UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549
                                   ----------

                                   FORM 10-Q


(Mark One)
[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934.

For the quarterly period ended June 30, 2006

                                       OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934.

For the transition period from ____________________ to _______________________

                        Commission file number 000-51327

                      BlackRock Kelso Capital Corporation
                      -----------------------------------
             (Exact Name of Registrant as Specified in Its Charter)

Delaware                                                     20-2725151
-------------------------------------------------------------------------------
(State or Other Jurisdiction of                          (I.R.S. Employer
Incorporation or Organization)                           Identification No.)

40 East 52nd Street, New York, New York                         10022
-------------------------------------------------------------------------------
(Address of Principal Executive Offices)                      (Zip Code)

Registrant's Telephone Number, Including Area Code   212-810-5800
                                                    -------------

-------------------------------------------------------------------------------
              Former Name, Former Address and Former Fiscal Year,
                         if Changed Since last Report.

     Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|

     Indicate by check mark whether the Registrant is a large accelerated
filer, an accelerated filer or a non-accelerated filer as defined in Rule 12b-2
of the Exchange Act. Large accelerated filer |_| Accelerated filer |_|
Non-Accelerated filer |X|

     Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes |_| No |X|

     The number of shares of the Registrant's common stock, $.001 par value per
share, outstanding at August 10, 2006, was 36,893,977.

<PAGE>

                      BLACKROCK KELSO CAPITAL CORPORATION

                 FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2006

                               Table of Contents

                     INDEX                                             PAGE NO.
                     -----                                             --------

PART I.              FINANCIAL INFORMATION

        Item 1.      Financial Statements
                     Statements of Assets and Liabilities as of
                     June 30, 2006  (unaudited) and December 31, 2005       4

                     Statements of Operations (unaudited) for the
                     three and six months ended June 30, 2006               5

                     Statement of Changes in Net Assets (unaudited)         6
                     for the six months ended June 30, 2006

                     Statement of Cash Flows (unaudited) for
                     the six months ended June 30, 2006                     7

                     Schedules of Investments as of June 30, 2006
                     (unaudited) and December 31, 2005                      8

                     Notes to Financial Statements (unaudited)             15

        Item 2.      Management's Discussion and Analysis of Financial
                     Condition and Results of Operations                   21

        Item 3.      Quantitative and Qualitative Disclosures about
                     Market Risk                                           25

        Item 4.      Controls and Procedures                               25

PART II.             OTHER INFORMATION

        Item 1.      Legal Proceedings                                     26
        Item 1A.     Risk Factors                                          26
        Item 2.      Unregistered Sales of Equity Securities and
                     Use of Proceeds                                       26
        Item 3.      Defaults Upon Senior Securities                       26
        Item 4.      Submission of Matters to a Vote of Security Holders   26
        Item 5.      Other Information                                     26
        Item 6.      Exhibits                                              27

SIGNATURES                                                                 28

                                       2
<PAGE>


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained herein constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 with
respect to future financial or business performance, strategies or
expectations. Forward-looking statements are typically identified by words or
phrases such as "trend," "opportunity," "pipeline," "believe," "comfortable,"
"expect," "anticipate," "current," "intention," "estimate," "position,"
"assume," "potential," "outlook," "continue," "remain," "maintain," "sustain,"
"seek," "achieve" and similar expressions, or future or conditional verbs such
as "will," "would," "should," "could," "may" or similar expressions. BlackRock
Kelso Capital Corporation (the "Company") cautions that forward-looking
statements are subject to numerous assumptions, risks and uncertainties, which
change over time. Forward-looking statements speak only as of the date they are
made, and the Company assumes no duty to and does not undertake to update
forward-looking statements. Actual results could differ materially from those
anticipated in forward-looking statements and future results could differ
materially from historical performance.

In addition to factors previously disclosed in the Company's Securities and
Exchange Commission (the "SEC") reports and those identified elsewhere in this
report, the following factors, among others, could cause actual results to
differ materially from forward-looking statements or historical performance:

     (1)  the introduction, withdrawal, success and timing of business
          initiatives and strategies;
     (2)  changes in political, economic or industry conditions, the interest
          rate environment or financial and capital markets, which could result
          in changes in the value of the Company's assets;
     (3)  the relative and absolute investment performance and operations of
          the Company's investment adviser, BlackRock Kelso Capital Advisors
          LLC (the "Investment Advisor");
     (4)  the impact of increased competition;
     (5)  the impact of future acquisitions and divestitures;
     (6)  the unfavorable resolution of legal proceedings;
     (7)  the extent and timing of any share repurchases;
     (8)  the impact, extent and timing of technological changes and the
          adequacy of intellectual property protection;
     (9)  the impact of legislative and regulatory actions and reforms and
          regulatory, supervisory or enforcement actions of government agencies
          relating to the Company or the Investment Advisor;
     (10) terrorist activities, which may adversely affect the general economy,
          real estate, financial and capital markets, specific industries, and
          the Company and the Investment Advisor;
     (11) the ability of the Investment Advisor to attract and retain highly
          talented professionals;
     (12) fluctuations in foreign currency exchange rates; and
     (13) the impact of changes to tax legislation and, generally, the tax
          position of the Company.

Forward-looking statements speak only as of the date they are made. The Company
does not undertake, and specifically disclaims any obligation, to publicly
release the result of any revisions which may be made to any forward-looking
statements to reflect the occurrence of anticipated or unanticipated events or
circumstances after the date of such statements.



                                       3

<PAGE>


PART I.  FINANCIAL INFORMATION

In this Quarterly Report, "Company", "we", "us" and "our" refer to BlackRock
Kelso Capital Corporation unless the context states otherwise.

Item 1.  Financial Statements.

<TABLE>
<CAPTION>

                                           BLACKROCK KELSO CAPITAL CORPORATION
                                          STATEMENTS OF ASSETS AND LIABILITIES

                                                                           JUNE 30, 2006
                                                                            (UNAUDITED)              DECEMBER 31, 2005
                                                                          --------------------   ------------------------

<S>                                                                        <C>                         <C>
ASSETS:
Cash and cash equivalents (amortized cost of $123,522,867 and
  $288,984,387)                                                            $      123,522,867          $     288,972,347
Investments, at fair value (amortized cost of $451,148,550 and
  $250,184,074)                                                                   453,205,721                250,436,350
Receivable for investments sold                                                             -                    996,250
Interest receivable                                                                 3,710,392                  1,656,131
Dividends receivable                                                                   32,378                          -
Other assets                                                                          143,583                    165,363
                                                                          --------------------       -------------------
Total Assets                                                               $      580,614,941          $     542,226,441
                                                                          ====================       ====================

LIABILITIES:

Payable to custodian                                                       $       17,348,239          $               -
Payable for investments purchased                                                   6,247,500                  4,198,296
Dividend distribution payable                                                          19,832                  7,073,318
Legal fees (offering costs) payable                                                   584,453                    587,080
Management fees payable                                                               453,573                    455,329
Accrued administrative services expenses                                              967,726                    508,950
Other accrued expenses and payables                                                   612,673                    698,619
                                                                          --------------------       --------------------
Total Liabilities                                                                  26,233,996                 13,521,592
                                                                          --------------------       --------------------

NET ASSETS:
Common stock, par value $.001 per share, 40,000,000 common shares
authorized, 36,893,977 and 35,366,589 issued and outstanding                           36,894                     35,367
Paid-in capital in excess of par                                                  552,207,075                529,298,432
Undistributed (distributions in excess of) net investment income                      281,509                   (870,327)
Accumulated net realized (loss) gain                                                 (201,704)                     1,141
Net unrealized appreciation                                                         2,057,171                    240,236
                                                                          --------------------       --------------------
Total Net Assets                                                                  554,380,945                528,704,849
                                                                          --------------------       --------------------
Total Liabilities and Net Assets                                           $      580,614,941          $     542,226,441
                                                                          ====================       ====================

Net Asset Value Per Share                                                  $            15.03          $           14.95
                                                                          ====================       ====================






                       The accompanying notes are an integral part of these financial statements.

</TABLE>

                                       4
<PAGE>

<TABLE>

                                           BLACKROCK KELSO CAPITAL CORPORATION
                                          STATEMENTS OF OPERATIONS (UNAUDITED)

<CAPTION>

                                                            FOR THE THREE MONTHS       FOR THE SIX MONTHS
                                                                   ENDED                      ENDED
                                                               JUNE 30, 2006              JUNE 30, 2006
                                                            --------------------      -------------------
   INVESTMENT INCOME:
<S>                                                            <C>                     <C>
   Interest income                                             $     11,963,082        $    20,442,574
   Dividend income                                                      161,419                313,337
   Other income                                                          20,134                122,134
                                                            --------------------     ------------------
   Total investment income                                           12,144,635             20,878,045
                                                            --------------------     ------------------

   EXPENSES:
   Management fees                                                    2,734,456              5,399,334
   Administrative services                                              291,762                580,107
   Professional fees                                                    106,082                319,999
   Investment Advisor expenses                                          203,179                281,136
   Director fees                                                         86,873                157,061
   Insurance                                                             46,566                 83,105
   Other                                                                 45,651                 79,687
                                                            --------------------     ------------------
            Expenses before management fee waiver                     3,514,569              6,900,429
   Management fee waiver                                             (1,367,361)            (2,699,800)
                                                            --------------------     ------------------
            Net expenses                                              2,147,208              4,200,629
                                                            --------------------     ------------------

   NET INVESTMENT INCOME                                              9,997,427             16,677,416
                                                            --------------------     ------------------

   REALIZED AND UNREALIZED GAIN (LOSS):
   Net realized gain (loss) on investments                              202,321              (202,845)
                                                            --------------------     ------------------
   Net change in unrealized appreciation (depreciation):
            Investments                                                 970,702              1,804,895
            Cash equivalents                                                  -                 12,040
                                                            --------------------     ------------------
   Net change in unrealized appreciation                                970,702              1,816,935
                                                            --------------------     ------------------
            Net realized and unrealized gain                          1,173,023              1,614,090
                                                            --------------------     ------------------

   NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS        $     11,170,450        $    18,291,506
                                                            ====================     ==================

   Earnings Per Share                                          $           0.31        $          0.51
                                                            ====================     ==================

   Basic and Diluted Weighted-Average Shares Outstanding             36,345,171             36,017,156











                       The accompanying notes are an integral part of these financial statements.

</TABLE>

                                                           5
<PAGE>


<TABLE>

                                           BLACKROCK KELSO CAPITAL CORPORATION
                                     STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
                                         FOR THE SIX MONTHS ENDED JUNE 30, 2006
<CAPTION>


         NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS:

<S>                                                                                      <C>
         Net investment income                                                           $     16,677,416
         Net change in unrealized appreciation                                                  1,816,935
         Net realized loss on investments                                                        (202,845)
                                                                                       -------------------
                  Net increase in net assets resulting from operations                         18,291,506
                                                                                       -------------------

         DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT
           INCOME                                                                             (15,525,485)
                                                                                       -------------------

         CAPITAL SHARE TRANSACTIONS:
         Proceeds from shares sold                                                                810,000
         Reinvestment of dividends                                                             22,100,075
                                                                                       -------------------
                  Net increase in net assets resulting from capital share
                  transactions                                                                 22,910,075
                                                                                       -------------------
         TOTAL INCREASE IN NET ASSETS                                                          25,676,096
         Net assets at beginning of period                                                    528,704,849
                                                                                       -------------------

         Net assets at end of period                                                     $    554,380,945
                                                                                       ===================

         CAPITAL SHARE ACTIVITY:
         Shares issued from subscriptions                                                          54,000
         Shares issued from reinvestment of dividends                                           1,473,388
                                                                                       -------------------
                  Total increase in shares                                               $      1,527,388
                                                                                       ===================
         ACCUMULATED DISTRIBUTIONS:

         Undistributed net investment income                                             $        281,509
                                                                                       ===================












                       The accompanying notes are an integral part of these financial statements.

</TABLE>


                                                           6
<PAGE>

<TABLE>

                                           BLACKROCK KELSO CAPITAL CORPORATION
                                           STATEMENT OF CASH FLOWS (UNAUDITED)
                                         FOR THE SIX MONTHS ENDED JUNE 30, 2006
<CAPTION>

         OPERATING ACTIVITIES:

<S>                                                                                          <C>
         Net increase in net assets resulting from operations                                $      18,291,506
         Adjustments to reconcile net increase in net assets resulting from
         operations
         to net cash used in operating activities:
         Proceeds from dispositions of short-term investments - net                                 24,990,928
         Purchases of long-term investments                                                       (260,908,244)
         Proceeds from principal repayments/dispositions of long-term investments                   35,363,676
         Net change in unrealized appreciation on investments                                       (1,804,895)
         Net realized loss on investments                                                              202,845
         Amortization of premium/discount - net                                                       (615,961)
         Decrease in receivable for investments sold                                                   996,250
         Increase in interest receivable                                                            (2,054,261)
         Increase in dividends receivable                                                              (32,378)
         Decrease in other assets                                                                       21,780
         Increase in payable for investments purchased                                               2,049,204
         Decrease in legal fees (offering costs) payable                                                (2,627)
         Decrease in management fees payable                                                            (1,756)
         Increase in accrued administrative services expenses                                          458,776
         Decrease in other accrued expenses and payables                                               (85,946)
                                                                                       ------------------------
             Net cash used in operating activities                                                (183,131,103)
                                                                                       ------------------------

         FINANCING ACTIVITIES:
         Increase in payable to custodian                                                           17,348,239
         Proceeds from capital subscriptions                                                           810,000
         Dividends paid - net of reinvestment                                                         (476,616)
                                                                                       ------------------------
         Net cash provided by financing activities                                                  17,681,623
                                                                                       ------------------------

         Net decrease in cash and cash equivalents                                                (165,449,480)

         Cash and cash equivalents, beginning of period                                            288,972,347
                                                                                       ------------------------
         Cash and cash equivalents, end of period                                            $     123,522,867
                                                                                       ========================

         Supplemental disclosure of non-cash financing activities:
         Dividend distributions reinvested                                                   $      22,100,075
                                                                                       ========================













                       The accompanying notes are an integral part of these financial statements.

</TABLE>


                                                           7
<PAGE>
<TABLE>

                                             BLACKROCK KELSO CAPITAL CORPORATION
                                             SCHEDULES OF INVESTMENTS (UNAUDITED)
                                                        JUNE 30, 2006
<CAPTION>


                                                                                     Principal
                                                                                     Amount or
                                                                                     Number of                     Fair
Portfolio Company (a)                                           Industry            Shares/Units    Cost (b)       Value
---------------------                                           --------            ------------    --------       -----

<S>                                                           <C>                  <C>             <C>            <C>

SHORT-TERM INVESTMENTS - 14.8%
------------------------------
Asset-Backed Security - 2.7%
RACERS Trust, Series 2005-17-O, 5.21%
    (LIBOR + 0.02%/Q), 8/21/06, acquired 8/29/05 (c)     Asset-Backed Security    $  15,000,000   $ 15,000,000   $ 15,000,000
                                                                                  -------------------------------------------

Certificates of Deposit - 2.7%
DEFPA BANK plc, New York, 4.53%, 10/16/06                       Banking              15,000,000     15,000,000     14,948,577
                                                                                  -------------------------------------------

Commercial Paper - 8.3%
Morgan Stanley & Co. Incorporated, 5.39%, 8/4/06     Securities Broker and Dealer    26,000,000     26,000,000     26,000,000
Natexis Banques Populaires US Finance Co. LLC,
    4.56%, 7/31/06                                              Banking              20,000,000     19,924,083     19,924,083
                                                                                  -------------------------------------------
Total Commercial Paper                                                               46,000,000     45,924,083     45,924,083
                                                                                  -------------------------------------------

Master Notes - 1.1%
Citigroup Global Markets Inc., 4.63%, 8/25/06              Financial Services         6,000,000      6,000,000      6,000,000
                                                                                  -------------------------------------------
TOTAL SHORT-TERM INVESTMENTS                                                      $  82,000,000   $ 81,924,083   $ 81,872,660
                                                                                  ===============----------------------------

LONG-TERM INVESTMENTS - 66.9%
-----------------------------
Subordinated Debt / Corporate Notes - 1.6%
First Mercury Holdings, Inc., 13.17%
    (LIBOR + 8.00%/Q), 8/15/12, acquired 8/12/05 (c)           Insurance          $   1,800,000      1,784,239      1,854,000
U.S. Security Holdings, Inc., 13.00%, 5/8/14,
    acquired 5/10/06 (c)                                  Security Services           7,000,000      7,000,000      7,026,250
                                                                                  -------------------------------------------
Total Subordinated Debt / Corporate Notes                                         $   8,800,000      8,784,239      8,880,250
                                                                                  ===============----------------------------

Senior Secured Loans (d) - 64.0%
AGY Holding Corp., Second Lien, 12.50%
    (LIBOR + 7.00%), 4/7/13                              Glass Yarns/Fibers       $  10,000,000     10,000,000     10,150,000
ALM Media, Inc., Second Lien, 11.25%
    (LIBOR + 5.75%), 3/7/11                                    Publishing            39,750,000     39,752,286     39,978,563
Applied Tech Products Corp. et al., Tranche A,
    First Lien, 9.32% (LIBOR + 4.50%), 10/24/10          Plastic Packaging            4,251,515      4,222,979      4,222,979 (e)
Applied Tech Products Corp. et al., Tranche B,
    Second Lien, 13.82% (LIBOR + 9.00%), 4/24/11         Plastic Packaging            1,951,515      1,933,858      1,933,858 (e)
Applied Tech Products Corp. et al., Tranche C,
    Third Lien, 17.32% (LIBOR + 6.30% cash,
    6.20% PIK), 10/24/11                                 Plastic Packaging              715,236        625,010        625,010 (e)





                          The accompanying notes are an integral part of these financial statements.

</TABLE>

                                                           8
<PAGE>

<TABLE>

                                             BLACKROCK KELSO CAPITAL CORPORATION
                                       SCHEDULES OF INVESTMENTS (UNAUDITED) (continued)
                                                        JUNE 30, 2006
<CAPTION>

                                                                                     Principal
                                                                                     Amount or
                                                                                     Number of                     Fair
Portfolio Company (a)                                           Industry            Shares/Units    Cost (b)       Value
---------------------                                           --------            ------------    --------       -----

<S>                                                           <C>                  <C>             <C>            <C>
Bare Escentuals Beauty, Inc., Second Lien, 12.43%
    (LIBOR + 7.00%), 2/18/13                                     Cosmetics        $  4,000,000    $  4,000,000  $   4,040,000
Benchmark Medical Holdings Inc., First Lien, 8.34%
    (LIBOR + 3.00%), 12/27/12                              Rehabilitation Centers    1,990,000       1,990,000      1,990,000
Benchmark Medical Holdings, Inc., Second Lien,
    12.06% (LIBOR + 7.00%), 6/27/13                        Rehabilitation Centers    9,000,000       9,000,000      9,000,000
Bushnell Performance Optics, First Lien, 8.32%
    (LIBOR + 3.00%), 8/19/11                                  Leisure Products         995,122         995,122      1,000,512
Cambridge International, Inc., Second Lien, 12.31%
    (LIBOR + 6.50%), 11/11/13                               Metal Conveyor Belts    20,500,000      20,298,814     20,295,000
Cannondale Bicycle Corporation, Second Lien, 12.35%
    (LIBOR + 7.00%), 6/5/10                                   Bicycles/Apparel      10,000,000      10,000,000     10,000,000 (e)
Champion Energy Corporation et al., First Lien, 10.50%
    (LIBOR + 5.00%), 6/29/11                             Heating and Oil Services   15,000,000      15,000,000     15,000,000 (e)
Champion Energy Corporation et al., Second Lien,
    16.00% (12.00% cash, 4.00% PIK), 6/30/12             Heating and Oil Services   20,000,000      19,700,000     19,700,000 (e)
Clean Earth Inc., Tranche B, First Lien, 7.98%
    (LIBOR + 2.75%), 10/17/11                             Environmental Services     1,462,521       1,462,521      1,466,177
Data Transmission Network Corporation, Second Lien,
    13.30% (LIBOR + 8.00%), 9/10/13                       Information Services       4,000,000       4,000,000      4,000,000
Delta Air Lines, Inc., Term Loan B, First Lien, 10.02%
    (LIBOR + 4.75%), 3/16/08                                      Airlines           1,000,000       1,000,000      1,020,313
Deluxe Entertainment Services Group Inc., Second Lien,
    13.75% (LIBOR + 8.25%), 7/28/11                           Entertainment         16,000,000      16,000,000     16,480,000
DynaVox Systems LLC, Term Loan B, First Lien,                Augmentative
    9.00% (LIBOR + 3.50%), 6/30/11                       Communication Products      3,500,000       3,474,006      3,500,000
DynaVox Systems LLC, Term Loan C, First Lien,                Augmentative
    10.50% (LIBOR + 5.00%), 12/13/11                     Communication Products      1,750,000       1,736,993      1,750,000
Eight O'Clock Coffee Company, First Lien, 8.13%
    (LIBOR + 3.00%), 11/14/11                             Coffee Distributor         2,705,357       2,705,357      2,705,357
Eight O'Clock Coffee Company, Second Lien, 12.13%
    (LIBOR + 7.00%), 11/14/12                             Coffee Distributor        12,000,000      12,000,000     12,180,000
Electrical Components International Holdings Company,
    Second Lien, 11.78% (LIBOR + 6.50%), 5/1/14               Electronics           20,000,000      20,000,000     20,050,000
Event Rentals, Inc., First Lien, 10.80% (LIBOR +
    5.25%), 11/17/11                                         Party Rentals          14,228,693      14,228,693     14,228,693 (e)
Event Rentals, Inc., Acquisition Loan,
    First Lien, 10.74% (LIBOR + 5.25%), 11/17/11             Party Rentals          17,225,000      17,225,000     17,225,000 (e)
Haggar Clothing Co., Second Lien, 12.28%
    (LIBOR + 7.00%), 11/1/11                                    Apparel              2,500,000       2,477,761      2,500,000
Heartland Automotive Services II Inc. et al.,
    Term Loan A, First Lien, 8.96% (LIBOR + 3.75%),
    2/27/12                                               Automobile Repair          6,864,375       6,857,437      6,898,697


                          The accompanying notes are an integral part of these financial statements.
</TABLE>

                                                           9
<PAGE>

<TABLE>

                                             BLACKROCK KELSO CAPITAL CORPORATION
                                       SCHEDULES OF INVESTMENTS (UNAUDITED) (continued)
                                                        JUNE 30, 2006
<CAPTION>

                                                                                    Principal
                                                                                    Amount or
                                                                                    Number of                     Fair
Portfolio Company (a)                                           Industry           Shares/Units    Cost (b)       Value
---------------------                                           --------           ------------    --------       -----

<S>                                                        <C>                    <C>             <C>            <C>

Heartland Automotive Services II Inc. et al.,
    Acquisition Loan (Funded), First Lien, 9.11%,
    (LIBOR + 4.00%), 2/27/12                                Automobile Repair    $   1,740,000   $  1,740,000   $   1,740,000
Heartland Automotive Services II Inc. et al.,
    Acquisition Loan (Unfunded), First Lien, 0.75%,
    2/27/08                                                 Automobile Repair        1,260,000      1,260,000   $   1,260,000
HIT Entertainment, Inc., Second Lien, 10.58%
    (LIBOR + 5.50%), 2/26/13                                 Entertainment           1,000,000      1,000,000       1,005,000
Houghton International Inc., First Lien, 8.40%
    (LIBOR + 3.00%), 12/15/11                              Specialty Chemicals       4,919,444      4,919,444       4,950,191
International Radiology Group, L.L.C. et al., First
Lien,                                                     Healthcare Management
    10.00% (Base Rate + 1.75%), 6/30/11                         Services             5,000,000      4,950,039       5,000,000
International Radiology Group, L.L.C. et al., Second      Healthcare Management
    Lien, 13.75% (Base Rate + 5.50%), 6/30/12                   Services            10,000,000      9,900,046      10,000,000
MacAndrews Deluxe Holdings LLC, First
Lien,                  13.00%, 7/28/11                        Entertainment         14,000,000     14,000,000      14,105,000
Precision Parts International Services Corp. et al.,
    First Lien, 8.81% (LIBOR + 3.75%), 9/30/11              Automotive Parts         2,985,000      2,985,000       2,977,538
Prism Business Media Holdings, Inc., Second Lien,
    11.13% (LIBOR + 6.00%), 9/30/13                       Information Services      11,000,000     10,990,669      10,835,000
Professional Paint, Inc., Second Lien, 11.38%
    (LIBOR + 5.75%), 5/31/13                               Paint and Coatings       16,000,000     16,000,000      16,160,000
QTC Acquisition Inc., Second Lien, 11.85%
    (LIBOR + 6.50%), 5/10/13                             Disability Evaluations     10,000,000     10,000,000      10,000,000
Robertson Aviation, L.L.C., First Lien, 9.04%
    (LIBOR + 3.50%), 4/19/13                              Aviation Fuel Systems      5,000,000      4,987,500       5,025,000
United Subcontractors, Inc., Second Lien, 11.95%
    (LIBOR + 7.25%), 6/27/13                           Building and Construction    10,000,000     10,000,000       9,950,000
US Investigations Services, Inc., Tranche B, First
Lien,
    7.92% (LIBOR + 2.50%), 10/14/12                      Investigative Services      1,973,197      1,973,197       1,968,264
US Investigations Services, Inc., Tranche C, First
Lien,
    7.92% (LIBOR + 2.50%), 10/14/12                      Investigative Services        741,803        741,803         739,949
Wastequip, Inc., Second Lien, 11.00%
    (LIBOR + 5.50%), 7/15/12                                 Waste Treatment           500,000        500,000         500,000
Wembley, Inc., Second Lien, 8.74%
    (LIBOR + 3.75%), 8/23/12                                     Gaming              1,000,000      1,000,000       1,005,833
Westward Dough Operating Company, LLC, Term
    Loan A, First Lien, 9.51% (LIBOR + 4.00%),
    3/30/11                                                   Restaurants            8,000,000      8,000,000       8,000,000 (e)
Westward Dough Operating Company, LLC, Term
    Loan B, First Lien, 12.51% (LIBOR + 7.00%),
    3/30/11                                                    Restaurants           8,000,000      8,000,000       8,000,000 (e)
                                                                                 ------------------------------------------------
Total Senior Secured Loans                                                       $ 354,508,778    353,633,535     355,161,934
                                                                                 =================-------------------------------

                          The accompanying notes are an integral part of these financial statements.

</TABLE>

                                                           10
<PAGE>

<TABLE>

                                             BLACKROCK KELSO CAPITAL CORPORATION
                                       SCHEDULES OF INVESTMENTS (UNAUDITED) (continued)
                                                        JUNE 30, 2006
<CAPTION>

                                                                        Principal
                                                                        Amount or
                                                                        Number of                           Fair
Portfolio Company (a)                               Industry           Shares/Units       Cost (b)          Value
---------------------                               --------           ------------      --------           -----

<S>                                                <C>                    <C>           <C>            <C>

Closed-End Funds - 1.4%
Eaton Vance Floating-Rate Income Trust             Closed-End Fund         175,000    $   2,988,407     $    3,171,000
Nuveen Floating Rate Income Fund                   Closed-End Fund          94,400        1,159,147          1,232,864
PIMCO Floating Rate Strategy Fund                  Closed-End Fund         170,000        2,997,026          3,224,900
                                                                                      --------------------------------
Total Closed-End Funds                                                                    7,144,580          7,628,764
                                                                                      --------------------------------

Equity Warrants - 0.0% (f)


ATEP Holdings, Inc., expire 10/24/15              Plastic Packaging            470                -                  - (e)
ATH Holdings, Inc., expire 10/24/15               Plastic Packaging            470                -                  - (e)
ATPP Holdings, Inc., expire 10/24/15              Plastic Packaging            470           90,112             90,112 (e)
ATPR Holdings, Inc., expire 10/24/15              Plastic Packaging            470                -                  - (e)
Champion Energy Corporation, expire 6/29/16   Heating and Oil Services      15,900          300,000            300,000 (e)
                                                                                     ---------------------------------
Total Equity Warrants                                                                       390,112            390,112
                                                                                     ---------------------------------

TOTAL LONG-TERM  INVESTMENTS
INCLUDING UNEARNED INCOME                                                               369,952,466        372,061,060

UNEARNED INCOME - (0.1)%                                                                   (727,999)          (727,999)
                                                                                     ----------------------------------
TOTAL LONG-TERM  INVESTMENTS                                                            369,224,467        371,333,061
                                                                                     ----------------------------------

TOTAL INVESTMENTS - 81.7%                                                               451,148,550        453,205,721
                                                                                    ==============---------------------

OTHER ASSETS & LIABILITIES (NET) - 18.3%                                                                   101,175,224
                                                                                                        ---------------

NET ASSETS - 100.0%                                                                                     $  554,380,945
                                                                                                        ===============


----------------

(a)  None of our portfolio companies are "controlled" or "affiliated" as defined in the Investment Company Act of 1940.

(b)  Represents amortized cost for fixed income securities and unearned income, and cost for closed-end funds and equity
     warrants.

(c)  These securities are exempt from registration under Rule 144A of the Securities Act of 1933. These securities may
     be resold in transactions that are exempt from registration, normally to qualified institutional buyers. In the
     aggregate, these securities represent 4.3% of net assets at June 30, 2006.

(d)  Approximately 90% of the senior secured loans to our portfolio companies bear interest at a floating rate that may
     be determined by reference to the London Interbank Offered Rate (LIBOR) or other base rate (commonly the Federal
     Funds Rate or the Prime Rate), at the borrower's option. Additionally, the borrower under a senior secured loan
     generally has the option to select from interest rate reset periods of one, two, three or six months and may alter
     that selection at the end of any reset period. Current reset frequencies for floating rate instruments other than
     senior secured loans are indicated by Q (quarterly) or S (semiannually).

(e)  Fair value of this investment determined by or under the direction of our Board of Directors (see Note 2). The
     aggregate fair value of these investments (net of unearned income) is $98,597,653, or 17.8% of net assets, at June
     30, 2006.

(f)  Equity warrants are non-income producing securities.




                       The accompanying notes are an integral part of these financial statements.
</TABLE>


                                                           11
<PAGE>


<TABLE>

                                           BLACKROCK KELSO CAPITAL CORPORATION
                                                SCHEDULES OF INVESTMENTS
                                                    DECEMBER 31, 2005
<CAPTION>

                                                                        Principal
                                                                        Amount or
                                                                        Number of                          Fair
Portfolio Company (a)                               Industry           Shares/Units      Cost (b)          Value
---------------------                               --------           ------------      --------          -----

<S>                                           <C>                     <C>              <C>               <C>
SHORT-TERM INVESTMENTS - 20.1%
Asset-Backed Security - 2.8%
RACERS Trust, Series 2005-17-O, 4.39%
    (LIBOR + 0.02%/Q), 8/21/06,
    acquired 8/29/05 (d)                      Asset-Backed Security   $   15,000,000   $   15,000,000    $   15,006,300
                                                                      -------------------------------------------------

Certificates of Deposit - 5.7%
DEFPA BANK plc, New York, 4.53%, 10/16/06          Banking                15,000,000       15,000,000        14,961,713
Washington Mutual Bank N.A., 4.46%, 3/28/06        Banking                15,000,000       15,000,000        14,999,820
                                                                      -------------------------------------------------
Total Certificates of Deposit                                             30,000,000       30,000,000        29,961,533
                                                                      -------------------------------------------------

Commercial Paper - 11.6%
Barclays US Funding Corp., 4.24%, 2/3/06           Banking                 26,000,000      25,900,019       25,900,019
BNP Paribas (Canada), 3.83%, 1/24/06               Banking                  1,500,000       1,496,397        1,496,397
Credit Suisse First Boston USA, Inc.,           Securities Broker
    3.83%, 1/27/06                                 and Dealer               8,000,000       7,978,626        7,978,626
Morgan Stanley & Co. Incorporated,              Securities Broker
    4.08%, 8/4/06                                  and Dealer              26,000,000      26,000,000       26,003,120
                                                                      ------------------------------------------------
Total Commercial Paper                                                     61,500,000      61,375,042       61,378,162
                                                                      -------------------------------------------------

TOTAL SHORT-TERM INVESTMENTS                                          $   106,500,000     106,375,042      106,345,995
                                                                      =================--------------------------------

LONG-TERM INVESTMENTS - 27.3%
Subordinated Debt / Corporate Notes - 1.3%
First Mercury Holdings, Inc., 12.33%
    (LIBOR + 8.00%/Q), 8/15/12,
    acquired 8/12/05 (d)                            Insurance         $     1,800,000       1,782,965        1,831,500
InSight Health Services Corp., 9.17%
    (LIBOR + 5.25%/Q), 11/1/11,
    acquired 9/16/05 (d)                       Diagnostic Imaging           2,500,000       2,488,066        2,375,000
Select Medical Holdings Corporation, 9.93%
    (LIBOR + 5.75%/S), 9/15/15,
    acquired 9/15/05 (d)                       Specialty Hospitals          2,500,000       2,500,000        2,512,500
                                                                      -------------------------------------------------
Total Subordinated Debt / Corporate Notes                             $     6,800,000       6,771,031        6,719,000
                                                                      =================

Senior Secured Loans (e) - 24.8%
Applied Tech Products Corp. et al.,
    Tranche A, First Lien,  8.91%
    (LIBOR + 4.50%), 10/24/10                  Plastic Packaging      $     4,251,515       4,219,701        4,219,629 (f)
Applied Tech Products Corp. et al.,
    Tranche B, Second Lien, 13.41%
    (LIBOR + 9.00%), 4/24/11                   Plastic Packaging            1,951,515       1,932,040        1,932,000 (f)
Applied Tech Products Corp. et al.,
    Tranche C, Third Lien, 16.91%
    (LIBOR + 6.30% cash,
    6.20% PIK), 10/24/11                       Plastic Packaging              696,970         598,331          598,145 (f)
Benchmark Medical Holdings Inc.,
    First Lien, 9.00%
    (Base Rate + 1.75%), 12/27/12            Rehabilitation Centers         2,000,000       2,000,000        2,015,000
Benchmark Medical Holdings Inc.,
    Second Lien, 13.00% (Base Rate
    + 5.75%), 6/27/13                        Rehabilitation Centers         9,000,000       9,000,000        9,000,000
Bushnell Performance Optics, First
    Lien, 7.53% (LIBOR + 3.00%), 8/19/11        Leisure Products            1,000,000       1,000,000        1,012,469


                       The accompanying notes are an integral part of these financial statements.

</TABLE>

                                                           12

<PAGE>

<TABLE>

                                           BLACKROCK KELSO CAPITAL CORPORATION
                                          SCHEDULES OF INVESTMENTS (continued)
                                                    DECEMBER 31, 2005
<CAPTION>

                                                                        Principal
                                                                        Amount or
                                                                        Number of                          Fair
Portfolio Company (a)                               Industry           Shares/Units      Cost (b)          Value
---------------------                               --------           ------------      --------          -----

<S>                                              <C>                   <C>              <C>               <C>

Cannondale Bicycle Corporation, Second
    Lien, 11.53% (LIBOR + 7.00%), 6/5/10        Bicycles/Apparel       $   10,000,000    $   10,000,000    $   10,000,000 (f)
Champion Energy Corporation et al.,
    First Lien, 13.38% (LIBOR + 9.00%),          Heating and
    6/30/09                                      Oil Services              18,000,000        18,000,000        18,000,000 (f)
Clean Earth Inc., Tranche B, First Lien,
    7.39% (LIBOR + 3.00%), 10/17/11            Environmental Services       1,500,000         1,500,000         1,515,000
Delta Air Lines, Inc., Term Loan B,
    First Lien, 11.01%
    (LIBOR + 6.50%), 3/16/08                       Airlines                 1,000,000         1,000,000         1,036,750
Eight O'Clock Coffee Company,
    First Lien, 7.44%
    (LIBOR + 3.00%), 11/14/11                 Coffee Distributor            3,000,000         3,000,000         3,022,500
Eight O'Clock Coffee Company,
    Second Lien,  11.44%
    (LIBOR + 7.00%), 11/14/12                 Coffee Distributor           12,000,000        12,000,000        12,000,000
Event Rentals, Inc., First Lien, 9.94%
    (LIBOR + 5.25%), 11/17/11                    Party Rentals             14,454,545        14,454,545        14,454,545 (f)
Event Rentals, Inc., Acquisition
    Loan (Funded), First Lien, 9.92%
    (LIBOR + 5.25%), 11/17/11                    Party Rentals              9,847,159         9,847,159         9,847,159 (f)
Event Rentals, Inc., Acquisition Loan
    (Unfunded), First Lien, 0.50%, 11/18/07      Party Rentals              2,198,295         2,198,295         2,198,295 (f)
Haggar Clothing Co., Second Lien, 11.51%
    (LIBOR + 7.00%), 11/1/11                       Apparel                  2,500,000         2,500,000         2,500,000
The Hertz Corporation, Tranche B,
    First Lien, 8.50%                            Automobile and
    (Base Rate + 1.25%), 12/21/12               Equipment Rental            2,000,000         2,000,000         2,022,500
HIT Entertainment, Inc., Second Lien, 9.71%
    (LIBOR + 5.50%), 2/26/13                      Entertainment             1,000,000         1,000,000           990,000
Houghton International Inc., First Lien, 9.25%
    (Base Rate + 2.00%), 12/15/11              Specialty Chemicals          5,000,000         5,000,000         5,043,750
MD Beauty, Inc., Second Lien, 11.25%
    (LIBOR + 7.00%), 2/18/13                       Cosmetics                3,000,000         3,000,000         3,022,500
Metaldyne Corporation et al., First Lien, 8.58%
    (LIBOR + 4.50%), 12/31/09                    Automotive Parts             998,741           988,476         1,001,237
NTELOS Inc., Second Lien, 9.39%
    (LIBOR + 5.00%), 2/24/12                    Telecommunications          2,000,000         1,984,276         2,020,000
PBI Media, Inc., Second Lien, 10.24%
    (LIBOR + 6.00%), 9/30/13                    Information Services        6,000,000         5,990,032         5,940,000
Precision Parts International Services
    Corp. et al., First Lien, 7.98%
    (LIBOR + 3.75%), 9/30/11                    Automotive Parts            3,000,000         3,000,000         3,022,501
QTC Acquisition Inc., Second Lien, 10.84%
    (LIBOR + 6.50%), 5/10/13                  Disability Evaluations       10,000,000        10,000,000        10,075,000
US Investigations Services, Inc.,
    Tranche B, First Lien,
    7.00% (LIBOR + 2.50%), 10/14/12           Investigative Services        1,995,000         1,995,000         1,999,988
U.S. Security Holdings, Inc.,
    First Lien, 7.27%
    (LIBOR + 3.25%), 2/29/12                    Security Services             983,400           983,400           990,776
Wastequip, Inc., Second Lien, 10.53%
    (LIBOR + 6.00%), 7/15/12                    Waste Treatment               500,000           500,000           506,250
Wembley, Inc., Second Lien, 7.83%
    (LIBOR + 3.75%),  8/23/12                     Gaming                    1,000,000         1,000,000         1,006,250
                                                                       ---------------------------------------------------
Total Senior Secured Loans                                             $  130,877,140       130,691,255       130,992,244
                                                                       =================----------------------------------

                       The accompanying notes are an integral part of these financial statements.

</TABLE>


                                                           13
<PAGE>

<TABLE>

                                           BLACKROCK KELSO CAPITAL CORPORATION
                                          SCHEDULES OF INVESTMENTS (continued)
                                                    DECEMBER 31, 2005
<CAPTION>

                                                                      Principal
                                                                      Amount or
                                                                      Number of                            Fair
Portfolio Company (a)                             Industry           Shares/Units        Cost (b)          Value
---------------------                             --------           ------------        --------          -----

<S>                                            <C>                   <C>              <C>               <C>

Closed-End Funds - 1.4%
Eaton Vance Floating-Rate Income Trust             Closed-End Fund       175,000     $     2,988,408    $     2,952,250
Nuveen Floating Rate Income Fund                   Closed-End Fund        94,400           1,159,147          1,188,496
PIMCO Floating Rate Strategy Fund                  Closed-End Fund       170,000           2,997,026          3,036,200
                                                                                    -----------------------------------
Total Closed-End Funds                                                                     7,144,581          7,176,946
                                                                                    -----------------------------------

Equity Warrants - 0.0% (g)

ATEP Holdings, Inc., expire 10/24/15              Plastic Packaging          470                   -                  - (f)
ATH Holdings, Inc., expire 10/24/15               Plastic Packaging          470                   -                  - (f)
ATPP Holdings, Inc., expire 10/24/15              Plastic Packaging          470              90,114             90,114 (f)
ATPR Holdings, Inc., expire 10/24/15              Plastic Packaging          470                   -                  - (f)
                                                                                   ------------------------------------
Total Equity Warrants                                                                         90,114             90,114
                                                                                   ------------------------------------

TOTAL LONG-TERM INVESTMENTS
INCLUDING UNEARNED INCOME                                                                144,696,981        144,978,304

UNEARNED INCOME - (0.2)%                                                                    (887,949)          (887,949)
                                                                                   -------------------------------------

TOTAL LONG-TERM INVESTMENTS                                                              143,809,032        144,090,355
                                                                                   -------------------------------------

TOTAL INVESTMENTS - 47.4%                                                            $   250,184,074        250,436,350
                                                                                   =================-------------------

OTHER ASSETS & LIABILITIES (NET) - 52.6%                                                                    278,268,499
                                                                                                      ------------------

NET ASSETS - 100.0%                                                                                     $   528,704,849
                                                                                                      ==================

----------------

(a)  None of our portfolio companies are "controlled" or "affiliated" as defined in the Investment Company Act of 1940.

(b)  Unaudited.

(c)  Represents amortized cost for fixed income securities and unearned income, and cost for closed-end funds and equity
     warrants.

(d)  These securities are exempt from registration under Rule 144A of the Securities Act of 1933. These securities may
     be resold in transactions that are exempt from registration, normally to qualified institutional buyers. In the
     aggregate, these securities represent 4.1% of net assets at December 31, 2005.

(e)  Approximately 98% of the senior secured loans to our portfolio companies bear interest at a floating rate that may
     be determined by reference to the London Interbank Offered Rate (LIBOR) or other base rate (commonly the Federal
     Funds Rate or the Prime Rate), at the borrower's option. Additionally, the borrower under a senior secured loan
     generally has the option to select from interest rate reset periods of one, two, three or six months and may alter
     that selection at the end of any reset period. Current reset frequencies for floating rate instruments other than
     senior secured loans are indicated by Q (quarterly) or S (semiannually).

(f)  Fair value of this investment determined by or under the direction of our Board of Directors (see Note 2). The
     aggregate fair value of these investments (net of unearned income) is $60,451,938, or 11.4% of net assets, at
     December 31, 2005.

(g)  Equity warrants are non-income producing securities.


                       The accompanying notes are an integral part of these financial statements.

</TABLE>
                                                           14
<PAGE>


                      BLACKROCK KELSO CAPITAL CORPORATION
                   NOTES TO FINANCIAL STATEMENTS (UNAUDITED)


1.   Organization

BlackRock Kelso Capital Corporation (the "Company") was organized as a Delaware
corporation on April 13, 2005 and was initially funded on July 25, 2005. The
Company has filed an election to be treated as a business development company
("BDC") under the Investment Company Act of 1940 (the "1940 Act"). In addition,
for tax purposes the Company has qualified and has elected to be treated as a
regulated investment company, or RIC, under the Internal Revenue Code of 1986
(the "Code"). The Company's investment objective is to generate both current
income and capital appreciation through debt and equity investments. The
Company intends to invest primarily in middle-market companies in the form of
senior and junior secured and unsecured debt securities and loans, each of
which may include an equity component, and by making direct preferred, common
and other equity investments in such companies.

On July 25, 2005, the Company completed a private placement (the "Offering") of
35,366,589 shares of its common stock, par value $.001 per share (the "Common
Stock"), at a price of $15.00 per share. Net proceeds from the Offering of
$529,333,799 reflect the payment of a placement fee of $507,407 and legal fees
and other offering costs of $657,639.

The accompanying interim financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America
("GAAP"). In the opinion of management, all adjustments, consisting solely of
normal recurring accruals, considered necessary for the fair presentation of
financial statements for the interim period, have been included. The results of
operations for interim periods are not necessarily indicative of results to be
expected for the full year.

Certain financial information that is normally included in annual financial
statements, including certain financial statement footnotes, prepared in
accordance with GAAP, is not required for interim reporting purposes and has
been condensed or omitted herein. These financial statements should be read in
conjunction with the Company's financial statements and notes related thereto
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2005, which was filed with the Securities and Exchange Commission
on March 29, 2006.

2.   Significant Accounting Policies

The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial statements and the
reported amounts of income and expenses during the reported period. Changes in
the economic environment, financial markets and any other parameters used in
determining these estimates could cause actual results to differ and such
differences could be material.

The significant accounting policies consistently followed by the Company are:

(a)  Investments for which market quotations are readily available are valued
     at such market quotations, which are generally obtained from an
     independent pricing service or one or more broker-dealers or market
     makers. However, debt investments with remaining maturities within 60 days
     are valued at cost plus accreted discount, or minus amortized premium,
     which approximates fair value. Debt and equity securities for which market
     quotations are not readily available are valued at fair value as
     determined in good faith by or under the direction of the Company's Board
     of Directors. Because the Company expects that there will not be a readily
     available market value for many of the investments in its portfolio, the
     Company expects to value many of its portfolio investments at fair value
     as determined in good faith by or under the direction of the Board of
     Directors using a consistently applied valuation process in accordance
     with a documented valuation policy that has been reviewed and approved by
     the Board of Directors. Due to the inherent uncertainty of determining the
     fair value of investments that do not have a readily available market
     value, the fair value of the Company's investments may differ
     significantly from the values that would have been used had a readily
     available market value existed for such investments, and the differences
     could be material.

                                      15
<PAGE>

                      BLACKROCK KELSO CAPITAL CORPORATION
                   NOTES TO FINANCIAL STATEMENTS (UNAUDITED)


With respect to the Company's investments for which market quotations are not
readily available, the Board of Directors undertakes a multi-step valuation
process each quarter, as described below:

         (1)      The quarterly valuation process begins with each portfolio
                  company or investment being initially valued by the
                  investment professionals of BlackRock Kelso Capital Advisors
                  LLC, the Company's investment adviser (the "Investment
                  Advisor"), responsible for the portfolio investment;

         (2)      Preliminary valuation conclusions are then documented and
                  discussed with senior management;

         (3)      To the extent determined by the Audit Committee of the Board
                  of Directors, independent valuation firms engaged by the
                  Board of Directors conduct independent appraisals and review
                  management's preliminary valuations and their own independent
                  assessment;

         (4)      The Audit Committee of the Board of Directors reviews the
                  preliminary valuations of the investment professionals,
                  senior management and independent valuation firms; and

         (5)      The Board of Directors discusses valuations and determines
                  the fair value of each investment in the ( portfolio in good
                  faith based on the input of the Investment Advisor, the
                  respective independent valuation firms and the Audit
                  Committee.

The types of factors that the Company may take into account in fair value
pricing its investments include, as relevant, the nature and realizable value
of any collateral, the portfolio company's ability to make payments and its
earnings and discounted cash flow, the markets in which the portfolio company
does business, comparison to publicly traded securities and other relevant
factors.

Determination of fair values involves subjective judgments and estimates.
Accordingly, these notes to the financial statements express the uncertainty
with respect to the possible effect of such valuations, and any change in such
valuations, on the financial statements.

The carrying value of the Company's financial instruments approximate fair
value. The carrying value of receivables, other assets, accounts payable and
accrued expenses approximate fair value due to their short maturity.

None of the Company's portfolio companies are controlled by or affiliated with
the Company as defined in the 1940 Act.

(b)  Cash equivalents include short-term investments in money market
     instruments with remaining maturities when purchased of three months or
     less.

(c)  Security transactions are accounted for on the trade date unless there are
     substantial conditions to the purchase.

(d)  Gains or losses on the sale of investments are calculated using the
     specific identification method.

(e)  Interest income, adjusted for amortization of premium and accretion of
     discount, is recorded on an accrual basis. Interest income is not accrued
     if collection is deemed doubtful or the related investment is in default.
     For loans and debt securities with contractual payment-in-kind ("PIK")
     interest, which represents contractual interest accrued and added to the
     loan balance and which generally becomes due at maturity, PIK interest is
     not accrued if the portfolio company valuation indicates that the PIK
     interest is not collectible. Origination, structuring, closing, commitment
     and other upfront fees and discounts and premiums on investments purchased
     are accreted/amortized over the life of the respective investment.
     Unamortized origination, structuring, closing, commitment and other
     upfront fees are recorded as unearned income. Upon the prepayment of a
     loan or debt security, any prepayment penalties and unamortized loan
     origination, structuring, closing, commitment and other upfront fees are
     recorded as interest income. Dividend income is recorded on the
     ex-dividend date. Expenses are recorded on an accrual basis.


<PAGE>

                      BLACKROCK KELSO CAPITAL CORPORATION
             NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (Continued)


(f)  Organizational costs of the Company were expensed as incurred. Offering
     costs were charged against paid-in capital.

(g)  The Company has qualified and elected and intends to continue to qualify
     for the tax treatment applicable to regulated investment companies under
     Subchapter M of the Code, and, among other things, has made and intends to
     continue to make the requisite distributions to its shareholders which
     will relieve the Company from federal income and excise taxes. Therefore,
     no provision has been recorded for federal income or excise taxes.

     In order to qualify as a RIC, the Company is required to distribute
     annually to its shareholders at least 90% of investment company taxable
     income, as defined by the Code. To avoid federal excise taxes, the Company
     must distribute annually at least 98% of its income (both ordinary income
     and net capital gains).

     In accordance with GAAP, book and tax basis differences relating to
     distributions to shareholders and other permanent book and tax differences
     are reclassified to capital in excess of par. In addition, the character
     of income and gains to be distributed is determined in accordance with
     income tax regulations that may differ from GAAP.

(h)  Dividends and distributions to common shareholders are recorded on the
     ex-date. The amount to be paid out as a dividend is determined by the
     Board of Directors. Recent dividends declared by the Company were as
     follows:

<TABLE>
<CAPTION>

         Dividend Amount
      Per Share Outstanding         Ex-Date             Record Date            Pay Date
      ---------------------         -------             -----------            --------

<S>          <C>                <C>                    <C>                  <C>
             $0.20              December 29, 2005      December 31, 2005     January 31, 2006
             $0.20               March 29, 2006         March 15, 2006        March 31, 2006
             $0.23               June 28, 2006          June 15, 2006         June 30, 2006
             $0.30             September 13, 2006     September 15, 2006    September 29, 2006
</TABLE>


     The Company has adopted a dividend reinvestment plan that provides for
     reinvestmen f of shareholders, unless a shareholder elects to receive
     cash. As a result, if thet of distributions on behal authorizes, and the
     Company declares, a cash dividend, then shareholders who have Board of
     Directors dividend reinvestment plan will have their cash dividends
     automatically reinvestednot "opted out" of the Common Stock, rather than
     receiving the cash dividends. in additional shares of

3.   Agreements and Related Party Transaction

The Company has entered into an Investment Management Agreement (the
"Management Agreement") with the Investment Advisor, under which the Investment
Advisor, subject to the overall supervision of the Company's Board of
Directors, manages the day-to-day operations of, and provides investment
advisory services to, the Company. For providing these services, the Investment
Advisor receives a fee (the "Management Fee") from the Company at an annual
rate of 2.0% of the Company's total assets, including any assets acquired with
the proceeds of leverage. For services rendered under the Management Agreement
during the period commencing from July 25, 2005, the closing of the Offering
(the "Closing"), through and including the first twelve months of operations,
the Management Fee will be payable monthly in arrears. For services rendered
under the Management Agreement after that time, the Management Fee will be paid
quarterly in arrears. The Investment Advisor has contractually agreed to waive
its rights to receive one-half of the amount of the Management Fee the
Investment Advisor would otherwise be entitled to receive from the Company
until the first date on which 90% of the assets of the Company are invested in
portfolio companies in accordance with the Company's investment objective,
excluding investments in cash, cash equivalents, U.S. government securities and
other high-quality debt investments that mature in one year or less from the
date of investment, or the first anniversary of the Closing, whichever is
sooner (the "Ramp-Up Date"). Thereafter, the Investment Advisor has agreed to
waive, until such time as the Company has completed an initial public offering
of its Common Stock and listed its Common Stock on a national securities
exchange (collectively, the "Public Market Event"), one-quarter of the amount
of the Management Fee the Investment Advisor would otherwise be entitled to
receive from the Company. In addition, the Investment Advisor has agreed to (a)
waive Management Fees for any calendar year in excess of approximately $11.9
million until the earlier of (i) such time as the Company has completed the
Public Market Event or (ii) the fourth anniversary of the Company's inception
of operations and (b) waive Management Fees in excess of approximately $5.6
million during the fifth year of the Company's operations unless the Company
has completed the Public Market Event.

                                      17
<PAGE>


                      BLACKROCK KELSO CAPITAL CORPORATION
             NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (Continued)


For the three and six months ended June 30, 2006, the Investment Advisor earned
$1,367,095 and $2,699,534 in management fees, net of the waiver provision, from
the Company.

The Management Agreement provides that the Investment Advisor or its affiliates
may be entitled to an incentive fee (the "Carried Interest") under certain
circumstances. The determination of the Carried Interest, as described in more
detail below, will result in the Investment Advisor or its affiliates receiving
no Carried Interest payments if returns to Company shareholders, as described
in more detail below, do not meet an 8.0% annualized rate of return and will
result in the Investment Advisor or its affiliates receiving less than the full
amount of the Carried Interest percentage until returns to shareholders exceed
an approximate 13.3% annualized rate of return.

Commencing on the Ramp-Up Date, the Company will pay to the Investment Advisor
or its affiliates at the same time as, and not in advance of, any distributions
in respect of the Company's Common Stock, (i) 50% of the amount by which the
cumulative distributions and amounts distributable to the holders of the Common
Stock of the Company exceed an 8% annualized rate of return on net asset value
on the Ramp-Up Date until the Investment Advisor or its affiliates have
received from the Company an amount equal to 20% of the sum of the cumulative
amounts distributed pursuant to this paragraph and the cumulative amounts of
net income (including realized capital gains in excess of realized capital
losses) in excess of net unrealized capital depreciation distributed to the
holders of the Company's Common Stock, and (ii) thereafter an amount equal to
20% of the sum of the amount distributed pursuant to this paragraph and the
cumulative amounts of net income (including realized capital gains in excess of
realized capital losses) in excess of net unrealized capital depreciation
distributed to the holders of the Company's Common Stock. After the Public
Market Event, if any, the amounts above will be measured and paid quarterly on
a rolling four-quarter basis and will take into account any decrease in net
unrealized depreciation during the measurement period to the extent such
decrease did not exceed the net amount of capital depreciation at the beginning
of such period and does not exceed the excess of cumulative realized capital
gains over cumulative realized capital losses.

During the three and six months ended June 30, 2006, no Carried Interest
amounts were earned by the Investment Advisor.

The Management Agreement provides that the Company will reimburse the
Investment Advisor for costs and expenses incurred by the Investment Advisor
for office space rental, office equipment and utilities allocable to the
performance by the Investment Advisor of its duties under the Management
Agreement, as well as any costs and expenses incurred by the Investment Advisor
relating to any non-investment advisory, administrative or operating services
provided by the Investment Advisor to the Company. For the three and six months
ended June 30, 2006, the Company incurred $203,179 and $281,136, respectively,
for costs and expenses reimbursable to the Investment Advisor under the
Management Agreement.

No person who is an officer, director or employee of the Investment Advisor and
who serves as a director of the Company receives any compensation from the
Company for such services. Directors who are not affiliated with the Investment
Advisor receive compensation for their services and reimbursement of expenses
incurred to attend meetings.

The Company has also entered into an Administration Agreement with BlackRock
Financial Management, Inc. (the "Administrator"), a majority-owned subsidiary
of The PNC Financial Services Group, Inc. ("PNC"), under which the
Administrator provides administrative services to the Company. For providing
these services, facilities and personnel, the Company reimburses the
Administrator for the Company's allocable portion of overhead and other
expenses incurred by the Administrator in performing its obligations under the
Administration Agreement, including rent and the Company's allocable portion of
the cost of certain of the Company's officers and their respective staffs.

For the three and six months ended June 30, 2006, the Company incurred $249,316
and $495,891, respectively, for administrative services expenses payable to the
Administrator under the Administration Agreement.

From time to time, the Investment Advisor or the Administrator may pay amounts
owed by the Company to third party providers of goods or services. The Company
will subsequently reimburse the Investment Advisor or the Administrator, as the
case may be, for such amounts paid on its behalf. Reimbursements to the
Investment Advisor for the three and six months ended June 30, 2006 were
$282,261 and $432,253, respectively, and reimbursements to the Administrator


                                      18
<PAGE>

                      BLACKROCK KELSO CAPITAL CORPORATION
             NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (Continued)



for the three and six months ended June 30, 2006 were $2,594 and $27,494,
respectively. An additional $1,009 in reimbursements remains payable to the
Investment Advisor at June 30, 2006.

PFPC Inc. ("PFPC"), a subsidiary of PNC, provides administrative and accounting
services to the Company pursuant to a Sub-Administration and Accounting
Services Agreement. PFPC Trust Company, another subsidiary of PNC, provides
custodian services to the Company pursuant to a Custodian Services Agreement.
Also, PFPC provides transfer agency and compliance support services to the
Company pursuant to a Transfer Agency Agreement and a Compliance Support
Services Agreement, respectively. For the services provided to the Company by
PFPC and its affiliates, PFPC is entitled to an annual fee of 0.02% of the
Company's average net assets plus reimbursement of reasonable expenses, and a
base fee, payable monthly. PFPC may charge the Company additional fees for cash
overdraft balances or for sweeping excess cash balances.

For the three months and six months ended June 30, 2006, the Company incurred
$49,935 and $105,344, respectively, for administrative, accounting, custodian
and transfer agency services fees payable to PFPC and its affiliates under the
related agreements.

On July 25, 2005, in connection with the closing of the Offering, the Company
issued approximately 33,333,333 shares of its Common Stock to BlackRock Kelso
Capital Holding LLC, an entity for which the Investment Advisor serves as
manager, in exchange for total consideration of $500,000,000 ($15.00 per
share), consisting of $80,282,060 in cash and a portfolio of short-term
investments and cash equivalents valued at $419,717,940. The transaction was
effected in accordance with the Company's valuation procedures governing
securities transactions with affiliates and was ratified by the Board of
Directors.

On March 8, 2006, the Company's Board of Directors authorized the issuance and
sale from time to time of up to $2,500,000 in aggregate net asset value of
shares of the Company's Common Stock to certain existing and future employees
of the Investment Advisor at a price per share equal to the greater of $15.00
or the Company's most recently determined net asset value per share at the time
of sale. Pursuant to this authorization, on April 1, 2006 the Company issued
and sold in a private placement 54,000 shares of Common Stock for aggregate
proceeds of $810,000 to certain employees of the Investment Advisor. On August
10, 2006, the Company's Board of Directors authorized the issuance and sale
from time to time of an unlimited number of shares of the Company's Common
Stock to the Investment Advisor at a price per share equal to the Company's
most recently determined net asset value per share at the time of sale, such
shares to be used by the Advisor for employee compensation purposes. Sales
under both of the foregoing authorizations are expected to be exempt from the
registration requirements of the Securities Act of 1933.

At June 30, 2006, the Investment Advisor beneficially owned indirectly
approximately 766,000 shares of the Company's Common Stock, representing
approximately 2.1% of the total shares outstanding. At June 30, 2006, other
entities affiliated with the Administrator and PFPC beneficially owned
indirectly approximately 2,426,000 shares of the Company's Common Stock,
representing approximately 6.6% of the total shares outstanding. These
percentages of total shares outstanding did not change appreciably from
December 31, 2005. At June 30, 2006 and December 31, 2005, an entity affiliated
with the Administrator and PFPC owned 36.5% of the members' interests of the
Investment Advisor.

4.   Earnings Per Share

The following information sets forth the computation of basic and diluted net
increase in net assets per share resulting from operations for the three and
six months ended June 30, 2006.

<TABLE>
<CAPTION>

                                                                           Three Months Ended      Six Months Ended
                                                                              June 30, 2006         June 30, 2006
                                                                              -------------         -------------

<S>                                                                            <C>                   <C>
Numerator for basic and diluted net increase in net assets per share           $11,170,450           $18,291,506
Denominator for basic and diluted weighted average shares                       36,345,171            36,017,156

Basic/diluted net increase in net assets per share resulting from
operations                                                                        $0.31                 $0.51

</TABLE>


                                      19
<PAGE>


                      BLACKROCK KELSO CAPITAL CORPORATION
             NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (Continued)


Diluted net increase in net assets per share resulting from operations equals
basic net increase in net assets per share resulting from operations for the
periods because there were no common stock equivalents outstanding during such
period.

5.   Purchases and Sales/Repayments of Investments

Excluding short-term investments, the Company's purchases and sales/repayments
of investments for the three months ended June 30, 2006 totaled $188,254,574
and $29,107,373, respectively, and for the six months ended June 30, 2006
totaled $260,908,244 and $35,363,676, respectively.

6.   Commitments and Contingencies

In the normal course of business, the Company enters into contractual
agreements that provide general indemnifications against losses, costs, claims
and liabilities arising from the performance of individual obligations under
such agreements. The Company has had no prior claims or payments pursuant to
such agreements. The Company's individual maximum exposure under these
arrangements is unknown, as this would involve future claims that may be made
against the Company that have not yet occurred. However, based on management's
experience, the Company expects the risk of loss to be remote.

7.   Financial Highlights

The following per share data and ratios have been derived from information
provided in the financial statements. The following is a schedule of financial
highlights for a common share outstanding during the six months ended June 30,
2006:

         Per Share Data:

         Net asset value, beginning of period                   $       14.95
                                                               ---------------
         Net investment income                                           0.46
         Net realized and unrealized gain                                0.05
                                                               ---------------
         Total from investment operations                                0.51
                                                               ---------------
         Less:  Dividends to shareholders from net
             investment income                                          (0.43)
                                                               ---------------
         Net change in net assets                                        0.08
                                                               ---------------
         Net asset value, end of period                         $       15.03
                                                               ===============

         Total return (1)(2)                                             3.42%

         Ratios / Supplemental Data:
         Ratio of expenses to average net assets (3)
             Before management fee waiver                                2.57%
             After management fee waiver                                 1.57%
         Ratio of net investment income
             to average net assets (3)                                   6.21%
         Net assets, end of period                              $ 554,380,945
         Portfolio turnover (2)                                            15%


         --------------
         (1)  Total return is based on the change in net asset value per
              share during the period and takes into account dividends and
              distributions, if any, reinvested in accordance with the
              Company's dividend reinvestment plan.

         (2)  Not annualized.

         (3)  Annualized.

                                      20
<PAGE>


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

The information contained in this section should be read in conjunction with
the financial statements and notes thereto appearing elsewhere in this report.

Overview

We were incorporated in Delaware on April 13, 2005 and were initially funded on
July 25, 2005. Our investment objective is to provide a combination of current
income and capital appreciation. We intend to invest primarily in debt and
equity securities of private U.S. middle-market companies.

We are externally managed and have elected to be treated as a BDC under the
1940 Act. As a BDC, we are required to comply with certain regulatory
requirements. For instance, we generally have to invest at least 70% of our
total assets in "qualifying assets," including securities of private U.S.
companies, cash, cash equivalents, U.S. government securities and high-quality
debt investments that mature in one year or less.

On July 25, 2005, we completed the Offering of 35,366,589 shares of our Common
Stock at a price of $15.00 per share, less a placement fee of $507,407 and
legal fees and other offering costs of $657,639. We received approximately
$529.3 million in net proceeds from the Offering.

We have qualified and elected to be treated as a regulated investment company,
or a RIC, under Subchapter M of the Code. To continue to qualify as a RIC, we
must, among other things, continue to meet certain source-of-income and asset
diversification requirements. Pursuant to these elections, we generally have
not had and will not have to pay corporate-level taxes on any income that we
distribute to our shareholders.

Portfolio and Investment Activity

The second quarter was active. We believe this level of activity is a result of
our expansive transaction network and growing team of investment professionals,
as well as current market conditions. During the quarter ended June 30, 2006,
we invested approximately $188.3 million across eight new and six existing
portfolio companies. The new investments consisted primarily of senior loans
secured by second liens ($141.6 million) and first liens ($39.3 million), and
subordinated debt ($7.0 million). For the year-to-date period through June 30,
2006, we invested $260.9 million across 14 new and 7 existing portfolio
companies.

During the quarter, we received proceeds from principal repayments/dispositions
of approximately $29.1 million. The majority of that total represents a
refinancing we completed for an existing portfolio company in which we
restructured the terms and increased the amount of our investment, enabling the
issuer to repay higher cost debt. For the year-to-date period through June 30,
2006, we received proceeds from principal repayments/dispositions of
approximately $35.4 million.

At June 30, 2006, our net portfolio (investments plus cash and cash
equivalents) of $577 million consisted of 35 portfolio companies and was
invested 61% in senior secured loans, 2% in subordinated debt/corporate notes,
1% in publicly traded, floating rate closed-end funds, less than 1% in common
stock/warrants and 36% in short-term investments (including cash and cash
equivalents). Our average portfolio company investment by market value was
approximately $10 million. Our largest portfolio company investment by market
value was approximately $40 million and our five largest portfolio company
investments by market value comprised approximately 26% of our net assets at
June 30, 2006. At December 31, 2005, our net portfolio of $539 million
consisted of 26 portfolio companies and was invested 25% in senior secured
loans, 1% in subordinated debt/corporate notes, 1% in publicly traded, floating
rate closed-end funds, less than 1% in common stock/warrants and 73% in
short-term investments (including cash and cash equivalents).

Our weighted average yield on invested capital other than closed-end funds,
short-term investments and cash equivalents was 11.4% at June 30, 2006 versus
10.9% at March 31, 2006 and 10.7% at December 31, 2005. The weighted average
yield on our invested capital including closed-end funds, short-term
investments and cash equivalents was 9.1% at June 30, 2006, versus 7.0% and
6.0% at March 31, 2006 and December 31, 2005, respectively. Net of expenses,
such yields were 7.6% at June 30, 2006, 5.5% at March 31, 2006 and 4.4% at
December 31, 2005. The weighted average yields on our subordinated
debt/corporate notes and senior secured loans were 12.8% and 11.5%,

                                      21
<PAGE>

respectively, at June 30, 2006 versus 10.7% and 10.9%, respectively, at March
31, 2006, and 10.3% and 10.8%, respectively, at December 31, 2005. Yields are
computed using interest rates and dividend yields as of the purchase date and
include amortization of loan origination and commitment fees, original issue
discount and market premium or discount, weighted by the value of the
respective investment when averaged.

At June 30, 2006, 89% of our long-term investments bear interest based on
floating rates, such as LIBOR, the Federal Funds Rate or the Prime Rate, and
11% bear interest at fixed rates. At December 31, 2005, more than 98% of our
long-term investments bore interest based on floating rates.

Results of Operations

We commenced operations on July 25, 2005 and, therefore, there is no comparable
period from the prior year with which to compare the results of operations for
the three and six months ended June 30, 2006.

Operating Results for the Three Months Ended June 30, 2006

Operating Income

Investment income totaled $12,144,635 for the three months ended June 30, 2006,
of which $8,176,419 was attributable to interest and amortization of upfront
fees on senior secured loans, $3,580,213 to interest earned on short-term
investments and cash equivalents, $206,451 to interest earned on subordinated
debt/corporate notes, $161,418 to dividends received from closed-end funds and
$20,134 to other income. In connection with the successful completion of a
refinancing for an existing portfolio company, during the three months ended
June 30, 2006 we recognized $1,125,114 of unamortized upfront loan fees and
prepayment fees as interest income attributable to senior secured loans. As we
continue to invest in longer-term investments, we expect that we will generate
additional income at rates higher than those we received on our investments
since our inception of operations, although there can be no assurance that we
will achieve this objective.

Operating Expenses

Net operating expenses for the three months ended June 30, 2006 were
$2,147,208, consisting of $1,367,095 in management fees (net of management fee
waiver of $1,367,361), $291,762 in administrative services expenses, $106,082
in professional fees, $203,179 in Investment Advisor expenses, $86,873 in
director fees, $46,566 in insurance expenses, and $45,651 in other expenses.
For the three months ended June 30, 2006, no incentive fee, or Carried
Interest, amounts were paid or owed to the Investment Advisor.

Net Investment Income

Net investment income was $9,997,427 for the three months ended June 30, 2006.

Net Realized Gain

Net realized gain on investments of $202,321 for the three months ended June
30, 2006 resulted primarily from the disposition of one subordinated
debt/corporate note position and one senior secured loan position.

Net Unrealized Appreciation

For the three months ended June 30, 2006, the change in net unrealized
appreciation was $970,702, which was comprised of an increase in net unrealized
appreciation on investments.

Net Increase in Net Assets Resulting From Operations

The net increase in net assets resulting from operations for the three months
ended June 30, 2006 was $11,170,450.

                                      22
<PAGE>

Operating Results for the Six Months Ended June 30, 2006

Operating Income

Investment income totaled $20,878,045 for the six months ended June 30, 2006,
of which $12,386,193 was attributable to interest and amortization of upfront
fees on senior secured loans, $7,706,119 to interest earned on short-term
investments and cash equivalents, $350,262 to interest earned on subordinated
debt/corporate notes, $313,337 to dividends received from closed-end funds and
$122,134 to other income. In connection with the successful completion of a
refinancing for an existing portfolio company, during the six months ended June
30, 2006 we recognized $1,125,114 of unamortized upfront loan fees and
prepayment fees as interest income attributable to senior secured loans. As we
continue to invest in longer-term investments, we expect that we will generate
additional income at rates higher than those we received on our investments
since our inception of operations, although there can be no assurance that we
will achieve this objective.

Operating Expenses

Net operating expenses for the six months ended June 30, 2006 were $4,200,629,
consisting of $2,699,534 in management fees (net of management fee waiver of
$2,699,800), $580,107 in administrative services expenses, $319,999 in
professional fees, $281,136 in Investment Advisor expenses, $157,061 in
director fees, $83,105 in insurance expenses, and $79,687 in other expenses.
For the six months ended June 30, 2006, no incentive fee, or Carried Interest,
amounts were paid or owed to the Investment Advisor.

Net Investment Income

Net investment income was $16,677,416 for the six months ended June 30, 2006.

Net Realized Loss

Net realized loss on investments of $202,845 for the six months ended June 30,
2006 resulted primarily from realized losses on the disposition of two
subordinated debt/corporate notes positions, which were partially offset by
realized gains on the disposition of one subordinated debt/corporate note
position and one senior secured loan position.

Net Unrealized Appreciation

For the six months ended June 30, 2006, the change in net unrealized
appreciation was $1,816,935, which was comprised of an increase in net
unrealized appreciation on investments of $1,804,895 and a decrease in net
unrealized depreciation on cash equivalents of $12,040.

Net Increase in Net Assets Resulting From Operations

The net increase in net assets resulting from operations for the six months
ended June 30, 2006 was $18,291,506.

Financial Condition, Liquidity and Capital Resources

On July 25, 2005, we completed a private placement of 35,366,589 shares of our
Common Stock at a price of $15.00 per share. The net proceeds from the Offering
of $529,333,799 consisted of cash of $109,615,859 and a contribution of
short-term investments and cash equivalents of $419,717,940.

On March 8, 2006, our Board of Directors authorized the issuance and sale from
time to time of up to $2,500,000 in aggregate net asset value of shares of our
Common Stock to certain existing and future employees of the Investment Advisor
at a price per share equal to the greater of $15.00 or our most recently
determined net asset value per share at the time of sale. Pursuant to this
authorization, on April 1, 2006 we issued and sold in a private placement
54,000 shares of Common Stock for aggregate proceeds of $810,000 to certain
employees of the Investment Advisor.

During the six months ended June 30, 2006, we generated cash primarily from
cash flows from operations, including interest earned on senior secured loans
and subordinated debt/corporate notes, as well as from temporary investments in
cash equivalents and other high-quality debt investments that mature in one
year or less. In the future, we may also fund a portion of our investments
through borrowings from banks and issuances of senior securities. As a business


                                      23
<PAGE>

development company, we are subject to regulations governing our operations
that affect our ability to raise additional capital. In the future, we may also
securitize a portion of our investments in senior secured loans or other
assets.

At June 30, 2006, we had $123,522,867 in cash and cash equivalents and
$81,872,660 in other short-term investments that we intend to use in our
operations.

Our primary uses of funds are investments in portfolio companies, payment of
fees and other operating expenses and cash distributions to shareholders.

Our operating activities resulted in a net use of cash of $183,131,103 for the
six months ended June 30, 2006, primarily due to net purchases of investments.

Our financing activities resulted in the inflow of cash of $17,681,623 for the
six months ended June 30, 2006, primarily due to temporary borrowings from our
custodian. In addition, our non-cash financing activities consisted of
$22,100,075 of dividend distributions reinvested.

Off-Balance Sheet Financing

At June 30, 2006, we had no off-balance sheet contractual obligations or
arrangements.

Dividends

We intend to distribute quarterly dividends to our shareholders. Our quarterly
dividends, if any, will be determined by our Board of Directors. Recent
dividends declared by the Company were as follows:

<TABLE>
<CAPTION>

       Dividend Amount
    Per Share Outstanding               Ex-Date                   Record Date                  Pay Date
    ---------------------               -------                   -----------                  --------
<S>         <C>                    <C>                         <C>                         <C>
            $0.20                  December 29, 2005           December 31, 2005            January 31, 2006
            $0.20                    March 29, 2006              March 15, 2006              March 31, 2006
            $0.23                    June 28, 2006               June 15, 2006               June 30, 2006
            $0.30                  September 13, 2006          September 15, 2006          September 29, 2006
</TABLE>

We have qualified and elected to be taxed as a regulated investment company, or
RIC, under Subchapter M of the Code. To maintain our RIC status, we must
distribute annually at least 90% of our ordinary income and realized net
short-term capital gains in excess of realized net long-term capital losses, if
any, out of the assets legally available for distribution. In order to avoid
certain excise taxes imposed on RICs, we currently intend to distribute during
each calendar year an amount at least equal to the sum of (1) 98% of our
ordinary income for the calendar year, (2) 98% of our capital gains in excess
of capital losses for the one-year period ending on October 31st and (3) any
ordinary income and net capital gains for preceding years that were not
distributed during such years. In addition, although we currently intend to
distribute realized net capital gains (i.e., net long-term capital gains in
excess of short-term capital losses), if any, at least annually, out of the
assets legally available for such distributions, we may in the future decide to
retain such capital gains for investment.

We maintain an "opt out" dividend reinvestment plan for our common
shareholders. As a result, if we declare a dividend, shareholders' cash
dividends will be automatically reinvested in additional shares of our Common
Stock, unless they specifically "opt out" of the dividend reinvestment plan so
as to receive cash dividends.

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

With respect to the dividends paid to shareholders, income from origination,
structuring, closing, commitment and other upfront fees associated with
investments in portfolio companies is treated as taxable income and
accordingly, distributed to shareholders. For the three and six months ended
June 30, 2006, these fees totaled $445,722 and $773,222, respectively.

                                      24
<PAGE>

Item 3.   Quantitative and Qualitative Disclosures about Market Risk

We are subject to financial market risks, including changes in interest rates.
At June 30, 2006, 89% of our long-term investments bear interest based on
floating rates, such as LIBOR, the Federal Funds Rate or the Prime Rate. The
interest rates on such investments generally reset by reference to the current
market index after one to six months. In addition, at June 30, 2006, 36% of our
net portfolio consists of high quality short-term investments and cash
equivalents.

To illustrate the potential impact of changes in interest rates, we have
performed the following analysis based on our June 30, 2006 balance sheet and
assuming no changes in our investment structure. Net asset value is analyzed
using the assumptions that interest rates, as defined by the LIBOR and U.S.
Treasury yield curves, increase or decrease and that the yield curves of the
rate shocks will be parallel to each other. Under this analysis, an
instantaneous 100 basis point increase in LIBOR and U.S. Treasury yields would
cause a decline of approximately $1,800,000 in the value of our net assets at
June 30, 2006.

While hedging activities may insulate us against adverse changes in interest
rates, they may also limit our ability to participate in the benefits of lower
interest rates with respect to our portfolio of investments. During the three
and six months ended June 30, 2006, we did not engage in any hedging
activities.


Item 4.  Controls and Procedures

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

There have been no changes in our internal control over financial reporting
that occurred during our most recently completed fiscal quarter that have
materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.




                                      25

<PAGE>



PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

We are not a party in any material pending legal proceeding, and no such
proceedings are known to be contemplated.

Item 1A.  Risk Factors

Not required.

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

On April 1, 2006, we completed a private placement of 54,000 shares of our
common stock, par value $.001 per share, for aggregate proceeds of $810,000,
which were used for general corporate purposes. The placement was exempt from
the registration requirements of the Securities Act of 1933 (the "Securities
Act") pursuant to Section 4(2) of the Securities Act and Regulation D, Rule 506
promulgated thereunder for transactions not involving a public offering and
based on the fact that the common stock was issued to accredited investors.

Item 3.  Defaults Upon Senior Securities

None.

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

None.

Item 5.  Other Information

None.





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<PAGE>


Item 6.  Exhibits.

(a)   Exhibits.

         31.1     Certification of Chief Executive Officer Pursuant to 18
                  U.S.C. Section 1350, as Adopted Pursuant to Section 302 of
                  the Sarbanes-Oxley Act of 2002.

         31.2     Certification of Chief Financial Officer Pursuant to 18
                  U.S.C. Section 1350, as Adopted Pursuant to Section 302 of
                  the Sarbanes-Oxley Act of 2002.

         32       Certification of CEO and CFO Pursuant to 18 U.S.C. Section
                  1350, as Adopted Pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002.


(b)   Reports on Form 8-K.

         On August 10, 2006, we filed a current report on Form 8-K, pursuant to
Item 7.01 reporting the issuance of a press release announcing a fiscal third
quarter dividend of $0.30 per share.

         On May 9, 2006, we filed a current report on Form 8-K, pursuant to
Item 7.01 reporting the issuance of a press release announcing a fiscal second
quarter dividend of $0.23 per share.

         On March 8, 2006, we filed a current report on Form 8-K, pursuant to
Item 7.01 reporting the issuance of a press release announcing a fiscal first
quarter dividend of $0.20 per share.



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<PAGE>

                                   SIGNATURES


         Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.


                                           BLACKROCK KELSO CAPITAL CORPORATION


Date:  August 11, 2006                     By: /s/  James R. Maher
                                               -----------------------
                                                James R. Maher
                                                Chief Executive Officer


Date:  August 11, 2006                     By: /s/  Frank D. Gordon
                                               -----------------------
                                                Frank D. Gordon
                                                Chief Financial Officer



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