##### 



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, 2006ORo

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:
  Name of each exchangeTitle of each class

on which registeredCommon Stock, par value
    $0.01 per share

NASDAQ Global Select Market   SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE
    ACT:
    NONE
  o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. o
  Rule 12b-2
 o þ o
  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


14ITEM 1B.


UNRESOLVED STAFF
    COMMENTS


23ITEM 2.


PROPERTIES


23ITEM 3.


LEGAL
    PROCEEDINGS


23ITEM 4.


SUBMISSION OF
    MATTERS TO A VOTE OF SECURITY HOLDERS


23PART
    IIITEM 5.


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


24ITEM 6.


SELECTED FINANCIAL
    DATA


28ITEM 7.


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


29ITEM 7A.


QUANTITATIVE AND
    QUALITATIVE DISCLOSURE ABOUT MARKET RISK


44ITEM 8.


FINANCIAL
    STATEMENTS AND SUPPLEMENTARY DATA


45ITEM 9.


CHANGES IN AND
    DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
    DISCLOSURE


73ITEM 9A.


CONTROLS AND
    PROCEDURES


73ITEM 9B.


OTHER
    INFORMATION


74PART
    IIIITEM 10.


DIRECTORS,
    EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE


74ITEM 11.


EXECUTIVE
    COMPENSATION


74ITEM 12.


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


74ITEM 13.


CERTAIN
    RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
    INDEPENDENCE


74ITEM 14.


PRINCIPAL
    ACCOUNTING FEES AND SERVICES


75PART
    IVITEM 15.


EXHIBITS, FINANCIAL
    STATEMENT SCHEDULES


75SIGNATURES





77EXHIBIT
    INDEX





78




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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-Q, Form 8-K 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 and
    maintaining 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, and 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 mitigate loan losses, to continue to generate a stable and
    diversified revenue stream of current income from our debt
    investments and provide us with the ability 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 35 years of
    experience in lending to, and investing in, small- to 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, 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.  and/or and/or
 4




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
    Initial or additional
    on-site
    visits with management and relevant employees;
    Review of historical and projected financial statements,
    including reports from third-party 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 payment-in-kind
  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 5




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
    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
  payment-in-kind
 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, 2006


December 31, 2005Debt





DebtInvestments at


Percentage of


Investments at


Percentage ofInvestment Rating

Fair Value


Total Portfolio


Fair Value


Total Portfolio1

$
22,689,633



8.8
%

$
16,069,312



11.5
%2


198,127,878



77.1



102,189,918



72.83


36,196,874



14.1



20,136,424



14.34










2,000,000



1.45














Total

$
257,014,385



100.00
%

$
140,395,654



100.0
%   and/or
  Regulations
  Regulation
    as a Business Development Company
   7




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##### 



Qualifying
    Assets
                             8




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Managerial
    Assistance to Portfolio Companies
    Senior
    Securities
    Code of
    Ethics
  Rule 17j-1 1-800-SEC-0330.
  Proxy
    Voting Policies and Procedures
  case-by-case
     9




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Other
          Taxation
    as a Regulated Investment Company
         10




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Determination
    of Net Asset Value
  Quarterly
    Net Asset Value Determinations
             11




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
    Our quarterly valuation process begins 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 selected preliminary valuations and
    prepare an independent valuation report;
    The valuation committee of our board of directors reviews the
    preliminary valuations and any independent valuation reports
    prepared by Duff & Phelps, LLC, and our investment
    professionals and Duff & Phelps, LLC, as appropriate,
    will respond to and supplement the preliminary valuations and
    independent valuation reports, respectively, 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 where applicable,
    Duff & Phelps, LLC.    
    quarterly for all of our portfolio investments assigned an
    investment rating of 3, 4 or 5 under our investment rating
    system;
    at least once annually for all portfolio investments assigned an
    investment rating of 1 or 2 under our investment rating system;
    the quarter in which a transaction was entered into for all new
    investments of $3 million or more; and
    the quarter following the quarter in which a transaction was
    entered into for all new investments of less than
    $3 million.    Determinations
    in Connection with Offerings
   12




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
    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 (i) 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 (ii) the offering
    price of the shares of our common stock in the proposed offering.        Competition
    Employees
   13




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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.
    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.
   14




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We
    operate in a highly competitive market for investment
    opportunities.
      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 are 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.
 15




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Securitization of Loans.
  The
    agreements governing our amended and restated 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 fail to
    maintain our status 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. 16




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
    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 or delay the closing of new investments in
    order to prevent the loss of RIC status and could result in a
    loss of business. Because most of our investments will be in
    private companies, and therefore will be relatively illiquid,
    any such dispositions could be made at disadvantageous prices
    and could result in substantial losses.    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
  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.
   17




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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.
    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.
   18




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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.
      Changes
    in laws or regulations governing our operations may adversely
    affect our business.
    Interpretations
    of the staff of the Securities and Exchange Commission regarding
    the appropriateness of the consolidation of our wholly-owned,
    bankruptcy remote, special purpose subsidiary may have an impact
    on our business, financial condition and results of
    operations.
   19




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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 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.
   20




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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.
    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.
   21




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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.
    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.
    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; 22




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##### 




    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    Item 4.
    Submission
    of Matters to a Vote of Security Holders   23




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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 2006First quarter

$
13.07


$
12.07Second quarter

$
12.85


$
10.66Third quarter

$
13.35


$
10.54Fourth quarter

$
14.90


$
13.32Fiscal year 2005Third quarter (from July 28,
    2005)

$
14.33


$
13.72Fourth quarter

$
13.56


$
10.77     Sales of
    Unregistered Securities
    Dividends
     24




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##### 



Date Declared

Record Date

Payment Date

Amount2007February 23, 2007

March 15, 2007

April 18, 2007

$
0.322006November 10, 2006

December 15, 2006

January 17, 2007

$
0.31August 7, 2006

September 15, 2006

October 17, 2006

$
0.31May 9, 2006

June 2, 2006

July 17, 2006

$
0.29February 28, 2006

March 21, 2006

April 11, 2006

$
0.29Total  2006





$
1.202005November 8, 2005

November 30, 2005

December 30, 2005

$
0.27September 7, 2005

September 30, 2005

October 31, 2005

$
0.16Total  2005





$
0.43   Form 10-K
 25




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##### 



Stock
    Performance Graph
      COMPARISON
    OF 18 MONTH CUMULATIVE TOTAL RETURN(1)
 
  
  Company/Index


7-28-05(1)


2005


2006Patriot Capital Funding, Inc.


$
100



$
90



$
117Nasdaq Composite Index


$
100



$
105



$
114Patriot Capital Funding Peer
    Group(2)


$
100



$
94



$
119     (1)
    
    From July 28, 2005, the date our common stock began to
    trade on the Nasdaq National Market (now known as the NASDAQ
    Global Select Market) in connection with our initial public
    offering.(2)
    
    The Patriot Capital Funding Peer Group consists of the following
    closed-end investment companies that have elected to be
    regulated as business development companies under the 1940 Act:
    Ares Capital Corporation, Gladstone Capital Corporation,
    Gladstone Investment Corporation, Hercules Technology Growth
    Capital, Inc., MVC Capital, Inc., NGP Capital Resources Company,
    Prospect Energy Corporation and Technology Investment Capital
    Corporation. 26




---



##### 



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


903,000


$
10.97



227,181Equity compensation plans not
    approved by security holders


1,301,496
(1)


14.00



Total


2,204,496


$
12.76



227,181
(2)     (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.(2)
    
    On February 23, 2007, the board of directors granted
    options to purchase 227,181 shares of our common stock to our
    executive officers and employees. The exercise price of these
    options is $14.38 per share, the closing market price of common
    stock on the date of grant.  Stock
    Option Plan
         27




---



##### 



Item 6.
    Selected
    Financial Data  Form 10-K.
  Year Ended December 31,Income Statement Data

2006


2005


2004


2003Investment Income:Interest income

$
25,387,709


$
13,035,673


$
4,616,665


$
253,755Fees


270,176



366,830



241,870



5,274Other investment income


848,449



46,839







Total Investment Income


26,506,334



13,449,342



4,858,535



259,029Expenses:Compensation expense


3,877,525



2,481,761



1,326,576



835,600Consulting fees(1)






554,796



1,000,000



916,666Interest(2)


4,332,582



3,517,989



1,504,998



201,331Professional fees


1,045,613



730,550



192,938



290,822Prepayment penalty(3)






3,395,335







General and administrative


2,229,970



1,041,030



227,208



164,032Total Expenses


11,485,690



11,721,461



4,251,720



2,408,451Net investment income (loss)


15,020,644



1,727,881



606,815



(2,149,422
)Net realized loss on investments


(3,262,966
)










Net unrealized appreciation
    (depreciation) on investments


3,817,931



(2,965,175
)


(876,021
)


Net unrealized gain on interest
    rate swap


12,961











Net income (loss)

$
15,588,570


$
(1,237,294
)

$
(269,206
)

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

$
1.10


$
(0.17
)

$
(0.07
)

$
(0.56
)Weighted average shares
    outstanding, basic


14,145,200



7,253,632



3,847,902



3,847,902Weighted average shares
    outstanding, diluted


14,237,952



7,253,632



3,847,902



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

$
257,248,376


$
137,951,659


$
65,603,830


$
28,687,831Total assets


270,522,505



150,655,993



72,038,863



35,116,998Total debt outstanding


98,380,000



21,650,000



42,645,458



9,400,000Stockholders equity


164,108,629



127,152,365



27,311,918



24,531,124Net asset value per common share

$
10.37


$
10.48


$
7.10


$
6.38Other Data:Weighted average yield on debt
    investments(4)


13.4
% (5)


13.5
%


12.6
%


11.2
%Number of portfolio companies


26



15



9



3Number of employees


11



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 28




---



##### 



our initial public offering to repay all of our outstanding
    indebtedness, including the $3.4 million prepayment
    penalty, at the time of our initial public offering. We are
    generally only allowed to borrow amounts such that our asset
    coverage, as defined in the 1940 Act, equals at least 200% after
    such borrowing.(3)
    
    The prepayment penalty was incurred in connection with the
    repayment in full and termination of our $120.0 million
    financing agreement.(4)
    
    Computed using actual interest income earned for the fiscal
    year, including amortization of deferred financing fees and
    original issue discount, divided by the weighted average fair
    value of debt investments.(5)
    
    The weighted average yield on our debt investments was 13.0% for
    the year ended December 31, 2006 if we exclude the impact
    of the unamortized deferred financing fees realized in
    connection with the early repayment of one of our investments
    during the quarter ended March 31, 2006.  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
 29




---



##### 



Portfolio
    Composition
      December 31,


December 31,2006


2005Beginning portfolio at fair value

$
141,390,954


$
67,677,751Investments in debt securities


154,876,598



88,850,000Investments in equity securities


3,074,997



575,490Investment repayments


(37,627,269
)


(14,572,867
)Increase in
    payment-in-kind
    interest/dividends


2,424,927



1,825,755Sale of investments


(7,098,878
)


Increase (decrease) in fair value
    of investments


3,817,931



(2,965,175
)Ending portfolio at fair value

$
260,859,260


$
141,390,954       December 31, 2006


December 31, 2005Investments at


Percentage of


Investments at


Percentage ofFair Value


Total Portfolio


Fair Value


Total PortfolioSenior secured revolving lines of
    credit

$
7,010,219



2.7
%

$
250,000



0.2
%Senior secured term loans


133,672,426



51.2



62,802,077



44.4Junior secured term loans


57,032,813



21.9



21,704,625



15.3Senior subordinated debt


59,298,927



22.7



55,638,952



39.4Investments in equity securities


3,844,875



1.5



995,300



0.7Totals

$
260,859,260



100.0
%

$
141,390,954



100.0
%  30




---



##### 



December 31, 2006


December 31, 2005Cost


%(1)


Fair Value


%(1)


Cost


%(1)


Fair Value


%(1)Manufacturing

$
118,031,907



45.2
%

$
118,274,709



45.3
%

$
74,921,696



51.6
%

$
71,172,168



50.3
%Distribution


47,685,031



18.3



47,513,531



18.2



3,850,000



2.6



3,850,000



2.7Service


33,142,636



12.7



32,834,136



12.6



16,901,343



11.6



16,654,743



11.8Consumer/Retail Goods


58,398,679



22.4



58,564,779



22.5



31,580,928



21.8



31,606,328



22.4Publishing


3,161,105



1.2



3,166,305



1.2



3,515,015



2.4



3,533,915



2.5Defense


463,168



0.2



505,800



0.2



14,463,168



10.0



14,573,800



10.3Total

$
260,882,526



100.0
%

$
260,859,260



100.0
%

$
145,232,150



100.0
%

$
141,390,954



100.0
%     (1)
    
    Represents percentage of total portfolio.   31




---



##### 



Asset
    Quality-Debt Portfolio
  and/or
    December 31, 2006


December 31, 2005Debt





DebtInvestments at


Percentage of


Investments at


Percentage ofInvestment Rating

Fair Value


Total Portfolio


Fair Value


Total Portfolio1

$
22,689,633



8.8
%

$
16,069,312



11.5
%2


198,127,878



77.1



102,189,918



72.83


36,196,874



14.1



20,136,424



14.34










2,000,000



1.45














Totals

$
257,014,385



100.0
%

$
140,395,654



100.0
%   Loans and
    Debt Securities on Non-Accrual Status
    Results
    of Operations
    Comparison
    of the year ended December 31, 2006 and December 31,
    2005
  Total
    Investment Income
     32




---



##### 



payment-in-kind payment-in-kind
    Expenses
        Realized
    Gain (Loss) on Sale of Investments
   33




---



##### 



Net
    Change in Unrealized Appreciation or Depreciation on
    Investments
    and/or
    (Earnings Before Interest,
    Taxes, Depreciation and Amortization)
     34




---



##### 



Unrealized
    Gain on Interest Rate Swap
    Net
    Income from Operations
    Comparison
    of the year ended December 31, 2005 and December 31,
    2004
  Total
    Investment Income
    payment-in-kind
    Expenses
   35




---



##### 



Net
    Change in Unrealized Appreciation or Depreciation on
    Investments
        Net
    Loss from Operations
    Financial
    Condition, Liquidity and Capital Resources
  Cash,
    Cash Equivalents and Restricted Cash
   36




---



##### 



payment-in-kind
  Liquidity
    and Capital Resources
         37




---



##### 



Borrowings
  Amended and Restated Securitization Revolving Credit
    Facility. 364-day 24-month
  364-day 24-month
   38




---



##### 



Regulated
    Investment Company Status and Dividends
              Off-Balance
    Sheet Arrangements
   39




---



##### 



Contractual
    Obligations
    Payments Due by PeriodMore than 5Contractual Obligations

2007


2008


2009


2010


2011


YearsLong-term debt obligations(1)

$



$



$
98,380,000


$



$



$
Capital lease obligations






















Operating lease obligations


231,000



237,000



241,000



247,000



21,000



Purchase obligations






















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






















Unused lending commitments(2)


27,040,000



















Total

$
27,271,000


$
237,000


$
98,621,000


$
247,000


$
21,000


$
     (1)
    
    Our amended and restated securitization credit facility permits
    draws under the facility until July 23, 2009, unless
    extended prior to such date for an additional
    364-day
    period with the consent of the lender. If the facility is not
    extended, any principal amounts then outstanding will be
    amortized over a
    24-month
    period following July 23, 2009 and interest will accrue on
    outstanding borrowings under the facility at the prime rate plus
    2.0%. This table assumes that we would repay all of our
    indebtedness under the facility at the time that we were no
    longer able to make draws under the facility. However, we cannot
    provide any assurance that we would be able to repay all of such
    outstanding indebtedness at such time.(2)
    
    Represents the unfunded commitment to extend credit to 11 of our
    portfolio companies.  Recent
    Developments
  payment-in-kind
     40




---



##### 



Related
    Party Transactions
              Critical
    Accounting Policies
   41




---



##### 



Valuation
    of Portfolio Investments
                Fee
    Income Recognition
  00-21 00-21). 00-21
 42




---



##### 



00-21 states
  Payment-in-Kind
    or PIK Interest and Dividends
  payment-in-kind
    Fiscal YearEndedDecember 31,2006Beginning PIK balance

$
2,174,974PIK interest and dividends earned
    during the period


2,424,927Sale of investments


(383,946
)PIK payments received during the
    period


(1,324,390
)Ending PIK balance

$
2,891,565   Interest
    and Dividend Income Recognition
   43




---



##### 



Item 7A.
    Quantitative
    and Qualitative Disclosure About Market Risk     44




---



##### 



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

PageReport of Independent Registered
    Public Accounting Firm


46Consolidated Balance Sheets at
    December 31, 2006 and 2005


47Consolidated Statements of
    Operations for the years ended December 31, 2006, 2005 and
    2004


48Consolidated Statements of Cash
    Flows for the years ended December 31, 2005, 2004 and 2003


49Consolidated Statements of Changes
    in Net Assets for the years ended December 31, 2006, 2005
    and 2004


50Consolidated Schedule of
    Investments at December 31, 2006 and 2005


51Notes to Consolidated Financial
    Statements


54Report of Independent Registered
    Public Accounting Firm


71Schedule of Investments In and
    Advances to Affiliates


72  45




---



##### 



Report of
    Independent Registered Public Accounting Firm
                   46




---



##### 



PATRIOT
    CAPITAL FUNDING, INC.
  Consolidated
    Balance Sheets
  December 31,2006


2005ASSETSInvestments at fair value:Non-control/non-affiliate
    investments (cost of $251,915,921  2006,
    $145,232,150  2005)

$
251,933,655


$
141,390,954Affiliate investments (cost of
    $8,966,605  2006, $0  2005)


8,925,605



Unearned income


(3,610,884
)


(3,439,295
)Total investments


257,248,376



137,951,659Cash and cash equivalents


4,211,643



2,371,841Restricted cash


5,113,806



7,806,328Interest receivable


2,221,000



867,475Other assets


1,727,680



1,658,690TOTAL ASSETS

$
270,522,505


$
150,655,993LIABILITIES AND
    STOCKHOLDERS EQUITYLIABILITIESBorrowings

$
98,380,000


$
21,650,000Interest payable


523,709



60,334Dividends payable


4,904,818



Accounts payable, accrued expenses
    and other


2,605,349



1,793,294TOTAL LIABILITIES


106,413,876



23,503,628STOCKHOLDERS
    EQUITYPreferred stock, $0.01 par
    value, 1,000,000 shares authorized; no shares issued and
    outstanding






Common stock, $0.01 par
    value, 49,000,000 shares authorized; 15,821,994 and
    12,136,655 shares issued and outstanding at
    December 31, 2006 and 2005, respectively


158,220



121,367Paid-in-capital


171,957,327



136,267,552Accumulated net investment loss


(1,912,061
)


(1,912,061
)Distributions in excess of net
    investment income


(2,821,587
)


(3,483,297
)Net realized loss on investments


(3,262,966
)


Net unrealized gain on interest
    rate swaps


12,961



Net unrealized depreciation on
    investments


(23,265
)


(3,841,196
)TOTAL STOCKHOLDERS EQUITY


164,108,629



127,152,365TOTAL LIABILITIES AND
    STOCKHOLDERS EQUITY

$
270,522,505


$
150,655,993NET ASSET VALUE PER COMMON SHARE

$
10.37


$
10.48    47




---



##### 



PATRIOT
    CAPITAL FUNDING, INC.
  Consolidated
    Statements of Operations
  Year Ended December 31,2006


2005


2004INVESTMENT INCOMEInterest:Non-control/non-affiliate
    investments (less than 5% owned)

$
25,011,993


$
13,035,673


$
4,616,665Affiliate investments (5% to 25%
    owned)


375,716







Total interest income


25,387,709



13,035,673



4,616,665Fees:Non-control/non-affiliate
    investments (less than 5% owned)


260,289



366,830



241,870Affiliate investments (5% to 25%
    owned)


9,887







Total fee income


270,176



366,830



241,870Other investment
    income  non-control/non-affiliate investments (less
    than 5% owned)


848,449



46,839



Total Investment Income


26,506,334



13,449,342



4,858,535EXPENSESCompensation expense


3,877,525



2,481,761



1,326,576Consulting fees






554,796



1,000,000Interest


4,332,582



3,517,989



1,504,998Professional fees


1,045,613



730,550



192,938Prepayment penalty






3,395,335



General and administrative


2,229,970



1,041,030



227,208Total Expenses


11,485,690



11,721,461



4,251,720Net Investment Income


15,020,644



1,727,881



606,815NET REALIZED AND UNREALIZED GAIN
    AND LOSSNet realized loss on
    investments  non-control/non-affiliate investments
    (less than 5% owned)


(3,262,966
)






Net unrealized appreciation
    (depreciation) on investments 
    non-control/non-affiliate investments (less than 5% owned)


3,858,931



(2,965,175
)


(876,021
)Net unrealized depreciation on
    investments  affiliate investments (5% to 25% owned)


(41,000
)






Net unrealized gain on interest
    rate swaps


12,961







Net Realized and Unrealized Gain
    (Loss)


567,926



(2,965,175
)


(876,021
)NET INCOME (LOSS)

$
15,588,570


$
(1,237,294
)

$
(269,206
)Income (loss) per share, basic and
    diluted

$
1.10


$
(0.17
)

$
(0.07
)Weighted average shares
    outstanding, basic


14,145,200



7,253,632



3,847,902Weighted average shares
    outstanding, diluted


14,237,952



7,253,632



3,847,902    48




---



##### 



PATRIOT
    CAPITAL FUNDING, INC.
  Consolidated
    Statements of Cash Flows
  Year Ended December 31,2006


2005


2004CASH FLOWS FROM OPERATING
    ACTIVITIES:Net income (loss)

$
15,588,570


$
(1,237,294
)

$
(269,206
)Adjustments to reconcile net
    income (loss) to net cash provided by (used for) operating
    activities:Depreciation and amortization


456,289



192,785



21,343Increase in interest receivable


(1,353,525
)


(252,232
)


(565,681
)Net realized loss on sale of
    investments


3,262,966







Change in unrealized depreciation
    (appreciation) on investments


(3,817,931
)


2,965,175



876,021Payment-in-kind
    interest and dividends


(2,424,927
)


(1,825,755
)


(694,158
)Unrealized gain on interest rate
    swap


(12,961
)






Stock based compensation expense


505,785







Change in unearned income


364,866



789,884



726,763Change in interest payable


463,375



(222,762
)


81,765Change in management fee payable






(916,666
)


500,000Change in other assets


(9,663
)


(83,849
)


(200,129
)Change in accounts payable,
    accrued expenses and other


812,055



911,569



313,848Net cash provided by operating
    activities


13,834,899



320,855



790,566CASH FLOWS FROM INVESTING
    ACTIVITIES:Funded investments


(157,951,595
)


(88,850,000
)


(42,850,000
)Principal repayments on investments


37,627,269



14,572,867



3,025,375Proceeds from investment sales


3,642,634







2,000,000Purchase of furniture and equipment


(269,436
)


(235,057
)


(15,903
)Net cash used for investing
    activities


(116,951,128
)


(74,512,190
)


(37,840,528
)CASH FLOWS FROM FINANCING
    ACTIVITIES:Borrowings


353,580,000



68,900,000



38,259,092Repayments on borrowings


(276,850,000
)


(89,895,458
)


(5,013,634
)Deferred offering costs


(159,620
)






Net proceeds from sale of common
    stock


36,652,098



106,288,919



3,050,000Decrease (increase) in restricted
    cash


2,692,522



(4,806,328
)


2,000,000Dividends paid


(10,885,371
)


(5,211,178
)


Deferred financing costs


(73,598
)


(1,204,256
)


Net cash provided by financing
    activities


104,956,031



74,071,699



38,295,458NET INCREASE (DECREASE) IN CASH
    AND CASH EQUIVALENTS


1,839,802



(119,636
)


1,245,496CASH AND CASH EQUIVALENTS AT:Beginning of year


2,371,841



2,491,477



1,245,981End of year

$
4,211,643


$
2,371,841


$
2,491,477Supplemental information:Interest paid

$
3,869,208


$
3,436,464


$
1,407,433Non-cash financing activities:Dividends reinvested in common
    stock

$
1,054,090


$
242,737


$
Dividends declared but not paid

$
4,904,818


$



$
    49




---



##### 



PATRIOT
    CAPITAL FUNDING, INC.
  Consolidated
    Statements of Changes in Net Assets
  2006


2005


2004Operations:Net investment income

$
15,020,644


$
1,727,881


$
606,815Net realized loss on investments


(3,262,966
)






Net unrealized appreciation
    (depreciation) on investments


3,817,931



(2,965,175
)


(876,021
)Net unrealized gain on interest
    rate swap


12,961







Net increase (decrease) in net
    assets from operations


15,588,570



(1,237,294
)


(269,206
)Shareholder distributions:Distributions to stockholders from
    net investment income


(15,020,644
)


(1,727,881
)


Tax return of capital


(2,485,345
)






Distributions in excess of net
    investment income


661,710



(3,483,297
)


Net decrease in net assets from
    shareholder distributions


(16,844,279
)


(5,211,178
)


Capital share transactions:Issuance of common stock


36,652,098



106,046,182



3,050,000Issuance of common stock under
    dividend reinvestment plan


1,054,090



242,737



Stock option compensation


505,785







Net increase in net assets from
    capital share transactions


38,211,973



106,288,919



3,050,000Total increase in net assets


36,956,264



99,840,447



2,780,794Net assets at beginning of period


127,152,365



27,311,918



24,531,124Net assets at end of period

$
164,108,629


$
127,152,365


$
27,311,918Net asset value per common share

$
10.37


$
10.48


$
7.10Common shares outstanding at end
    of period


15,821,994



12,136,655



3,847,902     *
    
    As discussed in the Notes to Consolidated Financial Statements,
    the Company recorded $2.4 million of distributions as tax
    return of capital upon the close of its first RIC tax year ended
    July 31, 2006. Accordingly, certain amounts recorded as
    distributions in excess of net investment income for
    distributions that occurred in calendar year 2005 were included
    in the amount recorded as tax return of capital in 2006.   50




---



##### 



PATRIOT
    CAPITAL FUNDING, INC.
    Consolidated Schedule of Investments
    December 31, 2006
  Company(1)

Industry

Investment

Principal


Cost


ValueAffiliate investments (5% to 25%
    owned):Smart, LLC (5)

Provider of tuition management
    services

Senior Secured Term Loan A (10.4%,
    Due 6/11) (3)
    Senior Secured Term Loan B  (16.5%, Due 2/12)
    (2) (3)
    Membership Interest   Class B (4)

$
4,425,000
    3,541,605


$
4,425,000
    3,541,605
    1,000,000


$
4,425,000
    3,541,605
    959,000Total affiliate investments
    (represents 3.4% of total investments at fair value)






8,966,605



8,925,605Non-control/non-affiliate
    investments (less than 5% owned):ADAPCO, Inc.

Distributor of specialty chemicals
    and contract application services

Senior Secured Term Loan A (10.9%,
    Due 6/11) (3)
    Common Stock (4)


13,350,000



13,350,000
    500,000



13,350,000
    328,500Agent Media Corporation

Publisher of insurance industry
    periodicals

Senior Secured Term Loan A (10.1%,
    Due 9/08) (3)
    Senior Secured Term Loan B (12.4%, Due 9/09) (3)
    Common Stock Warrants (4)


1,000,000
    2,130,105



1,000,000
    2,130,105
    31,000



1,000,000
    2,130,105
    36,200Allied Defense Group, Inc.

Diversified defense company

Common Stock Warrants (4)






463,168



505,800Arrowhead General Insurance Agency,
    Inc.

Insurance agency and program
    specialist

Junior Secured Term Loan (12.6%,
    Due 2/13) (3)


5,000,000



5,000,000



5,075,000Borga, Inc.

Manufacturer of pre-fabricated
    metal building systems

Senior Secured Term Loan A (8.9%,
    Due 3/09) (3)
    Senior Secured Term Loan B (11.9%, Due 5/10) (3)
    Senior Secured Term Loan C (16.0%, Due 5/10) (2) (3)
    Common Stock Warrants (4)


1,208,500
    1,810,250
    7,485,057



1,208,500
    1,810,250
    7,485,057
    20,250



1,208,500
    1,810,250
    7,485,057
    21,200Caleel + Hayden, LLC

Provider of proprietary branded
    professional skincare and cosmetic products to physicians and
    spa communities

Senior Secured Term Loan A
    (8.1%, Due 11/10)
    Senior Secured Term Loan B (10.1%, Due 11/11) (3)
    Senior Subordinated Debt (14.5%, Due 11/12) (2) (3)
    Common Stock (4)


5,000,000
    11,000,000
    6,272,135



5,000,000
    11,000,000
    6,272,135
    750,000



5,000,000
    11,000,000
    6,272,135
    858,100Cheeseworks, Inc.

Distributor of specialty cheese and
    food products

Revolving Line of Credit (8.0%, Due
    6/11) (3)
    Senior Secured Term Loan (11.0%, Due 6/11) (3)


5,080,219
    11,845,374



5,080,219
    11,845,374



5,080,219
    11,845,374Copperhead Chemical Company,
    Inc.

Manufacturer of bulk pharmaceuticals

Senior Subordinated Debt (15.3%,
    Due 11/10) (2) (3)


4,824,790



4,824,790



4,824,790Dover Saddlery, Inc.

Equestrian products catalog retailer

Senior Subordinated Debt (11.5%,
    Due 9/09) (3)
    Common Stock Warrants (4)


3,000,000



3,000,000
    148,200



3,000,000
    171,200Eight OClock Coffee Company

Manufacturer, distributor, and
    marketer of coffee

Junior Secured Term Loan (11.9%,
    Due 7/13) (3)


9,000,000



9,000,000



9,146,250Employbridge Holding Company (5)

A provider of specialized staffing
    services

Junior Secured Term Loan  (12.4%,
    Due 10/13) (3)


3,000,000



3,000,000



3,007,500Encore Legal Solutions, Inc.

Legal document management services

Junior Secured Term Loan A (10.6%,
    Due 12/09) (3)
    Junior Secured Term Loan B (10.8%, Due 12/09) (3)
    Senior Subordinated Debt (15.0%, Due 5/10) (2) (3)
    Common Stock Warrants (4)


3,819,500
    6,907,625
    5,098,906



3,819,500
    6,907,625
    5,098,906
    350,000



3,819,500
    6,907,625
    5,098,906
    EXL Acquisition Corp.

Manufacturer of lab testing supplies

Senior Secured Term Loan A  (8.6%,
    Due 3/11) (3)
    Senior Secured Term Loan B (9.1%, Due 3/12) (3)
    Senior Secured Term Loan D (15.0%, Due 3/12) (2) (3)
    Common Stock   Class A (4)
    Common Stock   Class B (2)


7,100,000
    2,382,000
    5,000,833



7,100,000
    2,382,000
    5,000,833
    2,475
    267,466



7,100,000
    2,382,000
    5,000,833
    86,300
    268,266Fairchild Industrial Products,
    Co.

Manufacturer of industrial controls
    and power transmission products

Senior Secured Term Loan A (9.4%,
    Due 7/10) (3)
    Senior Secured Term Loan B (11.4%, Due 7/11) (3)
    Senior Subordinated Debt (15.5%, Due 7/11) (2)
    Preferred Stock   Class A (2)
    Common Stock   Class B (4)


9,770,000
    2,793,750
    5,368,427



9,770,000
    2,793,750
    5,368,427
    399,401
    121,598



9,770,000
    2,793,750
    5,368,427
    399,401
    80,400Impact Products, LLC

Distributor of janitorial supplies

Junior Secured Term Loan B  (9.6%,
    Due 9/12) (3)
    Junior Secured Term Loan C (13.5%, Due 9/12) (2) (3)


7,462,500
    5,596,938



7,462,500
    5,596,938



7,462,500
    5,596,938Innovative Concepts in
    Entertainment, Inc.

Manufacturer of coin operated games

Senior Secured Term Loan A  (9.4%,
    Due 2/11) (3)
    Senior Secured Term Loan B  (9.9%, Due 2/11) (3)
    Senior Secured Term Loan C  (13.0%, Due 8/11) (3)


5,550,000
    3,582,000
    3,900,000



5,550,000
    3,582,000
    3,900,000



5,550,000
    3,582,000
    3,900,000Keltner Enterprises, LLC (5)

Distributor of automotive oils,
    chemicals and parts

Senior Subordinated Debt (14.0%,
    Due 12/11) (3)


3,850,000



3,850,000



3,850,000 51




---



##### 



Company(1)

Industry

Investment

Principal


Cost


ValueL.A. Spas, Inc.

Manufacturer of above ground spas

Senior Subordinated Debt (15.5%,
    Due 1/10) (2) (3)
    Common Stock Warrants (4)


7,020,843



7,020,843
    5,000



7,020,843
    Natural Products Group, LLC(5)

Manufacturer and marketer of
    branded personal care products

Junior Secured Term Loan (11.9%,
    Due 12/13) (3)


4,000,000



4,000,000



4,040,000Prince Mineral Company, Inc.

Manufacturer of pigments

Junior Secured Term Loan (10.3%,
    Due 12/12) (3)
    Senior Subordinated Debt (14.0%, Due 7/13) (2) (3)


11,475,000
    11,803,278



11,475,000
    11,803,278



11,475,000
    11,803,278Quartermaster, Inc.

Retailer of uniforms and tactical
    equipment to law enforcement and security professionals

Senior Secured Term Loan A
    (9.9%, Due 12/10) (3)
    Senior Secured Term Loan B (11.2%, Due 12/10) (3)
    Senior Secured Term Loan C (15.0%, Due 12/11) (2) (3)


6,000,000
    2,600,000
    3,199,633



6,000,000
    2,600,000
    3,199,633



6,000,000
    2,600,000
    3,199,633R-O-M Corporation

Manufacturer of doors, ramps and
    bulk heads for fire trucks and food transportation

Revolving Line of Credit (9.1%, Due
    12/09) (3)
    Senior Secured Term Loan A (9.0%, Due 12/09) (3)
    Senior Secured Term Loan B (9.4%, Due 12/10) (3)
    Senior Subordinated Debt (16.0%, Due 12/10) (2) (3)


1,500,000
    2,958,000
    3,374,500
    7,082,680



1,500,000
    2,958,000
    3,374,500
    7,082,680



1,500,000
    2,958,000
    3,374,500
    7,082,680Robert Rothschild Farm, Inc.

Manufacturer of specialty food
    products

Senior Secured Term Loan B (9.1%,
    Due 7/11) (3)
    Senior Subordinated Debt (16.3%, Due 1/12) (2) (3)


4,500,000
    4,902,868



4,500,000
    4,902,868



4,500,000
    4,902,868Sidumpr Trailer Company,
    Inc.

Manufacturer of side dump trailers

Revolving Line of Credit (10.8%,
    Due 1/11) (3)
    Senior Secured Term Loan A (9.0%, Due 1/11) (3)
    Senior Secured Term Loan B (12.0%, Due 1/11) (3)
    Senior Secured Term Loan C (14.0%, Due 7/11) (2) (3)
    Senior Subordinated Debt (12.0%, Due 1/12) (3)
    Preferred Stock (2)
    Common Stock (4)


430,000
    2,660,000
    2,344,125
    3,161,694
    75,000
    80,808
    25



430,000
    2,660,000
    2,344,125
    3,161,694
    75,000
    80,808
    25



430,000
    2,660,000
    2,344,125
    3,161,694
    75,000
    80,808
    49,700Stolle Machinery Company, LLC

Provider of capital equipment used
    in the production of aluminum or steel beverage and food cans

Junior Secured Term Loan (11.4%,
    Due 9/13)


500,000



500,000



502,500Total Non-control/non-affiliate
    investments (represents 96.6% of total investments at fair
    value)






251,915,921



251,933,655Total Investments










260,882,526



260,859,260Unearned Income










(3,610,884
)


(3,610,884
)Total Investments Net of Unearned
    Income







$
257,271,642


$
257,248,376   (1)
    
    The Company does not
    control, and, except with respect to Smart LLC, is
    not an affiliate of, any of its portfolio companies,
    each as defined in the Investment Company Act of 1940, as
    amended (the 1940 Act). In general, under the 1940
    Act, the Company would control a portfolio company
    if the Company owned 25% or more of its voting securities and
    would be an affiliate of a portfolio company if the
    Company owned 5% or more of its voting securities.(2)
    
    Amount includes
    payment-in-kind
    (PIK) interest or dividends.(3)
    
    Pledged as collateral under the
    Companys Securitization Facility. See Note 3 to
    Consolidated Financial Statements.(4)
    
    Non-income producing.(5)
    
    Some of the investments listed are
    issued by an affiliate of the listed portfolio company.   52




---



##### 



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

Industry

Investment

Principal


Cost


ValueAgent Media Corporation

Publisher of insurance

Senior Secured Term Loan A
    (11.8%, Due 9/08) (3)

$
1,375,000


$
1,375,000


$
1,375,000industry periodicals

Senior Secured Term Loan B
    (16.0%, Due 9/09) (2) (3)


2,109,015



2,109,015



2,109,015Common Stock Warrants (4)






31,000



49,900Allied Defense Group,

Diversified defense

Senior Secured Term Loan (11.5%,
    Due 11/10) (3)


14,000,000



14,000,000



14,000,000Inc.

company

Common Stock Warrants (4)






463,168



573,800Borga, Inc.

Manufacturer of pre-

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


2,046,000



2,046,000



2,046,000fabricated metal

Senior Secured Term Loan B
    (10.7%, Due 5/10) (3)


1,835,250



1,835,250



1,835,250building systems

Senior Secured Term Loan C
    (16.0%, Due 5/10) (2) (3)


7,188,062



7,188,062



7,188,062Common Stock Warrants (4)






20,250



89,600Copperhead Chemical
    Company, Inc.

Manufacturer of
    bulk pharmaceuticals

Senior Subordinated Debt (15.3%,
    Due 11/10) (2) (3)


4,668,608



4,668,608



4,668,608Dover Saddlery, Inc.

Equestrian products

Senior Subordinated Debt (11.5%,
    Due 9/09) (2) (3)


3,000,000



3,000,000



3,000,000catalog retailer

Common Stock Warrants (4)






148,200



178,600Eight OClock Coffee Company

Manufacturer, distributor,
    and marketer of coffee

Junior Secured Term Loan (11.4%,
    Due 11/12) (3)


6,500,000



6,500,000



6,500,000Encore Legal Solutions,

Legal document

Junior Secured Term Loan A
    (9.8%, Due 12/08) (3)


4,660,000



4,660,000



4,660,000Inc.

management services

Junior Secured Term Loan B
    (8.3%, Due 12/09) (3)


6,944,625



6,944,625



6,944,625Senior Subordinated Debt (15.0%,
    Due 5/10) (2) (3)


4,946,718



4,946,718



4,946,718Common Stock Warrants (4)






350,000



103,400Fairchild Industrial

Manufacturer of industrial

Senior Secured Term Loan A
    (8.0%, Due 7/10) (3)


9,670,000



9,670,000



9,670,000Products, Co.

controls and power

Senior Secured Term Loan B
    (10.0%, Due 7/11) (3)


2,818,750



2,818,750



2,818,750transmission products

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


5,355,000



5,355,000



5,355,000Interstate Highway Sign

Manufacturer of

Senior Secured Term Loan (10.5%,
    Due 12/09) (3)


1,360,000



1,360,000



1,360,000Corporation

highway and roadway

Senior Subordinated Debt (18.0%,
    Due 12/09) (2) (3)


5,837,409



5,758,946



2,000,000signs

Common Stock Warrants (4)






59,932



Keltner Enterprises, LLC (5)

Distributor of automotive
    oils, chemicals and parts

Senior Subordinated Debt (14.0%,
    Due 12/11) (3)


3,850,000



3,850,000



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

Manufacturer of

Senior Subordinated Debt (15.5%,
    Due 1/10) (2) (3)


6,776,424



6,776,424



6,776,424above ground spas

Common Stock Warrants (4)






5,000



Prince Mineral Company,

Manufacturer of pigments

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


3,600,000



3,600,000



3,600,000Inc.



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


10,228,579



10,228,579



10,228,579Quartermaster, Inc.

Retailer of uniforms and

Revolving Line of Credit (9.5%, Due
    12/10) (3)


250,000



250,000



250,000tactical equipment to law

Senior Secured Term Loan A
    (9.2%, Due 12/10) (3)


6,000,000



6,000,000



6,000,000enforcement and security

Senior Secured Term Loan B
    (10.4%, Due 12/10) (3)


2,600,000



2,600,000



2,600,000professionals

Senior Secured Term Loan C
    (15.0%, Due 12/11) (2) (3)


3,104,133



3,104,133



3,104,133Robert Rothschild Farm,

Manufacturer of

Senior Secured Term Loan B
    (8.5%, Due 7/10) (3)


5,000,000



5,000,000



5,000,000Inc.

specialty food products

Senior Subordinated Debt (16.3%,
    Due 1/12) (2) (3)


4,697,171



4,697,171



4,697,171R-O-M Corporation

Manufacturer of doors,

Senior Secured Term Loan A
    (8.8%, Due 12/09) (3)


3,400,000



3,400,000



3,400,000ramps and bulk heads for

Senior Secured Term Loan B
    (9.8%, Due 12/10) (3)


3,400,000



3,400,000



3,400,000fire trucks and food

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


7,012,319



7,012,319



7,012,319transportationTotal Non-control/non-affiliate
    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)
    
    During 2005, the Company did not
    control, and is not an affiliate of, any
    of its portfolio companies, each as defined in the Investment
    Company Act of 1940, as amended (the 1940 Act). In
    general, under the 1940 Act, the Company would
    control a portfolio company if the Company owned 25%
    or more of its voting securities and would be an
    affiliate of a portfolio company if the Company
    owned 5% or more of its voting securities.(2)
    
    Amount includes
    payment-in-kind
    (PIK) interest or dividends.(3)
    
    Pledged as collateral under the
    Companys Securitization Facility. See Note 3 to
    Consolidated Financial Statements.(4)
    
    Non-income producing.(5)
    
    Some of the investments listed are
    issued by an affiliate of the listed portfolio company.  See Notes to Consolidated Financial
    Statements
 53




---



##### 



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
         54




---



##### 



Patriot
    Capital Funding, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
   Use of
    Estimates
    Cash
    and Cash Equivalents
    Restricted
    Cash
    Concentration
    of Credit Risk
    Investment
    Valuation
         55




---



##### 



Patriot
    Capital Funding, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
      Property,
    Equipment and Leasehold Improvements
    Debt
    Issuance Costs
    Interest
    Income Recognition
     56




---



##### 



Patriot
    Capital Funding, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
    Fee
    Income Recognition
    00-21 00-21). 00-21
      2006


2005Beginning unearned income balance

$
3,439,295


$
2,073,921Fees received


2,254,649



1,497,541Warrants received






575,490Unearned income recognized


(2,083,060
)


(707,657
)Ending unearned income balance

$
3,610,884


$
3,439,295  57




---



##### 



Patriot
    Capital Funding, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  Payment
    in Kind Interest/Dividends
      2006


2005Beginning of period PIK loan
    balance

$
2,174,974


$
727,087PIK interest earned during the year


2,424,927



1,825,755Sales of investments


(383,946
)


Payments received during the year


(1,324,390
)


(377,868
)Ending PIK loan balance

$
2,891,565


$
2,174,974     Realized
    Gain or Loss and Unrealized Appreciation or Depreciation of
    Investments
    Stock
    Options
    Accounting for Stock Issued to Employees.
   58




---



##### 



Patriot
    Capital Funding, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
          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
)    59




---



##### 



Patriot
    Capital Funding, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
   Management
    Fees
    Federal
    Income Taxes
    Dividends
    Paid
        Recent
    Accounting Pronouncements
   60




---



##### 



Patriot
    Capital Funding, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  Accounting for
    Uncertainty in Income Taxes  an interpretation of
    FASB Statement No. 109 Accounting for Income
    Taxes
  Reclassifications
    Note 3.
    Investments    December 31, 2006


December 31, 2005Cost


Fair Value


Cost


Fair ValueCommercial loans

$
256,743,135


$
257,014,385


$
144,154,600


$
140,395,654Investments in equity securities


4,139,391



3,844,875



1,077,550



995,300Subtotal


260,882,526



260,859,260



145,232,150



141,390,954Unearned income


(3,610,884
)


(3,610,884
)


(3,439,295
)


(3,439,295
)Total

$
257,271,642


$
257,248,376


$
141,792,855


$
137,951,659       December 31, 2006


December 31, 2005Cost


%(1)


Fair Value


%(1)


Cost


%(1)


Fair Value


%(1)Senior Secured Debt

$
140,682,645



53.9
%

$
140,682,645



53.9
%

$
63,052,077



43.4
%

$
63,052,077



44.6
%Junior Secured Debt


56,761,563



21.8



57,032,813



21.9



21,704,625



15.0



21,704,625



15.3Subordinated Debt


59,298,927



22.7



59,298,927



22.7



59,397,898



40.9



55,638,952



39.4Warrants/Equity


4,139,391



1.6



3,844,875



1.5



1,077,550



0.7



995,300



0.7Total

$
260,882,526



100
%

$
260,859,260



100
%

$
145,232,150



100
%

$
141,390,954



100
%     (1)
    
    Represents percentage of total portfolio. 61




---



##### 



Patriot
    Capital Funding, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
    December 31, 2006


December 31, 2005Cost


%(1)


Fair Value


%(1)


Cost


%(1)


Fair Value


%(1)Manufacturing

$
118,031,907



45.2
%

$
118,274,709



45.3
%

$
74,921,696



51.6
%

$
71,172,168



50.3
%Distribution


47,685,031



18.3



47,513,531



18.2



3,850,000



2.6



3,850,000



2.7Service


33,142,636



12.7



32,834,136



12.6



16,901,343



11.6



16,654,743



11.8Consumer/Retail Goods


58,398,679



22.4



58,564,779



22.5



31,580,928



21.8



31,606,328



22.4Publishing


3,161,105



1.2



3,166,305



1.2



3,515,015



2.4



3,533,915



2.5Defense


463,168



0.2



505,800



0.2



14,463,168



10.0



14,573,800



10.3Total

$
260,882,526



100.0
%

$
260,859,260



100.0
%

$
145,232,150



100.0
%

$
141,390,954



100.0
%     (1)
    
    Represents percentage of total portfolio.  Note 4.
    Borrowings    364-day 24-month 364-day
 62




---



##### 



Patriot
    Capital Funding, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  24-month
  Year Ended December 31,2006


2005


2004Interest charges

$
3,753,153


$
3,083,563


$
1,489,198Amortization of debt issuance costs


365,855



276,623



15,800Unused facility fees


213,574



157,803



Total

$
4,332,582


$
3,517,989


$
1,504,998       Note 5.
    Employee
    Benefit Plan    Note 6.
    Common
    Stock Transactions  9,081.7-for-1
 63




---



##### 



Patriot
    Capital Funding, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
            Date Declared

Record Date

Payment Date

AmountNovember 10, 2006

December 15, 2006

January 17, 2007

$
0.31August 7, 2006

September 15, 2006

October 17, 2006

$
0.31May 9, 2006

June 2, 2006

July 17, 2006

$
0.29February 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

$
0.16   Note 7.
    Per Share
    Data    Year Ended December 31,2006


2005


2004Net income (loss)

$
15,588,570


$
(1,237,294
)

$
(269,206
)Weighted average common shares
    outstanding, basic


14,145,200



7,253,632



3,847,902Weighted average common shares
    outstanding, diluted


14,237,952



7,253,632



3,847,902Income (loss) per common share,
    basic and diluted

$
1.10


$
(0.17
)

$
(0.07
)  64




---



##### 



Patriot
    Capital Funding, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  Note 8.
    Commitments
    and Contingencies        Note 9.
    Concentrations
    of Credit Risk      Note 10.
    Related
    Party Transactions      Note 11.
    Income
    Taxes   65




---



##### 



Patriot
    Capital Funding, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
    93-2
    January 1, 2006


August 1, 2005to


toDecember 31, 2006


July 31, 2006GAAP Net Investment Income

$
15,021,000


$
8,969,000Tax timing differences of:Origination fees, net


668,000



481,000Stock compensation expense, bonus
    accruals, original issue discount and other


1,437,000



322,000Tax Distributable Income

$
17,126,000


$
9,772,000       January 1, 2006


August 1, 2005to


toDecember 31, 2006


July 31, 2006Distributions paid from:Ordinary income

$
10,968,000


$
9,772,000Long-term capital gains






Subtotal


10,968,000



9,772,000Tax return of capital


972,000



2,485,000Total distributions

$
11,940,000


$
12,257,000   Form 1099-DIV. 1099-DIV.
 66




---



##### 



Patriot
    Capital Funding, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
     December 31, 2006Distributable ordinary income

$
4,905,000Other book/tax temporary
    differences


(5,266,000
)Unrealized depreciation


(10,000
)Accumulated capital and other
    losses


(3,263,000
)            67




---



##### 



Patriot
    Capital Funding, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  Note 12.
    Financial
    Highlights  For the Year Ended December 31,2006


2005


2004Per Share Data:Net asset value at beginning of
    year

$
10.48


$
7.10


$
6.38Net investment income


1.06



.24



.16Net realized loss on investments


(.23
)






Net change in unrealized
    appreciation (depreciation) on investments


.27



(.41
)


(.23
)Issuance of common stock


10.23



12.83



.79Distributions from net investment
    income


(1.07
)


(.14
)


Tax return of capital


(.08
)


(.12
)


Distributions in excess of net
    investment income


(.05
)


(.17
)


Stock based compensation expense


.04







Dilutive effect of share issuance


(10.28
)


(8.85
)


Net asset value at end of year

$
10.37


$
10.48


$
7.10Total Net Asset Value Return(1)


10.4
%


3.7
%


(1.1
)%Per share market value, beginning
    of period

$
12.20


$
14.00
(3)Per share market value, end of
    period

$
14.49


$
12.20Total Market Value Return(2)


28.6
%


(9.8
)%Shares outstanding at end of year


15,821,994



12,136,655



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

$
164,108,629


$
127,152,365


$
27,311,918Average net assets


149,790,000



70,188,000



25,842,000Ratio of operating expenses to
    average net assets


7.7
%


16.7
%


16.5
%Ratio of net investment income to
    average net assets


10.0
%


2.5
%


2.3
%Weighted average borrowings
    outstanding

$
55,255,000


$
30,877,000


$
13,647,000Average amount of borrowings per
    share

$
3.49


$
2.54


$
3.55     (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. 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 for
    2005) reflects the change in the ending market value per
    share plus dividends, divided by the beginning market value per
    share.(3)
    
    Share price as of August 2, 2005, the date the Company
    closed its initial public offering. 68




---



##### 



Patriot
    Capital Funding, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
   Note 13.
    Selected
    Quarterly Data (Unaudited)    Year Ended December 31, 2006Quarter


Quarter


Quarter


QuarterEnded


Ended


Ended


EndedDecember 31


September 30


June 30


March 31Total Investment Income

$
7,595,548


$
6,879,633


$
5,807,865


$
6,223,288Net Investment Income


4,119,940



4,096,455



3,094,715



3,709,534Net Realized and Unrealized Gain
    (Loss)


402,445



(569,280
)


1,489,896



(755,135
)Net Income


4,522,385



3,527,175



4,584,611



2,954,399Net Income Per Share, Basic

$
0.29


$
0.22


$
0.36


$
0.24Net Income Per Share, Diluted

$
0.28


$
0.22


$
0.36


$
0.24Weighted Average
    Shares Outstanding, Basic


15,815,485



15,781,525



12,788,727



12,136,655Weighted Average
    Shares Outstanding, Diluted


15,908,237



15,836,416



12,788,727



12,136,655   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 Realized and Unrealized Gain
    (Loss)


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   Note 14.
    Subsequent
    Events (Unaudited)  payment-in-kind
     69




---



##### 



Patriot
    Capital Funding, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
          70




---



##### 



Report of
    Independent Registered Public Accounting Firm
     Form 10-K.
        71




---



##### 



Schedule 12-14
  PATRIOT
    CAPITAL FUNDING, INC.
    SCHEDULE OF INVESTMENTS IN AND ADVANCES TO
    AFFILIATES
  Year EndedDecember 31, 2006


As of








As ofAmount of Interest


December 31,








December 31,or Dividends


2005


Gross


Gross


2006Portfolio Company

Investment(1)

Credited to Income(2)


Fair Value


Additions(3)


Reductions(4)


Fair ValueAffiliate InvestmentsSmart, LLC

Debt

$
375,716


$



$
9,041,605


$
(1,075,000
)

$
7,966,605Membership Interest
      Class B(5)










1,000,000



(41,000
)


959,000Total Affiliate
    Investments



$
375,716














$
8,925,605       (1)
    
    All investments listed are restricted securities
    within the meaning of Rule 144 under the Securities Act of
    1933.(2)
    
    Represents the total amount of interest or dividends credited to
    income for the portion of the year that the investment was an
    affiliate investment (5% to 25% owned).(3)
    
    Gross additions include increases in investments resulting from
    new portfolio company investments and
    paid-in-kind
    interest or dividends. Gross additions also include net
    increases in unrealized appreciation or net decreases in
    unrealized depreciation.(4)
    
    Gross reductions include decreases in investments resulting from
    principal collections related to investment repayments. Gross
    reductions also include net increases in unrealized depreciation
    or net decreases in unrealized appreciation.(5)
    
    Non-income producing. 72




---



##### 



Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure    Item 9A.
    Controls
    and Procedures  Disclosure
    Controls and Procedures.
  Form 10-K), Rule 13a-15(e) 15d-15(e)
  Managements
    Annual Report on Internal Control Over Financial
    Reporting.
    
    Pertain to the maintenance of records that in reasonable detail
    accurately and fairly reflect the transactions and the
    dispositions of assets;
    Provide reasonable assurance that transactions are recorded as
    necessary to permit preparation of financial statements in
    accordance with generally accepted accounting principles, and
    that receipts and expenditures of the company are being made
    only in accordance with appropriate authorizations; and
    Provide reasonable assurance regarding prevention or timely
    detection of unauthorized acquisition, use or disposition of the
    companys assets that could have a material effect on our
    financial statements.       73




---



##### 



Attestation
    Report of Registered Public Accounting Firm.
  Form 10-K.
  Change in
    Internal Control Over Financial Reporting
    Item 9B.
    Other
    Information   PART III  Item 10.
    Directors,
    Executive Officers and Corporate Governance    Form 8-K.
  Item 11.
    Executive
    Compensation    Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters    Item 13.
    Certain
    Relationships and Related Transactions and Director
    Independence     74




---



##### 



Item 14.
    Principal
    Accounting Fees and Services   PART IV  Item 15.
    Exhibits,
    Financial Statement Schedules.                  2.
    The following financial statement schedule is filed herewith:
    Schedule 12-14  Patriot Capital Funding, Inc.
    Schedule of Investments In and Advances to Affiliates.3.
    Exhibits required to be filed by Item 601 of
    Regulation S-K.  Regulation S-K):
  ExhibitNumber

Description of Document3
.1

Restated Certificate of
    Incorporation (Incorporated by reference to Exhibit 3.1 of
    Patriot Capital Fundings
    Form 10-Q
    filed with the SEC on August 10, 2006).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).10
.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

Patriot Capital Funding, Inc.
    Amended Stock Option Plan (Incorporated by reference to
    Appendix B to Patriot Capital Fundings definitive
    proxy statement filed with the SEC on May 1, 2006).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 Association 75




---



##### 



ExhibitNumber

Description of Document10
.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

Amended and Restated
    Loan Funding and Servicing Agreement by and among the
    Patriot Capital Funding, Patriot Capital Funding LLC I,
    Fairway Finance Company, LLC, BMO Capital Markets Corp. and
    Wells Fargo Bank, National Association (Incorporated by
    reference to Exhibit 10.1 filed with Patriot Capital
    Fundings
    Form 8-K
    filed with the SEC on September 21, 2006).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  Delaware23 **


Consent of Grant Thornton LLP,
    independent registered public accounting firm.31
.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 76




---



##### 



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 5, 2007/s/  WILLIAM
    E. ALVAREZ,
    JR.William
    E. Alvarez, Jr.

Chief Financial Officer (Principal
    Financial and Accounting Officer)

March 5, 2007/s/  TIMOTHY
    W. HASSLERTimothy
    W. Hassler

Chief Operating and Compliance
    Officer and Director

March 5, 2007/s/  MEL
    P.
    MELSHEIMERMel
    P. Melsheimer

Chairman and Director

March 5, 2007/s/  STEVEN
    DROGINSteven
    Drogin

Director

March 5, 2007/s/  DENNIS
    C.
    ODOWDDennis
    C. ODowd

Director

March 5, 2007/s/  RICHARD
    A.
    SEBASTIAORichard
    A. Sebastiao

Director

March 5, 2007  77




---



##### 



Exhibit Index  Exhibit

Description23


Consent of Grant Thornton LLP,
    independent registered public accounting firm.31
.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).  78