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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, 2009

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 6, 2009 was 56,346,526.









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BLACKROCK KELSO CAPITAL CORPORATION

FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2009

Table of
Contents



|           |  |                       |  |                                                                                       |  |         
|---------- |  | --------------------- |  | ------------------------------------------------------------------------------------- |  | --------
|           |  |                       |  | INDEX                                                                                 |  | PAGE NO.
|PART I.    |  | FINANCIAL INFORMATION |  |                                                                                      
|           |  |                       | 
|           |  | Item 1.               |  | Financial Statements                                                                  |  |         
|           |  |                       |  | Statements of Assets and Liabilities (unaudited)                                      |  | 3       
|           |  |                       |  | Statements of Operations (unaudited)                                                  |  | 4       
|           |  |                       |  | Statements of Changes in Net Assets (unaudited)                                       |  | 5       
|           |  |                       |  | Statements of Cash Flows (unaudited)                                                  |  | 6       
|           |  |                       |  | Schedules of Investments (unaudited)                                                  |  | 7       
|           |  |                       |  | Notes to Financial Statements (unaudited)                                             |  | 21      
|           |  |                       | 
|           |  | Item 2.               |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 32      
|           |  |                       | 
|           |  | Item 3.               |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 39      
|           |  |                       | 
|           |  | Item 4.               |  | Controls and Procedures                                                               |  | 39      
|           |  |                      
|PART II.   |  | OTHER INFORMATION     |  |                                                                                      
|           |  |                       | 
|           |  | Item 1.               |  | Legal Proceedings                                                                     |  | 39      
|           |  | Item 1A.              |  | Risk Factors                                                                          |  | 39      
|           |  | Item 2.               |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 39      
|           |  | Item 3.               |  | Defaults Upon Senior Securities                                                       |  | 40      
|           |  | Item 4.               |  | Submission of Matters to a Vote of Security Holders                                   |  | 40      
|           |  | Item 5.               |  | Other Information                                                                     |  | 41      
|           |  | Item 6.               |  | Exhibits                                                                              |  | 42      
|           |  |                      
|SIGNATURES |  |                       |  | 43                                                                                   



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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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 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;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | --------------------------------------------------------------------------

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.



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 30,2009 |              |   | December 31,2008 |  
|Assets:                                                                                                                                                   |  |              |              |   |                  |   |              |  
|Investments at fair value:                                                                                                                                |  |              |              |   |                  |   |              |  
|Non-controlled, non-affiliated investments (amortized cost of $1,087,446,222 and $1,115,354,825)                                                          |  | $            | 836,681,399  |   |                  | $ | 875,633,291  |  
|Non-controlled, affiliated investments (amortized cost of $72,302,719 and $64,268,941)                                                                    |  |              | 39,076,742   |   |                  |   | 40,015,080   |  
|Controlled investments (amortized cost of $56,459,758 and $56,207,945)                                                                                    |  |              | 9,097,457    |   |                  |   | 11,196,555   |  
|                                                                                                                                                          |  |              |              |   |                  |   |              |  
|Total investments at fair value (amortized cost of $1,216,208,699 and $1,235,831,711)                                                                     |  |              | 884,855,598  |   |                  |   | 926,844,926  |  
|Cash equivalents                                                                                                                                          |  |              | 1,780,019    |   |                  |   | 15,024,972   |  
|Foreign currency at fair value (cost of $562 and $764,413)                                                                                                |  |              | 583          |   |                  |   | 761,299      |  
|Unrealized appreciation on forward foreign currency contracts                                                                                             |  |              | 1,072,130    |   |                  |   | 717,972      |  
|Interest receivable                                                                                                                                       |  |              | 13,804,981   |   |                  |   | 16,300,537   |  
|Dividends receivable                                                                                                                                      |  |              | 5,443,073    |   |                  |   | 4,161,246    |  
|Prepaid expenses and other assets                                                                                                                         |  |              | 1,717,816    |   |                  |   | 2,380,988    |  
|                                                                                                                                                          |  |              |              |   |                  |   |              |  
|Total Assets                                                                                                                                              |  | $            | 908,674,200  |   |                  | $ | 966,191,940  |  
|                                                                                                                                                          |  |              |              |   |                  |   |              |  
|Liabilities:                                                                                                                                              |  |              |              |   |                  |   |              |  
|Payable for investments purchased                                                                                                                         |  | $            | 3,223,790    |   |                  | $ | 1,005,101    |  
|Unrealized depreciation on forward foreign currency contracts                                                                                             |  |              |             |   |                  |   | 1,054,165    |  
|Credit facility payable                                                                                                                                   |  |              | 376,000,000  |   |                  |   | 426,000,000  |  
|Interest payable on credit facility                                                                                                                       |  |              | 319,896      |   |                  |   | 835,491      |  
|Dividend distributions payable                                                                                                                            |  |              | 8,902,610    |   |                  |   | 19,463,166   |  
|Base management fees payable                                                                                                                              |  |              | 4,647,032    |   |                  |   | 5,725,029    |  
|Accrued administrative services                                                                                                                           |  |              | 250,773      |   |                  |   | 170,445      |  
|Other accrued expenses and payables                                                                                                                       |  |              | 1,298,196    |   |                  |   | 1,643,042    |  
|                                                                                                                                                          |  |              |              |   |                  |   |              |  
|Total Liabilities                                                                                                                                         |  |              | 394,642,297  |   |                  |   | 455,896,439  |  
|                                                                                                                                                          |  |              |              |   |                  |   |              |  
|Net Assets:                                                                                                                                               |  |              |              |   |                  |   |              |  
|Common stock, par value $.001 per share, 100,000,000 common shares authorized, 56,602,989 and 55,670,594 issued and 55,641,310 and 55,292,487
outstanding |  |              | 56,603       |   |                  |   | 55,671       |  
|Paid-in capital in excess of par                                                                                                                          |  |              | 822,577,562  |   |                  |   | 818,627,914  |  
|Undistributed net investment income                                                                                                                       |  |              | 35,407,886   |   |                  |   | 3,855,016    |  
|Accumulated net realized gain (loss)                                                                                                                      |  |              | (8,294,283   | ) |                  |   | 243,475      |  
|Net unrealized depreciation                                                                                                                               |  |              | (330,289,965 | ) |                  |   | (309,295,567 | )
|Treasury stock at cost, 961,679 and 378,107 shares held                                                                                                   |  |              | (5,425,900   | ) |                  |   | (3,191,008   | )
|                                                                                                                                                          |  |              |              |   |                  |   |              |  
|Total Net Assets                                                                                                                                          |  |              | 514,031,903  |   |                  |   | 510,295,501  |  
|                                                                                                                                                          |  |              |              |   |                  |   |              |  
|Total Liabilities and Net Assets                                                                                                                          |  | $            | 908,674,200  |   |                  | $ | 966,191,940  |  
|                                                                                                                                                          |  |              |              |   |                  |   |              |  
|Net Asset Value Per Share                                                                                                                                 |  | $            | 9.24         |   |                  | $ | 9.23         |  

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



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BlackRock Kelso Capital Corporation

Statements of Operations (Unaudited)



|                                                                |  |                                |             |   |                                |   |             |                              |  |   |                              |   |  |   |             |  
|--------------------------------------------------------------- |  | ------------------------------ | ----------- | - | ------------------------------ | - | ----------- | ---------------------------- |  | - | ---------------------------- | - |  | - | ----------- | -
|                                                                |  | Three monthsendedJune 30, 2009 |             |   | Three monthsendedJune 30, 2008 |   |             | Six monthsendedJune 30, 2009 |  |   | Six monthsendedJune 30, 2008 |  
|Investment Income:                                              |  |                                |             |   |                                |   |             |                              |  |   |                              |   |  |   |             |  
|From non-controlled, non-affiliated investments:                |  |                                |             |   |                                |   |             |                              |  |   |                              |   |  |   |             |  
|Interest                                                        |  | $                              | 32,153,777  |   |                                | $ | 32,528,115  |                              |  | $ | 62,489,811                   |   |  | $ | 65,616,322  |  
|Dividends                                                       |  |                                | 365,547     |   |                                |   | 303,589     |                              |  |   | 870,756                      |   |  |   | 784,703     |  
|Other income                                                    |  |                                |            |   |                                |   | 1,750       |                              |  |   |                             |   |  |   | 2,296       |  
|From non-controlled, affiliated investments:                    |  |                                |             |   |                                |   |             |                              |  |   |                              |   |  |   |             |  
|Interest                                                        |  |                                | 433,133     |   |                                |   | 1,153,761   |                              |  |   | 914,518                      |   |  |   | 2,354,325   |  
|Dividends                                                       |  |                                | 268,207     |   |                                |   | 342,530     |                              |  |   | 541,414                      |   |  |   | 737,050     |  
|From controlled investments:                                    |  |                                |             |   |                                |   |             |                              |  |   |                              |   |  |   |             |  
|Interest                                                        |  |                                | 218,964     |   |                                |   | 544,191     |                              |  |   | 434,429                      |   |  |   | 1,073,757   |  
|                                                                |  |                                |             |   |                                |   |             |                              |  |   |                              |   |  |   |             |  
|Total investment income                                         |  |                                | 33,439,628  |   |                                |   | 34,873,936  |                              |  |   | 65,250,928                   |   |  |   | 70,568,453  |  
|                                                                |  |                                |             |   |                                |   |             |                              |  |   |                              |   |  |   |             |  
|Expenses:                                                       |  |                                |             |   |                                |   |             |                              |  |   |                              |   |  |   |             |  
|Base management fees                                            |  |                                | 4,647,032   |   |                                |   | 5,583,589   |                              |  |   | 9,395,250                    |   |  |   | 11,150,449  |  
|Interest and credit facility fees                               |  |                                | 1,712,222   |   |                                |   | 4,292,574   |                              |  |   | 3,548,611                    |   |  |   | 9,506,631   |  
|Investment advisor expenses                                     |  |                                | 340,273     |   |                                |   | 263,951     |                              |  |   | 687,067                      |   |  |   | 538,849     |  
|Professional fees                                               |  |                                | 374,516     |   |                                |   | 240,141     |                              |  |   | 606,566                      |   |  |   | 838,471     |  
|Administrative services                                         |  |                                | 201,927     |   |                                |   | 311,998     |                              |  |   | 431,035                      |   |  |   | 605,433     |  
|Amortization of debt issuance costs                             |  |                                | 171,197     |   |                                |   | 167,230     |                              |  |   | 339,489                      |   |  |   | 333,425     |  
|Insurance                                                       |  |                                | 131,864     |   |                                |   | 138,853     |                              |  |   | 261,225                      |   |  |   | 276,436     |  
|Director fees                                                   |  |                                | 88,863      |   |                                |   | 98,235      |                              |  |   | 184,155                      |   |  |   | 192,735     |  
|Other                                                           |  |                                | 236,331     |   |                                |   | 513,772     |                              |  |   | 510,745                      |   |  |   | 648,424     |  
|                                                                |  |                                |             |   |                                |   |             |                              |  |   |                              |   |  |   |             |  
|Total expenses                                                  |  |                                | 7,904,225   |   |                                |   | 11,610,343  |                              |  |   | 15,964,143                   |   |  |   | 24,090,853  |  
|                                                                |  |                                |             |   |                                |   |             |                              |  |   |                              |   |  |   |             |  
|Net Investment Income                                           |  |                                | 25,535,403  |   |                                |   | 23,263,593  |                              |  |   | 49,286,785                   |   |  |   | 46,477,600  |  
|                                                                |  |                                |             |   |                                |   |             |                              |  |   |                              |   |  |   |             |  
|Realized and Unrealized Gain (Loss):                            |  |                                |             |   |                                |   |             |                              |  |   |                              |   |  |   |             |  
|Net realized gain (loss):                                       |  |                                |             |   |                                |   |             |                              |  |   |                              |   |  |   |             |  
|Non-controlled, non-affiliated investments                      |  |                                | (7,067,506  | ) |                                |   | 122,229     |                              |  |   | (7,062,957                   | ) |  |   | 126,639     |  
|Non-controlled, affiliated investments                          |  |                                |            |   |                                |   | 88,830      |                              |  |   | 12,240                       |   |  |   | 112,783     |  
|Foreign currency                                                |  |                                | (3,598,580  | ) |                                |   | (1,729,512  | )                            |  |   | (1,487,041                   | ) |  |   | (1,552,360  | )
|                                                                |  |                                |             |   |                                |   |             |                              |  |   |                              |   |  |   |             |  
|Net realized gain (loss)                                        |  |                                | (10,666,086 | ) |                                |   | (1,518,453  | )                            |  |   | (8,537,758                   | ) |  |   | (1,312,938  | )
|                                                                |  |                                |             |   |                                |   |             |                              |  |   |                              |   |  |   |             |  
|Net change in unrealized appreciation or depreciation on:       |  |                                |             |   |                                |   |             |                              |  |   |                              |   |  |   |             |  
|Non-controlled, non-affiliated investments                      |  |                                | 12,328,390  |   |                                |   | (8,263,289  | )                            |  |   | (11,043,289                  | ) |  |   | (58,185,837 | )
|Non-controlled, affiliated investments                          |  |                                | (4,687,450  | ) |                                |   | 470,657     |                              |  |   | (8,972,116                   | ) |  |   | (6,265,458  | )
|Controlled investments                                          |  |                                | (748,728    | ) |                                |   | (3,678,763  | )                            |  |   | (2,350,911                   | ) |  |   | (9,027,233  | )
|Foreign currency translation                                    |  |                                | 2,060,171   |   |                                |   | 1,585,589   |                              |  |   | 1,371,919                    |   |  |   | 699,686     |  
|                                                                |  |                                |             |   |                                |   |             |                              |  |   |                              |   |  |   |             |  
|Net change in unrealized appreciation or depreciation           |  |                                | 8,952,383   |   |                                |   | (9,885,806  | )                            |  |   | (20,994,397                  | ) |  |   | (72,778,842 | )
|                                                                |  |                                |             |   |                                |   |             |                              |  |   |                              |   |  |   |             |  
|Net realized and unrealized gain (loss)                         |  |                                | (1,713,703  | ) |                                |   | (11,404,259 | )                            |  |   | (29,532,155                  | ) |  |   | (74,091,780 | )
|                                                                |  |                                |             |   |                                |   |             |                              |  |   |                              |   |  |   |             |  
|Net Increase (Decrease) in Net Assets Resulting from Operations |  | $                              | 23,821,700  |   |                                | $ | 11,859,334  |                              |  | $ | 19,754,630                   |   |  | $ | (27,614,180 | )
|                                                                |  |                                |             |   |                                |   |             |                              |  |   |                              |   |  |   |             |  
|Net Investment Income Per Share                                 |  | $                              | 0.46        |   |                                | $ | 0.44        |                              |  | $ | 0.89                         |   |  | $ | 0.88        |  
|                                                                |  |                                |             |   |                                |   |             |                              |  |   |                              |   |  |   |             |  
|Earnings (Loss) Per Share                                       |  | $                              | 0.43        |   |                                | $ | 0.22        |                              |  | $ | 0.36                         |   |  | $ | (0.52       | )
|                                                                |  |                                |             |   |                                |   |             |                              |  |   |                              |   |  |   |             |  
|Basic and Diluted Weighted-Average Shares Outstanding           |  |                                | 55,621,338  |   |                                |   | 53,289,838  |                              |  |   | 55,433,200                   |   |  |   | 53,059,946  |  

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



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##### Table of Contents

BlackRock Kelso Capital Corporation

Statements of Changes in Net Assets (Unaudited)



|                                                                     |  |                              |             |   |                              |   |             |  
|-------------------------------------------------------------------- |  | ---------------------------- | ----------- | - | ---------------------------- | - | ----------- | -
|                                                                     |  | Six monthsendedJune 30, 2009 |             |   | Six monthsendedJune 30, 2008 |  
|Net Increase (Decrease) in Net Assets Resulting from Operations:     |  |                              |             |   |                              |   |             |  
|Net investment income                                                |  | $                            | 49,286,785  |   |                              | $ | 46,477,600  |  
|Net change in unrealized appreciation or depreciation                |  |                              | (20,994,397 | ) |                              |   | (72,778,842 | )
|Net realized gain (loss)                                             |  |                              | (8,537,758  | ) |                              |   | (1,312,938  | )
|                                                                     |  |                              |             |   |                              |   |             |  
|Net increase (decrease) in net assets resulting from operations      |  |                              | 19,754,630  |   |                              |   | (27,614,180 | )
|                                                                     |  |                              |             |   |                              |   |             |  
|Dividend Distributions to Stockholders from:                         |  |                              |             |   |                              |   |             |  
|Net investment income                                                |  |                              | (17,733,915 | ) |                              |   | (45,623,048 | )
|                                                                     |  |                              |             |   |                              |   |             |  
|Capital Share Transactions:                                          |  |                              |             |   |                              |   |             |  
|Reinvestment of dividends                                            |  |                              | 3,950,579   |   |                              |   | 17,231,470  |  
|Purchases of treasury stock                                          |  |                              | (2,234,892  | ) |                              |   |            |  
|                                                                     |  |                              |             |   |                              |   |             |  
|Net increase in net assets resulting from capital share transactions |  |                              | 1,715,687   |   |                              |   | 17,231,470  |  
|                                                                     |  |                              |             |   |                              |   |             |  
|Total Increase (Decrease) in Net Assets                              |  |                              | 3,736,402   |   |                              |   | (56,005,758 | )
|Net assets at beginning of period                                    |  |                              | 510,295,501 |   |                              |   | 728,191,869 |  
|                                                                     |  |                              |             |   |                              |   |             |  
|Net assets at end of period                                          |  | $                            | 514,031,903 |   |                              | $ | 672,186,111 |  
|                                                                     |  |                              |             |   |                              |   |             |  
|Capital Share Activity:                                              |  |                              |             |   |                              |   |             |  
|Shares issued from reinvestment of dividends                         |  |                              | 932,395     |   |                              |   | 1,799,434   |  
|Purchases of treasury stock                                          |  |                              | (583,572    | ) |                              |   |            |  
|                                                                     |  |                              |             |   |                              |   |             |  
|Total increase in shares                                             |  |                              | 348,823     |   |                              |   | 1,799,434   |  
|                                                                     |  |                              |             |   |                              |   |             |  
|Undistributed (distributions in excess of) net investment income     |  | $                            | 35,407,886  |   |                              | $ | (4,556,801  | )

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 monthsendedJune 30, 2009 |             |   | Six monthsendedJune 30, 2008 |  
|Operating Activities:                                                                                                                            |  |                              |             |   |                              |   |              |  
|Net increase (decrease) in net assets resulting from operations                                                                                  |  | $                            | 19,754,630  |   |                              | $ | (27,614,180  | )
|Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used in) operating
activities: |  |                              |             |   |                              |   |              |  
|Purchases of long-term investments                                                                                                               |  |                              | (27,189,886 | ) |                              |   | (174,601,047 | )
|Purchases of foreign currencynet                                                                                                                |  |                              | (2,245,931  | ) |                              |   | (1,613,107   | )
|Proceeds from sales/repayments of long-term investments                                                                                          |  |                              | 43,908,566  |   |                              |   | 51,483,558   |  
|Net change in unrealized appreciation or depreciation on investments                                                                             |  |                              | 22,366,316  |   |                              |   | 73,478,528   |  
|Net change in unrealized appreciation or depreciation on foreign currency translation                                                            |  |                              | (1,371,919  | ) |                              |   | (699,686     | )
|Net realized loss (gain) on investments                                                                                                          |  |                              | 7,050,717   |   |                              |   | (239,422     | )
|Net realized loss on foreign currency                                                                                                            |  |                              | 1,487,041   |   |                              |   | 1,552,360    |  
|Amortization of premium/discountnet                                                                                                             |  |                              | (2,663,183  | ) |                              |   | (1,203,998   | )
|Amortization of debt issuance costs                                                                                                              |  |                              | 339,489     |   |                              |   | 333,425      |  
|Decrease in interest receivable                                                                                                                  |  |                              | 2,495,556   |   |                              |   | 774,847      |  
|Increase in dividends receivable                                                                                                                 |  |                              | (1,281,827  | ) |                              |   | (898,406     | )
|Decrease in prepaid expenses and other assets                                                                                                    |  |                              | 323,683     |   |                              |   | 231,708      |  
|Increase in payable for investments purchased                                                                                                    |  |                              | 2,218,689   |   |                              |   | 8,700,000    |  
|Decrease in interest payable on credit facility                                                                                                  |  |                              | (515,595    | ) |                              |   | (1,176,719   | )
|Decrease in base management fees payable                                                                                                         |  |                              | (1,077,997  | ) |                              |   | (22,624      | )
|Increase (decrease) in accrued administrative services payable                                                                                   |  |                              | 80,328      |   |                              |   | (78,654      | )
|Increase (decrease) in other accrued expenses and payables                                                                                       |  |                              | (344,846    | ) |                              |   | 249,003      |  
|                                                                                                                                                 |  |                              |             |   |                              |   |              |  
|Net cash provided by (used in) operating activities                                                                                              |  |                              | 63,333,831  |   |                              |   | (71,344,414  | )
|                                                                                                                                                 |  |                              |             |   |                              |   |              |  
|Financing Activities:                                                                                                                            |  |                              |             |   |                              |   |              |  
|Dividend distributions paid                                                                                                                      |  |                              | (24,343,892 | ) |                              |   | (31,702,184  | )
|Borrowings under credit facility                                                                                                                 |  |                              | 22,000,000  |   |                              |   | 141,700,000  |  
|Repayments under credit facility                                                                                                                 |  |                              | (72,000,000 | ) |                              |   | (39,000,000  | )
|Purchases of treasury stock                                                                                                                      |  |                              | (2,234,892  | ) |                              |   |             |  
|                                                                                                                                                 |  |                              |             |   |                              |   |              |  
|Net cash provided by (used in) financing activities                                                                                              |  |                              | (76,578,784 | ) |                              |   | 70,997,816   |  
|                                                                                                                                                 |  |                              |             |   |                              |   |              |  
|Net decrease in cash equivalents                                                                                                                 |  |                              | (13,244,953 | ) |                              |   | (346,598     | )
|Cash equivalents, beginning of period                                                                                                            |  |                              | 15,024,972  |   |                              |   | 5,077,695    |  
|                                                                                                                                                 |  |                              |             |   |                              |   |              |  
|Cash equivalents, end of period                                                                                                                  |  | $                            | 1,780,019   |   |                              | $ | 4,731,097    |  
|                                                                                                                                                 |  |                              |             |   |                              |   |              |  
|Supplemental disclosure of cash flow information:                                                                                                |  |                              |             |   |                              |   |              |  
|Cash paid during period for:                                                                                                                     |  |                              |             |   |                              |   |              |  
|Interest                                                                                                                                         |  | $                            | 3,929,854   |   |                              | $ | 10,526,438   |  
|Franchise, excise and income taxes                                                                                                               |  | $                            | 484,257     |   |                              | $ | 61,230       |  
|                                                                                                                                                 |  |                             
|Supplemental disclosure of non-cash financing activities:                                                                                        |  |                              |             |   |                              |   |              |  
|Dividend distributions reinvested                                                                                                                |  | $                            | 3,950,579   |   |                              | $ | 17,231,470   |  

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, 2009



|                                                                                           |  |                                     |  |                                         |            |         |   |             |  |   |             |    
|------------------------------------------------------------------------------------------ |  | ----------------------------------- |  | --------------------------------------- | ---------- | ------- | - | ----------- |  | - | ----------- | ---
|Portfolio Company                                                                          |  | Industry                            |  | PrincipalAmount orNumber ofShares/Units |            | Cost(a) |   | FairValue   | 
|Senior Secured Notes10.2%                                                                 |  |                                     |  |                                         |            |         |   |             |  |   |             |    
|AGY Holding Corp., Second Lien, 11.00%, 11/15/14                                           |  | Glass Yarns/Fibers                  |  | $                                       | 23,500,000 |         | $ | 23,104,686  |  | $ | 22,301,500  | (b)
|TriMark Acquisition Corp., Second Lien, 11.50% (9.50% cash, 2.00% PIK), 11/30/13           |  | Food ServiceEquipment               |  |                                         | 31,191,106 |         |   | 31,191,106  |  |   | 30,005,844  | (b)
|                                                                                           |  |                                     |  |                                         |            |         |   |             |  |   |             |    
|Total Senior Secured Notes                                                                 |  |                                     |  |                                         |            |         |   | 54,295,792  |  |   | 52,307,344  |    
|                                                                                           |  |                                     |  |                                         |            |         |   |             |  |   |             |    
|Unsecured Debt29.1%                                                                       |  |                                     |  |                                         |            |         |   |             |  |   |             |    
|AMC Entertainment Holdings, Inc., 5.62% PIK (LIBOR + 5.00%), 6/13/12                       |  | Entertainment                       |  |                                         | 14,234,311 |         |   | 14,057,300  |  |   | 11,401,683  | (b)
|ASM Intermediate Holdings Corp. II, 12.00% PIK, 12/27/13                                   |  | MarketingServices                   |  |                                         | 54,036,681 |         |   | 54,036,681  |  |   | 48,957,233  | (b)
|BE Foods Investments, Inc., 6.08% (LIBOR + 5.00% cash or 5.75% PIK), 7/11/12               |  | Food                                |  |                                         | 25,761,797 |         |   | 25,225,517  |  |   | 22,618,858  | (b)
|Big Dumpster Acquisition, Inc., 13.50% PIK, 7/5/15                                         |  | WasteManagement Equipment           |  |                                         | 40,090,906 |         |   | 40,090,906  |  |   | 12,989,453  | (b)
|Marquette Transportation Company Holdings, LLC, 14.75% PIK, 3/21/14                        |  | Transportation                      |  |                                         | 52,253,576 |         |   | 52,253,576  |  |   | 49,588,643  | (b)
|Marsico Parent Holdco, LLC et al., 12.50% PIK, 7/15/16, acquired 11/28/07(c)               |  | Financial Services                  |  |                                         | 10,606,494 |         |   | 10,606,494  |  |   | 2,545,559   | (b)
|Marsico Parent Superholdco, LLC et al., 14.50% PIK, 1/15/18, acquired 11/28/07(c)          |  | Financial Services                  |  |                                         | 7,255,639  |         |   | 6,938,756   |  |   | 1,385,827   | (b)
|                                                                                           |  |                                     |  |                                         |            |         |   |             |  |   |             |    
|Total Unsecured Debt                                                                       |  |                                     |  |                                         |            |         |   | 203,209,230 |  |   | 149,487,256 |    
|                                                                                           |  |                                     |  |                                         |            |         |   |             |  |   |             |    
|Subordinated Debt24.7%                                                                    |  |                                     |  |                                         |            |         |   |             |  |   |             |    
|A & A Manufacturing Co., Inc., 14.00% (12.00% cash, 2.00% PIK), 4/2/14                     |  | Protective Enclosures               |  |                                         | 19,348,276 |         |   | 19,348,276  |  |   | 17,413,449  | (b)
|Advanstar, Inc., 7.60% PIK (LIBOR + 7.00%), 11/30/15                                       |  | Printing/ Publishing                |  |                                         | 7,467,528  |         |   | 7,467,528   |  |   | 41,071      | (b)
|Al Solutions, Inc., 16.00% PIK, 12/29/13(d)(e)                                             |  | Metals                              |  |                                         | 13,680,233 |         |   | 13,359,154  |  |   |            | (b)
|Conney Safety Products, LLC, 16.00%, 10/1/14                                               |  | Safety Products                     |  |                                         | 30,000,000 |         |   | 30,000,000  |  |   | 24,600,000  | (b)
|DynaVox Systems LLC, 15.00%, 6/23/15                                                       |  | Augmentative Communication Products |  |                                         | 25,000,000 |         |   | 25,000,000  |  |   | 25,000,000  | (b)
|Mattress Giant Corporation, 16.25% PIK, 8/1/12(e)                                          |  | Bedding Retail                     |  |                                         | 15,185,673 |         |   | 15,115,373  |  |   |            | (b)
|MediMedia USA, Inc., 11.38%, 11/15/14, acquired multiple dates(c)                          |  | InformationServices                 |  |                                         | 8,000,000  |         |   | 8,062,643   |  |   | 6,424,000   | (b)
|The Pay-O-Matic Corp., 14.00% (12.00% cash, 2.00% PIK), 1/15/15                            |  | Financial Services                  |  |                                         | 15,366,867 |         |   | 15,366,867  |  |   | 15,366,867  | (b)
|PGA Holdings, Inc., 12.50%, 3/12/16                                                        |  | HealthcareServices                  |  |                                         | 5,000,000  |         |   | 4,916,737   |  |   | 4,900,000   | (b)
|Sentry Security Systems, LLC, 16.00% (14.00% cash, 2.00% PIK), 8/7/12                      |  | SecurityServices                    |  |                                         | 10,724,763 |         |   | 10,724,763  |  |   | 10,199,250  | (b)
|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  |  |   | 15,021,667  | (b)
|U.S. Security Holdings, Inc., 13.00% (11.00% cash, 2.00% PIK), 5/8/14, acquired 5/10/06(c) |  | SecurityServices                    |  |                                         | 7,000,000  |         |   | 7,000,000   |  |   | 5,250,000   |    

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, 2009



|                                                                                                       |  |                          |  |                                         |            |     |         |   |             |  |   |             |    
|------------------------------------------------------------------------------------------------------ |  | ------------------------ |  | --------------------------------------- | ---------- | --- | ------- | - | ----------- |  | - | ----------- | ---
|Portfolio Company                                                                                      |  | Industry                 |  | PrincipalAmount orNumber ofShares/Units |            |     | Cost(a) |   | FairValue   | 
|Wastequip, Inc., 12.00% (10.00% cash, 2.00% PIK), 2/5/15                                               |  | WasteManagementEquipment |  | $                                       | 7,794,649  |     |         | $ | 7,794,649   |  | $ | 2,930,788   | (b)
|                                                                                                       |  |                          |  |                                         |            |     |         |   |             |  |   |             |    
|Total Subordinated Debt                                                                                |  |                          |  |                                         |            |     |         |   | 179,177,657 |  |   | 127,147,092 |    
|                                                                                                       |  |                          |  |                                         |            |     |         |   |             |  |   |             |    
|Senior Secured Loans102.7%(f)                                                                         |  |                          |  |                                         |            |     |         |   |             |  |   |             |    
|Advanstar Communications Inc., Second Lien, 5.60% (LIBOR + 5.00%), 11/30/14                            |  | Printing/Publishing      |  |                                         | 14,000,000 |     |         |   | 14,000,000  |  |   | 1,330,000   | (b)
|Alpha Media Group Inc., Second Lien, 9.75% (LIBOR + 7.50%), 2/11/15(e)                                 |  | Publishing               |  |                                         | 20,000,000 |     |         |   | 19,397,208  |  |   | 2,285,200   | (b)
|Al Solutions, Inc., First Lien, 10.00%, 6/28/13 ($140,421 unfunded)(d)                                 |  | Metals                   |  |                                         | 150,000    |     |         |   | 147,045     |  |   | 150,000     | (b)
|American Residential Services L.L.C., Second Lien, 12.00% (10.00% cash, 2.00% PIK), 4/17/15            |  | HVAC/Plumbing Services   |  |                                         | 40,806,020 |     |         |   | 40,806,020  |  |   | 36,072,523  | (b)
|American Safety Razor Company, LLC, Second Lien, 6.56% (LIBOR + 6.25%), 1/30/14                        |  | ConsumerProducts         |  |                                         | 10,000,000 |     |         |   | 10,000,000  |  |   | 8,430,000   | (b)
|American SportWorks LLC, Second Lien, 20.00%, 6/27/14(e)(g)                                            |  | UtilityVehicles          |  |                                         | 13,403,274 |     |         |   | 13,403,274  |  |   | 3,572,448   | (b)
|AmQuip Crane Rental LLC, Second Lien, 6.09% (LIBOR + 5.75%), 6/29/14                                   |  | ConstructionEquipment    |  |                                         | 25,660,446 |     |         |   | 23,633,942  |  |   | 23,761,573  | (b)
|Applied Tech Products Corp. et al., Tranche A, First Lien, 7.75% (Base Rate + 4.50%), 10/24/10(e)      |  | PlasticPackaging         |  |                                         | 1,230,907  |     |         |   | 1,228,390   |  |   | 804,866     | (b)
|Applied Tech Products Corp. et al., Tranche B, Second Lien, 11.75% (Base Rate + 8.50%), 4/24/11(e)     |  | PlasticPackaging         |  |                                         | 2,308,004  |     |         |   | 2,301,355   |  |   |            | (b)
|Applied Tech Products Corp. et al., Tranche C, Third Lien, 15.25% PIK (Base Rate + 12.00%),10/24/11(e) |  | PlasticPackaging         |  |                                         | 916,240    |     |         |   | 876,961     |  |   |            | (b)
|Arclin US Holdings Inc., First Lien, 7.00% (Base Rate + 3.75%), 7/10/14                                |  | Chemicals                |  |                                         | 6,423,685  |     |         |   | 3,083,369   |  |   | 6,125,819   | (b)
|Arclin US Holdings Inc., Second Lien, 7.44% (LIBOR + 6.50%), 7/10/15                                   |  | Chemicals                |  |                                         | 14,500,000 |     |         |   | 14,500,000  |  |   | 4,056,955   | (b)
|Bankruptcy Management Solutions, Inc., Second Lien, 6.56% (LIBOR + 6.25%), 7/31/13                     |  | FinancialServices        |  |                                         | 24,312,500 |     |         |   | 24,312,500  |  |   | 18,210,063  | (b)
|The Bargain! Shop Holdings Inc., Term Loan A, First Lien, 14.50% (13.50% cash, 1.00% PIK), 6/29/12(h)  |  | DiscountStores           |  |                                         | 13,791,968 | (i) |         |   | 13,363,147  |  |   | 11,757,049  | (b)
|The Bargain! Shop Holdings Inc., Term Loan B, First Lien, 14.50% (13.50% cash, 1.00% PIK), 7/1/12(h)   |  | DiscountStores           |  |                                         | 18,958,032 | (i) |         |   | 17,737,320  |  |   | 16,160,892  | (b)
|Berlin Packaging L.L.C., Second Lien, 7.18% (LIBOR + 6.50%), 8/17/15                                   |  | RigidPackaging           |  |                                         | 24,000,000 |     |         |   | 23,447,407  |  |   | 21,432,000  | (b)
|Champion Energy Corporation et al., First Lien, 14.50%, 5/22/11                                        |  | Heating and OilServices  |  |                                         | 30,000,000 |     |         |   | 30,000,000  |  |   | 30,000,000  | (b)
|Custom Direct, Inc. et al., Second Lien, 6.60% (LIBOR + 6.00%), 12/31/14                               |  | Printing                 |  |                                         | 10,000,000 |     |         |   | 10,000,000  |  |   | 7,260,000   | (b)
|Deluxe Entertainment Services Group Inc., Second Lien, 6.60% (LIBOR + 6.00%), 11/11/13                 |  | Entertainment            |  |                                         | 12,000,000 |     |         |   | 12,000,000  |  |   | 9,780,000   | (b)

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, 2009



|                                                                                                                           |  |                            |  |                                         |            |         |   |            |  |   |            |     
|-------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- |  | --------------------------------------- | ---------- | ------- | - | ---------- |  | - | ---------- | ----
|Portfolio Company                                                                                                          |  | Industry                   |  | PrincipalAmount orNumber ofShares/Units |            | Cost(a) |   | FairValue  | 
|Electrical Components International, Inc., Second Lien, 11.50% (Base Rate + 8.25%), 5/1/14                                 |  | Electronics                |  | $                                       | 26,000,000 |         | $ | 22,529,284 |  | $ | 8,180,000  | (b) 
|Event Rentals, Inc., Acquisition Loan, First Lien, 8.12% (LIBOR + 4.25% cash, 2.00% PIK), 12/19/13                         |  | PartyRentals               |  |                                         | 3,187,951  |         |   | 3,187,951  |  |   | 2,598,180  |     
|Facet Technologies, LLC, Second Lien, 17.50% PIK, 7/26/12                                                                  |  | MedicalDevices             |  |                                         | 31,445,932 |         |   | 31,445,932 |  |   | 10,754,509 | (b) 
|Facet Technologies, LLC, Guaranty                                                                                          |  | MedicalDevices             |  |                                         |           |         |   |           |  |   | (296,000   | )(b)
|Fairway Group Holdings Corp. et al., Term B Loan, First Lien, 11.25% (LIBOR + 7.75%), 1/18/13                              |  | RetailGrocery              |  |                                         | 1,470,000  |         |   | 1,467,826  |  |   | 1,470,000  | (b) 
|Fairway Group Holdings Corp. et al., Term C Loan, Second Lien, 17.00%, 1/18/14                                             |  | RetailGrocery              |  |                                         | 11,757,987 |         |   | 11,720,613 |  |   | 11,757,987 | (b) 
|Fitness Together Franchise Corporation, First Lien, 11.50% (9.50% cash, 2.00% PIK), 11/10/13(d)                            |  | PersonalFitness            |  |                                         | 6,951,319  |         |   | 6,951,319  |  |   | 6,360,457  | (b) 
|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  |         |   | 3,324,270  |  |   | 2,687,297  | (b) 
|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           |  |                                         | 2,235,905  |         |   | 2,235,705  |  |   | 1,761,893  | (b) 
|HIT Entertainment, Inc., Second Lien, 6.51% (LIBOR + 5.50%), 2/26/13                                                       |  | Entertainment              |  |                                         | 1,000,000  |         |   | 1,000,000  |  |   | 340,000    |     
|InterMedia Outdoor, Inc., Second Lien, 7.35% (LIBOR + 6.75%), 1/31/14                                                      |  | Printing/Publishing        |  |                                         | 10,000,000 |         |   | 10,000,000 |  |   | 7,900,000  | (b) 
|Isola USA Corp., First Lien, 11.00% (Base Rate + 7.75%), 12/18/12                                                          |  | Electronics                |  |                                         | 8,901,316  |         |   | 8,823,812  |  |   | 7,254,572  | (b) 
|Isola USA Corp., Second Lien, 17.75% (Base Rate + 14.50%), 12/18/13                                                        |  | Electronics                |  |                                         | 25,000,000 |         |   | 25,000,000 |  |   | 13,225,000 | (b) 
|Kaz, Inc. et al., First Lien, 16.00% (12.00% cash, 4.00% PIK), 12/8/11                                                     |  | ConsumerProducts           |  |                                         | 23,684,036 |         |   | 23,510,744 |  |   | 23,684,036 | (b) 
|LJVH Holdings Inc., Second Lien, 6.10% (LIBOR + 5.50%), 1/19/15(h)                                                         |  | SpecialtyCoffee            |  |                                         | 25,000,000 |         |   | 25,000,000 |  |   | 22,125,000 | (b) 
|MCCI Group Holdings, LLC, Second Lien, 7.91% (LIBOR + 7.25%), 6/21/13                                                      |  | HealthcareServices         |  |                                         | 29,000,000 |         |   | 28,955,688 |  |   | 28,246,000 | (b) 
|Navilyst Medical, Inc., Second Lien, 12.25%, 8/14/15                                                                       |  | HealthcareServices         |  |                                         | 15,000,000 |         |   | 14,785,253 |  |   | 14,445,000 | (b) 
|New Enterprise Stone & Lime Co., Inc., Second Lien, 12.50%, 7/11/14                                                        |  | Mining/Construction        |  |                                         | 35,000,000 |         |   | 34,725,150 |  |   | 33,460,000 | (b) 
|Oriental Trading Company, Inc., Second Lien, 6.31% (LIBOR + 6.00%), 1/31/14                                                |  | PartySupplies andNovelties |  |                                         | 3,000,000  |         |   | 3,000,000  |  |   | 862,500    |     
|Penton Media, Inc. et al., Second Lien, 6.04% (LIBOR + 5.00%), 2/1/14(g)                                                   |  | InformationServices        |  |                                         | 26,000,000 |         |   | 25,640,871 |  |   | 16,406,000 | (b) 
|Physiotherapy Associates, Inc. et al., Second Lien, 12.00% (Base Rate + 8.75%), 12/31/13                                   |  | RehabilitationCenters      |  |                                         | 17,000,000 |         |   | 17,000,000 |  |   | 13,940,000 | (b) 
|PQ Corporation, Second Lien, 7.54% (LIBOR + 6.50%), 7/30/15                                                                |  | SpecialtyChemicals         |  |                                         | 10,000,000 |         |   | 8,877,480  |  |   | 7,370,000  | (b) 

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, 2009



|                                                                                                          |  |                            |  |                                         |            |         |   |             |  |   |             |    
|--------------------------------------------------------------------------------------------------------- |  | -------------------------- |  | --------------------------------------- | ---------- | ------- | - | ----------- |  | - | ----------- | ---
|Portfolio Company                                                                                         |  | Industry                   |  | PrincipalAmount orNumber ofShares/Units |            | Cost(a) |   | FairValue   | 
|Precision Parts International Services Corp. et al., First Lien, 8.00% (Base Rate + 4.75%), 9/30/11(e)    |  | AutomotiveParts            |  | $                                       | 2,847,627  |         | $ | 2,847,627   |  | $ | 711,907     |    
|Premier Yachts, Inc. et al., Term A, First Lien, 4.07% (LIBOR + 3.75%), 8/22/12                           |  | EntertainmentCruises       |  |                                         | 6,627,236  |         |   | 6,609,882   |  |   | 6,474,810   | (b)
|Premier Yachts, Inc. et al., Term B, First Lien, 7.69% (LIBOR + 7.00%), 8/22/13                           |  | EntertainmentCruises       |  |                                         | 1,714,226  |         |   | 1,709,507   |  |   | 1,714,226   | (b)
|Sunrise Medical LTC LLC et al., Second Lien, 6.81% (LIBOR + 6.50%), 12/28/13                              |  | HealthcareEquipment        |  |                                         | 14,400,000 |         |   | 14,400,000  |  |   | 13,276,800  | (b)
|Texas Competitive Electric Holdings Company LLC, Tranche B-2, First Lien, 3.82% (LIBOR + 3.50%), 10/10/14 |  | Utilities                  |  |                                         | 4,962,121  |         |   | 4,017,780   |  |   | 3,558,154   |    
|Total Safety U.S., Inc., Second Lien, 6.81% (LIBOR + 6.50%), 12/8/13                                      |  | Industrial SafetyEquipment |  |                                         | 9,000,000  |         |   | 9,000,000   |  |   | 7,722,000   | (b)
|United Subcontractors, Inc., First Lien, 2.10% (LIBOR + 1.50%), 6/30/15(g)                                |  | Building andConstruction   |  |                                         | 1,549,226  |         |   | 1,549,226   |  |   | 1,549,226   | (b)
|Water Pik, Inc., Second Lien, 5.82% (LIBOR + 5.50%), 6/15/14                                              |  | ConsumerProducts           |  |                                         | 30,000,000 |         |   | 30,000,000  |  |   | 29,400,000  | (b)
|WBS Group LLC et al., Second Lien, 6.57% (LIBOR + 6.25%), 6/7/13                                          |  | Software                   |  |                                         | 20,000,000 |         |   | 20,000,000  |  |   | 15,800,000  | (b)
|Wembley, Inc., Second Lien, 6.50% (Base Rate + 3.25%), 8/23/12(e)                                         |  | Gaming                     |  |                                         | 1,000,000  |         |   | 1,000,000   |  |   | 75,000      |    
|Westward Dough Operating Company, LLC, Term Loan A, First Lien, 4.60% (LIBOR + 4.00%), 3/30/11            |  | Restaurants                |  |                                         | 6,850,000  |         |   | 6,850,000   |  |   | 5,137,500   | (b)
|Westward Dough Operating Company, LLC, Term Loan B, First Lien, 7.60% (LIBOR + 7.00%), 3/30/11(e)         |  | Restaurants                |  |                                         | 8,334,656  |         |   | 8,334,656   |  |   | 6,982,700   | (b)
|                                                                                                          |  |                            |  |                                         |            |         |   |             |  |   |             |    
|Total Senior Secured Loans                                                                                |  |                            |  |                                         |            |         |   | 689,738,514 |  |   | 528,124,142 |    
|                                                                                                          |  |                            |  |                                         |            |         |   |             |  |   |             |    
|Preferred Stock1.5%                                                                                      |  |                            |  |                                         |            |         |   |             |  |   |             |    
|Facet Holdings Corp., Class A, 12.00% PIK(e)                                                              |  | MedicalDevices             |  |                                         | 900        |         |   | 900,000     |  |   |            | (b)
|Fitness Together Holdings, Inc., Series A(d)(j)                                                           |  | PersonalFitness            |  |                                         | 187,500    |         |   | 173,326     |  |   |            | (b)
|Fitness Together Holdings, Inc., Series A-1(d)(j)                                                         |  | PersonalFitness            |  |                                         | 49,056     |         |   | 49,056      |  |   |            | (b)
|Fitness Together Holdings, Inc., Series BConvertible(d)(j)                                                |  | PersonalFitness            |  |                                         | 11,343,804 |         |   | 6,500,000   |  |   | 2,587,000   | (b)
|M & M Tradition Holdings Corp., Series A Convertible, 16.00% PIK(g)                                       |  | Sheet MetalFabrication     |  |                                         | 4,968      |         |   | 4,968,000   |  |   | 5,117,040   | (b)
|Tygem Holdings, Inc., 8.00% PIK(d)(e)                                                                     |  | Metals                     |  |                                         | 10,789,367 |         |   | 10,826,867  |  |   |            | (b)
|Tygem Holdings, Inc., Series B Convertible(d)(j)                                                          |  | Metals                     |  |                                         | 54,574,501 |         |   | 14,725,535  |  |   |            | (b)
|                                                                                                          |  |                            |  |                                         |            |         |   |             |  |   |             |    
|Total Preferred Stock                                                                                     |  |                            |  |                                         |            |         |   | 38,142,784  |  |   | 7,704,040   |    
|                                                                                                          |  |                            |  |                                         |            |         |   |             |  |   |             |    
|Common Stock3.2%(j)                                                                                      |  |                            |  |                                         |            |         |   |             |  |   |             |    
|BKC ARS Blocker, Inc. (American Residential)(k)                                                           |  | HVAC/PlumbingServices      |  |                                         | 1,000      |         |   |            |  |   | 620,000     | (b)
|BKC ASW Blocker, Inc. (American SportWorks)(g)(l)                                                         |  | UtilityVehicles            |  |                                         | 1,000      |         |   | 250,000     |  |   | 5,883       | (b)

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, 2009



|                                                                     |  |                                   |  |                                         |  |         |            |           |   |            |    
|-------------------------------------------------------------------- |  | --------------------------------- |  | --------------------------------------- |  | ------- | ---------- | --------- | - | ---------- | ---
|Portfolio Company                                                    |  | Industry                          |  | PrincipalAmount orNumber ofShares/Units |  | Cost(a) |            | FairValue |  
|BKC DVSH Blocker, Inc. (DynaVox Systems)(m)                          |  | AugmentativeCommunicationProducts |  | 100                                     |  | $       | 1,000,000  |           | $ | 1,470,100  | (b)
|BKC MTCH Blocker, Inc. (Marquette Transportation)(n)                 |  | Transportation                    |  | 1,000                                   |  |         | 5,000,000  |           |   | 2,322,000  | (b)
|Facet Holdings Corp.                                                 |  | Medical Devices                   |  | 10,000                                  |  |         | 100,000    |           |   |           | (b)
|Fitness Together Holdings, Inc.(d)                                   |  | Personal Fitness                  |  | 173,547                                 |  |         | 118,500    |           |   |           | (b)
|M & M Tradition Holdings Corp.(g)                                    |  | Sheet MetalFabrication            |  | 500,000                                 |  |         | 5,000,000  |           |   | 5,000,000  | (b)
|MGHC Holding Corporation (Mattress Giant)                            |  | BeddingRetail                    |  | 205,000                                 |  |         | 2,050,000  |           |   |           | (b)
|Tygem Holdings, Inc.(d)                                              |  | Metals                            |  | 3,596,456                               |  |         | 3,608,956  |           |   |           | (b)
|USI Senior Holdings, Inc.(g)                                         |  | Building andConstruction          |  | 72,254                                  |  |         | 6,826,150  |           |   | 6,826,150  | (b)
|                                                                     |  |                                   |  |                                         |  |         |            |           |   |            |    
|Total Common Stock                                                   |  |                                   |  |                                         |  |         | 23,953,606 |           |   | 16,244,133 |    
|                                                                     |  |                                   |  |                                         |  |         |            |           |   |            |    
|Limited Partnership/LimitedLiability Company Interests1.6%          |  |                                   |  |                                         |  |         |            |           |   |            |    
|Big Dumpster Coinvestment, LLC(j)                                    |  | Waste ManagementEquipment         |  |                                        |  |         | 5,333,333  |           |   |           | (b)
|Marsico Parent Superholdco, LLC, 16.75% PIK, acquired 11/28/07(c)(e) |  | FinancialServices                 |  | 1,750                                   |  |         | 1,650,005  |           |   |           | (b)
|PG Holdco, LLC (Press Ganey), 15.00% PIK                             |  | Healthcare Services               |  | 333                                     |  |         | 333,333    |           |   | 333,560    | (b)
|PG Holdco, LLC (Press Ganey), Class A(j)                             |  | Healthcare Services               |  | 16,667                                  |  |         | 166,667    |           |   | 216,667    | (b)
|Prism Business Media Holdings LLC (Penton Media)(g)(j)               |  | InformationServices               |  | 68                                      |  |         | 14,943,201 |           |   | 878,000    | (b)
|Sentry Security Systems Holdings, LLC(j)                             |  | Security Services                 |  | 147,271                                 |  |         | 147,271    |           |   |           | (b)
|Sentry Security Systems Holdings, LLC, 8.00% PIK                     |  | Security Services                 |  | 602,729                                 |  |         | 602,729    |           |   | 127,471    | (b)
|WBS Group Holdings, LLC, Class B, 16.00% PIK                         |  | Software                          |  | 8,000                                   |  |         | 8,000,000  |           |   | 6,789,211  | (b)
|                                                                     |  |                                   |  |                                         |  |         |            |           |   |            |    
|Total Limited Partnership/Limited Liability Company Interests        |  |                                   |  |                                         |  |         | 31,176,539 |           |   | 8,344,909  |    
|                                                                     |  |                                   |  |                                         |  |         |            |           |   |            |    
|Equity Warrants/Options0.0%(j)                                      |  |                                   |  |                                         |  |         |            |           |   |            |    
|ATEP Holdings, Inc. (Applied Tech), expire 10/24/15                  |  | Plastic Packaging                 |  | 470                                     |  |         |           |           |   |           | (b)
|ATH Holdings, Inc. (Applied Tech), expire 10/24/15                   |  | Plastic Packaging                 |  | 470                                     |  |         |           |           |   |           | (b)
|ATPP Holdings, Inc. (Applied Tech), expire 10/24/15                  |  | Plastic Packaging                 |  | 470                                     |  |         | 90,112     |           |   |           | (b)
|ATPR Holdings, Inc. (Applied Tech), expire 10/24/15                  |  | Plastic Packaging                 |  | 470                                     |  |         |           |           |   |           | (b)
|Kaz, Inc., expire 12/8/16                                            |  | Consumer Products                 |  | 49                                      |  |         | 512,000    |           |   | 102,905    | (b)
|Kaz, Inc., expire 12/8/16                                            |  | Consumer Products                 |  | 16                                      |  |         | 64,000     |           |   | 13,490     | (b)
|Kaz, Inc., expire 12/8/16                                            |  | Consumer Products                 |  | 16                                      |  |         | 24,000     |           |   | 6,170      | (b)
|Kaz, Inc., expire 12/8/16                                            |  | Consumer Products                 |  | 16                                      |  |         | 9,000      |           |   | 3,102      | (b)
|Marsico Superholdco SPV, LLC, expire 12/14/19, acquired 11/28/07(c)  |  | FinancialServices                 |  | 455                                     |  |         | 444,450    |           |   |           | (b)
|                                                                     |  |                                   |  |                                         |  |         |            |           |   |            |    
|Total Equity Warrants/Options                                        |  |                                   |  |                                         |  |         | 1,143,562  |           |   | 125,667    |    
|                                                                     |  |                                   |  |                                         |  |         |            |           |   |            |    

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



11



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##### Table of Contents

BlackRock Kelso Capital Corporation

Schedules of Investments (Unaudited)(Continued)

June 30, 2009



|                                            |  |          |  |                                         |  |         |               |   |           |   |              |  
|------------------------------------------- |  | -------- |  | --------------------------------------- |  | ------- | ------------- | - | --------- | - | ------------ | -
|Portfolio Company                           |  | Industry |  | PrincipalAmount orNumber ofShares/Units |  | Cost(a) |               |   | FairValue |  
|TOTAL INVESTMENTS INCLUDING UNEARNED INCOME |  |          |  |                                         |  | $       | 1,220,837,684 |   |           | $ | 889,484,583  |  
|UNEARNED INCOME(0.9)%                      |  |          |  |                                         |  |         | (4,628,985    | ) |           |   | (4,628,985   | )
|                                            |  |          |  |                                         |  |         |               |   |           |   |              |  
|TOTAL INVESTMENTS172.1%                    |  |          |  |                                         |  | $       | 1,216,208,699 |   |           |   | 884,855,598  |  
|                                            |  |          |  |                                         |  |         |               |   |           |   |              |  
|OTHER ASSETS & LIABILITIES (NET)(72.1)%    |  |          |  |                                         |  |         |               |   |           |   | (370,823,695 | )
|                                            |  |          |  |                                         |  |         |               |   |           |   |              |  
|NET ASSETS100.0%                           |  |          |  |                                         |  |         |               |   |           | $ | 514,031,903  |  
|                                            |  |          |  |                                         |  |         |               |   |           |   |              |  



|(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 of this investment determined by or under the direction of the Companys Board of Directors (see Note 2). The aggregate fair value of these investments (net of
unearned income) is $871,459,857 or 169.5% of net assets at June 30, 2009.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(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 3.0% of net assets at June 30, 2009.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(d) | 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 atJune 30,2009 |   | InterestIncome**
|Al Solutions, Inc.:                    |  |                               |            |                       |   |                          |  |   |                           |   |                  |   |           |  |   |        
|Senior Secured Loan                    |  | $                             |           |                       | $ | 147,045                  |  | $ | 2,955                     |   |                  | $ | 150,000   |  | $ | 103    
|Subordinated Debt                      |  |                               |           |                       |   |                         |  |   |                          |   |                  |   |          |  |   | 35,393 
|Fitness Together Franchise Corporation |  |                               |            |                       |   |                          |  |   |                           |   |                  |   |           |  |   |        
|Senior Secured Loan                    |  |                               | 6,496,555  |                       |   |                         |  |   | (136,098                  | ) |                  |   | 6,360,457 |  |   | 398,933
|Fitness Together Holdings, Inc.:       |  |                               |            |                       |   |                          |  |   |                           |   |                  |   |           |  |   |        
|Preferred Stock Series A               |  |                               |           |                       |   |                         |  |   |                          |   |                  |   |          |  |   |       
|Preferred Stock Series A-1             |  |                               |           |                       |   |                         |  |   |                          |   |                  |   |          |  |   |       
|Preferred Stock Series B Convertible   |  |                               | 4,700,000  |                       |   |                         |  |   | (2,113,000                | ) |                  |   | 2,587,000 |  |   |       
|Common Stock                           |  |                               |           |                       |   |                         |  |   |                          |   |                  |   |          |  |   |       
|Tygem Holdings, Inc.:                  |  |                               |            |                       |   |                          |  |   |                           |   |                  |   |           |  |   |        
|Preferred Stock                        |  |                               |           |                       |   |                         |  |   |                          |   |                  |   |          |  |   |       
|Preferred Stock Series B Convertible   |  |                               |           |                       |   |                         |  |   |                          |   |                  |   |          |  |   |       
|Common Stock                           |  |                               |           |                       |   |                         |  |   |                          |   |                  |   |          |  |   |       
|                                       |  |                               |            |                       |   |                          |  |   |                           |   |                  |   |           |  |   |        
|Totals                                 |  | $                             | 11,196,555 |                       | $ | 147,045                  |  | $ | (2,246,143                | ) |                  | $ | 9,097,457 |  | $ | 434,429
|                                       |  |                               |            |                       |   |                          |  |   |                           |   |                  |   |           |  |   |        



| | 
| | 

| | * | 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 six months ended June 30, 2009. There were no realized gains (losses) or dividend income from these securities during the period.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------

| | The aggregate fair value of controlled investments (net of unearned income) at June 30, 2009 represents 1.8% of net assets.
| | ---------------------------------------------------------------------------------------------------------------------------

|(e) | Non-accrual status (in default) at June 30, 2009 and therefore non-income producing. At June 30, 2009, the aggregate fair value and amortized cost of debt investments on
non-accrual status represents 1.7% and 6.9% of total debt investments at fair value and amortized cost, respectively.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



12



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##### Table of Contents

|(f) | Approximately 63% 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 6% of such senior secured loans have floors of 1.50% to 3.50% 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, 2009 of all contracts within the specified loan facility.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(g) | 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:
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                       |  |                               |            |   |                       |   |                         |  |   |                          |   |  |                           |            |   |                           |   |                   |   |                   |   |        |  |   |         |  |   |        
|-------------------------------------- |  | ----------------------------- | ---------- | - | --------------------- | - | ----------------------- |  | - | ------------------------ | - |  | ------------------------- | ---------- | - | ------------------------- | - | ----------------- | - | ----------------- | - | ------ |  | - | ------- |  | - | -------
|Non-controlled, Affiliated Investments |  | Fair Value atDecember 31,2008 |            |   | GrossAdditions(Cost)* |   | GrossReductions(Cost)** |  |   | NetUnrealizedGain (Loss) |   |  | Fair Value atJune 30,2009 |            |   | NetRealizedGain (Loss)*** |   | InterestIncome*** |   | DividendIncome***
|AmericanSportWorks LLC                 |  |                               |            |   |                       |   |                         |  |   |                          |   |  |                           |            |   |                           |   |                   |   |                   |   |        |  |   |         |  |   |        
|Senior Secured Loan                    |  | $                             | 5,716,023  |   |                       | $ |                        |  | $ |                         |   |  | $                         | (2,143,575 | ) |                           | $ | 3,572,448         |   |                   | $ |       |  | $ | 27,617  |  | $ |       
|BKC ASW Blocker, Inc.                  |  |                               |            |   |                       |   |                         |  |   |                          |   |  |                           |            |   |                           |   |                   |   |                   |   |        |  |   |         |  |   |        
|Common Stock                           |  |                               | 16,399     |   |                       |   |                        |  |   |                         |   |  |                           | (10,516    | ) |                           |   | 5,883             |   |                   |   |       |  |   |        |  |   |       
|M&M TraditionHoldings Corp.:           |  |                               |            |   |                       |   |                         |  |   |                          |   |  |                           |            |   |                           |   |                   |   |                   |   |        |  |   |         |  |   |        
|Preferred Stock                        |  |                               | 5,537,280  |   |                       |   |                        |  |   | (408,000                 | ) |  |                           | (12,240    | ) |                           |   | 5,117,040         |   |                   |   | 12,240 |  |   |        |  |   | 541,414
|Common Stock                           |  |                               | 6,095,000  |   |                       |   |                        |  |   |                         |   |  |                           | (1,095,000 | ) |                           |   | 5,000,000         |   |                   |   |       |  |   |        |  |   |       
|Penton Media, Inc.                     |  |                               |            |   |                       |   |                         |  |   |                          |   |  |                           |            |   |                           |   |                   |   |                   |   |        |  |   |         |  |   |        
|Senior Secured Loan                    |  |                               | 18,226,000 |   |                       |   | 38,784                  |  |   |                         |   |  |                           | (1,858,784 | ) |                           |   | 16,406,000        |   |                   |   |       |  |   | 886,901 |  |   |       
|Prism Business Media Holdings LLC      |  |                               |            |   |                       |   |                         |  |   |                          |   |  |                           |            |   |                           |   |                   |   |                   |   |        |  |   |         |  |   |        
|Limited Liability Co. Interest         |  |                               | 4,730,000  |   |                       |   |                        |  |   |                         |   |  |                           | (3,852,000 | ) |                           |   | 878,000           |   |                   |   |       |  |   |        |  |   |       
|United Subcontractors, Inc.            |  |                               |            |   |                       |   |                         |  |   |                          |   |  |                           |            |   |                           |   |                   |   |                   |   |        |  |   |         |  |   |        
|Senior Secured Loan                    |  |                               |           |   |                       |   | 1,549,226               |  |   |                         |   |  |                           |           |   |                           |   | 1,549,226         |   |                   |   |       |  |   |        |  |   |       
|USI Senior Holdings, Inc.              |  |                               |            |   |                       |   |                         |  |   |                          |   |  |                           |            |   |                           |   |                   |   |                   |   |        |  |   |         |  |   |        
|Common Stock                           |  |                               |           |   |                       |   | 6,826,150               |  |   |                         |   |  |                           |           |   |                           |   | 6,826,150         |   |                   |   |       |  |   |        |  |   |       
|Less: Unearned Income                  |  |                               | (305,622   | ) |                       |   | 27,617                  |  |   |                         |   |  |                           |           |   |                           |   | (278,005          | ) |                   |   |       |  |   |        |  |   |       
|                                       |  |                               |            |   |                       |   |                         |  |   |                          |   |  |                           |            |   |                           |   |                   |   |                   |   |        |  |   |         |  |   |        
|Totals                                 |  | $                             | 40,015,080 |   |                       | $ | 8,441,777               |  | $ | (408,000                 | ) |  | $                         | (8,972,115 | ) |                           | $ | 39,076,742        |   |                   | $ | 12,240 |  | $ | 914,518 |  | $ | 541,414
|                                       |  |                               |            |   |                       |   |                         |  |   |                          |   |  |                           |            |   |                           |   |                   |   |                   |   |        |  |   |         |  |   |        

| | 
| | 

| | * | 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, 2009.
| | --- | ---------------------------------------

| | The aggregate fair value of non-controlled, affiliated investments (net of unearned income) at June 30, 2009 represents 7.6% of net assets.
| | -------------------------------------------------------------------------------------------------------------------------------------------

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

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

|(j) | Non-income producing equity securities at June 30, 2009.
|--- | --------------------------------------------------------

|(k) | 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.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(l) | The Company is the sole stockholder of BKC ASW Blocker, Inc., which is the beneficiary of 5% or more (but not more than 25%) of the voting securities of American SportWorks LLC.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(m) | 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.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------

|(n) | 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, 2008



|                                                                                          |  |                                     |  |                                         |            |     |         |   |             |  |   |             |    
|----------------------------------------------------------------------------------------- |  | ----------------------------------- |  | --------------------------------------- | ---------- | --- | ------- | - | ----------- |  | - | ----------- | ---
|Portfolio Company                                                                         |  | Industry(a)                         |  | PrincipalAmount orNumber ofShares/Units |            |     | Cost(b) |   | FairValue   | 
|Senior Secured Notes10.3%                                                                |  |                                     |  |                                         |            |     |         |   |             |  |   |             |    
|AGY Holding Corp., Second Lien, 11.00%, 11/15/14                                          |  | Glass Yarns/Fibers                  |  | $                                       | 23,500,000 |     |         | $ | 23,079,223  |  | $ | 22,818,500  | (c)
|TriMark Acquisition Corp., Second Lien, 11.50% (9.50% cash, 2.00% PIK), 11/30/13          |  | Food ServiceEquipment               |  |                                         | 30,882,283 |     |         |   | 30,882,283  |  |   | 29,523,463  | (c)
|                                                                                          |  |                                     |  |                                         |            |     |         |   |             |  |   |             |    
|Total Senior Secured Notes                                                                |  |                                     |  |                                         |            |     |         |   | 53,961,506  |  |   | 52,341,963  |    
|                                                                                          |  |                                     |  |                                         |            |     |         |   |             |  |   |             |    
|Unsecured Debt27.4%                                                                      |  |                                     |  |                                         |            |     |         |   |             |  |   |             |    
|AMC Entertainment Holdings, Inc., 7.00% PIK (LIBOR + 5.00%), 6/13/12                      |  | Entertainment                       |  |                                         | 13,764,638 |     |         |   | 13,557,906  |  |   | 9,291,131   | (c)
|ASM Intermediate Holdings Corp. II, 12.00% PIK, 12/27/13                                  |  | MarketingServices                   |  |                                         | 50,918,276 |     |         |   | 50,918,276  |  |   | 39,716,255  | (c)
|BE Foods Investments, Inc., 7.39% (LIBOR + 5.00% cash or 5.75% PIK), 7/11/12              |  | Food                                |  |                                         | 24,950,709 |     |         |   | 24,326,664  |  |   | 19,561,356  | (c)
|Big Dumpster Acquisition, Inc., 13.50% PIK, 7/5/15                                        |  | Waste ManagementEquipment           |  |                                         | 37,488,669 |     |         |   | 37,488,669  |  |   | 13,870,808  | (c)
|Lucite International Luxembourg Finance S.àr.l., 13.97% PIK (EURIBOR + 9.00%), 7/14/14(d) |  | Chemicals                           |  |                                         | 12,589,294 | (e) |         |   | 16,066,347  |  |   | 15,784,742  | (c)
|Marquette Transportation Company Holdings, LLC, 14.75% PIK, 3/21/14                       |  | Transportation                      |  |                                         | 45,423,354 |     |         |   | 45,423,354  |  |   | 39,245,778  | (c)
|Marsico Parent Holdco, LLC et al., 12.50% PIK, 7/15/16, acquired 11/28/07(f)              |  | Financial Services                  |  |                                         | 9,973,416  |     |         |   | 9,973,416   |  |   | 1,585,773   | (c)
|Marsico Parent Superholdco, LLC et al., 14.50% PIK, 1/15/18, acquired 11/28/07(f)         |  | Financial Services                  |  |                                         | 6,756,886  |     |         |   | 6,431,358   |  |   | 891,909     | (c)
|                                                                                          |  |                                     |  |                                         |            |     |         |   |             |  |   |             |    
|Total Unsecured Debt                                                                      |  |                                     |  |                                         |            |     |         |   | 204,185,990 |  |   | 139,947,752 |    
|                                                                                          |  |                                     |  |                                         |            |     |         |   |             |  |   |             |    
|Subordinated Debt25.8%                                                                   |  |                                     |  |                                         |            |     |         |   |             |  |   |             |    
|A & A Manufacturing Co., Inc., 14.00% (12.00% cash, 2.00% PIK), 4/2/14                    |  | Protective Enclosures               |  |                                         | 19,156,235 |     |         |   | 19,156,235  |  |   | 17,757,830  | (c)
|Advanstar, Inc., 8.46% PIK (LIBOR + 7.00%), 11/30/15                                      |  | Printing/ Publishing                |  |                                         | 7,164,027  |     |         |   | 7,164,027   |  |   | 2,752,688   | (c)
|Al Solutions, Inc., 16.00% PIK, 12/29/13(g)(h)                                            |  | Metals                              |  |                                         | 13,680,233 |     |         |   | 13,323,761  |  |   |            | (c)
|Conney Safety Products, LLC, 16.00%, 10/1/14                                              |  | Safety Products                     |  |                                         | 30,000,000 |     |         |   | 30,000,000  |  |   | 28,500,000  | (c)
|DynaVox Systems LLC, 15.00%, 6/23/15                                                      |  | Augmentative Communication Products |  |                                         | 25,000,000 |     |         |   | 25,000,000  |  |   | 25,000,000  | (c)
|Mattress Giant Corporation, 16.25% PIK, 8/1/12(h)                                         |  | Bedding Retail                     |  |                                         | 15,185,673 |     |         |   | 15,104,082  |  |   |            | (c)
|MediMedia USA, Inc., 11.38%, 11/15/14, acquired multiple dates(f)                         |  | InformationServices                 |  |                                         | 8,000,000  |     |         |   | 8,066,847   |  |   | 4,800,000   |    
|The Pay-O-Matic Corp., 14.00% (12.00% cash, 2.00% PIK), 1/15/15                           |  | Financial Services                  |  |                                         | 15,290,415 |     |         |   | 15,290,415  |  |   | 14,663,508  | (c)
|PGA Holdings, Inc., 12.50%, 3/12/16                                                       |  | HealthcareServices                  |  |                                         | 5,000,000  |     |         |   | 4,910,576   |  |   | 4,750,000   | (c)
|Sentry Security Systems, LLC, 15.00% (12.00% cash, 3.00% PIK), 8/7/12                     |  | SecurityServices                    |  |                                         | 10,591,381 |     |         |   | 10,591,381  |  |   | 9,998,264   | (c)
|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  |  |   | 14,100,000  | (c)

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, 2008



|                                                                                                       |  |                          |  |                                         |            |     |         |   |             |  |   |             |    
|------------------------------------------------------------------------------------------------------ |  | ------------------------ |  | --------------------------------------- | ---------- | --- | ------- | - | ----------- |  | - | ----------- | ---
|Portfolio Company                                                                                      |  | Industry(a)              |  | PrincipalAmount orNumber ofShares/Units |            |     | Cost(b) |   | FairValue   | 
|U.S. Security Holdings, Inc., 13.00% (11.00% cash, 2.00% PIK), 5/8/14, acquired 5/10/06(f)             |  | SecurityServices         |  | $                                       | 7,000,000  |     |         | $ | 7,000,000   |  | $ | 5,250,000   |    
|Wastequip, Inc., 12.00% (10.00% cash, 2.00% PIK), 2/5/15                                               |  | WasteManagementEquipment |  |                                         | 7,715,353  |     |         |   | 7,715,353   |  |   | 4,158,575   | (c)
|                                                                                                       |  |                          |  |                                         |            |     |         |   |             |  |   |             |    
|Total Subordinated Debt                                                                                |  |                          |  |                                         |            |     |         |   | 178,344,344 |  |   | 131,730,865 |    
|                                                                                                       |  |                          |  |                                         |            |     |         |   |             |  |   |             |    
|Senior Secured Loans112.9%(i)                                                                         |  |                          |  |                                         |            |     |         |   |             |  |   |             |    
|Advanstar Communications Inc., Second Lien, 6.46% (LIBOR + 5.00%), 11/30/14                            |  | Printing/ Publishing     |  |                                         | 14,000,000 |     |         |   | 14,000,000  |  |   | 5,379,325   | (c)
|Alpha Media Group Inc., Second Lien, 8.97% (LIBOR + 7.50%), 2/11/15(h)                                 |  | Publishing               |  |                                         | 20,000,000 |     |         |   | 19,344,012  |  |   | 2,000,000   | (c)
|American Residential Services L.L.C., Second Lien, 12.00% (10.00% cash, 2.00% PIK), 4/17/15            |  | HVAC/ Plumbing Services  |  |                                         | 40,401,000 |     |         |   | 40,401,000  |  |   | 35,027,667  | (c)
|American Safety Razor Company, LLC, Second Lien, 6.72% (LIBOR + 6.25%), 1/30/14                        |  | ConsumerProducts         |  |                                         | 10,000,000 |     |         |   | 10,000,000  |  |   | 7,510,000   | (c)
|American SportWorks LLC, Second Lien, 20.00%, 6/27/14(j)(h)                                            |  | Utility Vehicles         |  |                                         | 13,403,274 |     |         |   | 13,403,274  |  |   | 5,716,023   | (c)
|AmQuip Crane Rental LLC, Second Lien, 6.25% (LIBOR + 5.75%), 6/29/14                                   |  | Construction Equipment   |  |                                         | 25,660,446 |     |         |   | 23,432,847  |  |   | 23,171,383  | (c)
|Applied Tech Products Corp. et al., Tranche A, First Lien, 7.75% (Base Rate + 4.50%), 10/24/10         |  | PlasticPackaging         |  |                                         | 1,230,907  |     |         |   | 1,227,441   |  |   | 847,900     | (c)
|Applied Tech Products Corp. et al., Tranche B, Second Lien, 11.75% (Base Rate + 8.50%), 4/24/11(h)     |  | PlasticPackaging         |  |                                         | 2,308,004  |     |         |   | 2,299,537   |  |   |            | (c)
|Applied Tech Products Corp. et al., Tranche C, Third Lien, 15.25% PIK (Base Rate + 12.00%),10/24/11(h) |  | PlasticPackaging         |  |                                         | 916,240    |     |         |   | 868,547     |  |   |            | (c)
|Arclin US Holdings Inc., Second Lien, 8.79% (LIBOR + 6.50%), 7/10/15                                   |  | Chemicals                |  |                                         | 14,500,000 |     |         |   | 14,500,000  |  |   | 8,569,500   | (c)
|Bankruptcy Management Solutions, Inc., Second Lien, 8.13% (LIBOR + 6.25%), 7/31/13                     |  | Financial Services       |  |                                         | 24,437,500 |     |         |   | 24,437,500  |  |   | 18,059,313  | (c)
|The Bargain! Shop Holdings Inc., Term Loan A, First Lien, 14.50% (13.50% cash, 1.00% PIK),6/29/12(d)   |  | Discount Stores          |  |                                         | 13,981,476 | (k) |         |   | 13,518,079  |  |   | 11,167,060  | (c)
|The Bargain! Shop Holdings Inc., Term Loan B, First Lien, 14.50% (13.50% cash, 1.00% PIK), 7/1/12(d)   |  | Discount Stores          |  |                                         | 19,218,524 | (k) |         |   | 17,965,225  |  |   | 15,349,911  | (c)
|Berlin Packaging L.L.C., Second Lien, 8.55% (LIBOR + 6.50%), 8/17/15                                   |  | Rigid Packaging          |  |                                         | 24,000,000 |     |         |   | 23,402,716  |  |   | 19,968,000  | (c)
|Champion Energy Corporation et al., First Lien, 14.50%, 5/22/11                                        |  | Heating and OilServices  |  |                                         | 34,000,000 |     |         |   | 34,000,000  |  |   | 33,082,000  | (c)
|Custom Direct, Inc. et al., Second Lien, 7.46% (LIBOR + 6.00%), 12/31/14                               |  | Printing                 |  |                                         | 10,000,000 |     |         |   | 10,000,000  |  |   | 6,590,000   | (c)
|Deluxe Entertainment Services Group Inc., Second Lien, 7.46% (LIBOR + 6.00%), 11/11/13                 |  | Entertainment            |  |                                         | 12,000,000 |     |         |   | 12,000,000  |  |   | 8,976,000   | (c)
|Electrical Components International, Inc., Second Lien, 11.50% (Base Rate + 8.25%), 5/1/14             |  | Electronics              |  |                                         | 22,000,000 |     |         |   | 21,098,897  |  |   | 13,530,000  | (c)

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, 2008



|                                                                                                            |  |                            |  |                                         |            |         |   |            |  |   |            |    
|----------------------------------------------------------------------------------------------------------- |  | -------------------------- |  | --------------------------------------- | ---------- | ------- | - | ---------- |  | - | ---------- | ---
|Portfolio Company                                                                                           |  | Industry(a)                |  | PrincipalAmount orNumber ofShares/Units |            | Cost(b) |   | FairValue  | 
|Event Rentals, Inc., Acquisition Loan, First Lien, 6.99% (LIBOR + 4.00%), 12/19/13                          |  | Party Rentals              |  | $                                       | 15,000,000 |         | $ | 15,000,000 |  | $ | 13,050,000 | (c)
|Facet Technologies, LLC, Second Lien, 16.00% (LIBOR + 2.00% cash, 10.00% PIK), 1/26/12                      |  | MedicalDevices             |  |                                         | 28,547,347 |         |   | 28,547,347 |  |   | 26,263,559 | (c)
|Fairway Group Holdings Corp. et al., Term B Loan, First Lien, 9.50% (Base Rate + 4.25%), 1/18/13            |  | RetailGrocery              |  |                                         | 1,470,000  |         |   | 1,467,522  |  |   | 1,470,000  | (c)
|Fairway Group Holdings Corp. et al., Term C Loan, Second Lien, 14.00% (13.00% cash, 1.00% PIK), 1/18/14     |  | RetailGrocery              |  |                                         | 11,720,175 |         |   | 11,678,730 |  |   | 11,720,175 | (c)
|Fitness Together Franchise Corporation, First Lien, 11.50% (9.50% cash, 2.00% PIK), 11/10/13(g)             |  | PersonalFitness            |  |                                         | 6,881,944  |         |   | 6,881,944  |  |   | 6,496,555  | (c)
|Heartland Automotive Services II, Inc. et al., Term Loan A, First Lien, 7.75% (LIBOR + 3.75%), 2/27/12      |  | AutomobileRepair           |  |                                         | 3,678,231  |         |   | 3,676,226  |  |   | 3,034,540  | (c)
|Heartland Automotive Services II, Inc. et al., Acquisition Loan, First Lien, 8.00% (LIBOR + 4.00%), 2/27/12 |  | AutomobileRepair           |  |                                         | 1,799,837  |         |   | 1,799,837  |  |   | 1,497,464  | (c)
|HIT Entertainment, Inc., Second Lien, 8.21% (LIBOR + 5.50%), 2/26/13                                        |  | Entertainment              |  |                                         | 1,000,000  |         |   | 1,000,000  |  |   | 350,000    |    
|InterMedia Outdoor, Inc., Second Lien, 8.21% (LIBOR + 6.75%), 1/31/14                                       |  | Printing/ Publishing       |  |                                         | 10,000,000 |         |   | 10,000,000 |  |   | 7,240,000  | (c)
|Isola USA Corp., First Lien, 9.21% (LIBOR + 7.75%), 12/18/12                                                |  | Electronics                |  |                                         | 8,901,316  |         |   | 8,812,731  |  |   | 7,726,342  | (c)
|Isola USA Corp., Second Lien, 15.67% (LIBOR + 12.25%), 12/18/13                                             |  | Electronics                |  |                                         | 25,000,000 |         |   | 25,000,000 |  |   | 21,600,000 | (c)
|Kaz, Inc. et al., First Lien, 16.00% (12.00% cash, 4.00% PIK), 12/8/11                                      |  | ConsumerProducts           |  |                                         | 33,022,141 |         |   | 32,730,352 |  |   | 32,526,809 | (c)
|LJVH Holdings Inc., Second Lien, 6.96% (LIBOR + 5.50%), 1/19/15(d)                                          |  | Specialty Coffee           |  |                                         | 25,000,000 |         |   | 25,000,000 |  |   | 20,225,000 | (c)
|MCCI Group Holdings, LLC, Second Lien, 9.43% (LIBOR + 7.25%), 6/21/13                                       |  | HealthcareServices         |  |                                         | 29,000,000 |         |   | 28,950,160 |  |   | 26,651,000 | (c)
|NAMIC/VA, Inc., Second Lien, 12.25%, 8/14/15                                                                |  | HealthcareServices         |  |                                         | 15,000,000 |         |   | 14,767,862 |  |   | 14,430,000 | (c)
|New Enterprise Stone & Lime Co., Inc., Second Lien, 12.50%, 7/11/14                                         |  | Mining/ Construction       |  |                                         | 35,000,000 |         |   | 34,698,054 |  |   | 32,410,000 | (c)
|Oriental Trading Company, Inc., Second Lien, 6.47% (LIBOR + 6.00%), 1/31/14                                 |  | PartySupplies andNovelties |  |                                         | 3,000,000  |         |   | 3,000,000  |  |   | 772,500    |    
|Penton Media, Inc. et al., Second Lien, 8.42% (LIBOR + 5.00%),2/1/14(j)                                     |  | Information Services       |  |                                         | 26,000,000 |         |   | 25,602,087 |  |   | 18,226,000 | (c)
|Physiotherapy Associates, Inc. et al., Second Lien, 12.00% (Base Rate + 8.75%), 12/31/13                    |  | Rehabilitation Centers     |  |                                         | 17,000,000 |         |   | 17,000,000 |  |   | 12,206,000 | (c)
|PQ Corporation, Second Lien, 9.97% (LIBOR + 6.50%), 7/30/15                                                 |  | Specialty Chemicals        |  |                                         | 10,000,000 |         |   | 8,785,959  |  |   | 7,860,000  | (c)
|Precision Parts International Services Corp. et al., First Lien, 8.00% (Base Rate + 4.75%), 9/30/11(h)      |  | AutomotiveParts            |  |                                         | 2,847,627  |         |   | 2,847,627  |  |   | 1,922,148  |    

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, 2008



|                                                                                                          |  |                           |  |                                         |            |         |   |             |  |   |             |    
|--------------------------------------------------------------------------------------------------------- |  | ------------------------- |  | --------------------------------------- | ---------- | ------- | - | ----------- |  | - | ----------- | ---
|Portfolio Company                                                                                         |  | Industry(a)               |  | PrincipalAmount orNumber ofShares/Units |            | Cost(b) |   | FairValue   | 
|Premier Yachts, Inc. et al., Term A, First Lien, 5.63% (LIBOR + 3.75%), 8/22/12                           |  | EntertainmentCruises      |  | $                                       | 7,088,755  |         | $ | 7,067,266   |  | $ | 6,734,317   | (c)
|Premier Yachts, Inc. et al., Term B, First Lien, 8.88% (LIBOR + 7.00%), 8/22/13                           |  | EntertainmentCruises      |  |                                         | 1,758,235  |         |   | 1,752,951   |  |   | 1,658,016   | (c)
|Sunrise Medical LTC LLC et al., Second Lien, 6.97% (LIBOR + 6.50%), 12/28/13                              |  | HealthcareEquipment       |  |                                         | 14,400,000 |         |   | 14,400,000  |  |   | 11,750,400  | (c)
|Texas Competitive Electric Holdings Company LLC, Tranche B-2, First Lien, 5.58% (LIBOR + 3.50%), 10/10/14 |  | Utilities                 |  |                                         | 4,987,374  |         |   | 3,949,074   |  |   | 3,480,770   |    
|Total Safety U.S., Inc., Second Lien, 6.96% (LIBOR + 6.50%), 12/8/13                                      |  | IndustrialSafetyEquipment |  |                                         | 9,000,000  |         |   | 9,000,000   |  |   | 4,950,000   |    
|United Subcontractors, Inc., Tranche B, First Lien, 6.92% (LIBOR + 3.00% cash, 2.00% PIK), 12/27/12       |  | Building andConstruction  |  |                                         | 6,484,524  |         |   | 1,005,101   |  |   | 4,312,208   | (c)
|United Subcontractors, Inc., Second Lien, 11.69% (LIBOR + 7.25% cash, 2.00% PIK), 6/27/13                 |  | Building andConstruction  |  |                                         | 10,109,782 |         |   | 10,109,782  |  |   | 6,743,225   | (c)
|Water Pik, Inc., Second Lien, 6.46% (LIBOR + 5.50%), 6/15/14                                              |  | ConsumerProducts          |  |                                         | 30,000,000 |         |   | 30,000,000  |  |   | 26,400,000  | (c)
|WBS Group LLC et al., Second Lien, 8.81% (LIBOR + 6.25%), 6/7/13                                          |  | Software                  |  |                                         | 20,000,000 |         |   | 20,000,000  |  |   | 15,600,000  | (c)
|Wembley, Inc., Second Lien, 4.70% (LIBOR + 4.25%), 8/23/12(h)                                             |  | Gaming                    |  |                                         | 1,000,000  |         |   | 1,000,000   |  |   | 108,333     |    
|Westward Dough Operating Company, LLC, Term Loan A, First Lien, 5.46% (LIBOR + 4.00%), 3/30/11            |  | Restaurants               |  |                                         | 6,850,000  |         |   | 6,850,000   |  |   | 5,199,150   | (c)
|Westward Dough Operating Company, LLC, Term Loan B, First Lien, 8.46% (LIBOR + 7.00%), 3/30/11(h)         |  | Restaurants               |  |                                         | 8,334,656  |         |   | 8,334,656   |  |   | 6,446,407   | (c)
|                                                                                                          |  |                           |  |                                         |            |         |   |             |  |   |             |    
|Total Senior Secured Loans                                                                                |  |                           |  |                                         |            |         |   | 716,614,343 |  |   | 576,005,000 |    
|                                                                                                          |  |                           |  |                                         |            |         |   |             |  |   |             |    
|Preferred Stock2.0%                                                                                      |  |                           |  |                                         |            |         |   |             |  |   |             |    
|Facet Holdings Corp., Class A, 12.00% PIK(h)                                                              |  | MedicalDevices            |  |                                         | 900        |         |   | 900,000     |  |   |            | (c)
|Fitness Together Holdings, Inc., Series A(g)(l)                                                           |  | PersonalFitness           |  |                                         | 187,500    |         |   | 173,326     |  |   |            | (c)
|Fitness Together Holdings, Inc., Series A-1(g)(l)                                                         |  | PersonalFitness           |  |                                         | 49,056     |         |   | 49,056      |  |   |            | (c)
|Fitness Together Holdings, Inc., Series B Convertible(g)(l)                                               |  | PersonalFitness           |  |                                         | 11,343,804 |         |   | 6,500,000   |  |   | 4,700,000   | (c)
|M & M Tradition Holdings Corp., Series A Convertible, 16.00% PIK(j)                                       |  | Sheet MetalFabrication    |  |                                         | 5,376      |         |   | 5,376,000   |  |   | 5,537,280   | (c)
|Tygem Holdings, Inc., 8.00% PIK(g)(h)                                                                     |  | Metals                    |  |                                         | 10,789,367 |         |   | 10,826,867  |  |   |            | (c)
|Tygem Holdings, Inc., Series B Convertible(g)(l)                                                          |  | Metals                    |  |                                         | 54,574,501 |         |   | 14,725,535  |  |   |            | (c)
|                                                                                                          |  |                           |  |                                         |            |         |   |             |  |   |             |    
|Total Preferred Stock                                                                                     |  |                           |  |                                         |            |         |   | 38,550,784  |  |   | 10,237,280  |    
|                                                                                                          |  |                           |  |                                         |            |         |   |             |  |   |             |    
|Common Stock1.8%(l)                                                                                      |  |                           |  |                                         |            |         |   |             |  |   |             |    
|BKC ASW Blocker, Inc. (American SportWorks)(j)(m)                                                         |  | UtilityVehicles           |  |                                         | 1,000      |         |   | 250,000     |  |   | 16,399      | (c)

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



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BlackRock Kelso Capital Corporation

Schedules of Investments(Continued)

December 31, 2008



|                                                                    |  |                                   |  |                                         |  |         |            |           |   |            |    
|------------------------------------------------------------------- |  | --------------------------------- |  | --------------------------------------- |  | ------- | ---------- | --------- | - | ---------- | ---
|Portfolio Company                                                   |  | Industry(a)                       |  | PrincipalAmount orNumber ofShares/Units |  | Cost(b) |            | FairValue |  
|BKC DVSH Blocker, Inc. (DynaVox Systems)(n)                         |  | AugmentativeCommunicationProducts |  | 100                                     |  | $       | 1,000,000  |           | $ | 1,000,000  | (c)
|BKC MTCH Blocker, Inc. (Marquette Transportation)(o)                |  | Transportation                    |  | 1,000                                   |  |         | 5,000,000  |           |   | 2,200,000  | (c)
|Facet Holdings Corp.                                                |  | Medical Devices                   |  | 10,000                                  |  |         | 100,000    |           |   |           | (c)
|Fitness Together Holdings, Inc.(g)                                  |  | Personal Fitness                  |  | 173,547                                 |  |         | 118,500    |           |   |           | (c)
|M & M Tradition Holdings Corp.(j)                                   |  | Sheet MetalFabrication            |  | 500,000                                 |  |         | 5,000,000  |           |   | 6,095,000  | (c)
|MGHC Holding Corporation (Mattress Giant)                           |  | BeddingRetail                    |  | 205,000                                 |  |         | 2,050,000  |           |   |           | (c)
|Tygem Holdings, Inc.(g)                                             |  | Metals                            |  | 3,596,456                               |  |         | 3,608,956  |           |   |           | (c)
|                                                                    |  |                                   |  |                                         |  |         |            |           |   |            |    
|Total Common Stock                                                  |  |                                   |  |                                         |  |         | 17,127,456 |           |   | 9,311,399  |    
|                                                                    |  |                                   |  |                                         |  |         |            |           |   |            |    
|Limited Partnership/LimitedLiability Company Interests2.5%         |  |                                   |  |                                         |  |         |            |           |   |            |    
|ARS Investment Holdings, LLC (American Residential)(l)              |  | HVAC/PlumbingServices             |  | 66,902                                  |  |         |           |           |   | 360,000    | (c)
|Big Dumpster Coinvestment, LLC(l)                                   |  | WasteManagementEquipment          |  |                                        |  |         | 5,333,333  |           |   |           | (c)
|Marsico Parent Superholdco, LLC, 16.75% PIK, acquired 11/28/07(f)   |  | Financial Services                |  | 1,750                                   |  |         | 1,650,005  |           |   |           | (c)
|PG Holdco, LLC (Press Ganey), 15.00% PIK                            |  | HealthcareServices                |  | 333                                     |  |         | 333,333    |           |   | 282,169    | (c)
|PG Holdco, LLC (Press Ganey), Class A(l)                            |  | HealthcareServices                |  | 16,667                                  |  |         | 166,667    |           |   | 166,667    | (c)
|Prism Business Media Holdings LLC (Penton Media)(j)(l)              |  | Information Services              |  | 68                                      |  |         | 14,943,200 |           |   | 4,730,000  | (c)
|Sentry Common Investors, LLC(l)                                     |  | Security Services                 |  | 147,271                                 |  |         | 147,271    |           |   |           | (c)
|Sentry Security Systems Holdings, LLC, 8.00% PIK                    |  | Security Services                 |  | 602,729                                 |  |         | 602,729    |           |   | 117,546    | (c)
|WBS Group Holdings, LLC, Class B, 16.00% PIK                        |  | Software                          |  | 8,000                                   |  |         | 8,000,000  |           |   | 6,878,899  | (c)
|                                                                    |  |                                   |  |                                         |  |         |            |           |   |            |    
|Total Limited Partnership/Limited LiabilityCompany Interests        |  |                                   |  |                                         |  |         | 31,176,538 |           |   | 12,535,281 |    
|                                                                    |  |                                   |  |                                         |  |         |            |           |   |            |    
|Equity Warrants/Options0.0%(l)                                     |  |                                   |  |                                         |  |         |            |           |   |            |    
|ATEP Holdings, Inc. (Applied Tech), expire 10/24/15                 |  | Plastic Packaging                 |  | 470                                     |  |         |           |           |   |           | (c)
|ATH Holdings, Inc. (Applied Tech), expire 10/24/15                  |  | Plastic Packaging                 |  | 470                                     |  |         |           |           |   |           | (c)
|ATPP Holdings, Inc. (Applied Tech), expire 10/24/15                 |  | Plastic Packaging                 |  | 470                                     |  |         | 90,112     |           |   |           | (c)
|ATPR Holdings, Inc. (Applied Tech), expire 10/24/15                 |  | Plastic Packaging                 |  | 470                                     |  |         |           |           |   |           | (c)
|Kaz, Inc., expire 12/8/16                                           |  | Consumer Products                 |  | 49                                      |  |         | 512,000    |           |   | 7,417      | (c)
|Kaz, Inc., expire 12/8/16                                           |  | Consumer Products                 |  | 16                                      |  |         | 64,000     |           |   | 560        | (c)
|Kaz, Inc., expire 12/8/16                                           |  | Consumer Products                 |  | 16                                      |  |         | 24,000     |           |   | 164        | (c)
|Kaz, Inc., expire 12/8/16                                           |  | Consumer Products                 |  | 16                                      |  |         | 9,000      |           |   | 57         | (c)
|Marsico Superholdco SPV, LLC, expire 12/14/19, acquired 11/28/07(f) |  | Financial Services                |  | 455                                     |  |         | 444,450    |           |   |           | (c)
|                                                                    |  |                                   |  |                                         |  |         |            |           |   |            |    
|Total Equity Warrants/Options                                       |  |                                   |  |                                         |  |         | 1,143,562  |           |   | 8,198      |    
|                                                                    |  |                                   |  |                                         |  |         |            |           |   |            |    

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



18



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##### Table of Contents

BlackRock Kelso Capital Corporation

Schedules of Investments(Continued)

December 31, 2008



|                                            |  |             |  |                                         |  |         |               |   |           |   |              |  
|------------------------------------------- |  | ----------- |  | --------------------------------------- |  | ------- | ------------- | - | --------- | - | ------------ | -
|Portfolio Company                           |  | Industry(a) |  | PrincipalAmount orNumber ofShares/Units |  | Cost(b) |               |   | FairValue |  
|TOTAL INVESTMENTS INCLUDING UNEARNED INCOME |  |             |  |                                         |  | $       | 1,241,104,523 |   |           | $ | 932,117,738  |  
|UNEARNED INCOME(1.0)%                      |  |             |  |                                         |  |         | (5,272,812    | ) |           |   | (5,272,812   | )
|                                            |  |             |  |                                         |  |         |               |   |           |   |              |  
|TOTAL INVESTMENTS181.6%                    |  |             |  |                                         |  | $       | 1,235,831,711 |   |           |   | 926,844,926  |  
|                                            |  |             |  |                                         |  |         |               |   |           |   |              |  
|OTHER ASSETS & LIABILITIES (NET)(81.6)%    |  |             |  |                                         |  |         |               |   |           |   | (416,549,425 | )
|                                            |  |             |  |                                         |  |         |               |   |           |   |              |  
|NET ASSETS100.0%                           |  |             |  |                                         |  |         |               |   |           | $ | 510,295,501  |  
|                                            |  |             |  |                                         |  |         |               |   |           |   |              |  



|(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 of this investment determined by or under the direction of the Companys Board of Directors (see Note 2). The aggregate fair value of these investments (net of
unearned income) is $905,211,175 or 177.4% of net assets at December 31, 2008.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|(e) | Principal amount is denominated in Euros.
|--- | -----------------------------------------

|(f) | 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 2.5% of net assets at December 31, 2008.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(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 31,2007 |            |   | GrossAdditions(Cost)* |   | NetUnrealizedGain (Loss) |  |   | Fair Value atDecember 31,2008 |   | InterestIncome**
|Al Solutions, Inc.                                         |  |                               |            |   |                       |   |                          |  |   |                               |   |                  |   |            |  |   |          
|Subordinated Debt                                          |  | $                             | 12,648,145 |   |                       | $ | 675,616                  |  | $ | (13,323,761                   | ) |                  | $ |           |  | $ | 1,103,658
|Fitness Together Franchise Corporation Senior Secured Loan |  |                               |           |   |                       |   | 6,881,944                |  |   | (385,389                      | ) |                  |   | 6,496,555  |  |   | 114,000  
|Fitness Together Holdings, Inc.:                           |  |                               |            |   |                       |   |                          |  |   |                               |   |                  |   |            |  |   |          
|Preferred Stock Series A                                   |  |                               |           |   |                       |   | 173,326                  |  |   | (173,326                      | ) |                  |   |           |  |   |         
|Preferred Stock Series A-1                                 |  |                               |           |   |                       |   | 49,056                   |  |   | (49,056                       | ) |                  |   |           |  |   |         
|Preferred Stock Series BConvertible                        |  |                               |           |   |                       |   | 6,500,000                |  |   | (1,800,000                    | ) |                  |   | 4,700,000  |  |   |         
|Common Stock                                               |  |                               |           |   |                       |   | 118,500                  |  |   | (118,500                      | ) |                  |   |           |  |   |         
|Tygem Holdings, Inc.:                                      |  |                               |            |   |                       |   |                          |  |   |                               |   |                  |   |            |  |   |          
|Preferred Stock                                            |  |                               |           |   |                       |   |                         |  |   |                              |   |                  |   |           |  |   |         
|Preferred Stock Series BConvertible                        |  |                               | 2,613,900  |   |                       |   | 2,500,000                |  |   | (5,113,900                    | ) |                  |   |           |  |   |         
|Common Stock                                               |  |                               |           |   |                       |   |                         |  |   |                              |   |                  |   |           |  |   |         
|Less: Unearned Income                                      |  |                               | (427,650   | ) |                       |   | 427,650                  |  |   |                              |   |                  |   |           |  |   |         
|                                                           |  |                               |            |   |                       |   |                          |  |   |                               |   |                  |   |            |  |   |          
|Totals                                                     |  | $                             | 14,834,395 |   |                       | $ | 17,326,092               |  | $ | (20,963,932                   | ) |                  | $ | 11,196,555 |  | $ | 1,217,658
|                                                           |  |                               |            |   |                       |   |                          |  |   |                               |   |                  |   |            |  |   |          

| | 
| | 

| | * | 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, 2008. There were no realized gains (losses) or dividend income from these securities during the year.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------

| | The aggregate fair value of controlled investments (net of unearned income) at December 31, 2008 represents 2.2% of net assets.
| | -------------------------------------------------------------------------------------------------------------------------------

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



19



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##### Table of Contents

|(h) | Non-accrual status (in default) at December 31, 2008 and therefore non-income producing. At December 31, 2008, the aggregate fair value and amortized cost of debt
investments on non-accrual status represents 1.8% and 6.6% of total debt investments at fair value and amortized cost, respectively.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(i) | 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), Euro Interbank Offered Rate (EURIBOR), or other base rate (commonly the Federal Funds Rate or the Prime Rate), at the borrowers option. In addition, approximately 12% of such senior secured loans have floors of 3.00% to
4.00% 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, 2008 of all contracts within the specified loan facility.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(j) | 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:
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                       |  |                               |            |   |                       |   |                         |  |   |                          |   |  |                               |             |   |                           |   |                         |   |                   |   |         |  |   |           |  |   |          
|-------------------------------------- |  | ----------------------------- | ---------- | - | --------------------- | - | ----------------------- |  | - | ------------------------ | - |  | ----------------------------- | ----------- | - | ------------------------- | - | ----------------------- | - | ----------------- | - | ------- |  | - | --------- |  | - | ---------
|Non-controlled, Affiliated Investments |  | Fair Value atDecember 31,2007 |            |   | GrossAdditions(Cost)* |   | GrossReductions(Cost)** |  |   | NetUnrealizedGain (Loss) |   |  | Fair Value atDecember 31,2008 |             |   | NetRealizedGain (Loss)*** |   | Interest/OtherIncome*** |   | DividendIncome***
|American SportWorks LLC                |  |                               |            |   |                       |   |                         |  |   |                          |   |  |                               |             |   |                           |   |                         |   |                   |   |         |  |   |           |  |   |          
|Senior Secured Loan                    |  | $                             | 13,202,280 |   |                       | $ | 200,994                 |  | $ |                         |   |  | $                             | (7,687,251  | ) |                           | $ | 5,716,023               |   |                   | $ |        |  | $ | 2,070,263 |  | $ |         
|BKC ASW Blocker, Inc.                  |  |                               |            |   |                       |   |                         |  |   |                          |   |  |                               |             |   |                           |   |                         |   |                   |   |         |  |   |           |  |   |          
|Common Stock                           |  |                               | 406,689    |   |                       |   |                        |  |   |                         |   |  |                               | (390,290    | ) |                           |   | 16,399                  |   |                   |   |        |  |   |          |  |   |         
|M&M Tradition Holdings Corp.:          |  |                               |            |   |                       |   |                         |  |   |                          |   |  |                               |             |   |                           |   |                         |   |                   |   |         |  |   |           |  |   |          
|Preferred Stock                        |  |                               | 9,415,180  |   |                       |   |                        |  |   | (3,832,000               | ) |  |                               | (45,900     | ) |                           |   | 5,537,280               |   |                   |   | 112,783 |  |   |          |  |   | 1,262,730
|Common Stock                           |  |                               | 5,000,000  |   |                       |   |                        |  |   |                         |   |  |                               | 1,095,000   |   |                           |   | 6,095,000               |   |                   |   |        |  |   |          |  |   |         
|Penton Media, Inc.                     |  |                               |            |   |                       |   |                         |  |   |                          |   |  |                               |             |   |                           |   |                         |   |                   |   |         |  |   |           |  |   |          
|Senior Secured Loan                    |  |                               | 21,250,000 |   |                       |   | 936,445                 |  |   |                         |   |  |                               | (3,960,445  | ) |                           |   | 18,226,000              |   |                   |   |        |  |   | 2,226,284 |  |   |         
|Prism Business Media Holdings LLC      |  |                               |            |   |                       |   |                         |  |   |                          |   |  |                               |             |   |                           |   |                         |   |                   |   |         |  |   |           |  |   |          
|LimitedLiability Co.Interest           |  |                               | 16,500,000 |   |                       |   |                        |  |   |                         |   |  |                               | (11,770,000 | ) |                           |   | 4,730,000               |   |                   |   |        |  |   |          |  |   |         
|Less: Unearned Income                  |  |                               | (361,467   | ) |                       |   | 55,845                  |  |   |                         |   |  |                               |            |   |                           |   | (305,622                | ) |                   |   |        |  |   |          |  |   |         
|                                       |  |                               |            |   |                       |   |                         |  |   |                          |   |  |                               |             |   |                           |   |                         |   |                   |   |         |  |   |           |  |   |          
|Totals                                 |  | $                             | 65,412,682 |   |                       | $ | 1,193,284               |  | $ | (3,832,000               | ) |  | $                             | (22,758,886 | ) |                           | $ | 40,015,080              |   |                   | $ | 112,783 |  | $ | 4,296,547 |  | $ | 1,262,730
|                                       |  |                               |            |   |                       |   |                         |  |   |                          |   |  |                               |             |   |                           |   |                         |   |                   |   |         |  |   |           |  |   |          

| | 
| | 

| | * | 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, 2008.
| | --- | -------------------------------------

| | The aggregate fair value of non-controlled, affiliated investments (net of unearned income) at December 31, 2008 represents 7.8% of net assets.
| | -----------------------------------------------------------------------------------------------------------------------------------------------

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

|(l) | Non-income producing equity securities at December 31, 2008.
|--- | ------------------------------------------------------------

|(m) | The Company is the sole stockholder of BKC ASW Blocker, Inc., which is the beneficiary of 5% or more (but not more than 25%) of the voting securities of American SportWorks LLC.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(n) | 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.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------

|(o) | 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 (collectively, the Public Market Event). The Company received net proceeds of approximately $150 million from
this offering.

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, 2008, which was filed with the Securities and Exchange Commission (SEC) on March 16, 2009.

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 Company has reviewed
subsequent events occurring through August 6, 2009, the date that these financial statements were issued, and determined that no subsequent events occurred requiring accrual or disclosure.

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 mid-market pricing 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
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
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



21



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##### Table of Contents

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.

Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157) (Accounting Standards Codification (ASC)
820-10, Fair Value Measurements and Disclosures), which defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. The adoption of SFAS 157 did not have a material
impact on the Companys financial statements. See Note 10.



|(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 is 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 may not be accrued
if the portfolio company valuation indicates that the PIK income is not collectible. Origination, structuring, closing, commitment and other upfront fees and discounts and premiums on investments purchased are accreted/amortized over the life of the
respective investment. Unamortized origination, structuring, closing, commitment and other upfront fees are recorded as unearned income. Upon the prepayment of a loan or debt security, any prepayment penalties and unamortized loan origination,
structuring, closing, commitment and other upfront fees are recorded as interest income. Expenses are recorded on an accrual basis.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(e) | The Company has elected to be taxed as a regulated investment company 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 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



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| | 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 undistributed taxable income as required.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(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.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

In March 2008, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities (SFAS 161) (ASC
815-19,Derivatives and Hedging), which is intended to improve financial reporting for derivative instruments by requiring enhanced disclosure that enables investors to understand how and why an entity uses derivatives, how derivatives are
accounted for, and how derivative instruments affect an entitys results of operations and financial position. The adoption of SFAS 161 on January 1, 2009 did not have a material impact on the Companys financial statements.

In April 2009, the FASB issued FASB Staff Position No. FAS 157-4, Determining Fair Value When the Volume and Level
of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP 157-4) (ASC 820-10, Fair Value Measurements and Disclosures), which provides clarification for the
application of SFAS 157 in markets that are not active. FSP 157-4 provides guidance for determining when the volume and trading level of activity for an asset or liability has significantly decreased and for identifying circumstances that indicate a
transaction is not orderly. Since FSP 157-4 does not change the fair value measurement principles set forth in SFAS 157, the Companys practices for determining the fair value of its investment portfolio have been, and continue to be,
consistent with the guidance provided in FSP 157-4. Therefore, the adoption of FSP 157-4 on June 30, 2009 did not have a material impact on the Companys financial statements.

In April 2009, the FASB issued FASB Staff Position No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial
Instruments (FSP 107-1) (ASC 825-10, Financial Instruments). FSP 107-1 amends Statement of Financial Accounting Standards No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about
fair value of financial instruments in interim as well as in annual financial statements. FSP 107-1 also amends Accounting Principles Board Opinion 28, Interim Financial Reporting, to require those disclosures in all interim financial
statements. The adoption of FSP 107-1 on June 30, 2009 did not have a material impact on the Companys financial statements.

In May 2009, the FASB issued Statement of Financial Accounting Standards No. 165, Subsequent Events (SFAS 165) (ASC 855-10, Subsequent Events). SFAS 165 establishes general standards of
accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. The adoption of SFAS 165 on June 30, 2009 did not have a material impact on the Companys financial statements.

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principlesa replacement of FASB Statement No. 162 (SFAS 168) (ASC 105-10, Generally Accepted Accounting Principles). On the effective date of SFAS 168,
the ASC will supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the ASC will become non-authoritative. SFAS 168 is effective for financial statements
issued for interim and annual periods ending after September 15, 2009. The Company does not expect SFAS 168 to have a material impact on the Companys financial statements.

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



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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, 2009, the
Advisor earned $4,647,032 and $9,395,250, respectively, in base management fees from the Company. For the three and six months ended June 30, 2008, the Advisor earned $5,583,589 and $11,150,449, 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: the transition period; 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 transition period began on July 1, 2007 and ended on June 30, 2008.
| | - |  | -------------------------------------------------------------------------



| |  |  | The initial trailing four quarters periods ended on September 30, 2008. In other words, the income portion of the Incentive Fee payable for
the quarterly period ended on September 30, 2008 was determined by reference to the four quarter period ended on September 30, 2008.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The term annual period means the period beginning on July 1 of each calendar year beginning in 2007 and ending on June 30 of the next calendar
year.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

The hurdle rate for each quarterly portion of a measurement period is 2.0% multiplied by the net asset value of
the Companys common stock at the beginning of the respective measurement period calculated after giving effect to any distributions that occurred during the measurement period times the number of calendar quarters in 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 of the first two measurement periods referred to above (the transition period and each rolling four quarters period), the Company paid or will pay 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 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 excess income amount distributed or distributable to stockholders. Thereafter, the portion of the Incentive Fee based on income for the period equals an amount such that the
cumulative Incentive Fee payments to the Advisor during the period based on income equal 20% of the periods excess income amount.

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 paid or will pay 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 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 excess 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 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



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periods hurdle, then the portion of the Incentive Fee based on capital gains will be capped at 20% of the excess 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, 2009
and 2008, the Advisor earned no Incentive Fee from the Company as the hurdle rate was not achieved. Although the Company did not incur any Incentive Fee during the three and six months ended June 30, 2009, it may incur such fees in the future
relating to investment performance since September 30, 2008 measured on a trailing four quarters basis at September 30, 2009 and thereafter.

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,
2009, the Company incurred $340,273 and $687,067, respectively, for costs and expenses reimbursable to the Advisor under the Management Agreement. For the three and six months ended June 30, 2008, the Company incurred $263,951 and $538,849,
respectively, in such costs and expenses.

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, 2009 were $333,945 and $674,568, respectively. Reimbursements
to the Advisor for the three and six months ended June 30, 2008 were $405,673 and $806,831, 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, 2009, the Company incurred $153,726 and $333,975, respectively, for administrative services expenses payable to the Administrator under the
administration agreement. For the three and six months ended June 30, 2008, the Company incurred $248,418 and $512,561, 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), a subsidiary of PNC, provides
administrative and accounting services to the Company pursuant to a Sub-Administration and Accounting Services Agreement. PFPC Trust Company, another subsidiary of PNC, provides custodian services to the Company pursuant to a Custodian Services
Agreement. Also, 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, 2009, the Company incurred $55,590 and
$110,429, 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, 2008, the Company incurred $73,009
and $122,334, respectively, for such fees payable to PGIS and its affiliates.

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,



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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 and 2008, the Advisor purchased 80,867 and 103,735 shares of the Companys common stock in the open market for $312,322 and $1,232,599, respectively, including brokerage commissions.

At June 30, 2009 and December 31, 2008, the Advisor owned directly approximately 546,000 and 504,000 shares, respectively, of the
Companys common stock, representing 1.0% and 0.9% of the total shares outstanding. The Advisors allocable portion of shares of the Companys common stock owned indirectly by an entity in which the Advisor holds a non-voting
investment interest was approximately 2,166,000 and 1,319,000 shares at June 30, 2009 and December 31, 2008, respectively. The Advisor disclaims ownership of the shares held by such entity. Inclusive of its allocable portion of the shares
held by such entity, the Advisor would be deemed to own approximately 4.9% and 3.3% of the Companys total shares outstanding at June 30, 2009 and December 31, 2008, respectively. At June 30, 2009 and December 31, 2008,
other entities affiliated with the Administrator and PGIS beneficially owned indirectly approximately 3,211,000 and 3,195,000 shares, respectively, of the Companys common stock, representing approximately 5.8% of the total shares outstanding.
At June 30, 2009 and December 31, 2008, an entity affiliated with the Administrator and PGIS owned approximately 32.0% of the members interests of the Advisor.

4. Earnings (loss) per share

The following information sets forth the computation of basic and
diluted net increase (decrease) in net assets per share (earnings (loss) per share) resulting from operations for the three and six months ended June 30, 2009 and 2008.



|                                                                                        |  |                                |            |                                |   |                              |  |                              |            |  |   |             |  
|--------------------------------------------------------------------------------------- |  | ------------------------------ | ---------- | ------------------------------ | - | ---------------------------- |  | ---------------------------- | ---------- |  | - | ----------- | -
|                                                                                        |  | Three months endedJune 30,2009 |            | Three months endedJune 30,2008 |   | Six months endedJune 30,2009 |  | Six months endedJune 30,2008 |           
|Numerator for basic and diluted net increase (decrease) in net assets per share         |  | $                              | 23,821,700 |                                | $ | 11,859,334                   |  | $                            | 19,754,630 |  | $ | (27,614,180 | )
|Denominator for basic and diluted weighted average shares                               |  |                                | 55,621,338 |                                |   | 53,289,838                   |  |                              | 55,433,200 |  |   | 53,059,946  |  
|Basic/diluted net increase (decrease) in net assets per share resulting from operations |  | $                              | 0.43       |                                | $ | 0.22                         |  | $                            | 0.36       |  | $ | (0.52       | )

Diluted net increase (decrease) in net assets per share resulting from operations equals basic net
increase (decrease) 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 long-term investments for the three months ended June 30, 2009 and
2008 totaled $11,916,326 and $80,042,350, respectively, and for the six months ended June 30, 2009 and 2008 totaled $27,189,886 and $174,601,047, respectively. Sales/repayments of long-term investments for the three months ended June 30,
2009 and 2008 totaled $43,188,200 and $23,497,861, respectively, and for six months ended June 30, 2009 and 2008 totaled $43,908,566 and $51,483,558, respectively.

At June 30, 2009 investments consisted of the following:



|                                                        |  |      |             |            |   |            
|------------------------------------------------------- |  | ---- | ----------- | ---------- | - | -----------
|                                                        |  | Cost |             | Fair Value
|Senior secured notes                                    |  | $    | 54,295,792  |            | $ | 52,307,344 
|Unsecured debt                                          |  |      | 203,209,230 |            |   | 149,487,256
|Subordinated debt                                       |  |      | 179,177,657 |            |   | 127,147,092
|Senior secured loans:                                   |  |      |             |            |   |            
|First lien                                              |  |      | 146,979,576 |            |   | 136,943,584
|Second/other priority lien                              |  |      | 542,758,938 |            |   | 391,180,558
|                                                        |  |      |             |            |   |            
|Total senior secured loans                              |  |      | 689,738,514 |            |   | 528,124,142
|                                                        |  |      |             |            |   |            
|Preferred stock                                         |  |      | 38,142,784  |            |   | 7,704,040  
|Common stock                                            |  |      | 23,953,606  |            |   | 16,244,133 
|Limited partnership/limited liability company interests |  |      | 31,176,539  |            |   | 8,344,909  
|Equity warrants/options                                 |  |      | 1,143,562   |            |   | 125,667    
|                                                        |  |      |             |            |   |            



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|                                            |  |   |               |   |  |   |             |  
|------------------------------------------- |  | - | ------------- | - |  | - | ----------- | -
|Total investments including unearned income |  |   | 1,220,837,684 |   |  |   | 889,484,583 |  
|Unearned income                             |  |   | (4,628,985    | ) |  |   | (4,628,985  | )
|                                            |  |   |               |   |  |   |             |  
|Total investments                           |  | $ | 1,216,208,699 |   |  | $ | 884,855,598 |  
|                                            |  |   |               |   |  |   |             |  

At December 31, 2008, investments consisted of the following:



|                                                        |  |      |               |   |            |   |             |  
|------------------------------------------------------- |  | ---- | ------------- | - | ---------- | - | ----------- | -
|                                                        |  | Cost |               |   | Fair Value |  
|Senior secured notes                                    |  | $    | 53,961,506    |   |            | $ | 52,341,963  |  
|Unsecured debt                                          |  |      | 204,185,990   |   |            |   | 139,947,752 |  
|Subordinated debt                                       |  |      | 178,344,344   |   |            |   | 131,730,865 |  
|Senior secured loans:                                   |  |      |               |   |            |   |             |  
|First lien                                              |  |      | 168,886,032   |   |            |   | 156,001,597 |  
|Second/other priority lien                              |  |      | 547,728,311   |   |            |   | 420,003,403 |  
|                                                        |  |      |               |   |            |   |             |  
|Total senior secured loans                              |  |      | 716,614,343   |   |            |   | 576,005,000 |  
|                                                        |  |      |               |   |            |   |             |  
|Preferred stock                                         |  |      | 38,550,784    |   |            |   | 10,237,280  |  
|Common stock                                            |  |      | 17,127,456    |   |            |   | 9,311,399   |  
|Limited partnership/limited liability company interests |  |      | 31,176,538    |   |            |   | 12,535,281  |  
|Equity warrants/options                                 |  |      | 1,143,562     |   |            |   | 8,198       |  
|                                                        |  |      |               |   |            |   |             |  
|Total investments including unearned income             |  |      | 1,241,104,523 |   |            |   | 932,117,738 |  
|Unearned income                                         |  |      | (5,272,812    | ) |            |   | (5,272,812  | )
|                                                        |  |      |               |   |            |   |             |  
|Total investments                                       |  | $    | 1,235,831,711 |   |            | $ | 926,844,926 |  
|                                                        |  |      |               |   |            |   |             |  

The industry composition of the portfolio at fair value at June 30, 2009 and
December 31, 2008 was as follows, excluding unearned income:



|                               |  |              |   |  |                  |  
|------------------------------ |  | ------------ | - |  | ---------------- | -
|Industry                       |  | June 30,2009 |   |  | December 31,2008 |  
|Business Services              |  | 10.7         | % |  | 8.9              | %
|Healthcare                     |  | 9.2          |   |  | 8.1              |  
|Other Services                 |  | 8.8          |   |  | 9.6              |  
|Consumer Products              |  | 8.7          |   |  | 10.0             |  
|Manufacturing                  |  | 7.6          |   |  | 7.8              |  
|Beverage, Food and Tobacco     |  | 6.4          |   |  | 5.5              |  
|Electronics                    |  | 6.2          |   |  | 7.4              |  
|Transportation                 |  | 5.8          |   |  | 4.4              |  
|Printing, Publishing and Media |  | 4.5          |   |  | 5.0              |  
|Chemicals                      |  | 4.5          |   |  | 5.9              |  
|Distribution                   |  | 4.4          |   |  | 4.6              |  
|Financial Services             |  | 4.2          |   |  | 3.8              |  
|Retail                         |  | 4.2          |   |  | 4.7              |  
|Metals                         |  | 3.8          |   |  | 3.5              |  
|Utilities                      |  | 3.8          |   |  | 3.9              |  
|Entertainment and Leisure      |  | 3.8          |   |  | 3.5              |  
|Containers and Packaging       |  | 2.5          |   |  | 2.2              |  
|Building and Real Estate       |  | 0.9          |   |  | 1.2              |  
|                               |  |              |   |  |                  |  
|Total                          |  | 100.0        | % |  | 100.0            | %
|                               |  |              |   |  |                  |  

The geographic composition of the portfolio at fair value at June 30, 2009 was United States
94.3%, Canada 5.7% and United Kingdom and other less than 1%, and at December 31, 2008 was United States 93.3%, Canada 5.0% and United Kingdom and other 1.7%. 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 equivalents at a major financial
institution.



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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 the period. 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, 2009, details of
open forward foreign currency contracts were as follows:



|                                                                                          |  |                  |  |                       |  |                             |            |                               |   |                                       |  |   |            |  
|----------------------------------------------------------------------------------------- |  | ---------------- |  | --------------------- |  | --------------------------- | ---------- | ----------------------------- | - | ------------------------------------- |  | - | ---------- | -
|ForeignCurrency                                                                           |  | Settlement Date  |  | Amount andTransaction |  | US$ Value atSettlement Date |            | US$ Value atJune 30, 2009     |   | UnrealizedAppreciation/(Depreciation) | 
|Canadian dollar                                                                           |  | August 26, 2009  |  | 32,500,000 Sold       |  | $                           | 29,039,118 |                               | $ | 27,966,988                            |  | $ | 1,072,130  |  
|                                                                                          | 
|At December 31, 2008, details of open forward foreign currency contracts were as follows: |  |                  |  |                      
|                                                                                          |  |                  |  |                       | 
|ForeignCurrency                                                                           |  | Settlement Date  |  | Amount andTransaction |  | US$ Value atSettlement Date |            | US$ Value atDecember 31, 2008 |   | UnrealizedAppreciation/(Depreciation) | 
|Euro                                                                                      |  | January 21, 2009 |  | 8,500,000 Sold        |  | $                           | 10,795,085 |                               | $ | 11,849,250                            |  | $ | (1,054,165 | )
|Canadian dollar                                                                           |  | January 21, 2009 |  | 33,200,000 Sold       |  |                             | 28,034,621 |                               |   | 27,316,649                            |  |   | 717,972    |  
|                                                                                          |  |                  |  |                       |  |                             |            |                               |   |                                       |  |   |            |  
|Total                                                                                     |  |                  |  |                       |  | $                           | 38,829,706 |                               | $ | 39,165,899                            |  | $ | (336,193   | )
|                                                                                          |  |                  |  |                       |  |                             |            |                               |   |                                       |  |   |            |  

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 agreement and borrowings

In accordance with the 1940 Act, with certain limited exceptions, the Company is only permitted to borrow such that its asset coverage, as defined in the
1940 Act, is at least 200% after such borrowing. At June 30, 2009, the Companys asset coverage for borrowed amounts was 237%. On December 28, 2007, the Company amended and restated its Senior Secured, Multi-Currency Credit Agreement
(the Credit Agreement). Under the amended Credit Agreement, the lenders agreed to extend credit to the Company in an aggregate principal amount not to exceed $600 million outstanding, at any one time, consisting of $455 million in
revolving loan commitments and $145 million in term loan commitments. Total availability and revolving loan commitments reverted to $545 million and $400 million, respectively, on April 14, 2008. The Credit Agreement has a stated maturity date
of December 6, 2010 and is secured by substantially all of the assets in the Companys portfolio, including cash and cash equivalents. The term loans under the facility mature on the termination date of the Credit Agreement, have been
fully drawn and, once repaid, may not be reborrowed. Subject to certain exceptions, the interest rate payable under the facility is LIBOR plus 87.5 basis points with respect to revolving loans and LIBOR plus 150 basis points with respect to term
loans. The Credit Agreement also includes an accordion feature that allows the Company to increase the size of the credit facility under certain circumstances to a maximum of $1 billion with respect to the revolving loans and $395
million with respect to the term loans. The Credit Agreement is used to supplement the Companys equity capital to make additional portfolio investments and for other general corporate purposes.

At June 30, 2009, the Company had $376,000,000 drawn on the credit facility versus $426,000,000 at December 31, 2008. The weighted average
annual interest cost for the three and six months ended June 30, 2009 and 2008 was 1.55% and 1.61%, respectively, exclusive of 0.175% in commitment fees and of other prepaid expenses related to establishing the credit facility.



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The average debt outstanding on the credit facility during the three and six months ended June 30,
2009 was $424,105,766 and $428,185,814, respectively. The maximum amounts borrowed during the three and six months ended June 30, 2009 was $429,500,000 and $434,000,000, respectively, and during the three and six months ended June 30, 2008
was $484,000,000. The remaining amount available under the facility was $169,000,000 at June 30, 2009.

At June 30, 2009, the
Company was in compliance with all financial and operational covenants required by the Credit Agreement.

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 its stockholders approve such a sale and its Board of Directors makes certain determinations. On May 18, 2009, the Companys stockholders approved a proposal to provide the
Company with the flexibility, with approval of its Board of Directors and subject to certain other conditions, to sell shares of its common stock at a price below, but no more than 5 percent below, the then current NAV per share. The approval
expires on the earlier of May 18, 2010 or on the date of the Companys 2010 Annual Meeting of Stockholders. Any sale of the Companys common stock at a price below NAV would have a dilutive effect on the NAV.

In August 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 May 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. The repurchase plan is expected to be in effect through the earlier of June 30, 2010 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. Since inception of the repurchase plan through
June 30, 2009, 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, 2009, the total number of remaining shares authorized for repurchase was 1,794,971.
The Company currently holds the shares it repurchased in treasury.

Under the terms of the Companys amended and restated dividend
reinvestment plan adopted on March 4, 2009, dividends may be paid in newly issued or treasury shares of the Companys common stock at a price equal to 95 percent of the market price on the dividend payment date. This feature of the plan
means that, under certain circumstances, the Company may issue shares of its common stock at a price below NAV per share, which could cause the Companys stockholders to experience dilution. With respect to the Companys April 3, 2009
dividend, reinvestment at such prices resulted in dilution of the Companys NAV of approximately $0.08 per share. Giving effect to the reinvestment at such prices of the dividend to be paid by the Company on July 2, 2009 would result
in additional dilution of approximately $0.04 per share.

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. The maximum amount of potential future payments under such guarantees was $6,000,000 at June 30, 2009 with an expiration
of July 2011. There were no guarantees outstanding at December 31, 2008. Guarantees made on behalf of portfolio companies are considered in determining the fair value of the Companys 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 $376,000,000 and $235,000,000 at June 30, 2009 and $426,000,000 and $234,000,000 at December 31, 2008, respectively.

Effective January 1, 2008, the Company adopted SFAS 157. SFAS 157 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. SFAS 157 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.

SFAS 157 establishes a hierarchy that classifies these inputs into the three broad levels listed below:



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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.

In addition to using the above inputs in
investment valuations, the Company continues to employ the valuation policy approved by its Board of Directors that is consistent with SFAS 157 (see Note 2). Consistent with this valuation policy, the Company evaluates the source of inputs,
including any markets in which its investments are trading, in determining fair value.

The following table summarizes the fair values of
the Companys cash equivalents, foreign currency, debt and equity investments and forward foreign currency contracts based on the inputs used as of June 30, 2009 in determining such fair values:



|                                            |  |                  |           |                  |   |                 |  |                   |             |                                  |   |            |  |   |          
|------------------------------------------- |  | ---------------- | --------- | ---------------- | - | --------------- |  | ----------------- | ----------- | -------------------------------- | - | ---------- |  | - | ---------
|Valuation Inputs                            |  | Cash Equivalents |           | Foreign Currency |   | DebtInvestments |  | EquityInvestments |             | Forward ForeignCurrencyContracts
|Level 1Price quotations                    |  | $                | 1,780,019 |                  | $ | 583             |  | $                 |            |                                  | $ |           |  | $ |         
|Level 2Significant other observable inputs |  |                  |          |                  |   |                |  |                   |            |                                  |   |           |  |   | 1,072,310
|Level 3Significant unobservable inputs     |  |                  |          |                  |   |                |  |                   | 852,436,849 |                                  |   | 32,418,749 |  |   |         
|                                            |  |                  |           |                  |   |                 |  |                   |             |                                  |   |            |  |   |          
|Total fair value                            |  | $                | 1,780,019 |                  | $ | 583             |  | $                 | 852,436,849 |                                  | $ | 32,418,749 |  | $ | 1,072,310
|                                            |  |                  |           |                  |   |                 |  |                   |             |                                  |   |            |  |   |          

Debt investments include the Companys investments in senior secured notes, unsecured debt, subordinated debt
and senior secured loans. Equity investments include the Companys investments in preferred stock, common stock, limited partnership/limited liability company interests and equity warrants/options.

The following table summarizes the valuation techniques used as of June 30, 2009 and December 31, 2008 in determining the fair values of the
Companys investments for which significant unobservable inputs (Level 3) were used in determining fair value:



|                                                                                            |  |                 |             |                   |   |                  |  |   |            
|------------------------------------------------------------------------------------------- |  | --------------- | ----------- | ----------------- | - | ---------------- |  | - | -----------
|                                                                                            |  | DebtInvestments |             | EquityInvestments |   | TotalInvestments
|Market approach, income approach or both, utilizing one or more third-party valuation firms |  | $               | 839,041,108 |                   | $ | 32,418,749       |  | $ | 871,459,857
|Broker quote(s)                                                                             |  |                 | 13,395,741  |                   |   |                 |  |   | 13,395,741 
|                                                                                            |  |                 |             |                   |   |                  |  |   |            
|Fair value at June 30, 2009                                                                 |  | $               | 852,436,849 |                   | $ | 32,418,749       |  | $ | 884,855,598
|                                                                                            |  |                 |             |                   |   |                  |  |   |            



|                                                                                            |  |                 |             |                   |   |                  |  |   |            
|------------------------------------------------------------------------------------------- |  | --------------- | ----------- | ----------------- | - | ---------------- |  | - | -----------
|                                                                                            |  | DebtInvestments |             | EquityInvestments |   | TotalInvestments
|Market approach, income approach or both, utilizing one or more third-party valuation firms |  | $               | 873,119,017 |                   | $ | 32,092,158       |  | $ | 905,211,175
|Broker quote(s)                                                                             |  |                 | 21,633,751  |                   |   |                 |  |   | 21,633,751 
|                                                                                            |  |                 |             |                   |   |                  |  |   |            
|Fair value at December 31, 2008                                                             |  | $               | 894,752,768 |                   | $ | 32,092,158       |  | $ | 926,844,926
|                                                                                            |  |                 |             |                   |   |                  |  |   |            

The following are reconciliations for the three and six months ended June 30, 2009 of
investments for which Level 3 inputs were used in determining fair value:



|                                                      |  |                 |             |   |                   |   |            |                  |  |   |             |  
|----------------------------------------------------- |  | --------------- | ----------- | - | ----------------- | - | ---------- | ---------------- |  | - | ----------- | -
|                                                      |  | DebtInvestments |             |   | EquityInvestments |   |            | TotalInvestments | 
|Fair value at March 31, 2009                          |  | $               | 884,526,434 |   |                   | $ | 28,415,242 |                  |  | $ | 912,941,676 |  
|Amortization of premium/discountnet                  |  |                 | 1,817,474   |   |                   |   |           |                  |  |   | 1,817,474   |  
|Net realized loss                                     |  |                 | (7,067,506  | ) |                   |   |           |                  |  |   | (7,067,506  | )
|Net change in unrealized appreciation or depreciation |  |                 | 15,528,505  |   |                   |   | (2,822,643 | )                |  |   | 12,705,862  |  
|Net purchases, sales or redemptions                   |  |                 | (42,368,058 | ) |                   |   | 6,826,150  |                  |  |   | (35,541,908 | )
|Net transfers in or out of Level 3                    |  |                 |            |   |                   |   |           |                  |  |   |            |  
|                                                      |  |                 |             |   |                   |   |            |                  |  |   |             |  
|Fair value at June 30, 2009                           |  | $               | 852,436,849 |   |                   | $ | 32,418,749 |                  |  | $ | 884,855,598 |  
|                                                      |  |                 |             |   |                   |   |            |                  |  |   |             |  



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|                                                      |  |                 |             |   |                   |   |            |                  |  |   |             |  
|----------------------------------------------------- |  | --------------- | ----------- | - | ----------------- | - | ---------- | ---------------- |  | - | ----------- | -
|                                                      |  | DebtInvestments |             |   | EquityInvestments |   |            | TotalInvestments | 
|Fair value at December 31, 2008                       |  | $               | 894,752,768 |   |                   | $ | 32,092,158 |                  |  | $ | 926,844,926 |  
|Amortization of premium/discountnet                  |  |                 | 2,663,183   |   |                   |   |           |                  |  |   | 2,663,183   |  
|Net realized gain (loss)                              |  |                 | (7,062,957  | ) |                   |   | 12,240     |                  |  |   | (7,050,717  | )
|Net change in unrealized appreciation or depreciation |  |                 | (10,490,483 | ) |                   |   | (6,103,799 | )                |  |   | (16,594,282 | )
|Net purchases, sales or redemptions                   |  |                 | (27,425,662 | ) |                   |   | 6,418,150  |                  |  |   | (21,007,512 | )
|Net transfers in or out of Level 3                    |  |                 |            |   |                   |   |           |                  |  |   |            |  
|                                                      |  |                 |             |   |                   |   |            |                  |  |   |             |  
|Fair value at June 30, 2009                           |  | $               | 852,436,849 |   |                   | $ | 32,418,749 |                  |  | $ | 884,855,598 |  
|                                                      |  |                 |             |   |                   |   |            |                  |  |   |             |  

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. Transfers in or out of Level 3 represent the value of any investment where a change in the pricing level occurred from the beginning to the end of the period.

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, 2009, as well as similar information with respect to foreign currency translation for the periods then ended.



|                                                                                            |  |                 |              |   |                   |   |             |                            |  |       |           |  |   |              |  
|------------------------------------------------------------------------------------------- |  | --------------- | ------------ | - | ----------------- | - | ----------- | -------------------------- |  | ----- | --------- |  | - | ------------ | -
|                                                                                            |  | DebtInvestments |              |   | EquityInvestments |   |             | ForeignCurrencyTranslation |  | Total |          
|Net change in unrealized appreciation or depreciation on investments held at end of period: |  |                 |              |   |                   |   |             |                            |  |       |           |  |   |              |  
|Three months ended June 30, 2009                                                            |  | $               | 9,714,855    |   |                   | $ | (2,822,643  | )                          |  | $     | 2,060,171 |  | $ | 8,952,383    |  
|Six months ended June 30, 2009                                                              |  | $               | (16,274,757  | ) |                   | $ | (6,091,559  | )                          |  | $     | 1,371,919 |  | $ | (20,994,397  | )
|Net unrealized depreciation at June 30, 2009                                                |  | $               | (269,355,360 | ) |                   | $ | (61,997,739 | )                          |  | $     | 1,063,134 |  | $ | (330,289,965 | )

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, 2009 and 2008.



|                                                                                   |  |                              |        |    |                              |   |        |   
|---------------------------------------------------------------------------------- |  | ---------------------------- | ------ | -- | ---------------------------- | - | ------ | --
|                                                                                   |  | Six months endedJune 30,2009 |        |    | Six months endedJune 30,2008 |  
|Per Share Data:                                                                    |  |                              |        |    |                              |   |        |   
|Net asset value, beginning of period                                               |  | $                            | 9.23   |    |                              | $ | 13.78  |   
|                                                                                   |  |                              |        |    |                              |   |        |   
|Net investment income                                                              |  |                              | 0.89   |    |                              |   | 0.88   |   
|Net realized and unrealized gain (loss)                                            |  |                              | (0.53  | )  |                              |   | (1.40  | ) 
|                                                                                   |  |                              |        |    |                              |   |        |   
|Total from investment operations                                                   |  |                              | 0.36   |    |                              |   | (0.52  | ) 
|Dividend distributions to stockholders from net investment income                  |  |                              | (0.32  | )  |                              |   | (0.86  | ) 
|Issuance of stock under dividend reinvestment plan at prices below net asset value |  |                              | (0.08  | )  |                              |   | (0.09  | ) 
|Purchases of treasury stock at prices below net asset value                        |  |                              | 0.05   |    |                              |   |       |   
|                                                                                   |  |                              |        |    |                              |   |        |   
|Net increase (decrease) in net assets                                              |  |                              | 0.01   |    |                              |   | (1.47  | ) 
|                                                                                   |  |                              |        |    |                              |   |        |   
|Net asset value, end of period                                                     |  | $                            | 9.24   |    |                              | $ | 12.31  |   
|                                                                                   |  |                              |        |    |                              |   |        |   
|Market price, end of period                                                        |  | $                            | 6.23   |    |                              | $ | 9.46   |   
|                                                                                   |  |                              |        |    |                              |   |        |   
|Total return(1)(2)                                                                 |  |                              | (34.43 | )% |                              |   | (32.67 | )%
|Ratios/Supplemental Data:                                                          |  |                              |        |    |                              |   |        |   
|Ratio of operating expenses to average net assets(3)                               |  |                              | 4.76   | %  |                              |   | 4.13   | % 
|Ratio of credit facility related expenses to average net assets(3)                 |  |                              | 1.53   | %  |                              |   | 2.85   | % 
|                                                                                   |  |                              |        |    |                              |   |        |   



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|                                                        |  |                              |             |   |                              |   |             |  
|------------------------------------------------------- |  | ---------------------------- | ----------- | - | ---------------------------- | - | ----------- | -
|                                                        |  | Six months endedJune 30,2009 |             |   | Six months endedJune 30,2008 |  
|Ratio of total expenses to average net assets(3)        |  |                              | 6.29        | % |                              |   | 6.98        | %
|Ratio of net investment income to average net assets(3) |  |                              | 19.41       | % |                              |   | 13.47       | %
|Net assets, end of period                               |  | $                            | 514,031,903 |   |                              | $ | 672,186,111 |  
|Average debt outstanding                                |  | $                            | 428,185,814 |   |                              | $ | 427,958,978 |  
|Weighted average shares outstanding                     |  |                              | 55,433,200  |   |                              |   | 53,059,946  |  
|Average debt per share(4)                               |  | $                            | 7.72        |   |                              | $ | 8.07        |  
|Portfolio turnover(2)                                   |  |                              | 5           | % |                              |   | 5           | %



|(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.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------



|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.

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



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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, 2008. See Note 2 to the financial statements in this Quarterly Report for a description of recently issued accounting pronouncements.

Portfolio and investment activity

During the three
months ended June 30, 2009, we invested approximately $11.9 million across two existing portfolio companies. The new investments consisted primarily of senior loans secured by first liens ($3.6 million, or 30% of the total) or second liens
($3.1 million, or 26%), unsecured or subordinated debt securities ($4.9 million, or 41%) and senior secured notes ($0.3 million or 3%). Additionally, we received proceeds from sales/repayments of investment principal of approximately $43.2 million
during the three months ended June 30, 2009.

At June 30, 2009, our net portfolio of $887 million (at fair value) consisted of 62
portfolio companies and was invested 59% in senior secured loans, 31% in unsecured or subordinated debt securities, 6% in senior secured notes, 4% in equity investments and less than 1% in cash equivalents and foreign currency. Our average portfolio
company investment at amortized cost was approximately $19.6 million. Our largest portfolio company investment by value was approximately $51.9 million and our five largest portfolio company investments by value comprised approximately 23% of our
portfolio at June 30, 2009. At December 31, 2008, our portfolio of $943 million (at fair value) consisted of 63 portfolio companies and was invested 61% in senior secured loans, 28% in unsecured or subordinated debt securities, 6% in
senior secured notes, 3% in equity investments and approximately 2% in cash equivalents and foreign currency. Our average portfolio company investment at amortized cost was approximately $19.6 million at December 31, 2008. Our largest portfolio
company investment by value was approximately $41.4 million and our five largest portfolio company investments by value comprised approximately 19% of our portfolio at December 31, 2008.

The weighted average yield of the debt and income producing equity securities in our portfolio at their current cost basis was 10.4% at June 30,
2009 and 11.0% at December 31, 2008. The weighted average yields on our senior secured loans and other debt securities at their current cost basis were 9.8% and 12.1%, respectively, at June 30, 2009, versus 10.2% and 12.2%, respectively,
at December 31, 2008. 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 equivalents and foreign currency.

At June 30, 2009, 43% of our debt investments bore interest based on floating rates, such as LIBOR, the Federal Funds Rate or the Prime Rate, and 57% bore interest at fixed rates. The percentage of our total debt
investments that bore floating rate interest based on an interest rate floor was 4% at June 30, 2009. At December 31, 2008, 47% of our



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debt investments bore interest based on floating rates and 53% bore interest at fixed rates. The percentage of our total
debt investments that bore floating rate interest based on an interest rate floor was 8% at December 31, 2008.

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.

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 1.37 at June 30, 2009 versus 1.45 at December 31, 2008.
The following is a distribution of the investment ratings of our portfolio companies at June 30, 2009 and December 31, 2008:



|                                            |  |               |             |   |                   |   |             |  
|------------------------------------------- |  | ------------- | ----------- | - | ----------------- | - | ----------- | -
|                                            |  | June 30, 2009 |             |   | December 31, 2008 |  
|Grade 1                                     |  | $             | 666,823,985 |   |                   | $ | 626,372,188 |  
|Grade 2                                     |  |               | 152,428,148 |   |                   |   | 245,441,091 |  
|Grade 3                                     |  |               | 36,689,286  |   |                   |   | 11,051,924  |  
|Grade 4                                     |  |               | 33,543,164  |   |                   |   | 49,252,535  |  
|                                            |  |               |             |   |                   |   |             |  
|Total investments including unearned income |  |               | 889,484,583 |   |                   |   | 932,117,738 |  
|Unearned income                             |  |               | (4,628,985  | ) |                   |   | (5,272,812  | )
|                                            |  |               |             |   |                   |   |             |  
|Total investments                           |  | $             | 884,855,598 |   |                   | $ | 926,844,926 |  
|                                            |  |               |             |   |                   |   |             |  

Results of operations

Results comparisons for the three months ended June 30, 2009 and 2008.

Investment income

Investment income totaled $33,439,628 and $34,873,936, respectively, for the three months ended June 30, 2009 and 2008, of
which $19,179,036 and $21,251,008 were attributable to interest and fees on senior secured loans, $13,622,931 and $12,966,651 to interest earned on other debt securities, $633,754 and $646,119 to dividends from preferred equity securities, $3,907
and $8,408 to interest earned on short-term investments and cash equivalents, and zero and $1,750 to other income, respectively. The decrease in investment income for the three months ended June 30, 2009 primarily reflects the impact of lower
levels of LIBOR on interest income from our floating rate debt investments, which generally bear interest based on LIBOR. Three-month LIBOR averaged 0.84% during the three months ended June 30, 2009, compared to 2.75% during the three months
ended June 30, 2008.

Expenses

Expenses for the three months ended June 30, 2009 and 2008 were $7,904,225 and $11,610,343, respectively, which consisted of $4,647,032 and $5,583,589 in base management fees, $1,712,222 and $4,292,574 in
interest expense and fees related to the Credit Facility, $340,273 and $263,951 in Advisor expenses, $374,516 and $240,141 in professional fees, $201,927 and $311,998 in administrative services, $171,197 and $167,230 in amortization of debt issuance
costs, $131,864 and $138,853 in insurance expenses, $88,863 and $98,235 in director fees and $236,331 and



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$513,772 in other expenses, respectively. The decrease in base management fees for the three months ended June 30,
2009 reflects a decline in the quarterly portfolio values on which the fees are paid (in arrears). The decrease in interest expense and fees related to the Credit Facility is mainly a result of reduced borrowing costs from lower prevailing levels of
LIBOR. Other general and administrative expenses were generally lower due to the reduced level of new investment originations.

Net
investment income

Net investment income was $25,535,403 and $23,263,593 for the three months ended June 30, 2009 and 2008,
respectively. The increase is primarily a result of a decline in interest and other expenses, which more than offset a decrease in interest income.

Net realized gain or loss

Net realized loss of $(10,666,086) for the three months ended June 30, 2009 was the
result of $(7,067,506) in net realized loss from the disposition of investments and $(3,598,580) in net realized loss on foreign currency transactions during the period. For the three months ended June 30, 2008, the net realized loss was
$(1,518,453). During the three months ended June 30, 2009, we partially exited our debt investment in Event Rentals, Inc., realizing a loss of $(2,127,073) and reversing an unrealized loss of $(1,536,220) at March 31, 2009. On
June 30, 2009, we closed on a restructuring of our debt investments in United Subcontractors, Inc., realizing a net loss of $(5,151,164) and reversing a net unrealized loss of $(4,941,581) at March 31, 2009. Foreign currency losses mainly
represent losses on forward currency contracts used to hedge our investments denominated in foreign currencies.

Net unrealized
appreciation or depreciation

For the three months ended June 30, 2009 and 2008, the net change in unrealized appreciation or
depreciation on our investments and foreign currency translation was appreciation of $8,952,383 and depreciation of $(9,885,806), respectively. The net unrealized appreciation for the three months ended June 30, 2009 was comprised of net
unrealized appreciation on investments of $6,892,212 and net unrealized appreciation on foreign currency translation of $2,060,171. The net unrealized depreciation for the three months ended June 30, 2008 was comprised of net unrealized
depreciation on investments of $(11,471,395) and net unrealized appreciation on foreign currency translation of $1,585,589. The net unrealized appreciation during the second quarter of 2009 was primarily a result of improved market conditions,
although such conditions were and continue to be somewhat volatile. 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.

Net increase in net assets resulting from operations

The net increase in net assets resulting from operations for the three months ended June 30, 2009 and 2008 was $23,821,700 and $11,859,334, respectively. As compared to the prior period, the increase primarily
reflects the net unrealized appreciation on investments for the three months ended June 30, 2009.

Results comparisons for the six
months ended June 30, 2009 and 2008.

Investment income

Investment income totaled $65,250,928 and $70,568,453, respectively, for the six months ended June 30, 2009 and 2008, of which $37,020,547 and
$43,962,023 were attributable to interest and fees on senior secured loans, $26,808,331 and $25,065,282 to interest earned on other debt securities, $1,412,170 and $1,521,753 to dividends from preferred equity securities, $9,880 and $17,099 to
interest earned on short-term investments and cash equivalents, and zero and $2,296 to other income, respectively. The decrease in investment income primarily reflects the impact of lower levels of LIBOR on interest income from our floating rate
debt investments, which generally bear interest based on LIBOR. Three-month LIBOR averaged 1.04% during the six months ended June 30, 2009, compared to 3.02% during the six months ended June 30, 2008.

Expenses

Expenses for the six
months ended June 30, 2009 and 2008 were $15,964,143 and $24,090,853, respectively, which consisted of $9,395,250 and $11,150,449 in base management fees, $3,548,611 and $9,506,631 in interest expense and fees related to the Credit Facility,
$687,067 and $538,849 in Advisor expenses, $606,566 and $838,471 in professional fees, $431,035 and $605,433 in administrative services, $339,489 and $333,425 in amortization of debt issuance costs, $261,225 and $276,436 in insurance expenses,
$184,155 and $192,735 in director fees and $510,745



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and $648,424 in other expenses, respectively. The decrease in base management fees for the six months ended June 30,
2009 reflects a decline in the quarterly portfolio values on which the fees are paid (in arrears). The decrease in interest expense and fees related to the Credit Facility is mainly a result of reduced borrowing costs from lower prevailing levels of
LIBOR. Other general and administrative expenses were generally lower due to the reduced level of new investment originations.

Net
investment income

Net investment income was $49,286,785 and $46,477,600 for the six months ended June 30, 2009 and 2008,
respectively. The increase is primarily a result of a decline in interest and other expenses, which more than offset a decrease in interest income.

Net realized gain or loss

Net realized loss of $(8,537,758) for the six months ended June 30, 2009 was the
result of $(7,050,717) in net realized loss from the disposition of investments and $(1,487,041) in net realized loss on foreign currency transactions during the period. For the six months ended June 30, 2008, the net realized loss was
$(1,312,938). During the six months ended June 30, 2009, we partially exited our debt investment in Event Rentals, Inc., realizing a loss of $(2,127,073) and reversing an unrealized loss of $(1,536,220) at December 31, 2008. On
June 30, 2009, we closed on a restructuring of our debt investments in United Subcontractors, Inc., realizing a net loss of $(5,151,164) and reversing a negligible net unrealized loss at December 31, 2008. Foreign currency losses mainly
represent losses on forward currency contracts used to hedge our investments denominated in foreign currencies.

Net unrealized
appreciation or depreciation

For the six months ended June 30, 2009 and 2008, the change in net unrealized appreciation or
depreciation was an increase in net unrealized depreciation of $(20,994,397) and $(72,778,842), respectively. The increase in net unrealized depreciation for the six months ended June 30, 2009 was comprised of net unrealized depreciation on
investments of $(22,366,316) and net unrealized appreciation on foreign currency translation of $1,371,919. The increase in net unrealized depreciation for the six months ended June 30, 2008 was comprised of net unrealized depreciation on
investments of $(73,478,528) and net unrealized appreciation on foreign currency translation of $699,686. The increase in net unrealized depreciation for the six months ended June 30, 2009 was primarily a result of a reduction in multiples used
to estimate the fair value of our investments, the underperformance of some portfolio companies, and market-wide changes in interest yields. Market-wide movements and trading multiples are not necessarily indicative of any fundamental change in the
condition or prospects of our portfolio companies.

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, 2009 and 2008 was an
increase of $19,754,630 and a decrease of $(27,614,180), respectively. As compared to the prior period, the increase primarily reflects the decrease in net unrealized depreciation on investments for the six months ended June 30, 2009.

Financial condition, liquidity and capital resources

During the six months ended June 30, 2009, we generated operating cash flows primarily from interest earned and fees received on senior secured loans and other debt securities.

Net cash provided by operating activities during the six months ended June 30, 2009 was $63,333,831. Our primary sources of cash from operating
activities during the period consisted of a net increase in net assets from operations of $19,754,630 and sales of investments (net of purchases) of $16,718,680.

We used $76,578,784 for financing activities during the six months ended June 30, 2009, consisting primarily of $24,343,892 of dividend distributions, $50,000,000 of net repayments under our Credit Facility and
$2,234,892 of treasury stock purchases.

On December 28, 2007, we amended and restated our senior secured, multi-currency Credit
Facility to provide us with $600,000,000 in total availability, consisting of $455,000,000 in revolving loan commitments and $145,000,000 in term loan commitments. Total availability and revolving commitments reverted to $545,000,000 and
$400,000,000, respectively, on April 14, 2008. Subject to certain conditions, we have the ability in the future to seek additional commitments from new and existing lenders up to an aggregate amount not to exceed $1,000,000,000 with respect to
revolving loans and $395,000,000 with respect to term loans. The interest rate applicable to borrowings under the Credit Facility is generally LIBOR plus 87.5 basis points with respect to revolving loans and LIBOR plus 150 basis points with



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respect to term loans. The term loans have been fully drawn and mature on December 6, 2010, the termination date of
the Credit Facility, and term loans, 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, 2009, we had $376,000,000 drawn and
outstanding under the Credit Facility, with $169,000,000 available to us, subject to compliance with customary affirmative and negative covenants, 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, 2009, we had $1,780,019 in cash and cash equivalents. In addition, we had $583 in foreign currency at that date.

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 October 23, 2008, our Form N-2 shelf registration statement was declared effective by the SEC. The shelf registration permits us to offer,
from time to time, up to $1 billion 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 May 18, 2009, our stockholders approved a proposal to provide us with the flexibility, with
approval of our Board of Directors and subject to certain other conditions, to sell shares of our common stock at a price below, but no more than 5 percent below, our then current NAV per share. The approval expires on the earlier of May 18, 2010 or
on the date of our 2010 Annual Meeting of Stockholders. Any sale of our common stock at a price below NAV would have a dilutive effect on our NAV.

The economic downturn generally and the disruptions in the capital markets in particular have decreased liquidity and increased the cost of raising capital, where available. In the near term, we expect to meet our liquidity needs through
use of the remaining availability under our Credit Facility, continued cash flows from operations and investment sales. In the future, we may raise additional equity or debt capital off our shelf registration or may securitize a portion of our
investments, among other options. However, under current market conditions equity capital may be difficult to raise because our ability to issue and sell our common stock at a price below NAV per share is limited in certain respects. In
addition, the debt capital that will be available, if at all, may be at a higher cost, and on less favorable terms and conditions in the future. Continued inability to raise capital would have a negative effect on our operations.

Contractual obligations

A
summary of our significant contractual payment obligations for the repayment of outstanding borrowings under our Credit Facility at June 30, 2009 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) |  | $                                            | 376 |                  | $ |          |  | $         | 376 |               | $ |  |  | $ | 



|(1) | At June 30, 2009, $169 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. The maximum amount of potential
future payments under such guarantees was $6,000,000 at June 30, 2009 with an expiration of July 2011. There were no guarantees outstanding at December 31, 2008. Guarantees made on behalf of portfolio companies are considered in
determining the fair value of the Companys investments.

Dividends

We intend to distribute quarterly dividends to our stockholders. Our quarterly dividends are determined by our Board of Directors. Dividends declared by
the Company since July 25, 2005 (inception of operations) have been as follows:



|                                    |  |                    |  |                   
|----------------------------------- |  | ------------------ |  | ------------------
|Dividend AmountPer ShareOutstanding |  | 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    



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|                                    |  |                    |  |                   
|----------------------------------- |  | ------------------ |  | ------------------
|Dividend AmountPer ShareOutstanding |  | Record Date        |  | Pay Date          
|$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   

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

The Company has qualified and elected and intends to continue to qualify for the tax treatment applicable to regulated investment companies
under Subchapter M of the Code, and, among other things, has made and intends to continue to make the requisite distributions to its stockholders which will relieve the Company from federal income taxes. Therefore, no provision has been recorded for
federal income taxes. 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. The Company will accrue excise tax on estimated undistributed taxable income as
required.

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 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).

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 April 3, 2009 and July 2, 2009 dividends, a total of $8,164,597 was reinvested pursuant to our dividend reinvestment plan. With respect to our March 31, 2008 and June 30, 2008 dividends, a total of $17,231,470 was reinvested
pursuant to our dividend reinvestment plan.

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. With respect to our April 3, 2009 and July 2, 2009 dividends, reinvestment at such prices resulted in
cumulative dilution of our net asset value of approximately $0.12 per share.

With respect to dividends paid to stockholders, 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, 2009, there were no such fees. For the three and six months ended June 30,
2008, these fees totaled $1,734,438 and $2,571,938, respectively. 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.

Temporary guidance issued by the Internal Revenue Service earlier this year permits publicly-traded RICs to distribute stock to
satisfy their distribution requirements if stated conditions are met. Our Board of Directors has not yet made a determination whether to utilize the new guidance.

Recent developments

On August 5, 2009, our Board of Directors declared a dividend of $0.16 per share, payable on
October 2, 2009 to stockholders of record at the close of business on September 18, 2009.

Notice is hereby given in accordance
with Section 23(c) of the 1940 Act that from time to time the Company may purchase shares of its 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, 2009, 43% 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, 2009, the percentage of our total debt investments that bore floating rate interest based on an interest rate floor was 4%.
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, 2009 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 $9,000,000, or $0.16 per share, in the value of our net assets at June 30, 2009 and a corresponding 100 basis point decrease in
LIBOR and U.S. Treasury yields would cause an increase of approximately $8,500,000, or $0.15 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, 2009 and 2008, 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.

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

We did not sell any securities during the period covered by this report that were not
registered under the Securities Act of 1933.

Issuer purchases of equity securities

The following table provides information regarding our open-market purchases of our common stock for each month in the three month period ended
June 30, 2009.



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|           |  |                             |      |                                 |        |                                                                              |        |                                                                                                        |          
|---------- |  | --------------------------- | ---- | ------------------------------- | ------ | ---------------------------------------------------------------------------- | ------ | ------------------------------------------------------------------------------------------------------ | ---------
|Period     |  | Average Price Paidper Share |      | Total Number ofShares Purchased |        | Total Number ofShares Purchasedas Part of PubliclyAnnounced Plansor Programs |        | Maximum Number(or ApproximateDollar Value) ofShares that MayYet Be PurchasedUnder the
Plans orPrograms
|April 2009 |  | $                           | 4.31 |                                 | 82,208 |                                                                              | 82,208 |                                                                                                        | 1,794,971
|May 2009   |  |                             |     |                                 |       |                                                                              |       |                                                                                                        |         
|June 2009  |  |                             |     |                                 |       |                                                                              |       |                                                                                                        |         
|           |  |                             |      |                                 |        |                                                                              |        |                                                                                                        |          
|Total      |  | $                           | 4.31 |                                 | 82,208 |                                                                              | 82,208 |                                                                                                        | 1,794,971
|           |  |                             |      |                                 |        |                                                                              |        |                                                                                                        |          

In August 2008, our Board of Directors approved a share repurchase plan under which we may
repurchase up to 2.5 percent of our then outstanding shares of common stock (representing a maximum of 1,365,613 shares as of such date) from time to time in open market or privately negotiated transactions. In May 2009, our Board of Directors
approved an extension and increase to our existing share repurchase plan which authorizes us to repurchase up to an additional 2.5 percent of our outstanding shares of common stock from time to time in open market or privately negotiated
transactions. After giving effect to the Boards most recent action, the total number of additional shares authorized for repurchase is 1,794,971. The repurchase plan does not obligate us to acquire any specific number of shares and may be
discontinued at any time. We intend to fund any repurchases with available cash. The repurchase plan is expected to be in effect through the earlier of June 30, 2010 or until the approved number of shares has been repurchased.

The following table provides information regarding open-market purchases of our common stock by the Advisor for each month in the three month period
ended June 30, 2009.



|           |  |                             |      |                                 |        |                                                                              |   |                                                                                                        |  
|---------- |  | --------------------------- | ---- | ------------------------------- | ------ | ---------------------------------------------------------------------------- | - | ------------------------------------------------------------------------------------------------------ | -
|Period     |  | Average Price Paidper Share |      | Total Number ofShares Purchased |        | Total Number ofShares Purchasedas Part of PubliclyAnnounced Plansor Programs |   | Maximum Number(or ApproximateDollar Value) ofShares that MayYet Be PurchasedUnder the Plans
orPrograms
|April 2009 |  | $                           | 4.36 |                                 | 15,846 |                                                                              |  |                                                                                                        | 
|May 2009   |  |                             |     |                                 |       |                                                                              |  |                                                                                                        | 
|June 2009  |  |                             |     |                                 |       |                                                                              |  |                                                                                                        | 
|           |  |                             |      |                                 |        |                                                                              |   |                                                                                                        |  
|Total      |  | $                           | 4.36 |                                 | 15,846 |                                                                              |  |                                                                                                        | 
|           |  |                             |      |                                 |        |                                                                              |   |                                                                                                        |  

In November 2007, our Board of Directors authorized the purchase from time to time in the open
market of an indeterminate number of shares of our common stock by the Advisor, in its discretion, subject to compliance with our and the Advisors applicable policies and requirements of law. The above purchases by the Advisor were made in
accordance with such policies and Rule 10b-18 under the Exchange Act.



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

None.



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

On May 18, 2009, the Company held its 2009 Annual Meeting of Stockholders in New York, New York for the purpose of considering and voting upon the election of the Class II Directors, to approve a proposal to authorize flexibility for
the Company, with approval of its Board of Directors, to sell shares of its common stock at a price below, but no more than 5% below, the Companys then current net asset value per share, and to ratify the selection of an independent registered
public accounting firm. Votes were cast as follows:



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##### Table of Contents

|                           |  |            |  |          
|-------------------------- |  | ---------- |  | ---------
|Class II Director nominees |  | For        |  | Withheld 
|William E. Mayer           |  | 48,973,342 |  | 1,192,189
|François de Saint Phalle   |  | 49,927,988 |  | 237,543  

The following directors continued as directors of the Company for their respective terms: James R.
Maher, Jerrold B. Harris and Maureen K. Usifer.



|                                                                                                                                                                                                                                              |  |            |  |         |  |         |  |               
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------- |  | ------- |  | ------- |  | --------------
|Proposal                                                                                                                                                                                                                                      |  | For        |  | Against |  | Abstain |  | BrokerNon-Vote
|To approve a proposal to authorize flexibility for the Company, with approval of its Board of Directors, to sell shares of its common stock at
a price below, but no more than 5% below, the Companys then current net asset value per share |  | 13,316,212 |  | 352,061 |  | 58,276  |  | 4,513,018     
|All Shares                                                                                                                                                                                                                                    |  | 45,242,167 |  | 352,061 |  | 58,276  |  | 4,513,018     
|Ratify the selection of Deloitte & Touche LLP                                                                                                                                                                                                 |  | 50,093,247 |  | 9,414   |  | 62,869  |  |              



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

None.



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##### Table of Contents

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



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



|     |  |                                                                                                                                                   
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|     | 
|31.2 |  | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|     | 
|32   |  | Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.            



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##### Table of Contents

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 6, 2009 |  | By:                                 |  | /s/    James R. Maher  
|                     |  |                                     |  | James R. Maher         
|                     |  |                                     |  | Chief Executive Officer
|                     |  |                                    
|Date: August 6, 2009 |  | By:                                 |  | /s/    Frank D. Gordon 
|                     |  |                                     |  | Frank D. Gordon        
|                     |  |                                     |  | Chief Financial Officer



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