Patriot Capital Funding (PCAP) 10-Q 2008 Q1 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended March 31, 2008

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 other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
274 Riverside Avenue
Westport, CT	06880
(Address of principal executive office)	(Zip Code)

(203) 429-2700
(Registrant’s telephone number, including area code)

     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 period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated, a non-accelerated filer or a smaller reporting company. See the definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):

Large Accelerated Filero	Accelerated Filerþ	Non-Accelerated Filero	Smaller Reporting Companyo
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

The number of shares of the registrant’s Common Stock, $.01 par value, outstanding as of May 8, 2008 was 20,702,485.

PATRIOT CAPITAL FUNDING, INC.

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2008

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION		1
Item 1.	Financial Statements (Unaudited)	1
	Consolidated Balance Sheets at March 31, 2008 and December 31, 2007	1
	Consolidated Statements of Operations for the three months ended March 31, 2008 and 2007	2
	Consolidated Statements of Changes in Net Assets for the three months ended March 31, 2008 and 2007	3
	Consolidated Statements of Cash Flows for the three months ended March 31, 2008 and 2007	4
	Consolidated Schedule of Investments as of March 31, 2008	5
	Consolidated Schedule of Investments as of December 31, 2007	11
	Notes to Consolidated Financial Statements	17
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	36
PART II OTHER INFORMATION		37
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 3.	Defaults upon Senior Securities	37
Item 4.	Submission of Matters to a Vote of Security Holders	37
Item 5.	Other Information	37
Item 6.	Exhibits	37
Signatures		38

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Patriot Capital Funding, Inc.

Consolidated Balance Sheets

(unaudited)

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

See Notes to Consolidated Financial Statements.

1

Patriot Capital Funding, Inc.

Consolidated Statements of Operations

(unaudited)

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

See Notes to Consolidated Financial Statements.

2

Patriot Capital Funding, Inc.

Consolidated Statements of Changes in Net Assets

(unaudited)

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

See Notes to Consolidated Financial Statements.

3

Patriot Capital Funding, Inc.

Consolidated Statements of Cash Flows

(unaudited)

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

See Notes to Consolidated Financial Statements.

4

Patriot Capital Funding, Inc.

Consolidated Schedule of Investments
March 31, 2008
(unaudited)

Company(1)
(Industry)	Company Description	Investment	Principal		Cost		Value
Control investments:
Fischbein, LLC   (Machinery)	Designer and manufacturer of packaging equipment	Senior Subordinated Debt (16.5%, Due 5/13) (2) (3)	$	4,260,082	$	4,229,968	$	4,357,968
		Membership Interest — Class A (4)				2,800,000		4,172,000
Total Control investments (represents 2.4% of total investments at fair value)					$	7,029,968	$	8,529,968
Affiliate investments:
Aylward Enterprises, LLC (5)   (Machinery)	Manufacturer of packaging equipment	Revolving Line of Credit (7.5%, Due 2/12) (3)	$	3,700,000	$	3,634,298	$	3,634,298
		Senior Secured Term Loan A (8.8%, Due 2/12) (3)		8,199,063		8,080,949		8,080,949
		Senior Subordinated Debt (22.0%, Due 8/12) (2)		6,525,623		6,441,259		4,558,259
		Subordinated Member Note (8.0%, Due 2/13) (2)		142,632		142,632	—
		Membership Interest (4)				1,250,000	—
KTPS Holdings, LLC   (Textiles & Leather)	Manufacturer and distributor of specialty pet products	Revolving Line of Credit (7.0%, Due 1/12) (3)		500,000		483,631		483,631
		Senior Secured Term Loan A (6.3%, Due 1/12) (3)		5,850,000		5,785,770		5,785,770
		Senior Secured Term Loan B (12.0%, Due 1/12) (3)		1,980,000		1,957,137		1,957,137
		Junior Secured Term Loan (15.0%, Due 3/12) (2) (3)		4,112,832		4,068,832		4,068,832
		Membership Interest — Class A (4)				730,020		778,700
		Membership Interest — Common (4)				—		250,500
Nupla Corporation   (Home & Office Furnishings,    Housewares & Durable    Consumer Products)	Manufacturer and marketer of professional high-grade fiberglass-handled striking and digging tools	Revolving Line of Credit (6.7%, Due 9/12) (3)		1,050,000		1,033,650		1,033,650
		Senior Secured Term Loan A (6.6%, Due 9/12) (3)		5,606,250		5,559,194		5,467,194
		Senior Subordinated Debt (14.0%, Due 3/13) (2)		3,034,956		3,010,144		2,926,144
		Preferred Stock (2)				507,638		210,100
		Common Stock (4)				25,000	—

5

Company(1)
(Industry)	Company Description	Investment	Principal		Cost		Value
Smart, LLC (5)   (Diversified/Conglomerate    Service)	Provider of tuition management services	Revolving Line of Credit (7.8%, Due 8/11) (3)		870,000		826,025		826,025
		Senior Secured Term Loan A (8.1%, Due 6/11) (3)		3,693,750		3,653,999		3,653,999
		Senior Secured Term Loan B (16.5%, Due 2/12) (2) (3)		3,736,431		3,696,341		3,696,341
		Convertible Subordinated Note (22.0%, Due 8/12)		500,000		500,000		500,000
		Membership Interest - Class B (4)				1,000,000		616,800
Sport Helmets Holdings, LLC (5)   (Personal & Nondurable    Consumer Products)	Manufacturer of protective headgear	Senior Secured Term Loan A (6.8%, Due 12/13)		4,500,000		4,434,846		4,434,846
		Senior Secured Term Loan B (7.3%, Due 12/13)		7,500,000		7,388,891		7,388,891
		Senior Subordinated Debt (15.0%, Due 6/14) (2)		8,072,086		7,954,740		7,954,740
		Common Stock (4)				2,000,000		1,907,200
Vince & Associates Clinic    Research, Inc.   (Healthcare, Education &    Childcare)	Provider of clinical testing services	Senior Secured Term Loan (6.6%, Due 11/12) (2) (3)		7,312,500		7,211,084		7,211,084
		Senior Subordinated Debt (15.0%, Due 5/13) (2)		5,563,538		5,487,196		5,487,196
		Convertible Preferred Stock (4)				500,000		452,700
Total Affiliate investments (represents 23.7% of total investments at fair value)					$	87,363,276	$	83,364,986
Non-control/non-affiliate investments:
ADAPCO, Inc.   (Ecological)	Distributor of specialty chemicals and contract application services	Revolving Line of Credit (9.5%, Due 7/11) (3)	$	3,000,000	$	2,979,269	$	2,979,269
		Senior Secured Term Loan A (12.8%, Due 6/11) (3)		8,849,375		8,785,284		8,085,334
		Common Stock (4)				500,000	—
Aircraft Fasteners    International, LLC   (Machinery)	Distributor of fasteners and related hardware for use in aerospace, electronics and defense industries	Senior Secured Term Loan (6.8%, Due 11/12) (3)		6,732,000		6,634,895		6,488,895
		Junior Secured Term Loan (14.0%, Due 5/13) (2) (3)		5,226,289		5,151,778		5,015,778
		Convertible Preferred Stock (2)				258,329		399,287
Allied Defense Group, Inc.   (Aerospace & Defense)	Diversified defense company	Common Stock (4)				463,168		165,200

6

Company(1)
(Industry)	Company Description	Investment	Principal		Cost		Value
Arrowhead General Insurance    Agency, Inc. (6)   (Insurance)	Insurance agency and program specialist	Junior Secured Term Loan (10.0%, Due 2/13) (3)		5,000,000		5,000,000		3,750,000
Borga, Inc.   (Mining, Steel, Iron &    Nonprecious Metals)	Manufacturer of pre-fabricated metal building systems	Senior Secured Term Loan A (6.7%, Due 3/09) (3)		1,054,000		1,045,276		1,045,276
		Senior Secured Term Loan B (9.5%, Due 5/10) (3)		1,721,000		1,694,153		1,694,153
		Senior Secured Term Loan C (16.0%, Due 5/10) (2) (3)		7,873,398		7,807,371		7,807,371
		Common Stock Warrants (4)				11,761	—
Caleel + Hayden, LLC (5)   (Personal & Nondurable    Consumer Products)	Provider of proprietary branded professional skincare and cosmetic products to physicians and spa communities	Junior Secured Term Loan B (6.9%, Due 11/11) (3)		10,852,187		10,725,908		10,725,908
		Senior Subordinated Debt (14.5%, Due 11/12) (2) (3)		6,250,000		6,178,321		6,178,321
		Common Stock (4)				750,000		1,137,000
Cheeseworks, Inc.   (Grocery)	Distributor of specialty cheese and food products	Revolving Line of Credit (5.6%, Due 6/11) (3)		5,080,219		4,991,252		4,991,252
		Senior Secured Term Loan (8.7%, Due 6/11) (3)		10,264,966		10,141,173		10,141,173
CS Operating, LLC (5)   (Buildings & Real Estate)	Provider of maintenance, repair and replacement of HVAC, electrical, plumbing, and foundation repair	Revolving Line of Credit (7.4%, Due 1/13) (3)		200,000		193,234		193,234
		Senior Secured Term Loan A (7.9%, Due 7/12) (3)		2,237,500		2,206,004		2,206,004
		Senior Subordinated Debt (14.5%, Due 1/13) (2) (3)		2,543,300		2,507,956		2,507,956
Copperhead Chemical    Company, Inc.   (Chemicals, Plastics &    Rubber)	Manufacturer of bulk pharmaceuticals	Senior Subordinated Debt (15.3%, Due 1/13) (2) (3)		3,570,112		3,536,303		3,536,303
Custom Direct, Inc. (6)   (Printing & Publishing)	Direct marketer of checks and other financial products and services	Junior Secured Term Loan (8.7%, Due 12/14) (3)		2,000,000		2,000,000		1,550,000
Dover Saddlery, Inc.   (Retail Stores)	Equestrian products catalog retailer	Common Stock (4)				148,200		160,800
Employbridge Holding    Company (5) (6)   (Personal, Food &    Miscellaneous Services)	A provider of specialized staffing services	Junior Secured Term Loan (9.7%, Due 10/13) (3)		3,000,000		3,000,000		2,730,000

7

Company(1)
(Industry)	Company Description	Investment	Principal		Cost		Value
Encore Legal Solutions, Inc.   (Printing & Publishing)	Legal document management services	Junior Secured Term Loan A (8.3%, Due 6/10) (2) (3)		3,987,873		3,966,964		3,966,964
		Junior Secured Term Loan B (10.4%, Due 6/10) (2) (3)		7,267,900		7,217,806		6,295,806
		Senior Subordinated Debt (15.0%, Due 6/10) (2) (3)		6,154,438		6,120,537		3,720,577
		Common Stock Warrants (4)				232,833		—
EXL Acquisition Corp.   (Electronics)	Manufacturer of lab testing supplies	Senior Secured Term Loan A (5.9%, Due 3/11) (3)		4,406,659		4,373,473		4,305,473
		Senior Secured Term Loan B (6.3%, Due 3/12) (3)		4,765,771		4,709,231		4,635,630
		Senior Secured Term Loan C (6.8%, Due 3/12) (3)		2,939,415		2,894,241		2,848,841
		Senior Secured Term Loan D (15.0%, Due 3/12) (3)		6,893,099		6,822,796		6,822,796
		Common Stock — Class A (4)				2,475		139,500
		Common Stock — Class B (2)				260,314		261,681
Fairchild Industrial Products, Co.(Electronics)	Manufacturer of industrial controls and power transmission products	Senior Secured Term Loan A (6.5%, Due 7/10) (3)		2,252,500		2,231,651		2,231,651
		Senior Secured Term Loan B (8.2%, Due 7/11) (3)		4,621,875		4,582,766		4,582,766
		Senior Subordinated Debt (14.8%, Due 7/11) (2)		5,460,000		5,405,807		5,405,807
		Preferred Stock — Class A (2)				334,259		334,259
		Common Stock — Class B (4)				121,598		327,900
Impact Products, LLC   (Machinery)	Distributor of janitorial supplies	Junior Secured Term Loan (7.4%, Due 9/12) (3)		8,950,000		8,887,181		7,949,181
		Senior Subordinated Debt (13.5%, Due 9/12) (2) (3)		5,547,993		5,511,641		5,246,648
Innovative Concepts in    Entertainment, Inc.   (Personal & Nondurable    Consumer Products)	Manufacturer of coin operated games	Junior Secured Term Loan A (7.2%, Due 2/11) (3)		4,050,000		4,032,875		4,032,875
		Junior Secured Term Loan B (7.6%, Due 2/11) (3)		3,528,000		3,512,065		3,512,065
		Junior Secured Term Loan C (13.0%, Due 8/11) (3)		3,900,000		3,883,181		3,883,181
Keltner Enterprises, LLC (5)   (Oil & Gas)	Distributor of automotive oils, chemicals and parts	Senior Subordinated Debt (14.0%, Due 12/11) (3)		3,850,000		3,838,335		3,838,335

8

Company(1)
(Industry)	Company Description	Investment	Principal		Cost		Value
L.A. Spas, Inc.	Manufacturer of above ground spas	Senior Subordinated Debt
(Chemicals, Plastics &		(17.5%, Due 1/10) (2) (3)		7,680,391		7,640,089		7,640,089
Rubber)
		Common Stock Warrants (4)				3,248		—
LHC Holdings Corp.	Provider of home healthcare services	Senior Secured Term Loan A
(Healthcare, Education & Childcare)		(8.8%, Due 11/12) (3)		4,978,875		4,918,951		4,918,951
		Senior Subordinated Debt
		(14.5%, Due 5/13)		4,565,000		4,509,922		4,509,922
		Membership Interest (4)				125,000		109,100
Mac & Massey Holdings, LLC	Broker and distributor of ingredients to	Senior Subordinated Debt
(Grocery)	manufacturers of food products	(16.5%, Due 2/13) (2)		7,560,495		7,526,464		7,526,464
		Common Stock (4)				247,284		259,700
Metrologic Instruments, Inc. (6)	Manufacturer of imaging and scanning	Senior Secured Term Loan
(Electronics)	equipment	(5.7%, Due 4/14) (3)		990,000		990,000		900,900
		Junior Secured Term Loan
		(9.0%, Due 12/15)		1,000,000		1,000,000		875,000
Northwestern Management Services, LLC	Provider of dental services	Senior Secured Term Loan A (7.1%, Due 12/12) (3)		5,895,000		5,835,379		5,835,379
(Healthcare, Education & Childcare)
		Senior Secured Term Loan B
		(7.6%, Due 12/12) (3)		1,246,875		1,234,149		1,234,149
		Junior Secured Term Loan
		(15.0%, Due 6/13) (2)		2,775,063		2,747,272		2,747,272
		Common Stock (4)				500,000		397,500
Prince Mineral Company, Inc.	Manufacturer of pigments	Junior Secured Term Loan
(Metals & Minerals)		(8.3%, Due 12/12) (3)		11,350,000		11,185,465		10,153,465
		Senior Subordinated Debt
		(14.0%, Due 7/13) (2) (3)		11,943,272		11,805,660		11,484,660
Quartermaster, Inc.	Retailer of uniforms and tactical	Revolving Line of Credit
(Retail Stores)	equipment to law enforcement and	(7.5%, Due 12/10) (3)		1,000,000		974,234		974,234
	security professionals
		Senior Secured Term Loan A
		(9.3%, Due 12/10) (3)		4,057,500		4,014,646		4,014,646
		Senior Secured Term Loan B
		(10.6%, Due 12/10) (3)		2,562,500		2,538,642		2,538,642
		Senior Secured Term Loan C
		(15.0%, Due 12/11) (2) (3)		3,323,081		3,292,912		3,292,912

9

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

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

See Notes to Consolidated Financial Statements

10

PATRIOT CAPITAL FUNDING, INC.

Consolidated Schedule of Investments
December 31, 2007

Company(1)
(Industry)	Company Description	Investment	Principal		Cost		Value
Control investments:
Fischbein, LLC	Designer and manufacturer of packaging	Senior Subordinated Debt
(Machinery)	equipment	(16.5%, Due 5/13) (2) (3)	$	4,211,988	$	4,180,389	$	4,180,389
		Membership Interest – Class A (4)				2,800,000		5,148,000
Total Control investments (represents 2.4% of total investments at fair value)					$	6,980,389	$	9,328,389
Affiliate investments:
Aylward Enterprises, LLC (5)	Manufacturer of packaging equipment	Revolving Line of Credit
(Machinery)		(8.7%, Due 2/12) (3)	$	3,700,000	$	3,630,012	$	3,630,012
		Senior Secured Term Loan A
		(9.5%, Due 2/12) (3)		8,292,188		8,162,724		8,162,724
		Senior Subordinated Debt
		(14.5%, Due 8/12) (2)		6,424,702		6,335,464		6,335,464
		Membership Interest (4)				1,250,000		—
KTPS Holdings, LLC	Manufacturer and distributor of	Revolving Line of Credit
(Textiles & Leather)	specialty pet products	(8.2%, Due 1/12) (3)		300,000		282,562		282,562
		Senior Secured Term Loan A
		(8.4%, Due 1/12) (3)		6,012,500		5,941,886		5,941,886
		Senior Secured Term Loan B
		(12.0%, Due 1/12) (3)		1,985,000		1,960,952		1,960,952
		Junior Secured Term Loan
		(15.0%, Due 3/12) (2) (3)		4,081,878		4,035,122		4,035,122
		Membership Interest – Class A (4)				730,020		769,000
		Membership Interest – Common (4)				19,980		87,900
Nupla Corporation	Manufacturer and marketer of professional high-grade fiberglass-handled striking and digging tools	Revolving Line of Credit
(Home & Office Furnishings, Housewares & Durable		(9.5%, Due 9/12) (3)		550,000		532,725		532,725
Consumer Products)
		Senior Secured Term Loan A
		(8.8%, Due 9/12) (3)		5,678,125		5,628,411		5,628,411
		Senior Subordinated Debt
		(14.0%, Due 3/13) (2)		3,019,688		2,993,614		2,993,614
		Preferred Stock (2)				493,427		493,427
		Common Stock (4)				25,000		38,300

11

Company(1)
(Industry)	Company Description	Investment	Principal		Cost		Value
Smart, LLC (5)	Provider of tuition management services	Revolving Line of Credit
(Diversified/Conglomerate Service)		(12.3%, Due 8/11) (3)		870,000		822,799		822,799
		Senior Secured Term Loan A
		(12.3%, Due 8/11) (3)		3,862,500		3,817,733		3,817,733
		Senior Secured Term Loan B
		(19.0%, Due 2/12) (2) (3)		3,668,965		3,626,308		3,626,308
		Convertible Subordinated Note
		(22.0%, Due 8/12)		250,000		250,000		250,000
		Membership Interest – Class B (4)				1,000,000		729,100
Sport Helmets Holdings, LLC (5)	Manufacturer of protective headgear	Senior Secured Term Loan A
(Personal & Nondurable Consumer Products)		(9.0%, Due 12/13)		4,500,000		4,431,440		4,431,440
		Senior Secured Term Loan B
		(9.5%, Due 12/13)		7,500,000		7,385,336		7,385,336
		Senior Subordinated Debt
		(15.0%, Due 6/14) (2)		8,011,333		7,889,250		7,889,250
		Common Stock (4)				2,000,000		1,901,500
Vince & Associates Clinic	Provider of clinical testing services	Senior Secured Term Loan
Research, Inc.		(10.0%, Due 11/12) (2) (3)		7,500,000		7,391,657		7,391,657
(Healthcare, Education & Childcare)
		Senior Subordinated Debt
		(15.0%, Due 5/13) (2)		5,521,561		5,441,483		5,441,483
		Convertible Preferred Stock (4)				500,000		592,900
Total Affiliate investments (represents 22.1% of total investments at fair value)					$	86,577,905	$	85,171,605
Non-control/non-affiliate investments:
ADAPCO, Inc.	Distributor of specialty chemicals and	Revolving Line of Credit
(Ecological)	contract application services	(9.0%, Due 7/11) (3)	$	2,200,000	$	2,177,697	$	2,177,697
		Senior Secured Term Loan A
		(10.5%, Due 6/11) (3)		13,016,250		12,916,093		12,216,143
		Common Stock (4)				500,000		—
Aircraft Fasteners	Distributor of fasteners and related	Senior Secured Term Loan
International, LLC	hardware for use in aerospace,	(8.3%, Due 11/12) (3)		6,800,000		6,697,869		6,697,869
(Machinery)	electronics and defense industries
		Junior Secured Term Loan
		(14.0%, Due 5/13) (2) (3)		5,200,000		5,121,815		5,121,815
		Convertible Preferred Stock (2)				253,342		341,800
Allied Defense Group, Inc.	Diversified defense company	Common Stock (4)				463,168		161,600
(Aerospace & Defense)

12

Company(1)
(Industry)	Company Description	Investment	Principal		Cost		Value
Arrowhead General Insurance Agency, Inc. (6)(Insurance)	Insurance agency and program specialist	Junior Secured Term Loan (12.1%, Due 2/13) (3)		5,000,000		5,000,000		4,500,000
Borga, Inc.(Mining, Steel, Iron & Nonprecious Metals)	Manufacturer of pre-fabricated metal building systems	Senior Secured Term Loan A (8.8%, Due 3/09) (3)		1,321,000		1,309,581		1,309,581
		Senior Secured Term Loan B (11.8%, Due 5/10) (3)		1,785,250		1,755,679		1,755,679
		Senior Secured Term Loan C (16.0%, Due 5/10) (2) (3)		7,794,323		7,720,404		7,720,404
		Common Stock Warrants (4)				10,746	—
Caleel + Hayden, LLC (5) (Personal & Nondurable Consumer Products)	Provider of proprietary branded professional skincare and cosmetic products to physicians and spa communities	Junior Secured Term Loan B (9.6%, Due 11/11) (3)		10,879,062		10,745,564		10,745,564
		Senior Subordinated Debt (14.5%, Due 11/12) (2) (3)		6,250,000		6,174,425		6,174,425
		Common Stock (4)				750,000		1,058,600
Cheeseworks, Inc.(Grocery)	Distributor of specialty cheese and food products	Revolving Line of Credit (7.6%, Due 6/11) (3)		5,080,219		4,984,386		4,984,386
		Senior Secured Term Loan (10.7%, Due 6/11) (3)		10,648,560		10,512,576		10,512,576
CS Operating, LLC (5) (Buildings & Real Estate)	Provider of maintenance, repair and replacement of HVAC, electrical, plumbing, and foundation repair	Senior Secured Term Loan A (9.1%, Due 7/12) (3)		2,325,000		2,290,500		2,290,500
		Senior Subordinated Debt (14.5%, Due 1/13) (2) (3)		2,527,328		2,490,326		2,490,326
Copperhead Chemical Company, Inc.(Chemicals, Plastics & Rubber)	Manufacturer of bulk pharmaceuticals	Senior Subordinated Debt (15.3%, Due 1/13) (2) (3)		3,540,943		3,505,378		3,505,378
Custom Direct, Inc. (6) (Printing & Publishing)	Direct marketer of checks and other financial products and services	Junior Secured Term Loan (10.8%, Due 12/14) (3)		2,000,000		2,000,000		1,750,000
Dover Saddlery, Inc.(Retail Stores)	Equestrian products catalog retailer	Common Stock (4)				148,200		129,200
Eight O’Clock Coffee Company (6) (Beverage, Food & Tobacco)	Manufacturer, distributor, and marketer of coffee	Junior Secured Term Loan (11.4%, Due 7/13) (3)		9,000,000		9,000,000		9,000,000
Employbridge Holding Company(5)(6) (Personal, Food & Miscellaneous Services)	A provider of specialized staffing services	Junior Secured Term Loan (11.8%, Due 10/13) (3)		3,000,000		3,000,000		2,910,000

13

Company(1)
(Industry)	Company Description	Investment	Principal		Cost		Value
Encore Legal Solutions, Inc.(Printing & Publishing)	Legal document management services	Junior Secured Term Loan A (10.7%, Due 6/10) (2) (3)		3,949,437		3,925,802		3,925,802
		Junior Secured Term Loan B (10.8%, Due 6/10) (2) (3)		7,193,143		7,138,192		7,138,192
		Senior Subordinated Debt (15.0%, Due 6/10) (2) (3)		5,926,861		5,889,187		3,489,226
		Common Stock Warrants (4)				219,791		—
EXL Acquisition Corp.(Electronics)	Manufacturer of lab testing supplies	Senior Secured Term Loan A (8.4%, Due 3/11) (3)		4,800,000		4,761,933		4,761,933
		Senior Secured Term Loan B (8.9%, Due 3/12) (3)		4,851,840		4,792,326		4,792,326
		Senior Secured Term Loan C (9.4%, Due 3/12) (3)		2,992,500		2,944,981		2,944,981
		Senior Secured Term Loan D (15.0%, Due 3/12) (3)		7,000,000		6,925,241		6,925,241
		Common Stock — Class A (4)				2,475		123,900
		Common Stock — Class B (2)				254,057		255,325
Fairchild Industrial Products, Co.(Electronics)	Manufacturer of industrial controls and power transmission products	Senior Secured Term Loan A (8.3%, Due 7/10) (3)		5,580,000		5,531,331		5,531,331
		Senior Secured Term Loan B (10.0%, Due 7/11) (3)		9,325,000		9,239,973		9,239,973
		Senior Subordinated Debt (14.8%, Due 7/11) (2)		5,460,000		5,401,721		5,401,721
		Preferred Stock — Class A (2)				327,879		327,879
		Common Stock — Class B (4)				121,598		293,200
Impact Products, LLC (Machinery)	Distributor of janitorial supplies	Junior Secured Term Loan (9.5%, Due 9/12) (3)		8,968,750		8,903,106		8,903,106
		Senior Subordinated Debt (13.5%, Due 9/12) (2) (3)		5,547,996		5,509,594		5,509,594
Innovative Concepts in Entertainment, Inc.(Personal & Nondurable Consumer Products)	Manufacturer of coin operated games	Junior Secured Term Loan A (9.0%, Due 2/11) (3)		4,312,500		4,292,854		4,292,854
		Junior Secured Term Loan B (9.5%, Due 2/11) (3)		3,537,000		3,519,896		3,519,896
		Junior Secured Term Loan C (13.0%, Due 8/11) (3)		3,900,000		3,881,940		3,881,940
Keltner Enterprises, LLC (5) (Oil & Gas)	Distributor of automotive oils, chemicals and parts	Senior Subordinated Debt (14.0%, Due 12/11) (3)		3,850,000		3,837,555		3,837,555

14

Company(1)
(Industry)	Company Description	Investment	Principal		Cost		Value
L.A. Spas, Inc.(Chemicals, Plastics & Rubber)	Manufacturer of above ground spas	Senior Subordinated Debt (15.5%, Due 1/10) (2) (3)		7,271,249		7,225,464		7,225,464
		Common Stock Warrants (4)				3,009		—
LHC Holdings Corp.(Healthcare, Education & Childcare)	Provider of home healthcare services	Revolving Line of Credit (8.8%, Due 11/12) (3)		300,000		287,369		287,369
		Senior Secured Term Loan A (8.8%, Due 11/12) (3)		5,100,000		5,035,888		5,035,888
		Senior Subordinated Debt (14.5%, Due 5/13)		4,565,000		4,507,250		4,507,250
		Membership Interest (4)				125,000		120,500
Mac & Massey Holdings, LLC (Grocery)	Broker and distributor of ingredients to manufacturers of food products	Senior Subordinated Debt (16.5%, Due 2/13) (2)		7,438,280		7,402,496		7,402,496
		Common Stock (4)				250,000		388,200
Metrologic Instruments, Inc. (6)(Electronics)	Manufacturer of imaging and scanning equipment	Senior Secured Term Loan (7.8%, Due 4/14) (3)		992,500		992,500		942,900
		Junior Secured Term Loan (11.1%, Due 12/15)		1,000,000		1,000,000		930,000
Nice-Pak Products, Inc. (6)(Containers, Packaging & Glass)	Manufacturer of pre-moistened wipes	Senior Secured Term Loan (8.5%, Due 6/14) (3)		2,985,000		2,985,000		2,895,500
Northwestern Management Services, LLC (Healthcare, Education & Childcare)	Provider of dental services	Senior Secured Term Loan A (8.9%, Due 12/12) (3)		6,000,000		5,936,612		5,936,612
		Senior Secured Term Loan B (9.4%, Due 12/12) (3)		1,250,000		1,236,744		1,236,744
		Junior Secured Term Loan (15.0%, Due 6/13) (2)		2,754,125		2,724,995		2,724,995
		Common Stock (4)				500,000		504,400
Prince Mineral Company, Inc.(Metals & Minerals)	Manufacturer of pigments	Junior Secured Term Loan (9.9%, Due 12/12) (3)		11,375,000		11,203,941		11,203,941
		Senior Subordinated Debt (14.0%, Due 7/13) (2) (3)		11,913,159		11,768,249		11,768,249
Quartermaster, Inc.(Retail Stores)	Retailer of uniforms and tactical equipment to law enforcement and security professionals	Revolving Line of Credit (9.5%, Due 12/10) (3)		500,000		471,887		471,887
		Senior Secured Term Loan A (9.4%, Due 12/10) (3)		4,276,250		4,228,116		4,228,116
		Senior Secured Term Loan B (10.6%, Due 12/10) (3)		2,568,750		2,542,846		2,542,846
		Senior Secured Term Loan C (15.0%, Due 12/11) (2) (3)		3,298,069		3,265,862		3,265,862

15

Company(1)
(Industry)	Company Description	Investment	Principal		Cost		Value
R-O-M Corporation (Automobile)	Manufacturer of doors, ramps and bulk heads for fire trucks and food transportation	Senior Secured Term Loan A (8.0%, Due 2/13) (3)		7,440,000		7,359,023		7,359,023
		Senior Secured Term Loan B (9.3%, Due 5/13) (3)		8,464,500		8,359,596		8,359,596
		Senior Subordinated Debt (15.0%, Due 8/13) (2)		9,100,000		8,991,761		8,991,761
Sidump’r Trailer Company, Inc.(Automobile)	Manufacturer of side dump trailers	Revolving Line of Credit (9.8%, Due 1/11) (3)		1,675,000		1,651,732		1,651,732
		Senior Secured Term Loan A (8.5%, Due 1/11) (3)		2,047,500		2,028,320		2,028,320
		Senior Secured Term Loan B (11.5%, Due 1/11) (3)		2,320,625		2,294,336		2,294,336
		Senior Secured Term Loan C (15.0%, Due 7/11) (2) (3)		3,230,074		3,197,254		3,197,254
		Senior Subordinated Debt (12.0%, Due 1/12) (3)		75,000		75,000		75,000
		Preferred Stock (2)				87,271	—
		Common Stock (4)				25	—
Total Non-control/non-affiliate investments (represents 75.5% of total investments at fair value)					$	294,686,727	$	290,225,759
Total Investments					$	388,245,021	$	384,725,753

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

See Notes to Consolidated Financial Statements

16

Patriot Capital Funding, Inc.

Notes to Consolidated Financial Statements

(unaudited)

Note 1. Description of Business and Basis of Presentation

Description of Business

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

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

Basis of Presentation

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

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

Recent Accounting Pronouncements

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

Interest, Dividends, Fees, and Other Investment Income

Interest and dividend income is recognized as revenue when earned according to the terms of the investment, and when in the opinion of management, it is collectible. Premiums paid and discounts obtained, including discounts in the form of fees, are amortized into interest income over the estimated life of the investment using the interest method. Fees consist principally of loan and arrangement fees, annual administrative fees, unused fees, prepayment fees, amendment fees, equity structuring fees and waiver fees. Equity structuring fees are recognized as earned, which is generally when the investment transaction closes. Other investment income consists principally of the recognition of unamortized deferred financing fees received from portfolio companies on the repayment of their debt investment, the sale of the debt investment or a reduction of available credit under the debt investment.

17

Federal Income Taxes

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

Dividends Paid

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

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

Reclassifications

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

Note 2. Investments

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

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

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

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

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

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

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

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

(1) Represents percentage of total portfolio.

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

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

(1) Represents percentage of total portfolio.

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

Note 3. Fair Value Measurements

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

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

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

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

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

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

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

The following table provides a roll-forward in the changes in fair value from December 31, 2007 to March 31, 2008, for all investments for which the Company determines fair value using unobservable (Level 3) factors. When a determination is made to classify a financial instrument within Level 3 of the valuation hierarchy, the determination is based upon the fact that the unobservable factors, are the most significant, to the overall fair value measurement. However, Level 3 financial instruments typically include, in addition to the unobservable or Level 3 components, observable components (that is, components that are actively quoted and can be validated to external sources). Accordingly, the appreciation (depreciation) in the table below includes changes in fair value due in part to observable factors that are part of the valuation methodology.

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

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

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

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

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

Note 4. Borrowings

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

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

The Securitization Facility contains restrictions pertaining to the geographic and industry concentrations of funded loans, maximum size of funded loans, interest rate payment frequency of funded loans, maturity dates of funded loans and maximum yields on funded loans. The Securitization Facility also contains certain requirements relating to portfolio performance, including required minimum portfolio yield and limitations on delinquencies and charge-offs, violation of which could result in the early termination of the facility. In connection with the origination and amendment of the securitization revolving credit facility, the Company incurred $1.4 million of fees which is being amortized over the term of the securitization revolving credit facility.

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

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

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

Note 5. Stock Option Plan

As of March 31, 2008, 3,644,677 shares of common stock are reserved for issuance upon exercise of options to be granted under the Company’s stock option plan (the “Plan”). On February 27, 2008, options to purchase a total of 800,500 shares of common stock were granted to the Company’s executive officers and employees with an exercise price of $10.91 per share (the closing price of the common stock at date of grant). As of March 31, 2008, 3,237,177 options were outstanding, 1,499,243 of which were exercisable. The options have a weighted average remaining contractual life of 8.3 years, a weighted average exercise price of $12.41, and an aggregate intrinsic value of $0.

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

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

Note 6. Share Data and Common Stock

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

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

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

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

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

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

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

Note 7. Commitments and Contingencies

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

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

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

Note 8. Concentrations of Credit Risk

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

At March 31, 2008 and December 31, 2007, the Company’s two largest investments represented approximately 13% and 12%, respectively, of the total investment portfolio at fair value. Investment income, consisting of interest, dividends, fees, and realization of gains or losses on investments, can fluctuate dramatically upon repayment of an investment or sale of an equity interest. Revenue recognition in any given period can be highly concentrated among several portfolio companies. During the three months ended March 31, 2008 and 2007, the Company did not record investment income from any portfolio company in excess of 10.0% of total investment income.

Note 9. Income Taxes

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

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

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

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

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

There were no capital gain distributions in 2008 or 2007.

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

Note 10. Financial Highlights

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

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

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Note 11. Subsequent Events

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

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

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The information contained in this section should be read in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this quarterly report on Form 10-Q.

     Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements because they relate to future events or our future performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q may include statements as to:

• Our future operating results;

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

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

• The ability of our portfolio companies to achieve their objectives;

• Our expected financings and investments;

• The adequacy of our cash resources and working capital; and

• The timing of cash flows, if any, from the operations of our portfolio companies.

     In addition, words such as “anticipate,” “believe,” “expect” and “intend” indicate a forward-looking statement, although not all forward-looking statements include these words. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth in “Risk Factors” in our 2007 annual report on Form 10-K. Other factors that could cause actual results to differ materially include:

• changes in the economy;

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

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

     We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report on Form 10-Q, 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 through reports that we may file in the future with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

Overview

     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 and on July 27, 2005, we elected to be treated as a business development company under the Investment Company Act of 1940. 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.

Current Market Conditions

     The debt and equity capital markets in the United States have been severely impacted by significant write-offs in the financial services sector relating to subprime mortgages and the re-pricing of credit risk in the broadly syndicated loan market, among other things. These events, along with the deterioration of the housing market, have led to worsening general economic conditions, which have impacted the broader capital and credit markets and have reduced the availability of debt and equity capital for the market as a whole and financial firms in particular. In the past, we were able to access the capital and credit markets to finance our investment activities. However, due to the current turmoil in the debt markets and uncertainty in the equity capital markets, we cannot assure you that debt or equity capital will be available to us on favorable terms, or at all. As an example, because our common stock has occasionally traded at a price below our current net asset value per share over the last several months and we are not generally able under the 1940 Act to sell our common stock at a price below net asset value per share, we have been and may continue to be limited in our ability to raise equity capital. These conditions may limit our ability to grow our investment portfolio.

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Portfolio Composition

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

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

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

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

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

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

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

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

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

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

(1) Represents percentage of total portfolio.

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

Portfolio Asset Quality

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

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

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

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

Loans and Debt Securities on Non-Accrual Status

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

Results of Operations

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

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

     Total Investment Income

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

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

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

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     Expenses

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

     Expenses for the three months ended March 31, 2008 and 2007, were $4.5 million and $3.6 million, respectively. Expenses increased for the three months ended March 31, 2008 as compared to the three months ended March 31, 2007 by approximately

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

     Realized Gain (Loss) on Sale of Investments

     Net realized gain (loss) on the sale of investments is the difference between the proceeds received from dispositions of portfolio investments and their stated cost. During the three months ended March 31, 2008, we sold one investment in which we realized a loss of $90,000. During the three months ended March 31, 2007, we sold one investment in which we realized a gain of $6,000.

     Net Change in Unrealized Appreciation or Depreciation on Investments

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

     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 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, or when the bond yield models concludes that the debt investment is impaired. 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 enterprise at a point in time. We record unrealized appreciation if we believe that the underlying portfolio company has appreciated in value and/or our equity security has also appreciated in value or the bond yield models concludes that the debt investment has appreciated in value. Changes in fair value are recorded in the statement of operations as net change in unrealized appreciation or depreciation.

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

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

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     Net Unrealized Depreciation on Interest Rate Swaps

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

     Net Income (Loss)

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

Financial Condition, Liquidity and Capital Resources

Cash, Cash Equivalents and Restricted Cash

     At March 31, 2008 and December 31, 2007, we had $1.3 million and $789,000, respectively, in cash and cash equivalents. In addition, at March 31, 2008 and December 31, 2007, we had $9.1 million and $10.5 million, respectively, in restricted cash which we maintained in accordance with the terms of our $175.0 million amended and restated securitization revolving credit facility with an entity affiliated with BMO Capital Markets Corp. A portion of these funds were released to us on April 14, 2008 and January 14, 2008.

     For the three months ended March 31, 2008, net cash provided by operating activities totaled $3.2 million, compared to net cash provided by operating activities of $3.9 million for the comparable 2007 period. Cash provided by (used for) investing activities totaled $24.6 million and ($13.8) million for the three months ended March 31, 2008 and 2007, respectively. This change was principally due to lower investment originations in 2008 of $52.1 million, and lower loan repayments and amortization of $18.7 million, offset by an increase in proceeds from investment sales of $5.0 million. Cash provided by (used for) financing activities totaled ($27.3) million and $10.4 million in the three months ended March 31, 2008 and 2007, respectively. This change was principally due to a net decrease of $3.9 million in our net borrowings, a decrease in sale of common stock of $31.7 million, and an increase of $2.4 million in dividends paid.

Liquidity and Capital Resources

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

     Although we expect that cash on hand, borrowing availability, and cash generated from operations to be adequate to meet our cash needs at our current level of operations, we may face difficultly in obtaining new debt and equity financing as a result of the current turmoil in the credit markets and uncertainty in the capital markets, which could limit our ability to grow. In this regard, because our common stock has occasionally traded at a price below our current net asset value per share over the last several months and we are limited in our ability to sell our common stock at a price below net asset value per share, we have been and may continue to be limited in our ability to raise equity capital. In addition, our amended and restated securitization revolving credit facility contains certain requirements, including, but not limited to, minimum diversity, rating and yield, and limitations on loan size. These requirements may limit our ability to fund certain new originations with advances under the facility, in which case we will seek to fund originations using new debt or equity financings, which may or may not be available on favorable terms, if at all. On April 11, 2008, the Company entered into an amended and restated securitization revolving credit facility with an entity affiliated with BMO Capital Markets Corp. and Branch Banking and Trust Company. See – “Recent Developments.”

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

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

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Borrowings

     Securitization Revolving Credit Facility.On September 18, 2006, we, through a wholly-owned, bankruptcy remote, special purpose subsidiary of ours, entered into an amended and restated securitization revolving credit facility (the “Securitization Facility “), with an entity affiliated with BMO Capital Markets Corp. On May 2, 2007, we amended our Securitization Facility and lowered the interest rate payable on any outstanding balances under the Securitization Facility during the period of time we are permitted to make draws. The amendment also reduced or eliminated certain restrictions pertaining to certain loan covenants. On August 31, 2007, we amended the Securitization Facility and increased its borrowing capacity by $35 million. The amendment also extended the commitment termination date by an additional 364-day period to July 22, 2010 and also reduced or eliminated certain restrictions pertaining to certain loan covenants. The Securitization Facility allows our special purpose subsidiary to borrow up to $175 million ($140.0 million prior to August 31, 2007) through the issuance of notes to a multi-seller commercial paper conduit administered by the affiliated entity. The Securitization Facility is secured by all of the loans held by our special purpose subsidiary. The Securitization Facility bears interest at the commercial paper rate plus 1.0% (1.35% prior to May 2, 2007) and allows our special purpose subsidiary to make draws under the Securitization Facility until July 22, 2010 (July 23, 2009 prior to August 31, 2007), unless extended prior to such date for an additional 364-day period with the consent of the lender. If the Securitization Facility is not extended, any principal amounts then outstanding will be amortized over a 24-month period following July 23, 2010 and interest will accrue on outstanding borrowings under the facility at the prime rate plus 2.0%. The Securitization Facility provides for the payment to the lender of a monthly fee equal to 0.25% per annum on the unused amount of the Securitization Facility. We can use the proceeds of the Securitization Facility to fund our loan origination activities and for general corporate purposes. Each loan origination under the Securitization Facility will be subject to the satisfaction of certain conditions. We cannot assure you that we will be able to borrow funds under the Securitization Facility at any particular time or at all. As of March 31, 2008, $143.0 million was outstanding under the Securitization Facility. At March 31, 2008, the interest rate was 4.1%.

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

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

Regulated Investment Company Status and Dividends

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

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

     To obtain and maintain RIC tax treatment, we must, among other things, distribute, with respect to each taxable year, at least 90% of our investment company taxable income (i.e., our net ordinary income and our realized net short-term capital gains in excess of realized net long-term capital losses, if any). In order to avoid certain excise taxes imposed on RICs, we currently intend to distribute, with respect to each calendar year, an amount at least equal to the sum of (1) 98% of our ordinary income for the calendar year, (2) 98% of our capital gains in excess of capital losses for the one-year period ending on October 31 of the calendar year and (3) any ordinary income and net capital gains for preceding years that were not distributed during such years.

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We intend to make distributions to our stockholders on a quarterly basis of substantially all of our annual taxable income (which includes our taxable interest and fee income). We currently intend to retain for investment some or all of our net taxable capital gains (i.e., realized net long-term capital gains in excess of realized net short-term capital losses) and treat such amounts as deemed distributions to our stockholders. If we do this, our stockholders will be treated as if they received actual distributions of the capital gains we retained and then reinvested the net after-tax proceeds in our common stock. Our stockholders also may be eligible to claim tax credits (or, in certain circumstances, tax refunds) equal to their allocable share of the tax we paid on the capital gains deemed distributed to them. During the three months ended March 31, 2008 and 2007, we realized capital gain (loss) of approximately ($90,000) and $6,000, respectively. In addition, at March 31, 2008, the Company has a net capital loss carryforward of $3.2 million to offset net capital gains until December 31, 2013. To the extent our taxable earnings for a fiscal tax year fall below the total amount of our dividends for that fiscal year, a portion of those dividend distributions may be deemed a return of capital to our stockholders.

     We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage test for borrowings applicable to us as a business development company under the Investment Company Act of 1940 and due to provisions in our amended and restated securitization revolving credit facility. If we do not distribute at least a certain percentage of our taxable income annually, we will suffer adverse tax consequences, including possible loss of our status as a RIC. We cannot assure stockholders that they will receive any distributions or distributions at a particular level.

Critical Accounting Policies

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

Valuation of Portfolio Investments

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

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

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

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

Fee Income Recognition

     We receive a variety of fees in the ordinary course of our business, including arrangement fees and loan fees. We account for our fee income in accordance with Emerging Issues Task Force Issue 00-21 “Accounting for Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). EITF 00-21 addresses certain aspects of a company’s accounting for arrangements containing multiple revenue-generating activities. In some arrangements, the different revenue-generating activities (deliverables) are sufficiently separable and there exists sufficient evidence of their fair values to separately account for some or all of the deliverables (i.e., there are separate units of accounting). EITF 00-21 states that the total consideration received for the arrangement be allocated to each unit based upon each unit’s relative fair value. In other arrangements, some or all of the deliverables are not independently functional, or there is not sufficient evidence of their fair values to account for them separately. In determining fair value of various fee income we receive, we will first rely on data compiled through our investment and syndication activities and secondly on independent third party data. The timing of revenue recognition for a given unit of accounting depends on the nature of the deliverable(s) in that accounting unit (and the corresponding revenue recognition model) and whether the general conditions for revenue recognition have been met. Fee income for which fair value cannot be reasonably ascertained is recognized using the interest method in accordance with Statement of Financial Accounting Standards No. 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases,” (“SFAS No. 91”). We have historically recognized fee income in accordance with SFAS No. 91. In addition, we capitalize and offset direct loan origination costs against the origination fees received and only defer the net fee.

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Payment-in-Kind or PIK Interest and Dividends

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

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

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

Interest and Dividend Income Recognition

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

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

Off-Balance Sheet Arrangements

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

     In connection with our amended and restated securitization revolving credit facility, our consolidated special purpose subsidiary may be required under certain circumstances to enter into interest rate swap agreements or other interest rate hedging transactions. We have agreed to guarantee the payment of certain swap breakage costs that may be payable by our special purpose subsidiary in connection with any such interest rate swap agreements or other interest rate hedging transactions. At March 31, 2008, we had five interest rate swap agreements outstanding. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition, Liquidity and Capital Resources — Borrowings.”

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Contractual Obligations

     As of March 31, 2008, we had $143.0 million outstanding under the Securitization Facility. Our Securitization Facility is due in July 2010. On April 11, 2008, the Company entered into a second amended and restated securitization revolving credit facility with an entity affiliated with BMO Capital Markets Corp. and Branch Banking and Trust Company (see Note 11 to the consolidated financial statements). The Securitization Facility contains provisions for the payment of any outstanding balance upon maturity. On August 11, 2005, we entered into a lease agreement for office space expiring on January 15, 2011. Future minimum lease payments due under the office lease and for certain office equipment are as follows: remainder of 2008 — $193,000; 2009 - $241,000; 2010 — $247,000; 2011 — $21,000.

Recent Developments

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

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

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

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

     There has been no material change in quantitative and qualitative disclosures about market risks since December 31, 2007.

Item 4. Controls and Procedures

(a)

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our current disclosure controls and procedures are effective in facilitating timely decisions regarding required disclosure of any material information relating to us that is required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934.

(b)

There have been no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. 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 1A. Risk Factors

     There were no material changes from the risk factors previously disclosed in our 2007 annual report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

     In January 2008, as a part of the Company’s dividend reinvestment plan for our common stockholders, we directed the plan administrator to purchase 55,134 shares of our common stock for $573,000 in the open market in order to satisfy our obligations to deliver shares of common stock to our stockholders with respect to our dividend for the fourth quarter of 2007. The following chart summarizes repurchases of our common stock during the quarter ended March 31, 2008.

Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
January 1, 2008 through January 31, 2008		55,134 (1)	$	10.39		—		—
February 1, 2008 through February 29, 2008		—		—		—		—
March 1, 2008 through March 31, 2008		—		—		—		—

(1) Pursuant to our dividend reinvestment plan, we directed our plan administrator to purchase 55,134 shares in the open market in order to satisfy our obligations to deliver shares of common stock to our stockholders with respect to our dividend for the fourth quarter of 2007.

Item 3. Defaults Upon Senior Securities

     Not Applicable.

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

     Not Applicable.

Item 5. Other Information

     Not Applicable.

Item 6. Exhibits

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

Exhibit
Number	Description of Document
31.1*	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
31.2*	Certification of Chief Financial Officer Pursuant to Rule 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).

* Submitted herewith.

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SIGNATURES

     Pursuant to the requirements of the 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 May 12, 2008.

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

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