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 September 30, 2009
 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.
  Delaware
    
    74-3068511(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)274 Riverside AvenueWestport, CT
    
    06880(Address of principal executive office)
    
    (Zip Code)
 (203) 429-2700
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



PATRIOT CAPITAL FUNDING, INC.
 FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2009
 TABLE OF CONTENTS
 PART I
    
    FINANCIAL INFORMATION
    
    
    1Item 1.
    
    Financial Statements (Unaudited)
    
    
    1Consolidated Balance Sheets at September 30, 2009 and December 31, 2008
    
    
    1Consolidated Statements of Operations for the three and nine months ended September 30, 2009 and 2008
    
    
    2Consolidated Statements of Changes in Net Assets for the nine months ended September 30, 2009 and 2008
    
    
    3Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and 2008
    
    
    4Consolidated Schedule of Investments as of September 30, 2009
    
    
    5Consolidated Schedule of Investments as of December 31, 2008
    
    
    11Notes to Consolidated Financial Statements
    
    
    17Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    29Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    42Item 4.
    
    Controls and Procedures
    
    
    42PART II
    
    OTHER INFORMATION
    
    
    43Item 1.
    
    Legal Proceedings
    
    
    43Item 1A.
    
    Risk Factors
    
    
    43Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    45Item 3.
    
    Defaults upon Senior Securities
    
    
    46Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    46Item 5.
    
    Other Information
    
    
    46Item 6.
    
    Exhibits
    
    
    46Signatures
    
    
    47




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##### 



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 Patriot Capital Funding, Inc.
Consolidated Balance Sheets
(unaudited)
 September 30,
    
    
    December 31,2009
    
    
    2008ASSETSInvestments at fair value:Non-control/non-affiliate investments (cost of $206,077,578 - 2009,
$269,577,008 - 2008)
    
    $
    190,913,655
    
    
    $
    240,486,620Affiliate investments (cost of $52,120,596 - 2009,
$53,129,533 - 2008)
    
    
    45,953,070
    
    
    
    51,457,082Control investments (cost of $47,032,697 - 2009, $43,192,484 -
2008)
    
    
    20,565,598
    
    
    
    30,427,046Total investments
    
    
    257,432,323
    
    
    
    322,370,748Cash and cash equivalents
    
    
    5,062,075
    
    
    
    6,449,454Restricted cash
    
    
    8,025,982
    
    
    
    22,155,073Interest receivable
    
    
    1,200,833
    
    
    
    1,390,285Other assets
    
    
    1,193,669
    
    
    
    1,897,086TOTAL ASSETS
    
    $
    272,914,882
    
    
    $
    354,262,646LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIESBorrowings
    
    $
    112,706,453
    
    
    $
    162,600,000Interest payable
    
    
    656,954
    
    
    
    514,125Dividends payable
    
    
    
    
    
    
    5,253,709Accounts payable, accrued expenses and other
    
    
    3,620,996
    
    
    
    5,777,642TOTAL LIABILITIES
    
    
    116,984,403
    
    
    
    174,145,476COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITYPreferred stock, $.01 par value, 1,000,000 shares authorized;
no shares issued and outstanding
    
    
    
    
    
    
    Common stock, $.01 par value, 49,000,000 shares authorized; 20,950,501
and 20,827,334 shares issued and outstanding at September 30, 2009,
and December 31, 2008, respectively
    
    
    209,506
    
    
    
    208,274Paid-in capital
    
    
    235,333,314
    
    
    
    234,385,063Accumulated net investment income (loss)
    
    
    5,097,676
    
    
    
    (1,912,061
    )Distributions in excess of net investment income
    
    
    
    
    
    
    (1,758,877
    )Net realized loss on investments
    
    
    (33,722,252
    )
    
    
    (4,053,953
    )Net realized loss on interest rate swaps
    
    
    (3,251,026
    )
    
    
    Net unrealized depreciation on interest rate swaps
    
    
    
    
    
    
    (3,097,384
    )Net unrealized depreciation on investments
    
    
    (47,736,739
    )
    
    
    (43,653,892
    )TOTAL STOCKHOLDERS EQUITY
    
    
    155,930,479
    
    
    
    180,117,170TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    272,914,882
    
    
    $
    354,262,646NET ASSET VALUE PER COMMON SHARE
    
    $
    7.44
    
    
    $
    8.65
  1




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##### 



Patriot Capital Funding, Inc.
Consolidated Statements of Operations
(unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008INVESTMENT INCOMEInterest and dividends:Non-control/non-affiliate investments
    
    $
    5,991,449
    
    
    $
    6,477,906
    
    
    $
    18,430,839
    
    
    $
    21,909,910Affiliate investments
    
    
    1,476,296
    
    
    
    1,994,624
    
    
    
    4,215,461
    
    
    
    7,007,546Control investments
    
    
    332,501
    
    
    
    966,986
    
    
    
    1,282,578
    
    
    
    1,645,111Total interest and dividend income
    
    
    7,800,246
    
    
    
    9,439,516
    
    
    
    23,928,878
    
    
    
    30,562,567Fees:Non-control/non-affiliate investments
    
    
    86,334
    
    
    
    105,464
    
    
    
    334,151
    
    
    
    343,550Affiliate investments
    
    
    41,739
    
    
    
    282,518
    
    
    
    180,462
    
    
    
    358,966Control investments
    
    
    9,909
    
    
    
    72,487
    
    
    
    78,067
    
    
    
    113,737Total fee income
    
    
    137,982
    
    
    
    460,469
    
    
    
    592,680
    
    
    
    816,253Other investment income:Non-control/non-affiliate investments
    
    
    112,357
    
    
    
    17,833
    
    
    
    121,161
    
    
    
    300,076Affiliate investments
    
    
    
    
    
    
    307,245
    
    
    
    
    
    
    
    307,245Control investments
    
    
    
    
    
    
    4,357
    
    
    
    
    
    
    
    142,383Total other investment income
    
    
    112,357
    
    
    
    329,435
    
    
    
    121,161
    
    
    
    749,704Total Investment Income
    
    
    8,050,585
    
    
    
    10,229,420
    
    
    
    24,642,719
    
    
    
    32,128,524EXPENSESCompensation expense
    
    
    748,280
    
    
    
    834,779
    
    
    
    2,508,241
    
    
    
    3,440,278Interest expense
    
    
    2,404,776
    
    
    
    1,789,755
    
    
    
    6,768,583
    
    
    
    5,774,508Professional fees
    
    
    2,822,671
    
    
    
    340,388
    
    
    
    4,169,297
    
    
    
    1,011,119General and administrative expense
    
    
    926,591
    
    
    
    706,715
    
    
    
    2,427,985
    
    
    
    2,140,238Total Expenses
    
    
    6,902,318
    
    
    
    3,671,637
    
    
    
    15,874,106
    
    
    
    12,366,143Net Investment Income
    
    
    1,148,267
    
    
    
    6,557,783
    
    
    
    8,768,613
    
    
    
    19,762,381NET REALIZED GAIN (LOSS) AND NET UNREALIZED
APPRECIATION (DEPRECIATION)Net realized loss on investments  non-control/non-affiliate
    
    
    (2,461,200
    )
    
    
    (2,500
    )
    
    
    (2,873,909
    )
    
    
    (86,267
    )Net realized gain on investments  affiliate
    
    
    
    
    
    
    458,405
    
    
    
    
    
    
    
    458,405Net realized loss on investments  control
    
    
    (15,193,626
    )
    
    
    
    
    
    
    (26,794,390
    )
    
    
    (350,000
    )Net realized loss on interest rate swaps
    
    
    (3,251,026
    )
    
    
    
    
    
    
    (3,251,026
    )
    
    
    Net unrealized depreciation on investments 
non-control/non-affiliate
    
    
    (990,698
    )
    
    
    (2,054,709
    )
    
    
    (5,948,006
    )
    
    
    (10,684,608
    )Net unrealized depreciation on investments  affiliate
    
    
    (1,301,399
    )
    
    
    (2,808,033
    )
    
    
    (4,495,048
    )
    
    
    (8,470,041
    )Net unrealized appreciation (depreciation) on investments  control
    
    
    15,079,424
    
    
    
    (2,285,030
    )
    
    
    6,360,207
    
    
    
    (1,212,632
    )Net unrealized appreciation (depreciation) on interest rate swaps
    
    
    2,235,647
    
    
    
    (182,011
    )
    
    
    3,097,384
    
    
    
    34,772Net Realized Gain (Loss) and Net Unrealized Appreciation
(Depreciation)
    
    
    (5,882,878
    )
    
    
    (6,873,878
    )
    
    
    (33,904,788
    )
    
    
    (20,310,371
    )NET LOSS
    
    $
    (4,734,611
    )
    
    $
    (316,095
    )
    
    $
    (25,136,175
    )
    
    $
    (547,990
    )Loss per share, basic and diluted
    
    $
    (0.23
    )
    
    $
    (0.02
    )
    
    $
    (1.20
    )
    
    $
    (0.03
    )Weighted average shares outstanding, basic and diluted
    
    
    20,950,501
    
    
    
    20,702,485
    
    
    
    20,943,734
    
    
    
    20,682,167
  2




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##### 



Patriot Capital Funding, Inc.
Consolidated Statements of Changes in Net Assets
(unaudited)
 Nine Months EndedSeptember 30,2009
    
    2008Operations:Net investment income
    
    $
    8,768,613
    
    
    $
    19,762,381Net realized gain (loss) on investments
    
    
    (29,668,299
    )
    
    
    22,138Net realized loss on interest rate swaps
    
    
    (3,251,026
    )Net unrealized depreciation on investments
    
    
    (4,082,847
    )
    
    
    (20,367,281
    )Net unrealized appreciation on interest rate swaps
    
    
    3,097,384
    
    
    
    34,772Net decrease in net assets from operations
    
    
    (25,136,175
    )
    
    
    (547,990
    )Stockholder transactions:Distributions to stockholders from net investment income
    
    
    
    
    
    
    (19,762,381
    )Distributions in excess of net investment income
    
    
    
    
    
    
    (778,609
    )Net decrease in net assets from stockholder distributions
    
    
    
    
    
    
    (20,540,990
    )Capital share transactions:Common stock listing fees
    
    
    
    
    
    
    (23,585
    )Issuance of common stock under dividend reinvestment plan
    
    
    359,500
    
    
    
    535,062Stock option compensation
    
    
    589,984
    
    
    
    568,891Net increase in net assets from capital share transactions
    
    
    949,484
    
    
    
    1,080,368Total decrease in net assets
    
    
    (24,186,691
    )
    
    
    (20,008,612
    )Net assets at beginning of period
    
    
    180,117,170
    
    
    
    221,597,684Net assets at end of period
    
    $
    155,930,479
    
    
    $
    201,589,072Net asset value per common share
    
    $
    7.44
    
    
    $
    9.74Common shares outstanding at end of period
    
    
    20,950,501
    
    
    
    20,702,485
  3




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##### 



Patriot Capital Funding, Inc.
Consolidated Statements of Cash Flows
(unaudited)
 Nine Months EndedSeptember 30,2009
    
    
    2008CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (25,136,175
    )
    
    $
    (547,990
    )Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:Depreciation and amortization
    
    
    491,794
    
    
    
    439,159Change in interest receivable
    
    
    189,452
    
    
    
    237,506Realized (gain) loss on sale of investments
    
    
    29,668,299
    
    
    
    (22,138
    )Realized loss on sale of interest rate swaps
    
    
    3,251,026
    
    
    
    Unrealized depreciation on investments
    
    
    4,082,847
    
    
    
    20,367,281Unrealized appreciation on interest rate swaps
    
    
    (3,097,384
    )
    
    
    (34,772
    )Payment-in-kind interest and dividends
    
    
    (3,459,359
    )
    
    
    (4,275,711
    )Stock-based compensation expense
    
    
    589,984
    
    
    
    568,891Change in unearned income
    
    
    (760,464
    )
    
    
    108,349Change in interest payable
    
    
    142,829
    
    
    
    (334,317
    )Change in other assets
    
    
    117,874
    
    
    
    (262,351
    )Change in accounts payable, accrued expenses and other
    
    
    (810,288
    )
    
    
    (1,865,883
    )Net cash provided by operating activities
    
    
    5,270,435
    
    
    
    14,378,024CASH FLOWS FROM INVESTING ACTIVITIES:Funded investments
    
    
    (10,273,464
    )
    
    
    (60,267,723
    )Principal repayments on investments
    
    
    41,222,305
    
    
    
    86,432,830Proceeds from sale of investments
    
    
    4,552,011
    
    
    
    11,309,638Purchases of furniture and equipment
    
    
    
    
    
    
    (6,295
    )Net cash provided by investing activities
    
    
    35,500,852
    
    
    
    37,468,450CASH FLOWS FROM FINANCING ACTIVITIES:Borrowings
    
    
    7,500,000
    
    
    
    76,904,117Repayments on borrowings
    
    
    (57,393,547
    )
    
    
    (87,604,117
    )Payments on interest rate swaps
    
    
    (1,500,000
    )
    
    
    Common stock listing fees
    
    
    
    
    
    
    (23,585
    )Dividends paid
    
    
    (4,894,210
    )
    
    
    (19,926,056
    )Deferred offering costs
    
    
    
    
    
    
    (145,941
    )Deferred financing costs
    
    
    
    
    
    
    (1,030,972
    )Decrease (increase) in restricted cash
    
    
    14,129,091
    
    
    
    (19,810,123
    )Net cash used for financing activities
    
    
    (42,158,666
    )
    
    
    (51,636,677
    )NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
    
    
    (1,387,379
    )
    
    
    209,797CASH AND CASH EQUIVALENTS AT:Beginning of Period
    
    
    6,449,454
    
    
    
    789,451End of Period
    
    $
    5,062,075
    
    
    $
    999,248Supplemental information:Interest paid
    
    $
    6,230,570
    
    
    $
    6,108,825Non-cash investing activities:Conversion of debt to equity
    
    $
    
    
    
    $
    5,734,567Non-cash financing activities:Dividends reinvested in common stock
    
    $
    359,500
    
    
    $
    535,062Dividends declared but not paid
    
    
    
    
    
    
    6,894,520
  4




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##### 



Patriot Capital Funding, Inc.
Consolidated Schedule of Investments
September 30, 2009
(unaudited)
 Company(1)(Industry)
    
    Company Description
    
    Investment
    
    Principal
    
    Cost
    
    ValueControl investments:Aylward Enterprises, LLC (5)(Machinery)
    
    Manufacturer of packaging equipment
    
    Revolving Line of Credit
(5.3%, Due 2/12) (3)
    
    $
    4,000,000
    
    
    $
    3,955,707
    
    
    $
    3,955,707Senior Secured Term Loan A
(6.0%, Due 2/12) (3)
    
    
    8,085,938
    
    
    
    8,019,598
    
    
    
    1,301,299Senior Subordinated Debt
(22.0%, Due 8/12) (2)
    
    
    7,731,663
    
    
    
    6,747,301
    
    
    Subordinated Member Note
(8.0%, Due 2/13) (2)
    
    
    160,909
    
    
    
    148,491
    
    
    Membership Interest
(1,250,000 units) (4)
    
    
    
    
    
    
    1,250,000
    
    
    Fischbein, LLC(Machinery)
    
    Designer and manufacturer of packaging
equipment
    
    Senior Subordinated Debt
(18.5%, Due 5/13) (2) (3)
    
    
    3,626,635
    
    
    
    3,608,764
    
    
    
    3,608,764Membership Interest - Class
A (2,800,000 units) (4)
    
    
    
    
    
    
    2,800,000
    
    
    
    2,738,800Nupla 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
(9.3%, Due 9/12) (3)
    
    
    1,093,276
    
    
    
    1,082,468
    
    
    
    1,082,468Senior Secured Term Loan A
(10.0%, Due 9/12) (3)
    
    
    5,139,064
    
    
    
    5,108,295
    
    
    
    5,108,295Senior Subordinated Debt
(15.0%, Due 3/13) (2) (3)
    
    
    3,162,122
    
    
    
    3,142,795
    
    
    
    386,356Preferred Stock Class A (475
shares) (2)
    
    
    
    
    
    
    564,638
    
    
    Preferred Stock Class B
(1,045 shares) (2)
    
    
    
    
    
    
    1,131,921
    
    
    Common Stock (1,140,584
shares) (4)
    
    
    
    
    
    
    80,100
    
    
    Sidumpr Trailer Company, Inc.(Automobile)
    
    Manufacturer of side dump trailers
    
    Revolving Line of Credit
(7.3%, Due 1/11) (3)
    
    
    950,000
    
    
    
    934,432
    
    
    
    934,432Senior Secured Term Loan A
(7.3%, Due 1/11) (3)
    
    
    2,047,500
    
    
    
    2,036,677
    
    
    
    1,449,477Senior Secured Term Loan B
(8.8%, Due 1/11) (3)
    
    
    2,320,625
    
    
    
    2,301,926
    
    
    Senior Secured Term Loan C
(16.5%, Due 7/11) (2) (3)
    
    
    2,578,751
    
    
    
    2,253,829
    
    
    Senior Secured Term Loan D
(7.3%, Due 7/11)
    
    
    1,700,000
    
    
    
    1,700,000
    
    
    Preferred Stock (49,635.5
shares) (2)
    
    
    
    
    
    
    165,730
    
    
    Common Stock (64,050 shares)
(4)
    
    
    
    
    
    
    25
    
    
    Total Control investments (represents 8.0% of total investments at fair value)
    
    $
    47,032,697
    
    
    $
    20,565,598
 5




---



##### 



Company(1)(Industry)
    
    Company Description
    
    Investment
    
    Principal
    
    Cost
    
    ValueAffiliate investments:Boxercraft Incorporated(Textiles & Leather)
    
    Supplier of spiritwear and campus apparel
    
    Revolving Line of Credit
(9.0%, Due 9/13) (3)
    
    $
    800,000
    
    
    $
    778,452
    
    
    $
    778,452Senior Secured Term Loan A
(9.5%, Due 9/13) (3)
    
    
    4,320,135
    
    
    
    4,277,785
    
    
    
    4,277,785Senior Secured Term Loan B
(10.0%, Due 9/13) (3)
    
    
    4,923,823
    
    
    
    4,874,659
    
    
    
    4,874,659Senior Secured Term Loan C
(18.5%, Due 3/14) (2) (3)
    
    
    6,888,400
    
    
    
    6,831,019
    
    
    
    6,831,019Preferred Stock (1,000,000 shares) (4)
    
    
    
    
    
    
    1,105,556
    
    
    
    760,856Common Stock (10,000 shares)
(4)
    
    
    
    
    
    
    100
    
    
    KTPS Holdings, LLC(Textiles & Leather)
    
    Manufacturer and distributor of specialty
pet products
    
    Revolving Line of Credit
(10.5%, Due 1/12) (3)
    
    
    1,500,000
    
    
    
    1,490,039
    
    
    
    1,490,039Senior Secured Term Loan A
(10.5%, Due 1/12) (3)
    
    
    3,696,940
    
    
    
    3,667,226
    
    
    
    3,667,226Senior Secured Term Loan B
(12.0%, Due 1/12) (3)
    
    
    450,000
    
    
    
    446,327
    
    
    
    446,327Senior Secured Term Loan C
(18.0%, Due 3/12) (2) (3)
    
    
    4,653,485
    
    
    
    4,626,001
    
    
    
    4,346,001Membership Interest - Class
A (730.02 units) (4)
    
    
    
    
    
    
    730,020
    
    
    Membership Interest -
Common (199,795.08 units)
(4)
    
    
    
    
    
    
    
    
    
    Smart, LLC (5)(Diversified/Conglomerate Service)
    
    Provider of tuition management services
    
    Membership Interest - Class
B (1,218 units) (4)
    
    
    
    
    
    
    1,280,403
    
    
    Membership Interest - Class
D (1 unit) (4)
    
    
    
    
    
    
    290,333
    
    
    Sport Helmets Holdings, LLC (5)(Personal & Nondurable Consumer Products)
    
    Manufacturer of protective headgear
    
    Senior Secured Term Loan A
(4.3%, Due 12/13) (3)
    
    
    4,031,250
    
    
    
    3,988,310
    
    
    
    3,493,710Senior Secured Term Loan B
(4.9%, Due 12/13) (3)
    
    
    7,443,750
    
    
    
    7,356,056
    
    
    
    6,442,786Senior Subordinated Debt -
Series A (15.0%, Due 6/14)
(2) (3)
    
    
    7,160,461
    
    
    
    7,071,499
    
    
    
    6,026,299Senior Subordinated Debt -
Series B (15.0%, Due 6/14)
(2)
    
    
    1,306,811
    
    
    
    1,306,811
    
    
    
    1,116,111Common Stock (20,000 shares)(4)
    
    
    
    
    
    
    2,000,000
    
    
    
    1,401,800Total Affiliate investments (represents 17.8% of total investments at fair value)
    
    $
    52,120,596
    
    
    $
    45,953,070
 6




---



##### 



Company(1)(Industry)
    
    Company Description
    
    Investment
    
    Principal
    
    Cost
    
    ValueNon-control/non-affiliate investments:ADAPCO, Inc.(Ecological)
    
    Distributor of specialty chemicals and
contract application services
    
    Revolving Line of Credit
(10.3%, Due 7/11) (3)
    
    $
    800,000
    
    
    $
    788,688
    
    
    $
    788,688Senior Secured Term Loan A
(10.3%, Due 6/11) (3)
    
    
    7,465,625
    
    
    
    7,436,141
    
    
    
    7,436,141Common Stock (5,000 shares) (4)
    
    
    
    
    
    
    500,000
    
    
    
    187,400Aircraft Fasteners International, LLC(Machinery)
    
    Distributor of fasteners and related
hardware for use in aerospace,
electronics and defense industries
    
    Senior Secured Term Loan
(4.0%, Due 11/12) (3)
    
    
    5,273,000
    
    
    
    5,208,351
    
    
    
    5,004,551Junior Secured Term Loan
(14.0%, Due 5/13) (2) (3)
    
    
    5,387,135
    
    
    
    5,334,639
    
    
    
    5,267,639Convertible Preferred Stock
(32,000 shares) (2)
    
    
    
    
    
    
    240,737
    
    
    
    391,613Allied Defense Group, Inc.(Aerospace & Defense)
    
    Diversified defense company
    
    Common Stock (27,968 shares)(4)
    
    
    
    
    
    
    463,168
    
    
    
    145,900Arrowhead General Insurance Agency, Inc. (6)(Insurance)
    
    Insurance agency and program specialist
    
    Junior Secured Term Loan
(12.8%, Due 2/13) (2) (3)
    
    
    5,052,366
    
    
    
    5,052,366
    
    
    
    3,826,463Borga, Inc.(Mining, Steel, Iron & Nonprecious
Metals)
    
    Manufacturer of pre-fabricated metal
building systems
    
    Revolving Line of Credit
(8.0%, Due 5/10) (3)
    
    
    800,000
    
    
    
    797,323
    
    
    
    797,323Senior Secured Term Loan B
(11.5%, Due 5/10) (3)
    
    
    1,617,921
    
    
    
    1,608,969
    
    
    
    1,608,969Senior Secured Term Loan C
(19.0%, Due 5/10) (2) (3)
    
    
    8,366,831
    
    
    
    8,348,093
    
    
    
    2,155,096Common Stock Warrants
(33,750 warrants) (4)
    
    
    
    
    
    
    17,841
    
    
    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
(9.8%, Due 11/11) (3)
    
    
    9,946,551
    
    
    
    9,867,666
    
    
    
    9,867,666Senior Subordinated Debt
(16.5%, Due 11/12) (3)
    
    
    6,250,000
    
    
    
    6,201,664
    
    
    
    6,264,164Common Stock (7,500 shares) (4)
    
    
    
    
    
    
    750,000
    
    
    
    689,000Options in Mineral Fusion
Natural Brands, LLC (11,662 options) (4)
    
    
    
    
    
    
    
    
    
    CS Operating, LLC (5)(Buildings & Real Estate)
    
    Provider of maintenance, repair and
replacement of HVAC, electrical,
plumbing, and foundation repair
    
    Revolving Line of Credit
(10.5%, Due 1/13) (3)
    
    
    200,000
    
    
    
    195,890
    
    
    
    195,890Senior Secured Term Loan A
(9.5%, Due 7/12) (3)
    
    
    1,517,564
    
    
    
    1,502,240
    
    
    
    1,502,240Senior Subordinated Debt
(16.5%, Due 1/13) (2) (3)
    
    
    2,742,862
    
    
    
    2,717,458
    
    
    
    2,717,458
 7




---



##### 



Company(1)(Industry)
    
    Company Description
    
    Investment
    
    Principal
    
    Cost
    
    ValueCopernicus Group(Healthcare, Education & Childcare)
    
    Provider of clinical trial review services
    
    Revolving Line of Credit
(11.5%, Due 10/13) (3)
    
    
    150,000
    
    
    
    133,780
    
    
    
    133,780Senior Secured Term Loan A
(11.5%, Due 10/13) (3)
    
    
    7,425,000
    
    
    
    7,327,081
    
    
    
    7,327,081Senior Subordinated Debt
(18.0%, Due 4/14) (3)
    
    
    12,546,282
    
    
    
    12,387,096
    
    
    
    10,855,296Preferred Stock - Series A
(1,000,000) (4)
    
    
    
    
    
    
    1,000,000
    
    
    
    558,300Custom Direct, Inc. (6)(Printing & Publishing)
    
    Direct marketer of checks and other
financial products and services
    
    Senior Secured Term Loan
(3.0%, Due 12/13) (3)
    
    
    1,782,598
    
    
    
    1,569,445
    
    
    
    1,381,507Junior Secured Term Loan
(6.3%, Due 12/14) (3)
    
    
    2,000,000
    
    
    
    2,000,000
    
    
    
    1,150,000Dover Saddlery, Inc.(Retail Stores)
    
    Equestrian products catalog retailer
    
    Common Stock (30,974 shares) (4)
    
    
    
    
    
    
    148,200
    
    
    
    67,166EXL Acquisition Corp.(Electronics)
    
    Manufacturer of lab testing supplies
    
    Senior Secured Term Loan A
(3.9%, Due 3/11) (3)
    
    
    2,159,783
    
    
    
    2,149,712
    
    
    
    1,992,612Senior Secured Term Loan B
(4.2%, Due 3/12) (3)
    
    
    4,202,073
    
    
    
    4,164,654
    
    
    
    3,858,953Senior Secured Term Loan C
(4.7%, Due 3/12) (3)
    
    
    2,591,740
    
    
    
    2,561,719
    
    
    
    2,373,120Senior Secured Term Loan D
(15.0%, Due 3/12) (3)
    
    
    6,170,807
    
    
    
    6,127,206
    
    
    
    6,127,206Common Stock - Class A
(2,475 shares) (4)
    
    
    
    
    
    
    2,475
    
    
    
    402,539Common Stock - Class B (25
shares) (2)
    
    
    
    
    
    
    297,993
    
    
    
    304,448Fairchild Industrial Products, Co.(Electronics)
    
    Manufacturer of industrial controls and
power transmission products
    
    Preferred Stock - Class A
(378.4 shares) (2)
    
    
    
    
    
    
    372,765
    
    
    
    379,868Common Stock - Class B
(27.5 shares) (4)
    
    
    
    
    
    
    121,598
    
    
    
    260,000Hudson Products Holdings, Inc. (6)(Mining, Steel, Iron & Nonprecious
 Metals)
    
    Manufactures and designs air-cooled heat
exchanger equipment
    
    Senior Secured Term Loan
(8.0%, Due 8/15) (3)
    
    
    7,425,000
    
    
    
    7,229,085
    
    
    
    6,125,660Impact Products, LLC(Machinery)
    
    Distributor of janitorial supplies
    
    Junior Secured Term Loan
(6.3%, Due 9/12) (3)
    
    
    8,837,500
    
    
    
    8,792,956
    
    
    
    8,525,556Senior Subordinated Debt
(15.0%, Due 9/12) (3)
    
    
    5,547,993
    
    
    
    5,523,924
    
    
    
    5,523,924
 8




---



##### 



Company(1)(Industry)
    
    Company Description
    
    Investment
    
    Principal
    
    Cost
    
    ValueLabel Corp Holdings, Inc. (6)(Printing & Publishing)
    
    Manufacturer of prime labels
    
    Senior Secured Term Loan
(7.9%, Due 8/14) (3)
    
    
    5,836,416
    
    
    
    5,590,057
    
    
    
    5,019,293LHC Holdings Corp.(Healthcare, Education & Childcare)
    
    Provider of home healthcare services
    
    Senior Secured Term Loan A
(4.3%, Due 11/12) (3)
    
    
    3,276,942
    
    
    
    3,245,173
    
    
    
    2,898,073Senior Subordinated Debt
(14.5%, Due 5/13) (3)
    
    
    4,565,000
    
    
    
    4,525,929
    
    
    
    4,525,929Membership Interest (125,000 units) (4)
    
    
    
    
    
    
    125,000
    
    
    
    182,100Mac & Massey Holdings, LLC(Grocery)
    
    Broker and distributor of ingredients to
manufacturers of food products
    
    Senior Subordinated Debt
(15.8%, Due 2/13) (2) (3)
    
    
    8,303,730
    
    
    
    8,280,201
    
    
    
    8,280,201Common Stock (250 shares) (4)
    
    
    
    
    
    
    235,128
    
    
    
    469,976Northwestern Management Services, LLC(Healthcare, Education & Childcare)
    
    Provider of dental services
    
    Revolving Line of Credit
(5.8%, Due 12/12) (3)
    
    
    125,000
    
    
    
    118,159
    
    
    
    118,159Senior Secured Term Loan A
(4.3%, Due 12/12) (3)
    
    
    5,049,874
    
    
    
    5,012,776
    
    
    
    4,696,776Senior Secured Term Loan B
(4.8%, Due 12/12) (3)
    
    
    1,228,125
    
    
    
    1,218,838
    
    
    
    1,142,038Junior Secured Term Loan
(15.0%, Due 6/13) (2) (3)
    
    
    2,904,561
    
    
    
    2,884,791
    
    
    
    2,785,091Common Stock (500 shares) (4)
    
    
    
    
    
    
    500,000
    
    
    
    450,500Prince Mineral Company, Inc.(Metals & Minerals)
    
    Manufacturer of pigments
    
    Junior Secured Term Loan
(5.5%, Due 12/12) (3)
    
    
    11,200,000
    
    
    
    11,078,557
    
    
    
    11,078,557Senior Subordinated Debt
(14.0%, Due 7/13) (2) (3)
    
    
    12,126,568
    
    
    
    12,032,680
    
    
    
    12,032,680Quartermaster, Inc.(Retail Stores)
    
    Retailer of uniforms and tactical
equipment to law enforcement and security
professionals
    
    Revolving Line of Credit
(5.9%, Due 12/10) (3)
    
    
    3,000,000
    
    
    
    2,988,297
    
    
    
    2,988,297Senior Secured Term Loan A
(5.7%, Due 12/10) (3)
    
    
    2,271,000
    
    
    
    2,256,498
    
    
    
    2,256,498Senior Secured Term Loan B
(7.0%, Due 12/10) (3)
    
    
    2,525,000
    
    
    
    2,514,665
    
    
    
    2,514,665Senior Secured Term Loan C
(15.0%, Due 12/11) (2) (3)
    
    
    3,477,752
    
    
    
    3,459,794
    
    
    
    3,459,794R-O-M Corporation(Automobile)
    
    Manufacturer of doors, ramps and bulk
heads for fire trucks and food
transportation
    
    Senior Secured Term Loan A
(3.0%, Due 2/13) (3)
    
    
    5,470,000
    
    
    
    5,699,316
    
    
    
    5,189,516Senior Secured Term Loan B
(4.5%, Due 5/13) (3)
    
    
    8,314,875
    
    
    
    8,238,981
    
    
    
    7,500,480Senior Subordinated Debt
(15.0%, Due 8/13) (3)
    
    
    7,208,688
    
    
    
    7,131,815
    
    
    
    7,131,815
 9




---



##### 



Company(1)(Industry)
    
    Company Description
    
    Investment
    
    Principal
    
    Cost
    
    ValueTotal Non-control/non-affiliate investments (represents 74.2% of total investments at fair value)
    
    $
    206,077,578
    
    
    $
    190,913,655Total Investments
    
    
    
    
    
    
    
    
    
    $
    305,230,871
    
    
    $
    257,432,323
 
 (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 Amended
Securitization Facility. See Note 7 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.  10




---



##### 



PATRIOT CAPITAL FUNDING, INC.
Consolidated Schedule of Investments
December 31, 2008
 Company(1)(Industry)
    
    Company Description
    
    Investment
    
    Principal
    
    Cost
    
    ValueControl investments:Encore Legal Solutions, Inc.(Printing & Publishing)
    
    Legal document management services
    
    Junior Secured Term Loan A
(6.2%, Due 12/10) (2) (3)
    
    $
    4,020,456
    
    
    $
    4,007,366
    
    
    $
    3,537,910Junior Secured Term Loan B
(9.2%, Due 12/10) (2) (3)
    
    
    7,390,687
    
    
    
    7,355,975
    
    
    
    6,492,888Common Stock (30,000 shares)(4)
    
    
    
    
    
    
    5,159,567
    
    
    
    326,900Fischbein, LLC(Machinery)
    
    Designer and manufacturer of packaging
equipment
    
    Senior Subordinated Debt
(16.5%, Due 5/13) (2) (3)
    
    
    3,492,760
    
    
    
    3,471,147
    
    
    
    3,540,987Membership Interest - Class
A (2,800,000 units) (4)
    
    
    
    
    
    
    2,800,000
    
    
    
    3,876,000Nupla 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
(7.3%, Due 9/12) (3)
    
    
    870,000
    
    
    
    856,425
    
    
    
    856,425Senior Secured Term Loan A
(8.0%, Due 9/12) (3)
    
    
    5,354,688
    
    
    
    5,315,741
    
    
    
    5,166,852Senior Subordinated Debt
(15.0%, Due 3/13) (2) (3)
    
    
    3,123,084
    
    
    
    3,102,059
    
    
    
    2,192,375Preferred Stock Class A (475
shares) (2)
    
    
    
    
    
    
    550,584
    
    
    
    15,900Preferred Stock Class B
(1,045 shares) (2)
    
    
    
    
    
    
    1,101,001
    
    
    
    1,101,500Common Stock (1,140,584 shares) (4)
    
    
    
    
    
    
    80,000
    
    
    Sidumpr Trailer Company, Inc.
(Automobile)
    
    Manufacturer of side dump trailers
    
    Revolving Line of Credit
(7.3%, Due 1/11) (3)
    
    
    950,000
    
    
    
    934,432
    
    
    
    934,432Senior Secured Term Loan A
(7.3%, Due 1/11) (3)
    
    
    2,047,500
    
    
    
    2,036,677
    
    
    
    2,036,677Senior Secured Term Loan B
(8.8%, Due 1/11) (3)
    
    
    2,320,625
    
    
    
    2,301,926
    
    
    Senior Secured Term Loan C
(16.5%, Due 7/11) (2) (3)
    
    
    2,406,374
    
    
    
    2,253,829
    
    
    Senior Secured Term Loan D
(7.3%, Due 7/11)
    
    
    1,700,000
    
    
    
    1,700,000
    
    
    
    348,200Preferred Stock (49,635.5
shares) (2)
    
    
    
    
    
    
    165,730
    
    
    Common Stock (64,050 shares)
(4)
    
    
    
    
    
    
    25
    
    
    Total Control investments (represents 9.4% of total investments at fair value)
    
    $
    43,192,484
    
    
    $
    30,427,046
 11




---



##### 



Company(1)(Industry)
    
    Company Description
    
    Investment
    
    Principal
    
    Cost
    
    ValueAffiliate investments:Boxercraft Incorporated(Textiles & Leather)
    
    Supplier of spiritwear and campus apparel
    
    Senior Secured Term Loan A
(8.0%, Due 9/13) (3)
    
    
    5,328,125
    
    
    
    5,273,766
    
    
    
    5,273,766Senior Secured Term Loan B
(8.5%, Due 9/13) (3)
    
    
    5,486,250
    
    
    
    5,429,567
    
    
    
    5,429,567Senior Subordinated Debt
(16.8%, Due 3/14) (2) (3)
    
    
    6,591,375
    
    
    
    6,524,347
    
    
    
    6,524,347Preferred Stock (1,000,000 shares) (4)
    
    
    
    
    
    
    1,029,722
    
    
    
    849,500Common Stock (10,000 shares) (4)
    
    
    
    
    
    
    100
    
    
    KTPS Holdings, LLC(Textiles & Leather)
    
    Manufacturer and distributor of specialty
pet products
    
    Revolving Line of Credit
(5.0%, Due 1/12) (3)
    
    
    1,000,000
    
    
    
    986,840
    
    
    
    986,840Senior Secured Term Loan A
(5.1%, Due 1/12) (3)
    
    
    4,996,875
    
    
    
    4,950,978
    
    
    
    4,951,005Senior Secured Term Loan B
(12.0%, Due 1/12) (3)
    
    
    465,000
    
    
    
    460,265
    
    
    
    460,265Junior Secured Term Loan
(15.0%, Due 3/12) (2) (3)
    
    
    4,207,806
    
    
    
    4,172,076
    
    
    
    4,172,076Membership Interest - Class
A (730.02 units) (4)
    
    
    
    
    
    
    730,020
    
    
    
    721,200Membership Interest -
Common (199,795.08 units)
(4)
    
    
    
    
    
    
    
    
    
    Smart, LLC (5)(Diversified/Conglomerate Service)
    
    Provider of tuition management services
    
    Membership Interest - Class
B (1,218 units) (4)
    
    
    
    
    
    
    1,280,403
    
    
    
    311,500Membership Interest - Class
D (1 unit) (4)
    
    
    
    
    
    
    290,333
    
    
    
    312,000Sport Helmets Holdings, LLC (5)(Personal & Nondurable Consumer
Products)
    
    Manufacturer of protective headgear
    
    Senior Secured Term Loan A
(5.9%, Due 12/13) (3)
    
    
    4,500,000
    
    
    
    4,445,614
    
    
    
    4,282,314Senior Secured Term Loan B
(6.4%, Due 12/13) (3)
    
    
    7,500,000
    
    
    
    7,400,148
    
    
    
    7,128,048Senior Subordinated Debt -
Series A (15.0%, Due 6/14)
(2) (3)
    
    
    7,000,000
    
    
    
    6,896,866
    
    
    
    6,896,866Senior Subordinated Debt -
Series B (15.0%, Due 6/14)
(2)
    
    
    1,258,488
    
    
    
    1,258,488
    
    
    
    1,258,488Common Stock (20,000 shares)(4)
    
    
    
    
    
    
    2,000,000
    
    
    
    1,899,300Total Affiliate investments (represents 16.0% of total investments at fair value)
    
    $
    53,129,533
    
    
    $
    51,457,082
 12




---



##### 



Company(1)(Industry)
    
    Company Description
    
    Investment
    
    Principal
    
    Cost
    
    ValueNon-control/non-affiliate investments:ADAPCO, Inc.(Ecological)
    
    Distributor of specialty chemicals and
contract application services
    
    Senior Secured Term Loan A
(11.5%, Due 6/11) (3)
    
    $
    8,103,125
    
    
    $
    8,056,102
    
    
    $
    8,056,102Common Stock (5,000 shares)
(4)
    
    
    
    
    
    
    500,000
    
    
    
    108,800Aircraft Fasteners International, LLC(Machinery)
    
    Distributor of fasteners and related
hardware for use in aerospace,
electronics and defense industries
    
    Senior Secured Term Loan
(4.1%, Due 11/12) (3)
    
    
    5,528,000
    
    
    
    5,446,932
    
    
    
    5,208,632Junior Secured Term Loan
(14.0%, Due 5/13) (2) (3)
    
    
    5,306,249
    
    
    
    5,242,761
    
    
    
    5,242,761Convertible Preferred Stock
(32,500 shares) (2)
    
    
    
    
    
    
    273,397
    
    
    
    503,600Allied Defense Group, Inc.(Aerospace & Defense)
    
    Diversified defense company
    
    Common Stock (4,000 shares) (4)
    
    
    
    
    
    
    463,168
    
    
    
    173,600Arrowhead General Insurance Agency, Inc. (6)(Insurance)
    
    Insurance agency and program specialist
    
    Junior Secured Term Loan
(7.7%, Due 2/13) (3)
    
    
    5,000,000
    
    
    
    5,000,000
    
    
    
    4,048,200Aylward Enterprises, LLC (5)(Machinery)
    
    Manufacturer of packaging equipment
    
    Revolving Line of Credit
(10.0%, Due 2/12) (3)
    
    $
    3,700,000
    
    
    $
    3,647,158
    
    
    $
    3,647,158Senior Secured Term Loan A
(11.6%, Due 2/12) (3)
    
    
    8,085,938
    
    
    
    7,999,958
    
    
    
    3,572,320Senior Subordinated Debt
(22.0%, Due 8/12) (2)
    
    
    7,328,591
    
    
    
    6,747,301
    
    
    Subordinated Member Note
(8.0%, Due 2/13) (2)
    
    
    151,527
    
    
    
    148,491
    
    
    Membership Interest
(1,250,000 units) (4)
    
    
    
    
    
    
    1,250,000
    
    
    Borga, Inc.(Mining, Steel, Iron & Nonprecious
 Metals)
    
    Manufacturer of pre-fabricated metal
building systems
    
    Revolving Line of Credit
(4.9%, Due 5/10) (3)
    
    
    800,000
    
    
    
    793,950
    
    
    
    793,950Senior Secured Term Loan A
(5.4%, Due 5/09) (3)
    
    
    328,116
    
    
    
    325,903
    
    
    
    325,903Senior Secured Term Loan B
(8.4%, Due 5/10) (3)
    
    
    1,635,341
    
    
    
    1,617,095
    
    
    
    1,617,095Senior Secured Term Loan C
(16.0%, Due 5/10) (2) (3)
    
    
    8,117,266
    
    
    
    8,074,916
    
    
    
    8,074,916Common Stock Warrants
(33,750 warrants) (4)
    
    
    
    
    
    
    14,805
    
    
    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
(4.7%, Due 11/11) (3)
    
    
    10,771,562
    
    
    
    10,668,072
    
    
    
    10,668,072Senior Subordinated Debt
(14.5%, Due 11/12) (3)
    
    
    6,250,000
    
    
    
    6,190,008
    
    
    
    6,252,608Common Stock (7,500 shares) (4)
    
    
    
    
    
    
    750,000
    
    
    
    862,100
 13




---



##### 



Company(1)(Industry)
    
    Company Description
    
    Investment
    
    Principal
    
    Cost
    
    ValueCDW Corporation (6)(Electronics)
    
    Direct marketer of computer and
peripheral equipment
    
    Senior Secured Term Loan
(6.7%, Due 10/14)
    
    
    2,000,000
    
    
    
    1,780,924
    
    
    
    920,000CS Operating, LLC (5)(Buildings & Real Estate)
    
    Provider of maintenance, repair and
replacement of HVAC, electrical,
plumbing, and foundation repair
    
    Revolving Line of Credit
(6.8%, Due 1/13) (3)
    
    
    200,000
    
    
    
    194,564
    
    
    
    194,564Senior Secured Term Loan A
(6.6%, Due 7/12) (3)
    
    
    1,855,064
    
    
    
    1,832,122
    
    
    
    1,832,122Senior Subordinated Debt
(16.5%, Due 1/13) (2) (3)
    
    
    2,616,863
    
    
    
    2,586,496
    
    
    
    2,586,496Copernicus Group(Healthcare, Education & Childcare)
    
    Provider of clinical trial review services
    
    Revolving Line of Credit
(8.8%, Due 10/13) (3)
    
    
    150,000
    
    
    
    130,753
    
    
    
    130,753Senior Secured Term Loan A
(9.0%, Due 10/13) (3)
    
    
    8,043,750
    
    
    
    7,917,470
    
    
    
    7,917,470Senior Subordinated Debt
(16.0%, Due 4/14) (3)
    
    
    12,112,000
    
    
    
    11,926,408
    
    
    
    11,926,408Preferred Stock - Series A
(1,000,000 shares) (4)
    
    
    
    
    
    
    1,000,000
    
    
    
    1,033,000Copperhead Chemical Company, Inc.(Chemicals, Plastics & Rubber)
    
    Manufacturer of bulk pharmaceuticals
    
    Senior Subordinated Debt
(21.0%, Due 1/13) (2) (3)
    
    
    3,693,195
    
    
    
    3,664,655
    
    
    
    3,664,655Custom Direct, Inc. (6)(Printing & Publishing)
    
    Direct marketer of checks and other
financial products and services
    
    Senior Secured Term Loan
(4.2%, Due 12/13) (3)
    
    
    1,847,386
    
    
    
    1,603,118
    
    
    
    1,330,100Junior Secured Term Loan
(7.5%, Due 12/14) (3)
    
    
    2,000,000
    
    
    
    2,000,000
    
    
    
    880,000Dover Saddlery, Inc.(Retail Stores)
    
    Equestrian products catalog retailer
    
    Common Stock (30,974 shares) (4)
    
    
    
    
    
    
    148,200
    
    
    
    41,500Employbridge Holding Company (5) (6)(Personal, Food & Miscellaneous Services)
    
    A provider of specialized staffing
services
    
    Junior Secured Term Loan
(10.4%, Due 10/13) (3)
    
    
    3,000,000
    
    
    
    3,000,000
    
    
    
    1,050,000EXL Acquisition Corp.
(Electronics)
    
    Manufacturer of lab testing supplies
    
    Senior Secured Term Loan A
(6.6%, Due 3/11) (3)
    
    
    3,278,998
    
    
    
    3,258,757
    
    
    
    3,072,159Senior Secured Term Loan B
(6.9%, Due 3/12) (3)
    
    
    4,499,911
    
    
    
    4,452,650
    
    
    
    4,196,539Senior Secured Term Loan C
(7.4%, Due 3/12) (3)
    
    
    2,775,439
    
    
    
    2,737,602
    
    
    
    2,579,563Senior Secured Term Loan D
(15.0%, Due 3/12) (3)
    
    
    6,557,997
    
    
    
    6,501,063
    
    
    
    6,501,063Common Stock - Class A
(2,475 shares) (4)
    
    
    
    
    
    
    2,475
    
    
    
    269,000Common Stock - Class B (25
shares) (2)
    
    
    
    
    
    
    279,222
    
    
    
    281,900
 14




---



##### 



Company(1)(Industry)
    
    Company Description
    
    Investment
    
    Principal
    
    Cost
    
    ValueFairchild Industrial Products, Co.(Electronics)
    
    Manufacturer of industrial controls and
power transmission products
    
    Senior Secured Term Loan A
(5.8%, Due 7/10) (3)
    
    
    1,690,402
    
    
    
    1,678,459
    
    
    
    1,652,157Senior Secured Term Loan B
(7.7%, Due 1/11) (3)
    
    
    4,477,500
    
    
    
    4,448,975
    
    
    
    4,379,475Senior Subordinated Debt
(14.8%, Due 7/11) (3)
    
    
    5,460,000
    
    
    
    5,418,066
    
    
    
    5,418,066Preferred Stock - Class A
(378.4 shares) (2)
    
    
    
    
    
    
    353,573
    
    
    
    353,573Common Stock - Class B
(27.5 shares) (4)
    
    
    
    
    
    
    121,598
    
    
    
    410,000Hudson Products Holdings, Inc. (6)
(Mining, Steel, Iron & Nonprecious
Metals)
    
    Manufactures and designs air-cooled heat
exchanger equipment
    
    Senior Secured Term Loan
(8.0%, Due 8/15) (3)
    
    
    7,481,250
    
    
    
    7,265,876
    
    
    
    6,433,900Impact Products, LLC(Machinery)
    
    Distributor of janitorial supplies
    
    Junior Secured Term Loan
(7.0%, Due 9/12) (3)
    
    
    8,893,750
    
    
    
    8,839,775
    
    
    
    8,418,625Senior Subordinated Debt
(15.0%, Due 9/12) (3)
    
    
    5,547,993
    
    
    
    5,517,791
    
    
    
    5,517,791Keltner Enterprises, LLC (5)(Oil & Gas)
    
    Distributor of automotive oils, chemicals
and parts
    
    Senior Subordinated Debt
(14.0%, Due 12/11) (3)
    
    
    3,850,000
    
    
    
    3,840,677
    
    
    
    3,840,677Label Corp Holdings, Inc. (6)(Printing & Publishing)
    
    Manufacturer of prime labels
    
    Senior Secured Term Loan
(8.0%, Due 8/14) (3)
    
    
    6,483,750
    
    
    
    6,176,385
    
    
    
    5,592,200L.A. Spas, Inc.(Chemicals, Plastics & Rubber)
    
    Manufacturer of above ground spas
    
    Revolving Line of Credit
(8.8%, Due 12/09) (3)
    
    
    1,000,000
    
    
    
    990,794
    
    
    
    990,794Senior Secured Term Loan
(8.8%, Due 12/09) (3)
    
    
    4,165,430
    
    
    
    4,092,364
    
    
    
    4,092,364Senior Subordinated Debt
(17.5%, Due 1/10) (2) (3)
    
    
    8,011,600
    
    
    
    7,907,534
    
    
    
    599,193Common Stock (250,000 shares) (4)
    
    
    
    
    
    
    100
    
    
    Common Stock Warrants
(13,828 warrants) (4)
    
    
    
    
    
    
    3,963
    
    
    LHC Holdings Corp.(Healthcare, Education & Childcare)
    
    Provider of home healthcare services
    
    Senior Secured Term Loan A
(4.5%, Due 11/12) (3)
    
    
    4,100,403
    
    
    
    4,057,774
    
    
    
    3,927,171Senior Subordinated Debt
(14.5%, Due 5/13) (3)
    
    
    4,565,000
    
    
    
    4,517,936
    
    
    
    4,517,936Membership Interest
(1,25,000 units) (4)
    
    
    
    
    
    
    125,000
    
    
    
    159,500Mac & Massey Holdings, LLC(Grocery)
    
    Broker and distributor of ingredients to
manufacturers of food products
    
    Senior Subordinated Debt
(16.5%, Due 2/13) (2) (3)
    
    
    7,942,142
    
    
    
    7,913,369
    
    
    
    7,913,369Common Stock (250 shares) (4)
    
    
    
    
    
    
    242,820
    
    
    
    365,200
 15




---



##### 



Company(1)(Industry)
    
    Company Description
    
    Investment
    
    Principal
    
    Cost
    
    ValueNorthwestern Management Services, LLC(Healthcare, Education & Childcare)
    
    Provider of dental services
    
    Senior Secured Term Loan A
(4.5%, Due 12/12) (3)
    
    
    5,580,000
    
    
    
    5,531,693
    
    
    
    5,531,693Senior Secured Term Loan B
(5.0%, Due 12/12) (3)
    
    
    1,237,500
    
    
    
    1,226,436
    
    
    
    1,226,436Junior Secured Term Loan
(15.0%, Due 6/13) (2) (3)
    
    
    2,839,310
    
    
    
    2,815,535
    
    
    
    2,815,535Common Stock (500 shares) (4)
    
    
    
    
    
    
    500,000
    
    
    
    315,200Prince Mineral Company, Inc.(Metals & Minerals)
    
    Manufacturer of pigments
    
    Junior Secured Term Loan
(5.5%, Due 12/12) (3)
    
    
    11,275,000
    
    
    
    11,131,129
    
    
    
    10,750,129Senior Subordinated Debt
(14.0%, Due 7/13) (2) (3)
    
    
    12,034,071
    
    
    
    11,918,351
    
    
    
    11,703,780Quartermaster, Inc.(Retail Stores)
    
    Retailer of uniforms and tactical
equipment to law enforcement and security
professionals
    
    Revolving Line of Credit
(6.7%, Due 12/10) (3)
    
    
    1,750,000
    
    
    
    1,731,275
    
    
    
    1,731,275Senior Secured Term Loan A
(6.8%, Due 12/10) (3)
    
    
    3,225,250
    
    
    
    3,197,369
    
    
    
    3,197,369Senior Secured Term Loan B
(8.1%, Due 12/10) (3)
    
    
    2,543,750
    
    
    
    2,526,377
    
    
    
    2,526,377Senior Secured Term Loan C
(15.0%, Due 12/11) (2) (3)
    
    
    3,399,818
    
    
    
    3,375,763
    
    
    
    3,375,763R-O-M Corporation(Automobile)
    
    Manufacturer of doors, ramps and bulk
heads for fire trucks and food
transportation
    
    Senior Secured Term Loan A
(3.4%, Due 2/13) (3)
    
    
    6,640,000
    
    
    
    6,582,627
    
    
    
    6,266,127Senior Secured Term Loan B
(4.9%, Due 5/13) (3)
    
    
    8,379,000
    
    
    
    8,290,058
    
    
    
    7,890,766Senior Subordinated Debt
(15.0%, Due 8/13) (3)
    
    
    9,100,000
    
    
    
    9,011,070
    
    
    
    9,011,070Total Non-control/non-affiliate investments (represents 74.6% of total investments at fair value)
    
    $
    269,577,008
    
    
    $
    240,486,620Total Investments
    
    
    
    
    
    
    
    
    
    $
    365,899,025
    
    
    $
    322,370,748
 
 (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 Amended
Securitization Facility. See Note 7 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.  16




---



##### 



Patriot Capital Funding, Inc.
Notes to Consolidated Financial Statements
(unaudited)
 Note 1. Description of Business
 Description of Business
   Note 2. Going Concern
    Note 3. Proposed Merger
  17




---



##### 



Note 4. Summary of Significant Accounting Policies
 Basis of Presentation
   Recent Accounting Pronouncements
  18




---



##### 



Interest, Dividends, Fees, and Other Investment Income
  19




---



##### 



Federal Income Taxes
  Dividends Paid
   Consideration of Subsequent Events.
  Note 5. Investments
  September 30, 2009
    
    
    December 31, 2008Cost
    
    
    Fair Value
    
    
    Cost
    
    
    Fair ValueInvestments in debt securities
    
    $
    289,057,140
    
    
    $
    248,042,057
    
    
    $
    344,683,219
    
    
    $
    308,079,975Investments in equity securities
    
    
    16,173,731
    
    
    
    9,390,266
    
    
    
    21,215,806
    
    
    
    14,290,773Total
    
    $
    305,230,871
    
    
    $
    257,432,323
    
    
    $
    365,899,025
    
    
    $
    322,370,748
  20




---



##### 



September 30, 2009
    
    
    December 31, 2008Cost
    
    
    % (1)
    
    
    Fair Value
    
    
    % (1)
    
    
    Cost
    
    
    % (1)
    
    
    Fair Value
    
    
    % (1)Senior Secured Debt
    
    $
    151,762,717
    
    
    
    49.7
    %
    
    $
    125,895,068
    
    
    
    48.9
    %
    
    $
    171,889,470
    
    
    
    47.0
    %
    
    $
    156,638,667
    
    
    
    48.6
    %Junior Secured Debt
    
    
    49,636,976
    
    
    
    16.3
    
    
    
    46,846,973
    
    
    
    18.2
    
    
    
    64,232,689
    
    
    
    17.5
    
    
    
    58,076,196
    
    
    
    18.0Subordinated Debt
    
    
    87,657,447
    
    
    
    28.7
    
    
    
    75,300,016
    
    
    
    29.3
    
    
    
    108,561,060
    
    
    
    29.7
    
    
    
    93,365,112
    
    
    
    29.0Warrants / Equity
    
    
    16,173,731
    
    
    
    5.3
    
    
    
    9,390,266
    
    
    
    3.6
    
    
    
    21,215,806
    
    
    
    5.8
    
    
    
    14,290,773
    
    
    
    4.4Total
    
    $
    305,230,871
    
    
    
    100.0
    %
    
    $
    257,432,323
    
    
    
    100.0
    %
    
    $
    365,899,025
    
    
    
    100.0
    %
    
    $
    322,370,748
    
    
    
    100.0
    %
 
 (1)
    
    Represents percentage of total portfolio.  September 30, 2009
    
    
    December 31, 2008Cost
    
    
    % (1)
    
    
    Fair Value
    
    
    % (1)
    
    
    Cost
    
    
    % (1)
    
    
    Fair Value
    
    
    % (1)Machinery
    
    $
    51,630,468
    
    
    
    16.9
    %
    
    $
    36,317,853
    
    
    
    14.1
    %
    
    $
    51,384,711
    
    
    
    14.0
    %
    
    $
    39,527,874
    
    
    
    12.3
    %Personal & Nondurable Consumer Products
    
    
    38,542,006
    
    
    
    12.6
    
    
    
    35,301,536
    
    
    
    13.7
    
    
    
    39,609,196
    
    
    
    10.8
    
    
    
    39,247,796
    
    
    
    12.2Health Care, Education & Childcare
    
    
    38,478,623
    
    
    
    12.6
    
    
    
    35,673,123
    
    
    
    13.9
    
    
    
    39,749,005
    
    
    
    10.9
    
    
    
    39,501,102
    
    
    
    12.2Automobile
    
    
    30,462,731
    
    
    
    10.0
    
    
    
    22,205,720
    
    
    
    8.6
    
    
    
    33,276,374
    
    
    
    9.1
    
    
    
    26,487,272
    
    
    
    8.2Textiles & Leather
    
    
    28,827,184
    
    
    
    9.4
    
    
    
    27,472,364
    
    
    
    10.7
    
    
    
    29,557,681
    
    
    
    8.1
    
    
    
    29,368,566
    
    
    
    9.1Metals & Minerals
    
    
    23,111,237
    
    
    
    7.6
    
    
    
    23,111,237
    
    
    
    9.0
    
    
    
    23,049,480
    
    
    
    6.3
    
    
    
    22,453,909
    
    
    
    7.0Mining, Steel, Iron & Nonprecious Metals
    
    
    18,001,311
    
    
    
    5.9
    
    
    
    10,687,048
    
    
    
    4.1
    
    
    
    18,092,545
    
    
    
    4.9
    
    
    
    17,245,764
    
    
    
    5.3Electronics
    
    
    15,798,122
    
    
    
    5.2
    
    
    
    15,698,746
    
    
    
    6.1
    
    
    
    31,033,364
    
    
    
    8.5
    
    
    
    30,033,495
    
    
    
    9.3Retail Stores
    
    
    11,367,454
    
    
    
    3.7
    
    
    
    11,286,420
    
    
    
    4.4
    
    
    
    10,978,984
    
    
    
    3.0
    
    
    
    10,872,284
    
    
    
    3.4Housewares & Durable Consumer Products
    
    
    11,110,217
    
    
    
    3.6
    
    
    
    6,577,119
    
    
    
    2.5
    
    
    
    11,005,810
    
    
    
    3.0
    
    
    
    9,333,052
    
    
    
    2.9Printing & Publishing
    
    
    9,159,502
    
    
    
    3.0
    
    
    
    7,550,800
    
    
    
    2.9
    
    
    
    26,302,411
    
    
    
    7.2
    
    
    
    18,159,998
    
    
    
    5.6Ecological
    
    
    8,724,829
    
    
    
    2.9
    
    
    
    8,412,229
    
    
    
    3.3
    
    
    
    8,556,102
    
    
    
    2.3
    
    
    
    8,164,902
    
    
    
    2.5Grocery
    
    
    8,515,329
    
    
    
    2.8
    
    
    
    8,750,177
    
    
    
    3.4
    
    
    
    8,156,189
    
    
    
    2.2
    
    
    
    8,278,569
    
    
    
    2.6Insurance
    
    
    5,052,366
    
    
    
    1.7
    
    
    
    3,826,463
    
    
    
    1.5
    
    
    
    5,000,000
    
    
    
    1.4
    
    
    
    4,048,200
    
    
    
    1.3Buildings & Real Estate
    
    
    4,415,588
    
    
    
    1.5
    
    
    
    4,415,588
    
    
    
    1.7
    
    
    
    4,613,182
    
    
    
    1.3
    
    
    
    4,613,182
    
    
    
    1.4Diversified/Conglomerate Service
    
    
    1,570,736
    
    
    
    0.5
    
    
    
    
    
    
    
    
    
    
    
    1,570,736
    
    
    
    0.4
    
    
    
    623,500
    
    
    
    0.2Aerospace & Defense
    
    
    463,168
    
    
    
    0.1
    
    
    
    145,900
    
    
    
    0.1
    
    
    
    463,168
    
    
    
    0.1
    
    
    
    173,600
    
    
    
    0.1Chemicals, Plastic & Rubber
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,659,410
    
    
    
    4.6
    
    
    
    9,347,006
    
    
    
    2.9Oil & Gas
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,840,677
    
    
    
    1.1
    
    
    
    3,840,677
    
    
    
    1.2Personal, Food & Miscellaneous Services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,000,000
    
    
    
    0.8
    
    
    
    1,050,000
    
    
    
    0.3Total
    
    $
    305,230,871
    
    
    
    100.0
    %
    
    $
    257,432,323
    
    
    
    100.0
    %
    
    $
    365,899,025
    
    
    
    100.0
    %
    
    $
    322,370,748
    
    
    
    100.0
    %
 
 (1)
    
    Represents percentage of total portfolio.  21




---



##### 



Note 6. Fair Value Measurements
       As of September 30, 2009Internal Models
    
    
    Internal ModelsQuoted Market
    
    
    with Significant
    
    
    with Significant
    
    
    Total Fair ValuePrices in Active
    
    
    Observable Market
    
    
    Unobservable Market
    
    
    Reported inMarkets
    
    
    Parameters
    
    
    Parameters
    
    
    Consolidated(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    Balance SheetInvestments:Non-affiliate investments
    
    $
    213,066
    
    
    $
    17,502,923
    
    
    $
    173,197,666
    
    
    $
    190,913,655Affiliate investments
    
    
    
    
    
    
    
    
    
    
    45,953,070
    
    
    
    45,953,070Control investments
    
    
    
    
    
    
    
    
    
    
    20,565,598
    
    
    
    20,565,598Total investments at fair value
    
    $
    213,066
    
    
    $
    17,502,923
    
    
    $
    239,716,334
    
    
    $
    257,432,323
  Fair value measurements using unobservable inputs (Level 3)Non-affiliate
    
    
    Affiliate
    
    
    ControlInvestments
    
    
    Investments
    
    
    Investments
    
    
    TotalFair Value December 31, 2008
    
    $
    220,017,120
    
    
    $
    51,457,082
    
    
    $
    30,427,046
    
    
    $
    301,901,248Total realized losses
    
    
    
    
    
    
    
    
    
    
    (26,700,640
    )
    
    
    (26,700,640
    )Change in unrealized depreciation
    
    
    (8,579,846
    )
    
    
    (4,495,048
    )
    
    
    6,360,208
    
    
    
    (6,714,686
    )(1)Purchases, issuances, settlements and other, net
    
    
    (25,337,778
    )
    
    
    (1,008,964
    )
    
    
    (2,422,846
    )
    
    
    (28,769,588
    )Transfers within Level 3
    
    
    (12,901,830
    )
    
    
    
    
    
    
    12,901,830
    
    
    
    Transfers in (out) of Level 3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Fair value as of September 30, 2009
    
    $
    173,197,666
    
    
    $
    45,953,070
    
    
    $
    20,565,598
    
    
    $
    239,716,334
 
 (1)
    
    Relates to assets held at September 30, 2009  22




---



##### 



Note 7. Borrowings
    23




---



##### 



Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Interest charges
    
    $
    2,273,048
    
    
    $
    1,579,647
    
    
    $
    6,316,663
    
    
    $
    5,299,168Amortization of debt issuance costs
    
    
    131,728
    
    
    
    131,728
    
    
    
    395,184
    
    
    
    322,360Unused facility fees
    
    
    
    
    
    
    78,380
    
    
    
    56,736
    
    
    
    152,980Total
    
    $
    2,404,776
    
    
    $
    1,789,755
    
    
    $
    6,768,583
    
    
    $
    5,774,508
 Note 8. Stock Option Plan and Restricted Stock Plan
  24




---



##### 



Note 9. Share Data and Common Stock
  Three Months Ended September 30,
    
    
    
    Nine Months Ended September 30,2009
    
    
    
    2008
    
    
    
    2009
    
    
    
    2008Weighted average common shares outstanding, basic
    
    
    20,950,501
    
    
    
    20,702,485
    
    
    
    20,943,734
    
    
    
    20,682,167Effect of dilutive stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average common shares outstanding, diluted
    
    
    20,950,501
    
    
    
    20,702,485
    
    
    
    20,943,734
    
    
    
    20,682,167
   Date Declared
    
    Record Date
    
    Payment Date
    
    AmountOctober 30, 2008
    
    December 22, 2008
    
    January 15, 2009
    
    $0.25July 30, 2008
    
    September 12, 2008
    
    October 15, 2008
    
    $0.33May 2, 2008
    
    June 5, 2008
    
    July 16, 2008
    
    $0.33February 27, 2008
    
    March 14, 2008
    
    April 16, 2008
    
    $0.33
  Note 10. Commitments and Contingencies
  25




---



##### 



Note 11. Concentrations of Credit Risk
   Note 12. Income Taxes
   January 1, 2009toSeptember 30, 2009GAAP net investment income
    
    $
    8,769,000Tax timing differences of:Origination fees, net
    
    
    (1,311,000
    )Permanent impairment on loans
    
    
    (11,826,000
    )Stock
compensation expense, original issue discount, depreciation and
amortization, and other
    
    
    1,953,000Tax loss
    
    $
    (2,415,000
    )
   26




---



##### 



Note 13. Hedging Activities
  Note 14. Financial Highlights
 For the Nine Months EndedSeptember 30,2009
    
    
    2008Per Share Data:Net asset value at beginning of period
    
    $
    8.65
    
    
    $
    10.73Net investment income
    
    
    .42
    
    
    
    .95Net realized loss on investments
    
    
    (1.42
    )
    
    
    Net realized loss on interest rate swaps
    
    
    (.16
    )
    
    
    Net change in unrealized depreciation
on investments
    
    
    (.19
    )
    
    
    (.98
    )Effect of issuance of common stock
    
    
    (.04
    )
    
    
    Distributions from net investment income
    
    
    
    
    
    
    (.95
    )Distributions in excess of net investment income
    
    
    
    
    
    
    (.04
    )Net change in unrealized swap appreciation
    
    
    .15
    
    
    
    Stock based compensation expense
    
    
    .03
    
    
    
    .03Net asset value at end of period
    
    $
    7.44
    
    
    $
    9.74Total net asset value return (1)
    
    
    (14.0
    )%
    
    
    0.0
    %Per share market value, beginning of period
    
    $
    3.64
    
    
    $
    10.09Per share market value, end of period
    
    $
    4.08
    
    
    $
    6.37Total market value return (2)
    
    
    12.1
    %
    
    
    (27.0
    )%Shares outstanding at end of period
    
    
    20,950,501
    
    
    
    20,702,485Ratios and Supplemental Data:Net assets at end of period
    
    $
    155,930,000
    
    
    $
    201,589,000Average net assets
    
    
    168,702,000
    
    
    
    211,657,000Ratio of operating expenses to average
net assets (annualized)
    
    
    12.5
    %
    
    
    7.8
    %Ratio of net investment income to average
net assets (annualized)
    
    
    6.9
    %
    
    
    12.4
    %Average borrowings outstanding
    
    $
    137,389,000
    
    
    $
    138,173,000Average amount of borrowings per
share
    
    $
    6.56
    
    
    $
    6.67
 
 (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. 27




---



##### 



Note 15. Litigation
       Note 16. Subsequent Events
     28




---



##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
   
    
    The likelihood that the proposed merger with Prospect Capital Corporation is completed and
the anticipated timing of the completion of the proposed merger;
    
    Our future operating results and business prospects if the proposed merger is not completed;
    
    Our ability to negotiate an arrangement with the lenders of our Amended Securitization
Facility for repayment terms that do not require us to use all principal and interest
collected from the debt investments secured by the facility to pay down amounts outstanding
thereunder;
    
    Our ability to negotiate other financing and/or strategic alternatives, including possible
debt or equity financing, acquisition or disposition of assets, and other strategic
transactions;
    
    Our ability to maintain our status as a RIC under the Code;
    
    Our ability to continue as a going concern;
    
    Our future operating results;
    
    Our business prospects and the prospects of our portfolio companies;
    
    The ability of our portfolio companies to achieve their objectives;
    
    Our expected financings and investments;
    
    Future changes in laws or regulations (including the interpretation of these laws and
regulations by regulatory authorities) and conditions in our operating areas, particularly
with respect to business development companies and RICs;
    
    The adequacy of our cash resources and working capital; and
    
    The timing of cash flows, if any, from the operations of our portfolio companies.
   Overview
  29




---



##### 



30




---



##### 



Portfolio Composition
   September 30, 2009
    
    
    December 31, 2008Beginning portfolio at fair value
    
    $
    322,370,748
    
    
    $
    384,725,753Investments in debt securities
    
    
    10,273,276
    
    
    
    79,096,786Investments in equity securities
    
    
    188
    
    
    
    3,245,937Investment repayments
    
    
    (41,222,305
    )
    
    
    (95,018,988
    )Increase in payment-in-kind interest/dividends
    
    
    3,459,359
    
    
    
    5,452,124Sale of investments
    
    
    (4,552,011
    )
    
    
    (15,267,401
    )Change in unearned revenue
    
    
    760,464
    
    
    
    129,458Realized loss on investments
    
    
    (29,574,549
    )
    
    
    Change in fair value of investments
    
    
    (4,082,847
    )
    
    
    (39,992,921
    )Ending portfolio at fair value
    
    $
    257,432,323
    
    
    $
    322,370,748
  September 30, 2009
    
    
    December 31, 2008Investments at
    
    
    Percentage of
    
    
    Investments at
    
    
    Percentage ofFair Value
    
    
    Total Portfolio
    
    
    Fair Value
    
    
    Total PortfolioSenior secured revolving lines of credit
    
    $
    13,263,235
    
    
    
    5.1
    %
    
    $
    10,266,191
    
    
    
    3.2
    %Senior secured term loans
    
    
    112,631,833
    
    
    
    43.8
    
    
    
    146,372,476
    
    
    
    45.4Junior secured term loans
    
    
    46,846,973
    
    
    
    18.2
    
    
    
    58,076,196
    
    
    
    18.0Senior subordinated debt
    
    
    75,300,016
    
    
    
    29.3
    
    
    
    93,365,112
    
    
    
    29.0Investments in equity securities
    
    
    9,390,266
    
    
    
    3.6
    
    
    
    14,290,773
    
    
    
    4.4Totals
    
    $
    257,432,323
    
    
    
    100.0
    %
    
    $
    322,370,748
    
    
    
    100.0
    %
  31




---



##### 



September 30, 2009
    
    
    December 31, 2008Cost
    
    
    % (1)
    
    
    Fair Value
    
    
    % (1)
    
    
    Cost
    
    
    % (1)
    
    
    Fair Value
    
    
    % (1)Machinery
    
    $
    51,630,468
    
    
    
    16.9
    %
    
    $
    36,317,853
    
    
    
    14.1
    %
    
    $
    51,384,711
    
    
    
    14.0
    %
    
    $
    39,527,874
    
    
    
    12.3
    %Personal & Nondurable Consumer Products
    
    
    38,542,006
    
    
    
    12.6
    
    
    
    35,301,536
    
    
    
    13.7
    
    
    
    39,609,196
    
    
    
    10.8
    
    
    
    39,247,796
    
    
    
    12.2Health Care, Education & Childcare
    
    
    38,478,623
    
    
    
    12.6
    
    
    
    35,673,123
    
    
    
    13.9
    
    
    
    39,749,005
    
    
    
    10.9
    
    
    
    39,501,102
    
    
    
    12.2Automobile
    
    
    30,462,731
    
    
    
    10.0
    
    
    
    22,205,720
    
    
    
    8.6
    
    
    
    33,276,374
    
    
    
    9.1
    
    
    
    26,487,272
    
    
    
    8.2Textiles & Leather
    
    
    28,827,184
    
    
    
    9.4
    
    
    
    27,472,364
    
    
    
    10.7
    
    
    
    29,557,681
    
    
    
    8.1
    
    
    
    29,368,566
    
    
    
    9.1Metals & Minerals
    
    
    23,111,237
    
    
    
    7.6
    
    
    
    23,111,237
    
    
    
    9.0
    
    
    
    23,049,480
    
    
    
    6.3
    
    
    
    22,453,909
    
    
    
    7.0Mining, Steel, Iron & Nonprecious Metals
    
    
    18,001,311
    
    
    
    5.9
    
    
    
    10,687,048
    
    
    
    4.1
    
    
    
    18,092,545
    
    
    
    4.9
    
    
    
    17,245,764
    
    
    
    5.3Electronics
    
    
    15,798,122
    
    
    
    5.2
    
    
    
    15,698,746
    
    
    
    6.1
    
    
    
    31,033,364
    
    
    
    8.5
    
    
    
    30,033,495
    
    
    
    9.3Retail Stores
    
    
    11,367,454
    
    
    
    3.7
    
    
    
    11,286,420
    
    
    
    4.4
    
    
    
    10,978,984
    
    
    
    3.0
    
    
    
    10,872,284
    
    
    
    3.4Housewares & Durable Consumer Products
    
    
    11,110,217
    
    
    
    3.6
    
    
    
    6,577,119
    
    
    
    2.5
    
    
    
    11,005,810
    
    
    
    3.0
    
    
    
    9,333,052
    
    
    
    2.9Printing & Publishing
    
    
    9,159,502
    
    
    
    3.0
    
    
    
    7,550,800
    
    
    
    2.9
    
    
    
    26,302,411
    
    
    
    7.2
    
    
    
    18,159,998
    
    
    
    5.6Ecological
    
    
    8,724,829
    
    
    
    2.9
    
    
    
    8,412,229
    
    
    
    3.3
    
    
    
    8,556,102
    
    
    
    2.3
    
    
    
    8,164,902
    
    
    
    2.5Grocery
    
    
    8,515,329
    
    
    
    2.8
    
    
    
    8,750,177
    
    
    
    3.4
    
    
    
    8,156,189
    
    
    
    2.2
    
    
    
    8,278,569
    
    
    
    2.6Insurance
    
    
    5,052,366
    
    
    
    1.7
    
    
    
    3,826,463
    
    
    
    1.5
    
    
    
    5,000,000
    
    
    
    1.4
    
    
    
    4,048,200
    
    
    
    1.3Buildings & Real Estate
    
    
    4,415,588
    
    
    
    1.5
    
    
    
    4,415,588
    
    
    
    1.7
    
    
    
    4,613,182
    
    
    
    1.3
    
    
    
    4,613,182
    
    
    
    1.4Diversified/Conglomerate Service
    
    
    1,570,736
    
    
    
    0.5
    
    
    
    
    
    
    
    
    
    
    
    1,570,736
    
    
    
    0.4
    
    
    
    623,500
    
    
    
    0.2Aerospace & Defense
    
    
    463,168
    
    
    
    0.1
    
    
    
    145,900
    
    
    
    0.1
    
    
    
    463,168
    
    
    
    0.1
    
    
    
    173,600
    
    
    
    0.1Chemicals, Plastic & Rubber
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,659,410
    
    
    
    4.6
    
    
    
    9,347,006
    
    
    
    2.9Oil & Gas
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,840,677
    
    
    
    1.1
    
    
    
    3,840,677
    
    
    
    1.2Personal, Food & Miscellaneous Services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,000,000
    
    
    
    0.8
    
    
    
    1,050,000
    
    
    
    0.3Total
    
    $
    305,230,871
    
    
    
    100.0
    %
    
    $
    257,432,323
    
    
    
    100.0
    %
    
    $
    365,899,025
    
    
    
    100.0
    %
    
    $
    322,370,748
    
    
    
    100.0
    %
 
 (1)
    
    Represents percentage of total portfolio.  Portfolio Asset Quality
   32




---



##### 



September 30, 2009
    
    
    December 31, 2008Investments at
    
    
    Percentage of
    
    
    Investments at
    
    
    Percentage ofInvestment Rating
    
    Fair Value
    
    
    Total Portfolio
    
    
    Fair Value
    
    
    Total Portfolio1
    
    $
    84,419,431
    
    
    
    34.0
    %
    
    $
    82,179,735
    
    
    
    26.7
    %2
    
    
    97,997,274
    
    
    
    39.5
    
    
    
    184,507,897
    
    
    
    59.93
    
    
    55,442,985
    
    
    
    22.4
    
    
    
    21,275,475
    
    
    
    6.94
    
    
    4,890,139
    
    
    
    2.0
    
    
    
    8,477,320
    
    
    
    2.75
    
    
    5,292,228
    
    
    
    2.1
    
    
    
    11,639,548
    
    
    
    3.8Totals
    
    $
    248,042,057
    
    
    
    100.0
    %
    
    $
    308,079,975
    
    
    
    100.0
    %
   Results of Operations
  Comparison for the three months ended September 30, 2009 and 2008
 Total Investment Income
    Expenses
  33




---



##### 



Realized Gain (Loss) on Disposition of Investments
  Net Change in Unrealized Appreciation or Depreciation on Investments
  Net Unrealized Appreciation or Depreciation on Interest Rate Swaps
  Net Income (Loss)
  34




---



##### 



Comparison for the nine months ended September 30, 2009 and 2008
 Total Investment Income
    Expenses
   Realized Gain (Loss) on the Disposition of Investments
  35




---



##### 



Net Change in Unrealized Appreciation or Depreciation on Investments
  Unrealized Appreciation or Depreciation on Interest Rate Swaps
  Net Income (Loss)
  Financial Condition, Liquidity and Capital Resources
 Cash, Cash Equivalents and Restricted Cash
   36




---



##### 



Liquidity and Capital Resources
   
    
    curtailing our investment originations;
    
    reducing our operating expenses;
    
    obtaining stockholder approval at our 2008 annual meeting of stockholders to sell shares
of our common stock below the then current net asset value per share in one or more
offerings for a period of one year which ended on June 17, 2009; and
    
    postponing any decisions relating to 2009 dividend requirements, if any, until we had a
better insight on our requirement and our ability to pay.
  Borrowings
 Securitization Revolving Credit Facility.
  37




---



##### 



Regulated Investment Company Status and Dividends
   38




---



##### 



Critical Accounting Policies
  Going Concern
  Valuation of Portfolio Investments
     39




---



##### 



Fee Income Recognition
  Payment-in-Kind or PIK Interest and Dividends
   Nine Months EndedSeptember 30, 2009Beginning PIK balance
    
    $
    6,605,194PIK interest and dividends earned during the period
    
    
    3,459,359PIK write-off
    
    
    (1,817,059
    )PIK receipts during the period
    
    
    (1,003,525
    )Ending PIK balance
    
    $
    7,243,969
 Interest and Dividend Income Recognition
   Off-Balance Sheet Arrangements
  40




---



##### 



Contractual Obligations
   Recent Developments
     41




---



##### 



Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 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 September 30, 2009 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
 42




---



##### 



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
        
 Item 1A. Risk Factors
  Patriot and Prospect have agreed to a fixed exchange ratio, and, as a result, the shares of
Prospect common stock to be issued in the merger may have a market value that is lower than
expected.
  
    
    changes in the business, operations and prospects of Prospect or Patriot;
    
    the financial condition of current or prospective portfolio companies of Prospect or Patriot;
    
    interest rates, general market and economic conditions;
    
    market assessments of the likelihood that the proposed merger will be completed and the timing of the merger; and
    
    market perception of the future profitability of the combined company.
 43




---



##### 



The proposed merger is subject to the receipt of payoff letters from the Amended Securitization
Facility lenders that could delay completion of the proposed merger, cause abandonment of the
merger or have other negative effects on Patriot and Prospect.
  Patriot shareholders will experience a reduction in percentage ownership and voting power with
respect to their shares as a result of the merger.
  Termination of the merger agreement could negatively impact Patriot.
  
    
    Patriots businesses may have been adversely impacted by the failure
to pursue other beneficial opportunities due to the focus of
management on the merger, without realizing any of the anticipated
benefits of completing the merger;
    
    the market price of Patriots common stock might decline to the extent
that the market price prior to termination reflects a market
assumption that the merger will be completed;
    
    Patriot may not be able to find a party willing to pay an equivalent
or more attractive price than the price Prospect has agreed to pay in
the merger; and
    
    Patriot may not have sufficient liquidity to operate its business or
pursue other strategic transactions and, as a result, would likely be
required to seek bankruptcy protection.
 Under certain circumstances, Patriot is obligated to pay Prospect a termination fee or other
amounts upon termination of the merger agreement.
 44




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The merger agreement severely limits Patriots ability to pursue alternatives to the merger.
  The merger is subject to closing conditions, including stockholder approval, that, if not satisfied
or waived, will result in the merger not being completed, which may result in material adverse
consequences to Patriots business and operations.
  Certain executive officers and directors of Patriot have interests in the completion of the
proposed merger that may differ from or conflict with the interests of Patriot shareholders.
   
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  45




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Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
  ExhibitNumber
    
    Description of Document10.1*
    
    Agreement, Limited Consent and
Amendment No. 1 to Second Amended and Restated Loan Funding and
Servicing Agreement by and among the Patriot Capital Funding, Inc.,
Patriot Capital Funding LLC I, Fairway Finance Company, LLC, BMO
Capital Markets Corp., Branch Banking and Trust Company and Wells Fargo
Bank, National Association.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. 46




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SIGNATURES
  PATRIOT CAPITAL FUNDING, INC.By:
    /s/ Richard P. BuckanavageRichard P. BuckanavageChief Executive Officer and PresidentBy:
    /s/ William E. Alvarez, Jr.William E. Alvarez, Jr.Executive Vice President, Chief Financial Officer and
Secretary 47