##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the Quarterly Period Ended March 31, 2007
 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 þ o
 o þ




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##### 



PATRIOT CAPITAL FUNDING, INC.
 FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2007
 TABLE OF CONTENTS
 PART I FINANCIAL INFORMATION
    
    
    1Item 1. Financial Statements (Unaudited)
    
    
    1Consolidated Balance Sheets at March 31, 2007 and December 31, 2006
    
    
    1Consolidated Statements of Operations for the three months ended March 31, 2007 and 2006
    
    
    2Consolidated Statement of Changes in Net Assets for the three months ended March 31, 2007 and 2006
    
    
    3Consolidated Statements of Cash Flows for the three months ended March 31, 2007 and 2006
    
    
    4Consolidated Schedule of Investments as of March 31, 2007
    
    
    5Consolidated Schedule of Investments as of December 31, 2006
    
    
    9Notes to Consolidated Financial Statements
    
    
    13Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    28Item 4. Controls and Procedures
    
    
    28PART II OTHER INFORMATION
    
    
    29Item 1. Legal Proceedings
    
    
    29Item 1A. Risk Factors
    
    
    29Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    29Item 3. Defaults upon Senior Securities
    
    
    29Item 4. Submission of Matters to a Vote of Security Holders
    
    
    29Item 5. Other Information
    
    
    29Item 6. Exhibits
    
    
    29Signatures
    
    
    30




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##### 



PART I. FINANCIAL INFORMATION
 Item 1. Financial Statements
 Patriot Capital Funding, Inc.
Consolidated Balance Sheets
(unaudited)
 March 31,
    
    December 31,2007
    
    2006ASSETSInvestments at fair value:Non-control/non-affiliate investments (cost of
$246,833,788  2007,
$251,915,921 - 2006)
    
    $
    246,783,422
    
    
    $
    251,933,655Affiliate investments (cost of $28,677,282  2007,
$8,966,605  2006)
    
    
    28,789,482
    
    
    
    8,925,605Unearned income
    
    
    (3,773,603
    )
    
    
    (3,610,884
    )Total investments
    
    
    271,799,301
    
    
    
    257,248,376Cash and cash equivalents
    
    
    4,779,029
    
    
    
    4,211,643Restricted cash
    
    
    3,970,824
    
    
    
    5,113,806Interest receivable
    
    
    2,153,941
    
    
    
    2,221,000Other assets
    
    
    1,355,311
    
    
    
    1,727,680TOTAL ASSETS
    
    $
    284,058,406
    
    
    $
    270,522,505LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIESBorrowings
    
    $
    80,373,000
    
    
    $
    98,380,000Interest payable
    
    
    476,618
    
    
    
    523,709Dividends payable
    
    
    5,831,525
    
    
    
    4,904,818Accounts payable, accrued expenses and other
    
    
    1,398,578
    
    
    
    2,605,349TOTAL LIABILITIES
    
    
    88,079,721
    
    
    
    106,413,876STOCKHOLDERS 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;
18,223,517 and 15,821,994 shares issued and outstanding
at
at March 31, 2007 and December 31, 2006, respectively
    
    
    182,235
    
    
    
    158,220Paid-in capital
    
    
    204,261,677
    
    
    
    171,957,327Accumulated net investment loss
    
    
    (1,912,061
    )
    
    
    (1,912,061
    )Dividends in excess of net investment income
    
    
    (3,307,835
    )
    
    
    (2,821,587
    )Net realized loss on investments
    
    
    (3,256,799
    )
    
    
    (3,262,966
    )Net unrealized gain (loss) on interest rate swap
    
    
    (50,367
    )
    
    
    12,961Net unrealized appreciation (depreciation) on investments
    
    
    61,835
    
    
    
    (23,265
    )TOTAL STOCKHOLDERS EQUITY
    
    
    195,978,685
    
    
    
    164,108,629TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    284,058,406
    
    
    $
    270,522,505NET ASSET VALUE PER COMMON SHARE
    
    $
    10.75
    
    
    $
    10.37
  1




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##### 



Patriot Capital Funding, Inc.
Consolidated Statements of Operations
(unaudited)
 Three Months EndedMarch 31,2007
    
    2006INVESTMENT INCOMEInterest and dividends:Non-control/non-affiliate investments (less than 5% owned)
    
    $
    7,578,948
    
    
    $
    5,439,771Affiliate investments (5% to 25% owned)
    
    
    619,233
    
    
    
    Total interest income
    
    
    8,198,181
    
    
    
    5,439,771Fees:Non-control/non-affiliate investments (less than 5% owned)
    
    
    381,626
    
    
    
    70,068Affiliate investments (5% to 25% owned)
    
    
    13,229
    
    
    
    Total fee income
    
    
    394,855
    
    
    
    70,068Other investment income  non-control/non-affiliate investments
(less than 5% owned)
    
    
    384,287
    
    
    
    713,449Total Investment Income
    
    
    8,977,323
    
    
    
    6,223,288EXPENSESCompensation expense
    
    
    1,219,533
    
    
    
    868,747Interest expense
    
    
    1,506,212
    
    
    
    969,131Professional fees
    
    
    307,627
    
    
    
    239,069General and administrative expense
    
    
    598,673
    
    
    
    436,807Total Expenses
    
    
    3,632,045
    
    
    
    2,513,754Net Investment Income
    
    
    5,345,278
    
    
    
    3,709,534NET REALIZED AND UNREALIZED GAIN AND LOSSNet realized gain on investments  non-control/non-affiliate
investments (less than 5% owned)
    
    
    6,167
    
    
    
    Net unrealized depreciation on investments  non-control/non-
affiliate investments (less than 5% owned)
    
    
    (68,100
    )
    
    
    (804,333
    )Net unrealized appreciation on investments  affiliate
investments (5% to 25% owned)
    
    
    153,200
    
    
    
    Net unrealized gain (loss) on interest rate swap
    
    
    (63,328
    )
    
    
    49,197Net realized and unrealized gain (loss)
    
    
    27,939
    
    
    
    (755,136
    )NET INCOME
    
    $
    5,373,217
    
    
    $
    2,954,398Earnings per share, basic
    
    $
    0.31
    
    
    $
    0.24Earnings per share, diluted
    
    $
    0.30
    
    
    $
    0.24Weighted average shares outstanding, basic
    
    
    17,532,896
    
    
    
    12,136,655Weighted average shares outstanding, diluted
    
    
    17,724,026
    
    
    
    12,136,655
  2




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##### 



Patriot Capital Funding, Inc.
Consolidated Statements of Changes in Net Assets
(unaudited)
 Three Months EndedMarch 31,2007
    
    2006Operations:Net investment income
    
    $
    5,345,278
    
    
    $
    3,709,534Net realized gain on investments
    
    
    6,167
    
    
    
    Net unrealized appreciation (depreciation) on investments
    
    
    85,100
    
    
    
    (804,333
    )Net unrealized gain (loss) on interest rate swap
    
    
    (63,328
    )
    
    
    49,197Net increase in assets from operations
    
    
    5,373,217
    
    
    
    2,954,398Stockholder transactions:Dividends to stockholders from net investment income
    
    
    (5,345,278
    )
    
    
    (3,519,630
    )Dividends in excess of net investment income
    
    
    (486,247
    )
    
    
    Net decrease
in assets from stockholder transactions
    
    
    (5,831,525
    )
    
    
    (3,519,630
    )Capital share transactions:Issuance of common stock
    
    
    31,718,816
    
    
    
    Issuance of common stock under dividend reinvestment plan
    
    
    450,766
    
    
    
    Stock option compensation
    
    
    158,782
    
    
    
    97,612Net increase in assets from capital share transactions
    
    
    32,328,364
    
    
    
    97,612Total increase (decrease) in net assets
    
    
    31,870,056
    
    
    
    (467,620
    )Net assets at beginning of period
    
    
    164,108,629
    
    
    
    127,152,365Net assets at end of period
    
    $
    195,978,685
    
    
    $
    126,684,745Net asset value per common share
    
    $
    10.75
    
    
    $
    10.44Common shares outstanding at end of period
    
    
    18,223,517
    
    
    
    12,136,655
  3




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##### 



Patriot Capital Funding, Inc.
Consolidated Statements of Cash Flows
(unaudited)
 Three Months EndedMarch 31,2007
    
    2006CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    5,373,217
    
    
    $
    2,954,398Adjustments to reconcile net income to net cash
provided by (used for) operating activities:Depreciation and amortization
    
    
    107,010
    
    
    
    117,385Change in interest receivable
    
    
    67,059
    
    
    
    (341,843
    )Realized gain on sale of investment
    
    
    (6,167
    )
    
    
    Change in unrealized (appreciation) depreciation on investments
    
    
    (85,100
    )
    
    
    804,333Unrealized (gain) loss on interest rate swap
    
    
    63,328
    
    
    
    (49,197
    )Payment-in-kind interest and dividends
    
    
    (840,698
    )
    
    
    (551,977
    )Stock-based compensation expense
    
    
    158,782
    
    
    
    97,612Change in unearned income
    
    
    162,719
    
    
    
    (339,678
    )Change in interest payable
    
    
    (47,091
    )
    
    
    324,684Change in other assets
    
    
    202,031
    
    
    
    6,573Change in accounts payable, accrued expenses and other
    
    
    (1,206,770
    )
    
    
    (908,176
    )Net cash provided by operating activities
    
    
    3,948,320
    
    
    
    2,114,114CASH FLOWS FROM INVESTING ACTIVITIES:Funded investments
    
    
    (57,286,250
    )
    
    
    (51,497,394
    )Principal repayments on investments
    
    
    38,154,654
    
    
    
    15,894,462Proceeds from sale of investments
    
    
    5,349,917
    
    
    
    Purchase of furniture and equipment
    
    
    
    
    
    
    (29,966
    )Net cash used for investing activities
    
    
    (13,781,679
    )
    
    
    (35,632,898
    )CASH FLOWS FROM FINANCING ACTIVITIES:Borrowings
    
    
    55,550,000
    
    
    
    109,300,000Repayments on borrowings
    
    
    (73,557,000
    )
    
    
    (78,550,000
    )Net proceeds from sale of common stock
    
    
    31,718,816
    
    
    
    Dividends paid
    
    
    (4,454,053
    )
    
    
    Deferred offering costs
    
    
    
    
    
    
    47,395Change in restricted cash
    
    
    1,142,982
    
    
    
    4,555,778Net cash provided by financing activities
    
    
    10,400,745
    
    
    
    35,353,173NET INCREASE IN CASH AND CASH
EQUIVALENTS
    
    
    567,386
    
    
    
    1,834,389CASH AND CASH EQUIVALENTS AT:Beginning of Period
    
    
    4,211,643
    
    
    
    2,371,841End of Period
    
    $
    4,779,029
    
    
    $
    4,206,230Supplemental information:Interest paid
    
    $
    1,553,303
    
    
    $
    644,448Non-cash financing activities:Dividends reinvested in common stock
    
    $
    450,766
    
    
    $
    Dividends declared but not paid
    
    
    5,831,525
    
    
    
    3,519,630
  4




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##### 



Patriot Capital Funding, Inc.
Consolidated Schedule of Investments
(unaudited)
March 31, 2007
 Company(1)
    
    Industry
    
    Investment
    
    Principal
    
    Cost
    
    ValueAffiliate investments (5% to 25% owned):Aylward Enterprises, LLC (5)
    
    Manufacturer of packaging equipment
    
    Revolving Line of Credit
(8.8%, Due 2/12) (3)
    
    $
    1,500,000
    
    
    $
    1,500,000
    
    
    $
    1,500,000Senior Secured Term Loan A
(9.6%, Due 2/12) (3)
    
    
    10,000,000
    
    
    
    10,000,000
    
    
    
    10,000,000Senior Subordinated Debt
(14.5%, Due 8/12) (2)
    
    
    6,279,688
    
    
    
    6,279,688
    
    
    
    6,279,688Membership Interest  Class A-2
    
    
    
    
    
    
    1,250,000
    
    
    
    1,400,000Smart, LLC (5)
    
    Provider of tuition management
services
    
    Revolving Line of Credit
(10.8%, Due 8/11) (3)
    
    
    725,000
    
    
    
    725,000
    
    
    
    725,000Senior Secured Term Loan A
(10.3%, Due 6/11) (3)
    
    
    4,350,000
    
    
    
    4,350,000
    
    
    
    4,350,000Senior Secured Term Loan B
(16.5%, Due 2/12) (2) (3)
    
    
    3,572,594
    
    
    
    3,572,594
    
    
    
    3,572,594Membership Interest  Class B (4)
    
    
    
    
    
    
    1,000,000
    
    
    
    962,200Total Affiliate investments (represents 10.4% of total investments at fair value)
    
    
    
    
    
    
    28,677,282
    
    
    
    28,789,482Non-control/non-affiliate investments (less than 5% owned):ADAPCO, Inc.
    
    Distributor of specialty chemicals
and contract application services
    
    Senior Secured Term Loan A
(10.9%, Due 6/11) (3)
    
    $
    13,350,000
    
    
    $
    13,350,000
    
    
    
    $13,350,000Common Stock (4)
    
    
    
    
    
    
    500,000
    
    
    
    329,800Agent Media
Corporation
    
    Publisher of insurance
industry periodicals
    
    Senior Secured Term Loan A
(9.9%, Due 9/08) (3)
    
    
    750,000
    
    
    
    750,000
    
    
    
    750,000Senior Secured Term Loan B
(13.4%, Due 9/09) (3)
    
    
    2,130,105
    
    
    
    2,130,105
    
    
    
    2,130,105Common Stock Warrants (4)
    
    
    
    
    
    
    31,000
    
    
    
    37,900Allied Defense
Group, Inc.
    
    Diversified defense company
    
    Common Stock Warrants (4)
    
    
    
    
    
    
    463,168
    
    
    
    203,500Arrowhead General
Insurance  Agency, Inc.
    
    Insurance agency and program
specialist
    
    Junior Secured Term Loan
(12.6%, Due 2/13) (3)
    
    
    5,000,000
    
    
    
    5,000,000
    
    
    
    5,131,300
 5




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##### 



Company(1)
    
    Industry
    
    Investment
    
    Principal
    
    Cost
    
    ValueBorga, Inc.
    
    Manufacturer of pre-fabricated metal
building systems
    
    Senior Secured Term Loan A
(8.8%, Due 3/09) (3)
    
    
    996,000
    
    
    
    996,000
    
    
    
    996,000Senior Secured Term Loan B
(11.8%, Due 5/10) (3)
    
    
    1,804,000
    
    
    
    1,804,000
    
    
    
    1,804,000Senior Secured Term Loan C
(16.0%, Due 5/10) (2) (3)
    
    
    7,560,157
    
    
    
    7,560,157
    
    
    
    7,560,157Common Stock Warrants (4)
    
    
    
    
    
    
    20,250
    
    
    
    40,400Caleel + Hayden,
LLC
    
    Provider of proprietary branded
professional skincare and cosmetic
products to physicians and spa
communities
    
    Senior Secured Term Loan B
(10.1%, Due 11/11) (3)
    
    
    10,959,687
    
    
    
    10,959,687
    
    
    
    10,959,687Senior Subordinated Debt
(14.5%, Due 11/12) (2) (3)
    
    
    6,311,334
    
    
    
    6,311,334
    
    
    
    6,311,334Common Stock (4)
    
    
    
    
    
    
    750,000
    
    
    
    839,600Cheeseworks, Inc.
    
    Distributor of specialty cheese and food
products
    
    Revolving Line of Credit
(8.0%, Due 6/11) (3)
    
    
    5,080,219
    
    
    
    5,080,219
    
    
    
    5,080,219Senior Secured Term Loan
(10.9%, Due 6/11) (3)
    
    
    11,630,561
    
    
    
    11,630,561
    
    
    
    11,630,561Copperhead
Chemical  Company, Inc.
    
    Manufacturer of
bulk pharmaceuticals
    
    Senior Subordinated Debt
(15.3%, Due 11/10) (2) (3)
    
    
    4,864,098
    
    
    
    4,864,098
    
    
    
    4,864,098Dover Saddlery,
Inc.
    
    Equestrian products
catalog retailer
    
    Senior Subordinated Debt
(11.5%, Due 9/09) (3)
    
    
    3,000,000
    
    
    
    3,000,000
    
    
    
    3,000,000Common Stock Warrants (4)
    
    
    
    
    
    
    148,200
    
    
    
    235,400Eight OClock
Coffee  Company
    
    Manufacturer, distributor, and
marketer of coffee
    
    Junior Secured Term Loan
(11.9%, Due 7/13) (3)
    
    
    9,000,000
    
    
    
    9,000,000
    
    
    
    9,112,450Employbridge
Holding  Company
(5)
    
    A provider of specialized
staffing services
    
    Junior Secured Term Loan
(12.3%, Due 10/13) (3)
    
    
    3,000,000
    
    
    
    3,000,000
    
    
    
    3,007,500Encore Legal
Solutions, Inc.
    
    Legal document
management services
    
    Junior Secured Term Loan A
(10.5%, Due 12/09) (2) (3)
    
    
    3,844,466
    
    
    
    3,844,466
    
    
    
    3,844,466Junior Secured Term Loan B
(10.8%, Due 12/09) (2) (3)
    
    
    6,975,901
    
    
    
    6,975,901
    
    
    
    6,975,901Senior Subordinated Debt
(15.0%, Due 5/10)(2)(3)
    
    
    5,291,213
    
    
    
    5,291,213
    
    
    
    5,291,213Common Stock Warrants(4)
    
    
    
    
    
    
    350,000
    
    
    
    
 6




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##### 



Company(1)
    
    Industry
    
    Investment
    
    Principal
    
    Cost
    
    ValueEXL Acquisition
Corp.
    
    Manufacturer of lab testing supplies
    
    Senior Secured Term Loan A
(8.6%, Due 3/11) (3)
    
    
    6,800,000
    
    
    
    6,800,000
    
    
    
    6,800,000Senior Secured Term Loan B
(11.0%, Due 3/12) (3)
    
    
    2,376,000
    
    
    
    2,376,000
    
    
    
    2,376,000Senior Secured Term Loan D
(15.0%, Due 3/12) (2) (3)
    
    
    5,000,417
    
    
    
    5,000,417
    
    
    
    5,000,417Common Stock  Class A (4)
    
    
    
    
    
    
    2,475
    
    
    
    203,900Common Stock  Class B (2)
    
    
    
    
    
    
    273,653
    
    
    
    275,653Fairchild Industrial
Products, Co.
    
    Manufacturer of industrial controls
and power transmission products
    
    Senior Secured Term Loan A
(8.6%, Due 7/10) (3)
    
    
    6,555,000
    
    
    
    6,555,000
    
    
    
    6,555,000Senior Secured Term Loan B
(10.4%, Due 7/11) (3)
    
    
    9,468,750
    
    
    
    9,468,750
    
    
    
    9,468,750Senior Subordinated Debt
(14.8%, Due 7/11) (2)
    
    
    5,471,032
    
    
    
    5,471,032
    
    
    
    5,471,032Preferred Stock  Class A (2)
    
    
    
    
    
    
    307,033
    
    
    
    307,033Common Stock  Class B (4)
    
    
    
    
    
    
    121,598
    
    
    
    131,700Impact Products,
LLC
    
    Distributor of janitorial supplies
    
    Junior Secured Term Loan B
(9.6%, Due 9/12) (3)
    
    
    7,443,750
    
    
    
    7,443,750
    
    
    
    7,443,750Junior Secured Term Loan C
(13.5%, Due 9/12) (2) (3)
    
    
    5,594,801
    
    
    
    5,594,801
    
    
    
    5,594,801Innovative
Concepts in
Entertainment, Inc.
    
    Manufacturer of coin operated games
    
    Senior Secured Term Loan A
(9.4%, Due 2/11) (3)
    
    
    5,325,000
    
    
    
    5,325,000
    
    
    
    5,325,000Senior Secured Term Loan B
(9.9%, Due 2/11) (3)
    
    
    3,573,000
    
    
    
    3,573,000
    
    
    
    3,573,000Senior Secured Term Loan C
(13.0%, Due 8/11) (3)
    
    
    3,900,000
    
    
    
    3,900,000
    
    
    
    3,900,000Keltner Enterprises,
LLC (5)
    
    Distributor of automotive
oils, chemicals and parts
    
    Senior Subordinated Debt
(14.0%, Due 12/11) (3)
    
    
    3,850,000
    
    
    
    3,850,000
    
    
    
    3,850,000L.A. Spas, Inc.
    
    Manufacturer of above
ground spas
    
    Senior Subordinated Debt
(15.5%, Due 1/10) (2) (3)
    
    
    7,082,454
    
    
    
    7,082,454
    
    
    
    7,082,454Common Stock Warrants (4)
    
    
    
    
    
    
    5,000
    
    
    Metrologic
Instruments, Inc.
    
    Manufacturer of imaging and
scanning equipment
    
    Junior Secured Term Loan
(11.8%, Due 12/14)
    
    
    1,000,000
    
    
    
    1,000,000
    
    
    
    1,015,000
 7




---



##### 



Company(1)
    
    Industry
    
    Investment
    
    Principal
    
    Cost
    
    ValuePrince Mineral  Company, Inc.
    
    Manufacturer of
pigments
    
    Junior Secured Term Loan
(10.3%, Due 12/12) (3)
    
    
    11,450,000
    
    
    
    11,450,000
    
    
    
    11,450,000Senior Subordinated Debt
(14.0%, Due 6/13) (2) (3)
    
    
    11,832,778
    
    
    
    11,832,778
    
    
    
    11,832,778Quartermaster, Inc.
    
    Retailer of
uniforms and
tactical equipment
to law enforcement
and security
professionals
    
    Senior Secured Term Loan A
(9.9%, Due 12/10) (3)
    
    
    5,076,250
    
    
    
    5,076,250
    
    
    
    5,076,250Senior Secured Term Loan B
(11.1%, Due 12/10) (3)
    
    
    2,593,750
    
    
    
    2,593,750
    
    
    
    2,593,750Senior Secured Term Loan C
(15.0%, Due 12/11) (2) (3)
    
    
    3,223,630
    
    
    
    3,223,630
    
    
    
    3,223,630R-O-M Corporation
    
    Manufacturer of
doors, ramps and
bulk headsfor fire
trucks and food
transportation
    
    Revolving Line of Credit
(10.0%, Due 2/13)
(3)
    
    
    200,000
    
    
    
    200,000
    
    
    
    200,000Senior Secured Term Loan A
(8.4%, Due 2/13) (3)
    
    
    8,000,000
    
    
    
    8,000,000
    
    
    
    8,000,000Senior Secured Term Loan B
(9.6%, Due 5/13) (3)
    
    
    8,550,000
    
    
    
    8,550,000
    
    
    
    8,550,000Senior Subordinated Debt
(15.0%, Due 8/13) (2)
    
    
    9,123,508
    
    
    
    9,123,508
    
    
    
    9,123,508Sidumpr Trailer  Company, Inc.
    
    Manufacturer of
side dump trailers
    
    Revolving Line of Credit
(10.8%, Due 1/11) (3)
    
    
    630,000
    
    
    
    630,000
    
    
    
    630,000Senior Secured Term Loan A
(8.9%, Due 1/11) (3)
    
    
    2,520,000
    
    
    
    2,520,000
    
    
    
    2,520,000Senior Secured Term Loan B
(11.9%, Due 1/11) (3)
    
    
    2,338,250
    
    
    
    2,338,250
    
    
    
    2,338,250Senior Secured Term Loan C
(14.0%, Due 7/11) (2) (3)
    
    
    3,177,906
    
    
    
    3,177,906
    
    
    
    3,177,906Senior Subordinated Debt
(12.0%, Due 1/12) (3)
    
    
    75,000
    
    
    
    75,000
    
    
    
    75,000Preferred Stock (2)
    
    
    82,369
    
    
    
    82,369
    
    
    
    82,369Common Stock (4)
    
    
    25
    
    
    
    25
    
    
    
    50,900Total Non-control/non-affiliate investments (represents 89.6% of total investments at fair
value)
    
    
    
    
    
    
    246,833,788
    
    
    
    246,783,422Total Investments
    
    
    
    
    
    
    
    
    
    
    275,511,070
    
    
    
    275,572,904Unearned Income
    
    
    
    
    
    
    
    
    
    
    (3,773,603
    )
    
    
    (3,773,603
    )Total
Investments Net of Unearned Income
    $
    271,737,467
    
    
    $
    271,799,301
 
 (1)
    
    The Company does not control, and, except with
respect to Aylward Enterprises, LLC and Smart, LLC, is not an affiliate of, any of its portfolio companies, each as
defined in the Investment Company Act of 1940, as amended (the 1940 Act). In general, under the 1940 Act, the Company controls a portfolio company if
it owns 25% or more of its voting securities and is an affiliate of a portfolio company if the Company owns 5% or more of its voting securities.(2)
    
    Amount includes payment-in-kind (PIK) interest or dividends.(3)
    
    Pledged as collateral under the Companys Securitization Facility. See Note 3 to Consolidated Financial Statements.(4)
    
    Non-income producing.(5)
    
    Some of the investments listed are issued by an affiliate of the listed portfolio company.  8




---



##### 



PATRIOT CAPITAL FUNDING, INC.
Consolidated Schedule of Investments
December 31, 2006
 Company(1)
    
    Industry
    
    Investment
    
    Principal
    
    Cost
    
    ValueAffiliate investments (5% to 25% owned):Smart, LLC (5)
    
    Provider of tuition
management services
    
    Senior Secured Term Loan A
(10.4%, Due 6/11) (3)
    
    $
    4,425,000
    
    
    $
    4,425,000
    
    
    $
    4,425,000Senior Secured Term Loan B
(16.5%, Due 2/12) (2) (3)
    
    
    3,541,605
    
    
    
    3,541,605
    
    
    
    3,541,605Membership Interest 
Class B (4)
    
    
    
    
    
    
    1,000,000
    
    
    
    959,000Total Affiliate investments (represents 3.4% of total investments at fair value)
    
    
    
    
    
    
    8,966,605
    
    
    
    8,925,605Non-control/non-affiliate investments (less than 5% owned):ADAPCO, Inc.
    
    Distributor of specialty chemicals
and contract application services
    
    Senior Secured Term Loan A(10.9%,
Due 6/11) (3)
    
    $
    13,350,000
    
    
    $
    13,350,000
    
    
    $
    13,350,000Common Stock (4)
    
    
    
    
    
    
    500,000
    
    
    
    328,500Agent Media  Corporation
    
    Publisher of insurance
industry periodicals
    
    Senior Secured Term Loan A
(10.1%,
Due 9/08) (3)
    
    
    1,000,000
    
    
    
    1,000,000
    
    
    
    1,000,000Senior Secured Term Loan B(12.4%, Due
9/09) (3)
    
    
    2,130,105
    
    
    
    2,130,105
    
    
    
    2,130,105Common Stock Warrants (4)
    
    
    
    
    
    
    31,000
    
    
    
    36,200Allied Defense  Group, Inc.
    
    Diversified defense company
    
    Common Stock Warrants (4)
    
    
    
    
    
    
    463,168
    
    
    
    505,800Arrowhead General  
Insurance Agency, Inc.
    
    Insurance agency and program
specialist
    
    Junior Secured Term Loan
(12.6%, Due 2/13) (3)
    
    
    5,000,000
    
    
    
    5,000,000
    
    
    
    5,075,000Borga, Inc.
    
    Manufacturer of pre-fabricated
metal building systems
    
    Senior Secured Term Loan
A(8.9%, Due 3/09)
(3)
    
    
    1,208,500
    
    
    
    1,208,500
    
    
    
    1,208,500Senior Secured Term Loan
B(11.9%, Due 5/10)
(3)
    
    
    1,810,250
    
    
    
    1,810,250
    
    
    
    1,810,250Senior Secured Term Loan
C(16.0%, Due 5/10)
(2) (3)
    
    
    7,485,057
    
    
    
    7,485,057
    
    
    
    7,485,057Common Stock Warrants (4)
    
    
    
    
    
    
    20,250
    
    
    
    21,200Caleel + Hayden,  LLC
    
    Provider of proprietary branded
professional skincare and
cosmetic products to physicians
and spa communities
    
    Senior Secured Term Loan
A(8.1%, Due 11/10)
    
    
    5,000,000
    
    
    
    5,000,000
    
    
    
    5,000,000Senior Secured Term Loan
B(10.1%, Due 11/11)
(3)
    
    
    11,000,000
    
    
    
    11,000,000
    
    
    
    11,000,000Senior Subordinated Debt
(14.5%, Due 11/12)
(2) (3)
    
    
    6,272,135
    
    
    
    6,272,135
    
    
    
    6,272,135Common Stock (4)
    
    
    
    
    
    
    750,000
    
    
    
    858,100
 9




---



##### 



Company(1)
    
    Industry
    
    Investment
    
    Principal
    
    Cost
    
    ValueCheeseworks, Inc.
    
    Distributor of specialty cheese
and food products
    
    Revolving Line of Credit
(8.0%, Due 6/11) (3)
    
    
    5,080,219
    
    
    
    5,080,219
    
    
    
    5,080,219Senior Secured Term Loan
(11.0%, Due 6/11) (3)
    
    
    11,845,374
    
    
    
    11,845,374
    
    
    
    11,845,374Copperhead
Chemical  Company, Inc.
    
    Manufacturer of
bulk pharmaceuticals
    
    Senior Subordinated Debt
(15.3%,
Due 11/10) (2) (3)
    
    
    4,824,790
    
    
    
    4,824,790
    
    
    
    4,824,790Dover Saddlery, Inc.
    
    Equestrian products
catalog retailer
    
    Senior Subordinated Debt
(11.5%, Due
9/09) (3)
    
    
    3,000,000
    
    
    
    3,000,000
    
    
    
    3,000,000Common Stock Warrants (4)
    
    
    
    
    
    
    148,200
    
    
    
    171,200Eight OClock Coffee  Company
    
    Manufacturer, distributor, and
marketer of coffee
    
    Junior Secured Term Loan
(11.9%, Due 7/13) (3)
    
    
    9,000,000
    
    
    
    9,000,000
    
    
    
    9,146,250Employbridge Holding  Company (5)
    
    A provider of specialized
staffing services
    
    Junior Secured Term Loan
(12.4%,
Due 10/13) (3)
    
    
    3,000,000
    
    
    
    3,000,000
    
    
    
    3,007,500Encore Legal Solutions, Inc.
    
    Legal document
management services
    
    Junior Secured Term Loan A(10.6%,
Due 12/09) (3)
    
    
    3,819,500
    
    
    
    3,819,500
    
    
    
    3,819,500Junior Secured Term Loan
B(10.8%,
Due 12/09) (3)
    
    
    6,907,625
    
    
    
    6,907,625
    
    
    
    6,907,625Senior Subordinated Debt
(15.0%,
Due 5/10) (2) (3)
    
    
    5,098,906
    
    
    
    5,098,906
    
    
    
    5,098,906Common Stock Warrants (4)
    
    
    
    
    
    
    350,000
    
    
    
    EXL Acquisition Corp.
    
    Manufacturer of lab testing
supplies
    
    Senior Secured Term Loan
A(8.6%, Due 3/11) (3)
    
    
    7,100,000
    
    
    
    7,100,000
    
    
    
    7,100,000Senior Secured Term Loan
B(9.1%, Due 3/12) (3)
    
    
    2,382,000
    
    
    
    2,382,000
    
    
    
    2,382,000Senior Secured Term Loan
D(15.0%, Due 3/12)
(2) (3)
    
    
    5,000,833
    
    
    
    5,000,833
    
    
    
    5,000,833Common Stock  Class A (4)
    
    
    
    
    
    
    2,475
    
    
    
    86,300Common Stock  Class B (2)
    
    
    
    
    
    
    267,466
    
    
    
    268,266Fairchild Industrial  Products, Co.
    
    Manufacturer of industrial
controls
andpower transmission products
    
    Senior Secured Term Loan
A(9.4%, Due 7/10) (3)
    
    
    9,770,000
    
    
    
    9,770,000
    
    
    
    9,770,000Senior Secured Term Loan
B(11.4%,
Due 7/11) (3)
    
    
    2,793,750
    
    
    
    2,793,750
    
    
    
    2,793,750Senior Subordinated Debt
(15.5%,
Due 7/11) (2)
    
    
    5,368,427
    
    
    
    5,368,427
    
    
    
    5,368,427Preferred Stock  Class A
(2)
    
    
    
    
    
    
    399,401
    
    
    
    399,401Common Stock  Class B (4)
    
    
    
    
    
    
    121,598
    
    
    
    80,400
 10




---



##### 



Company(1)
    
    Industry
    
    Investment
    
    Principal
    
    Cost
    
    ValueImpact Products, LLC
    
    Distributor of janitorial supplies
    
    Junior Secured Term Loan
B(9.6%, Due 9/12) (3)
    
    
    7,462,500
    
    
    
    7,462,500
    
    
    
    7,462,500Junior Secured Term Loan
C(13.5%, Due
9/12) (2) (3)
    
    
    5,596,938
    
    
    
    5,596,938
    
    
    
    5,596,938Innovative Concepts   in Entertainment, Inc.
    
    Manufacturer of coin operated
games
    
    Senior Secured Term Loan
A(9.4%, Due 2/11) (3)
    
    
    5,550,000
    
    
    
    5,550,000
    
    
    
    5,550,000Senior Secured Term Loan
B(9.9%, Due 2/11) (3)
    
    
    3,582,000
    
    
    
    3,582,000
    
    
    
    3,582,000Senior Secured Term Loan
C(13.0%, Due 8/11)
(3)
    
    
    3,900,000
    
    
    
    3,900,000
    
    
    
    3,900,000Keltner Enterprises, LLC (5)
    
    Distributor of automotive
oils,chemicals and parts
    
    Senior Subordinated Debt
(14.0%, Due 12/11) (3)
    
    
    3,850,000
    
    
    
    3,850,000
    
    
    
    3,850,000L.A. Spas, Inc.
    
    Manufacturer of above
ground spas
    
    Senior Subordinated Debt
(15.5%,
Due 1/10) (2) (3)
    
    
    7,020,843
    
    
    
    7,020,843
    
    
    
    7,020,843Common Stock Warrants (4)
    
    
    
    
    
    
    5,000
    
    
    
    Natural Products   Group, LLC (5)
    
    Manufacturer and marketer of
brandedpersonal care products
    
    Junior Secured Term Loan
(11.9%, Due 12/13) (3)
    
    
    4,000,000
    
    
    
    4,000,000
    
    
    
    4,040,000Prince Mineral   Company, Inc.
    
    Manufacturer of
pigments
    
    Junior Secured Term Loan
(10.3%,
Due 12/12) (3)
    
    
    11,475,000
    
    
    
    11,475,000
    
    
    
    11,475,000Senior Subordinated Debt
(14.0%,
Due 7/13) (2) (3)
    
    
    11,803,278
    
    
    
    11,803,278
    
    
    
    11,803,278Quartermaster, Inc.
    
    Retailer of uniforms and tactical
equipment to law enforcement and
security professionals
    
    Senior Secured Term Loan A
 (9.9%, Due 12/10) (3)
    
    
    6,000,000
    
    
    
    6,000,000
    
    
    
    6,000,000Senior Secured Term Loan B
(11.2%, Due 12/10) (3)
    
    
    2,600,000
    
    
    
    2,600,000
    
    
    
    2,600,000Senior Secured Term Loan C
(15.0%, Due 12/11) (2) (3)
    
    
    3,199,633
    
    
    
    3,199,633
    
    
    
    3,199,633R-O-M Corporation
    
    Manufacturer of doors, ramps and
bulk headsfor fire trucks and
food transportation
    
    Revolving Line of Credit
(9.1%, Due 12/09)
(3)
    
    
    1,500,000
    
    
    
    1,500,000
    
    
    
    1,500,000Senior Secured Term Loan
A(9.0%,
Due 12/09) (3)
    
    
    2,958,000
    
    
    
    2,958,000
    
    
    
    2,958,000Senior Secured Term Loan
B(9.4%,
Due 12/10) (3)
    
    
    3,374,500
    
    
    
    3,374,500
    
    
    
    3,374,500Senior Subordinated Debt
(16.0%,
Due 12/10) (2) (3)
    
    
    7,082,680
    
    
    
    7,082,680
    
    
    
    7,082,680
 11




---



##### 



Company(1)
    
    Industry
    
    Investment
    
    Principal
    
    Cost
    
    ValueRobert Rothschild   Farm, Inc.
    
    Manufacturer of
specialty food products
    
    Senior Secured Term Loan
B(9.1%,
Due 7/11) (3)
    
    
    4,500,000
    
    
    
    4,500,000
    
    
    
    4,500,000Senior Subordinated Debt
(16.3%,
Due 1/12) (2) (3)
    
    
    4,902,868
    
    
    
    4,902,868
    
    
    
    4,902,868Sidumpr Trailer   Company, Inc.
    
    Manufacturer of
side dump trailers
    
    Revolving Line of Credit
(10.8%, Due 1/11) (3)
    
    
    430,000
    
    
    
    430,000
    
    
    
    430,000Senior Secured Term Loan A
(9.0%, Due 1/11) (3)
    
    
    2,660,000
    
    
    
    2,660,000
    
    
    
    2,660,000Senior Secured Term Loan B
(12.0%, Due 1/11) (3)
    
    
    2,344,125
    
    
    
    2,344,125
    
    
    
    2,344,125Senior Secured Term Loan C
(14.0%, Due 7/11) (2) (3)
    
    
    3,161,694
    
    
    
    3,161,694
    
    
    
    3,161,694Senior Subordinated Debt
(12.0%, Due
1/12) (3)
    
    
    75,000
    
    
    
    75,000
    
    
    
    75,000Preferred Stock (2)
    
    
    80,808
    
    
    
    80,808
    
    
    
    80,808Common Stock (4)
    
    
    25
    
    
    
    25
    
    
    
    49,700Stolle Machinery   Company, LLC
    
    Provider of capital equipment
used in the production of
aluminum or steel beverage and
food cans
    
    Junior Secured Term Loan
(11.4%, Due 9/13)
    
    
    500,000
    
    
    
    500,000
    
    
    
    502,500Total Non-control/non-affiliate investments (represents 96.6% of total investments at fair value)
    
    
    
    
    
    
    251,915,921
    
    
    
    251,933,655Total Investments
    
    
    
    
    
    
    
    
    
    
    260,882,526
    
    
    
    260,859,260Unearned Income
    
    
    
    
    
    
    
    
    
    
    (3,610,884
    )
    
    
    (3,610,884
    )Total Investments Net of Unearned Income
    
    
    
    
    
    
    
    
    
    $
    257,271,642
    
    
    $
    257,248,376
 
 (1)
    
    The Company does not control, and, except with respect to Smart LLC, is not an affiliate of, any of its portfolio companies, each as defined in the Investment
Company Act of 1940, as amended (the 1940 Act). In general, under the 1940 Act, the Company controls a portfolio company if it owns 25% or more of its voting
securities and is an affiliate of a portfolio company if the Company owns 5% or more of its voting securities.(2)
    
    Amount includes payment-in-kind (PIK) interest or dividends.(3)
    
    Pledged as collateral under the Companys Securitization Facility. See Note 3 to Consolidated Financial Statements.(4)
    
    Non-income producing.(5)
    
    Some of the investments listed are issued by an affiliate of the listed portfolio company.  12




---



##### 



Patriot Capital Funding, Inc.
Notes to Consolidated Financial Statements
(unaudited)
  Description of Business
   Basis of Presentation
    Recent Accounting Pronouncements
   13




---



##### 



Interest, Dividends, Fees, and Other Investment Income
  Dividends Paid
    Reclassifications
    March 31, 2007
    
    
    December 31, 2006Cost
    
    
    Fair Value
    
    
    Cost
    
    
    Fair ValueCommercial loans
    
    $
    270,206,299
    
    
    $
    270,472,549
    
    
    $
    256,743,135
    
    
    $
    257,014,385Investments in equity securities
    
    
    5,304,771
    
    
    
    5,100,355
    
    
    
    4,139,391
    
    
    
    3,844,875Subtotal
    
    
    275,511,070
    
    
    
    275,572,904
    
    
    
    260,882,526
    
    
    
    260,859,260Unearned income
    
    
    (3,773,603
    )
    
    
    (3,773,603
    )
    
    
    (3,610,884
    )
    
    
    (3,610,884
    )Total
    
    $
    271,737,467
    
    
    $
    271,799,301
    
    
    $
    257,271,642
    
    
    $
    257,248,376
   14




---



##### 



March 31, 2007
    
    
    December 31, 2006Cost
    
    
    % (1)
    
    
    Fair Value
    
    
    % (1)
    
    
    Cost
    
    
    % (1)
    
    
    Fair Value
    
    
    % (1)Senior Secured Debt
    
    $
    153,716,276
    
    
    
    55.8
    %
    
    $
    153,716,276
    
    
    
    55.8
    %
    
    $
    140,682,645
    
    
    
    53.9
    %
    
    $
    140,682,645
    
    
    
    53.9
    %Junior Secured Debt
    
    
    53,308,918
    
    
    
    19.4
    
    
    
    53,575,168
    
    
    
    19.4
    
    
    
    56,761,563
    
    
    
    21.8
    
    
    
    57,032,813
    
    
    
    21.9Subordinated Debt
    
    
    63,181,105
    
    
    
    22.9
    
    
    
    63,181,105
    
    
    
    22.9
    
    
    
    59,298,927
    
    
    
    22.7
    
    
    
    59,298,927
    
    
    
    22.7Warrants / Equity
    
    
    5,304,771
    
    
    
    1.9
    
    
    
    5,100,355
    
    
    
    1.9
    
    
    
    4,139,391
    
    
    
    1.6
    
    
    
    3,844,875
    
    
    
    1.5Total
    
    $
    275,511,070
    
    
    
    100.0
    %
    
    $
    275,572,904
    
    
    
    100.0
    %
    
    $
    260,882,526
    
    
    
    100.0
    %
    
    $
    260,859,260
    
    
    
    100.0
    %
 
 (1)
    
    Represents percentage of total portfolio.  March 31, 2007
    
    
    December 31, 2006Cost
    
    
    % (1)
    
    
    Fair Value
    
    
    % (1)
    
    
    Cost
    
    
    % (1)
    
    
    Fair Value
    
    
    % (1)Manufacturing
    
    $
    151,427,987
    
    
    
    54.9
    %
    
    $
    151,989,989
    
    
    
    55.1
    %
    
    $
    118,031,907
    
    
    
    45.2
    %
    
    $
    118,274,709
    
    
    
    45.3
    %Distribution
    
    
    47,449,331
    
    
    
    17.2
    
    
    
    47,279,131
    
    
    
    17.1
    
    
    
    47,685,031
    
    
    
    18.3
    
    
    
    47,513,531
    
    
    
    18.2Service
    
    
    34,109,174
    
    
    
    12.4
    
    
    
    33,860,174
    
    
    
    12.3
    
    
    
    33,142,636
    
    
    
    12.7
    
    
    
    32,834,136
    
    
    
    12.6Consumer / Retail Goods
    
    
    39,150,305
    
    
    
    14.2
    
    
    
    39,322,105
    
    
    
    14.3
    
    
    
    58,398,679
    
    
    
    22.4
    
    
    
    58,564,779
    
    
    
    22.5Publishing
    
    
    2,911,105
    
    
    
    1.1
    
    
    
    2,918,005
    
    
    
    1.1
    
    
    
    3,161,105
    
    
    
    1.2
    
    
    
    3,166,305
    
    
    
    1.2Defense
    
    
    463,168
    
    
    
    0.2
    
    
    
    203,500
    
    
    
    0.1
    
    
    
    463,168
    
    
    
    0.2
    
    
    
    505,800
    
    
    
    0.2Total
    
    $
    275,511,070
    
    
    
    100.0
    %
    
    $
    275,572,904
    
    
    
    100.0
    %
    
    $
    260,882,526
    
    
    
    100.0
    %
    
    $
    260,859,260
    
    
    
    100.0
    %
 
 (1)
    
    Represents percentage of total portfolio.   Three Months Ended March 31,2007
    
    
    2006Interest charges
    
    $
    1,401,562
    
    
    $
    813,005Amortization of debt issuance costs
    
    
    70,059
    
    
    
    100,605Unused facility fees
    
    
    34,591
    
    
    
    55,521Total
    
    $
    1,506,212
    
    
    $
    969,131
 15




---



##### 



Accounting for Stock Issued to
Employees.
   16




---



##### 



Three Months Ended March 31,2007
    
    
    2006Basic:Net income
    
    $
    5,373,217
    
    
    $
    2,954,398Weighted average common shares outstanding
    
    
    17,532,896
    
    
    
    12,136,655Earnings per common share, basic
    
    $
    0.31
    
    
    $
    0.24Diluted:Net income
    
    $
    5,373,217
    
    
    $
    2,954,398Weighted average common shares outstanding
    
    
    17,532,896
    
    
    
    12,136,655Dilutive effect of stock options
    
    
    191,130
    
    
    
    Weighted average common shares and common stock equivalents
    
    
    17,724,026
    
    
    
    12,136,655Earnings per common share, diluted
    
    $
    0.30
    
    
    $
    0.24
     Date Declared
    
    Record Date
    
    Payment Date
    
    AmountFebruary 23, 2007
    
    March 15, 2007
    
    April 18, 2007
    
    $0.32November 10, 2006
    
    December 15, 2006
    
    January 17, 2007
    
    $0.31August 7, 2006
    
    September 15, 2006
    
    October 17, 2006
    
    $0.31May 9, 2006
    
    June 2, 2006
    
    July 17, 2006
    
    $0.29February 28, 2006
    
    March 21, 2006
    
    April 11, 2006
    
    $0.29
     17




---



##### 



January 1, 2007
    
    
    August 1, 2006to
    
    
    toMarch 31, 2007
    
    
    March 31, 2007GAAP net investment income
    
    $
    5,345,000
    
    
    $
    12,232,000Tax timing differences of:Origination fees, net
    
    
    315,000
    
    
    
    772,000Stock compensation expense, bonus accruals, original
issue discount and other
    
    
    (1,136,000
    )
    
    
    (155,000
    )Tax distributable income
    
    $
    4,524,000
    
    
    $
    12,849,000
      For the Three Months EndedMarch 31,2007
    
    
    2006Per Share Data:Net asset value at beginning of period
    
    $
    10.37
    
    
    $
    10.48Net investment income
    
    
    .31
    
    
    
    .31Net change in unrealized appreciation (depreciation)
on investments
    
    
    .01
    
    
    
    (.07
    )Effect of issuance of common stock
    
    
    .39
    
    
    
    Distributions from net investment income
    
    
    (.31
    )
    
    
    (.29
    )Distributions in excess of net investment income
    
    
    (.03
    )
    
    
    Stock based compensation expense
    
    
    .01
    
    
    
    .01Net asset value at end of period
    
    $
    10.75
    
    
    $
    10.44
 18




---



##### 



For the Three Months EndedMarch 31,2007
    
    
    2006Total net asset value return (1)
    
    
    6.9
    %
    
    
    5.1
    %Per share
market value, Beginning of Period
    
    $
    14.49
    
    
    $
    12.20Per share
market value, End of Period
    
    $
    14.20
    
    
    $
    12.50Total market value return (2)
    
    
    0.3
    %
    
    
    4.8
    %Shares outstanding at end of period
    
    
    18,223,517
    
    
    
    12,136,655Ratios and Supplemental Data:Net assets at end of period
    
    $
    195,979,000
    
    
    $
    126,685,000Average net assets
    
    
    195,963,000
    
    
    
    127,885,000Ratio of operating expenses to average
net assets (annualized)
    
    
    7.4
    %
    
    
    7.9
    %Ratio of net investment income (loss) to
average net assets (annualized)
    
    
    10.9
    %
    
    
    11.6
    %Average borrowings outstanding
    
    $
    84,855,000
    
    
    $
    50,356,000Average amount of borrowings per
share
    
    $
    4.66
    
    
    $
    4.15
 
 (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.      19




---



##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
   
    
    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.
  
    
    changes in the economy;
    
    risks associated with possible disruption in our operations or the economy generally due to terrorism; and
    
    future changes in laws or regulations and conditions in our operating areas.
  Overview
  Portfolio Composition
  20




---



##### 



March 31, 2007
    
    
    December 31, 2006Beginning portfolio at fair value
    
    $
    260,859,260
    
    
    $
    141,390,954Investments in debt securities
    
    
    56,036,250
    
    
    
    154,876,598Investments in equity securities
    
    
    1,250,000
    
    
    
    3,074,997Investment repayments
    
    
    (38,654,654
    )
    
    
    (37,627,269
    )Increase in payment-in-kind interest/dividends
    
    
    840,698
    
    
    
    2,424,927Sale of investments
    
    
    (4,843,750
    )
    
    
    (7,098,878
    )Increase in fair value of investments
    
    
    85,100
    
    
    
    3,817,931Ending portfolio at fair value
    
    $
    275,572,904
    
    
    $
    260,859,260
  March 31, 2007
    
    
    December 31, 2006Investments at
    
    
    Percentage of
    
    
    Investments at
    
    
    Percentage ofFair Value
    
    
    Total Portfolio
    
    
    Fair Value
    
    
    Total PortfolioSenior secured revolving lines of credit
    
    $
    8,135,219
    
    
    
    3.0
    %
    
    $
    7,010,219
    
    
    
    2.7
    %Senior secured term loans
    
    
    145,581,057
    
    
    
    52.8
    
    
    
    133,672,426
    
    
    
    51.2Junior secured term loans
    
    
    53,575,168
    
    
    
    19.4
    
    
    
    57,032,813
    
    
    
    21.9Senior subordinated debt
    
    
    63,181,105
    
    
    
    22.9
    
    
    
    59,298,927
    
    
    
    22.7Investments in equity securities
    
    
    5,100,355
    
    
    
    1.9
    
    
    
    3,844,875
    
    
    
    1.5Totals
    
    $
    275,572,904
    
    
    
    100.0
    %
    
    $
    260,859,260
    
    
    
    100.0
    %
   21




---



##### 



March 31, 2007
    
    
    December 31, 2006Cost
    
    
    %(1)
    
    
    Fair Value
    
    
    % (1)
    
    
    Cost
    
    
    % (1)
    
    
    Fair Value
    
    
    % (1)Manufacturing
    
    $
    151,427,987
    
    
    
    54.9
    %
    
    $
    151,989,989
    
    
    
    55.1
    %
    
    $
    118,031,907
    
    
    
    45.2
    %
    
    $
    118,274,709
    
    
    
    45.3
    %Distribution
    
    
    47,449,331
    
    
    
    17.2
    
    
    
    47,279,131
    
    
    
    17.1
    
    
    
    47,685,031
    
    
    
    18.3
    
    
    
    47,513,531
    
    
    
    18.2Service
    
    
    34,109,174
    
    
    
    12.4
    
    
    
    33,860,174
    
    
    
    12.3
    
    
    
    33,142,636
    
    
    
    12.7
    
    
    
    32,834,136
    
    
    
    12.6Consumer / Retail Goods
    
    
    39,150,305
    
    
    
    14.2
    
    
    
    39,322,105
    
    
    
    14.3
    
    
    
    58,398,679
    
    
    
    22.4
    
    
    
    58,564,779
    
    
    
    22.5Publishing
    
    
    2,911,105
    
    
    
    1.1
    
    
    
    2,918,005
    
    
    
    1.1
    
    
    
    3,161,105
    
    
    
    1.2
    
    
    
    3,166,305
    
    
    
    1.2Defense
    
    
    463,168
    
    
    
    0.2
    
    
    
    203,500
    
    
    
    0.1
    
    
    
    463,168
    
    
    
    0.2
    
    
    
    505,800
    
    
    
    0.2Total
    
    $
    275,511,070
    
    
    
    100.0
    %
    
    $
    275,572,904
    
    
    
    100.0
    %
    
    $
    260,882,526
    
    
    
    100.0
    %
    
    $
    260,859,260
    
    
    
    100.0
    %
 
 (1)
    
    Represents percentage of total portfolio.
  Portfolio Asset Quality
   March 31, 2007
    
    
    December 31, 2006Investments at
    
    
    Percentage of
    
    
    Investments at
    
    
    Percentage ofInvestment Rating
    
    Fair Value
    
    
    Total Portfolio
    
    
    Fair Value
    
    
    Total Portfolio1
    
    $
    27,782,181
    
    
    
    10.3
    %
    
    $
    22,689,633
    
    
    
    8.8
    %2
    
    
    206,146,334
    
    
    
    76.2
    
    
    
    198,127,878
    
    
    
    77.13
    
    
    36,544,034
    
    
    
    13.5
    
    
    
    36,196,874
    
    
    
    14.14
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Totals
    
    $
    270,472,549
    
    
    
    100.0
    %
    
    $
    257,014,385
    
    
    
    100.0
    %
 Loans and Debt Securities on Non-Accrual Status
  22




---



##### 



Results of Operations
  Comparison for the three months ended March 31, 2007 and 2006
 Total Investment Income
    Expenses
   Realized Gain (Loss) on Sale of Investments
  23




---



##### 



Net Change in Unrealized Appreciation or Depreciation on Investments
     Unrealized Loss on Interest Rate Swap
  Net Income
  Financial Condition, Liquidity and Capital Resources
 Cash, Cash Equivalents and Restricted Cash
   24




---



##### 



Liquidity and Capital Resources
     Borrowings
 Securitization Revolving Credit Facility.
    25




---



##### 



Regulated Investment Company Status and Dividends
     Critical Accounting Policies
  Valuation of Portfolio Investments
   26




---



##### 



Fee Income Recognition
  Payment-in-Kind or PIK Interest and Dividends
  27




---



##### 



Three Months EndedMarch 31, 2007Beginning PIK balance
    
    $
    2,891,565PIK interest and dividends earned during the period
    
    
    840,698PIK receipts during the period
    
    
    (744,852
    )Ending PIK balance
    
    $
    2,987,411
 Interest and Dividend Income Recognition
   Off-Balance Sheet Arrangements
   Contractual Obligations
  Recent Developments
     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 March 31, 2007 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
 28




---



##### 



PART II. OTHER INFORMATION
 Item 1. Legal Proceedings
  Item 1A. Risk Factors
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  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*
    
    First Amendment to Amended and Restated Loan Funding and Servicing Agreement by and among Patriot Capital Funding, Inc., Patriot Capital Funding LLC I, Fairway Finance Company, LLC and BMO Capital Markets Corp.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. 29




---



##### 



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 30