,842		2.8
Retail Stores		10,968,634		3.0			10,981,234		3.1			10,656,911		2.7			10,637,911		2.8
Mining, Steel, Iron & Nonprecious Metals		10,558,561		2.9			10,546,800		3.0			10,796,410		2.8			10,785,664		2.8
Housewares & Durable Consumer Products		10,135,626		2.8			9,637,088		2.7			9,673,177		2.5			9,686,477		2.5
Diversified/Conglomerate Service		9,676,365		2.6			9,293,165		2.6			9,516,840		2.4			9,245,940		2.4
Insurance		5,000,000		1.4			3,750,000		1.1			5,000,000		1.3			4,500,000		1.2
Buildings & Real Estate		4,907,194		1.3			4,907,194		1.4			4,780,826		1.2			4,780,826		1.2
Oil & Gas		3,838,335		1.0			3,838,335		1.1			3,837,555		1.0			3,837,555		1.0
Personal, Food & Miscellaneous Services		3,000,000		0.8			2,730,000		0.8			3,000,000		0.8			2,910,000		0.8
Aerospace & Defense		463,168		0.1			165,200		0.1			463,168		0.1			161,600		0.1
Beverage, Food & Tobacco		—		—			—		—			9,000,000		2.3			9,000,000		2.3
Containers, Packaging & Glass		—		—			—		—			2,985,000		0.8			2,895,500		0.8
Total	$	365,331,239		100.0	%	$	351,946,400		100.0	%	$	388,245,021		100.0	%	$	384,725,753		100.0	%

(1) Represents percentage of total portfolio.

As required by the 1940 Act, the Company classifies its investments by level of control. “Control Investments” are defined in the 1940 Act as investments in those companies that the Company is deemed to “Control.” Generally, under the 1940 Act, the Company is deemed to “Control” a company in which it has invested if it owns 25% or more of the voting securities of such company or has greater than 50% representation on its board. “Affiliate Investments” are investments in those companies that are “Affiliated Companies” of the Company, as defined in the 1940 act, which are not Control Investments. The Company is deemed to be an “Affiliate” of a company in which it has invested if it owns 5% or more but less than 25% of the voting securities of such company. “Non-Control/Non-Affiliate Investments” are those investments that are neither Control Investments nor Affiliate Investments. At March 31, 2008 and December 31, 2007, the Company owned greater than 5% but less than 25% of the voting securities in six

F-15

PATRIOT CAPITAL FUNDING, INC.

Notes to Consolidated Financial Statements

(unaudited) — (Continued)

investments. At March 31, 2008 and December 31, 2007, the Company owned 25% or more of the voting securities in one investment.

Note 3.   Fair Value Measurements

In September 2006, the Financial Accounting Standards Board issued Statement of Financial Standards No. 157 — Fair Value Measurements, or SFAS 157, which is effective for fiscal years beginning after November 15, 2007, with early adoption permitted. SFAS 157 defines fair value as the price at which an asset could be exchanged in a current transaction between knowledgeable, willing parties. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligator, not the amount that would be paid to settle the liability with the creditor. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation techniques are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the investments or market and the investments’ complexity.

Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by SFAS 157 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:

Level 1 — Unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data at the measurement date for substantially the full term of the assets or liabilities.

Level 3 — Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

The following table presents the financial instruments carried at fair value as of March 31, 2008, by caption on the Consolidated Balance Sheet for each of the three levels of hierarchy established by SFAS 157.

	As of March 31, 2008
			Internal Models with		Internal Models with
			Significant		Significant		Total Fair Value
	Quoted Market Prices		Observable		Unobservable		Reported in
	in Active Markets		Market Parameters		Market Parameters		Consolidated
	(Level 1)		(Level 2)		(Level 3)		Balance Sheet
Non-affiliate investments	$	326,000	$	9,805,900	$	249,919,546	$	260,051,446
Affiliate investments		—		—		83,364,986		83,364,986
Control investments		—		—		8,529,968		8,529,968
Total investments at fair value	$	326,000	$	9,805,900	$	341,814,500	$	351,946,400

The following table provides a roll-forward in the changes in fair value from December 31, 2007 to March 31, 2008, for all investments for which the Company determines fair value using unobservable (Level 3) factors. When a determination is made to classify a financial instrument within Level 3 of the valuation hierarchy, the determination is based upon the fact that the unobservable factors, are the most

F-16

PATRIOT CAPITAL FUNDING, INC.

Notes to Consolidated Financial Statements

(unaudited) — (Continued)

significant, to the overall fair value measurement. However, Level 3 financial instruments typically include, in addition to the unobservable or Level 3 components, observable components (that is, components that are actively quoted and can be validated to external sources). Accordingly, the appreciation (depreciation) in the table below includes changes in fair value due in part to observable factors that are part of the valuation methodology.

	Fair value measurements using unobservable inputs (Level 3)
	Non-affiliate			Affiliate			Control
	Investments			Investments			Investments			Total
Fair Value December 31, 2007	$	267,006,559		$	85,171,605		$	9,328,389		$	361,506,553
Total realized gains (losses)		—			—			—			—
Change in unrealized depreciation		(5,311,484	)		(2,591,990	)		(848,000	)		(8,751,474	)
Purchases, issuances and settlements, net		(11,775,529	)		785,371			49,579			(10,940,579	)
Transfers in (out) of Level 3		—			—			—			—
Fair Value as of March 31, 2008	$	249,919,546		$	83,364,986		$	8,529,968		$	341,814,500

Concurrent with its adoption of SFAS 157, effective January 1, 2008, the Company augmented the valuation techniques it uses to estimate the fair value of its debt investments where there is not a readily available market value (Level 3). Prior to January 1, 2008, the Company estimated the fair value of its Level 3 debt investments by first estimating the enterprise value of the portfolio company which issued the debt investment. To estimate the enterprise value of a portfolio company, the Company analyzed various factors, including the portfolio companies historical and projected financial results. Typically, private companies are valued based on multiples of EBITDA (Earning Before Interest, Taxes, Depreciation and Amortization), cash flow, net income, revenues or, in limited instances, book value.

In estimating a multiple to use for valuation purposes, the Company looked to private merger and acquisition statistics, discounted public trading multiples or industry practices. In some cases, the best valuation methodology may have been a discounted cash flow analysis based on future projections. If a portfolio company was distressed, a liquidation analysis may have provided the best indication of enterprise value.

If there was adequate enterprise value to support the repayment of the Company’s debt, the fair value of the Level 3 loan or debt security normally corresponded to cost plus the amortized original issue discount unless the borrower’s condition or other factors lead to a determination of fair value at a different amount.

Beginning on January 1, 2008, the Company also introduced a bond-yield model to value these investments based on the present value of expected cash flows. The primary inputs into the model are market interest rates for debt with similar characteristics and an adjustment for the portfolio company’s credit risk. The credit risk component of the valuation considers several factors including financial performance, business outlook, debt priority and collateral position. During the three months ended March 31, 2008 and 2007, we recorded net unrealized appreciation (depreciation) of ($9.9 million) and $85,000, respectively, on our investments. For 2008, a portion of our net unrealized depreciation, approximately $1.2 million, resulted from quoted market prices on our syndicated loan portfolio as a result of disruption in the financial credit markets for broadly syndicated loans; approximately $4.2 million, resulted from a decline in cash flows of our portfolio companies requiring closer monitoring or performing below expectations; and approximately $4.5 million, resulted from the adoption of SFAS No. 157.

F-17

PATRIOT CAPITAL FUNDING, INC.

Notes to Consolidated Financial Statements

(unaudited) — (Continued)

Note 4.   Borrowings

On September 18, 2006, the Company, through a consolidated wholly-owned bankruptcy remote, special purpose subsidiary, entered into an amended and restated securitization revolving credit facility (the “Securitization Facility”) with an entity affiliated with BMO Capital Markets Corp. (formerly known as Harris Nesbitt Corp.). On May 2, 2007, the Company amended its Securitization Facility and lowered the interest rate payable on any outstanding balances under the Securitization Facility during the period of time the Company is permitted to make draws. The amendment also reduced or eliminated certain restrictions pertaining to certain loan covenants. On August 31, 2007, the Company amended its Securitization Facility and increased its borrowing capacity by $35 million. The amendment also extended the commitment termination date by an additional 364-day period to July 22, 2010 and also reduced or eliminated certain restrictions pertaining to certain loan covenants. The Securitization Facility allows the special purpose subsidiary to borrow up to $175 million ($140.0 million prior to August 31, 2007) through the issuance of notes to a multi-seller commercial paper conduit administered by the affiliated entity. The Securitization Facility is secured by all of the loans held by the special purpose subsidiary. The Securitization Facility bears interest at the commercial paper rate plus 1.0% (1.35% prior to May 2, 2007) and allows the special purpose subsidiary to make draws under the Securitization Facility until July 22, 2010 (July 23, 2009 prior to August 31, 2007), unless extended prior to such date for an additional 364-day period with the consent of the lender. If the Securitization Facility is not extended, any principal amounts then outstanding will be amortized over a 24-month period following July 23, 2010 and interest will accrue on outstanding borrowings under the facility at the prime rate plus 2.0%. The Securitization Facility provides for the payment to the lender of a monthly fee equal to 0.25% per annum on the unused amount of the Securitization Facility. The Company can use the proceeds of the Securitization Facility to fund loan origination activities and for general corporate purposes. Each loan origination under the Securitization Facility will be subject to the satisfaction of certain conditions. The predecessor securitization revolving credit facility to the Securitization Facility: (i) allowed our special purpose subsidiary to make draws under the facility until July 24, 2008, unless extended prior to such date for an additional 364-day period with the consent of the lender thereto; (ii) bore interest at the commercial paper rate plus 1.75%; (iii) provided that in the event that the facility was not extended, any principal amounts then outstanding would be amortized over a 24-month period following July 24, 2008 and interest would accrue on outstanding borrowings under the facility at the prime rate plus 2.0%; and (iv) contained more stringent restrictions regarding certain loan concentrations. At March 31, 2008 and December 31, 2007, $143.0 million and $164.9 million, respectively, of borrowings were outstanding under the Securitization Facility. At March 31, 2008, the interest rate was 4.1%. Interest expense for the three months ended March 31, 2008 and 2007 consisted of the following:

	Three Months Ended March 31,
	2008		2007
Interest charges	$	1,986,376	$	1,401,562
Amortization of debt issuance costs		58,904		70,059
Unused facility fees		14,243		34,591
Total	$	2,059,523	$	1,506,212

The Securitization Facility contains restrictions pertaining to the geographic and industry concentrations of funded loans, maximum size of funded loans, interest rate payment frequency of funded loans, maturity dates of funded loans and maximum yields on funded loans. The Securitization Facility also contains certain requirements relating to portfolio performance, including required minimum portfolio yield and limitations on delinquencies and charge-offs, violation of which could result in the early termination of the facility. In connection with the origination and amendment of the securitization revolving credit facility,

F-18

PATRIOT CAPITAL FUNDING, INC.

Notes to Consolidated Financial Statements

(unaudited) — (Continued)

the Company incurred $1.4 million of fees which is being amortized over the term of the securitization revolving credit facility.

On April 11, 2008, the Company entered into a second amended and restated securitization revolving credit facility with an entity affiliated with BMO Capital Markets Corp. and Branch Banking and Trust Company (“BB&T”). The second amended and restated securitization revolving credit facility amends and restates our Securitization Facility. The amended and restated Securitization Facility was amended and restated to, among other things: (i) increase the borrowing capacity from $175 million to $225 million; (ii) extend the date until which we are allowed to make draws under the facility from July 22, 2010 to April 11, 2011 (unless extended prior to such date for an additional 364-day period with the consent of the lenders thereto); (iii) increase the interest rate payable under the facility from the commercial paper rate plus 1.00% to the commercial paper rate plus 1.75% on up to $175 million of outstanding borrowings and the LIBOR rate plus 1.75% on up to $50 million of outstanding borrowings; and (iv) increase the unused commitment fee from 0.25% per annum to 0.30% per annum. Similar to the Securitization Facility, the second amended and restated securitization revolving credit facility contains restrictions pertaining to the geographic and industry concentrations of funded loans, maximum size of funded loans, interest rate payment frequency of funded loans, maturity dates of funded loans, minimum yields on funded loans and minimum equity requirements. These restrictions may affect the amount of notes our special purpose subsidiary may issue from time to time. The second amended and restated securitization revolving credit facility also contains certain requirements relating to portfolio performance, including required minimum portfolio yield and limitations on delinquencies and charge-offs, violation of which could result in the early termination of the second amended and restated securitization revolving credit facility. Each loan origination under the second amended and restated securitization revolving credit facility is subject to the satisfaction of certain conditions.

Since 2006, the Company, through our special purpose subsidiary, entered into five interest rate swap agreements. The swap agreements have a fixed rate range of 4.8% to 5.2% on an initial notional amount of $34.8 million. The swap agreements expire five years from issuance. The swaps were put into place to hedge against changes in variable interest payments on a portion of our outstanding borrowings. For the three months ended March 31, 2008 and 2007, net unrealized depreciation attributed to the swaps were approximately $753,000 and $63,000, respectively. 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 rates with respect to the outstanding borrowings.

As of January 1, 2008, the Company adopted SFAS 157 (see Note 3) for the fair value measurement of its interest rate swaps. There was no impact on the basis for which the fair value of these items was determined. The Company measures the fair value of its $34.8 million of interest rate swaps under a Level 2 input as defined by SFAS 157. The Company relies on a mark to market valuation prepared by a bank based on observable interest rate yield curves. As of March 31, 2008, the accrued mark to market loss on these swaps is $1.5 million. Of this amount $762,000, has been recognized in prior periods. The loss recorded in the three months ended March 31, 2008 is $753,000, which represents the change in the mark to market valuation on the swaps during the period. The Company’s swaps are not designated as effective hedging instruments under SFAS 133.

Note 5.   Stock Option Plan

As of March 31, 2008, 3,644,677 shares of common stock are reserved for issuance upon exercise of options to be granted under the Company’s stock option plan (the “Plan”). On February 27, 2008, options to purchase a total of 800,500 shares of common stock were granted to the Company’s executive officers and employees with an exercise price of $10.91 per share (the closing price of the common stock at date of

F-19

PATRIOT CAPITAL FUNDING, INC.

Notes to Consolidated Financial Statements

(unaudited) — (Continued)

grant). As of March 31, 2008, 3,237,177 options were outstanding, 1,499,243 of which were exercisable. The options have a weighted average remaining contractual life of 8.3 years, a weighted average exercise price of $12.41, and an aggregate intrinsic value of $0.

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment,” (“SFAS 123R”). The Company has elected the “modified prospective method” of transition as permitted by SFAS 123R. Under this transition method, the Company is required to record compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that were outstanding at the date of adoption. The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option pricing model. For shares granted in February 2008, this model used the following assumptions: annual dividend rate of 11.8%, risk free interest rate of 3.0%, expected volatility of 26%, and the expected life of the options of 6.5 years. The Company calculated its expected term assumption using guidance provided by SEC Staff Accounting Bulletin 107 (“SAB 107”). SAB 107 allows companies to use a simplified expected term calculation in instances where no historical experience exists, provided that the companies meet specific criteria. Expected volatility was based on the Company’s historical volatility.

Assumptions used with respect to future grants may change as the Company’s actual experience may be different. The fair value of options granted in 2008 and 2007 was approximately $0.47 and $0.98, respectively, using the Black-Scholes option pricing model. The Company has adopted the policy of recognizing compensation cost for options with graded vesting on a straight-line basis over the requisite service period for the entire award. For the three months ended March 31, 2008 and 2007, the Company recorded compensation expense related to stock options of approximately $182,000 and $159,000, respectively, which is included in compensation expense in the consolidated statements of operations. The Company does not record the tax benefits associated with the expensing of stock options since the Company elected to be treated as a RIC under Subchapter M of the Internal Revenue Code and as such, the Company is not subject to federal income tax on the portion of taxable income and gains distributed to stockholders, provided that at least 90% of its annual taxable income is distributed. As of March 31, 2008, there was $1.2 million of unrecognized compensation cost related to unvested options which is expected to be recognized over 2.9 years.

Note 6.   Share Data and Common Stock

The following table sets forth a reconciliation of weighted average shares outstanding for computing basic and diluted income (loss) per common share for the three months ended March 31, 2008 and 2007.

	Three Months Ended March 31,
	2008		2007
Weighted average common shares outstanding, basic		20,650,455		17,532,896
Effect of dilutive stock options		—		191,130
Weighted average common shares outstanding, diluted		20,650,455		17,724,026

The dilutive effect of stock options is computed using the treasury stock method. Options on 3.2 million (2008) and 1.5 million (2007) shares, were anti-dilutive and therefore excluded from the computation of diluted earnings per share.

On January 26, 2007, the Company closed a shelf offering of 2,370,000 shares of common stock and received gross proceeds of $33.7 million less underwriters’ commissions and discounts, and fees of approximately $2.0 million.

F-20

PATRIOT CAPITAL FUNDING, INC.

Notes to Consolidated Financial Statements

(unaudited) — (Continued)

On October 2, 2007, the Company closed a shelf offering of 2,300,000 shares of common stock and received gross proceeds of $30.5 million less underwriters’ commissions and discounts, and fees of $1.6 million.

In 2005, the Company established a dividend reinvestment plan, and during the three months ended March 31, 2008 and the year ended December 31, 2007, issued 0 and 158,500 shares, respectively, in connection with dividends paid. The Company did not issue any shares of its common stock under the dividend reinvestment plan during the three months ended March 31, 2008 because it elected to satisfy the share requirements of the dividend reinvestment plan in connection with the dividend paid on January 16, 2008 through open market purchases of its common stock by the administrator of the dividend reinvestment plan. The following table reflects the Company’s dividends paid since January 1, 2007:

Date Declared	Record Date	Payment Date	Amount
February 27, 2008	March 14, 2008	April 16, 2008	$	0.33
November 1, 2007	December 14, 2007	January 16, 2008	$	0.33
August 2, 2007	September 14, 2007	October 17, 2007	$	0.32
April 30, 2007	June 15, 2007	July 17, 2007	$	0.32
February 23, 2007	March 15, 2007	April 18, 2007	$	0.32

Note 7.   Commitments and Contingencies

The balance of unused commitments to extend credit was $26.1 million and $29.3 million at March 31, 2008 and December 31, 2007, respectively. Commitments to extend credit consist principally of the unused portions of commitments that obligate the Company to extend credit, such as contingent investment draws, revolving credit arrangements or similar transactions. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the counterparty. Since commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

In connection with borrowings under the Securitization Facility, the Company’s special purpose subsidiary may be required under certain circumstances to enter into interest rate swap agreements or other interest rate hedging transactions. The Company has agreed to guarantee the payment of certain swap breakage costs that may be payable by the Company’s special purpose subsidiary in connection with any such interest rate swap agreements or other interest rate hedging transactions (see “Note 3. Borrowings”).

The Company leases its corporate offices and certain equipment under operating leases with terms expiring in 2011. Future minimum lease payments due under operating leases at March 31, 2008 are as follows: $193,000 — remainder of 2008, $241,000 — 2009, $247,000 — 2010, $21,000 — 2011. Rent expense was approximately $68,000 and $56,000 for the three months ended March 31, 2008 and 2007, respectively. At March 31, 2008, the Company had an outstanding letter of credit in the amount of $38,000 as security deposit for the lease of the Company’s corporate offices.

Note 8.   Concentrations of Credit Risk

The Company’s portfolio companies are primarily small- to mid-sized companies that operate in a variety of industries.

At March 31, 2008 and December 31, 2007, the Company’s two largest investments represented approximately 13% and 12%, respectively, of the total investment portfolio at fair value. Investment income, consisting of interest, dividends, fees, and realization of gains or losses on investments, can fluctuate dramatically upon repayment of an investment or sale of an equity interest. Revenue recognition in any

F-21

PATRIOT CAPITAL FUNDING, INC.

Notes to Consolidated Financial Statements

(unaudited) — (Continued)

given period can be highly concentrated among several portfolio companies. During the three months ended March 31, 2008 and 2007, the Company did not record investment income from any portfolio company in excess of 10.0% of total investment income.

Note 9.   Income Taxes

Effective August 1, 2005, the Company elected to be treated as a RIC. Accordingly, the Company’s RIC tax year was initially filed on a July 31 basis. The Company’s policy is to comply with the requirements of Subchapter M of the Code; that are applicable to RICs and to distribute substantially all of its taxable income to its shareholders. To date, the Company has fully met all of the distribution requirements and other requirements of Subchapter M of the Code, therefore, no federal, state or local income tax provision is required. On February 11, 2008, the Company was granted permission by the Internal Revenue Service to change its RIC tax year from July 31 to December 31, effective on December 31, 2007. Accordingly, the Company will prepare a short period tax return from August 1, 2007 through December 31, 2007, and will file on a calendar year basis for 2008 and thereafter.

Distributable taxable income for the period January 1, 2008 through March 31, 2008 is as follows:

	January 1, 2008
	to
	March 31,
	2008
GAAP net investment income	$	6,786,000
Tax timing differences of:
Origination fees, net		(245,000	)
Stock compensation expense, bonus accruals, original issue discount and depreciation and amortization		(1,428,000	)
Tax distributable income	$	5,113,000

Distributable taxable income differs from GAAP net investment income primarily due to: (1) origination fees received in connection with investments in portfolio companies are treated as taxable income upon receipt; (2) certain stock compensation are not currently deductible for tax purposes and a bonus accrual carryover, as a result of the change in the Company’s tax year described above, until actually paid; (3) certain debt investments that generate original issue discount; and (4) depreciation and amortization.

Distributions which exceed tax distributable income (tax net investment income and realized gains, if any) are reported as distributions of paid-in capital (i.e. return of capital). The taxability of the distributions made during the three months ended March 31, 2008 will be determined by the Company’s tax earnings and profits for its tax year ending December 31, 2008. As of March 31, 2008, the Company estimates that 92% of the April 16, 2008 distribution will be treated as ordinary income, principally as a result of the change in tax year.

There were no capital gain distributions in 2008 or 2007.

At March 31, 2008, the Company has a net capital loss carryforward of $3.2 million to offset net capital gains, to the extent provided by federal tax law. The capital loss carryforward will expire in the Company’s tax fiscal year ending December 31, 2013.

F-22

Note 10.   Financial Highlights

	For the Three Months Ended
	March 31,
	2008			2007
Per Share Data:
Net asset value at beginning of period	$	10.73		$	10.37
Net investment income		.33			.31
Net change in unrealized appreciation (depreciation) on investments		(.48	)		.01
Effect of issuance of common stock		—			.39
Distributions from net investment income		(.33	)		(.31	)
Distributions in excess of net investment income		—			(.03	)
Net change in unrealized swap depreciation		(.04	)		—
Stock based compensation expense		.01			.01
Net asset value at end of period	$	10.22		$	10.75
Total net asset value return(1)		(1.7	)%		6.9	%
Per share market value, beginning of period	$	10.09		$	14.49
Per share market value, end of period	$	10.47		$	14.20
Total market value return(2)		7.0	%		0.3	%
Shares outstanding at end of period		20,650,455			18,223,517
Ratios and Supplemental Data:
Net assets at end of period	$	211,057,000		$	195,979,000
Average net assets		218,247,000			195,963,000
Ratio of operating expenses to average net assets (annualized)		8.2	%		7.4	%
Ratio of net investment income (loss) to average net assets (annualized)		12.4	%		10.9	%
Average borrowings outstanding	$	152,702,000		$	84,855,000
Average amount of borrowings per share	$	7.39		$	4.66

(1)	The total net asset value return (not annualized) reflects the change in net asset value of a share of stock, plus dividends.
(2)	The total market value return (not annualized) reflects the change in the ending market value per share plus dividends, divided by the beginning market value per share.

Note 11.   Subsequent Events

On April 2, 2008 the Company amended its senior and subordinated debt investments in Encore Legal Solutions Inc. (“Encore”). Concurrent with a $1.0 million subordinated debt pay down received from Encore on April 2, 2008, the remaining subordinated debt cost balance of approximately $5.2 million was converted into an equity investment. At March 31, 2008, the fair value balance of the subordinated debt was approximately $3.7 million before the pay down and conversion. After the conversion, the Company had a 30% equity ownership in Encore.

On May 2, 2008, the Board of Directors declared a cash dividend of $0.33 per share, payable on July 16, 2008 to stockholders of record as of the close of business on June 5, 2008. Such cash dividend is payable on total shares issued and outstanding on the record date.

F-23

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders’ of

  Patriot Capital Funding, Inc.

We have audited the accompanying consolidated balance sheets of Patriot Capital Funding, Inc. (a Delaware corporation), including the consolidated schedule of investments, as of December 31, 2007 and 2006, and the related consolidated statements of operations, cash flows and changes in net assets for each of the three years in the period ended December 31, 2007. We have also audited Patriot Capital Funding, Inc’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Patriot Capital Funding, Inc’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on Patriot Capital Funding, Inc’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audits of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Patriot Capital Funding, Inc. as of December 31, 2007 and 2006, and the results of its operations, cash flows and changes in net assets for each of the three years in the period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, Patriot Capital Funding, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by COSO.

/s/ GRANT THORNTON LLP

New York, New York

February 29, 2008

F-24

PATRIOT CAPITAL FUNDING, INC.

Consolidated Balance Sheets

	December 31,
	2007			2006
ASSETS
Investments at fair value:
Non-control/non-affiliate investments (cost of $297,661,308 — 2007, $251,915,321 — 2006)	$	293,058,636		$	251,933,655
Affiliate investments (cost of $87,746,867 — 2007, $8,966,605 — 2006)		86,340,567			8,925,605
Control investments (cost of $7,011,988 — 2007)		9,359,988			—
Unearned income		(4,555,713	)		(3,610,884	)
Total investments		384,203,478			257,248,376
Cash and cash equivalents		789,451			4,211,643
Restricted cash		10,487,202			5,113,806
Interest receivable		1,758,954			2,221,000
Other assets		617,448			1,727,680
TOTAL ASSETS	$	397,856,533		$	270,522,505
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Borrowings	$	164,900,000		$	98,380,000
Interest payable		821,124			523,709
Dividends payable		6,814,650			4,904,818
Accounts payable, accrued expenses and other		3,723,075			2,605,349
TOTAL LIABILITIES		176,258,849			106,413,876
STOCKHOLDERS’ EQUITY
Preferred stock, $0.01 par value, 1,000,000 shares authorized; no shares issued and outstanding		—			—
Common stock, $0.01 par value, 49,000,000 shares authorized; 20,650,455 and 15,821,994 shares issued and outstanding at December 31, 2007 and 2006, respectively		206,504			158,220
Paid-in-capital		233,722,593			171,957,327
Accumulated net investment loss		(1,912,061	)		(1,912,061	)
Distributions in excess of net investment income		(2,824,651	)		(2,821,587	)
Net realized loss on investments		(3,171,365	)		(3,262,966	)
Net unrealized appreciation (depreciation) on interest rate swaps		(762,365	)		12,961
Net unrealized depreciation on investments		(3,660,971	)		(23,265	)
TOTAL STOCKHOLDERS’ EQUITY		221,597,684			164,108,629
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	397,856,533		$	270,522,505
NET ASSET VALUE PER COMMON SHARE	$	10.73		$	10.37

See Notes to Consolidated Financial Statements

F-25

PATRIOT CAPITAL FUNDING, INC.

Consolidated Statements of Operations

	Year Ended December 31,
	2007			2006			2005
INVESTMENT INCOME
Interest and dividends:
Non-control/non-affiliate investments (less than 5% owned)	$	31,729,397		$	25,011,993		$	13,035,673
Affiliate investments (5% to 25% owned)		4,947,294			375,716			—
Control investments (greater than 25% owned)		470,584			—			—
Total interest and dividend income		37,147,275			25,387,709			13,035,673
Fees:
Non-control/non-affiliate investments (less than 5% owned)		1,080,929			260,289			366,830
Affiliate investments (5% to 25% owned)		93,419			9,887			—
Control investments (greater than 25% owned)		106,013			—			—
Total fee income		1,280,361			270,176			366,830
Other investment income non-control/non-affiliate investments (less than 5% owned)		534,901			848,449			46,839
Total Investment Income		38,962,537			26,506,334			13,449,342
EXPENSES
Compensation expense		5,410,075			3,877,525			2,481,761
Consulting fees		—			—			554,796
Interest		7,421,596			4,332,582			3,517,989
Professional fees		887,021			1,045,613			730,550
Prepayment penalty		—			—			3,395,335
General and administrative		2,498,724			2,229,970			1,041,030
Total Expenses		16,217,416			11,485,690			11,721,461
Net Investment Income		22,745,121			15,020,644			1,727,881
NET REALIZED GAIN AND (LOSS) AND NET UNREALIZED APPRECIATION (DEPRECIATION)
Net realized gain (loss) on investments — non-control/non-affiliate investments (less than 5% owned)		91,601			(3,262,966	)		—
Net unrealized appreciation (depreciation) on investments — non-control/non-affiliate investments (less than 5% owned)		(4,620,406	)		3,858,931			(2,965,175	)
Net unrealized depreciation on investments — affiliate investments (5% to 25% owned)		(1,365,300	)		(41,000	)		—
Net unrealized appreciation on investments — control investments (greater than 25% owned)		2,348,000			—			—
Net unrealized appreciation (depreciation) on interest rate swaps		(775,326	)		12,961			—
Net Realized Gain (Loss) and Net Unrealized Appreciation (Depreciation)		(4,321,431	)		567,926			(2,965,175	)
NET INCOME (LOSS)	$	18,423,690		$	15,588,570		$	(1,237,294	)
Income (loss) per share, basic	$	0.99		$	1.10		$	(0.17	)
Income (loss) per share, diluted	$	0.98		$	1.10		$	(0.17	)
Weighted average shares outstanding, basic		18,670,904			14,145,200			7,253,632
Weighted average shares outstanding, diluted		18,830,213			14,237,952			7,253,632

See Notes to Consolidated Financial Statements

F-26

PATRIOT CAPITAL FUNDING, INC.

Consolidated Statements of Cash Flows

	Year Ended December 31,
	2007			2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	18,423,690		$	15,588,570		$	(1,237,294	)
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
Depreciation and amortization		411,860			456,289			192,785
Change in interest receivable		462,046			(1,353,525	)		(252,232	)
Net realized loss (gain) on sale of investments		(91,601	)		3,262,966			—
Net change in unrealized depreciation (appreciation) on investments		3,637,706			(3,817,931	)		2,965,175
Unrealized depreciation (appreciation) on interest rate swap		775,326			(12,961	)		—
Payment-in-kind interest and dividends		(3,928,159	)		(2,424,927	)		(1,825,755	)
Stock based compensation expense		675,822			505,785			—
Change in unearned income		944,829			364,866			789,884
Change in interest payable		297,415			463,375			(222,762	)
Change in management fee payable		—			—			(916,666	)
Change in other assets		93,868			(9,663	)		(83,849	)
Change in accounts payable, accrued expenses and other		1,117,726			812,055			911,569
Net cash provided by operating activities		22,820,528			13,834,899			320,855
CASH FLOWS FROM INVESTING ACTIVITIES:
Funded investments		(200,316,250	)		(157,951,595	)		(88,850,000	)
Principal repayments on investments		67,332,023			37,627,269			14,572,867
Proceeds from sales of investments		5,466,351			3,642,634			—
Purchase of furniture and equipment		(47,832	)		(269,436	)		(235,057	)
Net cash used for investing activities		(127,565,708	)		(116,951,128	)		(74,512,190	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings		188,177,000			353,580,000			68,900,000
Repayments on borrowings		(121,657,000	)		(276,850,000	)		(89,895,458	)
Deferred offering costs		—			(159,620	)		—
Net proceeds from sale of common stock		60,517,044			36,652,098			106,288,919
Dividends paid		(20,217,670	)		(10,885,371	)		(5,211,178	)
Decrease (increase) in restricted cash		(5,373,396	)		2,692,522			(4,806,328	)
Deferred financing costs		(122,990	)		(73,598	)		(1,204,256	)
Net cash provided by financing activities		101,322,988			104,956,031			74,071,699
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(3,422,192	)		1,839,802			(119,636	)
CASH AND CASH EQUIVALENTS AT:
Beginning of year		4,211,643			2,371,841			2,491,477
End of year	$	789,451		$	4,211,643		$	2,371,841
Supplemental information:
Interest paid	$	7,124,181		$	3,869,208		$	3,436,464
Non-cash financing activities:
Dividends reinvested in common stock	$	2,212,996		$	1,054,090		$	242,737
Dividends declared but not paid	$	6,814,650		$	4,904,818		$	—

See Notes to Consolidated Financial Statements

F-27

PATRIOT CAPITAL FUNDING, INC.

Consolidated Statements of Changes in Net Assets

	2007			2006			2005
Operations:
Net investment income	$	22,745,121		$	15,020,644		$	1,727,881
Net realized gain (loss) on investments		91,601			(3,262,966	)		—
Net unrealized appreciation (depreciation) on investments		(3,637,706	)		3,817,931			(2,965,175	)
Net unrealized appreciation (depreciation) on interest rate swap		(775,326	)		12,961			—
Net increase (decrease) in net assets from operations		18,423,690			15,588,570			(1,237,294	)
Shareholder transactions:
Distributions to stockholders from net investment income		(22,745,121	)		(15,020,644	)		(1,727,881	)
Tax return of capital		(1,592,314	)		(2,484,892	)		—
Distributions in excess of net investment income		(3,063	)		661,257			(3,483,297	)
Net decrease in net assets from shareholder distributions		(24,340,498	)		(16,844,279	)		(5,211,178	)
Capital share transactions:
Issuance of common stock		60,517,045			36,652,098			106,046,182
Issuance of common stock under dividend reinvestment plan		2,212,996			1,054,090			242,737
Stock option compensation		675,822			505,785			—
Net increase in net assets from capital share transactions		63,405,863			38,211,973			106,288,919
Total increase in net assets		57,489,055			36,956,264			99,840,447
Net assets at beginning of period		164,108,629			127,152,365			27,311,918
Net assets at end of period	$	221,597,684		$	164,108,629		$	127,152,365
Net asset value per common share	$	10.73		$	10.37		$	10.48
Common shares outstanding at end of period		20,650,455			15,821,994			12,136,655

See Notes to Consolidated Financial Statements

F-28

PATRIOT CAPITAL FUNDING, INC.

Consolidated Schedule of Investments

December 31, 2007

Company(1)	Company
(Industry)	Description	Investment	Principal		Cost		Value
Control investments (greater than 25% owned):
Fischbein, LLC (Machinery)	Designer and manufacturer of packaging equipment	Senior Subordinated Debt (16.5%, Due 5/13) (2) (3) Membership Interest — Class A (4)	$	4,211,988	$	4,211,988 2,800,000	$	4,211,988 5,148,000
Total Control investments (represents 2.4% of total investments at fair value)					$	7,011,988	$	9,359,988
Affiliate investments (5% to 25% owned):
Aylward Enterprises, LLC(5) (Machinery)	Manufacturer of packaging equipment	Revolving Line of Credit (8.7%, Due 2/12) (3) Senior Secured Term Loan A (9.5%, Due 2/12) (3)	$	3,700,000 8,292,188	$	3,700,000 8,292,188	$	3,700,000 8,292,188
		Senior Subordinated Debt (14.5%, Due 8/12) (2)		6,424,702		6,424,702		6,424,702
		Membership Interest (4)				1,250,000		—
KTPS Holdings, LLC (Textiles & Leather)	Manufacturer and distributor of specialty pet products	Revolving Line of Credit (8.2%, Due 1/12) (3) Senior Secured Term Loan A (8.4%, Due 1/12) (3) Senior Secured Term Loan B (12.0%, Due 1/12) (3)		300,000 6,012,500 1,985,000		300,000 6,012,500 1,985,000		300,000 6,012,500 1,985,000
		Senior Subordinated Debt (15.0%, Due 3/12) (2) (3)		4,081,878		4,081,878		4,081,878
		Membership Interest — Class A (4)				730,020		769,000
		Membership Interest — Common (4)				19,980		87,900
Nupla Corporation (Home & Office Furnishings, Housewares & Durable Consumer Products)	Manufacturer and marketer of professional high-grade fiberglass-handled striking and digging tools	Revolving Line of Credit (9.5%, Due 9/12) (3) Senior Secured Term Loan A (8.8%, Due 9/12) (3) Senior Subordinated Debt (14.0%, Due 3/13) (2) Preferred Stock (4) Common Stock (4)		550,000 5,678,125 3,019,688		550,000 5,678,125 3,019,688 493,427 25,000		550,000 5,678,125 3,019,688 493,427 38,300
Smart, LLC (5) (Diversified/Conglomerate Service)	Provider of tuition management services	Revolving Line of Credit (12.3%, Due 8/11) (3) Senior Secured Term Loan A (12.3%, Due 8/11) (3) Senior Secured Term Loan B (19.0%, Due 2/12) (2) (3)		870,000 3,862,500 3,668,965		870,000 3,862,500 3,668,965		870,000 3,862,500 3,668,965
		Convertible Subordinated Note (22.0%, Due 8/12)		250,000		250,000		250,000
		Membership Interest — Class B (4)				1,000,000		729,100
Sport Helmets Holdings, LLC (5) (Personal & Nondurable Consumer Products)	Manufacturer of protective headgear	Senior Secured Term Loan A (9.0%, Due 12/13) Senior Secured Term Loan B (9.5%, Due 12/13) Senior Subordinated Debt (15.0%, Due 6/14) (2) Common Stock (4)		4,500,000 7,500,000 8,011,333		4,500,000 7,500,000 8,011,333 2,000,00		4,500,000 7,500,000 8,011,333 1,901,500
Vince & Associates Clinic Research, Inc. (Healthcare, Education & Childcare)	Provider of clinical testing services	Senior Secured Term Loan (10.0%, Due 11/12) (2) (3) Senior Subordinated Debt (15.0%, Due 5/13) (2) Convertible Preferred Stock (4)		7,500,000 5,521,561		7,500,000 5,521,561 500,000		7,500,000 5,521,561 592,900
Total Affiliate investments (represents 22.2% of total investments at fair value)					$	87,746,867	$	86,340,567
Non-control/non-affiliate investments (less than 5% owned):
ADAPCO, Inc. (Ecological)	Distributor of specialty chemicals and contract application services	Revolving Line of Credit (9.0%, Due 7/11) (3) Senior Secured Term Loan A (10.5%, Due 6/11) (3) Common Stock (4)	$	2,200,000 13,016,250	$	2,200,000 13,016,250 500,000	$	2,200,000 12,316,300 —
Aircraft Fasteners International, LLC (Machinery)	Distributor of fasteners and related hardware for use in aerospace, electronics and defense industries	Senior Secured Term Loan (8.3%, Due 11/12) (3) Senior Subordinated Debt (14.0%, Due 5/13) (2) (3) Convertible Preferred Stock (4)		6,800,000 5,200,000		6,800,000 5,200,000 253,342		6,800,000 5,200,000 341,800
Allied Defense Group, Inc. (Aerospace & Defense)	Diversified defense company	Common Stock (4)				463,168		161,600
Arrowhead General Insurance Agency, Inc. (6) (Insurance)	Insurance agency and program specialist	Junior Secured Term Loan (12.1%, Due 2/13) (3)		5,000,000		5,000,000		4,500,000
Borga, Inc. (Mining, Steel, Iron & Nonprecious Metals)	Manufacturer of pre-fabricated metal building systems	Senior Secured Term Loan A (8.8%, Due 3/09) (3) Senior Secured Term Loan B (11.8%, Due 5/10) (3) Senior Secured Term Loan C (16.0%, Due 5/10) (2) (3) Common Stock Warrants (4)		1,321,000 1,785,250 7,794,323		1,321,000 1,785,250 7,794,323 20,250		1,321,000 1,785,250 7,794,323 —
Caleel + Hayden, LLC (5) (Personal & Nondurable Consumer Products)	Provider of proprietary branded professional skincare and cosmetic products to physicians and spa communities	Senior Secured Term Loan B (9.6%, Due 11/11) (3) Senior Subordinated Debt (14.5%, Due 11/12) (2) (3) Common Stock (4)		10,879,062 6,250,000		10,879,062 6,250,000 750,000		10,879,062 6,250,000 1,058,600

F-29

Company(1)	Company
(Industry)	Description	Investment	Principal		Cost		Value
Cheeseworks, Inc. (Grocery)	Distributor of specialty cheese and food products	Revolving Line of Credit (7.6%, Due 6/11) (3) Senior Secured Term Loan (10.7%, Due 6/11) (3)		5,080,219 10,648,560		5,080,219 10,648,560		5,080,219 10,648,560
CS Operating, LLC (5) (Buildings & Real Estate)	Provider of maintenance, repair and replacement of HVAC, electrical, plumbing, and foundation repair	Senior Secured Term Loan A (9.1%, Due 7/12) (3) Senior Subordinated Debt (14.5%, Due 1/13) (2) (3)		2,325,000 2,527,328		2,325,000 2,527,328		2,325,000 2,527,328
Copperhead Chemical Company, Inc. (Chemicals, Plastics & Rubber)	Manufacturer of bulk pharmaceuticals	Senior Subordinated Debt (15.3%, Due 1/13) (2) (3)		3,540,943		3,540,943		3,540,943
Custom Direct, Inc. (6) (Printing & Publishing)	Direct marketer of checks and other financial products and services	Junior Secured Term Loan (10.8%, Due 12/14) (3)		2,000,000		2,000,000		1,750,000
Dover Saddlery, Inc. (Retail Stores)	Equestrian products catalog retailer	Common Stock (4)				148,200		129,200
Eight O’Clock Coffee Company (6) (Beverage, Food & Tobacco)	Manufacturer, distributor, and marketer of coffee	Junior Secured Term Loan (11.4%, Due 7/13) (3)		9,000,000		9,000,000		9,000,000
Employbridge Holding Company (5) (6) (Personal, Food & Miscellaneous Services)	A provider of specialized staffing services	Junior Secured Term Loan (11.8%, Due 10/13) (3)		3,000,000		3,000,000		2,910,000
Encore Legal Solutions, Inc. (Printing & Publishing)	Legal document management services	Junior Secured Term Loan A (10.7%, Due 6/10) (2) (3) Junior Secured Term Loan B (10.8%, Due 6/10) (2) (3) Senior Subordinated Debt (15.0%, Due 6/10) (2) (3) Common Stock Warrants (4)		3,949,437 7,193,143 5,926,861		3,949,437 7,193,143 5,926,861 350,000		3,949,437 7,193,143 3,526,900 —
EXL Acquisition Corp. (Electronics)	Manufacturer of lab testing supplies	Senior Secured Term Loan A (8.4%, Due 3/11) (3) Senior Secured Term Loan B (8.9%, Due 3/12) (3)		4,800,000 4,851,840		4,800,000 4,851,840		4,800,000 4,851,840
		Senior Secured Term Loan C (9.4%, Due 3/12) (3)		2,992,500		2,992,500		2,992,500
		Senior Secured Term Loan D (15.0%, Due 3/12) (3)		7,000,000		7,000,000		7,000,000
		Common Stock — Class A (4)				2,475		123,900
		Common Stock — Class B (2)				254,057		255,325
Fairchild Industrial Products, Co. (Electronics)	Manufacturer of industrial controls and power transmission products	Senior Secured Term Loan A (8.3%, Due 7/10) (3) Senior Secured Term Loan B (10.0%, Due 7/11) (3) Senior Subordinated Debt (14.8%, Due 7/11) (2) Preferred Stock — Class A (2)		5,580,000 9,325,000 5,460,000		5,580,000 9,325,000 5,460,000 327,879		5,580,000 9,325,000 5,460,000 327,879
		Common Stock — Class B (4)				121,598		293,200
Impact Products, LLC (Machinery)	Distributor of janitorial supplies	Junior Secured Term Loan B (9.5%, Due 9/12) (3) Junior Secured Term Loan C (13.5%, Due 9/12) (2) (3)		8,968,750 5,547,996		8,968,750 5,547,996		8,968,750 5,547,996
Innovative Concepts in Entertainment, Inc. (Personal & Nondurable Consumer Products)	Manufacturer of coin operated games	Senior Secured Term Loan A (9.0%, Due 2/11) (3) Senior Secured Term Loan B (9.5%, Due 2/11) (3) Senior Secured Term Loan C (13.0%, Due 8/11) (3)		4,312,500 3,537,000 3,900,000		4,312,500 3,537,000 3,900,000		4,312,500 3,537,000 3,900,000
Keltner Enterprises, LLC(5) (Oil & Gas)	Distributor of automotive oils, chemicals and parts	Senior Subordinated Debt (14.0%, Due 12/11) (3)		3,850,000		3,850,000		3,850,000
L.A. Spas, Inc. (Chemicals, Plastics & Rubber)	Manufacturer of above ground spas	Senior Subordinated Debt (15.5%, Due 1/10) (2) (3) Common Stock Warrants (4)		7,271,249		7,271,249 5,000		7,271,249 —
LHC Holdings Corp.	Provider of home healthcare services	Revolving Line of Credit (8.8%, Due 11/12) (3) Senior Secured Term Loan A (8.8%, Due 11/12) (3)		300,000 5,100,000		300,000 5,100,000		300,000 5,100,000
		Senior Subordinated Debt (14.5%, Due 5/13)		4,565,000		4,565,000		4,565,000
		Membership Interest (4)				125,000		120,500
Mac & Massey Holdings, LLC (Grocery)	Broker and distributor of ingredients to manufacturers of food products	Senior Subordinated Debt (16.5%, Due 2/13) (2) Common Stock (4)		7,438,280		7,438,280 250,000		7,438,280 388,200
Metrologic Instruments, Inc. (6) (Electronics)	Manufacturer of imaging and scanning equipment	Senior Secured Term Loan (7.8%, Due 4/14) (3) Junior Secured Term Loan (11.1%, Due 4/15)		992,500 1,000,000		992,500 1,000,000		942,900 930,000

F-30

Company(1)	Company
(Industry)	Description	Investment	Principal		Cost			Value
Nice-Pak Products, Inc. (6) (Containers, Packaging & Glass)	Manufacturer of pre-moistened wipes	Senior Secured Term Loan (8.5%, Due 6/14) (3)		2,985,000		2,985,000			2,895,500
Northwestern Management Services, LLC (Healthcare, Education & Childcare)	Provider of dental services	Senior Secured Term Loan A (8.9%, Due 12/12) (3) Senior Secured Term Loan B (9.4%, Due 12/12) (3) Senior Subordinated Debt (15.0%, Due 6/13) (2) Common Stock (4)		6,000,000 1,250,000 2,754,125		6,000,000 1,250,000 2,754,125 500,000			6,000,000 1,250,000 2,754,125 504,400
Prince Mineral Company, Inc. (Metals & Minerals)	Manufacturer of pigments	Junior Secured Term Loan (9.9%, Due 12/12) (3) Senior Subordinated Debt (14.0%, Due 7/13) (2) (3)		11,375,000 11,913,159		11,375,000 11,913,159			11,375,000 11,913,159
Quartermaster, Inc. (Retail Stores)	Retailer of uniforms and tactical equipment to law enforcement and security professionals	Revolving Line of Credit (9.5%, Due 12/10) (3) Senior Secured Term Loan A (9.4%, Due 12/10) (3) Senior Secured Term Loan B (10.6%, Due 12/10) (3) Senior Secured Term Loan C (15.0%, Due 12/11) (2) (3)		500,000 4,276,250 2,568,750 3,298,069		500,000 4,276,250 2,568,750 3,298,069			500,000 4,276,250 2,568,750 3,298,069
R-O-M Corporation (Automobile)	Manufacturer of doors, ramps and bulk heads for fire trucks and food transportation	Senior Secured Term Loan A (8.0%, Due 2/13) (3) Senior Secured Term Loan B (9.3%, Due 5/13) (3) Senior Subordinated Debt (15.0%, Due 8/13) (2)		7,440,000 8,464,500 9,100,000		7,440,000 8,464,500 9,100,000			7,440,000 8,464,500 9,100,000
Sidump’r Trailer Company, Inc. (Automobile)	Manufacturer of side dump trailers	Revolving Line of Credit (9.8%, Due 1/11) (3) Senior Secured Term Loan A (8.5%, Due 1/11) (3) Senior Secured Term Loan B (11.5%, Due 1/11) (3)		1,675,000 2,047,500 2,320,625		1,675,000 2,047,500 2,320,625			1,675,000 2,047,500 2,320,625
		Senior Secured Term Loan C (15.0%, Due 7/11) (2) (3)		3,230,074		3,230,074			3,230,074
		Senior Subordinated Debt (12.0%, Due 1/12) (3)		75,000		75,000			75,000
		Preferred Stock (2)				87,271			—
		Common Stock (4)				25			—
Total Non-control/non-affiliate investments (represents 75.4% of total investments at fair value)					$	297,661,308		$	293,058,636
Total Investments					$	392,420,163		$	388,759,191
Unearned Income						(4,555,713	)		(4,555,713	)
Total Investments Net of Unearned Income					$	387,864,450		$	384,203,478

(1)	Affiliate investments are generally defined under the Investment Company Act of 1940, as amended (the “1940 Act”) as companies in which the Company owns at least 5% but not more than 25% of the voting securities of the company. Controls investments are generally defined under the 1940 Act as companies in which the Company owns at more than 25% of the voting securities of the company.
(2)	Amount includes payment-in-kind (PIK) interest or dividends.
(3)	Pledged as collateral under the Company’s Securitization Facility. See Note 4 to Consolidated Financial Statements.
(4)	Non-income producing.
(5)	Some of the investments listed are issued by an affiliate of the listed portfolio company.
(6)	Syndicated investment which has been originated by another financial institution and broadly distributed.

See Notes to Consolidated Financial Statements

F-31

PATRIOT CAPITAL FUNDING, INC.
Consolidated Schedule of Investments
December 31, 2006

Company(1)
(Industry)	Company Description	Investment	Principal		Cost		Value
Affiliate investments (5% to 25% owned):
Smart, LLC (5) (Diversified/Conglomerate Service)	Provider of tuition management services	Senior Secured Term Loan A (10.4%, Due 6/11) (3) Senior Secured Term Loan B (16.5%, Due 2/12) (2) (3) Membership Interest — Class B (4)	$	4,425,000 3,541,605	$	4,425,000 3,541,605 1,000,000	$	4,425,000 3,541,605 959,000
Total Affiliate investments (represents 3.4% of total investments at fair value)					$	8,966,605	$	8,925,605
Non-control/non-affiliate investments (less than 5% owned):
ADAPCO, Inc (Ecological)	Distributor of specialty chemicals and contract application services	Senior Secured Term Loan A (10.9%, Due 6/11) (3) Common Stock (4)	$	13,350,000	$	13,350,000 500,000	$	13,350,000 328,500
Agent Media Corporation (Printing & Publishing)	Publisher of insurance industry periodicals	Senior Secured Term Loan A (10.1%, Due 9/08) (3) Senior Secured Term Loan B (12.4%, Due 9/09) (3) Common Stock Warrants (4)		1,000,000 2,130,105		1,000,000 2,130,105 31,000		1,000,000 2,130,105 36,200
Allied Defense Group, Inc. (Aerospace & Defense)	Diversified defense company	Common Stock Warrants (4)				463,168		505,800
Arrowhead General Insurance Agency, Inc. (6) (Insurance)	Insurance agency and program specialist	Junior Secured Term Loan (12.6%, Due 2/13) (3)		5,000,000		5,000,000		5,075,000
Borga, Inc. (Mining, Steel, Iron & Nonprecious Metals)	Manufacturer of pre-fabricated metal building systems	Senior Secured Term Loan A (8.9%, Due 3/09) (3) Senior Secured Term Loan B (11.9%, Due 5/10) (3) Senior Secured Term Loan C (16.0%, Due 5/10) (2) (3) Common Stock Warrants (4)		1,208,500 1,810,250 7,485,057		1,208,500 1,810,250 7,485,057 20,250		1,208,500 1,810,250 7,485,057 21,200
Caleel + Hayden, LLC (5) (Personal & Nondurable Consumer Products)	Provider of proprietary branded professional skincare and cosmetic products to physicians and spa communities	Senior Secured Term Loan A (8.1%, Due 11/10) Senior Secured Term Loan B (10.1%, Due 11/11) (3) Senior Subordinated Debt (14.5%, Due 11/12) (2) (3) Common Stock (4)		5,000,000 11,000,000 6,272,135		5,000,000 11,000,000 6,272,135 750,000		5,000,000 11,000,000 6,272,135 858,100
Cheeseworks, Inc. (Grocery)	Distributor of specialty cheese and food products	Revolving Line of Credit (8.0%, Due 6/11) (3) Senior Secured Term Loan (11.0%, Due 6/11) (3)		5,080,219 11,845,374		5,080,219 11,845,374		5,080,219 11,845,374
Copperhead Chemical Company, Inc. (Chemicals, Plastics & Rubber)	Manufacturer of bulk pharmaceuticals	Senior Subordinated Debt (15.3%, Due 11/10) (2) (3)		4,824,790		4,824,790		4,824,790
Dover Saddlery, Inc. (Retail Stores)	Equestrian products catalog retailer	Senior Subordinated Debt (11.5%, Due 9/09) (3) Common Stock (4)		3,000,000		3,000,000 148,200		3,000,000 171,200
Eight O’Clock Coffee Company (6) (Beverage, Food & Tobacco)	Manufacturer, distributor, and marketer of coffee	Junior Secured Term Loan (11.9%, Due 7/13) (3)		9,000,000		9,000,000		9,146,250
Employbridge Holding Company (5) (6) (Personal, Food & Miscellaneous Services)	A provider of specialized staffing services	Junior Secured Term Loan (12.4%, Due 10/13) (3)		3,000,000		3,000,000		3,007,500
Encore Legal Solutions, Inc. (Printing & Publishing)	Legal document management services	Junior Secured Term Loan A (10.6%, Due 12/09) (3) Junior Secured Term Loan B (10.8%, Due 12/09) (3) Senior Subordinated Debt (15.0%, Due 5/10) (2) (3) Common Stock Warrants (4)		3,819,500 6,907,625 5,098,906		3,819,500 6,907,625 5,098,906 350,000		3,819,500 6,907,625 5,098,906 —
EXL Acquisition Corp. (Electronics)	Manufacturer of lab testing supplies	Senior Secured Term Loan A (8.6%, Due 3/11) (3) Senior Secured Term Loan B (9.1%, Due 3/12) (3) Senior Secured Term Loan D (15.0%, Due 3/12) (2) (3)		7,100,000 2,382,000 5,000,833		7,100,000 2,382,000 5,000,833		7,100,000 2,382,000 5,000,833
		Common Stock — Class A (4)				2,475		86,300
		Common Stock — Class B (2)				267,466		268,266
Fairchild Industrial Products, Co. (Electronics)	Manufacturer of industrial controls and power transmission products	Senior Secured Term Loan A (9.4%, Due 7/10) (3) Senior Secured Term Loan B (11.4%, Due 7/11) (3) Senior Subordinated Debt (15.5%, Due 7/11) (2) Preferred Stock — Class A (2)		9,770,000 2,793,750 5,368,427		9,770,000 2,793,750 5,368,427 399,401		9,770,000 2,793,750 5,368,427 399,401
		Common Stock — Class B (4)				121,598		80,400
Impact Products, LLC (Machinery)	Distributor of janitorial supplies	Junior Secured Term Loan B (9.6%, Due 9/12) (3) Junior Secured Term Loan C (13.5%, Due 9/12) (2) (3)		7,462,500 5,596,938		7,462,500 5,596,938		7,462,500 5,596,938

F-32

Company(1)
(Industry)	Company Description	Investment	Principal		Cost			Value
Innovative Concepts in Entertainment, Inc. (Personal & Nondurable Consumer Products)	Manufacturer of coin operated games	Senior Secured Term Loan A (9.4%, Due 2/11) (3) Senior Secured Term Loan B (9.9%, Due 2/11) (3) Senior Secured Term Loan C (13.0%, Due 8/11) (3)		5,550,000 3,582,000 3,900,000		5,550,000 3,582,000 3,900,000			5,550,000 3,582,000 3,900,000
Keltner Enterprises, LLC(5) (Oil & Gas)	Distributor of automotive oils, chemicals and parts	Senior Subordinated Debt (14.0%, Due 12/11) (3)		3,850,000		3,850,000			3,850,000
L.A. Spas, Inc. (Chemicals, Plastics & Rubber)	Manufacturer of above ground spas	Senior Subordinated Debt (15.5%, Due 1/10) (2) (3) Common Stock Warrants (4)		7,020,843		7,020,843 5,000 —			7,020,843
Natural Products Group, LLC (5) (6) (Personal & Nondurable Consumer Products)	Manufacturer and marketer of branded personal care products	Junior Secured Term Loan (11.9%, Due 12/13) (3)		4,000,000		4,000,000			4,040,000
Prince Mineral Company, Inc. (Metals & Minerals)	Manufacturer of pigments	Junior Secured Term Loan (10.3%, Due 12/12) (3) Senior Subordinated Debt (14.0%, Due 7/13) (2) (3)		11,475,000 11,803,278		11,475,000 11,803,278			11,475,000 11,803,278
Quartermaster, Inc. (Retail Stores)	Retailer of uniforms and tactical equipment to law enforcement and security professionals	Senior Secured Term Loan A (9.9%, Due 12/10) (3) Senior Secured Term Loan B (11.2%, Due 12/10) (3) Senior Secured Term Loan C (15.0%, Due 12/11) (2) (3)		6,000,000 2,600,000 3,199,633		6,000,000 2,600,000 3,199,633			6,000,000 2,600,000 3,199,633
R-O-M Corporation (Automobile)	Manufacturer of doors, ramps and bulk heads for fire trucks and food transportation	Revolving Line of Credit (9.1%, Due 12/09) (3) Senior Secured Term Loan A (9.0%, Due 12/09) (3) Senior Secured Term Loan B (9.4%, Due 12/10) (3) Senior Subordinated Debt (16.0%, Due 12/10) (2) (3)		1,500,000 2,958,000 3,374,500 7,082,680		1,500,000 2,958,000 3,374,500 7,082,680			1,500,000 2,958,000 3,374,500 7,082,680
Robert Rothschild Farm, Inc. (Beverage, Food & Tobacco)	Manufacturer of specialty food products	Senior Secured Term Loan B (9.1%, Due 7/11) (3) Senior Subordinated Debt (16.3%, Due 1/12) (2) (3)		4,500,000 4,902,868		4,500,000 4,902,868			4,500,000 4,902,868
Sidump’r Trailer Company, Inc. (Automobile)	Manufacturer of side dump trailers	Revolving Line of Credit (10.8%, Due 1/11) (3) Senior Secured Term Loan A (9.0%, Due 1/11) (3) Senior Secured Term Loan B (12.0%, Due 1/11) (3)		430,000 2,660,000 2,344,125		430,000 2,660,000 2,344,125			430,000 2,660,000 2,344,125
		Senior Secured Term Loan C (14.0%, Due 7/11) (2) (3)		3,161,694		3,161,694			3,161,694
		Senior Subordinated Debt (12.0%, Due 1/12) (3)		75,000		75,000			75,000
		Preferred Stock (2)		80,808		80,808			80,808
		Common Stock (4)		25		25			49,700
Stolle Machinery Company, LLC (6) (Machinery)	Provider of capital equipment used in the production of aluminum or steel beverage and food cans	Junior Secured Term Loan (11.4%, Due 9/13)		500,000		500,000			502,500
Total Non-control/non-affiliate investments (represents 96.6% of total investments at fair value)					$	251,915,921		$	251,933,655
Total Investments					$	260,882,526		$	260,859,260
Unearned Income						(3,610,884	)		(3,610,884	)
Total Investments Net of Unearned Income					$	257,271,642		$	257,248,376

(1)	The Company does not “control,” and, except with respect to Smart, LLC, is not an “affiliate” of, any of its portfolio companies, each as defined in the Investment Company Act of 1940, as amended (the “1940 Act”). In general, under the 1940 Act, the Company “controls” a portfolio company if it owns 25% or more of its voting securities and is an “affiliate” of a portfolio company if the Company owns 5% or more of its voting securities.
(2)	Amount includes payment-in-kind (PIK) interest or dividends.
(3)	Pledged as collateral under the Company’s Securitization Facility. See Note 4 to Consolidated Financial Statements.
(4)	Non-income producing.
(5)	Some of the investments listed are issued by an affiliate of the listed portfolio company.
(6)	Syndicated investment which has been originated by another financial institution and broadly distributed.

See Notes to Consolidated Financial Statements

F-33

PATRIOT CAPITAL FUNDING, INC.

Notes to Consolidated Financial Statements

Note 1.   Organization

Patriot Capital Funding, Inc. (the “Company”) is a specialty finance company that provides customized financing solutions to small- to mid-sized companies. The Company typically invests in companies with annual revenues between $10 million and $100 million, and companies which operate in diverse industry sectors. Investments usually take the form of senior secured loans, junior secured loans and subordinated debt investments — which may contain equity or equity-related instruments. The Company also offers “one-stop” financing, which typically includes a revolving credit line, one or more term senior loans and a subordinated debt investment.

On July 27, 2005, the Company elected to be treated as a business development company under the Investment Company Act of 1940, as amended. On August 2, 2005, the Company completed an initial public offering of shares of its common stock. The Company has elected to be treated as a regulated investment company (“RIC”) under the Internal Revenue Code of 1986, as amended (the “Code”).

Note 2.   Summary of Significant Accounting Policies

Basis of Presentation

Prior to July 27, 2005, the Company had originated, arranged and serviced the investments made by Wilton Funding, LLC (“Wilton”), which had invested in debt instruments and warrants of U.S.-based companies. On July 27, 2005, Wilton merged with and into the Company. As both the Company and Wilton were under common ownership and control, the merger was accounted for like a pooling of interests whereby the net assets of Wilton were recorded at their carrying amounts and the accompanying 2005 financial statements are presented by combining the assets, liabilities and operations of Wilton and the Company prior to the merger, with all significant intercompany balances and transactions eliminated.

Since the merger, the accompanying financial statements reflect the consolidated accounts of the Company, including its special purpose financing subsidiary, Patriot Capital Funding LLC I, with all significant intercompany balances eliminated. The financial results of the Company’s portfolio investments are not consolidated in the Company’s financial statements.

Use of Estimates

The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America that require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents consist of demand deposits and highly liquid investments with original maturities of three months or less. Cash and cash equivalents are carried at cost which approximates fair value.

Restricted Cash

Restricted cash at December 31, 2007 and 2006, consisted of cash held in an operating and money market account, pursuant to the Company’s agreement with its lender.

Concentration of Credit Risk

The Company places its cash and cash equivalents with financial institutions and, at times, cash held in checking accounts may exceed the Federal Deposit Insurance Corporation insured limit.

F-34

PATRIOT CAPITAL FUNDING, INC.

Notes to Consolidated Financial Statements — (Continued)

Investment Valuation

Investments are recorded at fair value with changes in value reflected in operations in unrealized appreciation (depreciation) of investments. The Company’s process for determining the fair value of the investments begins with determining the enterprise value of the portfolio company. There is no one methodology to determine enterprise value and, in fact, for any one portfolio company, enterprise value is best expressed as a range of fair values, from which the Company derives a single estimate of enterprise value.

To determine the enterprise value of a portfolio company, the Company analyzes the historical and projected financial results. The Company generally requires portfolio companies to provide annual audited and quarterly and monthly unaudited financial statements, as well as annual projections for the upcoming fiscal year. Typically in the private equity business, companies are valued based on multiples of EBITDA, cash flow, net income, revenues or, in limited instances, book value. When using EBITDA to determine enterprise value, the Company may adjust EBITDA for non-recurring items. Such adjustments are intended to normalize EBITDA to reflect the portfolio company’s earnings power. Adjustments to EBITDA may include compensation to previous owners, acquisition, recapitalization, or restructuring related items or one-time non-recurring income or expense items.

In determining a multiple to use for valuation purposes, the Company looks to private merger and acquisition statistics, discounted public trading multiples or industry practices. In estimating a reasonable multiple, the Company considers not only the fact that our portfolio company may be a private company relative to a peer group of public comparables, but the Company also considers the size and scope of its portfolio companies and its specific strengths and weaknesses. In some cases, the best valuation methodology may be a discounted cash flow analysis based on future projections. If a portfolio company is distressed, a liquidation analysis may provide the best indication of enterprise value.

If there is adequate enterprise value to support the repayment of the debt securities, the fair value of these securities normally corresponds to cost plus amortized original issue discount unless the borrower’s condition or other factors lead to a determination of fair value at a different amount. The fair value of equity interests in portfolio companies is determined based on various factors, including the enterprise value remaining for equity holders after the repayment of the portfolio company’s debt and other preference capital, and other pertinent factors such as recent offers to purchase a portfolio company, recent transactions involving the purchase or sale of the portfolio company’s equity securities, or other liquidation events. The determined fair values of equity securities are generally discounted to account for restrictions on resale and minority ownership positions.

Duff & Phelps, LLC, an independent valuation firm (“Duff & Phelps”), provided third party valuation consulting services to the Company which consisted of certain limited procedures that the Company engaged them to perform. At December 31, 2007 and 2006, the Company asked Duff & Phelps to perform the limited procedures on certain investments in its portfolio. The Company’s Board of Directors is solely responsible for the valuation of the Company’s portfolio investments at fair value as determined in good faith pursuant to the Company’s valuation policy and consistently applied valuation process.

Property, Equipment and Leasehold Improvements

Property, equipment and leasehold improvements are included in other assets and are carried at cost and are depreciated using the straight-line method over the estimated useful lives of the related assets up to five years and over the shorter of the economic life or the term of the lease for leasehold improvements.

F-35

PATRIOT CAPITAL FUNDING, INC.

Notes to Consolidated Financial Statements — (Continued)

Debt Issuance Costs

Debt issuance costs represent fees and other direct incremental costs incurred in connection with the Company’s borrowings. These amounts are amortized into the statement of operations ratably over the contractual term of the borrowing. At December 31, 2007 and 2006, unamortized debt issuance costs were $609,000 and $747,000 and included in other assets in the accompanying balance sheets. Amortization expense was $262,000, $366,000, and $174,000 for the years ended 2007, 2006 and 2005, respectively.

Interest Income Recognition

Interest income is recorded on an accrual basis to the extent that such amounts are expected to be collected. When a loan becomes 90 days or more past due, or if the Company otherwise does not expect the debtor to be able to service its debt or other obligations, the Company will place the loan on non-accrual status and cease recognizing interest income on that loan until the borrower has demonstrated the ability and intent to pay contractual amounts due. However, the Company remains contractually entitled to this interest and may collect it upon the sale or recapitalization of the portfolio company. At December 31, 2007 and 2006, none of the Company’s loans or debt securities were on non-accrual status. Investment origination fees are deferred and amortized as adjustments to the related yield over the contractual life of the investment. Unearned income was $4.6 million and $3.6 million as of December 31, 2007 and 2006, respectively.

In certain investment arrangements, the Company may also receive warrants or other equity interests in connection with a debt investment. The Company records the financial instruments received at estimated fair value as determined by the Board of Directors. Fair values are determined using various valuation models which estimate the underlying value of the associated entity. These models are then applied to the Company’s ownership share considering any discounts for transfer restrictions or other terms which impact the value. Changes in the fair value of these financial instruments are recorded through our statement of operations in unrealized appreciation (depreciation) on investments. Any warrants and other equity interests that the Company receives in connection with its debt investments will generally be valued as part of the negotiation process with the particular portfolio company. As a result, a portion of the aggregate purchase price for the debt investments, and the warrants and other equity interests will be allocated to the warrants and other equity interests that the Company receives. This will generally result in a “discount” on the debt investment, which the Company must recognize as interest income. The resulting “discount,” if any, on the debt investment is accreted into interest income over the term of the investment. At the time the investment is made, any associated warrants or other equity instruments are recorded based upon fair value of the purchase price allocation, if any, as set forth in the investment agreement together with a corresponding discount. The resulting discount, if any, on the investment from recordation of warrant or other equity instruments is accreted into interest income over the term of the investment.

Fee Income Recognition

The Company receives a variety of fees in the ordinary course of conducting its business, including Advisory Fees, Loan Fees, Arrangement Fees, Amendment Fees, Unused Fees, Draw Fees, Annual Administrative Fees, Anniversary Fees, and Prepayment Fees (collectively the “Fees”). In a limited number of cases, the Company may also receive a non-refundable deposit earned upon the termination of a transaction. The Company recognizes Fees, which qualify as loan origination fees, in accordance with the Statement of Financial Accounting Standards No. 91 “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases,” (“SFAS 91”). SFAS 91 requires that the Company recognize loan origination fees using the interest method. In addition, the Company capitalizes and offsets direct loan origination costs against the Fees received and only defers and amortizes the net Fee. During the year ended December 31, 2007, the Company capitalized $610,000 of

F-36

PATRIOT CAPITAL FUNDING, INC.

Notes to Consolidated Financial Statements — (Continued)

direct loan origination costs and offset $668,000 of capitalized costs against fees received of $4.3 million. At December 31, 2007, the remaining balance of capitalized costs totaled $46,000, which relates to loan originations in process. During the year ended December 31, 2006, the Company capitalized $411,000 of direct loan origination costs and offset $409,000 of capitalized costs against fees received of $2.3 million. During the year ended December 31, 2005, the Company capitalized $203,000 of direct loan origination costs and offset $102,000 of capitalized costs against fees received of $352,000.

The Company accounts for its other Fees in accordance with the Emerging Issues Task Force Issue 00-21 “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). EITF 00-21 addresses revenue arrangements with multiple deliverables and states that the total consideration received for the arrangement be allocated to each unit based upon each unit’s relative fair value. In determining the fair value of various Fees it receives, the Company will first rely on data compiled through its investment and syndication activities and secondly on independent third party data. Fees for which fair value cannot be reasonably ascertained, will be recognized using the interest method over the anticipated life of the related investment.

During the years ended December 31, 2007, 2006 and 2005, the Company recognized $1.0 million, $1.1 million and $414,000, respectively, of income from fees and other investment income other than loan origination fees. Other investment income consists principally of deferred financing fees and prepayment fees received from portfolio companies on the repayment of their debt facility.

Unearned income activity for the years ended December 31, 2007 and 2006 was as follows:

	2007			2006
Beginning unearned income balance	$	3,610,884		$	3,439,295
Net fees received		3,647,472			2,254,649
Unearned income recognized		(2,702,643	)		(2,083,060	)
Ending unearned income balance	$	4,555,713		$	3,610,884

Payment in Kind Interest/Dividends

The Company has investments in debt and equity securities in its portfolio which contain a payment in kind or “PIK” interest or dividend provision. PIK interest and dividends are computed at the contractual rate specified in each investment agreement and added to the principal balance of the investment and recorded as income. For the years ended December 31, 2007, 2006 and 2005, the Company recorded PIK income of $3.9 million, $2.4 million and $1.8 million, respectively.

PIK related activity for the years ended December 31, 2007 and 2006 was as follows:

	2007			2006
Beginning of period PIK balance	$	2,891,565		$	2,174,974
PIK interest and dividends earned during the year		3,928,159			2,424,927
Sales of investments		—			(383,946	)
Payments received during the year		(2,105,368	)		(1,324,390	)
Ending PIK balance	$	4,714,356		$	2,891,565

To qualify for the federal income tax benefits applicable to RICs (see Accounting Policy Note on Federal Income Taxes), this non-cash source of income is included in the income that must be paid out to stockholders in the form of dividends, even though the Company has not yet collected the cash relating to such income.

F-37

PATRIOT CAPITAL FUNDING, INC.

Notes to Consolidated Financial Statements — (Continued)

Realized Gain or Loss and Unrealized Appreciation or Depreciation of Investments

Realized gain or loss is recorded at the disposition of an investment and is the difference between the net proceeds from the sale and the cost basis of the investment using the specific identification method. Unrealized appreciation or depreciation reflects the difference between the valuation of the investments and the cost basis of the investments.

Stock Options

During 2005, the Company established a stock option plan (the “Plan”) and reserved 1,341,748 shares of common stock for issuance under the Plan. On August 2, 2005, concurrent with the completion of the Company’s initial public offering, options to purchase a total of 1,301,496 shares of common stock were granted to the Company’s executive officers with an exercise price of $14.00 per share (the initial public offering price of the common stock). Such options vest equally over three years from the date of grant and have a ten-year exercise period. In June 2006, the stockholders approved the issuance of an additional 1,089,929 shares of the Company’s common stock upon exercise of options to be granted under the Plan. On June 26, 2006, options to purchase a total of 903,000 shares of common stock were granted to the Company’s executive officers and employees with an exercise price of $10.97 per share (the closing price of the common stock at date of grant). Such options vest equally, on a monthly basis, over three years from the date of grant and have a ten-year exercise period. On February 23, 2007, options to purchase a total of 227,181 shares of common stock were granted to the Company’s executive officers and employees with an exercise price of $14.38 per share (the closing price of the common stock at date of grant). Such options vest equally, on a monthly basis, over three years from the date of grant and have a ten-year exercise period. In June 2007, the stockholders approved the issuance of an additional 1,213,000 shares of the Company’s common stock upon exercise of options to be granted under the Plan. On November 1, 2007, options to purchase a total of 5,000 shares of common stock were granted to the Company’s employees with an exercise price of $11.49 per share (the closing price of the common stock at date of grant). As of December 31, 2007, 2,436,677 options were outstanding, of which 1,382,409 were exercisable. The options have a weighted average remaining contractual life of 8.0 years, a weighted average exercise price of $12.91, and an aggregate intrinsic value of approximately $0.

Prior to January 1, 2006, the Company accounted for the Plan and related grants thereunder using the intrinsic value method prescribed in APB Opinion No. 25, “Accounting for Stock Issued to Employees.” Under this method, no stock-based employee compensation expense is reflected in net income (loss), as all of the options granted under the Plan had an exercise price equal to the market value of the underlying common stock on the date of grant.

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment,” (“SFAS 123R”). The Company has elected the “modified prospective method” of transition as permitted by SFAS 123R. Under this transition method, the Company is required to record compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that were outstanding at the date of adoption. Accordingly, periods prior to adoption are not restated. The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option pricing model. For shares granted in 2005, this model used the following assumptions: annual dividend rate of 8%, risk free interest rate of 4.3%, expected volatility of 21%, and the expected life of the options of 10 years. As a result of the Company’s recent initial public offering, the Company did not have a history of option exercises or forfeitures and, accordingly applied a 10 year expected option life, equal to the life of the grants, in the option pricing model for grants in 2005. For shares granted in 2006, this model used the following assumptions: annual dividend rate of 9.2%, risk free interest rate of 5.25%, expected volatility of 21%, and the expected life of the options of 6.5 years. For shares granted in February 2007, this model used the following assumptions: annual dividend rate of 8.3%,

F-38

PATRIOT CAPITAL FUNDING, INC.

Notes to Consolidated Financial Statements — (Continued)

risk free interest rate of 4.7%, expected volatility of 20%, and the expected life of the options of 6.5 years. For shares granted in November 2007, this model used the following assumptions: annual dividend rate of 11.1%, risk free interest rate of 4.2%, expected volatility of 24%, and the expected life of the options of 6.5 years. For 2006 and 2007 grants, the Company calculated its expected term assumption using guidance provided by SEC Staff Accounting Bulletin 107 (“SAB 107”). SAB 107 allows companies to use a simplified expected term calculation in instances where no historical experience exists, provided that the companies meet specific criteria. The stock options granted by the Company meet those criteria, and the expected terms were determined using the SAB 107 simplified method. Expected volatility was based on historical volatility of similar entities whose share prices and volatility were available for all grants except the November 2007 grant. The November 2007 grant was calculated using the Company’s historical volatility.

Assumptions used on future grants may change as the Company’s actual experience may be different. The weighted average fair value of options granted in 2007, 2006 and 2005 was approximately $0.98, $0.74 and $0.90, respectively, using the Black-Scholes option pricing model. The Company has adopted the policy of recognizing compensation cost for options with graded vesting on a straight-line basis over the requisite service period for the entire award. For the years ended December 31, 2007 and 2006, the Company recorded compensation expense related to stock options of approximately $676,000 and $506,000, respectively, which is included in compensation expense in the Consolidated Statements of Operations. The Company does not record the tax benefits associated with the expensing of stock options since the Company elected to be treated as a RIC under Subchapter M of the Internal Revenue Code and as such, the Company is not subject to federal income tax on the portion of taxable income and gains distributed to stockholders, provided that at least 90% of its annual taxable income is distributed. As of December 31, 2007, there was $896,000 of unrecognized compensation cost related to unvested options which is expected to be recognized over 2.8 years.

Prior to the adoption of SFAS 123R, the Company provided disclosures required under SFAS No. 123, “Accounting for Stock-Based Compensation”. The Company did not recognize stock-based compensation cost in our consolidated statements of operations for periods prior to the adoption of SFAS 123R, as all options granted had an exercise price equal to the closing market price of our common stock on the date of grant.

The following table illustrates the effect on net loss and basic and diluted loss per share for the year ended December 31, 2005 as if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation:

	For the Year Ended
	December 31, 2005
Net loss, as reported	$	(1,237,294	)
Deduct: Total stock-based compensation expense determined under fair value based method for all awards		162,687
Pro forma net loss	$	(1,399,981	)
Loss per share, as reported — basic and diluted	$	(0.17	)
Loss per share, pro forma — basic and diluted	$	(0.19	)

The pro forma compensation costs presented above were determined using the weighted average fair value of options granted under the Plan of $0.90 per share determined as described above.

F-39

PATRIOT CAPITAL FUNDING, INC.

Notes to Consolidated Financial Statements — (Continued)

Management Fees

Prior to the Company’s initial public offering, consulting fees were paid to two related parties which provided financial and management consulting services. These consulting arrangements were terminated on July 27, 2005 and any unpaid amounts were paid using the proceeds of the initial public offering.

Federal Income Taxes

The Company has elected to be treated as a RIC under the Code. The Company’s RIC tax year was filed on a July 31 basis. The Company’s policy is to comply with the requirements of the Code that are applicable to RICs and to distribute substantially all of its taxable income to its stockholders. Therefore, no federal income tax provision is included in the accompanying financial statements. On February 11, 2008, the Company was granted permission by the Internal Revenue Service to change its RIC tax year from July 31, to December 31, effective on December 31, 2007. Accordingly, the Company will prepare a short period tax return from August 1, 2007 through December 31, 2007, and will file on a calendar year basis for 2008 and thereafter (see Note 11. Income Taxes).

Dividends Paid

Distributions to stockholders are recorded on the declaration date. The Company is required to pay out to its shareholders at least 90% of its net ordinary income and net realized short-term capital gains in excess of net realized long-term capital losses for each taxable year in order to be eligible for the tax benefits allowed to a RIC under Subchapter M of the Code. It is the policy of the Company to pay out as a dividend all or substantially all of those amounts. The amount to be paid out as a dividend is determined by the Board of Directors each quarter and is based on the annual earnings estimated by the management of the Company. Based on that, a dividend is declared and paid each quarter. At its year-end the Company may pay a bonus dividend, in addition to the quarterly dividends, to ensure that it has paid out at least 90% of its net ordinary income and net realized short-term capital gains in excess of net realized long-term capital losses for the year.

Dividends and distributions which exceed net investment income and net realized capital gains for financial reporting purposes but not for tax purposes are reported as distributions in excess of net investment income and net realized capital gains, respectively. To the extent that they exceed net investment income and net realized gains for tax purposes, they are reported as distributions of paid-in capital (i.e., return of capital). The Company determined that $335,000 and $2.5 million, respectively, of distributions represented a return of capital for tax purposes for the tax years ended July 31, 2007 and 2006, respectively. In addition, because of the change in our tax year, the Company determined that $1.3 million of distributions during the RIC short tax period, August 1, 2007 through December 31, 2007, represented a return of capital for tax purposes. As more fully discussed in Note 11, such return of capital distributions was determined by the Company’s tax earnings and profits during such periods.

Recent Accounting Pronouncements

In June 2007, the AICPA issued Statement of Position 07-1, “Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies” (“SOP 07-01”). SOP 07-1 also provides guidance for determining whether investment company accounting applied by a subsidiary or equity method investee should be retained in the financial statements of the parent company or an equity method investor. SOP 07-1 is effective for fiscal years beginning after December 15, 2007 with early adoption encouraged. On February 6, 2008, the FASB deferred the effective date of SOP 07-1 indefinitely.

F-40

PATRIOT CAPITAL FUNDING, INC.

Notes to Consolidated Financial Statements — (Continued)

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” (“SFAS 159”). SFAS No. 159 allows the Company to make an irrevocable election to measure certain financial assets and liabilities at fair value, with unrealized gains and losses on the elected items recognized in earnings at each reporting period. The fair value option may only be elected at the time of initial recognition of a financial asset or financial liability or upon the occurrence of certain specified events. The election is applied on an instrument by instrument basis, with a few exceptions, and is applied only to entire instruments and not to portions of instruments. SFAS 159 also provides expanded disclosure requirements regarding the effects of electing the fair value option on the financial statements. SFAS 159 is effective prospectively for fiscal years beginning after November 15, 2007. Although the Company is currently evaluating SFAS 159 it does not anticipate that adoption will have a significant impact, if any, on our results of operations or financial condition.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. FASB Statement No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently analyzing the effect of adoption of this statement on its consolidated financial position, including its net asset value, and results of operations. The Company will adopt this statement on a prospective basis for the quarter ending March 31, 2008. Adoption of this statement could have an adverse material effect on our consolidated financial statements, including our net asset value. However, the actual impact on our consolidated financial statements in the period of adoption and subsequent to the period of adoption cannot be determined at this time as it will be influenced by the estimates of fair value for that period and the number and amount of investments we originate, acquire or exit.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current year presentation.

Note 3.   Investments

At December 31, 2007 and December 31, 2006, investments consisted of the following:

	December 31, 2007						December 31, 2006
	Cost			Fair Value			Cost			Fair Value
Investments in debt securities	$	379,443,471		$	375,294,460		$	256,743,135		$	257,014,385
Investments in equity securities		12,976,692			13,464,731			4,139,391			3,844,875
Subtotal		392,420,163			388,759,191			260,882,526			260,859,260
Unearned income		(4,555,713	)		(4,555,713	)		(3,610,884	)		(3,610,884	)
Total	$	387,864,450		$	384,203,478		$	257,271,642		$	257,248,376

The Company is a specialty finance company that provides customized financing solutions to small- to mid-sized companies that operate in diverse industry sectors. The Company makes investments in senior secured loans, junior secured loans, subordinated debt and equity-based investments, including warrants. At December 31, 2007 and December 31, 2006, $139.4 million and $102.7 million, respectively, of the Company’s portfolio investments at fair value were at fixed rates, which represented approximately 36% and 39%, respectively, of the Company’s total portfolio of investments at fair value. The Company generally structures its subordinated debt at fixed rates, although many of its senior secured and junior secured loans are, and will be, at variable rates determined on the basis of a benchmark LIBOR or prime rate. The Company’s loans generally have stated maturities ranging from 4 to 7.5 years.

F-41

PATRIOT CAPITAL FUNDING, INC.

Notes to Consolidated Financial Statements — (Continued)

The composition of the Company’s investments as of December 31, 2007 and December 31, 2006 at cost and fair value was as follows, excluding unearned income:

	December 31, 2007										December 31, 2006
	Cost		%(1)			Fair Value		%(1)			Cost		%(1)			Fair Value		%(1)
Senior Secured Debt	$	215,016,050		54.8	%	$	214,177,000		55.1	%	$	140,682,645		53.9	%	$	140,682,645		53.9	%
Junior Secured Debt		57,034,326		14.5			56,124,326		14.4			56,761,563		21.8			57,032,813		21.9
Subordinated Debt		107,393,095		27.4			104,993,134		27.0			59,298,927		22.7			59,298,927		22.7
Warrants/Equity		12,976,692		3.3			13,464,731		3.5			4,139,391		1.6			3,844,875		1.5
Total	$	392,420,163		100.0	%	$	388,759,191		100.0	%	$	260,882,526		100.0	%	$	260,859,260		100.0	%

(1) Represents percentage of total portfolio.

The composition of the Company’s investment portfolio by industry sector, using Moody’s Industry Classifications, excluding unearned income, as of December 31, 2007 and December 31, 2006 at cost and fair value was as follows:

	December 31, 2007										December 31, 2006
	Cost		%(1)			Fair Value		%(1)			Cost		%(1)			Fair Value		%(1)
Machinery	$	53,448,966		13.6	%	$	54,635,424		14.1	%	$	13,559,438		5.2	%	$	13,561,938		5.2	%
Personal & Nondurable Consumer Products		51,639,895		13.2			51,849,995		13.3			40,054,135		15.4			40,202,235		15.4
Electronics		42,707,849		10.9			42,882,544		11.0			33,205,950		12.7			33,249,377		12.8
Automobile		34,439,995		8.8			34,352,699		8.8			23,666,832		9.1			23,716,507		9.1
Health Care, Education & Childcare		34,115,686		8.7			34,208,486		8.8			—		—			—		—
Grocery		23,417,059		6.0			23,555,259		6.1			16,925,593		6.5			16,925,593		6.5
Metals & Minerals		23,288,159		5.9			23,288,159		6.0			23,278,278		8.9			23,278,278		8.9
Printing & Publishing		19,419,441		4.9			16,419,480		4.2			19,337,136		7.4			18,992,336		7.3
Ecological		15,716,250		4.0			14,516,300		3.7			13,850,000		5.3			13,678,500		5.2
Textiles & Leather		13,129,378		3.3			13,236,278		3.4			—		—			—		—
Mining, Steel, Iron & Nonprecious Metals		10,920,823		2.8			10,900,573		2.8			10,524,057		4.0			10,525,007		4.0
Chemicals, Plastic & Rubber		10,817,192		2.8			10,812,192		2.8			11,850,633		4.5			11,845,633		4.5
Retail Stores		10,791,269		2.7			10,772,269		2.8			14,947,833		5.7			14,970,833		5.7
Housewares & Durable Consumer Products		9,766,240		2.5			9,779,540		2.5			—		—			—		—
Diversified/Conglomerate Service		9,651,465		2.4			9,380,565		2.4			8,966,605		3.4			8,925,605		3.4
Beverage, Food & Tobacco		9,000,000		2.3			9,000,000		2.3			18,402,868		7.1			18,549,118		7.1
Buildings & Real Estate		4,852,328		1.2			4,852,328		1.2			—		—			—		—
Insurance		5,000,000		1.3			4,500,000		1.2			5,000,000		1.9			5,075,000		2.0
Oil & Gas		3,850,000		1.0			3,850,000		1.0			3,850,000		1.5			3,850,000		1.5
Personal, Food & Miscellaneous Services		3,000,000		0.8			2,910,000		0.8			3,000,000		1.2			3,007,500		1.2
Containers, Packaging & Glass		2,985,000		0.8			2,895,500		0.7			—		—			—		—
Aerospace & Defense		463,168		0.1			161,600		0.1			463,168		0.2			505,800		0.2
Total	$	392,420,163		100.0	%	$	388,759,191		100.0	%	$	260,882,526		100.0	%	$	260,859,260		100.0	%

(1) Represents percentage of total portfolio.

As required by the 1940 Act, the Company classifies its investments by level of control. “Control Investments” are defined in the 1940 Act as investments in those companies that the Company is deemed to “Control.” Generally, under the 1940 Act, the Company is deemed to “Control” a company in which it

F-42

PATRIOT CAPITAL FUNDING, INC.

Notes to Consolidated Financial Statements — (Continued)

has invested if it owns 25% or more of the voting securities of such company or has greater than 50% representation on its board. “Affiliate Investments” are investments in those companies that are “Affiliated Companies” of the Company, as defined in the 1940 act, which are not Control Investments. The Company is deemed to be an “Affiliate” of a company in which it has invested if it owns 5% or more but less than 25% of the voting securities of such company. “Non-Control/Non-Affiliate Investments” are those investments that are neither Control Investments nor Affiliate Investments. At December 31, 2007, the Company owned greater than 25% of the voting securities in one investment, and owned greater than 5% but less than 25% of the voting securities in six investments. At December 31, 2006, the Company owned greater than 5% but less than 25% of the voting securities in one investment.

Note 4.   Borrowings

In February 2003, Wilton entered into a $120.0 million line of credit with a lender (“Financing Agreement”) which had an original draw period through February 11, 2005, and had an original maturity date of February 11, 2012. The Financing Agreement also had an option to extend both the draw period and maturity date by one year. Wilton exercised its right to extend both the draw period and maturity date. Effective June 10, 2004, the Financing Agreement was amended to reduce the interest rate on outstanding borrowings from a fixed rate of 11.75% per annum to a fixed rate of 10.0% per annum. The Financing Agreement contained customary terms and conditions, including, without limitation, affirmative and negative covenants such as information reporting, minimum required equity and minimum performance benchmarks. The Financing Agreement also contained customary events of default with customary cure and notice, including, without limitation, breach of covenants, cross-default to other indebtedness, bankruptcy, change of control, change of management and material adverse change. Additionally, all draws were at the discretion of the lender. Under the terms of the amended Financing Agreement, if the Company elected to pre-pay its outstanding obligation a prepayment penalty would be imposed. On August 2, 2005, the Company used the proceeds from its initial public offering to pay all of its outstanding obligations under the Financing Agreement, including a prepayment penalty of $3.4 million.

On September 18, 2006, the Company, through a consolidated wholly-owned bankruptcy remote, special purpose subsidiary, entered into an amended and restated securitization revolving credit facility with an entity affiliated with BMO Capital Markets Corp. (formerly known as Harris Nesbitt Corp.). On May 2, 2007, the Company amended its Securitization Facility and lowered the interest rate payable on any outstanding balances under the Securitization Facility during the period of time the Company is permitted to make draws. The amendment also reduced or eliminated certain restrictions pertaining to certain loan covenants. On August 31, 2007, the Company amended its Securitization Facility and increased its borrowing capacity by $35 million. The amendment also extended the commitment termination date by an additional 364-day period to July 22, 2010 and also reduced or eliminated certain restrictions pertaining to certain loan covenants. The Securitization Facility allows the special purpose subsidiary to borrow up to $175 million ($140.0 million prior to August 31, 2007) through the issuance of notes to a multi-seller commercial paper conduit administered by the affiliated entity. The Securitization Facility is secured by all of the loans held by the special purpose subsidiary. The Securitization Facility bears interest at the commercial paper rate plus 1.0% (1.35% prior to May 2, 2007) and allows the special purpose subsidiary to make draws under the Securitization Facility until July 22, 2010 (July 23, 2009 prior to August 31, 2007), unless extended prior to such date for an additional 364-day period with the consent of the lender. If the Securitization Facility is not extended, any principal amounts then outstanding will be amortized over a 24-month period following July 23, 2010 and interest will accrue on outstanding borrowings under the facility at the prime rate plus 2.0%. The Securitization Facility provides for the payment to the lender of a monthly fee equal to 0.25% per annum on the unused amount of the Securitization Facility. The Company can use the proceeds of the Securitization Facility to fund loan origination activities and for general corporate purposes. Each loan origination under the Securitization Facility will be subject to the satisfaction

F-43

PATRIOT CAPITAL FUNDING, INC.

Notes to Consolidated Financial Statements — (Continued)

of certain conditions. The predecessor securitization revolving credit facility to the amended and restated securitization revolving credit facility: (i) allowed our special purpose subsidiary to make draws under the facility until July 24, 2008, unless extended prior to such date for an additional 364-day period with the consent of the lender thereto; (ii) bore interest at the commercial paper rate plus 1.75%; (iii) provided that in the event that the facility was not extended, any principal amounts then outstanding would be amortized over a 24-month period following July 24, 2008 and interest would accrue on outstanding borrowings under the facility at the prime rate plus 2.0%; and (iv) contained more stringent restrictions regarding certain loan concentrations. At December 31, 2007 and 2006, $164.9 million and $98.4 million, respectively, of borrowings were outstanding under the facility. At December 31, 2007, the interest rate was 6.2%. Interest expense for the years ended December 31, 2007, 2006 and 2005 consisted of the following:

	Year Ended December 31,
	2007		2006		2005
Interest charges	$	7,044,208	$	3,753,153	$	3,083,563
Amortization of debt issuance costs		261,614		365,855		276,623
Unused facility fees		115,774		213,574		157,803
Total	$	7,421,596	$	4,332,582	$	3,517,989

The amended and restated securitization revolving credit facility contains restrictions pertaining to the geographic and industry concentrations of funded loans, maximum size of funded loans, interest rate payment frequency of funded loans, maturity dates of funded loans and maximum yields on funded loans. The amended and restated securitization revolving credit facility also contains certain requirements relating to portfolio performance, including required minimum portfolio yield and limitations on delinquencies and charge-offs, violation of which could result in the early termination of the facility. In connection with the origination and amendment of the facility, the Company incurred $1.4 million of fees which is being amortized over the term of the facility.

In 2006 and 2007, the Company, through our special purpose subsidiary, entered into five interest rate swap agreements. The swap agreements have a fixed rate range of 4.8% to 5.2% on an initial notional amount totaling $34.8 million. The swap agreements expire five years from issuance. The swaps were put into place to hedge against changes in variable interest payments on a portion of our outstanding borrowings. For the year ended December 31, 2007, net unrealized depreciation attributed to the swaps was approximately $775,000. For the year ended December 31, 2006, net unrealized appreciation attributed to the swaps was approximately $13,000. 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 rates with respect to the outstanding borrowings. At December 31, 2005, we did not hold any derivative financial instruments for hedging purposes.

Note 5.   Employee Benefit Plan

The Company adopted a 401(k) plan (“Plan”) effective January 1, 2003. The Plan permits an employee to defer a portion of their total annual compensation up to the Internal Revenue Service annual maximum. Employees are eligible to participate in the Plan upon completion of one year of service. On an annual basis, the Company makes a contribution equal to 4% (1% of which is discretionary) to each eligible employee’s account, up to the Internal Revenue Service annual maximum. For the years ended December 31, 2007, 2006 and 2005, the Company recorded $85,000, $65,000, and $42,000, respectively, for employer contributions to the Plan.

F-44

PATRIOT CAPITAL FUNDING, INC.

Notes to Consolidated Financial Statements — (Continued)

Note 6.   Common Stock Transactions

On July 27, 2005, Wilton merged with and into the Company and the Company then effected a 9,081.7-for-1 stock split of its common stock. Prior to the consummation of the merger and stock split, Patriot Partners, L.P. owned 200 shares of common stock of the Company and Wilton Funding Holdings, LLC owned 223.7 equity interests in Wilton. Compass Group Investments, Inc. (“Compass”) was deemed to be the beneficial owner of the shares of common stock and equity interests owned by Patriot Partners, L.P. and Wilton Funding Holdings, LLC, respectively. As a result of the stock split, the Company had 3,847,902 shares of common stock outstanding immediately prior to the completion of its initial public offering.

On August 2, 2005, the Company closed its initial public offering of 7,190,477 shares of common stock and received gross proceeds of $100.7 million less underwriters’ commissions, discounts and fees of $8.6 million. In addition, on August 15, 2005, the underwriters exercised their option to purchase an additional 1,078,572 shares of common stock and the Company received gross proceeds of $15.1 million less underwriters commissions, discounts and fees of $1.1 million. Also, as part of the initial public offering, Compass sold 2,464,285 shares of common stock of the Company, which resulted in it beneficially owning 10.6% of the outstanding shares of common stock of the Company immediately after the completion of such offering.

On June 14, 2006, the Company closed a follow-on public offering of 3,600,000 shares of common stock and received gross proceeds of $39.1 million less underwriters’ commissions and discounts, and fees of $2.4 million. Also as part of this follow-on public offering, Compass sold 250,000 shares of common stock of the Company on July 5, 2006, which resulted in it beneficially owning 6.5% of the outstanding shares of common stock of the Company immediately upon completion of such offering.

On January 26, 2007, the Company closed a shelf offering of 2,370,000 shares of common stock and received gross proceeds of $33.7 million less underwriters’ commissions and discounts, and fees of $2.0 million.

On October 2, 2007, the Company closed a shelf offering of 2,300,000 shares of common stock and received gross proceeds of $30.5 million less underwriters’ commissions and discounts, and fees of $1.6 million.

In addition, during 2005, the Company established a dividend reinvestment plan, and during the years ended December 31, 2007, 2006 and 2005, issued 158,461, 85,339 and 19,704 shares, respectively, in

F-45

PATRIOT CAPITAL FUNDING, INC.

Notes to Consolidated Financial Statements — (Continued)

connection with dividends paid. The following table summarizes the Company’s dividends paid during 2007, 2006 and 2005:

Date Declared	Record Date	Payment Date	Amount
2007
November 1, 2007	December 14, 2007	January 16, 2008	$	0.33
August 2, 2007	September 14, 2007	October 17, 2007		0.32
April 30, 2007	June 15, 2007	July 17, 2007		0.32
February 23, 2007	March 15, 2007	April 18, 2007		0.32
Total — 2007			$	1.29
2006
November 10, 2006	December 15, 2006	January 17, 2007	$	0.31
August 7, 2006	September 15, 2006	October 17, 2006		0.31
May 9, 2006	June 2, 2006	July 17, 2006		0.29
February 28, 2006	March 21, 2006	April 11, 2006		0.29
Total — 2006			$	1.20
2005
November 8, 2005	November 30, 2005	December 30, 2005	$	0.27
September 7, 2005	September 30, 2005	October 31, 2005		0.16
Total — 2005			$	0.43

Note 7.   Share Data

The following table sets forth a reconciliation of weighted average shares outstanding for computing basic and diluted income (loss) per common share for the years ended December 31, 2007, 2006 and 2005.

	Year Ended December 31,
	2007		2006		2005
Weighted average common shares outstanding, basic		18,670,904		14,145,200		7,253,632
Effect of dilutive stock options		159,309		92,752		—
Weighted average common shares outstanding, diluted		18,830,213		14,237,952		7,253,632

The dilutive effect of stock options is computed using the treasury stock method. Options on 1.5 million (2007), 1.3 million (2006), and 1.3 million (2005) shares, were anti-dilutive and therefore excluded from the computation of diluted earnings per share.

Note 8.   Commitments and Contingencies

The balance of unused commitments to extend credit was $29.3 million and $27.0 million at December 31, 2007 and December 31, 2006, respectively. Commitments to extend credit consist principally of the unused portions of commitments that obligate the Company to extend credit, such as investment draws, revolving credit arrangements or similar transactions. Commitments generally have fixed expiration dates or other termination clauses and generally require payment of a fee by the counterparty. Since commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

F-46

PATRIOT CAPITAL FUNDING, INC.

Notes to Consolidated Financial Statements — (Continued)

In connection with borrowings under the Securitization Facility, the Company’s special purpose subsidiary may be required under certain circumstances to enter into interest rate swap agreements or other interest rate hedging transactions. The Company has agreed to guarantee the payment of certain swap breakage costs that may be payable by the Company’s special purpose subsidiary in connection with any such interest rate swap agreements or other interest rate hedging transactions (see Note 4. Borrowings).

The Company leases its corporate offices and certain equipment under operating leases with terms expiring through 2011. Future minimum lease payments due under operating leases at December 31, 2007 are as follows: $267,000 — 2008, $241,000 — 2009, $247,000 — 2010, $21,000 — 2011. Rent expense was approximately $245,000, $222,000 and $56,000 for the years ended December 31, 2007, 2006 and 2005, respectively. At December 31, 2007, the Company had an outstanding letter of credit in the amount of $38,000 as security deposit for the lease of the Company’s corporate office.

Note 9.   Concentrations of Credit Risk

The Company’s customers are primarily small- to mid-sized companies in a variety of industries.

At December 31, 2007 and December 31, 2006, the Company’s two largest investments represented approximately 12% and 18%, respectively, of the total investment portfolio at fair value. Investment income, consisting of interest, dividends and fees, can fluctuate dramatically upon repayment of an investment or sale of an equity interest. Revenue recognition in any given year can be highly concentrated among several customers. During the years ended December 31, 2007 and 2006, the Company did not record investment income from any customer in excess of 10.0% of total investment income. During the year ended December 31, 2005, investment income from three customers accounted for 15.1%, 14.8%, and 13.4%.

Note 10.   Related Party Transactions

On February 11, 2003, the Company entered into a $2.0 million revolving credit agreement and a $400,000 demand note agreement with Patriot Partners, L.P., an affiliate of Compass. The revolving credit agreement and the demand note had no stated maturity. On May 9, 2005, the Company repaid all outstanding borrowings under the demand note. On July 12, 2005, the Company repaid all outstanding borrowings under the revolving credit agreement.

The Company paid consulting fees of approximately $555,000 for 2005 to Kilgore Consulting CPM LLC and Philan LLC, entities affiliated with Compass, until July 27, 2005, at which time such consulting agreements were terminated.

Note 11.   Income Taxes

Effective August 1, 2005, the Company elected to be treated as a RIC. Accordingly, the Company’s RIC tax year was filed on a July 31 basis. The Company’s policy is to comply with the requirements of Subchapter M of the Code that are applicable to RICs and to distribute substantially all of its taxable income to its shareholders. To date, the Company has fully met all of the distribution requirements and other requirements of Subchapter M of the Code, therefore, no federal, state or local income tax provision is required. On February 11, 2008, the Company was granted permission by the Internal Revenue Service to change its RIC tax year from July 31, to December 31, effective on December 31, 2007. Accordingly, the Company will prepare a short period tax return from August 1, 2007 through December 31, 2007, and will file on a calendar year basis for 2008 and thereafter.

F-47

PATRIOT CAPITAL FUNDING, INC.

Notes to Consolidated Financial Statements — (Continued)

Distributable taxable income for the period January 1, 2007 through December 31, 2007 and for the period August 1, 2006 through July 31, 2007 (close of RIC tax year) and August 1, 2007 through December 31, 2007 (RIC short tax period) is as follows:

	January 1, 2007			August 1, 2006		August 1, 2007
	to			to		to
	December 31, 2007			July 31, 2007		December 31, 2007
GAAP Net Investment Income	$	22,745,000		$	19,407,000	$	10,224,000
Tax timing differences of:
Origination fees, net		1,649,000			883,000		1,223,000
Stock compensation expense, bonus accruals, original issue discount and other		(173,000	)		846,000		(37,000	)
Tax Distributable Income	$	24,221,000		$	21,136,000	$	11,410,000

Distributable taxable income differs from GAAP net investment income primarily due to: (1) origination fees received in connection with investments in portfolio companies, which are amortized into interest income over the estimated life of the investment for GAAP purposes, are treated as taxable income upon receipt; (2) certain stock compensation and other bonus accruals, which are expensed currently for GAAP purposes, are not currently deductible for tax purposes, excluding $1.6 million of tax deductions not deductible until paid in 2008; (3) certain debt investments that generate original issue discount; and (4) other, which includes depreciation and amortization.

Distributions which exceed tax distributable income (tax net investment income and realized gains, if any) are reported as distributions of paid-in capital. The taxability of the four distributions made in the period August 1, 2006 through July 31, 2007 was determined by the Company’s tax earnings and profits for its tax fiscal year ended July 31, 2007. The taxability of the two distributions made in the period August 1, 2007 through December 31, 2007 (RIC short tax period) was determined by the Company’s tax earnings and profits for the five months ended December 31, 2007. The taxability of the distributions made in the period August 1, 2006 through July 31, 2007 and August 1, 2007 through December 31, 2007 is as follows:

	August 1, 2006		August 1, 2007
	to		to
	July 31, 2007		December 31, 2007
Distributions paid from:
Ordinary income	$	21,136,000	$	11,410,000
Long-term capital gains		—		—
Subtotal		21,136,000		11,410,000
Tax return of capital		335,000		1,258,000
Total distributions	$	21,471,000	$	12,668,000

For 2007, ordinary income of $1.21 per share and tax return of capital of $0.08 per share was reported on Form 1099-DIV. For 2006, ordinary income of $1.12 per share and tax return of capital of $0.08 per share was reported on Form 1099-DIV. For 2005, ordinary income of $0.31 per share and tax return of capital of $0.12 per share was reported on Form 1099-DIV. There were no capital gain distributions in 2007, 2006 or 2005. The tax cost basis of the Company’s investments as of December 31, 2007 approximates the book cost.

At December 31, 2007, the Company had a net capital loss carryforward of $3.2 million to offset net capital gains, to the extent provided by federal tax law. The capital loss carryforward will expire in the Company’s tax fiscal year ending December 31, 2013.

F-48

PATRIOT CAPITAL FUNDING, INC.

Notes to Consolidated Financial Statements — (Continued)

As of December 31, 2007, the components of accumulated earnings on a tax basis were as follows:

Distributable ordinary income	$	6,138,000
Bonuses accrued — deductible for tax when paid in 2008		(1,566,000	)
Other book/tax temporary differences		(4,670,000	)
Unrealized depreciation		(4,423,000	)
Accumulated capital and other losses		(3,171,000	)

The tax distributable income of $6,138,000 as of December 31, 2007 noted above was paid out as part of the January 16, 2008 cash distribution of $6,814,000, which included $676,000 as tax return of capital. (Note: the dividend declared on November 1, 2007 with a record date of December 14, 2007 and paid on January 16, 2008, is included in the 2007 Form 1099-DIV, under the requirements of Subchapter M of the Code.

In June 2006, the FASB issued FASB Interpretation No. 48 (“FIN No. 48”), “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109”, which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company adopted FIN No. 48 effective January 1, 2007 which had no effect on our results of operations or financial condition.

F-49

PATRIOT CAPITAL FUNDING, INC.

Notes to Consolidated Financial Statements — (Continued)

Note 12.   Financial Highlights

	For the Year Ended December 31,
	2007			2006			2005
Per Share Data:
Net asset value at beginning of year	$	10.37		$	10.48		$	7.10
Net investment income		1.22			1.06			.24
Net realized gain (loss) on investments		.01			(.23	)		—
Net change in unrealized appreciation (depreciation) on investments		(.20	)		.27			(.41	)
Net change in swap depreciation		(.04	)		—			—
Issuance of common stock		12.99			10.23			12.83
Tax return of capital		(.08	)		(.18	)		(.29	)
Distributions from net investment income		(1.22	)		(1.06	)		(.14	)
Distributions in excess of net investment income		—			.05			—
Stock based compensation expense		.03			.03			—
Dilutive effect of share issuance		(12.35	)		(10.28	)		(8.85	)
Net asset value at end of year	$	10.73		$	10.37		$	10.48
Total Net Asset Value Return(1)		16.1	%		10.4	%		3.7	%
Per share market value, beginning of period	$	14.49		$	12.20		$	14.00	(3)
Per share market value, end of period	$	10.09		$	14.49		$	12.20
Total Market Value Return(2)		(21.4	)%		28.6	%		(9.8	)%
Shares outstanding at end of year		20,650,455			15,821,994			12,136,655
Ratios and Supplemental Data:
Net assets at end of year	$	221,598,000		$	164,109,000		$	127,152,000
Average net assets		202,531,000			149,790,000			70,188,000
Ratio of operating expenses to average net assets		8.0	%		7.7	%		16.7	%
Ratio of net investment income to average net assets		11.2	%		10.0	%		2.5	%
Weighted average borrowings outstanding	$	106,034,000		$	55,469,000		$	30,877,000
Average amount of borrowings per share	$	5.13		$	3.51		$	2.54

(1)	The total net asset value return reflects the change in net asset value of a share of stock plus dividends from beginning of year to end of year. On July 27, 2005, Wilton merged with and into the Company and the Company then effected a stock split. As a result, the Company’s financial statements reflect 3,847,902 shares issued and outstanding from January 1, 2005. On August 2, 2005, the Company closed its initial public offering of 7,190,477 shares of common stock and on August 15, 2005, the underwriters exercised their option to purchase an additional 1,078,572 shares of common stock.
(2)	The total market value return (not annualized for 2005) reflects the change in the ending market value per share plus dividends, divided by the beginning market value per share.
(3)	Share price as of August 2, 2005, the date the Company closed its initial public offering.

F-50

PATRIOT CAPITAL FUNDING, INC.

Notes to Consolidated Financial Statements — (Continued)

Note 13.   Selected Quarterly Data (Unaudited)

The following table sets forth certain quarterly financial information for each of the fiscal quarters during the years ending December 31, 2007 and 2006. This information was derived from our unaudited financial statements. Results for any quarter are not necessarily indicative of results for the full year or for any future quarter.

	Year Ended December 31, 2007
	Quarter			Quarter			Quarter		Quarter
	Ended			Ended			Ended		Ended
	December 31			September 30			June 30		March 31
Total Investment Income	$	11,142,679		$	9,752,882		$	9,089,653	$	8,977,323
Net Investment Income		6,507,150			5,500,985			5,391,708		5,345,278
Net Realized and Unrealized Gains (Losses) on Investments and Interest Rate Swap		(3,146,414	)		(1,494,112	)		291,156		27,939
Net Income		3,360,736			4,006,873			5,682,864		5,373,217
Net Income Per Share, Basic	$	0.16		$	0.22		$	0.31	$	0.31
Net Income Per Share, Diluted	$	0.16		$	0.22		$	0.31	$	0.30
Weighted Average Shares Outstanding, Basic		20,589,650			18,284,737			18,246,987		17,532,896
Weighted Average Shares Outstanding, Diluted		20,748,959			18,476,049			18,466,510		17,724,026

	Year Ended December 31, 2006
	Quarter		Quarter			Quarter		Quarter
	Ended		Ended			Ended		Ended
	December 31		September 30			June 30		March 31
Total Investment Income	$	7,595,548	$	6,879,633		$	5,807,865	$	6,223,288
Net Investment Income		4,119,939		4,096,455			3,094,715		3,709,535
Net Realized and Unrealized Gains (Losses) on Investments and Interest Rate Swap		402,445		(569,280	)		1,489,896		(755,135	)
Net Income		4,522,384		3,527,175			4,584,611		2,954,400
Net Income Per Share, Basic	$	0.29	$	0.22		$	0.36	$	0.24
Net Income Per Share, Diluted	$	0.28	$	0.22		$	0.36	$	0.24
Weighted Average Shares Outstanding, Basic		15,815,485		15,781,525			12,788,727		12,136,655
Weighted Average Shares Outstanding, Diluted		15,908,237		15,836,416			12,788,727		12,136,655

F-51

PATRIOT CAPITAL FUNDING, INC.

Notes to Consolidated Financial Statements — (Continued)

Note 14.   Subsequent Events (Unaudited)

On January 11, 2008, the Company received proceeds of $2.9 million in conjunction with the sale of our senior secured term loan investment in Nice-Pak Products, Inc. In connection with the sale, the Company recorded a $90,000 realized loss.

On January 24, 2008, the Company received proceeds of $7.4 million in conjunction with the sale of 50% of our revolver commitment and 50% of our senior term debt investment in Fairchild Industrial Products, Co. No gain or loss was recorded on the sale.

On February 11, 2008, the Company was granted permission by the Internal Revenue Service to change its RIC tax year from July 31, to December 31, effective on December 31, 2007. Accordingly, the Company will prepare a short period tax return from August 1, 2007 through December 31, 2007, and will file on a calendar year basis for 2008 and thereafter (see Note 11. Income Taxes).

On February 27, 2008, the Board of Directors declared a cash dividend of $0.33 per share, payable on April 16, 2008 to stockholders of record as of the close of business March 14, 2008. Such cash dividend is payable on the total shares issued and outstanding on the record date.

On February 27, 2008, the Board of Directors granted options to purchase 800,500 shares of the Company’s common stock to executive officers and employees. The exercise price of these options is $10.91 per share, the closing market price of common stock on the date of grant.

On February 28, 2008, the Company received gross proceeds of $9.1 million in conjunction with the full repayment of a junior secured term loan to Eight O’Clock Coffee Company. Proceeds received included a $90,000 prepayment fee.

F-52

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders’ of

Patriot Capital Funding, Inc.

We have audited in accordance with the standards of the Public Company Accounting Oversight Board (United States) the consolidated financial statements of Patriot Capital Funding, Inc. referred to in our report dated February 29, 2008, which is included in the annual report on Form 10-K. Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule of investments in and advances to affiliates is presented for purposes of additional analysis and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.

/s/ GRANT THORNTON LLP

New York, New York

February 29, 2008

F-53

Schedule 12-14

PATRIOT CAPITAL FUNDING, INC.
SCHEDULE OF INVESTMENTS IN AND ADVANCES TO AFFILIATES

		Amount of Interest
		or Dividends		December 31,							December 31,
		Credited		2006		Gross		Gross			2007
Portfolio Company	Investment(1)	to Income		Fair Value		Additions(2)		Reductions(3)			Fair Value
Companies More Than 25% Owned:
Fischbein, LLC	Subordinated Debt	$	470,584	$	—	$	4,211,988	$	—		$	4,211,988
	Membership Interest(4)		—		—		5,148,000		—			5,148,000
Total companies more than 25% owned		$	470,584	$	—	$	9,359,988	$	—		$	9,359,988
Companies 5% to 25% Owned:
Aylward Enterprises, LLC	Senior Debt	$	1,076,369	$	—	$	12,992,188	$	(1,000,000	)	$	11,992,188
	Subordinated Debt		864,669		—		6,424,703		—			6,424,703
	Membership Interest(4)		—		—		1,250,000		(1,250,000	)		—
KTPS Holdings, LLC	Senior Debt		627,067		—		9,497,500		(1,200,000	)		8,297,500
	Subordinated Debt		418,472		—		4,081,878		—			4,081,878
	Membership Interest(4)		—		—		856,900		—			856,900
Nupla Corporation	Senior Debt		200,830		—		7,128,125		(900,000	)		6,228,125
	Subordinated Debt		140,615		—		3,019,688		—			3,019,688
	Preferred Stock		18,427		—		493,427		—			493,427
	Common Stock(4)		—		—		38,300		—			38,300
Smart, LLC	Senior Debt		1,259,877		7,966,605		1,684,860		(1,250,000	)		8,401,465
	Subordinated Note		3,361		—		250,000		—			250,000
	Membership Interest(4)		—		959,000		—		(229,900	)		729,100
Sport Helmets	Senior Debt		59,001		—		12,000,000		—			12,000,000
Holdings, LLC	Subordinated Debt		60,937		—		8,011,333		—			8,011,333
	Common Stock(4)		—		—		2,000,000		(98,500	)		1,901,500
Vince & Associates	Senior Debt		105,645		—		7,500,000		—			7,500,000
Clinic Research, Inc	Subordinated Debt		112,023		—		5,521,561		—			5,521,561
	Preferred Stock(4)		—		—		592,900		—			592,900
Total companies 5% to 25% owned		$	4,947,293	$	8,925,605	$	83,343,363	$	(5,928,400	)	$	86,340,568

This schedule should be read in conjunction with the Company’s Consolidated Financial Statements, including the Consolidated Statement of Investments and Notes to the Consolidated Financial Statements.

(1)	All investments listed are “restricted securities” within the meaning of Rule 144 under the Securities Act of 1933.
(2)	Gross additions include increases in investments resulting from new portfolio company investments and paid-in-kind interest or dividends. Gross additions also include net increases in unrealized appreciation or net decreases in unrealized depreciation.
(3)	Gross reductions include decreases in investments resulting from principal collections related to investment repayments. Gross reductions also include net increases in unrealized depreciation or net decreases in unrealized appreciation.
(4)	Non-income producing.

F-54

Common Stock

Prospectus

   , 2008

PART C

Other Information

Item 25.   Financial Statements And Exhibits

(1) Financial Statements

The following financial statements of Patriot Capital Funding, Inc. (the “Registrant” or the “Company”) are included in Part A of this Registration Statement:

	Page
Consolidated Financial Statements
Consolidated Balance Sheets at March 31, 2008 (unaudited) and December 31, 2007	F-2
Consolidated Statements of Operations for the three months ended March 31, 2008 and 2007 (unaudited)	F-3
Consolidated Statement of Changes in Net Assets for the three months ended March 31, 2008 and 2007 (unaudited)	F-4
Consolidated Statements of Cash Flows for the three months ended March 31, 2008 and 2007 (unaudited)	F-5
Consolidated Schedule of Investments as of March 31, 2008 (unaudited)	F-6
Consolidated Schedule of Investments as of December 31, 2007	F-9
Notes to Consolidated Financial Statements (unaudited)	F-12
Report of Independent Registered Public Accounting Firm	F-24
Consolidated Balance Sheets at December 31, 2007 and 2006	F-25
Consolidated Statements of Operations for the years ended December 31, 2007, 2006 and 2005	F-26
Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005	F-27
Consolidated Statements of Changes in Net Assets for the years ended December 31, 2007, 2006 and 2005	F-28
Consolidated Schedule of Investments at December 31, 2007 and 2006	F-29
Notes to Consolidated Financial Statements	F-34
Report of Independent Registered Public Accounting Firm	F-53
Schedule of Investments in and Advances to Affiliates	F-54

(2) Exhibits

(a)(1)	Restated Certificate of Incorporation (Incorporated by reference to Exhibit 3.1 of Patriot Capital Funding’s Form 10-Q filed with the SEC on August 10, 2006).
(a)(2)	Form of Certificate of Amendment to Restated Certificate of Incorporation (Incorporated by reference to Amendment No. 2 of the Company’s Registration Statement on Form N-2 filed on July 27, 2005 (Registration No. 333-124831)).
(b)	Restated Bylaws of the Registrant (Incorporated by reference to Form 10-Q for the quarterly period ended June 30, 2006 filed on August 10, 2006).
(c)	Not Applicable
(d)	Form of Stock Certificate (Incorporated by reference to Amendment No. 1 of the Company’s Registration Statement on Form N-2 filed on July 13, 2005 (Registration No. 333-124831)).
(e)	Dividend Reinvestment Plan (Incorporated by reference to Exhibit 10.1 to Form 10-K for the year ended December 31, 2007, filed with the SEC on March 4, 2008).
(f)	Not Applicable
(g)	Not Applicable
(h)	Form of Underwriting Agreement**
(i)(1)	Amended Stock Option Plan (Incorporated by reference to Appendix B of the Company’s Definitive Proxy Statement filed with the SEC on May 1, 2006).

C-1

(i)(2)	Form of Stock Option Agreement for Officers (Incorporated by reference to Amendment No. 1 of the Company’s Registration Statement on Form N-2 filed on July 13, 2005 (Registration No. 333-124831)).
(j)	Custodian Agreement with Wells Fargo, National Association (contained in Exhibit(k)(9) Incorporated by reference to the Post-Effective Amendment of the Company’s Registration Statement on Form N-2 filed on August 1, 2005 (Registration No. 333-124831)).
(k)(1)	Employment Agreement between Registrant and Richard P. Buckanavage (Incorporated by reference to Amendment No. 1 of the Company’s Registration Statement on Form N-2 filed on July 13, 2005 (Registration No. 333-124831)).
(k)(2)	Employment Agreement between Registrant and Timothy W. Hassler (Incorporated by reference to Amendment No. 1 of the Company’s Registration Statement on Form N-2 filed on July 13, 2005 (Registration No. 333-124831)).
(k)(3)	Employment agreement between Registrant and William E. Alvarez, Jr. (Incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 10-Q filed on August 7, 2007).
(k)(4)	Employment agreement between Registrant and Matthew R. Colucci (Incorporated by reference to Exhibit 10.3 to the Company’s current report on Form 8-K filed on December 21, 2005).
(k)(6)	Second Amended and Restated Loan Funding and Servicing Agreement by and among the Patriot Capital Funding, Inc., Patriot Capital Funding LLC I, Fairway Finance Company, LLC, BMO Capital Markets Corp. and Wells Fargo Bank, National Association (Incorporated by reference to Exhibit 10.1 filed Patriot Capital Funding’s Form 8-K filed with the SEC on April 16, 2008).
(k)(7)	Purchase and Sale Agreement by and between the Registrant and Patriot Capital Funding LLC I (Incorporated by reference to the Post-Effective Amendment of the Company’s Registration Statement on Form N-2 filed on August 1, 2005 (Registration No. 333-124831)).
(k)(8)	Securities Account Control Agreement by and among the Registrant, Patriot Capital Funding LLC I, Harris Nesbitt Corp. and Wells Fargo Bank, National Association (Incorporated by reference to the Post-Effective Amendment of the Company’s Registration Statement on Form N-2 filed on August 1, 2005 (Registration No. 333-124831)).
(k)(9)	Intercreditor and Concentration Account Administration Agreement by and among the Registrant, U.S. Bank National Association and Wells Fargo, National Association (Incorporated by reference to the Post-Effective Amendment of the Company’s Registration Statement on Form N-2 filed on August 1, 2005 (Registration No. 333-124831)).
(l)	Opinion and consent of Sutherland Asbill & Brennan LLP**
(m)	Not Applicable
(n)(1)	Consent of Grant Thornton LLP, independent registered public accounting firm for Registrant*
(n)(2)	Report of Grant Thornton LLP regarding “Senior Securities” table contained herein*
(n)(3)	Consent of Sutherland Asbill & Brennan LLP (included in Exhibit (1))**
(o)	Not Applicable
(p)	Not Applicable
(q)	Not Applicable
(r)	Code of Ethics (Incorporated by reference to Amendment No. 1 of the Company’s Registration Statement on Form N-2 filed on July 13, 2005 (Registration No. 333-124831)).

*	Filed herewith.
**	Previously filed.

Item 26.   Marketing Arrangements

The information contained under the heading “Plan of Distribution” in this Registration Statement is incorporated herein by reference, and any information concerning any underwriters will be contained in any prospectus supplement, if any, accompanying this prospectus.

C-2

Item 27.   Other Expenses Of Issuance And Distribution

SEC registration fee	$	25,757
Nasdaq Global Select Market listing fee	$	45,000
FINRA filing fee	$	24,572
Accounting fees and expenses	$	75,000	(1)
Legal fees and expenses	$	150,000	(1)
Printing and engraving	$	200,000	(1)
Miscellaneous fees and expenses	$	4,671	(1)
Total	$	525,000

(1) These amounts are estimates.

All of the expenses set forth above shall be borne by the Registrant.

Item 28.   Persons Controlled By Or Under Common Control

The Registrant owns 100% of the outstanding equity interests of Patriot Capital Funding LLC I, a Delaware limited liability company.

Item 29.   Number Of Holders Of Securities

The following table sets forth the number of record holders of the Registrant’s capital stock at June 11, 2008.

	Number of
Title of Class	Record Holders
Common stock, $0.01 par value		23

Item 30.   Indemnification

Section 145 of the Delaware General Corporation Law empowers a Delaware corporation to indemnify its officers and directors and specific other persons to the extent and under the circumstances set forth therein.

Section 102(b)(7) of the Delaware General Corporation Law allows a Delaware corporation to eliminate the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liabilities arising (a) from any breach of the director’s duty of loyalty to the corporation or its stockholders; (b) from acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (c) under Section 174 of the Delaware General Corporation Law; or (d) from any transaction from which the director derived an improper personal benefit.

Subject to the 1940 Act or any valid rule, regulation or order of the Securities and Exchange Commission thereunder, our restated certificate of incorporation, provides that we will indemnify any person who was or is a party or is threatened to be made a party to any threatened action, suit or proceeding whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director or officer of the Registrant, or is or was serving at the request of the Registrant as a director or officer of another corporation, partnership, limited liability company, joint venture, trust or other enterprise, in accordance with provisions corresponding to Section 145 of the Delaware General Corporation Law. The 1940 Act provides that a company may not indemnify any director or officer against liability to it or its security holders to which he or she might otherwise be subject by reason of his or her willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office unless a determination is made by final decision of a court, by vote of a majority of a quorum of directors who are disinterested, non-party directors or by independent legal counsel that the liability for which indemnification is sought did not arise out of the foregoing conduct. In addition, our restated certificate of incorporation provides that the indemnification described therein is not exclusive and shall not exclude any other rights to which the person seeking to be indemnified may be entitled under statute, any bylaw,

C-3

agreement, vote of stockholders or directors who are not interested persons, or otherwise, both as to action in his official capacity and to his action in another capacity while holding such office.

The above discussion of Section 145 of the Delaware General Corporation Law and the Registrant’s restated certificate of incorporation is not intended to be exhaustive and is respectively qualified in its entirety by such statute and the Registrant’s restated certificate of incorporation.

Insofar as indemnification for liability arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

The Registrant has obtained primary and excess insurance policies insuring our directors and officers against some liabilities they may incur in their capacity as directors and officers. Under such policies, the insurer, on the Registrant’s behalf, may also pay amounts for which the Registrant has granted indemnification to the directors or officers.

The Registrant may agree to indemnify any underwriters against specific liabilities, including liabilities under the Securities Act of 1933.

Item 31.   Business And Other Connections Of Investment Adviser

Not applicable.

Item 32.   Location Of Accounts And Records

All accounts, books and other documents required to be maintained by Section 31(a) of the Investment Company Act of 1940, and the rules thereunder are maintained at the offices of:

(1) the Registrant, 274 Riverside Avenue, Westport, CT 06880;

(2) the Transfer Agent; and

(3) the Custodian.

Item 33.   Management Services

Not Applicable.

Item 34.   Undertakings

We hereby undertake:

(1) to suspend the offering of shares until the prospectus is amended if (i) subsequent to the effective date of this registration statement, the net asset value declines more than ten percent from the net asset value as of the effective date of this registration statement, or (ii) the net asset value increases to an amount greater than the net proceeds as stated in the prospectus;

(2) Not applicable.

(3) Not applicable.

C-4

(4) (a) to file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

(i) to include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;

(ii) to reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; and

(iii) to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.

(b) that, for the purpose of determining any liability under the 1933 Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of those securities at the time shall be deemed to be the initial bona fide offering thereof; and

(c) to remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

(d) that, for the purpose of determining liability under the Securities Act of 1933 to any purchaser, if the Registrant is subject to Rule 430C [17 CFR 230.430C]: Each prospectus filed pursuant to Rule 497(b), (c), (d) or (e) under the Securities Act of 1933 [17 CFR 230.497(b), (c), (d) or (e)] as part of a registration statement relating to an offering, other than prospectuses filed in reliance on Rule 430A under the Securities Act of 1933 [17 CFR 230.430A], shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.

(e) that for the purpose of determining liability of the Registrant under the Securities Act of 1933 to any purchaser in the initial distribution of securities, the undersigned Registrant undertakes that in a primary offering of securities of the undersigned Registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned Registrant will be a seller to the purchaser and will be considered to offer or sell such securities to the purchaser:

(i) any preliminary prospectus or prospectus of the undersigned Registrant relating to the offering required to be filed pursuant to Rule 497 under the Securities Act of 1933 [17 CFR 230.497];

(ii) the portion of any advertisement pursuant to Rule 482 under the Securities Act of 1933 [17 CFR 230.482] relating to the offering containing material information about the undersigned Registrant or its securities provided by or on behalf of the undersigned Registrant; and

(iii) any other communication that is an offer in the offering made by the undersigned Registrant to the purchaser.

(5) Not applicable.

(6) Not applicable.

C-5

Signatures

Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Post-Effective Amendment No. 4 to the Registration Statement on Form N-2 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Westport, in the State of Connecticut, on the 18th day of June 2008.

PATRIOT CAPITAL FUNDING, INC.

By:  /s/  Richard P. Buckanavage

Richard P. Buckanavage

President, Chief Executive Officer and Director

Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment No. 4 to the Registration Statement has been signed by the following persons in the capacities indicated on June 18, 2008.

Signature	Title
/s/  Richard P. Buckanavage Richard P. Buckanavage	President, Chief Executive Officer and Director (principal executive officer)
/s/  William E. Alvarez, Jr. William E. Alvarez, Jr.	Executive Vice President, Chief Financial Officer and Secretary (principal financial and accounting officer)
/s/  Timothy W. Hassler Timothy W. Hassler	Chief Investment Officer and Director
* Steven Drogin	Director
* Mel P. Melsheimer	Chairman of the Board of Directors
* Dennis C. O’Dowd	Director
* Richard A. Sebastiao	Director

(*) Signed by Richard P. Buckanavage on behalf of those identified pursuant to his designation as attorney-in-fact signed by each on October 6, 2006.

C-6

EX-99.(N)(1)

Exhibit (n)(1)

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We have issued our reports dated February 29, 2008, accompanying the consolidated financial statements and schedule of Patriot Capital Funding, Inc. and our report dated June 17, 2008 on the senior securities table of Patriot Capital Funding, Inc. contained in the Registration Statement and Prospectus. We consent to the use of the aforementioned reports in the Registration Statement and Prospectus and to the use of our name as it appears under the caption “Independent Registered Public Accounting Firm.”

/s/ GRANT THORNTON LLP
New York, New York
June 17, 2008

EX-99.(N)(2)

Exhibit (n)(2)

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors of

     Patriot Capital Funding, Inc.

We have audited in accordance with the standards of the Public Company Accounting Oversight Board (United States) the consolidated financial statements of Patriot Capital Funding, Inc. referred to in our report dated February 29, 2008, which is included in the Registration Statement and Prospectus. Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The senior securities table is presented for purposes of additional analysis and is not a required part of the basic financial statements. This table has been subjected to the auditing procedures applied in the audit of the basic financial statements taken as a whole and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.

/s/ GRANT THORNTON LLP
New York, New York
June 17, 2008