Patriot Capital Funding (PCAP) 10-Q 2008 Q2 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 June 30, 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	(I.R.S. Employer
incorporation or organization)	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 filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filero  Accelerated filerþ  Non-accelerated filer  o
(Do not check if a smaller reporting company) Smaller reporting companyo 

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 August 7, 2008 was 20,702,485.

PATRIOT CAPITAL FUNDING, INC.

FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2008

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION	1
Item 1. Financial Statements	1
Consolidated Balance Sheets at June 30, 2008 (unaudited) and December 31, 2007	1
Consolidated Statements of Operations for the three and six months ended June 30, 2008 and 2007 (unaudited)	2
Consolidated Statements of Changes in Net Assets for the six months ended June 30, 2008 and 2007 (unaudited)	3
Consolidated Statements of Cash Flows for the six months ended June 30, 2008 and 2007 (unaudited)	4
Consolidated Schedule of Investments as of June 30, 2008 (unaudited)	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	37
Item 4. Controls and Procedures	37
PART II OTHER INFORMATION	38
Item 1. Legal Proceedings	38
Item 1A. Risk Factors	38
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 3. Defaults upon Senior Securities	38
Item 4. Submission of Matters to a Vote of Security Holders	38
Item 5. Other Information	39
Item 6. Exhibits	40
Signatures	41

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Patriot Capital Funding, Inc.
Consolidated Balance Sheets

	June 30,			December 31,
	2008			2007
	(unaudited)
ASSETS
Investments at fair value:
Non-control/non-affiliate investments (cost of $227,867,732 - 2008, $294,686,727 - 2007)	$	218,344,290		$	290,225,759
Affiliate investments (cost of $87,868,751 - 2008, $86,577,905 - 2007)		80,800,446			85,171,605
Control investments (cost of $23,517,554 - 2008, $6,980,389 - 2007)		23,265,964			9,328,389
Total investments		322,410,700			384,725,753
Cash and cash equivalents		1,102,733			789,451
Restricted cash		7,963,276			10,487,202
Interest receivable		1,357,563			1,758,954
Other assets		2,264,347			617,448
TOTAL ASSETS	$	335,098,619		$	398,378,808
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Borrowings	$	116,100,000		$	164,900,000
Interest payable		467,998			821,124
Dividends payable		6,831,820			6,814,650
Accounts payable, accrued expenses and other		3,077,175			4,245,350
TOTAL LIABILITIES		126,476,993			176,781,124
COMMITMENTS
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; 20,702,485 and 20,650,455 shares issued and outstanding at June 30, 2008, and December 31, 2007, respectively		207,024			206,504
Paid-in capital		234,624,380			233,722,593
Accumulated net investment loss		(1,912,061	)		(1,912,061	)
Distributions in excess of net investment income		(3,266,523	)		(2,824,651	)
Net realized loss on investments		(3,605,132	)		(3,171,365	)
Net unrealized depreciation on interest rate swaps		(545,582	)		(762,365	)
Net unrealized depreciation on investments		(16,880,480	)		(3,660,971	)
TOTAL STOCKHOLDERS’ EQUITY		208,621,626			221,597,684
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	335,098,619		$	398,378,808
NET ASSET VALUE PER COMMON SHARE	$	10.08		$	10.73

See Notes to Consolidated Financial Statements.

1

Patriot Capital Funding, Inc.
Consolidated Statements of Operations
(unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007
INVESTMENT INCOME
Interest and dividends:
Non-control/non-affiliate investments	$	7,133,671		$	7,535,657		$	15,432,004		$	15,114,605
Affiliate investments		2,498,499			1,214,881			5,012,922			1,834,114
Control investments		499,659			—			678,125			—
Total interest and dividend income		10,131,829			8,750,538			21,123,051			16,948,719
Fees:
Non-control/non-affiliate investments		69,389			188,099			238,086			569,725
Affiliate investments		37,787			111,174			76,448			124,403
Control investments		35,000			—			41,250			—
Total fee income		142,176			299,273			355,784			694,128
Other investment income:
Non-control/non-affiliate investments		242,388			39,842			282,243			424,129
Control investments		138,026			—			138,026			—
Total other investment income		380,414			39,842			420,269			424,129
Total Investment Income		10,654,419			9,089,653			21,899,104			18,066,976
EXPENSES
Compensation expense		1,107,324			1,331,965			2,605,499			2,551,498
Interest expense		1,925,230			1,642,509			3,984,753			3,148,721
Professional fees		408,204			106,044			670,731			413,671
General and administrative expense		794,963			617,427			1,433,523			1,216,100
Total Expenses		4,235,721			3,697,945			8,694,506			7,329,990
Net Investment Income		6,418,698			5,391,708			13,204,598			10,736,986
NET REALIZED GAIN (LOSS) AND NET UNREALIZED APPRECIATION (DEPRECIATION)
Net realized loss or investments - control		(350,000	)		—			(350,000	)		—
Net realized gain (loss) on investments — non-control/non-affiliate		5,783			77,934			(83,767	)		84,101
Net unrealized depreciation on investments - non-control/non-affiliate		(2,218,615	)		(296,850	)		(8,629,899	)		(364,950	)
Net unrealized appreciation (depreciation) on investments - affiliate		(3,070,018	)		324,600			(5,662,008	)		477,800
Net unrealized appreciation on investments — control		1,920,398			—			1,072,398			—
Net unrealized appreciation on interest rate swaps		969,634			185,472			216,783			122,144
Net Realized Gain (Loss) and Net Unrealized Appreciation (Depreciation)		(2,742,818	)		291,156			(13,436,493	)		319,095
NET INCOME (LOSS)	$	3,675,880		$	5,682,864		$	(231,895	)	$	11,056,081
Earnings (loss) per share, basic	$	0.18		$	0.31		$	(0.01	)	$	0.62
Earnings (loss) per share, diluted	$	0.18		$	0.31		$	(0.01	)	$	0.61
Weighted average shares outstanding, basic		20,693,337			18,246,987			20,671,896			17,891,914
Weighted average shares outstanding, diluted		20,693,337			18,466,510			20,671,896			18,111,437

See Notes to Consolidated Financial Statements.

2

Patriot Capital Funding, Inc.
Consolidated Statements of Changes in Net Assets
(unaudited)

	Six Months Ended
	June 30,
	2008			2007
Operations:
Net investment income	$	13,204,598		$	10,736,986
Net realized gain (loss) on investments		(433,767	)		84,101
Net unrealized appreciation (depreciation) on investments		(13,219,509	)		112,850
Net unrealized appreciation on interest rate swaps		216,783			122,144
Net increase (decrease) in net assets from operations		(231,895	)		11,056,081
Stockholder transactions:
Distributions to stockholders from net investment income		(13,204,598	)		(10,736,986	)
Distributions in excess of net investment income		(441,872	)		(935,427	)
Net decrease in net assets from stockholder distributions		(13,646,470	)		(11,672,413	)
Capital share transactions:
Issuance of common stock		—			31,694,803
Common stock listing fees		(23,585	)		—
Issuance of common stock under dividend reinvestment plan		540,064			871,477
Stock option compensation		385,828			330,669
Net increase in net assets from capital share transactions		902,307			32,896,949
Total increase (decrease) in net assets		(12,976,058	)		32,280,617
Net assets at beginning of period		221,597,684			164,108,629
Net assets at end of period	$	208,621,626		$	196,389,246
Net asset value per common share	$	10.08		$	10.76
Common shares outstanding at end of period		20,702,485			18,252,774

See Notes to Consolidated Financial Statements.

3

Patriot Capital Funding, Inc.
Consolidated Statements of Cash Flows
(unaudited)

	Six Months Ended
	June 30,
	2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(231,895	)	$	11,056,081
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Depreciation and amortization		268,963			214,104
Change in interest receivable		401,391			(208,552	)
Realized (gain) loss on sale of investments		433,767			(84,101	)
Unrealized (appreciation) depreciation on investments		13,219,509			(112,850	)
Unrealized appreciation on interest rate swaps		(216,783	)		(122,144	)
Payment-in-kind interest and dividends		(2,899,860	)		(1,770,022	)
Stock-based compensation expense		385,828			330,669
Change in unearned income		(633,242	)		270,397
Change in interest payable		(353,126	)		13,287
Change in other assets		(17,370	)		235,365
Change in accounts payable, accrued expenses and other		(1,713,757	)		(750,582	)
Net cash provided by operating activities		8,643,425			9,071,652
CASH FLOWS FROM INVESTING ACTIVITIES:
Funded investments		(9,691,406	)		(86,981,250	)
Principal repayments on investments		51,532,552			46,917,872
Proceeds from sale of investments		10,353,733			5,458,851
Purchases of furniture and equipment		(6,295	)		(4,085	)
Net cash provided by (used for) investing activities		52,188,584			(34,608,612	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings		9,052,500			87,050,000
Repayments on borrowings		(57,852,500	)		(82,857,000	)
Net proceeds from sale of common stock		—			31,694,804
Common stock listing fees		(23,585	)		—
Dividends paid		(13,089,236	)		(9,864,867	)
Deferred offering costs		(98,860	)		(23,188	)
Deferred financing costs		(1,030,972	)		—
Decrease in restricted cash		2,523,926			951,530
Net cash provided by (used for) financing activities		(60,518,727	)		26,951,279
NET INCREASE IN CASH AND CASH EQUIVALENTS		313,282			1,414,319
CASH AND CASH EQUIVALENTS AT:
Beginning of Period		789,451			4,211,643
End of Period	$	1,102,733		$	5,625,962
Supplemental information:
Interest paid	$	4,337,879		$	3,135,434
Non-cash investing activities:
Conversion of debt to equity	$	5,159,567		$	—
Non-cash financing activities:
Dividends reinvested in common stock	$	540,064		$	871,477
Dividends declared but not paid		6,831,820			5,840,888

See Notes to Consolidated Financial Statements.

4

Patriot Capital Funding, Inc.
Consolidated Schedule of Investments
June 30, 2008
(unaudited)

Company(1)
(Industry)	Company Description	Investment	Principal		Cost		Value
Control investments:
Encore Legal Solutions, Inc. (Printing & Publishing)	Legal document management services	Junior Secured Term Loan A (8.2%, Due 12/10) (2) (3)	$	4,010,866	$	3,992,624	$	3,992,624
		Junior Secured Term Loan B (11.2%, Due 12/10) (2) (3)		7,330,372		7,285,268		7,285,268
		Common Stock (4)				5,159,567		3,516,800
Fischbein, LLC (Machinery)	Designer and manufacturer of packaging equipment	Senior Subordinated Debt (16.5%, Due 5/13) (2) (3)		4,308,724		4,280,095		4,366,272
		Membership Interest — Class A (4)				2,800,000		4,105,000
Total Control investments (represents 7.2% of total investments at fair value)					$	23,517,554	$	23,265,964
Affiliate investments:
Aylward Enterprises, LLC (5) (Machinery)	Manufacturer of packaging equipment	Revolving Line of Credit (6.3%, Due 2/12) (3)	$	3,700,000	$	3,638,585	$	3,638,585
		Senior Secured Term Loan A (7.0%, Due 2/12) (3)		8,105,938		7,998,860		7,998,860
		Senior Subordinated Debt (22.0%, Due 8/12) (2)		6,698,824		6,619,335		1,243,811
		Subordinated Member Note (8.0%, Due 2/13) (2)		145,516		145,516		—
		Membership Interest (4)				1,250,000		—
KTPS Holdings, LLC (Textiles & Leather)	Manufacturer and distributor of specialty pet products	Revolving Line of Credit (6.8%, Due 1/12) (3)		1,000,000		984,700		984,700
		Senior Secured Term Loan A (6.0%, Due 1/12) (3)		5,850,000		5,792,103		5,792,103
		Senior Secured Term Loan B (12.0%, Due 1/12) (3)		1,980,000		1,958,354		1,958,354
		Junior Secured Term Loan (15.0%, Due 3/12) (2) (3)		4,144,021		4,102,778		4,102,778
		Membership Interest — Class A (4)				730,020		798,200
		Membership Interest — Common (4)				—		428,900

5

Company(1)
(Industry)	Company Description	Investment	Principal		Cost		Value
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)		960,000		944,574		944,574
		Senior Secured Term Loan A (6.2%, Due 9/12) (3)		5,534,375		5,489,998		5,489,998
		Senior Subordinated Debt (14.0%, Due 3/13) (2)(3)		3,050,297		3,026,747		3,026,747
		Preferred Stock (2)				521,849		387,800
		Common Stock (4)				25,000		—
Smart, LLC (5) (Diversified/Conglomerate Service)	Provider of tuition management services	Revolving Line of Credit (6.9%, Due 8/11) (3)		870,000		829,250		829,250
		Senior Secured Term Loan A (7.6%, Due 6/11) (3)		3,525,000		3,490,142		3,490,142
		Senior Secured Term Loan B (16.5%, Due 2/12) (2) (3)		3,943,206		3,905,684		3,905,684
		Convertible Subordinated Note (22.0%, Due 8/12)		500,000		500,000		500,000
		Membership Interest — Class B (4)				1,000,000		494,900
Sport Helmets Holdings, LLC (5) (Personal & Nondurable Consumer Products)	Manufacturer of protective headgear	Senior Secured Term Loan A (6.5%, Due 12/13) (3)		4,500,000		4,438,342		4,438,342
		Senior Secured Term Loan B (7.0%, Due 12/13)(3)		7,500,000		7,392,542		7,360,342
		Senior Subordinated Debt (15.0%, Due 6/14) (2)		8,133,299		8,020,690		7,966,994
		Common Stock (4)				2,000,000		1,799,800
Vince & Associates Clinic Research, Inc.(Healthcare, Education & Childcare)	Provider of clinical testing services	Senior Secured Term Loan (6.5%, Due 11/12) (2) (3)		7,125,000		7,030,452		6,936,252
		Senior Subordinated Debt (15.0%, Due 5/13) (2)(3)		5,605,835		5,533,230		5,533,230
		Convertible Preferred Stock (4)				500,000		750,100
Total Affiliate investments (represents 25.1% of total investments at fair value)					$	87,868,751	$	80,800,446
Non-control/non-affiliate investments:
ADAPCO, Inc. (Ecological)	Distributor of specialty chemicals and contract application services	Revolving Line of Credit (9.3%, Due 7/11) (3)	$	3,000,000	$	2,980,841	$	2,980,841
		Senior Secured Term Loan A (12.5%, Due 6/11) (3)		8,682,500		8,624,049		8,029,149
		Common Stock (4)				500,000		—

6

Company(1)
(Industry)	Company Description	Investment	Principal		Cost		Value
Aircraft Fasteners International, LLC (Machinery)	Distributor of fasteners and related hardware for use in aerospace, electronics and defense industries	Senior Secured Term Loan (6.6%, Due 11/12) (3)		6,664,000		6,571,972		6,380,172
		Junior Secured Term Loan (14.0%, Due 5/13) (2) (3)		5,252,420		5,181,583		5,004,263
		Convertible Preferred Stock (2)				263,315		454,100
Allied Defense Group, Inc. (Aerospace & Defense)	Diversified defense company	Common Stock (4)				463,168		156,200
Arrowhead General Insurance Agency, Inc. (6)     (Insurance)	Insurance agency and program specialist	Junior Secured Term Loan (9.7%, 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	Revolving Line of Credit (5.5%, Due 5/10) (3)		350,000		341,695		341,695
		Senior Secured Term Loan A (6.0%, Due 3/09) (3)		816,500		810,033		810,033
		Senior Secured Term Loan B (9.0%, Due 5/10) (3)		1,714,954		1,690,901		1,690,901
		Senior Secured Term Loan C (16.0%, Due 5/10) (2) (3)		7,953,275		7,895,140		7,895,140
		Common Stock Warrants (4)				12,775		—
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 (6.7%, Due 11/11) (3)		10,825,312		10,706,437		10,706,437
		Senior Subordinated Debt (14.5%, Due 11/12) (2) (3)		6,250,000		6,182,216		6,307,216
		Common Stock (4)				750,000		1,103,300
CS Operating, LLC (5) (Buildings & Real Estate)	Provider of maintenance, repair and replacement of HVAC, electrical, plumbing, and foundation repair	Revolving Line of Credit (6.3%, Due 1/13) (3)		200,000		193,677		193,677
		Senior Secured Term Loan A (6.9%, Due 7/12) (3)		2,067,564		2,039,002		2,018,538
		Senior Subordinated Debt (14.5%, Due 1/13) (2) (3)		2,559,372		2,525,687		2,486,815
Copperhead Chemical Company, Inc.(Chemicals, Plastics & Rubber)	Manufacturer of bulk pharmaceuticals	Senior Subordinated Debt (15.3%, Due 1/13) (2) (3)		3,599,522		3,567,469		3,567,469
Custom Direct, Inc. (6) (Printing & Publishing)	Direct marketer of checks and other financial products and services	Senior Secured Term Loan (5.5%, Due 12/13) (3)		1,856,763		1,592,672		1,466,809
		Junior Secured Term Loan (8.7%, Due 12/14) (3)		2,000,000		2,000,000		1,350,000

7

Company(1)
(Industry)	Company Description	Investment	Principal		Cost		Value
Dover Saddlery, Inc. (Retail Stores)	Equestrian products catalog retailer	Common Stock (4)				148,200		122,300
Employbridge Holding Company (5) (6) (Personal, Food & Miscellaneous Services)	A provider of specialized staffing services	Junior Secured Term Loan (9.8%, Due 10/13) (3)		3,000,000		3,000,000		2,625,000
EXL Acquisition Corp. (Electronics)	Manufacturer of lab testing supplies	Senior Secured Term Loan A (5.8%, Due 3/11) (3)		4,086,623		4,058,039		3,972,416
		Senior Secured Term Loan B (6.3%, Due 3/12) (3)		4,753,796		4,700,289		4,600,693
		Senior Secured Term Loan C (6.8%, Due 3/12) (3)		2,932,029		2,889,250		2,827,821
		Senior Secured Term Loan D (15.0%, Due 3/12) (3)		6,893,099		6,827,252		6,827,252
		Common Stock — Class A (4)				2,475		195,000
		Common Stock — Class B (2)				266,571		268,599
Fairchild Industrial Products, Co.(Electronics)	Manufacturer of industrial controls and power transmission products	Senior Secured Term Loan A (6.3%, Due 7/10) (3)		1,972,469		1,954,758		1,954,758
		Senior Secured Term Loan B (7.9%, Due 7/11) (3)		4,581,250		4,545,624		4,545,624
		Senior Subordinated Debt (14.8%, Due 7/11) (2)(3)		5,460,000		5,409,893		5,409,893
		Preferred Stock — Class A (2)				340,638		342,100
		Common Stock — Class B (4)				121,598		450,800
Impact Products, LLC (Machinery)	Distributor of janitorial supplies	Junior Secured Term Loan (8.5%, Due 9/12) (3)		8,931,250		8,871,317		8,404,067
		Senior Subordinated Debt (15.0%, Due 9/12) (2) (3)		5,547,993		5,513,691		5,513,691
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		3,839,116		3,839,116
L.A. Spas, Inc. (Chemicals, Plastics & Rubber)	Manufacturer of above ground spas	Senior Subordinated Debt (17.5%, Due 1/10) (2) (3)		7,788,849		7,754,030		7,754,030
		Common Stock Warrants (4)				3,487		—

8

Company(1)
(Industry)	Company Description	Investment	Principal		Cost		Value
LHC Holdings Corp. (Healthcare, Education & Childcare)	Provider of home healthcare services	Senior Secured Term Loan A (6.5%, Due 11/12) (3)		4,857,750		4,801,984		4,737,634
		Senior Subordinated Debt (14.5%, Due 5/13) (3)		4,565,000		4,512,593		4,435,693
		Membership Interest (4)				125,000		157,400
Mac & Massey Holdings, LLC (Grocery)	Broker and distributor of ingredients to manufacturers of food products	Senior Subordinated Debt (16.5%, Due 2/13) (2)(3)		7,684,718		7,652,439		7,652,439
		Common Stock (4)				247,284		247,800
Metrologic Instruments, Inc. (6) (Electronics)	Manufacturer of imaging and scanning equipment	Senior Secured Term Loan (7.0%, Due 4/14) (3)		987,500		987,500		987,500
		Junior Secured Term Loan (10.3%, Due 4/15)		1,000,000		1,000,000		1,000,000
Northwestern Management Services, LLC (Healthcare, Education & Childcare)	Provider of dental services	Senior Secured Term Loan A (6.5%, Due 12/12) (3)		5,790,000		5,734,148		5,662,748
		Senior Secured Term Loan B (7.0%, Due 12/12) (3)		1,243,750		1,231,566		1,216,316
		Junior Secured Term Loan (15.0%, Due 6/13) (2)(3)		2,796,161		2,769,708		2,769,708
		Common Stock (4)				500,000		357,100
Prince Mineral Company, Inc. (Metals & Minerals)	Manufacturer of pigments	Junior Secured Term Loan (7.9%, Due 12/12) (3)		11,325,000		11,167,167		10,400,767
		Senior Subordinated Debt (14.0%, Due 7/13) (2) (3)		11,973,462		11,843,147		11,427,985
Quartermaster, Inc. (Retail Stores)	Retailer of uniforms and tactical equipment to law enforcement and security professionals	Revolving Line of Credit (7.3%, Due 12/10) (3)		1,450,000		1,426,580		1,426,580
		Senior Secured Term Loan A (7.7%, Due 12/10) (3)		3,687,750		3,650,035		3,650,035
		Senior Secured Term Loan B (8.9%, Due 12/10) (3)		2,556,250		2,534,495		2,534,495
		Senior Secured Term Loan C (15.0%, Due 12/11) (2) (3)		3,348,281		3,320,150		3,320,150
R-O-M Corporation (Automobile)	Manufacturer of doors, ramps and bulk heads for fire trucks and food transportation	Senior Secured Term Loan A (5.5%, Due 2/13) (3)		7,040,000		6,970,950		6,789,950
		Senior Secured Term Loan B (6.8%, Due 5/13) (3)		8,421,750		8,324,632		8,108,182
		Senior Subordinated Debt (15.0%, Due 8/13) (2)		9,100,000		9,001,415		9,001,415

9

Company(1)
(Industry)	Company Description	Investment	Principal		Cost		Value
Sidump’r Trailer Company, Inc. (Automobile)	Manufacturer of side dump trailers	Revolving Line of Credit (7.5%, Due 1/11) (3)		2,200,000		2,180,582		2,180,582
		Senior Secured Term Loan A (6.0%, Due 1/11) (3)		2,047,500		2,032,500		2,032,500
		Senior Secured Term Loan B (9.0%, Due 1/11) (3)		2,320,625		2,298,021		1,901,396
		Senior Secured Term Loan C (15.0%, Due 7/11) (2) (3)		3,279,374		3,251,221		—
		Senior Subordinated Debt (12.0%, Due 1/12) (3)		75,000		75,000		—
		Preferred Stock (2)				90,730		—
		Common Stock (4)				25		—
Total Non-control/non-affiliate investments (represents 67.7% of total investments at fair value)					$	227,867,732	$	218,344,290
Total Investments					$	339,254,037	$	322,410,700

(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 (Machinery)	Designer and manufacturer of packaging equipment	Senior Subordinated Debt (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) (Machinery)	Manufacturer of packaging equipment	Revolving Line of Credit (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 (Textiles & Leather)	Manufacturer and distributor of specialty pet products	Revolving Line of Credit (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 (Home & Office Furnishings, Housewares & Durable Consumer Products)	Manufacturer and marketer of professional high-grade fiberglass-handled striking and digging tools	Revolving Line of Credit (9.5%, Due 9/12) (3)		550,000		532,725		532,725
		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) (Diversified/Conglomerate Service)	Provider of tuition management services	Revolving Line of Credit (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) (Personal & Nondurable Consumer Products)	Manufacturer of protective headgear	Senior Secured Term Loan A (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 Research, Inc. (Healthcare, Education & Childcare)	Provider of clinical testing services	Senior Secured Term Loan (10.0%, Due 11/12) (2) (3)		7,500,000		7,391,657		7,391,657
		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. (Ecological)	Distributor of specialty chemicals and contract application services	Revolving Line of Credit (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 International, LLC (Machinery)	Distributor of fasteners and related hardware for use in aerospace, electronics and defense industries	Senior Secured Term Loan (8.3%, Due 11/12) (3)		6,800,000		6,697,869		6,697,869
		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. (Aerospace & Defense)	Diversified defense company	Common Stock (4)				463,168		161,600

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 Financial Accounting Standards Board (“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 is not expected to impact the results of operations or financial condition.

In June 2008, FASB issued Emerging Issues Task Force 03-6-1,Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. This FASB Staff Position (“FSP”) addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (“EPS”). This FSP shall be effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. All prior-period EPS data presented shall be adjusted retrospectively (including interim financial statements, summaries of earnings, and selected financial data) to conform with the provisions of this FSP. Early application is not permitted. The Company will adopt this statement effective January 1, 2009. The Company is currently analyzing the effect on EPS from the adoption of this statement.

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 stockholders 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 estimate, 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 conform 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 June 30, 2008 and December 31, 2007, investments consisted of the following:

	June 30, 2008				December 31, 2007
	Cost		Fair Value		Cost		Fair Value
Investments in debt securities	$	321,432,335	$	306,274,501	$	375,410,033	$	371,261,022
Investments in equity securities		17,821,702		16,136,199		12,834,988		13,464,731
Total	$	339,254,037	$	322,410,700	$	388,245,021	$	384,725,753

At June 30, 2008 and December 31, 2007, $123.9 million and $138.0 million, respectively, of the Company’s portfolio investments at fair value were at fixed rates, which represented approximately 38% 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 June 30, 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.

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During the three months ended June 30, 2008, the Company realized a loss of $344,000 on investments principally from the cancellation of warrants in which the Company had previously recorded unrealized depreciation on the entire warrant balance. During the six months ended June 30, 2008, the Company realized a net loss of $434,000 from the sale of one portfolio debt investment and cancellation of warrants during the second quarter of 2008. During the three and six months ended June 30, 2007, the Company realized a gain of $78,000 and $84,000, respectively, on the sale of portfolio investments. During the three and six months ended June 30, 2008 the Company recorded unrealized depreciation of $3.4 million and $13.2 million, respectively, and during the three and six months ended June 30, 2007, the Company recorded unrealized appreciation of $28,000 and $113,000, respectively.

The composition of the Company’s investments as of June 30, 2008 and December 31, 2007 at cost and fair value was as follows:

	June 30, 2008										December 31, 2007
	Cost		% (1)			Fair Value		% (1)			Cost		% (1)			Fair Value		% (1)
Senior Secured Debt	$	160,353,144		47.2	%	$	154,850,773		48.0	%	$	190,048,200		49.0	%	$	189,209,150		49.2	%
Junior Secured Debt		65,076,882		19.2			61,390,912		19.1			85,493,227		22.0			84,583,227		22.0
Subordinated Debt		96,002,309		28.3			90,032,816		27.9			99,868,606		25.7			97,468,645		25.3
Warrants / Equity		17,821,702		5.3			16,136,199		5.0			12,834,988		3.3			13,464,731		3.5
Total	$	339,254,037		100.0	%	$	322,410,700		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 June 30, 2008 and December 31, 2007 at cost and fair value was as follows:

	June 30, 2008										December 31, 2007
	Cost		% (1)			Fair Value		% (1)			Cost		% (1)			Fair Value		% (1)
Machinery	$	53,134,269		15.6	%	$	47,108,821		14.6	%	$	52,844,315		13.6	%	$	54,030,773		14.0	%
Personal & Nondurable Consumer Products		39,490,227		11.6			39,682,431		12.3			51,070,705		13.2			51,280,805		13.3
Automobile		34,225,076		10.1			30,014,025		9.3			34,044,318		8.8			33,957,022		8.8
Electronics		33,103,887		9.8			33,382,456		10.4			42,296,015		10.9			42,470,710		11.0
Health Care, Education & Childcare		32,738,681		9.6			32,556,181		10.1			33,686,998		8.7			33,779,798		8.8
Metals & Minerals		23,010,314		6.8			21,828,752		6.8			22,972,190		5.9			22,972,190		6.0
Printing & Publishing		20,030,131		6.0			17,611,501		5.5			19,172,972		4.9			16,303,220		4.2
Textiles & Leather		13,567,955		4.0			14,065,035		4.4			12,970,522		3.3			13,077,422		3.4
Ecological		12,104,890		3.6			11,009,990		3.4			15,593,790		4.0			14,393,840		3.7
Chemicals, Plastic & Rubber		11,324,986		3.3			11,321,499		3.5			10,733,851		2.8			10,730,842		2.8
Retail Stores		11,079,460		3.3			11,053,560		3.4			10,656,911		2.7			10,637,911		2.8
Mining, Steel, Iron & Nonprecious Metals		10,750,544		3.2			10,737,769		3.3			10,796,410		2.8			10,785,664		2.8
Housewares & Durable Consumer Products		10,008,168		2.9			9,849,119		3.0			9,673,177		2.5			9,686,477		2.5
Diversified/Conglomerate Service		9,725,076		2.9			9,219,976		2.9			9,516,840		2.4			9,245,940		2.4
Grocery		7,899,723		2.3			7,900,239		2.4			23,149,458		6.0			23,287,658		6.1
Insurance		5,000,000		1.5			3,750,000		1.2			5,000,000		1.3			4,500,000		1.2
Buildings & Real Estate		4,758,366		1.4			4,699,030		1.4			4,780,826		1.2			4,780,826		1.2
Oil & Gas		3,839,116		1.1			3,839,116		1.2			3,837,555		1.0			3,837,555		1.0
Personal, Food & Miscellaneous Services		3,000,000		0.9			2,625,000		0.8			3,000,000		0.8			2,910,000		0.8
Aerospace & Defense		463,168		0.1			156,200		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	$	339,254,037		100.0	%	$	322,410,700		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. 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 June 30, 2008 and December 31, 2007, the Company owned greater than 5% but less than 25% of the voting securities in six investments. At June 30, 2008 and December 31, 2007, the Company owned 25% or more of the voting securities in two and one investments, respectively.

Note 3. Fair Value Measurements

The Company accounts for its portfolio investments and interest rate swaps at fair value. As a result, the Company adopted the provisions of SFAS No. 157 in the first quarter of 2008. SFAS 157 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements. 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 June 30, 2008, by caption on the Consolidated Balance Sheet for each of the three levels of hierarchy established by SFAS 157.

	As of June 30, 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	$	278,500	$	11,179,309	$	206,886,481	$	218,344,290
Affiliate investments		—		—		80,800,446		80,800,446
Control investments		—		—		23,265,964		23,265,964
Total investments at fair value	$	278,500	$	11,179,309	$	310,952,891	$	322,410,700

The following table provides a roll-forward in the changes in fair value from December 31, 2007 to June 30, 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 also typically include, in addition to the unobservable or Level 3 components, observable components (that is, Level 1 and Level 2 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 Level 1 and Level 2 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)		—			—			(350,000	)		(350,000	)
Change in unrealized depreciation		(7,265,836	)		(5,662,008	)		1,072,398			(11,855,446	)
Purchases, issuances, settlements and other, net		(52,854,242	)		1,290,849			13,215,177			(38,348,216	)
Transfers in (out) of Level 3		—			—			—			—
Fair value as of June 30, 2008	$	206,886,481		$	80,800,446		$	23,265,964		$	310,952,891

Concurrent with its adoption of SFAS 157, effective January 1, 2008, the Company augmented its valuation techniques 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 company’s 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 primarily looked to private merger and acquisition statistics, discounted public trading multiples or industry practices. In some cases, the valuation may be based on a combination of valuation methodologies including but not limited to multiple based, discounted cash flow and liquidation analyses.

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

Beginning on January 1, 2008, the Company also introduced a bond-yield model to value these investments based on the present value of expected cash flows. The primary inputs into the model are market interest rates for debt with similar characteristics and an adjustment for the portfolio company’s credit risk. The credit risk component of the valuation considers several factors including financial performance, business outlook, debt priority and collateral position. During the three and six months ended June 30, 2008, the Company recorded net unrealized depreciation of $3.4 million and $13.2 million, respectively, on its investments, and during the three and six months ended June 30, 2007, the Company recorded unrealized appreciation of $28,000 and $113,000, respectively. For the six months ended June 30, 2008, a portion of the Company’s net unrealized depreciation, approximately $1.4 million, resulted from net decreases in the quoted market prices on its syndicated loan portfolio as a result of disruption in the financial credit markets for broadly syndicated loans; approximately $7.8 million, resulted from a decline in the financial performance of our portfolio companies; and approximately $4.0 million, resulted from the adoption of SFAS 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.). The Securitization Facility allowed the special purpose subsidiary to borrow up to $140 million through the issuance of notes to a multi-seller commercial paper conduit administered by the affiliated entity. On May 2, 2007, the Company amended the Securitization Facility to lower the interest rate payable on any outstanding borrowings under the Securitization Facility from the commercial paper rate plus 1.35% to the commercial paper rate plus 1.00% during the period of time the Company was permitted to make draws under the Securitization Facility. The amendment also reduced or eliminated certain restrictions pertaining to certain loan covenants. On August 31, 2007, the Company amended the Securitization Facility to increase its borrowing capacity thereunder by $35 million. The amendment also extended the commitment termination date from July 23, 2009 to July 22, 2010 and reduced or eliminated certain restrictions pertaining to certain loan covenants. The Securitization Facility provided for the payment by the Company to the lender of a monthly fee equal to 0.25% per annum on the unused amount of the Securitization Facility.

On April 11, 2008, the Company entered into a second amended and restated securitization revolving credit facility (the “Amended Securitization Facility”) with an entity affiliated with BMO Capital Markets Corp. and Branch Banking and Trust Company. The Amended Securitization Facility amended and restated the Securitization Facility to, among other things: (i) increase the borrowing capacity from $175 million to $225 million; (ii) extend the date until which the Company is allowed to make draws thereunder 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.

If the Amended Securitization Facility is not extended, any principal amounts then outstanding will be due on April 11, 2011. The Company can use the proceeds of the Amended Securitization Facility to fund loan origination activities and for general corporate purposes. Each loan origination under the Amended Securitization Facility will be subject to the satisfaction of certain conditions.

Similar to the Securitization Facility, the Amended Securitization Facility contains restrictions pertaining to the geographic and industry concentrations of funded loans, maximum size of funded loans, interest rate payment frequency of funded loans, maturity dates of funded loans and minimum equity requirements. These restrictions may affect the amount of notes the Company’s special purpose subsidiary may issue from time to time. The Amended Securitization Facility also contains certain requirements relating to portfolio performance, including required minimum portfolio yield and limitations on delinquencies and charge-offs, violation of which could result in the early termination of the Amended Securitization Facility. The Amended Securitization Facility is secured by all of the loans held by the Company’s special purpose subsidiary and, at June 30, 2008, the Company was in compliance with all covenants.

In connection with the origination and amendment of the Securitization Facility and the Amended Securitization Facility, the Company incurred $2.4 million of fees which is being amortized over the term of the facility.

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At June 30, 2008 and December 31, 2007, $116.1 million and $164.9 million, respectively, of borrowings were outstanding under the facility. The weighted average interest rate during the six months ended June 30, 2008 and 2007 was 5.1% and 6.5%, respectively. At June 30, 2008, the interest rate was 4.5%. Interest expense for the three and six months ended June 30, 2008 and 2007 consisted of the following:

	Three Months Ended June 30,				Six Months Ended June 30,
	2008		2007		2008		2007
Interest charges	$	1,733,144	$	1,544,512	$	3,719,520	$	2,946,074
Amortization of debt issuance costs		131,728		70,059		190,632		140,118
Unused facility fees		60,358		27,938		74,601		62,529
Total	$	1,925,230	$	1,642,509	$	3,984,753	$	3,148,721

Since 2006, the Company, through its special purpose subsidiary, has entered into seven interest rate swap agreements. The swap agreements have a fixed rate range of 3.3% to 5.2% on an initial notional amount of $44.6 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 the Company’s outstanding borrowings. For the three and six months ended June 30, 2008, net unrealized appreciation attributed to the swaps were approximately $970,000 and $217,000, respectively, and for the three and six months ended June 30, 2007, net unrealized appreciation attributed to the swaps were approximately $185,000 and $122,000, respectively. While hedging activities may insulate the Company against adverse changes in interest rates, they may also limit the Company’s 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 for the fair value measurement of its interest rate swaps. There was no impact of the adoption of SFAS 157 on the basis by which the fair value of the swaps was determined. The Company measures the fair value of its $44.6 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 June 30, 2008, the accrued mark to market loss on these swaps is $546,000. The unrealized gain recorded in the three months ended June 30, 2008 is $970,000, 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 and Restricted Stock Plan

As of June 30, 2008, 3,644,677 shares of common stock were reserved for issuance upon exercise of options to be granted under the Company’s stock option plan (the “Plan”) and 2,065,045 shares of the Company’s common stock were reserved for issuance under the Company’s employee restricted stock 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 June 30, 2008, 3,237,177 options were outstanding, 1,660,550 of which were exercisable, and no shares of restricted stock were outstanding. The options have a weighted average remaining contractual life of 8.0 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 and six months ended June 30, 2008, the Company recorded compensation expense related to stock options of approximately $204,000 and $386,000, respectively, and for three and six months ended June 30, 2007, the Company recorded compensation expense related to stock options of approximately $172,000 and $331,000, 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 June 30, 2008, there was $717,000 of unrecognized compensation cost related to unvested options which is expected to be recognized over 2.7 years.

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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 and six months ended June 30, 2008 and 2007.

	Three Months Ended June 30,				Six Months Ended June 30,
	2008		2007		2008		2007
Weighted average common shares outstanding, basic		20,693,337		18,246,987		20,671,896		17,891,914
Effect of dilutive stock options		—		219,523		—		219,523
Weighted average common shares outstanding, diluted		20,693,337		18,466,510		20,671,896		18,111,437

The dilutive effect of stock options is computed using the treasury stock method. Options on 3.2 million and 227,000 shares in 2008 and 2007, respectively, 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 six months ended June 30, 2008 and the year ended December 31, 2007, issued 52,000 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
May 2, 2008	June 5, 2008	July 16, 2008	$0.33
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 $22.0 million and $29.3 million at June 30, 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 Amended Securitization Facility, the Company’s special purpose subsidiary may be required under certain circumstances to enter into interest rate swap agreements or other interest rate hedging transactions. The Company has agreed to guarantee the payment of certain swap breakage costs that may be payable by the Company’s special purpose subsidiary in connection with any such interest rate swap agreements or other interest rate hedging transactions (see “Note 4. Borrowings”).

The Company leases its corporate offices and certain equipment under operating leases with terms expiring in 2011. Future minimum lease payments due under operating leases at June 30, 2008 are as follows: $120,000 — remainder of 2008, $241,000 — 2009, $247,000 — 2010, $21,000 — 2011. Rent expense was approximately $68,000 and $136,000 for the three and six months ended June 30, 2008, respectively, and was approximately $56,000 and $112,000 for the three and six months ended June 30, 2007, respectively. At June 30, 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.

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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 June 30, 2008 and December 31, 2007, the Company’s two largest investments represented approximately 14% 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 and six months ended June 30, 2008 and 2007, the Company did not record investment income from any portfolio company in excess of 10% 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 stockholders. To date, the Company has fully met all of the distribution requirements and other requirements of Subchapter M of the Code, therefore, no federal, state or local income tax provision is required. On February 11, 2008, the Company was granted permission by the Internal Revenue Service to change its RIC tax year from July 31 to December 31, effective on December 31, 2007. Accordingly, the Company will prepare a short period tax return from August 1, 2007 through December 31, 2007, and will file on a calendar year basis for 2008 and thereafter.

Distributable taxable income for the period January 1, 2008 through June 30, 2008 is as follows:

	January 1, 2008
	to
	June 30, 2008
GAAP net investment income	$	13,205,000
Tax timing differences of:
Origination fees, net		(685,000	)
Stock compensation expense, bonus accruals, original issue discount and depreciation and amortization		(1,246,000	)
Tax distributable income	$	11,274,000

Distributable taxable income differs from GAAP net investment income primarily due to the following: (1) origination fees received in connection with investments in portfolio companies are treated as taxable income upon receipt but are amortized into income for GAAP purposes; (2) certain stock compensation is not currently deductible for tax purposes but are current expenses for GAAP 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 six months ended June 30, 2008 will be determined by the Company’s tax earnings and profits for its full tax year ending December 31, 2008. As of June 30, 2008, the Company estimates that 87% of the April 16, 2008 distribution, and the July 16, 2008 distribution will be treated as ordinary income with the balance treated as return of capital. As noted, the amount treated as return of capital will be determined at the close of the Company's calendar 2008 tax year.

The tax cost basis of the Company’s investments as of June 30, 2008 approximates the book cost. There were no capital gain distributions in 2008 or 2007.

At June 30, 2008, the Company had a net capital loss carryforward of $3.2 million to offset net capital gains, to the extent provided by federal tax law. The capital loss carryforward will expire in the Company’s tax fiscal year ending December 31, 2013.

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Note 10. Financial Highlights

	For the Six Months Ended
	June 30,
	2008			2007
Per Share Data:
Net asset value at beginning of period	$	10.73		$	10.37
Net investment income		.64			.59
Net gain (loss) on investments		(.02	)		.01
Net change in unrealized appreciation (depreciation) on investments		(.64	)		.01
Effect of issuance of common stock		—			.39
Distributions from net investment income		(.64	)		(.59	)
Distributions in excess of net investment income		(.02	)		(.05	)
Net change in unrealized swap appreciation		.01			.01
Stock based compensation expense		.02			.02
Net asset value at end of period	$	10.08		$	10.76
Total net asset value return (1)		0.1	%		10.0	%
Per share market value, beginning of period	$	10.09		$	14.49
Per share market value, end of period	$	6.25		$	14.85
Total market value return (2)		(31.5	)%		6.9	%
Shares outstanding at end of period		20,702,485			18,252,774
Ratios and Supplemental Data:
Net assets at end of period	$	208,622,000		$	196,389,000
Average net assets		214,404,000			195,149,000
Ratio of operating expenses to average net assets (annualized)		8.1	%		7.5	%
Ratio of net investment income (loss) to average net assets (annualized)		12.3	%		11.0	%
Average borrowings outstanding	$	146,170,000		$	90,359,000
Average amount of borrowings per share	$	7.06		$	4.95

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

Note 11. Subsequent Events

On July 1, 2008, the Company received gross proceeds of $2.0 million in conjunction with the full repayment of both the junior and senior term loans to Metrologic Instruments, Inc. Proceeds received included a $10,000 prepayment fee.

On July 1, 2008, the Company placed one of its portfolio companies on non-accrual status.

On July 17, 2008, the Company funded a $2.0 million senior secured term loan debt investment in Cengage Learning Acquisitions, Inc., a company that delivers highly customized learning solutions.

On July 23, 2008, the Company funded a $1.1 million equity investment in Nupla Corporation, an existing portfolio company. Subsequent to the investment, the Company’s equity interest in Nupla Corporation exceeds 25%.

On July 30, 2008, the Board of Directors declared a cash dividend of $0.33 per share, payable on October 15, 2008 to stockholders of record as of the close of business on September 12, 2008. Such cash dividend is payable on total shares issued and outstanding on the record date.

On July 30, 2008, the Company funded a $5.5 million debt investment in L.A. Spas, Inc., an existing portfolio company. The financing is comprised of a senior secured revolving line of credit and a secured term loan.

On July 30, 2008, the Company entered into agreements with Richard P. Buckanavage, the Company’s chief executive officer and president, and Timothy W. Hassler, the Company’s chief investment officer, to extend the terms of their employment agreements for a 90-day period. Their employment agreements were set to expire in August 2008. The Company expects to enter into new employment agreements with such executive officers during the extension period.

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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 annual report on Form 10-K for the year ended December 31, 2007. Other factors that could cause actual results to differ materially include:

• changes in the economy, including economic downturns or recessions;

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

• future changes in laws, accounting pronouncements or regulations.

     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. These conditions may limit our ability to grow our investment portfolio, which may, in turn, limit our ability to make distributions to our stockholders at a specific level or to increase the amount of these distributions from time to time. See “-Liquidity and Capital Resources”.

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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 $322.4 million and $384.7 million at June 30, 2008 and December 31, 2007, respectively.

     Total portfolio investment activity as of and for the six months ended June 30, 2008 and the year ended December 31, 2007 was as follows:

	June 30, 2008			December 31, 2007
Beginning portfolio at fair value	$	384,725,753		$	257,812,235
Investments in debt securities		9,691,406			191,391,250
Investments in equity securities		—			8,925,000
Investment repayments		(51,532,552	)		(67,332,023	)
Increase in payment-in-kind interest/dividends		2,899,860			3,928,159
Sale of investments		(10,787,500	)		(5,374,749	)
Change in unearned revenue		633,242			(986,413	)
Decrease in fair value of investments		(13,219,509	)		(3,637,706	)
Ending portfolio at fair value	$	322,410,700		$	384,725,753

     As of June 30, 2008 and December 31, 2007, the composition of our portfolio at fair value was as follows:

	June 30, 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	$	13,520,484		4.2	%	$	14,841,169		3.9	%
Senior secured term loans		141,330,289		43.8			174,367,981		45.3
Junior secured term loans		61,390,912		19.1			84,583,227		22.0
Senior subordinated debt		90,032,816		27.9			97,468,645		25.3
Investments in equity securities		16,136,199		5.0			13,464,731		3.5
Totals	$	322,410,700		100.0	%	$	384,725,753		100.0	%

     For the six months ended June 30, 2008 and year ended December 31, 2007, the weighted average yield on all of our outstanding debt investments was approximately 12.3% and 12.4%, respectively. The weighted average balance of our debt investment portfolio during the six months ended June 30, 2008 was $350.3 million, up from $298.5 million during the year ended December 31, 2007. Yields are computed using actual interest income earned for the year (annualized for the six months ended June 30, 2008), including amortization of loan fees and original issue discount, divided by the weighted average fair value of debt investments. As of June 30, 2008 and December 31, 2007, $123.9 million and $138.0 million, respectively, of our portfolio investments at fair value were at fixed interest rates, which represented approximately 38% 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.

27

     Since 2006, we, through our special purpose subsidiary, have entered into seven interest rate swap agreements. Our swap agreements have a fixed rate range of 3.3% to 5.2% on an initial notional amount of $44.6 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 and six months ended June 30, 2008, net unrealized appreciation attributed to the swaps were approximately $970,000 and $217,000, respectively, and for the three and six months ended June 30, 2007, net unrealized appreciation attributed to the swaps were approximately $185,000 and $122,000, respectively. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of lower rates with respect to the outstanding borrowings. At June 30, 2008, we did not hold any derivative financial instruments for hedging purposes.

     At June 30, 2008 and December 31, 2007, our equity investments consisted of common and preferred stock, LLC membership interests and warrants to acquire equity interests in certain of our portfolio companies. Warrants to acquire equity interests allow us to participate in the potential appreciation in the value of the portfolio company, while minimizing the amount of upfront cost to us.

     The composition of our investment portfolio by industry sector, using Moody’s Industry Classifications, excluding unearned income, as of June 30, 2008 and December 31, 2007 at cost and fair value was as follows:

	June 30, 2008										December 31, 2007
	Cost		% (1)			Fair Value		% (1)			Cost		% (1)			Fair Value		% (1)
Machinery	$	53,134,269		15.6	%	$	47,108,821		14.6	%	$	52,844,315		13.6	%	$	54,030,773		14.0	%
Personal & Nondurable Consumer Products		39,490,227		11.6			39,682,431		12.3			51,070,705		13.2			51,280,805		13.3
Automobile		34,225,076		10.1			30,014,025		9.3			34,044,318		8.8			33,957,022		8.8
Electronics		33,103,887		9.8			33,382,456		10.4			42,296,015		10.9			42,470,710		11.0
Health Care, Education & Childcare		32,738,681		9.6			32,556,181		10.1			33,686,998		8.7			33,779,798		8.8
Metals & Minerals		23,010,314		6.8			21,828,752		6.8			22,972,190		5.9			22,972,190		6.0
Printing & Publishing		20,030,131		6.0			17,611,501		5.5			19,172,972		4.9			16,303,220		4.2
Textiles & Leather		13,567,955		4.0			14,065,035		4.4			12,970,522		3.3			13,077,422		3.4
Ecological		12,104,890		3.6			11,009,990		3.4			15,593,790		4.0			14,393,840		3.7
Chemicals, Plastic & Rubber		11,324,986		3.3			11,321,499		3.5			10,733,851		2.8			10,730,842		2.8
Retail Stores		11,079,460		3.3			11,053,560		3.4			10,656,911		2.7			10,637,911		2.8
Mining, Steel, Iron & Nonprecious Metals		10,750,544		3.2			10,737,769		3.3			10,796,410		2.8			10,785,664		2.8
Housewares & Durable Consumer Products		10,008,168		2.9			9,849,119		3.0			9,673,177		2.5			9,686,477		2.5
Diversified/Conglomerate Service		9,725,076		2.9			9,219,976		2.9			9,516,840		2.4			9,245,940		2.4
Grocery		7,899,723		2.3			7,900,239		2.4			23,149,458		6.0			23,287,658		6.1
Insurance		5,000,000		1.5			3,750,000		1.2			5,000,000		1.3			4,500,000		1.2
Buildings & Real Estate		4,758,366		1.4			4,699,030		1.4			4,780,826		1.2			4,780,826		1.2
Oil & Gas		3,839,116		1.1			3,839,116		1.2			3,837,555		1.0			3,837,555		1.0
Personal, Food & Miscellaneous Services		3,000,000		0.9			2,625,000		0.8			3,000,000		0.8			2,910,000		0.8
Aerospace & Defense		463,168		0.1			156,200		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	$	339,254,037		100.0	%	$	322,410,700		100.0	%	$	388,245,021		100.0	%	$	384,725,753		100.0	%

(1) Represents percentage of total portfolio.

     At June 30, 2008 and December 31, 2007, our two largest investments represented approximately 14% and 12%, respectively, of our 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 and six months ended June 30, 2008 and 2007, we did not record investment income from any portfolio company in excess of 10% of total investment income.

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Portfolio Asset Quality

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

     The following table shows the distribution of our debt investments on the 1 to 5 investment rating scale at fair value as of June 30, 2008 and December 31, 2007:

	June 30, 2008					December 31, 2007
	Investments at		Percentage of			Investments at		Percentage of
Investment Rating	Fair Value		Total Portfolio			Fair Value		Total Portfolio
1	$	68,047,026		22.2	%	$	46,466,323		12.5	%
2		162,225,619		53.0			252,730,493		68.1
3		62,795,000		20.5			57,510,986		15.5
4		9,272,960		3.0			14,553,220		3.9
5		3,933,896		1.3			—		—
Totals	$	306,274,501		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. As a result, certain of our portfolio companies may 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 June 30, 2008 and December 31, 2007, none of our loans or debt securities were on non-accrual status. On July 1, 2008, we placed one of our portfolio companies on non-accrual status. We received approximately $545,000 of investment income from such portfolio company during the six months ended June 30, 2008.

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 June 30, 2008 and 2007

     Total Investment Income

     Total investment income includes 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 June 30, 2008 and 2007, was $10.7 million and $9.1 million, respectively. For the three months ended June 30, 2008, this amount consisted of interest income of $30,000 from cash and cash equivalents, $10.1 million of interest and dividend income from portfolio investments (which included $1.4 million in payment-in-kind or PIK interest and dividends), $142,000 in fee income and $380,000 in other investment income. For the three months ended June 30, 2007, this amount primarily consisted of interest income of $59,000 from cash and cash equivalents, $8.7 million of interest and dividend income from portfolio investments (which included $929,000 in payment-in-kind or PIK interest and dividends), $299,000 in fee income and $40,000 in other investment income.

     The increase in our total investment income for the three months ended June 30, 2008 as compared to the three months ended June 30, 2007 was primarily attributable to an increase in the weighted average fair value balance outstanding of our interest-bearing investment portfolio. During the three months ended June 30, 2008, the weighted average fair value balance outstanding of our interest-bearing investment portfolio was approximately $337.3 million as compared to approximately $282.9 million during the three months ended June 30, 2007.

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     Expenses

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

     Expenses for the three months ended June 30, 2008 and 2007, were $4.2 million and $3.7 million, respectively. Expenses increased for the three months ended June 30, 2008 as compared to the three months ended June 30, 2007 by approximately $538,000, primarily as a result of higher interest expense which increased by $283,000, higher professional fees which increased by $302,000, and higher general and administrative expenses which increased by $178,000, offset by lower compensation expense of $225,000. The lower compensation expense was attributable to a reduction in bonus accruals. The increase in interest expense was attributable to an increase in weighted average borrowings outstanding, which were approximately $139.6 million during the three months ended June 30, 2008, as compared to $90.4 million during the three months ended June 30, 2007. Such borrowings were used primarily to fund investments. The increase in professional fees expense is primarily due to additional compliance related fees we incurred in 2008. The increase in general and administrative expenses primarily related to proxy solicitation fees and increased insurance costs.

     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 June 30, 2008, we realized a loss of $344,000 on investments principally from the cancellation of warrants in which the Company had previously recorded unrealized depreciation on the entire warrant balance. During the three months ended June 30, 2007, we realized gains on the sale of investments in the amount of $78,000, which includes a realized gain of $75,000 from the sale of warrants in one portfolio company and a realized gain of approximately $3,000 from the sale of a debt investment commitment.

     Net Change in Unrealized Appreciation or Depreciation on Investments

     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 June 30, 2008 and 2007, we recorded net unrealized appreciation (depreciation) of ($3.4 million) and $28,000, respectively, on our investments. For the three months ended June 30, 2008, a portion of our net unrealized depreciation, approximately $217,000, resulted from the decrease in quoted market prices on our syndicated loan portfolio; approximately $3.6 million, resulted from a decline in the financial performance of our portfolio companies; partially offset by approximately $452,000, of unrealized appreciation which resulted from the January 1, 2008 adoption of FASB Statement of Financial Accounting Standards No. 157, “Fair Value Measurements.”

     Net Unrealized Appreciation or Depreciation on Interest Rate Swaps

     Net unrealized appreciation (depreciation) on interest rate swaps represents the change in the fair value of our swap agreements. For the three months ended June 30, 2008 and 2007, we recorded unrealized appreciation of approximately $970,000 and $185,000, respectively, on our interest rate swap agreements. The unrealized appreciation in the value of our interest rate swap agreements in 2008 and 2007 resulted from the volatility and corresponding fluctuation in variable interest rates during the periods and reversal of unrealized depreciation recorded in prior periods.

     Net Income

     Net income was $3.7 million for the quarter ended June 30, 2008 as compared to net income of $5.7 million for the quarter ended June 30, 2007.

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Comparison for the six months ended June 30, 2008 and 2007

     Total Investment Income

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

     Total investment income for the six months ended June 30, 2008 and 2007, was $21.9 million and $18.1 million, respectively. For the six months ended June 30, 2008, this amount consisted of interest income of $84,000 from cash and cash equivalents, $21.0 million of interest income from portfolio investments (which included $3.0 million in payment-in-kind or PIK interest and dividends), $356,000 in fee income and $420,000 in other investment income. For the six months ended June 30, 2007, this amount consisted of interest income of $138,000 from cash and cash equivalents, $16.8 million of interest income from portfolio investments (which included $1.8 million in payment-in-kind or PIK interest and dividends), $694,000 in fee income and $424,000 in other investment income.

     The increase in our total investment income for the six months ended June 30, 2008 as compared to the six months ended June 30, 2007 is primarily attributable to an increase in the weighted average fair value balance outstanding of our interest-bearing investment portfolio, partially offset by a decrease in the weighted average yield of our investments, during the six months ended June 30, 2008. During the six months ended June 30, 2008, the weighted average fair value balance outstanding of our interest-bearing investment portfolio was approximately $350.3 million as compared to approximately $274.3 million during the six months ended June 30, 2007. The weighted average yield on our investments decreased as a result of a shift in our portfolio mix towards more senior secured investments and an overall decrease in market interest rates.

     Expenses

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

     Expenses for the six months ended June 30, 2008 and 2007, were $8.7 million and $7.3 million, respectively. Expenses increased for the six months ended June 30, 2008, as compared to the six months ended June 30, 2007, by approximately $1.4 million, primarily as a result of an $836,000 increase in interest expense, a $54,000 increase in compensation expense, a $257,000 increase in professional fees, and a $217,000 increase in general and administrative expenses. The higher interest expense is due to the increase in weighted average borrowings outstanding. The higher compensation expense is attributable to increases in salaries offset by a decrease in bonus accruals and an increase in stock option compensation expense. The increase in professional fees expense is primarily due to an increase in legal, valuation and compliance related fees we incurred in 2008. The increase in general and administrative expenses primarily related to proxy solicitation fees and increased insurance costs.

     Realized Gain (Loss) on Sale of Investments

     Net realized gain (loss) on sale of investments is the difference between the proceeds received from dispositions of portfolio investments and their stated cost. During the six months ended June 30, 2008, we realized a loss of $434,000, on investments from the sale of one portfolio debt investment and from the cancellation of warrants in which the Company had previously recorded unrealized depreciation on the entire warrant balance. During the six months ended June 30, 2007, we realized a gain of $84,000, principally due to the sale of equity warrants from one of our portfolio investments.

     Net Change in Unrealized Appreciation or Depreciation on Investments

     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 six months ended June 30, 2008, we recorded net unrealized depreciation of $13.2 million on our investments. For the six months ended June 30, 2008, a portion of our net unrealized depreciation, approximately $1.4 million resulted from the decrease in quoted market prices on our syndicated loan portfolio as a result of disruption in the financial credit markets for broadly syndicated loans; approximately $7.8 million resulted from a decline in the financial performance of our portfolio companies; approximately $4.0 million resulted from the January 1, 2008 adoption of FASB Statement of Financial Accounting Standards No. 157, “Fair Value Measurements.” During the six months ended June 30, 2007, we recorded net unrealized appreciation of $113,000 on our investments.

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     We believe that the majority of the $4.0 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 $4.0 million of unrealized depreciation at June 30, 2008 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 June 30, 2008.

     Unrealized Appreciation or Depreciation on Interest Rate Swaps

     Net unrealized appreciation (depreciation) on interest rate swaps represents the change in the fair value of our swap agreements. For the six months ended June 30, 2008 and 2007, we recorded unrealized appreciation of approximately $217,000 and $122,000, respectively, on our interest rate swap agreements. The unrealized appreciation in the value of our interest rate swap agreements in 2008 and 2007 resulted from the volatility and corresponding fluctuation in variable interest rates during the periods and reversal of unrealized depreciation recorded in prior periods.

     Net Income (Loss)

     Net loss was $232,000 for the six months ended June 30, 2008 as compared to net income of $11.1 million for the six months ended June 30, 2007. The $11.3 million decrease in net income was primarily a result of an increase in net unrealized depreciation of $13.2 million in 2008, partially offset by an increase in net investment income of $2.5 million.

Financial Condition, Liquidity and Capital Resources

Cash, Cash Equivalents and Restricted Cash

     At June 30, 2008 and December 31, 2007, we had $1.1 million and $789,000, respectively, in cash and cash equivalents. In addition, at June 30, 2008 and December 31, 2007, we had $8.0 million and $10.5 million, respectively, in restricted cash which we maintained in accordance with the terms of the Amended Securitization Facility. A portion of these funds were released to us on July 14, 2008 and January 14, 2008.

Cash Flows

     For the six months ended June 30, 2008, net cash provided by operating activities totaled $8.6 million, compared to net cash provided by operating activities of $9.1 million for the comparable 2007 period. Cash provided by (used for) investing activities totaled $52.2 million and ($34.6) million for the three months ended June 30, 2008 and 2007, respectively. This change was principally due to lower investment originations in 2008 of $77.3 million, higher loan repayments and amortization of $4.6 million, and an increase in proceeds from investment sales of $4.9 million. Cash provided by (used for) financing activities totaled ($60.5) million and $27.0 million in the six months ended June 30, 2008 and 2007, respectively. This change was principally due to a net decrease of $53.0 million in our net borrowings, a decrease in sale of common stock of $31.7 million, and an increase of $3.2 million in dividends paid.

Liquidity and Capital Resources

     We have historically relied on cash generated from our operations and debt and equity financings to fund our business. We primarily use these funds to make investments in portfolio companies in accordance with our investment objective, to pay our operating expenses and to make cash distributions to the holders of our common stock. For a discussion of our intention to continue distributing to our stockholders substantially all of our taxable income in order to satisfy the requirements applicable to RICs under Subchapter M of the Code, see “— Regulated Investment Company Status and Dividends.” 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.

     In light of the current turmoil in the credit markets and uncertainty in the capital markets, we have taken a number of steps over the last several months to help ensure the continued availability of liquidity. First, we increased the borrowing availability under the Amended Securitization Facility from $175 million to $225 million in April 2008. Second, we obtained stockholder approval at our 2008 annual meeting of stockholders to, subject to approval from our board of directors, including our independent directors, (i) issue securities to subscribe to, convert to, or purchase shares of our common stock and (ii) sell shares of our common stock below the then current net asset value per share. Although we believe that these measures should provide us with sufficient sources of liquidity to support our operations and continued growth, we cannot provide any assurance that these measures will be sufficient given the current state of the debt and equity markets.

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     Moreover, the Amended Securitization Facility contains certain requirements, including minimum diversity, rating and yield, and limitations on loan size, and each loan origination under the Securitization Facility is subject to certain conditions. 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%. As of June 30, 2008, this ratio was 280%. These requirements may limit our ability to fund our operations and growth with advances under the Amended Securitization Facility.

Borrowings

     On September 18, 2006, we, through a consolidated wholly-owned bankruptcy remote, special purpose subsidiary, entered into the Securitization Facility. The Securitization Facility allowed the special purpose subsidiary to borrow up to $140 million through the issuance of notes to a multi-seller commercial paper conduit administered by the affiliated entity. On May 2, 2007, we amended the Securitization Facility to lower the interest rate payable on any outstanding borrowings under the Securitization Facility from the commercial paper rate plus 1.35% to the commercial paper rate plus 1.00% during the period of time we were permitted to make draws under the Securitization Facility. The amendment also reduced or eliminated certain restrictions pertaining to certain loan covenants. On August 31, 2007,we amended the Securitization Facility to increase our borrowing capacity thereunder by $35 million. The amendment also extended the commitment termination date from July 23, 2009 to July 22, 2010 and reduced or eliminated certain restrictions pertaining to certain loan covenants. The Securitization Facility provided for the payment by us to the lender of a monthly fee equal to 0.25% per annum on the unused amount of the Securitization Facility.

     On April 11, 2008,we entered into the Amended Securitization Facility. The Amended Securitization Facility amended and restated the Securitization Facility 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 thereunder 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.

     If the Amended Securitization Facility is not extended, any principal amounts then outstanding will be due on April 11, 2011. We can use the proceeds of the Amended Securitization Facility to fund loan origination activities and for general corporate purposes. Each loan origination under the Amended Securitization Facility will be subject to the satisfaction of certain conditions.

     Similar to the Securitization Facility, the Amended Securitization Facility contains restrictions pertaining to the geographic and industry concentrations of funded loans, maximum size of funded loans, interest rate payment frequency of funded loans, maturity dates of funded loans and minimum equity requirements. These restrictions may affect the amount of notes the Company’s special purpose subsidiary may issue from time to time. The Amended Securitization Facility also contains certain requirements relating to portfolio performance, including required minimum portfolio yield and limitations on delinquencies and charge-offs, violation of which could result in the early termination of the Amended Securitization Facility. The Amended Securitization Facility is secured by all of the loans held by our special purpose subsidiary and, at June 30, 2008, the Company was in compliance with all covenants.

     As of June 30, 2008, $116.1 million was outstanding under the Amended Securitization Facility. The weighted average interest rate during the six months ended June 30, 2008 and 2007 was 5.1% and 6.5%, respectively. At June 30, 2008, the interest rate was 4.5%.

     Since 2006, we, through our special purpose subsidiary, entered into seven interest rate swap agreements. The swap agreements have a fixed rate range of 3.3% to 5.2% on an initial notional amount of $44.6 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 six months ended June 30, 2008 and 2007, net unrealized appreciation attributed to the swaps were approximately $217,000 and $122,000, 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, we elected to be treated as a RIC under Subchapter M of the Code. As long as we qualify as a RIC, we will not be taxed on our investment company taxable income or realized net capital gains, to the extent that such taxable income or gains are distributed, or deemed to be distributed, to stockholders on a timely basis.

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     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. 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 six months ended June 30, 2008 and 2007, we realized capital gains (losses) of approximately ($434,000) and $84,000, respectively. In addition, at June 30, 2008, we had a net capital loss carryforward of $3.2 million to offset net capital gains until December 31, 2013. To the extent our taxable earnings for a fiscal tax year fall below the total amount of our dividends for that fiscal year, a portion of those dividend distributions may be deemed a return of capital to our stockholders.

     We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage test for borrowings applicable to us as a business development company under the 1940 Act and due to provisions in the Amended Securitization 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.

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     The fair value of our investments at June 30, 2008, and December 31, 2007 was determined in good faith by our board of directors. Duff & Phelps, LLC, an independent valuation firm (“Duff & Phelps”), provided third party valuation consulting services to us which consisted of certain mutually agreed upon limited procedures that we engaged them to perform. At June 30, 2008 and at December 31, 2007, we asked Duff & Phelps to perform the limited procedures on investments in 13 and 15 portfolio companies, respectively, comprising approximately 42% 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.

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 $5.6 million or 1.7% of our portfolio of investments at fair value as of June 30, 2008 and $4.7 million or 1.2% of our portfolio of investments at fair value as of December 31, 2007. The net increase in loan and equity balances as a result of contracted PIK arrangements are separately identified on our statements of cash flows.

     PIK related activity for the six months ended June 30, 2008 was as follows:

	Six Months Ended
	June 30, 2008
Beginning PIK balance	$	4,714,356
PIK interest and dividends earned during the period		2,899,860
PIK conversion to equity		(1,519,567	)
PIK receipts during the period		(510,288	)
Ending PIK balance	$	5,584,361

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. To the extent interest payments are received on a loan that is not accruing interest, we may use such payments to reduce our cost basis in the investment in lieu of recognizing interest income. At June 30, 2008 and December 31, 2007, none of our loans and debt securities were greater than 90 days past due or on non-accrual. On July 1, 2008, we placed one of our portfolio companies on non-accrual status.

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

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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 June 30, 2008, we had unused commitments to extend credit to our portfolio companies of $22.0 million, which are not reflected on our balance sheet.

     In connection with the Amended Securitization 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 June 30, 2008, we had seven interest rate swap agreements outstanding. See “ – Financial Condition, Liquidity and Capital Resources – Borrowings.”

Contractual Obligations

     As of June 30, 2008, we had $116.1 million outstanding under the Amended Securitization Facility. Our Amended Securitization Facility is due in April 2010. The Amended 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 — $120,000; 2009 — $241,000; 2010 — $247,000; 2011 – $21,000.

Recent Developments

      On July 1, 2008, we received gross proceeds of $2.0 million in conjunction with the full repayment of both the junior and senior term loans to Metrologic Instruments, Inc. Proceeds received included a $10,000 prepayment fee.

     On July 17, 2008, we funded a $2.0 million senior secured term loan debt investment in Cengage Learning Acquisitions, Inc., a company that delivers highly customized learning solutions.

     On July 23, 2008, we funded a $1.1 million equity investment in Nupla Corporation, an existing portfolio company. Subsequent to the investment, our equity interest in Nupla Corporation exceeds 25%.

     On July 30, 2008, the Board of Directors declared a cash dividend of $0.33 per share, payable on October 15, 2008 to stockholders of record as of the close of business on September 12, 2008. Such cash dividend is payable on total shares issued and outstanding on the record date.

     On July 30, 2008, we funded a $5.5 million debt investment in L.A. Spas, Inc., an existing portfolio company. The financing is comprised of a senior secured revolving line of credit and a secured term loan.

     On July 30, 2008, we entered into agreements with Richard P. Buckanavage, our chief executive officer and president, and Timothy W. Hassler, our chief investment officer, to extend the terms of their employment agreements for a 90-day period. Their employment agreements were set to expire in August 2008. It is anticipated that we will enter into new employment agreements with such executive officers during the extension period.

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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 June 30, 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

     Other than as set forth below, there were no material changes from the risk factors previously disclosed in our annual report on Form 10-K for the year ended December 31, 2007.

Stockholders may incur dilution if we sell shares of our common stock in one or more offerings at prices below the then current net asset value per share of our common stock or issue securities to subscribe to, convert to or purchase shares of our common stock.

     At our 2008 annual meeting of stockholders, our stockholders approved two proposals designed to allow us to access the capital markets in ways that we were previously unable to as a result of restrictions that, absent stockholder approval, apply to business development companies under the 1940 Act. Specifically, our stockholders approved proposals that (1) authorize us to sell shares of our common stock below the then current net asset value per share of our common stock in one or more offerings and (2) authorize us to issue securities to subscribe to, convert to, or purchase shares of our common stock in one or more offerings. Any decision to sell shares of our common stock below the then current net asset value per share of our common stock or securities to subscribe to, convert to, or purchase shares of our common stock would be subject to the determination by our Board of Directors that such issuance is in our and our stockholders’ best interests.

     If we were to issue shares of our common stock below net asset value per share, such sales would result in an immediate dilution to existing common stockholders. This dilution would include reduction in the net asset value per share as a result of the issuance of shares at a price below the then current net asset value per share of our common stock and a proportionately greater decrease in a stockholder’s interest in our earnings and assets and voting interest in us than the increase in our assets resulting from such issuance. In addition, if we issue securities to subscribe to, convert to or purchase shares of common stock, the exercise or conversion of such securities would increase the number of outstanding shares of our common stock. Any such exercise would be dilutive on the voting power of existing stockholders, and could be dilutive with regard to dividends and our net asset value, and other economic aspects of the common stock.

     Because the number of shares of common stock that could be so issued and the timing of any issuance is not currently known, the actual dilutive effect cannot be predicted.

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

     During the three months ended June 30, 2008, we issued 52,030 shares of our common stock under our dividend reinvestment plan pursuant to an exemption from the registration requirements of the Securities Act of 1933. The aggregate offering price for the shares of common stock sold under the dividend reinvestment plan was approximately $540,000.

Item 3. Defaults Upon Senior Securities

     Not Applicable.

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

The Annual Meeting of Stockholders of Patriot Capital Funding, Inc. was held on June 24, 2008, for the purpose of:

• Proposal No. 1:election of two directors to our Board of Directors who will serve for three years;

• Proposal No. 2: the ratification of the selection of Grant Thornton LLP to serve as our independent registered public accounting firm for the fiscal year ending December 31, 2008;

• Proposal No. 3: the authorization for us, with the approval of our Board of Directors, to sell shares of our common stock below the then current net asset value per share in one or more offerings;

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• Proposal No. 4: the authorization for us to issue shares of restricted stock under our Employee Restricted Stock Plan; and

• Proposal No. 5: the approval of a proposal to authorize us to issue securities to subscribe to, convert to, or purchase shares of our common stock in one or more offerings.

     The nominees for directors for a three-year term as listed in our 2008 proxy statement were elected by the following votes:

	For		Against		Abstain
Richard P. Buckanavage		13,980,845		627,448		262,812
Timothy W. Hassler		13,987,920		623,582		259,604

     The following directors are continuing their terms as directors:

Dennis C. O’Dowd, two years remaining
Steven Drogin, one year remaining
Mel P. Melsheimer, one year remaining
Richard A. Sebastiao, one year remaining

     The recommendation to ratify the selection of Grant Thornton LLP as the independent registered accounting firm was approved by the following vote:

	For		Against		Abstain
Totals		14,525,611		132,362		213,131

     The recommendation to sell shares of our common stock at prices below the then current net asset value per share in one or more offerings was approved by the following vote:

Including Votes by Our Affiliated Persons

							Broker
	For		Against		Abstain		Non-Votes
Totals		10,361,853		2,286,562		313,056		1,909,636

Excluding Votes by Our Affiliated Persons

	For		Against		Abstain		Non-Votes
Totals		10,194,108		2,286,562		313,056		1,909,636

     The recommendation to approve the issuance of shares of restricted stock under our Employee Restricted Stock Plan was approved by the following vote:

							Broker
	For		Against		Abstain		Non-Votes
Totals		7,931,210		4,489,980		540,283		1,909,634

     The recommendation to authorize us to issue securities to subscribe to, convert to, or purchase shares of our common stock in one or more offerings was approved by the following vote:

							Broker
	For		Against		Abstain		Non-Votes
Totals		11,252,345		1,370,151		338,975		1,909,636

Item 5. Other Information

     Not Applicable.

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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 August 8, 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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