##### 



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, 2006
 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 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)274 Riverside AvenueWestport, CT
(Address of principal executive office)
    
    06880
(Zip Code)
 (203) 429-2700
 þ o
  o o þ
 o þ




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##### 



PATRIOT CAPITAL FUNDING, INC.
 FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2006
 TABLE OF CONTENTS
 PART I FINANCIAL INFORMATION
    
    
    1Item 1. Financial Statements (Unaudited)
    
    
    1Consolidated Balance Sheets at September 30, 2006 and December 31, 2005
    
    
    1Consolidated Statements of Operations for the three and nine months ended September 30, 2006 and 2005
    
    
    2Consolidated Statement of Stockholders Equity for the nine months ended September 30, 2006
    
    
    3Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and 2005
    
    
    4Consolidated Schedule of Investments as of September 30, 2006
    
    
    5Consolidated Schedule of Investments as of December 31, 2005
    
    
    9Notes to Consolidated Financial Statements
    
    
    11Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    32Item 4. Controls and Procedures
    
    
    32PART II OTHER INFORMATION
    
    
    33Item 1. Legal Proceedings
    
    
    33Item 1A. Risk Factors
    
    
    33Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    33Item 3. Defaults upon Senior Securities
    
    
    33Item 4. Submission of Matters to a Vote of Security Holders
    
    
    33Item 5. Other Information
    
    
    33Item 6. Exhibits
    
    
    33Signatures
    
    
    34




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##### 



PART I. FINANCIAL INFORMATION
 Item 1. Financial Statements
 Patriot Capital Funding, Inc.
 Consolidated Balance Sheets
 (unaudited)
 September 30,
    
    December 31,2006
    
    2005ASSETSInvestments at fair value:Investments in debt securities (cost of $214,161,069  2006,
$144,154,600 - 2005)
    
    $
    214,243,569
    
    
    $
    140,395,654Investments in equity securities (cost of $3,372,850  2006,
$1,077,550  2005)
    
    
    2,911,934
    
    
    
    995,300Unearned income
    
    
    (3,278,752
    )
    
    
    (3,439,295
    )Total investments
    
    
    213,876,751
    
    
    
    137,951,659Cash and cash equivalents
    
    
    7,114,449
    
    
    
    2,371,841Restricted cash
    
    
    5,301,867
    
    
    
    7,806,328Interest receivable
    
    
    1,374,323
    
    
    
    867,475Other assets
    
    
    1,750,945
    
    
    
    1,658,690TOTAL ASSETS
    
    $
    229,418,335
    
    
    $
    150,655,993LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIESBorrowings
    
    $
    57,885,000
    
    
    $
    21,650,000Interest payable
    
    
    349,837
    
    
    
    60,334Dividends payable
    
    
    4,893,898
    
    
    
    Accounts payable, accrued expenses and other
    
    
    2,434,873
    
    
    
    1,793,294TOTAL LIABILITIES
    
    
    65,563,608
    
    
    
    23,503,628STOCKHOLDERS 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;
15,786,769 and 12,136,655 shares issued and outstanding at
September 30, 2006, and December 31, 2005, respectively
    
    
    157,868
    
    
    
    121,367Paid-in capital
    
    
    171,321,343
    
    
    
    136,267,552Accumulated net investment loss
    
    
    (1,912,061
    )
    
    
    (1,912,061
    )Distributions in excess of net investment income
    
    
    (2,036,708
    )
    
    
    (3,483,297
    )Net realized loss on investments
    
    
    (3,271,091
    )
    
    
    Net unrealized loss on interest rate swap
    
    
    (26,209
    )
    
    
    Net unrealized depreciation on investments
    
    
    (378,415
    )
    
    
    (3,841,196
    )TOTAL STOCKHOLDERS EQUITY
    
    
    163,854,727
    
    
    
    127,152,365TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    229,418,335
    
    
    $
    150,655,993NET ASSET VALUE PER COMMON SHARE
    
    $
    10.38
    
    
    $
    10.48
  1




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##### 



Patriot Capital Funding, Inc.
Consolidated Statements of Operations
(unaudited)
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005INVESTMENT INCOMEInterest and dividend income
    
    $
    6,682,400
    
    
    $
    3,611,189
    
    
    $
    17,874,203
    
    
    $
    8,710,879Fees
    
    
    62,233
    
    
    
    122,486
    
    
    
    188,134
    
    
    
    187,983Other investment income
    
    
    135,000
    
    
    
    
    
    
    
    848,449
    
    
    
    Total Investment Income
    
    
    6,879,633
    
    
    
    3,733,675
    
    
    
    18,910,786
    
    
    
    8,898,862EXPENSESCompensation expense
    
    
    944,918
    
    
    
    944,369
    
    
    
    2,662,083
    
    
    
    1,834,598Consulting fees
    
    
    
    
    
    
    54,796
    
    
    
    
    
    
    
    554,796Interest expense
    
    
    994,883
    
    
    
    845,435
    
    
    
    2,918,271
    
    
    
    3,247,101Professional fees
    
    
    213,238
    
    
    
    75,252
    
    
    
    637,522
    
    
    
    311,431Prepayment penalty
    
    
    
    
    
    
    3,395,335
    
    
    
    
    
    
    
    3,395,335General and administrative expense
    
    
    630,139
    
    
    
    304,957
    
    
    
    1,792,205
    
    
    
    693,070Total Expenses
    
    
    2,783,178
    
    
    
    5,620,144
    
    
    
    8,010,081
    
    
    
    10,036,331Net Investment Income (Loss)
    
    
    4,096,455
    
    
    
    (1,886,469
    )
    
    
    10,900,705
    
    
    
    (1,137,469
    )NET REALIZED AND UNREALIZED GAIN (LOSS)Net realized loss on investments
    
    
    
    
    
    
    
    
    
    
    (3,271,091
    )
    
    
    Net unrealized appreciation (depreciation) on investments
    
    
    (344,187
    )
    
    
    (3,761,046
    )
    
    
    3,462,781
    
    
    
    (3,081,035
    )Net unrealized loss on interest rate swap
    
    
    (225,093
    )
    
    
    
    
    
    
    (26,209
    )
    
    
    Net realized and unrealized gain (loss)
    
    
    (569,280
    )
    
    
    (3,761,046
    )
    
    
    165,481
    
    
    
    (3,081,035
    )NET INCOME (LOSS)
    
    $
    3,527,175
    
    
    $
    (5,647,515
    )
    
    $
    11,066,186
    
    
    $
    (4,218,504
    )Earnings per share, basic and diluted
    
    $
    0.22
    
    
    $
    (0.62
    )
    
    $
    0.81
    
    
    $
    (0.75
    )Weighted average shares outstanding, basic
    
    
    15,781,525
    
    
    
    9,088,353
    
    
    
    13,582,320
    
    
    
    5,613,915Weighted average shares outstanding, diluted
    
    
    15,836,416
    
    
    
    9,088,353
    
    
    
    13,637,211
    
    
    
    5,613,915
  2




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##### 



Patriot Capital Funding, Inc.
Consolidated Statement of Stockholders Equity
(unaudited)
 Distributions
    
    
    
    
    
    
    
    
    
    NetAccumulated
    
    In Excess of
    
    
    
    
    
    Net
    
    UnrealizedNet
    
    Net
    
    Net
    
    Unrealized
    
    AppreciationInvestment
    
    Investment
    
    Realized
    
    Loss on
    
    (Depreciation)
    
    TotalFor the Nine Months Ended
    
    Common
    
    
    
    
    
    Income
    
    Income
    
    Loss on
    
    Interest Rate
    
    on
    
    StockholdersSeptember 30, 2006:
    
    Stock
    
    Paid-in Capital
    
    (Loss)
    
    (Loss)
    
    Investments
    
    Swap
    
    Investments
    
    EquityBalance, December 31, 2005
    
    $
    121,367
    
    
    $
    136,267,552
    
    
    $
    (1,912,061
    )
    
    $
    (3,483,297
    )
    
    $
    
    
    
    $
    
    
    
    $
    (3,841,196
    )
    
    $
    127,152,365Shares issued in
connection with dividend
reinvestment
    
    
    501
    
    
    
    571,008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    571,509Sale of Common Stock, net
of offering expenses of
$2.4 million
    
    
    36,000
    
    
    
    36,616,098
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,652,098Stock option compensation
    
    
    
    
    
    
    352,030
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    352,030Tax return of capital
    
    
    
    
    
    
    (2,485,345
    )
    
    
    
    
    
    
    2,485,345
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Distributions declared
($0.89 per common share)
    
    
    
    
    
    
    
    
    
    
    (10,900,705
    )
    
    
    (1,038,756
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,939,461
    )Net income
    
    
    
    
    
    
    
    
    
    
    10,900,705
    
    
    
    
    
    
    
    (3,271,091
    )
    
    
    (26,209
    )
    
    
    3,462,781
    
    
    
    11,066,186Balance, September 30,
2006
    
    $
    157,868
    
    
    $
    171,321,343
    
    
    $
    (1,912,061
    )
    
    $
    (2,036,708
    )
    
    $
    (3,271,091
    )
    
    $
    (26,209
    )
    
    $
    (378,415
    )
    
    $
    163,854,727
  3




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##### 



Patriot Capital Funding, Inc.
Consolidated Statements of Cash Flows
(unaudited)
 Nine Months EndedSeptember 30,2006
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    11,066,186
    
    
    $
    (4,218,504
    )Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation and amortization
    
    
    349,026
    
    
    
    82,048Change in interest receivable
    
    
    (506,848
    )
    
    
    (302,090
    )Realized loss on sale of investment
    
    
    3,271,091
    
    
    
    Change in unrealized depreciation on investments
    
    
    (3,462,781
    )
    
    
    3,081,035Unrealized loss on interest rate swap
    
    
    26,209
    
    
    
    Payment-in-kind interest and dividends
    
    
    (1,767,272
    )
    
    
    (1,367,401
    )Stock-based compensation expense
    
    
    352,030
    
    
    
    Change in unearned income
    
    
    32,734
    
    
    
    606,545Change in interest payable
    
    
    289,503
    
    
    
    (283,096
    )Change in management fee payable
    
    
    
    
    
    
    (916,666
    )Change in other assets
    
    
    (125,027
    )
    
    
    (158,301
    )Change in accounts payable, accrued expenses and other
    
    
    641,579
    
    
    
    388,390Net cash provided by (used for) operating activities
    
    
    10,166,430
    
    
    
    (3,088,040
    )CASH FLOWS FROM INVESTING ACTIVITIES:Funded investments
    
    
    (108,551,595
    )
    
    
    (54,300,000
    )Principal repayments on investments
    
    
    30,918,221
    
    
    
    7,872,875Proceeds from sale of investment
    
    
    3,634,509
    
    
    
    Purchase of furniture and equipment
    
    
    (265,365
    )
    
    
    (32,382
    )Net cash used for investing activities
    
    
    (74,264,230
    )
    
    
    (46,459,507
    )CASH FLOWS FROM FINANCING ACTIVITIES:Borrowings
    
    
    270,685,000
    
    
    
    47,250,000Repayments on borrowings
    
    
    (234,450,000
    )
    
    
    (89,895,458
    )Net proceeds from sale of common stock
    
    
    36,652,098
    
    
    
    106,067,747Dividends paid
    
    
    (6,474,053
    )
    
    
    Deferred offering costs
    
    
    (3,500
    )
    
    
    473,904Deferred financing costs
    
    
    (73,598
    )
    
    
    (1,180,326
    )Change in restricted cash
    
    
    2,504,461
    
    
    
    3,000,000Net cash provided by financing activities
    
    
    68,840,408
    
    
    
    65,715,867NET INCREASE IN CASH AND CASH
EQUIVALENTS
    
    
    4,742,608
    
    
    
    16,168,230CASH AND CASH EQUIVALENTS AT:Beginning of Period
    
    
    2,371,841
    
    
    
    2,491,477End of Period
    
    $
    7,114,449
    
    
    $
    18,659,797Supplemental information:Interest paid
    
    $
    2,628,769
    
    
    $
    3,288,538Non-cash financing activities:Dividends reinvested in common stock
    
    $
    571,509
    
    
    $
    Dividends declared but not paid
    
    
    4,893,898
    
    
    
    =
  4




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##### 



Patriot Capital Funding, Inc.
Consolidated Schedule of Investments
(unaudited)
September 30, 2006
 Company(1)
    
    Industry
    
    Investment
    
    Principal
    
    Cost
    
    Fair Value(3)ADAPCO, Inc.
    
    Distributor of specialty chemicals
and contract application services
    
    Senior Secured Term Loan A
(11.0%, Due 6/11) (6)
    
    $
    13,350,000
    
    
    $
    13,350,000
    
    
    $
    13,350,000Common Stock (4)
    
    
    500,000
    
    
    
    500,000
    
    
    
    328,000Agent Media Corporation
    
    Publisher of insurance
industry periodicals
    
    Senior Secured Term Loan A
(9.9%, Due 9/08) (6)
    
    $
    1,000,000
    
    
    $
    1,000,000
    
    
    $
    1,000,000Senior Secured Term Loan B
(12.5%, Due 9/09) (6)
    
    
    2,130,105
    
    
    
    2,130,105
    
    
    
    2,130,105Common Stock Warrants, Less
than 5% of Co. (4)
    
    
    
    
    
    
    31,000
    
    
    
    51,200Allied Defense Group, Inc.
    
    Diversified defense company
    
    Common Stock Warrants, Less
than 5% of Co. (4)
    
    
    
    
    
    
    463,168
    
    
    
    391,300Arrowhead General Insurance
Agency, Inc.
    
    Insurance agency and program
specialist
    
    Junior Secured Term Loan
(12.6%, Due 2/13) (6) (7)
    
    
    5,000,000
    
    
    
    5,000,000
    
    
    
    5,062,500Bare Escentuals Beauty, Inc.
    
    Marketer of mineral-based cosmetics
and branded skin care products
    
    Junior Secured Term Loan
(14.3%, Due 2/13)
    
    
    1,000,000
    
    
    
    1,000,000
    
    
    
    1,000,000Borga, Inc.
    
    Manufacturer of pre-fabricated
metal building systems
    
    Revolving Line of Credit
(8.3%, Due 5/10) (6)
    
    
    500,000
    
    
    
    500,000
    
    
    
    500,000Senior Secured Term Loan A
(8.9%, Due 3/09) (6)
    
    
    1,421,000
    
    
    
    1,421,000
    
    
    
    1,421,000Senior Secured Term Loan B
(11.9%, Due 5/10) (6)
    
    
    1,816,500
    
    
    
    1,816,500
    
    
    
    1,816,500Senior Secured Term Loan C
(16.0%, Due 5/10) (2) (6)
    
    
    7,409,062
    
    
    
    7,409,062
    
    
    
    7,409,062Common Stock Warrants, Less
than 5% of Co. (4)
    
    
    
    
    
    
    20,250
    
    
    
    60,600Cheeseworks, Inc.
    
    Distributor of specialty cheese and
food products
    
    Revolving Line of Credit
(8.0%, Due 6/11) (6)
    
    
    5,080,219
    
    
    
    5,080,219
    
    
    
    5,080,219Senior Secured Term Loan
(11.0%, Due 6/11) (6)
    
    
    12,060,187
    
    
    
    12,060,187
    
    
    
    12,060,187Copperhead Chemical
Company, Inc.
    
    Manufacturer of
bulk pharmaceuticals
    
    Senior Subordinated Debt
(15.3%, Due 11/10) (2) (6)
    
    
    4,784,938
    
    
    
    4,784,938
    
    
    
    4,784,938
 5




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##### 



Company(1)
    
    Industry
    
    Investment
    
    Principal
    
    Cost
    
    Fair Value(3)Dover Saddlery, Inc.
    
    Equestrian products
catalog retailer
    
    Senior Subordinated Debt
(11.5%, Due 9/09) (6)
    
    
    3,000,000
    
    
    
    3,000,000
    
    
    
    3,000,000Common Stock Warrants, Less
than 5% of Co. (4)
    
    
    
    
    
    
    148,200
    
    
    
    147,800Encore Legal Solutions, Inc.
    
    Legal document
management services
    
    Junior Secured Term Loan A
(10.6%, Due 12/09) (6)
    
    
    3,819,500
    
    
    
    3,819,500
    
    
    
    3,819,500Junior Secured Term Loan B
(10.8%, Due 12/09) (6)
    
    
    6,907,625
    
    
    
    6,907,625
    
    
    
    6,907,625Senior Subordinated Debt
(15.0%, Due 5/10) (2) (6)
    
    
    5,060,109
    
    
    
    5,060,109
    
    
    
    5,060,109Common Stock Warrants, Less
than 5% of Co. (4)
    
    
    
    
    
    
    350,000
    
    
    
    EXL Acquisition Corp.
    
    Manufacturer of lab testing supplies
    
    Senior Secured Term Loan A
(8.4%, Due 3/11) (6)
    
    
    7,400,000
    
    
    
    7,400,000
    
    
    
    7,400,000Senior Secured Term Loan B
(9.1%, Due 3/12) (6)
    
    
    2,388,000
    
    
    
    2,388,000
    
    
    
    2,388,000Senior Secured Term Loan D
(15.0%, Due 3/12) (2) (6)
    
    
    5,000,417
    
    
    
    5,000,417
    
    
    
    5,000,417Common Stock  Class A (4)
    
    
    
    
    
    
    2,475
    
    
    
    51,300Common Stock  Class B (2)
    
    
    
    
    
    
    261,140
    
    
    
    261,640Fairchild Industrial Products, Co.
    
    Manufacturer of industrial controls
and power transmission products
    
    Senior Secured Term Loan A
(9.3%, Due 7/10) (6)
    
    
    10,120,000
    
    
    
    10,120,000
    
    
    
    10,120,000Senior Secured Term Loan B
(11.3%, Due
7/11) (6)
    
    
    2,800,000
    
    
    
    2,800,000
    
    
    
    2,800,000Senior Subordinated Debt
(15.5%, Due 7/11) (2)
    
    
    5,368,427
    
    
    
    5,368,427
    
    
    
    5,368,427Preferred Stock (2)
    
    
    
    
    
    
    390,698
    
    
    
    390,698Common Stock (4)
    
    
    
    
    
    
    121,598
    
    
    
    107,300Impact Products, LLC
    
    Distributor of janitorial supplies
    
    Junior Secured Term Loan B
(9.6%, Due 9/12) (6)
    
    
    7,462,500
    
    
    
    7,462,500
    
    
    
    7,462,500Junior Secured Term Loan C
(13.5%, Due 9/12)
(2) (6)
    
    
    5,547,993
    
    
    
    5,547,993
    
    
    
    5,547,993
 6




---



##### 



Company(1)
    
    Industry
    
    Investment
    
    Principal
    
    Cost
    
    Fair Value(3)Innovative Concepts in Entertainment, Inc.
    
    Manufacturer of coin operated games
    
    Senior Secured Term Loan A
(9.4%, Due 2/11) (6)
    
    
    5,550,000
    
    
    
    5,550,000
    
    
    
    5,550,000Senior Secured Term Loan B
(9.9%, Due 2/11) (6)
    
    
    3,582,000
    
    
    
    3,582,000
    
    
    
    3,582,000Senior Secured Term Loan C
(13.0%, Due 8/11) (6)
    
    
    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) (6)
    
    
    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) (6)
    
    
    6,958,416
    
    
    
    6,958,416
    
    
    
    6,958,416Common Stock Warrants,
Less than 5% of Co. (4)
    
    
    
    
    
    
    5,000
    
    
    
    Natural Products
Group, LLC (5)
    
    Manufacturer and marketer of
branded personal care products
    
    Junior Secured Term Loan
(12.0%, Due 12/13) (6) (7)
    
    
    4,000,000
    
    
    
    4,000,000
    
    
    
    4,020,000Prince Mineral Company,
Inc.
    
    Manufacturer of
pigments
    
    Junior Secured Term Loan
(11.0%, Due 3/11) (6)
    
    
    3,600,000
    
    
    
    3,600,000
    
    
    
    3,600,000Senior Subordinated Debt
(17.0%, Due 9/11) (2) (6)
    
    
    10,541,985
    
    
    
    10,541,985
    
    
    
    10,541,985Quartermaster, Inc.
    
    Retailer of uniforms and tactical
equipment to law enforcement and
security professionals
    
    Revolving Line of Credit
(10.5%, Due 12/10) (6)
    
    
    600,000
    
    
    
    600,000
    
    
    
    600,000Senior Secured Term Loan A
(10.1%, Due 12/10) (6)
    
    
    6,000,000
    
    
    
    6,000,000
    
    
    
    6,000,000Senior Secured Term Loan B
(11.3%, Due 12/10) (6)
    
    
    2,600,000
    
    
    
    2,600,000
    
    
    
    2,600,000Senior Secured Term Loan C
(15.0%, Due 12/11) (2) (6)
    
    
    3,175,289
    
    
    
    3,175,289
    
    
    
    3,175,289R-O-M Corporation
    
    Manufacturer of doors, ramps and
bulkheads for fire trucks and food
transportation
    
    Senior Secured Term Loan A
(10.1%, Due 12/09) (6)
    
    
    3,105,334
    
    
    
    3,105,334
    
    
    
    3,105,334Senior Secured Term Loan B
(11.1%, Due 12/10) (6)
    
    
    3,383,000
    
    
    
    3,383,000
    
    
    
    3,383,000Senior Subordinated Debt
(16.0%, Due 12/10) (2) (6)
    
    
    7,082,136
    
    
    
    7,082,136
    
    
    
    7,082,136
 7




---



##### 



Company(1)
    
    Industry
    
    Investment
    
    Principal
    
    Cost
    
    Fair Value(3)Robert Rothschild Farm, Inc.
    
    Manufacturer of
specialty food products
    
    Senior Secured Term Loan B
(9.0%, Due 7/11) (6)
    
    
    4,650,000
    
    
    
    4,650,000
    
    
    
    4,650,000Senior Subordinated Debt
(16.3%, Due 1/12) (2) (6)
    
    
    4,850,189
    
    
    
    4,850,189
    
    
    
    4,850,189Sidumpr Trailer Company, Inc.
    
    Manufacturer of
side dump trailers
    
    Senior Secured Term Loan A
(8.9%, Due 1/11) (6)
    
    
    2,800,000
    
    
    
    2,800,000
    
    
    
    2,800,000Senior Secured Term Loan B
(11.9%, Due 1/11) (6)
    
    
    2,350,000
    
    
    
    2,350,000
    
    
    
    2,350,000Senior Secured Term Loan C
(14.0%, Due 7/11) (2) (6)
    
    
    3,145,589
    
    
    
    3,145,589
    
    
    
    3,145,589Senior Subordinated Debt
(12.0%, Due
1/12) (6)
    
    
    75,000
    
    
    
    75,000
    
    
    
    75,000Preferred Stock (2)
    
    
    79,296
    
    
    
    79,296
    
    
    
    79,296Common Stock (4)
    
    
    25
    
    
    
    25
    
    
    
    39,500Smart, LLC (5)
    
    Provider of tuition
management services
    
    Senior Secured Term Loan A
(10.3%, Due 6/11) (6)
    
    
    4,425,000
    
    
    
    4,425,000
    
    
    
    4,425,000Senior Secured Term Loan B
(16.5%, Due 2/12) (2) (6)
    
    
    3,510,549
    
    
    
    3,510,549
    
    
    
    3,510,549Common Stock  Class B (4)
    
    
    
    
    
    
    1,000,000
    
    
    
    1,003,300Total Investments
    
    
    
    
    
    
    
    
    
    
    217,533,919
    
    
    
    217,155,503Unearned Income
    
    
    
    
    
    
    
    
    
    
    (3,278,752
    )
    
    
    (3,278,752
    )Total Investments Net of 
     Unearned Income
    
    
    
    
    
    
    
    
    
    $
    214,255,167
    
    
    $
    213,876,751
 
 
 (1)
    
    The Company does not control, and is not an affiliate of, any of its portfolio
companies, each as defined in the Investment Company Act of 1940, as amended (the 1940 Act). In
general, under the 1940 Act, the Company would control a portfolio company if the Company owned
25% or more of its voting securities and would be an affiliate of a portfolio company if the
Company owned 5% or more of its voting securities.(2)
    
    Amount includes payment-in-kind (PIK) interest or dividends.(3)
    
    Fair value is determined in good faith by our board of directors.(4)
    
    Non-income producing.(5)
    
    Some of the investments listed are issued by an affiliate of the listed portfolio company.(6)
    
    Pledged as collateral under the Companys Securitization Facility. See Note 3 to Consolidated
Financial Statements.(7)
    
    Fair value is based on dealer quotes where there is an active market.  8




---



##### 



PATRIOT CAPITAL FUNDING, INC.
Consolidated Schedule of Investments
December 31, 2005
 Company(1)
    
    Industry
    
    Investment
    
    Principal
    
    Cost
    
    Fair Value(3)Agent Media Corporation
    
    Publisher of insurance
industry periodicals
    
    Senior Secured Term Loan A
(11.8%, Due 9/08) (6)
    
    $
    1,375,000
    
    
    $
    1,375,000
    
    
    $
    1,375,000Senior Secured Term Loan B
(16.0%, Due 9/09) (2) (6)
    
    
    2,109,015
    
    
    
    2,109,015
    
    
    
    2,109,015Common Stock Warrants,  Less than
5% of Co.(4)
    
    
    
    
    
    
    31,000
    
    
    
    49,900Allied Defense Group, Inc.
    
    Diversified defense company
    
    Senior Secured Term Loan
(11.5%, Due 11/10) (6)
    
    
    14,000,000
    
    
    
    14,000,000
    
    
    
    14,000,000Common Stock Warrants, Less
than 5% of Co.(4)
    
    
    
    
    
    
    463,168
    
    
    
    573,800Borga, Inc.
    
    Manufacturer of pre-fabricated
metal building systems
    
    Senior Secured Term Loan A
(7.7%, Due 3/09) (6)
    
    
    2,046,000
    
    
    
    2,046,000
    
    
    
    2,046,000Senior Secured Term Loan B
(10.7%, Due 5/10) (6)
    
    
    1,835,250
    
    
    
    1,835,250
    
    
    
    1,835,250Senior Secured Term Loan C
(16.0%, Due 5/10) (2) (6)
    
    
    7,188,062
    
    
    
    7,188,062
    
    
    
    7,188,062Common Stock Warrants, Less than
5% of Co.(4)
    
    
    
    
    
    
    20,250
    
    
    
    89,600Copperhead Chemical 
     Company, Inc.
    
    Manufacturer of
bulk pharmaceuticals
    
    Senior Subordinated Debt
(15.3%, Due 11/10) (2) (6)
    
    
    4,668,608
    
    
    
    4,668,608
    
    
    
    4,668,608Dover Saddlery, Inc.
    
    Equestrian products
catalog retailer
    
    Senior Subordinated Debt
(11.5%, Due 9/09) (6)
    
    
    3,000,000
    
    
    
    3,000,000
    
    
    
    3,000,000Common Stock Warrants, Less than
5% of Co.(4)
    
    
    
    
    
    
    148,200
    
    
    
    178,600Eight OClock Coffee 
     Company
    
    Manufacturer, distributor, and
marketer of coffee
    
    Junior Secured Term Loan
(11.4%, Due 11/12) (6)
    
    
    6,500,000
    
    
    
    6,500,000
    
    
    
    6,500,000Encore Legal Solutions, 
     Inc.
    
    Legal document
management services
    
    Junior Secured Term Loan A
(9.8%, Due 12/09) (6)
    
    
    4,660,000
    
    
    
    4,660,000
    
    
    
    4,660,000Junior Secured Term Loan B
(8.3%, Due 12/09) (6)
    
    
    6,944,625
    
    
    
    6,944,625
    
    
    
    6,944,625Senior Subordinated Debt
(15.0%, Due 5/10) (2) (6)
    
    
    4,946,718
    
    
    
    4,946,718
    
    
    
    4,946,718Common Stock Warrants, Less than
5% of Co.(4)
    
    
    
    
    
    
    350,000
    
    
    
    103,400Fairchild Industrial
Products, Co.
    
    Manufacturer of industrial controls
and power transmission products
    
    Senior Secured Term Loan A
(8.0%, Due 7/10) (6)
    
    
    9,670,000
    
    
    
    9,670,000
    
    
    
    9,670,000Senior Secured Term Loan B
(10.0%, Due 7/11) (6)
    
    
    2,818,750
    
    
    
    2,818,750
    
    
    
    2,818,750Senior Subordinated Debt
(15.5%, Due 7/11)
    
    
    5,355,000
    
    
    
    5,355,000
    
    
    
    5,355,000
 9




---



##### 



Company(1)
    
    Industry
    
    Investment
    
    Principal
    
    Cost
    
    Fair Value(3)Interstate Highway Sign 
     Corporation
    
    Manufacturer of highway and
roadway signs
    
    Senior Secured Term Loan
(10.5%, Due 12/09) (6)
    
    
    1,360,000
    
    
    
    1,360,000
    
    
    
    1,360,000Senior Subordinated Debt
(18.0%, Due 12/09) (2) (6)
    
    
    5,837,409
    
    
    
    5,758,946
    
    
    
    2,000,000Common Stock
Warrants, Less than
5% of Co.(4)
    
    
    
    
    
    
    59,932
    
    
    
    Keltner Enterprises, LLC (5)
    
    Distributor of automotive
oils, chemicals and parts
    
    Senior Subordinated Debt
(14.0%, Due 12/11) (6)
    
    
    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) (6)
    
    
    6,776,424
    
    
    
    6,776,424
    
    
    
    6,776,424Common Stock  Warrants, Less
than
5% of Co.(4)
    
    
    
    
    
    
    5,000
    
    
    
    Prince Mineral Company,
Inc.
    
    Manufacturer of
pigments
    
    Junior Secured Term Loan
(11.0%, Due 3/11) (6)
    
    
    3,600,000
    
    
    
    3,600,000
    
    
    
    3,600,000Senior Subordinated Debt
(17.0%, Due 9/11) (2) (6)
    
    
    10,228,579
    
    
    
    10,228,579
    
    
    
    10,228,579Quartermaster, Inc.
    
    Retailer of uniforms and
tactical equipment
to law enforcement and security
professionals
    
    Revolving Line of Credit
(9.5%, Due 12/10) (6)
    
    
    250,000
    
    
    
    250,000
    
    
    
    250,000Senior Secured Term Loan A
(9.2%, Due 12/10) (6)
    
    
    6,000,000
    
    
    
    6,000,000
    
    
    
    6,000,000Senior Secured Term Loan B
(10.4%, Due 12/10) (6)
    
    
    2,600,000
    
    
    
    2,600,000
    
    
    
    2,600,000Senior Secured Term Loan C
(15.0%, Due 12/11) (2) (6)
    
    
    3,104,133
    
    
    
    3,104,133
    
    
    
    3,104,133Robert Rothschild Farm, Inc.
    
    Manufacturer of
specialty food products
    
    Senior Secured Term Loan B
(8.5%, Due 7/11) (6)
    
    
    5,000,000
    
    
    
    5,000,000
    
    
    
    5,000,000Senior Subordinated Debt
(16.3%, Due 1/12) (2) (6)
    
    
    4,697,171
    
    
    
    4,697,171
    
    
    
    4,697,171R-O-M Corporation
    
    Manufacturer of doors, ramps and
bulkheads for fire trucks and
food transportation
    
    Senior Secured Term Loan A
(8.8%, Due 12/09) (6)
    
    
    3,400,000
    
    
    
    3,400,000
    
    
    
    3,400,000Senior Secured Term Loan B
(9.8%, Due 12/10) (6)
    
    
    3,400,000
    
    
    
    3,400,000
    
    
    
    3,400,000Senior Subordinated Debt
(16.0%, Due 12/10) (2) (6)
    
    
    7,012,319
    
    
    
    7,012,319
    
    
    
    7,012,319Total Investments
    
    
    
    
    
    
    
    
    
    
    145,232,150
    
    
    
    141,390,954Unearned Income
    
    
    
    
    
    
    
    
    
    
    (3,439,295
    )
    
    
    (3,439,295
    )Total Investments Net of
Unearned Income
    
    
    
    
    
    
    
    
    
    $
    141,792,855
    
    
    $
    137,951,659
 
 (1)
    
    The Company does not control, and is not an affiliate of, any of its portfolio
companies, each as defined in the Investment Company Act of 1940, as amended (the 1940 Act). In
general, under the 1940 Act, the Company would control a portfolio company if the Company owned
25% or more of its voting securities and would be an affiliate of a portfolio company if the
Company owned 5% or more of its voting securities.(2)
    
    Principal amount includes payment-in-kind (PIK) interest.(3)
    
    Fair value is determined in good faith by the Companys board of directors.(4)
    
    Non-income producing.(5)
    
    Some of the investments listed are issued by an affiliate of the listed portfolio company.(6)
    
    Pledged as collateral under the Companys Securitization Facility. See Note 3 to Consolidated
Financial Statements.
  10




---



##### 



Patriot Capital Funding, Inc.
Notes to Consolidated Financial Statements
(unaudited)
  Description of Business
   Basis of Presentation
     Interest, Dividends, Fees, and Other Investment Income
  11




---



##### 



Dividends Paid
   As Reported
    
    Reclassification
    
    As ReclassifiedAccumulated net investment loss
    
    $
    (5,395,358
    )
    
    $
    3,483,297
    
    
    $
    (1,912,061
    )Distributions in excess of net investment income
    
    
    
    
    
    
    (3,483,297
    )
    
    
    (3,483,297
    )
   Reclassifications
    September 30, 2006
    
    
    December 31, 2005Cost
    
    
    Fair Value
    
    
    Cost
    
    
    Fair ValueCommercial loans
    
    $
    214,161,069
    
    
    $
    214,243,569
    
    
    $
    144,154,600
    
    
    $
    140,395,654Investments in equity securities
    
    
    3,372,850
    
    
    
    2,911,934
    
    
    
    1,077,550
    
    
    
    995,300Subtotal
    
    
    217,533,919
    
    
    
    217,155,503
    
    
    
    145,232,150
    
    
    
    141,390,954Unearned income
    
    
    (3,278,752
    )
    
    
    (3,278,752
    )
    
    
    (3,439,295
    )
    
    
    (3,439,295
    )Total
    
    $
    214,255,167
    
    
    $
    213,876,751
    
    
    $
    141,792,855
    
    
    $
    137,951,659
   12




---



##### 



September 30, 2006
    
    
    December 31, 2005Cost
    
    
    % (1)
    
    
    Fair Value
    
    
    % (1)
    
    
    Cost
    
    
    % (1)
    
    
    Fair Value
    
    
    % (1)Senior Secured Debt
    
    $
    122,076,962
    
    
    
    56.1
    %
    
    $
    122,076,962
    
    
    
    56.2
    %
    
    $
    63,052,077
    
    
    
    43.4
    %
    
    $
    63,052,077
    
    
    
    44.6
    %Junior Secured Debt
    
    
    37,337,618
    
    
    
    17.2
    
    
    
    37,420,118
    
    
    
    17.2
    
    
    
    21,704,625
    
    
    
    15.0
    
    
    
    21,704,625
    
    
    
    15.3Subordinated Debt
    
    
    54,746,489
    
    
    
    25.2
    
    
    
    54,746,489
    
    
    
    25.2
    
    
    
    59,397,898
    
    
    
    40.9
    
    
    
    55,638,952
    
    
    
    39.4Warrants / Equity
    
    
    3,372,850
    
    
    
    1.5
    
    
    
    2,911,934
    
    
    
    1.4
    
    
    
    1,077,550
    
    
    
    0.7
    
    
    
    995,300
    
    
    
    0.7Total
    
    $
    217,533,919
    
    
    
    100.0
    %
    
    $
    217,155,503
    
    
    
    100.0
    %
    
    $
    145,232,150
    
    
    
    100.0
    %
    
    $
    141,390,954
    
    
    
    100.0
    %
 
 (1)
    
    Represents percentage of total portfolio.  September 30, 2006
    
    
    December 31, 2005Cost
    
    
    % (1)
    
    
    Fair Value
    
    
    % (1)
    
    
    Cost
    
    
    % (1)
    
    
    Fair Value
    
    
    % (1)Manufacturing
    
    $
    98,998,870
    
    
    
    45.5
    %
    
    $
    99,113,722
    
    
    
    45.6
    %
    
    $
    74,921,696
    
    
    
    51.6
    %
    
    $
    71,172,168
    
    
    
    50.3
    %Distribution
    
    
    47,850,899
    
    
    
    22.0
    
    
    
    47,678,899
    
    
    
    22.0
    
    
    
    3,850,000
    
    
    
    2.6
    
    
    
    3,850,000
    
    
    
    2.7Service
    
    
    30,072,783
    
    
    
    13.8
    
    
    
    29,788,583
    
    
    
    13.7
    
    
    
    16,901,343
    
    
    
    11.6
    
    
    
    16,654,743
    
    
    
    11.8Consumer / Retail Goods
    
    
    36,987,094
    
    
    
    17.0
    
    
    
    37,001,694
    
    
    
    17.0
    
    
    
    31,580,928
    
    
    
    21.8
    
    
    
    31,606,328
    
    
    
    22.4Publishing
    
    
    3,161,105
    
    
    
    1.5
    
    
    
    3,181,305
    
    
    
    1.5
    
    
    
    3,515,015
    
    
    
    2.4
    
    
    
    3,533,915
    
    
    
    2.5Defense
    
    
    463,168
    
    
    
    0.2
    
    
    
    391,300
    
    
    
    0.2
    
    
    
    14,463,168
    
    
    
    10.0
    
    
    
    14,573,800
    
    
    
    10.3Total
    
    $
    217,533,919
    
    
    
    100.0
    %
    
    $
    217,155,503
    
    
    
    100.0
    %
    
    $
    145,232,150
    
    
    
    100.0
    %
    
    $
    141,390,954
    
    
    
    100.0
    %
 
 (1)
    
    Represents percentage of total portfolio.    13




---



##### 



Accounting for Stock Issued to
Employees.
   14




---



##### 



For the Three Months Ended
    
    

    For the Nine Months EndedSeptember 30, 2005
    
    
    September 30, 2005Net loss, as reported
    
 
    $
    (5,647,515
    )
    
 
    $
    (4,218,504
    )Deduct: Total stock-based compensation
expense determined under fair
value based method for all awards
    
 
    
    65,075
    
    
 
    
    65,075Pro forma net loss
    
 
    $
    (5,712,590
    )
    
 
    $
    (4,283,579
    )Loss per share, as reported  basic and diluted
    
 
    $
    (0.62
    )
    
 
    $
    (0.75
    )Loss per share, pro forma  basic and diluted
    
 
    $
    (0.63
    )
    
 
    $
    (0.76
    )
    Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Basic:Net income (loss)
    
    $
    3,527,175
    
    
    $
    (5,647,515
    )
    
    $
    11,066,186
    
    
    $
    (4,218,504
    )Weighted average common shares outstanding
    
    
    15,781,525
    
    
    
    9,088,353
    
    
    
    13,582,320
    
    
    
    5,613,915Earnings (loss) per common share, basic
    
    $
    0.22
    
    
    $
    (0.62
    )
    
    $
    0.81
    
    
    $
    (0.75
    )Diluted:Net income (loss)
    
    $
    3,527,175
    
    
    $
    (5,647,515
    )
    
    $
    11,066,186
    
    
    $
    (4,218,504
    )Weighted average common shares outstanding
    
    
    15,781,525
    
    
    
    9,088,353
    
    
    
    13,582,320
    
    
    
    5,613,915Dilutive effect of stock options
    
    
    54,891
    
    
    
    
    
    
    
    54,891
    
    
    
    Weighted average common shares and common stock equivalents
    
    
    15,836,416
    
    
    
    9,088,353
    
    
    
    13,637,211
    
    
    
    5,613,915Earnings (loss) per common share, diluted
    
    $
    0.22
    
    
    $
    (0.62
    )
    
    $
    0.81
    
    
    $
    (0.75
    )
   15




---



##### 



16




---



##### 



January 1, 2006
    
    
    August 1, 2005to
    
    
    toSeptember 30, 2006
    
    
    July 31, 2006GAAP Net Investment Income
    
    $
    10,901,000
    
    
    $
    8,969,000Tax timing differences of:Origination fees, net
    
    
    336,000
    
    
    
    481,000Stock compensation expense, bonus accruals, original
issue discount and other
    
    
    804,000
    
    
    
    322,000Tax Distributable Income
    
    $
    12,041,000
    
    
    $
    9,772,000
   January 1, 2006
    
    
    August 1, 2005to
    
    
    toSeptember 30, 2006
    
    
    July 31, 2006Distributions paid from :Ordinary income
    
    $
    5,617,000
    
    
    $
    9,772,000Long-term capital gains
    
    
    
    
    
    
    Subtotal
    
    
    5,617,000
    
    
    
    9,772,000Tax return of capital
    
    
    1,429,000
    
    
    
    2,485,000Total distributions
    
    $
    7,046,000
    
    
    $
    12,257,000
   17




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##### 



September 30, 2006Distributable ordinary income
    
    $
    3,155,000Other book/tax temporary differences
    
    
    (3,949,000
    )Unrealized appreciation
    
    
    (405,000
    )Accumulated capital and other losses
    
    
    (3,271,000
    )
      For the Nine Months EndedSeptember 30,2006
    
    
    2005Per Share Data:Net asset value at beginning of period
    
    $
    10.48
    
    
    $
    7.10Net investment income (loss)
    
    
    .69
    
    
    
    (.20
    )Net loss on investments
    
    
    (.21
    )
    
    
    Net change in unrealized appreciation
on investments
    
    
    .22
    
    
    
    (.55
    )Issuance of common stock
    
    
    10.34
    
    
    
    12.83Distributions from net investment income
    
    
    (.69
    )
    
    
    (.16
    )Distributions in excess of net investment income
    
    
    (.07
    )
    
    
    Stock based compensation expense
    
    
    .02
    
    
    
    Dilutive effect of share issuance
    
    
    (10.40
    )
    
    
    (8.52
    )Net asset value at end of period
    
    $
    10.38
    
    
    $
    10.50Total Net Asset Value Return (1)
    
    
    13.9
    %
    
    
    (8.3
    )%Per share market value, December 31
    
    $
    12.20
    
    
    $
    14.00
    (3)Per share market value, September 30
    
    $
    13.32
    
    
    $
    13.74Total Market Value Return (2)
    
    
    15.4
    %
    
    
    (0.7
    )%Shares outstanding at end of period
    
    
    15,786,769
    
    
    
    12,116,951Ratios and Supplemental Data:Net assets at end of period
    
    $
    163,855,000
    
    
    $
    127,222,000Average net assets
    
    
    145,025,000
    
    
    
    50,913,000Ratio of operating expenses to average
net assets (annualized)
    
    
    7.4
    %
    
    
    26.3
    %Ratio of net investment income (loss) to
average net assets (annualized)
    
    
    10.0
    %
    
    
    (3.0
    )%Average borrowings outstanding
    
    $
    48,114,000
    
    
    $
    39,470,000Average amount of borrowings per
share
    
    $
    3.05
    
    
    $
    3.26
 
 (1)
    
    The total net asset value return (not annualized) reflects the change in net asset
value of a share of stock, plus dividends. On July 27, 2005, Patriot and Wilton merged,
and then the merged entity effected a stock split. As a result, the Companys financial
statements reflect 3,847,902 shares issued and outstanding for the periods prior to the
merger. On August 2, 2005, 18




---



##### 



the Company closed its initial public offering of 7,190,477
shares of common stock and on August 15, 2005, the underwriters exercised their option to
purchase an additional 1,078,572 shares of common stock.(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.(3)
    
    Share price as of August 2, 2005, the date the Company closed its initial public
offering.      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
    20




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##### 



Portfolio Composition
   September 30, 2006
    
    
    December 31, 2005Beginning portfolio at fair value
    
    $
    141,390,954
    
    
    $
    67,677,751Originations/draws/purchases
    
    
    106,226,598
    
    
    
    88,850,000Investments in equity securities
    
    
    2,324,997
    
    
    
    575,490Investment repayments
    
    
    (30,918,221
    )
    
    
    (14,572,867
    )Increase in payment-in-kind interest / dividends
    
    
    1,767,272
    
    
    
    1,825,755Sale of investments
    
    
    (7,098,878
    )
    
    
    Increase (decrease) in fair value of investments
    
    
    3,462,781
    
    
    
    (2,965,175
    )Ending portfolio at fair value
    
    $
    217,155,503
    
    
    $
    141,390,954
  September 30, 2006
    
    
    December 31, 2005Investments at
    
    
    Percentage of
    
    
    Investments at
    
    
    Percentage ofFair Value
    
    
    Total Portfolio
    
    
    Fair Value
    
    
    Total PortfolioSenior secured revolving lines of credit
    
    $
    6,180,219
    
    
    
    2.8
    %
    
    $
    250,000
    
    
    
    0.2
    %Senior secured term loans
    
    
    115,896,743
    
    
    
    53.4
    
    
    
    62,802,077
    
    
    
    44.4Junior secured term loans
    
    
    37,420,118
    
    
    
    17.2
    
    
    
    21,704,625
    
    
    
    15.3Senior subordinated debt
    
    
    54,746,489
    
    
    
    25.2
    
    
    
    55,638,952
    
    
    
    39.4Investments in equity securities
    
    
    2,911,934
    
    
    
    1.4
    
    
    
    995,300
    
    
    
    0.7Totals
    
    $
    217,155,503
    
    
    
    100.0
    %
    
    $
    141,390,954
    
    
    
    100.0
    %
  21




---



##### 



September 30, 2006
    
    
    December 31, 2005Cost
    
    
    % (1)
    
    
    Fair Value
    
    
    % (1)
    
    
    Cost
    
    
    % (1)
    
    
    Fair Value
    
    
    % (1)Manufacturing
    
    $
    98,998,870
    
    
    
    45.5
    %
    
    $
    99,113,722
    
    
    
    45.6
    %
    
    $
    74,921,696
    
    
    
    51.6
    %
    
    $
    71,172,168
    
    
    
    50.3
    %Distribution
    
    
    47,850,899
    
    
    
    22.0
    
    
    
    47,678,899
    
    
    
    22.0
    
    
    
    3,850,000
    
    
    
    2.6
    
    
    
    3,850,000
    
    
    
    2.7Service
    
    
    30,072,783
    
    
    
    13.8
    
    
    
    29,788,583
    
    
    
    13.7
    
    
    
    16,901,343
    
    
    
    11.6
    
    
    
    16,654,743
    
    
    
    11.8Consumer / Retail Goods
    
    
    36,987,094
    
    
    
    17.0
    
    
    
    37,001,694
    
    
    
    17.0
    
    
    
    31,580,928
    
    
    
    21.8
    
    
    
    31,606,328
    
    
    
    22.4Publishing
    
    
    3,161,105
    
    
    
    1.5
    
    
    
    3,181,305
    
    
    
    1.5
    
    
    
    3,515,015
    
    
    
    2.4
    
    
    
    3,533,915
    
    
    
    2.5Defense
    
    
    463,168
    
    
    
    0.2
    
    
    
    391,300
    
    
    
    0.2
    
    
    
    14,463,168
    
    
    
    10.0
    
    
    
    14,573,800
    
    
    
    10.3Total
    
    $
    217,533,919
    
    
    
    100.0
    %
    
    $
    217,155,503
    
    
    
    100.0
    %
    
    $
    145,232,150
    
    
    
    100.0
    %
    
    $
    141,390,954
    
    
    
    100.0
    %
 
 (1)
    
    Represents percentage of total portfolio.  Asset
Quality  Debt Portfolio
   September 30, 2006
    
    
    December 31, 2005Investments at
    
    
    Percentage of
    
    
    Investments at
    
    
    Percentage ofInvestment Rating
    
    Fair Value
    
    
    Total Portfolio
    
    
    Fair Value
    
    
    Total Portfolio1
    
    $
    18,166,562
    
    
    
    8.5
    %
    
    $
    16,069,312
    
    
    
    11.5
    %2
    
    
    159,981,357
    
    
    
    74.7
    
    
    
    102,189,918
    
    
    
    72.83
    
    
    36,095,650
    
    
    
    16.8
    
    
    
    20,136,424
    
    
    
    14.34
    
    
    
    
    
    
    
    
    
    
    2,000,000
    
    
    
    1.45
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Totals
    
    $
    214,243,569
    
    
    
    100.0
    %
    
    $
    140,395,654
    
    
    
    100.0
    %
 22




---



##### 



Loans and Debt Securities on Non-Accrual Status
  Results of Operations
  Comparison for the three months ended September 30, 2006 and 2005
 Total Investment Income
    Expenses
    23




---



##### 



Realized Gain (Loss) on Sale of Investments
  Net Change in Unrealized Appreciation or Depreciation on Investments
     Unrealized Loss on Interest Rate Swap
  Net Income
  Comparison for the nine months ended September 30, 2006 and 2005
 Total Investment Income
  24




---



##### 



Expenses
    Realized Gain (Loss) on Sale of Investments
  Net Change in Unrealized Appreciation or Depreciation on Investments
  25




---



##### 



Unrealized Loss on Interest Rate Swap
  Net Income
  Financial Condition, Liquidity and Capital Resources
 Cash, Cash Equivalents and Restricted Cash
   Liquidity and Capital Resources
    26




---



##### 



Borrowings
 Credit Agreement.
 Revolving Credit Agreement.
 Demand Note.
 Securitization Revolving Credit Facility.
  Regulated Investment Company Status and Dividends
  27




---



##### 



Critical Accounting Policies
  Valuation of Portfolio Investments
      28




---



##### 



Fee Income Recognition
  Payment-in-Kind or PIK Interest and Dividends
   Nine Months EndedSeptember 30, 2006Beginning PIK balance
    
    $
    2,174,974PIK interest and dividends earned during the period
    
    
    1,767,272Sale of investment
    
    
    (383,945
    )PIK receipts during the period
    
    
    (357,863
    )Ending PIK balance
    
    $
    3,200,438
 Interest and Dividend Income Recognition
  29




---



##### 



Off-Balance Sheet Arrangements
   Contractual Obligations
  Related Party Transactions
       30




---



##### 



Recent Developments
     31




---



##### 



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 to allow 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, 2006 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
 32




---



##### 



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 Document31.1*
    
    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. 33




---



##### 



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, ChiefFinancial Officer and Secretary
 34