Patriot Capital Funding (PCAP) 10-K 2006 FY Annual report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-K

(Mark One)
þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2006
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER: 0-51459

PATRIOT CAPITAL FUNDING, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE	74-3068511
(STATE OR JURISDICTION OF INCORPORATION OR ORGANIZATION)	(IRS EMPLOYER IDENTIFICATION NO.)
274 Riverside Avenue, Westport, CT (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)	06880 (ZIP CODE)

REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE:
(203) 429-2700

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

	Name of each exchange
Title of each class	on which registered
Common Stock, par value $0.01 per share	NASDAQ Global Select Market

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   YES o     NO þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   YES o     NO þ

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods as the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES þ     NO o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to thisForm 10-K.  o

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

Large accelerated filer o     Accelerated filer þ     Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Act)   YES o     NO þ

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of June 30, 2006 was approximately $158,000,000.

The registrant had 18,223,517 outstanding shares of common stock as of February 23, 2007.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement relating to the 2007 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission, are incorporated by reference in Part III of this Annual Report onForm 10-K as indicated herein.

TABLE OF CONTENTS

			Page
PART I
	ITEM 1.	BUSINESS		1
	ITEM 1A.	RISK FACTORS		14
	ITEM 1B.	UNRESOLVED STAFF COMMENTS		23
	ITEM 2.	PROPERTIES		23
	ITEM 3.	LEGAL PROCEEDINGS		23
	ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		23
PART II
	ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES		24
	ITEM 6.	SELECTED FINANCIAL DATA		28
	ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		29
	ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK		44
	ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA		45
	ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE		73
	ITEM 9A.	CONTROLS AND PROCEDURES		73
	ITEM 9B.	OTHER INFORMATION		74
PART III
	ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE		74
	ITEM 11.	EXECUTIVE COMPENSATION		74
	ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS		74
	ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE		74
	ITEM 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES		75
PART IV
	ITEM 15.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES		75
	SIGNATURES			77
	EXHIBIT INDEX			78

PART I

ITEM 1.   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 which we generally expect to be less than $2.0 million. 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 $346.1 million of investments, (which includes $27.0 million of unfunded 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 December 31, 2006, we had debt investments in 25 portfolio companies with an aggregate fair value of $257.0 million, warrants to purchase shares of common stock in six of our portfolio companies with a fair value of $734,000, and equity investments (other than warrants) in six portfolio companies with a fair value of $3.1 million. These proposed investments are subject to the completion of our due diligence and approval process as well as negotiation of definitive agreements with prospective portfolio companies and, as a result, may not result in completed transactions.

As of December 31, 2006, senior secured revolving lines of credit, senior secured term loans, junior secured term loans and subordinated debt investments comprised approximately 2.7%, 51.2%, 21.9% and 22.7%, respectively, of our investment portfolio at fair value. Approximately 55.2% of our investments at fair value at December 31, 2006 were originated in connection with our “one-stop” financing. For the year ended December 31, 2006, the weighted average yield on all of our outstanding debt investments was approximately 13.4%, which reflects the positive impact of the realization of unamortized deferred financing fees associated with the early repayment of one of our investments during the year. For the year ended December 31, 2006, the weighted average yield on all of our outstanding debt investments was approximately 13.0%, if we exclude the impact of the unamortized deferred financing fees realized in connection with such repayment.

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 are permitted to, and expect to, finance our investments using debt and equity. However, our ability to use debt is limited in certain significant respects. See “Business — Regulations — Regulation as a Business Development Company.” 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 “Business — Regulations — Taxation as a Regulated Investment Company.” 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 certainsource-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 operating officer and chief compliance 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.

Since 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 ofU.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 atwww.patcapfunding.com. We make available free of charge through our website our annual report onForm 10-K, quarterly reports onForm 10-Q, current reports onForm 8-K and amendments to those reports as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Information contained on our website is not incorporated by reference into this annual report onForm 10-K and you should not consider information contained on our website to be part of this annual report onForm 10-K.

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.

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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.

•  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, and 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 operating officer and chief compliance officer, Mr. Hassler, who combined have more than 35 years of experience in lending to, and investing in, small- to 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 (Earnings Before Interest, Taxes,

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Depreciation and Amortization) of $2 million. We do not intend to invest instart-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.

•  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 our 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 our investment committee votes to proceed, we submit a non-binding proposal to the prospective private equity sponsorand/or potential portfolio company. Once the private equity sponsorand/or potential

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portfolio company agree to the terms and conditions outlined in our financing proposal, we commence our full due diligence assessment, including:

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

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

•  Interviews with customers and suppliers;

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

•  Management background checks;

•  Review of material contracts;

•  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 approval, 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 operating officer and chief compliance officer, Mr. Hassler, our executive vice president and chief investment 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.

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 $20 million in companies with annual revenues 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, includingpayment-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, includingpayment-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

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

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. Our senior secured loans may take many forms, 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, andpayment-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.

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 includepayment-in-kind or 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;

•  Periodicface-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 expectationsand/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 December 31, 2006 and December 31, 2005:

	December 31, 2006					December 31, 2005
	Debt					Debt
	Investments at		Percentage of			Investments at		Percentage of
Investment Rating	Fair Value		Total Portfolio			Fair Value		Total Portfolio
1	$	22,689,633		8.8	%	$	16,069,312		11.5	%
2		198,127,878		77.1			102,189,918		72.8
3		36,196,874		14.1			20,136,424		14.3
4		—		—			2,000,000		1.4
5		—		—			—		—
Total	$	257,014,385		100.00	%	$	140,395,654		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 scopeand/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.

Regulations

Regulation as a Business Development Company

We have elected to be regulated as a business development company under the 1940 Act. The 1940 Act requires that a majority of our directors be persons other than “interested persons,” as that term is defined in

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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;

(ii) 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

(iii) 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.

(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.

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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.

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.

Code of Ethics

We have adopted a code of ethics pursuant toRule 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. The code of ethics is filed as an exhibit to our registration statement which is on file with the SEC. You may read and copy the code of ethics at the Securities and Exchange Commission’s Public Reference Room in Washington, D.C. You may obtain information on the operation of the Public Reference Room by calling the Securities and Exchange Commission at1-800-SEC-0330. In addition, the code of ethics is available on the EDGAR Database on the Securities and Exchange Commission’s Internet site at http://www.sec.gov. You may obtain copies of the code of ethics, after paying a duplicating fee, by electronic request at the following Email address: publicinfo@sec.gov, or by writing the Securities and Exchange Commission’s Public Reference Section, 100 F Street, N.E., Washington, D.C. 20549.

Proxy Voting Policies and Procedures

We vote proxies relating to our portfolio securities in the best interest of our stockholders. We review on acase-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.

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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.

Taxation as a Regulated Investment Company

We have elected to be taxed 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 generally 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.

To 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 the 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 year ended December 31, 2006, we realized a short-term capital gain of $8,000 and during the year ended December 31, 2005, we did not realize any capital gains. During the year ended December 31, 2006, we realized a capital loss of $3.3 million which will be available to offset capital gains until July 31, 2014. 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

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development company under the 1940 Act and due to provisions in our credit facilities. If we do not distribute 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 at a particular level.

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.

Our process for determining the fair value of our 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 values, from which we derive a single estimate of enterprise value.

To determine the enterprise value of a portfolio company, we analyze its 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 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, we 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, we look to private merger and acquisition statistics, discounted public trading multiples or industry practices. In deciding on a reasonable multiple, we consider not only the fact that our portfolio company may be a private company relative to a peer group of public comparables, but we also consider the size and scope of our portfolio company 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 our debt, the fair value of our loan or debt security normally corresponds 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. The conditions and other factors we consider in determining the fair value of our debt securities include, among other factors, the financial risk and performance of the portfolio company, competitive market dynamics and, to a lesser extent, market interest rates. 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

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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.

The fair value of our investments at December 31, 2006, and December 31, 2005 was determined in good faith by our board of directors. We received valuation assistance from our independent valuation firm, Duff & Phelps, LLC, on a portion of our investment portfolio at December 31, 2006 and on our entire investment portfolio at December 31, 2005 (see below for change in valuation process).

Our board of directors will undertake 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;

•  Preliminary valuation conclusions will then be documented and discussed with our investment committee;

•  Duff & Phelps, LLC, an independent valuation firm engaged by us, will review selected preliminary valuations and prepare an independent valuation report;

•  The valuation committee of our board of directors reviews the preliminary valuations and any independent valuation reports prepared by Duff & Phelps, LLC, and our investment professionals and Duff & Phelps, LLC, as appropriate, will respond to and supplement the preliminary valuations and independent valuation reports, respectively, to reflect any comments provided by the valuation committee; and

•  Our board of directors will determine the fair value of each investment in our portfolio in good faith after considering the input of the valuation committee and where applicable, Duff & Phelps, LLC.

Due to the increasing size of our investment portfolio and costs incurred by us in connection with Duff & Phelps, LLC’s review of our investment professionals’ preliminary valuations of, and preparation of independent valuation reports with respect to, such investments, our board of directors determined to engage Duff & Phelps, LLC on a more targeted basis. In this regard, on November 10, 2006, our board of directors approved a change in our valuation process whereby Duff & Phelps, LLC will review preliminary valuation conclusions made by our investment professionals with respect to, and prepare an independent valuation report for, our portfolio investments as follows:

•  quarterly for all of our portfolio investments assigned an investment rating of 3, 4 or 5 under our investment rating system;

•  at least once annually for all portfolio investments assigned an investment rating of 1 or 2 under our investment rating system;

•  the quarter in which a transaction was entered into for all new investments of $3 million or more; and

•  the quarter following the quarter in which a transaction was entered into for all new investments of less than $3 million.

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 will 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

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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) 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.

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.

Employees

As of December 31, 2006, we had 11 employees, including investment and portfolio management professionals, and operations professionals.

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ITEM 1A.   Risk Factors

Risk Factors

Investing in our common stock involves a number of significant risks. We cannot assure you that we will achieve our investment objective. You should consider carefully the risks described below and all other information contained in this annual report onForm 10-K, including our financial statements and the related notes.

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.

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 operating officer and chief compliance 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 of Messrs. Buckanavage and Hassler cease to be employed by us, the lender under our amended and restated securitization revolving credit facility could, absent a waiver or cure, terminate the facility.

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 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 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.

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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.

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. We may acquire additional capital from the following sources:

Senior Securities and Other Indebtedness.  We may issue debt securities or preferred stockand/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 salesand/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. 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

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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). 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 retain a portion of the 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 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.

The agreements governing our 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 an amended and restated securitization revolving credit facility with an entity affiliated with BMO Capital Markets Corp. (formerly known as Harris Nesbitt Corp.). 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 RIC tax treatment 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 distributions necessary to satisfy the distribution requirement. If we are unable to obtain cash from other sources, we could fail to qualify for RIC tax treatment 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.

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•  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 for RIC tax treatment 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, contractualpayment-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 contractualpayment-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 RIC tax treatment under the Code. Accordingly, we may have to sell some of our investments at timesand/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 for RIC tax treatment and thus become subject to corporate-level income tax. For additional discussion regarding the tax implications of a RIC, please see “Business — Regulations — Taxation as a Regulated Investment Company.”

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. 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.

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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 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.

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.

Interpretations of the staff of the Securities and Exchange Commission regarding the appropriateness of the consolidation of our wholly-owned, bankruptcy remote, special purpose subsidiary may have an impact on our business, financial condition and results of operations.

The staff of the Securities and Exchange Commission is reviewing, on an industry-wide basis, the appropriateness of the consolidation by business development companies of certain types of subsidiaries under SEC accounting rules and GAAP. In the event that the staff takes a position that would require us to deconsolidate our wholly-owned, bankruptcy remote, special purpose subsidiary, we will likely be required to make additional disclosures and prospective changes in our accounting methods to conform with such position. We cannot predict the impact, if any, that such position may have on our business, financial condition and results of operations.

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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.

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 December 31, 2006, our two largest investments represented approximately 18% of our investments at fair value. During the year ended December 31, 2006, we did not record investment income from any customer in excess of 10.0% of total investment income. 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 of December 31, 2006, approximately 45% of our investments were in manufacturing companies. 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.

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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 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.

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 re-characterize 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.

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.

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.

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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.

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 oryear-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.

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 or tax guidelines, 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;

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•  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.

Item 1B.   Unresolved Staff Comments

Not applicable.

Item 2.   Properties

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

Item 3.   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.

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

No matters were submitted to a vote of stockholders during the quarter ended December 31, 2006.

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PART II

Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

Price Range of Common Stock

Our common stock has been 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 stock quotations are interdealer quotations and do not include markups, markdowns or commissions.

	High		Low
Fiscal year 2006
First quarter	$	13.07	$	12.07
Second quarter	$	12.85	$	10.66
Third quarter	$	13.35	$	10.54
Fourth quarter	$	14.90	$	13.32
Fiscal year 2005
Third quarter (from July 28, 2005)	$	14.33	$	13.72
Fourth quarter	$	13.56	$	10.77

As of February 23, 2007, we had 25 stockholders of record of our common stock. In addition, we believe we had approximately 14,000 beneficial owners, whose shares of common stock are held in the names of brokers, dealers and clearing agencies.

Sales of Unregistered Securities

During the year ended December 31, 2006, and the three months ended December 31, 2005, we issued a total of 85,339 and 19,704, respectively of shares of our common stock under our dividend reinvestment plan pursuant to an exemption from the registration requirements of the Securities Act of 1933. The aggregate offering price for the shares of our common stock sold under the dividend reinvestment plan was approximately $1.1 million and $243,000 during the year ended December 31, 2006 and the three months ended December 31, 2005, respectively.

Dividends

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 deemed to be distributed, to stockholders on a timely basis. Our amended and restated securitization revolving credit 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.

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The following table summarizes our dividends declared to date:

Date Declared	Record Date	Payment Date	Amount
2007
February 23, 2007	March 15, 2007	April 18, 2007	$	0.32
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

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 in thisForm 10-K for information regarding the tax characterization of our dividends.

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Stock Performance Graph

The following graph compares the yearly percentage change in the cumulative stockholder return on our common stock during the two years ended December 31, 2006 with (i) the Nasdaq Composite Index, and (ii) the Patriot Capital Funding Peer Group index. This comparison assumes $100.00 was invested on July 28, 2005 (the date our common stock began to trade on the Nasdaq National Market (now known as the NASDAQ Global Select Market) in connection with our initial public offering) in our common stock and in the comparison groups and assumes the reinvestment of all cash dividends prior to any tax effect.

The comparisons in the graph below are based on historical data and are not intended to forecast the possible future performance of our common stock.

COMPARISON OF 18 MONTH CUMULATIVE TOTAL RETURN(1)

Among Patriot Capital Funding, Inc., The NASDAQ Composite Index
And Patriot Capital Funding Peer Group

Company/Index	7-28-05(1)		2005		2006
Patriot Capital Funding, Inc.	$	100	$	90	$	117
Nasdaq Composite Index	$	100	$	105	$	114
Patriot Capital Funding Peer Group(2)	$	100	$	94	$	119

(1)

From July 28, 2005, the date our common stock began to trade on the Nasdaq National Market (now known as the NASDAQ Global Select Market) in connection with our initial public offering.

(2)

The Patriot Capital Funding Peer Group consists of the following closed-end investment companies that have elected to be regulated as business development companies under the 1940 Act: Ares Capital Corporation, Gladstone Capital Corporation, Gladstone Investment Corporation, Hercules Technology Growth Capital, Inc., MVC Capital, Inc., NGP Capital Resources Company, Prospect Energy Corporation and Technology Investment Capital Corporation.

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Securities Authorized For Issuance Under Equity Compensation Plans

As of December 31, 2006, we had a stock option plan under which shares of our common stock were authorized for issuance.

						Number of Securities
						Remaining Available for
	Number of Securities to be			Weighted-Average		Future Issuance Under
	Issued Upon Exercise of			Exercise Price of		Equity Compensation Plans
	Outstanding Options,			Outstanding Options,		(Excluding Securities
Plan Category	Warrants and Rights			Warrants and Rights		Reflected in Column(a))
	(a)			(b)		(c)
Equity compensation plans approved by security holders		903,000		$	10.97		227,181
Equity compensation plans not approved by security holders		1,301,496	(1)		14.00		—
Total		2,204,496		$	12.76		227,181	(2)

(1)	The stock option plan pursuant to which these options were issued or are issuable was approved by our stockholders prior to our initial public offering.
(2)	On February 23, 2007, the board of directors granted options to purchase 227,181 shares of our common stock to our executive officers and employees. The exercise price of these options is $14.38 per share, the closing market price of common stock on the date of grant.

Stock Option Plan

Our stock option plan is intended to encourage stock ownership in us by our officers and employees. The principal objective in awarding stock options to our eligible officers and employees is to align each optionee’s interests with our success and the financial interests of our stockholders by linking a portion of such optionee’s compensation to the performance of our stock and the value delivered to stockholders.

A total of 2,431,677 shares of common stock are reserved for issuance under our 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. Each option will state the period or periods of time within which the option may be exercised, which may not exceed ten years from the date of grant. The compensation committee of our board of directors will determine the amount and features of the stock options, if any, to be awarded to optionees. The compensation committee will evaluate a number of criteria, including the past service of each such optionee to us, the present and potential contributions of such optionee 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 recipient’s 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. The compensation committee will award stock options on a subjective basis and such awards will depend in each case on the performance of the officer or director under consideration, and in the case of new hires, their potential performance.

The stock option plan is designed to satisfy the conditions of Section 422 of the Code so that, if the compensation committee so elects, options granted under the stock option plan may qualify as “incentive stock options.” To qualify as “incentive stock options,” options may not become exercisable for the first time in any year if the number of incentive options first exercisable in that year multiplied by the exercise price exceeds $100,000.

Under current SEC rules and regulations applicable to business development companies, a business development company may not grant options to non-employee directors. We may apply for exemptive relief from the SEC to permit us to grant options to purchase shares of our common stock to our non-employee directors as a portion of their compensation for service on our board of directors.

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Item 6.   Selected Financial 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 thisForm 10-K. The selected consolidated financial data at and for the fiscal years ended December 31, 2006, 2005, 2004 and 2003 have been derived from our audited financial statements. 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. We did not have any meaningful operations during 2002. As a result, information relating to 2002 has not been presented.

	Year Ended December 31,
Income Statement Data	2006			2005			2004			2003
Investment Income:
Interest income	$	25,387,709		$	13,035,673		$	4,616,665		$	253,755
Fees		270,176			366,830			241,870			5,274
Other investment income		848,449			46,839			—			—
Total Investment Income		26,506,334			13,449,342			4,858,535			259,029
Expenses:
Compensation expense		3,877,525			2,481,761			1,326,576			835,600
Consulting fees(1)		—			554,796			1,000,000			916,666
Interest(2)		4,332,582			3,517,989			1,504,998			201,331
Professional fees		1,045,613			730,550			192,938			290,822
Prepayment penalty(3)		—			3,395,335			—			—
General and administrative		2,229,970			1,041,030			227,208			164,032
Total Expenses		11,485,690			11,721,461			4,251,720			2,408,451
Net investment income (loss)		15,020,644			1,727,881			606,815			(2,149,422	)
Net realized loss on investments		(3,262,966	)		—			—			—
Net unrealized appreciation (depreciation) on investments		3,817,931			(2,965,175	)		(876,021	)		—
Net unrealized gain on interest rate swap		12,961			—			—			—
Net income (loss)	$	15,588,570		$	(1,237,294	)	$	(269,206	)	$	(2,149,422	)
Earnings (loss) per share, basic and diluted	$	1.10		$	(0.17	)	$	(0.07	)	$	(0.56	)
Weighted average shares outstanding, basic		14,145,200			7,253,632			3,847,902			3,847,902
Weighted average shares outstanding, diluted		14,237,952			7,253,632			3,847,902			3,847,902
Balance Sheet Data:
Total Investments, net of unearned income	$	257,248,376		$	137,951,659		$	65,603,830		$	28,687,831
Total assets		270,522,505			150,655,993			72,038,863			35,116,998
Total debt outstanding		98,380,000			21,650,000			42,645,458			9,400,000
Stockholder’s equity		164,108,629			127,152,365			27,311,918			24,531,124
Net asset value per common share	$	10.37		$	10.48		$	7.10		$	6.38
Other Data:
Weighted average yield on debt investments(4)		13.4	% (5)		13.5	%		12.6	%		11.2	%
Number of portfolio companies		26			15			9			3
Number of employees		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

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	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)	The weighted average yield on our debt investments was 13.0% for the year ended December 31, 2006 if we exclude the impact of the unamortized deferred financing fees realized in connection with the early repayment of one of our investments during the quarter ended March 31, 2006.

Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in thisForm 10-K.

ThisForm 10-K contains forward-looking statements regarding the plans and objectives of management for future operations. This information may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend” or “project” or the negative of these words or other variations on these words or comparable terminology. These forward-looking statements are based on assumptions that may be incorrect, and we cannot assure you that these projections included in these forward-looking statements will come to pass. Our actual results could differ materially from those expressed or implied by the forward-looking statements as a result of various factors.

We have based the forward-looking statements included in this annual report onForm 10-K on information available to us on the date of this annual report onForm 10-K, 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 onForm 10-K, quarterly reports onForm 10-Q and current reports onForm 8-K.

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 ofU.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

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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.

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 (excluding unearned income of $3.6 million and $3.4 million at December 31, 2006 and 2005, respectively) was $260.9 million and $141.4 million at December 31, 2006 and December 31, 2005, respectively. The increase in the value of our portfolio during each period is primarily attributable to newly-originated investments.

Total portfolio investment activity (excluding unearned income) as of the fiscal year ended December 31, 2006 and December 31, 2005, respectively, was as follows:

	December 31,			December 31,
	2006			2005
Beginning portfolio at fair value	$	141,390,954		$	67,677,751
Investments in debt securities		154,876,598			88,850,000
Investments in equity securities		3,074,997			575,490
Investment repayments		(37,627,269	)		(14,572,867	)
Increase inpayment-in-kind interest/dividends		2,424,927			1,825,755
Sale of investments		(7,098,878	)		—
Increase (decrease) in fair value of investments		3,817,931			(2,965,175	)
Ending portfolio at fair value	$	260,859,260		$	141,390,954

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. These proposed investments are subject to the completion of our due diligence and approval process as well as negotiation of definitive agreements with prospective portfolio companies and, as a result, may not result in completed transactions.

As of December 31, 2006 and December 31, 2005, the composition of our portfolio at fair value (excluding unearned income) was as follows:

	December 31, 2006					December 31, 2005
	Investments at		Percentage of			Investments at		Percentage of
	Fair Value		Total Portfolio			Fair Value		Total Portfolio
Senior secured revolving lines of credit	$	7,010,219		2.7	%	$	250,000		0.2	%
Senior secured term loans		133,672,426		51.2			62,802,077		44.4
Junior secured term loans		57,032,813		21.9			21,704,625		15.3
Senior subordinated debt		59,298,927		22.7			55,638,952		39.4
Investments in equity securities		3,844,875		1.5			995,300		0.7
Totals	$	260,859,260		100.0	%	$	141,390,954		100.0	%

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For the years ended December 31, 2006 and 2005, the weighted average yield on all of our outstanding debt investments was approximately 13.4% and 13.5%, respectively. Yields are computed using actual interest income earned for the respective year, including amortization of loan fees and original issue discount, divided by the weighted average fair value of debt investments. The yield during the year ended December 31, 2006 was positively impacted by the recognition of deferred financing fees received from one of our portfolio companies as a result of the repayment of its entire outstanding debt. For the year ended December 31, 2006, the weighted average yield on all of our outstanding debt investments was approximately 13.0%, excluding the impact of the unamortized deferred financing fees. The remaining balance of deferred financing fees for this portfolio company recognized during the year ended December 31, 2006 totaled $713,000. The lower weighted average yield on our outstanding debt, excluding the impact of the unamortized financing fees, in 2006 as compared to 2005 related to the shift in our investment mix towards senior secured loans. The weighted average yield on our outstanding debt investments during the three months ended December 31, 2006 was approximately 12.7% based upon weighted average debt investments of $231.5 million during the quarter. As of December 31, 2006, $102.7 million of our portfolio investments at fair value (excluding unearned income) were at fixed interest rates, which represented approximately 39% of our total portfolio of investments at fair value (excluding unearned income). As of December 31, 2005, $82.5 million of our portfolio investments at fair value (excluding unearned income) were at fixed interest rates, which represented approximately 58% of our total portfolio of investments at fair value (excluding unearned income). We generally structure our subordinated debt investments at fixed rates, although many of our senior secured and junior secured loans are, and will be, at variable rates.

In March and December of 2006, we, through our special purpose subsidiary, entered into interest rate swap agreements. Our swap agreement entered into in March is at a fixed rate of 5.04% on an initial notional amount of $20.0 million, for five years, and our December swap agreement is at a fixed rate of 4.84% on an initial notional amount of $3.5 million, for five years. 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, 2006, net unrealized gains attributed to the swaps were 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 hedged portfolio. At December 31, 2005, we did not hold any derivative financial instruments for hedging purposes.

The composition of our investment portfolio by industry sector, excluding unearned income, as of December 31, 2006 and December 31, 2005 at cost and fair value was as follows:

	December 31, 2006										December 31, 2005
	Cost		%(1)			Fair Value		%(1)			Cost		%(1)			Fair Value		%(1)
Manufacturing	$	118,031,907		45.2	%	$	118,274,709		45.3	%	$	74,921,696		51.6	%	$	71,172,168		50.3	%
Distribution		47,685,031		18.3			47,513,531		18.2			3,850,000		2.6			3,850,000		2.7
Service		33,142,636		12.7			32,834,136		12.6			16,901,343		11.6			16,654,743		11.8
Consumer/Retail Goods		58,398,679		22.4			58,564,779		22.5			31,580,928		21.8			31,606,328		22.4
Publishing		3,161,105		1.2			3,166,305		1.2			3,515,015		2.4			3,533,915		2.5
Defense		463,168		0.2			505,800		0.2			14,463,168		10.0			14,573,800		10.3
Total	$	260,882,526		100.0	%	$	260,859,260		100.0	%	$	145,232,150		100.0	%	$	141,390,954		100.0	%

(1) Represents percentage of total portfolio.

At December 31, 2006 and December 31, 2005, our two largest investments (as a percentage of commitments) represented approximately 17% and 24%, respectively, of the total investment portfolio. Investment income, consisting of interest, fees, and recognition of gains on equity interests, 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 customers. During the year ended December 31, 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% of total investment income.

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At December 31, 2006, our equity investments consisted of common and preferred stock, LLC membership interests and warrants to acquire equity interests in certain of our portfolio companies. At December 31, 2005, all of our equity investments were 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.

Asset Quality-Debt Portfolio

We utilize a standard investment rating system for our entire portfolio of debt investments. Investment Rating 1 is used for investments that exceed expectationsand/or 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 debt investments on the 1 to 5 investment rating scale at fair value as of December 31, 2006 and December 31, 2005:

	December 31, 2006					December 31, 2005
	Debt					Debt
	Investments at		Percentage of			Investments at		Percentage of
Investment Rating	Fair Value		Total Portfolio			Fair Value		Total Portfolio
1	$	22,689,633		8.8	%	$	16,069,312		11.5	%
2		198,127,878		77.1			102,189,918		72.8
3		36,196,874		14.1			20,136,424		14.3
4		—		—			2,000,000		1.4
5		—		—			—		—
Totals	$	257,014,385		100.0	%	$	140,395,654		100.0	%

Loans and Debt Securities on Non-Accrual Status

At December 31, 2006, none of our loans or debt securities were on non-accrual status. At December 31, 2005, loans and debt securities at fair value not accruing PIK interest for our total investment portfolio were $2.0 million, all of which related to one investment. At December 31, 2005, all cash interest and principal due on this investment was paid on a timely basis. On May 12, 2006, we sold this investment.

Results of Operations

The principal measure of our financial performance is the net income (loss) which includes net investment income (loss) and net realized and unrealized gain (loss). 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 investments is the net change in the fair value of our investment portfolio.

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 and unused fees. Other investment income consists primarily of the recognition of deferred financing fees received from our portfolio companies on the repayment of its entire outstanding debt.

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

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income of $423,000 from cash and cash equivalents, $25.0 million of interest income from portfolio investments (which included $2.4 million inpayment-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 inpayment-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 under our $140.0 million amended and restated securitization revolving credit facility. Our weighted average borrowings outstanding during the three months ended December 31, 2006 were approximately $76.7 million. 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. See “Related Party Transactions.”

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. In connection with the sale of the Interstate Highway Sign Corporation investment, the Company also received a participation interest of 10% in any future consideration received by the purchaser with respect to the subordinated debt investment. The Company, at this time, does not believe it will receive any additional consideration from the Interstate Highway Sign Corporation investment, and accordingly, has not recorded any value with respect to the participation interest. In addition, also during 2006, we realized a capital gain of $8,000 on the sale of our investment in Intergraph Corporation. We did not realize any gains or losses on the sale of our portfolio investments during the year ended December 31, 2005.

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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 is 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 (net of unearned income) 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.

There is no single standard for determining fair value in good faith. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment while employing a consistently applied valuation process for the types of investments we make. We specifically value each individual investment on a quarterly basis. We will record unrealized depreciation on investments when we believe that an investment has become impaired, including where collection of a loan or realization of an equity security is doubtful, or when the enterprise value of the portfolio company does not currently support the cost of our debt or equity investment. Enterprise value means the entire value of the company to a potential buyer, including the sum of the values of debt and equity securities used to capitalize the company at a point in time. We will record unrealized appreciation if we believe that the underlying portfolio company has appreciated in valueand/or our equity security has also appreciated in value. Changes in fair value are recorded in the statement of operations as net change in unrealized appreciation or depreciation.

Our process for determining the fair value of our 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 values, from which we derive a single estimate of enterprise value.

To determine the enterprise value of a portfolio company, we analyze its 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 in the private equity business, companies are valued based on multiples of EBITDA(Earnings Before Interest, Taxes, Depreciation and Amortization), cash flow, net income, revenues or, in limited instances, book value. When using EBITDA to determine enterprise value, we 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, we look to private merger and acquisition statistics, discounted public trading multiples or industry practices. In estimating a reasonable multiple, we consider not only the fact that our portfolio company may be a private company relative to a peer group of public comparables, but we also consider the size and scope of our portfolio company 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 our debt securities, the fair value of these securities normally corresponds 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. The conditions and other factors we consider in determining the fair value of our debt securities include, among other factors, the financial risk and performance of the portfolio company, competitive market dynamics and, to a lesser extent, market interest rates. The fair value of equity interests in portfolio companies is determined based on various

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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.

We received valuation assistance from our independent valuation firm, Duff & Phelps, LLC, on a portion of our investment portfolio at December 31, 2006 and on our entire investment portfolio at December 31, 2005.

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 Gain on Interest Rate Swap

For the year ended December 31, 2006, we recorded an unrealized gain of approximately $13,000 on our interest rate swap agreements.

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.

Comparison of the year ended December 31, 2005 and December 31, 2004

Total Investment Income

Total investment income included interest income on our investments, fee income and other investment income. Our fee income primarily included loan and arrangement fees. Other investment income consists primarily of the recognition of deferred financing fees received from our portfolio companies on the repayment of outstanding debt.

Total investment income for the years ended December 31, 2005 and December 31, 2004 was $13.4 million and $4.9 million, respectively. For the year ended December 31, 2005, this amount 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 inpayment-in-kind or PIK interest), $367,000 in fee income and $47,000 in other investment income. For the year ended December 31, 2004, this amount primarily consisted of interest income of $26,000 from cash and cash equivalents, $4.6 million of interest income from portfolio investments (which included $694,000 in PIK interest) and $242,000 in fee income.

The increase in our total investment income for the year ended December 31, 2005 as compared to the year ended December 31, 2004 is primarily attributable to an increase in the weighted average fair value balance outstanding of, and higher yields on, our interest-bearing investment portfolio during the year ended December 31, 2005. During the year ended December 31, 2005, the weighted average fair value balance outstanding of our interest-bearing investment portfolio was approximately $95.4 million as compared to approximately $36.5 million during the year ended December 31, 2004.

Expenses

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

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Expenses for the years ended December 31, 2005 and December 31, 2004 were $11.7 million and $4.3 million, respectively. Expenses increased for the year ended December 31, 2005 as compared to the year ended December 31, 2004 primarily as a result of incurring a $3.4 million prepayment penalty from the payoff of the outstanding balance under our $120.0 million credit agreement, higher interest expense, which increased by $2.0 million, higher employee compensation, which increased by $1.2 million, higher professional fees, which increased by $538,000, and higher general and administrative expenses, which increased by $814,000 million, offset by a decrease in consulting fees of $445,000. The higher interest expense was attributable to an increase in borrowings outstanding under the $120.0 million financing agreement through August 2, 2005, the date we paid off the outstanding balance under the financing agreement. Such borrowings were used to fund investments. The higher employee compensation was attributable to the increase in the number of our 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 year ended December 31, 2005. We expect to hire additional employees as needed in the future as our investment activities grow. The increased professional fees are a result of higher costs attributable with being a public company. The increase in general and administrative costs is primarily due to increases in insurance costs, directors fees, and investor relations.

We incurred consulting fees in the amount of $555,000 and $1.0 million for the years ended December 31, 2005 and 2004, respectively, payable to two entities affiliated with Compass Group Investments, Inc. These consulting arrangements were terminated on July 27, 2005. See “Managements Discussion and Analysis of Results of Operations — Related Party Transactions.”

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 is 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, 2005 and 2004, portfolio investments recorded at fair value were approximately 91.6% and 91.1% 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.

We received valuation assistance from our independent valuation firm, Duff & Phelps, LLC, on our entire investment portfolio at December 31, 2005 and December 31, 2004.

Net unrealized appreciation (depreciation) on investments is the net change in the fair value of our investment portfolio. During the year ended December 31, 2005, we recorded net unrealized depreciation of $3.0 million on our investments, which primarily related to one investment. During 2004, we recorded unrealized depreciation of $876,000 on our investments, of which, $866,000 related to one investment.

Net Loss from Operations

Net loss was $1.2 million for the year ended December 31, 2005 as compared to net loss of $269,000 for the year ended December 31, 2004.

Financial Condition, Liquidity and Capital Resources

Cash, Cash Equivalents and Restricted Cash

At December 31, 2006 and 2005, we had $4.2 million and $2.4 million, respectively, in cash and cash equivalents. In addition, at December 31, 2006 and 2005, we had $5.1 million and $7.8 million, respectively,

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in restricted cash which we maintained in accordance with the terms of our $140.0 million amended and restated securitization revolving credit facility with an entity affiliated with BMO Capital Markets Corp. (formerly known as Harris Nesbitt Corp.). A portion of these funds, approximately $4.1 million, were released to us on January 12, 2007.

For the year ended December 31, 2006, net cash provided by operating activities totaled $13.8 million, compared to net cash provided by operating activities of $321,000 for the comparable period. This change was due primarily to an increase in net income, due to an increase in realized loss on the sale of investments, and an increase in stock based compensation expense offset by an increase in interest receivable, an increase in unrealized appreciation on investments and an increase inpayment-in-kind interest and dividends. Cash used for investing activities totaled $117.0 million and $74.5 million for the years ended December 31, 2006 and 2005, respectively. This change was principally due to higher investment origination in 2006, partially offset by an increase of $23.1 million in loan prepayments and amortization and an increase in proceeds from investment sales of $3.6 million. Cash provided by financing activities totaled $105.0 million and $74.1 million in the years ended December 31, 2006 and 2005, respectively. This change was principally due to a net increase of $97.7 million in our borrowings, a decrease in restricted cash of $7.5 million and a decrease in deferred financing costs of $1.1 million, offset by a decrease in net proceeds from sale of common stock of $69.6 million and an increase in dividends paid of $5.7 million.

Liquidity and Capital Resources

Prior to our initial public offering, our primary sources of capital had been from Compass Group Investments, Inc. which provided us with a $30.1 million equity investment, a $400,000 demand note and a $2.0 million secured revolving line of credit and an unaffiliated lender which provided us with a line of credit under which we had the ability to borrow up to $120.0 million, subject to certain conditions. On August 2, 2005, we completed an initial public offering of 7,190,477 shares of our common stock and on August 15, 2005, the underwriters exercised their option to purchase an additional 1,078,572 shares of common stock. We received net proceeds after underwriters’ commissions, discounts and fees of $106.1 million. Concurrent with our initial public offering, we entered into a securitization revolving credit facility, which we amended and restated in September 2006. See “— Borrowings.”

On June 14, 2006, we closed a secondary 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 secondary public offering, Compass Group Investments, Inc. sold 250,000 shares of our common stock, which resulted in it beneficially owning 6.5% of our outstanding shares of common stock immediately upon the completion of such offering. We did not receive any proceeds from the sale of such shares by Compass Group Investments, Inc. On January 17, 2007, we closed a shelf public 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.

We expect our cash on hand, borrowings under our future debt agreements, including our amended and restated securitization revolving credit facility, and cash generated from operations, including income earned from investments in our portfolio companies and, to a lesser extent, the temporary investments of cash in U.S. government securities and other high-quality debt investments that mature in one year or less, will be adequate to meet our cash needs at our current level of operations. Our primary use of funds will be investments in portfolio companies. In order to fund new originations, we intend to use cash on hand, advances under our amended and restated securitization revolving credit facility and equity financings. Our amended and restated securitization revolving credit facility contains collateral requirements, including, but not limited to, minimum diversity, rating and yield, and limitations on loan size. These limitations 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.

In order to satisfy the requirements applicable to RIC’s under Subchapter M of the Code, we intend to distribute to our stockholders substantially all of our taxable income, (which includes our taxable interest and fee income), except for certain realized net capital gains. Taxable income generally differs from net income

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(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, as unrealized appreciation or depreciation on our investments is not included in taxable income until realized. Taxable income includes non-cash income, such as PIK interest and dividends or the amortization of discounts and fees. Cash collections of income resulting from PIK interest and dividends or the amortization of discounts and fees generally occur upon the repayment of the loans or debt securities that include such items. Non-cash taxable income is reduced by non-cash expenses, such as realized losses and depreciation and amortization expense. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — 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 include 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 December 31, 2006, this ratio was 267%. 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.

Borrowings

Amended and Restated 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 with an entity affiliated with BMO Capital Markets Corp. (formerly known as Harris Nesbitt Corp.). The facility allows our special purpose subsidiary to borrow up to $140.0 million through the issuance of notes to a multi-seller commercial paper conduit that is administered by the affiliated entity. The facility is secured by all of the loans held by our special purpose subsidiary. The facility bears interest at the commercial paper rate plus 1.35% and allows our special purpose subsidiary to make draws under the facility until July 23, 2009, unless extended prior to such date for an additional364-day period with the consent of the lender. If the facility is not extended, any principal amounts then outstanding will be amortized over a24-month period following July 23, 2009 and interest will accrue on outstanding borrowings under the facility at the prime rate plus 2.0%. The facility provides for the payment to the lender of a monthly fee equal to 0.25% per annum on the unused amount of the facility. We will use the net proceeds of the facility to fund our loan origination activities and for general corporate purposes. Each loan origination under the amended and restated securitization revolving credit 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 and restated securitization revolving credit facility at any particular time or at all. As of December 31, 2006, $98.4 million was outstanding under the facility.

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 additional364-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 a24-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.

In March and December of 2006, we, through our special purpose subsidiary, entered into interest rate swap agreements. Our swap agreement entered into in March is at a fixed rate of 5.04% for five years, and our December swap agreement is at a fixed rate of 4.84% for five years. 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, 2006, net unrealized gains attributed to the swaps were 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 hedged portfolio. At December 31, 2005, we did not hold any derivative financial instruments for hedging purposes.

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Regulated Investment Company Status and Dividends

Effective as of 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, the distribution of prior year taxable income carried forward into and distributed in the current year. Distributions also may include returns of capital.

To 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 2006, we realized a capital gain of approximately $8,000 and a capital loss of $3.3 million. We did not realize any capital gains during 2005. At December 31, 2006, our net realized capital loss of $3.3 million will be available to offset capital gains until July 31, 2014.

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 tax 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 credit facilities. 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.

On February 23, 2007, our board of directors authorized a cash dividend of $0.32 per share, payable on April 18, 2007 to stockholders of record as of the close of business March 15, 2007. Such cash dividend will be paid on total shares issued and outstanding on the record date. During 2006, we paid $1.20 per share of dividends to our stockholders, which were comprised of $1.12 per share from ordinary income and $0.08 per share from paid-in capital. During 2005, we paid $0.43 per share of dividends to our stockholders, which were comprised of $0.31 per share from ordinary income and $0.12 per share from paid-in capital.

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.

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We attempt to limit our credit risk by conducting extensive due diligence, negotiating appropriate financial covenants and obtaining collateral where necessary. As of December 31, 2006, we had unused commitments to extend credit to our portfolio companies of $27.0 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 December 31, 2006, we held two interest rate swap agreements.

Contractual Obligations

The following table reflects a summary of our contractual cash obligations and other commercial commitments as of December 31, 2006:

	Payments Due by Period
											More than 5
Contractual Obligations	2007		2008		2009		2010		2011		Years
Long-term debt obligations(1)	$	—	$	—	$	98,380,000	$	—	$	—	$	—
Capital lease obligations		—		—		—		—		—		—
Operating lease obligations		231,000		237,000		241,000		247,000		21,000		—
Purchase obligations		—		—		—		—		—		—
Other long-term liabilities reflected on the balance sheet under GAAP		—		—		—		—		—		—
Unused lending commitments(2)		27,040,000		—		—		—		—		—
Total	$	27,271,000	$	237,000	$	98,621,000	$	247,000	$	21,000	$	—

(1)

Our amended and restated securitization credit facility permits draws under the facility until July 23, 2009, unless extended prior to such date for an additional364-day period with the consent of the lender. If the facility is not extended, any principal amounts then outstanding will be amortized over a24-month period following July 23, 2009 and interest will accrue on outstanding borrowings under the facility at the prime rate plus 2.0%. This table assumes that we would repay all of our indebtedness under the facility at the time that we were no longer able to make draws under the facility. However, we cannot provide any assurance that we would be able to repay all of such outstanding indebtedness at such time.

(2)

Represents the unfunded commitment to extend credit to 11 of our portfolio companies.

Recent Developments

On January 4, we received proceeds of $9.4 million in conjunction with the full repayment of our senior secured term loan and subordinated debt investment in Robert Rothschild Farm, Inc. Proceeds received included approximately $500,000 of accruedpayment-in-kind interest and a prepayment fee.

On January 11, 2007, we invested $1.0 million in a syndicated junior secured term loan in Metrologic Instruments, Inc., a global supplier of data capture and collection hardware and software.

On January 19, 2007, we made a $3.9 million follow-on investment, which is comprised of a senior secured term loan and a senior subordinated debt investment, in Fairchild Industrial Products, Co. In conjunction with such investment, Fairchild Industrial Products, Co. paid us $98,000 to redeem certain shares of preferred stock held by us, including accrued dividends thereon.

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On January 26, 2007, we 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.

On February 2, 2007, we closed a $22.5 million one-stop investment, including an equity co-investment, in Aylward Enterprises, LLC, a manufacturer of solid dose tablet feed systems and bottle fillers.

On February 9, 2007, we closed a $28.2 million one-stop investment in R-O-M Corporation, in conjunction with the sale of the company to a private equity partner. This investment represented a net $12.4 million increase in our commitment to the company.

On February 23, 2007, our board of directors declared a cash dividend of $0.32 per share, payable on April 18, 2007 to stockholders of record as of the close of business March 15, 2007.

Related Party Transactions

Prior to our initial public offering, Compass Group Investments, Inc. beneficially owned 100% of our equity interests. As of December 31, 2006, Compass Group Investments, Inc. beneficially owned 6.5% of the outstanding shares of common stock.

In November 2002, we entered into an informal arrangement with The Compass Group International LLC, (“Compass International”), the investment advisor for Compass Group Investments, Inc., under which we occupied space at Compass International’s offices located in Westport, Connecticut in exchange for Compass International’s use of certain of our administrative personnel. In August 2005, we entered into a lease agreement for new office space in Westport, Connecticut, with an unaffiliated third party, with occupancy commencing on October 1, 2005. As a result, we terminated our informal arrangement with Compass International on October 1, 2005.

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 net proceeds we received in connection with 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 net proceeds we received in connection with 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.

On February 11, 2003, we also entered into a $400,000 note agreement with an entity affiliated with Compass Group Investments, Inc. On May 9, 2005, we repaid all outstanding borrowings under this note agreement.

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

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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.

Our process for determining the fair value of our 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 we derive a single estimate of enterprise value.

To determine the enterprise value of a portfolio company, we analyze its 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 in the private equity business, companies are valued based on multiples of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), cash flow, net income, revenues or, in limited instances, book value. When using EBITDA to determine enterprise value, we 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, we look to private merger and acquisition statistics, discounted public trading multiples or industry practices. In estimating a reasonable multiple, we consider not only the fact that our portfolio company may be a private company relative to a peer group of public comparables, but we also consider the size and scope of our portfolio company 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 our 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.

The fair value of our investments at December 31, 2006 and 2005 was determined in good faith by our board of directors. We received valuation assistance from our independent valuation firm, Duff & Phelps, LLC, on a portion of our investment portfolio at December 31, 2006 and on our entire investment portfolio at December 31, 2005.

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 Issue00-21 “Accounting for Revenue Arrangements with Multiple Deliverables” (“EITF00-21”). EITF00-21 addresses certain aspects

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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). EITF00-21 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 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 will depend 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 contractualpayment-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. 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 $2.9 million or 1.1% of our portfolio of investments at fair value (excluding unearned income) as of December 31, 2006 and $2.2 million or 1.5% of our portfolio of investments at fair value (excluding unearned income) as of December 31, 2005. 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 year ended December 31, 2006 was as follows:

	Fiscal Year
	Ended
	December 31,
	2006
Beginning PIK balance	$	2,174,974
PIK interest and dividends earned during the period		2,424,927
Sale of investments		(383,946	)
PIK payments received during the period		(1,324,390	)
Ending PIK balance	$	2,891,565

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 December 31, 2006, none of our loans or debt securities were greater than 90 days past due or on non-accrual status. At December 31, 2005, although none of our loans and debt securities were greater than 90 days past due, loans and debt securities at fair value totaling $2.0 million were not accruing PIK interest.

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Item 7A.   Quantitative and Qualitative Disclosure About Market Risk

Our business activities contain elements of market risk. We consider interest rates to be our principal market risk. We consider the management of risk essential to conducting our business. Accordingly, our risk management systems and procedures are designed to identify and analyze our risks, to set appropriate policies and limits and to continually monitor these risks and limits by means of reliable administrative and information systems and other policies and programs. Our investment income is affected by changes in various interest rates, including LIBOR and prime rates. Approximately 39% of our investment portfolio at fair value bears interest at fixed rates, with the remainder at floating rates.

Because we borrow money to make investments, our net investment income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income. In periods of rising interest rates, our cost of funds would increase, which would reduce our net investment income. Our interest rates on our borrowings are based on commercial paper rates. We have and may continue to use interest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations. Such techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act. We have analyzed the potential impact of changes in interest rates on interest income net of interest expense. Assuming that the balance sheet were to remain constant and no actions were taken to alter the existing interest rate sensitivity, a hypothetical immediate 1% change in interest rates would have affected investment income by approximately $1.5 million and interest expense by approximately $769,000. Although management believes that this measure is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in credit quality, size and composition of the assets on the balance sheet and other business developments that could affect net increase in assets resulting from operations, or net income. Accordingly, no assurances can be given that actual results would not differ materially from the potential outcome simulated by this estimate.

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Item 8.   Financial Statements and Supplementary Data

Index to Consolidated Financial Statements

Documents	Page
Report of Independent Registered Public Accounting Firm		46
Consolidated Balance Sheets at December 31, 2006 and 2005		47
Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and 2004		48
Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003		49
Consolidated Statements of Changes in Net Assets for the years ended December 31, 2006, 2005 and 2004		50
Consolidated Schedule of Investments at December 31, 2006 and 2005		51
Notes to Consolidated Financial Statements		54
Report of Independent Registered Public Accounting Firm		71
Schedule of Investments In and Advances to Affiliates		72

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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. (the “Company”), including the consolidated schedule of investments, as of December 31, 2006 and 2005, 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, 2006. We have also audited management’s assessment, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’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. Our responsibility is to express an opinion on these financial statements, an opinion on management’s assessment, and an opinion on the effectiveness of the company’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 audit 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 audit of internal control included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and 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 generally accepted accounting principles. 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 generally accepted accounting principles, 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2006 and 2005, 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, 2006 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

/s/ GRANT THORNTON LLP

New York, New York

February 16, 2007

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PATRIOT CAPITAL FUNDING, INC.

Consolidated Balance Sheets

	December 31,
	2006			2005
ASSETS
Investments at fair value:
Non-control/non-affiliate investments (cost of $251,915,921 — 2006, $145,232,150 — 2005)	$	251,933,655		$	141,390,954
Affiliate investments (cost of $8,966,605 — 2006, $0 — 2005)		8,925,605			—
Unearned income		(3,610,884	)		(3,439,295	)
Total investments		257,248,376			137,951,659
Cash and cash equivalents		4,211,643			2,371,841
Restricted cash		5,113,806			7,806,328
Interest receivable		2,221,000			867,475
Other assets		1,727,680			1,658,690
TOTAL ASSETS	$	270,522,505		$	150,655,993
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Borrowings	$	98,380,000		$	21,650,000
Interest payable		523,709			60,334
Dividends payable		4,904,818			—
Accounts payable, accrued expenses and other		2,605,349			1,793,294
TOTAL LIABILITIES		106,413,876			23,503,628
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; 15,821,994 and 12,136,655 shares issued and outstanding at December 31, 2006 and 2005, respectively		158,220			121,367
Paid-in-capital		171,957,327			136,267,552
Accumulated net investment loss		(1,912,061	)		(1,912,061	)
Distributions in excess of net investment income		(2,821,587	)		(3,483,297	)
Net realized loss on investments		(3,262,966	)		—
Net unrealized gain on interest rate swaps		12,961			—
Net unrealized depreciation on investments		(23,265	)		(3,841,196	)
TOTAL STOCKHOLDERS’ EQUITY		164,108,629			127,152,365
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	270,522,505		$	150,655,993
NET ASSET VALUE PER COMMON SHARE	$	10.37		$	10.48

See Notes to Consolidated Financial Statements

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PATRIOT CAPITAL FUNDING, INC.

Consolidated Statements of Operations

	Year Ended December 31,
	2006			2005			2004
INVESTMENT INCOME
Interest:
Non-control/non-affiliate investments (less than 5% owned)	$	25,011,993		$	13,035,673		$	4,616,665
Affiliate investments (5% to 25% owned)		375,716			—			—
Total interest income		25,387,709			13,035,673			4,616,665
Fees:
Non-control/non-affiliate investments (less than 5% owned)		260,289			366,830			241,870
Affiliate investments (5% to 25% owned)		9,887			—			—
Total fee income		270,176			366,830			241,870
Other investment income — non-control/non-affiliate investments (less than 5% owned)		848,449			46,839			—
Total Investment Income		26,506,334			13,449,342			4,858,535
EXPENSES
Compensation expense		3,877,525			2,481,761			1,326,576
Consulting fees		—			554,796			1,000,000
Interest		4,332,582			3,517,989			1,504,998
Professional fees		1,045,613			730,550			192,938
Prepayment penalty		—			3,395,335			—
General and administrative		2,229,970			1,041,030			227,208
Total Expenses		11,485,690			11,721,461			4,251,720
Net Investment Income		15,020,644			1,727,881			606,815
NET REALIZED AND UNREALIZED GAIN AND LOSS
Net realized loss on investments — non-control/non-affiliate investments (less than 5% owned)		(3,262,966	)		—			—
Net unrealized appreciation (depreciation) on investments — non-control/non-affiliate investments (less than 5% owned)		3,858,931			(2,965,175	)		(876,021	)
Net unrealized depreciation on investments — affiliate investments (5% to 25% owned)		(41,000	)		—			—
Net unrealized gain on interest rate swaps		12,961			—			—
Net Realized and Unrealized Gain (Loss)		567,926			(2,965,175	)		(876,021	)
NET INCOME (LOSS)	$	15,588,570		$	(1,237,294	)	$	(269,206	)
Income (loss) per share, basic and diluted	$	1.10		$	(0.17	)	$	(0.07	)
Weighted average shares outstanding, basic		14,145,200			7,253,632			3,847,902
Weighted average shares outstanding, diluted		14,237,952			7,253,632			3,847,902

See Notes to Consolidated Financial Statements

48

PATRIOT CAPITAL FUNDING, INC.

Consolidated Statements of Cash Flows

	Year Ended December 31,
	2006			2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	15,588,570		$	(1,237,294	)	$	(269,206	)
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
Depreciation and amortization		456,289			192,785			21,343
Increase in interest receivable		(1,353,525	)		(252,232	)		(565,681	)
Net realized loss on sale of investments		3,262,966			—			—
Change in unrealized depreciation (appreciation) on investments		(3,817,931	)		2,965,175			876,021
Payment-in-kind interest and dividends		(2,424,927	)		(1,825,755	)		(694,158	)
Unrealized gain on interest rate swap		(12,961	)		—			—
Stock based compensation expense		505,785			—			—
Change in unearned income		364,866			789,884			726,763
Change in interest payable		463,375			(222,762	)		81,765
Change in management fee payable		—			(916,666	)		500,000
Change in other assets		(9,663	)		(83,849	)		(200,129	)
Change in accounts payable, accrued expenses and other		812,055			911,569			313,848
Net cash provided by operating activities		13,834,899			320,855			790,566
CASH FLOWS FROM INVESTING ACTIVITIES:
Funded investments		(157,951,595	)		(88,850,000	)		(42,850,000	)
Principal repayments on investments		37,627,269			14,572,867			3,025,375
Proceeds from investment sales		3,642,634			—			2,000,000
Purchase of furniture and equipment		(269,436	)		(235,057	)		(15,903	)
Net cash used for investing activities		(116,951,128	)		(74,512,190	)		(37,840,528	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings		353,580,000			68,900,000			38,259,092
Repayments on borrowings		(276,850,000	)		(89,895,458	)		(5,013,634	)
Deferred offering costs		(159,620	)		—			—
Net proceeds from sale of common stock		36,652,098			106,288,919			3,050,000
Decrease (increase) in restricted cash		2,692,522			(4,806,328	)		2,000,000
Dividends paid		(10,885,371	)		(5,211,178	)		—
Deferred financing costs		(73,598	)		(1,204,256	)		—
Net cash provided by financing activities		104,956,031			74,071,699			38,295,458
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		1,839,802			(119,636	)		1,245,496
CASH AND CASH EQUIVALENTS AT:
Beginning of year		2,371,841			2,491,477			1,245,981
End of year	$	4,211,643		$	2,371,841		$	2,491,477
Supplemental information:
Interest paid	$	3,869,208		$	3,436,464		$	1,407,433
Non-cash financing activities:
Dividends reinvested in common stock	$	1,054,090		$	242,737		$	—
Dividends declared but not paid	$	4,904,818		$	—		$	—

See Notes to Consolidated Financial Statements

49

PATRIOT CAPITAL FUNDING, INC.

Consolidated Statements of Changes in Net Assets

	2006			2005			2004
Operations:
Net investment income	$	15,020,644		$	1,727,881		$	606,815
Net realized loss on investments		(3,262,966	)		—			—
Net unrealized appreciation (depreciation) on investments		3,817,931			(2,965,175	)		(876,021	)
Net unrealized gain on interest rate swap		12,961			—			—
Net increase (decrease) in net assets from operations		15,588,570			(1,237,294	)		(269,206	)
Shareholder distributions:
Distributions to stockholders from net investment income		(15,020,644	)		(1,727,881	)		—
Tax return of capital		(2,485,345	)		—			—
Distributions in excess of net investment income		661,710			(3,483,297	)		—
Net decrease in net assets from shareholder distributions		(16,844,279	)		(5,211,178	)		—
Capital share transactions:
Issuance of common stock		36,652,098			106,046,182			3,050,000
Issuance of common stock under dividend reinvestment plan		1,054,090			242,737			—
Stock option compensation		505,785			—			—
Net increase in net assets from capital share transactions		38,211,973			106,288,919			3,050,000
Total increase in net assets		36,956,264			99,840,447			2,780,794
Net assets at beginning of period		127,152,365			27,311,918			24,531,124
Net assets at end of period	$	164,108,629		$	127,152,365		$	27,311,918
Net asset value per common share	$	10.37		$	10.48		$	7.10
Common shares outstanding at end of period		15,821,994			12,136,655			3,847,902

* As discussed in the Notes to Consolidated Financial Statements, the Company recorded $2.4 million of distributions as tax return of capital upon the close of its first RIC tax year ended July 31, 2006. Accordingly, certain amounts recorded as distributions in excess of net investment income for distributions that occurred in calendar year 2005 were included in the amount recorded as tax return of capital in 2006.

See Notes to Consolidated Financial Statements

50

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

Company(1)	Industry	Investment	Principal		Cost		Value
Affiliate investments (5% to 25% owned):
Smart, LLC (5)	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.	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	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.	Diversified defense company	Common Stock Warrants (4)				463,168		505,800
Arrowhead General Insurance Agency, Inc.	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.	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	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.	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.	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.	Equestrian products catalog retailer	Senior Subordinated Debt (11.5%, Due 9/09) (3) Common Stock Warrants (4)		3,000,000		3,000,000 148,200		3,000,000 171,200
Eight O’Clock Coffee Company	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)	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.	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.	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) Common Stock — Class A (4) Common Stock — Class B (2)		7,100,000 2,382,000 5,000,833		7,100,000 2,382,000 5,000,833 2,475 267,466		7,100,000 2,382,000 5,000,833 86,300 268,266
Fairchild Industrial Products, Co.	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) Common Stock — Class B (4)		9,770,000 2,793,750 5,368,427		9,770,000 2,793,750 5,368,427 399,401 121,598		9,770,000 2,793,750 5,368,427 399,401 80,400
Impact Products, LLC	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
Innovative Concepts in Entertainment, Inc.	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)	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

51

Company(1)	Industry	Investment	Principal		Cost			Value
L.A. Spas, Inc.	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)	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.	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.	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	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.	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.	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) Senior Secured Term Loan C (14.0%, Due 7/11) (2) (3) Senior Subordinated Debt (12.0%, Due 1/12) (3) Preferred Stock (2) Common Stock (4)		430,000 2,660,000 2,344,125 3,161,694 75,000 80,808 25		430,000 2,660,000 2,344,125 3,161,694 75,000 80,808 25			430,000 2,660,000 2,344,125 3,161,694 75,000 80,808 49,700
Stolle Machinery Company, LLC	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 would “control” a portfolio company if the Company owned 25% or more of its voting securities and would be an “affiliate” of a portfolio company if the Company owned 5% or more of its voting securities.
(2)	Amount includespayment-in-kind (PIK) interest or dividends.
(3)	Pledged as collateral under the Company’s Securitization Facility. See Note 3 to Consolidated Financial Statements.
(4)	Non-income producing.
(5)	Some of the investments listed are issued by an affiliate of the listed portfolio company.

See Notes to Consolidated Financial Statements

52

PATRIOT CAPITAL FUNDING, INC.
Consolidated Schedule of Investments
December 31, 2005

Company(1)	Industry	Investment	Principal		Cost			Value
Agent Media Corporation	Publisher of insurance	Senior Secured Term Loan A (11.8%, Due 9/08) (3)	$	1,375,000	$	1,375,000		$	1,375,000
	industry periodicals	Senior Secured Term Loan B (16.0%, Due 9/09) (2) (3)		2,109,015		2,109,015			2,109,015
		Common Stock Warrants (4)				31,000			49,900
Allied Defense Group,	Diversified defense	Senior Secured Term Loan (11.5%, Due 11/10) (3)		14,000,000		14,000,000			14,000,000
Inc.	company	Common Stock Warrants (4)				463,168			573,800
Borga, Inc.	Manufacturer of pre-	Senior Secured Term Loan A (7.7%, Due 3/09) (3)		2,046,000		2,046,000			2,046,000
	fabricated metal	Senior Secured Term Loan B (10.7%, Due 5/10) (3)		1,835,250		1,835,250			1,835,250
	building systems	Senior Secured Term Loan C (16.0%, Due 5/10) (2) (3)		7,188,062		7,188,062			7,188,062
		Common Stock Warrants (4)				20,250			89,600
Copperhead Chemical Company, Inc.	Manufacturer of bulk pharmaceuticals	Senior Subordinated Debt (15.3%, Due 11/10) (2) (3)		4,668,608		4,668,608			4,668,608
Dover Saddlery, Inc.	Equestrian products	Senior Subordinated Debt (11.5%, Due 9/09) (2) (3)		3,000,000		3,000,000			3,000,000
	catalog retailer	Common Stock Warrants (4)				148,200			178,600
Eight O’Clock Coffee Company	Manufacturer, distributor, and marketer of coffee	Junior Secured Term Loan (11.4%, Due 11/12) (3)		6,500,000		6,500,000			6,500,000
Encore Legal Solutions,	Legal document	Junior Secured Term Loan A (9.8%, Due 12/08) (3)		4,660,000		4,660,000			4,660,000
Inc.	management services	Junior Secured Term Loan B (8.3%, Due 12/09) (3)		6,944,625		6,944,625			6,944,625
		Senior Subordinated Debt (15.0%, Due 5/10) (2) (3)		4,946,718		4,946,718			4,946,718
		Common Stock Warrants (4)				350,000			103,400
Fairchild Industrial	Manufacturer of industrial	Senior Secured Term Loan A (8.0%, Due 7/10) (3)		9,670,000		9,670,000			9,670,000
Products, Co.	controls and power	Senior Secured Term Loan B (10.0%, Due 7/11) (3)		2,818,750		2,818,750			2,818,750
	transmission products	Senior Subordinated Debt (15.5%, Due 7/11)		5,355,000		5,355,000			5,355,000
Interstate Highway Sign	Manufacturer of	Senior Secured Term Loan (10.5%, Due 12/09) (3)		1,360,000		1,360,000			1,360,000
Corporation	highway and roadway	Senior Subordinated Debt (18.0%, Due 12/09) (2) (3)		5,837,409		5,758,946			2,000,000
	signs	Common Stock Warrants (4)				59,932			—
Keltner Enterprises, LLC (5)	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.	Manufacturer of	Senior Subordinated Debt (15.5%, Due 1/10) (2) (3)		6,776,424		6,776,424			6,776,424
	above ground spas	Common Stock Warrants (4)				5,000			—
Prince Mineral Company,	Manufacturer of pigments	Junior Secured Term Loan (11.0%, Due 3/11) (3)		3,600,000		3,600,000			3,600,000
Inc.		Senior Subordinated Debt (17.0%, Due 9/11) (2) (3)		10,228,579		10,228,579			10,228,579
Quartermaster, Inc.	Retailer of uniforms and	Revolving Line of Credit (9.5%, Due 12/10) (3)		250,000		250,000			250,000
	tactical equipment to law	Senior Secured Term Loan A (9.2%, Due 12/10) (3)		6,000,000		6,000,000			6,000,000
	enforcement and security	Senior Secured Term Loan B (10.4%, Due 12/10) (3)		2,600,000		2,600,000			2,600,000
	professionals	Senior Secured Term Loan C (15.0%, Due 12/11) (2) (3)		3,104,133		3,104,133			3,104,133
Robert Rothschild Farm,	Manufacturer of	Senior Secured Term Loan B (8.5%, Due 7/10) (3)		5,000,000		5,000,000			5,000,000
Inc.	specialty food products	Senior Subordinated Debt (16.3%, Due 1/12) (2) (3)		4,697,171		4,697,171			4,697,171
R-O-M Corporation	Manufacturer of doors,	Senior Secured Term Loan A (8.8%, Due 12/09) (3)		3,400,000		3,400,000			3,400,000
	ramps and bulk heads for	Senior Secured Term Loan B (9.8%, Due 12/10) (3)		3,400,000		3,400,000			3,400,000
	fire trucks and food	Senior Subordinated Debt (16.0%, Due 12/10) (2) (3)		7,012,319		7,012,319			7,012,319
	transportation
Total Non-control/non-affiliate Investments						145,232,150			141,390,954
Unearned Income						(3,439,295	)		(3,439,295	)
Total Investments Net of Unearned Income					$	141,792,855		$	137,951,659

(1)	During 2005, the Company did not “control,” and 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 would “control” a portfolio company if the Company owned 25% or more of its voting securities and would be an “affiliate” of a portfolio company if the Company owned 5% or more of its voting securities.
(2)	Amount includespayment-in-kind (PIK) interest or dividends.
(3)	Pledged as collateral under the Company’s Securitization Facility. See Note 3 to Consolidated Financial Statements.
(4)	Non-income producing.
(5)	Some of the investments listed are issued by an affiliate of the listed portfolio company.

See Notes to Consolidated Financial Statements

53

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.

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 ofU.S.-based companies. On July 27, 2005, Wilton merged with and into the Company and then the Company effected a stock split. Also, 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

The accompanying financial statements reflect the adjustments resulting from the July 27, 2005 stock split for all periods presented. Upon completion of the merger and stock split, the Company had 3,847,902 shares of common stock outstanding prior to shares issued in the initial public offering. Accordingly, capital stock and paid-in capital has been adjusted to reflect the merger and stock split for all periods presented. Prior to the completion of the initial public offering, Compass Group Investments, Inc. (“Compass”) beneficially owned all of the outstanding stock of the Company.

Moreover, 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 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.

Our portfolio and related portfolio income and net realized and unrealized gain (loss) on our portfolio are presented in three categories: “control investments,” “affiliate investments,” and “non-affiliate investments.” “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 December 31, 2006, the Company owned greater than 5% but less than 25% of the voting securities in one investment. At December 31, 2005, all of the Company’s investments were in Non-Control/Non-Affiliate companies.

54

Patriot Capital Funding, Inc.

Notes to Consolidated Financial Statements — (Continued)

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, 2006 and 2005, 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.

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 conditions and other factors we consider in determining the fair value of our debt securities include, among other factors, the financial risk

55

Patriot Capital Funding, Inc.

Notes to Consolidated Financial Statements — (Continued)

and performance of the portfolio company, competitive market dynamics and, to a lesser extent, market interest rates. 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.

The Company’s board of directors, in good faith, determined the fair value of the investments at December 31, 2006 and 2005. The Company received valuation assistance from our independent valuation firm, Duff & Phelps, LLC, on a portion of our investment portfolio at December 31, 2006 and on our entire investment portfolio at December 31, 2005.

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.

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, 2006 and 2005, unamortized debt issuance costs were $747,000 and $1.0 million and included in other assets in the accompanying balance sheets. Amortization expense was $366,000, $174,000, and $16,000 for the years ended 2006, 2005 and 2004, 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, 2006, none of the Company’s loans or debt securities were on non-accrual status. At December 31, 2005, loans and debt securities at fair value not accruing PIK interest for the Company’s total investment portfolio were $2.0 million, all of which related to one investment. At December 31, 2005, all cash interest and principal due on this investment was paid on a timely basis. On May 12, 2006, this investment was sold. Investment origination fees are deferred and amortized as adjustments to the related yield over the contractual life of the investment. Unearned income was $3.6 million and $3.4 million as of December 31, 2006 and 2005, 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

56

Patriot Capital Funding, Inc.

Notes to Consolidated Financial Statements — (Continued)

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, 2006, the Company capitalized $411,000 of direct loan origination costs of which $409,000 were offset against fees received of $2.3 million. At December 31, 2006, the remaining balance of capitalized costs totaled $104,000, which relates to loan originations in process. During the year ended December 31, 2005, the Company capitalized $203,000 of direct loan origination costs of which $102,000 were offset against fees received of $352,000. The Company did not incur any direct loan origination costs prior to 2005.

The Company accounts for its other Fees in accordance with the Emerging Issues Task Force Issue00-21 “Revenue Arrangements with Multiple Deliverables” (“EITF00-21”). EITF00-21 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, 2006, 2005 and 2004, the Company recognized $1.1 million, $414,000 and $242,000, 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, 2006 and 2005 was as follows:

	2006			2005
Beginning unearned income balance	$	3,439,295		$	2,073,921
Fees received		2,254,649			1,497,541
Warrants received		—			575,490
Unearned income recognized		(2,083,060	)		(707,657	)
Ending unearned income balance	$	3,610,884		$	3,439,295

57

Patriot Capital Funding, Inc.

Notes to Consolidated Financial Statements — (Continued)

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, 2006, 2005 and 2004, the Company recorded PIK income of $2.4 million, $1.8 million and $694,000, respectively.

PIK related activity for the years ended December 31, 2006 and 2005 was as follows:

	2006			2005
Beginning of period PIK loan balance	$	2,174,974		$	727,087
PIK interest earned during the year		2,424,927			1,825,755
Sales of investments		(383,946	)		—
Payments received during the year		(1,324,390	)		(377,868	)
Ending PIK loan balance	$	2,891,565		$	2,174,974

To qualify for the federal income tax benefits applicable to RIC’s (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.

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 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. As of December 31, 2006, 2,204,496 options were outstanding, of which 584,332 were exercisable. The options have a weighted average remaining contractual life of 8.9 years, a weighted average exercise price of $12.76, and an aggregate intrinsic value of approximately $3.8 million.

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

58

Patriot Capital Funding, Inc.

Notes to Consolidated Financial Statements — (Continued)

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 4.34%, 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 2006 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.

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 2006 and 2005 was approximately $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 year ended December 31, 2006, the Company recorded compensation expense related to stock options of approximately $506,000, 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, 2006, there was $1.2 million of unrecognized compensation cost related to unvested options which is expected to be recognized over 2.5 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 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.

59

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. In connection with this election, the Company adopted a tax year ending July 31. As a result of the election, 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.

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.

On July 31, 2006, the Company completed its first RIC tax year, and, as a result, the Company determined that $2.5 million of distributions represented a return of capital for tax purposes for the fiscal year from August 1, 2005 through July 31, 2006. Such amount has been reclassified as a reduction of paid-in capital for tax purposes at July 31, 2006.

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 on capital stock in excess of par (i.e., return of capital). As more fully discussed in Note 11, the return of capital for distributions made for the period August 1, 2005 through July 31, 2006 was determined by the Company’s tax earnings and profits for its tax fiscal year ended July 31, 2006.

Recent Accounting Pronouncements

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 addressed how to calculate fair value measurements required or permitted under other accounting pronouncements. Accordingly, this statement does not require any new fair value measurements. However, for some entities, the application of this statement will change current practice. FASB Statement No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. Early adoption is permitted, provided that financial statements for that fiscal year, including any interim periods within that fiscal year, have not been issued. The Company is currently evaluating the impact, if any, that the implementation of SFAS No. 157 will have on our results of operations or financial condition.

60

Patriot Capital Funding, Inc.

Notes to Consolidated Financial Statements — (Continued)

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. FIN No. 48 will be effective as of the beginning of an entity’s first fiscal year that begins after December 15, 2006. The Company will adopt this Interpretation effective January 1, 2007. The Company is currently evaluating the impact of FIN No. 48 on its financial position and results of operations.

Reclassifications

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

Note 3.   Investments

At December 31, 2006 and December 31, 2005, investments consisted of the following:

	December 31, 2006						December 31, 2005
	Cost			Fair Value			Cost			Fair Value
Commercial loans	$	256,743,135		$	257,014,385		$	144,154,600		$	140,395,654
Investments in equity securities		4,139,391			3,844,875			1,077,550			995,300
Subtotal		260,882,526			260,859,260			145,232,150			141,390,954
Unearned income		(3,610,884	)		(3,610,884	)		(3,439,295	)		(3,439,295	)
Total	$	257,271,642		$	257,248,376		$	141,792,855		$	137,951,659

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, 2006 and December 31, 2005, $102.7 million and $82.5 million, respectively, of the Company’s portfolio investments at fair value were at fixed rates, which represented approximately 39% and 58%, 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.

The composition of the Company’s investments as of December 31, 2006 and December 31, 2005 at cost and fair value was as follows, excluding unearned income:

	December 31, 2006										December 31, 2005
	Cost		%(1)			Fair Value		%(1)			Cost		%(1)			Fair Value		%(1)
Senior Secured Debt	$	140,682,645		53.9	%	$	140,682,645		53.9	%	$	63,052,077		43.4	%	$	63,052,077		44.6	%
Junior Secured Debt		56,761,563		21.8			57,032,813		21.9			21,704,625		15.0			21,704,625		15.3
Subordinated Debt		59,298,927		22.7			59,298,927		22.7			59,397,898		40.9			55,638,952		39.4
Warrants/Equity		4,139,391		1.6			3,844,875		1.5			1,077,550		0.7			995,300		0.7
Total	$	260,882,526		100	%	$	260,859,260		100	%	$	145,232,150		100	%	$	141,390,954		100	%

(1) Represents percentage of total portfolio.

61

Patriot Capital Funding, Inc.

Notes to Consolidated Financial Statements — (Continued)

The composition of the Company’s investment portfolio by industry sector, excluding unearned income, as of December 31, 2006 and December 31, 2005 at cost and fair value was as follows:

	December 31, 2006										December 31, 2005
	Cost		%(1)			Fair Value		%(1)			Cost		%(1)			Fair Value		%(1)
Manufacturing	$	118,031,907		45.2	%	$	118,274,709		45.3	%	$	74,921,696		51.6	%	$	71,172,168		50.3	%
Distribution		47,685,031		18.3			47,513,531		18.2			3,850,000		2.6			3,850,000		2.7
Service		33,142,636		12.7			32,834,136		12.6			16,901,343		11.6			16,654,743		11.8
Consumer/Retail Goods		58,398,679		22.4			58,564,779		22.5			31,580,928		21.8			31,606,328		22.4
Publishing		3,161,105		1.2			3,166,305		1.2			3,515,015		2.4			3,533,915		2.5
Defense		463,168		0.2			505,800		0.2			14,463,168		10.0			14,573,800		10.3
Total	$	260,882,526		100.0	%	$	260,859,260		100.0	%	$	145,232,150		100.0	%	$	141,390,954		100.0	%

(1) Represents percentage of total portfolio.

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.). The facility allows the special purpose subsidiary to borrow up to $140.0 million through the issuance of notes to a multi-seller commercial paper conduit that is administered by the affiliated entity. The facility is secured by all of the loans held by the special purpose subsidiary. The facility bears interest at the commercial paper rate plus 1.35% and allows the special purpose subsidiary to make draws under the facility until July 23, 2009, unless extended prior to such date for an additional364-day period with the consent of the lender. If the facility is not extended, any principal amounts then outstanding will be amortized over a24-month period following July 23, 2009 and interest will accrue on outstanding borrowings under the facility at the prime rate plus 2.0%. The facility provides for the payment to the lender of a monthly fee equal to 0.25% per annum on the unused amount of the facility. The Company can use the net proceeds of the facility to fund loan origination activities and for general corporate purposes. Each loan origination under the amended and restated securitization revolving credit facility will be subject to the satisfaction 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 additional364-day period with the consent of the lender thereto; (ii) bore

62

Patriot Capital Funding, Inc.

Notes to Consolidated Financial Statements — (Continued)

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 a24-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, 2006 and 2005, $98.4 million and $21.7 million, respectively of borrowings were outstanding under the facility. At December 31, 2006, the interest rate was 6.7%. Interest expense for the years ended December 31, 2006, 2005 and 2004 consisted of the following:

	Year Ended December 31,
	2006		2005		2004
Interest charges	$	3,753,153	$	3,083,563	$	1,489,198
Amortization of debt issuance costs		365,855		276,623		15,800
Unused facility fees		213,574		157,803		—
Total	$	4,332,582	$	3,517,989	$	1,504,998

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 $1.3 million of fees which is being amortized over the term of the facility.

In March and December of 2006, the Company, through our special purpose subsidiary, entered into interest rate swap agreements. The swap agreement entered into in March is at a fixed rate of 5.04% on an initial notional amount of $20.0 million, for five years. The December swap agreement is at a fixed rate of 4.84% on an initial notional amount of $3.5 million, for five years. 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, 2006, net unrealized gains attributed to the swaps were 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 hedged portfolio. 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, 2006, 2005 and 2004, the Company recorded $65,000, $42,000, and $19,000, respectively, for employer contributions to the Plan.

Note 6.   Common Stock Transactions

On July 27, 2005, Wilton merged with and into the Company and the Company then effected a9,081.7-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 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

63

Patriot Capital Funding, Inc.

Notes to Consolidated Financial Statements — (Continued)

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. All periods have been retroactively adjusted to reflect the merger and the stock split.

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 secondary 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 secondary 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 approximately $2.0 million.

In addition, during 2005, the Company established a dividend reinvestment plan, and during the years ended December 31, 2006 and 2005, issued 85,339 and 19,704 shares, respectively in connection with dividends paid. The following table summaries the Company’s dividends paid to date (see Note 11 for per share tax return of capital distributions):

Date Declared	Record Date	Payment Date	Amount
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
November 8, 2005	November 30, 2005	December 30, 2005	$	0.27
September 7, 2005	September 30, 2005	October 31, 2005	$	0.16

Note 7.   Per Share Data

The following table sets forth the computation of basic and diluted income (loss) per common share for the years ended December 31, 2006, 2005 and 2004. No effect was given to outstanding stock options (1,341,748 at December 31, 2005) in the computation of diluted loss per share for the year ended December 31, 2005, as the effect would be anti-dilutive.

	Year Ended December 31,
	2006		2005			2004
Net income (loss)	$	15,588,570	$	(1,237,294	)	$	(269,206	)
Weighted average common shares outstanding, basic		14,145,200		7,253,632			3,847,902
Weighted average common shares outstanding, diluted		14,237,952		7,253,632			3,847,902
Income (loss) per common share, basic and diluted	$	1.10	$	(0.17	)	$	(0.07	)

64

Patriot Capital Funding, Inc.

Notes to Consolidated Financial Statements — (Continued)

Note 8.   Commitments and Contingencies

The balance of unused commitments to extend credit was $27.0 million and $8.8 million at December 31, 2006 and December 31, 2005, 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.

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, 2006 are as follows: $231,000 — 2007, $237,000 — 2008, $241,000 — 2009, $247,000 — 2010, $21,000 — 2011. Rent expense was approximately $222,000 and $56,000 for the years ended December 31, 2006 and 2005, respectively. At December 31, 2006, 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, 2006 and December 31, 2005, the Company’s two largest investments (as a percentage of commitments) represented approximately 17% and 24%, respectively, of the total investment portfolio. Investment income, consisting of interest, fees, and realization of gains or losses on equity interests, 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 year ended December 31, 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%; and for the year ended December 31, 2004, investment income from three customers accounted for 35.5%, 27.7%, and 14.0%.

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 and $1.0 million for the years 2005 and 2004, respectively 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. The Company’s first RIC tax year ended on July 31, 2006. The Company’s policy is to comply with the requirements of the Code that are

65

Patriot Capital Funding, Inc.

Notes to Consolidated Financial Statements — (Continued)

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, therefore, no federal, state or local income tax provision is required.

In accordance with Statement of Position93-2 Determination, Disclosure and Financial Statement Presentation of Income, Capital Gain, and Return of Capital Distributions by Investment Companies, GAAP and tax basis differences relating to stockholder dividends and distributions and other permanent GAAP and tax differences are classified to paid-in capital. In addition, the character of income and gains to be distributed is determined in accordance with income tax regulations that may differ from GAAP.

Distributable taxable income for the period January 1, 2006 through December 31, 2006 and for the period August 1, 2005 (commencement of RIC status) through July 31, 2006 (close of first RIC tax year) is as follows:

	January 1, 2006		August 1, 2005
	to		to
	December 31, 2006		July 31, 2006
GAAP Net Investment Income	$	15,021,000	$	8,969,000
Tax timing differences of:
Origination fees, net		668,000		481,000
Stock compensation expense, bonus accruals, original issue discount and other		1,437,000		322,000
Tax Distributable Income	$	17,126,000	$	9,772,000

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 and other bonus accruals are not currently deductible for tax purposes; and (3) certain debt investments that generate original issue discount.

The tax character of distributions paid for the period January 1, 2006 through December 31, 2006 and for the period August 1, 2005 (commencement of RIC status) through July 31, 2006 (close of first RIC tax year) is as follows:

	January 1, 2006		August 1, 2005
	to		to
	December 31, 2006		July 31, 2006
Distributions paid from:
Ordinary income	$	10,968,000	$	9,772,000
Long-term capital gains		—		—
Subtotal		10,968,000		9,772,000
Tax return of capital		972,000		2,485,000
Total distributions	$	11,940,000	$	12,257,000

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 four distributions made in the period August 1, 2005 through July 31, 2006 was determined by the Company’s tax earnings and profits for its tax fiscal year ended July 31, 2006. For 2006, ordinary income of $1.12 per share and tax return of capital of $0.08 per share were reported onForm 1099-DIV. For 2005, ordinary income of $0.31 per share and tax return of capital of $0.12 per share were reported on Form1099-DIV. There were no capital gain distributions in either 2006 or 2005.

66

Patriot Capital Funding, Inc.

Notes to Consolidated Financial Statements — (Continued)

As of December 31, 2006, the components of accumulated earnings on a tax basis were as follows:

	December 31, 2006
Distributable ordinary income	$	4,905,000
Other book/tax temporary differences		(5,266,000	)
Unrealized depreciation		(10,000	)
Accumulated capital and other losses		(3,263,000	)

The tax cost basis of the Company’s investments as of December 31, 2006 and 2005 approximates the book cost basis.

The tax distributable income of $4.9 million as of December 31, 2006 noted above was paid out as part of the January 17, 2007 cash distribution. The taxability of this distribution will be determined by the Company’s tax earnings and profits for its tax fiscal year ending July 31, 2007. As of December 31, 2006, the Company estimates that 100% of the January 17, 2007 and October 17, 2006 distributions will be treated as ordinary income. Accordingly, the 2006 Form 1099-DIV to shareholders included 100% of the October 16, 2006 and January 17, 2007 distributions as ordinary income dividends. (Note – the dividend declared on November 10, 2006 with a record date of December 15, 2006 and paid on January 17, 2007, is included in the 2006 Form 1099-DIV, under the requirements of Subchapter M).

At December 31, 2006, the Company has a net capital loss carryforward, of $3.3 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 July 31, 2014.

Prior to August 1, 2005, the Company was treated as a Subchapter C Corporation under the Internal Revenue Code. The Company’s items of tax income and expense included the operations of Wilton which, as a single member LLC, was disregarded as a separate entity for federal, state and local income tax purposes. As a C Corporation, the Company had a federal net operating loss carryforward (“NOL”) of approximately $70,000. In general, the Company’s C Corporation NOL carryforward cannot offset its RIC status taxable income or gains.

As a Subchapter C Corporation, the Company accounted for its income taxes following the asset and liability method in accordance with SFAS No. 109, “Accounting for Income Taxes.” Under such method, deferred tax assets and liabilities are recognized for future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. At December 31, 2006 and 2005, there were no deferred tax assets due to the Company’s election of RIC status.

67

Patriot Capital Funding, Inc.

Notes to Consolidated Financial Statements — (Continued)

Note 12.   Financial Highlights

	For the Year Ended December 31,
	2006			2005			2004
Per Share Data:
Net asset value at beginning of year	$	10.48		$	7.10		$	6.38
Net investment income		1.06			.24			.16
Net realized loss on investments		(.23	)		—			—
Net change in unrealized appreciation (depreciation) on investments		.27			(.41	)		(.23	)
Issuance of common stock		10.23			12.83			.79
Distributions from net investment income		(1.07	)		(.14	)		—
Tax return of capital		(.08	)		(.12	)		—
Distributions in excess of net investment income		(.05	)		(.17	)		—
Stock based compensation expense		.04			—			—
Dilutive effect of share issuance		(10.28	)		(8.85	)		—
Net asset value at end of year	$	10.37		$	10.48		$	7.10
Total Net Asset Value Return(1)		10.4	%		3.7	%		(1.1	)%
Per share market value, beginning of period	$	12.20		$	14.00	(3)
Per share market value, end of period	$	14.49		$	12.20
Total Market Value Return(2)		28.6	%		(9.8	)%
Shares outstanding at end of year		15,821,994			12,136,655			3,847,902
Ratios and Supplemental Data:
Net assets at end of year	$	164,108,629		$	127,152,365		$	27,311,918
Average net assets		149,790,000			70,188,000			25,842,000
Ratio of operating expenses to average net assets		7.7	%		16.7	%		16.5	%
Ratio of net investment income to average net assets		10.0	%		2.5	%		2.3	%
Weighted average borrowings outstanding	$	55,255,000		$	30,877,000		$	13,647,000
Average amount of borrowings per share	$	3.49		$	2.54		$	3.55

(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 throughout all periods presented. 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. The Company made its first investment on November 21, 2003 and, accordingly, an investment return was not reflected for 2003, as the Company did not have substantive investment operations in 2003.
(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.

68

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, 2006 and 2005. 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, 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		4,119,940		4,096,455			3,094,715		3,709,534
Net Realized and Unrealized Gain (Loss)		402,445		(569,280	)		1,489,896		(755,135	)
Net Income		4,522,385		3,527,175			4,584,611		2,954,399
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
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 Gain (Loss)		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

Note 14.   Subsequent Events (Unaudited)

On January 4, the Company received proceeds of $9.4 million in conjunction with the full repayment of a senior secured term loan and subordinated debt investment in Robert Rothschild Farm, Inc. Proceeds received included approximately $500,000 of accruedpayment-in-kind interest and a prepayment fee.

On January 11, 2007, the Company invested $1.0 million in a syndicated junior secured term loan in Metrologic Instruments, Inc., a global supplier of data capture and collection hardware and software.

On January 19, 2007, the Company made a $3.9 million follow-on investment, which is comprised of a senior secured term loan and a senior subordinated debt investment, in Fairchild Industrial Products, Co. In conjunction with such investment, Fairchild Industrial Products, Co. paid $98,000 to redeem certain shares of preferred stock held by the Company, including accrued dividends thereon.

69

Patriot Capital Funding, Inc.

Notes to Consolidated Financial Statements — (Continued)

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.

On February 2, 2007, the Company closed an $22.5 million one-stop investment, including an equity co-investment, in Aylward Enterprises, LLC, a manufacturer of solid dose tablet feed systems and bottle fillers.

On February 9, 2007, the Company closed a $28.2 million one-stop investment in R-O-M Corporation, in conjunction with the sale of the company to a private equity partner. This investment represented a net $12.4 million increase in our commitment to the company.

On February 23, 2007, the Board of Directors declared a cash dividend of $0.32 per share, payable on April 18, 2007 to stockholders of record as of the close of business March 15, 2007. Such cash dividend is payable on the total shares issued and outstanding on the record date.

70

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 16, 2007, which is included in the annual report onForm 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 16, 2007

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Schedule 12-14

PATRIOT CAPITAL FUNDING, INC.
SCHEDULE OF INVESTMENTS IN AND ADVANCES TO AFFILIATES

		Year Ended
		December 31, 2006		As of							As of
		Amount of Interest		December 31,							December 31,
		or Dividends		2005		Gross		Gross			2006
Portfolio Company	Investment(1)	Credited to Income(2)		Fair Value		Additions(3)		Reductions(4)			Fair Value
Affiliate Investments
Smart, LLC	Debt	$	375,716	$	—	$	9,041,605	$	(1,075,000	)	$	7,966,605
	Membership Interest  — Class B(5)		—		—		1,000,000		(41,000	)		959,000
Total Affiliate Investments		$	375,716								$	8,925,605

This schedule should be read in conjunction with the Company’s Consolidated Financial Statements, including the Consolidated Schedule 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)	Represents the total amount of interest or dividends credited to income for the portion of the year that the investment was an affiliate investment (5% to 25% owned).
(3)	Gross additions include increases in investments resulting from new portfolio company investments andpaid-in-kind interest or dividends. Gross additions also include net increases in unrealized appreciation or net decreases in unrealized depreciation.
(4)	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.
(5)	Non-income producing.

72

Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

Item 9A.   Controls and Procedures

Disclosure Controls and Procedures.

As of December 31, 2006 (the end of the period covered by this annual report onForm 10-K), management, with participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined inRule 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934). Based on such evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in ensuring that information required to be included in periodic SEC filings is recorded, processed, summarized and reported, within the time periods specified by the SEC’s rules and forms, and accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Management’s Annual Report on Internal Control Over Financial Reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Pursuant to the rules and regulations of the Securities Exchange Commission, internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

•  Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and the dispositions of assets;

•  Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with appropriate authorizations; and

•  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 our financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Management has evaluated the effectiveness of its internal control over financial reporting as of December 31, 2006, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework. Based on such evaluation, management has concluded that internal control over financial reporting is effective as of December 31, 2006.

Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006 has been audited by Grant Thornton LLP, an independent registered public accounting firm, as stated in their report which is included herein.

73

Attestation Report of Registered Public Accounting Firm.

Refer to the Report of the Registered Public Accounting Firm contained in Item 8 “Financial Statements and Supplementary Data” of thisForm 10-K.

Change in Internal Control Over Financial Reporting

There were no changes in internal controls for the quarter ended December 31, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.   Other Information

None.

PART III

Item 10.   Directors, Executive Officers and Corporate Governance

The information with respect to our directors and executive officers is contained under the captions “Proposal I: Election of Directors”, “— Section 16(a) Beneficial Ownership Reporting Compliance,” “— Committees of the Boards of Directors” and “— Corporate Governance” in our definitive proxy statement for the 2007 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934 and is incorporated in this annual report by reference in response to this item.

We have adopted a code of business conduct and ethics that applies to directors, officers and employees. The code of business conduct and ethics is available on our website at http://www.patcapfunding.com. We will report any amendments to or waivers of a required provision of the code of business conduct and ethics in aForm 8-K.

Item 11.   Executive Compensation

The information with respect to compensation of executives and directors is contained under the caption “Proposal I: Election of Directors — Compensation of Executive Officers and Directors” in our definitive proxy statement for the 2007 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934 and is incorporated in this annual report by reference in response to this item.

Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information with respect to security ownership of certain beneficial owners and management is contained under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plans” in our definitive proxy statement for the 2007 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934 and is incorporated in this annual report by reference in response to this item.

Item 13.   Certain Relationships and Related Transactions and Director Independence

The information with respect to certain relationships and related transactions is contained under the caption “Proposal I: Election of Directors — Certain Relationships and Transactions” in our definitive proxy statement for the 2007 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act and is incorporated in this annual report by reference in response to this item.

The information with respect to director independence is contained under the caption “Proposal I: Election of Directors” in our definitive proxy statement for the 2007 Annual Meeting of Stockholders to be

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filed with the Securities and Exchange Commission pursuant to Schedule 14A under the Securities Exchange Act of 1934 and is incorporated by reference in this annual report in response to this item.

Item 14.   Principal Accounting Fees and Services

The information with respect to principal accountant fees and services is contained under the captions “Audit Committee Report” and “Proposal II: Ratification of Selection of Independent Auditors” in our definitive proxy statement for the 2006 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934 and is incorporated in this annual report by reference to this item.

PART IV

Item 15.   Exhibits, Financial Statement Schedules.

1. The following financial statements are filed herewith:

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets at December 31, 2006 and 2005

Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and 2004

Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004

Consolidated Statements of Changes in Net Assets for the years ended December 31, 2006, 2005 and 2004

Consolidated Schedule of Investments as of December 31, 2006 and 2005

Notes to Consolidated Financial Statements

2.	The following financial statement schedule is filed herewith: Schedule 12-14 — Patriot Capital Funding, Inc. Schedule of Investments In and Advances to Affiliates.
3.	Exhibits required to be filed by Item 601 ofRegulation S-K.

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

Exhibit
Number			Description of Document
	3	.1	Restated Certificate of Incorporation (Incorporated by reference to Exhibit 3.1 of Patriot Capital Funding’sForm 10-Q filed with the SEC on August 10, 2006).
	3	.2	Form of Certificate of Amendment to Restated Certificate of Incorporation (Incorporated by reference to Exhibit (a)(2) filed with Patriot Capital Funding’sForm N-2 filed with the SEC on July 27, 2005).
	3	.3	Restated Bylaws (Incorporated by reference to Exhibit (b) filed with Patriot Capital Funding’sForm N-2 filed with the SEC on July 13, 2005).
	4	.1	Form of Stock Certificate (Incorporated by reference to Exhibit (d) filed with Patriot Capital Funding’sForm N-2 filed with the SEC on July 13, 2005).
	10	.1	Dividend Reinvestment Plan (Incorporated by reference to Exhibit (e) filed with Patriot Capital Funding’sForm N-2 filed with the SEC on July 13, 2005).
	10	.2	Patriot Capital Funding, Inc. Amended Stock Option Plan (Incorporated by reference to Appendix B to Patriot Capital Funding’s definitive proxy statement filed with the SEC on May 1, 2006).
	10	.3	Form of Stock Option Agreement for Officers (Incorporated by reference to Exhibit (i)(2) filed with Patriot Capital Funding’sForm N-2 filed with the SEC on July 13, 2005).
	10	.4	Custodian Agreement with U.S. Bank National Association (Incorporated by reference to Exhibit (j) filed with Patriot Capital Funding’sForm N-2 filed with the SEC on July 13, 2005).
	10	.5	Custodian Agreement with Wells Fargo, National Association

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Exhibit
Number			Description of Document
	10	.6	Employment Agreement between Patriot Capital Funding and Richard P. Buckanavage (Incorporated by reference to Exhibit (k)(4) filed with Patriot Capital Funding’sForm N-2 filed with the SEC on July 13, 2005).
	10	.7	Employment Agreement between Patriot Capital Funding and Timothy W. Hassler (Incorporated by reference to Exhibit (k)(5) filed with Patriot Capital Funding’sForm N-2 filed with the SEC on July 13, 2005).
	10	.8	Employment Agreement between Patriot Capital Funding and William E. Alvarez, Jr. (Incorporated by reference to Exhibit 10.1 filed with Patriot Capital Funding’sForm 8-K filed with the SEC on December 21, 2005).
	10	.9	Employment Agreement between Patriot Capital Funding and Clifford L. Wells (Incorporated by reference to Exhibit 10.2 filed with Patriot Capital Funding’sForm 8-K filed with the SEC on December 21, 2005).
	10	.10	Employment Agreement between Patriot Capital Funding and Matthew R. Colucci (Incorporated by reference to Exhibit 10.3 filed with Patriot Capital Funding’sForm 8-K filed with the SEC on December 21, 2005).
	10	.11	Amended and Restated Loan Funding and Servicing Agreement by and among the Patriot Capital Funding, 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 with Patriot Capital Funding’sForm 8-K filed with the SEC on September 21, 2006).
	10	.12	Purchase and Sale Agreement by and between the Registrant and Patriot Capital Funding LLC I (Incorporated by reference to Exhibit (k)(10) filed with Patriot Capital Funding’s Post-Effective Amendment No. 1 toForm N-2 filed with the SEC on August 1, 2005).
	10	.13	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 Exhibit (k)(11) filed with Patriot Capital Funding’s Post-Effective Amendment No. 1 toForm N-2 filed with the SEC on August 1, 2005).
	10	.14	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 Exhibit (k)(12) filed with Patriot Capital Funding’s Post-Effective Amendment No. 1 toForm N-2 filed with the SEC on August 1, 2005).
	21		Subsidiaries of Patriot Capital Funding and jurisdiction of incorporation/organizations:
			Patriot Capital Funding LLC I — Delaware
	23 **		Consent of Grant Thornton LLP, independent registered public accounting firm.
	31	.1**	Certification of Chief Executive Officer Pursuant toRule 13a-14(a) under the Securities Exchange Act of 1934.
	31	.2**	Certification of Chief Financial Officer Pursuant toRule 13a-14(a) under the Securities Exchange Act of 1934.
	32	.1**	Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S. C. 1350).
	32	.2**	Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S. C. 1350).

**  Filed Herewith

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on March 5, 2007.

PATRIOT CAPITAL FUNDING, INC.

By:  /s/  Richard P. Buckanavage

Richard P. Buckanavage

Chief Executive Officer and President

By:  /s/  William E. Alvarez, Jr.

William E. Alvarez, Jr.

Executive Vice President, Chief

Financial Officer and Secretary

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.

Signature	Title(Capacity)	Date
/s/  RICHARD P. BUCKANAVAGE Richard P. Buckanavage	Chief Executive Officer and Director (Principal Executive Officer)	March 5, 2007
/s/  WILLIAM E. ALVAREZ, JR. William E. Alvarez, Jr.	Chief Financial Officer (Principal Financial and Accounting Officer)	March 5, 2007
/s/  TIMOTHY W. HASSLER Timothy W. Hassler	Chief Operating and Compliance Officer and Director	March 5, 2007
/s/  MEL P. MELSHEIMER Mel P. Melsheimer	Chairman and Director	March 5, 2007
/s/  STEVEN DROGIN Steven Drogin	Director	March 5, 2007
/s/  DENNIS C. O’DOWD Dennis C. O’Dowd	Director	March 5, 2007
/s/  RICHARD A. SEBASTIAO Richard A. Sebastiao	Director	March 5, 2007

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Exhibit Index

Exhibit			Description
	23		Consent of Grant Thornton LLP, independent registered public accounting firm.
	31	.1	Certification of Chief Executive Officer Pursuant toRule 13a-14(a) under the Securities Exchange Act of 1934.
	31	.2	Certification of Chief Financial Officer Pursuant toRule 13a-14(a) under the Securities Exchange Act of 1934.
	32	.1	Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S. C. 1350).
	32	.2	Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S. C. 1350).

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