##### Table of Contents





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, 2010

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 001-33559





BLACKROCK KELSO CAPITAL CORPORATION

(Exact Name of Registrant as Specified in Its Charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 20-2725151                          
|(State or Other Jurisdiction of
Incorporation or Organization) |  | (I.R.S. Employer
Identification No.)
|                                                               | 
|40 East
52ndStreet, New York, NY                               |  | 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 þ    No  ̈

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes  ̈    No  ̈

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ̈    Accelerated filer
þ    Non-Accelerated filer  ̈    (Do not check if a smaller reporting company)

Smaller reporting company  ̈

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 þ

The number of shares of the Registrants common stock, $.001 par value per share, outstanding at August 5, 2010 was 65,510,978.









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BLACKROCK KELSO CAPITAL CORPORATION

FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2010

Table of Contents



|                              |  |                                                                                                 |  |         
|----------------------------- |  | ----------------------------------------------------------------------------------------------- |  | --------
|                              |  | INDEX                                                                                           |  | PAGE NO.
|                              | 
|PART I. FINANCIAL INFORMATION |  |                                                                                                
|                              |  |                                                                                                
|Item 1.                       |  | Financial Statements                                                                            |  |         
|                              |  |                                                                                                
|                              |  | Statements of Assets and Liabilities as of June 30, 2010 and December 31, 2009 (unaudited)      |  | 3       
|                              |  |                                                                                                
|                              |  | Statements of Operations for the three and six months ended June 30, 2010 and 2009 (unaudited)  |  | 4       
|                              |  |                                                                                                
|                              |  | Statements of Changes in Net Assets for the six months ended June 30, 2010 and 2009 (unaudited) |  | 5       
|                              |  |                                                                                                
|                              |  | Statements of Cash Flows for the six months ended June 30, 2010 and 2009 (unaudited)            |  | 6       
|                              |  |                                                                                                
|                              |  | Schedules of Investments as of June 30, 2010 and December 31, 2009 (unaudited)                  |  | 7       
|                              |  |                                                                                                
|                              |  | Notes to Financial Statements (unaudited)                                                       |  | 21      
|                              |  |                                                                                                
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations           |  | 34      
|                              |  |                                                                                                
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                      |  | 42      
|                              |  |                                                                                                
|Item 4.                       |  | Controls and Procedures                                                                         |  | 42      
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                
|                              |  |                                                                                                
|Item 1.                       |  | Legal Proceedings                                                                               |  | 43      
|                              |  |                                                                                                
|Item 1A.                      |  | Risk Factors                                                                                    |  | 43      
|                              |  |                                                                                                
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                     |  | 43      
|                              |  |                                                                                                
|Item 3.                       |  | Defaults Upon Senior Securities                                                                 |  | 43      
|                              |  |                                                                                                
|Item 4.                       |  | [Reserved]                                                                                      |  | 43      
|                              |  |                                                                                                
|Item 5.                       |  | Other Information                                                                               |  | 43      
|                              |  |                                                                                                
|Item 6.                       |  | Exhibits                                                                                        |  | 44      
|                              | 
|SIGNATURES                    |  | 45                                                                                             



1



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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report, and other statements that we may make, may contain forward-looking statements 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.

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 we assume no duty to and do 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 identified elsewhere in
the reports BlackRock Kelso Capital Corporation has filed with the Securities and Exchange Commission (the SEC), the following factors, among others, could cause actual results to differ materially from forward-looking statements or
historical performance:



| |  |  | our future operating results;
| | - |  | -----------------------------



| |  |  | our business prospects and the prospects of our portfolio companies;
| | - |  | --------------------------------------------------------------------



| |  |  | the impact of investments that we expect to make;
| | - |  | -------------------------------------------------



| |  |  | our contractual arrangements and relationships with third parties;
| | - |  | ------------------------------------------------------------------



| |  |  | the dependence of our future success on the general economy and its impact on the industries in which we invest;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | the ability of our portfolio companies to achieve their objectives;
| | - |  | -------------------------------------------------------------------



| |  |  | our expected financings and investments;
| | - |  | ----------------------------------------



| |  |  | the adequacy of our cash resources and working capital, including our ability to obtain continued financing on favorable terms;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | the timing of cash flows, if any, from the operations of our portfolio companies;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | the impact of increased competition;
| | - |  | ------------------------------------



| |  |  | the ability of BlackRock Kelso Capital Advisors LLC, our investment advisor (the Advisor), to locate suitable investments for us and to
monitor and administer our investments;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | potential conflicts of interest in the allocation of opportunities between us and other investment funds managed by the Advisor or its affiliates;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the ability of the Advisor to attract and retain highly talented professionals;
| | - |  | -------------------------------------------------------------------------------



| |  |  | fluctuations in foreign currency exchange rates; and
| | - |  | ----------------------------------------------------



| |  |  | the impact of changes to tax legislation and, generally, our tax position.
| | - |  | --------------------------------------------------------------------------



2



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PART 1. 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
|------- | --------------------

BlackRock Kelso Capital Corporation

Statements of Assets and Liabilities (Unaudited)



|                                                                                                                                                                          |  |              |              |   |                  |   |              |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------------ | - | ---------------- | - | ------------ | -
|                                                                                                                                                                          |  | June 30,2010 |              |   | December 31,2009 |  
|Assets:                                                                                                                                                                   |  |              |              |   |                  |   |              |  
|Investments at fair value:                                                                                                                                                |  |              |              |   |                  |   |              |  
|Non-controlled, non-affiliated investments (amortized cost of $772,076,780 and $963,463,604)                                                                              |  | $            | 641,782,785  |   |                  | $ | 810,035,780  |  
|Non-controlled, affiliated investments (amortized cost of $63,489,666 and $63,942,195)                                                                                    |  |              | 58,692,298   |   |                  |   | 26,793,989   |  
|Controlled investments (amortized cost of $51,096,865 and $27,414,204)                                                                                                    |  |              | 53,115,874   |   |                  |   | 9,912,276    |  
|                                                                                                                                                                          |  |              |              |   |                  |   |              |  
|Total investments at fair value (amortized cost of $886,663,311 and $1,054,820,003)                                                                                       |  |              | 753,590,957  |   |                  |   | 846,742,045  |  
|Cash and cash equivalents                                                                                                                                                 |  |              | 20,384,318   |   |                  |   | 5,048,136    |  
|Cash denominated in foreign currency (cost of $909,784 and $759,760)                                                                                                      |  |              | 881,628      |   |                  |   | 759,765      |  
|Unrealized appreciation on forward foreign currency contracts                                                                                                             |  |              | 1,383,928    |   |                  |   | 203,998      |  
|Receivable for investments sold                                                                                                                                           |  |              | 695,718      |   |                  |   |             |  
|Interest receivable                                                                                                                                                       |  |              | 18,353,477   |   |                  |   | 18,441,527   |  
|Dividends receivable                                                                                                                                                      |  |              | 8,249,511    |   |                  |   | 6,620,903    |  
|Prepaid expenses and other assets                                                                                                                                         |  |              | 8,854,191    |   |                  |   | 1,710,105    |  
|                                                                                                                                                                          |  |              |              |   |                  |   |              |  
|Total Assets                                                                                                                                                              |  | $            | 812,393,728  |   |                  | $ | 879,526,479  |  
|                                                                                                                                                                          |  |              |              |   |                  |   |              |  
|Liabilities:                                                                                                                                                              |  |              |              |   |                  |   |              |  
|Payable for investments purchased                                                                                                                                         |  | $            | 272,789      |   |                  | $ | 557,483      |  
|Credit facility payable                                                                                                                                                   |  |              | 145,000,000  |   |                  |   | 296,000,000  |  
|Interest payable on credit facility                                                                                                                                       |  |              | 161,351      |   |                  |   | 959,458      |  
|Dividend distributions payable                                                                                                                                            |  |              | 18,157,464   |   |                  |   | 18,072,063   |  
|Base management fees payable                                                                                                                                              |  |              | 4,151,014    |   |                  |   | 4,547,129    |  
|Incentive management fees payable                                                                                                                                         |  |              |             |   |                  |   | 16,818,602   |  
|Accrued administrative services                                                                                                                                           |  |              | 220,256      |   |                  |   | 201,728      |  
|Other accrued expenses and payables                                                                                                                                       |  |              | 2,015,058    |   |                  |   | 2,807,254    |  
|                                                                                                                                                                          |  |              |              |   |                  |   |              |  
|Total Liabilities                                                                                                                                                         |  |              | 169,977,932  |   |                  |   | 339,963,717  |  
|                                                                                                                                                                          |  |              |              |   |                  |   |              |  
|Net Assets:                                                                                                                                                               |  |              |              |   |                  |   |              |  
|Common stock, par value $.001 per share, 200,000,000 and 100,000,000 common shares authorized, 66,328,753 and 57,436,875 issued
and 65,367,074 and 56,475,196 outstanding |  |              | 66,329       |   |                  |   | 57,437       |  
|Paid-in capital in excess of par                                                                                                                                          |  |              | 912,913,513  |   |                  |   | 826,617,395  |  
|Undistributed net investment income                                                                                                                                       |  |              | 23,879,992   |   |                  |   | 19,463,949   |  
|Accumulated net realized loss                                                                                                                                             |  |              | (157,293,763 | ) |                  |   | (93,279,572  | )
|Net unrealized depreciation                                                                                                                                               |  |              | (131,724,375 | ) |                  |   | (207,870,547 | )
|Treasury stock at cost, 961,679 and 961,679 shares held                                                                                                                   |  |              | (5,425,900   | ) |                  |   | (5,425,900   | )
|                                                                                                                                                                          |  |              |              |   |                  |   |              |  
|Total Net Assets                                                                                                                                                          |  |              | 642,415,796  |   |                  |   | 539,562,762  |  
|                                                                                                                                                                          |  |              |              |   |                  |   |              |  
|Total Liabilities and Net Assets                                                                                                                                          |  | $            | 812,393,728  |   |                  | $ | 879,526,479  |  
|                                                                                                                                                                          |  |              |              |   |                  |   |              |  
|Net Asset Value Per Share                                                                                                                                                 |  | $            | 9.83         |   |                  | $ | 9.55         |  

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



3



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BlackRock Kelso Capital Corporation

Statements of Operations (Unaudited)



|                                                          |  |                                |             |   |                                |   |             |                              |  |   |                              |   |  |   |             |  
|--------------------------------------------------------- |  | ------------------------------ | ----------- | - | ------------------------------ | - | ----------- | ---------------------------- |  | - | ---------------------------- | - |  | - | ----------- | -
|                                                          |  | Three months endedJune
30,2010 |             |   | Three months endedJune
30,2009 |   |             | Six months endedJune
30,2010 |  |   | Six months endedJune
30,2009 |  
|Investment Income:                                        |  |                                |             |   |                                |   |             |                              |  |   |                              |   |  |   |             |  
|From non-controlled, non-affiliated investments:          |  |                                |             |   |                                |   |             |                              |  |   |                              |   |  |   |             |  
|Interest                                                  |  | $                              | 25,008,141  |   |                                | $ | 32,153,777  |                              |  | $ | 50,321,153                   |   |  | $ | 62,489,811  |  
|Dividends                                                 |  |                                | 541,610     |   |                                |   | 365,547     |                              |  |   | 1,045,255                    |   |  |   | 870,756     |  
|Other income                                              |  |                                | 37,500      |   |                                |   |            |                              |  |   | 37,500                       |   |  |   |            |  
|From non-controlled, affiliated investments:              |  |                                |             |   |                                |   |             |                              |  |   |                              |   |  |   |             |  
|Interest                                                  |  |                                | 1,624,132   |   |                                |   | 433,133     |                              |  |   | 3,084,840                    |   |  |   | 914,518     |  
|Dividends                                                 |  |                                | 314,411     |   |                                |   | 268,207     |                              |  |   | 616,574                      |   |  |   | 541,414     |  
|From controlled investments:                              |  |                                |             |   |                                |   |             |                              |  |   |                              |   |  |   |             |  
|Interest                                                  |  |                                | 685,161     |   |                                |   | 218,964     |                              |  |   | 904,732                      |   |  |   | 434,429     |  
|                                                          |  |                                |             |   |                                |   |             |                              |  |   |                              |   |  |   |             |  
|Total investment income                                   |  |                                | 28,210,955  |   |                                |   | 33,439,628  |                              |  |   | 56,010,054                   |   |  |   | 65,250,928  |  
|                                                          |  |                                |             |   |                                |   |             |                              |  |   |                              |   |  |   |             |  
|Expenses:                                                 |  |                                |             |   |                                |   |             |                              |  |   |                              |   |  |   |             |  
|Base management fees                                      |  |                                | 4,151,014   |   |                                |   | 4,647,032   |                              |  |   | 8,473,485                    |   |  |   | 9,395,250   |  
|Incentive management fees                                 |  |                                |            |   |                                |   |            |                              |  |   | 493,951                      |   |  |   |            |  
|Interest and credit facility fees                         |  |                                | 1,699,510   |   |                                |   | 1,712,222   |                              |  |   | 2,821,764                    |   |  |   | 3,548,611   |  
|Investment advisor expenses                               |  |                                | 385,297     |   |                                |   | 340,273     |                              |  |   | 783,961                      |   |  |   | 687,067     |  
|Amortization of debt issuance costs                       |  |                                | 587,884     |   |                                |   | 171,197     |                              |  |   | 756,176                      |   |  |   | 339,489     |  
|Administrative services                                   |  |                                | 220,987     |   |                                |   | 201,927     |                              |  |   | 478,710                      |   |  |   | 431,035     |  
|Professional fees                                         |  |                                | 192,965     |   |                                |   | 374,516     |                              |  |   | 396,231                      |   |  |   | 606,566     |  
|Insurance                                                 |  |                                | 182,203     |   |                                |   | 131,864     |                              |  |   | 334,611                      |   |  |   | 261,225     |  
|Director fees                                             |  |                                | 91,832      |   |                                |   | 88,863      |                              |  |   | 187,669                      |   |  |   | 184,155     |  
|Other                                                     |  |                                | 278,626     |   |                                |   | 236,331     |                              |  |   | 597,594                      |   |  |   | 510,745     |  
|                                                          |  |                                |             |   |                                |   |             |                              |  |   |                              |   |  |   |             |  
|Net expenses                                              |  |                                | 7,790,318   |   |                                |   | 7,904,225   |                              |  |   | 15,324,152                   |   |  |   | 15,964,143  |  
|                                                          |  |                                |             |   |                                |   |             |                              |  |   |                              |   |  |   |             |  
|Net Investment Income                                     |  |                                | 20,420,637  |   |                                |   | 25,535,403  |                              |  |   | 40,685,902                   |   |  |   | 49,286,785  |  
|                                                          |  |                                |             |   |                                |   |             |                              |  |   |                              |   |  |   |             |  
|Realized and Unrealized Gain (Loss):                      |  |                                |             |   |                                |   |             |                              |  |   |                              |   |  |   |             |  
|Net realized gain (loss):                                 |  |                                |             |   |                                |   |             |                              |  |   |                              |   |  |   |             |  
|Non-controlled, non-affiliated investments                |  |                                | (20,391,142 | ) |                                |   | (7,067,506  | )                            |  |   | (27,086,218                  | ) |  |   | (7,062,957  | )
|Non-controlled, affiliated investments                    |  |                                |            |   |                                |   |            |                              |  |   | (36,221,865                  | ) |  |   | 12,240      |  
|Controlled investments                                    |  |                                | 634         |   |                                |   |            |                              |  |   | 2,515                        |   |  |   |            |  
|Foreign currency                                          |  |                                | (1,260,360  | ) |                                |   | (3,598,580  | )                            |  |   | (708,623                     | ) |  |   | (1,487,041  | )
|                                                          |  |                                |             |   |                                |   |             |                              |  |   |                              |   |  |   |             |  
|Net realized gain (loss)                                  |  |                                | (21,650,868 | ) |                                |   | (10,666,086 | )                            |  |   | (64,014,191                  | ) |  |   | (8,537,758  | )
|                                                          |  |                                |             |   |                                |   |             |                              |  |   |                              |   |  |   |             |  
|Net change in unrealized appreciation or depreciation on: |  |                                |             |   |                                |   |             |                              |  |   |                              |   |  |   |             |  
|Non-controlled, non-affiliated investments                |  |                                | 3,529,516   |   |                                |   | 12,328,390  |                              |  |   | 19,116,927                   |   |  |   | (11,043,289 | )
|Non-controlled, affiliated investments                    |  |                                | (1,445,753  | ) |                                |   | (4,687,450  | )                            |  |   | 36,367,741                   |   |  |   | (8,972,116  | )
|Controlled investments                                    |  |                                | 18,876,805  |   |                                |   | (748,728    | )                            |  |   | 19,520,937                   |   |  |   | (2,350,911  | )
|Foreign currency translation                              |  |                                | 2,604,495   |   |                                |   | 2,060,171   |                              |  |   | 1,140,567                    |   |  |   | 1,371,919   |  
|                                                          |  |                                |             |   |                                |   |             |                              |  |   |                              |   |  |   |             |  
|Net change in unrealized appreciation or depreciation     |  |                                | 23,565,063  |   |                                |   | 8,952,383   |                              |  |   | 76,146,172                   |   |  |   | (20,994,397 | )
|                                                          |  |                                |             |   |                                |   |             |                              |  |   |                              |   |  |   |             |  
|Net realized and unrealized gain (loss)                   |  |                                | 1,914,195   |   |                                |   | (1,713,703  | )                            |  |   | 12,131,981                   |   |  |   | (29,532,155 | )
|                                                          |  |                                |             |   |                                |   |             |                              |  |   |                              |   |  |   |             |  
|Net Increase in Net Assets Resulting from Operations      |  | $                              | 22,334,832  |   |                                | $ | 23,821,700  |                              |  | $ | 52,817,883                   |   |  | $ | 19,754,630  |  
|                                                          |  |                                |             |   |                                |   |             |                              |  |   |                              |   |  |   |             |  
|Net Investment Income Per Share                           |  | $                              | 0.36        |   |                                | $ | 0.46        |                              |  | $ | 0.71                         |   |  | $ | 0.89        |  
|                                                          |  |                                |             |   |                                |   |             |                              |  |   |                              |   |  |   |             |  
|Earnings Per Share                                        |  | $                              | 0.39        |   |                                | $ | 0.43        |                              |  | $ | 0.93                         |   |  | $ | 0.36        |  
|                                                          |  |                                |             |   |                                |   |             |                              |  |   |                              |   |  |   |             |  
|Basic and Diluted Weighted-Average Shares Outstanding     |  |                                | 57,490,004  |   |                                |   | 55,621,338  |                              |  |   | 57,045,983                   |   |  |   | 55,433,200  |  
|Dividends Declared Per Share                              |  | $                              | 0.32        |   |                                | $ | 0.16        |                              |  | $ | 0.64                         |   |  | $ | 0.32        |  

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



4



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##### Table of Contents

BlackRock Kelso Capital Corporation

Statements of Changes in Net Assets (Unaudited)



|                                                                     |  |                               |             |   |                               |   |             |  
|-------------------------------------------------------------------- |  | ----------------------------- | ----------- | - | ----------------------------- | - | ----------- | -
|                                                                     |  | Six months endedJune 
30,2010 |             |   | Six months endedJune 
30,2009 |  
|Net Increase in Net Assets Resulting from Operations:                |  |                               |             |   |                               |   |             |  
|Net investment income                                                |  | $                             | 40,685,902  |   |                               | $ | 49,286,785  |  
|Net realized gain (loss)                                             |  |                               | (64,014,191 | ) |                               |   | (8,537,758  | )
|Net change in unrealized appreciation or depreciation                |  |                               | 76,146,172  |   |                               |   | (20,994,397 | )
|                                                                     |  |                               |             |   |                               |   |             |  
|Net increase in net assets resulting from operations                 |  |                               | 52,817,883  |   |                               |   | 19,754,630  |  
|                                                                     |  |                               |             |   |                               |   |             |  
|Dividend Distributions to Stockholders from:                         |  |                               |             |   |                               |   |             |  
|Net investment income                                                |  |                               | (36,269,859 | ) |                               |   | (17,733,915 | )
|                                                                     |  |                               |             |   |                               |   |             |  
|Capital Share Transactions:                                          |  |                               |             |   |                               |   |             |  
|Proceeds from shares sold                                            |  |                               | 88,406,250  |   |                               |   |            |  
|Less offering costs                                                  |  |                               | (4,514,243  | ) |                               |   |            |  
|Reinvestment of dividends                                            |  |                               | 2,413,003   |   |                               |   | 3,950,579   |  
|Purchases of treasury stock                                          |  |                               |            |   |                               |   | (2,234,892  | )
|                                                                     |  |                               |             |   |                               |   |             |  
|Net increase in net assets resulting from capital share transactions |  |                               | 86,305,010  |   |                               |   | 1,715,687   |  
|                                                                     |  |                               |             |   |                               |   |             |  
|Total Increase in Net Assets                                         |  |                               | 102,853,034 |   |                               |   | 3,736,402   |  
|Net assets at beginning of period                                    |  |                               | 539,562,762 |   |                               |   | 510,295,501 |  
|                                                                     |  |                               |             |   |                               |   |             |  
|Net assets at end of period                                          |  | $                             | 642,415,796 |   |                               | $ | 514,031,903 |  
|                                                                     |  |                               |             |   |                               |   |             |  
|Capital Share Activity:                                              |  |                               |             |   |                               |   |             |  
|Shares issued from subscriptions                                     |  |                               | 8,625,000   |   |                               |   |            |  
|Shares issued from reinvestment of dividends                         |  |                               | 266,878     |   |                               |   | 932,395     |  
|Purchases of treasury stock                                          |  |                               |            |   |                               |   | (583,572    | )
|                                                                     |  |                               |             |   |                               |   |             |  
|Total increase in shares                                             |  |                               | 8,891,878   |   |                               |   | 348,823     |  
|                                                                     |  |                               |             |   |                               |   |             |  
|Undistributed net investment income at end of period                 |  | $                             | 23,879,992  |   |                               | $ | 35,407,886  |  

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



5



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##### Table of Contents

BlackRock Kelso Capital Corporation

Statements of Cash Flows (Unaudited)



|                                                                                                                            |  |                              |              |   |                              |   |             |  
|--------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ------------ | - | ---------------------------- | - | ----------- | -
|                                                                                                                            |  | Six months endedJune
30,2010 |              |   | Six months endedJune
30,2009 |  
|Operating Activities:                                                                                                       |  |                              |              |   |                              |   |             |  
|Net increase in net assets resulting from operations                                                                        |  | $                            | 52,817,883   |   |                              | $ | 19,754,630  |  
|Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by operating
activities: |  |                              |              |   |                              |   |             |  
|Proceeds from dispositions of short-term investmentsnet                                                                    |  |                              | 358,276      |   |                              |   |            |  
|Purchases of investments                                                                                                    |  |                              | (144,288,230 | ) |                              |   | (27,189,886 | )
|Purchases of foreign currencynet                                                                                           |  |                              | (734,518     | ) |                              |   | (3,009,782  | )
|Proceeds from sales/repayments of investments                                                                               |  |                              | 254,025,286  |   |                              |   | 43,908,566  |  
|Net change in unrealized appreciation or depreciation on investments                                                        |  |                              | (75,005,605  | ) |                              |   | 22,366,316  |  
|Net change in unrealized appreciation or depreciation on foreign currency translation                                       |  |                              | (1,140,567   | ) |                              |   | (1,371,919  | )
|Net realized loss (gain) on investments                                                                                     |  |                              | 63,305,568   |   |                              |   | 7,050,717   |  
|Net realized loss (gain) on foreign currency                                                                                |  |                              | 708,623      |   |                              |   | 1,487,041   |  
|Amortization of premium/discountnet                                                                                        |  |                              | (5,229,514   | ) |                              |   | (2,663,183  | )
|Amortization of debt issuance costs                                                                                         |  |                              | 756,176      |   |                              |   | 339,489     |  
|Increase in receivable for investments sold                                                                                 |  |                              | (695,718     | ) |                              |   |            |  
|Decrease in interest receivable                                                                                             |  |                              | 88,050       |   |                              |   | 2,495,556   |  
|Increase in dividends receivable                                                                                            |  |                              | (1,628,608   | ) |                              |   | (1,281,827  | )
|Decrease (increase) in prepaid expenses and other assets                                                                    |  |                              | (98,864      | ) |                              |   | 323,683     |  
|Increase (decrease) in payable for investments purchased                                                                    |  |                              | (284,694     | ) |                              |   | 2,218,689   |  
|Decrease in interest payable on credit facility                                                                             |  |                              | (798,107     | ) |                              |   | (515,595    | )
|Decrease in base management fees payable                                                                                    |  |                              | (396,115     | ) |                              |   | (1,077,997  | )
|Decrease in incentive management fees payable                                                                               |  |                              | (16,818,602  | ) |                              |   |            |  
|Increase in accrued administrative services payable                                                                         |  |                              | 18,528       |   |                              |   | 80,328      |  
|Decrease in other accrued expenses and payables                                                                             |  |                              | (792,196     | ) |                              |   | (344,846    | )
|                                                                                                                            |  |                              |              |   |                              |   |             |  
|Net cash provided by operating activities                                                                                   |  |                              | 124,167,052  |   |                              |   | 62,569,980  |  
|                                                                                                                            |  |                              |              |   |                              |   |             |  
|Financing Activities:                                                                                                       |  |                              |              |   |                              |   |             |  
|Net proceeds from issuance of common stock                                                                                  |  |                              | 83,892,007   |   |                              |   |            |  
|Dividend distributions paid                                                                                                 |  |                              | (33,771,455  | ) |                              |   | (24,343,892 | )
|Borrowings under credit facility                                                                                            |  |                              | 134,600,000  |   |                              |   | 22,000,000  |  
|Repayments under credit facility                                                                                            |  |                              | (285,600,000 | ) |                              |   | (72,000,000 | )
|Increase in deferred debt issuance costs                                                                                    |  |                              | (7,801,398   | ) |                              |   |            |  
|Purchases of treasury stock                                                                                                 |  |                              |             |   |                              |   | (2,234,892  | )
|                                                                                                                            |  |                              |              |   |                              |   |             |  
|Net cash used in financing activities                                                                                       |  |                              | (108,680,846 | ) |                              |   | (76,578,784 | )
|                                                                                                                            |  |                              |              |   |                              |   |             |  
|Effect of exchange rate changes on cash and cash equivalents                                                                |  |                              | (28,161      | ) |                              |   | 3,135       |  
|                                                                                                                            |  |                              |              |   |                              |   |             |  
|Net increase (decrease) in cash                                                                                             |  |                              | 15,458,045   |   |                              |   | (14,005,669 | )
|Cash and cash equivalents, beginning of period                                                                              |  |                              | 5,807,901    |   |                              |   | 15,786,271  |  
|                                                                                                                            |  |                              |              |   |                              |   |             |  
|Cash and cash equivalents, end of period                                                                                    |  | $                            | 21,265,946   |   |                              | $ | 1,780,602   |  
|                                                                                                                            |  |                              |              |   |                              |   |             |  
|Supplemental disclosure of cash flow information and non-cash financing activities:                                         |  |                              |              |   |                              |   |             |  
|Cash paid during period for:                                                                                                |  |                              |              |   |                              |   |             |  
|Interest                                                                                                                    |  | $                            | 3,162,381    |   |                              | $ | 3,929,854   |  
|Taxes                                                                                                                       |  | $                            | 1,086,264    |   |                              | $ | 484,257     |  
|Dividend distributions reinvested                                                                                           |  | $                            | 2,413,003    |   |                              | $ | 3,950,579   |  

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



6



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##### Table of Contents

BlackRock Kelso Capital Corporation

Schedules of Investments (Unaudited)

June 30, 2010



|                                                                                              |  |                           |  |                                         |            |         |   |              |  |   |            
|--------------------------------------------------------------------------------------------- |  | ------------------------- |  | --------------------------------------- | ---------- | ------- | - | ------------ |  | - | -----------
|Portfolio Company                                                                             |  | Industry                  |  | PrincipalAmount orNumber
ofShares/Units |            | Cost(a) |   | FairValue(b)
|Senior Secured Notes13.5%                                                                    |  |                           |  |                                         |            |         |   |              |  |   |            
|AGY Holding Corp.,
Second Lien, 11.00%, 11/15/14                                              |  | Glass Yarns/Fibers        |  | $                                       | 23,500,000 |         | $ | 23,160,604   |  | $ | 19,740,000 
|American Residential Services L.L.C. et al.,
Second Lien, 12.00%, 4/15/15, acquired 4/9/10(c) |  | HVAC/Plumbing
Services    |  |                                         | 40,000,000 |         |   | 39,822,320   |  |   | 40,000,000 
|TriMark USA, Inc.,
Second Lien, 11.50% (LIBOR + 1.75% cash, 2.00% PIK), 11/30/13              |  | Food ServiceEquipment     |  |                                         | 31,818,047 |         |   | 31,818,047   |  |   | 27,204,431 
|                                                                                              |  |                           |  |                                         |            |         |   |              |  |   |            
|Total Senior Secured Notes                                                                    |  |                           |  |                                         |            |         |   | 94,800,971   |  |   | 86,944,431 
|                                                                                              |  |                           |  |                                         |            |         |   |              |  |   |            
|Unsecured Debt1.3%                                                                           |  |                           |  |                                         |            |         |   |              |  |   |            
|Big Dumpster Acquisition, Inc.,
13.50% PIK, 7/5/15                                            |  | Waste ManagementEquipment |  |                                         | 45,866,390 |         |   | 44,599,248   |  |   | 3,944,510  
|Marsico Parent Holdco, LLC et al.,
12.50% PIK, 7/15/16, acquired 11/28/07(c)                  |  | FinancialServices         |  |                                         | 11,995,758 |         |   | 11,725,114   |  |   | 3,022,931  
|Marsico Parent Superholdco, LLC et al.,
14.50% PIK, 1/15/18, acquired 11/28/07(c)             |  | FinancialServices         |  |                                         | 8,366,307  |         |   | 7,827,812    |  |   | 1,472,470  
|                                                                                              |  |                           |  |                                         |            |         |   |              |  |   |            
|Total Unsecured Debt                                                                          |  |                           |  |                                         |            |         |   | 64,152,174   |  |   | 8,439,911  
|                                                                                              |  |                           |  |                                         |            |         |   |              |  |   |            
|Subordinated Debt19.2%                                                                       |  |                           |  |                                         |            |         |   |              |  |   |            
|A & A Manufacturing Co., Inc.,
18.00% (12.00% cash, 6.00% PIK), 4/2/14                        |  | ProtectiveEnclosures      |  |                                         | 20,821,427 |         |   | 20,821,427   |  |   | 18,510,249 
|Conney Safety Products, LLC,
16.00%, 10/1/14(d)                                               |  | SafetyProducts            |  |                                         | 30,582,734 |         |   | 29,222,314   |  |   | 29,359,425 
|Mattress Giant Corporation,
11.00% PIK, 12/31/12(d)                                           |  | BeddingRetail            |  |                                         | 6,066,231  |         |   | 3,257,336    |  |   | 1,674,280  
|MediMedia USA, Inc.,
11.38%, 11/15/14, acquired multiple dates(c)                             |  | InformationServices       |  |                                         | 8,000,000  |         |   | 8,053,501    |  |   | 7,352,000  
|The Pay-O-Matic Corp.,
14.00% (12.00% cash, 2.00% PIK), 1/15/15                               |  | FinancialServices         |  |                                         | 15,366,867 |         |   | 15,366,867   |  |   | 15,628,104 
|PGA Holdings, Inc.,
12.50%, 3/12/16                                                           |  | HealthcareServices        |  |                                         | 5,000,000  |         |   | 4,929,162    |  |   | 5,100,000  
|Sarnova HC, LLC et al.,
14.00% (12.00% cash, 2.00% PIK), 4/6/16                               |  | HealthcareProducts        |  |                                         | 25,118,056 |         |   | 25,118,056   |  |   | 25,118,056 
|Sentry Security Systems, LLC,
16.00% (14.00% cash, 2.00% PIK), 8/7/12                         |  | SecurityServices          |  |                                         | 10,943,896 |         |   | 10,943,896   |  |   | 10,648,410 
|U.S. Security Holdings, Inc.,
13.00% (11.00% cash, 2.00% PIK), 5/8/14, acquired5/10/06(c)     |  | SecurityServices          |  |                                         | 7,000,000  |         |   | 7,000,000    |  |   | 7,000,000  
|Wastequip, Inc.,
12.50% (10.00% cash, 2.50% PIK), 2/5/15                                      |  | Waste ManagementEquipment |  |                                         | 8,237,300  |         |   | 8,065,555    |  |   | 3,130,174  
|                                                                                              |  |                           |  |                                         |            |         |   |              |  |   |            
|Total Subordinated Debt                                                                       |  |                           |  |                                         |            |         |   | 132,778,114  |  |   | 123,520,698
|                                                                                              |  |                           |  |                                         |            |         |   |              |  |   |            

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



7



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##### Table of Contents

BlackRock Kelso Capital Corporation

Schedules of Investments (Unaudited)(Continued)

June 30, 2010





|                                                                                                                           |  |                       |  |                                         |            |     |         |   |              |  |   |            |  
|-------------------------------------------------------------------------------------------------------------------------- |  | --------------------- |  | --------------------------------------- | ---------- | --- | ------- | - | ------------ |  | - | ---------- | -
|Portfolio Company                                                                                                          |  | Industry              |  | PrincipalAmount orNumber
ofShares/Units |            |     | Cost(a) |   | FairValue(b) | 
|Senior Secured Loans69.0%(e)                                                                                              |  |                       |  |                                         |            |     |         |   |              |  |   |            |  
|Alpha Media Group Inc.,
First Lien, 12.00% PIK, 7/15/13                                                                    |  | Publishing            |  | $                                       | 4,206,983  |     |         | $ | 3,023,434    |  | $ | 1,805,942  |  
|Al Solutions, Inc.,
First Lien, 10.00%, 6/28/13(f)                                                                         |  | Metals                |  |                                         | 135,000    |     |         |   | 135,000      |  |   | 135,000    |  
|American Safety Razor Company, LLC,
Second Lien, 10.50% (Base Rate + 7.25%), 1/30/14(g)                                    |  | ConsumerProducts      |  |                                         | 10,000,000 |     |         |   | 10,000,000   |  |   | 2,000,000  |  
|American SportWorks LLC,
Second Lien, 13.00%, 6/16/15(f)                                                                   |  | UtilityVehicles       |  |                                         | 8,000,000  |     |         |   | 8,000,000    |  |   | 6,400,000  |  
|AmQuip Crane Rental LLC,
Second Lien, 6.13% (LIBOR + 5.75%), 6/29/14                                                       |  | ConstructionEquipment |  |                                         | 24,089,541 |     |         |   | 22,468,559   |  |   | 21,632,408 |  
|Applied Tech Products Corp. et al.,
Tranche A, First Lien, 7.75% (Base Rate + 4.50%), 10/24/10(g)                          |  | PlasticPackaging      |  |                                         | 731,669    |     |         |   | 731,310      |  |   | 252,907    |  
|Arclin US Holdings Inc.,
Second Lien, 7.76% (LIBOR + 6.00%), 1/15/15(h)                                                    |  | Chemicals             |  |                                         | 1,885,164  |     |         |   | 1,206,340    |  |   | 1,836,150  |  
|Bankruptcy Management Solutions, Inc.,
Second Lien, 6.60% (LIBOR + 6.25%), 7/31/13                                         |  | FinancialServices     |  |                                         | 43,216,385 |     |         |   | 28,348,965   |  |   | 30,208,253 |  
|The Bargain! Shop Holdings Inc.,
Term Loan A, First Lien, 16.00%, 6/29/12(h)                                               |  | DiscountStores        |  |                                         | 13,412,952 | (i) |         |   | 13,059,220   |  |   | 12,622,173 |  
|The Bargain! Shop Holdings Inc.,
Term Loan B, First Lien, 16.00%, 7/1/12(h)                                                |  | DiscountStores        |  |                                         | 18,437,048 | (i) |         |   | 17,284,754   |  |   | 17,350,066 |  
|Berlin Packaging L.L.C.,
Second Lien, 6.96% (LIBOR + 6.50%), 8/17/15                                                       |  | RigidPackaging        |  |                                         | 24,000,000 |     |         |   | 23,537,531   |  |   | 24,000,000 |  
|Electrical Components International, Inc.,
Tranche B, First Lien, 9.50% (LIBOR + 6.50%), 5/14/15(f)                        |  | Electronics           |  |                                         | 1,649,968  |     |         |   | 1,649,968    |  |   | 1,649,968  |  
|Event Rentals, Inc.,
Acquisition Loan, First Lien, 7.75% (LIBOR + 4.25% cash, 2.00% PIK),
12/19/13                         |  | PartyRentals          |  |                                         | 3,170,324  |     |         |   | 3,170,324    |  |   | 2,567,963  |  
|Facet Technologies, LLC,
Second Lien, 17.50% PIK, 7/26/12                                                                  |  | MedicalDevices        |  |                                         | 37,407,728 |     |         |   | 36,195,331   |  |   | 9,179,501  |  
|Facet Technologies, LLC, Guaranty(j)                                                                                       |  | MedicalDevices        |  |                                         |           |     |         |   |             |  |   | (240,000   | )
|Fitness Together Franchise Corporation,
First Lien, 11.50% (9.50% cash, 2.00% PIK), 11/10/13(f)                            |  | PersonalFitness       |  |                                         | 7,093,352  |     |         |   | 7,093,352    |  |   | 5,986,789  |  
|Heartland Automotive Services II, Inc. et al.,
Term Loan A, First Lien, 7.25% (Base Rate + 4.00%), 1/30/14                 |  | AutomobileRepair      |  |                                         | 3,304,931  |     |         |   | 3,303,694    |  |   | 3,086,806  |  
|Heartland Automotive Services II, Inc. et al.,
Term Loan B, First Lien, 9.25% (Base Rate + 4.00% cash, 2.00% PIK),
1/30/14 |  | AutomobileRepair      |  |                                         | 2,281,667  |     |         |   | 2,281,511    |  |   | 2,023,843  |  
|Hoffmaster Group, Inc.,
First Lien, 7.00% (LIBOR + 5.00%), 6/2/16                                                          |  | ConsumerProducts      |  |                                         | 17,352,404 |     |         |   | 17,352,404   |  |   | 17,352,404 |  
|Hoffmaster Group, Inc.,
Second Lien, 13.50%, 6/2/17                                                                        |  | ConsumerProducts      |  |                                         | 33,000,000 |     |         |   | 33,000,000   |  |   | 33,000,000 |  

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



8



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##### Table of Contents

BlackRock Kelso Capital Corporation

Schedules of Investments (Unaudited)(Continued)

June 30, 2010



|                                                                                                  |  |                           |  |                                         |            |         |   |              |  |   |            
|------------------------------------------------------------------------------------------------- |  | ------------------------- |  | --------------------------------------- | ---------- | ------- | - | ------------ |  | - | -----------
|Portfolio Company                                                                                 |  | Industry                  |  | PrincipalAmount
orNumber ofShares/Units |            | Cost(a) |   | FairValue(b)
|InterMedia Outdoors, Inc.,
Second Lien, 7.28% (LIBOR + 6.75%), 1/31/14                            |  | Printing/Publishing       |  | $                                       | 10,000,000 |         | $ | 10,000,000   |  | $ | 8,220,000  
|Isola USA Corp.,
First Lien, 13.00% (Base Rate + 9.75%), 12/18/12                                 |  | Electronics               |  |                                         | 10,901,316 |         |   | 10,152,685   |  |   | 10,901,316 
|Isola USA Corp.,
Second Lien, 17.75% (Base Rate + 14.50%), 12/18/13                               |  | Electronics               |  |                                         | 25,000,000 |         |   | 25,000,000   |  |   | 25,000,000 
|LJVH Holdings Inc.,
Second Lien, 6.03% (LIBOR + 5.50%), 1/19/15(h)                                |  | SpecialtyCoffee           |  |                                         | 25,000,000 |         |   | 25,000,000   |  |   | 23,225,000 
|MCCI Group Holdings, LLC,
Second Lien, 8.00% (LIBOR + 7.25%), 6/21/13                             |  | HealthcareServices        |  |                                         | 29,000,000 |         |   | 28,966,834   |  |   | 28,797,000 
|Navilyst Medical, Inc.,
Second Lien, 13.00%, 8/14/15                                              |  | HealthcareServices        |  |                                         | 15,000,000 |         |   | 14,820,324   |  |   | 14,850,000 
|New Enterprise Stone & Lime Co., Inc.,
Second Lien, 12.50%, 7/11/14                               |  | Mining/Construction       |  |                                         | 35,000,000 |         |   | 34,779,790   |  |   | 35,000,000 
|Physiotherapy Associates, Inc. et al.,
Second Lien, 12.00% (Base Rate + 8.75%), 12/31/13          |  | RehabilitationCenters     |  |                                         | 17,000,000 |         |   | 17,000,000   |  |   | 16,048,000 
|Premier Yachts, Inc. et al.,
Term A, First Lien, 4.10% (LIBOR + 3.75%), 8/22/12                   |  | EntertainmentCruises      |  |                                         | 5,458,146  |         |   | 5,448,398    |  |   | 5,458,146  
|Premier Yachts, Inc. et al.,
Term B, First Lien, 7.35% (LIBOR + 7.00%), 8/22/13                   |  | EntertainmentCruises      |  |                                         | 687,342    |         |   | 685,800      |  |   | 687,342    
|Sunrise Medical LTC LLC et al.,
Second Lien, 6.85% (LIBOR + 6.50%), 12/28/13                      |  | HealthcareEquipment       |  |                                         | 14,400,000 |         |   | 14,400,000   |  |   | 14,400,000 
|Total Safety U.S., Inc.,
Second Lien, 6.85% (LIBOR + 6.50%), 12/8/13                              |  | IndustrialSafetyEquipment |  |                                         | 9,000,000  |         |   | 9,000,000    |  |   | 8,658,000  
|United Subcontractors, Inc.,
First Lien, 2.04% (LIBOR + 1.50%), 6/30/15(d)                        |  | Building andConstruction  |  |                                         | 1,626,814  |         |   | 1,618,495    |  |   | 1,408,821  
|Water Pik, Inc.,
Second Lien, 5.85% (LIBOR + 5.50%), 6/15/14                                      |  | ConsumerProducts          |  |                                         | 30,000,000 |         |   | 30,000,000   |  |   | 30,000,000 
|WBS Group LLC et al.,
Second Lien, 10.50% (LIBOR + 9.00%), 6/7/13                                 |  | Software                  |  |                                         | 20,000,000 |         |   | 20,000,000   |  |   | 18,700,000 
|Wembley, Inc.,
Second Lien, 8.50% (Base Rate + 5.25%), 8/22/12(g)                                 |  | Gaming                    |  |                                         | 1,000,000  |         |   | 1,000,000    |  |   | 28,750     
|Westward Dough Operating Company, LLC,
Term Loan A, First Lien, 4.53% (LIBOR + 4.00%), 3/30/11    |  | Restaurants               |  |                                         | 6,850,000  |         |   | 6,850,000    |  |   | 3,685,300  
|Westward Dough Operating Company, LLC,
Term Loan B, First Lien, 7.53% (LIBOR + 7.00%), 3/30/11(g) |  | Restaurants               |  |                                         | 8,334,656  |         |   | 8,334,656    |  |   | 5,494,135  
|                                                                                                  |  |                           |  |                                         |            |         |   |              |  |   |            
|Total Senior Secured Loans                                                                        |  |                           |  |                                         |            |         |   | 494,898,679  |  |   | 443,411,983
|                                                                                                  |  |                           |  |                                         |            |         |   |              |  |   |            
|Preferred Stock0.8%                                                                              |  |                           |  |                                         |            |         |   |              |  |   |            
|Alpha Media Group Holdings Inc., Series A-2(k)                                                    |  | Publishing                |  |                                         | 5,000      |         |   |             |  |   |           
|Facet Holdings Corp., Class A, 12.00% PIK(g)                                                      |  | MedicalDevices            |  |                                         | 900        |         |   | 900,000      |  |   |           

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



9



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##### Table of Contents

BlackRock Kelso Capital Corporation

Schedules of Investments (Unaudited)(Continued)

June 30, 2010



|                                                                     |  |                                   |  |                                         |  |         |            |              |   |           
|-------------------------------------------------------------------- |  | --------------------------------- |  | --------------------------------------- |  | ------- | ---------- | ------------ | - | ----------
|Portfolio Company                                                    |  | Industry                          |  | PrincipalAmount
orNumber ofShares/Units |  | Cost(a) |            | FairValue(b)
|Fitness Together Holdings, Inc.,
Series A(f)(k)                      |  | PersonalFitness                   |  | 187,500                                 |  | $       | 173,326    |              | $ |          
|Fitness Together Holdings, Inc.,
Series A-1(f)(k)                    |  | PersonalFitness                   |  | 49,056                                  |  |         | 49,056     |              |   |          
|Fitness Together Holdings, Inc.,
Series B Convertible(f)(k)          |  | PersonalFitness                   |  | 13,263,524                              |  |         | 7,600,000  |              |   | 197,000   
|M & M Tradition Holdings Corp.,
Series A Convertible, 16.00% PIK(d)  |  | Sheet MetalFabrication            |  | 4,968                                   |  |         | 4,968,000  |              |   | 5,117,040 
|                                                                     |  |                                   |  |                                         |  |         |            |              |   |           
|Total Preferred Stock                                                |  |                                   |  |                                         |  |         | 13,690,382 |              |   | 5,314,040 
|                                                                     |  |                                   |  |                                         |  |         |            |              |   |           
|Common Stock9.8%(k)                                                 |  |                                   |  |                                         |  |         |            |              |   |           
|Alpha Media Group Holdings Inc.,
Class B                             |  | Publishing                        |  | 12,500                                  |  |         |           |              |   |          
|Arclin Cayman Holdings Ltd.(h)                                       |  | Chemicals                         |  | 450,532                                 |  |         | 9,722,203  |              |   | 5,320,000 
|BKC ARS Blocker, Inc.
(American Residential)(l)                      |  | HVAC/PlumbingServices             |  | 1,000                                   |  |         | 20,798     |              |   | 876,161   
|BKC ASW Blocker, Inc.
(American SportWorks)(f)(m)                    |  | UtilityVehicles                   |  | 1,000                                   |  |         | 7,428,827  |              |   | 577,117   
|BKC CSP Blocker, Inc.
(Conney Safety)(d)(n)                          |  | Safety Products                   |  | 100                                     |  |         | 888,910    |              |   | 946,689   
|BKC DVSH Blocker, Inc.
(DynaVox Systems and Sunrise Medical)(o)      |  | AugmentativeCommunicationProducts |  | 100                                     |  |         | 758,068    |              |   | 2,920,256 
|BKC MTCH Blocker, Inc.
(Marquette Transportation)(p)                 |  | Transportation                    |  | 1,000                                   |  |         | 5,000,000  |              |   | 2,726,000 
|ECI Holdco, Inc.,
Class A-1(f)                                       |  | Electronics                       |  | 18,848,836                              |  |         | 18,848,836 |              |   | 38,170,000
|Facet Holdings Corp.                                                 |  | Medical Devices                   |  | 10,000                                  |  |         | 100,000    |              |   |          
|Fitness Together Holdings, Inc.(f)                                   |  | Personal Fitness                  |  | 173,547                                 |  |         | 118,500    |              |   |          
|M & M Tradition Holdings Corp.(d)                                    |  | Sheet MetalFabrication            |  | 500,000                                 |  |         | 5,000,000  |              |   | 5,000,000 
|MGHC Holding Corporation
(Mattress Giant)(d)                         |  | BeddingRetail                    |  | 2,285,815                               |  |         | 2,285,815  |              |   |          
|USI Senior Holdings, Inc.
(United Subcontractors)(d)                 |  | Building andConstruction          |  | 88,330                                  |  |         | 7,198,797  |              |   | 6,136,043 
|                                                                     |  |                                   |  |                                         |  |         |            |              |   |           
|Total Common Stock                                                   |  |                                   |  |                                         |  |         | 57,370,754 |              |   | 62,672,266
|                                                                     |  |                                   |  |                                         |  |         |            |              |   |           
|Limited Partnership/Limited
Liability Company Interests3.4%         |  |                                   |  |                                         |  |         |            |              |   |           
|Big Dumpster Coinvestment, LLC(k)                                    |  | WasteManagementEquipment          |  |                                        |  |         | 5,333,333  |              |   |          
|Marsico Parent Superholdco, LLC,
16.75% PIK, acquired 11/28/07(c)(g) |  | FinancialServices                 |  | 1,750                                   |  |         | 1,650,005  |              |   |          
|Penton Business Media Holdings LLC(d)(k)                             |  | InformationServices               |  |                                        |  |         | 9,050,000  |              |   | 9,050,000 

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



10



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##### Table of Contents

BlackRock Kelso Capital Corporation

Schedules of Investments (Unaudited)(Continued)

June 30, 2010



|                                                                    |  |                     |  |                                         |  |         |             |   |              |   |              |  
|------------------------------------------------------------------- |  | ------------------- |  | --------------------------------------- |  | ------- | ----------- | - | ------------ | - | ------------ | -
|Portfolio Company                                                   |  | Industry            |  | PrincipalAmount orNumber
ofShares/Units |  | Cost(a) |             |   | FairValue(b) |  
|PG Holdco, LLC (Press Ganey),
15.00% PIK                            |  | Healthcare Services |  | 333                                     |  | $       | 333,333     |   |              | $ | 345,743      |  
|PG Holdco, LLC (Press Ganey),
Class A(k)                            |  | Healthcare Services |  | 16,667                                  |  |         | 166,667     |   |              |   | 216,667      |  
|Sentry Security Systems Holdings,
LLC(k)                            |  | Security Services   |  | 147,271                                 |  |         | 147,271     |   |              |   | 867          |  
|Sentry Security Systems Holdings, LLC,
8.00% PIK                    |  | Security Services   |  | 602,729                                 |  |         | 602,729     |   |              |   | 602,729      |  
|VSS-AHC Holdings LLC (Advanstar)(k)                                 |  | Printing/Publishing |  | 352,941                                 |  |         | 4,199,161   |   |              |   | 4,198,939    |  
|WBS Group Holdings, LLC, Class B, 16.00% PIK                        |  | Software            |  | 8,000                                   |  |         | 8,000,000   |   |              |   | 7,486,449    |  
|                                                                    |  |                     |  |                                         |  |         |             |   |              |   |              |  
|Total Limited Partnership/Limited Liability
Company Interests       |  |                     |  |                                         |  |         | 29,482,499  |   |              |   | 21,901,394   |  
|                                                                    |  |                     |  |                                         |  |         |             |   |              |   |              |  
|Equity Warrants/Options0.7%(k)                                     |  |                     |  |                                         |  |         |             |   |              |   |              |  
|Arclin Cayman Holdings Ltd., Tranche 1,
expire 1/15/14(h)           |  | Chemicals           |  | 230,159                                 |  |         | 403,815     |   |              |   | 916,823      |  
|Arclin Cayman Holdings Ltd., Tranche 2,
expire 1/15/15(h)           |  | Chemicals           |  | 230,159                                 |  |         | 323,052     |   |              |   | 1,071,769    |  
|Arclin Cayman Holdings Ltd., Tranche 3,
expire 1/15/14(h)           |  | Chemicals           |  | 230,159                                 |  |         | 484,578     |   |              |   | 747,423      |  
|Arclin Cayman Holdings Ltd., Tranche 4,
expire 1/15/15(h)           |  | Chemicals           |  | 230,159                                 |  |         | 403,815     |   |              |   | 909,256      |  
|Kaz, Inc., expire 12/8/16                                           |  | Consumer Products   |  | 49                                      |  |         | 512,000     |   |              |   | 728,019      |  
|Kaz, Inc., expire 12/8/16                                           |  | Consumer Products   |  | 16                                      |  |         | 64,000      |   |              |   | 112,638      |  
|Kaz, Inc., expire 12/8/16                                           |  | Consumer Products   |  | 16                                      |  |         | 24,000      |   |              |   | 53,224       |  
|Kaz, Inc., expire 12/8/16                                           |  | Consumer Products   |  | 16                                      |  |         | 9,000       |   |              |   | 26,054       |  
|Marsico Superholdco SPV, LLC,
expire 12/14/19, acquired 11/28/07(c) |  | FinancialServices   |  | 455                                     |  |         | 444,450     |   |              |   |             |  
|                                                                    |  |                     |  |                                         |  |         |             |   |              |   |              |  
|Total Equity Warrants/Options                                       |  |                     |  |                                         |  |         | 2,668,710   |   |              |   | 4,565,206    |  
|                                                                    |  |                     |  |                                         |  |         |             |   |              |   |              |  
|TOTAL INVESTMENTS INCLUDING
UNEARNED INCOME                         |  |                     |  |                                         |  |         | 889,842,283 |   |              |   | 756,769,929  |  
|UNEARNED INCOME(0.5)%                                              |  |                     |  |                                         |  |         | (3,178,972  | ) |              |   | (3,178,972   | )
|                                                                    |  |                     |  |                                         |  |         |             |   |              |   |              |  
|TOTAL INVESTMENTS117.3%                                            |  |                     |  |                                         |  | $       | 886,663,311 |   |              |   | 753,590,957  |  
|                                                                    |  |                     |  |                                         |  |         |             |   |              |   |              |  
|OTHER ASSETS & LIABILITIES (NET)(17.3)%                            |  |                     |  |                                         |  |         |             |   |              |   | (111,175,161 | )
|                                                                    |  |                     |  |                                         |  |         |             |   |              |   |              |  
|NET ASSETS100.0%                                                   |  |                     |  |                                         |  |         |             |   |              | $ | 642,415,796  |  
|                                                                    |  |                     |  |                                         |  |         |             |   |              |   |              |  



|(a) | Represents amortized cost for fixed income securities and unearned income, and cost for preferred and common stock, limited partnership/limited liability company
interests and equity warrants/options.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | Fair value is determined by or under the direction of the Companys Board of Directors (see Note 2).
|--- | ----------------------------------------------------------------------------------------------------

|(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 9.2% of net assets at June 30, 2010.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(d) | Non-controlled, affiliated investments under the Investment Company Act of 1940, whereby the Company owns 5% or more (but not more than 25%) of the
portfolio companys outstanding voting securities, are as follows:
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



11



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|                                                                  |  |                               |            |                       |   |                         |  |   |                          |   |  |                           |            |                           |  |   |                   |  |   |                   |   |  |   |           |   |  |   |        
|----------------------------------------------------------------- |  | ----------------------------- | ---------- | --------------------- | - | ----------------------- |  | - | ------------------------ | - |  | ------------------------- | ---------- | ------------------------- |  | - | ----------------- |  | - | ----------------- | - |  | - | --------- | - |  | - | -------
|Non-controlled,
Affiliated Investments                            |  | Fair Value
atDecember 31,2009 |            | GrossAdditions(Cost)* |   | GrossReductions(Cost)** |  |   | NetUnrealizedGain
(Loss) |   |  | Fair Value
atJune 30,2010 |            | NetRealizedGain (Loss)*** |  |   | InterestIncome*** |  |   | DividendIncome***
|BKC CSP Blocker, Inc.
Common Stock                                |  | $                             |           |                       | $ | 888,910                 |  | $ |                         |   |  | $                         | 57,779     |                           |  | $ | 946,689           |  | $ |                  |   |  | $ |          |   |  | $ |       
|Conney Safety Products, LLC
Subordinated Debt                     |  |                               |           |                       |   | 25,205,409              |  |   |                         |   |  |                           | 4,154,016  |                           |  |   | 29,359,425        |  |   |                  |   |  |   | 2,358,336 |   |  |   |       
|M&M Tradition Holdings Corp.:
Preferred Stock                     |  |                               | 5,117,040  |                       |   |                        |  |   |                         |   |  |                           |           |                           |  |   | 5,117,040         |  |   |                  |   |  |   |          |   |  |   | 616,574
|Common Stock                                                      |  |                               | 5,000,000  |                       |   |                        |  |   |                         |   |  |                           |           |                           |  |   | 5,000,000         |  |   |                  |   |  |   |          |   |  |   |       
|Mattress Giant Corporation
Subordinated Debt                      |  |                               | 3,521,162  |                       |   | 736,134                 |  |   |                         |   |  |                           | (2,583,016 | )                         |  |   | 1,674,280         |  |   |                  |   |  |   | 736,232   |   |  |   |       
|MGHC Holding Corporation                                          |  |                               |            |                       |   |                         |  |   |                          |   |  |                           |            |                           |  |   |                   |  |   |                   |   |  |   |           |   |  |   |        
|Common Stock                                                      |  |                               |           |                       |   |                        |  |   |                         |   |  |                           |           |                           |  |   |                  |  |   |                  |   |  |   |          |   |  |   |       
|Penton Business Media Holdings LLC
Limited Liability Co. Interest |  |                               | 515,870    |                       |   | 9,050,000               |  |   | (14,943,201              | ) |  |                           | 14,427,331 |                           |  |   | 9,050,000         |  |   | (14,426,995       | ) |  |   |          |   |  |   |       
|Penton Media, Inc.
Senior Secured Loan                            |  |                               | 4,290,000  |                       |   | 14,571                  |  |   | (25,694,870              | ) |  |                           | 21,390,299 |                           |  |   |                  |  |   | (21,794,870       | ) |  |   | (25,073   | ) |  |   |       
|United Subcontractors, Inc.
Senior Secured Loan                   |  |                               | 1,447,864  |                       |   | 826                     |  |   |                         |   |  |                           | (39,869    | )                         |  |   | 1,408,821         |  |   |                  |   |  |   | 15,345    |   |  |   |       
|USI Senior Holdings, Inc.
Common Stock                            |  |                               | 6,902,053  |                       |   | 272,789                 |  |   |                         |   |  |                           | (1,038,799 | )                         |  |   | 6,136,043         |  |   |                  |   |  |   |          |   |  |   |       
|                                                                  |  |                               |            |                       |   |                         |  |   |                          |   |  |                           |            |                           |  |   |                   |  |   |                   |   |  |   |           |   |  |   |        
|Totals                                                            |  | $                             | 26,793,989 |                       | $ | 36,168,639              |  | $ | (40,638,071              | ) |  | $                         | 36,367,741 |                           |  | $ | 58,692,298        |  | $ | (36,221,865       | ) |  | $ | 3,084,840 |   |  | $ | 616,574
|                                                                  |  |                               |            |                       |   |                         |  |   |                          |   |  |                           |            |                           |  |   |                   |  |   |                   |   |  |   |           |   |  |   |        



|* | Gross additions include increases in the cost basis of investments resulting from new portfolio investments, payment-in-kind interest or dividends, the amortization of
unearned income, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company into this category from a different category.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|** | Gross reductions include decreases in the cost basis of investments resulting from principal collections related to investment repayments or sales, the exchange of one
or more existing securities for one or more new securities and the movement of an existing portfolio company out of this category into a different category.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|*** | For the six months ended June 30, 2010.
|--- | ---------------------------------------

The aggregate fair value of non-controlled, affiliated investments (net of unearned income) at June 30, 2010 represents 9.1% of net
assets.



|(e) | Approximately 69% of the senior secured loans to the Companys 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. In addition, approximately 14% of such senior secured loans have floors of 1.50% to 7.75% on the LIBOR base
rate. The borrower under a senior secured loan generally has the option to select from interest reset periods of one, two, three or six months and may alter that selection at the end of any reset period. The stated interest rate represents the
weighted average interest rate at June 30, 2010 of all contracts within the specified loan facility.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(f) | Controlled investments under the Investment Company Act of 1940, whereby the Company owns more than 25% of the portfolio companys outstanding voting
securities, are as follows:
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



12



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|                                                                                                                                       |  |                               |              |   |                       |   |                                |                         |  |   |                          |     |  |                           |                 |                          |  |                   |              |  |   |        |  |   |                      
|-------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------- | ------------ | - | --------------------- | - | ------------------------------ | ----------------------- |  | - | ------------------------ | --- |  | ------------------------- | --------------- | ------------------------ |  | ----------------- | ------------ |  | - | ------ |  | - | ---------------------
|Controlled Investments                                                                                                                 |  | Fair Value
atDecember 31,2009 |              |   | GrossAdditions(Cost)* |   |                                | GrossReductions(Cost)** |  |   | NetUnrealizedGain
(Loss) |     |  | Fair Value
atJune 30,2010 |                 | NetRealizedGain(Loss)*** |  | InterestIncome***
|Al Solutions, Inc.
Senior Secured Loan                                                                                                 |  | $                             | 150,000      |   |                       | $ | 221                            |                         |  | $ | (12,638                  | )   |  | $                         | (2,583          | )                        |  | $                 | 135,000      |  | $ | 2,362  |  | $ | 7,568                
|American SportWorks LLC
Senior Secured Loan                                                                                            |  |                               | 3,262,261    |   |                       |   | 2,000,000                      |                         |  |   | (7,178,673               | )   |  |                           | 8,316,412       |                          |  |                   | 6,400,000    |  |   | 153    |  |   | 68,662               
|BKC ASW Blocker, Inc.
Common Stock                                                                                                     |  |                               | 163,289      |   |                       |   | 7,353,826                      |                         |  |   | (175,000                 | )   |  |                           | (6,764,998      | )                        |  |                   | 577,117      |  |   |       |  |   |                     
|Electrical Components International, Inc.:
Senior Secured Loan
Senior Secured Loan
Senior Secured Loan                                 |  |                               | 
         |   |                       |   | 1,649,96812,000,000
12,000,000 |                         |  |   | (12,000,000
(12,000,000 | )
) |  |                           | 
            |                          |  |                   | 1,649,968
 |  |   | 
   |  |   | 20,900200,267
200,251
|ECI Holdco, Inc.
Common Stock                                                                                                          |  |                               |             |   |                       |   | 18,848,836                     |                         |  |   |                         |     |  |                           | 19,321,164      |                          |  |                   | 38,170,000   |  |   |       |  |   |                     
|Fitness Together Franchise Corporation
Senior Secured Loan                                                                             |  |                               | 5,807,656    |   |                       |   | 70,793                         |                         |  |   |                         |     |  |                           | 108,340         |                          |  |                   | 5,986,789    |  |   |       |  |   | 407,084              
|Fitness Together Holdings, Inc.:
Preferred Stock Series A
Preferred Stock Series A-1
Preferred Stock Series B Convertible
Common Stock |  |                               | 
779,000
 |   |                       |   | 
1,100,000
                 |                         |  |   | 

                   |     |  |                           | 
(1,682,000
 | )                        |  |                   | 
197,000
 |  |   | 

 |  |   | 

               
|Less: Unearned Income                                                                                                                  |  |                               | (249,930     | ) |                       |   | (332,948                       | )                       |  |   | 358,276                  |     |  |                           | 224,602         |                          |  |                   |             |  |   |       |  |   |                     
|                                                                                                                                       |  |                               |              |   |                       |   |                                |                         |  |   |                          |     |  |                           |                 |                          |  |                   |              |  |   |        |  |   |                      
|Totals                                                                                                                                 |  | $                             | 9,912,276    |   |                       | $ | 54,690,696                     |                         |  | $ | (31,008,035              | )   |  | $                         | 19,520,937      |                          |  | $                 | 53,115,874   |  | $ | 2,515  |  | $ | 904,732              
|                                                                                                                                       |  |                               |              |   |                       |   |                                |                         |  |   |                          |     |  |                           |                 |                          |  |                   |              |  |   |        |  |   |                      



|* | Gross additions include increases in the cost basis of investments resulting from new portfolio investments, payment-in-kind interest or dividends, the amortization of
unearned income, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company into this category from a different category.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|** | Gross reductions include decreases in the cost basis of investments resulting from principal collections related to investment repayments or sales, the exchange of one
or more existing securities for one or more new securities and the movement of an existing portfolio company out of this category into a different category.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|*** | For the six months ended June 30, 2010. There was no dividend income from these securities during the period.
|--- | -------------------------------------------------------------------------------------------------------------

The aggregate fair value of controlled investments (net of unearned income) at June 30, 2010 represents 8.3% of net assets.



|(g) | Non-accrual status (in default) at June 30, 2010 and therefore non-income producing. At June 30, 2010, the aggregate fair value and amortized cost of debt
investments on non-accrual status represents 1.2% and 2.6% of total debt investments at fair value and amortized cost, respectively.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(h) | Non-U.S. company or principal place of business outside the U.S.
|--- | ----------------------------------------------------------------

|(i) | Principal amount is denominated in Canadian dollars.
|--- | ----------------------------------------------------

|(j) | Guaranty by the Company on behalf of portfolio company Facet Technologies, LLC. The maximum amount of potential future payments under this guaranty is $6,000,000 at
June 30, 2010 with an expiration of December 31, 2011.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(k) | Non-income producing equity securities at June 30, 2010.
|--- | --------------------------------------------------------

|(l) | The Company is the sole stockholder of BKC ARS Blocker, Inc., which is the beneficiary of less than 5% of the voting securities of American Residential Services L.L.C.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(m) | The Company is the sole stockholder of BKC ASW Blocker, Inc., which is the beneficiary of more than 25% of the voting securities of American SportWorks LLC.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|(n) | The Company is the sole stockholder of BKC CSP Blocker, Inc., which is the beneficiary of more than 5% (but less than 25%) of the voting securities of Conney Prime
Holdings, LLC.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(o) | The Company is the sole stockholder of BKC DVSH Blocker, Inc., which is the beneficiary of less than 5% of the voting securities of each of DynaVox Systems LLC and
Sunrise Medical Investors LLC.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(p) | The Company is the sole stockholder of BKC MTCH Blocker, Inc., which is the beneficiary of less than 5% of the voting securities of Marquette Transportation Company
Holdings, LLC.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|PIK | Payment-in-kind.
|--- | ----------------

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



13



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##### Table of Contents

BlackRock Kelso Capital Corporation

Schedules of Investments

December 31, 2009



|                                                                                          |  |                                    |  |                                         |            |         |   |              |  |   |            
|----------------------------------------------------------------------------------------- |  | ---------------------------------- |  | --------------------------------------- | ---------- | ------- | - | ------------ |  | - | -----------
|Portfolio Company                                                                         |  | Industry(a)                        |  | PrincipalAmount orNumber
ofShares/Units |            | Cost(b) |   | FairValue(c)
|Senior Secured Notes9.0%                                                                 |  |                                    |  |                                         |            |         |   |              |  |   |            
|AGY Holding Corp.,
Second Lien, 11.00%, 11/15/14                                          |  | Glass Yarns/Fibers                 |  | $                                       | 23,500,000 |         | $ | 23,131,937   |  | $ | 19,740,000 
|TriMark Acquisition Corp.,
Second Lien, 11.50% (9.50% cash, 2.00% PIK), 11/30/13          |  | Food ServiceEquipment              |  |                                         | 31,503,017 |         |   | 31,503,017   |  |   | 28,667,746 
|                                                                                          |  |                                    |  |                                         |            |         |   |              |  |   |            
|Total Senior Secured Notes                                                                |  |                                    |  |                                         |            |         |   | 54,634,954   |  |   | 48,407,746 
|                                                                                          |  |                                    |  |                                         |            |         |   |              |  |   |            
|Unsecured Debt23.5%                                                                      |  |                                    |  |                                         |            |         |   |              |  |   |            
|ASM Intermediate Holdings Corp. II,
12.00% PIK, 12/27/13                                  |  | MarketingServices                  |  |                                         | 57,401,749 |         |   | 57,401,749   |  |   | 56,138,911 
|Big Dumpster Acquisition, Inc.,
13.50% PIK, 7/5/15                                        |  | Waste ManagementEquipment          |  |                                         | 42,889,344 |         |   | 42,889,344   |  |   | 14,024,815 
|Marquette Transportation Company Holdings, LLC,
14.75% PIK, 3/21/14                       |  | Transportation                     |  |                                         | 52,253,576 |         |   | 52,253,576   |  |   | 51,365,265 
|Marsico Parent Holdco, LLC et al.,
12.50% PIK, 7/15/16, acquired 11/28/07(d)              |  | FinancialServices                  |  |                                         | 11,279,758 |         |   | 11,279,758   |  |   | 3,508,005  
|Marsico Parent Superholdco, LLC et al.,
14.50% PIK, 1/15/18, acquired 11/28/07(d)         |  | FinancialServices                  |  |                                         | 7,791,207  |         |   | 7,483,674    |  |   | 1,947,802  
|                                                                                          |  |                                    |  |                                         |            |         |   |              |  |   |            
|Total Unsecured Debt                                                                      |  |                                    |  |                                         |            |         |   | 171,308,101  |  |   | 126,984,798
|                                                                                          |  |                                    |  |                                         |            |         |   |              |  |   |            
|Subordinated Debt24.7%                                                                   |  |                                    |  |                                         |            |         |   |              |  |   |            
|A & A Manufacturing Co., Inc.,
16.00% (14.00% cash, 2.00% PIK), 4/2/14                    |  | ProtectiveEnclosures               |  |                                         | 19,542,243 |         |   | 19,542,243   |  |   | 14,871,647 
|Conney Safety Products, LLC,
18.00% (16.00% cash, 2.00% PIK), 10/1/14                     |  | SafetyProducts                     |  |                                         | 30,300,750 |         |   | 30,300,750   |  |   | 25,452,630 
|DynaVox Systems LLC,
15.00%, 6/23/15                                                      |  | AugmentativeCommunication
Products |  |                                         | 25,000,000 |         |   | 25,000,000   |  |   | 25,950,000 
|Mattress Giant Corporation,
11.00% PIK, 12/31/12(e)                                       |  | BeddingRetail                     |  |                                         | 5,744,147  |         |   | 2,521,202    |  |   | 3,521,162  
|MediMedia USA, Inc.,
11.38%, 11/15/14, acquired multiple dates(d)                         |  | InformationServices                |  |                                         | 8,000,000  |         |   | 8,058,173    |  |   | 6,728,000  
|The Pay-O-Matic Corp.,
14.00% (12.00% cash, 2.00% PIK), 1/15/15                           |  | FinancialServices                  |  |                                         | 15,366,867 |         |   | 15,366,867   |  |   | 15,643,470 
|PGA Holdings, Inc.,
12.50%, 3/12/16                                                       |  | HealthcareServices                 |  |                                         | 5,000,000  |         |   | 4,923,000    |  |   | 5,100,000  
|Sentry Security Systems, LLC,
16.00% (14.00% cash, 2.00% PIK), 8/7/12                     |  | SecurityServices                   |  |                                         | 10,834,674 |         |   | 10,834,674   |  |   | 10,607,146 
|Tri-anim Health Services, Inc. et al.,
14.00% (12.00% cash, 2.00% PIK), 6/4/15            |  | HealthcareProducts                 |  |                                         | 15,021,667 |         |   | 15,021,667   |  |   | 15,322,100 
|U.S. Security Holdings, Inc.,
13.00% (11.00% cash, 2.00% PIK), 5/8/14, acquired5/10/06(d) |  | SecurityServices                   |  |                                         | 7,000,000  |         |   | 7,000,000    |  |   | 7,000,000  
|Wastequip, Inc.,
12.50% (10.00% cash, 2.50% PIK), 2/5/15                                  |  | Waste ManagementEquipment          |  |                                         | 7,947,596  |         |   | 7,947,596    |  |   | 3,035,981  
|                                                                                          |  |                                    |  |                                         |            |         |   |              |  |   |            
|Total Subordinated Debt                                                                   |  |                                    |  |                                         |            |         |   | 146,516,172  |  |   | 133,232,136
|                                                                                          |  |                                    |  |                                         |            |         |   |              |  |   |            

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



14



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##### Table of Contents

BlackRock Kelso Capital Corporation

Schedules of Investments(Continued)

December 31, 2009



|                                                                                                      |  |                         |  |                                         |            |     |         |   |              |  |   |            |  
|----------------------------------------------------------------------------------------------------- |  | ----------------------- |  | --------------------------------------- | ---------- | --- | ------- | - | ------------ |  | - | ---------- | -
|Portfolio Company                                                                                     |  | Industry(a)             |  | PrincipalAmount
orNumber ofShares/Units |            |     | Cost(b) |   | FairValue(c) | 
|Senior Secured Loans93.3%(f)                                                                         |  |                         |  |                                         |            |     |         |   |              |  |   |            |  
|Alpha Media Group Inc.,
First Lien, 12.00% PIK, 7/15/13                                               |  | Publishing              |  | $                                       | 3,964,202  |     |         | $ | 2,669,800    |  | $ | 2,055,532  |  
|Al Solutions, Inc.,
First Lien, 10.00%, 6/28/13(g)                                                    |  | Metals                  |  |                                         | 150,000    |     |         |   | 147,418      |  |   | 150,000    |  
|American Residential Services L.L.C.,
Second Lien, 12.00% (10.00% cash, 2.00% PIK), 4/17/15           |  | HVAC/Plumbing
Services  |  |                                         | 41,215,100 |     |         |   | 41,215,100   |  |   | 40,102,293 |  
|American Safety Razor Company, LLC,
Second Lien, 6.51% (LIBOR + 6.25%), 1/30/14                       |  | ConsumerProducts        |  |                                         | 10,000,000 |     |         |   | 10,000,000   |  |   | 9,090,000  |  
|American SportWorks LLC,
Second Lien, 20.00%, 6/27/14(g)(h)                                           |  | UtilityVehicles         |  |                                         | 13,403,274 |     |         |   | 13,403,274   |  |   | 3,262,261  |  
|AmQuip Crane Rental LLC,
Second Lien, 6.01% (LIBOR + 5.75%), 6/29/14                                  |  | ConstructionEquipment   |  |                                         | 24,089,541 |     |         |   | 22,267,464   |  |   | 22,403,273 |  
|Applied Tech Products Corp. et al.,
Tranche A, First Lien, 7.75% (Base Rate + 4.50%),10/24/10(h)      |  | PlasticPackaging        |  |                                         | 731,669    |     |         |   | 730,747      |  |   | 275,359    |  
|Arclin US Holdings Inc.,
First Lien, 7.00% (Base Rate + 3.75%), 7/10/14(h)                            |  | Chemicals               |  |                                         | 6,423,655  |     |         |   | 3,357,410    |  |   | 5,607,851  |  
|Arclin US Holdings Inc.,
Second Lien, 10.75% (Base Rate + 7.50%), 7/10/15(h)                          |  | Chemicals               |  |                                         | 14,500,000 |     |         |   | 14,500,000   |  |   | 3,335,290  |  
|Bankruptcy Management Solutions, Inc.,
Second Lien, 6.48% (LIBOR + 6.25%), 7/31/13                    |  | FinancialServices       |  |                                         | 24,187,500 |     |         |   | 24,187,500   |  |   | 17,802,000 |  
|The Bargain! Shop Holdings Inc.,
Term Loan A, First Lien, 14.50% (13.50% cash, 1.00% PIK), 6/29/12(i) |  | DiscountStores          |  |                                         | 13,602,460 | (j) |         |   | 13,211,257   |  |   | 12,975,113 |  
|The Bargain! Shop Holdings Inc.,
Term Loan B, First Lien, 14.50% (13.50% cash, 1.00% PIK), 7/1/12(i)  |  | DiscountStores          |  |                                         | 18,697,540 | (j) |         |   | 17,511,078   |  |   | 17,835,208 |  
|Berlin Packaging L.L.C.,
Second Lien, 6.76% (LIBOR + 6.50%), 8/17/15                                  |  | RigidPackaging          |  |                                         | 24,000,000 |     |         |   | 23,492,840   |  |   | 22,680,000 |  
|Champion Energy Corporation et al.,
First Lien, 14.50%, 5/22/11                                       |  | Heating and OilServices |  |                                         | 30,000,000 |     |         |   | 30,000,000   |  |   | 30,210,000 |  
|Custom Direct, Inc. et al.,
Second Lien, 6.31% (LIBOR + 6.00%), 12/31/14                              |  | Printing                |  |                                         | 10,000,000 |     |         |   | 10,000,000   |  |   | 7,990,000  |  
|Deluxe Entertainment Services Group Inc.,
Second Lien, 11.00% (LIBOR + 9.00%), 11/11/13               |  | Entertainment           |  |                                         | 12,000,000 |     |         |   | 12,000,000   |  |   | 11,148,000 |  
|Electrical Components International, Inc.,
First Lien, 9.25% (Base Rate + 6.00%), 5/1/14              |  | Electronics             |  |                                         | 2,974,210  |     |         |   | 2,052,126    |  |   | 2,562,460  |  
|Electrical Components International, Inc.,
Second Lien, 11.50% (Base Rate + 8.25%), 5/1/14(h)         |  | Electronics             |  |                                         | 26,000,000 |     |         |   | 22,891,103   |  |   | 8,874,840  |  
|Event Rentals, Inc.,
Acquisition Loan, First Lien, 7.75% (LIBOR + 4.25% cash, 2.00% PIK),
12/19/13    |  | PartyRentals            |  |                                         | 3,217,840  |     |         |   | 3,217,840    |  |   | 2,622,540  |  
|Facet Technologies, LLC,
Second Lien, 17.50% PIK, 7/26/12                                             |  | MedicalDevices          |  |                                         | 34,321,490 |     |         |   | 34,321,490   |  |   | 10,000,012 |  
|Facet Technologies, LLC,
Guaranty(k)                                                                  |  | MedicalDevices          |  |                                         |           |     |         |   |             |  |   | (225,000   | )

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



15



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##### Table of Contents

BlackRock Kelso Capital Corporation

Schedules of Investments(Continued)

December 31, 2009



|                                                                                                                           |  |                             |  |                                         |            |         |   |              |  |   |           
|-------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- |  | --------------------------------------- | ---------- | ------- | - | ------------ |  | - | ----------
|Portfolio Company                                                                                                          |  | Industry(a)                 |  | PrincipalAmount
orNumber ofShares/Units |            | Cost(b) |   | FairValue(c)
|Fitness Together Franchise Corporation,
First Lien, 11.50% (9.50% cash, 2.00% PIK), 11/10/13(g)                            |  | PersonalFitness             |  | $                                       | 7,022,559  |         | $ | 7,022,559    |  | $ | 5,807,656 
|Heartland Automotive Services II, Inc. et al.,
Term Loan A, First Lien, 7.25% (Base Rate + 4.00%), 1/30/14                 |  | AutomobileRepair            |  |                                         | 3,325,862  |         |   | 3,324,445    |  |   | 3,026,535 
|Heartland Automotive Services II, Inc. et al.,
Term Loan B, First Lien, 9.25% (Base Rate + 4.00% cash, 2.00% PIK),
1/30/14 |  | AutomobileRepair            |  |                                         | 2,258,858  |         |   | 2,258,680    |  |   | 1,951,653 
|HIT Entertainment, Inc.,
Second Lien, 5.78% (LIBOR + 5.50%), 2/26/13                                                       |  | Entertainment               |  |                                         | 1,000,000  |         |   | 1,000,000    |  |   | 550,000   
|InterMedia Outdoors, Inc.,
Second Lien, 7.00% (LIBOR + 6.75%), 1/31/14                                                     |  | Printing/Publishing         |  |                                         | 10,000,000 |         |   | 10,000,000   |  |   | 8,520,000 
|Isola USA Corp.,
First Lien, 13.00% (Base Rate + 9.75%), 12/18/12                                                          |  | Electronics                 |  |                                         | 10,901,316 |         |   | 10,002,294   |  |   | 10,138,224
|Isola USA Corp.,
Second Lien, 17.75% (Base Rate + 14.50%), 12/18/13                                                        |  | Electronics                 |  |                                         | 25,000,000 |         |   | 25,000,000   |  |   | 22,050,000
|LJVH Holdings Inc.,
Second Lien, 5.75% (LIBOR + 5.50%), 1/19/15(i)                                                         |  | SpecialtyCoffee             |  |                                         | 25,000,000 |         |   | 25,000,000   |  |   | 22,700,000
|MCCI Group Holdings, LLC,
Second Lien, 7.51% (LIBOR + 7.25%), 6/21/13                                                      |  | HealthcareServices          |  |                                         | 29,000,000 |         |   | 28,961,307   |  |   | 28,710,000
|Navilyst Medical, Inc.,
Second Lien, 12.25%, 8/14/15                                                                       |  | HealthcareServices          |  |                                         | 15,000,000 |         |   | 14,802,935   |  |   | 14,700,000
|New Enterprise Stone & Lime Co., Inc.,
Second Lien, 12.50%, 7/11/14                                                        |  | Mining/Construction         |  |                                         | 35,000,000 |         |   | 34,752,695   |  |   | 35,000,000
|Oriental Trading Company, Inc.,
Second Lien, 6.24% (LIBOR + 6.00%), 1/31/14                                                |  | Party Suppliesand Novelties |  |                                         | 3,000,000  |         |   | 3,000,000    |  |   | 802,500   
|Penton Media, Inc. et al.,
Second Lien, 5.28% (LIBOR + 5.00%), 2/1/14(e)                                                   |  | InformationServices         |  |                                         | 26,000,000 |         |   | 25,680,299   |  |   | 4,290,000 
|Physiotherapy Associates, Inc. et al.,
Second Lien, 12.00% (Base Rate + 8.75%), 12/31/13                                   |  | RehabilitationCenters       |  |                                         | 17,000,000 |         |   | 17,000,000   |  |   | 15,759,000
|PQ Corporation,
Second Lien, 6.74% (LIBOR + 6.50%), 7/30/15                                                                |  | SpecialtyChemicals          |  |                                         | 10,000,000 |         |   | 8,970,517    |  |   | 8,520,000 
|Premier Yachts, Inc. et al.,
Term A, First Lien, 3.98% (LIBOR + 3.75%), 8/22/12                                            |  | EntertainmentCruises        |  |                                         | 5,973,418  |         |   | 5,960,283    |  |   | 5,973,418 
|Premier Yachts, Inc. et al.,
Term B, First Lien, 7.23% (LIBOR + 7.00%), 8/22/13                                            |  | EntertainmentCruises        |  |                                         | 1,265,983  |         |   | 1,263,002    |  |   | 1,265,983 
|Sunrise Medical LTC LLC et al.,
Second Lien, 6.74% (LIBOR + 6.50%), 12/28/13                                               |  | HealthcareEquipment         |  |                                         | 14,400,000 |         |   | 14,400,000   |  |   | 14,097,600
|Total Safety U.S., Inc.,
Second Lien, 6.74% (LIBOR + 6.50%), 12/8/13                                                       |  | Industrial SafetyEquipment  |  |                                         | 9,000,000  |         |   | 9,000,000    |  |   | 8,514,000 
|United Subcontractors, Inc.,
First Lien, 1.76% (LIBOR + 1.50%), 6/30/15(e)                                                 |  | Building andConstruction    |  |                                         | 1,626,814  |         |   | 1,617,669    |  |   | 1,447,864 
|Water Pik, Inc.,
Second Lien, 5.73% (LIBOR + 5.50%), 6/15/14                                                               |  | ConsumerProducts            |  |                                         | 30,000,000 |         |   | 30,000,000   |  |   | 30,000,000
|WBS Group LLC et al.,
Second Lien, 6.54% (LIBOR + 6.25%), 6/7/13                                                           |  | Software                    |  |                                         | 20,000,000 |         |   | 20,000,000   |  |   | 17,000,000

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



16



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##### Table of Contents

BlackRock Kelso Capital Corporation

Schedules of Investments(Continued)

December 31, 2009



|                                                                                                 |  |                                   |  |                                         |            |         |   |              |  |   |            
|------------------------------------------------------------------------------------------------ |  | --------------------------------- |  | --------------------------------------- | ---------- | ------- | - | ------------ |  | - | -----------
|Portfolio Company                                                                                |  | Industry(a)                       |  | PrincipalAmount
orNumber ofShares/Units |            | Cost(b) |   | FairValue(c)
|Wembley, Inc.,
Second Lien, 8.50% (Base Rate + 5.25%), 8/22/12(h)                                |  | Gaming                            |  | $                                       | 1,000,000  |         | $ | 1,000,000    |  | $ | 67,500     
|Westward Dough Operating Company, LLC,
Term Loan A, First Lien, 4.25% (LIBOR + 4.00%), 3/30/11   |  | Restaurants                       |  |                                         | 6,850,000  |         |   | 6,850,000    |  |   | 4,719,650  
|Westward Dough Operating Company, LLC,
Term Loan B, First Lien, 7.25% (LIBOR + 7.00%),3/30/11(h) |  | Restaurants                       |  |                                         | 8,334,656  |         |   | 8,334,656    |  |   | 6,784,379  
|                                                                                                 |  |                                   |  |                                         |            |         |   |              |  |   |            
|Total Senior Secured Loans                                                                       |  |                                   |  |                                         |            |         |   | 616,377,788  |  |   | 503,152,994
|                                                                                                 |  |                                   |  |                                         |            |         |   |              |  |   |            
|Preferred Stock1.1%                                                                             |  |                                   |  |                                         |            |         |   |              |  |   |            
|Alpha Media Group Holdings Inc.,
Series A-2(l)                                                   |  | Publishing                        |  |                                         | 5,000      |         |   |             |  |   |           
|Facet Holdings Corp.,
Class A, 12.00% PIK(h)                                                     |  | MedicalDevices                    |  |                                         | 900        |         |   | 900,000      |  |   |           
|Fitness Together Holdings, Inc.,
Series A(g)(l)                                                  |  | PersonalFitness                   |  |                                         | 187,500    |         |   | 173,326      |  |   |           
|Fitness Together Holdings, Inc.,
Series A-1(g)(l)                                                |  | PersonalFitness                   |  |                                         | 49,056     |         |   | 49,056       |  |   |           
|Fitness Together Holdings, Inc.,
Series B Convertible(g)(l)                                      |  | PersonalFitness                   |  |                                         | 11,343,804 |         |   | 6,500,000    |  |   | 779,000    
|M & M Tradition Holdings Corp.,
Series A Convertible, 16.00% PIK(e)                              |  | Sheet MetalFabrication            |  |                                         | 4,968      |         |   | 4,968,000    |  |   | 5,117,040  
|                                                                                                 |  |                                   |  |                                         |            |         |   |              |  |   |            
|Total Preferred Stock                                                                            |  |                                   |  |                                         |            |         |   | 12,590,382   |  |   | 5,896,040  
|                                                                                                 |  |                                   |  |                                         |            |         |   |              |  |   |            
|Common Stock3.5%(l)                                                                             |  |                                   |  |                                         |            |         |   |              |  |   |            
|Alpha Media Group Holdings Inc.,
Class B                                                         |  | Publishing                        |  |                                         | 12,500     |         |   |             |  |   |           
|BKC ARS Blocker, Inc.
(American Residential)(m)                                                  |  | HVAC/Plumbing Services            |  |                                         | 1,000      |         |   | 192,418      |  |   | 1,610,000  
|BKC ASW Blocker, Inc.
(American SportWorks)(g)(n)                                                |  | UtilityVehicles                   |  |                                         | 1,000      |         |   | 250,001      |  |   | 163,289    
|BKC DVSH Blocker, Inc.
(DynaVox Systems)(o)                                                      |  | AugmentativeCommunicationProducts |  |                                         | 100        |         |   | 1,000,000    |  |   | 2,560,000  
|BKC MTCH Blocker, Inc.
(Marquette Transportation)(p)                                             |  | Transportation                    |  |                                         | 1,000      |         |   | 5,000,000    |  |   | 2,635,000  
|Facet Holdings Corp.                                                                             |  | Medical Devices                   |  |                                         | 10,000     |         |   | 100,000      |  |   |           
|Fitness Together Holdings, Inc.(g)                                                               |  | Personal Fitness                  |  |                                         | 173,547    |         |   | 118,500      |  |   |           
|M & M Tradition Holdings Corp.(e)                                                                |  | Sheet MetalFabrication            |  |                                         | 500,000    |         |   | 5,000,000    |  |   | 5,000,000  
|MGHC Holding Corporation (Mattress Giant)(e)                                                     |  | BeddingRetail                    |  |                                         | 2,285,815  |         |   | 2,285,815    |  |   |           
|USI Senior Holdings, Inc. (United Subcontractors)(e)                                             |  | Building andConstruction          |  |                                         | 79,237     |         |   | 6,926,008    |  |   | 6,902,053  
|                                                                                                 |  |                                   |  |                                         |            |         |   |              |  |   |            
|Total Common Stock                                                                               |  |                                   |  |                                         |            |         |   | 20,872,742   |  |   | 18,870,342 
|                                                                                                 |  |                                   |  |                                         |            |         |   |              |  |   |            

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



17



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##### Table of Contents

BlackRock Kelso Capital Corporation

Schedules of Investments(Continued)

December 31, 2009



|                                                                     |  |                           |  |                                         |  |         |               |   |              |   |              |  
|-------------------------------------------------------------------- |  | ------------------------- |  | --------------------------------------- |  | ------- | ------------- | - | ------------ | - | ------------ | -
|Portfolio Company                                                    |  | Industry(a)               |  | PrincipalAmount
orNumber ofShares/Units |  | Cost(b) |               |   | FairValue(c) |  
|Limited Partnership/Limited Liability
Company Interests2.4%         |  |                           |  |                                         |  |         |               |   |              |   |              |  
|Big Dumpster Coinvestment, LLC(l)                                    |  | Waste ManagementEquipment |  |                                        |  | $       | 5,333,333     |   |              | $ |             |  
|Marsico Parent Superholdco, LLC,
16.75% PIK, acquired 11/28/07(d)(h) |  | FinancialServices         |  | 1,750                                   |  |         | 1,650,005     |   |              |   |             |  
|PG Holdco, LLC (Press Ganey),
15.00% PIK                             |  | Healthcare Services       |  | 333                                     |  |         | 333,333       |   |              |   | 346,654      |  
|PG Holdco, LLC (Press Ganey),
Class A(l)                             |  | Healthcare Services       |  | 16,667                                  |  |         | 166,667       |   |              |   | 250,000      |  
|Prism Business Media Holdings LLC (Penton Media)(e)(l)               |  | InformationServices       |  | 68                                      |  |         | 14,943,201    |   |              |   | 515,870      |  
|Sentry Security Systems Holdings, LLC(l)                             |  | Security Services         |  | 147,271                                 |  |         | 147,271       |   |              |   | 479          |  
|Sentry Security Systems Holdings, LLC,
8.00% PIK                     |  | Security Services         |  | 602,729                                 |  |         | 602,729       |   |              |   | 602,729      |  
|VSS-AHC Holdings LLC (Advanstar)(l)                                  |  | Printing/Publishing       |  | 352,941                                 |  |         | 4,199,161     |   |              |   | 4,198,939    |  
|WBS Group Holdings, LLC, Class B,
16.00% PIK                         |  | Software                  |  | 8,000                                   |  |         | 8,000,000     |   |              |   | 7,167,857    |  
|                                                                     |  |                           |  |                                         |  |         |               |   |              |   |              |  
|Total Limited Partnership/Limited Liability
Company Interests        |  |                           |  |                                         |  |         | 35,375,700    |   |              |   | 13,082,528   |  
|                                                                     |  |                           |  |                                         |  |         |               |   |              |   |              |  
|Equity Warrants/Options0.2%(l)                                      |  |                           |  |                                         |  |         |               |   |              |   |              |  
|Kaz, Inc., expire 12/8/16                                            |  | Consumer Products         |  | 49                                      |  |         | 512,000       |   |              |   | 770,160      |  
|Kaz, Inc., expire 12/8/16                                            |  | Consumer Products         |  | 16                                      |  |         | 64,000        |   |              |   | 136,373      |  
|Kaz, Inc., expire 12/8/16                                            |  | Consumer Products         |  | 16                                      |  |         | 24,000        |   |              |   | 75,141       |  
|Kaz, Inc., expire 12/8/16                                            |  | Consumer Products         |  | 16                                      |  |         | 9,000         |   |              |   | 43,073       |  
|Marsico Superholdco SPV, LLC,
expire 12/14/19, acquired 11/28/07(d)  |  | FinancialServices         |  | 455                                     |  |         | 444,450       |   |              |   |             |  
|                                                                     |  |                           |  |                                         |  |         |               |   |              |   |              |  
|Total Equity Warrants/Options                                        |  |                           |  |                                         |  |         | 1,053,450     |   |              |   | 1,024,747    |  
|                                                                     |  |                           |  |                                         |  |         |               |   |              |   |              |  
|TOTAL INVESTMENTS INCLUDING
UNEARNED INCOME                          |  |                           |  |                                         |  |         | 1,058,729,289 |   |              |   | 850,651,331  |  
|UNEARNED INCOME(0.7)%                                               |  |                           |  |                                         |  |         | (3,909,286    | ) |              |   | (3,909,286   | )
|                                                                     |  |                           |  |                                         |  |         |               |   |              |   |              |  
|TOTAL INVESTMENTS156.9%                                             |  |                           |  |                                         |  | $       | 1,054,820,003 |   |              |   | 846,742,045  |  
|                                                                     |  |                           |  |                                         |  |         |               |   |              |   |              |  
|OTHER ASSETS & LIABILITIES (NET)(56.9)%                             |  |                           |  |                                         |  |         |               |   |              |   | (307,179,283 | )
|                                                                     |  |                           |  |                                         |  |         |               |   |              |   |              |  
|NET ASSETS100.0%                                                    |  |                           |  |                                         |  |         |               |   |              | $ | 539,562,762  |  
|                                                                     |  |                           |  |                                         |  |         |               |   |              |   |              |  



|(a) | Unaudited.
|--- | ----------

|(b) | Represents amortized cost for fixed income securities and unearned income, and cost for preferred and common stock, limited partnership/limited liability company
interests and equity warrants/options.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) | Fair value is determined by or under the direction of the Companys Board of Directors (see Note 2).
|--- | ----------------------------------------------------------------------------------------------------

|(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 3.6% of net assets at December 31, 2009.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(e) | Non-controlled, affiliated investments under the Investment Company Act of 1940, whereby the Company owns 5% or more (but not more than 25%) of the
portfolio companys outstanding voting securities, are as follows:
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



18



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|                                                                 |  |                               |            |   |                       |   |                         |  |   |                          |   |  |                               |             |   |                          |   |                   |   |                   |   |        |  |   |           |  |   |          
|---------------------------------------------------------------- |  | ----------------------------- | ---------- | - | --------------------- | - | ----------------------- |  | - | ------------------------ | - |  | ----------------------------- | ----------- | - | ------------------------ | - | ----------------- | - | ----------------- | - | ------ |  | - | --------- |  | - | ---------
|Non-controlled,
Affiliated Investments                           |  | Fair Value
atDecember 31,2008 |            |   | GrossAdditions(Cost)* |   | GrossReductions(Cost)** |  |   | NetUnrealizedGain (Loss) |   |  | Fair Value
atDecember 31,2009 |             |   | NetRealizedGain(Loss)*** |   | InterestIncome*** |   | DividendIncome***
|American SportWorks LLC
Senior Secured Loan                      |  | $                             | 5,716,023  |   |                       | $ |                        |  | $ | (3,572,448               | ) |  | $                             | (2,143,575  | ) |                          | $ |                  |  |                   | $ |       |  | $ | 27,617    |  | $ |         
|BKC ASW Blocker, Inc.
Common Stock                               |  |                               | 16,399     |   |                       |   |                        |  |   | (5,883                   | ) |  |                               | (10,516     | ) |                          |   |                  |  |                   |   |       |  |   |          |  |   |         
|M&M Tradition Holdings Corp.:                                    |  |                               |            |   |                       |   |                         |  |   |                          |   |  |                               |             |   |                          |   |                   |   |                   |   |        |  |   |           |  |   |          
|Preferred Stock                                                  |  |                               | 5,537,280  |   |                       |   |                        |  |   | (408,000                 | ) |  |                               | (12,240     | ) |                          |   | 5,117,040         |   |                   |   | 12,240 |  |   |          |  |   | 1,110,885
|Common Stock                                                     |  |                               | 6,095,000  |   |                       |   |                        |  |   |                         |   |  |                               | (1,095,000  | ) |                          |   | 5,000,000         |   |                   |   |       |  |   |          |  |   |         
|Mattress Giant Corporation
Subordinated Debt                     |  |                               |           |   |                       |   | 2,521,202               |  |   |                         |   |  |                               | 999,960     |   |                          |   | 3,521,162         |   |                   |   |       |  |   | 773,581   |  |   |         
|MGHC Holding Corporation
Common Stock                            |  |                               |           |   |                       |   | 2,285,815               |  |   |                         |   |  |                               | (2,285,815  | ) |                          |   |                  |   |                   |   |       |  |   |          |  |   |         
|Penton Media, Inc.
Senior Secured Loan                           |  |                               | 18,226,000 |   |                       |   | 78,211                  |  |   |                         |   |  |                               | (14,014,211 | ) |                          |   | 4,290,000         |   |                   |   |       |  |   | 1,437,763 |  |   |         
|Prism Business Media Holdings LLC
Limited Liability Co. Interest |  |                               | 4,730,000  |   |                       |   |                        |  |   |                         |   |  |                               | (4,214,130  | ) |                          |   | 515,870           |   |                   |   |       |  |   |          |  |   |         
|United Subcontractors, Inc.
Senior Secured Loan                  |  |                               |           |   |                       |   | 1,617,669               |  |   |                         |   |  |                               | (169,805    | ) |                          |   | 1,447,864         |   |                   |   |       |  |   | 16,210    |  |   |         
|USI Senior Holdings, Inc.
Common Stock                           |  |                               |           |   |                       |   | 6,926,008               |  |   |                         |   |  |                               | (23,955     | ) |                          |   | 6,902,053         |   |                   |   |       |  |   |          |  |   |         
|Less: Unearned Income                                            |  |                               | (305,622   | ) |                       |   | 305,622                 |  |   |                         |   |  |                               |            |   |                          |   |                  |   |                   |   |       |  |   |          |  |   |         
|                                                                 |  |                               |            |   |                       |   |                         |  |   |                          |   |  |                               |             |   |                          |   |                   |   |                   |   |        |  |   |           |  |   |          
|Totals                                                           |  | $                             | 40,015,080 |   |                       | $ | 13,734,527              |  | $ | (3,986,331               | ) |  | $                             | (22,969,287 | ) |                          | $ | 26,793,989        |   |                   | $ | 12,240 |  | $ | 2,255,171 |  | $ | 1,110,885
|                                                                 |  |                               |            |   |                       |   |                         |  |   |                          |   |  |                               |             |   |                          |   |                   |   |                   |   |        |  |   |           |  |   |          



|* | Gross additions include increases in the cost basis of investments resulting from new portfolio investments, payment-in-kind interest or dividends, the amortization of
unearned income, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company into this category from a different category.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|** | Gross reductions include decreases in the cost basis of investments resulting from principal collections related to investment repayments or sales, the exchange of one
or more existing securities for one or more new securities and the movement of an existing portfolio company out of this category into a different category.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|*** | For the year ended December 31, 2009.
|--- | -------------------------------------

| | Investment moved out of the non-controlled, affiliated category into the controlled category during the year.
|- | -------------------------------------------------------------------------------------------------------------

The aggregate fair value of non-controlled, affiliated investments (net of unearned income) at December 31, 2009 represents 5.0% of
net assets.



|(f) | Approximately 66% of the senior secured loans to the Companys 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. In addition, approximately 9% of such senior secured loans have floors of 1.50% to 3.25% on the LIBOR base
rate. The borrower under a senior secured loan generally has the option to select from interest reset periods of one, two, three or six months and may alter that selection at the end of any reset period. The stated interest rate represents the
weighted average interest rate at December 31, 2009 of all contracts within the specified loan facility.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



19



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##### Table of Contents

|(g) | Controlled investments under the Investment Company Act of 1940, whereby the Company owns more than 25% of the portfolio companys outstanding voting
securities, are as follows:
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                                                                                                       |  |                               |                |                       |   |               |                          |  |   |                               |   |  |                   |              |   |                        |   |              |   |  |   |            
|-------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------- | -------------- | --------------------- | - | ------------- | ------------------------ |  | - | ----------------------------- | - |  | ----------------- | ------------ | - | ---------------------- | - | ------------ | - |  | - | -----------
|Controlled Investments                                                                                                                 |  | Fair Value
atDecember 31,2008 |                | GrossAdditions(Cost)* |   |               | NetUnrealizedGain (Loss) |  |   | Fair Value
atDecember 31,2009 |   |  | NetRealizedLoss** |              |   | Interest/OtherIncome**
|Al Solutions, Inc.
Senior Secured Loan
Subordinated Debt                                                                               |  | $                             |              |                       | $ | 147,41871,373 |                          |  | $ | 2,582(71,373                  | ) |  | $                 | 150,000     |   |                        | $ | (13,395,134 | ) |  | $ | 5,82171,373
|American SportWorks LLC
Senior Secured Loan                                                                                            |  |                               |               |                       |   | 3,572,448     |                          |  |   | (310,187                      | ) |  |                   | 3,262,261    |   |                        |   |             |   |  |   | 78,075     
|BKC ASW Blocker, Inc.
Common Stock                                                                                                     |  |                               |               |                       |   | 5,883         |                          |  |   | 157,406                       |   |  |                   | 163,289      |   |                        |   |             |   |  |   |           
|Fitness Together Franchise Corporation
Senior Secured Loan                                                                             |  |                               | 6,496,555      |                       |   | 140,615       |                          |  |   | (829,514                      | ) |  |                   | 5,807,656    |   |                        |   |             |   |  |   | 808,583    
|Fitness Together Holdings, Inc.:
Preferred Stock Series A
Preferred Stock Series A-1
Preferred Stock Series B Convertible
Common Stock |  |                               | 
4,700,000
 |                       |   | 

        |                          |  |   | 
(3,921,000
               | ) |  |                   | 
779,000
 |   |                        |   | 

       |   |  |   | 

     
|Tygem Holdings, Inc.:
Preferred Stock                                                                                                  |  |                               |               |                       |   |              |                          |  |   |                              |   |  |                   |             |   |                        |   | (10,826,867  | ) |  |   |           
|Preferred Stock Series B Convertible                                                                                                   |  |                               |               |                       |   |              |                          |  |   |                              |   |  |                   |             |   |                        |   | (14,725,535  | ) |  |   |           
|Common Stock                                                                                                                           |  |                               |               |                       |   |              |                          |  |   |                              |   |  |                   |             |   |                        |   | (3,608,956   | ) |  |   |           
|Less: Unearned Income                                                                                                                  |  |                               |               |                       |   | (249,930      | )                        |  |   |                              |   |  |                   | (249,930     | ) |                        |   |             |   |  |   |           
|                                                                                                                                       |  |                               |                |                       |   |               |                          |  |   |                               |   |  |                   |              |   |                        |   |              |   |  |   |            
|Totals                                                                                                                                 |  | $                             | 11,196,555     |                       | $ | 3,687,807     |                          |  | $ | (4,972,086                    | ) |  | $                 | 9,912,276    |   |                        | $ | (42,556,492  | ) |  | $ | 963,852    
|                                                                                                                                       |  |                               |                |                       |   |               |                          |  |   |                               |   |  |                   |              |   |                        |   |              |   |  |   |            



|* | Gross additions include increases in the cost basis of investments resulting from new portfolio investments, payment-in-kind interest or dividends, the amortization of
unearned income, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company into this category from a different category.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|** | For the year ended December 31, 2009. There was no dividend income from these securities during the year.
|-- | ---------------------------------------------------------------------------------------------------------

The aggregate fair value of controlled investments (net of unearned income) at December 31, 2009 represents 1.8% of net assets.



|(h) | Non-accrual status (in default) at December 31, 2009 and therefore non-income producing. At December 31, 2009, the aggregate fair value and amortized cost of
debt investments on non-accrual status represents 3.5% and 6.5% of total debt investments at fair value and amortized cost, respectively.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(i) | Non-U.S. company or principal place of business outside the U.S.
|--- | ----------------------------------------------------------------

|(j) | Principal amount is denominated in Canadian dollars.
|--- | ----------------------------------------------------

|(k) | Guaranty by the Company on behalf of portfolio company Facet Technologies, LLC. The maximum amount of potential future payments under this guaranty is $6,000,000 at
December 31, 2009 with an expiration of December 31, 2011.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(l) | Non-income producing equity securities at December 31, 2009.
|--- | ------------------------------------------------------------

|(m) | The Company is the sole stockholder of BKC ARS Blocker, Inc., which is the beneficiary of less than 5% of the voting securities of American Residential Services L.L.C.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(n) | The Company is the sole stockholder of BKC ASW Blocker, Inc., which is the beneficiary of more than 25% of the voting securities of American SportWorks LLC.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|(o) | The Company is the sole stockholder of BKC DVSH Blocker, Inc., which is the beneficiary of less than 5% of the voting securities of DynaVox Systems LLC.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------

|(p) | The Company is the sole stockholder of BKC MTCH Blocker, Inc., which is the beneficiary of less than 5% of the voting securities of Marquette Transportation Company
Holdings, LLC.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|PIK | Payment-in-kind.
|--- | ----------------

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



20



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##### Table of Contents

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 elected to be regulated 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 (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 invests 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 of 35,366,589 shares of its common stock at a price of $15.00 per share receiving net proceeds of approximately $529 million. On July 2, 2007, the Company completed an initial public offering through which it sold an
additional 10,000,000 shares of its common stock at a price of $16.00 per share and listed its shares on The NASDAQ Global Select Market. The Company received net proceeds of approximately $150 million from this offering.

On June 22, 2010, the Company closed an add-on public offering and sold 7,500,000 shares of its common stock at a price of $10.25
per share receiving net proceeds of approximately $73 million. On June 28, 2010, the underwriters of the add-on offering exercised their over-allotment option under the underwriting agreement and elected to purchase an additional 1,125,000
shares of common stock at a price of $10.25 per share resulting in net proceeds of approximately $11 million.

The
accompanying 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 periods, have been included. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year.
Certain prior year amounts have been reclassified to conform to the current year presentation.

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, 2009, which was filed with the Securities
and Exchange Commission (SEC) on March 12, 2010.

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 unless they are deemed not to represent fair value.
The Company generally obtains market quotations from an independent pricing service or one or more broker-dealers or market makers and utilizes the average of the range of bid and ask quotations as a practical expedient for fair value. However, debt
investments with remaining maturities within 60 days are valued at amortized cost, which approximates fair value. Debt and equity securities for which market quotations are not readily available or for which market quotations are deemed not to
represent fair value 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 substantially all
of the investments in its portfolio, the Company expects to value substantially all 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 and subjectivity of determining the fair value of investments that do not have a readily
available market value, the fair value of the
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

BlackRock Kelso Capital Corporation

Notes to Financial Statements (Unaudited)Continued



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 may differ materially from the
values that the Company may ultimately realize. In addition, changes in the market environment and other events may have differing impacts on the market quotations used to value some of the Companys investments than on the fair values of the
Companys investments for which market quotations are not readily available. Market quotations may be deemed not to represent fair value in certain circumstances where BlackRock Kelso Capital Advisors LLC, the Companys investment advisor
(the Advisor), believes that facts and circumstances applicable to an issuer, a seller or purchaser or the market for a particular security cause current market quotations to not reflect the fair value of the security. Examples of these
events could include cases where a security trades infrequently causing a quoted purchase or sale price to become stale, where there is a forced sale by a distressed seller, where market quotations vary substantially among market makers,
or where there is a wide bid-ask spread or significant increase in the bid-ask spread.

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



| | (i) | The quarterly valuation process begins with each portfolio company or investment being initially evaluated and rated by the investment professionals of the Advisor
responsible for the portfolio investment;
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | The investment professionals provide recent portfolio company financial statements and other reporting materials to independent valuation firms engaged by the Board of
Directors, such firms conduct independent appraisals each quarter and their preliminary valuation conclusions are documented and discussed with senior management of the Advisor;
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iii) | The audit committee of the Board of Directors reviews the preliminary valuations of the independent valuation firms; and
| | ----- | ------------------------------------------------------------------------------------------------------------------------



| | (iv) | 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 Advisor, the
respective independent valuation firms and the audit committee.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Those investments for which market quotations
are not readily available or for which market quotations are deemed not to represent fair value are valued utilizing a market approach, an income approach, or both approaches, as appropriate. The market approach uses prices and other relevant
information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single
present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that the Company may take into account in determining the
fair value of its investments include, as relevant and among other factors: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call
protection provisions, information rights, the nature and realizable value of any collateral, the portfolio companys ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business,
comparisons of financial ratios of peer companies that are public, M&A comparables, the Companys principal market (as the reporting entity) and enterprise values.

Until the end of the second calendar quarter following its acquisition, each unquoted investment in a new portfolio company generally is
valued at cost, which approximates fair value. As of that date, an independent valuation firm conducts an initial independent appraisal of the investment.

Accounting Standards Codification (ASC) 820-10, Fair Value Measurements and Disclosures (ASC 820-10),
issued by the Financial Accounting Standards Board (FASB), defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. ASC 820-10 defines fair value as the price
that the Company would receive upon selling an investment or pay to transfer a liability in an orderly transaction to a market participant in the principal or most advantageous market for the investment. ASC 820-10 emphasizes that valuation
techniques maximize the use of observable market inputs and minimize the use of unobservable inputs. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability, including assumptions about risk.
Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on market data obtained from sources independent of the Company.
Unobservable inputs are inputs that reflect the Companys assumptions about the assumptions market participants would use in pricing an asset or liability developed based on the best information available in the circumstances.



22



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BlackRock Kelso Capital Corporation

Notes to Financial Statements (Unaudited)Continued



ASC 820-10 establishes a hierarchy that classifies these inputs into the three broad
levels listed below:

Level 1  Valuations based on unadjusted quoted prices in active markets for identical assets or
liabilities that the Company has the ability to access.

Level 2  Valuations based on unadjusted quoted prices in markets
that are not active or for which all significant inputs are observable, either directly or indirectly.

Level 3 
Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The inputs into the determination of fair value may require significant management judgment or estimation. Even if observable market data is
available, such information may be the result of consensus pricing information or broker quotes which include a disclaimer that the broker would not be held to such a price in an actual transaction. The non-binding nature of consensus pricing and/or
quotes accompanied by disclaimer would result in classification as Level 3 information, assuming no additional corroborating evidence.

Transfers between levels, if any, represent the value as of the beginning of the period of any investment where a change in the pricing
level occurred from the beginning to the end of the period.

The Companys valuation policy is consistent with ASC 820-10.
In accordance with this valuation policy, the Company evaluates the source of inputs, including any markets in which its investments are trading, in determining fair value.



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



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



|(d) | Interest income, adjusted for amortization of premium and accretion of discount, and dividend income are recorded on an accrual basis to the extent that the Company
expects to collect such amounts. For loans and securities with payment-in-kind (PIK) income, which represents contractual interest or dividends accrued and added to the principal balance and generally due at maturity, PIK income is
accrued only to the extent that the portfolio company valuation indicates that the PIK income is likely to be collected. 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. Expenses are recorded on an accrual basis.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(e) | The Company has elected to be taxed as a RIC under Subchapter M of the Code and currently qualifies, and intends to continue to qualify each year, as a RIC under the
Code.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In order to qualify for favorable tax treatment as a RIC, the Company is required to distribute annually
to its stockholders at least 90% of its 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). The
Company, at its discretion, may carry forward taxable income in excess of calendar year distributions and pay a 4% excise tax on this income. If the Company chooses to do so, all other things being equal, this would increase expenses and reduce the
amount available to be distributed to stockholders. The Company will accrue excise tax on estimated excess taxable income as required.

The Company holds 100% of the common stock of certain companies as indicated in the accompanying schedules of investments. These wholly
owned companies are recorded at fair value in the statements of assets and liabilities, net of any applicable income tax liabilities. An income tax provision has been provided at the wholly owned company level on all income of such companies,
including realized and unrealized gains. Such wholly owned companies are held in connection with the Companys election to be taxed as a RIC. In general, these wholly owned companies earn income that, if earned directly by the Company, would
not be qualifying income for purposes of the Company qualifying as a RIC. Dividends from these wholly owned companies and gains from the sale of their stock are qualifying income for this purpose. The Company makes investments in securities in
accordance with its investment policies through these wholly owned companies.



|(f) | Dividends and distributions to common stockholders are recorded on the ex-dividend date. The amount to be paid out as a dividend is determined by the Board of
Directors. Net realized capital gains, if any, generally are distributed at least annually, although the Company may decide to retain such capital gains for investment.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(g) | Loans are placed on non-accrual status, as a general matter, when principal or interest payments are past due 30 days or more or when there is reasonable doubt that
principal or interest will be collected. Accrued interest generally is reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon
managements judgment. Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in managements judgment, are likely to remain current. The Company may make exceptions to this treatment if the loan
has sufficient collateral value and is in the process of collection.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



23



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##### Table of Contents

BlackRock Kelso Capital Corporation

Notes to Financial Statements (Unaudited)Continued



|(h) | Recently Issued Accounting Pronouncements:
|--- | ------------------------------------------

In January 2010, the FASB issued Accounting Standards Update 2010-06, Fair Value Measurements and Disclosures (ASU
2010-06). ASU 2010-06 amends ASC 820-10 to require new disclosures with regard to transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements within the Level 3 fair value rollforward.
ASU 2010-06 also clarifies existing fair value disclosures about the appropriate level of disaggregation and about inputs and valuation techniques for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3.
The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales and settlements in the rollforward of
activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption on January 1, 2010 of the applicable additional disclosure
requirements of ASU 2010-06 did not materially impact the Companys financial statements. The adoption of the additional disclosure requirements, which will be effective in 2011, is not expected to materially impact the Companys financial
statement disclosures.

3. Agreements and related party transactions

The Company has entered into an Investment Management Agreement (the Management Agreement) with the Advisor, under which the
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 Advisor receives a base
management fee (the Management Fee) from the Company quarterly in arrears at an annual rate of 2.0% of the Companys total assets, including any assets acquired with the proceeds of leverage.

For the three and six months ended June 30, 2010, the Advisor earned $4,151,014 and $8,473,485, respectively, in base management
fees from the Company. For the three and six months ended June 30, 2009, the Advisor earned $4,647,032 and $9,395,250, respectively, in such fees from the Company.

The Management Agreement provides that the Advisor or its affiliates may be entitled to an incentive management fee (the Incentive
Fee) under certain circumstances. The determination of the Incentive Fee, as described in more detail below, will result in the Advisor or its affiliates receiving no Incentive Fee payments if returns to Company stockholders do not meet an
8.0% annualized rate of return during the applicable fee measurement period and will result in the Advisor or its affiliates receiving less than the full amount of the Incentive Fee percentage until returns to stockholders exceed an approximate
13.3% annualized rate of return during such period. Annualized rate of return in this context is computed by reference to the Companys net asset value and does not take into account changes in the market price of the Companys common
stock.

The Advisor will be entitled to receive the Incentive Fee if the Companys performance exceeds a hurdle
rate during different measurement periods: trailing four quarters periods (which applies only to the portion of the Incentive Fee based on income) and annual periods (which applies only to the portion of the Incentive Fee based on
capital gains). The trailing four quarters periods for purposes of determining the income portion of the Incentive Fee payable for the three months ended June 30, 2010 and 2009 was determined by reference to the four quarter
periods ended on June 30, 2010 and 2009, respectively. The term annual period means the period beginning on July 1 of each calendar year and ending on June 30 of the next calendar year.

The hurdle rate for each measurement period is 2.0% multiplied by the Companys net asset values at the beginning of each calendar
quarter during the measurement period, calculated after giving effect to any distributions that occurred during the measurement period. A portion of the Incentive Fee is based on the Companys income and a portion is based on capital gains.
Each portion of the Incentive Fee is described below.

Quarterly Incentive Fee Based on Income.For each trailing four
quarters period, the Company pays the Advisor an Incentive Fee based on the amount by which (A) aggregate distributions and amounts distributable out of taxable net income (excluding any capital gain and loss) during the period less the
amount, if any, by which net unrealized capital depreciation exceeds net realized capital gains during the period exceeds (B) the hurdle rate for the period. The amount of the excess of (A) over (B) described in this paragraph for
each period is referred to as the excess income amount.

The portion of the Incentive Fee based on income for each period will
equal 50% of the periods excess income amount, until the cumulative Incentive Fee payments for the period equal 20% of the periods income amount distributed or distributable to stockholders as described in clause (A) of the
preceding paragraph. Thereafter, the portion of the Incentive Fee based on income for the period will equal 20% of the periods remaining excess income amount.



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BlackRock Kelso Capital Corporation

Notes to Financial Statements (Unaudited)Continued



Periodic Incentive Fee Based on Capital Gains. The portion of the Incentive Fee
based on capital gains is calculated on an annual basis. For each annual period, the Company pays the Advisor an Incentive Fee based on the amount by which (A) net realized capital gains, if any, to the extent they exceed gross unrealized
capital depreciation, if any, occurring during the period exceeds (B) the amount, if any, by which the periods hurdle rate exceeds the amount of income used in the determination of the Incentive Fee based on income for the period. The
amount of the excess of (A) over (B) described in this paragraph is referred to as the excess gain amount.

The
portion of the Incentive Fee based on capital gains for each period will equal 50% of the periods excess gain amount, until such payments equal 20% of the periods capital gain amount distributed or distributable to stockholders.
Thereafter, the portion of the Incentive Fee based on capital gains for the period equals an amount such that the portion of the Incentive Fee payments to the Advisor based on capital gains for the period equals 20% of the periods remaining
excess gain amount. The result of this formula is that, if the portion of the Incentive Fee based on income for the period exceeds the periods hurdle, then the portion of the Incentive Fee based on capital gains will be capped at 20% of the
capital gain amount.

In calculating whether the portion of the Incentive Fee based on capital gains is payable with respect
to any period, the Company accounts for its assets on a security-by-security basis. In addition, the Company uses the period-to-period method pursuant to which the portion of the Incentive Fee based on capital gains for any period is
based on realized capital gains for the period reduced by realized capital losses and gross unrealized capital depreciation for the period. Based on current interpretations of Section 205(b)(3) of the Investment Advisers Act of 1940 by the SEC
and its staff, the calculation of unrealized depreciation for each portfolio security over a period is based on the fair value of the security at the end of the period compared to the fair value at the beginning of the period. Incentive Fees earned
in any of the periods described above are not subject to modification or repayment based upon performance in a subsequent period.

For the three and six months ended June 30, 2010, the Advisor earned zero and $493,951, respectively, in Incentive Fees from the
Company. For the three and six months ended June 30, 2009, the Advisor earned no incentive fees from the Company.

The
Management Agreement provides that the Company will reimburse the Advisor for costs and expenses incurred by the Advisor for office space rental, office equipment and utilities allocable to the Advisor under the Management Agreement, as well as any
costs and expenses incurred by the Advisor relating to any non-investment advisory, administrative or operating services provided by the Advisor to the Company. For the three and six months ended June 30, 2010, the Company incurred $385,297 and
$783,961, respectively, for costs and expenses reimbursable to the Advisor under the Management Agreement. Reimbursements to the Advisor for the three and six months ended June 30, 2009 were $340,273 and $687,067, respectively.

From time to time, the Advisor may pay amounts owed by the Company to third party providers of goods or services. The Company will
subsequently reimburse the Advisor for such amounts paid on its behalf. Reimbursements to the Advisor for the three and six months ended June 30, 2010 were $356,428 and $1,715,197, respectively. Reimbursements to the Advisor for the three and
six months ended June 30, 2009 were $333,945 and $674,568, respectively.

No person who is an officer, director or
employee of the 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 Advisor receive compensation for their services and reimbursement of expenses
incurred to attend meetings.

The Company also has entered into an administration agreement with BlackRock Financial
Management, Inc. (the Administrator) 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, 2010, the Company incurred $175,581 and $391,367, respectively, for administrative services expenses payable to the Administrator under the administration
agreement. For the three and six months ended June 30, 2009, the Company incurred $153,726 and $333,975, respectively, in such expenses.

The PNC Financial Services Group, Inc. (PNC) is a significant stockholder of the ultimate parent of the Administrator. PNC
Global Investment Servicing Inc. (PGIS), until recently a subsidiary of PNC, provides



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BlackRock Kelso Capital Corporation

Notes to Financial Statements (Unaudited)Continued



administrative and accounting services to the Company pursuant to a Sub-Administration and Accounting Services Agreement. PFPC Trust Company, until recently another subsidiary of PNC, provides
custodian services to the Company pursuant to a Custodian Services Agreement. Also, PGIS 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 PGIS and its affiliates, PGIS 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
Trust Company may charge the Company additional fees for cash overdraft balances or for sweeping excess cash balances.

For
the three and six months ended June 30, 2010, the Company incurred $60,584 and $109,755, respectively, for administrative, accounting, custodian and transfer agency services fees payable to PGIS and its affiliates under the related agreements.
For the three and six months ended June 30, 2009, the Company incurred $55,590 and $110,429, respectively, for such fees payable to PGIS and its affiliates.

Effective July 1, 2010, PGIS and PFPC Trust Company were acquired by subsidiaries of The Bank of New York Mellon Corporation and
will no longer be considered related parties of the Company as of and after that date.

In November 2007, the Companys
Board of Directors authorized the purchase by the Advisor from time to time in the open market of an indeterminate number of shares of the Companys common stock, in the Advisors discretion, subject to compliance with the Companys
and the Advisors applicable policies and requirements of law. Pursuant to this authorization, during the six months ended June 30, 2009, the Advisor purchased 80,867 shares of the Companys common stock in the open market for
$312,322, including brokerage commissions. There were no such purchases during the six months ended June 30, 2010.

At
June 30, 2010 and December 31, 2009, the Advisor owned directly approximately 470,000 and 555,000 shares, respectively, of the Companys common stock, representing approximately 0.7% and 1.0% of the total shares outstanding. At
June 30, 2010 and December 31, 2009, other entities affiliated with the Administrator and PGIS beneficially owned indirectly approximately 1,867,000 and 2,611,000 shares, respectively, of the Companys common stock, representing
approximately 2.9% and 4.6% of the total shares outstanding. An entity affiliated with the Administrator and PGIS has ownership and financial interests in the Advisor.

4. Earnings per share

The following information sets forth the computation of basic and diluted net increase in net assets per share (earnings per share)
resulting from operations for the three and six months ended June 30, 2010 and 2009.



|                                                                             |  |                                 |            |                                 |   |                               |  |                               |            |  |   |           
|---------------------------------------------------------------------------- |  | ------------------------------- | ---------- | ------------------------------- | - | ----------------------------- |  | ----------------------------- | ---------- |  | - | ----------
|                                                                             |  | Three months endedJune 
30,2010 |            | Three months endedJune 
30,2009 |   | Six months endedJune 
30,2010 |  | Six months endedJune 
30,2009
|Numerator for basic and diluted net increase in net assets per share         |  | $                               | 22,334,832 |                                 | $ | 23,821,700                    |  | $                             | 52,817,883 |  | $ | 19,754,630
|Denominator for basic and diluted weighted average shares                    |  |                                 | 57,490,004 |                                 |   | 55,621,338                    |  |                               | 57,045,983 |  |   | 55,433,200
|Basic/diluted net increase in net assets per share resulting from operations |  | $                               | 0.39       |                                 | $ | 0.43                          |  | $                             | 0.93       |  | $ | 0.36      

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

5. Investments

Purchases of investments for the three months ended June 30, 2010 and 2009 totaled $127,846,687 and $11,916,326, respectively, and
for the six months ended June 30, 2010 and 2009 totaled $144,288,230 and $27,189,886, respectively. Sales/repayments of investments for the three months ended June 30, 2010 and 2009 totaled $181,349,009 and $43,188,200, respectively, and
for six months ended June 30, 2010 and 2009 totaled $254,025,286 and $43,908,566, respectively.



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BlackRock Kelso Capital Corporation

Notes to Financial Statements (Unaudited)Continued



At June 30, 2010, investments consisted of the following:



|                                                        |  |      |             |   |            |   |             |  
|------------------------------------------------------- |  | ---- | ----------- | - | ---------- | - | ----------- | -
|                                                        |  | Cost |             |   | Fair Value |  
|Senior secured notes                                    |  | $    | 94,800,971  |   |            | $ | 86,944,431  |  
|Unsecured debt                                          |  |      | 64,152,174  |   |            |   | 8,439,911   |  
|Subordinated debt                                       |  |      | 132,778,114 |   |            |   | 123,520,698 |  
|Senior secured loans:                                   |  |      |             |   |            |   |             |  
|First lien                                              |  |      | 102,175,005 |   |            |   | 92,468,921  |  
|Second/other priority lien                              |  |      | 392,723,674 |   |            |   | 350,943,062 |  
|                                                        |  |      |             |   |            |   |             |  
|Total senior secured loans                              |  |      | 494,898,679 |   |            |   | 443,411,983 |  
|                                                        |  |      |             |   |            |   |             |  
|Preferred stock                                         |  |      | 13,690,382  |   |            |   | 5,314,040   |  
|Common stock                                            |  |      | 57,370,754  |   |            |   | 62,672,266  |  
|Limited partnership/limited liability company interests |  |      | 29,482,499  |   |            |   | 21,901,394  |  
|Equity warrants/options                                 |  |      | 2,668,710   |   |            |   | 4,565,206   |  
|                                                        |  |      |             |   |            |   |             |  
|Total investments including unearned income             |  |      | 889,842,283 |   |            |   | 756,769,929 |  
|Unearned income                                         |  |      | (3,178,972  | ) |            |   | (3,178,972  | )
|                                                        |  |      |             |   |            |   |             |  
|Total investments                                       |  | $    | 886,663,311 |   |            | $ | 753,590,957 |  
|                                                        |  |      |             |   |            |   |             |  

At December 31, 2009, investments consisted of the following:



|                                                        |  |      |               |   |            |   |             |  
|------------------------------------------------------- |  | ---- | ------------- | - | ---------- | - | ----------- | -
|                                                        |  | Cost |               |   | Fair Value |  
|Senior secured notes                                    |  | $    | 54,634,954    |   |            | $ | 48,407,746  |  
|Unsecured debt                                          |  |      | 171,308,101   |   |            |   | 126,984,798 |  
|Subordinated debt                                       |  |      | 146,516,172   |   |            |   | 133,232,136 |  
|Senior secured loans:                                   |  |      |               |   |            |   |             |  
|First lien                                              |  |      | 119,531,264   |   |            |   | 115,409,425 |  
|Second/other priority lien                              |  |      | 496,846,524   |   |            |   | 387,743,569 |  
|                                                        |  |      |               |   |            |   |             |  
|Total senior secured loans                              |  |      | 616,377,788   |   |            |   | 503,152,994 |  
|                                                        |  |      |               |   |            |   |             |  
|Preferred stock                                         |  |      | 12,590,382    |   |            |   | 5,896,040   |  
|Common stock                                            |  |      | 20,872,742    |   |            |   | 18,870,342  |  
|Limited partnership/limited liability company interests |  |      | 35,375,700    |   |            |   | 13,082,528  |  
|Equity warrants/options                                 |  |      | 1,053,450     |   |            |   | 1,024,747   |  
|                                                        |  |      |               |   |            |   |             |  
|Total investments including unearned income             |  |      | 1,058,729,289 |   |            |   | 850,651,331 |  
|Unearned income                                         |  |      | (3,909,286    | ) |            |   | (3,909,286  | )
|                                                        |  |      |               |   |            |   |             |  
|Total investments                                       |  | $    | 1,054,820,003 |   |            | $ | 846,742,045 |  
|                                                        |  |      |               |   |            |   |             |  

The industry composition of the portfolio at fair value at June 30, 2010 and December 31, 2009 was
as follows:



|                               |  |              |   |  |                  |  
|------------------------------ |  | ------------ | - |  | ---------------- | -
|Industry                       |  | June 30,2010 |   |  | December 31,2009 |  
|Consumer Products              |  | 12.2         | % |  | 6.0              | %
|Healthcare                     |  | 11.5         |   |  | 10.0             |  
|Electronics                    |  | 10.4         |   |  | 8.5              |  
|Other Services                 |  | 10.2         |   |  | 9.4              |  
|Manufacturing                  |  | 7.6          |   |  | 7.6              |  
|Distribution                   |  | 7.3          |   |  | 4.8              |  
|Business Services              |  | 7.0          |   |  | 12.6             |  
|Financial Services             |  | 6.6          |   |  | 4.6              |  
|Retail                         |  | 4.9          |   |  | 4.6              |  
|Metals                         |  | 4.6          |   |  | 4.1              |  
|Beverage, Food and Tobacco     |  | 4.3          |   |  | 4.0              |  
|Chemicals                      |  | 4.0          |   |  | 4.4              |  
|Containers and Packaging       |  | 3.2          |   |  | 2.7              |  
|Printing, Publishing and Media |  | 3.1          |   |  | 3.2              |  
|Entertainment and Leisure      |  | 1.7          |   |  | 2.6              |  
|Building and Real Estate       |  | 1.0          |   |  | 1.0              |  
|Transportation                 |  | 0.4          |   |  | 6.3              |  
|Utilities                      |  |             |   |  | 3.6              |  
|                               |  |              |   |  |                  |  
|Total                          |  | 100.0        | % |  | 100.0            | %
|                               |  |              |   |  |                  |  



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BlackRock Kelso Capital Corporation

Notes to Financial Statements (Unaudited)Continued



The geographic composition of the portfolio at fair value at June 30, 2010 was
United States 92.2% and Canada 7.8%, and at December 31, 2009 was United States 93.7%, Canada 6.3% and United Kingdom and other less than 0.1%. The geographic composition is determined by the location of the corporate headquarters of the
portfolio company.

In the ordinary course of its business, the Company manages a variety of risks relating to its
investments, including market risk and credit risk. Market risk is the risk of potential adverse changes to the values of investments because of changes in market conditions such as interest rate movements and volatility in investment prices. Credit
risk is the risk of default or non-performance by portfolio companies equivalent to the investments carrying amount. The Company is also exposed to credit risk related to maintaining all of its cash and cash equivalents at a major financial
institution.

The Company has investments in lower rated and comparable quality unrated senior and junior secured, unsecured
and subordinated debt securities and loans, which are subject to a greater degree of credit risk than more highly rated investments. The risk of loss due to default by the issuer is significantly greater for holders of such securities and loans,
particularly in cases where the investment is unsecured or subordinated to other creditors of the issuer.

6. Foreign currency transactions

The Company may enter into forward foreign currency contracts from time to time to facilitate settlement of purchases and
sales of investments denominated in foreign currencies or to help mitigate the impact that an adverse change in foreign exchange rates would have on the value of the Companys investments denominated in foreign currencies. A forward foreign
currency contract is a commitment to purchase or sell a foreign currency at a future date (usually the security transaction settlement date) at a negotiated forward rate. These contracts are marked-to-market by recognizing the difference between the
contract exchange rate and the current market rate as unrealized appreciation or depreciation. Realized gains or losses are recognized when contracts are settled. The Companys forward foreign currency contracts generally have terms of
approximately three months. The volume of open contracts at the end of each reporting period is reflective of the typical volume of transactions during each calendar quarter. Risks may arise as a result of the potential inability of the
counterparties to meet the terms of their contracts. The Company attempts to limit this risk by dealing with creditworthy counterparties.

At June 30, 2010, details of open forward foreign currency contracts were as follows:



|                                                                                          |  |                  |  |                       |  |                             |            |   |                               |   |            |                        |  |   |          
|----------------------------------------------------------------------------------------- |  | ---------------- |  | --------------------- |  | --------------------------- | ---------- | - | ----------------------------- | - | ---------- | ---------------------- |  | - | ---------
|Foreign
Currency                                                                          |  | Settlement Date  |  | Amount andTransaction |  | US$ Value atSettlement Date |            |   | US$ Value atJune 30, 2010     |   |            | UnrealizedAppreciation
|Canadian dollar                                                                           |  | July 28, 2010    |  | 31,850,000 Sold       |  | $                           | 31,367,103 |   |                               | $ | 29,983,175 |                        |  | $ | 1,383,928
|At December 31, 2009,
details of open forward foreign currency contracts were as follows:
|Foreign
Currency                                                                          |  | Settlement Date  |  | Amount andTransaction |  | US$ Value atSettlement Date |            |   | US$ Value
atDecember 31, 2009 |   |            | UnrealizedAppreciation
|Canadian dollar                                                                           |  | January 27, 2010 |  | 795,444 Purchased     |  | $                           | (759,501   | ) |                               | $ | (760,561   | )                      |  | $ | 1,060    
|Canadian dollar                                                                           |  | January 27, 2010 |  | 31,500,000 Sold       |  |                             | 30,316,883 |   |                               |   | 30,118,610 |                        |  |   | 198,273  
|Canadian dollar                                                                           |  | January 27, 2010 |  | 800,000 Sold          |  |                             | 769,582    |   |                               |   | 764,917    |                        |  |   | 4,665    
|                                                                                          |  |                  |  |                       |  |                             |            |   |                               |   |            |                        |  |   |          
|Total                                                                                     |  |                  |  |                       |  | $                           | 30,326,964 |   |                               | $ | 30,122,966 |                        |  | $ | 203,998  
|                                                                                          |  |                  |  |                       |  |                             |            |   |                               |   |            |                        |  |   |          

All realized and unrealized gains and losses on
forward foreign currency contracts are included in earnings (changes in net assets) and are reported as separate line items within the Companys statements of operations. Unrealized gains and losses on forward foreign currency contracts are
also reported as separate line items within the Companys statements of assets and liabilities.

7. Credit facility and borrowings

Under the terms of the Companys amended and restated Senior Secured, Multi-Currency Credit Agreement (the
Credit Facility), as amended on December 28, 2007, certain lenders agreed to extend credit to the Company in an aggregate principal amount not to exceed $545,000,000 outstanding, at any one time, consisting of $400,000,000



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BlackRock Kelso Capital Corporation

Notes to Financial Statements (Unaudited)Continued



in revolving loan commitments and $145,000,000 in term loan commitments. On April 20, 2010, the Company amended the Credit Facility to extend through December 6, 2013 certain existing
lenders commitments. These extended commitments, together with the addition of commitments from new lenders, total $375,000,000, consisting of $275,000,000 of revolving loan commitments and $100,000,000 of term loan commitments. Non-extending
lender commitments of $245,000,000, consisting of $200,000,000 of revolving loan commitments and $45,000,000 of term loan commitments, mature on December 6, 2010 unless extended prior to such date. The Credit Facility is secured by
substantially all of the assets in the Companys portfolio, including cash and cash equivalents. Subject to certain exceptions, pricing for outstanding borrowings made by extending lenders and new lenders is at LIBOR plus an applicable spread
of either 3.00% or 3.25% for revolving loans, based on a pricing grid depending on the Companys credit rating, and LIBOR plus 3.00% for term loans. Pricing for outstanding borrowings made by non-extending lenders remains at LIBOR plus 0.875%
with respect to revolving loans and LIBOR plus 1.50% with respect to term loans. The Credit Facility does not contain a LIBOR floor requirement. At June 30, 2010, the effective LIBOR spread under the Credit Facility was 2.53%. Term loan
commitments under the Credit Facility have been fully drawn and, once repaid, may not be reborrowed. The Credit Facility also includes an accordion feature that allows the Company, under certain circumstances, to increase the size of the
Credit Facility by up to an additional $275,000,000 of revolving loan commitments and $250,000,000 of term loan commitments. The Credit Facility is used to supplement the Companys equity capital to make additional portfolio investments and for
other general corporate purposes.

At June 30, 2010, the Company had $145,000,000 drawn on the Credit Facility versus
$296,000,000 at December 31, 2009. The average debt outstanding on the Credit Facility during the three and six months ended June 30, 2010 was $220,993,407 and $240,760,221, respectively. The maximum amounts borrowed during the three and
six months ended June 30, 2010 were $275,700,000 and $314,000,000, respectively, and during the three and six months ended June 30, 2009 were $429,500,000 and $434,000,000. The remaining amount available under the Credit Facility was
$475,000,000 at June 30, 2010, of which $245,000,000 expires December 6, 2010.

The weighted average annual interest cost
under the Credit Facility for the three and six months ended June 30, 2010 was 2.51% and 1.98%, respectively, and for the three and six months ended June 30, 2009 was 1.55% and 1.66%, exclusive of commitment fees and of other prepaid
expenses related to establishing the Credit Facility. With respect to any unused portion of the commitments under the Credit Facility, the Company incurs an annual commitment fee of 0.50% to extending lenders and new lenders and 0.17% to
non-extending lenders. Commitment fees incurred for the three and six months ended June 30, 2010 were $300,788 and $426,540, respectively, and for the three and six months ended June 30, 2009 were $55,276 and $104,589.

The April 2010 amendment to the Credit Facility did not substantially change the financial and operational covenants required under the
previous agreement. At June 30, 2010, the Company was in compliance with all such covenants.

8. Capital stock

As a closed-end investment company regulated as a BDC under the 1940 Act, the Company is prohibited from selling shares of its common
stock at a price below the current net asset value of the stock, or NAV, unless the Companys stockholders approve such a sale and its Board of Directors makes certain determinations. On February 8, 2010, subject to certain Board of
Director determinations, the Companys stockholders approved the ability to sell or otherwise issue shares of the Companys common stock at a price below its then current net asset value per share for a twelve month period expiring on the
anniversary of the date of stockholder approval. In any such case, the price at which the Companys common stock would be issued and sold may not be less than a price that, in the determination of the Companys Board of Directors, closely
approximates the market value of such common stock. Any sale of the Companys common stock at a price below NAV would have a dilutive effect on NAV.

In 2008, the Companys Board of Directors approved a share repurchase plan under which the Company may repurchase up to 2.5 percent
of its outstanding shares of common stock from time to time in open market or privately negotiated transactions. In 2009, the Board of Directors approved an extension and increase to the plan which authorized the Company to repurchase up to an
additional 2.5 percent of its outstanding shares of common stock. In May 2010, the repurchase plan was further extended through the earlier of June 30, 2011 or until the approved number of shares has been repurchased. During the three and six
months ended June 30, 2009, the Company purchased a total of 82,208 and 583,572 shares of its common stock on the open market for $357,233 and $2,234,892, respectively, including brokerage commissions. There were no such purchases during the
three and six months ended June 30, 2010. Since inception of the repurchase plan through June 30, 2010, the Company has purchased 961,679 shares of its common stock on the open market for $5,425,900, including brokerage commissions. At
June 30, 2010, the total number of remaining shares authorized for repurchase was 1,794,971. The Company currently holds the shares it repurchased in treasury.



29



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##### Table of Contents

BlackRock Kelso Capital Corporation

Notes to Financial Statements (Unaudited)Continued



On June 7, 2010, the Companys stockholders approved an amendment to the
Companys Certificate of Incorporation to increase the number of authorized shares of the Companys common stock from 100,000,000 to 200,000,000. The amendment was effective on that date.

9. Guarantees and commitments

In the normal course of business, the Company may enter into guarantees on behalf of portfolio companies. Under these arrangements, the
Company would be required to make payments to third parties if the portfolio companies were to default on their related payment obligations. At June 30, 2010 and December 31, 2009, the maximum amount of potential future payments under such
guarantees was $6,000,000, with an expiration of December 31, 2011. Guarantees made on behalf of portfolio companies are considered in determining the fair value of the Companys investments. The potential liability under such guarantees is
reflected at fair value in the Companys schedules of investments.

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.

From time to time, the Company may be a party to certain legal proceedings
incidental to the normal course of its business, including the enforcement of the Companys rights under contracts with its portfolio companies. While the Company cannot predict the outcome of these legal proceedings with certainty, it does not
expect that these proceedings will have a material effect on its financial statements.

10. Fair value of financial instruments

The carrying values of the Companys financial instruments approximate fair value. The carrying values of
receivables, other assets, accounts payable and accrued expenses approximate fair value due to their short maturities. The carrying and fair values of the Companys Credit Facility payable were $145,000,000 and $145,000,000 at June 30,
2010 and $296,000,000 and $287,120,000 at December 31, 2009, respectively.

The following tables summarize the fair
values of the Companys cash and cash equivalents, investments and forward foreign currency contracts based on the inputs used at June 30, 2010 and December 31, 2009 in determining such fair values:



|                                                        |  |                               |             |                                        |   |                                              |  |                                        |           |  |   |            
|------------------------------------------------------- |  | ----------------------------- | ----------- | -------------------------------------- | - | -------------------------------------------- |  | -------------------------------------- | --------- |  | - | -----------
|                                                        |  |                               |             | Fair Value Inputs at June 30, 2010    
|                                                        |  | Fair Value atJune
30,2010     |             | PriceQuotations(Level 1)               |   | Significant OtherObservable 
Inputs(Level 2) |  | SignificantUnobservableInputs(Level 3)
|Senior secured notes                                    |  | $                             | 86,944,431  |                                        | $ |                                             |  | $                                      |          |  | $ | 86,944,431 
|Unsecured debt                                          |  |                               | 8,260,675   |                                        |   |                                             |  |                                        |          |  |   | 8,260,675  
|Subordinated debt                                       |  |                               | 122,465,964 |                                        |   |                                             |  |                                        |          |  |   | 122,465,964
|Senior secured loans                                    |  |                               | 441,466,981 |                                        |   |                                             |  |                                        |          |  |   | 441,466,981
|Preferred stock                                         |  |                               | 5,314,040   |                                        |   |                                             |  |                                        |          |  |   | 5,314,040  
|Common stock                                            |  |                               | 62,672,266  |                                        |   |                                             |  |                                        |          |  |   | 62,672,266 
|Limited partnership/limited liability company interests |  |                               | 21,901,394  |                                        |   |                                             |  |                                        |          |  |   | 21,901,394 
|Equity warrants/options                                 |  |                               | 4,565,206   |                                        |   |                                             |  |                                        |          |  |   | 4,565,206  
|                                                        |  |                               |             |                                        |   |                                              |  |                                        |           |  |   |            
|Total investments                                       |  |                               | 753,590,957 |                                        |   |                                             |  |                                        |          |  |   | 753,590,957
|Forward foreign currency contracts                      |  |                               | 1,383,928   |                                        |   |                                             |  |                                        | 1,383,928 |  |   |           
|Cash and cash equivalents                               |  |                               | 21,265,946  |                                        |   | 21,265,946                                   |  |                                        |          |  |   |           
|                                                        |  |                               |             |                                        |   |                                              |  |                                        |           |  |   |            
|Total                                                   |  | $                             | 776,240,831 |                                        | $ | 21,265,946                                   |  | $                                      | 1,383,928 |  | $ | 753,590,957
|                                                        |  |                               |             |                                        |   |                                              |  |                                        |           |  |   |            
|                                                        |  |                              
|                                                        |  |                               |             | Fair Value Inputs at December 31, 2009
|                                                        |  | Fair Value atDecember
31,2009 |             | PriceQuotations(Level 1)               |   | Significant OtherObservable 
Inputs(Level 2) |  | SignificantUnobservableInputs(Level 3)
|Senior secured notes                                    |  | $                             | 48,407,746  |                                        | $ |                                             |  | $                                      |          |  | $ | 48,407,746 
|Unsecured debt                                          |  |                               | 126,312,042 |                                        |   |                                             |  |                                        |          |  |   | 126,312,042
|Subordinated debt                                       |  |                               | 131,337,094 |                                        |   |                                             |  |                                        |          |  |   | 131,337,094
|Senior secured loans                                    |  |                               | 501,811,506 |                                        |   |                                             |  |                                        |          |  |   | 501,811,506
|Preferred stock                                         |  |                               | 5,896,040   |                                        |   |                                             |  |                                        |          |  |   | 5,896,040  
|Common stock                                            |  |                               | 18,870,342  |                                        |   |                                             |  |                                        |          |  |   | 18,870,342 
|Limited partnership/limited liability company interests |  |                               | 13,082,528  |                                        |   |                                             |  |                                        |          |  |   | 13,082,528 
|Equity warrants/options                                 |  |                               | 1,024,747   |                                        |   |                                             |  |                                        |          |  |   | 1,024,747  
|                                                        |  |                               |             |                                        |   |                                              |  |                                        |           |  |   |            
|Total investments                                       |  |                               | 846,742,045 |                                        |   |                                             |  |                                        |          |  |   | 846,742,045
|Forward foreign currency contracts                      |  |                               | 203,998     |                                        |   |                                             |  |                                        | 203,998   |  |   |           
|Cash and cash equivalents                               |  |                               | 5,807,901   |                                        |   | 5,807,901                                    |  |                                        |          |  |   |           
|                                                        |  |                               |             |                                        |   |                                              |  |                                        |           |  |   |            
|Total                                                   |  | $                             | 852,753,944 |                                        | $ | 5,807,901                                    |  | $                                      | 203,998   |  | $ | 846,742,045
|                                                        |  |                               |             |                                        |   |                                              |  |                                        |           |  |   |            



30



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BlackRock Kelso Capital Corporation

Notes to Financial Statements (Unaudited)Continued



In determining the fair values of the Companys forward foreign currency contracts
at June 30, 2010 and December 31, 2009, the Company used unadjusted indicative price quotations for similar assets (Level 2). The following tables summarize the valuation techniques used at June 30, 2010 and December 31, 2009 in
determining the fair values of the Companys investments for which significant unobservable inputs (Level 3) were used in determining fair value:



|                                                        |  |                           |             |                                      |   |                                                                                        |  |   |            
|------------------------------------------------------- |  | ------------------------- | ----------- | ------------------------------------ | - | -------------------------------------------------------------------------------------- |  | - | -----------
|                                                        |  |                           |             | Valuation Techniques atJune 30,
2010
|                                                        |  | Fair Value atJune
30,2010 |             | Broker 
Quote(s)forIdentical Assets  |   | Market Approach,Income
Approachor Both, UtilizingOne or
MoreThird-PartyValuation Firms
|Senior secured notes                                    |  | $                         | 86,944,431  |                                      | $ |                                                                                       |  | $ | 86,944,431 
|Unsecured debt                                          |  |                           | 8,260,675   |                                      |   |                                                                                       |  |   | 8,260,675  
|Subordinated debt                                       |  |                           | 122,465,964 |                                      |   |                                                                                       |  |   | 122,465,964
|Senior secured loans                                    |  |                           | 441,466,981 |                                      |   | 2,596,713                                                                              |  |   | 438,870,268
|Preferred stock                                         |  |                           | 5,314,040   |                                      |   |                                                                                       |  |   | 5,314,040  
|Common stock                                            |  |                           | 62,672,266  |                                      |   |                                                                                       |  |   | 62,672,266 
|Limited partnership/limited liability company interests |  |                           | 21,901,394  |                                      |   |                                                                                       |  |   | 21,901,394 
|Equity warrants/options                                 |  |                           | 4,565,206   |                                      |   |                                                                                       |  |   | 4,565,206  
|                                                        |  |                           |             |                                      |   |                                                                                        |  |   |            
|Total investments                                       |  | $                         | 753,590,957 |                                      | $ | 2,596,713                                                                              |  | $ | 750,994,244
|                                                        |  |                           |             |                                      |   |                                                                                        |  |   |            



|                                                        |  |                               |             |                                          |   |                                                                                        |  |   |            
|------------------------------------------------------- |  | ----------------------------- | ----------- | ---------------------------------------- | - | -------------------------------------------------------------------------------------- |  | - | -----------
|                                                        |  |                               |             | Valuation Techniques
atDecember 31, 2009
|                                                        |  | Fair Value atDecember
31,2009 |             | Broker 
Quote(s)forIdentical Assets      |   | Market Approach,Income
Approachor Both, UtilizingOne or
MoreThird-PartyValuation Firms
|Senior secured notes                                    |  | $                             | 48,407,746  |                                          | $ |                                                                                       |  | $ | 48,407,746 
|Unsecured debt                                          |  |                               | 126,312,042 |                                          |   |                                                                                       |  |   | 126,312,042
|Subordinated debt                                       |  |                               | 131,337,094 |                                          |   |                                                                                       |  |   | 131,337,094
|Senior secured loans                                    |  |                               | 501,811,506 |                                          |   | 4,042,540                                                                              |  |   | 497,768,966
|Preferred stock                                         |  |                               | 5,896,040   |                                          |   |                                                                                       |  |   | 5,896,040  
|Common stock                                            |  |                               | 18,870,342  |                                          |   |                                                                                       |  |   | 18,870,342 
|Limited partnership/limited liability company interests |  |                               | 13,082,528  |                                          |   |                                                                                       |  |   | 13,082,528 
|Equity warrants/options                                 |  |                               | 1,024,747   |                                          |   |                                                                                       |  |   | 1,024,747  
|                                                        |  |                               |             |                                          |   |                                                                                        |  |   |            
|Total investments                                       |  | $                             | 846,742,045 |                                          | $ | 4,042,540                                                                              |  | $ | 842,699,505
|                                                        |  |                               |             |                                          |   |                                                                                        |  |   |            

The following are reconciliations for the three months
ended June 30, 2010 of investments for which Level 3 inputs were used in determining fair value:



|                                                        |  |                             |             |                                       |   |                          |  |   |                                                    |   |  |                                   |            |   |                                      |   |                            |   |  |   |   |  |   |            
|------------------------------------------------------- |  | --------------------------- | ----------- | ------------------------------------- | - | ------------------------ |  | - | -------------------------------------------------- | - |  | --------------------------------- | ---------- | - | ------------------------------------ | - | -------------------------- | - |  | - | - |  | - | -----------
|                                                        |  | Fair Value atMarch 31,
2010 |             | Amortization ofPremium/Discount - Net |   | Net Realized
Gain
(Loss) |  |   | Net Change inUnrealizedAppreciation orDepreciation |   |  | Net Purchases,Sales orRedemptions |            |   | Net Transfers
in or out of
(Level 3) |   | Fair Value atJune 30,
2010
|Senior secured notes                                    |  | $                           | 48,265,219  |                                       | $ | 20,492                   |  | $ |                                                   |   |  | $                                 | (1,472,710 | ) |                                      | $ | 40,131,430                 |   |  | $ |  |  | $ | 86,944,431 
|Unsecured debt                                          |  |                             | 74,641,210  |                                       |   | 78,451                   |  |   |                                                   |   |  |                                   | (7,597,259 | ) |                                      |   | (58,861,727                | ) |  |   |  |  |   | 8,260,675  
|Subordinated debt                                       |  |                             | 135,569,589 |                                       |   | 960,846                  |  |   |                                                   |   |  |                                   | (102,768   | ) |                                      |   | (13,961,703                | ) |  |   |  |  |   | 122,465,964
|Senior secured loans                                    |  |                             | 488,497,173 |                                       |   | 2,128,953                |  |   | (21,452,437                                        | ) |  |                                   | 18,248,245 |   |                                      |   | (45,954,953                | ) |  |   |  |  |   | 441,466,981
|Preferred stock                                         |  |                             | 6,123,040   |                                       |   |                         |  |   |                                                   |   |  |                                   | (1,309,000 | ) |                                      |   | 500,000                    |   |  |   |  |  |   | 5,314,040  
|Common stock                                            |  |                             | 24,489,162  |                                       |   |                         |  |   | 1,061,929                                          |   |  |                                   | 12,471,205 |   |                                      |   | 24,649,970                 |   |  |   |  |  |   | 62,672,266 
|Limited partnership/limited liability company interests |  |                             | 21,938,853  |                                       |   |                         |  |   |                                                   |   |  |                                   | (37,459    | ) |                                      |   |                           |   |  |   |  |  |   | 21,901,394 
|Equity warrants/ options                                |  |                             | 3,804,892   |                                       |   |                         |  |   |                                                   |   |  |                                   | 760,314    |   |                                      |   |                           |   |  |   |  |  |   | 4,565,206  
|                                                        |  |                             |             |                                       |   |                          |  |   |                                                    |   |  |                                   |            |   |                                      |   |                            |   |  |   |   |  |   |            
|Total investments                                       |  | $                           | 803,329,138 |                                       | $ | 3,188,742                |  | $ | (20,390,508                                        | ) |  | $                                 | 20,960,568 |   |                                      | $ | (53,496,983                | ) |  | $ |  |  | $ | 753,590,957
|                                                        |  |                             |             |                                       |   |                          |  |   |                                                    |   |  |                                   |            |   |                                      |   |                            |   |  |   |   |  |   |            



31



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BlackRock Kelso Capital Corporation

Notes to Financial Statements (Unaudited)Continued



The following are reconciliations for the six months ended June 30, 2010 of
investments for which Level 3 inputs were used in determining fair value:



|                                                         |  |                               |             |                                       |   |                        |  |   |                                                    |   |  |                                   |             |   |                                    |   |                           |   |  |   |   |  |   |            
|-------------------------------------------------------- |  | ----------------------------- | ----------- | ------------------------------------- | - | ---------------------- |  | - | -------------------------------------------------- | - |  | --------------------------------- | ----------- | - | ---------------------------------- | - | ------------------------- | - |  | - | - |  | - | -----------
|                                                         |  | Fair Value atDecember 31,2009 |             | Amortizationof Premium/Discount - Net |   | Net
RealizedGain(Loss) |  |   | Net Change inUnrealizedAppreciation orDepreciation |   |  | Net Purchases,Sales orRedemptions |             |   | Net Transfersin or out
of(Level 3) |   | Fair Value atJune 30,2010
|Senior secured notes                                     |  | $                             | 48,407,746  |                                       | $ | 34,586                 |  | $ |                                                   |   |  | $                                 | (1,629,331  | ) |                                    | $ | 40,131,430                |   |  | $ |  |  | $ | 86,944,431 
|Unsecured debt                                           |  |                               | 126,312,042 |                                       |   | 567,988                |  |   |                                                   |   |  |                                   | (11,388,961 | ) |                                    |   | (107,230,394              | ) |  |   |  |  |   | 8,260,675  
|Subordinated debt                                        |  |                               | 131,337,094 |                                       |   | 1,642,656              |  |   | 358                                                |   |  |                                   | 4,026,620   |   |                                    |   | (14,540,764               | ) |  |   |  |  |   | 122,465,964
|Senior secured loans                                     |  |                               | 501,811,506 |                                       |   | 2,626,008              |  |   | (49,940,860                                        | ) |  |                                   | 61,738,099  |   |                                    |   | (74,767,772               | ) |  |   |  |  |   | 441,466,981
|Preferred stock                                          |  |                               | 5,896,040   |                                       |   |                       |  |   |                                                   |   |  |                                   | (1,682,000  | ) |                                    |   | 1,100,000                 |   |  |   |  |  |   | 5,314,040  
|Common stock                                             |  |                               | 18,870,342  |                                       |   |                       |  |   | 1,061,929                                          |   |  |                                   | 7,303,912   |   |                                    |   | 35,436,083                |   |  |   |  |  |   | 62,672,266 
|Limited partnership/ limited liability company interests |  |                               | 13,082,528  |                                       |   |                       |  |   | (14,426,995                                        | ) |  |                                   | 14,712,067  |   |                                    |   | 8,533,794                 |   |  |   |  |  |   | 21,901,394 
|Equity warrants/ options                                 |  |                               | 1,024,747   |                                       |   |                       |  |   |                                                   |   |  |                                   | 1,925,199   |   |                                    |   | 1,615,260                 |   |  |   |  |  |   | 4,565,206  
|                                                         |  |                               |             |                                       |   |                        |  |   |                                                    |   |  |                                   |             |   |                                    |   |                           |   |  |   |   |  |   |            
|Total investments                                        |  | $                             | 846,742,045 |                                       | $ | 4,871,238              |  | $ | (63,305,568                                        | ) |  | $                                 | 75,005,605  |   |                                    | $ | (109,722,363              | ) |  | $ |  |  | $ | 753,590,957
|                                                         |  |                               |             |                                       |   |                        |  |   |                                                    |   |  |                                   |             |   |                                    |   |                           |   |  |   |   |  |   |            

All realized and unrealized gains and losses are
included in earnings (changes in net assets) and are reported as separate line items within the Companys statements of operations.

The following table contains information with respect to net unrealized appreciation or depreciation on investments for which Level 3
inputs were used in determining fair value that are still held by the Company at June 30, 2010.



|                                                        |  |                                                                                                                              |             |   |                                                              |   |              |  
|------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------- | ----------- | - | ------------------------------------------------------------ | - | ------------ | -
|                                                        |  | Net Change in
UnrealizedAppreciation or Depreciationfor the Six Months EndedJune 30,
2010on Investments Held atJune 30, 2010 |             |   | Net
UnrealizedDepreciationon InvestmentsHeld
atJune 30, 2010 |  
|Senior secured notes                                    |  | $                                                                                                                            | (1,629,331  | ) |                                                              | $ | (7,856,540   | )
|Unsecured debt                                          |  |                                                                                                                              | (13,540,110 | ) |                                                              |   | (55,712,264  | )
|Subordinated debt                                       |  |                                                                                                                              | 4,976,620   |   |                                                              |   | (9,257,415   | )
|Senior secured loans                                    |  |                                                                                                                              | 14,736,320  |   |                                                              |   | (51,486,696  | )
|Preferred stock                                         |  |                                                                                                                              | (1,682,000  | ) |                                                              |   | (8,376,342   | )
|Common stock                                            |  |                                                                                                                              | 7,681,325   |   |                                                              |   | 5,301,512    |  
|Limited partnership/limited liability company interests |  |                                                                                                                              | 285,072     |   |                                                              |   | (7,581,105   | )
|Equity warrants/options                                 |  |                                                                                                                              | 1,925,199   |   |                                                              |   | 1,896,496    |  
|                                                        |  |                                                                                                                              |             |   |                                                              |   |              |  
|Total investments                                       |  | $                                                                                                                            | 12,753,095  |   |                                                              | $ | (133,072,354 | )
|                                                        |  |                                                                                                                              |             |   |                                                              |   |              |  

11. 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, 2010 and 2009.



|                                                                   |  |                               |             |   |                               |   |             |   
|------------------------------------------------------------------ |  | ----------------------------- | ----------- | - | ----------------------------- | - | ----------- | --
|                                                                   |  | Six months endedJune 
30,2010 |             |   | Six months endedJune 
30,2009 |  
|Per Share Data:                                                    |  |                               |             |   |                               |   |             |   
|Net asset value, beginning of period                               |  | $                             | 9.55        |   |                               | $ | 9.23        |   
|                                                                   |  |                               |             |   |                               |   |             |   
|Net investment income                                              |  |                               | 0.71        |   |                               |   | 0.89        |   
|Net realized and unrealized gain (loss)                            |  |                               | 0.22        |   |                               |   | (0.53       | ) 
|                                                                   |  |                               |             |   |                               |   |             |   
|Total from investment operations                                   |  |                               | 0.93        |   |                               |   | 0.36        |   
|Dividend distributions to stockholders from net investment income  |  |                               | (0.64       | ) |                               |   | (0.32       | ) 
|Issuance of stock at prices below net asset value                  |  |                               | (0.01       | ) |                               |   | (0.08       | ) 
|Purchases of treasury stock at prices below net asset value        |  |                               |            |   |                               |   | 0.05        |   
|                                                                   |  |                               |             |   |                               |   |             |   
|Net increase in net assets                                         |  |                               | 0.28        |   |                               |   | 0.01        |   
|                                                                   |  |                               |             |   |                               |   |             |   
|Net asset value, end of period                                     |  | $                             | 9.83        |   |                               | $ | 9.24        |   
|                                                                   |  |                               |             |   |                               |   |             |   
|Market price, end of period                                        |  | $                             | 9.87        |   |                               | $ | 6.23        |   
|                                                                   |  |                               |             |   |                               |   |             |   
|Total return(1)(2)                                                 |  |                               | 24.32       | % |                               |   | (34.43      | )%
|Ratios / Supplemental Data:                                        |  |                               |             |   |                               |   |             |   
|Ratio of operating expenses to average net assets(3)               |  |                               | 4.20        | % |                               |   | 4.76        | % 
|Ratio of credit facility related expenses to average net assets(3) |  |                               | 1.28        | % |                               |   | 1.53        | % 
|                                                                   |  |                               |             |   |                               |   |             |   
|Ratio of total expenses to average net assets(3)                   |  |                               | 5.48        | % |                               |   | 6.29        | % 
|Ratio of net investment income to average net assets(3)            |  |                               | 14.54       | % |                               |   | 19.41       | % 
|Net assets, end of period                                          |  | $                             | 642,415,796 |   |                               | $ | 514,031,903 |   
|Average debt outstanding                                           |  | $                             | 240,760,221 |   |                               | $ | 428,185,814 |   
|Weighted average shares outstanding                                |  |                               | 57,045,983  |   |                               |   | 55,433,200  |   
|Average debt per share(4)                                          |  | $                             | 4.22        |   |                               | $ | 7.72        |   
|Portfolio turnover(2)                                              |  |                               | 33          | % |                               |   | 3           | % 



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##### Table of Contents

BlackRock Kelso Capital Corporation

Notes to Financial Statements (Unaudited)Continued



|(1) | Total return is based on the change in market price per share during the respective periods. Total return calculations take into account dividends and
distributions, if any, reinvested in accordance with the Companys dividend reinvestment plan and do not reflect brokerage commissions.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Not annualized.
|--- | ---------------

|(3) | Annualized.
|--- | -----------

|(4) | Average debt per share is calculated as average debt outstanding divided by the weighted average shares outstanding during the applicable period.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------

12. Subsequent events

On August 4, 2010, the Companys Board of Directors declared a dividend of $0.32 per share, payable on October 1, 2010 to
stockholders of record at the close of business on September 17, 2010.

In addition to the subsequent events included in
these notes to the financial statements, the Company conducted a review for additional subsequent events and determined that no additional subsequent events had occurred that would require accrual or additional disclosures.



33



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|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

The information contained in this section should be read in conjunction with 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 regulated 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 or thinly traded public 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 a private
placement of 35,366,589 shares of our common stock at a price of $15.00 per share that raised approximately $529 million in net proceeds. On July 2, 2007, we completed an initial public offering of 10,000,000 shares of our common stock at a
price of $16.00 per share that raised approximately $150 million in net proceeds. On June 22, 2010, we closed an add-on public offering and sold 7,500,000 shares of our common stock at a price of $10.25 per share receiving approximately $73
million in net proceeds. On June 28, 2010, the underwriters of the add-on offering exercised their over-allotment option under the underwriting agreement and elected to purchase an additional 1,125,000 shares of common stock at a price of
$10.25 per share resulting in approximately $11 million of net proceeds.

Investments

Our level of investment activity can and does vary substantially from period to period depending on many factors, including the amount of
debt and equity capital available to middle-market companies, the level of merger and acquisition activity, the general economic environment and the competitive environment for the types of investments we make.

As a BDC, we must not acquire any assets other than qualifying assets specified in the 1940 Act unless, at the time the
acquisition is made, at least 70% of our total assets are qualifying assets (with certain limited exceptions). Qualifying assets include investments in eligible portfolio companies. Under the relevant SEC rules, the term eligible
portfolio company includes all private companies, companies whose securities are not listed on a national securities exchange, and certain public companies that have listed their securities on a national securities exchange and have a market
capitalization of less than $250 million. These rules also permit us to include as qualifying assets certain follow-on investments in companies that were eligible portfolio companies at the time of initial investment but that no longer meet the
definition.

Revenues

We generate revenues primarily in the form of interest on the debt we hold, dividends on our equity interests and capital gains on the
sale of warrants and other debt or equity interests that we acquire in portfolio companies. Our investments in fixed income instruments generally have an expected maturity of three to ten years, although we have no lower or upper constraint on
maturity, and typically bear interest at a fixed or floating rate. Interest on our debt securities is generally payable quarterly or semi-annually. Payments of principal of our debt investments may be amortized over the stated term of the
investment, deferred for several years or due entirely at maturity. In some cases, our debt instruments and preferred stock investments may defer payments of cash interest or dividends or pay interest or dividends in-kind. Any outstanding principal
amount of our debt securities and any accrued but unpaid interest will generally become due at the maturity date. In addition, we may generate revenue in the form of prepayment fees, commitment, origination, structuring or due diligence fees, fees
for providing significant managerial assistance and consulting fees.

Expenses

Our primary operating expenses include the payment of a base management fee and, depending on our operating results, an incentive
management fee, expenses reimbursable under the management agreement, administration fees and the allocable portion of overhead under the administration agreement. The base management fee and incentive management fee compensate the Advisor for work
in identifying, evaluating, negotiating, closing and monitoring our investments. Our management agreement with the Advisor provides that we will reimburse the Advisor for costs and expenses incurred by the Advisor for office space rental, office
equipment and utilities allocable to the Advisor under the management agreement, as well as any costs and expenses incurred by the Advisor relating to any non-investment advisory, administrative or operating services provided by the Advisor to us.
We bear all other costs and expenses of our operations and transactions.

Critical accounting policies

Our discussion and analysis of our financial condition and results of operations are based upon our financial
statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes
in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ. Our critical accounting policies are further described in the notes to the financial statements and in
Note 2 to the financial statements in the Companys Annual Report on Form 10-K for the year ended December 31, 2009, which was filed with the SEC on March 12, 2010. See Note 2 to the financial statements in this Quarterly Report for a
description of recently issued accounting pronouncements.

Financial and operating highlights

At June 30, 2010:

Investment Portfolio: $774.9 million

Net Assets: $642.4 million

Net Indebtedness (borrowings less cash and cash equivalents): $123.7 million

Net Asset Value per share: $9.83

Portfolio Activity for the Three Months Ended June 30, 2010:

Cost of investments during period: $127.8 million

Sales, repayments and other exits during period: $181.3 million

Number of portfolio companies at end of period: 51



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Operating Results for the Three Months Ended June 30, 2010:

Net investment income before Incentive Fees per share: $0.36

Net investment income per share: $0.36

Dividends declared per share: $0.32

Net increase in net assets from operations per share: $0.39

Net investment income before Incentive Fees: $20.4 million

Net investment income: $20.4 million

Net realized and unrealized gains: $1.9 million

Net increase in net assets from operations: $22.3 million

Portfolio and investment activity

During the three months ended June 30, 2010, we invested approximately $127.8 million across one new and several existing portfolio
companies. The new investments consisted primarily of senior loans secured by first liens ($17.8 million, or 14% of the total) or second liens ($34.5 million, or 27%), senior secured notes ($45.1 million, or 35%), equity securities ($19.1 million,
or 15%) and unsecured or subordinated debt securities ($11.3 million, or 9%). Additionally, we received proceeds from sales/repayments of investment principal of approximately $181.3 million during the three months ended June 30, 2010.

At June 30, 2010, our net portfolio of $775 million (at fair value) consisted of 51 portfolio companies and was invested
57% in senior secured loans, 17% in unsecured or subordinated debt securities, 12% in equity investments, 11% in senior secured notes and 3% in cash and cash equivalents. Our average portfolio company investment at amortized cost was approximately
$17.4 million. Our largest portfolio company investment by value was approximately $50.4 million and our five largest portfolio company investments by value comprised approximately 26% of our portfolio at June 30, 2010. At December 31,
2009, our net portfolio of $853 million (at fair value) consisted of 57 portfolio companies and was invested 59% in senior secured loans, 30% in unsecured or subordinated debt securities, 6% in senior secured notes, 5% in equity investments and less
than 1% in cash and cash equivalents. Our average portfolio company investment at amortized cost was approximately $18.5 million at December 31, 2009. Our largest portfolio company investment by value was approximately $56.1 million and our
five largest portfolio company investments by value comprised approximately 26% of our portfolio at December 31, 2009.

The weighted average yield of the debt and income producing equity securities in our portfolio at fair value was 12.4% at June 30,
2010 and 13.7% at December 31, 2009. The weighted average yields on our senior secured loans and other debt securities at fair value were 11.2% and 15.1%, respectively, at June 30, 2010, versus 11.6% and 17.2% at December 31, 2009.
The weighted average yield of the debt and income producing equity securities in our portfolio at their current cost basis was 10.5% at June 30, 2010 and 11.2% at December 31, 2009. The weighted average yields on our senior secured loans
and other debt securities at their current cost basis were 10.0% and 11.3%, respectively, at June 30, 2010, versus 9.4% and 14.2% at December 31, 2009. Yields are computed using interest rates and dividend yields as of the balance sheet
date and include amortization of loan origination and commitment fees, original issue discount and market premium or discount. Yields exclude common equity investments, preferred equity investments with no stated dividend rate, short-term
investments, cash and cash equivalents.

At June 30, 2010, 51% of our debt investments bore interest based on floating
rates, such as LIBOR, the Federal Funds Rate or the Prime Rate, and 49% bore interest at fixed rates. The percentage of our total debt investments that bore floating rate interest based on an interest rate floor was 10% at June 30, 2010. At
December 31, 2009, 41% of our debt investments bore interest based on floating rates and 59% bore interest at fixed rates. The percentage of our total debt investments that bore floating rate interest based on an interest rate floor was 5% at
December 31, 2009.

The Advisor employs a grading system for our entire portfolio. The Advisor grades all loans on a
scale of 1 to 4. This system is intended to reflect the performance of the borrowers business, the collateral coverage of the loans and other factors considered relevant. Generally, the Advisor assigns only one loan grade to each
portfolio company for all loan investments in that portfolio company; however, the Advisor will assign multiple ratings when appropriate for different investments in one portfolio company. The following is a description of the conditions associated
with each investment rating:

Grade 1: Investments in portfolio companies whose performance is substantially within the
Advisors expectations and whose risk factors are neutral to favorable to those at the time of the original investment.



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Grade 2: Investments in portfolio companies whose performance is below the
Advisors expectations and that require closer monitoring; however, no loss of investment return (interest and/or dividends) or principal is expected.

Grade 3: Investments in portfolio companies whose performance is below the Advisors expectations and for which risk has
increased materially since origination. Some loss of investment return is expected, but no loss of principal is expected. Companies graded 3 generally will be out of compliance with debt covenants and will be unlikely to make debt repayments on
their original schedule.

Grade 4: Investments in portfolio companies whose performance is materially below the
Advisors expectations where business trends have deteriorated and risk factors have increased substantially since the original investment. Investments graded 4 are those for which some loss of principal is expected.

The Advisor monitors and, when appropriate, changes the investment ratings assigned to each investment in our portfolio. In connection
with our valuation process, the Advisor and Board of Directors review these investment ratings on a quarterly basis. Our average investment rating was 1.35 at June 30, 2010 versus 1.46 at December 31, 2009. The following is a distribution
of the investment ratings of our portfolio companies at June 30, 2010 and December 31, 2009:



|                                            |  |               |             |   |                   |   |             |  
|------------------------------------------- |  | ------------- | ----------- | - | ----------------- | - | ----------- | -
|                                            |  | June 30, 2010 |             |   | December 31, 2009 |  
|Grade 1                                     |  | $             | 537,937,638 |   |                   | $ | 553,361,682 |  
|Grade 2                                     |  |               | 187,965,987 |   |                   |   | 224,552,728 |  
|Grade 3                                     |  |               | 13,434,902  |   |                   |   | 51,207,962  |  
|Grade 4                                     |  |               | 17,431,402  |   |                   |   | 21,528,959  |  
|                                            |  |               |             |   |                   |   |             |  
|Total investments including unearned income |  |               | 756,769,929 |   |                   |   | 850,651,331 |  
|Unearned income                             |  |               | (3,178,972  | ) |                   |   | (3,909,286  | )
|                                            |  |               |             |   |                   |   |             |  
|Total investments                           |  | $             | 753,590,957 |   |                   | $ | 846,742,045 |  
|                                            |  |               |             |   |                   |   |             |  

Results comparisons for the three months ended June 30, 2010 and 2009.

Investment income

Investment income totaled $28,210,955 and $33,439,628, respectively, for the three months ended June 30, 2010 and 2009, of which
$15,576,232 and $19,179,036 were attributable to interest and fees on senior secured loans, $11,738,087 and $13,622,931 to interest earned on other debt securities, $856,021 and $633,754 to dividends from preferred equity securities, $3,115 and
$3,907 to interest earned on cash equivalents and $37,500 and zero to other income, respectively. The decrease in investment income for the three months ended June 30, 2010 primarily reflects a reduction in the size of our portfolio due to
sales, repayments and restructurings, as well as the impact of lower levels of LIBOR on interest income from our floating rate debt investments, which generally bear interest based on LIBOR. Total investments at their current cost basis were
$886,663,311 at June 30, 2010, compared to $1,216,208,699 at June 30, 2009.

Expenses

Expenses for the three months ended June 30, 2010 and 2009 were $7,790,318 and $7,904,225, respectively, which consisted of
$4,151,014 and $4,647,032 in base management fees, $1,699,510 and $1,712,222 in interest expense and fees related to the Credit Facility, $385,297 and $340,273 in Advisor expenses, $587,884 and $171,197 in amortization of debt issuance costs,
$220,987 and $201,927 in administrative services, $192,965 and $374,516 in professional fees, $182,203 and $131,864 in insurance expenses, $91,832 and $88,863 in director fees and $278,626 and $236,331 in other expenses, respectively. The decrease
in base management fees reflects a decline in the quarterly portfolio values on which the fees are paid (in arrears). The increase in amortization of debt issuance costs reflects the incurrence of structuring and arrangement fees in connection with
the amendment of our Credit Facility in April 2010. The decrease in professional fees reflects lower fees for legal and accounting services.

Net investment income

Net investment income was $20,420,637 and $25,535,403 for the three months ended June 30, 2010 and 2009, respectively. The decrease
is primarily a result of a decline in interest income.



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Net realized gain or loss

Net realized loss of $(21,650,868) for the three months ended June 30, 2010 was the result of $(20,390,508) in net losses realized
from the disposition or restructuring of our investments and $(1,260,360) in net loss realized on foreign currency transactions. Net realized loss on investments for the three months ended June 30, 2010 resulted primarily from the restructuring
of our investment in Electrical Components International, Inc. Foreign currency losses mainly represent losses on forward currency contracts used to hedge our investments denominated in foreign currencies. For the three months ended June 30,
2009, net realized loss was $(10,666,086), which was comprised of $(7,067,506) in net losses realized from the disposition or restructuring of our investments and $(3,598,580) in net loss realized on foreign currency transactions.

Net unrealized appreciation or depreciation

For the three months ended June 30, 2010 and 2009, the change in net unrealized appreciation was a decrease in net unrealized
depreciation of $23,565,063 and $8,952,383, respectively. The decrease in net unrealized depreciation for the three months ended June 30, 2010 was comprised of a decrease in net unrealized depreciation on investments of $20,960,568 and a net
unrealized foreign currency translation gain of $2,604,495. The decrease in net unrealized depreciation on investments for the three months ended June 30, 2010 includes $16,219,514 relating to reversals of prior periods net unrealized
depreciation as a result of investment restructurings and dispositions. The decrease in net unrealized depreciation during the second quarter of 2010 was primarily a result of the reversals described above and changes in capital market conditions.
The valuations of our investments were favorably impacted by increased multiples used to estimate the fair value of some of our investments. Market-wide movements and trading multiples are not necessarily indicative of any fundamental change in the
condition or prospects of our portfolio companies. The decrease in net unrealized depreciation for the three months ended June 30, 2009 was comprised of increases in net unrealized appreciation on investments of $6,892,212 and a net unrealized
foreign currency translation gain of $2,060,171.

Net increase or decrease in net assets resulting from operations

The net increase or decrease in net assets resulting from operations for the three months ended June 30, 2010 and 2009
was an increase of $22,334,832 and $23,821,700, respectively. As compared to the prior period, the increase primarily reflects the decrease in net unrealized depreciation on investments, net of realized gains and losses, for the three months ended
June 30, 2010.

Results comparisons for the six months ended June 30, 2010 and 2009.

Investment income

Investment income totaled $56,010,054 and $65,250,928, respectively, for the six months ended June 30, 2010 and 2009, of which
$30,570,467 and $37,020,547 were attributable to interest and fees on senior secured loans, $23,736,914 and $26,808,331 to interest earned on other debt securities, $1,661,829 and $1,412,170 to dividends from preferred equity securities, $3,344 and
$9,880 to interest earned on cash equivalents and $37,500 and zero to other income, respectively. The decrease in investment income for the six months ended June 30, 2010 primarily reflects a reduction in the size of our portfolio due to sales,
repayments and restructurings, as well as the impact of lower levels of LIBOR on interest income from our floating rate debt investments, which generally bear interest based on LIBOR. Total investments at their current cost basis were $886,663,311
at June 30, 2010, compared to $1,216,208,699 at June 30, 2009.

Expenses

Expenses for the six months ended June 30, 2010 and 2009 were $15,324,152 and $15,964,143, respectively, which consisted of
$8,473,485 and $9,395,250 in base management fees, $493,951 and zero in incentive management fees, $2,821,764 and $3,548,611 in interest expense and fees related to the Credit Facility, $783,961 and $687,067 in Advisor expenses, $756,176 and
$339,489 in amortization of debt issuance costs, $478,710 and $431,035 in administrative services, $396,231 and $606,566 in professional fees, $334,611 and $261,225 in insurance expenses, $187,669 and $184,155 in director fees and $597,594 and
$510,745 in other expenses, respectively. The decrease in base management fees reflects a decline in the quarterly portfolio values on which the fees are paid (in arrears). The increase in incentive management fees is due to continued strong
investment earnings, without the substantial net capital depreciation (including net realized and unrealized gains and losses) that had occurred in the prior period. The decrease in interest expense and fees related to the Credit Facility is mainly
a result of reduced borrowing levels and lower prevailing levels of LIBOR. Total borrowings were $145,000,000 at June 30, 2010, compared to $376,000,000 at June 30, 2009. The increase in amortization of debt issuance costs reflects the
incurrence of structuring and arrangement fees in connection with the amendment of our Credit Facility in April 2010. The decrease in professional fees reflects lower fees for legal and accounting services.



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Net investment income

Net investment income was $40,685,902 and $49,286,785 for the six months ended June 30, 2010 and 2009, respectively. The decrease is
primarily a result of a decline in interest income.

Net realized gain or loss

Net realized loss of $(64,014,191) for the six months ended June 30, 2010 was the result of $(63,305,568) in net losses realized from
the disposition or restructuring of our investments and $(708,623) in net loss realized on foreign currency transactions. Net realized loss on investments for the six months ended June 30, 2010 resulted primarily from the restructuring of our
investments in Penton Media Inc., Arclin US Holdings Inc and Electrical Components International, Inc. Nearly the entire net realized loss on investments represents amounts that had been reflected in unrealized depreciation on investments in prior
periods. Foreign currency losses mainly represent losses on forward currency contracts used to hedge our investments denominated in foreign currencies. For the six months ended June 30, 2009, net realized loss was $(8,537,758), which was
comprised of $(7,050,717) in net losses realized from the disposition or restructuring of our investments and $(1,487,041) in net loss realized on foreign currency transactions.

Net unrealized appreciation or depreciation

For the six months ended June 30, 2010 and 2009, the change in net unrealized depreciation was a decrease (increase) in net
unrealized depreciation of $76,146,172 and $(20,994,397), respectively. The decrease in net unrealized depreciation for the six months ended June 30, 2010 was comprised of a decrease in net unrealized depreciation on investments of $75,005,605
and a net unrealized foreign currency translation gain of $1,140,567. The decrease in net unrealized depreciation on investments for the six months ended June 30, 2010 includes $62,252,511 relating to reversals of prior periods net
unrealized depreciation as a result of investment restructurings and dispositions. The decrease in net unrealized depreciation during the first six months of 2010 was primarily a result of the reversals described above and improved capital market
conditions. The valuations of our investments were favorably impacted by market-wide decreases in interest yields, as well as increases in multiples used to estimate the fair value of some of our investments. Market-wide movements and trading
multiples are not necessarily indicative of any fundamental change in the condition or prospects of our portfolio companies. The increase in net unrealized depreciation for the six months ended June 30, 2009 was comprised of increases in net
unrealized depreciation on investments of $(22,366,316) and a net unrealized foreign currency translation gain of $1,371,919.

Net increase or decrease in net assets resulting from operations

The net increase or decrease in net assets resulting from operations for the six months ended June 30, 2010 and 2009 were increases
of $52,817,883 and $19,754,630, respectively. As compared to the prior period, the increase primarily reflects the decrease in net unrealized depreciation on investments, net of realized gains and losses, for the six months ended June 30, 2010.

Supplemental information

We report our financial results on a GAAP basis; however, management believes that evaluating our ongoing operating results may be
enhanced if investors have additional non-GAAP basis financial measures. Management reviews non-GAAP financial measures to assess ongoing operations and, for the reasons described below, considers them to be effective indicators, for both management
and investors, of our financial performance over time. Management does not advocate that investors consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.

We record our liability for Incentive Fees as we become legally obligated to pay them, based on a hypothetical liquidation at
the end of each reporting period. Our obligation to pay Incentive Fees with respect to any fiscal quarter is based on a formula that reflects our results over a trailing four-fiscal quarter period ending with the current fiscal quarter. We are
legally obligated to pay the amount resulting from the formula less any cash payments of Incentive Fees during the prior three quarters. The formulas requirement to reduce the Incentive Fees by amounts paid with respect to Incentive Fees in
the prior three quarters has caused our Incentive Fees expense to become, and currently is expected to be, concentrated in the fourth quarter of each year. Management believes that reflecting Incentive Fees throughout the year, as the related
investment income is earned, is an effective measure of our profitability and financial performance that facilitates comparison of current results with historical results and with those of our peers. Our as adjusted results reflect
Incentive Fees based on the formula we utilize for each trailing four-fiscal quarter period, with the formula applied to the current quarters incremental earnings and without any reduction for Incentive Fees paid during the prior three
quarters. The resulting amount represents an upper limit of each quarters incremental Incentive Fees that we may become legally obligated to pay at the end of the year. Prior year amounts are estimated in the same manner. These estimates
represent upper limits because, in any calendar year, subsequent quarters investment underperformance could reduce the Incentive Fees payable with respect to prior quarters



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operating results. Changes in the economic environment, financial markets and other parameters used in determining such estimates could cause actual results to differ and such differences could
be material. See Note 3 to the financial statements in this Quarterly Report for a more detailed description of the Companys incentive management fee.

Computations for all periods are derived from our financial statements as follows:



|                                                                                                              |  |                                |             |   |                                |   |             |                              |  |   |                              |   |  |   |             |  
|------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | ----------- | - | ------------------------------ | - | ----------- | ---------------------------- |  | - | ---------------------------- | - |  | - | ----------- | -
|                                                                                                              |  | Three
monthsendedJune 30, 2010 |             |   | Three
monthsendedJune 30, 2009 |   |             | Six
monthsendedJune 30, 2010 |  |   | Six
monthsendedJune 30, 2009 |  
|GAAP Basis:                                                                                                   |  |                                |             |   |                                |   |             |                              |  |   |                              |   |  |   |             |  
|Net Investment Income                                                                                         |  | $                              | 20,420,637  |   |                                | $ | 25,535,403  |                              |  | $ | 40,685,902                   |   |  | $ | 49,286,785  |  
|Net Increase in Net Assets from Operations                                                                    |  |                                | 22,334,832  |   |                                |   | 23,821,700  |                              |  |   | 52,817,883                   |   |  |   | 19,754,630  |  
|Net Asset Value at end of period                                                                              |  |                                | 642,415,796 |   |                                |   | 514,031,903 |                              |  |   | 642,415,796                  |   |  |   | 514,031,903 |  
|Less: Incremental Incentive Fee expense using existing formula as applied to current period operating results |  |                                | (4,130,722  | ) |                                |   | (4,701,094  | )                            |  |   | (7,631,808                   | ) |  |   | (9,317,859  | )
|As Adjusted:                                                                                                  |  |                                |             |   |                                |   |             |                              |  |   |                              |   |  |   |             |  
|Net Investment Income                                                                                         |  | $                              | 16,289,915  |   |                                | $ | 20,834,309  |                              |  | $ | 33,054,094                   |   |  | $ | 39,968,926  |  
|Net Increase in Net Assets from Operations                                                                    |  |                                | 18,204,110  |   |                                |   | 19,120,606  |                              |  |   | 45,186,075                   |   |  |   | 10,436,771  |  
|Net Asset Value at end of period                                                                              |  |                                | 634,783,988 |   |                                |   | 504,714,044 |                              |  |   | 634,783,988                  |   |  |   | 504,714,044 |  
|Per Share Amounts, GAAP Basis:                                                                                |  |                                |             |   |                                |   |             |                              |  |   |                              |   |  |   |             |  
|Net Investment Income                                                                                         |  | $                              | 0.36        |   |                                | $ | 0.46        |                              |  | $ | 0.71                         |   |  | $ | 0.89        |  
|Net Increase in Net Assets from Operations                                                                    |  |                                | 0.39        |   |                                |   | 0.43        |                              |  |   | 0.93                         |   |  |   | 0.36        |  
|Net Asset Value at end of period                                                                              |  |                                | 9.83        |   |                                |   | 9.24        |                              |  |   | 9.83                         |   |  |   | 9.24        |  
|Per Share Amounts, As Adjusted:                                                                               |  |                                |             |   |                                |   |             |                              |  |   |                              |   |  |   |             |  
|Net Investment Income                                                                                         |  | $                              | 0.28        |   |                                | $ | 0.37        |                              |  | $ | 0.58                         |   |  | $ | 0.72        |  
|Net Increase in Net Assets from Operations                                                                    |  |                                | 0.32        |   |                                |   | 0.34        |                              |  |   | 0.79                         |   |  |   | 0.19        |  
|Net Asset Value at end of period                                                                              |  |                                | 9.71        |   |                                |   | 9.07        |                              |  |   | 9.71                         |   |  |   | 9.07        |  

Financial
condition, liquidity and capital resources

During the six months ended June 30, 2010, we generated operating cash
flows primarily from interest earned and fees received on senior secured loans and other debt securities, as well as from sales of selected portfolio company investments or repayments of principal.

Net cash provided by operating activities during the six months ended June 30, 2010 was $124,167,052. Our primary sources of cash
from operating activities during the period consisted of a net increase in net assets from operations of $52,817,883 and sales/repayments of investments (net of purchases) of $109,737,056.

We used $108,680,846 for financing activities during the six months ended June 30, 2010. Our primary uses of cash for financing
activities were $33,771,455 of dividend distributions, $151,000,000 of net repayments under our Credit Facility and $7,801,398 of debt issuance costs incurred in connection with our Credit Facility amendment. During the period, we raised $83,892,007
in net proceeds from an add-on public offering of our common stock.

Our senior secured, multi-currency Credit Facility
provides us with $620,000,000 in total availability, consisting of $475,000,000 in revolving loan commitments and $145,000,000 in term loan commitments. Commitments that mature on December 6, 2013 total $375,000,000, consisting of $275,000,000
of available revolving loans and $100,000,000 of available term loans. Commitments that mature on December 6, 2010, unless extended prior to such date, total $245,000,000, consisting of $200,000,000 of available revolving loans and $45,000,000
of available term loans. Subject to certain conditions, we have the ability in the future to seek additional commitments from new and existing lenders up to an additional $275,000,000 of revolving loan commitments and $250,000,000 of term loan
commitments. The interest rates applicable to the commitments that mature in December 2013 are generally LIBOR plus a spread of either 3.00% or 3.25% for revolving loans, based on a pricing grid depending on our credit rating, and LIBOR plus 3.00%
for term loans. The interest rates applicable to the commitments that mature in December 2010 are generally LIBOR plus 0.875% with respect to revolving loans and LIBOR plus 1.50% with respect to term loans. The facility does not contain a LIBOR
floor requirement. At June 30, 2010, the effective LIBOR spread under the Credit Facility was 2.53%. The term loans have been fully drawn and, once repaid, may not be reborrowed. The Credit Facility is secured by substantially all of the assets
in our portfolio, including cash and cash equivalents. At June 30, 2010, we had $145,000,000 drawn and outstanding under the Credit Facility, with $475,000,000 available to us, subject to compliance with customary affirmative and negative
covenants,



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including the maintenance of a minimum stockholders equity, the maintenance of a ratio of not less than 200% of total assets (less total liabilities other than indebtedness) to total
indebtedness, and restrictions on certain payments and issuance of debt.

At June 30, 2010, we had $21,265,946 in cash
and cash equivalents.

The primary use of existing funds is expected to be purchases of investments in portfolio companies,
cash distributions to our stockholders, repayment of indebtedness and other general corporate purposes.

On June 7, 2010,
our stockholders approved an amendment to our Certificate of Incorporation to increase the number of authorized shares of our common stock from 100,000,000 to 200,000,000. The amendment became effective on that date.

Our shelf registration permits us to offer, from time to time, up to approximately $900 million of our common stock, preferred stock,
debt securities, warrants representing rights to purchase shares of our common stock, preferred stock or debt securities and subscription rights. As a closed-end investment company regulated as a BDC under the 1940 Act, we are prohibited from
selling shares of our common stock at a price below the current net asset value of the stock, or NAV, unless our stockholders approve such a sale and our Board of Directors makes certain determinations. On February 8, 2010, subject to certain
Board of Director determinations, our stockholders approved our ability to sell or otherwise issue shares of our common stock at a price below its then current net asset value per share for a twelve month period expiring on the anniversary of the
date of stockholder approval. In any such case, the price at which our common stock would be issued and sold may not be less than a price that, in the determination of our Board of Directors, closely approximates the market value of such common
stock. Any sale of the Companys common stock at a price below NAV would have a dilutive effect on our NAV.

Contractual obligations

A summary of our significant contractual payment obligations for the repayment of outstanding borrowings under our Credit Facility at
June 30, 2010 is as follows:



|                                                        |  |                                              |       |                  |   |           |  |           |   |               |   |       |  |   |  
|------------------------------------------------------- |  | -------------------------------------------- | ----- | ---------------- | - | --------- |  | --------- | - | ------------- | - | ----- |  | - | -
|                                                        |  | Payments Due By Period (dollars in millions)
|                                                        |  | Total                                        |       | Less than 1 year |   | 1-3 years |  | 3-5 years |   | After 5 years
|Credit Facility Payable(1)                              |  | $                                            | 145.0 |                  | $ | 45.0      |  | $         |  |               | $ | 100.0 |  | $ | 
|Interest and Commitment Fees Payable on Credit Facility |  |                                              | 0.5   |                  |   |          |  |           |  |               |   | 0.5   |  |   | 



|(1) | At June 30, 2010, $475.0 million remained unused under our Credit Facility.
|--- | ---------------------------------------------------------------------------

Off-balance sheet arrangements

In the normal course of business, the Company may enter into guarantees on behalf of portfolio companies. Under these arrangements, the
Company would be required to make payments to third parties if the portfolio companies were to default on their related payment obligations. At June 30, 2010 and December 31, 2009, the maximum amount of potential future payments under such
guarantees was $6,000,000, with an expiration of December 31, 2011. Guarantees made on behalf of portfolio companies are considered in determining the fair value of the Companys investments.

Dividends

Our quarterly dividends, if any, are determined by our Board of Directors. Dividends are declared considering our estimate of annual
taxable income available for distribution to stockholders and the amount of taxable income carried over from the prior year for distribution in the current year. We cannot assure stockholders that they will receive any dividends and distributions or
dividends and distributions at a particular level. Dividends declared by the Company since July 25, 2005 (inception of operations) have been as follows:



|                                      |  |                    |  |                   
|------------------------------------- |  | ------------------ |  | ------------------
|Dividend Amount
Per Share
Outstanding |  | Record Date        |  | Pay Date          
|$0.20                                 |  | December 31, 2005  |  | January 31, 2006  
|$0.20                                 |  | March 15, 2006     |  | March 31, 2006    
|$0.23                                 |  | June 15, 2006      |  | June 30, 2006     
|$0.30                                 |  | September 15, 2006 |  | September 29, 2006
|$0.42                                 |  | December 31, 2006  |  | January 31, 2007  
|$0.42                                 |  | March 15, 2007     |  | March 30, 2007    
|$0.42                                 |  | May 15, 2007       |  | May 31, 2007      
|$0.42                                 |  | September 14, 2007 |  | September 28, 2007
|$0.43                                 |  | December 14, 2007  |  | December 31, 2007 
|$0.43                                 |  | March 17, 2008     |  | March 31, 2008    
|$0.43                                 |  | June 16, 2008      |  | June 30, 2008     
|$0.43                                 |  | September 15, 2008 |  | September 30, 2008
|$0.43                                 |  | December 15, 2008  |  | December 31, 2008 
|$0.16                                 |  | March 20, 2009     |  | April 3, 2009     
|$0.16                                 |  | June 19, 2009      |  | July 2, 2009      
|$0.16                                 |  | September 18, 2009 |  | October 2, 2009   
|$0.32                                 |  | December 21, 2009  |  | January 4, 2010   
|$0.32                                 |  | March 22, 2010     |  | April 5, 2010     
|$0.32                                 |  | May 17, 2010       |  | July 2, 2010      
|$0.32                                 |  | September 17, 2010 |  | October 1, 2010   



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Tax characteristics of all dividends are reported to stockholders on Form 1099 after the end
of the calendar year.

We have qualified and elected and intend to continue to qualify for the tax treatment applicable to
regulated investment companies under Subchapter M of the Code, and, among other things, have made and intend to continue to make the requisite distributions to its stockholders which will relieve us from federal income taxes. Therefore, no provision
has been recorded for federal income taxes. We may, at our discretion, carry forward taxable income in excess of calendar year distributions and pay a 4% excise tax on this income. We will accrue excise tax on estimated undistributed taxable income
as required.

In order to qualify for favorable tax treatment as a RIC, we are required to distribute annually to our
stockholders at least 90% of investment company taxable income, as defined by the Code. To avoid federal excise taxes, we must distribute annually at least 98% of our income (both ordinary income and net capital gains).

We maintain an opt out dividend reinvestment plan for our common stockholders. As a result, except as discussed below, if we
declare a dividend, stockholders 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. With
respect to our dividends and distributions paid to stockholders during the six months ended June 30, 2010 and 2009, dividends reinvested pursuant to our dividend reinvestment plan totaled $2,413,003 and $3,950,579, respectively.

Under the terms of our amended and restated dividend reinvestment plan adopted on March 4, 2009, dividends may be paid in newly
issued or treasury shares of our common stock at a price equal to 95% of the market price on the dividend payment date. This feature of the plan means that, under certain circumstances, we may issue shares of our common stock at a price below net
asset value per share, which could cause our stockholders to experience dilution.

Income we receive from origination,
structuring, closing, commitment and other upfront fees associated with investments in portfolio companies is treated as taxable income when received and accordingly, distributed to stockholders. For financial reporting purposes, such fees are
recorded as unearned income and accreted/amortized over the life of the respective investment. For the three and six months ended June 30, 2010, these fees totaled $2,373,462 and $2,400,962. For the three and six months ended June 30,
2009, there were no such fees. We anticipate earning additional upfront fees in the future and such fees may cause our taxable income to exceed our GAAP income, although the differences are expected to be temporary in nature.

In order to satisfy the annual distribution requirement applicable to RICs, we have the ability to declare a large portion of a dividend
in shares of our common stock instead of in cash. As long as a portion of such dividend is paid in cash (which portion can be as low as 10% for our taxable years ending on or before December 31, 2011) and certain requirements are met, the
entire distribution would be treated as a dividend for U.S. federal income tax purposes.

Recent developments

On August 4, 2010, our Board of Directors declared a dividend of $0.32 per share, payable on October 1, 2010 to
stockholders of record at the close of business on September 17, 2010.

Notice is hereby given in accordance with
Section 23 of the 1940 Act that from time to time we may purchase shares of our common stock in the open market at prevailing market prices.



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|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

We are subject to financial market risks, including changes in interest rates. At June 30, 2010, 51% of our debt investments bore
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. At June 30, 2010, the percentage
of our total debt investments that bore floating rate interest based on an interest rate floor was 10%. Floating rate investments subject to a floor generally reset by reference to the current market index after one to six months only if the index
exceeds the floor.

To illustrate the potential impact of changes in interest rates, we have performed the following analysis
based on our June 30, 2010 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 $8,600,000, or $0.13 per share, in
the value of our net assets at June 30, 2010 and a corresponding 100 basis point decrease in LIBOR and U.S. Treasury yields would cause an increase of approximately $7,500,000, or $0.11 per share, in the value of our net assets on that date.

While hedging activities may help to insulate us against adverse changes in interest rates, they also may 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, 2010 and 2009, we did not engage in any interest rate hedging activity.



|Item 4. | Controls and Procedures
|------- | -----------------------

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer and 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 us 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.



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PART II. OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

From
time to time, we and the Advisor may be a party to certain legal proceedings incidental to the normal course of our business, including the enforcement of our rights under contracts with our portfolio companies. While we cannot predict the outcome
of these legal proceedings with certainty, we do not expect that these proceedings will have a material effect on our financial statements.



|Item 1A. | Risk Factors
|-------- | ------------

There have
been no material changes from the risk factors previously disclosed in our most recent Form 10-K filing.



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

Sales of unregistered securities

None.

Issuer purchases of equity securities

None.



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------

None.



|Item 4. | [Reserved]
|------- | ----------



|Item 5. | Other Information
|------- | -----------------

None.



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|Item 6. | Exhibits.
|------- | ---------



|(a) | Exhibits.
|--- | ---------



|     |  |                                                                                                                                                                                                                                                                                                                                                                
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|10.1 |  | Underwriting Agreement dated June 16, 2010 by and among BlackRock Kelso Capital Corporation, BlackRock Kelso Capital Advisors LLC and Citigroup Global Markets Inc., Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Credit Suisse Securities (USA) LLC, and UBS Securities LLC as representatives of the several underwriters named in Schedule A thereto.
|     | 
|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.                                                                                                                                                                                                                         



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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 5, 2010 |  |  |  | By:                                 |  | /S/    JAMES R.
MAHER  
|                     |  |  |  |                                     |  | James R. Maher         
|                     |  |  |  |                                     |  | Chief Executive Officer



|                     |  |  |  |     |  |                        
|-------------------- |  |  |  | --- |  | -----------------------
|Date: August 5, 2010 |  |  |  | By: |  | /S/    FRANK D.
GORDON 
|                     |  |  |  |     |  | Frank D. Gordon        
|                     |  |  |  |     |  | Chief Financial Officer



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