FORM 10-Q
  UNITED STATES
 SECURITIES AND EXCHANGE
    COMMISSION
 WASHINGTON, DC 20549
  x
    Quarterly Report Pursuant to
    Section 13 or 15(d) of the Securities Exchange Act
    of 1934  For The Quarterly
    Period
 Ended September 30,
    2008
  o
    Transition Report Pursuant to
    Section 13 or 15(d) of the Securities Exchange Act of
    1934  Commission File
    Number:
 0-22832
  ALLIED CAPITAL
    CORPORATION
 (Exact Name of Registrant as
    Specified in its Charter)
  Maryland(State or Jurisdiction of
    Incorporation or Organization)

52-1081052(IRS Employer
    Identification No.)   1919 Pennsylvania Avenue,
    N.W.
 Washington, DC 20006
 (Address of Principal Executive
    Offices)
  Registrants telephone number, including area code:
    (202) 721-6100
    x o
  Rule 12b-2
  Large
    accelerated
    filer x
    Accelerated
    filer o
    Non-accelerated
    filer o
    Smaller
    reporting
    company o   o x




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##### 



ALLIED
    CAPITAL CORPORATION
  FORM 10-Q TABLE OF CONTENTS
  PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheet as of September 30, 2008
    (unaudited) and
    December 31, 2007

1Consolidated Statement of Operations (unaudited)  For the
    Three and Nine Months Ended September 30, 2008 and 2007

2Consolidated Statement of Changes in Net Assets (unaudited)
     For the Nine Months Ended September 30, 2008 and 2007

3Consolidated Statement of Cash Flows (unaudited)  For the
    Nine Months Ended September 30, 2008 and 2007

4Consolidated Statement of Investments as of September 30,
    2008
    (unaudited)

5Consolidated Statement of Investments as of December 31,
    2007

21Notes to Consolidated Financial Statements

36Report of Independent Registered Public Accounting Firm

71Item 2. Managements Discussion and Analysis of
    Financial Condition and Results of Operations

76Item 3. Quantitative and Qualitative Disclosures About
    Market Risk

119Item 4. Controls and Procedures

119PART II. OTHER INFORMATIONItem 1. Legal Proceedings

120Item 1A. Risk Factors

121Item 2. Unregistered Sales of Equity Securities and
    Use of Proceeds

129Item 3. Defaults Upon Senior Securities

129Item 4. Submission of Matters to a Vote of Security
    Holders

129Item 5. Other Information

129Item 6. Exhibits

130Signatures

134




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##### 



PART I:
    FINANCIAL INFORMATION Item
    1.  Financial Statements  ALLIED
    CAPITAL CORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEET
  September 30,


December 31,(in thousands, except per share
    amounts)

2008


2007(unaudited)ASSETSPortfolio at value:Private financeCompanies more than 25% owned (cost:
    2008-$2,242,291;
    2007-$1,622,094)

$
1,433,700


$
1,279,080Companies 5% to 25% owned (cost:
    2008-$313,212;
    2007-$426,908)


360,905



389,509Companies less than 5% owned (cost:
    2008-$2,600,556;
    2007-$2,994,880)


2,307,332



2,990,732Total private finance (cost:
    2008-$5,156,059;
    2007-$5,043,882)


4,101,937



4,659,321Commercial real estate finance (cost:
    2008-$85,229;
    2007-$96,942)


106,632



121,200Total portfolio at value (cost:
    2008-$5,241,288;
    2007-$5,140,824)


4,208,569



4,780,521Accrued interest and dividends receivable


69,848



71,429Other assets


131,949



157,864Investments in money market and other securities


13,384



201,222Cash


201,915



3,540Total assets

$
4,625,665


$
5,214,576LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Notes payable (maturing within one year:
    2008-$15,950;
    2007-$153,000)

$
1,960,950


$
1,922,220Revolving line of credit


170,000



367,250Accounts payable and other liabilities


81,309



153,259Total liabilities


2,212,259



2,442,729Commitments and contingenciesShareholders equity:Common stock, $0.0001 par value, 400,000 shares authorized;
    178,692 and 158,002 shares issued and outstanding at
    September 30, 2008, and December 31, 2007, respectively


18



16Additional paid-in capital


3,060,271



2,657,939Common stock held in deferred compensation trusts






(39,942
)Notes receivable from sale of common stock


(1,851
)


(2,692
)Net unrealized appreciation (depreciation)


(1,066,833
)


(379,327
)Undistributed earnings


421,801



535,853Total shareholders equity


2,413,406



2,771,847Total liabilities and shareholders equity

$
4,625,665


$
5,214,576Net asset value per common share

$
13.51


$
17.54   The accompanying notes are an
    integral part of these consolidated financial statements.
 1




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##### 



ALLIED
    CAPITAL CORPORATION AND SUBSIDIARIES
  CONSOLIDATED
    STATEMENT OF OPERATIONS
  For the Three


For the NineMonths Ended


Months EndedSeptember 30,


September 30,(in thousands, except per share
    amounts)

2008


2007


2008


2007(unaudited)


(unaudited)Interest and Related Portfolio Income:Interest and dividendsCompanies more than 25% owned

$
29,699


$
28,198


$
85,167


$
83,895Companies 5% to 25% owned


9,864



9,374



31,587



32,111Companies less than 5% owned


72,644



68,097



249,325



194,460Total interest and dividends


112,207



105,669



366,079



310,466Fees and other incomeCompanies more than 25% owned


6,130



5,146



22,638



14,552Companies 5% to 25% owned


342



19



411



518Companies less than 5% owned


1,983



7,534



11,056



18,460Total fees and other income


8,455



12,699



34,105



33,530Total interest and related portfolio income


120,662



118,368



400,184



343,996Expenses:Interest


35,949



33,744



109,974



98,368Employee


21,443



26,306



57,439



76,845Employee stock options


1,477



18,312



9,531



31,492Administrative


14,138



10,496



36,100



38,225Total operating expenses


73,007



88,858



213,044



244,930Net investment income before income taxes


47,655



29,510



187,140



99,066Income tax expense (benefit), including excise tax


2,060



11,192



8,141



16,073Net investment income


45,595



18,318



178,999



82,993Net Realized and Unrealized Gains (Losses):Net realized gains (losses)Companies more than 25% owned


1,098



201,582



1,967



267,359Companies 5% to 25% owned


7,234



(5,475
)


(6,569
)


(5,171
)Companies less than 5% owned


53,710



16,263



51,932



52,727Total net realized gains (losses)


62,042



212,370



47,330



314,915Net change in unrealized appreciation or depreciation


(425,899
)


(327,156
)


(687,506
)


(272,132
)Total net gains (losses)


(363,857
)


(114,786
)


(640,176
)


42,783Net increase (decrease) in net assets resulting from operations

$
(318,262
)

$
(96,468
)

$
(461,177
)

$
125,776Basic earnings (loss) per common share

$
(1.78
)

$
(0.63
)

$
(2.70
)

$
0.83Diluted earnings (loss) per common share

$
(1.78
)

$
(0.63
)

$
(2.70
)

$
0.81Weighted average common shares outstanding  basic


178,692



154,025



171,084



151,979Weighted average common shares outstanding  diluted


178,692



154,025



171,084



154,708   The accompanying notes are an
    integral part of these consolidated financial statements.
 2




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##### 



ALLIED
    CAPITAL CORPORATION AND SUBSIDIARIES
  CONSOLIDATED STATEMENT OF CHANGES IN NET
    ASSETS
  For the Nine MonthsEnded September 30,(in thousands, except per share
    amounts)

2008


2007(unaudited)Operations:Net investment income

$
178,999


$
82,993Net realized gains


47,330



314,915Net change in unrealized appreciation or depreciation


(687,506
)


(272,132
)Net increase (decrease) in net assets resulting from operations


(461,177
)


125,776Shareholder distributions:Common stock dividends


(340,381
)


(293,706
)Net decrease in net assets resulting from shareholder
    distributions


(340,381
)


(293,706
)Capital share transactions:Sale of common stock


402,478



93,784Issuance of common stock in lieu of cash distributions


3,751



12,447Issuance of common stock upon the exercise of stock options






13,307Cash portion of option cancellation payment






(52,833
)Stock option expense


9,655



32,069Net decrease in notes receivable from sale of common stock


841



142Purchase of common stock held in deferred compensation trusts


(943
)


(9,272
)Distribution of common stock held in deferred compensation trusts


27,335



528Other






2,297Net increase in net assets resulting from capital share
    transactions


443,117



92,469Total decrease in net assets


(358,441
)


(75,461
)Net assets at beginning of period


2,771,847



2,841,244Net assets at end of period

$
2,413,406


$
2,765,783Net asset value per common share

$
13.51


$
17.90Common shares outstanding at end of period


178,692



154,506   The accompanying notes are an
    integral part of these consolidated financial statements.
 3




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##### 






ALLIED
    CAPITAL CORPORATION AND SUBSIDIARIES
  CONSOLIDATED
    STATEMENT OF CASH FLOWS
  For the Nine MonthsEnded September 30,(in thousands)

2008


2007(unaudited)Cash flows from operating activities:Net increase (decrease) in net assets resulting from operations

$
(461,177
)

$
125,776Adjustments:Portfolio investments


(1,019,750
)


(1,236,671
)Principal collections related to investment repayments or sales


878,229



1,086,513Payment-in-kind interest and dividends, net of cash collections


(35,947
)


(5,462
)Net increase (decrease) in accrued interest and dividends


835



(10,710
)Net collection (amortization) of discounts and fees


(10,176
)


(1,215
)Net redemption of (investments in) U.S. Treasury bills, money
    market and other securities


187,838



(88,859
)Stock option expense


9,655



32,069Changes in other assets and liabilities


(42,537
)


13,943Depreciation and amortization


1,752



1,540Realized gains from the receipt of notes and other consideration
    from sale of investments, net of collections


14,430



(29,716
)Realized losses


87,867



81,456Net change in unrealized (appreciation) or depreciation


687,506



272,132Net cash provided by (used in) operating activities


298,525



240,796Cash flows from financing activities:Sale of common stock


402,478



93,784Sale of common stock upon the exercise of stock options






13,307Collections of notes receivable from sale of common stock


841



142Borrowings under notes payable


193,000



230,000Repayments on notes payable


(153,000
)


Net borrowings under (repayments on) revolving line of credit


(197,250
)


(207,750
)Cash portion of option cancellation payment






(52,833
)Purchase of common stock held in deferred compensation trusts


(943
)


(9,272
)Other financing activities


(8,646
)


(6,363
)Common stock dividends and distributions paid


(336,630
)


(288,682
)Net cash provided by (used in) financing activities


(100,150
)


(227,667
)Net increase (decrease) in cash


198,375



13,129Cash at beginning of period


3,540



1,687Cash at end of period

$
201,915


$
14,816   The accompanying notes are an
    integral part of these consolidated financial statements.
 4




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ALLIED
    CAPITAL CORPORATION AND SUBSIDIARIES
  CONSOLIDATED
    STATEMENT OF INVESTMENTS
  Private Finance



September 30, 2008Portfolio Company



(unaudited)(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


ValueCompanies More Than 25% OwnedAGILE Fund I,
    LLC(5)

Equity Interests





$
814


$
751(Private Equity Fund)

Total Investment






814



751Alaris Consulting, LLC

Senior Loan (16.5%, Due 12/05 
    12/07)(6)

$
27,055



26,987



(Business Services)

Equity Interests






6,738



Total Investment






33,725



Standby Letters of Credit ($231)AllBridge Financial, LLC

Equity Interests






29,648



19,431(Asset Management)

Total Investment






29,648



19,431Standby Letter of Credit ($15,000)Allied Capital Senior Debt Fund,
    L.P.(5)

Equity Interests (See Note 3)






31,800



31,965(Private Debt Fund)

Total Investment






31,800



31,965Avborne,
    Inc.(7)

Preferred Stock (12,500 shares)










935(Business Services)

Common Stock (27,500 shares)










Total Investment










935Avborne Heavy Maintenance,
    Inc.(7)

Preferred Stock (1,568 shares)










157(Business Services)

Common Stock (2,750 shares)










896Total Investment










1,053Aviation Properties Corporation

Common Stock (100 shares)






68



(Business Services)

Total Investment






68



Standby Letters of Credit ($1,000)Border Foods, Inc.

Senior Loan (13.5%, Due
    12/11)(6)


18,834



12,537



18,834(Consumer Products)

Senior Loan (9.0%, Due 12/09  12/11)


23,127



23,127



23,127Preferred Stock (100,000 shares)






12,721



10,031Common Stock (260,467 shares)






3,847



Total Investment






52,232



51,992Calder Capital Partners,
    LLC(5)

Senior Loan (10.4%, Due
    5/09)(6)


4,277



4,277



668(Asset Management)

Equity Interests






2,398



Total Investment






6,675



668Callidus Capital Corporation

Senior Loan (12.0%, Due 12/08)


1,750



1,750



1,750(Asset Management)

Subordinated Debt (17.8%, Due 8/13  2/14)


13,318



13,318



13,318Common Stock (100 shares)






2,067



40,032Total Investment






17,135



55,100Guaranty ($9,636)  (1)

Interest rates represent the weighted average annual stated
    interest rate on loans and debt securities, which are presented
    by nature of indebtedness for a single issuer. The maturity
    dates represent the earliest and the latest maturity dates.(2)

Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.(5)

Non-registered investment company.(6)

Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.(7)

Avborne, Inc. and Avborne Heavy Maintenance, Inc. are affiliated
    companies.   The accompanying notes are an
    integral part of these consolidated financial statements.
 5




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ALLIED CAPITAL CORPORATION AND
    SUBSIDIARIES
  CONSOLIDATED STATEMENT OF
    INVESTMENTS  (Continued)
  Private Finance



September 30, 2008Portfolio Company



(unaudited)(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


ValueCiena Capital LLC

Senior Loan (6.8%,
    Due 3/09)(6)

$
319,031


$
319,031


$
180,194(Financial Services)

Class A Equity Interests (25.0%  See
    Note 3)(6)


99,044



99,044



Class B Equity Interests






119,436



Class C Equity Interests






109,169



Total Investment






646,680



180,194Guaranty ($5,000  See Note 3)Standby Letters of Credit ($102,600  
      See Note 3)CitiPostal Inc.

Senior Loan (7.2%, Due 12/13)


692



681



681(Business Services)

Unitranche Debt (12.0%, Due 12/13)


51,625



51,404



51,404Subordinated Debt (16.0%, Due 12/15)


8,756



8,756



8,756Common Stock (37,024 shares)






12,726



15,688Total Investment






73,567



76,529Coverall North America, Inc.

Unitranche Debt (12.0%, Due 7/11)


32,035



31,939



31,939(Business Services)

Subordinated Debt (15.0%, Due 7/11)


5,563



5,548



5,548Common Stock (763,333 shares)






14,361



17,738Total Investment






51,848



55,225CR Holding, Inc.

Subordinated Debt (16.6%, Due 2/13)


38,968



38,854



38,854(Consumer Products)

Common Stock (32,090,696 shares)






28,744



9,451Total Investment






67,598



48,305Crescent Equity
    Corp.(8)

Senior Loan (10.0%, Due 1/09)


433



433



433(Business Services/

Subordinated Debt (11.0%, Due 9/11 6/17)


31,989



31,893



31,893Broadcasting & Cable)

Subordinated Debt (12.5%, Due
    12/08)(6)


1,550



1,550



Common Stock (174 shares)






81,195



17,330Total Investment






115,071



49,656Guaranty ($900)Standby Letters of Credit ($200)Direct Capital Corporation

Subordinated Debt (16.0%, Due 3/13)


53,527



53,352



53,352(Financial Services)

Common Stock (2,317,020 shares)






25,732



5,424Total Investment






79,084



58,776Financial Pacific Company

Subordinated Debt (17.4%, Due 2/12  8/12)


68,738



68,600



68,600(Financial Services)

Preferred Stock (9,458 shares)






8,865



12,466Common Stock (12,711 shares)






12,783



Total Investment






90,248



81,066  (1)

Interest rates represent the weighted average annual stated
    interest rate on loans and debt securities, which are presented
    by nature of indebtedness for a single issuer. The maturity
    dates represent the earliest and the latest maturity dates.(2)

Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.(6)

Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.(8)

The Companys investment in Crescent Equity Corp. had a
    cost basis of $115.1 million and holds investments in
    Crescent Hotels & Resorts, LLC and affiliates
    (Business Services) with a value of $49.7 million, and
    Longview Cable & Data, LLC (Broadcasting & Cable) with
    a value of zero, for a total value of $49.7 million.   The accompanying notes are an
    integral part of these consolidated financial statements.
 6




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ALLIED CAPITAL CORPORATION AND
    SUBSIDIARIES
  CONSOLIDATED STATEMENT OF
    INVESTMENTS  (Continued)
  Private Finance



September 30, 2008Portfolio Company



(unaudited)(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


ValueForeSite Towers, LLC

Equity Interest





$



$
980(Tower Leasing)

Total Investment










980Global Communications, LLC

Senior Loan (10.0%, Due
    9/02)(6)

$
1,335



1,335



1,335(Business Services)

Total Investment






1,335



1,335Hot Light Brands, Inc.

Senior Loan (9.0%, Due
    2/11)(6)


29,662



29,662



13,256(Retail)

Common Stock (93,500 shares)






5,151



Total Investment






34,813



13,256Standby Letter of Credit ($105)Hot Stuff Foods, LLC

Senior Loan (7.2%, Due 2/11-2/12)


53,707



53,554



52,659(Consumer Products)

Subordinated Debt (13.3%, Due
    8/12-2/13)(6)


83,692



83,393



Common Stock (1,147,453 shares)






56,187



Total Investment






193,134



52,659Huddle House, Inc.

Subordinated Debt (15.0%, Due 12/12)


56,778



56,590



56,590(Retail)

Common Stock (358,428 shares)






35,828



32,996Total Investment






92,418



89,586IAT Equity, LLC and Affiliates

Subordinated Debt (9.0%, Due 6/14)


6,000



6,000



6,000d/b/a Industrial Air Tool

Equity Interests






7,500



8,633(Industrial Products)

Total Investment






13,500



14,633Impact Innovations Group, LLC

Equity Interests in Affiliate










321(Business Services)

Total Investment










321Insight Pharmaceuticals Corporation

Subordinated Debt (15.0%, Due 9/12)


45,595



45,498



45,498(Consumer Products)

Subordinated Debt (19.0%, Due
    9/12)(6)


16,177



16,126



15,698Preferred Stock (25,000 shares)






25,000



Common Stock (620,000 shares)






6,325



Total Investment






92,949



61,196Jakel, Inc.

Subordinated Debt (15.5%, Due
    3/08)(6)


748



748



748(Industrial Products)

Total Investment






748



748Knightsbridge CLO 2007-1
    Ltd.(4)

Class E Notes (11.8%, Due 1/22)


18,700



18,700



16,431(CLO)

Income Notes
    (15.0%)(11)






40,656



35,705Total Investment






59,356



52,136  (1)

Interest rates represent the weighted average annual stated
    interest rate on loans and debt securities, which are presented
    by nature of indebtedness for a single issuer. The maturity
    dates represent the earliest and the latest maturity dates.(2)

Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.(4)

Non-U.S. company
    or principal place of business outside the U.S.(6)

Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.(11)

Represents the effective interest yield earned on the cost basis
    of these preferred equity investments and income notes. The
    yield is included in interest income in the consolidated
    statement of operations.   The accompanying notes are an
    integral part of these consolidated financial statements.
 7




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##### 



ALLIED CAPITAL CORPORATION AND
    SUBSIDIARIES
  CONSOLIDATED STATEMENT OF
    INVESTMENTS  (Continued)
  Private Finance



September 30, 2008Portfolio Company



(unaudited)(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


ValueKnightsbridge CLO
    2008-1
    Ltd.(4)

Class C Notes (10.5%, Due 6/18)

$
12,800


$
12,800


$
12,800(CLO)

Class D Notes (11.5%, Due 6/18)


8,000



8,000



8,000Class E Notes (8.0%, Due 6/18)


13,200



10,534



10,534Income Notes
    (16.6%)(11)






20,453



20,453Total Investment






51,787



51,787Legacy Partners Group, Inc.

Senior Loan (14.0%, Due
    5/09)(6)


843



843



843(Financial Services)

Equity Interests






4,273



1,268Total Investment






5,116



2,111MHF Logistical Solutions, Inc.

Subordinated Debt (13.0%, Due 6/12 
    6/13)(6)


49,841



49,633



(Business Services)

Preferred Stock (10,000 shares)










Common Stock (20,934 shares)






20,942



Total Investment






70,575



MVL Group, Inc.

Senior Loan (12.0%, Due 6/09  7/09)


30,674



30,657



30,657(Business Services)

Subordinated Debt (14.5%, Due 6/09  7/09)


40,958



40,831



40,831Common Stock (560,716 shares)






555



21Total Investment






72,043



71,509Old Orchard Brands, LLC

Subordinated Debt (18.0%, Due 7/14)


18,760



18,688



18,688(Consumer Products)

Equity Interests






15,857



35,081Total Investment






34,545



53,769Penn Detroit Diesel Allison, LLC

Subordinated Debt (15.5%, Due 8/13)


37,701



37,580



37,580(Business Services)

Equity Interests






18,862



33,223Total Investment






56,442



70,803Service Champ, Inc.

Subordinated Debt (15.5%, Due 4/12)


26,878



26,808



26,808(Business Services)

Common Stock (55,112 shares)






11,785



24,726Total Investment






38,593



51,534Startec Equity, LLC

Equity Interests






206



214(Telecommunications)

Total Investment






206



214Unitranche Fund LLC

Subordinated Certificates (10.3%)






114,339



114,339(Private Debt Fund)

Equity Interests






1



1Total Investment






114,340



114,340Worldwide Express Operations, LLC

Subordinated Debt (14.0%, Due 2/14)


2,812



2,670



2,670(Business Services)

Equity Interests






11,384



16,262Warrants






144



205Total Investment






14,198



19,137Total
    companies more than 25% owned





$
2,242,291


$
1,433,700  (1)

Interest rates represent the weighted average annual stated
    interest rate on loans and debt securities, which are presented
    by nature of indebtedness for a single issuer. The maturity
    dates represent the earliest and the latest maturity dates.(2)

Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.(4)

Non-U.S. company
    or principal place of business outside the U.S.(6)

Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.(11)

Represents the effective interest yield earned on the cost basis
    of these preferred equity investments and income notes. The
    yield is included in interest income in the consolidated
    statement of operations.   The accompanying notes are an
    integral part of these consolidated financial statements.
 8




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##### 



ALLIED CAPITAL CORPORATION AND
    SUBSIDIARIES
  CONSOLIDATED STATEMENT OF
    INVESTMENTS  (Continued)
  Private Finance



September 30, 2008Portfolio Company



(unaudited)(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


ValueCompanies 5% to 25% Owned10th

    Street, LLC

Subordinated Debt (13.0%, Due 11/14)

$
21,223


$
21,109


$
21,223(Business Services)

Equity Interests






421



1,075Option






25



25Total Investment






21,555



22,323Advantage Sales & Marketing, Inc.

Subordinated Debt (12.0%, Due 3/14)


157,811



157,302



157,302(Business Services)

Equity Interests










13,000Total Investment






157,302



170,302Air Medical Group Holdings LLC

Senior Loan (5.6%, Due 3/11)


4,635



4,597



4,332(Healthcare Services)

Equity Interests






2,993



10,700Total Investment






7,590



15,032Alpine ESP Holdings, Inc.

Preferred Stock (536 shares)






531



(Business Services)

Common Stock (11,657 shares)






13



Total Investment






544



Amerex Group, LLC

Subordinated Debt (12.3%, Due 1/13)


8,789



8,784



8,784(Consumer Products)

Equity Interests






3,508



13,662Total Investment






12,292



22,446BB&T Capital Partners/WindsorMezzanine Fund,
    LLC(5)

Equity Interests






11,787



10,346(Private Equity Fund)

Total Investment






11,787



10,346Becker Underwood, Inc.

Subordinated Debt (14.5%, Due 8/12)


25,341



25,284



25,341(Industrial Products)

Common Stock (4,376 shares)






5,014



4,300Total Investment






30,298



29,641Drew Foam Companies, Inc.

Preferred Stock (622,555 shares)






623



335(Business Services)

Common Stock (6,286 shares)






6



Total Investment






629



335Hilden America, Inc.

Common Stock (19 shares)






454



70(Consumer Products)

Total Investment






454



70Lydall Transport, Ltd.

Equity Interests






432



423(Business Services)

Total Investment






432



423  (1)

Interest rates represent the weighted average annual stated
    interest rate on loans and debt securities, which are presented
    by nature of indebtedness for a single issuer. The maturity
    dates represent the earliest and the latest maturity dates.(2)

Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.(5)

Non-registered investment company.   The accompanying notes are an
    integral part of these consolidated financial statements.
 9




---



##### 



ALLIED CAPITAL CORPORATION AND
    SUBSIDIARIES
  CONSOLIDATED STATEMENT OF
    INVESTMENTS  (Continued)


Private Finance



September 30, 2008Portfolio Company



(unaudited)(in thousands, except number of shares)

Investment(1)(2)

Principal

Cost

ValueMedBridge Healthcare, LLC

Senior Loan (8.0%, Due
    8/09)(6)

$
6,587


$
6,587


$
6,587(Healthcare Services)

Subordinated Debt (10.0%, Due
    8/14)(6)


5,153



5,153



753Convertible Subordinated Debt (2.0%, Due
    8/14)(6)


2,970



984



Equity Interests






1,425



Total Investment






14,149



7,340Multi-Ad Services, Inc.

Unitranche Debt (11.3%, Due 11/11)


3,026



3,007



2,947(Business Services)

Equity Interests






1,731



1,422Total Investment






4,738



4,369Progressive International

Preferred Stock (500 shares)






500



1,103Corporation

Common Stock (197 shares)






13



4,600(Consumer Products)

Warrants










Total Investment






513



5,703Regency Healthcare Group, LLC

Unitranche Debt (11.1%, Due 6/12)


10,901



10,851



11,107(Healthcare Services)

Equity Interests






1,298



1,568Total Investment






12,149



12,675SGT India Private
    Limited(4)

Common Stock (150,596 shares)






4,122



1,206(Business Services)

Total Investment






4,122



1,206Soteria Imaging Services, LLC

Subordinated Debt (11.3%, Due 11/10)


4,250



4,155



4,107(Healthcare Services)

Equity Interests






1,881



2,157Total Investment






6,036



6,264Triax Holdings, LLC

Subordinated Debt (21.0%, Due 2/12)


10,551



10,514



10,316(Consumer Products)

Equity Interests






16,528



42,114Total Investment






27,042



52,430Universal Environmental Services, LLC

Equity Interests






1,580



(Business Services)

Total Investment






1,580



Total
    companies 5% to 25% owned





$
313,212


$
360,905Companies Less Than 5% Owned3SI Security Systems, Inc.

Subordinated Debt (14.6%, Due 8/13)

$
28,865


$
28,779


$
28,115(Consumer Products)

Total Investment






28,779



28,115Abraxas Corporation

Subordinated Debt (14.6%, Due 4/13)


37,000



36,831



36,274(Business Services)

Total Investment






36,831



36,274AgData, L.P.

Senior Loan (12.0%, Due 7/12)


1,843



1,837



1,834(Consumer Services)

Unitranche Debt (12.0%, Due 7/12)


13,925



13,876



13,854Total Investment






15,713



15,688  (1)

Interest rates represent the weighted average annual stated
    interest rate on loans and debt securities, which are presented
    by nature of indebtedness for a single issuer. The maturity
    dates represent the earliest and the latest maturity dates.(2)

Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.(4)

Non-U.S. company
    or principal place of business outside the U.S.(6)

Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.   The accompanying notes are an
    integral part of these consolidated financial statements.
 10




---



##### 



ALLIED CAPITAL CORPORATION AND
    SUBSIDIARIES
  CONSOLIDATED STATEMENT OF
    INVESTMENTS  (Continued)
  Private Finance



September 30, 2008Portfolio Company



(unaudited)(in thousands, except number of shares)

Investment(1)(2)

Principal

Cost

ValueAugusta Sportswear Group, Inc.

Subordinated Debt (13.0%, Due 1/15)

$
53,000


$
52,818


$
53,032(Consumer Products)

Common Stock (2,500 shares)






2,500



2,000Total Investment






55,318



55,032Axium Healthcare Pharmacy, Inc.

Senior Loan (14.0%, Due 12/12)


3,750



3,722



3,667(Healthcare Services)

Unitranche Debt (14.0%, Due 12/12)


8,500



8,469



7,897Common Stock (22,860 shares)






2,286



99Total Investment






14,477



11,663Baird Capital Partners IV
    Limited(5)

Limited Partnership Interest






3,114



2,994(Private Equity Fund)

Total Investment






3,114



2,994BenefitMall Holdings Inc.

Subordinated Debt (18.0%, Due 6/14)


40,326



40,234



40,234(Business Services)

Common Stock (39,274,290
    shares)(12)






39,274



90,653Warrants(12)










Total Investment






79,508



130,887Broadcast Electronics, Inc.

Senior Loan (9.8%, Due
    7/12)(6)


4,913



4,885



1,358(Business Services)

Total Investment






4,885



1,358Bushnell, Inc.

Subordinated Debt (10.3%, Due 2/14)


41,325



39,955



36,572(Consumer Products)

Total Investment






39,955



36,572Callidus Debt PartnersCDO Fund I,
    Ltd.(4)(10)

Class C Notes (12.9%, Due 12/13)


18,800



18,913



17,094(CDO)

Class D Notes (17.0%, Due 12/13)


9,400



9,456



8,674Total Investment






28,369



25,768Callidus Debt PartnersCLO Fund III,
    Ltd.(4)(10)

Preferred Shares (23,600,000 shares,
    14.2%)(11)






20,100



18,129(CLO)

Total Investment






20,100



18,129Callidus Debt PartnersCLO Fund IV,
    Ltd.(4)(10)

Class D Notes (7.3%, Due 4/20)


3,000



1,997



2,165(CLO)

Income Notes
    (20.6%)(11)






14,509



13,749Total Investment






16,506



15,914  (1)

Interest rates represent the weighted average annual stated
    interest rate on loans and debt securities, which are presented
    by nature of indebtedness for a single issuer. The maturity
    dates represent the earliest and the latest maturity dates.(2)

Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.(4)

Non-U.S. company
    or principal place of business outside the U.S.(5)

Non-registered investment company.(6)

Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.(10)

The fund is managed by Callidus Capital, a portfolio company of
    Allied Capital.(11)

Represents the effective interest yield earned on the cost basis
    of these preferred equity investments and income notes. The
    yield is included in interest income in the consolidated
    statement of operations.(12)

Common stock is non-voting. In addition to non-voting stock
    ownership, the Company has an option to acquire a majority of
    the voting securities of the portfolio company at fair market
    value.   The accompanying notes are an
    integral part of these consolidated financial statements.
 11




---



##### 



ALLIED CAPITAL CORPORATION AND
    SUBSIDIARIES
  CONSOLIDATED STATEMENT OF
    INVESTMENTS  (Continued)


Private Finance



September 30, 2008Portfolio Company



(unaudited)(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


ValueCallidus Debt PartnersCLO Fund V,
    Ltd.(4)(10)

Income Notes
    (22.0%)(11)





$
13,251


$
12,694(CLO)

Total Investment






13,251



12,694Callidus Debt PartnersCLO Fund VI,
    Ltd.(4)(10)

Class D Notes (8.8%, Due 10/21)

$
9,000



7,104



5,783(CLO)

Income Notes
    (23.2%)(11)






27,907



28,111Total Investment






35,011



33,894Callidus Debt PartnersCLO Fund VII,
    Ltd.(4)(10)

Income Notes
    (15.3%)(11)






23,825



19,699(CLO)

Total Investment






23,825



19,699Callidus MAPS CLO Fund I
    LLC(10)

Class E Notes (8.7%, Due 12/17)


17,000



17,000



13,955(CLO)

Income Notes
    (4.4%)(11)






45,792



33,767Total Investment






62,792



47,722Callidus MAPS CLO Fund II,
    Ltd.(4)(10)

Subordinated Debt (7.0%, Due 7/22)
    Income Notes
    (17.4%)(11)


7,700



3,494
    18,230



3,494
    15,224(CLO)

Total Investment






21,724



18,718Carlisle Wide Plank Floors, Inc.

Senior Loan (7.5%, Due 6/11)


500



497



481(Consumer Products)

Unitranche Debt (14.5%, Due 6/11)


3,161



3,136



3,031Preferred Stock (345,056 Shares)






345



150Total Investment






3,978



3,662Catterton Partners VI,
    L.P.(5)

Limited Partnership Interest






2,776



2,771(Private Equity Fund)

Total Investment






2,776



2,771Centre Capital Investors V,
    L.P.(5)

Limited Partnership Interest






1,741



1,526(Private Equity Fund)

Total Investment






1,741



1,526  (1)

Interest rates represent the weighted average annual stated
    interest rate on loans and debt securities, which are presented
    by nature of indebtedness for a single issuer. The maturity
    dates represent the earliest and the latest maturity dates.(2)

Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.(4)

Non-U.S. company
    or principal place of business outside the U.S.(5)

Non-registered investment company.(10)

The fund is managed by Callidus Capital, a portfolio company of
    Allied Capital.(11)

Represents the effective interest yield earned on the cost basis
    of these preferred equity investments and income notes. The
    yield is included in interest income in the consolidated
    statement of operations.   The accompanying notes are an
    integral part of these consolidated financial statements.
 12




---



##### 



ALLIED CAPITAL CORPORATION AND
    SUBSIDIARIES
  CONSOLIDATED STATEMENT OF
    INVESTMENTS  (Continued)
   Private Finance



September 30, 2008Portfolio Company



(unaudited)(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


ValueCK Franchising, Inc.

Senior Loan (7.0%, Due 7/12)

$
6,075


$
6,000


$
6,000(Consumer Services)

Subordinated Debt (12.3%, Due 7/12  7/17)


21,000



20,923



20,923Preferred Stock (1,281,887 shares)






1,282



1,549Common Stock (7,585,549 shares)






7,586



10,700Total Investment






35,791



39,172Commercial Credit Group, Inc.

Subordinated Debt (15.0%, Due 6/15)


16,000



15,971



15,971(Financial Services)

Preferred Stock (64,679 shares)






15,543



9,073Warrants










Total Investment






31,514



25,044Community Education Centers, Inc.

Subordinated Debt (13.5%, Due 11/13)


35,413



35,347



33,701(Education Services)

Total Investment






35,347



33,701Component Hardware Group, Inc.

Subordinated Debt (13.5%, Due 1/13)


18,640



18,581



18,444(Industrial Products)

Total Investment






18,581



18,444Cook Inlet Alternative Risk, LLC

Unitranche Debt (10.8%, Due 4/13)


90,000



89,597



87,765(Business Services)

Equity Interests






552



300Total Investment






90,149



88,065Cortec Group Fund IV,
    L.P.(5)

Limited Partnership Interest






4,647



4,084(Private Equity)

Total Investment






4,647



4,084Diversified Mercury

Senior Loan (6.2%, Due 3/13)


2,983



2,969



2,717Communications, LLC(Business Services)

Total Investment






2,969



2,717Digital VideoStream, LLC

Unitranche Debt (11.0%, Due 2/12)


14,568



14,498



14,609(Business Services)

Convertible Subordinated Debt (10.0%, Due 2/16)


4,434



4,421



5,412Total Investment






18,919



20,021DirectBuy Holdings, Inc.

Subordinated Debt (14.5%, Due 5/13)


75,428



75,110



72,282(Consumer Products)

Equity Interests






8,000



6,000Total Investment






83,110



78,282Distant Lands Trading Co.

Senior Loan (10.0%, Due 11/11)


4,050



4,022



3,892(Consumer Products)

Unitranche Debt (13.0%, Due 11/11)


42,890



42,770



42,684Common Stock (3,451 shares)






3,451



678Total Investment






50,243



47,254Driven Brands, Inc.

Subordinated Debt (11.7%, Due 1/15  7/15)


88,300



88,082



88,082d/b/a Meineke and Econo Lube

Common Stock (10,463,473
    shares)(12)






26,398



13,469(Consumer Services)

Warrants(12)










Total Investment






114,480



101,551  (1)

Interest rates represent the weighted average annual stated
    interest rate on loans and debt securities, which are presented
    by nature of indebtedness for a single issuer. The maturity
    dates represent the earliest and the latest maturity dates.(2)

Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.(5)

Non-registered investment company.(12)

Common stock is non-voting. In addition to non-voting stock
    ownership, the Company has an option to acquire a majority of
    the voting securities of the portfolio company at fair market
    value.    The accompanying notes are an
    integral part of these consolidated financial statements.
 13




---



##### 



ALLIED CAPITAL CORPORATION AND
    SUBSIDIARIES
  CONSOLIDATED STATEMENT OF
    INVESTMENTS  (Continued)
  Private Finance



September 30, 2008Portfolio Company



(unaudited)(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


ValueDryden XVIII LeveragedLoan 2007
    Limited(4)

Class B Notes (7.3%, Due 10/19)

$
9,000


$
7,580


$
7,383(CLO)

Income Notes
    (17.1%)(11)






22,462



20,760Total Investment






30,042



28,143Dynamic India Fund
    IV(4)(5)

Equity Interests






9,350



11,524(Private Equity Fund)

Total Investment






9,350



11,524EarthColor, Inc.

Subordinated Debt (15.0%, Due 11/13)


119,248



118,813



118,813(Business Services)

Common Stock
    (63,438 shares)(12)






63,438



9,751Warrants(12)










Total Investment






182,251



128,564eCentury Capital Partners,
    L.P.(5)

Limited Partnership Interest






7,274



1,822(Private Equity Fund)

Total Investment






7,274



1,822eInstruction Corporation

Subordinated Debt (13.6%, Due 7/14-1/15)


33,266



33,124



31,384(Education Services)

Common Stock (2,406 shares)






2,500



2,300Total Investment






35,624



33,684Farleys & Sathers Candy Company, Inc.

Subordinated Debt (11.0%, Due 3/11)


2,500



2,493



2,375(Consumer Products)

Total Investment






2,493



2,375FCP-BHI Holdings, LLC

Subordinated Debt (12.0%, Due 9/13)


26,485



26,387



25,390d/b/a Bojangles

Equity Interests






968



1,700(Retail)

Total Investment






27,355



27,090Fidus Mezzanine Capital,
    L.P.(5)

Limited Partnership Interest






9,597



9,077(Private Equity Fund)

Total Investment






9,597



9,077Freedom Financial Network, LLC

Senior Loan (6.5%, Due 2/13)


7,000



6,903



6,570(Financial Services)

Subordinated Debt (13.5%, Due 2/14)


13,000



12,942



12,625Total Investment






19,845



19,195Frozen Specialties, Inc.

Warrants






375



(Consumer Products)

Total Investment






375



Garden Ridge Corporation

Subordinated Debt (8.0%, Due
    5/12)(6)


20,500



20,500



20,500(Retail)

Total Investment






20,500



20,500Geotrace Technologies, Inc.

Warrants






2,027



2,800(Energy Services)

Total Investment






2,027



2,800  (1)

Interest rates represent the weighted average annual stated
    interest rate on loans and debt securities, which are presented
    by nature of indebtedness for a single issuer. The maturity
    dates represent the earliest and the latest maturity dates.(2)

Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.(4)

Non-U.S. company
    or principal place of business outside the U.S.(5)

Non-registered investment company.(6)

Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.(11)

Represents the effective interest yield earned on the cost basis
    of these preferred equity investments and income notes. The
    yield is included in interest income in the consolidated
    statement of operations.(12)

Common stock is non-voting. In addition to non-voting stock
    ownership, the Company has an option to acquire a majority of
    the voting securities of the portfolio company at fair market
    value.   The accompanying notes are an
    integral part of these consolidated financial statements.
 14




---



##### 



ALLIED CAPITAL CORPORATION AND
    SUBSIDIARIES
  CONSOLIDATED STATEMENT OF
    INVESTMENTS  (Continued)
   Private Finance



September 30, 2008Portfolio Company



(unaudited)(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


ValueGilchrist & Soames, Inc.

Subordinated Debt (13.4%, Due 10/13)

$
25,800


$
25,652


$
24,949(Consumer Products)

Total Investment






25,652



24,949Havco Wood Products LLC

Equity Interests






910



2,100(Industrial Products)

Total Investment






910



2,100Higginbotham Insurance Agency, Inc.

Subordinated Debt (13.7%, Due 8/13  8/14)


52,205



51,983



51,983(Business Services)

Common Stock
    (23,695 shares)(12)






23,695



24,828Warrant(12)










Total Investment






75,678



76,811The Hillman Companies,
    Inc.(3)

Subordinated Debt (10.0%, Due 9/11)


44,580



44,483



44,480(Consumer Products)

Total Investment






44,483



44,480The Homax Group, Inc.

Senior Loan (6.4%, Due 10/12)


11,921



11,877



10,897(Consumer Products)

Subordinated Debt (12.0%, Due 4/14)


14,000



13,342



12,880Preferred Stock (76 shares)






76



10Common Stock (24 shares)






5



Warrants






954



149Total Investment






26,254



23,936Ideal Snacks Corporation

Senior Loan (6.8%, Due 6/10)


1,113



1,113



1,072(Consumer Products)

Total Investment






1,113



1,072Integrity Interactive Corporation

Unitranche Debt (10.5%, Due 2/12)


10,789



10,709



10,923(Business Services)

Total Investment






10,709



10,923International Fiber Corporation

Preferred Stock (21,566 shares)






2,157



2,000(Industrial Products)

Total Investment






2,157



2,000Kodiak Fund
    LP(5)

Equity Interests






9,440



900(Private Equity Fund)

Total Investment






9,440



900Line-X, Inc.

Senior Loan (15.0%, Due
    8/11)(6)


900



888



888(Consumer Products)

Unitranche Debt (15.0% Due
    8/11)(6)


48,445



48,319



36,112Total Investment






49,207



37,000Standby Letter of Credit ($1,500)  (1)

Interest rates represent the weighted average annual stated
    interest rate on loans and debt securities, which are presented
    by nature of indebtedness for a single issuer. The maturity
    dates represent the earliest and the latest maturity dates.(2)

Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.(3)

Public company.(5)

Non-registered investment company.(6)

Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.(12)

Common stock is non-voting. In addition to non-voting stock
    ownership, the Company has an option to acquire a majority of
    the voting securities of the portfolio company at fair market
    value.   The accompanying notes are an
    integral part of these consolidated financial statements.
 15




---



##### 



ALLIED CAPITAL CORPORATION AND
    SUBSIDIARIES
  CONSOLIDATED STATEMENT OF
    INVESTMENTS  (Continued)
  Private Finance



September 30, 2008Portfolio Company



(unaudited)(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


ValueMarket Track Holdings, LLC

Senior Loan (8.5%, Due 6/14)

$
500


$
450


$
479(Business Services)

Subordinated Debt (15.9%, Due 6/14)


24,600



24,483



24,171Total Investment






24,933



24,650NetShape Technologies, Inc.

Senior Loan (7.0%, Due 2/13)


266



266



245(Industrial Products)

Total Investment






266



245Network Hardware Resale, Inc.

Unitranche Debt (10.0%, Due 12/11)


19,052



19,135



19,052(Business Services)

Convertible Subordinated Debt (9.8%, Due 12/15)


14,533



14,587



14,587Total Investment






33,722



33,639Novak Biddle Venture Partners III,
    L.P.(5)

Limited Partnership Interest






2,018



1,596(Private Equity Fund)

Total Investment






2,018



1,596Oahu Waste Services, Inc.

Stock Appreciation Rights






206



950(Business Services)

Total Investment






206



950Pangaea CLO 2007-1
    Ltd.(4)

Class D Notes (7.5%, Due 10/21)


15,000



11,667



9,497(CLO)

Total Investment






11,667



9,497PC Helps Support, LLC

Senior Loan (6.5%, Due 12/13)


8,846



8,756



8,799(Business Services)

Subordinated Debt (13.3%, Due 12/13)


28,909



28,775



30,023Total Investment






37,531



38,822Performant Financial Corporation

Common Stock (478,816 shares)






734



(Business Services)

Total Investment






734



Peter Brasseler Holdings, LLC

Equity Interests






3,451



3,600(Business Services)

Total Investment






3,451



3,600PharMEDium Healthcare Corporation

Senior Loan (6.4%, Due 10/13)


1,910



1,910



1,769(Healthcare Services)

Total Investment






1,910



1,769Postle Aluminum Company, LLC

Unitranche Debt (11.0%, Due 10/12)


60,750



60,541



31,489(Industrial Products)

Equity Interests






2,165



Total Investment






62,706



31,489  (1)

Interest rates represent the weighted average annual stated
    interest rate on loans and debt securities, which are presented
    by nature of indebtedness for a single issuer. The maturity
    dates represent the earliest and the latest maturity dates.(2)

Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.(4)

Non-U.S. company
    or principal place of business outside the U.S.(5)

Non-registered investment company.   The accompanying notes are an
    integral part of these consolidated financial statements.
 16




---



##### 



ALLIED CAPITAL CORPORATION AND
    SUBSIDIARIES
  CONSOLIDATED STATEMENT OF
    INVESTMENTS  (Continued)
  Private Finance



September 30, 2008Portfolio Company



(unaudited)(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


ValuePro Mach, Inc.

Subordinated Debt (12.5%, Due 6/12)

$
14,616


$
14,570


$
14,173(Industrial Products)

Equity Interests






1,294



1,900Total Investment






15,864



16,073Promo Works, LLC

Unitranche Debt (10.3%, Due 12/11)


24,932



24,762



23,988(Business Services)

Total Investment






24,762



23,988Reed Group, Ltd.

Senior Loan (6.5%, Due 12/13)


10,920



10,784



9,897(Healthcare Services)

Subordinated Debt (13.8%, Due 12/13)


18,367



18,289



17,060Equity Interests






1,800



500Total Investment






30,873



27,457S.B. Restaurant Company

Unitranche Debt (9.8%, Due 4/11)


39,501



39,272



38,138(Retail)

Preferred Stock (46,690 shares)






117



117Warrants






534



180Total Investment






39,923



38,435Standby Letters of Credit ($2,465)Snow Phipps Group,
    L.P.(5)

Limited Partnership Interest






4,113



4,457(Private Equity Fund)

Total Investment






4,113



4,457SPP Mezzanine Funding II,
    L.P.(5)

Limited Partnership Interest






9,503



9,400(Private Equity Fund)

Total Investment






9,503



9,400Stag-Parkway, Inc.

Unitranche Debt (14.0%, Due 7/12)


49,285



49,126



37,450(Business Services)

Total Investment






49,126



37,450STS Operating, Inc.

Subordinated Debt (11.0%, Due 1/13)


30,386



30,290



30,114(Industrial Products)

Total Investment






30,290



30,114Summit Energy Services, Inc.

Senior Loan (6.0%, Due 8/13)


9,075



9,031



8,514(Business Services)

Subordinated  Debt (11.6%, Due 8/13)


35,730



35,584



36,440Common Stock (415,982 shares)






1,861



1,800Total Investment






46,476



46,754Tank Intermediate Holding Corp.

Senior Debt (8.5%, Due 9/14)


538



384



384(Industrial Products)

Senior Debt (8.3%, Due 9/14)


30,900



30,079



30,079Total Investment






30,463



30,463  (1)

Interest rates represent the weighted average annual stated
    interest rate on loans and debt securities, which are presented
    by nature of indebtedness for a single issuer. The maturity
    dates represent the earliest and the latest maturity dates.(2)

Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.(5)

Non-registered investment company.   The accompanying notes are an
    integral part of these consolidated financial statements.
 17




---



##### 



ALLIED CAPITAL CORPORATION AND
    SUBSIDIARIES
  CONSOLIDATED STATEMENT OF
    INVESTMENTS  (Continued)
  Private Finance



September 30, 2008Portfolio Company



(unaudited)(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


ValueTappan Wire & Cable Inc.

Unitranche Debt (15.0%, Due 8/14)

$
22,346


$
22,243


$
22,243(Business Services)

Common Stock
    (12,940 shares)(12)






1,941



484Warrant(12)










Total Investment






24,184



22,727The Step2 Company, LLC

Unitranche Debt (11.0%, Due 4/12)


95,563



95,275



92,570(Consumer Products)

Equity Interests






2,149



1,500Total Investment






97,424



94,070Tradesmen International, Inc.

Subordinated Debt (12.0%, Due 12/12)


40,000



39,516



37,793(Business Services)

Total Investment






39,516



37,793TransAmerican Auto Parts, LLC

Subordinated Debt (16.3%, Due
    11/12)(6)


24,561



24,418



(Consumer Products)

Equity Interests






1,034



Total Investment






25,452



Trover Solutions, Inc.

Subordinated Debt (12.0%, Due 11/12)


60,054



59,834



57,350(Business Services)

Total Investment






59,834



57,350United Road Towing, Inc.

Subordinated Debt (10.0%, Due 1/14)


29,000



28,871



28,710(Consumer Services)

Total Investment






28,871



28,710Venturehouse-Cibernet Investors, LLC

Equity Interest










(Business Services)

Total Investment










VICORP Restaurants, Inc.

Warrants






33



(Retail)

Total Investment






33



WMA Equity Corporation and Affiliates

Subordinated Debt (16.8%, Due
    4/13-4/14)(6)


139,455



138,559



77,687d/b/a Wear Me Apparel

Common Stock (86 shares)






39,721



(Consumer Products)

Total Investment






178,280



77,687  (1)

Interest rates represent the weighted average annual stated
    interest rate on loans and debt securities, which are presented
    by nature of indebtedness for a single issuer. The maturity
    dates represent the earliest and the latest maturity dates.(2)

Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.(6)

Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.(12)

Common stock is non-voting. In addition to non-voting stock
    ownership, the Company has an option to acquire a majority of
    the voting securities of the portfolio company at fair market
    value.   The accompanying notes are an
    integral part of these consolidated financial statements.
 18




---



##### 



ALLIED CAPITAL CORPORATION AND
    SUBSIDIARIES
  CONSOLIDATED STATEMENT OF
    INVESTMENTS  (Continued)


Private Finance



September 30, 2008Portfolio Company



(unaudited)(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


ValueWebster Capital II,
    L.P.(5)

Limited Partnership Interest





$
1,700


$
1,431(Private Equity Fund)

Total Investment






1,700



1,431Woodstream Corporation

Subordinated Debt (12.0%, Due 2/15)

$
90,000



89,618



84,975(Consumer Products)

Common Stock (6,960 shares)






6,961



3,600Total Investment






96,579



88,575York Insurance Services Group, Inc.

Common Stock (12,939 shares)






1,294



1,700(Business Services)

Total Investment






1,294



1,700Other companies

Other debt investments


159



88



81Other equity investments






25



Total Investment






113



81Total companies less than 5% owned





$
2,600,556


$
2,307,332Total private finance (146 portfolio investments)





$
5,156,059


$
4,101,937  (1)

Interest rates represent the weighted average annual stated
    interest rate on loans and debt securities, which are presented
    by nature of indebtedness for a single issuer. The maturity
    dates represent the earliest and the latest maturity dates.(2)

Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.(5)

Non-registered investment company.   The accompanying notes are an
    integral part of these consolidated financial statements.
 19




---



##### 



ALLIED CAPITAL CORPORATION AND
    SUBSIDIARIES
  CONSOLIDATED STATEMENT OF
    INVESTMENTS  (Continued)
  Commercial
    Real Estate Finance
    (in thousands, except number of loans)
  September 30, 2008(unaudited)Stated Interest

Number ofRate Ranges

Loans

Cost

ValueCommercial Mortgage LoansUp to 6.99%



3


$
24,688


$
24,6887.00%8.99%



2



4,359



4,2949.00%10.99%



1



6,462



6,46211.00%12.99%



1



10,466



9,58815.00% and above



2



3,970



6,397Total commercial mortgage
    loans(13)









$
49,945


$
51,429Real Estate Owned









$
20,855


$
24,010Equity
    Interests(2) 

    Companies more than 25% owned





$
14,429


$
31,193Guarantees ($6,871)Standby Letter of Credit ($650)Total commercial real estate finance









$
85,229


$
106,632Total portfolio









$
5,241,288


$
4,208,569   Yield

Cost

ValueInvestments in U.S. Treasury Bills, Money Market and Other
    SecuritiesBlackrock Liquidity Funds


2.9%


$
1,226


$
1,226SEI Daily Income Tr Prime Obligation Money Market Fund


2.3%



5



5Columbia Money Market Reserves Fund


2.6%



12,153



12,153Total





$
13,384


$
13,384  (2)

Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.(13)

Commercial mortgage loans totaling $7.6 million at value
    were on non-accrual status and therefore were considered
    non-income producing.   The accompanying notes are an
    integral part of these consolidated financial statements.
 20




---



##### 



ALLIED
    CAPITAL CORPORATION AND SUBSIDIARIES
  CONSOLIDATED
    STATEMENT OF INVESTMENTS
  Private FinancePortfolio Company



December 31, 2007(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


ValueCompanies More Than 25% OwnedAlaris Consulting, LLC

Senior Loan (16.5%, Due 12/05 
    12/07)(6)

$
27,055


$
26,987


$
(Business Services)

Equity Interests






5,189



Total Investment






32,176



Guaranty ($1,100)AllBridge Financial, LLC

Equity Interests






7,800



7,800(Asset Management)

Total Investment






7,800



7,800Standby Letter of Credit ($30,000)Allied Capital Senior Debt Fund,
    L.P.(5)

Equity Interests (See Note 3)






31,800



32,811(Private Debt Fund)

Total Investment






31,800



32,811Avborne,
    Inc.(7)

Preferred Stock (12,500 shares)






611



1,633(Business Services)

Common Stock (27,500 shares)










Total Investment






611



1,633Avborne Heavy Maintenance,
    Inc.(7)

Preferred Stock (1,568 shares)






2,401



2,557(Business Services)

Common Stock (2,750 shares)










370Total Investment






2,401



2,927Guaranty ($2,401)Aviation Properties Corporation

Common Stock (100 shares)






65



(Business Services)

Total Investment






65



Standby Letters of Credit ($1,000)Border Foods, Inc.

Preferred Stock (100,000 shares)






12,721



4,648(Consumer Products)

Common Stock (148,838 shares)






3,847



Total Investment






16,568



4,648Calder Capital Partners,
    LLC(5)

Senior Loan (9.4%, Due
    5/09)(6)


2,907



2,907



3,035(Asset Management)

Equity Interests






2,396



3,559Total Investment






5,303



6,594Callidus Capital Corporation

Subordinated Debt (18.0%, Due 10/08)


6,871



6,871



6,871(Asset Management)

Common Stock (100 shares)






2,067



44,587Total Investment






8,938



51,458Ciena Capital LLC

Class A Equity Interests(25.0% 
    See Note 3)(6)


99,044



99,044



68,609(Financial Services)

Class B Equity Interests






119,436



Class C Equity Interests






109,301



Total Investment






327,781



68,609Guaranty ($258,707  See Note 3)Standby Letters of Credit ($18,000  
      See Note 3)  (1)

Interest rates represent the weighted average annual stated
    interest rate on loans and debt securities, which are presented
    by nature of indebtedness for a single issuer. The maturity
    dates represent the earliest and the latest maturity dates.(2)

Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.(5)

Non-registered investment company.(6)

Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.(7)

Avborne, Inc. and Avborne Heavy Maintenance, Inc. are affiliated
    companies.   The accompanying notes are an
    integral part of these consolidated financial statements.
 21




---



##### 



ALLIED CAPITAL CORPORATION AND
    SUBSIDIARIES
  CONSOLIDATED STATEMENT OF
    INVESTMENTS  (Continued)
  Private FinancePortfolio Company



December 31, 2007(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


ValueCitiPostal Inc.

Senior Loan (8.4%, Due 12/13)

$
692


$
679


$
679(Business Services)

Unitranche Debt (12.0%, Due 12/13)


50,852



50,597



50,597Subordinated Debt (16.0%, Due 12/15)


8,049



8,049



8,049Common Stock (37,024 shares)






12,726



12,726Total Investment






72,051



72,051Coverall North America, Inc.

Unitranche Debt (12.0%, Due 7/11)


35,054



34,923



34,923(Business Services)

Subordinated Debt (15.0%, Due 7/11)


6,000



5,979



5,979Common Stock (884,880 shares)






16,648



27,597Total Investment






57,550



68,499CR Holding, Inc.

Subordinated Debt (16.6%, Due 2/13)


40,956



40,812



40,812(Consumer Products)

Common Stock (37,200,551 shares)






33,321



40,934Total Investment






74,133



81,746Direct Capital Corporation

Subordinated Debt (16.0%, Due 3/13)


39,184



39,030



39,030(Financial Services)

Common Stock (2,097,234 shares)






19,250



6,906Total Investment






58,280



45,936Financial Pacific Company

Subordinated Debt (17.4%, Due 2/12  8/12)


73,031



72,850



72,850(Financial Services)

Preferred Stock (10,964 shares)






10,276



19,330Common Stock (14,735 shares)






14,819



38,544Total Investment






97,945



130,724ForeSite Towers, LLC

Equity Interest










878(Tower Leasing)Total Investment










878Global Communications, LLC

Senior Loan (10.0%, Due
    9/02)(6)


1,822



1,822



1,822(Business Services)

Total Investment






1,822



1,822Hot Stuff Foods, LLC

Senior Loan (8.4%, Due 2/11-2/12)


50,940



50,752



50,752(Consumer Products)

Subordinated Debt (12.1%, Due 8/12)


30,000



29,907



29,907Subordinated Debt (15.4%, Due
    2/13)(6)


52,373



52,150



1,337Common Stock (1,147,453 shares)






56,187



Total Investment






188,996



81,996Huddle House, Inc.

Subordinated Debt (15.0%, Due 12/12)


59,857



59,618



59,618(Retail)

Common Stock (415,328 shares)






41,533



44,154Total Investment






101,151



103,772Impact Innovations Group, LLC

Equity Interests in Affiliate










320(Business Services)

Total Investment










320  (1)

Interest rates represent the weighted average annual stated
    interest rate on loans and debt securities, which are presented
    by nature of indebtedness for a single issuer. The maturity
    dates represent the earliest and the latest maturity dates.(2)

Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.(6)

Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.   The accompanying notes are an
    integral part of these consolidated financial statements.
 22




---



##### 



ALLIED CAPITAL CORPORATION AND
    SUBSIDIARIES
  CONSOLIDATED STATEMENT OF
    INVESTMENTS  (Continued)
  Private FinancePortfolio Company



December 31, 2007(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


ValueInsight Pharmaceuticals Corporation

Subordinated Debt (15.0%, Due 9/12)

$
44,257


$
44,136


$
45,041(Consumer Products)

Subordinated Debt (19.0%, Due
    9/12)(6)


16,181



16,130



16,796Preferred Stock (25,000 shares)






25,000



1,462Common Stock (620,000 shares)






6,325



Total Investment






91,591



63,299Jakel, Inc.

Subordinated Debt (15.5%, Due
    3/08)(6)


1,563



1,563



1,563(Industrial Products)

Total Investment






1,563



1,563Legacy Partners Group, Inc.

Senior Loan (14.0%, Due
    5/09)(6)


3,843



3,843



3,843(Business Services)

Equity Interests






4,261



1,332Total Investment






8,104



5,175Litterer
    Beteiligungs-GmbH(4)

Subordinated Debt (8.0%, Due 12/08)


772



772



772(Business Services)

Equity Interest






1,809



700Total Investment






2,581



1,472MVL Group, Inc.

Senior Loan (12.0%, Due 6/09  7/09)


30,674



30,639



30,639(Business Services)

Subordinated Debt (14.5%, Due 6/09  7/09)


40,191



39,943



39,943Common Stock (648,661 shares)






643



4,949Total Investment






71,225



75,531Old Orchard Brands, LLC

Subordinated Debt (18.0%, Due 7/14)


19,632



19,544



19,544(Consumer Products)

Equity Interests






18,767



25,419Total Investment






38,311



44,963Penn Detroit Diesel Allison, LLC

Subordinated Debt (15.5%, Due 8/13)


39,331



39,180



39,180(Business Services)

Equity Interests






21,128



37,965Total Investment






60,308



77,145Powell Plant Farms, Inc.

Senior Loan (15.0%, Due
    12/07)(6)


1,350



1,350



1,534(Consumer Products)

Total Investment






1,350



1,534Service Champ, Inc.

Subordinated Debt (15.5%, Due 4/12)


28,443



28,351



28,351(Business Services)

Common Stock (63,888 shares)






13,662



26,292Total Investment






42,013



54,643Staffing Partners HoldingCompany, Inc.

Subordinated Debt (13.5%,
    Due 1/07)(6)


509



509



223(Business Services)

Total Investment






509



223Startec Equity, LLC

Equity Interests






190



430(Telecommunications)

Total Investment






190



430Sweet Traditions, Inc.

Senior Loan (13.0%, Due 9/08 
    8/11)(6)


39,692



36,052



35,229(Retail)

Preferred Stock (961 shares)






950



Common Stock (10,000 shares)






50



Total Investment






37,052



35,229  (1)

Interest rates represent the weighted average annual stated
    interest rate on loans and debt securities, which are presented
    by nature of indebtedness for a single issuer. The maturity
    dates represent the earliest and the latest maturity dates.(2)

Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.(4)

Non-U.S. company
    or principal place of business outside the U.S.(6)

Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.   The accompanying notes are an
    integral part of these consolidated financial statements.
 23




---



##### 



ALLIED CAPITAL CORPORATION AND
    SUBSIDIARIES
  CONSOLIDATED STATEMENT OF
    INVESTMENTS  (Continued)
  Private FinancePortfolio Company



December 31, 2007(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


ValueTriview Investments,
    Inc.(8)

Senior Loan (10.0%, Due 12/07)

$
433


$
433


$
433(Broadcasting & Cable/Business

Subordinated Debt (12.9%, Due 1/10  6/17)


43,157



42,977



42,977Services/Consumer Products)

Subordinated Debt (12.5%, Due 11/07 
    3/08)(6)


1,400



1,400



1,583Common Stock (202 shares)






120,638



83,453Total Investment






165,448



128,446Guaranty ($900)Standby Letter of Credit ($200)Unitranche Fund LLC

Subordinated Certificates






744



744(Private Debt Fund)

Equity Interests






1



1Total Investment






745



745Worldwide Express Operations, LLC

Subordinated Debt (14.0%, Due 2/14)


2,845



2,670



2,670(Business Services)

Equity Interests






12,900



21,516Warrants






163



272Total Investment






15,733



24,458Total
    companies more than 25% owned





$
1,622,094


$
1,279,080Companies 5% to 25% Owned10th

    Street, LLC

Subordinated Debt (13.0%, Due 12/14)

$
20,774


$
20,645


$
20,645(Business Services)

Equity Interests






446



1,100Total Investment






21,091



21,745Advantage Sales & Marketing, Inc.

Subordinated Debt (12.0%, Due 3/14)


155,432



154,854



154,854(Business Services)

Equity Interests










10,973Total Investment






154,854



165,827Air Medical Group Holdings LLC

Senior Loan (7.8%, Due 3/11)


3,030



2,980



2,980(Healthcare Services)

Equity Interests






3,470



10,800Total Investment






6,450



13,780Alpine ESP Holdings, Inc.

Preferred Stock (622 shares)






622



749(Business Services)

Common Stock (13,513 shares)






14



262Total Investment






636



1,011Amerex Group, LLC

Subordinated Debt (12.0%, Due 1/13)


8,400



8,400



8,400(Consumer Products)

Equity Interests






3,509



13,713Total Investment






11,909



22,113BB&T Capital Partners/WindsorMezzanine Fund,
    LLC(5)

Equity Interests






11,739



11,467(Private Equity Fund)

Total Investment






11,739



11,467  (1)

Interest rates represent the weighted average annual stated
    interest rate on loans and debt securities, which are presented
    by nature of indebtedness for a single issuer. The maturity
    dates represent the earliest and the latest maturity dates.(2)

Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.(5)

Non-registered investment company.(6)

Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.(8)

Triview Investments, Inc. had a cost basis of
    $165.4 million and holds investments in Longview Cable
    & Data, LLC (Broadcasting & Cable) with a value of
    $7.0 million, Triax Holdings, LLC (Consumer Products) with
    a value of $62.0 million, and Crescent Hotels &
    Resorts, LLC and affiliates (Business Services) with a value of
    $59.4 million, for a total value of $128.4 million.   The accompanying notes are an
    integral part of these consolidated financial statements.
 24




---



##### 



ALLIED CAPITAL CORPORATION AND
    SUBSIDIARIES
  CONSOLIDATED STATEMENT OF
    INVESTMENTS  (Continued)
   Private FinancePortfolio Company



December 31, 2007(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


ValueBecker Underwood, Inc.

Subordinated Debt (14.5%, Due 8/12)

$
24,865


$
24,798


$
24,798(Industrial Products)

Common Stock (5,073 shares)






5,813



4,190Total Investment






30,611



28,988BI Incorporated

Subordinated Debt (13.5%, Due 2/14)


30,615



30,499



30,499(Business Services)

Common Stock (40,000 shares)






4,000



7,382Total Investment






34,499



37,881Creative Group, Inc.

Subordinated Debt (14.0%, Due
    9/13)(6)


15,000



13,686



6,197(Business Services)

Common Stock (20,000 shares)










Warrant






1,387



Total Investment






15,073



6,197Drew Foam Companies, Inc.

Preferred Stock (722 shares)






722



396(Business Services)

Common Stock (7,287 shares)






7



Total Investment






729



396MedBridge Healthcare, LLC

Senior Loan (8.0%, Due
    8/09)(6)


7,164



7,164



7,164(Healthcare Services)

Subordinated Debt (10.0%, Due
    8/14)(6)


5,184



5,184



2,406Convertible Subordinated Debt (2.0%,
    Due
    8/14)(6)


2,970



984



Equity Interests






1,416



Total Investment






14,748



9,570MHF Logistical Solutions, Inc.

Subordinated Debt (11.5%, Due
    6/12)(6)


33,600



33,448



9,280(Business Services)

Subordinated Debt (18.0%, Due
    6/13)(6)


11,211



11,154



Common Stock (20,934
    shares)(12)






20,942



Warrants(12)










Total Investment






65,544



9,280Multi-Ad Services, Inc.

Unitranche Debt (11.3%, Due 11/11)


19,800



19,704



19,704(Business Services)

Equity Interests






2,000



940Total Investment






21,704



20,644Progressive InternationalCorporation

Subordinated Debt (16.0%, Due 12/09)


1,557



1,545



1,545(Consumer Products)

Preferred Stock (500 shares)






500



1,038Common Stock (197 shares)






13



4,900Warrants










Total Investment






2,058



7,483Regency Healthcare Group, LLC

Unitranche Debt (11.1%, Due 6/12)


12,000



11,941



11,941(Healthcare Services)

Equity Interests






1,500



1,681Total Investment






13,441



13,622  (1)

Interest rates represent the weighted average annual stated
    interest rate on loans and debt securities, which are presented
    by nature of indebtedness for a single issuer. The maturity
    dates represent the earliest and the latest maturity dates.(2)

Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.(6)

Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.(12)

Common stock is non-voting. In addition to non-voting stock
    ownership, the Company has an option to acquire a majority of
    the voting securities of the portfolio company at fair market
    value.   The accompanying notes are an
    integral part of these consolidated financial statements.
 25




---



##### 



ALLIED CAPITAL CORPORATION AND
    SUBSIDIARIES
  CONSOLIDATED STATEMENT OF
    INVESTMENTS  (Continued)
   Private FinancePortfolio Company



December 31, 2007(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


ValueSGT India Private
    Limited(4)

Common Stock (150,596 shares)





$
4,098


$
3,075(Business Services)

Total Investment






4,098



3,075Soteria Imaging Services, LLC

Subordinated Debt (12.0%, Due 11/10)

$
14,500



13,744



13,744(Healthcare Services)

Equity Interests






2,170



2,686Total Investment






15,914



16,430Universal Environmental Services, LLC

Equity Interests






1,810



(Business Services)

Total Investment






1,810



Total
    companies 5% to 25% owned





$
426,908


$
389,509Companies Less Than 5% Owned3SI Security Systems, Inc.

Subordinated Debt (14.5%, Due 8/13)

$
27,937


$
27,837


$
27,837(Consumer Products)

Total Investment






27,837



27,837AgData, L.P.

Senior Loan (10.3%, Due 7/12)


843



815



815(Consumer Services)

Total Investment






815



815Axium Healthcare Pharmacy, Inc.

Senior Loan (12.5%, Due 12/12)


2,600



2,567



2,567(Healthcare Services)

Unitranche Debt (12.5%, Due 12/12)


8,500



8,463



8,463Common Stock (26,500 shares)






2,650



1,097Total Investment






13,680



12,127Baird Capital Partners IV Limited
    Partnership(5)(Private Equity Fund)

Limited Partnership Interest






2,234



2,114Total Investment






2,234



2,114BenefitMall, Inc.

Subordinated Debt (14.9%, Due 10/13-10/14)


82,167



81,930



81,930(Business Services)

Common Stock (45,528,000
    shares)(12)






45,528



82,404Warrants(12)










Standby Letters of Credit ($3,961)Total Investment






127,458



164,334Broadcast Electronics, Inc.

Senior Loan (9.0%, Due
    7/12)(6)


4,913



4,884



3,273(Business Services)

Total Investment






4,884



3,273Bushnell, Inc.

Subordinated Debt (11.3%, Due 2/14)


41,325



39,821



39,821(Consumer Products)

Total Investment






39,821



39,821  (1)

Interest rates represent the weighted average annual stated
    interest rate on loans and debt securities, which are presented
    by nature of indebtedness for a single issuer. The maturity
    dates represent the earliest and the latest maturity dates.(2)

Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.(4)

Non-U.S. company
    or principal place of business outside the U.S.(5)

Non-registered investment company.(6)

Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.(12)

Common stock is non-voting. In addition to non-voting stock
    ownership, the Company has an option to acquire a majority of
    the voting securities of the portfolio company at fair market
    value.   The accompanying notes are an
    integral part of these consolidated financial statements.
 26




---



##### 



ALLIED CAPITAL CORPORATION AND
    SUBSIDIARIES
  CONSOLIDATED STATEMENT OF
    INVESTMENTS  (Continued)
  Private FinancePortfolio Company



December 31, 2007(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


ValueCallidus Debt PartnersCDO Fund I,
    Ltd.(4)(10)

Class C Notes (12.9%, Due 12/13)

$
18,800


$
18,929


$
18,988(CDO)

Class D Notes (17.0%, Due 12/13)


9,400



9,465



9,494Total Investment






28,394



28,482Callidus Debt PartnersCLO Fund III,
    Ltd.(4)(10)

Preferred Shares (23,600,000 shares,(CLO)

12.9%)(11)






21,783



19,999Total Investment






21,783



19,999Callidus Debt PartnersCLO Fund IV,
    Ltd.(4)(10)

Income Notes
    (14.8%)(11)






12,298



11,290(CLO)

Total Investment






12,298



11,290Callidus Debt PartnersCLO Fund V,
    Ltd.(4)(10)

Income Notes
    (20.3%)(11)






13,977



14,658(CLO)

Total Investment






13,977



14,658Callidus Debt PartnersCLO Fund VI,
    Ltd.(4)(10)

Class D Notes (11.3%, Due 10/21)


5,000



4,329



4,329(CLO)

Income Notes
    (19.3%)(11)






26,985



26,985Total Investment






31,314



31,314Callidus Debt
    Partners(4)(10)CLO Fund VII, Ltd.

Income Notes
    (16.6%)(11)






22,113



22,113(CLO)

Total Investment






22,113



22,113Callidus MAPS CLO Fund I
    LLC(10)

Class E Notes (10.4%, Due 12/17)


17,000



17,000



16,119(CLO)

Income Notes
    (5.6%)(11)






49,252



36,085Total Investment






66,252



52,204Callidus MAPS CLO Fund II,
    Ltd.(4)(10)

Income Notes
    (14.7%)(11)






18,753



18,753(CLO)

Total Investment






18,753



18,753Camden Partners Strategic Fund II,
    L.P.(5)

Limited Partnership Interest






997



1,350(Private Equity Fund)

Total Investment






997



1,350Carlisle Wide Plank Floors, Inc.

Senior Loan (9.8%, Due 6/11)


500



497



497(Consumer Products)

Unitranche Debt (10.0%, Due 6/11)


3,161



3,129



3,129Preferred Stock (400,000 Shares)






400



507Total Investment






4,026



4,133Catterton Partners V,
    L.P.(5)

Limited Partnership Interest






3,624



2,952(Private Equity Fund)

Total Investment






3,624



2,952  (1)

Interest rates represent the weighted average annual stated
    interest rate on loans and debt securities, which are presented
    by nature of indebtedness for a single issuer. The maturity
    dates represent the earliest and the latest maturity dates.(2)

Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.(4)

Non-U.S. company
    or principal place of business outside the U.S.(5)

Non-registered investment company.(10)

The fund is managed by Callidus Capital, a portfolio company of
    Allied Capital.(11)

Represents the effective interest yield earned on the cost basis
    of these preferred equity investments and income notes. The
    yield is included in interest income from companies less than 5%
    owned in the consolidated statement of operations.   The accompanying notes are an
    integral part of these consolidated financial statements.
 27




---



##### 



ALLIED CAPITAL CORPORATION AND
    SUBSIDIARIES
  CONSOLIDATED STATEMENT OF
    INVESTMENTS  (Continued)
   Private FinancePortfolio Company



December 31, 2007(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


ValueCatterton Partners VI,
    L.P.(5)

Limited Partnership Interest





$
2,259


$
2,103(Private Equity Fund)

Total Investment






2,259



2,103Centre Capital Investors IV,
    L.P.(5)

Limited Partnership Interest






2,215



2,276(Private Equity Fund)

Total Investment






2,215



2,276Centre Capital Investors V,
    L.P.(5)

Limited Partnership Interest






628



628(Private Equity Fund)

Total Investment






628



628CK Franchising, Inc.

Senior Loan (8.7%, Due 7/12)

$
9,000



8,911



8,911(Consumer Services)

Subordinated Debt (12.3%, Due 7/12  7/17)


21,000



20,908



20,908Preferred Stock (1,486,004 shares)






1,486



1,586Common Stock (8,793,408 shares)






8,793



8,654Total Investment






40,098



40,059Commercial Credit Group, Inc.

Subordinated Debt (14.8%, Due 2/11)


12,000



12,023



12,023(Financial Services)

Preferred Stock (74,978 shares)






18,018



19,421Warrants










Total Investment






30,041



31,444Community Education Centers, Inc.

Subordinated Debt (13.5%, Due 11/13)


35,011



34,936



34,936(Education Services)

Total Investment






34,936



34,936Component Hardware Group, Inc.

Subordinated Debt (13.5%, Due 1/13)


18,432



18,363



18,363(Industrial Products)

Total Investment






18,363



18,363Cook Inlet Alternative Risk, LLC

Unitranche Debt (10.8%, Due 4/13)


95,000



94,530



94,530(Business Services)

Equity Interests






640



1,696Total Investment






95,170



96,226Cortec Group Fund IV,
    L.P.(5)

Limited Partnership Interest






3,383



2,922(Private Equity)

Total Investment






3,383



2,922Diversified MercuryCommunications, LLC

Senior Loan (8.5%, Due 3/13)


233



217



217(Business Services)

Total Investment






217



217Digital VideoStream, LLC

Unitranche Debt (11.0%, Due 2/12)


17,213



17,128



17,128(Business Services)

Convertible Subordinated Debt(10.0%, Due 2/16)


4,118



4,103



5,397Total Investment






21,231



22,525DirectBuy Holdings, Inc.

Subordinated Debt (14.5%, Due 5/13)


75,000



74,631



74,631(Consumer Products)

Equity Interests






8,000



8,000Total Investment






82,631



82,631  (1)

Interest rates represent the weighted average annual stated
    interest rate on loans and debt securities, which are presented
    by nature of indebtedness for a single issuer. The maturity
    dates represent the earliest and the latest maturity dates.(2)

Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.(5)

Non-registered investment company.   The accompanying notes are an
    integral part of these consolidated financial statements.
 28




---



##### 



ALLIED CAPITAL CORPORATION AND
    SUBSIDIARIES
  CONSOLIDATED STATEMENT OF
    INVESTMENTS  (Continued)
   Private FinancePortfolio Company



December 31, 2007(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


ValueDistant Lands Trading Co.

Senior Loan (10.3%, Due 11/11)

$
10,000


$
9,966


$
$9,966(Consumer Products)

Unitranche Debt (11.0%, Due 11/11)


42,375



42,226



42,226Common Stock (4,000 shares)






4,000



2,645Total Investment






56,192



54,837Driven Brands, Inc.

Senior Loan (8.7%, Due 6/11)


37,070



36,951



36,951d/b/a Meineke and Econo Lube

Subordinated Debt (12.1%, Due 6/12  6/13)


83,000



82,754



82,754(Consumer Services)

Common Stock (11,675,331
    shares)(12)






29,455



15,977Warrants(12)










Total Investment






149,160



135,682Dryden XVIII LeveragedLoan 2007
    Limited(4)

Subordinated Debt (9.7%, Due 10/19)


9,000



7,406



7,406(CLO)

Income Notes
    (14.2%)(11)






21,940



21,940Total Investment






29,346



29,346Dynamic India Fund
    IV(4)(5)

Equity Interests






6,050



6,215(Private Equity Fund)

Total Investment






6,050



6,215EarthColor, Inc.

Subordinated Debt (15.0%, Due 11/13)


127,000



126,463



126,463(Business Services)

Common Stock
    (73,540 shares)(12)






73,540



62,675Warrants(12)










Total Investment






200,003



189,138eCentury Capital Partners,
    L.P.(5)

Limited Partnership Interest






6,899



2,176(Private Equity Fund)

Total Investment






6,899



2,176eInstruction Corporation

Subordinated Debt (13.5%, Due 7/14-1/15)


47,000



46,765



46,765(Education Services)

Common Stock (2,406 shares)






2,500



2,500Total Investment






49,265



49,265Farleys & Sathers Candy Company, Inc.

Subordinated Debt (13.7%, Due 3/11)


18,000



17,932



17,932(Consumer Products)

Total Investment






17,932



17,932FCP-BHI Holdings, LLC

Subordinated Debt (12.8%, Due 9/13)


24,000



23,887



23,887d/b/a Bojangles

Equity Interests






1,000



998(Retail)

Total Investment






24,887



24,885Fidus Mezzanine Capital,
    L.P.(5)

Limited Partnership Interest






6,357



6,357(Private Equity Fund)

Total Investment






6,357



6,357Frozen Specialties, Inc.

Warrants






435



229(Consumer Products)

Total Investment






435



229Garden Ridge Corporation

Subordinated Debt (7.0%, Due
    5/12)(6)


20,500



20,500



20,500(Retail)

Total Investment






20,500



20,500  (1)

Interest rates represent the weighted average annual stated
    interest rate on loans and debt securities, which are presented
    by nature of indebtedness for a single issuer. The maturity
    dates represent the earliest and the latest maturity dates.(2)

Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.(4)

Non-U.S. company
    or principal place of business outside the U.S.(5)

Non-registered investment company.(6)

Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.(11)

Represents the effective interest yield earned on the cost basis
    of these preferred equity investments and income notes. The
    yield is included in interest income from companies less than 5%
    owned in the consolidated statement of operations.(12)

Common stock is non-voting. In addition to non-voting stock
    ownership, the Company has an option to acquire a majority of
    the voting securities of the portfolio company at fair market
    value.   The accompanying notes are an
    integral part of these consolidated financial statements.
 29




---



##### 



ALLIED CAPITAL CORPORATION AND
    SUBSIDIARIES
  CONSOLIDATED STATEMENT OF
    INVESTMENTS  (Continued)
  Private FinancePortfolio Company



December 31, 2007(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


ValueGeotrace Technologies, Inc.

Subordinated Debt (10.0%, Due 6/09)

$
6,772


$
6,616


$
6,616(Energy Services)

Warrants






2,350



2,993Total Investment






8,966



9,609Gilchrist & Soames, Inc.

Senior Loan (9.0%, Due 10/13)


20,000



19,954



19,954(Consumer Products)

Subordinated Debt (13.4%, Due 10/13)


25,800



25,676



25,676Total Investment






45,630



45,630Grotech Partners, VI,
    L.P.(5)

Limited Partnership Interest






8,808



8,252(Private Equity Fund)

Total Investment






8,808



8,252Havco Wood Products LLC

Senior Loan (9.7%, Due 8/11)


600



585



585(Industrial Products)

Unitranche Debt (11.5%, Due 8/11)


5,100



4,248



4,248Equity Interests






1,055



3,192Total Investment






5,888



8,025Haven Eldercare of New England, LLC

Subordinated Debt (12.0%, Due
    8/09)(6)


1,927



1,927



(Healthcare Services)

Total Investment






1,927



Higginbotham Insurance Agency, Inc.

Senior Loan (7.7%, Due 8/12)


15,033



14,942



14,942(Business Services)

Subordinated Debt (13.5%,
    Due 8/13  8/14)


46,356



46,136



46,136Common Stock
    (23,926 shares)(12)






23,926



23,868Warrant(12)










Total Investment






85,004



84,946The Hillman Companies,
    Inc.(3)

Subordinated Debt (10.0%, Due 9/11)


44,580



44,458



44,458(Consumer Products)

Total Investment






44,458



44,458The Homax Group, Inc.

Senior Loan (8.7%, Due 10/12)


10,969



10,969



10,969(Consumer Products)

Subordinated Debt (12.0%, Due 4/14)


14,000



13,244



13,244Preferred Stock (89 shares)






89



13Common Stock (28 shares)






6



Warrants






1,106



194Total Investment






25,414



24,420Ideal Snacks Corporation

Senior Loan (9.0%, Due 6/10)


288



288



288(Consumer Products)

Total Investment






288



288Integrity Interactive Corporation

Unitranche Debt (10.5%, Due 2/12)


12,193



12,095



12,095(Business Services)

Total Investment






12,095



12,095International Fiber Corporation

Subordinated Debt (14.0%, Due 6/12)


24,572



24,476



24,476(Industrial Products)

Preferred Stock (25,000 shares)






2,500



2,194Total Investment






26,976



26,670  (1)

Interest rates represent the weighted average annual stated
    interest rate on loans and debt securities, which are presented
    by nature of indebtedness for a single issuer. The maturity
    dates represent the earliest and the latest maturity dates.(2)

Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.(3)

Public company.(5)

Non-registered investment company.(6)

Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.(12)

Common stock is non-voting. In addition to non-voting stock
    ownership, the Company has an option to acquire a majority of
    the voting securities of the portfolio company at fair market
    value.   The accompanying notes are an
    integral part of these consolidated financial statements.
 30




---



##### 



ALLIED CAPITAL CORPORATION AND
    SUBSIDIARIES
  CONSOLIDATED STATEMENT OF
    INVESTMENTS  (Continued)
  Private FinancePortfolio Company



December 31, 2007(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


ValueJones Stephens Corporation

Senior Loan (8.8%, Due 9/12)

$
5,537


$
5,525


$
5,525(Consumer Products)

Total Investment






5,525



5,525Knightsbridge CLO 2007-1
    Ltd.(4)

Subordinated Debt (14.1%, Due 1/22)


22,000



22,000



22,000(CLO)

Income Notes
    (15.2%)(11)






31,211



31,211Total Investment






53,211



53,211Kodiak Fund
    LP(5)

Equity Interests






9,423



2,853(Private Equity Fund

Total Investment






9,423



2,853Line-X, Inc.

Senior Loan (12.0%, Due 8/11)


900



885



885(Consumer Products)

Unitranche Debt (12.0% Due 8/11)


48,198



48,039



42,784Total Investment






48,924



43,669Standby Letter of Credit ($1,500)MedAssets,
    Inc.(3)

Common Stock (224,817 shares)






2,049



6,652(Business Services)

Total Investment






2,049



6,652Mid-Atlantic Venture Fund IV,
    L.P.(5)

Limited Partnership Interest






6,975



1,791(Private Equity Fund)

Total Investment






6,975



1,791Milestone AV Technologies, Inc.

Subordinated Debt (11.3%, Due 6/13)


37,500



37,500



36,750(Business Services)

Total Investment






37,500



36,750NetShape Technologies, Inc.

Senior Loan (8.6%, Due 2/13)


5,802



5,773



5,773(Industrial Products)

Total Investment






5,773



5,773Network Hardware Resale, Inc.

Unitranche Debt (10.5%, Due 12/11)


20,512



20,614



20,614(Business Services)

Convertible Subordinated Debt (9.8%, Due 12/15)


13,242



13,302



15,586Total Investment






33,916



36,200Norwesco, Inc.

Subordinated Debt (12.7%, Due 1/12  7/12)


82,924



82,674



82,674(Industrial Products)

Common Stock (559,603
    shares)(12)






38,313



117,831Warrants(12)










Total Investment






120,987



200,505Novak Biddle Venture Partners III,
    L.P.(5)

Limited Partnership Interest






1,910



1,256(Private Equity Fund)

Total Investment






1,910



1,256Oahu Waste Services, Inc.

Stock Appreciation Rights






239



998(Business Services)

Total Investment






239



998  (1)

Interest rates represent the weighted average annual stated
    interest rate on loans and debt securities, which are presented
    by nature of indebtedness for a single issuer. The maturity
    dates represent the earliest and the latest maturity dates.(2)

Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.(3)

Public company.(4)

Non-U.S. company
    or principal place of business outside the U.S.(5)

Non-registered investment company.(11)

Represents the effective interest yield earned on the cost basis
    of these preferred equity investments and income notes. The
    yield is included in interest income from companies less than 5%
    owned in the consolidated statement of operations.(12)

Common stock is non-voting. In addition to non-voting stock
    ownership, the Company has an option to acquire a majority of
    the voting securities of the portfolio company at fair market
    value.   The accompanying notes are an
    integral part of these consolidated financial statements.
 31




---



##### 



ALLIED CAPITAL CORPORATION AND
    SUBSIDIARIES
  CONSOLIDATED STATEMENT OF
    INVESTMENTS  (Continued)
  Private FinancePortfolio Company



December 31, 2007(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


ValueOdyssey Investment Partners Fund III,
    LP(5)

Limited Partnership Interest





$
2,276


$
2,567(Private Equity Fund)

Total Investment






2,276



2,567Pangaea CLO 2007-1
    Ltd.(4)

Subordinated Debt (10.2%, Due 10/21)

$
15,000



11,570



11,570(CLO)

Total Investment






11,570



11,570Passport HealthCommunications, Inc.

Preferred Stock (651,381 shares)






2,000



2,433(Healthcare Services)

Common Stock (19,680 shares)






48



7Total Investment






2,048



2,440PC Helps Support, LLC

Senior Loan (8.9%, Due 12/13)


20,000



20,000



20,000(Business Services)

Subordinated Debt (13.3%, Due 12/13)


30,895



30,743



30,743Total Investment






50,743



50,743Pendum, Inc.

Subordinated Debt (17.0%, Due
    1/11)(6)


34,028



34,028



(Business Services)

Preferred Stock (82,715 shares)










Warrants










Total Investment






34,028



Performant Financial Corporation

Common Stock (478,816 shares)






734



(Business Services)

Total Investment






734



PharMEDium Healthcare Corporation

Senior Loan (8.6%, Due 10/13)


19,577



19,577



19,577(Healthcare Services)

Total Investment






19,577



19,577Postle Aluminum Company, LLC

Unitranche Debt (11.0%, Due 10/12)


61,500



61,252



61,252(Industrial Products)

Equity Interests






2,500



3,092Total Investment






63,752



64,344Pro Mach, Inc.

Subordinated Debt (13.0%, Due 6/12)


14,562



14,506



14,506(Industrial Products)

Equity Interests






1,500



1,596Total Investment






16,006



16,102Promo Works, LLC

Unitranche Debt (10.3%, Due 12/11)


26,215



26,006



26,006(Business Services)

Guaranty ($600)Total Investment






26,006



26,006Reed Group, Ltd.

Senior Loan (8.7%, Due 12/13)


21,000



20,970



20,970(Healthcare Services)

Subordinated Debt (13.8%, Due 12/13)


18,000



17,910



17,910Equity Interests






1,800



1,800Total Investment






40,680



40,680S.B. Restaurant Company

Unitranche Debt (9.8%, Due 4/11)


34,001



33,733



33,733(Retail)

Preferred Stock (54,125 shares)






135



135Warrants






619



2,095Standby Letters of Credit ($2,540)Total Investment






34,487



35,963  (1)

Interest rates represent the weighted average annual stated
    interest rate on loans and debt securities, which are presented
    by nature of indebtedness for a single issuer. The maturity
    dates represent the earliest and the latest maturity dates.(2)

Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.(4)

Non-U.S. company
    or principal place of business outside the U.S.(5)

Non-registered investment company.(6)

Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.   The accompanying notes are an
    integral part of these consolidated financial statements.
 32




---



##### 



ALLIED CAPITAL CORPORATION AND
    SUBSIDIARIES
  CONSOLIDATED STATEMENT OF
    INVESTMENTS  (Continued)
  Private FinancePortfolio Company



December 31, 2007(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


ValueSBBUT, LLC

Equity Interests





$



$
(Consumer Products)

Total Investment










Service Center Metals, LLC

Subordinated Debt (15.5%, Due 9/11)

$
5,000



4,981



4,981(Industrial Products)

Equity Interests






313



343Total Investment






5,294



5,324Snow Phipps Group,
    L.P.(5)

Limited Partnership Interest






2,288



2,288(Private Equity Fund)

Total Investment






2,288



2,288SPP Mezzanine Funding,
    L.P.(5)

Limited Partnership Interest






2,268



1,942(Private Equity Fund)

Total Investment






2,268



1,942SPP Mezzanine Funding II,
    L.P.(5)

Limited Partnership Interest






4,077



3,731(Private Equity Fund)

Total Investment






4,077



3,731Stag-Parkway, Inc.

Unitranche Debt (10.8%, Due 7/12)


51,000



50,810



50,810(Business Services)

Total Investment






50,810



50,810STS Operating, Inc.

Subordinated Debt (11.0%, Due 1/13)


30,386



30,273



30,273(Industrial Products)

Total Investment






30,273



30,273Summit Energy Services, Inc.

Senior Loan (8.5%, Due 8/13)


24,239



24,239



23,512(Business Services)

Subordinated  Debt (11.6%, Due 8/13)


35,765



35,596



35,596Common Stock (89,406 shares)






2,000



1,995Total Investment






61,835



61,103Tappan Wire & Cable Inc.

Unitranche Debt (15.0%, Due 8/14)


24,100



23,975



23,975(Business Services)

Common Stock
    (15,000 shares)(12)






2,250



5,810Warrant(12)










Total Investment






26,225



29,785The Step2 Company, LLC

Unitranche Debt (11.0%, Due 4/12)


96,041



95,693



95,693(Consumer Products)

Equity Interests






2,483



2,987Total Investment






98,176



98,680Tradesmen International, Inc.

Subordinated Debt (12.0%, Due 12/12)


49,124



48,431



48,431(Business Services)

Total Investment






48,431



48,431TransAmerican Auto Parts, LLC

Subordinated Debt (14.0%, Due 11/12)


24,076



23,907



23,907(Consumer Products)

Equity Interests






1,198



1,014Total Investment






25,105



24,921Trover Solutions, Inc.

Subordinated Debt (12.0%, Due 11/12)


60,000



59,740



59,740(Business Services)

Total Investment






59,740



59,740Universal Air Filter Company

Subordinated Debt (12.0%, Due 11/12)


14,750



14,688



14,688(Industrial Products)

Total Investment






14,688



14,688  (1)

Interest rates represent the weighted average annual stated
    interest rate on loans and debt securities, which are presented
    by nature of indebtedness for a single issuer. The maturity
    dates represent the earliest and the latest maturity dates.(2)

Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.(5)

Non-registered investment company.(12)

Common stock is non-voting. In addition to non-voting stock
    ownership, the Company has an option to acquire a majority of
    the voting securities of the portfolio company at fair market
    value.   The accompanying notes are an
    integral part of these consolidated financial statements.
 33




---



##### 



ALLIED CAPITAL CORPORATION AND
    SUBSIDIARIES
  CONSOLIDATED STATEMENT OF
    INVESTMENTS  (Continued)
  Private FinancePortfolio Company



December 31, 2007(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


ValueUpdata Venture Partners II,
    L.P.(5)

Limited Partnership Interest





$
4,465


$
4,306(Private Equity Fund)

Total Investment






4,465



4,306Venturehouse-Cibernet Investors, LLC

Equity Interest










54(Business Services)

Total Investment










54Venturehouse Group,
    LLC(5)

Equity Interest










613(Private Equity Fund)

Total Investment










613VICORP Restaurants, Inc.

Warrants






33



(Retail)

Total Investment






33



Walker Investment Fund II,
    LLLP(5)

Limited Partnership Interest






1,330



(Private Equity Fund)

Total Investment






1,330



WMA Equity Corporation and Affiliates

Subordinated Debt (13.6%, Due 4/13)

$
125,000



124,010



124,010d/b/a Wear Me Apparel

Subordinated Debt (9.0%, Due
    4/14)(6)


13,033



13,033



13,302(Consumer Products)

Common Stock (100 shares)






46,046



13,726Total Investment






183,089



151,038Webster Capital II,
    L.P.(5)

Limited Partnership Interest






897



897(Private Equity Fund)

Total Investment






897



897Woodstream Corporation

Subordinated Debt (12.0%, Due 2/15)


90,000



89,574



89,574(Consumer Products)

Common Stock (7,500 shares)






7,500



7,482Total Investment






97,074



97,056York Insurance Services Group, Inc.

Subordinated Debt (14.5%, Due 1/14)


45,141



44,966



44,966(Business Services)

Common Stock (15,000 shares)






1,500



1,995Total Investment






46,466



46,961Other companies

Other debt investments


159



57



62Other equity investments






8



Total Investment






65



62Total
    companies less than 5% owned





$
2,994,880


$
2,990,732Total
    private finance (156 portfolio investments)





$
5,043,882


$
4,659,321  (1)

Interest rates represent the weighted average annual stated
    interest rate on loans and debt securities, which are presented
    by nature of indebtedness for a single issuer. The maturity
    dates represent the earliest and the latest maturity dates.(2)

Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.(5)

Non-registered investment company.(6)

Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.   The accompanying notes are an
    integral part of these consolidated financial statements.
 34




---



##### 



ALLIED CAPITAL CORPORATION AND
    SUBSIDIARIES
  CONSOLIDATED STATEMENT OF
    INVESTMENTS  (Continued)
  Commercial
    Real Estate Finance
    (in thousands, except number of loans)
  Stated Interest

Number of

December 31, 2007Rate Ranges

Loans

Cost

ValueCommercial Mortgage LoansUp to 6.99%



3


$
20,361


$
19,8427.00%8.99%



8



22,768



22,7689.00%10.99%



3



8,372



8,37211.00%12.99%



1



10,456



10,45615.00% and above



2



3,970



3,970Total commercial mortgage
    loans(13)






17


$
65,927


$
65,408Real Estate Owned









$
15,272


$
21,253Equity
    Interests(2) 

    Companies more than 25% owned





$
15,743


$
34,539Guarantees ($6,871)Standby Letter of Credit ($1,295)Total commercial real estate finance









$
96,942


$
121,200Total portfolio









$
5,140,824


$
4,780,521   Yield

Cost

ValueInvestments in U.S. Treasury Bills, Money Market and Other
    SecuritiesAmerican Beacon Money Market Select FD Fund


4.5%


$
126,910


$
126,910American Beacon Money Market Fund


4.8%



40,163



40,163SEI Daily Income Tr Prime Obligation Money Market Fund


4.9%



34,143



34,143Columbia Money Market Reserves Fund


4.6%



6



6Total





$
201,222


$
201,222  (2)

Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.(13)

Commercial mortgage loans totaling $14.3 million at value
    were on non-accrual status and therefore were considered
    non-income producing.   The accompanying notes are an
    integral part of these consolidated financial statements.
 35




---



##### 



ALLIED
    CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Information at and for the three and nine months ended
    September 30, 2008 and 2007, is unaudited)
  Note 1. Organization
       Regulation S-X,
     Note 2. Summary
    of Significant Accounting Policies
  Basis
    of Presentation
       36




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 2. Summary of Significant Accounting Policies,
    continued
      Valuation
    Of Portfolio Investments
  Fair Value
    Measurements
     37




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 2. Summary of Significant Accounting Policies,
    continued
  of the portfolio companys
    equity securities, liquidation events, or other events. The
    Company allocates the enterprise value to these securities in
    order of the legal priority of the securities.
      and/or security-by-security
   38




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 2. Summary of Significant Accounting Policies,
    continued
    Net
    Realized Gains or Losses and Net Change in Unrealized
    Appreciation or Depreciation
    Interest
    and Dividend Income
       39




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 2. Summary of Significant Accounting Policies,
    continued
      Fee
    Income    Guarantees
  Guarantors Accounting and
    Disclosure Requirements for Guarantees, Including Indirect
    Guarantees of Indebtedness of Others
  Financing
    Costs
    Dividends
    to Shareholders
   40




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 2. Summary of Significant Accounting Policies,
    continued
  Stock
    Compensation Plans
  Share-Based Payment
  For the Three

For the NineMonths Ended

Months EndedSeptember 30,

September 30,($ in millions, except per share
    amounts)

2008

2007

2008

2007Employee Stock Option Expense:Options granted:Previously awarded, unvested options as of January 1, 2006


$


$1.7


$3.9


$8.2Options granted on or after January 1, 2006


1.5


2.2


5.6


8.9Total options granted


1.5


3.9


9.5


17.1Options cancelled in connection with tender offer (see
    Note 9)





14.4





14.4Total employee stock option expense


$1.5


$18.3


$9.5


$31.5Per basic share


$0.01


$0.12


$0.06


$0.21Per diluted share


$0.01


$0.12


$0.06


$0.20    41




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 2. Summary of Significant Accounting Policies,
    continued
    For the Three


For the NineMonths Ended


Months EndedSeptember 30,


September 30,2008


2007


2008


2007Expected term (in years)


5.0



5.0



5.0



5.0Risk-free interest rate


3.4
%


4.6
%


2.8
%


4.6
%Expected volatility


32.8
%


24.4
%


27.8
%


26.4
%Dividend yield


8.5
%


8.9
%


8.5
%


8.9
%Weighted average fair value per option


$1.81



$2.51



$2.18



$2.96       Options Cancelled in Connection with Tender
    Offer.
 42




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 2. Summary of Significant Accounting Policies,
    continued
    Federal
    and State Income Taxes and Excise Tax
        Per
    Share Information
    Use of
    Estimates in the Preparation of Financial
    Statements
   43




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 2. Summary of Significant Accounting Policies,
    continued
    Recent
    Accounting Pronouncements
  Fair Value Measurements.
  The
    Fair Value Option for Financial Assets and Financial
    Liabilities  Including an Amendment of FASB Statement
    No. 115.
  No. 157-3, Determining the Fair Value of a Financial Asset When the
    Market for That Asset Is Not Active
 44




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 3. Portfolio
  Private
    Finance
     2008


2007($ in millions)

Cost


Value


Yield(1)


Cost


Value


Yield(1)Loans and debt securities:Senior loans

$
622.4


$
434.9



4.2%


$
374.1


$
344.3



7.7%Unitranche
    debt(2)


639.0



579.3



12.0%



659.2



653.9



11.5%Subordinated
    debt(3)


2,420.2



2,062.6



13.1%



2,576.4



2,416.4



12.8%Total loans and debt
    securities(4)


3,681.6



3,076.8



11.7%



3,609.7



3,414.6



12.1%Equity securities:Preferred shares/income notes of
    CLOs(5)


247.2



218.3



17.1%



218.3



203.0



14.6%Subordinated certificates in Unitranche Fund
    LLC(5)


114.3



114.3



10.3%



0.7



0.7



12.4%Other equity securities


1,113.0



692.5







1,215.2



1,041.0Total equity securities


1,474.5



1,025.1







1,434.2



1,244.7Total

$
5,156.1


$
4,101.9






$
5,043.9


$
4,659.3   (1)

    The weighted average yield on loans and debt securities is
    computed as the (a) annual stated interest on accruing
    loans and debt securities plus the annual amortization of loan
    origination fees, original issue discount, and market discount
    on accruing loans and debt securities less the annual
    amortization of loan origination costs, divided by
    (b) total loans and debt securities at value. At
    September 30, 2008, and December 31, 2007, the cost
    and value of subordinated debt included the Class A equity
    interests in Ciena Capital LLC, which were placed on non-accrual
    status during the fourth quarter of 2006. At September 30,
    2008, senior loans included the senior secured loan to Ciena
    totaling $319.0 million at cost and $180.2 million at
    value, which was placed on non-accrual on the purchase date. The weighted average yield on the
    preferred shares/income notes of CLOs is calculated as the
    (a) effective interest yield on the preferred shares/income
    notes of CLOs, divided by (b) total preferred shares/income
    notes of CLOs at value. The weighted average yields are computed
    as of the balance sheet date. The effective interest yield on
    the CLO assets represents the yield used for recording interest
    income. The market yield used in the valuation of the CLO assets
    may be different than the interest yields.
 The weighted average yield on the
    subordinated certificates in the Unitranche Fund LLC is
    computed as the (a) annual stated interest (LIBOR plus
    7.5%) divided by (b) total investment at value.
 (2)
    Unitranche debt is an investment that combines both senior and
    subordinated financing, generally in a first lien position.(3)
    Subordinated debt includes bonds in CLOs and in a CDO.(4)
    The total principal balance outstanding on loans and debt
    securities was $3,718.7 million and $3,639.6 million
    at September 30, 2008, and December 31, 2007, respectively.
    The difference between principal and cost is represented by
    unamortized loan origination fees and costs, original issue
    discounts, and market discounts totaling $37.1 million and
    $29.9 million at September 30, 2008, and
    December 31, 2007, respectively.(5)
    Investments in the preferred shares/income notes of CLOs and the
    subordinated certificates in Unitranche Fund LLC earn a current
    return that is included in interest income in the accompanying
    consolidated statement of operations.     45




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 3. Portfolio, continued
        Ciena Capital LLC.
     46




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 3. Portfolio, continued
              For the Three

For the NineMonths Ended

Months EndedSeptember 30,

September 30,($ in millions)

2008

2007

2008

2007Interest income on Class A equity interests


$


$


$


$Fees and other income





1.3





4.1Total interest and related portfolio income


$


$1.3


$


$4.1  47




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 3. Portfolio, continued
        No. 2:06-CR-20662
   48




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 3. Portfolio, continued
          Mercury Air Centers, Inc.
   49




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 3. Portfolio, continued
    For the Three


For the NineMonths Ended


Months Ended($ in millions)

September 30, 2007


September 30, 2007Interest income

$
1.0


$
5.1Fees and other income






0.2Total interest and related portfolio income

$
1.0


$
5.3    50




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 3. Portfolio, continued
  Collateralized Loan Obligations (CLOs) and
    Collateralized Debt Obligations
    (CDOs).
  2008


2007($ in millions)

Cost


Value


Yield(1)


Cost


Value


Yield(1)Bonds(2):Callidus Debt Partners CDO Fund I, Ltd.

$
28.4


$
25.8



15.5%


$
28.4


$
28.5



14.0%Callidus Debt Partners CLO Fund IV, Ltd.


2.0



2.2



20.0%







Callidus Debt Partners CLO Fund VI, Ltd.


7.1



5.8



16.7%



4.3



4.3



13.4%Callidus MAPS CLO Fund I LLC


17.0



13.9



10.6%



17.0



16.1



11.0%Callidus MAPS CLO Fund II LLC


3.5



3.5



23.8%







Dryden XVIII Leveraged Loan 2007 Limited


7.6



7.4



17.4%



7.4



7.4



12.7%Knightsbridge CLO 2007-1
    Ltd.(3)


18.7



16.4



13.4%



22.0



22.0



14.1%Knightsbridge CLO 2008-1
    Ltd.(3)


31.3



31.3



11.1%







Pangaea CLO 2007-1 Ltd.


11.6



9.5



16.2%



11.6



11.6



13.9%Total bonds


127.2



115.8



14.0%



90.7



89.9



13.3%Preferred Shares/Income Notes:Callidus Debt Partners CLO Fund III, Ltd.


20.1



18.1



15.7%



21.8



20.0



14.1%Callidus Debt Partners CLO Fund IV, Ltd.


14.5



13.7



21.7%



12.3



11.3



16.1%Callidus Debt Partners CLO Fund V, Ltd.


13.2



12.7



23.0%



14.0



14.7



19.3%Callidus Debt Partners CLO Fund VI, Ltd.


27.9



28.1



23.0%



27.0



27.0



19.3%Callidus Debt Partners CLO Fund VII, Ltd.


23.8



19.7



18.5%



22.1



22.1



16.6%Callidus MAPS CLO Fund I LLC


45.8



33.8



6.0%



49.3



36.1



7.6%Callidus MAPS CLO Fund II, Ltd.


18.2



15.2



20.8%



18.7



18.7



14.7%Dryden XVIII Leveraged Loan 2007 Limited


22.5



20.8



18.5%



21.9



21.9



14.2%Knightsbridge CLO
    2007-1
    Ltd.(3)


40.7



35.7



17.0%



31.2



31.2



15.2%Knightsbridge CLO 2008-1
    Ltd.(3)


20.5



20.5



16.6%







Total preferred shares/income notes


247.2



218.3



17.1%



218.3



203.0



14.6%Total

$
374.4


$
334.1






$
309.0


$
292.9   (1)

    The weighted average yield is calculated as the (a) annual
    stated interest or the effective interest yield on the accruing
    bonds or the effective interest yield on the preferred
    shares/income notes, divided by (b) CLO and CDO assets at
    value.  The yield on these debt and equity securities is
    included in interest income in the accompanying consolidated
    statement of operations. The market yield used in the
    valuation of the CLO and CDO assets may be different than the
    interest yields shown above.
 (2)
    These securities are included in private finance subordinated
    debt.(3)
    These funds are managed by the Company through a wholly-owned
    subsidiary.     51




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 3. Portfolio, continued
      ($ in millions)

2008


2007Bonds

$
273.2


$
288.5Syndicated loans


4,435.3



4,122.7Cash(1)


107.8



104.4Total underlying collateral
    assets(2)

$
4,816.3


$
4,515.6   (1)
    Includes undrawn liability amounts.(2)
    At September 30, 2008, and December 31, 2007, the
    total face value of defaulted obligations was $28.5 million
    and $18.4 million, respectively, or approximately 0.6% and
    0.4% respectively, of the total underlying collateral assets.  Loans and Debt Securities on Non-Accrual
    Status.
  ($ in millions)

2008


2007Loans and debt securities in workout statusCompanies more than 25% owned

$
197.0


$
114.1Companies 5% to 25% owned


0.8



11.7Companies less than 5% owned


136.6



23.8Loans and debt securities not in workout statusCompanies more than 25% owned


34.5



21.4Companies 5% to 25% owned


6.6



13.4Companies less than 5% owned






13.3Total

$
375.5


$
197.7  52




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 3. Portfolio, continued
  Industry and Geographic
    Compositions.
 2008


2007IndustryBusiness services


34
%


37
%Consumer products


24



25Financial services


8



6CLO/CDO(1)


8



6Industrial products


5



10Consumer services


5



4Retail


5



4Private debt funds


4



1Healthcare services


2



3Other


5



4Total


100
%


100
%Geographic
    Region(2)Mid-Atlantic


41
%


36
%Midwest


26



32Southeast


17



17West


14



14Northeast


2



1Total


100
%


100
%   (1)
    These funds primarily invest in senior corporate loans. Certain
    of these funds are managed by Callidus Capital, a portfolio
    company of Allied Capital, and certain of these funds are
    managed by the Company through a wholly-owned subsidiary.(2)
    The geographic region for the private finance portfolio depicts
    the location of the headquarters for the Companys
    portfolio companies. The portfolio companies may have a number
    of other locations in other geographic regions.  Commercial
    Real Estate Finance
   2008


2007Cost


Value


Yield(1)


Cost


Value


Yield(1)($ in millions)Commercial mortgage loans

$
49.9


$
51.4



7.4%


$
65.9


$
65.4



6.8%Real estate owned


20.9



24.0







15.3



21.3Equity interests


14.4



31.2







15.7



34.5Total

$
85.2


$
106.6






$
96.9


$
121.2   (1)
    The weighted average yield on the commercial mortgage loans is
    computed as the (a) annual stated interest on accruing
    loans plus the annual amortization of loan origination fees,
    original issue discount, and market discount on accruing loans
    less the annual amortization of origination costs, divided by
    (b) total interest-bearing investments at value. The
    weighted average yield is computed as of the balance sheet date. 53




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 3. Portfolio, continued
  Commercial Mortgage Loans and Equity
    Interests.
      2008


2007Property TypeHospitality


51
%


44
%Office


20



21Recreation


18



15Retail


9



18Other


2



2Total


100
%


100
%Geographic RegionSoutheast


43
%


40
%West


26



20Midwest


22



31Northeast


8



7Mid-Atlantic


1



2Total


100
%


100
%   Fair
    Value Measurements
   54




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 3. Portfolio, continued
    
    Level 1  Quoted prices (unadjusted) in active
    markets for identical assets
    Level 2  Inputs other than quoted prices that
    are observable to the market participant for the asset or quoted
    prices in a market that is not active
    Level 3  Unobservable inputs      Fair Value


Quoted Prices in


Significant Other


SignificantMeasurement


Active Markets for


Observable


Unobservableas of September 30,


Identical Assets


Inputs


Inputs($ in millions)

2008


(Level 1)


(Level 2)


(Level 3)Assets at Fair Value:PortfolioPrivate finance

$
4,101.9


$



$



$
4,101.9Commercial real estate finance


106.6











106.6Total portfolio

$
4,208.5


$



$



$
4,208.5     CommercialPrivate


Real Estate($ in millions)

Finance


Finance


TotalBalance at December 31, 2007

$
4,652.7


$
121.2


$
4,773.9Total gains or lossesNet realized gains
    (losses)(1)


80.2



(2.2
)


78.0Net change in unrealized appreciation or
    depreciation(2)


(665.0
)


(2.9
)


(667.9
)Purchases, issuances, repayments and exits,
    net(3)


34.0



(9.5
)


24.5Transfers in and/or out of level 3










Balance at September 30, 2008

$
4,101.9


$
106.6


$
4,208.5Net unrealized appreciation (depreciation) during the period
    relating to assets still held at the reporting
    date(2)

$
(611.1
)

$
(5.8
)

$
(616.9
)   (1)
    Includes net realized gains
    (losses) (recorded as realized gains or losses in the
    accompanying consolidated statement of operations) and
    amortization of discounts and closing points (recorded as
    interest income in the accompanying consolidated statement of
    operations).(2)
    Included in change in net
    unrealized appreciation or depreciation in the accompanying
    consolidated statement of operations. Net change in unrealized
    appreciation or depreciation includes net unrealized
    appreciation (depreciation) resulting from changes in portfolio
    investment values during the reporting period and the reversal
    of previously recorded unrealized appreciation or depreciation
    when gains or losses are realized.
 (3)
    Includes interest and dividend
    income reinvested through the receipt of a debt or equity
    security
    (payment-in-kind
    income) (recorded as interest and dividend income in the
    accompanying consolidated statement of operations). 55




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 3. Portfolio, continued
   Managed
    Funds
    Accounting for Transfers and Servicing of
    Financial Assets and Extinguishments of Liabilities
  Unitranche Fund LLC.
  Allied Capital Senior Debt Fund,
    L.P.
 56




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 3. Portfolio, continued
      Knightsbridge CLO
    2007-1
    Ltd. 2007-1
      Knightsbridge CLO
    2008-1
    Ltd. 2008-1
     57




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 3. Portfolio, continued
  AGILE Fund I, LLC.
  post-closing
        Note 4. Debt
    2008


2007Annual






AnnualFacility

Amount


Interest


Facility

Amount

InterestAmount

Drawn


Cost(1)


Amount

Drawn

Cost(1)($ in millions)Notes payable:Privately issued unsecured notes payable

$
1,081.0

$
1,081.0



6.6
%

$1,042.2

$1,042.2


6.1
%Publicly issued unsecured notes payable


880.0


880.0



6.7
%

880.0

880.0


6.7
%Total notes payable


1,961.0


1,961.0



6.6
%

1,922.2

1,922.2


6.4
%Revolving line of credit


632.5


170.0



5.0
%(2)

922.5

367.3


5.9
%(2)Total debt

$
2,593.5

$
2,131.0



6.8
%(3)

$2,844.7

$2,289.5


6.5
%(3)    (1)
    The weighted average annual
    interest cost is computed as the (a) annual stated interest on
    the debt plus the annual amortization of commitment fees, other
    facility fees and amortization of debt financing costs that are
    recognized into interest expense over the contractual life of
    the respective borrowings, divided by (b) debt outstanding on
    the balance sheet date.(2)
    The annual interest cost reflects
    the interest rate payable for borrowings under the revolving
    line of credit in effect at the balance sheet date. In addition
    to the current interest payable, there were annual costs of
    commitment fees, other facility fees and amortization of debt
    financing costs of $7.3 million and $3.7 million at
    September 30, 2008, and December 31, 2007,
    respectively.(3)
    The annual interest cost for total
    debt includes the annual cost of commitment fees, other facility
    fees and amortization of debt financing costs on the revolving
    line of credit regardless of the amount outstanding on the
    facility as of the balance sheet date. The annual interest cost
    reflects the facilities in place on the balance sheet date. 58




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 4. Debt, continued
    Notes
    Payable
  Privately Issued Unsecured
    Notes Payable.
      Publicly Issued Unsecured Notes
    Payable.
  ($ in millions)

Amount

Maturity Date6.625% Notes due 2011

$400.0

July 15, 20116.000% Notes due 2012

250.0

April 1, 20126.875% Notes due 2047

230.0

April 15, 2047Total

$880.0        59




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 4. Debt, continued
   Scheduled Maturities.
  Year

Amount Maturing($ in millions)2008

$
2009


268.52010


408.02011


472.52012


339.0Thereafter


473.0Total

$
1,961.0   Revolving
    Line of Credit    LIBOR-based
        60




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 4. Debt, continued
     Debt
    Covenants
      Note 5. Guarantees
    and Commitments
     61




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 5. Guarantees and Commitments, continued
     After(in millions)

Total


2008


2009


2010


2011


2012


2012Guarantees

$
22.4


$



$
7.5


$
9.6


$
4.4


$
0.1


$
0.8Standby letters of
    credit(1)


123.8







1.7







122.1







Total(2)

$
146.2


$



$
9.2


$
9.6


$
126.5


$
0.1


$
0.8   (1)
    Standby letters of credit are
    issued under the Companys revolving line of credit that
    expires in April 2011. Therefore, unless a standby letter
    of credit is set to expire at an earlier date, it is assumed
    that the standby letters of credit will expire contemporaneously
    with the expiration of the Companys line of credit in
    April 2011.(2)
    At September 30, 2008, the
    Company guaranteed $5 million of Cienas senior
    secured loan not held by the Company as well as related
    interest, fees and related expenses, and also had standby
    letters of credit issued totaling $102.6 million in
    connection with term securitizations completed by Ciena. The
    Company considered the outstanding letters of credit in its
    valuation at September 30, 2008. See Note 3.
    Private Finance  Ciena Capital LLC for
    additional information.      Note 6. Shareholders
    Equity
     (in millions)

2008


2007Number of common shares


20.5



3.3Gross proceeds

$
417.1


$
97.3Less costs, including underwriting fees


(14.6)



(3.5)Net proceeds

$
402.5


$
93.8    62




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 6. Shareholders Equity, continued
      For the NineMonths EndedSeptember 30,2008

2007(in millions, except per share amounts)Shares issued

0.2

0.4Average price per share

$19.49

$30.05Shares purchased by plan agent for shareholders

0.5

Average price per share

$14.43

   Note 7. Earnings
    Per Common Share
     For the Three

For the NineMonths Ended

Months EndedSeptember 30,

September 30,2008


2007

2008

2007(in millions, except per share amounts)Net increase (decrease) in net assets resulting from operations

$
(318.3
)

$
(96.5)

$
(461.2)

$
125.8Weighted average common shares
    outstanding  basic


178.7



154.0


171.1


152.0Dilutive options outstanding












2.7Weighted average common shares outstanding  diluted


178.7



154.0


171.1


154.7Basic earnings (loss) per common share

$
(1.78
)

$
(0.63)

$
(2.70)

$
0.83Diluted earnings (loss) per common share

$
(1.78
)

$
(0.63)

$
(2.70)

$
0.81   Note 8. Employee
    Compensation Plans
    63




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 8. Employee Compensation Plans, continued
              For the Three


For the NineMonths Ended


Months EndedSeptember 30,


September 30,($ in millions)

2008

2007


2008


2007IPA

$
2.0

$
2.4


$
6.6


$
7.4IPA mark to market expense (benefit)





(2.0
)


(4.1
)


(3.6
)Total IPA expense

$
2.0

$
0.4


$
2.5


$
3.8    64




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 8. Employee Compensation Plans, continued
    Note 9. Stock
    Option Plan
           Weighted


AggregateWeighted


Average


IntrinsicAverage


Contractual


Value atExercise Price


Remaining


September 30,(in millions, except per share
    amounts)

Shares


Per Share


Term (Years)


2008(1)Options outstanding at January 1, 2008


18.5


$
28.36Granted


7.7


$
22.52Exercised





$
Forfeited/cancelled


(4.5
)

$
26.59Options outstanding at September 30, 2008


21.7


$
26.65



5.58


$
Exercisable at September 30,
    2008(2)


13.9


$
28.15



5.22


$
Exercisable and expected to be exercisable at September 30,
    2008(3)


19.6


$
27.02



5.50


$
   (1)
    Represents the difference between
    the market value of the options at September 30, 2008, and
    the cost for the option holders to exercise the options.(2)
    Represents vested options.(3)
    The amount of options expected to
    be exercisable at September 30, 2008, is calculated based
    on an estimate of expected forfeitures. 65




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 9. Stock Option Plan, continued
         Note 10. Dividends
    and Distributions and Taxes
           66




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 10. Dividends and Distributions and Taxes,
    continued
          Note 11. Supplemental
    Disclosure of Cash Flow Information
        67




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 12. Financial
    Highlights
 At andAt and for the


for theNine Months Ended


Year EndedSeptember 30,


December 31,2008(1)


2007


2007Per Common Share DataNet asset value, beginning of period

$
17.54


$
19.12


$
19.12Net investment
    income(2)


1.04



0.54



0.91Net realized gains
    (losses)(2)(3)


0.28



2.03



1.74Net investment income plus net realized
    gains(2)


1.32



2.57



2.65Net change in unrealized appreciation or
    depreciation(2)(3)


(4.02
)


(1.76
)


(1.66
)Net increase (decrease) in net assets resulting from
    operations(2)


(2.70
)


0.81



0.99Net decrease in net assets from shareholder distributions


(1.95
)


(1.92
)


(2.64
)Net increase in net assets from capital share
    transactions(2)(4)


0.62



0.23



0.41Decrease in net assets from cash portion of the option
    cancellation
    payment(2)(6)






(0.34
)


(0.34
)Net asset value, end of period

$
13.51


$
17.90


$
17.54Market value, end of period

$
10.80


$
29.39


$
21.50Total
    return(5)


(43.3
)%


(4.2
)%


(27.6
)%Ratios and Supplemental Data($ and shares in thousands, except per share amounts)Ending net assets

$
2,413.4


$
2,765.8


$
2,771.8Common shares outstanding at end of period


178.7



154.5



158.0Diluted weighted average common shares outstanding


171.1



154.7



154.7Employee, employee stock option and administrative
    expenses/average net
    assets(7)


3.80
%


5.06
%


6.10
%Total operating expenses/average net
    assets(7)


7.85
%


8.46
%


10.70
%Income tax expense (benefit), including excise tax/average net
    assets(7)


0.30
%


0.56
%


0.47
%Net investment income/average net
    assets(7)


6.59
%


2.87
%


4.91
%Net increase (decrease) in net assets resulting from
    operations/average net
    assets(7)


(16.99
)%


4.35
%


5.34
%Portfolio turnover
    rate(7)


19.38
%


24.43
%


26.84
%Average debt outstanding

$
2,072.8


$
1,909.5


$
1,924.2Average debt per
    share(2)

$
12.12


$
12.34


$
12.44   (1)
    The results for nine months ended September 30, 2008, are
    not necessarily indicative of the operating results to be
    expected for the full year.(2)
    Based on diluted weighted average number of common shares
    outstanding for the period.(3)
    Net realized gains and net change in unrealized appreciation or
    depreciation can fluctuate significantly from period to period.
    As a result, quarterly comparisons may not be meaningful.(4)
    Excludes capital share transactions related to the cash portion
    of the option cancellation payment.(5)
    Total return assumes the reinvestment of all dividends paid for
    the periods presented.(6)
    On July 18, 2007, the Company completed a tender offer, which
    resulted in a total option cancellation payment of approximately
    $105.6 million, of which $52.8 million was paid in cash and
    $52.8 million was paid through the issuance of unregistered
    shares of the Companys common stock.(7)
    The ratios for the nine months ended September 30, 2008 and
    2007, do not represent annualized results.  68




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 13. Litigation
        Rule 10b-5
 69




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
   Note 13. Litigation,
    continued
       70




---



##### 



Report of
    Independent Registered Public Accounting Firm  The Board
    of Directors and Shareholders
 Allied Capital Corporation:
  three- nine-month
        
    71




---



##### 





Schedule 12-14
  ALLIED
    CAPITAL CORPORATION AND SUBSIDIARIES
  SCHEDULE OF INVESTMENTS IN AND ADVANCES TO AFFILIATES
  PRIVATE FINANCE



Amount of Interest or Dividends


December 31,








September 30,Portfolio Company



Credited





2007


Gross


Gross


2008(in thousands)

Investment(1)

to
    Income(6)


Other(2)


Value


Additions(3)


Reductions(4)


ValueCompanies More Than 25% OwnedAGILE Fund I, LLC

Equity Interests









$



$
861


$
(110
)

$
751(Private Equity Fund)Alaris Consulting, LLC

Senior
    Loan(5)






















(Business Services)

Equity Interests














1,549



(1,549
)


AllBridge Financial, LLC

Equity Interests










7,800



21,849



(10,218
)


19,431(Asset Management)Allied Capital Senior Debt Fund, L.P.

Equity Interests










32,811







(846
)


31,965(Private Debt Fund)Avborne, Inc.

Preferred Stock










1,633







(698
)


935(Business Services)

Common Stock






















Avborne Heavy Maintenance, Inc.

Preferred Stock










2,557







(2,400
)


157(Business Services)

Common Stock










370



526







896Aviation Properties Corporation

Common Stock














3



(3
)


(Business Services)Border Foods, Inc.

Senior
    Loan(5)














20,991



(2,157
)


18,834(Consumer Products)

Senior Loan

$
619











23,843



(716
)


23,127Preferred Stock










4,648



5,383







10,031Common Stock






















Calder Capital Partners, LLC

Senior
    Loan(5)





$
218



3,035



2,026



(4,393
)


668(Asset Management)

Equity Interests










3,559



2



(3,561
)


Callidus Capital Corporation

Senior Loan


95











1,750







1,750(Asset Management)

Subordinated Debt


1,251







6,871



9,947



(3,500
)


13,318Common Stock


3,000







44,587







(4,555
)


40,032Ciena Capital LLC

Senior Loan














319,031



(138,837
)


180,194(Financial Services)

Class A EquityInterests(5)










68,609







(68,609
)


Class B Equity Interests






















Class C Equity Interests






















CitiPostal Inc.

Senior Loan


36







679



2







681(Business Services)

Unitranche Debt


4,728







50,597



807







51,404Subordinated Debt


1,026







8,049



707







8,756Common Stock


27







12,726



2,962







15,688Coverall North America, Inc.

Unitranche Debt


2,983







34,923



35



(3,019
)


31,939(Business Services)

Subordinated Debt


643







5,979



6



(437
)


5,548Common Stock










27,597







(9,859
)


17,738CR Holding, Inc.

Subordinated Debt


4,936







40,812



1,048



(3,006
)


38,854(Consumer Products)

Common Stock










40,934







(31,483
)


9,451Crescent Equity Corp.

Senior Loan


33







433



11



(11
)


433(Business Services/

Subordinated Debt


2,688







42,977



1,402



(12,486
)


31,893Broadcasting & Cable)

Subordinated
    Debt(5)










1,583



150



(1,733
)


Common Stock


36







83,453



5,179



(71,302
)


17,330Direct Capital Corporation

Subordinated Debt


5,886







39,030



17,287



(2,965
)


53,352(Financial Services)

Common Stock










6,906



9,126



(10,608
)


5,424Financial Pacific Company

Subordinated Debt


9,014







72,850



1,064



(5,314
)


68,600(Financial Services)

Preferred Stock


1,281







19,330







(6,864
)


12,466Common Stock










38,544







(38,544
)


ForeSite Towers, LLC

Equity Interest










878



102







980(Tower Leasing)Global Communications, LLC

Senior
    Loan(5)










1,822







(487
)


1,335(Business Services)Hot Light Brands, Inc.

Senior
    Loan(5)














29,662



(16,406
)


13,256(Retail)

Common Stock














5,151



(5,151
)


  See related footnotes at the end of
    this schedule.
 72




---



##### 



PRIVATE FINANCE



Amount of Interest or Dividends


December 31,








September 30,Portfolio Company



Credited





2007


Gross


Gross


2008(in thousands)

Investment(1)

to
    Income(6)


Other(2)


Value


Additions(3)


Reductions(4)


ValueHot Stuff Foods, LLC

Senior Loan

$
2,622






$
50,752


$
3,132


$
(1,225
)

$
52,659(Consumer Products)

Subordinated Debt


1,589







29,907



1,335



(31,242
)


Subordinated
    Debt(5)










1,337







(1,337
)


Common Stock






















Huddle House, Inc.

Subordinated Debt


6,489







59,618



1,327



(4,355
)


56,590(Retail)

Common Stock










44,154







(11,158
)


32,996IAT Equity, LLC and Affiliates

Subordinated Debt


147











6,000







6,000d/b/a Industrial Air Tool

Common Stock














8,633







8,633(Industrial Products)Impact Innovations Group, LLC

Equity Interests in(Business Services)

Affiliate










320



1







321Insight Pharmaceuticals

Subordinated Debt


6,047







45,041



1,754



(1,297
)


45,498Corporation

Subordinated
    Debt(5)










16,796







(1,098
)


15,698(Consumer Products)

Preferred Stock










1,462







(1,462
)


Common Stock






















Jakel, Inc.

Subordinated
    Debt(5)










1,563







(815
)


748(Industrial Products)Knightsbridge CLO 2007-1
    Ltd.(8)

Class E Notes


1,345











21,985



(5,554
)


16,431(CLO)

Income Notes


3,294











39,228



(3,523
)


35,705Knightsbridge CLO
    2008-1 Ltd.

Class C Notes


435











16,000



(3,200
)


12,800(CLO)

Class D Notes


298











10,000



(2,000
)


8,000Class E Notes


388











13,834



(3,300
)


10,534Income Notes


1,080











32,605



(12,152
)


20,453Legacy Partners Group, Inc.

Senior
    Loan(5)










3,843







(3,000
)


843(Business Services)

Equity Interests










1,332



13



(77
)


1,268Litterer Beteiligungs-GmbH

Subordinated Debt


30







772



56



(828
)


(Business Services)

Equity Interest










700



1,110



(1,810
)


MHF Logistical Solutions,
    Inc.(7)

Subordinated
    Debt(5)














14,329



(14,329
)


(Business Services)

Preferred Stock






















Common Stock






















MVL Group, Inc.

Senior Loan


2,773







30,639



18







30,657(Business Services)

Subordinated Debt


4,600







39,943



888







40,831Common Stock










4,949







(4,928
)


21Old Orchard Brands, LLC

Subordinated Debt


2,551







19,544



572



(1,428
)


18,688(Consumer Products)

Equity Interests










25,419



12,572



(2,910
)


35,081Penn Detroit Diesel Allison, LLC

Subordinated Debt


4,380







39,180



1,283



(2,883
)


37,580(Business Services)

Equity Interests










37,965



13



(4,755
)


33,223Powell Plant Farms, Inc.

Senior Loan










1,534







(1,534
)


(Consumer Products)Service Champ, Inc.

Subordinated Debt


3,206







28,351



540



(2,083
)


26,808(Business Services)

Common Stock










26,292



311



(1,877
)


24,726Staffing Partners Holding

Subordinated Debt










223



286



(509
)


Company, Inc.(Business Services)Startec Equity, LLC

Equity Interests










430



16



(232
)


214(Telecommunications)Sweet Traditions, Inc.

Senior
    Loan(5)










35,229



4,865



(40,094
)


(Retail)

Preferred Stock














950



(950
)


Common Stock














50



(50
)


Unitranche Fund LLC

Subordinated Certificates


4,505







744



113,595







114,339(Private Debt Fund)

Equity Interests










1











1Worldwide Express Operations, LLC

Subordinated Debt


310







2,670



212



(212
)


2,670(Business Services)

Equity Interests


796







21,516







(5,254
)


16,262Warrants










272







(67
)


205Total companies more than 25% owned

$
85,167






$
1,279,080










$
1,433,700  See related footnotes at the end of
    this schedule.
 73




---



##### 



PRIVATE FINANCE



Amount of Interest or Dividends


December 31,








September 30,Portfolio Company



Credited





2007


Gross


Gross


2008(in thousands)

Investment(1)

to
    Income(6)


Other(2)


Value


Additions(3)


Reductions(4)


ValueCompanies 5% to 25% Owned10th Street, LLC

Subordinated Debt

$
2,062






$
20,645


$
578


$



$
21,223(Business Services)

Equity Interests










1,100







(25
)


1,075Option














25







25Advantage Sales &Marketing, Inc.

Subordinated Debt


14,339







154,854



2,448







157,302(Business Services)

Equity Interests










10,973



2,027







13,000Air Medical Group Holdings LLC

Senior Loan


179







2,980



9,885



(8,533
)


4,332(Healthcare Services)

Equity Interests


1,010







10,800



376



(476
)


10,700Alpine ESP Holdings, Inc.

Preferred Stock


169







749







(749
)


(Business Services)

Common Stock










262



1



(263
)


Amerex Group, LLC

Subordinated Debt


2,166







8,400



995



(611
)


8,784(Consumer Products)

Equity Interests


2,349







13,713







(51
)


13,662BB&T CapitalPartners/WindsorMezzanine Fund, LLC

Equity Interests










11,467



48



(1,169
)


10,346(Private Equity Fund)Becker Underwood, Inc.

Subordinated Debt


2,790







24,798



543







25,341(Industrial Products)

Common Stock










4,190



909



(799
)


4,300BI Incorporated

Subordinated Debt


2,722







30,499



116



(30,615
)


(Business Services)

Common Stock










7,382







(7,382
)


Creative Group, Inc.

Subordinated
    Debt(5)










6,197



8,877



(15,074
)


(Business Services)

Common Stock






















Warrant






















Drew Foam Companies, Inc.

Preferred Stock










396



38



(99
)


335(Business Services)

Common Stock














1



(1
)


Hilden America, Inc.

Common Stock














454



(384
)


70(Consumer Products)Lydall Transport, Ltd.

Equity Interests














432



(9
)


423(Business Services)MedBridge Healthcare,
    LLC(7)

Senior
    Loan(5)





$
321



7,164







(577
)


6,587(Healthcare Services)

Subordinated
    Debt(5)






31



2,406







(1,653
)


753ConvertibleSubordinated
    Debt(5)






















Equity Interests














9



(9
)


MHF Logistical Solutions, Inc.

Subordinated
    Debt(5)










9,280







(9,280
)


(Business Services)

Common Stock






















Warrants






















Multi-Ad Services, Inc.

Unitranche Debt


993







19,704



77



(16,834
)


2,947(Business Services)

Equity Interests










940



756



(274
)


1,422Progressive InternationalCorporation

Subordinated Debt


131







1,545



40



(1,585
)


(Consumer Products)

Preferred Stock










1,038



65







1,103Common Stock










4,900







(300
)


4,600Warrants






















Regency Healthcare Group, LLC

Senior Loan


2



















(Healthcare Services)

Unitranche Debt


979







11,941



265



(1,099
)


11,107Equity Interests


25







1,681



93



(206
)


1,568SGT India Private Limited

Common Stock










3,075



23



(1,892
)


1,206(Business Services)Soteria Imaging Services, LLC

Subordinated Debt


1,597







13,744



1,911



(11,548
)


4,107(Healthcare Services)

Equity Interests


74







2,686



10



(539
)


2,157Triax Holdings,
    LLC(9)

Subordinated Debt














10,316







10,316(Consumer Products)

Equity Interests














42,114







42,114Universal Environmental

Equity Interests














249



(249
)


Services, LLC(Business Services)Total companies 5% to 25% owned

$
31,587






$
389,509










$
360,905      (1)

    Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted. The
    principal amount for loans and debt securities and the number of
    shares of common stock and preferred stock is shown in the
    consolidated statement of investments as of September 30,
    2008. 74




---



##### 



(2)
    Other includes interest, dividend, or other income which was
    applied to the principal of the investment and therefore reduced
    the total investment. These reductions are also included in the
    Gross Reductions for the investment, as applicable.(3)
    Gross additions include increases in the cost basis of
    investments resulting from new portfolio investments,
    paid-in-kind
    interest or dividends, the amortization of discounts and closing
    fees, the exchange of one or more existing securities for one or
    more new securities and the movement of an existing portfolio
    company into this category from a different category. Gross
    additions also include net increases in unrealized appreciation
    or net decreases in unrealized depreciation.(4)
    Gross reductions include decreases in the cost basis of
    investments resulting from principal collections related to
    investment repayments or sales, the exchange of one or more
    existing securities for one or more new securities and the
    movement of an existing portfolio company out of this category
    into a different category. Gross reductions also include net
    increases in unrealized depreciation or net decreases in
    unrealized appreciation.(5)
    Loan or debt security is on non-accrual status at
    September 30, 2008, and is therefore considered non-income
    producing. Loans or debt securities on non-accrual status at the
    end of the period may or may not have been on non-accrual status
    for the full period.(6)
    Represents the total amount of interest or dividends credited to
    income for the portion of the year an investment was included in
    the companies more than 25% owned or companies 5% to 25% owned
    categories, respectively.(7)
    In the first quarter of 2008, the Company exercised its option
    to acquire a majority of the voting securities of MHF Logistical
    Solutions, Inc. (MHF). Therefore, MHF was reclassified to
    companies more than 25% owned in the first quarter of 2008. At
    December 31, 2007, the Companys investment in MHF was
    included in the companies 5% to 25% owned category.(8)
    On March 31, 2008, the Company assumed the management of
    Knightsbridge CLO
    2007-1.
    Therefore, this investment was reclassified to companies more
    than 25% owned. At December 31, 2007, this investment was
    included in the companies 5% to 25% owned category.(9)
    During the quarter ended September 30, 2008, the
    Companys equity interests in Triax Holding, LLC received
    voting rights. Therefore this investment was reclassified to
    companies 5% to 25% owned. 75




---



##### 





Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  The following analysis of the financial condition and results
    of operations of the Company should be read in conjunction with
    the Companys Consolidated Financial Statements and the
    Notes thereto included herein and in the Companys annual
    report on
    Form 10-K
    for the year ended December 31, 2007. In addition, this
    quarterly report on Form 10-Q contains certain forward-looking
    statements. These statements include the plans and objectives of
    management for future operations and financial objectives and
    can be identified by the use of forward-looking terminology such
    as may, will, expect,
    intend, anticipate,
    estimate, or continue or the negative
    thereof or other variations thereon or comparable terminology.
    These forward-looking statements are subject to the inherent
    uncertainties in predicting future results and conditions.
    Certain factors that could cause actual results and conditions
    to differ materially from those projected in these
    forward-looking statements are set forth below in the Risk
    Factors section. Other factors that could cause actual results
    to differ materially include:
  
    changes in the economy, including economic downturns or
    recessions;
    risks associated with possible disruption in our operations
    due to terrorism;
    future changes in laws or regulations or changes in
    accounting principles; and
    other risks and uncertainties as may be detailed from time to
    time in our public announcements and SEC filings.  Financial or other information presented for private finance
    portfolio companies has been obtained from the portfolio
    companies, and the financial information presented may represent
    unaudited, projected or pro forma financial information, and
    therefore may not be indicative of actual results. In addition,
    the private equity industry uses financial measures such as
    EBITDA or EBITDAM (Earnings Before Interest, Taxes,
    Depreciation, Amortization and, in some instances, Management
    fees) in order to assess a portfolio companys financial
    performance and to value a portfolio company. EBITDA and EBITDAM
    are not intended to represent cash flow from operations as
    defined by U.S. generally accepted accounting principles and
    such information should not be considered as an alternative to
    net income, cash flow from operations or any other measure of
    performance prescribed by U.S. generally accepted accounting
    principles.
  OVERVIEW
      September 30,


December 31,2008


2007


2007Private finance


97%



97%



97%Commercial real estate finance


3%



3%



3%  76




---



##### 



interest-bearing
    2007-1 2008-1
       77




---



##### 



PORTFOLIO AND
    INVESTMENT ACTIVITY
    At and for the


At and for the


At and for theThree Months


Nine Months


Year EndedEnded September 30,


Ended September 30,


December 31,($ in millions)

2008


2007


2008


2007


2007Portfolio at value

$
4,208.5


$
4,326.9


$
4,208.5


$
4,326.9


$
4,780.5Investments funded

$
433.8


$
577.5


$
1,027.8


$
1,236.7


$
1,846.0Payment-in-kind interest and dividends, net of cash collections

$
11.4


$
(1.2)


$
35.9


$
5.5


$
12.0Principal collections related to investment repayments
    or sales

$
280.6


$
351.1


$
878.2


$
1,086.5


$
1,211.6Yield on interest-bearing portfolio
    investments(1)


11.9%



11.9%



11.9%



11.9%



12.1%   (1)

    The weighted average yield on interest-bearing investments is
    computed as the (a) annual stated interest on accruing
    loans and debt securities plus the annual amortization of loan
    origination fees, original issue discount, and market discount
    on accruing loans and debt securities less the annual
    amortization of loan origination costs, plus the effective
    interest yield on the preferred shares/income notes of CLOs,
    plus the annual stated interest (LIBOR plus 7.5%) on the
    subordinated certificates in the Unitranche Fund LLC
    divided by (b) total interest-bearing investments at value.
    The weighted average yield is computed as of the balance sheet
    date. 78




---



##### 



Private
    Finance
  interest-bearing
  At and forAt and for the Three Months


At and for the Nine Months


the Year EndedEnded September 30,


Ended September 30,


December 31,2008


2007


2008


2007


2007($ in millions)

Value


Yield(1)


Value


Yield(1)


Value


Yield(1)


Value


Yield(1)


Value


Yield(1)Portfolio at value:Loans and debt securities:Senior loans

$
434.9



4.2
%

$
481.6



9.3
%

$
434.9



4.2
%

$
481.6



9.3
%

$
344.3



7.7
%Unitranche debt


579.3



12.0
%


698.1



11.5
%


579.3



12.0
%


698.1



11.5
%


653.9



11.5
%Subordinated debt


2,062.6



13.1
%


1,927.1



12.6
%


2,062.6



13.1
%


1,927.1



12.6
%


2,416.4



12.8
%Total loans and debt securities


3,076.8



11.7
%


3,106.8



11.8
%


3,076.8



11.7
%


3,106.8



11.8
%


3,414.6



12.1
%Equity securities:Preferred shares/income notes of
    CLOs(2)


218.3



17.1
%


131.5



15.1
%


218.3



17.1
%


131.5



15.1
%


203.0



14.6
%Subordinated certificates in 
    Unitranche
    Fund LLC(2)


114.3



10.3
%










114.3



10.3
%










0.7



12.4
%Other equity securities


692.5







968.8







692.5







968.8







1,041.0Total equity securities


1,025.1







1,100.3







1,025.1







1,100.3







1,244.7Total portfolio

$
4,101.9






$
4,207.1






$
4,101.9






$
4,207.1






$
4,659.3Investments funded

$
428.9






$
576.1






$
1,020.7






$
1,219.9






$
1,828.0Payment-in-kind interest and dividends, net 
    of cash collections

$
11.4






$







$
35.8






$
6.2






$
12.7Principal collections related to investment
    repayments or
    sales(3)

$
280.6






$
346.2






$
861.5






$
1,063.3






$
1,188.2   (1)
    The weighted average yield on loans and debt securities is
    computed as the (a) annual stated interest on accruing
    loans and debt securities plus the annual amortization of loan
    origination fees, original issue discount, and market discount
    on accruing loans and debt securities less the annual
    amortization of loan origination costs, divided by
    (b) total loans and debt securities at value. The weighted
    average yield on the preferred shares/income notes of CLOs is
    calculated as the (a) effective interest yield on the
    preferred shares/income notes of CLOs, divided by (b) preferred
    shares/income notes of CLOs at value. The weighted average yield
    on the subordinated certificates in the Unitranche Fund LLC
    is computed as the (a) annual stated interest (LIBOR plus
    7.5%) divided by (b) total investment at value. The
    weighted average yields are computed as of the balance sheet
    date. See Results of Operations  Total Interest
    and Related Portfolio Income below for discussion of the
    portfolio yield.(2)
    Investments in the preferred shares/income notes of CLOs and the
    subordinated certificates in the Unitranche Fund LLC earn a
    current return that is included in interest income in the
    consolidated statement of operations.(3)
    Includes collections from the sale or repayment of senior loans
    totaling $101.2 million and $76.4 million for the
    three months ended September 30, 2008 and 2007,
    respectively, $225.4 million and $312.6 million for
    the nine months ended September 30, 2008 and 2007,
    respectively, and $393.4 million for the year ended
    December 31, 2007.     79




---



##### 



Investment Activity.
 For the Nine Months Ended September 30, 2008Debt Investments


Buyout Investments


TotalWeighted





Weighted





WeightedAverage





Average





Average($ in millions)

Amount


Yield(1)


Amount


Yield(1)


Amount


Yield(1)Loans and debt securities:Senior loans

$
155.0



7.3%


$
12.6



6.0%


$
167.6



7.2%Senior secured loan to Ciena Capital LLC










319.0



0.0%
(2)


319.0



0.0%
(2)Unitranche
    debt(3)


15.3



10.5%



0.5



6.6%



15.8



10.4%Subordinated debt


243.4
(4)


12.6%



50.5



15.2%



293.9



13.0%Total loans and debt securities


413.7



10.5%



382.6



2.2%



796.3



6.5%
(7)Preferred shares/income notes of
    CLOs(5)


35.6



18.6%











35.6



18.6%Subordinated certificates in Unitranche Fund LLC


113.6



10.8%











113.6



10.8%Equity


37.7







37.5







75.2Total

$
600.6






$
420.1






$
1,020.7   For the Nine Months Ended September 30, 2007Debt Investments


Buyout Investments


TotalWeighted





Weighted





WeightedAverage





Average





Average($ in millions)

Amount


Yield(1)


Amount


Yield(1)


Amount


Yield(1)Loans and debt securities:Senior loans

$
285.6



10.3%


$
83.0



10.7%


$
368.6



10.4%Unitranche
    debt(3)


104.0



10.8%











104.0



10.8%Subordinated debt


279.0



12.4%



186.3



12.1%



465.3



12.3%Total loans and debt securities


668.6



11.3%



269.3



11.7%



937.9



11.4%Preferred shares/income notes on
    CLOs(5)


42.4



17.8%











42.4



17.8%Equity


112.8
(6)






126.8







239.6Total

$
823.8






$
396.1






$
1,219.9   80




---



##### 



For the Year Ended December 31, 2007Debt Investments


Buyout Investments


TotalWeighted





Weighted





WeightedAverage





Average





Average($ in millions)

Amount


Yield(1)


Amount


Yield(1)


Amount


Yield(1)Loans and debt securities:Senior loans

$
249.0



9.2%


$
63.1



8.8%


$
312.1



9.1%Unitranche
    debt(3)


109.1



10.8%



74.9



13.0%



184.0



11.7%Subordinated debt


719.4
(4)


12.8%



197.6



12.1%



917.0



12.6%Total loans and debt securities


1,077.5



11.7%



335.6



11.7%



1,413.1



11.7%Preferred shares/income notes of
    CLOs(5)


116.2



16.4%











116.2



16.4%Subordinated certificates in Unitranche Fund LLC


0.7



12.4%











0.7



12.4%Equity


152.0
(6)






146.0







298.0Total

$
1,346.4






$
481.6






$
1,828.0    (1)
    The weighted average yield on loans and debt securities is
    computed as the (a) annual stated interest or effective
    interest yield on accruing loans and debt securities, divided by
    (b) total loans and debt securities funded. The weighted
    average yield on the preferred shares/income notes of CLOs is
    calculated as the (a) effective interest yield on the
    preferred shares/income notes of CLOs, divided by
    (b) preferred shares/income notes of CLOs funded. The
    weighted average yield on the subordinated certificates in the
    Unitranche Fund LLC is computed as the (a) annual
    stated interest (LIBOR plus 7.5%) divided by (b) total
    investment funded. The weighted average yield is calculated
    using yields as of the date an investment is funded.(2)
    The senior secured loan to Ciena acquired on September 30,
    2008, was placed on non-accrual on the purchase date.(3)
    Unitranche debt is an investment that combines both senior and
    subordinated financing, generally in a first lien position. The
    yield on a unitranche investment reflects the blended yield of
    senior and subordinated debt.(4)
    Subordinated debt investments for the nine months ended
    September 30, 2008, and year ended December 31, 2007,
    included $43.8 million and $45.3 million,
    respectively, in investments in the bonds of collateralized loan
    obligations (CLOs). Certain of these CLOs are managed by us or
    by Callidus Capital Corporation (Callidus), a portfolio company
    controlled by us. These CLOs primarily invest in senior
    corporate loans.(5)
    CLO equity investments included preferred shares/income notes of
    CLOs that primarily invest in senior corporate loans. Certain of
    these CLOs are managed by us or by Callidus.(6)
    Equity investments for the nine months ended September 30,
    2007, and for the year ended December 31, 2007, included
    $19.1 million and $31.8 million, respectively,
    invested in the Allied Capital Senior Debt Fund, L.P. See
    Managed Funds below.(7)
    Excluding the senior secured loan to Ciena Capital LLC, the
    weighted average yield for the nine months ended
    September 30, 2008, on new investments was 10.9%.   81




---



##### 



82




---



##### 



Outstanding Investment Commitments.
  Companies





CompaniesMore Than


Companies 5%


Less Than($ in millions)

25%
    Owned(1)


to 25% Owned


5% Owned


TotalSenior loans

$
6.7


$
11.4


$
112.4


$
130.5
(2)Unitranche debt


3.0







36.3



39.3Subordinated debt


26.5



4.3



6.1



36.9Total loans and debt securities


36.2



15.7



154.8



206.7Unitranche
    Fund(3)


399.6











399.6Equity securities


78.1



10.5



42.1



130.7
(4)Total

$
513.9


$
26.2


$
196.9


$
737.0   (1)
    Includes various commitments to
    Callidus Capital Corporation (Callidus), a portfolio company
    controlled by us, which owns 100% of Callidus Capital
    Management, LLC, an asset management company that structures and
    manages collateralized loan obligations (CLOs), collateralized
    debt obligations (CDOs), and other related investments, as
    follows:  AmountCommitted

Amount

Available($ in millions)

Amount

Drawn

to be DrawnRevolving line of credit for working capital

$
4.0


$
1.8


$
2.2Subordinated debt to support warehouse facilities &
    warehousing
    activities(*)


18.0



0.5



17.5Total

$
22.0


$
2.3


$
19.7   (*)
    Callidus has a synthetic credit
    facility with a third party for up to approximately
    $0.9 million. We have agreed to designate our subordinated
    debt commitment for Callidus to draw upon to provide first loss
    capital as needed to support this facility.  (2)
    Includes $145.7 million in the
    form of revolving senior debt facilities to 31 companies.(3)
    Represents our commitment to the
    Unitranche Fund LLC (see Managed Funds 
    Unitranche Fund LLC). Outstanding commitments to the
    Unitranche Fund LLC will be funded as investments are funded by
    the Unitranche Fund. Investments made by the Unitranche Fund
    must be approved by the investment committee of the Unitranche
    Fund, which includes a representative from us and GE, and the
    level of investments made by the Unitranche Fund will be
    dependent on market conditions and the Unitranche Funds
    ability to identify attractive investment opportunities during
    the investment period.(4)
    Includes $51.5 million to 12
    private equity and venture capital funds, including
    $3.5 million in co-investment commitments to one private
    equity fund.    Investments in Collateralized Loan Obligations and
    Collateralized Debt Obligations (CLO/CDO
    Assets).
  2008


2007($ in millions)

Cost


Value


Yield(1)


Cost


Value


Yield(1)CLO/CDO
    bonds(2)

$
127.2


$
115.8



14.0%


$
90.7


$
89.9



13.3%Preferred shares/income notes of CLOs


247.2



218.3



17.1%



218.3



203.0



14.6%Total

$
374.4


$
334.1






$
309.0


$
292.9Percentage of total assets






7.2%











5.6%   (1)

    The weighted average yield is calculated as the (a) annual
    stated interest or the effective interest yield on the accruing
    bonds or the effective interest yield on the preferred
    shares/income notes, divided by (b) CLO/CDO Assets at value. The market yield used in the
    valuation of the CLO/CDO Assets may be different than the yields
    shown above. See discussion below.
  (2)
    Included in private finance
    subordinated debt. 83




---



##### 



($ in millions)

2008


2007Bonds

$
273.2


$
288.5Syndicated loans


4,435.3



4,122.7Cash(1)


107.8



104.4Total underlying collateral
    assets(2)

$
4,816.3


$
4,515.6   (1)
    Includes undrawn liability amounts.(2)
    At September 30, 2008, and December 31, 2007, the
    total face value of defaulted obligations was $28.5 million
    and $18.4 million, respectively, or approximately 0.6% and
    0.4%, respectively, of the total underlying collateral assets.  third-party
   84




---



##### 



Ciena Capital LLC.
          debtor-in-possession
   85




---



##### 



($ in millions)

2008


2007Interest income on Class A equity interests

$



$
Fees and other income






4.1Total interest and related portfolio income

$



$
4.1         No. 2:06-CR-20662
   86




---



##### 



Mercury Air Centers, Inc.
      ($ in millions)

2007Interest income

$
5.1Fees and other income


0.2Total interest and related portfolio income

$
5.3    87




---



##### 



Commercial Real
    Estate Finance
    At and for theAt and for the


At and for the


Year EndedThree Months Ended September 30,


Nine Months Ended September 30,


December 31,2008


2007


2008


2007


2007($ in millions)

Value


Yield(1)


Value


Yield(1)


Value


Yield(1)


Value


Yield(1)


Value


Yield(1)Portfolio at value:Commercial mortgage loans

$
51.4



7.4%


$
64.2



6.4%


$
51.4



7.4%


$
64.2



6.4%


$
65.4



6.8
%Real estate owned


24.0







22.0







24.0







22.0







21.3Equity interests


31.2







33.5







31.2







33.5







34.5Total portfolio

$
106.6






$
119.7






$
106.6






$
119.7






$
121.2Investments funded

$
4.9






$
1.4






$
7.1






$
16.8






$
18.0Payment-in-kind interest, net of cash collections

$







$
(1.2)






$
0.1






$
(0.7)






$
(0.7)Principal collections related to investment repayments or sales

$







$
4.9






$
16.7






$
23.2






$
23.4   (1)

    The weighted average yield on the interest-bearing investments
    is computed as the (a) annual stated interest on accruing
    loans plus the annual amortization of loan origination fees,
    original issue discount, and market discount on accruing
    interest-bearing investments less the annual amortization of
    origination costs, divided by (b) total interest-bearing
    investments at value. The weighted average yield is computed as
    of the balance sheet date. Interest-bearing investments for the
    commercial real estate finance portfolio include all investments
    except for real estate owned and equity interests.    Managed
    Funds
    Unitranche Fund LLC.
 88




---



##### 



Allied Capital Senior Debt Fund,
    L.P.
      Knightsbridge CLO
    2007-1
    Ltd. 2007-1
   89




---



##### 



Knightsbridge CLO
    2008-1
    Ltd. 2008-1
      AGILE Fund I, LLC.
         90




---



##### 



PORTFOLIO ASSET
    QUALITY
  Portfolio by Grade.
    2008


2007Portfolio

Percentage of


Portfolio

Percentage ofGrade

at Value

Total Portfolio


at Value

Total Portfolio($ in millions)1

$
817.2


19.4
%

$
1,539.6


32.2
%2


2,886.9


68.6



2,915.7


61.03


125.3


3.0



122.5


2.64


108.7


2.6



157.2


3.35


270.4


6.4



45.5


0.9$
4,208.5


100.0
%

$
4,780.5


100.0
%       Loans and Debt Securities on Non-Accrual
    Status.
 91




---



##### 



($ in millions)

2008


2007Loans and debt securities in workout status (classified as
    Grade 4 or
    5)(1)Private financeCompanies more than 25% owned

$
197.0



$114.1Companies 5% to 25% owned


0.8



11.7Companies less than 5% owned


136.6



23.8Commercial real estate finance


7.6



12.4Loans and debt securities not in workout statusPrivate financeCompanies more than 25% owned


34.5



21.4Companies 5% to 25% owned


6.6



13.4Companies less than 5% owned






13.3Commercial real estate finance






1.9Total

$
383.1



$212.0Percentage of total portfolio


9.1
%


4.4
%   (1)
    Workout loans and debt securities
    exclude equity securities that are included in the total
    Grade 4 and 5 assets above.    Loans and Debt Securities Over 90 Days
    Delinquent.
  ($ in millions)

2008


2007Private finance


$20.0



$139.9Commercial mortgage loans


1.4



9.2Total


$21.4



$149.1Percentage of total portfolio


0.5
%


3.1
%   non-accrual
  and
   92




---



##### 



PORTFOLIO
    RETURNS
    OTHER ASSETS AND
    OTHER LIABILITIES
     93




---



##### 



RESULTS OF
    OPERATIONS
  Comparison of the
    Three and Nine Months Ended September 30, 2008 and
    2007
    For the Three Months Ended September 30,


For the Nine Months Ended September 30,Percent










Percent(in thousands, except per share amounts)

2008


2007


Change

Change


2008


2007


Change

Change(unaudited)







(unaudited)Interest and Related Portfolio Income:Interest and dividends

$
112,207


$
105,669


$
6,538



6
%

$
366,079


$
310,466


$
55,613



18
%Fees and other income


8,455



12,699



(4,244
)


(33
)%


34,105



33,530



575



2
%Total interest and related portfolio income


120,662



118,368



2,294



2
%


400,184



343,996



56,188



16
%Expenses:Interest


35,949



33,744



2,205



7
%


109,974



98,368



11,606



12
%Employee


21,443



26,306



(4,863
)


(18
)%


57,439



76,845



(19,406
)


(25
)%Employee stock options


1,477



18,312



(16,835
)


(92
)%


9,531



31,492



(21,961
)


(70
)%Administrative


14,138



10,496



3,642



35
%


36,100



38,225



(2,125
)


(6
)%Total operating expenses


73,007



88,858



(15,851
)


(18
)%


213,044



244,930



(31,886
)


(13
)%Net investment income before income taxes


47,655



29,510



18,145



61
%


187,140



99,066



88,074



89
%Income tax expense, including excise tax


2,060



11,192



(9,132
)


(82
)%


8,141



16,073



(7,932
)


(49
)%Net investment income


45,595



18,318



27,277



149
%


178,999



82,993



96,006



116
%Net Realized and Unrealized Gains (Losses):Net realized gains


62,042



212,370



(150,328
)



*


47,330



314,915



(267,585
)



*Net change in unrealized appreciation or depreciation


(425,899
)


(327,156
)


(98,743
)



*


(687,506
)


(272,132
)


(415,374
)



*Total net gains (losses)


(363,857
)


(114,786
)


(249,071
)



*


(640,176
)


42,783



(682,959
)



*Net income (loss)

$
(318,262
)

$
(96,468
)

$
(221,794
)


(230
)%

$
(461,177
)

$
125,776


$
(586,953
)


(467
)%Diluted earnings (loss) per common share

$
(1.78
)

$
(0.63
)

$
(1.15
)


(183
)%

$
(2.70
)

$
0.81


$
(3.51
)


(433
)%Weighted average common shares outstanding  diluted


178,692



154,025



24,667



16
%


171,084



154,708



16,376



11
%   *
    Net change in unrealized appreciation or depreciation and net
    gains (losses) can fluctuate significantly from period to
    period. As a result, comparisons may not be meaningful. 94




---



##### 





Total Interest and Related Portfolio Income.
  Interest and Dividends.
  For the Three

For the NineMonths Ended

Months EndedSeptember 30,

September 30,($ in millions)

2008

2007

2008

2007InterestPrivate finance loans and debt securities

$
95.8

$
94.1

$
311.0

$
280.4Preferred shares/income notes of CLOs


9.4


4.3


24.8


11.5Subordinated certificates in Unitranche Fund LLC


2.9





4.5


Commercial mortgage loans


0.9


1.1


3.1


4.9Cash, U.S. Treasury bills, money market and other securities


1.2


5.6


3.6


11.8Total interest


110.2


105.1


347.0


308.6Dividends


2.0


0.6


19.1


1.9Total interest and dividends

$
112.2

$
105.7

$
366.1

$
310.5     2008


2007($ in millions)

Value

Yield(1)


Value

Yield(1)Private finance:Loans and debt securities:Senior loans

$
434.9


4.2
%

$
481.6


9.3
%Unitranche debt


579.3


12.0
%


698.1


11.5
%Subordinated debt


2,062.6


13.1
%


1,927.1


12.6
%Equity securities:Preferred shares/ income notes of CLOs


218.3


17.1
%


131.5


15.1
%Subordinated certificates in Unitranche Fund LLC


114.3


10.3
%





Commercial real estate:Commercial mortgage loans


51.4


7.4
%


64.2


6.4
%Total interest-bearing investments

$
3,460.8


11.9
%

$
3,302.5


11.9
%   (1)
    The weighted average yield on loans and debt securities is
    computed as the (a) annual stated interest on accruing
    loans and debt securities plus the annual amortization of loan
    origination fees, original issue discount, and market discount
    on accruing loans and debt securities less the annual
    amortization of loan origination costs, divided by
    (b) total interest-bearing investments at value. The weighted average yield on the
    preferred shares/income notes of CLOs is calculated as the
    (a) effective interest yield on the preferred shares/income
    notes of CLOs, divided by (b) preferred shares/income notes
    of CLOs at value.
 The weighted average yield on the
    subordinated certificates in the Unitranche Fund LLC is
    computed as the (a) annual stated interest (LIBOR plus
    7.5%) divided by (b) total investment at value. This yield
    excludes any return from the potential future excess cash flows
    from portfolio earnings available to the subordinated
    certificate holders and from related structuring fees and
    management and sourcing fees. See  Fees and Other
    Income below.
 The weighted average yields are
    computed as of the balance sheet date.
 95




---



##### 



Fees and Other Income.
 96




---



##### 



For the Three Months Ended September 30,


For the Nine Months Ended September 30,($ in millions)

2008


2007


2008


2007Structuring and diligence

$
2.3



$7.3


$
15.8



$15.3Management, consulting and other services provided to portfolio
    companies


2.9



3.2



8.9



7.3Commitment, guaranty and other fees from portfolio
    companies(1)


1.1



2.0



4.7



7.0Fund management
    fees(2)


1.8







4.0



Loan prepayment premiums


0.3



0.1



0.6



3.7Other income


0.1



0.1



0.1



0.2Total fees and other income

$
8.5



$12.7


$
34.1



$33.5   (1)
    Commitment, guaranty and other fees from portfolio companies for
    the three and nine months ended September 30, 2007,
    included guaranty and other fees from Ciena of $1.3 million and
    $4.1 million, respectively. See  Private
    Finance, Ciena Capital, LLC above.(2)
    See Portfolio and Investment Activity  Managed
    Funds above.          Operating Expenses.
  Interest Expense.
 97




---



##### 



At and for the Three Months Ended September 30,


At and for the Nine Months Ended September 30,($ in millions)

2008


2007


2008


2007Total outstanding debt

$
2,131.0


$
1,922.4


$
2,131.0


$
1,922.4Average outstanding debt

$
1,967.2


$
1,921.1


$
2,072.8


$
1,909.5Weighted average
    cost(1)


6.8%



6.6%



6.8%



6.6%   (1)
    The weighted average annual
    interest cost is computed as the (a) annual stated interest rate
    on the debt plus the annual amortization of commitment fees,
    other facility fees and debt financing costs that are recognized
    into interest expense over the contractual life of the
    respective borrowings, divided by (b) debt outstanding on
    the balance sheet date.    Employee Expense.
  For the Three Months Ended September 30,


For the Nine Months Ended September 30,($ in millions)

2008


2007


2008


2007Salaries and employee benefits

$
17.0


$
23.3


$
48.1


$
65.9Individual performance award (IPA)


2.0



2.4



6.6



7.4IPA mark to market expense (benefit)






(2.0
)


(4.1
)


(3.6
)Individual performance bonus (IPB)


2.4



2.6



6.8



7.1Total employee
    expense(1)

$
21.4


$
26.3


$
57.4


$
76.8Number of employees at end of period


155



178



155



178   (1)
    Excludes stock options expense. See
    below.     98




---



##### 



Stock Options Expense. Share-Based Payment
 99




---



##### 



For the Three Months Ended September 30,


For the Nine Months Ended September 30,($ in millions)

2008


2007


2008


2007Employee Stock Option Expense:Options granted:Previously awarded, unvested options as of January 1, 2006

$



$
1.7


$
3.9


$
8.2Options granted on or after January 1, 2006


1.5



2.2



5.6



8.9Total options granted


1.5



3.9



9.5



17.1Options cancelled in connection with tender offer (see below)






14.4







14.4Total employee stock option expense

$
1.5


$
18.3


$
9.5


$
31.5       Administrative Expense.
   100




---



##### 



Income Tax Expense (Benefit), Including Excise
    Tax.
  For the Three Months Ended September 30,


For the Nine Months Ended September 30,($ in millions)

2008


2007


2008


2007Income tax expense (benefit)

$
1.2


$
2.2


$
3.0


$
(0.5
)Excise tax
    expense(1)


0.9



9.0



5.1



16.6Income tax expense (benefit), including excise tax

$
2.1


$
11.2


$
8.1


$
16.1    (1)
    While excise tax expense is
    presented in the Consolidated Statement of Operations as a
    reduction to net investment income, excise tax relates to both
    net investment income and net realized gains.      Realized Gains and Losses.
  For the Three Months Ended September 30,


For the Nine Months Ended September 30,($ in millions)

2008


2007


2008


2007Realized gains

$
97.5


$
275.8


$
135.2


$
396.4Realized losses


(35.5
)


(63.4
)


(87.9
)


(81.5
)Net realized gains

$
62.0


$
212.4


$
47.3


$
314.9    101




---



##### 



For the NineMonths EndedFor the Three Months Ended September 30,


September 30,($ in millions)

2008


2007


2008


2007Reversal of previously recorded net unrealized appreciation
    associated with realized gains

$
(80.4
)

$
(243.9
)

$
(115.1
)

$
(330.9
)Reversal of previously recorded net unrealized appreciation
    associated with dividends received


(1.6
)






(15.1
)


(1.1
)Reversal of previously recorded net unrealized depreciation
    associated with realized losses


34.8



65.8



80.2



89.2Total reversal

$
(47.2
)

$
(178.1
)

$
(50.0
)

$
(242.8
)     ($ in
    millions)
 2008Portfolio Company

AmountPrivate Finance:Norwesco, Inc.


$86.9BI Incorporated


7.4Passport Health Communications, Inc.


1.8Other


1.3Total private finance


97.4Commercial Real Estate:Other


0.1Total commercial real estate


0.1Total realized gains


$97.5   2007Portfolio Company

AmountPrivate Finance:Mercury Air Centers, Inc.

$
259.5Woodstream Corporation


14.6Mogas Energy, LLC


1.2Other


0.5Total realized gains

$
275.8     ($ in
    millions)
 2008Portfolio Company

AmountPrivate Finance:Pendum, Inc.


$34.0Other


1.5Total realized losses


$35.5   2007Portfolio Company

AmountPrivate Finance:Jakel, Inc.

$
24.8Startec Global Communications Corporation


20.2Gordian Group, Inc.


9.7Universal Environmental Services, LLC


8.6Other


0.1Total realized losses

$
63.4   102




---



##### 



($ in
    million)
 2008Portfolio Company

AmountPrivate Finance:Norwesco, Inc.

$
97.6BI Incorporated


7.4BenefitMall, Inc.


4.9Advantage Sales & Marketing,
    Inc.(1)


3.4Mercury Air Centers, Inc.


3.3Financial Pacific Company


3.1Passport Health Communications, Inc.


1.8Service Champ, Inc.


1.7Penn Detroit Diesel Allison, LLC


1.4Coverall North America, Inc.


1.4MedAssets, Inc.


1.3CR Holding, Inc.


1.0Other


6.5Total private finance


134.8Commercial Real Estate:Other


0.4Total commercial real estate


0.4Total realized gains

$
135.2   2007Portfolio Company

AmountPrivate Finance:Mercury Air Centers, Inc.

$259.5HMT, Inc.

39.9Healthy Pet Corp.

36.6Palm Coast Data, LLC

20.0Woodstream Corporation

14.6Wear Me Apparel Corporation

6.1Mogas Energy, LLC

5.7Tradesmen International, Inc.

3.8ForeSite Towers, LLC

3.8Advantage Sales & Marketing, Inc.

3.1Geotrace Technologies, Inc.

1.1Other

2.2Total realized gains

$396.4     (1) Includes
    an additional realized gain of $1.9 million related to the
    release of escrowed funds from the sale of our majority equity
    investment in 2006.
    ($ in
    millions)
 2008Portfolio Company

AmountPrivate Finance:Pendum, Inc.

$
34.0Creative Group, Inc.


15.6Crescent Equity Corp.  Longview Cable &
    Data, LLC


8.4Mid-Atlantic Venture Fund IV, L.P.


5.2WMA Equity Corporation and Affiliates


4.5Driven Brands, Inc.


1.9Direct Capital Corporation


1.7EarthColor, Inc.


1.7Sweet Traditions, Inc.


1.5Walker Investment Fund II, LLLP.


1.4Other


9.5Total private finance


85.4Commercial Real Estate:Other


2.5Total commercial real estate


2.5Total realized losses

$
87.9   2007Portfolio Company

AmountPrivate Finance:Jakel, Inc.

$24.8Startec Global Communications, Inc.

20.2Powell Plant Farms, Inc.

11.6Gordian Group, Inc.

9.7Universal Environmental Services, LLC

8.6Legacy Partners Group, LLC

5.8Other

0.8Total realized losses

$81.5   103




---



##### 



Change in Unrealized Appreciation or
    Depreciation. Fair Value Measurements
        Valuation Methodology.
   104




---



##### 



105




---



##### 



and/or security-by-security
       106




---



##### 



2008


2007Q1


Q2


Q3


Q1


Q2


Q3Number of private finance portfolio companies reviewed


124



119



128



88



92



135Percentage of private finance portfolio reviewed at value


94.0
%


94.9
%


97.2
%


91.8
%


92.1
%


92.1
%     Net Change in Unrealized Appreciation or
    Depreciation.
  For the Three


For the NineMonths Ended


Months EndedSeptember 30,


September 30,($ in millions)

2008(1)


2007(1)


2008(1)


2007(1)Net unrealized appreciation (depreciation)

$
(378.7
)

$
(149.1
)

$
(637.5
)

$
(29.3
)Reversal of previously recorded unrealized appreciation
    associated with realized gains


(80.4
)


(243.9
)


(115.1
)


(330.9
)Reversal of previously recorded net unrealized appreciation
    associated with dividends received


(1.6
)






(15.1
)


(1.1
)Reversal of previously recorded unrealized depreciation
    associated with realized losses


34.8



65.8



80.2



89.2Net change in unrealized appreciation or depreciation

$
(425.9
)

$
(327.2
)

$
(687.5
)

$
(272.1
)   (1)
    The net change in unrealized appreciation or depreciation can
    fluctuate significantly from period to period. As a result,
    quarterly comparisons may not be meaningful.  non-buyout automotive/RV CLO/CDO
   107




---



##### 



Valuation of Ciena Capital LLC.
        Per Share Amounts.
 108




---



##### 



OTHER
    MATTERS
  Regulated Investment Company Status.
        DIVIDENDS AND
    DISTRIBUTIONS
     109




---



##### 



110




---



##### 



FINANCIAL
    CONDITION, LIQUIDITY AND CAPITAL RESOURCES
    ($ in millions)

2008


2007Cash and investments in money market and other securities
    (including money market and other securities: 2008-$13.4;
    2007-$201.2)

$
215.3


$
204.8Total assets

$
4,625.7


$
5,214.6Total debt outstanding

$
2,131.0


$
2,289.5Total shareholders equity

$
2,413.4


$
2,771.8Debt to equity ratio


0.88



0.83Asset coverage
    ratio(1)


213
%


221
%    (1)

    As a business development company, we are generally required to
    maintain a minimum ratio of 200% of total assets to total
    borrowings.    ($ in millions)

2008


2007Net cash provided by operating activities

$
298.5


$
240.8Add: portfolio investments funded


1,019.8



1,236.7Total cash provided by operating activities before new
    investments

$
1,318.3


$
1,477.5       2008


2007($ in millions)

Value


Yield


Value


YieldMoney market and other securities

$
13.4



2.6
%

$
201.2



4.6
%Cash


201.9



0.7
%


3.6



2.9
%Total

$
215.3



0.8
%

$
204.8



4.6
%        111




---



##### 



2008


2007Annual








AnnualFacility


Amount


Interest


Facility


Amount


Interest($ in millions)

Amount


Outstanding


Cost(1)


Amount


Outstanding


Cost(1)Notes payable and debentures:Privately issued unsecured notes payable

$
1,081.0


$
1,081.0



6.6%


$
1,042.2


$
1,042.2



6.1%Publicly issued unsecured notes payable


880.0



880.0



6.7%



880.0



880.0



6.7%Total notes payable and debentures


1,961.0



1,961.0



6.6%



1,922.2



1,922.2



6.4%Revolving line of credit


632.5



170.0



5.0%
(2)


922.5



367.3



5.9%
(2)Total debt

$
2,593.5


$
2,131.0



6.8%
(3)

$
2,844.7


$
2,289.5



6.5%
(3)   (1)
    The weighted average annual interest cost is computed as the
    (a) annual stated interest on the debt plus the annual
    amortization of commitment fees, other facility fees and the
    amortization of debt financing costs that are recognized into
    interest expense over the contractual life of the respective
    borrowings, divided by (b) debt outstanding on the balance
    sheet date.(2)
    The annual interest cost reflects the interest rate payable for
    borrowings under the revolving line of credit in effect at the
    balance sheet date. In addition to the current interest rate
    payable, there were annual costs of commitment fees, other
    facility fees and amortization of debt financing costs of
    $7.3 million and $3.7 million at September 30,
    2008, and December 31, 2007, respectively.(3)
    The annual interest cost for total debt includes the annual cost
    of commitment fees and the amortization of debt financing costs
    on the revolving line of credit and other facility fees
    regardless of the amount outstanding on the facility as of the
    balance sheet date. The annual interest cost reflects the
    facilities in place on the balance sheet date.  Privately Issued Unsecured
    Notes Payable.
   112




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##### 



Publicly Issued Unsecured Notes
    Payable.
  ($ in millions)

Amount


Maturity Date6.625% Notes due 2011

$
400.0



July 15, 20116.000% Notes due 2012


250.0



April 1, 20126.875% Notes due 2047


230.0



April 15, 2047Total

$
880.0         Revolving Line of Credit.
     113




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##### 



Debt Covenants.
    Contractual Obligations.
  Payments Due By YearAfter($ in millions)

Total


2008


2009


2010


2011


2012


2012Unsecured notes payable

$
1,961.0


$



$
268.5


$
408.0


$
472.5


$
339.0


$
473.0Revolving line of
    credit(1)


170.0















170.0







Operating leases


16.9



1.1



4.6



4.5



1.8



1.8



3.1Total contractual obligations

$
2,147.9


$
1.1


$
273.1


$
412.5


$
644.3


$
340.8


$
476.1    (1)

    At September 30, 2008, $338.7 million remained unused
    and available on the revolving line of credit, net of amounts
    committed for standby letters of credit of $123.8 million
    issued under the credit facility. 114




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##### 



Off-Balance
    Sheet Arrangements
    Amount of Commitment Expiration Per YearAfter($ in millions)

Total


2008


2009


2010


2011


2012


2012Guarantees

$
22.4


$



$
7.5


$
9.6


$
4.4


$
0.1


$
0.8Standby letters of
    credit(1)


123.8







1.7







122.1







Total
    commitments(2)

$
146.2


$



$
9.2


$
9.6


$
126.5


$
0.1


$
0.8    (1)
    Standby letters of credit are issued under our revolving line of
    credit that expires in April 2011. Therefore, unless a standby
    letter of credit is set to expire at an earlier date, we have
    assumed that the standby letters of credit will expire
    contemporaneously with the expiration of our line of credit that
    expires in April 2011.(2)
    On September 30, 2008, Ciena voluntarily filed for
    bankruptcy protection as discussed above. As a result of
    Cienas decision to file for bankruptcy protection, our
    unconditional guaranty of the obligations outstanding under
    Cienas revolving credit facility became due, and we, in
    lieu of paying under our guaranty, purchased the positions of
    the senior lenders under Cienas revolving credit facility
    except for a $5 million position continued to be held by
    Citibank, N.A. We continue to guaranty the $5 million
    position, including interest, fees and related expenses, held by
    Citibank. See Note 3. Private Finance 
    Ciena Capital LLC for additional information. At
    September 30, 2008, we also had standby letters of credit
    issued totaling $102.6 million in connection with term
    securitizations completed by Ciena. We considered the
    outstanding letters of credit in our valuation at
    September 30, 2008. See Note 3. Private
    Finance  Ciena Capital LLC.    CRITICAL
    ACCOUNTING POLICIES
    Valuation of Portfolio
    Investments.
 115




---



##### 



Fair Value Measurements
       116




---



##### 



and/or security-by-security
      Net Realized Gains or Losses and Net Change in Unrealized
    Appreciation or Depreciation.
  Interest and Dividend Income.
 117




---



##### 



Fee Income.
  Federal and State Income Taxes and Excise
    Tax.
     118




---



##### 



Recent Accounting Pronouncements. Fair
    Value Measurements.
 Item 3.  Quantitative
    and Qualitative Disclosures About Market Risk   Item 4.  Controls
    and Procedures  Form 10-Q, Rules 13a-15 15d-15
   119




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##### 



PART II.
    OTHER INFORMATION Item 1.  Legal
    Proceedings        Rule 10b-5
   120




---



##### 



Item 1A.
    Risk Factors.  Investing in Allied Capital involves a number of significant
    risks relating to our business and investment objective. As a
    result, there can be no assurance that we will achieve our
    investment objective.
  Our portfolio of investments is illiquid.
  Investing in private companies involves a high degree of
    risk.
 121




---



##### 



Substantially all of our portfolio investments, which are
    generally illiquid, are recorded at fair value as determined in
    good faith by our Board of Directors and, as a result, there is
    uncertainty regarding the value of our portfolio
    investments.
      Fair Value
    Measurements
  We are currently in a period of capital markets disruption
    and recession and we do not expect these conditions to improve
    in the near future.
 122




---



##### 



Economic recessions or downturns could impair our portfolio
    companies and harm our operating results.
    Our borrowers may default on their payments, which may have a
    negative effect on our financial performance.
  Our private finance investments may not produce current
    returns or capital gains. co-investments,
  Our financial results could be negatively affected if a
    significant portfolio investment fails to perform as
    expected.
 123




---



##### 



We borrow money, which magnifies the potential for gain or
    loss on amounts invested and may increase the risk of investing
    in us.
    In addition to regulatory restrictions that restrict our
    ability to raise capital, our revolving line of credit and
    privately issued unsecured notes payable contain various
    covenants which, if not
 124




---



##### 



complied with, could accelerate repayment under these debt
    obligations, thereby materially and adversely affecting our
    liquidity, financial condition, results of operations and
    ability to pay dividends.
    Regulations governing our operation as a BDC affect our
    ability to, and the way in which, we raise additional
    capital.
  Our common stock may trade below its net asset value per
    share, which limits our ability to raise additional equity
    capital.
  We will continue to need additional capital to grow because
    we must distribute our income. If we are unable to obtain
    additional capital because of either regulatory or market price
    constraints, we may have to curtail or cease our new lending and
    investment activities.
 125




---



##### 



Loss of regulated investment company tax treatment would
    substantially reduce net assets and income available for debt
    service and dividends.
  There is a risk that our common stockholders may not receive
    dividends or distributions.
  Changes in interest rates may affect our cost of capital and
    net investment income.
 126




---



##### 



We operate in a competitive market for investment
    opportunities.
  There are potential conflicts of interest between us and the
    funds managed by us.
      Our business depends on our key personnel.
  Changes in the law or regulations that govern us could have a
    material impact on us or our operations.
 127




---



##### 



Failure to invest a sufficient portion of our assets in
    qualifying assets could preclude us from investing in accordance
    with our current business strategy.
  Results may fluctuate and may not be indicative of future
    performance.
  Our common stock price may be volatile.
  
    price and volume fluctuations in the overall stock market from
    time to time;
    significant volatility in the market price and trading volume of
    securities of business development companies or other financial
    services companies;
    volatility resulting from trading in derivative securities
    related to our common stock including puts, calls, long-term
    equity anticipation securities, or LEAPs, or short trading
    positions;
    the financial performance of the specific industries in which we
    invest on a recurring basis;
    changes in laws or regulatory policies or tax guidelines with
    respect to business development companies or regulated
    investment companies;
    actual or anticipated changes in our earnings or fluctuations in
    our operating results or changes in the expectations of
    securities analysts;
    general economic conditions and trends;
    loss of a major funding source; or
    departures of key personnel.  The trading market or market value of our publicly issued
    debt securities may be volatile.
 128




---



##### 




    the time remaining to the maturity of these debt securities;
    the outstanding principal amount of debt securities with terms
    identical to these debt securities;
    the supply of debt securities trading in the secondary market,
    if any;
    the redemption or repayment features, if any, of these debt
    securities;
    the level, direction and volatility of market interest rates
    generally; and
    market rates of interest higher or lower than rates borne by the
    debt securities.    Our credit ratings may not reflect all risks of an investment
    in the debt securities.
  Terms relating to redemption may materially adversely affect
    the return on the debt securities.
 Item 2.  Unregistered
    Sales of Equity Securities and Use of Proceeds   Item 3.  Defaults
    Upon Senior Securities   Item 4.  Submission
    of Matters to a Vote of Security Holders   Item 5.  Other
    Information   129




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##### 



Item 6.  Exhibits    ExhibitNumber

Description3.1

Restated Articles of Incorporation. (Incorporated by
    reference to Exhibit a.2 filed with Allied Capitals
    Post-Effective Amendment No. 1 to registration statement on
    Form N-2
    (File
    No. 333-141847)
    filed on June 1, 2007).3.2

Amended and Restated Bylaws. (Incorporated by reference to
    Exhibit 3.1. filed with Allied Capitals
    Form 8-K
    on March 14, 2008).4.1

Specimen Certificate of Allied Capitals Common Stock, par
    value $0.0001 per share. (Incorporated by reference to
    Exhibit d. filed with Allied Capitals registration
    statement on
    Form N-2
    (File
    No. 333-51899)
    filed on May 6, 1998).4.3

Form of Note under the Indenture relating to the issuance of
    debt securities. (Contained in Exhibit 4.4).
    (Incorporated by reference to Exhibit d.1 filed with Allied
    Capitals registration statement on
    Form N-2/A
    (File
    No. 333-133755)
    filed on June 21, 2006).4.4

Indenture by and between Allied Capital Corporation and The Bank
    of New York, dated June 16, 2006. (Incorporated by
    reference to Exhibit d.2 filed with Allied Capitals
    registration statement on
    Form N-2/A
    (File
    No. 333-133755)
    filed on June 21, 2006).4.5

Statement of Eligibility of Trustee on Form T-1.
    (Incorporated by reference to Exhibit d.3 filed with
    Allied Capitals registration statement on Form N-2
    (File No. 333-133755) filed on May 3, 2006).4.6

Form of First Supplemental Indenture by and between Allied
    Capital Corporation and the Bank of New York, dated as of
    July 25, 2006. (Incorporated by reference to
    Exhibit d.4 filed with Allied Capitals Post-Effective
    Amendment No. 1 to the registration statement on
    Form N-2/A
    (File No. 333-133755) filed on July 25, 2006).4.7

Form of 6.625% Note due 2011. (Incorporated by reference to
    Exhibit d.5 filed with Allied Capitals Post-Effective
    Amendment No. 1 to the registration statement on
    Form N-2/A (File No. 333-133755) filed on July 25,
    2006).4.8

Form of Second Supplemental Indenture by and between Allied
    Capital Corporation and The Bank of New York, dated as of
    December 8, 2006. (Incorporated by reference to
    Exhibit d.6 filed with Allied Capitals Post-Effective
    Amendment No. 2 to the registration statement on
    Form N-2/A
    (File
    No. 333-133755)
    filed on December 8, 2006).4.9

Form of 6.000% Notes due 2012. (Incorporated by reference to
    Exhibit d.7 filed with Allied Capitals Post-Effective
    Amendment No. 2 to the registration statement on
    Form N-2/A
    (File
    No. 333-133755)
    filed on December 8, 2006).4.10

Form of Third Supplemental Indenture by and between Allied
    Capital Corporation and The Bank of New York, dated as of
    March 28, 2007. (Incorporated by reference to
    Exhibit d.8 filed with Allied Capitals Post-Effective
    Amendment No. 3 to the registration statement on
    Form N-2/A
    (File
    No. 333-133755)
    filed on March 28, 2007).4.11

Form of 6.875% Notes due 2047. (Incorporated by
    reference to Exhibit d.9 filed with Allied Capitals
    Post-Effective Amendment No. 3 to the registration
    statement on
    Form N-2/A
    (File
    No. 333-133755)
    filed on March 28, 2007).4.11(a)

Form of 6.875% Notes due 2047. (Incorporated by
    reference to Exhibit d.9(a) filed with Allied
    Capitals Post-Effective Amendment No. 4 to the
    registration statement on
    Form N-2/A
    (File
    No. 333-133755)
    filed on April 2, 2007).10.1

Dividend Reinvestment Plan, as amended. (Incorporated by
    reference to Exhibit e. filed with Allied Capitals
    registration statement on
    Form N-2
    (File
    No. 333-87862)
    filed on May 8, 2002).10.2

Credit Agreement, dated April 9, 2008. (Incorporated by
    reference to Exhibit 10.1 filed with Allied Capitals
    Form 8-K
    on April 10, 2008).10.3

Note Agreement, dated October 13, 2005. (Incorporated by
    reference to Exhibit 10.1 filed with Allied Capitals
    Form 8-K
    on October 14, 2005). 130




---



##### 



ExhibitNumber

Description10.3(a)

Amendment dated February 29, 2008, to Note Agreement dated as of
    October 13, 2005. (Incorporated by reference to Exhibit
    f.3(a) filed with Allied Capitals Form N-2 (File No.
    333-150006) filed on April 1, 2008).10.4

Note Agreement, dated May 1, 2006. (Incorporated by
    reference to Exhibit 10.1 filed with Allied Capitals
    Form 8-K
    on May 1, 2006).10.4(a)

Amendment dated February 29, 2008, to Note Agreement dated as of
    May 1, 2006.  (Incorporated by reference to Exhibit f.11(a)
    filed with Allied Capitals Form N-2 (File No. 333-150006)
    filed on April 1, 2008).10.15

Second Amended and Restated Control Investor Guaranty, dated as
    of January 30, 2008, between Allied Capital and CitiBank,
    N.A., as Administrative Agent. (Incorporated by reference to
    Exhibit 10.1 filed with Allied Capitals Form 8-K
    filed on February 5, 2008).10.17

The 2005 Allied Capital Corporation
    Non-Qualified
    Deferred Compensation Plan II. (Incorporated by
    reference to Exhibit 10.2 filed with Allied Capitals
    Form 8-K
    filed on December 21, 2005).10.17(a)

Amendment to The 2005 Allied Capital Corporation Non-Qualified
    Deferred Compensation Plan II, dated January 20, 2006.
    (Incorporated by reference to Exhibit 10.17(a) filed
    with Allied Capitals Form 10-K for the year ended
    December 31, 2005).10.17(b)

Amendment to The 2005 Allied Capital Corporation Non-Qualified
    Deferred Compensation Plan II, dated December 14, 2007.
    (Incorporated by reference to Exhibit 10.2 filed with
    Allied Capitals
    Form 8-K
    filed on December 19, 2007).10.18

The 2005 Allied Capital Corporation Non-Qualified Deferred
    Compensation Plan. (Incorporated by reference to
    Exhibit 10.1 filed with Allied Capitals
    Form 8-K
    filed on December 21, 2005).10.18(a)

Amendment to The 2005 Allied Capital Corporation Non-Qualified
    Deferred Compensation Plan, dated January 20, 2006.
    (Incorporated by reference to Exhibit 10.18(a) filed
    with Allied Capitals Form 10-K for the year ended
    December 31, 2005).10.18(b)

Amendment to The 2005 Allied Capital Corporation Non-Qualified
    Deferred Compensation Plan, dated December 14, 2007.
    (Incorporated by reference to Exhibit 10.1 filed with
    Allied Capitals
    Form 8-K
    filed on December 19, 2007).10.19

Amended Stock Option Plan. (Incorporated by reference to
    Appendix B of Allied Capitals definitive proxy
    statement for Allied Capitals 2007 Annual Meeting of
    Stockholders filed on April 3, 2007).10.20(a)

Allied Capital Corporation 401(k) Plan, dated September 1,
    1999. (Incorporated by reference to Exhibit 4.4 filed
    with Allied Capitals registration statement on
    Form S-8
    (File
    No. 333-88681)
    filed on October 8, 1999).10.20(b)

Amendment to Allied Capital Corporation 401(k) Plan, dated
    April 15, 2004. (Incorporated by reference to
    Exhibit 10.20(b) filed with Allied Capitals
    Form 10-Q
    for the period ended June 30, 2004).10.20(c)

Amendment to Allied Capital Corporation 401(k) plan, dated
    November 1, 2005. (Incorporated by reference to Exhibit
    10.20(c) filed with Allied Capitals
    Form 10-Q
    for the quarter ended September 30, 2005).10.20(d)

Amendment to Allied Capital Corporation 401(k) plan, dated
    April 21, 2006. (Incorporated by reference to
    Exhibit i.4(c) filed with Allied Capitals
    Form N-2
    (File
    No. 333-133755)
    filed on May 3, 2006).10.20(e)

Amendment to Allied Capital Corporation 401(k) plan, adopted
    December 18, 2006. (Incorporated by reference to
    Exhibit 10.20(e) filed with Allied Capitals
    Form 10-K
    for the year ended December 31, 2006).10.20(f)

Amendment to Allied Capital Corporation 401(k) plan, dated
    June 21, 2007. (Incorporated by reference to Exhibit
    10.20(f) filed with Allied Capitals Form 10-Q for the
    quarter ended June 30, 2007). 131




---



##### 



ExhibitNumber

Description10.20(g)

Amendment to Allied Capital Corporation 401(k) plan, dated
    June 21, 2007. (Incorporated by reference to Exhibit
    10.20(g) filed with Allied Capitals Form 10-Q for the
    quarter ended June 30, 2007).10.20(h)

Amendment to Allied Capital Corporation 401(k) plan, dated
    September 14, 2007, with an effective date of
    January 1, 2008. (Incorporated by reference to
    Exhibit 10.20(h) filed with Allied Capitals
    Form 10-Q
    for the quarter ended September 30, 2007).10.21

Employment Agreement, dated January 1, 2004, between Allied
    Capital and William L. Walton. (Incorporated by
    reference to Exhibit 10.21 filed with Allied Capitals
    Form 10-K
    for the year ended December 31, 2003).10.21(a)

Amendment to Employment Agreement, dated March 29, 2007,
    between Allied Capital and William L. Walton.
    (Incorporated by reference to Exhibit 10.1 filed with
    Allied Capitals
    Form 8-K
    filed on April 3, 2007).10.22

Employment Agreement, dated January 1, 2004, between Allied
    Capital and Joan M. Sweeney. (Incorporated by reference
    to Exhibit 10.22 filed with Allied Capitals
    Form 10-K
    for the year ended December 31, 2003).10.22(a)

Amendment to Employment Agreement, dated March 29, 2007,
    between Allied Capital and Joan M. Sweeney. (Incorporated by
    reference to Exhibit 10.2 filed with Allied Capitals
    Form 8-K
    filed on April 3, 2007).10.23

Employment Agreement, dated January 1, 2004, between Allied
    Capital and Penelope F. Roll. (Incorporated by reference to
    Exhibit 10.23 filed with Allied Capitals
    Form 10-K
    for the year ended December 31, 2006).10.23(a)

Amendment to Employment Agreement, dated March 29, 2007,
    between Allied Capital and Penelope F. Roll. (Incorporated by
    reference to Exhibit 10.3 filed with Allied Capitals
    Form 8-K
    filed on April 3, 2007).10.25

Form of Custody Agreement with Riggs Bank N.A., which was
    assumed by PNC Bank through merger. (Incorporated by
    reference to Exhibit j.1 filed with Allied Capitals
    registration statement on
    Form N-2
    (File
    No. 333-51899)
    filed on May 6, 1998).10.26

Custodian Agreement with Chevy Chase Trust. (Incorporated by
    reference to Exhibit 10.26 filed with Allied Capitals
    Form 10-K for the year ended December 31, 2005).10.27

Custodian Agreement with Bank of America. (Incorporated by
    reference to Exhibit 10.27 filed with Allied Capitals
    Form 10-K
    for the year ended December 31, 2005).10.28

Code of Ethics. (Incorporated by reference to
    Exhibit 10.28 filed with Allied Capitals
    Form 10-K
    for the year ended December 31, 2006).10.29

Custodian Agreement with Union Bank of California.
    (Incorporated by reference to Exhibit 10.29 filed with
    Allied Capitals
    Form 10-Q
    for the quarter ended June 30, 2006).10.30

Custodian Agreement with M&T Bank. (Incorporated by
    reference to Exhibit 10.30 filed with Allied Capitals
    Form 10-Q
    for the quarter ended June 30, 2006).10.31

Note Agreement, dated as of May 14, 2003. (Incorporated
    by reference to Exhibit 10.31 filed with Allied
    Capitals
    Form 10-Q
    for the quarter ended March 31, 2003).10.31(a)

Amendment dated February 29, 2008, to Note Agreement dated as of
    May 14, 2003. (Incorporated by reference to Exhibit f.19(a)
    filed with Allied Capitals Form N-2 (File No. 333-150006)
    filed on April 1, 2008).10.32

Custodian Agreement with Branch Banking and Trust Company.
    (Incorporated by reference to Exhibit 10.32 filed with
    Allied Capitals Form 10-Q for the quarter ended
    March 31, 2008).10.33

Note Agreement, dated June 20, 2008. (Incorporated by
    reference to Exhibit 10.1 filed with Allied Capitals
    Form 8-K on June 23, 2008).10.37

Form of Indemnification Agreement between Allied Capital and its
    directors and certain officers. (Incorporated by reference to
    Exhibit 10.37 filed with Allied Capitals
    Form 10-K
    for the year ended December 31, 2003).10.38

Note Agreement, dated as of March 25, 2004.
    (Incorporated by reference to Exhibit 10.38 filed with
    Allied Capitals
    Form 10-Q
    for the period ended March 31, 2004.) 132




---



##### 



ExhibitNumber

Description10.38(a)

Amendment dated February 29, 2008, to Note Agreement dated as of
    March 25, 2004. (Incorporated by reference to Exhibit f.25(a)
    filed with Allied Capitals Form N-2 (File No. 333-150006)
    filed on April 1, 2008).10.38(b)

First Waiver and Second Amendment dated as of July 25,
    2008, to the Note Agreement dated as of March 25, 2004.
    (Incorporated by reference to Exhibit 10.38(b) filed
    with Allied Capitals
    Form 10-Q
    for the period ended June 30, 2008.)10.39

Note Agreement, dated as of November 15, 2004.
    (Incorporated by reference to Exhibit 99.1 filed with
    Allied Capitals current report on
    Form 8-K
    filed on November 18, 2004.)10.39(a)

Amendment dated February 29, 2008, to Note Agreement dated as of
    November 15, 2004. (Incorporated by reference to Exhibit
    f.26(a) filed with Allied Capitals Form N-2 (File No.
    333-150006) filed on April 1, 2008).10.40

First Omnibus Waiver and Amendment to the Note Agreements, dated
    as of July 25, 2008. (Incorporated by reference to
    Exhibit 10.40 filed with Allied Capitals
    Form 10-Q
    for the period ended June 30, 2008.)11

Statement regarding computation of per share earnings is
    included in Note 7 to Allied Capitals Notes to the
    Consolidated Financial Statements.15*

Letter regarding unaudited interim financial information.21

Subsidiaries of Allied Capital and jurisdiction of
    incorporation/organization:A.C. Corporation

DelawareAllied Capital REIT, Inc.

MarylandAllied Capital Holdings, LLC

DelawareAllied Investment Holdings, LLC

DelawareAllied Capital Beteiligungsberatung GmbH (inactive)

Germany31.1*

Certification of the Chief Executive Officer pursuant to Rule
    13a-14 of the Securities Exchange Act of 1934.31.2*

Certification of the Chief Financial Officer pursuant to Rule
    13a-14 of the Securities Exchange Act of 1934.31.3*

Certification of the Chief Accounting Officer pursuant to Rule
    13a-14 of the Securities Exchange Act of 1934.32.1*

Certification of the Chief Executive Officer pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
    Section 1350.32.2*

Certification of the Chief Financial Officer pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
    Section 1350.32.3*

Certification of the Chief Accounting Officer pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
    Section 1350.     *
    Filed herewith. 133




---



##### 



SIGNATURES       Dated: November 10, 2008

/s/  William
    L. WaltonWilliam
    L. Walton
    Chairman and Chief Executive Officer/s/  Penni
    F. RollPenni
    F. Roll
    Chief Financial Officer/s/  John
    C. WellonsJohn
    C. Wellons
    Chief Accounting Officer  134




---



##### 



EXHIBIT
    INDEX
  ExhibitNumber

Description15

Letter regarding Unaudited Interim Financial Information.31.1

Certification of the Chief Executive Officer pursuant to Rule
    13a-14 of the Securities Exchange Act of 1934.31.2

Certification of the Chief Financial Officer pursuant to Rule
    13a-14 of the Securities Exchange Act of 1934.31.3

Certification of the Chief Accounting Officer pursuant to Rule
    13a-14 of the Securities Exchange Act of 1934.32.1

Certification of the Chief Executive Officer pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
    Section 1350.32.2

Certification of the Chief Financial Officer pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
    Section 1350.32.3

Certification of the Chief Accounting Officer pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
    Section 1350.  135