##### 



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, DC 20549
      Form 10-K
  (Mark One)þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    December 31, 2005ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934   COMMISSION FILE NUMBER: 0-51459
      PATRIOT CAPITAL FUNDING,
    INC.
 (EXACT NAME OF REGISTRANT AS
    SPECIFIED IN ITS CHARTER)
  DELAWARE

74-3068511(STATE OR JURISDICTION OF
    INCORPORATION OR ORGANIZATION)

(IRS EMPLOYER
    IDENTIFICATION NO.)274 Riverside Avenue, Westport,
    CT(ADDRESS OF PRINCIPAL
    EXECUTIVE OFFICE)

06880(ZIP
    CODE)   REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE:
 (203) 429-2700
  SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE
    ACT:
 NONE
  SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE
    ACT:
  Title of each class
    o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. o
  Rule 12b-2
 o o þ
  Rule 12b-2 o þ
    DOCUMENTS
    INCORPORATED BY REFERENCE
  Form 10-K




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##### 



TABLE OF
    CONTENTS
  PagePART IITEM 1.

BUSINESS


1ITEM 1A.

RISK FACTORS


13ITEM 1B.

UNRESOLVED STAFF
    COMMENTS


23ITEM 2.

PROPERTIES


23ITEM 3.

LEGAL
    PROCEEDINGS


23ITEM 4.

SUBMISSION OF
    MATTERS TO A VOTE OF SECURITY HOLDERS


24PART IIITEM 5.

MARKET FOR
    REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
    ISSUER PURCHASES OF EQUITY SECURITIES


24ITEM 6.

SELECTED FINANCIAL
    DATA


26ITEM 7.

MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS


27ITEM 7A.

QUANTITATIVE AND
    QUALITATIVE DISCLOSURE ABOUT MARKET RISK


40ITEM 8.

FINANCIAL
    STATEMENTS AND SUPPLEMENTARY DATA


41ITEM 9.

CHANGES IN AND
    DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
    DISCLOSURE


63ITEM 9A.

CONTROLS AND
    PROCEDURES


63ITEM 9B.

OTHER
    INFORMATION


63PART IIIITEM 10.

DIRECTORS AND
    EXECUTIVE OFFICERS OF THE REGISTRANT


63ITEM 11.

EXECUTIVE
    COMPENSATION


63ITEM 12.

SECURITY OWNERSHIP
    OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
    STOCKHOLDER MATTERS


63ITEM 13.

CERTAIN
    RELATIONSHIPS AND RELATED TRANSACTIONS


64ITEM 14.

PRINCIPAL
    ACCOUNTING FEES AND SERVICES


64PART IVITEM 15.

EXHIBITS AND
    FINANCIAL STATEMENT SCHEDULES


64SIGNATURES


66EXHIBIT INDEX


67




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PART I  ITEM 1.
    Business  General
            source-of-income




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##### 



Corporate
    History and Information
    U.S.-based
  (203) 429-2700. www.patcapfunding.com. Form 10-K Form 10-K.
  Our
    Target Market
       2




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Our
    Business Strategy
    
    Deliver a comprehensive suite of customized financing
    solutions in a responsive and efficient
    manner.  Our goal is to provide a comprehensive
    suite of customized financing solutions in a responsive and
    efficient manner to private equity sponsors in connection with
    their proposed investments in small- to mid-sized companies.
    Private equity sponsors with whom we work require a high level
    of creativity and knowledge in structuring investment
    transactions. Our ability to provide financing across all levels
    of a companys capital structure appeals to private equity
    sponsors that typically seek to rely on a limited number of
    third party financing sources for their investment transactions
    in order to facilitate and ensure the timely closing of such
    transactions. We believe our ability to provide a comprehensive
    suite of customized financing solutions sets us apart from other
    lenders that focus on providing a limited number of financing
    solutions.
    Capitalize on our strong private equity sponsor
    relationships.  We are committed to establishing,
    building and maintaining our private equity sponsor
    relationships. Our marketing efforts are focused on building
    relationships with private equity sponsors that routinely make
    investments in the small- to mid-sized companies that we target.
    We believe that our relationships with private equity sponsors
    provide us with, in addition to potential investment
    opportunities, other significant benefits, including an
    additional layer of due diligence and additional monitoring
    capabilities. Private equity sponsors also provide our portfolio
    companies with significant benefits, including strategic
    guidance, an additional potential source of capital and
    operational expertise. We have assembled a management team that
    has developed an extensive network of private equity sponsor
    relationships in our target market over the last 15 years.
    We believe that our management teams relationships with
    these private equity sponsors will provide us with significant
    investment opportunities.
    Employ disciplined underwriting policies and maintain
    rigorous portfolio monitoring.  We have an
    extensive investment underwriting and monitoring process. We
    conduct a thorough analysis of each potential portfolio company
    and its prospects, competitive position, financial performance
    and industry dynamics. We stress the importance of credit and
    risk analysis in our underwriting process. We believe that our
    continued adherence to this disciplined process will permit us
    to continue to generate a stable, diversified and increasing
    revenue stream of current income from our debt investments to
    enable us to make distributions to our stockholders.
    Leverage the skills of our experienced management
    team.  Our management team is led by our president
    and chief executive officer, Mr. Buckanavage, and our chief
    operating officer and chief compliance officer,
    Mr. Hassler, who combined have more than 30 years of
    experience in lending to, and investing in, small and mid-sized
    companies. The members of our management team have broad
    investment backgrounds, with prior experience at specialty
    finance companies, middle market commercial banks and other
    financial services companies. We believe that the experience and
    contacts of our management team will continue to allow us to
    effectively implement the key aspects of our business strategy.  Investment
    Selection
    
    Established companies with positive cash
    flow.  We seek to invest in established companies
    with sound historical financial performance. We typically focus
    on companies with a history of profitability on an operating
    cash flow basis and that generate minimum annual EBITDA
    (Earnings Before Interest, Taxes, 3




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##### 



Depreciation and Amortization) of $2 million. We do not
    intend to invest in
    start-up
    companies or companies with speculative business plans.  
    Strong competitive position in industry.  We
    analyze the strengths and weaknesses of target companies
    relative to their competitors. The factors we consider include
    relative product pricing, product quality, customer loyalty,
    substitution risk, switching costs, patent protection, brand
    positioning and capitalization. We seek to invest in companies
    that have developed leading positions within their respective
    markets, are well positioned to capitalize on growth
    opportunities and operate businesses or in industries with
    significant barriers to entry. We seek companies that
    demonstrate advantages when compared to their competitors, which
    may help to protect their market position and profitability.
    Experienced management team.  We seek to invest
    in companies that have experienced management teams. We also
    seek to invest in companies that have proper incentives in
    place, including having significant equity interests, to
    motivate management to act in concert with our interests as
    investors.
    Diversified customer and supplier base.  We
    generally seek to invest in companies that have a diversified
    customer and supplier base. Companies with a diversified
    customer and supplier base are generally better able to endure
    economic downturns, industry consolidation, changing business
    preferences and other factors that may negatively impact their
    customers, suppliers and competitors.
    Private equity sponsorship.  We generally seek
    to invest in companies in conjunction with private equity
    sponsors who have proven capabilities in building value. We
    believe that a private equity sponsor can serve as a committed
    partner and advisor that will actively work with the company and
    its management team to meet company goals and create value. We
    assess a private equity sponsors commitment to a portfolio
    company by, among other things, the capital contribution it has
    made or will make in the portfolio company.
    Exit strategy.  We seek to invest in companies
    that we believe will provide a steady stream of cash flow to
    repay our debt investments and reinvest in their respective
    businesses. We expect that the primary means by which we exit
    our debt investments will be through the repayment of our
    investment by internally generated cash flow. In addition, we
    will seek to invest in companies whose business models and
    expected future cash flows may provide alternate methods of
    repaying our investment, such as through a strategic acquisition
    by other industry participants, an initial public offering of
    common stock, a recapitalization or another capital market
    transaction.  Underwriting
    Process and Investment Approval
    
    Transaction description;
    Company description, including product or service analysis,
    market position, market dynamics, customer and supplier analysis
    and evaluation of management;
    Quantitative and qualitative analysis of historical financial
    performance and financial projections;
    Competitive landscape;
    Business strengths and weaknesses;
    On-site
    visits with management and relevant employees;
    Quantitative and qualitative private equity sponsor
    analysis; and
    Potential investment structures, senior and total leverage
    multiples and investment pricing terms. 4




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and/or and/or
  
    Initial or additional
    on-site
    visits with management and relevant employees;
    Review of historical and projected financial statements,
    including reports from third-party forensic accountants;
    Interviews with customers and suppliers;
    Research on products and services, market dynamics and
    competitive landscape;
    Management background checks;
    Review of material contracts;
    Review by legal, environmental or other industry consultants, if
    applicable; and
    Financial sponsor diligence, including portfolio company and
    lender reference checks.        Investments
  payment-in-kind
 5




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##### 



Debt
    Investments
    
    negotiating covenants that are designed to protect our
    investments while affording our portfolio companies as much
    flexibility in managing their businesses as possible. Such
    restrictions may include affirmative and negative covenants,
    default penalties, lien protection, change of control provisions
    and board rights; and
    requiring a total return on our investments (including both
    interest and potential equity appreciation) that compensates us
    for credit risk.  Senior
    Secured Loans
    Junior
    Secured Loans
    Subordinated
    Debt
  payment-in-kind,
  One-Stop
    Financing
    Equity
    Investments
   6




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##### 



Portfolio
    Management
    
    Monthly review of actual financial performance versus the
    corresponding period of the prior year and financial projections;
    Monthly review of borrowing base, if applicable;
    Quarterly review of operating results, covenant compliance, and
    general business performance, including the preparation of a
    portfolio monitoring report which is distributed to members of
    our investment committee;
    Periodic
    face-to-face
    meetings with management teams and private equity sponsors of
    portfolio companies; and
    Attendance at portfolio company board meetings through board
    seats or observation rights.    
    Investment Rating 1  Investment that exceeds
    expectations
    and/or
    capital gain expected;
    Investment Rating 2  Investment generally
    performing in accordance with expectations;
    Investment Rating 3  Investment that requires
    closer monitoring;
    Investment Rating 4  Investment performing below
    expectations where a higher risk of loss exists; and
    Investment Rating 5  Investment performing
    significantly below expectations where we expect a loss.    December 31, 2005


December 31, 2004Debt





DebtInvestments at


Percentage of


Investments at


Percentage ofInvestment Rating

Fair Value


Total Portfolio


Fair Value


Total Portfolio1

$
16,069,312



11.5
%

$
21,274,306



31.6
%2


102,189,918



72.8



38,911,617



57.93


20,136,424



14.3



7,060,000



10.54


2,000,000



1.4







5














Total

$
140,395,654



100.00
%

$
67,245,923



100.0
%   and/or
 7




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##### 



Regulations
  Regulation
    as a Business Development Company
    Qualifying
    Assets
                           8




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##### 



Managerial
    Assistance to Portfolio Companies
    Senior
    Securities
    Code of
    Ethics
  Rule 17j-1
  Proxy
    Voting Policies and Procedures
  case-by-case
     9




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##### 



Other
          Taxation
    as a Regulated Investment Company
          i.e.
 10




---



##### 



Determination
    of Net Asset Value
  Quarterly
    Net Asset Value Determinations
             11




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##### 




    Our quarterly valuation process will begin with each portfolio
    company or investment being initially valued by the investment
    professionals responsible for the portfolio investment;
    Preliminary valuation conclusions will then be documented and
    discussed with our investment committee;
    Duff & Phelps, LLC, an independent valuation firm
    engaged by us, will review these preliminary valuations and
    prepare an independent valuation report;
    The valuation committee of our board of directors will review
    the preliminary valuations and Duff & Phelps, LLC will
    respond to and supplement the preliminary valuations to reflect
    any comments provided by the valuation committee; and
    Our board of directors will determine the fair value of each
    investment in our portfolio in good faith after considering the
    input of the valuation committee and Duff & Phelps, LLC.    Determinations
    in Connection with Offerings
    
    the net asset value of our common stock disclosed in the most
    recent periodic report we filed with the SEC;
    our managements assessment of whether any material change
    in the net asset value of our common stock has occurred
    (including through the realization of gains on the sale of our
    portfolio securities) from the period beginning on the date of
    the most recently disclosed net asset value of our common stock
    to the period ending two days prior to the date of the sale of
    our common stock; and
    the magnitude of the difference between the net asset value of
    our common stock disclosed in the most recent periodic report we
    filed with the SEC and our managements assessment of any
    material change in the net asset value of our common stock since
    the date of the most recently disclosed net asset value of our
    common stock, and the offering price of the shares of our common
    stock in the proposed offering.   12




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Competition
    Employees
    ITEM 1A.
    Risk
    Factors Risk
    Factors  Investing in our common stock involves a number of
    significant risks. We cannot assure you that we will achieve our
    investment objective. You should consider carefully the risks
    described below and all other information contained in this
    annual report on
    Form 10-K,
    including our financial statements and the related notes.
  We
    commenced investment operations in 2003 and, as a result, have a
    limited operating history.
    We are
    dependent upon our key investment personnel for our future
    success.
   13




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Our
    management team has limited experience managing a business
    development company.
    Our
    business model depends to a significant extent upon strong
    referral relationships with private equity sponsors, and our
    inability to maintain or develop these relationships, or the
    failure of these relationships to generate investment
    opportunities, could adversely affect our
    business.
    We
    operate in a highly competitive market for investment
    opportunities.
     14




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Regulations
    governing our operation as a business development company will
    affect our ability to, and the way in which we, raise additional
    capital.
    Senior Securities and Other Indebtedness. and/or
  
    Under the provisions of the 1940 Act, we will be permitted, as a
    business development company, to issue senior securities only in
    amounts such that our asset coverage, as defined in the 1940
    Act, equals at least 200% after each issuance of senior
    securities. If the value of our assets declines, we may be
    unable to satisfy this test. If that happens, we may be required
    to sell a portion of our investments and, depending on the
    nature of our leverage, repay a portion of our debt at a time
    when such sales
    and/or
    repayments may be disadvantageous.
    Any amounts that we use to service our debt or make payments on
    preferred stock will not be available for dividends to our
    common stockholders.
    It is likely that any senior securities or other indebtedness we
    issue will be governed by an indenture or other instrument
    containing covenants restricting our operating flexibility.
    Additionally, some of these securities or other indebtedness may
    be rated by rating agencies, and in obtaining a rating for such
    securities and other indebtedness, we may be required to abide
    by operating and investment guidelines that further restrict
    operating and financial flexibility.
    We and, indirectly, our stockholders will bear the cost of
    issuing and servicing such securities and other indebtedness.
    Preferred stock or any convertible or exchangeable securities
    that we issue in the future may have rights, preferences and
    privileges more favorable than those of our common stock,
    including separate voting rights and could delay or prevent a
    transaction or a change in control to the detriment of the
    holders of our common stock.  Additional Common Stock.
  Securitization of Loans.
 15




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The
    agreements governing our securitization revolving credit
    facility contain various covenants that, among other things,
    limit our discretion in operating our business and provide for
    certain minimum financial covenants.
      We
    will be subject to corporate-level income tax if we are unable
    to qualify as a RIC under Subchapter M of the
    Code.
    
    The annual distribution requirement for a RIC will be satisfied
    if we distribute to our stockholders on an annual basis at least
    90% of our net ordinary income and realized net short-term
    capital gains in excess of realized net long-term capital
    losses, if any. Because we use debt financing, we are subject to
    certain asset coverage ratio requirements under the 1940 Act and
    financial covenants under loan and credit agreements that could,
    under certain circumstances, restrict us from making
    distributions necessary to satisfy the distribution requirement.
    If we are unable to obtain cash from other sources, we could
    fail to qualify for RIC tax treatment and thus become subject to
    corporate-level income tax.
    The income source requirement will be satisfied if we obtain at
    least 90% of our income for each year from dividends, interest,
    gains from the sale of stock or securities or similar sources.
    The asset diversification requirement will be satisfied if we
    meet certain asset diversification requirements at the end of
    each quarter of our taxable year. Failure to meet those
    requirements may result in our having to dispose of certain
    investments quickly, obtain additional debt or equity capital or
    take other actions in order to prevent the loss of RIC status.
    Because most of our investments will be in private companies,
    and therefore will be relatively illiquid, any dispositions of
    investments could be made at disadvantageous prices and could
    result in substantial losses. Other alternatives could also have
    associated costs or disadvantages.    We may
    have difficulty paying our required distributions if we
    recognize income before or without receiving cash representing
    such income.
  payment-in-kind payment-in-kind
 16




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and/or
  Because
    we intend to distribute substantially all of our income to our
    stockholders in connection with our election to be treated as a
    RIC, we will continue to need additional capital to finance our
    growth. If additional funds are unavailable or not available on
    favorable terms, our ability to grow will be
    impaired.
    We
    borrow money, which magnifies the potential for gain or loss on
    amounts invested and may increase the risk of investing in
    us.
    Changes
    in interest rates may affect our cost of capital and net
    investment income.
   17




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A
    significant portion of our investment portfolio is and will
    continue to be recorded at fair value as determined in good
    faith by our board of directors and, as a result, there is and
    will continue to be uncertainty as to the value of our portfolio
    investments.
    The
    lack of liquidity in our investments may adversely affect our
    business.
    We may
    experience fluctuations in our quarterly results.
    Our
    financial condition and results of operations will depend on our
    ability to manage growth effectively.
   18




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Our
    ability to enter into transactions with our affiliates will be
    restricted.
    Changes
    in laws or regulations governing our operations may adversely
    affect our business.
    Our
    board of directors may change our operating policies and
    strategies without prior notice or stockholder approval, the
    effects of which may be adverse.
    Our
    investments in portfolio companies may be risky, and we could
    lose all or part of our investment.
    
    may have limited financial resources and may be unable to meet
    their obligations under their debt instruments that we hold,
    which may be accompanied by a deterioration in the value of any
    collateral and a reduction in the likelihood of us realizing any
    guarantees that we may have obtained in connection with our
    investment;
    may have shorter operating histories, narrower product lines and
    smaller market shares than larger businesses, which tend to
    render them more vulnerable to competitors actions and
    market conditions, as well as general economic downturns;
    are more likely to depend on the management talents and efforts
    of a small group of persons; therefore, the death, disability,
    resignation or termination of one or more of these persons could
    have a material adverse impact on our portfolio company and, in
    turn, on us;
    generally have less predictable operating results, may from time
    to time be parties to litigation, may be engaged in rapidly
    changing businesses with products subject to a substantial risk
    of obsolescence, and 19




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may require substantial additional capital to support their
    operations, finance expansion or maintain their competitive
    position. In addition, our executive officers and directors may,
    in the ordinary course of business, be named as defendants in
    litigation arising from our investments in the portfolio
    companies; and  
    generally have less publicly available information about their
    businesses, operations and financial condition. We are required
    to rely on the ability of our management team and investment
    professionals to obtain adequate information to evaluate the
    potential returns from investing in these companies. If we are
    unable to uncover all material information about these
    companies, we may not make a fully informed investment decision,
    and may lose all or part of our investment.  Our
    portfolio is and may continue to be concentrated in a limited
    number of portfolio companies and industries, which will subject
    us to a risk of significant loss if any of these companies
    defaults on its obligations under any of its debt instruments or
    by a downturn in the particular industry.
    Our
    portfolio companies may incur debt that ranks equally with, or
    senior to, our investments in such companies.
    There
    may be circumstances where our debt investments could be
    subordinated to claims of other creditors or we could be subject
    to lender liability claims.
   20




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We may
    not control any of our portfolio companies.
    Economic
    recessions or downturns could impair our portfolio companies and
    harm our operating results.
    Defaults
    by our portfolio companies will harm our operating
    results.
    Prepayments
    of our debt investments by our portfolio companies could
    adversely impact our results of operations and reduce our return
    on equity.
    We may
    not realize gains from our equity investments.
    If our
    primary investments are deemed not to be qualifying assets, we
    could be precluded from investing in the manner described in
    this annual report on Form
    10-K or
    deemed to be in violation of the 1940 Act.
   21




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##### 



Form 10-K
  There
    is a risk that you may not receive dividends or that our
    dividends may not grow over time.
  year-to-year
  Investing
    in our shares may involve an above average degree of
    risk.
    One of
    our current stockholders has significant influence over our
    management and affairs.
   22




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##### 



The
    market price of our common stock may fluctuate
    significantly.
    
    significant volatility in the market price and trading volume of
    securities of business development companies or other companies
    in our sector, which are not necessarily related to the
    operating performance of these companies;
    changes in regulatory policies or tax guidelines, particularly
    with respect to RICs or business development companies;
    loss of RIC status;
    changes in earnings or variations in operating results;
    changes in the value of our portfolio of investments;
    any shortfall in revenue or net income or any increase in losses
    from levels expected by investors or securities analysts;
    departure of our key personnel;
    operating performance of companies comparable to us;
    general economic trends and other external factors; and
    loss of a major funding source.  Terrorist
    attacks, acts of war or national disasters may affect any market
    for our common stock, impact the businesses in which we invest
    and harm our business operating results and financial
    condition.
    Certain
    provisions of our restated certificate of incorporation and
    restated bylaws as well as the Delaware General Corporation Law
    could deter takeover attempts and have an adverse impact on the
    price of our common stock.
    Item 1B.
    Unresolved
    Staff Comments    Item 2.
    Properties     Item 3.
    Legal
    Proceedings   23




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##### 



Item 4.
    Submission
    of Matters to a Vote of Security Holders    PART II  Item 5.
    Market
    for Registrants Common Equity, Related Stockholder
    Matters, and Issuer Purchases of Equity Securities  Price
    Range of Common Stock
    High


LowFiscal year 2005Third quarter (from July 28,
    2005)

$
14.33


$
13.72Fourth quarter

$
13.56


$
10.77     Sales of
    Unregistered Securities
    Dividends
        Date Declared

Record Date

Payment Date

AmountFebruary 28, 2006

March 21, 2006

April 11, 2006

$
0.29November 8, 2005

November 30, 2005

December 30, 2005

$
0.27September 7, 2005

September 30, 2005

October 31, 2005

$
0.16Total Declared





$
0.72    24




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##### 



Securities
    Authorized For Issuance Under Equity Compensation
    Plans
    Number of SecuritiesRemaining Available forNumber of Securities to be


Weighted-Average


Future Issuance UnderIssued Upon Exercise of


Exercise Price of


Equity Compensation PlansOutstanding Options,


Outstanding Options,


(Excluding SecuritiesPlan Category

Warrants and Rights


Warrants and Rights


Reflected in
    Column(a))(a)


(b)


(c)Equity compensation plans approved
    by security holders










Equity compensation plans not
    approved by security holders


1,301,496
(1)

$
14.00



40,252
(1)Total


1,301,496


$
14.00



40,252     (1)
    
    The stock option plan pursuant to which these options were
    issued or are issuable was approved by our stockholders prior to
    our initial public offering.  Stock
    Option Plan
         25




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##### 



Item 6.
    Selected
    Financial Data    Year Ended
    December 31,Income Statement Data

2005


2004


2003Investment Income:Interest income

$
13,035,673


$
4,616,665


$
253,755Fees


413,669



241,870



5,274Total Investment Income


13,449,342



4,858,535



259,029Expenses:Salaries and benefits


2,481,761



1,326,576



835,600Consulting fees (1)


554,796



1,000,000



916,666Interest (2)


3,517,989



1,489,198



201,331Professional fees


492,830



192,938



290,822Prepayment penalty


3,395,335







General and administrative


1,278,750



243,008



164,032Total Expenses


11,721,461



4,251,720



2,408,451Net investment income (loss)


1,727,881



606,815



(2,149,422
)Net unrealized depreciation on
    investments


(2,965,175
)


(876,021
)


Net loss

$
(1,237,294
)

$
(269,206
)

$
(2,149,422
)Loss per share, basic and diluted

$
(0.17
)

$
(0.07
)

$
(0.56
)Weighted average shares
    outstanding, basic and diluted


7,253,632



3,847,902



3,847,902Balance Sheet Data:Total investments, net of unearned
    income

$
137,951,659


$
65,603,830


$
28,687,831Total assets


150,655,993



72,038,863



35,116,998Total debt outstanding


21,650,000



42,645,458



9,400,000Stockholders equity


127,152,365



27,311,918



24,531,124Net asset value per common share

$
10.48


$
7.10


$
6.38Other Data:Weighted average yield on debt
    investments (3)


13.5
%


12.6
%


11.2
%Number of portfolio companies


15



9



3Number of employees


9



6



5     (1)
    
    On July 27, 2005, we terminated the consulting agreements
    pursuant to which we incurred these fees.(2)
    
    Our capital structure at December 31, 2004 reflected a
    higher percentage of leverage than we are permitted to maintain
    as a business development company. We used a portion of the net
    proceeds we received from our initial public offering to repay
    all of our outstanding indebtedness. We are generally only
    allowed to borrow amounts such that our asset coverage, as
    defined in the Investment Company Act of 1940, equals at least
    200% after such borrowing. 26




---



##### 



(3)
    
    Computed using actual interest income earned for the fiscal
    year, including amortization of loan fees and original issue
    discount, divided by the weighted average fair value of debt
    investments.  Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  Form 10-K.
  Form 10-K
  Form 10-K Form 10-K, Form 10-K, Form 10-Q Form 8-K.
  General
    U.S.-based
   27




---



##### 



Portfolio
    Composition
      December 31,


December 31,2005


2004Beginning portfolio at fair value

$
67,677,751


$
29,942,861Originations/draws/purchases


88,850,000



42,850,000Originations/warrants received on
    equity


575,490



92,128Early pay-offs/sales of investments


(14,572,867
)


(5,025,375
)Increase in
    payment-in-kind
    interest


1,825,755



694,158Decrease in fair value of
    investments


(2,965,175
)


(876,021
)Ending portfolio at fair value

$
141,390,954


$
67,677,751       December 31, 2005


December 31, 2004Investments at


Percentage of


Investments at


Percentage ofFair Value


Total Portfolio


Fair Value


Total PortfolioSenior secured revolving line of
    credit

$
250,000



0.2
%

$
2,000,000



2.9
%Senior secured term loans


62,802,077



44.4



12,960,608



19.2Junior secured term loans


21,704,625



15.3



16,174,625



23.9Senior subordinated debt


55,638,952



39.4



36,110,690



53.4Warrants to purchase common stock


995,300



0.7



431,828



0.6Totals

$
141,390,954



100.0
%

$
67,677,751



100.0
%    28




---



##### 



December 31, 2005


December 31, 2004Cost


%(1)


Fair Value


%(1)


Cost


%(1)


Fair Value


%(1)Manufacturing

$
74,921,696



51.6
%

$
71,172,168



50.3
%

$
34,615,503



50.5
%

$
33,749,782



49.9
%Distribution


3,850,000



2.6



3,850,000



2.7















Service


16,901,343



11.6



16,654,743



11.8



17,723,698



25.9



17,723,698



26.2Consumer/Retail Goods


31,580,928



21.8



31,606,328



22.4



10,226,835



14.9



10,221,835



15.1Publishing


3,515,015



2.4



3,533,915



2.5



3,931,608



5.7



3,926,308



5.8Defense


14,463,168



10.0



14,573,800



10.3



2,056,128



3.0



2,056,128



3.0Total

$
145,232,150



100.0
%

$
141,390,954



100.0
%

$
68,553,772



100.0
%

$
67,677,751



100.0
%     (1)
    
    Represents percentage of total portfolio.      Portfolio
    Asset Quality
  and/or
 29




---



##### 



December 31, 2005


December 31, 2004Debt





DebtInvestments at


Percentage of


Investments at


Percentage ofInvestment Rating

Fair Value


Total Portfolio


Fair Value


Total Portfolio1

$
16,069,312



11.5
%

$
21,274,306



31.6
%2


102,189,918



72.8



38,911,617



57.93


20,136,424



14.3



7,060,000



10.54


2,000,000



1.4







5














Totals

$
140,395,654



100.0
%

$
67,245,923



100.0
%   payment-in-kind and/or
  Loans and
    Debt Securities on Non-Accrual Status
    Results
    of Operations
    Comparison
    of the year ended December 31, 2005 and December 31,
    2004
  Total
    Investment Income
    payment-in-kind
 30




---



##### 



Expenses
        Net
    Change in Unrealized Appreciation or Depreciation on
    Investments
     31




---



##### 



and/or
    (Earnings Before
    Interest, Taxes, Depreciation and Amortization)
          Net
    Loss from Operations
   32




---



##### 



Comparison
    of the year ended December 31, 2004 and December 31,
    2003
  Total
    Investment Income
    payment-in-kind
    Expenses
        Net
    Unrealized Appreciation (Depreciation) on
    Investments
    Net
    Loss from Operations
   33




---



##### 



Financial
    Condition, Liquidity and Capital Resources
  Cash,
    Cash Equivalents and Restricted Cash
      Liquidity
    and Capital Resources
       34




---



##### 



Borrowings
  Credit Agreement.
  Revolving Credit Agreement.
  Demand Note.
  Securitization Revolving Credit Facility.
  Regulated
    Investment Company Status and Dividends
   35




---



##### 



Off-Balance
    Sheet Arrangements
   36




---



##### 



Contractual
    Obligations
    Payments Due by PeriodMore ThanContractual
    Obligations

2006


2007


2008


2009


2010


5 YearsLong-term debt obligations (1)

$



$



$
21,650,000


$



$



$
Capital lease obligations






















Operating lease obligations


223,963



231,247



237,261



241,035



247,147



20,769Purchase obligations






















Other long-term liabilities
    reflected on the balance sheet under GAAP






















Unused lending commitments (2)


8,750,000



















Total

$
8,973,963


$
231,247


$
21,887,261


$
241,035


$
247,147


$
20,769     (1)
    
    The term of our Securitization Facility is three years ending in
    July 2008. The Securitization Facility contains provisions for
    the payment of an outstanding balance in full upon maturity.(2)
    
    Represents the unfunded lending commitment in connection with
    outstanding revolving lines of credit.  Recent
    Developments
        Related
    Party Transactions
   37




---



##### 



Critical
    Accounting Policies
    Valuation
    of Portfolio Investments
       38




---



##### 



Fee
    Income Recognition
  Issue 00-21 (EITF 00-21). EITF 00-21 EITF 00-21 states
  Payment-in-Kind
    or PIK Interest
  payment-in-kind
 39




---



##### 



Fiscal YearEndedDecember 31,2005Beginning PIK loan balance

$
727,087PIK interest earned during the
    period


1,825,755PIK payments during the period


(377,868
)Ending PIK loan balance

$
2,174,974     Interest
    Income Recognition
    Item 7A.
    Quantitative
    and Qualitative Disclosure About Market Risk     40




---



##### 



Item 8.
    Financial
    Statements and Supplementary Data  Index to
    Consolidated Financial Statements
  Documents

PageReport of
    Independent Registered Public Accounting Firm


42Consolidated
    Balance Sheets at December 31, 2005 and 2004


43Consolidated
    Statements of Operations for the years ended December 31,
    2005, 2004 and 2003


44Consolidated
    Statements of Cash Flows for the years ended December 31,
    2005, 2004 and 2003


45Consolidated
    Statements of Stockholders Equity for the years ended
    December 31, 2005, 2004 and 2003


46Consolidated
    Schedule of Investments at December 31, 2005 and 2004


47Notes to
    Consolidated Financial Statements


50  41




---



##### 



Report of
    Independent Registered Public Accounting Firm               42




---



##### 



PATRIOT
    CAPITAL FUNDING, INC.
  Consolidated Balance Sheets
  December 31,2005


2004ASSETSInvestments at fair value:Investments in debt securities
    (cost of $144,154,600  2005,
    $68,051,712  2004)

$
140,395,654


$
67,245,923Investments in equity securities
    (cost of $1,077,550  2005,
    $502,060  2004)


995,300



431,828Unearned income


(3,439,295
)


(2,073,921
)Total investments


137,951,659



65,603,830Cash and cash equivalents


2,371,841



2,491,477Restricted cash


7,806,328



3,000,000Interest receivable


867,475



615,243Other assets


1,658,690



328,313TOTAL ASSETS

$
150,655,993


$
72,038,863LIABILITIES AND
    STOCKHOLDERS EQUITYLIABILITIESBorrowings

$
21,650,000


$
41,645,458Notes payable






1,000,000Interest payable


60,334



283,096Management fee payable






916,666Accounts payable, accrued expenses
    and other


1,793,294



881,725TOTAL LIABILITIES


23,503,628



44,726,945STOCKHOLDERS EQUITYCommon stock, $0.01 par
    value, 49,000,000 shares authorized; 12,136,655 shares
    issued and outstanding at December 31, 2005; and
    3,847,902 shares authorized, issued and outstanding at
    December 31, 2004


121,367



38,479Paid-in-capital


136,267,552



30,061,521Accumulated net investment loss


(5,395,358
)


(1,912,061
)Net unrealized depreciation on
    investments


(3,841,196
)


(876,021
)TOTAL STOCKHOLDERS EQUITY


127,152,365



27,311,918TOTAL LIABILITIES AND
    STOCKHOLDERS EQUITY

$
150,655,993


$
72,038,863NET ASSET VALUE PER COMMON SHARE

$
10.48


$
7.10    43




---



##### 



PATRIOT
    CAPITAL FUNDING, INC.
  Consolidated Statements of Operations
  Year Ended
    December 31,2005


2004


2003INVESTMENT INCOMEInterest income

$
13,035,673


$
4,616,665


$
253,755Fees


413,669



241,870



5,274Total Investment Income


13,449,342



4,858,535



259,029EXPENSESSalaries and benefits


2,481,761



1,326,576



835,600Consulting fees


554,796



1,000,000



916,666Interest


3,517,989



1,489,198



201,331Professional fees


492,830



192,938



290,822Prepayment penalty


3,395,335







General and administrative


1,278,750



243,008



164,032Total Expenses


11,721,461



4,251,720



2,408,451Net Investment Income (Loss)


1,727,881



606,815



(2,149,422
)NET INCREASE IN UNREALIZED
    DEPRECIATION ON INVESTMENTS


(2,965,175
)


(876,021
)


NET LOSS

$
(1,237,294
)

$
(269,206
)

$
(2,149,422
)Loss per share, basic and diluted

$
(0.17
)

$
(0.07
)

$
(0.56
)Weighted average shares
    outstanding, basic and diluted


7,253,632



3,847,902



3,847,902    44




---



##### 



PATRIOT
    CAPITAL FUNDING, INC.
  Consolidated Statements of Cash Flows
  Year Ended
    December 31,2005


2004


2003CASH FLOWS FROM OPERATING
    ACTIVITIES:Net loss

$
(1,237,294
)

$
(269,206
)

$
(2,149,422
)Adjustments to reconcile net loss
    to net cash provided by (used for) operating activities:Depreciation and amortization


192,785



21,343



15,960Increase in interest receivable


(252,232
)


(565,681
)


(49,562
)Increase in unrealized
    depreciation on investments


2,965,175



876,021



Payment-in-kind
    interest


(1,825,755
)


(694,158
)


(32,929
)Increase in unearned income


789,884



726,763



845,098Change in interest payable


(222,762
)


81,765



201,331Change in management fee payable


(916,666
)


500,000



416,666Change in other assets


(83,849
)


(200,129
)


62,600Change in accounts payable,
    accrued expenses and other


911,569



313,848



40,141Net cash provided by (used for)
    operating activities


320,855



790,566



(650,117
)CASH FLOWS FROM INVESTING
    ACTIVITIES:Funded investments


(88,850,000
)


(42,850,000
)


(29,500,000
)Principal repayments on investments


14,572,867



3,025,375



Proceeds from investment sales






2,000,000



Purchase of furniture and equipment


(235,057
)


(15,903
)


(7,384
)Net cash used for investing
    activities


(74,512,190
)


(37,840,528
)


(29,507,384
)CASH FLOWS FROM FINANCING
    ACTIVITIES:Borrowings


68,900,000



38,259,092



9,300,000Repayments on borrowings


(89,895,458
)


(5,013,634
)


Net proceeds from sale of common
    stock


106,288,919



3,050,000



26,950,000Decrease (increase) in restricted
    cash


(4,806,328
)


2,000,000



(5,000,000
)Dividends paid


(5,211,178
)






Deferred financing costs


(1,204,256
)






Net cash provided by financing
    activities


74,071,699



38,295,458



31,250,000NET INCREASE (DECREASE) IN CASH
    AND CASH EQUIVALENTS


(119,636
)


1,245,496



1,092,499CASH AND CASH EQUIVALENTS AT:Beginning of year


2,491,477



1,245,981



153,482End of year

$
2,371,841


$
2,491,477


$
1,245,981Supplemental information:Interest paid

$
3,436,464


$
1,407,433


$
    45




---



##### 



PATRIOT
    CAPITAL FUNDING, INC.
 Consolidated
    Statements of Stockholders Equity  AccumulatedInvestment


Net Unrealized


TotalCommon


Paid-in


Income


Depreciation


StockholdersStock


Capital


(Loss)


on Investments


EquityBalance, December 31, 2002

$
38,479


$
61,521


$
(369,454
)

$



$
(269,454
)Capital contributions






26,950,000











26,950,000Net loss










(2,149,422
)






(2,149,422
)Balance, December 31, 2003


38,479



27,011,521



(2,518,876
)






24,531,124Capital contributions






3,050,000











3,050,000Net income (loss)










606,815



(876,021
)


(269,206
)Balance, December 31, 2004


38,479



30,061,521



(1,912,061
)


(876,021
)


27,311,918Sale of common stock, net of
    offering expenses of $9.8 million


82,691



105,963,491











106,046,182Shares issued in connection with
    dividend reinvestment


197



242,540











242,737Dividends paid ($0.43 per
    common share)










(5,211,178
)






(5,211,178
)Net income (loss)










1,727,881



(2,965,175
)


(1,237,294
)Balance, December 31, 2005

$
121,367


$
136,267,552


$
(5,395,358
)

$
(3,841,196
)

$
127,152,365    46




---



##### 



PATRIOT
    CAPITAL FUNDING, INC.
 Consolidated Schedule of Investments
    December 31, 2005
  Company(1)

Industry

Investment

Principal


Cost


Fair Value(3)Agent Media Corporation

Publisher of insurance 
    industry periodicals

Senior Secured Term Loan A 
    (11.8%, Due 9/08)

$
1,375,000


$
1,375,000


$
1,375,000Senior Secured Term
    Loan B (2) 
    (16.0%, Due 9/09)


2,109,015



2,109,015



2,109,015Common Stock Warrants, Less than
    
    5% of Co.(4)






31,000



49,900Allied Defense Group, Inc.

Diversified defense company

Senior Secured Term Loan 
    (11.5%, Due 11/10)


14,000,000



14,000,000



14,000,000Common Stock Warrants, Less than
    
    5% of Co.(4)






463,168



573,800Borga, Inc.

Manufacturer of pre-fabricated
    metal 
    building systems

Senior Secured Term Loan A 
    (7.7%, Due 3/09)


2,046,000



2,046,000



2,046,000Senior Secured Term Loan B 
    (10.7%, Due 5/10)


1,835,250



1,835,250



1,835,250Senior Secured Term
    Loan C (2)
    (16.0%, Due 5/10)


7,188,062



7,188,062



7,188,062Common Stock Warrants, Less than
    
    5% of Co.(4)






20,250



89,600Copperhead Chemical
    Company, Inc.

Manufacturer of 
    bulk pharmaceuticals

Senior Subordinated
    Debt (2)
    (15.3%, Due 11/10)


4,668,608



4,668,608



4,668,608Dover Saddlery, Inc.

Equestrian products
    catalog retailer

Senior Subordinated
    Debt (2)
    (11.5%, Due 9/09)


3,000,000



3,000,000



3,000,000Common Stock Warrants, Less than
    
    5% of Co.(4)






148,200



178,600Eight OClock Coffee

Leading manufacturer, distributor,
    
    and marketer of coffee

Junior Secured Term Loan
    (11.4%, Due 11/12)


6,500,000



6,500,000



6,500,000Encore Legal Solutions, Inc.

Legal document 
    management services

Junior Secured Term Loan A
    (9.8%, Due 12/08)


4,660,000



4,660,000



4,660,000Junior Secured Term Loan B
    (8.3%, Due 12/09)


6,944,625



6,944,625



6,944,625Senior Subordinated
    Debt (2)
    (15.0%, Due 5/10)


4,946,718



4,946,718



4,946,718Common Stock Warrants, Less than
    
    5% of Co.(4)






350,000



103,400Fairchild Industrial Products,
    Co.

Manufacturer of industrial
    controls
    and power transmission products

Senior Secured Term Loan A
    (8.0%, Due 7/10)


9,670,000



9,670,000



9,670,000Senior Secured Term Loan B
    (10.0%, Due 7/11)


2,818,750



2,818,750



2,818,750Senior Subordinated Debt 
    (15.5%, Due 7/11)


5,355,000



5,355,000



5,355,000Interstate Highway Sign 
    Corporation

Manufacturer of 
    highway and

Senior Secured Term Loan 
    (10.5%, Due 12/09)


1,360,000



1,360,000



1,360,000roadway signs

Senior Subordinated Debt (2)
    
    (18.0%, Due 12/09)


5,837,409



5,758,946



2,000,000Common Stock Warrants, Less than
    
    5% of Co.(4)






59,932



Keltner Enterprises, LLC (5)

Manufacturer of automotive
    oils, chemicals and parts

Senior Subordinated Debt (2)
    
    (14.0%, Due 12/11)


3,850,000



3,850,000



3,850,000L.A. Spas, Inc.

Manufacturer of above 
    ground spas

Senior Subordinated Debt (2)
    
    (15.5%, Due 1/10)


6,776,424



6,776,424



6,776,424Common Stock Warrants, Less than
    
    5% of Co.(4)






5,000



Prince Mineral Company, 
    Inc.

Manufacturer of 
    pigments

Junior Secured Term Loan 
    (11.0%, Due 3/11)


3,600,000



3,600,000



3,600,000Senior Subordinated
    Debt (2)
    (17.0%, Due 9/11)


10,228,579



10,228,579



10,228,579 47




---



##### 



Company(1)

Industry

Investment

Principal


Cost


Fair Value(3)Quartermaster, Inc.

Retailer of uniforms and tactical
    
    equipment to law enforcement

Revolving Line of Credit
    (9.5%, Due 12/10)


250,000



250,000



250,000and security professionals

Senior Secured Term Loan A 
    (9.2%, Due 12/10)


6,000,000



6,000,000



6,000,000Senior Secured Term Loan B 
    (10.4%, Due 12/10)


2,600,000



2,600,000



2,600,000Senior Secured Term
    Loan C (2) 
    (15.0%, Due 12/11)


3,104,133



3,104,133



3,104,133Robert Rothschild Farm, Inc.

Manufacturer of 
    specialty food products

Senior Secured Term Loan B 
    (8.5%, Due 7/10)


5,000,000



5,000,000



5,000,000Senior Subordinated Debt (2)
    
    (16.3%, Due 1/12)


4,697,171



4,697,171



4,697,171R-O-M Corporation

Manufacturer of doors,
    ramps and bulk

Senior Secured Term Loan A 
    (8.8%, Due 12/09)


3,400,000



3,400,000



3,400,000heads for fire trucks 
    and food transportation

Senior Secured Term Loan B 
    (9.8%, Due 12/10)


3,400,000



3,400,000



3,400,000Senior Subordinated Debt (2)
    
    (16.0%, Due 12/10)


7,012,319



7,012,319



7,012,319Total Investments










145,232,150



141,390,954Unearned Income










(3,439,295
)


(3,439,295
)Total Investments Net of 
    Unearned Income









$
141,792,855


$
137,951,659    (1)
    
    The Company does not control, and is not an
    affiliate of, any of our portfolio companies, each
    as defined in the Investment Company Act of 1940, as amended
    (the 1940 Act). In general, under the 1940 Act, the
    Company would control a portfolio company if the
    Company owned 25% or more of its voting securities and would be
    an affiliate of a portfolio company if the Company
    owned 5% or more of its voting securities.(2)
    
    Principal amount includes
    payment-in-kind
    (PIK) interest. Refer to Note 2, Summary of
    Significant Accounting Policies.(3)
    
    Fair value is determined in good faith by the Companys
    board of directors.(4)
    
    Non-income producing.(5)
    
    Some of the investments listed are issued by an affiliate of the
    listed portfolio company.   48




---



##### 



PATRIOT
    CAPITAL FUNDING, INC.
    Consolidated Schedule of Investments
    December 31, 2004
  Company(1)

Industry

Investment

Principal


Cost


Fair Value(3)Agent Media Corporation

Publisher of insurance 
    industry periodicals

Senior Secured Term Loan A
    (9.8%, Due 9/08)

$
1,875,000


$
1,875,000


$
1,875,000Senior Secured Term Loan B(2)
    (16.0%, Due 9/09)2,025,608



2,025,608



2,025,608Common Stock Warrants, Less than 5%
    of Co.(4)31,000



25,700Allied Defense Group, Inc.

Diversified defense
    company

Senior Secured Acquisition Line of
    Credit (11.5%, Due 11/10)


2,000,000



2,000,000



2,000,000Common Stock Warrants, Less than 5%
    of Co.(4)56,128



56,128Copperhead Chemical 
    Company, Inc.

Manufacturer of 
    bulk pharmaceuticals

Senior Subordinated Debt(2) (15.3%,
    Due 11/10)


4,517,482



4,517,482



4,517,482Dover Saddlery, Inc.

Equestrian products
    catalog retailer

Senior Subordinated Debt(2) (17.3%,
    Due 3/07)


3,681,328



3,681,328



3,681,328Encore Legal Solutions, 
    Inc.

Legal document
    management services

Junior Secured Term Loan A
    (7.4%, Due 12/08)


5,560,000



5,560,000



5,560,000Junior Secured Term Loan B
    (8.3%, Due 12/09)7,014,625



7,014,625



7,014,625Senior Subordinated Debt(2) (15.0%,
    Due 5/10)4,799,073



4,799,073



4,799,073Common Stock Warrants, Less than 5%
    of Co.(4)350,000



350,000Interstate Highway Sign 
    Corporation

Manufacturer of 
    highway and roadway signs

Senior Secured Term Loan (7.4%, Due
    12/09)


2,260,000



2,260,000



2,260,000Senior Subordinated Debt(2) (16.0%,
    Due 12/09)5,605,789



5,605,789



4,800,000Common Stock Warrants, Less than 5%
    of Co.(4)59,932



L.A. Spas, Inc.

Manufacturer of above
    ground spas

Senior Subordinated Debt(2) (15.5%,
    Due 1/10)


6,540,507



6,540,507



6,540,507Common Stock Warrants, Less than 5%
    of Co.(4)5,000



Prince Mineral Company, 
    Inc.

Manufacturer of 
    pigments

Junior Secured Term Loan (10.3%,
    Due 9/10)


3,600,000



3,600,000



3,600,000Senior Subordinated Debt(2) (17.0%,
    Due 5/11)4,965,500



4,965,500



4,965,500R-O-M Corporation

Manufacturer of 
    doors, ramps and

Senior Secured Term Loan A
    (7.5%, Due 12/09)


3,400,000



3,400,000



3,400,000Bulk heads for fire
    trucks and food

Senior Secured Term Loan B
    (8.5%, Due 12/10)


3,400,000



3,400,000



3,400,000transportation

Senior Subordinated Debt(2) (16.0%,
    Due 12/10)6,806,800



6,806,800



6,806,800Total Investments










68,553,772



67,677,751Unearned Income










(2,073,921
)


(2,073,921
)Total Investments Net of
    Unearned Income









$
66,479,851


$
65,603,830    (1)
    
    The Company does not control, and is not an
    Affiliate of, any of our portfolio companies, each
    as defined in the Investment Company Act of 1940, as amended
    (the 1940 Act). In general, under the 1940 Act, the
    Company would control a portfolio company if the
    Company owned 25% or more of its voting securities and would be
    an affiliate of a portfolio company if the Company
    owned 5% or more of its voting securities.(2)
    
    Amount includes
    payment-in-kind
    (PIK) interest. Refer to Note 2, Summary of
    Significant Accounting Policies.(3)
    
    Fair value is determined in good faith by the Companys
    board of directors.(4)
    
    Non-income producing.   49




---



##### 



Patriot
    Capital Funding, Inc.
  Notes
    to Consolidated Financial Statements
  Note 1.
    Organization    U.S.-based
  Note 2.
    Summary
    of Significant Accounting Policies  Basis
    of Presentation
        Use of
    Estimates
    Cash
    and Cash Equivalents
   50




---



##### 



Patriot
    Capital Funding, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
   Restricted
    Cash
    Concentration
    of Credit Risk
    Investment
    Valuation
           51




---



##### 



Patriot
    Capital Funding, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
   Property,
    Equipment and Leasehold Improvements
    Debt
    Issuance Costs
    Interest
    Income Recognition
      Fee
    Income Recognition
   52




---



##### 



Patriot
    Capital Funding, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
    Issue 00-21 (EITF 00-21). EITF 00-21
      2005


2004Beginning unearned income balance

$
2,073,921


$
1,255,030Fees received


1,497,541



1,175,483Warrants received


575,490



92,128Unearned income recognized


(707,657
)


(448,720
)Ending unearned income balance

$
3,439,295


$
2,073,921   Payment
    in Kind Interest
      2005


2004Beginning of period PIK loan
    balance

$
727,087


$
32,929PIK interest earned during the year


1,825,755



694,158Payments received during the year


(377,868
)


Ending PIK loan balance

$
2,174,974


$
727,087    53




---



##### 



Patriot
    Capital Funding, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
   Realized
    Gain or Loss and Unrealized Appreciation or Depreciation of
    Investments
    Stock
    Options
  ten-year
  Accounting for Stock Issued to
    Employees. Accounting for Stock-based
    Compensation Accounting for Stock-Based
    Compensation  Transition and
    Disclosure
    For the Year EndedDecember 31, 2005Net loss, as reported

$
(1,237,294
)Deduct: Total stock-based
    compensation expense determined under fair value based method
    for all awards


162,687Pro forma net loss

$
(1,399,981
)Loss per share, as
    reported  basic and diluted

$
(0.17
)Loss per share, pro
    forma  basic and diluted

$
(0.19
)     Management
    Fees
   54




---



##### 



Patriot
    Capital Funding, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
    Federal
    Income Taxes
    Dividends
    Recent
    Accounting Pronouncements
     55




---



##### 



Patriot
    Capital Funding, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
   Note 3.
    Investments    December 31, 2005


December 31, 2004Cost


Fair Value


Cost


Fair ValueCommercial loans

$
144,154,600


$
140,395,654


$
68,051,712


$
67,245,923Investments in equity securities


1,077,550



995,300



502,060



431,828Subtotal


145,232,150



141,390,954



68,553,772



67,677,751Unearned income


(3,439,295
)


(3,439,295
)


(2,073,921
)


(2,073,921
)Total

$
141,792,855


$
137,951,659


$
66,479,851


$
65,603,830         December 31, 2005


December 31, 2004Cost


%(1)


Fair Value


%(1)


Cost


%(1)


Fair Value


%(1)Senior Secured Debt

$
63,052,077



43.4
%

$
63,052,077



44.6
%

$
14,960,608



21.8
%

$
14,960,608



22.1
%Junior Secured Debt


21,704,625



15.0



21,704,625



15.3



16,174,625



23.6



16,174,625



23.9Subordinated Debt


59,397,898



40.9



55,638,952



39.4



36,916,479



53.9



36,110,690



53.4Warrants to Acquire Equity


1,077,550



0.7



995,300



0.7



502,060



0.7



431,828



0.6Total

$
145,232,150



100
%

$
141,390,954



100
%

$
68,553,772



100.0
%

$
67,677,751



100.0
%     (1)
    
    Represents percentage of total portfolio. 56




---



##### 



Patriot
    Capital Funding, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
     December 31, 2005


December 31, 2004Cost


%(1)


Fair Value


%(1)


Cost


%(1)


Fair Value


%(1)Manufacturing

$
74,921,696



51.6
%

$
71,172,168



50.3
%

$
34,615,503



50.5
%

$
33,749,782



49.9
%Distribution


3,850,000



2.6



3,850,000



2.7















Service


16,901,343



11.6



16,654,743



11.8



17,723,698



25.9



17,723,698



26.2Consumer/ Retail Goods


31,580,928



21.8



31,606,328



22.4



10,226,835



14.9



10,221,835



15.1Publishing


3,515,015



2.4



3,533,915



2.5



3,931,608



5.7



3,926,308



5.8Defense


14,463,168



10.0



14,573,800



10.3



2,056,128



3.0



2,056,128



3.0Total

$
145,232,150



100.0
%

$
141,390,954



100.0
%

$
68,553,772



100.0
%

$
67,677,751



100.0
%     (1)
    
    Represents percentage of total portfolio.  Note 4.
    Borrowings     57




---



##### 



Patriot
    Capital Funding, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
    Note 5.
    Employee
    Benefit Plan    Note 6.
    Common
    Stock Transactions  9,081.7-for-1
       58




---



##### 



Patriot
    Capital Funding, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
   Note 7.
    Per Share
    Data    Year Ended
    December 31,2005


2004


2003Net loss

$
(1,237,294
)

$
(269,206
)

$
(2,149,422
)Weighted average common shares
    outstanding, basic and diluted


7,253,632



3,847,902



3,847,902Loss per common share, basic and
    diluted

$
(0.17
)

$
(0.07
)

$
(0.56
)   Note 8.
    Commitments
    and Contingencies        Note 9.
    Concentrations
    of Credit Risk     59




---



##### 



Patriot
    Capital Funding, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
   Note 10.
    Related
    Party Transactions      Note 11.
    Income
    Taxes       60




---



##### 



Patriot
    Capital Funding, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
   Note 12.
    Financial
    Highlights  For the Year Ended
    December 31,2005


2004


2003Per Share Data:Net asset value at beginning of
    year

$
7.10


$
6.38


$
(.06
)Net investment income (loss)


.24



.16



(.56
)Net change in unrealized
    depreciation on investments


(.41
)


(.23
)


Issuance of common stock


12.83



.79



7.00Dividends from net investment
    income


(.43
)






Dilutive effect of share issuance


(8.85
)






Net asset value at end of year

$
10.48


$
7.10


$
6.38Total Net Asset Value Return (1)


3.7
%


(1.1
)%


n/aPer share market value,
    August 2, 2005

$
14.00Per share market value,
    December 31, 2005

$
12.20Total Market Value Return (2)


(9.8
)%Shares outstanding at end of year


12,136,655



3,847,902



3,847,902Ratios and Supplemental
    Data:Net assets at end of year

$
127,152,365


$
27,311,918


$
24,531,124Average net assets


70,188,079



25,842,218



5,220,562Ratio of operating expenses to
    average net assets


16.7
%


16.5
%


n/aRatio of net investment income
    (loss)to average net assets


2.5
%


2.3
%


n/aWeighted average borrowings
    outstanding

$
30,876,522


$
13,646,506


$
1,653,972Average amount of borrowings per
    share

$
2.54


$
3.55


$
0.43     (1)
    
    The total net asset value return reflects the change in net
    asset value of a share of stock plus dividends from beginning of
    year to end of year. On July 27, 2005, Wilton merged with
    and into the Company and the Company then effected a stock
    split. As a result, the Companys financial statements
    reflect 3,847,902 shares issued and outstanding throughout
    all periods presented prior to August 2, 2005. On
    August 2, 2005, the Company closed its initial public
    offering of 7,190,477 shares of common stock and on
    August 15, 2005, the underwriters exercised their option to
    purchase an additional 1,078,572 shares of common stock.
    The Company made its first investment on November 21, 2003
    and, accordingly, an investment return was not reflected for
    2003, as the Company did not have substantive investment
    operations in 2003.(2)
    
    The total market value return (not annualized) reflects the
    change in the December 31, 2005 market value per share plus
    dividends, divided by the beginning market value per share
    (August 2, 2005). 61




---



##### 



Patriot
    Capital Funding, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
   Note 13.
    Selected
    Quarterly Data (Unaudited)    Year Ended December 31,
    2005Quarter


Quarter


Quarter


QuarterEnded


Ended


Ended


EndedDecember 31


September 30


June 30


March 31Total Investment Income

$
4,550,480


$
3,733,675


$
2,826,950


$
2,338,237Net Investment Income (Loss)


2,865,350



(1,886,469
)


478,232



270,768Net Unrealized Gains (Losses) on
    Investments


115,860



(3,761,046
)


(170,450
)


850,461Net Income (Loss)


2,981,210



(5,647,515
)


307,782



1,121,229Net Income (Loss) Per Share, Basic
    and Diluted

$
0.25


$
(0.62
)

$
0.08


$
0.29Weighted Average
    Shares Outstanding, Basic and Diluted


12,119,313



9,088,353



3,847,902



3,847,902   Year Ended December 31,
    2004Quarter


Quarter


Quarter


QuarterEnded


Ended


Ended


EndedDecember 31


September 30


June 30


March 31Total Investment Income

$
1,784,553


$
1,197,839


$
990,751


$
885,392Net Investment Income (Loss)


(59,621
)


408,503



191,236



66,697Net Unrealized Losses on
    Investments


(876,021
)










Net Income (Loss)


(935,642
)


408,503



191,236



66,697Net Income (Loss) Per Share, Basic
    and Diluted

$
(0.25
)

$
0.11


$
0.05


$
0.02Weighted Average
    Shares Outstanding, Basic and Diluted


3,847,902



3,847,902



3,847,902



3,847,902   Note 14.
    Subsequent
    Events (Unaudited)       62




---



##### 



Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosures    Item 9A.
    Controls
    and Procedures  Disclosure
    Controls and Procedures.
  Form 10-K, Rules 13a-15(e)
  Internal
    Control Over Financial Reporting
  Rule 13-15(f)
  Item 9B.
    Other
    Information   PART III  Item 10.
    Directors
    and Executive Officers of the Registrant    Form 8-K.
  Item 11.
    Executive
    Compensation    Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters   63




---



##### 



Item 13.
    Certain
    Relationships and Related Transactions    Item 14.
    Principal
    Accounting Fees and Services   PART IV  Item 15.
    Exhibits
    and Financial Statement Schedules.                  2.
    No financial statement schedules are filed herewith because
    (i) such schedules are not required or (ii) the
    information required has been presented in the aforementioned
    financial statements.  Regulation S-K.
  Regulation S-K):
  ExhibitNumber

Description of
    Document3
.1

Restated Certificate of
    Incorporation (Incorporated by reference to
    Exhibit (a) (1) filed with Patriot Capital
    Fundings
    Form N-2
    filed with the SEC on July 13, 2005).3
.2

Form of Certificate of Amendment
    to Restated Certificate of Incorporation (Incorporated by
    reference to Exhibit (a) (2) filed with Patriot
    Capital Fundings
    Form N-2
    filed with the SEC on July 27, 2005).3
.3

Restated Bylaws (Incorporated by
    reference to Exhibit (b) filed with Patriot Capital
    Fundings
    Form N-2
    filed with the SEC on July 13, 2005).4
.1

Form of Stock Certificate
    (Incorporated by reference to Exhibit (d) filed with
    Patriot Capital Fundings
    Form N-2
    filed with the SEC on July 13, 2005). 64




---



##### 



ExhibitNumber

Description of
    Document10
.1

Dividend Reinvestment Plan
    (Incorporated by reference to Exhibit (e) filed with
    Patriot Capital Fundings
    Form N-2
    filed with the SEC on July 13, 2005).10
.2

Stock Option Plan (Incorporated by
    reference to Exhibit (i) filed with Patriot Capital
    Fundings
    Form N-2
    filed with the SEC on July 13, 2005).10
.3

Form of Stock Option Agreement for
    Officers (Incorporated by reference to Exhibit (i) (2)
    filed with Patriot Capital Fundings
    Form N-2
    filed with the SEC on July 13, 2005).10
.4

Custodian Agreement with
    U.S. Bank National Association (Incorporated by reference
    to Exhibit (j) filed with Patriot Capital
    Fundings
    Form N-2
    filed with the SEC on July 13, 2005).10
.5

Custodian Agreement with Wells
    Fargo, National Association10
.6

Employment Agreement between
    Patriot Capital Funding and Richard P. Buckanavage (Incorporated
    by reference to Exhibit (k) (4) filed with Patriot
    Capital Fundings
    Form N-2
    filed with the SEC on July 13, 2005).10
.7

Employment Agreement between
    Patriot Capital Funding and Timothy W. Hassler (Incorporated by
    reference to Exhibit (k) (5) filed with Patriot
    Capital Fundings
    Form N-2
    filed with the SEC on July 13, 2005).10
.8

Employment Agreement between
    Patriot Capital Funding and William E. Alvarez, Jr.
    (Incorporated by reference to Exhibit 10.1 filed with
    Patriot Capital Fundings
    Form 8-K
    filed with the SEC on December 21, 2005).10
.9

Employment Agreement between
    Patriot Capital Funding and Clifford L. Wells (Incorporated by
    reference to Exhibit 10.2 filed with Patriot Capital
    Fundings
    Form 8-K
    filed with the SEC on December 21, 2005).10
.10

Employment Agreement between
    Patriot Capital Funding and Matthew R. Colucci (Incorporated by
    reference to Exhibit 10.3 filed with Patriot Capital
    Fundings
    Form 8-K
    filed with the SEC on December 21, 2005).10
.11

Loan Funding and Servicing
    Agreement by and among the Patriot Capital Funding, Patriot
    Capital Funding LLC I, Fairway Finance Company, LLC, Harris
    Nesbitt Corp. and Wells Fargo Bank, National Association
    (Incorporated by reference to Exhibit (k) (9) filed
    with Patriot Capital Fundings
    Post-Effective
    Amendment No. 1 to
    Form N-2
    filed with the SEC on August 1, 2005).10
.12

Purchase and Sale Agreement by and
    between the Registrant and Patriot Capital Funding LLC I
    (Incorporated by reference to Exhibit (k)(10) filed with
    Patriot Capital Fundings Post-Effective Amendment
    No. 1 to
    Form N-2
    filed with the SEC on August 1, 2005).10
.13

Securities Account Control
    Agreement by and among the Registrant, Patriot Capital Funding
    LLC I, Harris Nesbitt Corp. and Wells Fargo Bank, National
    Association (Incorporated by reference to Exhibit (k)(11)
    filed with Patriot Capital Fundings Post-Effective
    Amendment No. 1 to
    Form N-2
    filed with the SEC on August 1, 2005).10
.14

Intercreditor and Concentration
    Account Administration Agreement by and among the
    Registrant, U.S. Bank National Association and Wells Fargo,
    National Association (Incorporated by reference to
    Exhibit (k)(12) filed with Patriot Capital Fundings
    Post-Effective Amendment No. 1 to
    Form N-2
    filed with the SEC on August 1, 2005).21


Subsidiaries of Patriot Capital
    Funding and jurisdiction of incorporation/organizations: Patriot
    Capital Funding LLC I  Delaware31
.1**

Certification of Chief Executive
    Officer Pursuant to
    Rule 13a-14(a)
    under the Securities Exchange Act of 1934.31
.2**

Certification of Chief Financial
    Officer Pursuant to
    Rule 13a-14(a)
    under the Securities Exchange Act of 1934.32
.1**

Certification of Chief Executive
    Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002 (18 U.S. C. 1350).32
.2**

Certification of Chief Financial
    Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002 (18 U.S. C. 1350).     **
    Filed Herewith 65




---



##### 



SIGNATURES      By:
    /s/  Richard P. Buckanavage    Chief Executive Officer and President
  By:
    /s/  William E. Alvarez, Jr.    Executive Vice President, Chief
  Financial Officer and Secretary
    Signature

Title(Capacity)

Date/s/  RICHARD
    P. BUCKANAVAGERichard
    P. Buckanavage

Chief Executive Officer and
    Director (Principal Executive Officer)

March 3, 2006/s/  WILLIAM
    E. ALVAREZ, JR.William
    E.
    Alvarez, Jr.

Chief Financial Officer (Principal
    Financial and Accounting Officer)

March 3, 2006/s/  TIMOTHY
    W. HASSLERTimothy
    W. Hassler

Chief Operating and Compliance
    Officer and Director

March 3, 2006/s/  I.
    JOSEPH MASSOUDI.
    Joseph Massoud

Chairman and Director

March 3, 2006/s/  STEVEN
    DROGINSteven
    Drogin

Director

March 3, 2006/s/  MEL
    P. MELSHEIMERMel
    P. Melsheimer

Director

March 3, 2006/s/  DENNIS
    C. ODOWDDENNIS
    C. ODOWD

Director

March 3, 2006/s/  RICHARD
    A. SEBASTIAORichard
    A. Sebastiao

Director

March 3, 2006  66




---



##### 



Exhibit Index  Exhibit

Description31
.1

Certification of Chief Executive
    Officer Pursuant to
    Rule 13a-14(a)
    under the Securities Exchange Act of 1934.31
.2

Certification of Chief Financial
    Officer Pursuant to
    Rule 13a-14(a)
    under the Securities Exchange Act of 1934.32
.1

Certification of Chief Executive
    Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002 (18 U.S. C. 1350).32
.2

Certification of Chief Financial
    Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002 (18 U.S. C. 1350).  67