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 June 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




---



##### 





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

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

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

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

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

5Consolidated Statement of Investments as of December 31,
    2007

22Notes to Consolidated Financial Statements

37Report of Independent Registered Public Accounting Firm

70Item 2. Managements Discussion and Analysis of
    Financial Condition and Results of Operations

75Item 3. Quantitative and Qualitative Disclosures About
    Market Risk

113Item 4. Controls and Procedures

113PART II. OTHER INFORMATIONItem 1. Legal Proceedings

114Item 1A. Risk Factors

115Item 2. Unregistered Sales of Equity Securities and
    Use of Proceeds

122Item 3. Defaults Upon Senior Securities

122Item 4. Submission of Matters to a Vote of Security
    Holders

122Item 5. Other Information

122Item 6. Exhibits

122Signatures

127




---



##### 



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

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

2008

2007(unaudited)ASSETSPortfolio at value:Private financeCompanies more than 25% owned (cost:
    2008-$1,896,336;
    2007-$1,622,094)

$
1,289,400

$
1,279,080Companies 5% to 25% owned (cost:
    2008-$323,594;
    2007-$426,908)


353,776


389,509Companies less than 5% owned (cost:
    2008-$2,817,567;
    2007-$2,994,880)


2,747,658


2,990,732Total private finance (cost:
    2008-$5,037,497;
    2007-$5,043,882)


4,390,834


4,659,321Commercial real estate finance (cost:
    2008-$80,710;
    2007-$96,942)


106,801


121,200Total portfolio at value (cost:
    2008-$5,118,207;
    2007-$5,140,824)


4,497,635


4,780,521Accrued interest and dividends receivable


77,331


71,429Other assets


133,891


157,864Investments in U.S. Treasury bills, money market and other
    securities


100,052


201,222Cash


128,781


3,540Total assets

$
4,937,690

$
5,214,576LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Notes payable and debentures (maturing within one year:
    2008-$17,839;
    2007-$153,000)

$
1,962,839

$
1,922,220Revolving line of credit


80,500


367,250Accounts payable and other liabilities


48,574


153,259Total liabilities


2,091,913


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
    June 30, 2008, and December 31, 2007, respectively


18


16Additional paid-in capital


3,058,796


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





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


(2,417)


(2,692)Net unrealized appreciation (depreciation)


(640,934)


(379,327)Undistributed earnings


430,314


535,853Total shareholders equity


2,845,777


2,771,847Total liabilities and shareholders equity

$
4,937,690

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

$
15.93

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




---



##### 



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


For the SixMonths Ended


Months EndedJune 30,


June 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

$
26,844


$
28,540


$
55,468


$
55,697Companies 5% to 25% owned


9,049



10,876



21,723



22,737Companies less than 5% owned


83,319



63,398



176,681



126,363Total interest and dividends


119,212



102,814



253,872



204,797Fees and other incomeCompanies more than 25% owned


11,043



5,417



16,508



9,406Companies 5% to 25% owned


16



471



69



499Companies less than 5% owned


4,307



8,974



9,073



10,926Total fees and other income


15,366



14,862



25,650



20,831Total interest and related portfolio income


134,578



117,676



279,522



225,628Expenses:Interest


36,465



34,336



74,025



64,624Employee


13,344



28,611



35,996



50,539Employee stock options


3,859



9,519



8,054



13,180Administrative


12,943



14,505



21,962



27,729Total operating expenses


66,611



86,971



140,037



156,072Net investment income before income taxes


67,967



30,705



139,485



69,556Income tax expense (benefit), including excise tax


4,112



5,530



6,081



4,881Net investment income


63,855



25,175



133,404



64,675Net Realized and Unrealized Gains (Losses):Net realized gains (losses)Companies more than 25% owned


1,172



67,127



869



65,777Companies 5% to 25% owned


(15,046
)


138



(13,803
)


304Companies less than 5% owned


(3,981
)


7,614



(1,778
)


36,464Total net realized gains (losses)


(17,855
)


74,879



(14,712
)


102,545Net change in unrealized appreciation or depreciation


(148,203
)


(10,896
)


(261,607
)


55,024Total net gains (losses)


(166,058
)


63,983



(276,319
)


157,569Net increase (decrease) in net assets resulting from operations

$
(102,203
)

$
89,158


$
(142,915
)

$
222,244Basic earnings (loss) per common share

$
(0.59
)

$
0.59


$
(0.85
)

$
1.47Diluted earnings (loss) per common share

$
(0.59
)

$
0.57


$
(0.85
)

$
1.44Weighted average common shares outstanding  basic


172,968



152,361



167,238



150,940Weighted average common shares outstanding  diluted


172,968



156,051



167,238



154,446   The accompanying notes are an
    integral part of these consolidated financial statements.
 2




---



##### 



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

2008


2007(unaudited)Operations:Net investment income

$
133,404


$
64,675Net realized gains (losses)


(14,712
)


102,545Net change in unrealized appreciation or depreciation


(261,607
)


55,024Net increase (decrease) in net assets resulting from operations


(142,915
)


222,244Shareholder distributions:Common stock dividends


(224,231
)


(193,368
)Net decrease in net assets resulting from shareholder
    distributions


(224,231
)


(193,368
)Capital share transactions:Sale of common stock


402,478



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


3,751



8,279Issuance of common stock upon the exercise of stock options






11,967Stock option expense


8,180



13,358Net decrease in notes receivable from sale of common stock


275



141Purchase of common stock held in deferred compensation trusts


(943
)


(6,166
)Distribution of common stock held in deferred compensation trusts


27,335



127Other






(476
)Net increase in net assets resulting from capital share
    transactions


441,076



121,014Total increase in net assets


73,930



149,890Net assets at beginning of period


2,771,847



2,841,244Net assets at end of period

$
2,845,777


$
2,991,134Net asset value per common share

$
15.93


$
19.59Common shares outstanding at end of period


178,692



152,652   The accompanying notes are an
    integral part of these consolidated financial statements.
 3




---



##### 






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

2008


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

$
(142,915
)

$
222,244Adjustments:Portfolio investments


(593,959
)


(659,141
)Principal collections related to investment repayments or sales


597,577



735,441Payment-in-kind interest and dividends, net of cash collections


(24,497
)


(6,635
)Change in accrued interest and dividends


(5,942
)


(6,360
)Net collection (amortization) of discounts and fees


(7,635
)


(425
)Redemption of (investments in) U.S. Treasury bills, money market
    and other securities


101,173



(102,197
)Stock option expense


8,180



13,358Changes in other assets and liabilities


(58,377
)


(28,354
)Depreciation and amortization


1,143



1,022Realized gains from the receipt of notes and other consideration
    from sale of investments, net of collections


8,569



(9,201
)Realized losses


52,395



18,057Net change in unrealized (appreciation) or depreciation


261,607



(55,024
)Net cash provided by operating activities


197,319



122,785Cash flows from financing activities:Sale of common stock


402,478



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






11,967Collections of notes receivable from sale of common stock


275



141Borrowings under notes payable


193,000



230,000Repayments on notes payable


(153,000
)


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


(286,750
)


(207,750
)Purchase of common stock held in deferred compensation trusts


(943
)


(6,166
)Other financing activities


(6,658
)


(8,362
)Common stock dividends and distributions paid


(220,480
)


(192,512
)Net cash provided by (used in) financing activities


(72,078
)


(78,898
)Net increase (decrease) in cash


125,241



43,887Cash at beginning of period


3,540



1,687Cash at end of period

$
128,781


$
45,574   The accompanying notes are an
    integral part of these consolidated financial statements.
 4




---



##### 








ALLIED
    CAPITAL CORPORATION AND SUBSIDIARIES
  CONSOLIDATED
    STATEMENT OF INVESTMENTS
  Private Finance



June 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





$
825


$
774(Private Equity Fund)

Total Investment






825



774Alaris Consulting, LLC

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

$
27,055



26,986



(Business Services)

Equity Interests






6,738



Total Investment






33,724



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

Equity Interests






27,600



22,138(Asset Management)

Total Investment






27,600



22,138Standby Letter of Credit ($15,000)Allied Capital Senior Debt Fund,
    L.P.(5)

Equity Interests (See Note 3)






31,800



34,356(Private Debt Fund)

Total Investment






31,800



34,356Avborne,
    Inc.(7)

Preferred Stock (12,500 shares)










956(Business Services)

Common Stock (27,500 shares)










Total Investment










956Avborne Heavy Maintenance,
    Inc.(7)

Preferred Stock (1,568 shares)










157(Business Services)

Common Stock (2,750 shares)










890Total Investment










1,047Aviation Properties Corporation

Common Stock (100 shares)






68



(Business Services)

Total Investment






68



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

Senior Loan (9.0%, Due 12/08)


21,827



21,827



21,827(Consumer Products)

Senior Loan (13.5%, Due
    6/09)(6)


20,447



14,149



14,149Preferred Stock (100,000 shares)






12,721



4,595Common Stock (260,467 shares)






3,847



Total Investment






52,544



40,571Calder Capital Partners,
    LLC(5)

Senior Loan (10.0%, Due
    5/09)(6)


3,563



3,563



1,192(Asset Management)

Equity Interests






2,398



Total Investment






5,961



1,192Callidus Capital Corporation

Senior Loan (12.0%, Due 12/08)


1,500



1,500



1,500(Asset Management)

Subordinated Debt (17.2%, Due 10/08  2/14)


9,353



9,353



9,353Common Stock (100 shares)






2,067



40,131Total Investment






12,920



50,984  (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




---



##### 



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



June 30, 2008Portfolio Company



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

Investment(1)(2)

Principal


Cost


ValueCiena Capital LLC

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

$
99,044


$
99,044


$
9(Financial Services)

Class B Equity Interests






119,436



Class C Equity Interests






109,301



Total Investment






327,781



9Guaranty ($336,310  See Note 3)Standby Letters of Credit ($104,100  
      See Note 3)CitiPostal Inc.

Senior Loan (6.0%, Due 12/13)


691



680



680(Business Services)

Unitranche Debt (12.0%, Due 12/13)


51,496



51,264



51,264Subordinated Debt (16.0%, Due 12/15)


8,415



8,415



8,415Common Stock (37,024 shares)






12,726



16,187Total Investment






73,085



76,546Coverall North America, Inc.

Unitranche Debt (12.0%, Due 7/11)


32,035



31,931



31,931(Business Services)

Subordinated Debt (15.0%, Due 7/11)


5,563



5,546



5,546Common Stock (763,333 shares)






14,362



19,950Total Investment






51,839



57,427CR Holding, Inc.

Subordinated Debt (16.6%, Due 2/13)


38,636



38,515



38,515(Consumer Products)

Common Stock (32,090,696 shares)






28,744



27,056Total Investment






67,259



65,571Crescent Equity
    Corp.(8)

Senior Loan (10.0%, Due 12/08)


444



444



444(Business Services/

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


31,536



31,430



31,430Broadcasting & Cable)

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


1,550



1,550



1,584Common Stock (174 shares)






81,109



23,867Total Investment






114,533



57,325Guaranty ($900)Standby Letters of Credit ($200)Direct Capital Corporation

Subordinated Debt (16.0%, Due 3/13)


51,466



51,281



51,281(Financial Services)

Common Stock (1,809,159 shares)






22,644



11,006Total Investment






73,925



62,287Financial Pacific Company

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


68,396



68,248



68,248(Financial Services)

Preferred Stock (9,458 shares)






8,865



14,588Common Stock (12,711 shares)






12,783



Total Investment






89,896



82,836  (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 $114.5 million and holds investments in
    Crescent Hotels & Resorts, LLC and affiliates
    (Business Services) with a value of $55.7 million, and
    Longview Cable & Data, LLC (Broadcasting & Cable) with
    a value of $1.6 million, for a total value of $57.3 million.   The accompanying notes are an
    integral part of these consolidated financial statements.
 6




---



##### 



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



June 30, 2008Portfolio Company



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

Investment(1)(2)

Principal


Cost


ValueForeSite Towers, LLC

Equity Interest





$



$
759(Tower Leasing)

Total Investment










759Global Communications, LLC

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

$
1,350



1,350



1,350(Business Services)

Total Investment






1,350



1,350Hot Light Brands, Inc.

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


29,662



29,662



27,322(Retail)

Common Stock (93,500 shares)






5,151



Total Investment






34,813



27,322Hot Stuff Foods, LLC

Senior Loan (6.0%, Due 2/11-2/12)


53,285



53,121



53,121(Consumer Products)

Subordinated Debt (9.5%, Due 8/12)


31,320



31,237



7,130Subordinated Debt (15.4%, Due
    2/13)(6)


52,373



52,151



Common Stock (1,147,453 shares)






56,187



Total Investment






192,696



60,251Huddle House, Inc.

Subordinated Debt (15.0%, Due 12/12)


56,346



56,147



56,147(Retail)

Common Stock (358,428 shares)






35,828



32,667Total Investment






91,975



88,814IAT 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



5,219(Industrial Products)

Total Investment






13,500



11,219Impact Innovations Group, LLC

Equity Interests in Affiliate










321(Business Services)

Total Investment










321Insight Pharmaceuticals Corporation

Subordinated Debt (15.0%, Due 9/12)


45,391



45,285



45,285(Consumer Products)

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


16,181



16,130



17,139Preferred Stock (25,000 shares)






25,000



5,762Common Stock (620,000 shares)






6,325



Total Investment






92,740



68,186Jakel, 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 (14.1%, Due 1/22)


22,000



22,000



20,791(CLO)

Income Notes
    (16.6%)(11)






33,933



30,304Total Investment






55,933



51,095  (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




---



##### 



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



June 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)

$
16,000


$
16,000


$
16,000(CLO)

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


10,000



10,000



10,000Class E Notes (8.0%, Due 6/18)


16,500



13,116



13,116Income Notes
    (16.7%)(11)






24,441



24,441Total Investment






63,557



63,557Legacy Partners Group, Inc.

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


843



843



843(Financial Services)

Equity Interests






4,273



1,298Total Investment






5,116



2,141MHF Logistical Solutions, Inc.

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


49,841



49,633



5,917(Business Services)

Preferred Stock (10,000 shares)










Common Stock (20,934 shares)






20,942



Total Investment






70,575



5,917MVL Group, Inc.

Senior Loan (12.0%, Due 6/09  7/09)


30,674



30,651



30,651(Business Services)

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


40,701



40,534



40,534Common Stock (559,377 shares)






555



Total Investment






71,740



71,185Old Orchard Brands, LLC

Subordinated Debt (18.0%, Due 7/14)


18,573



18,498



18,498(Consumer Products)

Equity Interests






15,857



25,640Total Investment






34,355



44,138Penn Detroit Diesel Allison, LLC

Subordinated Debt (15.5%, Due 8/13)


37,421



37,293



37,293(Business Services)

Equity Interests






18,862



32,523Total Investment






56,155



69,816Service Champ, Inc.

Subordinated Debt (15.5%, Due 4/12)


26,709



26,634



26,634(Business Services)

Common Stock (55,112 shares)






11,785



25,919Total Investment






38,419



52,553Startec Equity, LLC

Equity Interests






206



390(Telecommunications)

Total Investment






206



390Unitranche Fund LLC

Subordinated Certificates (10.2%)






94,565



94,565(Private Debt Fund)

Equity Interests






1



1Total Investment






94,566



94,566Worldwide Express Operations, LLC

Subordinated Debt (14.0%, Due 2/14)


2,753



2,604



2,604(Business Services)

Equity Interests






11,384



18,219Warrants






144



230Total Investment






14,132



21,053Total
    companies more than 25% owned





$
1,896,336


$
1,289,400  (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




---



##### 



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



June 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)

$
21,009


$
20,890


$
21,009(Business Services)

Equity Interests






421



1,075Option






25



25Total Investment






21,336



22,109Advantage Sales & Marketing, Inc.

Subordinated Debt (12.0%, Due 3/14)


157,008



156,476



157,008(Business Services)

Equity Interests










12,200Total Investment






156,476



169,208Air Medical Group Holdings LLC

Senior Loan (5.4%, Due 3/11)


4,230



4,188



4,106(Healthcare Services)

Equity Interests






2,993



9,200Total Investment






7,181



13,306Alpine ESP Holdings, Inc.

Preferred Stock (536 shares)






531



(Business Services)

Common Stock (11,657 shares)






13



Total Investment






544



Amerex Group, LLC

Subordinated Debt (12.0%, Due 1/13)


7,789



7,789



7,789(Consumer Products)

Equity Interests






3,509



13,946Total Investment






11,298



21,735BB&T Capital Partners/WindsorMezzanine Fund,
    LLC(5)

Equity Interests






11,787



11,472(Private Equity Fund)

Total Investment






11,787



11,472Becker Underwood, Inc.

Subordinated Debt (14.5%, Due 8/12)


25,182



25,122



25,685(Industrial Products)

Common Stock (4,376 shares)






5,014



5,100Total Investment






30,136



30,785BI Incorporated

Subordinated Debt (13.5%, Due 2/14)


30,615



30,509



30,921(Business Services)

Common Stock (34,506 shares)






3,451



7,200Total Investment






33,960



38,121Drew Foam Companies, Inc.

Preferred Stock (622,555 shares)






623



171(Business Services)

Common Stock (6,286 shares)






6



Total Investment






629



171Hilden America, Inc.

Common Stock (19 shares)






454



300(Consumer Products)

Total Investment






454



300  (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



June 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)

$
6,943


$
6,943


$
6,943(Healthcare Services)

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


5,153



5,153



941Convertible Subordinated Debt (2.0%, Due
    8/14)(6)


2,970



984



Equity Interests






1,425



Total Investment






14,505



7,884Multi-Ad Services, Inc.

Unitranche Debt (11.3%, Due 11/11)


3,084



3,059



3,067(Business Services)

Equity Interests






1,731



1,101Total Investment






4,790



4,168Progressive International

Preferred Stock (500 shares)






500



1,080Corporation

Common Stock (197 shares)






13



5,800(Consumer Products)

Warrants










Total Investment






513



6,880Regency Healthcare Group, LLC

Unitranche Debt (11.1%, Due 6/12)


10,901



10,848



11,215(Healthcare Services)

Equity Interests






1,298



1,443Total Investment






12,146



12,658SGT India Private
    Limited(4)

Common Stock (150,596 shares)






4,116



1,938(Business Services)

Total Investment






4,116



1,938Soteria Imaging Services, LLC

Subordinated Debt (12.0%, Due 11/10)


10,750



10,263



10,750(Healthcare Services)

Equity Interests






1,881



2,291Total Investment






12,144



13,041Universal Environmental Services, LLC

Equity Interests






1,579



(Business Services)

Total Investment






1,579



Total
    companies 5% to 25% owned





$
323,594


$
353,776Companies Less Than 5% Owned3SI Security Systems, Inc.

Subordinated Debt (14.6%, Due 8/13)

$
28,544


$
28,453


$
28,555(Consumer Products)

Total Investment






28,453



28,555Abraxas Corporation

Senior Loan  (9.0%, Due 4/13)


15,000



15,000



15,000(Business Services)

Subordinated Debt (14.6%, Due 4/13)


37,000



36,821



36,821Total Investment






51,821



51,821AgData, L.P.

Senior Loan (10.8%, Due 7/12)


1,843



1,836



1,862(Consumer Services)

Unitranche Debt (10.8%, Due 7/12)


13,420



13,371



13,554Total Investment






15,207



15,416  (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



June 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


$
52,811


$
54,060(Consumer Products)

Common Stock (2,500 shares)






2,500



1,900Total Investment






55,311



55,960Axium Healthcare Pharmacy, Inc.

Senior Loan (14.0%, Due 12/12)


3,750



3,720



3,750(Healthcare Services)

Unitranche Debt (14.0%, Due 12/12)


8,500



8,467



8,147Common Stock (22,860 shares)






2,286



230Total Investment






14,473



12,127Baird Capital Partners IV
    Limited(5)

Limited Partnership Interest






3,114



3,021(Private Equity Fund)

Total Investment






3,114



3,021BenefitMall, Inc.

Subordinated Debt (18.0%, Due 6/14)


40,326



40,231



40,231(Business Services)

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






39,274



88,378Warrants(12)










Total Investment






79,505



128,609Broadcast Electronics, Inc.

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


4,913



4,885



2,077(Business Services)

Total Investment






4,885



2,077Bushnell, Inc.

Subordinated Debt (9.3%, Due 2/14)


41,325



39,908



37,949(Consumer Products)

Total Investment






39,908



37,949Callidus Debt PartnersCDO Fund I,
    Ltd.(4)(10)

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


18,800



18,919



18,667(CDO)

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


9,400



9,459



9,473Total Investment






28,378



28,140Callidus Debt PartnersCLO Fund III,
    Ltd.(4)(10)

Preferred Shares (23,600,000 shares,
    12.7%)(11)






20,588



19,179(CLO)

Total Investment






20,588



19,179Callidus Debt PartnersCLO Fund IV,
    Ltd.(4)(10)

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


3,000



1,962



2,518(CLO)

Income Notes
    (19.2%)(11)






15,066



15,240Total Investment






17,028



17,758  (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



June 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
    (20.8%)(11)





$
13,192


$
14,052(CLO)

Total Investment






13,192



14,052Callidus Debt PartnersCLO Fund VI,
    Ltd.(4)(10)

Class D Notes (8.9%) Due 10/21)

$
5,000



4,353



4,274(CLO)

Income Notes
    (21.3%)(11)






28,259



31,108Total Investment






32,612



35,382Callidus Debt PartnersCLO Fund VII,
    Ltd.(4)(10)

Income Notes
    (16.6%)(11)






24,008



24,008(CLO)

Total Investment






24,008



24,008Callidus MAPS CLO Fund I
    LLC(10)

Class E Notes (8.1%, Due 12/17)


17,000



17,000



14,900(CLO)

Income Notes
    (6.2%)(11)






46,759



35,536Total Investment






63,759



50,436Callidus MAPS CLO Fund II,
    Ltd.(4)(10)

Income Notes
    (16.2%)(11)






18,426



16,892(CLO)

Total Investment






18,426



16,892Carlisle Wide Plank Floors, Inc.

Senior Loan (7.5%, Due 6/11)


500



497



495(Consumer Products)

Unitranche Debt (14.5%, Due 6/11)


3,161



3,134



3,159Preferred Stock (345,056 Shares)






345



276Total Investment






3,976



3,930Catterton Partners VI,
    L.P.(5)

Limited Partnership Interest






2,539



2,501(Private Equity Fund)

Total Investment






2,539



2,501Centre Capital Investors V,
    L.P.(5)

Limited Partnership Interest






843



728(Private Equity Fund)

Total Investment






843



728  (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



June 30, 2008Portfolio Company



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

Investment(1)(2)

Principal


Cost


ValueCK Franchising, Inc.

Senior Loan (5.9%, Due 7/12)

$
6,750


$
6,670


$
6,670(Consumer Services)

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


21,152



21,071



21,071Preferred Stock (1,281,887 shares)






1,282



1,490Common Stock (7,585,549 shares)






7,586



8,900Total Investment






36,609



38,131Commercial 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)


35,279



35,210



35,873(Education Services)

Total Investment






35,210



35,873Component Hardware Group, Inc.

Subordinated Debt (13.5%, Due 1/13)


18,570



18,508



18,824(Industrial Products)

Total Investment






18,508



18,824Cook Inlet Alternative Risk, LLC

Unitranche Debt (10.8%, Due 4/13)


90,000



89,575



90,197(Business Services)

Equity Interests






552



300Total Investment






90,127



90,497Cortec Group Fund IV,
    L.P.(5)

Limited Partnership Interest






4,594



4,063(Private Equity)

Total Investment






4,594



4,063Diversified Mercury

Senior Loan (6.2%, Due 3/13)


2,983



2,969



2,838Communications, LLC(Business Services)

Total Investment






2,969



2,838Digital VideoStream, LLC

Unitranche Debt (11.0%, Due 2/12)


14,784



14,709



15,080(Business Services)

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


4,326



4,313



5,692Total Investment






19,022



20,772DirectBuy Holdings, Inc.

Subordinated Debt (14.5%, Due 5/13)


75,428



75,092



74,011(Consumer Products)

Equity Interests






8,000



6,400Total Investment






83,092



80,411Distant Lands Trading Co.

Senior Loan (10.0%, Due 11/11)


5,400



5,370



5,255(Consumer Products)

Unitranche Debt (13.0%, Due 11/11)


42,634



42,504



42,291Common Stock (3,451 shares)






3,451



583Total Investment






51,325



48,129Driven Brands, Inc.

Senior Loan (6.2%, Due 6/11)


38,270



38,158



38,158d/b/a Meineke and Econo Lube

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


82,961



82,729



82,729(Consumer Services)

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






26,398



6,409Warrants(12)










Total Investment






147,285



127,296  (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



June 30, 2008Portfolio Company



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

Investment(1)(2)

Principal


Cost


ValueDryden XVIII LeveragedLoan 2007
    Limited(4)

Class B Notes (7.4%, Due 10/19)

$
9,000


$
7,438


$
8,254(CLO)

Income Notes
    (14.9%)(11)






23,107



21,843Total Investment






30,545



30,097Dynamic 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)


117,759



117,304



117,304(Business Services)

Common Stock
    (63,438 shares)(12)






63,438



20,343Warrants(12)










Total Investment






180,742



137,647eCentury Capital Partners,
    L.P.(5)

Limited Partnership Interest






7,274



2,223(Private Equity Fund)

Total Investment






7,274



2,223eInstruction Corporation

Subordinated Debt (12.9%, Due 7/14-1/15)


32,633



32,487



31,851(Education Services)

Common Stock (2,406 shares)






2,500



2,300Total Investment






34,987



34,151Farleys & Sathers Candy Company, Inc.

Subordinated Debt (11.9%, Due 3/11)


9,000



8,973



8,550(Consumer Products)

Total Investment






8,973



8,550FCP-BHI Holdings, LLC

Subordinated Debt (12.0%, Due 9/13)


25,715



25,611



25,205d/b/a Bojangles

Equity Interests






968



1,600(Retail)

Total Investment






26,579



26,805Fidus Mezzanine Capital,
    L.P.(5)

Limited Partnership Interest






6,368



6,368(Private Equity Fund)

Total Investment






6,368



6,368Freedom Financial Network, LLC

Senior Loan (6.2%, Due 2/13)


10,000



10,000



9,891(Financial Services)

Subordinated Debt (13.5%, Due 2/14)


13,000



12,939



13,000Total Investment






22,939



22,891Frozen 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.

Subordinated Debt (10.0%, Due 6/09)


5,498



5,395



5,518(Energy Services)

Warrants






2,027



2,400Total Investment






7,422



7,918  (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



June 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


$
25,645


$
25,486(Consumer Products)

Total Investment






25,645



25,486Havco Wood Products LLC

Equity Interests






910



2,300(Industrial Products)

Total Investment






910



2,300Haven Eldercare of New England, LLC

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


1,383



1,383



1,383(Healthcare Services)

Total Investment






1,383



1,383Higginbotham Insurance Agency, Inc.

Senior Loan (5.2%, Due 8/12)


17,471



17,389



17,389(Business Services)

Subordinated Debt (13.6%, Due 8/13  8/14)


46,883



46,678



46,678Common Stock
    (22,020 shares)(12)






22,020



24,327Warrant(12)










Total Investment






86,087



88,394The Hillman Companies,
    Inc.(3)

Subordinated Debt (10.0%, Due 9/11)


44,580



44,474



44,580(Consumer Products)

Total Investment






44,474



44,580The Homax Group, Inc.

Senior Loan (6.5%, Due 10/12)


11,670



11,670



11,180(Consumer Products)

Subordinated Debt (12.0%, Due 4/14)


14,000



13,313



13,446Preferred Stock (76 shares)






76



9Common Stock (24 shares)






5



Warrants






954



141Total Investment






26,018



24,776Ideal Snacks Corporation

Senior Loan (6.8%, Due 6/10)


1,099



1,099



1,080(Consumer Products)

Total Investment






1,099



1,080Integrity Interactive Corporation

Unitranche Debt (10.5%, Due 2/12)


11,030



10,945



11,236(Business Services)

Total Investment






10,945



11,236International Fiber Corporation

Subordinated Debt (14.0%, Due 6/12)


24,822



24,737



24,822(Industrial Products)

Preferred Stock (21,566 shares)






2,157



2,500Total Investment






26,894



27,322  (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.(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



June 30, 2008Portfolio Company



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

Investment(1)(2)

Principal


Cost


ValueKodiak Fund
    LP(5)

Equity Interests





$
9,440


$
2,853(Private Equity Fund)

Total Investment






9,440



2,853Line-X, Inc.

Senior Loan (15.0%, Due 8/11)

$
900



887



887(Consumer Products)

Unitranche Debt (15.0% Due 8/11)


48,324



48,187



41,472Total Investment






49,074



42,359Standby Letter of Credit ($1,500)Market Track Holdings, LLC

Senior Loan (8.0%, Due 6/14)


16,359



16,359



16,196(Business Services)

Subordinated Debt (15.9%, Due 6/14)


24,600



24,478



24,478Total Investment






40,837



40,674NetShape Technologies, Inc.

Senior Loan (7.0%, Due 2/13)


32



32



31(Industrial Products)

Total Investment






32



31Network Hardware Resale, Inc.

Unitranche Debt (10.5%, Due 12/11)


19,397



19,485



19,784(Business Services)

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


14,533



14,589



14,833Total Investment






34,074



34,617Norwesco, Inc.

Subordinated Debt (15.4%, Due 9/13)


61,878



61,583



61,583(Industrial Products)

Common Stock (482,736
    shares)(12)






3,676



77,658Warrants(12)










Total Investment






65,259



139,241Novak Biddle Venture Partners III,
    L.P.(5)

Limited Partnership Interest






2,018



1,604(Private Equity Fund)

Total Investment






2,018



1,604  (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.(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.
 16




---



##### 



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



June 30, 2008Portfolio Company



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

Investment(1)(2)

Principal


Cost


ValueOahu Waste Services, Inc.

Stock Appreciation Rights





$
206


$
1,000(Business Services)

Total Investment






206



1,000Pangaea CLO 2007-1
    Ltd.(4)

Class D Notes (7.6%, Due 10/21)

$
15,000



11,621



10,138(CLO)

Total Investment






11,621



10,138Passport Health

Preferred Stock (561,908 shares)






1,725



4,095Communications, Inc.

Common Stock (16,977 shares)






42



90(Healthcare Services)

Total Investment






1,767



4,185PC Helps Support, LLC

Senior Loan (6.2%, Due 12/13)


8,964



8,956



8,882(Business Services)

Subordinated Debt (13.3%, Due 12/13)


29,295



29,155



29,238Total Investment






38,111



38,120Pendum, 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



Peter Brasseler Holdings, LLC

Equity Interests






3,451



3,100(Business Services)

Total Investment






3,451



3,100PharMEDium Healthcare Corporation

Senior Loan (6.6%, Due 10/13)


6,075



6,075



5,890(Healthcare Services)

Total Investment






6,075



5,890Postle Aluminum Company, LLC

Unitranche Debt (11.0%, Due 10/12)


61,000



60,778



59,657(Industrial Products)

Equity Interests






2,165



1,027Total Investment






62,943



60,684  (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.
 17




---



##### 



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



June 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)

$
14,635


$
14,585


$
14,818(Industrial Products)

Equity Interests






1,294



1,700Total Investment






15,879



16,518Promo Works, LLC

Unitranche Debt (10.3%, Due 12/11)


24,932



24,749



25,016(Business Services)

Total Investment






24,749



25,016Guaranty ($300)Reed Group, Ltd.

Senior Loan (6.4%, Due 12/13)


10,948



10,920



10,373(Healthcare Services)

Subordinated Debt (13.8%, Due 12/13)


18,195



18,113



17,400Equity Interests






1,800



800Total Investment






30,833



28,573S.B. Restaurant Company

Unitranche Debt (9.8%, Due 4/11)


39,501



39,249



39,003(Retail)

Preferred Stock (46,690 shares)






117



133Warrants






534



400Total Investment






39,900



39,536Standby Letters of Credit ($2,540)Service Center Metals, LLC

Subordinated Debt (15.5%, Due 9/11)


5,000



4,984



4,856(Industrial Products)

Equity Interests






274



307Total Investment






5,258



5,163Snow Phipps Group,
    L.P.(5)

Limited Partnership Interest






2,896



2,896(Private Equity Fund)

Total Investment






2,896



2,896SPP Mezzanine Funding II,
    L.P.(5)

Limited Partnership Interest






9,011



8,778(Private Equity Fund)

Total Investment






9,011



8,778Stag-Parkway, Inc.

Unitranche Debt (14.0%, Due 7/12)


49,186



49,017



42,874(Business Services)

Total Investment






49,017



42,874STS Operating, Inc.

Subordinated Debt (11.0%, Due 1/13)


30,386



30,285



30,690(Industrial Products)

Total Investment






30,285



30,690Summit Energy Services, Inc.

Senior Loan (5.9%, Due 8/13)


9,098



9,098



8,946(Business Services)

Subordinated  Debt (11.6%, Due 8/13)


35,730



35,576



36,802Common Stock (415,982 shares)






1,861



2,000Total Investment






46,535



47,748  (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.
 18




---



##### 



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



June 30, 2008Portfolio Company



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

Investment(1)(2)

Principal


Cost


ValueTappan Wire and Cable Inc.

Unitranche Debt (15.0%, Due 8/14)

$
22,346


$
22,239


$
22,239(Business Services)

Common Stock
    (12,940 shares)(12)






1,941



4,795Warrant(12)










Total Investment






24,180



27,034The Step2 Company, LLC

Unitranche Debt (11.0%, Due 4/12)


95,803



95,495



96,322(Consumer Products)

Equity Interests






2,149



1,772Total Investment






97,644



98,094Tradesmen International, Inc.

Subordinated Debt (12.0%, Due 12/12)


49,124



48,569



47,820(Business Services)

Total Investment






48,569



47,820TransAmerican Auto Parts, LLC

Subordinated Debt (16.3%, Due 11/12)


24,347



24,196



22,780(Consumer Products)

Equity Interests






1,034



125Total Investment






25,230



22,905Triax Holdings, LLC

Subordinated Debt (21.0%, Due 2/12)


10,392



10,351



10,440(Consumer Products)

Equity Interests






16,528



41,485Total Investment






26,879



51,925Trover Solutions, Inc.

Subordinated Debt (12.0%, Due 11/12)


60,054



59,820



60,291(Business Services)

Total Investment






59,820



60,291United Road Towing, Inc.

Subordinated Debt (10.0%, Due 1/14)


29,000



28,865



28,855(Consumer Services)

Total Investment






28,865



28,855Venturehouse-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 (14.0%, Due 4/13)


125,764



124,868



109,172d/b/a Wear Me Apparel

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


11,243



11,243



(Consumer Products)

Common Stock (86 shares)






39,721



Total Investment






175,832



109,172  (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.
 19




---



##### 



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



June 30, 2008Portfolio Company



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

Investment(1)(2)

Principal


Cost


ValueWebster Capital II,
    L.P.(5)

Limited Partnership Interest





$
738


$
459(Private Equity Fund)

Total Investment






738



459Woodstream Corporation

Subordinated Debt (12.0%, Due 2/15)

$
90,000



89,603



87,290(Consumer Products)

Common Stock (6,960 shares)






6,961



4,400Total Investment






96,564



91,690York Insurance Services Group, Inc.

Common Stock (12,939 shares)






1,294



1,400(Business Services)

Total Investment






1,294



1,400Other companies

Other debt investments


159



70



75Other equity investments






26



Total Investment






96



75Total companies less than 5% owned





$
2,817,567


$
2,747,658Total private finance (149 portfolio investments)





$
5,037,497


$
4,390,834  (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.
 20




---



##### 



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

Number ofRate Ranges

Loans

Cost

ValueCommercial Mortgage LoansUp to 6.99%



2


$
22,146


$
22,1467.00%8.99%



2



2,137



2,0719.00%10.99%



1



6,458



6,45811.00%12.99%



1



10,462



10,46215.00% and above



2



3,970



6,229Total commercial mortgage
    loans(13)









$
45,173


$
47,366Real Estate Owned









$
21,358


$
27,166Equity
    Interests(2) 
    Companies more than 25% owned





$
14,179


$
32,269Guarantees ($6,871)Standby Letter of Credit ($650)Total commercial real estate finance









$
80,710


$
106,801Total portfolio









$
5,118,207


$
4,497,635   Yield

Cost

ValueInvestments in U.S. Treasury Bills, Money Market and Other
    SecuritiesU.S. Treasury bills (Due July 2008)


1.6%


$
99,991


$
100,045SEI Daily Income Tr Prime Obligation Money Market Fund


2.5%



6



6Columbia Treasury Reserves Money Market Fund


2.6%



1



1Total





$
99,998


$
100,052  (2)

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

Commercial mortgage loans totaling $7.5 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.
 21




---



##### 



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.
 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


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.
 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


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.
 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


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.
 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


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.
 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


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.
 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


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.
 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


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.
 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


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.
 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


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.
 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


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.
 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


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.
 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


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 and 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.
 34




---



##### 



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.
 35




---



##### 



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 Treasury Reserves Money Market 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.
 36




---



##### 





ALLIED
    CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Information at and for the three and six months ended
    June 30, 2008 and 2007 is unaudited)
  Note 1. Organization
       Regulation S-X,
     Note 2. Summary
    of Significant Accounting Policies
  Basis
    of Presentation
       37




---



##### 



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
     38




---



##### 



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
   39




---



##### 



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
         40




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 2. Summary of Significant Accounting Policies,
    continued
  cash flows due to changes in
    prepayments and/or re-investments, credit losses or asset
    pricing. Changes in estimated yield are recognized as an
    adjustment to the estimated yield over the remaining life of the
    preferred shares/income notes from the date the estimated yield
    was changed. CLO and CDO bonds have stated interest rates. The
    weighted average yield on the CLO/CDO Assets is calculated as
    the (a) annual stated interest or the effective interest
    yield on the accruing bonds or the effective yield on the
    preferred shares/income notes, divided by (b) CLO/CDO
    Assets at value. The weighted average yields are computed as of
    the balance sheet date.
    Fee
    Income    Guarantees
  Guarantors Accounting and
    Disclosure Requirements for Guarantees, Including Indirect
    Guarantees of Indebtedness of Others
  Financing
    Costs
    Dividends
    to Shareholders
   41




---



##### 



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 SixMonths Ended

Months EndedJune 30,

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

2008

2007

2008

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


$2.1


$3.3


$3.9


$6.5Options granted on or after January 1, 2006


1.8


6.2


4.2


6.7Total employee stock option expense


$3.9


$9.5


$8.1


$13.2Per basic share


$0.02


$0.06


$0.05


$0.09Per diluted share


$0.02


$0.06


$0.05


$0.09       For the Three


For the SixMonths Ended


Months EndedJune 30,


June 30,2008


2007


2008


2007Expected term (in years)


5.0



5.0



5.0



5.0Risk-free interest rate


3.2
%


4.6
%


2.7
%


4.6
%Expected volatility


28.9
%


26.5
%


27.7
%


26.5
%Dividend yield


8.5
%


9.0
%


8.5
%


9.0
%Weighted average fair value per option


$2.09



$2.98



$2.19



$2.98  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
   43




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 2. Summary of Significant Accounting Policies,
    continued
    Use of
    Estimates in the Preparation of Financial
    Statements
      Recent
    Accounting Pronouncements
  Fair Value Measurements.
  The
    Fair Value Option for Financial Assets and Financial
    Liabilities  Including an Amendment of FASB Statement
    No. 115.
 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

$
367.5


$
330.9



6.4%


$
374.1


$
344.3



7.7%Unitranche
    debt(2)


639.1



627.6



12.2%



659.2



653.9



11.5%Subordinated debt


2,580.8



2,292.0



13.7%



2,576.4



2,416.4



12.8%Total loans and debt
    securities(3)


3,587.4



3,250.5



12.6%



3,609.7



3,414.6



12.1%Equity securities:Preferred shares/income notes of
    CLOs(4)


247.7



232.6



16.0%



218.3



203.0



14.6%Subordinated certificates in Unitranche Fund
    LLC(4)


94.6



94.6



10.2%



0.7



0.7



12.4%Other equity securities


1,107.8



813.1







1,215.2



1,041.0Total equity securities


1,450.1



1,140.3







1,434.2



1,244.7Total

$
5,037.5


$
4,390.8






$
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
    June 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. 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)
    The total principal balance outstanding on loans and debt
    securities was $3,620.4 million and $3,639.6 million
    at June 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 $33.0 million and
    $29.9 million at June 30, 2008, and December 31,
    2007, respectively.(4)
    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 SixMonths Ended

Months EndedJune 30,

June 30,($ in millions)

2008

2007

2008

2007Interest income on Class A equity interests


$


$


$


$Fees and other income





1.3





2.8Total interest and related portfolio income


$


$1.3


$


$2.8          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.
       For the Three


For the SixMonths Ended


Months Ended($ in millions)

June 30, 2007


June 30, 2007Interest income


$2.1



$4.1Fees and other income


0.1



0.2Total interest and related portfolio income


$2.2



$4.3    49




---



##### 



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


$
28.1



14.2%


$
28.4


$
28.5



14.0%Callidus Debt Partners CLO Fund IV, Ltd.


2.0



2.5



14.6%







Callidus Debt Partners CLO Fund VI, Ltd.


4.4



4.3



11.8%



4.3



4.3



13.4%Callidus MAPS CLO Fund I LLC


17.0



14.9



9.2%



17.0



16.1



11.0%Dryden XVIII Leveraged Loan 2007 Limited


7.4



8.3



15.4%



7.4



7.4



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


22.0



20.8



14.9%



22.0



22.0



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


39.1



39.1



11.1%







Pangaea CLO 2007-1 Ltd.


11.6



10.1



13.1%



11.6



11.6



13.9%Total bonds


131.9



128.1



12.7%



90.7



89.9



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


20.6



19.2



13.6%



21.8



20.0



14.1%Callidus Debt Partners CLO Fund IV, Ltd.


15.1



15.2



18.9%



12.3



11.3



16.1%Callidus Debt Partners CLO Fund V, Ltd.


13.2



14.1



19.6%



14.0



14.7



19.3%Callidus Debt Partners CLO Fund VI, Ltd.


28.2



31.1



19.4%



27.0



27.0



19.3%Callidus Debt Partners CLO Fund VII, Ltd.


24.0



24.0



16.6%



22.1



22.1



16.6%Callidus MAPS CLO Fund I LLC


46.8



35.5



8.1%



49.3



36.1



7.6%Callidus MAPS CLO Fund II, Ltd.


18.4



16.9



17.6%



18.7



18.7



14.7%Dryden XVIII Leveraged Loan 2007 Limited


23.1



21.9



15.8%



21.9



21.9



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


33.9



30.3



18.6%



31.2



31.2



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


24.4



24.4



16.7%







Total preferred shares/income notes


247.7



232.6



16.0%



218.3



203.0



14.6%Total

$
379.6


$
360.7






$
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.     50




---



##### 



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

2008


2007Bonds

$
278.6


$
288.5Syndicated loans


4,437.1



4,122.7Cash(1)


47.3



104.4Total underlying collateral
    assets(2)

$
4,763.0


$
4,515.6   (1)
    Includes undrawn liability amounts.(2)
    At June 30, 2008, and December 31, 2007, the total
    face value of defaulted obligations was $85.0 million and
    $18.4 million, respectively, or approximately 1.8% and 0.4%
    respectively, of the total underlying collateral assets.  Loans and Debt Securities on Non-Accrual
    Status.
  ($ in millions)

2008


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

$
33.0


$
114.1Companies 5% to 25% owned


0.9



11.7Companies less than 5% owned


24.0



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


37.2



21.4Companies 5% to 25% owned


7.0



13.4Companies less than 5% owned






13.3Total

$
102.1


$
197.7  51




---



##### 



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


2007IndustryBusiness services


35
%


37
%Consumer products


25



25Industrial products


8



10CLO/CDO(1)


8



6Consumer services


5



4Retail


5



4Financial services


4



6Private debt funds


3



1Healthcare services


2



3Other


5



4Total


100
%


100
%Geographic
    Region(2)Mid-Atlantic


37
%


36
%Midwest


29



32Southeast


18



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

$
45.2


$
47.4



7.8%


$
65.9


$
65.4



6.8%Real estate owned


21.3



27.2







15.3



21.3Equity interests


14.2



32.2







15.7



34.5Total

$
80.7


$
106.8






$
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. 52




---



##### 



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


2007Property TypeHospitality


48
%


44
%Office


23



21Recreation


19



15Retail


9



18Other


1



2Total


100
%


100
%Geographic RegionSoutheast


44
%


40
%Midwest


25



31West


22



20Northeast


8



7Mid-Atlantic


1



2Total


100
%


100
%   Fair
    Value Measurements
  Fair Value Measurements
 53




---



##### 



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 June 30,


Identical Assets


Inputs


Inputs($ in millions)

2008


(Level 1)


(Level 2)


(Level 3)Assets at Fair Value:U.S. Treasury Bills

$
100.0


$
100.0


$



$
PortfolioPrivate finance

$
4,390.8


$



$



$
4,390.8Commercial real estate finance


106.8











106.8Total portfolio

$
4,497.6


$



$



$
4,497.6  54




---



##### 



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


6.1



(2.1
)


4.0Net change in unrealized appreciation or
    depreciation(2)


(257.5
)


1.8



(255.7
)Purchases, issuances, repayments and exits,
    net(3)


(10.5
)


(14.1
)


(24.6
)Transfers in and/or out of level 3










Balance at June 30, 2008

$
4,390.8


$
106.8


$
4,497.6Net unrealized appreciation (depreciation) during the period
    relating to assets still held at the reporting
    date(2)

$
(250.8
)

$
(1.1
)

$
(251.9
)   (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).  Managed
    Funds
    Accounting for Transfers and Servicing of
    Financial Assets and Extinguishments of Liabilities
  Unitranche Fund LLC.
 55




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 3. Portfolio, continued
    Allied Capital Senior Debt Fund,
    L.P.
      Knightsbridge CLO
    2007-1
    Ltd. 2007-1
     56




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 3. Portfolio, continued
  Knightsbridge CLO
    2008-1
    Ltd. 2008-1
    AGILE Fund I, LLC.
  post-closing
       57




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 4. Debt
    2008


2007Annual






AnnualFacility

Amount


Interest


Facility

Amount

InterestAmount

Drawn


Cost(1)


Amount

Drawn

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

$
1,082.8

$
1,082.8



6.5
%

$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


1,962.8


1,962.8



6.6
%

1,922.2

1,922.2


6.4
%Revolving line of credit


632.5


80.5



4.4
%(2)

922.5

367.3


5.9
%(2)Total debt

$
2,595.3

$
2,043.3



6.9
%(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 $7.2 million and $3.7 million at
    June 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.  Notes
    Payable and Debentures
  Privately Issued Unsecured
    Notes Payable.
     58




---



##### 



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

Amount Maturing($ in millions)2008

$
2009


270.32010


408.02011


472.52012


339.0Thereafter


473.0Total

$
1,962.8   Revolving
    Line of Credit     59




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 4. Debt, continued
   LIBOR-based
         Debt
    Covenants
      Note 5. Guarantees
    and Commitments
   60




---



##### 



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

$
344.4


$
0.3


$
338.8


$



$
4.4


$
0.1


$
0.8Standby letters of
    credit(1)


125.2



1.0



0.7







123.5







Total(2)

$
469.6


$
1.3


$
339.5


$



$
127.9


$
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)
    The Companys most significant
    commitments relate to its investment in Ciena Capital LLC
    (Ciena). At June 30, 2008, the Company guaranteed 100% of
    the outstanding total obligations on Cienas revolving line
    of credit, which matures in March 2009, for a total guaranteed
    amount of $336.3 million. At June 30, 2008, the
    estimated net realizable value of Cienas assets exceeded
    the amount outstanding on this revolving line of credit. If the
    estimated net realizable value of Cienas assets were to
    fall below the amount outstanding on Cienas revolving line
    of credit, the Company would be required to record a liability
    for the amount that the revolving line of credit exceeds the net
    realizable value of Cienas assets. At June 30, 2008,
    the Company also had standby letters of credit issued totaling
    $104.1 million in connection with term securitizations
    completed by Ciena. The Company considered the outstanding
    letters of credit in its valuation at June 30, 2008. See
    Note 3.      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      61




---



##### 



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

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

0.2

0.3Average price per share

$19.49

$30.23Shares purchased by Plan Agent for shareholders

0.3

Average price per share

$14.14

   Note 7. Earnings
    Per Common Share
     For the Three

For the SixMonths Ended

Months EndedJune 30,

June 30,2008


2007

2008

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

$
(102.2
)

$
89.2

$
(142.9)

$
222.2Weighted average common shares
    outstanding  basic


173.0



152.4


167.2


150.9Dilutive options outstanding






3.7





3.5Weighted average common shares outstanding  diluted


173.0



156.1


167.2


154.4Basic earnings (loss) per common share

$
(0.59
)

$
0.59

$
(0.85)

$
1.47Diluted earnings (loss) per common share

$
(0.59
)

$
0.57

$
(0.85)

$
1.44   Note 8. Employee
    Compensation Plans
      62




---



##### 



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

For the SixMonths Ended

Months EndedJune 30,

June 30,($ in millions)

2008

2007

2008

2007IPA

$
2.2

$
2.4

$
4.6

$
4.9IPA mark to market expense (benefit)





2.4


(4.1)


(1.6)Total IPA expense

$
2.2

$
4.8

$
0.5

$
3.3     Note 9. Stock
    Option Plan
    63




---



##### 



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


AggregateWeighted


Average


IntrinsicAverage


Contractual


Value atExercise Price


Remaining


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

Shares


Per Share


Term (Years)


2008(1)Options outstanding at January 1, 2008


18.5


$
28.36Granted


7.5


$
22.75Exercised





$
Forfeited/cancelled


(1.5
)

$
27.42Options outstanding at June 30, 2008


24.5


$
26.69



6.05


$
Exercisable at June 30,
    2008(2)


15.4


$
28.11



5.82


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


23.1


$
26.89



6.02


$
   (1)
    Represents the difference between
    the market value of the options at June 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 June 30, 2008, is calculated based on an
    estimate of expected forfeitures, which do not include the
    effect of any forfeitures that may result from the headcount
    reductions in the third quarter of 2008.      Note 10. Dividends
    and Distributions and Taxes
    64




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 10. Dividends and Distributions and Taxes,
    continued
                65




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 10. Dividends and Distributions and Taxes,
    continued
  year relates to a variety of
    timing and permanent differences in the recognition of income
    and expenses for book and tax purposes.
    Note 11. Supplemental
    Disclosure of Cash Flow Information
        66




---



##### 



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


for theSix Months Ended


Year EndedJune 30,


December 31,2008(1)


2007


2007Per Common Share DataNet asset value, beginning of period

$
17.54


$
19.12


$
19.12Net investment
    income(2)


0.80



0.42



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


(0.09
)


0.66



1.74Net investment income plus net realized
    gains(2)


0.71



1.08



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


(1.56
)


0.36



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


(0.85
)


1.44



0.99Net decrease in net assets from shareholder distributions


(1.30
)


(1.27
)


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


0.54



0.30



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










(0.34
)Net asset value, end of period

$
15.93


$
19.59


$
17.54Market value, end of period

$
13.89


$
30.96


$
21.50Total
    return(5)


(30.3
)%


(1.2
)%


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

$
2,845.8


$
2,991.1


$
2,771.8Common shares outstanding at end of period


178.7



152.7



158.0Diluted weighted average common shares outstanding


167.2



154.4



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


2.34
%


3.11
%


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


4.97
%


5.31
%


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


0.22
%


0.17
%


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


4.74
%


2.20
%


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


(5.08
)%


7.57
%


5.34
%Portfolio turnover
    rate(7)


12.81
%


14.68
%


26.84
%Average debt outstanding

$
2,126.2


$
1,903.6


$
1,924.2Average debt per
    share(2)

$
12.71


$
12.33


$
12.44   (1)
    The results for six months ended June 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 six months ended June 30, 2008 and 2007,
    do not represent annualized results.  67




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 13. Litigation
        CA 001060-07,
 68




---



##### 



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




---



##### 



Report of
    Independent Registered Public Accounting Firm  The Board
    of Directors and Shareholders
 Allied Capital Corporation:
  three- six-month
        
    70




---



##### 





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,








June 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


$
(87
)

$
774(Private Equity Fund)Alaris Consulting, LLC

Senior
    Loan(5)






















(Business Services)

Equity Interests














1,549



(1,549
)


AllBridge Financial, LLC

Equity Interests










7,800



19,800



(5,462
)


22,138(Asset Management)Allied Capital Senior Debt Fund, L.P.

Equity Interests










32,811



1,545







34,356(Private Debt Fund)Avborne, Inc.

Preferred Stock










1,633







(677
)


956(Business Services)

Common Stock






















Avborne Heavy Maintenance, Inc.

Preferred Stock










2,557







(2,400
)


157(Business Services)

Common Stock










370



520







890Aviation Properties Corporation

Common Stock














3



(3
)


(Business Services)Border Foods, Inc.

Senior Loan

$
108











22,543



(716
)


21,827(Consumer Products)

Senior
    Loan(5)














14,149







14,149Preferred Stock










4,648







(53
)


4,595Common Stock






















Calder Capital Partners, LLC

Senior
    Loan(5)





$
132



3,035



1,225



(3,068
)


1,192(Asset Management)

Equity Interests










3,559



2



(3,561
)


Callidus Capital Corporation

Senior Loan


49











1,500







1,500(Asset Management)

Subordinated Debt


782







6,871



4,632



(2,150
)


9,353Common Stock


3,000







44,587







(4,456
)


40,131Ciena Capital LLC

Class A Equity(Financial Services)

Interests(5)










68,609







(68,600
)


9Class B Equity Interests






















Class C Equity Interests






















CitiPostal Inc.

Senior Loan


25







679



1







680(Business Services)

Unitranche Debt


3,134







50,597



667







51,264Subordinated Debt


668







8,049



366







8,415Common Stock


27







12,726



3,461







16,187Coverall North America, Inc.

Unitranche Debt


1,992







34,923



27



(3,019
)


31,931(Business Services)

Subordinated Debt


429







5,979



4



(437
)


5,546Common Stock










27,597







(7,647
)


19,950CR Holding, Inc.

Subordinated Debt


3,274







40,812



709



(3,006
)


38,515(Consumer Products)

Common Stock










40,934







(13,878
)


27,056Crescent Equity Corp.

Senior Loan


22







433



11







444(Business Services/

Subordinated Debt


1,778







42,977



939



(12,486
)


31,430Broadcasting & Cable)

Subordinated
    Debt(5)










1,583



150



(149
)


1,584Common Stock


36







83,453



6,290



(65,876
)


23,867Direct Capital Corporation

Subordinated Debt


3,732







39,030



15,216



(2,965
)


51,281(Financial Services)

Common Stock










6,906



6,744



(2,644
)


11,006Financial Pacific Company

Subordinated Debt


6,013







72,850



712



(5,314
)


68,248(Financial Services)

Preferred Stock


1,281







19,330







(4,742
)


14,588Common Stock










38,544







(38,544
)


ForeSite Towers, LLC

Equity Interest










878







(119
)


759(Tower Leasing)Global Communications, LLC

Senior
    Loan(5)










1,822







(472
)


1,350(Business Services)Hot Light Brands, Inc.

Senior
    Loan(5)














29,662



(2,340
)


27,322(Retail)

Common Stock














5,151



(5,151
)


  See related footnotes at the end of
    this schedule.
 71




---



##### 



PRIVATE FINANCE



Amount of Interest or Dividends


December 31,








June 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

$
1,789






$
50,752


$
2,589


$
(220
)

$
53,121(Consumer Products)

Subordinated Debt


1,584







29,907



1,330



(24,107
)


7,130Subordinated
    Debt(5)










1,337







(1,337
)


Common Stock






















Huddle House, Inc.

Subordinated Debt


4,306







59,618



884



(4,355
)


56,147(Retail)

Common Stock










44,154







(11,487
)


32,667IAT Equity, LLC and Affiliates

Subordinated Debt


9











6,000







6,000d/b/a Industrial Air Tool

Common Stock














7,500



(2,281
)


5,219(Industrial Products)Impact Innovations Group, LLC

Equity Interests in(Business Services)

Affiliate










320



1







321Insight Pharmaceuticals

Subordinated Debt


4,363







45,041



1,541



(1,297
)


45,285Corporation

Subordinated
    Debt(5)










16,796



343







17,139(Consumer Products)

Preferred Stock










1,462



4,300







5,762Common Stock






















Jakel, Inc.

Subordinated
    Debt(5)










1,563







(815
)


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

Class E Notes


786











21,983



(1,192
)


20,791(CLO)

Income Notes


1,519











32,505



(2,201
)


30,304Knightsbridge CLO
    2008-1 Ltd.

Class C Notes


93











16,000







16,000(CLO)

Class D Notes


64











10,000







10,000Class E Notes


83











13,116







13,116Income Notes


225











24,441







24,441Legacy Partners Group, Inc.

Senior
    Loan(5)










3,843







(3,000
)


843(Business Services)

Equity Interests










1,332







(34
)


1,298Litterer 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



(8,412
)


5,917(Business Services)

Preferred Stock






















Common Stock






















MVL Group, Inc.

Senior Loan


1,842







30,639



12







30,651(Business Services)

Subordinated Debt


3,046







39,943



591







40,534Common Stock










4,949







(4,949
)


Old Orchard Brands, LLC

Subordinated Debt


1,688







19,544



382



(1,428
)


18,498(Consumer Products)

Equity Interests










25,419



3,131



(2,910
)


25,640Penn Detroit Diesel Allison, LLC

Subordinated Debt


2,913







39,180



996



(2,883
)


37,293(Business Services)

Equity Interests










37,965



13



(5,455
)


32,523Powell Plant Farms, Inc.

Senior Loan










1,534







(1,534
)


(Consumer Products)Service Champ, Inc.

Subordinated Debt


2,137







28,351



366



(2,083
)


26,634(Business Services)

Common Stock










26,292



1,504



(1,877
)


25,919Staffing Partners Holding

Subordinated Debt










223



286



(509
)


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

Equity Interests










430



16



(56
)


390(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


1,641







744



93,821







94,565(Private Debt Fund)

Equity Interests










1











1Worldwide Express Operations, LLC

Subordinated Debt


204







2,670



146



(212
)


2,604(Business Services)

Equity Interests


796







21,516







(3,297
)


18,219Warrants










272







(42
)


230Total companies more than 25% owned

$
55,468






$
1,279,080










$
1,289,400  See related footnotes at the end of
    this schedule.
 72




---



##### 



PRIVATE FINANCE



Amount of Interest or Dividends


December 31,








June 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

$
1,368






$
20,645


$
364






$
21,009(Business Services)

Equity Interests










1,100






$
(25
)


1,075Option














25







25Advantage Sales &Marketing, Inc.

Subordinated Debt


9,500







154,854



2,154







157,008(Business Services)

Equity Interests










10,973



1,227







12,200Air Medical Group Holdings LLC

Senior Loan


119







2,980



6,056



(4,930
)


4,106(Healthcare Services)

Equity Interests


1,010







10,800







(1,600
)


9,200Alpine ESP Holdings, Inc.

Preferred Stock


169







749







(749
)


(Business Services)

Common Stock










262



1



(263
)


Amerex Group, LLC

Subordinated Debt


477







8,400







(611
)


7,789(Consumer Products)

Equity Interests


2,349







13,713



233







13,946BB&T CapitalPartners/WindsorMezzanine Fund, LLC

Equity Interests










11,467



48



(43
)


11,472(Private Equity Fund)Becker Underwood, Inc.

Subordinated Debt


1,847







24,798



887







25,685(Industrial Products)

Common Stock










4,190



1,709



(799
)


5,100BI Incorporated

Subordinated Debt


2,099







30,499



422







30,921(Business Services)

Common Stock










7,382



367



(549
)


7,200Creative Group, Inc.

Subordinated
    Debt(5)










6,197



8,877



(15,074
)


(Business Services)

Common Stock






















Warrant






















Drew Foam Companies, Inc.

Preferred Stock










396







(225
)


171(Business Services)

Common Stock














1



(1
)


Hilden America, Inc.

Common Stock














454



(154
)


300(Consumer Products)MedBridge Healthcare,
    LLC(7)

Senior
    Loan(5)





$
164



7,164







(221
)


6,943(Healthcare Services)

Subordinated
    Debt(5)






31



2,406







(1,465
)


941ConvertibleSubordinated
    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


900







19,704



79



(16,716
)


3,067(Business Services)

Equity Interests










940



435



(274
)


1,101Progressive InternationalCorporation

Subordinated Debt


131







1,545



40



(1,585
)


(Consumer Products)

Preferred Stock










1,038



42







1,080Common Stock










4,900



900







5,800Warrants






















Regency Healthcare Group, LLC

Senior Loan


1



















(Healthcare Services)

Unitranche Debt


666







11,941



373



(1,099
)


11,215Equity Interests


25







1,681



4



(242
)


1,443SGT India Private Limited

Common Stock










3,075



18



(1,155
)


1,938(Business Services)Soteria Imaging Services, LLC

Subordinated Debt


988







13,744



2,006



(5,000
)


10,750(Healthcare Services)

Equity Interests


74







2,686



10



(405
)


2,291Universal Environmental

Equity Interests














249



(249
)


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

$
21,723






$
389,509










$
353,776      (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 June 30, 2008.(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. 73




---



##### 



(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 June 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.  74




---



##### 





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
      June 30,


December 31,2008


2007


2007Private finance


98%



97%



97%Commercial real estate finance


2%



3%



3%    75




---



##### 



of interest income is directly
    related to the balance of the interest-bearing investment
    portfolio outstanding during the period multiplied by the
    weighted average yield. Our ability to generate interest income
    is dependent on economic, regulatory, and competitive factors
    that influence new investment activity, interest rates on the
    types of loans we make, the level of new investments and
    repayments in the
    interest-bearing
    investment portfolio, and the amount of loans and debt
    securities for which interest is not accruing. The level of fee
    income is primarily related to the level of new investment
    activity and the level of fees earned from portfolio companies
    and managed funds. The level of investment activity can vary
    substantially from period to period depending on many factors,
    including the amount of debt and equity capital available to
    middle market companies, the level of merger and acquisition
    activity for such companies, the general economic environment,
    the competitive environment for the types of investments we make
    and our ability to secure debt and equity capital for our
    investment activities.
    2007-1 2008-1
         76




---



##### 



PORTFOLIO AND
    INVESTMENT ACTIVITY
    At and for the


At and for the


At and for theThree Months


Six Months


Year EndedEnded June 30,


Ended June 30,


December 31,($ in millions)

2008


2007


2008


2007


2007Portfolio at value

$
4,497.6


$
4,471.1


$
4,497.6


$
4,471.1


$
4,780.5Investments funded

$
318.9


$
488.9


$
594.0


$
659.1


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

$
11.1


$
1.1


$
24.5


$
6.6


$
12.0Principal collections related to investment repayments
    or sales

$
332.8


$
499.9


$
597.6


$
735.4


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


12.7%



11.6%



12.7%



11.6%



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. 77




---



##### 



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


At and for the Six Months


the Year EndedEnded June 30,


Ended June 30,


December 312008


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

$
330.9



6.4
%

$
335.2



7.4
%

$
330.9



6.4
%

$
335.2



7.4
%

$
344.3



7.7
%Unitranche debt


627.6



12.2
%


681.4



11.4
%


627.6



12.2
%


681.4



11.4
%


653.9



11.5
%Subordinated debt


2,292.0



13.7
%


1,966.8



12.5
%


2,292.0



13.7
%


1,966.8



12.5
%


2,416.4



12.8
%Total loans and debt securities


3,250.5



12.6
%


2,983.4



11.7
%


3,250.5



12.6
%


2,983.4



11.7
%


3,414.6



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


232.6



16.0
%


111.3



14.0
%


232.6



16.0
%


111.3



14.0
%


203.0



14.6
%Subordinated certificates in 
    Unitranche
    Fund LLC(2)


94.6



10.2
%










94.6



10.2
%










0.7



12.4
%Other equity securities


813.1







1,253.6







813.1







1,253.6







1,041.0Total equity securities


1,140.3







1,364.9







1,140.3







1,364.9







1,244.7Total portfolio

$
4,390.8






$
4,348.3






$
4,390.8






$
4,348.3






$
4,659.3Investments funded

$
317.2






$
473.6






$
591.8






$
643.7






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

$
11.1






$
0.9






$
24.3






$
6.2






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

$
324.5






$
481.9






$
580.9






$
717.0






$
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 $124.2 million, $236.2 million, and
    $393.4 million for the six months ended June 30, 2008
    and 2007, and for the year ended December 31, 2007,
    respectively.       78




---



##### 



Investment Activity.
  For the Six Months Ended June 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

$
111.8



7.0%


$
11.6



6.1%


$
123.4



6.9%Unitranche
    debt(2)


14.8



10.5%



0.5



6.6%



15.3



10.4%Subordinated debt


240.7
(3)


12.6%



31.3



14.2%



272.0



12.8%Total loans and debt securities


367.3



10.8%



43.4



12.0%



410.7



10.9%Preferred shares/income notes of
    CLOs(4)


27.2



17.8%











27.2



17.8%Subordinated certificates in Unitranche Fund LLC


93.8



10.9%











93.8



10.9%Equity


29.5







30.6







60.1Total

$
517.8






$
74.0






$
591.8   For the Six Months Ended June 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

$
177.0



10.2%


$
40.0



9.4%


$
217.0



10.0%Unitranche
    debt(2)


57.1



10.7%











57.1



10.7%Subordinated debt


114.4



12.5%



103.2



10.9%



217.6



11.8%Total loans and debt securities


348.5



11.0%



143.2



10.5%



491.7



10.9%Preferred shares/income notes on
    CLOs(4)


17.2



14.8%











17.2



14.8%Equity


81.9
(5)






52.9







134.8Total

$
447.6






$
196.1






$
643.7   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(2)


109.1



10.8%



74.9



13.0%



184.0



11.7%Subordinated debt


719.4
(3)


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(4)


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
(5)






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 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 at value. The weighted average yield
    is calculated using yields as of the date an investment is
    funded.(2)
    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.(3)
    Subordinated debt investments for the six months ended
    June 30, 2008, and year ended December 31, 2007,
    included $41.1 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.(4)
    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.(5)
    Equity investments for the six months ended June 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. 79




---



##### 



80




---



##### 



Outstanding Investment Commitments.
  Companies





CompaniesMore Than


Companies 5%


Less Than($ in millions)

25%
    Owned(1)


to 25% Owned


5% Owned


TotalSenior loans

$
7.7


$
11.8


$
116.1


$
135.6
(2)Unitranche debt


3.0







36.9



39.9Subordinated debt


25.1



4.3



6.0



35.4Total loans and debt securities


35.8



16.1



159.0



210.9Unitranche
    Fund(3)


430.4











430.4Equity securities


85.3



10.9



49.7



145.9
(4)Total

$
551.5


$
27.0


$
208.7


$
787.2   (1)
    Includes various commitments to
    Callidus Capital Corporation (Callidus), a portfolio company
    controlled by us, which owns 80% (subject to dilution) 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


$
1.6


$
2.4Subordinated debt to support warehouse facilities &
    warehousing
    activities(*)


18.0



1.9



16.1Total

$
22.0


$
3.5


$
18.5   (*)
    Callidus has a synthetic credit
    facility with a third party for up to approximately
    $0.4 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 $135.3 million in the
    form of revolving senior debt facilities to 32 companies.(3)
    Represents our commitment to the
    Unitranche Fund LLC (see discussion below), which we estimate
    will be funded over a two to three year period as investments
    are made by the Unitranche Fund.(4)
    Includes $59.5 million to
    12 private equity and venture capital funds, including
    $3.9 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)

$
131.9


$
128.1



12.7%


$
90.7


$
89.9



13.3%Preferred shares/income notes of CLOs


247.7



232.6



16.0%



218.3



203.0



14.6%Total

$
379.6


$
360.7






$
309.0


$
292.9Percentage of total assets






7.3%











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 above. 81




---



##### 



($ in millions)

2008


2007Bonds

$
278.6


$
288.5Syndicated loans


4,437.1



4,122.7Cash(1)


47.3



104.4Total underlying collateral
    assets(2)

$
4,763.0


$
4,515.6   (1)
    Includes undrawn liability amounts.(2)
    At June 30, 2008, and December 31, 2007, the total
    face value of defaulted obligations was $85.0 million and
    $18.4 million, respectively, or approximately 1.8% and
    0.4%, respectively, of the total underlying collateral assets.  third-party
  Ciena Capital LLC.
   82




---



##### 



($ in millions)

2008


2007Interest income on Class A equity interests

$



$
Fees and other income






2.8Total interest and related portfolio income

$



$
2.8          83




---



##### 



Mercury Air Centers, Inc.
 84




---



##### 



($ in millions)

2007Interest income

$
4.1Fees and other income


0.2Total interest and related portfolio income

$
4.3     Commercial Real
    Estate Finance
    At and for theAt and for the


At and for the


Year EndedThree Months Ended June 30,


Six Months Ended June 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

$
47.4



7.8%


$
68.7



6.6%


$
47.4



7.8%


$
68.7



6.6%


$
65.4



6.8
%Real estate owned


27.2







20.4







27.2







20.4







21.3Equity interests


32.2







33.7







32.2







33.7







34.5Total portfolio

$
106.8






$
122.8






$
106.8






$
122.8






$
121.2Investments funded

$
1.7






$
15.3






$
2.2






$
15.4






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

$







$
0.2






$
0.2






$
0.4






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

$
8.3






$
18.0






$
16.7






$
18.4






$
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
   85




---



##### 



Unitranche Fund LLC.
    Allied Capital Senior Debt Fund,
    L.P.
     86




---



##### 



Knightsbridge CLO
    2007-1
    Ltd. 2007-1
      Knightsbridge CLO
    2008-1
    Ltd. 2008-1
    AGILE Fund I, LLC.
         87




---



##### 



PORTFOLIO ASSET
    QUALITY
  Portfolio by Grade.
    2008


2007Portfolio

Percentage of


Portfolio

Percentage ofGrade

at Value

Total Portfolio


at Value

Total Portfolio($ in millions)1

$
988.0


22.0
%

$
1,539.6


32.2
%2


3,161.0


70.3



2,915.7


61.03


270.7


6.0



122.5


2.64


31.0


0.7



157.2


3.35


46.9


1.0



45.5


0.9$
4,497.6


100.0
%

$
4,780.5


100.0
%       Loans and Debt Securities on Non-Accrual
    Status.
 88




---



##### 



($ in millions)

2008


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

$
33.0



$114.1Companies 5% to 25% owned


0.9



11.7Companies less than 5% owned


24.0



23.8Commercial real estate finance


6.0



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


37.2



21.4Companies 5% to 25% owned


7.0



13.4Companies less than 5% owned






13.3Commercial real estate finance


1.5



1.9Total

$
109.6



$212.0Percentage of total portfolio


2.4
%


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


$22.2



$139.9Commercial mortgage loans


1.5



9.2Total


$23.7



$149.1Percentage of total portfolio


0.5
%


3.1
%   non-accrual
  and
  PORTFOLIO
    RETURNS
   89




---



##### 



OTHER ASSETS AND
    OTHER LIABILITIES
     90




---



##### 



RESULTS OF
    OPERATIONS
  Comparison of the
    Three and Six Months Ended June 30, 2008 and 2007
    For the Three Months Ended June 30,


For the Six Months Ended June 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

$
119,212


$
102,814


$
16,398



16
%

$
253,872


$
204,797


$
49,075



24
%Fees and other income


15,366



14,862



504



3
%


25,650



20,831



4,819



23
%Total interest and related portfolio income


134,578



117,676



16,902



14
%


279,522



225,628



53,894



24
%Expenses:Interest


36,465



34,336



2,129



6
%


74,025



64,624



9,401



15
%Employee


13,344



28,611



(15,267)



(53)
%


35,996



50,539



(14,543)



(29)
%Employee stock options


3,859



9,519



(5,660)



(59)
%


8,054



13,180



(5,126)



(39)
%Administrative


12,943



14,505



(1,562)



(11)
%


21,962



27,729



(5,767)



(21)
%Total operating expenses


66,611



86,971



(20,360)



(23)
%


140,037



156,072



(16,035)



(10)
%Net investment income before income taxes


67,967



30,705



37,262



121
%


139,485



69,556



69,929



101
%Income tax expense (benefit), including excise tax


4,112



5,530



(1,418)



(26)
%


6,081



4,881



1,200



25
%Net investment income


63,855



25,175



38,680



154
%


133,404



64,675



68,729



106
%Net Realized and Unrealized Gains (Losses):Net realized gains (losses)


(17,855)



74,879



(92,734)




*


(14,712)



102,545



(117,257)




*Net change in unrealized appreciation or depreciation


(148,203)



(10,896)



(137,307)




*


(261,607)



55,024



(316,631)




*Total net gains (losses)


(166,058)



63,983



(230,041)




*


(276,319)



157,569



(433,888)




*Net income (loss)

$
(102,203)


$
89,158


$
(191,361)



(215)
%

$
(142,915)


$
222,244


$
(365,159)



(164)
%Diluted earnings (loss) per common share

$
(0.59)


$
0.57


$
(1.16)



(204)
%

$
(0.85)


$
1.44


$
(2.29)



(159)
%Weighted average common shares outstanding  diluted


172,968



156,051



16,917



11
%


167,238



154,446



12,792



8
%   *
    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. 91




---



##### 



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

For the SixMonths Ended

Months EndedJune 30,

June 30,($ in millions)

2008

2007

2008

2007InterestPrivate finance loans and debt securities

$
108.0

$
93.5

$
215.0

$
186.4Preferred shares/income notes of CLOs


7.9


3.4


15.5


7.1Subordinated certificates in Unitranche Fund LLC


1.4





1.6


Commercial mortgage loans


1.0


2.5


2.2


3.8Cash, U.S. Treasury bills, money market and other securities


0.7


3.4


2.5


6.2Total interest


119.0


102.8


236.8


203.5Dividends


0.2





17.1


1.3Total interest and dividends

$
119.2

$
102.8

$
253.9

$
204.8     2008


2007($ in millions)

Value

Yield(1)


Value

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

$330.9


6.4
%

$335.2


7.4
%Unitranche debt

627.6


12.2
%

681.4


11.4
%Subordinated debt

2,292.0


13.7
%

1,966.8


12.5
%Equity securities:Preferred shares/ income notes of CLOs

232.6


16.0
%

111.3


14.0
%Subordinated certificates in Unitranche Fund LLC

94.6


10.2
%




Commercial real estate:Commercial mortgage loans

47.4


7.8
%

68.7


6.6
%Total interest-bearing investments

$3,625.1


12.7
%

$3,163.4


11.6
%   (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.
   92




---



##### 



Fees and Other Income.
   For the Three Months Ended June 30,


For the Six Months Ended June 30,($ in millions)

2008


2007


2008


2007Structuring and diligence


$8.4



$6.2



$13.5



$7.9Management, consulting and other services provided to portfolio
    companies


3.1



2.3



6.0



4.1Commitment, guaranty and other fees from portfolio
    companies(1)


1.9



2.9



3.6



5.0Fund management
    fees(2)


1.6







2.2



Loan prepayment premiums


0.3



3.4



0.3



3.6Other income


0.1



0.1



0.1



0.2Total fees and other income


$15.4



$14.9



$25.7



$20.8   (1)
    Commitment, guaranty and other fees from portfolio companies for
    the three and six months ended June 30, 2007, included
    guaranty and other fees from Ciena of $1.3 million and
    $2.8 million, respectively. See  Private
    Finance, Ciena Capital, LLC above.(2)
    See Portfolio and Investment Activity  Managed
    Funds above.   93




---



##### 



Operating Expenses.
  Interest Expense.
  At and for the Three Months Ended June 30,


At and for the Six Months Ended June 30,($ in millions)

2008


2007


2008


2007Total outstanding debt

$
2,043.3


$
1,921.8


$
2,043.3


$
1,921.8Average outstanding debt

$
2,042.9


$
1,965.3


$
2,126.2


$
1,903.6Weighted average
    cost(1)


6.9%



6.6%



6.9%



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 June 30,


For the Six Months Ended June 30,($ in millions)

2008


2007


2008


2007Salaries and employee benefits

$
8.5


$
21.2


$
31.2


$
42.6Individual performance award (IPA)


2.2



2.4



4.6



4.9IPA mark to market expense (benefit)






2.4



(4.1
)


(1.6
)Individual performance bonus (IPB)


2.6



2.6



4.3



4.6Total employee
    expense(1)

$
13.3


$
28.6


$
36.0


$
50.5Number of employees at end of period


183



173



183



173   (1)
    Excludes stock options expense. See below. 94




---



##### 



95




---



##### 



Stock Options Expense. Share-Based Payment
     For the Three Months Ended June 30,


For the Six Months Ended June 30,($ in millions)

2008


2007


2008


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

$
2.1


$
3.3


$
3.9


$
6.5Options granted on or after January 1, 2006


1.8



6.2



4.2



6.7Total employee stock option expense

$
3.9


$
9.5


$
8.1


$
13.2       Administrative Expense.
   96




---



##### 



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


For the Six Months Ended June 30,($ in millions)

2008


2007


2008


2007Income tax expense (benefit)

$
2.2


$
1.5


$
1.9


$
(2.7
)Excise tax
    expense(1)


1.9



4.0



4.2



7.6Income tax expense (benefit), including excise tax

$
4.1


$
5.5


$
6.1


$
4.9    (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 June 30,


For the Six Months Ended June 30,($ in millions)

2008


2007


2008


2007Realized gains

$
5.0


$
87.4


$
37.7


$
120.6Realized losses


(22.9
)


(12.5
)


(52.4
)


(18.1
)Net realized gains (losses)

$
(17.9
)

$
74.9


$
(14.7
)

$
102.5    97




---



##### 



For the SixMonths EndedFor the Three Months Ended June 30,


June 30,($ in millions)

2008


2007


2008


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

$
(2.2
)

$
(55.0
)

$
(34.7
)

$
(85.9
)Reversal of previously recorded net unrealized appreciation
    associated with dividends received










(13.5
)


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


16.9



16.6



45.4



22.3Total reversal

$
14.7


$
(38.4
)

$
(2.8
)

$
(64.7
)     ($ in
    millions)
 2008Portfolio Company

AmountPrivate Finance:Mercury Air Centers, Inc.


$2.6MedAssets, Inc.


1.3Havco Wood Products LLC


0.7Other


0.3Total private finance


4.9Commercial Real Estate:Other


0.1Total commercial real estate


0.1Total realized gains


$5.0   2007Portfolio Company

AmountPrivate Finance:HMT, Inc.

$
39.9Healthy Pet Corp.


36.6Wear Me Apparel Corporation


6.1Advantage Sales & Marketing, Inc.


3.1Geotrace Technologies, Inc.


1.1Other


0.6Total realized gains

$
87.4


($ in
    millions)
 2008Portfolio Company

AmountPrivate Finance:Creative Group, Inc.


$15.5Walker Investment Fund II, LLLP


1.3Other


4.0Total private finance


20.8Commercial Real Estate:Other


2.1Total commercial real estate


2.1Total realized losses


$22.9   2007Portfolio Company

AmountPrivate Finance:Powell Plant Farms, Inc.

$
11.5Alaris Consulting, LLC


1.0Total realized losses

$
12.5   98




---



##### 



($ in
    million)
 2008Portfolio Company

AmountPrivate Finance:Norwesco, Inc.

$
10.7BenefitMall, Inc.


4.9Advantage Sales & Marketing,
    Inc.(1)


3.4Financial Pacific Company


3.1Mercury Air Centers, Inc.


2.6Service Champ, Inc.


1.7Penn Detroit Diesel Allison, LLC


1.4Coverall North America, Inc.


1.4MedAssets, Inc.


1.3CR Holding, Inc.


1.0Other


5.9Total private finance


37.4Commercial Real Estate:Other


0.3Total commercial real estate


0.3Total realized gains

$
37.7   2007Portfolio Company

AmountPrivate Finance:HMT, Inc.

$39.9Healthy Pet Corp.

36.6Palm Coast Data, LLC

20.0Wear Me Apparel Corporation

6.1Mogas Energy, LLC

4.5Tradesmen International, Inc.

3.8ForeSite Towers, LLC

3.8Advantage Sales & Marketing, Inc.

3.1Geotrace Technologies, Inc.

1.1Other

1.7Total realized gains

$120.6     (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:Creative Group, Inc.

$
15.5Crescent 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.


1.3Other


8.2Total private finance


49.9Commercial Real Estate:Other


2.5Total commercial real estate


2.5Total realized losses

$
52.4   2007Portfolio Company

AmountPrivate Finance:Powell Plant Farms, Inc.

$11.5Legacy Partners Group, LLC

5.8Alaris Consulting, LLC

1.0Other

(0.2)Total realized losses

$18.1   Change in Unrealized Appreciation or
    Depreciation.
 99




---



##### 



Fair Value Measurements
        Valuation Methodology.
   100




---



##### 



101




---



##### 



and/or security-by-security
          2008


2007Q1


Q2


Q1


Q2Number of private finance portfolio companies reviewed


124



119



88



92Percentage of private finance portfolio reviewed at value


94.0
%


94.9
%


91.8
%


92.1
%    102




---



##### 



Net Change in Unrealized Appreciation or
    Depreciation.
  For the Three


For the SixMonths Ended


Months EndedJune 30,


June 30,($ in millions)

2008(1)


2007(1)


2008(1)


2007(1)Net unrealized appreciation (depreciation)

$
(162.9
)

$
27.5


$
(258.8
)

$
119.7Reversal of previously recorded unrealized appreciation
    associated with realized gains


(2.2
)


(55.0
)


(34.7
)


(85.9
)Reversal of previously recorded net unrealized appreciation
    associated with dividends received










(13.5
)


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


16.9



16.6



45.4



22.3Net change in unrealized appreciation or depreciation

$
(148.2
)

$
(10.9
)

$
(261.6
)

$
55.0   (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.    Valuation of Ciena Capital LLC.
       103




---



##### 



Per Share Amounts.
  OTHER
    MATTERS
  Regulated Investment Company Status.
        DIVIDENDS AND
    DISTRIBUTIONS
   104




---



##### 



105




---



##### 



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

2008


2007Cash, U.S. Treasury bills and investments in money market and
    other securities (including U.S. Treasury bills, money
    market and other securities: 2008-$100.1; 2007-$201.2)

$
228.8


$
204.8Total assets

$
4,937.7


$
5,214.6Total debt outstanding

$
2,043.3


$
2,289.5Total shareholders equity

$
2,845.8


$
2,771.8Debt to equity ratio


0.72



0.83Asset coverage
    ratio(1)


239
%


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

$
197.3


$
122.8Add: portfolio investments funded


594.0



659.1Total cash provided by operating activities before new
    investments

$
791.3


$
781.9    106




---



##### 



2008


2007($ in millions)

Value


Yield


Value


YieldU.S. Treasury
    bills(1)

$
100.0



1.6
%






Money market securities










201.2



4.6
%Cash


128.8



1.2
%


3.6



2.9
%Total

$
228.8



1.4
%

$
204.8



4.6
%   (1)
    The Treasury bills matured in July 2008. We reinvested the
    proceeds from the matured Treasury bills in short-term Treasury
    bills.           107




---



##### 



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

$
1,082.8


$
1,082.8



6.5%


$
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


1,962.8



1,962.8



6.6%



1,922.2



1,922.2



6.4%Revolving line of credit


632.5



80.5



4.4%
(2)


922.5



367.3



5.9%
(2)Total debt

$
2,595.3


$
2,043.3



6.9%
(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
    $7.2 million and $3.7 million at June 30, 2008,
    and December 31, 2007, respectively.(3)
    The annual interest cost for total debt includes the annual cost
    of commitment fees and the amortization of debt financing costs
    on the revolving line of credit and other facility fees
    regardless of the amount outstanding on the facility as of the
    balance sheet date. The annual interest cost reflects the
    facilities in place on the balance sheet date.  Privately Issued Unsecured
    Notes Payable.
        Publicly Issued Unsecured Notes
    Payable.
  ($ 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    108




---



##### 



Revolving Line of Credit.
    Debt Covenants.
    Contractual Obligations.
  Payments Due By YearAfter($ in millions)

Total


2008


2009


2010


2011


2012


2012Unsecured notes payable

$
1,962.8


$



$
270.3


$
408.0


$
472.5


$
339.0


$
473.0Revolving line of
    credit(1)


80.5















80.5







Operating leases


18.0



2.2



4.6



4.5



1.8



1.8



3.1Total contractual obligations

$
2,061.3


$
2.2


$
274.9


$
412.5


$
554.8


$
340.8


$
476.1    (1)
    At June 30, 2008, $426.8 million remained unused and
    available on the revolving line of credit, net of amounts
    committed for standby letters of credit of $125.2 million
    issued under the credit facility. 109




---



##### 



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

Total


2008


2009


2010


2011


2012


2012Guarantees

$
344.4


$
0.3


$
338.8


$



$
4.4


$
0.1


$
0.8Standby letters of
    credit(1)


125.2



1.0



0.7







123.5







Total
    commitments(2)

$
469.6


$
1.3


$
339.5


$



$
127.9


$
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)
    Our most significant commitments relate to our investment in
    Ciena Capital LLC (Ciena). At June 30, 2008, the principal
    components of these guarantees included a guarantee of 100% of
    the outstanding total obligations on Cienas revolving line
    of credit, which matures in March 2009, for a total guaranteed
    amount of $336.3 million. At June 30, 2008, the
    estimated net realizable value of Cienas assets exceeded
    the amount outstanding on this revolving line of credit. If the
    estimated net realizable value of Cienas assets were to
    fall below the amount outstanding on Cienas revolving line
    of credit, we would be required to record a liability for the
    amount that the revolving line of credit exceeds the net
    realizable value of Cienas assets. At June 30, 2008,
    we also had standby letters of credit issued totaling
    $104.1 million in connection with term securitizations
    completed by Ciena. We considered the outstanding letters of
    credit in our valuation at June 30, 2008. See
     Private Finance, Ciena Capital LLC and
    Results of Operations  Change in Unrealized
    Appreciation or Depreciation above for further discussion.    CRITICAL
    ACCOUNTING POLICIES
    Valuation of Portfolio
    Investments. Fair Value Measurements
 110




---



##### 



and/or
 111




---



##### 



security-by-security
      Net Realized Gains or Losses and Net Change in Unrealized
    Appreciation or Depreciation.
  Interest and Dividend Income.
        Fee Income.
 112




---



##### 



Federal and State Income Taxes and Excise
    Tax.
      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
   113




---



##### 



PART II.
    OTHER INFORMATION Item 1.  Legal
    Proceedings          Rule 10b-5
 114




---



##### 



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.
  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.
   115




---



##### 



Fair Value
    Measurements
  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.
 116




---



##### 



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.
        We borrow money, which magnifies the potential for gain or
    loss on amounts invested and may increase the risk of investing
    in us.
 117




---



##### 



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.
  Loss of regulated investment company tax treatment would
    substantially reduce net assets and income available for debt
    service and dividends.
 118




---



##### 



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.
    We operate in a competitive market for investment
    opportunities.
 119




---



##### 



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.
  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.
 120




---



##### 



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;
    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.
  
    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.
 121




---



##### 



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    1.
    Election of Directors: Shareholders elected five directors of
    the Company, who will serve for three years, or until their
    successors are elected and qualified. This item was approved.
    Votes were cast as follows:  For


WithheldJohn D. Firestone


141,883,634



4,879,178Anthony T. Garcia


141,530,810



5,232,002Lawrence I. Hebert


142,280,390



4,482,422Marc F. Racicot


141,585,302



5,177,570Laura W. van Roijen


142,111,179



4,651,633     2.
    Ratification of the selection of KPMG LLP to serve as
    independent registered public accounting firm for the year
    ending December 31, 2008. This item was approved. Votes
    were cast as follows:  For

Against

Abstain143,025,170



2,271,943



1,465,699   3.
    Approval to authorize the Company, with the approval of its
    Board of Directors, to sell shares of its common stock below the
    Companys then current net asset value per share in one or
    more offerings.  Broker non-votes have the effect of a vote
    against this proposal. Therefore, this item was not approved.
    Votes were cast as follows:  For

Against

Abstain

Broker Non-Votes74,801,131



23,032,952



3,037,160



46,482,272  Item 5.  Other
    Information   122




---



##### 



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 July 30, 2007).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). 123




---



##### 



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).10.20(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). 124




---



##### 



ExhibitNumber

Description10.21(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.)10.38(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, 2004.10.39

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). 125




---



##### 



ExhibitNumber

Description10.40*

First Omnibus Waiver and Amendment to the Note Agreements, dated
    as of July 25, 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 1934.32.1*

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.     *
    Filed herewith. 126




---



##### 





SIGNATURES       Dated: August 8, 2008

/s/  William
    L. WaltonWilliam
    L. Walton
    Chairman and Chief Executive Officer/s/  Penni
    F. RollPenni
    F. Roll
    Chief Financial Officer  127




---



##### 



EXHIBIT
    INDEX
  ExhibitNumber

Description10
.38(b)

First Waiver and Second Amendment dated as of July 25,
    2008, to the Note Agreement dated as of March 25, 2004.10
.40

First Omnibus Waiver and Amendment to the Note Agreements, dated
    as of July 25, 2008.15


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 1934.32
.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.  128