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 March 31,
    2009
  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
  Regulation S-T o o
  Rule 12b-2
  Large
    accelerated
    filer x
    Accelerated
    filer o
    Non-accelerated
    filer o
    Smaller
    reporting
    company o   o x




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##### 





ALLIED
    CAPITAL CORPORATION
  FORM 10-Q TABLE OF CONTENTS
  PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheet as of March 31,
    2009 (unaudited) and
    December 31, 2008

1Consolidated Statement of Operations (unaudited)
     For the Three Months Ended March 31, 2009 and
    2008

2Consolidated Statement of Changes in Net Assets
    (unaudited)  For the Three Months Ended March 31,
    2009 and 2008

3Consolidated Statement of Cash Flows (unaudited)
     For the Three Months Ended March 31, 2009 and
    2008

4Consolidated Statement of Investments as of
    March 31, 2009
    (unaudited)

5Consolidated Statement of Investments as of
    December 31, 2008

19Notes to Consolidated Financial Statements

33Report of Independent Registered Public
    Accounting Firm

65Item 2. Managements Discussion
    and Analysis of Financial Condition and Results of Operations

69Item 3. Quantitative and Qualitative
    Disclosures About Market Risk

101Item 4. Controls and Procedures

102PART II. OTHER INFORMATIONItem 1. Legal Proceedings

103Item 1A. Risk Factors

104Item 2. Unregistered Sales of Equity
    Securities and Use of Proceeds

113Item 3. Defaults Upon Senior
    Securities

113Item 4. Submission of Matters to a Vote
    of Security Holders

113Item 5. Other Information

113Item 6. Exhibits

114Signatures

119




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##### 



PART I:
    FINANCIAL INFORMATION Item
    1.  Financial Statements  ALLIED
    CAPITAL CORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEET
  March 31,


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

2009


2008(unaudited)ASSETSPortfolio at value:Private financeCompanies more than 25% owned (cost:
    2009-$2,147,724;
    2008-$2,167,020)

$
1,039,191


$
1,187,722Companies 5% to 25% owned (cost:
    2009-$267,235;
    2008-$392,516)


196,460



352,760Companies less than 5% owned (cost:
    2009-$2,234,718;
    2008-$2,317,856)


1,594,387



1,858,581Total private finance (cost:
    2009-$4,649,677;
    2008-$4,877,392)


2,830,038



3,399,063Commercial real estate finance (cost:
    2009-$82,341;
    2008-$85,503)


79,030



93,887Total portfolio at value (cost:
    2009-$4,732,018;
    2008-$4,962,895)


2,909,068



3,492,950Accrued interest and dividends receivable


52,347



55,638Other assets


135,939



122,909Investments in money market and other securities


5



287Cash


290,227



50,402Total assets

$
3,387,586


$
3,722,186LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Notes payable (maturing within one year:
    2009-$1,015,000;
    2008-$1,015,000)

$
1,892,500


$
1,895,000Revolving line of credit


50,000



50,000Accounts payable and other liabilities


75,333



58,786Total liabilities


2,017,833



2,003,786Commitments and contingenciesShareholders equity:Common stock, $0.0001 par value, 400,000 shares authorized;
    178,692 shares issued and outstanding at March 31, 2009,
    and December 31, 2008


18



18Additional paid-in capital


3,036,236



3,037,845Notes receivable from sale of common stock


(457
)


(1,089
)Net unrealized appreciation (depreciation)


(1,853,159
)


(1,503,089
)Undistributed earnings


187,115



184,715Total shareholders equity


1,369,753



1,718,400Total liabilities and shareholders equity

$
3,387,586


$
3,722,186Net asset value per common share

$
7.67


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




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##### 



ALLIED
    CAPITAL CORPORATION AND SUBSIDIARIES
  CONSOLIDATED
    STATEMENT OF OPERATIONS
  For the ThreeMonths EndedMarch 31,(in thousands, except per share
    amounts)

2009


2008(unaudited)Interest and Related Portfolio Income:Interest and dividendsCompanies more than 25% owned

$
25,353


$
28,624Companies 5% to 25% owned


11,136



12,674Companies less than 5% owned


52,241



93,362Total interest and dividends


88,730



134,660Fees and other incomeCompanies more than 25% owned


5,276



5,465Companies 5% to 25% owned


17



53Companies less than 5% owned


1,159



4,766Total fees and other income


6,452



10,284Total interest and related portfolio income


95,182



144,944Expenses:Interest


43,485



37,560Employee


11,070



22,652Employee stock options


773



4,195Administrative


9,845



9,019Impairment of long-lived asset


2,873



Total operating expenses


68,046



73,426Gain on repurchase of debt


1,995



Net investment income before income taxes


29,131



71,518Income tax expense (benefit), including excise tax


(378
)


1,969Net investment income


29,509



69,549Net Realized and Unrealized Gains (Losses):Net realized gains (losses)Companies more than 25% owned


(4,050
)


(303
)Companies 5% to 25% owned


(30,095
)


1,243Companies less than 5% owned


7,036



2,203Total net realized gains (losses)


(27,109
)


3,143Net change in unrealized appreciation or depreciation


(350,070
)


(113,404
)Total net gains (losses)


(377,179
)


(110,261
)Net increase (decrease) in net assets resulting from operations

$
(347,670
)

$
(40,712
)Basic earnings (loss) per common share

$
(1.95
)

$
(0.25
)Diluted earnings (loss) per common share

$
(1.95
)

$
(0.25
)Weighted average common shares outstanding  basic


178,692



161,507Weighted average common shares outstanding  diluted


178,692



161,507   The accompanying notes are an
    integral part of these consolidated financial statements.
 2




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##### 



ALLIED
    CAPITAL CORPORATION AND SUBSIDIARIES
  CONSOLIDATED STATEMENT OF CHANGES IN NET
    ASSETS
  For the Three MonthsEnded March 31,(in thousands, except per share
    amounts)

2009


2008(unaudited)Operations:Net investment income

$
29,509


$
69,549Net realized gains (losses)


(27,109
)


3,143Net change in unrealized appreciation or depreciation


(350,070
)


(113,404
)Net increase (decrease) in net assets resulting from operations


(347,670
)


(40,712
)Shareholder distributions:Common stock dividends






(108,081
)Net decrease in net assets resulting from shareholder
    distributions






(108,081
)Capital share transactions:Sale of common stock






170,883Issuance of common stock in lieu of cash distributions






3,751Stock option expense


773



4,195Net decrease in notes receivable from sale of common stock


632



143Purchase of common stock held in deferred compensation trusts






(943
)Distribution of common stock held in deferred compensation trusts






27,335Other


(2,382
)


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


(977
)


205,364Total increase (decrease) in net assets


(348,647
)


56,571Net assets at beginning of period


1,718,400



2,771,847Net assets at end of period

$
1,369,753


$
2,828,418Net asset value per common share

$
7.67


$
16.99Common shares outstanding at end of period


178,692



166,472   The accompanying notes are an
    integral part of these consolidated financial statements.
 3




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##### 






ALLIED
    CAPITAL CORPORATION AND SUBSIDIARIES
  CONSOLIDATED
    STATEMENT OF CASH FLOWS
  For the Three MonthsEnded March 31,(in thousands)

2009


2008(unaudited)Cash flows from operating activities:Net increase (decrease) in net assets resulting from operations

$
(347,670
)

$
(40,712
)Adjustments:Portfolio investments


(39,917
)


(275,130
)Principal collections related to investment repayments or sales


109,524



264,777Collections of notes and other consideration received from sale
    of investments


132,246



4,901Realized gains from the receipt of notes and other consideration
    from sale of investments


(4,058
)


(5,466
)Realized losses


39,874



29,597Payment-in-kind interest and dividends, net of cash collections


(7,659
)


(13,392
)Change in accrued interest and dividends


1,554



(2,280
)Net collection (amortization) of discounts and fees


(4,697
)


(3,748
)Redemption of (investments in) U.S. Treasury bills, money market
    and other securities


282



80,834Stock option expense


773



4,195Impairment of long-lived asset


2,873



Changes in other assets and liabilities


8,498



(46,218
)Depreciation and amortization


398



528Gain on repurchase of debt


(1,995
)


Net change in unrealized (appreciation) or depreciation


350,070



113,404Net cash provided by operating activities


240,096



111,290Cash flows from financing activities:Sale of common stock






170,883Collections of notes receivable from sale of common stock


258



143Repurchase of notes payable


(529
)


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






(98,500
)Purchase of common stock held in deferred compensation trusts






(943
)Other financing activities






(916
)Common stock dividends and distributions paid






(104,330
)Net cash provided by (used in) financing activities


(271
)


(33,663
)Net increase (decrease) in cash


239,825



77,627Cash at beginning of period


50,402



3,540Cash at end of period

$
290,227


$
81,167   The accompanying notes are an
    integral part of these consolidated financial statements.
 4




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##### 



ALLIED
    CAPITAL CORPORATION AND SUBSIDIARIES
  CONSOLIDATED
    STATEMENT OF INVESTMENTS
  Private Finance



March 31, 2009Portfolio Company



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

Investment(1)(2)

Principal


Cost


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

Equity Interests





$
679


$
416(Private Equity Fund)

Total Investment






679



416AllBridge Financial, LLC

Equity Interests






34,967



11,071(Asset Management)

Total Investment






34,967



11,071Standby Letter of Credit ($15,000)Allied Capital Senior Debt Fund,
    L.P.(5)

Equity Interests (See Note 3)






31,800



32,877(Private Debt Fund)

Total Investment






31,800



32,877Avborne,
    Inc.(7)

Preferred Stock (12,500 shares)










938(Business Services)

Common Stock (27,500 shares)










Total Investment










938Avborne Heavy Maintenance,
    Inc.(7)

Common Stock (2,750 shares)










660(Business Services)

Total Investment



660Aviation Properties Corporation

Common Stock (100 shares)






93



(Business Services)

Total Investment






93



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

Senior Loan (12.8%, Due 3/12)

$
33,900



27,962



33,900(Consumer Products)

Preferred Stock (100,000 shares)






12,721



9,215Common Stock (260,467 shares)






3,847



Total Investment






44,530



43,115Calder Capital Partners,
    LLC(5)

Senior Loan (10.5%, Due
    5/09)(6)


4,496



4,496



881(Asset Management)

Equity Interests






2,453



Total Investment






6,949



881Callidus Capital Corporation

Subordinated Debt (18.0%, Due 8/13)


16,203



16,203



16,203(Asset Management)

Common Stock (100 shares)










27,705Total Investment






16,203



43,908Guaranty ($6,447)  (1)

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

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

Non-registered investment company.(6)

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

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




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



March 31, 2009Portfolio Company



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

Investment(1)(2)

Principal


Cost


ValueCiena Capital LLC

Senior Loan (5.5%,
    Due 3/09)(6)

$
319,031


$
319,031


$
64,088(Financial Services)

Class B Equity Interests






119,436



Class C Equity Interests






112,601



Total Investment






551,068



64,088Guaranty ($5,000  See Note 3)Standby Letters of Credit ($94,100  
      See Note 3)CitiPostal Inc.

Senior Loan (4.0%, Due 12/13)


692



682



682(Business Services)

Unitranche Debt (12.0%, Due 12/13)


51,892



51,692



51,692Subordinated Debt (16.0%, Due 12/15)


9,491



9,491



9,491Common Stock (37,024 shares)






12,726



Total Investment






74,591



61,865Coverall North America, Inc.

Unitranche Debt (12.0%, Due 7/11)


32,035



31,956



31,956(Business Services)

Subordinated Debt (15.0%, Due 7/11)


5,563



5,550



5,550Common Stock (763,333 shares)






14,362



19,011Total Investment






51,868



56,517CR Holding, Inc.

Subordinated Debt (16.6%, Due
    2/13)(6)


39,307



39,193



9,992(Consumer Products)

Common Stock (32,090,696 shares)






28,744



Total Investment






67,937



9,992Crescent Equity
    Corp.(8)

Senior Loan (10.0%, Due 1/09)


433



433



433(Business Services)

Subordinated Debt (11.0%, Due 6/17)


2,092



2,084



Subordinated Debt (12.0%, Due
    12/10  6/17)(6)


30,276



30,194



6,213Common Stock (174 shares)






82,596



39Total Investment






115,307



6,685Guaranty ($900)Direct Capital Corporation

Senior Loan (8.0%, Due
    1/14)(6)


8,175



8,175



8,240(Financial Services)

Subordinated Debt (16.0%, Due
    3/13)(6)


55,671



55,496



12,390Common Stock (2,317,020 shares)






25,732



Total Investment






89,403



20,630Financial Pacific Company

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


68,967



68,850



57,562(Financial Services)

Preferred Stock (9,458 shares)






8,865



Common Stock (12,711 shares)






12,783



Total Investment






90,498



57,562  (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)

Crescent Equity Corp. holds investments in Crescent
    Hotels & Resorts, LLC and affiliates.   The accompanying notes are an
    integral part of these consolidated financial statements.
 6




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##### 



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



March 31, 2009Portfolio Company



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

Investment(1)(2)

Principal


Cost


ValueForeSite Towers, LLC

Equity Interest





$



$
895(Tower Leasing)

Total Investment










895Global Communications, LLC

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

$
1,335



1,335



1,335(Business Services)

Total Investment






1,335



1,335Hot Light Brands, Inc.

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


30,572



30,572



13,443(Retail)

Common Stock (93,500 shares)






5,151



Total Investment






35,723



13,443Standby Letter of Credit ($70)Hot Stuff Foods, LLC

Senior Loan (4.0%, Due 2/11-2/12)


52,387



52,257



50,112(Consumer Products)

Subordinated Debt (12.5%, Due
    8/12-2/13)(6)


83,692



83,387



Common Stock (1,147,453 shares)






56,187



Total Investment






191,831



50,112Huddle House, Inc.

Subordinated Debt (15.0%, Due 12/12)


57,683



57,517



57,517(Retail)

Common Stock (358,428 shares)






35,828



17,455Total Investment






93,345



74,972IAT 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



9,078(Industrial Products)

Total Investment






13,500



15,078Impact Innovations Group, LLC

Equity Interests in Affiliate










322(Business Services)

Total Investment










322Insight Pharmaceuticals Corporation

Subordinated Debt (15.0%, Due 9/12)


46,064



45,982



46,064(Consumer Products)

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


16,775



16,724



17,532Preferred Stock (25,000 shares)






25,000



5,458Common Stock (620,000 shares)






6,325



Total Investment






94,031



69,054Jakel, Inc.

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


748



748



374(Industrial Products)

Total Investment






748



374Knightsbridge CLO 2007-1
    Ltd.(4)

Class E Notes (10.4%, Due 1/22)


18,700



18,700



14,984(CLO)

Income Notes
    (0.0%)(11)






41,747



20,431Total Investment






60,447



35,415  (1)

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

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

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

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

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




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##### 



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



March 31, 2009Portfolio Company



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

Investment(1)(2)

Principal


Cost


ValueKnightsbridge CLO
    2008-1
    Ltd.(4)

Class C Notes (8.8%, Due 6/18)

$
12,800


$
12,800


$
12,181(CLO)

Class D Notes (9.8%, Due 6/18)


8,000



8,000



7,046Class E Notes (6.3%, Due 6/18)


13,200



10,635



9,195Income Notes
    (20.6%)(11)






20,876



19,468Total Investment






52,311



47,890MHF Logistical Solutions, Inc.

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


49,841



49,633



(Business Services)

Preferred Stock (10,000 shares)










Common Stock (20,934 shares)






20,942



Total Investment






70,575



MVL Group, Inc.

Senior Loan (12.0%, Due 6/09  7/09)


30,170



30,164



30,164(Business Services)

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


41,337



41,296



31,956Subordinated Debt (3.0%, Due
    6/09)(6)


144



139



Common Stock (560,716 shares)






555



Total Investment






72,154



62,120Penn Detroit Diesel Allison, LLC

Subordinated Debt (15.5%, Due 8/13)


38,269



38,160



38,160(Business Services)

Equity Interests






18,873



20,191Total Investment






57,033



58,351Service Champ, Inc.

Subordinated Debt (15.5%, Due 4/12)


27,223



27,162



27,162(Business Services)

Common Stock (55,112 shares)






11,785



22,829Total Investment






38,947



49,991Stag-Parkway, Inc.

Subordinated Debt (10.0%, Due 7/12)


18,574



18,524



18,524(Business Services)

Common Stock (25,000 shares)






32,686



5,581Total Investment






51,210



24,105Startec Equity, LLC

Equity Interests






211



7(Telecommunications)

Total Investment






211



7Unitranche Fund LLC

Subordinated Certificates (9.1%)






124,521



124,521(Private Debt Fund)

Equity Interests






1



1Total Investment






124,522



124,522Worldwide Express Operations, LLC

Subordinated Debt (14.0%, Due
    2/14)(6)


2,823



2,680



(Business Services)

Equity Interests






11,084



Warrants






144



Total Investment






13,908



Total
    companies more than 25% owned





$
2,147,724


$
1,039,191  (1)

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

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

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

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

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




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##### 



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



March 31, 2009Portfolio 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)

$
21,657


$
21,552


$
21,657(Business Services)

Equity Interests






422



511Option






25



25Total Investment






21,999



22,193Air Medical Group Holdings LLC

Senior Loan (4.5%, Due 3/11)


2,220



2,190



2,078(Healthcare Services)

Equity Interests






2,993



12,100Total Investment






5,183



14,178Alpine ESP Holdings, Inc.

Preferred Stock (701 shares)






701



(Business Services)

Common Stock (11,657 shares)






13



Total Investment






714



Amerex Group, LLC

Subordinated Debt (12.3%, Due 1/13)


8,789



8,785



8,785(Consumer Products)

Equity Interests






3,508



10,505Total Investment






12,293



19,290BB&T Capital Partners/Windsor

Equity Interests






11,789



10,832Mezzanine Fund,
    LLC(5)(Private Equity Fund)

Total Investment






11,789



10,832Drew Foam Companies, Inc.

Preferred Stock (622,555 shares)






623



434(Business Services)

Common Stock (6,286 shares)






6



Total Investment






629



434Driven Brands, Inc.

Subordinated Debt (16.5%, Due 7/15)


85,872



85,480



83,568(Consumer Services)

Common Stock (3,772,098 shares)






9,516



2,500Total Investment






94,996



86,068Hilden America, Inc.

Common Stock (19 shares)






454



(Consumer Products)

Total Investment






454



Lydall Transport, Ltd.

Equity Interests






432



364(Business Services)

Total Investment






432



364Multi-Ad Services, Inc.

Unitranche Debt (11.3%, Due 11/11)


2,524



2,503



2,471(Business Services)

Equity Interests






1,737



2,185Total Investment






4,240



4,656Pendum Acquisition, Inc.

Common Stock (8,872 shares)










(Business Services)

Total Investment










  (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



March 31, 2009Portfolio Company



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

Investment(1)(2)

Principal

Cost

ValuePostle Aluminum Company, LLC

Senior Loan (6.0%, Due
    10/12)(6)

$
35,000


$
34,876


$
13,634(Industrial Products)

Subordinated Debt (3.0%, Due
    10/12)(6)


23,953



23,868



Equity Interests






2,174



Total Investment






60,918



13,634Progressive International

Preferred Stock (500 shares)






500



1,147Corporation

Common Stock (197 shares)






13



3,700(Consumer Products)

Warrants










Total Investment






513



4,847Regency Healthcare Group, LLC

Senior Loan (11.1%, Due 6/12)


2,000



1,989



1,906(Healthcare Services)

Unitranche Debt (11.1%, Due 6/12)


10,901



10,869



10,522Equity Interests






1,302



1,955Total Investment






14,160



14,383SGT India Private
    Limited(4)

Common Stock (150,596 shares)






4,140



(Business Services)

Total Investment






4,140



Soteria Imaging Services, LLC

Subordinated Debt (11.3%, Due 11/10)


4,250



4,180



4,071(Healthcare Services)

Equity Interests






1,881



1,510Total Investment






6,061



5,581Triax Holdings, LLC

Subordinated Debt (21.0%, Due
    2/12)(6)


10,625



10,587



(Consumer Products)

Equity Interests






16,528



Total Investment






27,115



Universal Environmental Services, LLC

Equity Interests






1,599



(Business Services)

Total Investment






1,599



Total
    companies 5% to 25% owned





$
267,235


$
196,460Companies Less Than 5% Owned3SI Security Systems, Inc.

Subordinated Debt (14.0%, Due 8/13)

$
20,500


$
20,440


$
18,442Subordinated Debt (16.0%, Due
    8/13)(6)


9,048



9,030



3,189(Consumer Products)

Total Investment






29,470



21,631Abraxas Corporation

Subordinated Debt (14.6%, Due 4/13)


36,644



36,493



35,323(Business Services)

Total Investment






36,493



35,323Advantage Sales & Marketing, Inc.

Equity Interests










9,300(Business Services)

Total Investment










9,300Augusta Sportswear Group, Inc.

Subordinated Debt (13.0%, Due 1/15)


53,000



52,833



51,638(Consumer Products)

Common Stock (2,500 shares)






2,500



1,500Total Investment






55,333



53,138Axium Healthcare Pharmacy, Inc.

Senior Loan (14.0%, Due 12/12)


3,750



3,726



3,749(Healthcare Services)

Unitranche Debt (14.0%, Due 12/12)


8,500



8,472



8,477Common Stock (22,860 shares)






2,286



155Total Investment






14,484



12,381  (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



March 31, 2009Portfolio Company



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

Investment(1)(2)

Principal

Cost

ValueBaird Capital Partners IV
    Limited(5)

Limited Partnership Interest





$
3,636


$
2,828(Private Equity Fund)

Total Investment






3,636



2,828BenefitMall Holdings Inc.

Subordinated Debt (18.0%, Due 6/14)

$
40,326



40,242



40,242(Business Services)

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






39,274



79,523Warrants(12)










Total Investment






79,516



119,765Broadcast Electronics, Inc.

Senior Loan (8.8%, Due
    11/11)(6)


4,890



4,862



625(Business Services)

Preferred Stock (2,044 shares)










Total Investment






4,862



625Bushnell, Inc.

Subordinated Debt (7.7%, Due 2/14)


41,325



40,053



33,836(Consumer Products)

Total Investment






40,053



33,836Callidus Debt Partners

Class C Notes (12.9%, Due
    12/13)(6)


18,800



18,907



11,108CDO Fund I,
    Ltd.(4)(10)

Class D Notes (17.0%, Due
    12/13)(6)


9,400



9,454



(CDO)Total Investment






28,361



11,108Callidus Debt Partners

Preferred Shares (23,600,000 shares)






20,138



6,360CLO Fund III,
    Ltd.(4)(10)(CLO)

Total Investment






20,138



6,360Callidus Debt Partners

Class D Notes (5.7%, Due 4/20)


3,000



2,074



1,607CLO Fund IV,
    Ltd.(4)(10)

Income Notes
    (0.0%)(11)






15,040



5,487(CLO)Total Investment






17,114



7,094Callidus Debt Partners

Income Notes
    (6.2%)(11)






13,631



6,924CLO Fund V,
    Ltd.(4)(10)(CLO)

Total Investment






13,631



6,924Callidus Debt Partners

Class D Notes (7.1%, Due 10/21)


9,000



7,180



4,004CLO Fund VI,
    Ltd.(4)(10)

Income Notes
    (2.6%)(11)






28,954



8,708(CLO)Total Investment






36,134



12,712Callidus Debt Partners

Income Notes
    (2.2%)(11)






24,688



10,520CLO Fund VII,
    Ltd.(4)(10)(CLO)

Total Investment






24,688



10,520  (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



March 31, 2009Portfolio Company



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

Investment(1)(2)

Principal


Cost


ValueCallidus MAPS CLO Fund I
    LLC(10)

Class E Notes (6.7%, Due 12/17)

$
17,000


$
17,000


$
11,120(CLO)

Income Notes
    (0.0%)(11)






43,814



13,428Total Investment






60,814



24,548Callidus MAPS CLO Fund II,
    Ltd.(4)(10)

Class D Notes (5.4%, Due 7/22)


7,700



3,615



3,005Income Notes
    (0.0%)(11)






18,804



4,401(CLO)

Total Investment






22,419



7,406Carlisle Wide Plank Floors, Inc.

Senior Loan (6.1%, Due 6/11)


500



498



454(Consumer Products)

Unitranche Debt (12.8%, Due 6/11)


3,161



3,141



2,894Preferred Stock (345,056 Shares)






345



93Total Investment






3,984



3,441Catterton Partners VI,
    L.P.(5)

Limited Partnership Interest






2,951



1,773(Private Equity Fund)

Total Investment






2,951



1,773Centre Capital Investors V,
    L.P.(5)

Limited Partnership Interest






2,767



1,934(Private Equity Fund)

Total Investment






2,767



1,934CK Franchising, Inc.
    (Consumer Services)

Senior Loan (5.5%, Due 7/12)


1,600



1,585



1,585Subordinated Debt (12.3%, Due 7/12  7/17)


21,115



21,048



21,048Preferred Stock (1,281,887 shares)






1,282



1,651Common Stock (7,585,549 shares)






7,586



11,100Total Investment






31,501



35,384Commercial Credit Group, Inc.

Subordinated Debt (15.0%, Due 6/15)


19,000



18,970



18,970(Financial Services)

Preferred Stock (64,679 shares)






15,543



9,074Warrants










Total Investment






34,513



28,044Community Education Centers, Inc.

Subordinated Debt (14.5%, Due 11/13)


35,749



35,690



33,260(Education Services)

Total Investment






35,690



33,260Component Hardware Group, Inc.

Subordinated Debt (13.5%, Due 1/13)


18,780



18,728



17,919(Industrial Products)

Total Investment






18,728



17,919Cook Inlet Alternative Risk, LLC

Unitranche Debt (10.8%, Due 4/13)


87,800



87,442



69,000(Business Services)

Equity Interests






552



Total Investment






87,994



69,000Cortec Group Fund IV,
    L.P.(5)

Limited Partnership Interest






4,727



2,941(Private Equity)

Total Investment






4,727



2,941  (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



March 31, 2009Portfolio Company



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

Investment(1)(2)

Principal


Cost


ValueDiversified Mercury

Senior Loan (4.5%, Due 3/13)

$
2,966


$
2,953


$
2,688Communications, LLC

Total Investment






2,953



2,688(Business Services)Digital VideoStream, LLC

Unitranche Debt (11.0%, Due 2/12)


14,133



14,073



13,934(Business Services)

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


4,659



4,647



4,647Total Investment






18,720



18,581DirectBuy Holdings, Inc.

Subordinated Debt (14.5%, Due 5/13)


76,384



76,100



65,015(Consumer Products)

Equity Interests






8,000



560Total Investment






84,100



65,575Distant Lands Trading Co.

Senior Loan (7.5%, Due 11/11)


10,000



9,977



9,437(Consumer Products)

Unitranche Debt (12.3%, Due 11/11)


43,337



43,236



42,361Common Stock (3,451 shares)






3,451



623Total Investment






56,664



52,421Dryden XVIII Leveraged
    Loan 2007
    Limited(4)

Class B Notes (5.7%, Due 10/19)
    Income Notes
    (8.2%)(11)


9,000



7,780
    22,694



3,093
    8,671(CLO)

Total Investment






30,474



11,764Dynamic India Fund
    IV(4)(5)

Equity Interests






9,350



8,842(Private Equity Fund)

Total Investment






9,350



8,842EarthColor, Inc.

Subordinated Debt (15.0%, Due
    11/13)(6)


123,819



123,385



(Business Services)

Common Stock
    (63,438 shares)(12)






63,438



Warrants(12)










Total Investment






186,823



eCentury Capital Partners,
    L.P.(5)

Limited Partnership Interest






7,274



308(Private Equity Fund)

Total Investment






7,274



308eInstruction Corporation

Subordinated Debt (12.7%, Due 7/14-1/15)


34,631



34,500



31,799(Education Services)

Common Stock (2,406 shares)






2,500



1,100Total Investment






37,000



32,899Farleys & Sathers Candy Company, Inc.

Subordinated Debt (8.5%, Due 3/11)


2,500



2,494



2,374(Consumer Products)

Total Investment






2,494



2,374  (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.
 13




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##### 



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



March 31, 2009Portfolio Company



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

Investment(1)(2)

Principal


Cost


ValueFCP-BHI Holdings, LLC

Subordinated Debt (12.0%, Due 9/13)

$
28,116


$
28,028


$
26,081d/b/a Bojangles

Equity Interests






1,029



1,800(Retail)

Total Investment






29,057



27,881Fidus Mezzanine Capital,
    L.P.(5)

Limited Partnership Interest






12,828



7,653(Private Equity Fund)

Total Investment






12,828



7,653Freedom Financial Network, LLC

Subordinated Debt (13.5%, Due 2/14)


13,000



12,947



13,168(Financial Services)

Total Investment






12,947



13,168Geotrace Technologies, Inc.

Warrants






2,027



3,000(Energy Services)

Total Investment






2,027



3,000Gilchrist & Soames, Inc.
    (Consumer Products)

Subordinated Debt (13.4%, Due 10/13)


25,800



25,667



23,807Total Investment






25,667



23,807Havco Wood Products LLC

Equity Interests






910



(Industrial Products)

Total Investment






910



Higginbotham Insurance Agency, Inc.

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


53,305



53,098



53,098(Business Services)

Common Stock
    (23,695 shares)(12)






23,695



15,881Warrant(12)










Total Investment






76,793



68,979The Hillman Companies,
    Inc.(3)

Subordinated Debt (10.0%, Due 9/11)


44,580



44,499



43,867(Consumer Products)

Total Investment






44,499



43,867The Homax Group, Inc.

Senior Loan (6.7%, Due 10/12)


11,203



11,159



10,013(Consumer Products)

Subordinated Debt (14.5%, Due 4/14)


14,158



13,558



9,282Preferred Stock (76 shares)






76



Common Stock (24 shares)






5



Warrants






954



Total Investment






25,752



19,295Ideal Snacks Corporation

Senior Loan (7.3%, Due 6/10)


1,333



1,333



1,286(Consumer Products)

Total Investment






1,333



1,286  (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.(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



March 31, 2009Portfolio Company



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

Investment(1)(2)

Principal


Cost


ValueKodiak Fund
    LP(5)

Equity Interests





$
9,368


$
900(Private Equity Fund)

Total Investment






9,368



900Market Track Holdings, LLC

Senior Loan (8.0%, Due 6/14)

$
2,500



2,450



2,352(Business Services)

Subordinated Debt (15.9%, Due 6/14)


24,600



24,493



23,287Total Investment






26,943



25,639NetShape Technologies, Inc.

Senior Loan (5.3%, Due 2/13)


441



441



375(Industrial Products)

Total Investment






441



375Network Hardware Resale, Inc.

Unitranche Debt (12.0%, Due 12/11)


16,618



16,682



16,632(Business Services)

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


15,953



16,004



16,004Total Investment






32,686



32,636Novak Biddle Venture Partners III,
    L.P.(5)

Limited Partnership Interest






2,018



1,227(Private Equity Fund)

Total Investment






2,018



1,227Oahu Waste Services, Inc.

Stock Appreciation Rights






206



375(Business Services)

Total Investment






206



375Pangaea CLO 2007-1
    Ltd.(4)

Class D Notes (5.9%, Due 4/09)


15,000



11,864



4,554(CLO)

Total Investment






11,864



4,554PC Helps Support, LLC

Senior Loan (4.3%, Due 12/13)


8,610



8,520



8,573(Business Services)

Subordinated Debt (12.8%, Due 12/13)


28,136



28,016



28,934Total Investment






36,536



37,507Performant Financial Corporation

Common Stock (478,816 shares)






734



400(Business Services)

Total Investment






734



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.(5)

Non-registered investment company.   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



March 31, 2009Portfolio Company



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

Investment(1)(2)

Principal


Cost


ValuePharMEDium Healthcare Corporation

Senior Loan (3.8%, Due 10/13)

$
1,910


$
1,910


$
1,747(Healthcare Services)

Total Investment






1,910



1,747Promo Works, LLC

Unitranche Debt (12.3%, Due 12/11)


23,111



22,967



21,030(Business Services)

Total Investment






22,967



21,030Reed Group, Ltd.

Senior Loan (7.2%, Due 12/13)


12,865



12,732



11,429(Healthcare Services)

Subordinated Debt (15.8%, Due 12/13)


18,723



18,652



16,408Equity Interests






1,800



226Total Investment






33,184



28,063S.B. Restaurant Company

Unitranche Debt (9.8%, Due 4/11)


37,327



37,142



35,682(Retail)

Preferred Stock (46,690 shares)






117



117Warrants






534



Total Investment






37,793



35,799Standby Letters of Credit ($2,465)Snow Phipps Group,
    L.P.(5)

Limited Partnership Interest






4,962



4,256(Private Equity Fund)

Total Investment






4,962



4,256SPP Mezzanine Funding II,
    L.P.(5)

Limited Partnership Interest






9,118



9,018(Private Equity Fund)

Total Investment






9,118



9,018STS Operating, Inc.

Subordinated Debt (11.0%, Due 1/13)


30,386



30,301



28,829(Industrial Products)

Total Investment






30,301



28,829Summit Energy Services, Inc.
    (Business Services)

Subordinated  Debt (11.6%, Due 8/13)


35,130



34,954



34,115Common Stock (415,982 shares)






1,861



2,000Total Investment






36,815



36,115Tank Intermediate Holding Corp.
    (Industrial Products)

Senior Loan (6.8%, Due 9/14)


16,552



16,000



13,946Total Investment






16,000



13,946  (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.
 16




---



##### 



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



March 31, 2009Portfolio Company



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

Investment(1)(2)

Principal


Cost


ValueTappan Wire & Cable Inc.

Unitranche Debt (15.0%, Due
    8/14)(6)

$
22,346


$
22,247


$
7,464(Business Services)

Common Stock
    (12,940 shares)(12)






2,043



Warrant(12)










Total Investment






24,290



7,464The Step2 Company, LLC

Unitranche Debt (11.0%, Due 4/12)


95,083



94,836



89,671(Consumer Products)

Equity Interests






2,156



1,065Total Investment






96,992



90,736Tradesmen International, Inc.

Subordinated Debt (12.0%, Due 12/12)


40,000



39,654



35,479(Business Services)

Total Investment






39,654



35,479TransAmerican Auto Parts, LLC

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


24,561



24,409



(Consumer Products)

Equity Interests






1,034



Total Investment






25,443



Trover Solutions, Inc.

Subordinated Debt (12.0%, Due 11/12)


60,286



60,093



56,474(Business Services)

Total Investment






60,093



56,474United Road Towing, Inc.

Subordinated Debt (11.8%, Due 1/14)


20,000



19,920



19,772(Consumer Services)

Total Investment






19,920



19,772Venturehouse-Cibernet Investors, LLC

Equity Interest










(Business Services)

Total Investment










WMA Equity Corporation and Affiliates

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


139,455



138,559



46,932d/b/a Wear Me Apparel

Common Stock (86 shares)






39,635



(Consumer Products)

Total Investment






178,194



46,932Webster Capital II,
    L.P.(5)

Limited Partnership Interest






1,899



1,466(Private Equity Fund)

Total Investment






1,899



1,466Woodstream Corporation

Subordinated Debt (12.0%, Due 2/15)


90,000



89,648



78,683(Consumer Products)

Common Stock (6,960 shares)






6,961



1,300Total Investment






96,609



79,983Other companies

Other debt investments


155



81



74Other equity investments






31



8Total Investment






112



82Standby Letters of Credit ($200)Total companies less than 5% owned





$
2,234,718


$
1,594,387Total private finance (132 portfolio investments)





$
4,649,677


$
2,830,038  (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.(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.
 17




---



##### 



ALLIED CAPITAL CORPORATION AND
    SUBSIDIARIES
  CONSOLIDATED STATEMENT OF
    INVESTMENTS  (Continued)
  Commercial
    Real Estate Finance
    (in thousands, except number of loans)
  March 31, 2009(unaudited)Stated Interest

Number ofRate Ranges

Loans

Cost

ValueCommercial Mortgage LoansUp to 6.99%



4


$
30,680


$
29,5387.00%8.99%



2



2,003



1,9409.00%10.99%



1



6,469



6,46911.00%12.99%



1



10,472



9,31615.00% and above



2



3,970



6,670Total commercial mortgage
    loans(13)









$
53,594


$
53,933Real Estate Owned









$
15,042


$
7,801Equity
    Interests(2) 

    Companies more than 25% owned





$
13,705


$
17,296Guarantees ($6,871)Standby Letter of Credit ($650)Total commercial real estate finance









$
82,341


$
79,030Total portfolio









$
4,732,018


$
2,909,068   Yield

Cost

ValueInvestments in Money Market and Other SecuritiesSEI Daily Income Tr Prime Obligation Money Market Fund


0.2

%

$
5


$
5Total






$
5


$
5  (2)

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

Commercial mortgage loans totaling $11.0 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.
 18




---



##### 



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



December 31, 2008(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


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

Equity Interests





$
694


$
497(Private Equity Fund)

Total Investment






694



497AllBridge Financial, LLC

Equity Interests






33,294



10,960(Asset Management)

Total Investment






33,294



10,960Standby Letter of Credit ($15,000)Allied Capital Senior Debt Fund,
    L.P.(5)

Equity Interests (See Note 3)






31,800



31,800(Private Debt Fund)

Total Investment






31,800



31,800Avborne,
    Inc.(7)

Preferred Stock (12,500 shares)










942(Business Services)

Common Stock (27,500 shares)










Total Investment










942Avborne Heavy Maintenance,
    Inc.(7)

Common Stock (2,750 shares)










(Business Services)

Total Investment










Aviation Properties Corporation

Common Stock (100 shares)






93



(Business Services)

Total Investment






93



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

Senior Loan (12.6%, Due 12/09  3/12)

$
33,027



26,860



33,027(Consumer Products)

Preferred Stock (100,000 shares)






12,721



11,851Common Stock (260,467 shares)






3,847



Total Investment






43,428



44,878Calder Capital Partners,
    LLC(5)

Senior Loan (10.5%, Due
    5/09)(6)


4,496



4,496



953(Asset Management)

Equity Interests






2,453



Total Investment






6,949



953Callidus Capital Corporation

Subordinated Debt (18.0%, Due 8/13  2/14)


16,068



16,068



16,068(Asset Management)

Common Stock (100 shares)










34,377Total Investment






16,068



50,445Guaranty ($6,447)  (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.
 19




---



##### 



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



December 31, 2008(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


ValueCiena Capital LLC

Senior Loan (5.5%,
    Due 3/09)(6)

$
319,031


$
319,031


$
104,883(Financial Services)

Class B Equity Interests






119,436



Class C Equity Interests






109,301



Total Investment






547,768



104,883Guaranty ($5,000  See Note 3)Standby Letters of Credit ($102,600  
      See Note 3)CitiPostal Inc.

Senior Loan (4.0%, Due 12/13)


692



681



681(Business Services)

Unitranche Debt (12.0%, Due 12/13)


51,758



51,548



51,548Subordinated Debt (16.0%, Due 12/15)


9,114



9,114



9,114Common Stock (37,024 shares)






12,726



8,616Total Investment






74,069



69,959Coverall North America, Inc.

Unitranche Debt (12.0%, Due 7/11)


32,035



31,948



31,948(Business Services)

Subordinated Debt (15.0%, Due 7/11)


5,563



5,549



5,549Common Stock (763,333 shares)






14,361



17,968Total Investment






51,858



55,465CR Holding, Inc.

Subordinated Debt (16.6%, Due
    2/13)(6)


39,307



39,193



17,360(Consumer Products)

Common Stock (32,090,696 shares)






28,744



Total Investment






67,937



17,360Crescent Equity
    Corp.(8)

Senior Loan (10.0%, Due 1/09)


433



433



433(Business Services)

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


22,312



22,247



14,283Subordinated Debt (11.0%, Due
    1/12  9/12)(6)


10,097



10,072



4,331Common Stock (174 shares)






81,255



4,580Total Investment






114,007



23,627Guaranty ($900)Standby Letters of Credit ($200)Direct Capital Corporation

Subordinated Debt (16.0%, Due
    3/13)(6)


55,671



55,496



13,530(Financial Services)

Common Stock (2,317,020 shares)






25,732



Total Investment






81,228



13,530Financial Pacific Company

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


68,967



68,840



62,189(Financial Services)

Preferred Stock (9,458 shares)






8,865



Common Stock (12,711 shares)






12,783



Total Investment






90,488



62,189  (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)

Crescent Equity Corp. holds investments in Crescent
    Hotels & Resorts, LLC and affiliates.   The accompanying notes are an
    integral part of these consolidated financial statements.
 20




---



##### 



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



December 31, 2008(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


ValueForeSite Towers, LLC

Equity Interest





$



$
889(Tower Leasing)

Total Investment










889Global Communications, LLC

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

$
1,335



1,335



1,335(Business Services)

Total Investment






1,335



1,335Hot Light Brands, Inc.

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


30,522



30,522



13,678(Retail)

Common Stock (93,500 shares)






5,151



Total Investment






35,673



13,678Standby Letter of Credit ($105)Hot Stuff Foods, LLC

Senior Loan (4.0%, Due 2/11-2/12)


53,597



53,456



42,378(Consumer Products)

Subordinated Debt (12.4%, Due
    8/12-2/13)(6)


83,692



83,387



Common Stock (1,147,453 shares)






56,187



Total Investment






193,030



42,378Huddle House, Inc.

Subordinated Debt (15.0%, Due 12/12)


57,244



57,067



57,067(Retail)

Common Stock (358,428 shares)






35,828



20,922Total Investment






92,895



77,989IAT Equity, LLC and Affiliates

Subordinated Debt (9.0%, Due 6/14)


6,000



6,000



6,000d/b/a Industrial Air Tool

Equity Interests






7,500



8,860(Industrial Products)

Total Investment






13,500



14,860Impact Innovations Group, LLC

Equity Interests in Affiliate










321(Business Services)

Total Investment










321Insight Pharmaceuticals Corporation

Subordinated Debt (15.0%, Due 9/12)


45,827



45,738



45,827(Consumer Products)

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


16,177



16,126



17,532Preferred Stock (25,000 shares)






25,000



4,068Common Stock (620,000 shares)






6,325



Total Investment






93,189



67,427Jakel, Inc.

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


748



748



374(Industrial Products)

Total Investment






748



374Knightsbridge CLO 2007-1
    Ltd.(4)

Class E Notes (13.8%, Due 1/22)


18,700



18,700



14,866(CLO)

Income Notes
    (14.9%)(11)






40,914



35,214Total Investment






59,614



50,080  (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.
 21




---



##### 



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



December 31, 2008(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


ValueKnightsbridge CLO
    2008-1
    Ltd.(4)

Class C Notes (9.3%, Due 6/18)

$
12,800


$
12,800


$
12,800(CLO)

Class D Notes (10.3%, Due 6/18)


8,000



8,000



8,000Class E Notes (6.8%, Due 6/18)


13,200



10,573



10,573Income Notes
    (16.6%)(11)






21,315



21,315Total Investment






52,688



52,688MHF Logistical Solutions, Inc.

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


49,841



49,633



(Business Services)

Preferred Stock (10,000 shares)










Common Stock (20,934 shares)






20,942



Total Investment






70,575



MVL Group, Inc.

Senior Loan (12.0%, Due 6/09  7/09)


30,674



30,663



30,663(Business Services)

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


41,074



40,994



40,994Subordinated Debt (3.0%, Due
    6/09)(6)


144



139



86Common Stock (560,716 shares)






555



Total Investment






72,351



71,743Old Orchard Brands, LLC

Subordinated Debt (18.0%, Due 7/14)


18,951



18,882



18,882(Consumer Products)

Equity Interests






16,857



27,763Total Investment






35,739



46,645Penn Detroit Diesel Allison, LLC

Subordinated Debt (15.5%, Due 8/13)


37,984



37,869



37,869(Business Services)

Equity Interests






18,873



21,100Total Investment






56,742



58,969Service Champ, Inc.

Subordinated Debt (15.5%, Due 4/12)


27,050



26,984



26,984(Business Services)

Common Stock (55,112 shares)






11,785



21,156Total Investment






38,769



48,140Stag-Parkway, Inc.

Unitranche Debt (14.0%, Due 7/12)


17,975



17,920



17,962(Business Services)

Common Stock (25,000 shares)






32,686



6,968Total Investment






50,606



24,930Startec Equity, LLC

Equity Interests






211



332(Telecommunications)

Total Investment






211



332Unitranche Fund LLC

Subordinated Certificates (12.0%)






125,423



125,423(Private Debt Fund)

Equity Interests






1



1Total Investment






125,424



125,424Worldwide Express Operations, LLC

Subordinated Debt (14.0%, Due
    2/14)(6)


2,865



2,722



2,032(Business Services)

Equity Interests






11,384



Warrants






144



Total Investment






14,250



2,032Total
    companies more than 25% owned





$
2,167,020


$
1,187,722  (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.
 22




---



##### 



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



December 31, 2008(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)

$
21,439


$
21,329


$
21,439(Business Services)

Equity Interests






422



975Option






25



25Total Investment






21,776



22,439Advantage Sales & Marketing, Inc.

Subordinated Debt (12.0%, Due 3/14)


158,617



158,132



135,000(Business Services)

Equity Interests










5,000Total Investment






158,132



140,000Air Medical Group Holdings LLC

Senior Loan (3.3%, Due 3/11)


3,360



3,326



3,139(Healthcare Services)

Equity Interests






2,993



10,800Total Investment






6,319



13,939Alpine ESP Holdings, Inc.

Preferred Stock (701 shares)






701



(Business Services)

Common Stock (11,657 shares)






13



Total Investment






714



Amerex Group, LLC

Subordinated Debt (12.3%, Due 1/13)


8,789



8,784



8,784(Consumer Products)

Equity Interests






3,508



9,932Total Investment






12,292



18,716BB&T Capital Partners/Windsor

Equity Interests






11,789



11,063Mezzanine Fund,
    LLC(5)(Private Equity Fund)

Total Investment






11,789



11,063Becker Underwood, Inc.

Subordinated Debt (14.5%, Due 8/12)


25,503



25,450



25,502(Industrial Products)

Common Stock (4,376 shares)






5,014



2,267Total Investment






30,464



27,769Drew Foam Companies, Inc.

Preferred Stock (622,555 shares)






623



512(Business Services)

Common Stock (6,286 shares)






6



Total Investment






629



512Driven Brands, Inc.

Subordinated Debt (16.5%, Due 7/15)


84,106



83,698



83,698(Consumer Services)

Common Stock (3,772,098 shares)






9,516



4,855Total Investment






93,214



88,553Hilden America, Inc.

Common Stock (19 shares)






454



76(Consumer Products)

Total Investment






454



76Lydall Transport, Ltd.

Equity Interests






432



345(Business Services)

Total Investment






432



345Multi-Ad Services, Inc.

Unitranche Debt (11.3%, Due 11/11)


3,018



2,995



2,941(Business Services)

Equity Interests






1,737



1,782Total Investment






4,732



4,723  (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.
 23




---



##### 



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



December 31, 2008(in thousands, except number of shares)

Investment(1)(2)

Principal

Cost

ValueProgressive International

Preferred Stock (500 shares)





$
500


$
1,125Corporation

Common Stock (197 shares)






13



4,600(Consumer Products)

Warrants










Total Investment






513



5,725Regency Healthcare Group, LLC

Unitranche Debt (11.1%, Due 6/12)

$
10,901



10,855



10,825(Healthcare Services)

Equity Interests






1,302



2,050Total Investment






12,157



12,875SGT India Private
    Limited(4)

Common Stock (150,596 shares)






4,137



(Business Services)

Total Investment






4,137



Soteria Imaging Services, LLC

Subordinated Debt (11.3%, Due 11/10)


4,250



4,167



4,054(Healthcare Services)

Equity Interests






1,881



1,971Total Investment






6,048



6,025Triax Holdings, LLC

Subordinated Debt (21.0%, Due
    2/12)(6)


10,625



10,587



(Consumer Products)

Equity Interests






16,528



Total Investment






27,115



Universal Environmental Services, LLC

Equity Interests






1,599



(Business Services)

Total Investment






1,599



Total
    companies 5% to 25% owned





$
392,516


$
352,760Companies Less Than 5% Owned3SI Security Systems, Inc.

Subordinated Debt (14.6%, Due 8/13)

$
29,200


$
29,118


$
28,170(Consumer Products)

Total Investment






29,118



28,170Abraxas Corporation

Subordinated Debt (14.6%, Due 4/13)


36,822



36,662



36,170(Business Services)

Total Investment






36,662



36,170Augusta Sportswear Group, Inc.

Subordinated Debt (13.0%, Due 1/15)


53,000



52,825



52,406(Consumer Products)

Common Stock (2,500 shares)






2,500



1,400Total Investment






55,325



53,806Axium Healthcare Pharmacy, Inc.

Senior Loan (14.0%, Due 12/12)


3,750



3,724



3,654(Healthcare Services)

Unitranche Debt (14.0%, Due 12/12)


8,500



8,471



7,908Common Stock (22,860 shares)






2,286



100Total Investment






14,481



11,662  (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, 2008(in thousands, except number of shares)

Investment(1)(2)

Principal

Cost

ValueBaird Capital Partners IV
    Limited(5)

Limited Partnership Interest





$
3,636


$
2,978(Private Equity Fund)

Total Investment






3,636



2,978BenefitMall Holdings Inc.

Subordinated Debt (18.0%, Due 6/14)

$
40,326



40,238



40,238(Business Services)

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






39,274



91,149Warrants(12)










Total Investment






79,512



131,387Broadcast Electronics, Inc.

Senior Loan (8.8%, Due
    11/11)(6)


4,912



4,884



773(Business Services)

Preferred Stock (2,044 shares)










Total Investment






4,884



773Bushnell, Inc.

Subordinated Debt (8.0%, Due 2/14)


41,325



40,003



35,794(Consumer Products)

Total Investment






40,003



35,794Callidus Debt Partners

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


18,800



18,907



10,116CDO Fund I,
    Ltd.(4)(10)

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


9,400



9,454



(CDO)Total Investment






28,361



10,116Callidus Debt Partners

Preferred Shares (23,600,000 shares)






20,138



5,402CLO Fund III,
    Ltd.(4)(10)(CLO)

Total Investment






20,138



5,402Callidus Debt Partners

Class D Notes (9.1%, Due 4/20)


3,000



2,045



1,445CLO Fund IV,
    Ltd.(4)(10)

Income Notes
    (13.2%)(11)






14,591



10,628(CLO)Total Investment






16,636



12,073Callidus Debt Partners

Income Notes
    (16.4%)(11)






13,388



10,331CLO Fund V,
    Ltd.(4)(10)(CLO)

Total Investment






13,388



10,331Callidus Debt Partners

Class D Notes (9.8%, Due 10/21)


9,000



7,144



3,929CLO Fund VI,
    Ltd.(4)(10)

Income Notes
    (17.8%)(11)






28,314



23,090(CLO)Total Investment






35,458



27,019Callidus Debt Partners

Income Notes
    (11.4%)(11)






24,026



15,361CLO Fund VII,
    Ltd.(4)(10)(CLO)

Total Investment






24,026



15,361  (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.
 25




---



##### 



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



December 31, 2008(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


ValueCallidus MAPS CLO Fund I
    LLC(10)

Class E Notes (7.0%, Due 12/17)

$
17,000


$
17,000


$
9,813(CLO)

Income Notes
    (4.0%)(11)






45,053



27,678Total Investment






62,053



37,491Callidus MAPS CLO Fund II,
    Ltd.(4)(10)

Class D Notes (8.8%, Due 7/22)


7,700



3,555



2,948Income Notes
    (13.3%)(11)






18,393



12,626(CLO)

Total Investment






21,948



15,574Carlisle Wide Plank Floors, Inc.

Senior Loan (6.1%, Due 6/11)


1,000



998



953(Consumer Products)

Unitranche Debt (14.5%, Due 6/11)


3,161



3,139



3,047Preferred Stock (345,056 Shares)






345



82Total Investment






4,482



4,082Catterton Partners VI,
    L.P.(5)

Limited Partnership Interest






2,812



2,356(Private Equity Fund)

Total Investment






2,812



2,356Centre Capital Investors V,
    L.P.(5)

Limited Partnership Interest






3,049



2,344(Private Equity Fund)

Total Investment






3,049



2,344CK Franchising, Inc.
    (Consumer Services)

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


21,000



20,912



20,912Preferred Stock (1,281,887 shares)






1,282



1,592Common Stock (7,585,549 shares)






7,586



10,600Total Investment






29,780



33,104Commercial Credit Group, Inc.

Subordinated Debt (15.0%, Due 6/15)


19,000



18,970



18,970(Financial Services)

Preferred Stock (64,679 shares)






15,543



9,073Warrants










Total Investment






34,513



28,043Community Education Centers, Inc.

Subordinated Debt (14.5%, Due 11/13)


35,548



35,486



34,056(Education Services)

Total Investment






35,486



34,056Component Hardware Group, Inc.

Subordinated Debt (13.5%, Due 1/13)


18,710



18,654



18,261(Industrial Products)

Total Investment






18,654



18,261Cook Inlet Alternative Risk, LLC

Unitranche Debt (10.8%, Due 4/13)


90,000



89,619



82,839(Business Services)

Equity Interests






552



Total Investment






90,171



82,839Cortec Group Fund IV,
    L.P.(5)

Limited Partnership Interest






4,647



3,445(Private Equity)

Total Investment






4,647



3,445  (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.
 26




---



##### 



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



December 31, 2008(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


ValueDiversified Mercury
    Communications, LLC

Senior Loan (4.5%, Due 3/13)

$
2,972


$
2,958


$
2,692(Business Services)

Total Investment






2,958



2,692Digital VideoStream, LLC

Unitranche Debt (11.0%, Due 2/12)


14,097



14,032



14,003(Business Services)

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


4,545



4,533



4,700Total Investment






18,565



18,703DirectBuy Holdings, Inc.

Subordinated Debt (14.5%, Due 5/13)


75,909



75,609



71,703(Consumer Products)

Equity Interests






8,000



3,200Total Investment






83,609



74,903Distant Lands Trading Co.

Senior Loan (7.5%, Due 11/11)


4,825



4,800



4,501(Consumer Products)

Unitranche Debt (12.3%, Due 11/11)


43,133



43,022



42,340Common Stock (3,451 shares)






3,451



984Total Investment






51,273



47,825Dryden XVIII Leveraged
    Loan 2007
    Limited(4)

Class B Notes (8.0%, Due 10/19)
    Income Notes
    (16.0%)(11)


9,000



7,728
    22,080



4,535
    17,477(CLO)

Total Investment






29,808



22,012Dynamic India Fund
    IV(4)(5)

Equity Interests






9,350



8,966(Private Equity Fund)

Total Investment






9,350



8,966EarthColor, Inc.

Subordinated Debt (15.0%, Due
    11/13)(6)


123,819



123,385



77,243(Business Services)

Common Stock
    (63,438 shares)(12)






63,438



Warrants(12)










Total Investment






186,823



77,243eCentury Capital Partners,
    L.P.(5)

Limited Partnership Interest






7,274



1,431(Private Equity Fund)

Total Investment






7,274



1,431eInstruction Corporation

Subordinated Debt (12.6%, Due 7/14-1/15)


33,931



33,795



31,670(Education Services)

Common Stock (2,406 shares)






2,500



1,700Total Investment






36,295



33,370Farleys & Sathers Candy Company, Inc.

Subordinated Debt (10.1%, Due 3/11)


2,500



2,493



2,365(Consumer Products)

Total Investment






2,493



2,365  (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.
 27




---



##### 



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



December 31, 2008(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


ValueFCP-BHI Holdings, LLC

Subordinated Debt (12.0%, Due 9/13)

$
27,284


$
27,191


$
25,640d/b/a Bojangles

Equity Interests






1,029



1,700(Retail)

Total Investment






28,220



27,340Fidus Mezzanine Capital,
    L.P.(5)

Limited Partnership Interest






9,597



6,754(Private Equity Fund)

Total Investment






9,597



6,754Freedom Financial Network, LLC

Subordinated Debt (13.5%, Due 2/14)


13,000



12,945



12,811(Financial Services)

Total Investment






12,945



12,811Geotrace Technologies, Inc.

Warrants






2,027



3,000(Energy Services)

Total Investment






2,027



3,000Gilchrist & Soames, Inc.
    (Consumer Products)

Subordinated Debt (13.4%, Due 10/13)


25,800



25,660



24,692Total Investment






25,660



24,692Havco Wood Products LLC

Equity Interests






910



400(Industrial Products)

Total Investment






910



400Higginbotham Insurance Agency, Inc.

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


53,305



53,088



53,088(Business Services)

Common Stock
    (23,695 shares)(12)






23,695



27,335Warrant(12)










Total Investment






76,783



80,423The Hillman Companies,
    Inc.(3)

Subordinated Debt (10.0%, Due 9/11)


44,580



44,491



44,345(Consumer Products)

Total Investment






44,491



44,345The Homax Group, Inc.

Senior Loan (7.2%, Due 10/12)


11,785



11,742



10,689(Consumer Products)

Subordinated Debt (14.5%, Due 4/14)


14,000



13,371



12,859Preferred Stock (76 shares)






76



Common Stock (24 shares)






5



Warrants






954



Total Investment






26,148



23,548Ideal Snacks Corporation

Senior Loan (5.3%, Due 6/10)


1,496



1,496



1,438(Consumer Products)

Total Investment






1,496



1,438  (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.(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.
 28




---



##### 



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



December 31, 2008(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


ValueKodiak Fund
    LP(5)

Equity Interests





$
9,422


$
900(Private Equity Fund)

Total Investment






9,422



900Market Track Holdings, LLC

Senior Loan (8.0%, Due 6/14)

$
2,500



2,450



2,352(Business Services)

Subordinated Debt (15.9%, Due 6/14)


24,600



24,488



23,785Total Investment






26,938



26,137NetShape Technologies, Inc.

Senior Loan (5.3%, Due 2/13)


382



382



346(Industrial Products)

Total Investment






382



346Network Hardware Resale, Inc.

Unitranche Debt (12.5%, Due 12/11)


18,734



18,809



18,703(Business Services)

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


14,533



14,585



14,585Total Investment






33,394



33,288Novak Biddle Venture Partners III,
    L.P.(5)

Limited Partnership Interest






2,018



1,349(Private Equity Fund)

Total Investment






2,018



1,349Oahu Waste Services, Inc.

Stock Appreciation Rights






206



750(Business Services)

Total Investment






206



750Pangaea CLO 2007-1
    Ltd.(4)

Class D Notes (9.2%, Due 10/21)


15,000



11,761



7,114(CLO)

Total Investment






11,761



7,114PC Helps Support, LLC

Senior Loan (4.8%, Due 12/13)


8,610



8,520



8,587(Business Services)

Subordinated Debt (13.3%, Due 12/13)


28,136



28,009



28,974Total Investment






36,529



37,561Performant Financial Corporation

Common Stock (478,816 shares)






734



200(Business Services)

Total Investment






734



200  (1)

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

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

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

Non-registered investment company.   The accompanying notes are an
    integral part of these consolidated financial statements.
 29




---



##### 



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



December 31, 2008(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


ValuePeter Brasseler Holdings, LLC

Equity Interests





$
3,451


$
2,900(Business Services)

Total Investment






3,451



2,900PharMEDium Healthcare Corporation

Senior Loan (4.3%, Due 10/13)

$
1,910



1,910



1,747(Healthcare Services)

Total Investment






1,910



1,747Postle Aluminum Company, LLC

Unitranche Debt (13.0%, Due
    10/12)(6)


58,953



58,744



9,978(Industrial Products)

Equity Interests






2,174



Total Investment






60,918



9,978Pro Mach, Inc.

Subordinated Debt (12.5%, Due 6/12)


14,616



14,573



14,089(Industrial Products)

Equity Interests






1,294



1,900Total Investment






15,867



15,989Promo Works, LLC

Unitranche Debt (12.3%, Due 12/11)


23,111



22,954



21,266(Business Services)

Total Investment






22,954



21,266Reed Group, Ltd.

Senior Loan (7.6%, Due 12/13)


12,893



12,758



11,502(Healthcare Services)

Subordinated Debt (13.8%, Due 12/13)


18,543



18,469



16,683Equity Interests






1,800



300Total Investment






33,027



28,485S.B. Restaurant Company

Unitranche Debt (9.8%, Due 4/11)


36,501



36,295



34,914(Retail)

Preferred Stock (46,690 shares)






117



117Warrants






534



Total Investment






36,946



35,031Standby Letters of Credit ($2,465)Snow Phipps Group,
    L.P.(5)

Limited Partnership Interest






4,785



4,374(Private Equity Fund)

Total Investment






4,785



4,374SPP Mezzanine Funding II,
    L.P.(5)

Limited Partnership Interest






9,362



9,269(Private Equity Fund)

Total Investment






9,362



9,269STS Operating, Inc.

Subordinated Debt (11.0%, Due 1/13)


30,386



30,296



29,745(Industrial Products)

Total Investment






30,296



29,745Summit Energy Services, Inc.
    (Business Services)

Subordinated  Debt (11.6%, Due 8/13)


35,730



35,547



32,113Common Stock (415,982 shares)






1,861



1,900Total Investment






37,408



34,013Tank Intermediate Holding Corp.
    (Industrial Products)

Senior Loan (7.1%, Due 9/14)


30,514



29,539



25,937Total Investment






29,539



25,937  (1)

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

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

Non-registered investment company.(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.
 30




---



##### 



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



December 31, 2008(in thousands, except number of shares)

Investment(1)(2)

Principal


Cost


ValueTappan Wire & Cable Inc.

Unitranche Debt (15.0%, Due 8/14)

$
22,346


$
22,248


$
15,625(Business Services)

Common Stock
    (12,940 shares)(12)






2,043



Warrant(12)










Total Investment






24,291



15,625The Step2 Company, LLC

Unitranche Debt (11.0%, Due 4/12)


95,083



94,816



90,474(Consumer Products)

Equity Interests






2,156



1,161Total Investment






96,972



91,635Tradesmen International, Inc.

Subordinated Debt (12.0%, Due 12/12)


40,000



39,586



37,840(Business Services)

Total Investment






39,586



37,840TransAmerican Auto Parts, LLC

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


24,561



24,409



(Consumer Products)

Equity Interests






1,034



Total Investment






25,443



Trover Solutions, Inc.

Subordinated Debt (12.0%, Due 11/12)


60,054



59,847



57,362(Business Services)

Total Investment






59,847



57,362United Road Towing, Inc.

Subordinated Debt (12.1%, Due 1/14)


20,000



19,915



20,000(Consumer Services)

Total Investment






19,915



20,000Venturehouse-Cibernet Investors, LLC

Equity Interest










(Business Services)

Total Investment










VICORP Restaurants, Inc.

Warrants






33



(Retail)

Total Investment






33



WMA Equity Corporation and Affiliates

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


139,455



138,559



63,823d/b/a Wear Me Apparel

Common Stock (86 shares)






39,721



(Consumer Products)

Total Investment






178,280



63,823Webster Capital II,
    L.P.(5)

Limited Partnership Interest






1,702



1,481(Private Equity Fund)

Total Investment






1,702



1,481Woodstream Corporation

Subordinated Debt (12.0%, Due 2/15)


90,000



89,633



83,258(Consumer Products)

Common Stock (6,960 shares)






6,961



2,500Total Investment






96,594



85,758York Insurance Services Group, Inc.

Common Stock (12,939 shares)






1,294



1,700(Business Services)

Total Investment






1,294



1,700Other companies

Other debt investments


155



74



72Other equity investments






30



8Total Investment






104



80Total companies less than 5% owned





$
2,317,856


$
1,858,581Total private finance (138 portfolio investments)





$
4,877,392


$
3,399,063  (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.(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)
  Commercial
    Real Estate Finance
    (in thousands, except number of loans)
  December 31, 2008(unaudited)Stated Interest

Number ofRate Ranges

Loans

Cost

ValueCommercial Mortgage LoansUp to 6.99%



4


$
30,999


$
30,5377.00%8.99%



1



644



5809.00%10.99%



1



6,465



6,46511.00%12.99%



1



10,469



9,39115.00% and above



2



3,970



6,529Total commercial mortgage
    loans(13)









$
52,547


$
53,502Real Estate Owned









$
18,201


$
20,823Equity
    Interests(2) 

    Companies more than 25% owned





$
14,755


$
19,562Guarantees ($6,871)Standby Letter of Credit ($650)Total commercial real estate finance









$
85,503


$
93,887Total portfolio









$
4,962,895


$
3,492,950   Yield

Cost

ValueInvestments in Money Market and Other SecuritiesSEI Daily Income Tr Prime Obligation Money Market Fund


0.9%


$
5


$
5Columbia Treasury Reserves Fund






12



12Other Money Market Funds






270



270Total





$
287


$
287  (2)

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

Commercial mortgage loans totaling $7.7 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.
 32




---



##### 



ALLIED
    CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Information at and for the three months ended March 31,
    2009 and 2008 is unaudited)
  Note 1. Organization
      Regulation S-X,
    Events
    of Default, Liquidity and Operations
    long-term
   33




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
             Note 2. Summary
    of Significant Accounting Policies
  Basis
    of Presentation
     34




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 2. Summary of Significant Accounting Policies,
    continued
        Fair Value Measurements
     35




---



##### 



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.
       36




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 2. Summary of Significant Accounting Policies,
    continued
  and/or security-by-security
  FSP 157-4 FSP 157-4.
  Net
    Realized Gains or Losses and Net Change in Unrealized
    Appreciation or Depreciation
    Interest
    and Dividend Income
     37




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 2. Summary of Significant Accounting Policies,
    continued
          Fee
    Income    Guarantees
  Guarantors Accounting and
    Disclosure Requirements for Guarantees, Including Indirect
    Guarantees of Indebtedness of Others
 38




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 2. Summary of Significant Accounting Policies,
    continued
    Financing
    Costs
    Dividends
    to Shareholders
    Stock
    Compensation Plans
  Share-Based Payment
  ($ in millions, except per share
    amounts)

2009


2008Employee Stock Option Expense:Previously awarded, unvested options as of January 1, 2006

$



$
1.7Options granted on or after January 1, 2006


0.8



2.5Total employee stock option expense

$
0.8


$
4.2Per basic share

$
0.00


$
0.03Per diluted share

$
0.00


$
0.03  39




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 2. Summary of Significant Accounting Policies,
    continued
   Options Granted.
  2009


2008Expected term (in years)


3.0



5.0Risk-free interest rate


1.3
%


2.7
%Expected volatility


103.8
%


27.6
%Dividend yield


34.4
%


8.5
%Weighted average fair value per option

$
0.12


$
2.19       Federal
    and State Income Taxes and Excise Tax
     40




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 2. Summary of Significant Accounting Policies,
    continued
      Per
    Share Information
    Use of
    Estimates in the Preparation of Financial
    Statements
      Recent
    Accounting Pronouncements
  Fair Value Measurements.
   41




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 2. Summary of Significant Accounting Policies,
    continued
  The Fair Value Option for Financial Assets and Financial
    Liabilities  Including an Amendment of FASB Statement
    No. 115.
    Determining the Fair Value of a Financial Asset When the
    Market for That Asset Is Not Active
    Determining Fair Value When the Volume and Level of Activity
    for the Asset or Liability Have Significantly Decreased and
    Identifying Transactions That Are Not Orderly FSP 157-4,
   42




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 3. Portfolio
  Private
    Finance
     2009


2008($ in millions)

Cost


Value


Yield(1)


Cost


Value


Yield(1)Loans and debt securities:Senior loans

$
592.3


$
289.1



5.9%


$
556.9


$
306.3



5.6%Unitranche
    debt(2)


447.3



403.8



12.1%



527.5



456.4



12.0%Subordinated
    debt(3)


2,134.7



1,492.7



13.5%



2,300.1



1,829.1



12.9%Total loans and debt
    securities(4)


3,174.3



2,185.6



12.3%



3,384.5



2,591.8



11.9%Equity securities:Preferred shares/income notes of
    CLOs(5)


250.4



104.4



8.0%



248.2



179.2



16.4%Subordinated certificates in Unitranche Fund
    LLC(5)


124.5



124.5



9.2%



125.4



125.4



12.0%Other equity securities


1,100.5



415.5







1,119.3



502.7Total equity securities


1,475.4



644.4







1,492.9



807.3Total

$
4,649.7


$
2,830.0






$
4,877.4


$
3,399.1   (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
    March 31, 2009, senior loans included the senior secured
    loan to Ciena totaling $319.0 million at cost and
    $64.1 million at value, which was placed on non-accrual
    status on the purchase date.  The weighted average yield on the
    preferred shares/income notes of CLOs is calculated as the
    (a) effective interest yield on the preferred shares/income
    notes of CLOs, divided by (b) total preferred shares/income
    notes of CLOs at value. The weighted average yields are computed
    as of the balance sheet date. The 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 divided by
    (b) total investment at value.
  (2)
    Unitranche debt is an investment that combines both senior and
    subordinated financing, generally in a first lien position.(3)
    Subordinated debt includes bonds in CLOs and in a CDO.(4)
    The total principal balance outstanding on loans and debt
    securities was $3,205.6 million and $3,418.0 million
    at March 31, 2009, and December 31, 2008, respectively. The
    difference between principal and cost is represented by
    unamortized loan origination fees and costs, original issue
    discounts, and market discounts totaling $31.3 million and
    $33.5 million at March 31, 2009, and December 31,
    2008, respectively.(5)
    Investments in the preferred shares/income notes of CLOs and the
    subordinated certificates in Unitranche Fund LLC earn a current
    return that is included in interest income in the accompanying
    consolidated statement of operations.     43




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 3. Portfolio, continued
        Ciena Capital LLC.
  debtor-in-possession
    March 31, 2009


December 31, 2008($ in millions)

Cost


Value


Cost


ValueSenior Loan

$
319.0


$
64.1


$
319.0


$
104.9Class B Equity
    Interests(1)


119.5







119.5



Class C Equity
    Interests(1)


112.6







109.3



Total

$
551.1


$
64.1


$
547.8


$
104.9   (1)

    At March 31, 2009 and December 31, 2008, the Company
    held 100% of the Class B equity interests and 94.9% of the
    Class C equity interests. 44




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 3. Portfolio, continued
              45




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 3. Portfolio, continued
      Collateralized Loan Obligations (CLOs) and
    Collateralized Debt Obligations
    (CDOs).
  2009


2008($ in millions)

Cost


Value


Yield(1)


Cost


Value


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

$
28.4


$
11.1



%


$
28.4


$
10.1



39.4%Callidus Debt Partners CLO Fund IV, Ltd.


2.0



1.6



21.6%



2.0



1.4



26.9%Callidus Debt Partners CLO Fund VI, Ltd.


7.2



4.0



20.9%



7.1



3.9



26.1%Callidus MAPS CLO Fund I LLC


17.0



11.1



10.3%



17.0



9.8



12.2%Callidus MAPS CLO Fund II LLC


3.6



3.0



25.6%



3.6



3.0



30.2%Dryden XVIII Leveraged Loan 2007 Limited


7.8



3.1



19.3%



7.7



4.5



20.5%Knightsbridge CLO 2007-1
    Ltd.(3)


18.7



15.0



12.9%



18.7



14.9



17.4%Knightsbridge CLO 2008-1
    Ltd.(3)


31.4



28.4



13.3%



31.4



31.4



10.2%Pangaea CLO 2007-1 Ltd.


11.9



4.6



24.4%



11.8



7.1



25.0%Total bonds


128.0



81.9



12.9%



127.7



86.1



18.5%Preferred Shares/Income Notes:Callidus Debt Partners CLO Fund III, Ltd.


20.1



6.4



%



20.1



5.4



%Callidus Debt Partners CLO Fund IV, Ltd.


15.0



5.5



%



14.6



10.6



18.1%Callidus Debt Partners CLO Fund V, Ltd.


13.6



6.9



12.1%



13.4



10.3



21.3%Callidus Debt Partners CLO Fund VI, Ltd.


29.0



8.7



8.7%



28.3



23.1



21.8%Callidus Debt Partners CLO Fund VII, Ltd.


24.7



10.5



5.1%



24.0



15.4



17.9%Callidus MAPS CLO Fund I LLC


43.8



13.4



%



45.1



27.8



6.5%Callidus MAPS CLO Fund II, Ltd.


18.8



4.4



%



18.4



12.6



19.3%Dryden XVIII Leveraged Loan 2007 Limited


22.7



8.7



21.5%



22.1



17.5



20.2%Knightsbridge CLO
    2007-1
    Ltd.(3)


41.8



20.4



%



40.9



35.2



17.4%Knightsbridge CLO 2008-1
    Ltd.(3)


20.9



19.5



22.1%



21.3



21.3



16.6%Total preferred shares/income notes


250.4



104.4



7.9%



248.2



179.2



16.4%Total

$
378.4


$
186.3






$
375.9


$
265.3   (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. 46




---



##### 



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

2009


2008Bonds

$
240.7


$
268.3Syndicated loans


4,428.8



4,477.3Cash(1)


130.6



89.6Total underlying collateral assets at
    cost(2)

$
4,800.1


$
4,835.2   (1)
    Includes undrawn liability amounts.(2)
    At March 31, 2009, and
    December 31, 2008, the total cost basis of defaulted
    obligations was $134.0 million and $95.0 million,
    respectively, or approximately 2.8% and 2.0% respectively, of
    the total underlying collateral assets.  Loans and Debt Securities on Non-Accrual
    Status.
  ($ in millions)

2009


2008Loans and debt securitiesCompanies more than 25% owned

$
134.5


$
176.1Companies 5% to 25% owned


13.6



Companies less than 5% owned


69.3



151.8Total

$
217.4


$
327.9  47




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 3. Portfolio, continued
  Industry and Geographic
    Compositions.
 2009


2008IndustryBusiness services


33
%


36
%Consumer products


26



24CLO/CDO(1)


7



8Financial services


6



6Private debt funds


5



5Consumer services


5



5Retail


5



5Industrial products


4



5Healthcare services


3



2Other


6



4Total


100
%


100
%Geographic
    Region(2)Mid-Atlantic


39
%


41
%Midwest


29



28Southeast


20



17West


11



13Northeast


1



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.(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
   2009


2008Cost


Value


Yield(1)


Cost


Value


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

$
53.6


$
53.9



6.7%


$
52.5


$
53.5



7.4%Real estate owned


15.0



7.8







18.2



20.8Equity interests


13.7



17.3







14.8



19.6Total

$
82.3


$
79.0






$
85.5


$
93.9   (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.  Commercial Mortgage Loans and Equity
    Interests.
 48




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 3. Portfolio, continued
       2009


2008Property TypeHospitality


57
%


52
%Recreation


28



22Office


13



15Retail






9Other


2



2Total


100
%


100
%Geographic RegionSoutheast


42
%


43
%West


30



26Midwest


19



22Northeast


9



9Mid-Atlantic






Total


100
%


100
%   Fair
    Value Measurements
      
    Level 1  Quoted prices (unadjusted) in active
    markets for identical assets 49




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 3. Portfolio, continued
   
    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 March 31,


Identical Assets


Inputs


Inputs($ in millions)

2009


(Level 1)


(Level 2)


(Level 3)Assets at Fair Value:PortfolioPrivate finance:Loans and debt securities

$
2,185.6


$



$



$
2,185.6Preferred shares/income notes of CLOs


104.4











104.4Subordinated certificates in Unitranche Fund LLC


124.5











124.5Other equity securities


415.5











415.5Commercial real estate finance


79.0











79.0Total portfolio

$
2,909.0


$



$



$
2,909.0     Private FinancePreferred


SubordinatedLoans and


Shares/


Certificates


Other


CommercialDebt


Income Notes


in Unitranche


Equity


Real Estate($ in millions)

Securities


of CLOs


Fund LLC


Securities


Finance


TotalBalance at December 31, 2008

$
2,591.8


$
179.2


$
125.4


$
502.7


$
93.9


$
3,493.0Total gains or lossesNet realized gains
    (losses)(1)


(30.4
)


7.3







(6.8
)


4.1



(25.8
)Net change in unrealized appreciation or
    depreciation(2)


(196.0
)


(76.9
)






(68.4
)


(11.7
)


(353.0
)Purchases, issuances, repayments and exits,
    net(3)


(179.8
)


(5.2
)


(0.9
)


(12.0
)


(7.3
)


(205.2
)Transfers in and/or out of level 3






















Balance at March 31, 2009

$
2,185.6


$
104.4


$
124.5


$
415.5


$
79.0


$
2,909.0Net unrealized appreciation (depreciation) during the period
    relating to assets still held at the reporting
    date(2)

$
(221.1
)

$
(76.9
)

$



$
(57.7
)

$
(5.2
)

$
(360.9
)   (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). 50




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 3. Portfolio, continued
   Managed
    Funds
  and/or
      Assets of Managed Funds($ in millions)

March 31,


December 31,


ManagementName of Fund

2009


2008


Fee(2)Unitranche Fund LLC

$
781.3


$
789.8



0.375
%Allied Capital Senior Debt Fund, L.P.


397.7



412.9



1.625
%(1)(2)Knightsbridge CLO
    2007-1
    Ltd.


502.0



500.6



0.600
%Knightsbridge CLO
    2008-1
    Ltd.


304.6



304.8



0.600
%AGILE Fund I, LLC


83.2



99.3




(1)Emporia Preferred Funding I, Ltd.


414.2







0.625
%(1)Emporia Preferred Funding II, Ltd.


352.5







0.650
%(1)Emporia Preferred Funding III, Ltd.


406.2







0.650
%(1)Total Assets

$
3,241.7


$
2,107.4   (1)
    The Company is entitled to an incentive allocation subject to
    certain performance benchmarks. There can be no assurance that
    the incentive allocation will be earned.(2)
    Management fees are stated as a percent of assets except for the
    Allied Capital Senior Debt Fund, L.P. (ACSDF) which
    is stated as a percent of equity capital. The management fee
    paid by ACSDF was 2.000% at December 31, 2008 and reduced
    to 1.625% effective January 1, 2009.  2007-1 2008-1
   51




---



##### 



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



March 31, 2009


December 31, 2008Name of Fund

Investment Description

Cost


Value


Cost


ValueUnitranche
    Fund LLC(1)

Subordinated Certificates and Equity Interests

$
124.5


$
124.5


$
125.4


$
125.4Allied Capital Senior Debt Fund, L.P.

Equity interests


31.8



32.9



31.8



31.8Knightsbridge CLO
    2007-1
    Ltd.

Class E Notes and Income Notes


60.4



35.4



59.6



50.1Knightsbridge CLO
    2008-1
    Ltd.

Class C Notes, Class D Notes, Class E Notes and Income Notes


52.3



47.9



52.7



52.7AGILE Fund I, LLC

Equity Interests


0.7



0.4



0.7



0.5Total



$
269.7


$
241.1


$
270.2


$
260.5   (1)

    The Company has committed up to $525.0 million of
    subordinated certificates to the Unitranche Fund. The Unitranche
    Fund will be capitalized as investment transactions are
    completed. Investments made by the Unitranche Fund must be
    approved by the investment committee of the Unitranche Fund,
    which includes a representative from the Company. Therefore,
    this commitment to the Unitranche Fund cannot be drawn without
    the Companys approval. 52




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 4. Debt
    2009


2008Annual






AnnualFacility

Amount


Interest


Facility

Amount

InterestAmount

Drawn


Cost(1)


Amount

Drawn

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

$1,015.0


$1,015.0



9.8
%(5)

$1,015.0

$1,015.0


7.8
%Publicly issued unsecured notes payable

877.5


877.5



6.7
%

880.0

880.0


6.7
%Total notes payable

1,892.5


1,892.5



8.3
%

1,895.0

1,895.0


7.3
%Revolving line of
    credit(4)

165.0


50.0



6.3
%(2)(5)

632.5

50.0


4.3
%(2)Total debt

$2,057.5


$1,942.5



8.6
%(3)(5)

$2,527.5

$1,945.0


7.7
%(3)   (1)
    The weighted average annual
    interest cost is computed as the (a) annual stated interest on
    the debt plus any applicable default interest, 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 $6.0 million at March 31, 2009, and
    $8.5 million at December 31, 2008.(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.(4)
    At March 31, 2009,
    $1.5 million remained unused on the revolving line of
    credit, net of amounts committed for standby letters of credit
    of $113.5 million issued under the credit facility. See
    discussion below.(5)
    Events of default have occurred and
    are continuing under the Revolving Line of Credit and Private
    Notes which have increased the interest rates by
    2.00% during the continuance of such events of default.
    Excluding this default interest, the annual interest cost on
    total debt would have been 7.5%.  Notes
    Payable
  Revolving Line of Credit.
      Privately Issued Unsecured
    Notes Payable.
 53




---



##### 



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

Amount

Maturity Date6.625% Notes due 2011

$397.5

July 15, 20116.000% Notes due 2012

250.0

April 1, 20126.875% Notes due 2047

230.0

April 15, 2047Total

$877.5  54




---



##### 



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


Publicly Issued($ in millions)

Unsecured Notes


Unsecured NotesYear

Payable(1)


Payable


Total2009

$
1,015.0


$



$
1,015.02010










2011






397.5



397.52012






250.0



250.02013










Thereafter






230.0



230.0Total

$
1,015.0


$
877.5


$
1,892.5   (1)

    The private notes have stated contractual maturities as follows:
    2009  $252.5 million, 2010 
    $408.0 million, 2011  $72.5 million,
    2012  $89.0 million, 2013 
    $140.5 million, and thereafter 
    $52.5 million.   55




---



##### 



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

Total


2009


2010


2011


2012


2013


After 2013Guarantees

$
19.2


$
7.5


$
6.4


$
4.4


$
0.1


$



$
0.8Standby letters of credit


113.5



113.5



















Total

$
132.7


$
121.0


$
6.4


$
4.4


$
0.1


$



$
0.8        56




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 6. Shareholders
    Equity
     (in millions)

2009


2008Number of common shares






8.3Gross proceeds

$



$
175.5Less costs, including underwriting fees






4.6Net proceeds

$



$
170.9       2009


2008(in millions, except per share amounts)Shares issued






0.2Average price per share

$



$
19.49Shares purchased by plan agent for shareholders






Average price per share






   Note 7. Earnings
    Per Common Share
     (in millions, except per share
    amounts)

2009


2008Net increase (decrease) in net assets resulting from operations

$
(347.7
)

$
(40.7
)Weighted average common shares
    outstanding  basic


178.7



161.5Dilutive options outstanding






Weighted average common shares outstanding  diluted


178.7



161.5Basic earnings (loss) per common share

$
(1.95
)

$
(0.25
)Diluted earnings (loss) per common share

$
(1.95
)

$
(0.25
)   Note 8. Employee
    Compensation Plans
    57




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 8. Employee Compensation Plans, continued
            ($ in millions)

2009


2008IPA

$



$
2.4IPA mark to market expense (benefit)






(4.1
)Total IPA expense (benefit)

$



$
(1.7
)Total IPB expense

$



$
1.7    Note 9. Stock
    Option Plan
    58




---



##### 



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

March 31,(in millions, except per share
    amounts)

Shares


Per Share

Term (Years)

2009(1)Options outstanding at January 1, 2009


19.7


$
26.56Granted


10.6


$
0.73Exercised





$
Forfeited


(3.6
)

$
26.73Options outstanding at March 31, 2009


26.7


$
16.28

5.98

$9.1Exercisable at March 31,
    2009(2)


9.8


$
28.23

5.14

$Exercisable and expected to be exercisable at March 31,
    2009(3)


23.2


$
16.37

5.95

$8.2   (1)
    Represents the difference between
    the market value of the options at March 31, 2009, 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 March 31, 2009, is calculated based on an
    estimate of expected forfeitures.    Note 10. Dividends
    and Distributions and Taxes
    59




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 10. Dividends and Distributions and Taxes,
    continued
             Note 11. Supplemental
    Disclosure of Cash Flow Information
      60




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 11. Supplemental Disclosure of Cash Flow
    Information, continued
     61




---



##### 



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


for theThree Months Ended


Year EndedMarch 31,


December 31,2009(1)


2008


2008Per Common Share DataNet asset value, beginning of period

$
9.62


$
17.54


$
17.54Net investment
    income(2)


0.16



0.43



1.23Net realized gains
    (losses)(2)(3)


(0.15
)


0.02



(0.75
)Net investment income plus net realized gains
    (losses)(2)


0.01



0.45



0.48Net change in unrealized appreciation or
    depreciation(2)(3)


(1.96
)


(0.70
)


(6.49
)Net increase (decrease) in net assets resulting from
    operations(2)


(1.95
)


(0.25
)


(6.01
)Net decrease in net assets from shareholder distributions






(0.65
)


(2.60
)Net increase in net assets from capital share
    transactions(2)






0.35



0.69Net asset value, end of period

$
7.67


$
16.99


$
9.62Market value, end of period

$
1.59


$
18.43


$
2.69Total
    return(4)


(40.9
)%


(11.4
)%


(82.5
)%Ratios and Supplemental Data($ and shares in millions, except per share amounts)Ending net assets

$
1,369.8


$
2,828.4


$
1,718.4Common shares outstanding at end of period


178.7



166.5



178.7Diluted weighted average common shares outstanding


178.7



161.5



173.0Employee, employee stock option and administrative
    expenses/average net
    assets(5)


1.40
%


1.28
%


5.47
%Total operating expenses/average net
    assets(5)(6)


4.41
%


2.62
%


11.39
%Income tax expense (benefit), including excise tax/average net
    assets(5)


(0.02
)%


0.07
%


0.10
%Net investment income/average net
    assets(5)


1.91
%


2.48
%


8.47
%Net increase (decrease) in net assets resulting from
    operations/average net
    assets(5)


(22.52
)%


(1.45
)%


(41.34
)%Portfolio turnover
    rate(5)


1.25
%


5.62
%


24.00
%Average debt outstanding

$
1,945.0


$
2,209.5


$
2,091.6Average debt per
    share(2)

$
10.88


$
13.68


$
12.09   (1)
    The results for the three months ended March 31, 2009, 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 (losses) 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)
    Total return assumes the reinvestment of all dividends paid for
    the periods presented.(5)
    The ratios for the three months ended March 31, 2009 and
    2008, do not represent annualized results.(6)
    Includes 0.19% for the effect of the impairment of long-lived
    asset during the three months ended March 31, 2009. 62




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Note 13. Litigation
        Rule 10b-5
 63




---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
   Note 13. Litigation,
    continued
        Note 14.
    Subsequent Events
  FSP 157-4.
    64




---



##### 



Report of
    Independent Registered Public Accounting Firm  The Board
    of Directors and Shareholders
 Allied Capital Corporation:
            
    65




---



##### 





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,








March 31,Portfolio Company



Credited





2008


Gross


Gross


2009(in thousands)

Investment(1)

to
    Income(6)


Other(2)


Value


Additions(3)


Reductions(4)


ValueCompanies More Than 25% OwnedAGILE Fund I, LLC

Equity Interests









$
497


$



$
(81
)

$
416(Private Equity Fund)AllBridge Financial, LLC

Equity Interests










10,960



1,673



(1,562
)


11,071(Asset Management)Allied Capital Senior Debt Fund, L.P.

Equity Interests










31,800



1,077







32,877(Private Debt Fund)Avborne, Inc.

Preferred Stock










942







(4
)


938(Business Services)

Common Stock






















Avborne Heavy Maintenance, Inc.

Common Stock














660







660(Business Services)Aviation Properties Corporation

Common Stock






















(Business Services)Border Foods, Inc.

Senior Loan

$
1,315







33,027



1,102



(229
)


33,900(Consumer Products)

Preferred Stock










11,851







(2,636
)


9,215Common Stock






















Calder Capital Partners, LLC

Senior
    Loan(5)










953







(72
)


881(Asset Management)

Equity Interests






















Callidus Capital Corporation

Subordinated Debt


720







16,068



135







16,203(Asset Management)

Common Stock










34,377







(6,672
)


27,705Ciena Capital LLC

Senior
    Loan(5)










104,883







(40,795
)


64,088(Financial Services)

Class B Equity Interests






















Class C Equity Interests














3,300



(3,300
)


CitiPostal Inc.

Senior Loan


8







681



1







682(Business Services)

Unitranche Debt


1,567







51,548



144







51,692Subordinated Debt


379







9,114



377







9,491Common Stock










8,616







(8,616
)


Coverall North America, Inc.

Unitranche Debt


969







31,948



8







31,956(Business Services)

Subordinated Debt


210







5,549



1







5,550Common Stock










17,968



1,043







19,011CR Holding, Inc.

Subordinated
    Debt(5)










17,360







(7,368
)


9,992(Consumer Products)

Common Stock






















Crescent Equity Corp.

Senior Loan


11







433











433(Business Services)

Subordinated Debt


58







1,135







(1,135
)


Subordinated
    Debt(5)










17,479







(11,266
)


6,213Common Stock










4,580



1,341



(5,882
)


39Direct Capital Corporation

Senior
    Loan(5)














8,240







8,240(Financial Services)

Subordinated
    Debt(5)










13,530







(1,140
)


12,390Common Stock






















Financial Pacific Company

Subordinated Debt


2,683







62,189



10



(4,637
)


57,562(Financial Services)

Preferred Stock






















Common Stock






















ForeSite Towers, LLC

Equity Interest










889



6







895(Tower Leasing)Global Communications, LLC

Senior
    Loan(5)










1,335











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

Senior
    Loan(5)










13,678



50



(285
)


13,443(Retail)

Common Stock






















Hot Stuff Foods, LLC

Senior Loan


539







42,378



8,944



(1,210
)


50,112(Consumer Products)

Subordinated
    Debt(5)






















Common Stock






















  See related footnotes at the end of
    this schedule.
 66




---



##### 



PRIVATE FINANCE



Amount of Interest or Dividends


December 31,








March 31,Portfolio Company



Credited





2008


Gross


Gross


2009(in thousands)

Investment(1)

to
    Income(6)


Other(2)


Value


Additions(3)


Reductions(4)


ValueHuddle House, Inc.

Subordinated Debt

$
2,168






$
57,067


$
450


$



$
57,517(Retail)

Common Stock










20,922







(3,467
)


17,455IAT Equity, LLC and Affiliates

Subordinated Debt


135







6,000











6,000d/b/a Industrial Air Tool

Equity Interests










8,860



218







9,078(Industrial Products)Impact Innovations Group, LLC

Equity Interests in(Business Services)

Affiliate










321



1







322Insight Pharmaceuticals

Subordinated Debt


1,731







45,827



244



(7
)


46,064Corporation

Subordinated
    Debt(5)










17,532



598



(598
)


17,532(Consumer Products)

Preferred Stock










4,068



1,390







5,458Common Stock






















Jakel, Inc.

Subordinated
    Debt(5)










374











374(Industrial Products)Knightsbridge CLO 2007-1 Ltd.

Class E Notes


503







14,866



118







14,984(CLO)

Income Notes


1,530







35,214



1,529



(16,312
)


20,431Knightsbridge CLO
    2008-1 Ltd.

Class C Notes


296







12,800







(619
)


12,181(CLO)

Class D Notes


205







8,000







(954
)


7,046Class E Notes


286







10,573



63



(1,441
)


9,195Income Notes


898







21,315



898



(2,745
)


19,468MHF Logistical Solutions, Inc.

Subordinated
    Debt(5)






















(Business Services)

Preferred Stock






















Common Stock






















MVL Group, Inc.

Senior Loan


901







30,663



6



(505
)


30,164(Business Services)

Subordinated Debt


1,282







40,994



302



(9,340
)


31,956Subordinated
    Debt(5)










86







(86
)


Common Stock






















Old Orchard Brands, LLC

Subordinated Debt


917







18,882



262



(19,144
)


(Consumer Products)

Equity Interests










27,763







(27,763
)


Penn Detroit Diesel Allison, LLC

Subordinated Debt


1,489







37,869



291







38,160(Business Services)

Equity Interests










21,100







(909
)


20,191Service Champ, Inc.

Subordinated Debt


1,060







26,984



178







27,162(Business Services)

Common Stock










21,156



1,673







22,829Stag-Parkway, Inc.

Unitranche Debt


169







17,962



418



(18,380
)


(Business Services)

Subordinated Debt


395











18,524







18,524Common Stock










6,968







(1,387
)


5,581Startec Equity, LLC

Equity Interests










332







(325
)


7(Telecommunications)Unitranche Fund LLC

Subordinated Certificates


2,929







125,423







(902
)


124,521(Private Debt Fund)

Equity Interests










1











1Worldwide Express Operations, LLC

Subordinated
    Debt(5)





$
41



2,032







(2,032
)


(Business Services)

Equity Interests














300



(300
)


Warrants






















Total companies more than 25% owned

$
25,353






$
1,187,722










$
1,039,191Companies 5% to 25% Owned10th Street, LLC

Subordinated Debt

$
708






$
21,439


$
223


$
(5
)

$
21,657(Business Services)

Equity Interests










975







(464
)


511Option










25











25Advantage Sales &

Subordinated Debt


2,286







135,000







(135,000
)


Marketing, Inc.

Equity Interests










5,000







5,000



(Business Services)Air Medical Group Holdings LLC

Senior Loan


33







3,139



5,344



(6,405
)


2,078(Healthcare Services)

Equity Interests










10,800



1,300







12,100Alpine ESP Holdings, Inc.

Preferred Stock






















(Business Services)

Common Stock






















Amerex Group, LLC

Subordinated Debt


1,772







8,784



1







8,785(Consumer Products)

Equity Interests


1,800







9,932



573







10,505BB&T Capital

Equity Interests










11,063







(231
)


10,832Partners/WindsorMezzanine Fund, LLC(Private Equity Fund)Becker Underwood, Inc.

Subordinated Debt


425







25,502



216



(25,718
)


(Industrial Products)

Common Stock










2,267



2,748



(5,015
)


Drew Foam Companies, Inc.

Preferred Stock










512







(78
)


434(Business Services)

Common Stock






















  See related footnotes at the end of
    this schedule.
 67




---



##### 



PRIVATE FINANCE



Amount of Interest or Dividends


December 31,








March 31,Portfolio Company



Credited





2008


Gross


Gross


2009(in thousands)

Investment(1)

to
    Income(6)


Other(2)


Value


Additions(3)


Reductions(4)


ValueDriven Brands, Inc.

Subordinated Debt

$
3,545






$
83,698


$
1,783


$
(1,913
)

$
83,568(Consumer Services)

Common Stock










4,855







(2,355
)


2,500Hilden America, Inc.

Common Stock










76







76



(Consumer Products)Lydall Transport, Ltd.

Equity Interests










345



19







364(Business Services)Multi-Ad Services, Inc.

Unitranche Debt


86







2,941



23



(493
)


2,471(Business Services)

Equity Interests










1,782



403







2,185Pendum Acquisition, Inc.
























(Business Services)Postle Aluminum Company, LLC

Senior Loan














34,876



(21,242
)


13,634(Industrial Products)

Subordinated
    Debt(5)














23,868



(23,868
)


Equity Interest






















Progressive International Corporation

Preferred Stock










1,125



22







1,147(Consumer Products)

Common Stock










4,600







(900
)


3,700Warrants






















Regency Healthcare Group, LLC

Senior Loan


44











4,001



(2,095
)


1,906(Healthcare Services)

Unitranche Debt


305







10,825



2



(305
)


10,522Equity Interests










2,050







(95
)


1,955SGT India Private Limited

Common Stock














3



(3
)


(Business Services)Soteria Imaging Services, LLC

Subordinated Debt










4,054



17







4,071(Healthcare Services)

Equity Interests










1,971







(461
)


1,510Triax Holdings, LLC

Subordinated
    Debt(5)


132



















(Consumer Products)

Equity Interests






















Universal Environmental

Equity Interests






















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

$
11,136






$
352,760










$
196,460   This schedule should be read in
    conjunction with the Companys consolidated financial
    statements, including the consolidated statement of investments
    and Note 3 to the consolidated financial statements.
    Note 3 includes additional information regarding activities
    in the private finance portfolio.
  (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 March 31, 2009.  (2)
    Other includes interest, dividend, or other income which was
    applied to the principal of the investment and therefore reduced
    the total investment. These reductions are also included in the
    Gross Reductions for the investment, as applicable.(3)
    Gross additions include increases in the cost basis of
    investments resulting from new portfolio investments,
    paid-in-kind
    interest or dividends, the amortization of discounts and closing
    fees, the exchange of one or more existing securities for one or
    more new securities and the movement of an existing portfolio
    company into this category from a different category. Gross
    additions also include net increases in unrealized appreciation
    or net decreases in unrealized depreciation.(4)
    Gross reductions include decreases in the cost basis of
    investments resulting from principal collections related to
    investment repayments or sales, the exchange of one or more
    existing securities for one or more new securities and the
    movement of an existing portfolio company out of this category
    into a different category. Gross reductions also include net
    increases in unrealized depreciation or net decreases in
    unrealized appreciation.(5)
    Loan or debt security is on non-accrual status at March 31,
    2009, 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. 68




---



##### 





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, 2008. 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
        March 31,


December 31,2009



2008


2008Private finance


97

%


98%



97%Commercial real estate finance


3

%


2%



3%  69




---



##### 



and/or
      PORTFOLIO AND
    INVESTMENT ACTIVITY
    At and for the


At and for theThree Months Ended


Year EndedMarch 31,


December 31,($ in millions)

2009


2008


2008Portfolio at value

$
2,909.1


$
4,635.6


$
3,493.0Investments funded

$
39.9


$
275.1


$
1,078.2Payment-in-kind interest and dividends, net of cash collections

$
7.7


$
13.4


$
53.4Principal collections related to investment repayments
    or sales(1)

$
241.8


$
264.8


$
1,037.3Yield on interest-bearing portfolio
    investments(2)


11.8
%


12.3
%


12.1
%   (1)
    Principal collections related to investment repayments or sales
    for the three months ended March 31, 2009, included
    $132.2 million of cash collections related to notes and
    other receivables received from the sale of investments in one
    portfolio company in prior periods. Principal collections
    related to investment repayments or sales for the three months
    ended March 31, 2008, and year ended December 31,
    2008, included collections of $30.0 million and $216.3
    million, respectively, related to the sale of loans to certain
    of our Managed Funds.(2)
    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 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. 70




---



##### 



Private
    Finance
    At and for


At and for theThree Months Ended March 31,


Year Ended December 31,2009


2008


2008($ in millions)

Value


Yield(1)


Value


Yield(1)


Value


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

$
289.1



5.9%


$
325.7



7.0%


$
306.3



5.6%Unitranche debt


403.8



12.1%



655.7



11.8%



456.4



12.0%Subordinated debt


1,492.7



13.5%



2,430.4



13.0%



1,829.1



12.9%Total loans and debt securities


2,185.6



12.3%



3,411.8



12.2%



2,591.8



11.9%Equity securities:Preferred shares/income notes of
    CLOs(2)


104.4



8.0%



197.4



15.8%



179.2



16.4%Subordinated certificates in Unitranche
    Fund LLC(2)


124.5



9.2%



31.5



12.4%



125.4



12.0%Other equity securities


415.5







879.1







502.7Total equity securities


644.4







1,108.0







807.3Total portfolio

$
2,830.0






$
4,519.8






$
3,399.1Investments funded

$
38.9
(4)





$
274.6






$
1,068.1Payment-in-kind interest and dividends, net of cash collections

$
7.7






$
13.2






$
53.2Principal collections related to investment repayments or
    sales(3)

$
240.7






$
256.4






$
1,020.5   (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 divided by
    (b) total investment at value. The weighted average yields
    are computed as of the balance sheet date.(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 $132.2 million of cash collections during the
    three months ended March 31, 2009, related to notes and
    other receivables received from the sale of investments in prior
    periods. Also includes collections from the sale or repayment of
    senior loans totaling $25.2 million, $48.6 million,
    and $285.3 million for the three months ended
    March 31, 2009 and 2008, and for the year ended
    December 31, 2008, respectively.(4)
    Includes $20.5 million funded under pre-existing
    commitments under revolving lines of credit. During the three
    months ended March 31, 2009, a total of $15.8 million
    was repaid under these arrangements, which is included in
    principal collections related to investment repayments or sales.  and/or and/or
 71




---



##### 



Investment Activity.
  For the Three Months Ended March 31, 2009Debt 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

$
20.4



7.0%


$
8.3



8.0%


$
28.7



7.3%Total loans and debt securities


20.4



7.0%



8.3



8.0%



28.7



7.3%Equity


3.9







6.3







10.2Total

$
24.3






$
14.6






$
38.9   For the Three Months Ended March 31, 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

$
26.8



7.4%


$
10.4



6.7%


$
37.2



7.2%Unitranche
    debt(2)


4.5



10.3%



0.5



6.6%



5.0



9.9%Subordinated debt


129.9
(3)


12.0%



31.3



14.2%



161.2



12.4%Total loans and debt securities


161.2



11.2%



42.2



12.3%



203.4



11.4%Preferred shares/income notes of
    CLOs(4)


3.0



27.6%











3.0



27.6%Subordinated certificates in Unitranche Fund LLC


30.7



12.4%











30.7



12.4%Equity


13.6







23.9







37.5Total

$
208.5






$
66.1






$
274.6   For the Year Ended December 31, 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

$
175.9



7.4%


$
13.9



5.4
%

$
189.8



7.2
%Senior secured loan to Ciena Capital LLC










319.0



0.0
%(5)


319.0



0.0
%(5)Unitranche
    debt(2)


15.3



10.5%



0.5



6.6
%


15.8



10.4
%Subordinated debt


246.4
(3)


12.6%



54.8



15.4
%


301.2



13.1
%Total loans and debt securities


437.6



10.4%



388.2



2.4
%


825.8



6.6
%(6)Preferred shares/income notes of
    CLOs(4)


35.6



18.6%











35.6



18.6
%Subordinated certificates in Unitranche  Fund LLC


124.7



10.9%











124.7



10.9
%Equity


40.5







41.5







82.0Total

$
638.4






$
429.7






$
1,068.1    (1)
    The weighted average yield on interest-bearing investments is
    computed as the (a) annual stated interest on accruing
    interest-bearing investments, divided by (b) total
    interest-bearing investments 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 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 three months ended
    March 31, 2008, and year ended December 31, 2008,
    included $2.0 million and $43.8 million, respectively,
    in investments in the bonds of collateralized loan obligations
    (CLOs). Certain of these CLOs are managed 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)
    The senior secured loan to Ciena Capital LLC was acquired on
    September 30, 2008, and was placed on non-accrual status on
    the purchase date.(6)
    Excluding the senior secured loan to Ciena, the weighted average
    yield on new investments for the year ended December 31,
    2008 was 10.8%. 72




---



##### 



73




---



##### 



Outstanding Investment Commitments.
  Companies





CompaniesMore Than


Companies 5%


Less Than($ in millions)

25%
    Owned(1)


to 25% Owned


5% Owned


TotalSenior loans

$
11.2


$
11.8


$
84.8


$
107.8
(2)Unitranche debt


3.0







15.6



18.6Subordinated debt


19.5



4.3



3.0



26.8Total loans and debt securities


33.7



16.1



103.4



153.2Unitranche Fund


399.6











399.6Equity securities


20.2



10.3



36.0



66.5
(3)Total

$
453.5


$
26.4


$
139.4


$
619.3   (1)
    Includes a $4.0 million
    revolving line of credit commitment for working capital to
    Callidus Capital Corporation (Callidus), a portfolio company
    controlled by us, which owns 100% of Callidus Capital
    Management, LLC, an asset management company that structures and
    manages collateralized loan obligations (CLOs), collateralized
    debt obligations (CDOs), and other related investments.(2)
    Includes $105.1 million in the
    form of revolving senior debt facilities to 27 companies.(3)
    Includes $45.2 million to
    11 private equity and venture capital funds, including
    $3.3 million in co-investment commitments to one private
    equity fund. These fund commitments are generally drawn over a
    multi-year
    period of time as the funds make investments.      Investments in Collateralized Loan Obligations and
    Collateralized Debt Obligations (CLO/CDO
    Assets).
  2009


2008($ in millions)

Cost


Value


Yield(1)


Cost


Value


Yield(1)CLO/CDO
    bonds(2)

$
128.0


$
81.9



12.9%


$
127.7


$
86.1



18.5%Preferred shares/income notes of CLOs


250.4



104.4



7.9%



248.2



179.2



16.4%Total

$
378.4


$
186.3






$
375.9


$
265.3Percentage of total assets






5.5%











7.1%   (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 market yield used in the valuation of the CLO and CDO
    assets may be different than the interest yields shown above.
    See discussion below.(2)
    Included in private finance subordinated debt.   74




---



##### 



($ in millions)

2009


2008Bonds

$
240.7


$
268.3Syndicated loans


4,428.8



4,477.3Cash(1)


130.6



89.6Total underlying collateral assets at
    cost(2)

$
4,800.1


$
4,835.2   (1)
    Includes undrawn liability amounts.(2)
    At March 31, 2009, and December 31, 2008, the total
    cost basis of defaulted obligations was $134.0 million and
    $95.0 million, respectively, or approximately 2.8% and
    2.0%, respectively, of the total underlying collateral assets.      Ciena Capital LLC.
   75




---



##### 



debtor-in-possession
    March 31, 2009


December 31, 2008($ in millions)

Cost


Value


Cost


ValueSenior Loan

$
319.0


$
64.1


$
319.0


$
104.9Class B Equity
    Interests(1)


119.5







119.5



Class C Equity
    Interests(1)


112.6







109.3



Total

$
551.1


$
64.1


$
547.8


$
104.9   (1)

    At March 31, 2009 and December 31, 2008, we held 100%
    of the Class B equity interests and 94.9% of the
    Class C equity interests.             76




---



##### 



Commercial Real
    Estate Finance
    At and for theAt and for the


Year EndedThree Months Ended March 31,


December 31,2009


2008


2008($ in millions)

Value


Yield(1)


Value


Yield(1)


Value


Yield(1)Portfolio at value:Commercial mortgage loans

$
53.9



6.7%


$
53.5



7.9%


$
53.5



7.4%Real estate owned


7.8







30.2







20.8Equity interests


17.3







32.1







19.6Total portfolio

$
79.0






$
115.8






$
93.9Investments funded

$
1.1






$
0.5






$
10.1Payment-in-kind interest, net of cash collections

$







$
0.2






$
0.2Principal collections related to investment repayments or sales

$
1.1






$
8.4






$
16.8   (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
  and/or
   77




---



##### 



Assets of Managed Funds($ in millions)

March 31,


December 31,


ManagementName of Fund

2009


2008


Fee(2)Unitranche Fund LLC

$
781.3


$
789.8



0.375
%Allied Capital Senior Debt Fund, L.P.


397.7



412.9



1.625
%(1)(2)Knightsbridge CLO
    2007-1
    Ltd.


502.0



500.6



0.600
%Knightsbridge CLO
    2008-1
    Ltd.


304.6



304.8



0.600
%AGILE Fund I, LLC


83.2



99.3




(1)Emporia Preferred Funding I, Ltd.


414.2







0.625
%(1)Emporia Preferred Funding II, Ltd.


352.5







0.650
%(1)Emporia Preferred Funding III, Ltd.


406.2







0.650
%(1)Total Assets

$
3,241.7


$
2,107.4   (1)
    In addition to the management fees, we are entitled to an
    incentive allocation subject to certain performance benchmarks.
    There can be no assurance that the incentive allocation will be
    earned.(2)
    Management fees are stated as a percent of assets except for the
    Allied Capital Senior Debt Fund, L.P. (ACSDF) which
    is stated as a percent of equity capital. The management fee
    paid by ACSDF was 2.000% at December 31, 2008 and reduced
    to 1.625% effective January 1, 2009.  2007-1 2008-1
        ($ in millions)



March 31, 2009


December 31, 2008Name of Fund

Investment Description

Cost


Value


Cost


ValueUnitranche
    Fund LLC(1)

Subordinated Certificates and Equity Interests

$
124.5


$
124.5


$
125.4


$
125.4Allied Capital Senior Debt Fund, L.P.

Equity interests


31.8



32.9



31.8



31.8Knightsbridge CLO
    2007-1 Ltd.

Class E Notes and Income Notes


60.4



35.4



59.6



50.1Knightsbridge CLO
    2008-1 Ltd.

Class C Notes, Class D Notes, Class E Notes and Income Notes


52.3



47.9



52.7



52.7AGILE Fund I, LLC

Equity Interests


0.7



0.4



0.7



0.5Total



$
269.7


$
241.1


$
270.2


$
260.5   (1)

    We have committed up to $525.0 million of subordinated
    certificates to the Unitranche Fund. The Unitranche Fund will be
    capitalized as investment transactions are completed.
    Investments made by the Unitranche Fund must be approved by the
    investment committee of the Unitranche Fund, which includes a
    representative from us. Therefore, our commitment to the
    Unitranche Fund cannot be drawn without our approval. 78




---



##### 



PORTFOLIO ASSET
    QUALITY
  Loans and Debt Securities on Non-Accrual
    Status.
    ($ in millions)

2009


2008Private financeCompanies more than 25% owned


$134.5



$176.1Companies 5% to 25% owned


13.6



Companies less than 5% owned


69.3



151.8Commercial real estate finance


11.0



7.7Total


$228.4



$335.6Percentage of total portfolio


7.9
%


9.6
%     Loans and Debt Securities Over 90 Days
    Delinquent.
  ($ in millions)

2009


2008Private finance

$
65.8



$106.6Commercial mortgage loans


1.4



1.4Total

$
67.2



$108.0Percentage of total portfolio


2.3
%


3.1
%     and payment-in-kind payment-in-kind payment-in-kind
 79




---



##### 



RESULTS OF
    OPERATIONS
  Comparison of the
    Three Months Ended March 31, 2009 and 2008
    For the Three MonthsEnded March 31,





Percent(in thousands, except per share
    amounts)

2009


2008


Change


Change(unaudited)Interest and Related Portfolio IncomeInterest and dividends

$
88,730


$
134,660


$
(45,930
)


(34
)%Fees and other income


6,452



10,284



(3,832
)


(37
)%Total interest and related portfolio income


95,182



144,944



(49,762
)


(34
)%ExpensesInterest


43,485



37,560



5,925



16
%Employee


11,070



22,652



(11,582
)


(51
)%Employee stock options


773



4,195



(1,994
)


(82
)%Administrative


9,845



9,019



826



9
%Impairment of long-lived asset


2,873







2,873



*Total operating expenses


68,046



73,426



(5,380
)


(8
)%Gain on repurchase of debt


1,995







1,995



*Net investment income before income taxes


29,131



71,518



(42,387
)


(59
)%Income tax expense (benefit), including excise tax


(378
)


1,969



(2,347
)


(119
)%Net investment income


29,509



69,549



(40,040
)


(58
)%Net Realized and Unrealized Gains (Losses)Net realized gains (losses)


(27,109
)


3,143



(30,252
)Net change in unrealized appreciation or depreciation


(350,070
)


(113,404
)


(236,666
)Total net gains (losses)


(377,179
)


(110,261
)


(266,918
)Net income (loss)

$
(347,670
)

$
(40,712
)

$
(309,958
)


(754
)%Diluted earnings (loss) per common share

$
(1.95
)

$
(0.25
)

$
(1.70
)


(680
)%Weighted average common shares outstanding  diluted


178,692



161,507



17,185



11
%   *
    Comparisons may not be meaningful. Net change in unrealized
    appreciation or depreciation and net gains (losses) can
    fluctuate significantly from period to period. 80




---



##### 



Interest and Related Portfolio Income.
  Interest and Dividends.
  ($ in millions)

2009

2008InterestPrivate finance loans and debt securities

$
70.8

$
107.0Preferred shares/income notes of CLOs


9.6


7.5Subordinated certificates in Unitranche Fund LLC


2.9


0.3Commercial mortgage loans


0.9


1.2Cash, U.S. Treasury bills, money market and other securities


0.0


1.8Total interest


84.2


117.8Dividends


4.5


16.9Total interest and dividends

$
88.7

$
134.7     2009


2008($ in millions)

Value

Yield(1)


Value

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

$
289.1


5.9
%

$
325.7


7.0
%Unitranche debt


403.8


12.1
%


655.7


11.8
%Subordinated debt


1,492.7


13.5
%


2,430.4


13.0
%Equity securities:Preferred shares/income notes of CLOs


104.4


8.0
%


197.4


15.8
%Subordinated certificates in Unitranche Fund LLC


124.5


9.2
%


31.5


12.4
%Commercial real estate:Commercial Mortgage loans


53.9


6.7
%


53.5


7.9
%Total interest-bearing investments

$
2,468.4


11.8
%

$
3,694.2


12.3
%   (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 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 rate 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.   81




---



##### 



Fees and Other Income.
   ($ in millions)

2009


2008Fund management
    fees(1)

$
2.8



0.6Management, consulting and other services provided to portfolio
    companies


2.2



2.9Loan prepayment premiums


0.8



Commitment, guaranty and other fees from portfolio companies


0.6



1.7Structuring and diligence





$
5.1Total fees and other income

$
6.4


$
10.3   (1)
    See Portfolio and Investment Activity  Managed
    Funds above.      Operating Expenses.
  Interest Expense.
 82




---



##### 



($ in millions)

2009


2008Total outstanding debt

$
1,942.5


$
2,191.6Average outstanding debt

$
1,945.0


$
2,209.5Weighted average
    cost(1)


8.6%



6.2%   (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.
  ($ in millions)

2009


2008Salaries and employee benefits

$
8.8


$
12.4Bonuses and performance awards


2.3



10.3Individual performance award (IPA)






2.4IPA mark to market expense (benefit)






(4.1
)Individual performance bonus (IPB)






1.7Total employee
    expense(1)

$
11.1


$
22.7Number of employees at end of period


134



186   (1)
    Excludes employee stock options
    expense. See below.     83




---



##### 



Employee Stock Options Expense.
  ($ in millions)

2009


2008Employee Stock Options Expense:Previously awarded, unvested options as of January 1, 2006

$



$
1.7Options granted on or after January 1, 2006


0.8



2.5Total employee stock options expense

$
0.8


$
4.2       Administrative Expense.
 84




---



##### 



Impairment of Long-Lived Asset.
  Income Tax Expense (Benefit), Including Excise
    Tax.
  ($ in millions)

2009


2008Income tax expense (benefit)

$
(0.4
)

$
(0.3
)Excise tax
    expense(1)






2.3Income tax expense (benefit), including excise tax

$
(0.4
)

$
2.0     (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 (losses).      Realized Gains and Losses.
  ($ in millions)

2009


2008Realized gains

$
12.8


$
32.7Realized losses


(39.9
)


(29.6
)Net realized gains (losses)

$
(27.1
)

$
3.1     ($ in millions)

2009


2008Reversal of previously recorded net unrealized appreciation
    associated with realized gains

$
(1.0
)

$
(32.5
)Reversal of previously recorded net unrealized appreciation
    associated with dividends received


(3.4
)


(13.5
)Reversal of previously recorded net unrealized depreciation
    associated with realized losses


17.0



28.5Total reversal

$
12.6


$
(17.5
)  85




---



##### 



($ in
    millions)
 2009Portfolio Company

AmountPrivate Finance:GC-Sun
    Holdings, LP

$
6.8Other


1.8Total private finance


8.6Commercial Real Estate:Real estate owned


4.1Other


0.1Total commercial real estate


4.2Total realized gains

$
12.8   2008Portfolio Company

AmountPrivate Finance:Norwesco, Inc.

$
10.7BenefitMall, Inc.


4.9Financial Pacific Company


3.1Penn Detroit Diesel Allison, LLC


1.7Service Champ, Inc.


1.7Advantage Sales & Marketing,
    Inc.(1)


3.2Coverall North America, Inc.


1.4CR Holding, Inc.


1.0Other


4.9Total private finance


32.6Commercial Real Estate:Other


0.1Total commercial real estate


0.1Total realized gains

$
32.7     (1) Includes
    an additional realized gain of $1.7 million related to the
    release of escrowed funds from the sale of our majority equity
    investment in 2006.
    ($ in
    millions)
 2009Portfolio Company

AmountPrivate Finance:Advantage Sales & Marketing, Inc.

$
27.3Becker Underwood, Inc.


2.8Old Orchard Brands, LLC


4.5Pro Mach, Inc.


2.9Tank Intermediate Holding Corp.


2.2Other


0.2Total private finance


39.9Commercial Real Estate:Other


Total commercial real estate


Total realized losses

$
39.9   2008Portfolio Company

AmountPrivate Finance:Crescent 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.


1.0Other


4.9Total private finance


29.3Commercial Real Estate:Other


0.3Total commercial real estate


0.3Total realized losses

$
29.6    86




---



##### 



Change in Unrealized Appreciation or
    Depreciation. Fair Value Measurements
        Valuation Methodology.
 87




---



##### 



88




---



##### 



and/or security-by-security
  FSP 157-4 FSP 157-4.
       89




---



##### 



2009


2008Number of private finance portfolio companies reviewed


93



124Percentage of private finance portfolio reviewed at value


94.0
%


94.0
%     Net Change in Unrealized Appreciation or
    Depreciation.
  ($ in millions)

2009(1)


2008(1)Net unrealized appreciation (depreciation)

$
(362.7
)

$
(95.9
)Reversal of previously recorded unrealized appreciation
    associated with realized gains


(1.0
)


(32.5
)Reversal of previously recorded net unrealized appreciation
    associated with dividends received


(3.4
)


(13.5
)Reversal of previously recorded unrealized depreciation
    associated with realized losses


17.0



28.5Net change in unrealized appreciation or depreciation

$
(350.1
)

$
(113.4
)   (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.      Per Share Amounts.
  OTHER
    MATTERS
  Regulated Investment Company Status.
 90




---



##### 



payment-in-kind payment-in-kind
    DIVIDENDS AND
    DISTRIBUTIONS
     91




---



##### 



FINANCIAL
    CONDITION, LIQUIDITY AND CAPITAL RESOURCES
  Events of Default, Liquidity and
    Operations.
             92




---



##### 



($ in millions)

2009


2008Cash and investments in money market and other securities
    (including money market and other securities: 2009-$0.0;
    2008-$0.3)

$
290.2


$
50.7Total assets

$
3,387.6


$
3,722.2Total debt outstanding

$
1,942.5


$
1,945.0Total shareholders equity

$
1,369.8


$
1,718.4Debt to equity ratio


1.42



1.13Asset coverage
    ratio(1)


171
%


188
%    (1)
    As a business development company,
    we generally are required to maintain a minimum ratio of 200% of
    total assets to total borrowings.   93




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##### 



($ in millions)

2009


2008Net cash provided by operating activities

$
240.1


$
111.3Add: portfolio investments funded


39.9



275.1Total cash provided by operating activities before new
    investments

$
280.0


$
386.4       2009


2008($ in millions)

Value


Yield


Value


YieldMoney market and other securities

$
0.0



0.2
%

$
0.3



1.7
%Cash


290.2



0.0
%


50.4



0.1
%Total

$
290.2



0.0
%

$
50.7



0.1
%           2009


2008Annual








AnnualFacility


Amount


Interest


Facility


Amount


Interest($ in millions)

Amount


Outstanding


Cost(1)


Amount


Outstanding


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

$
1,015.0



$1,015.0



9.8%
(5)

$
1,015.0


$
1,015.0



7.8%Publicly issued unsecured notes payable


877.5



877.5



6.7%



880.0



880.0



6.7%Total notes payable


1,892.5



1,892.5



8.3%



1,895.0



1,895.0



7.3%Revolving line of
    credit(2)


165.0



50.0



6.3%
(5)


632.5



50.0



4.3%
(3)Total debt

$
2,057.5



$1,942.5



8.6%
(5)

$
2,527.5


$
1,945.0



7.7%
(4)  94




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##### 



(1)
    The weighted average annual interest cost is computed as the
    (a) annual stated interest on the debt plus any applicable
    default interest, 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)
    At March 31, 2009 and December 31, 2008,
    $1.5 million and $460.2 million, respectively,
    remained unused on the revolving line of credit, net of amounts
    committed for standby letters of credit of $113.5 million
    and $122.3 million, respectively, issued under the credit
    facility.(3)
    The annual interest cost reflects the interest rate payable for
    borrowings under the revolving line of credit. In addition to
    the current interest rate payable, annual costs of commitment
    fees, other facility fees and amortization of debt financing
    costs related to the line of credit are $6.0 and
    $8.5 million, respectively, at both March 31, 2009,
    and December 31, 2008.(4)
    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.(5)
    Events of default have occurred and are continuing under the
    revolving line of credit and private notes which have increased
    the interest rates by 2.00% during the continuance of such
    events of default. Excluding this default interest, the annual
    interest cost on total debt would have been 7.5%.  Revolving Line of Credit.
      Privately Issued Unsecured
    Notes Payable.
    Amendments to Revolving Line of Credit and Privately
    Issued Unsecured Notes Payable.
 95




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##### 



Publicly Issued Unsecured Notes
    Payable.
  ($ in millions)

Amount


Maturity Date6.625% Notes due 2011

$
397.5



July 15, 20116.000% Notes due 2012


250.0



April 1, 20126.875% Notes due 2047


230.0



April 15, 2047Total

$
877.5        96




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##### 



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

Total


2009


2010


2011


2012


2013


2013Privately issued unsecured notes
    payable(1)

$
1,015.0


$
1,015.0


$



$



$



$



$
Publicly issued unsecured notes payable


877.5











397.5



250.0







230.0Revolving line of
    credit(2)


50.0



50.0



















Operating leases


14.1



3.4



4.4



1.7



1.7



1.7



1.2Total contractual obligations

$
1,956.6


$
1,068.4


$
4.4


$
399.2


$
251.7


$
1.7


$
231.2    (1)
    The private notes have stated contractual maturities as follows:
    2009-$252.5 million, 2010-$408.0 million,
    2011-$72.5 million, 2012-$89.0 million,
    2013-$140.5 million and thereafter-$52.5 million.(2)
    At March 31, 2009, $50.0 million was borrowed on the
    revolving line of credit and $113.5 million of standby
    letters of credit were issued under the credit facility. In
    March 2009, the commitment under our unsecured revolving
    line of credit was reduced to $165.0 million. See
    Revolving Line of Credit above.    Off-Balance
    Sheet Arrangements
    Amount of Commitment Expiration Per YearAfter($ in millions)

Total


2009


2010


2011


2012


2013


2013Guarantees

$
19.2


$
7.5


$
6.4


$
4.4


$
0.1


$



$
0.8Standby letters of credit


113.5



113.5



















Total commitments

$
132.7


$
121.0


$
6.4


$
4.4


$
0.1


$



$
0.8    97




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##### 



CRITICAL
    ACCOUNTING POLICIES
    Valuation of Portfolio
    Investments. Fair Value Measurements
     98




---



##### 



and/or security-by-security
  FSP 157-4 FSP 157-4.
    Net Realized Gains or Losses and Net Change in Unrealized
    Appreciation or Depreciation.
 99




---



##### 



Interest and Dividend Income.
        Fee Income.
  Federal and State Income Taxes and Excise
    Tax.
 100




---



##### 



Recent Accounting
    Pronouncements. Determining Fair Value
    When the Volume and Level of Activity for the Asset or Liability
    Have Significantly Decreased and Identifying Transactions That
    Are Not Orderly (FSP 157-4). FSP 157-4, FSP 157-4
  FSP 157-4 FSP 157-4
  Fair Value Measurements.
   Item 3.  Quantitative
    and Qualitative Disclosures About Market Risk   101




---



##### 



Item 4.  Controls
    and Procedures  Form 10-Q, Rules 13a-15 15d-15
   102




---



##### 



PART II.
    OTHER INFORMATION Item 1.  Legal
    Proceedings        Rule 10b-5
   103




---



##### 



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.
  Risks
    Related to Liquidity
  Certain events of default have occurred under our revolving
    credit facility and our private notes and, as a result, these
    lenders are permitted to accelerate repayment of the outstanding
    obligations thereunder.
        Our independent registered public accounting firm has
    expressed substantial doubt about our ability to continue as a
    going concern.
 104




---



##### 



Our use of leverage magnifies the potential for gain or loss
    on amounts invested and may increase the risk of investing in
    us.
    Regulations governing our operation as a BDC affect our
    ability to, and the way in which we, raise additional debt and
    equity capital.
   105




---



##### 



Our credit ratings may change and may not reflect all risks
    of an investment in the debt securities.
  Risks
    Related to Current Economic and Market Conditions
  We are currently in a period of capital markets disruption
    and severe recession and we do not expect these conditions to
    improve in the near future. These market conditions have
    materially and adversely affected the debt and equity capital
    markets in the United States, which has had and could continue
    to have a negative impact on our business and
    operations.
  Economic recessions, including the current global recession,
    could impair our portfolio companies and harm our operating
    results.
  Risks
    Related to Asset Values
  Declining asset values and illiquidity in the corporate debt
    markets have adversely affected, and may continue to adversely
    affect, the fair value of our portfolio investments, reducing
    the value of our assets.
 106




---



##### 



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.
      Risks
    Related to Our Portfolio
  Our portfolio of investments is illiquid.
    Investing in private companies involves a high degree of
    risk.
 107




---



##### 



Our borrowers may default on their payments, which may have a
    negative effect on our financial performance.
  We may be unable to fund our commitments to our portfolio
    companies as they become due, which may have a material adverse
    effect on our business.
  Our private finance investments may not produce current
    returns or capital gains.
  Our financial results could be negatively affected if a
    significant portfolio investment fails to perform as
    expected.
   108




---



##### 



We operate in a competitive market for investment
    opportunities.
  Risks
    Related to Regulation as a Business Development Company and
    Regulated Investment Company
  Loss of regulated investment company tax treatment could
    negatively impact our ability to service our debt and pay
    dividends.
  Failure to invest a sufficient portion of our assets in
    qualifying assets could preclude us from investing in accordance
    with our current business strategy.
 109




---



##### 



Changes in the law or regulations that govern us could have a
    material impact on us or our operations.
  Risks
    Related to Our Ability to Pay Dividends to Our
    Shareholders
  There is a risk that our common stockholders may not receive
    dividends or distributions.
  payment-in-kind payment-in-kind payment-in-kind
  Risks
    Related to Changes in Interest Rates
  Changes in interest rates may affect our cost of capital and
    net investment income.
  Risks
    Related to Asset Management Activities
  There are potential conflicts of interest between us and the
    funds managed by us.
 110




---



##### 



Our financial results could be negatively affected if our
    Managed Funds fail to perform as expected.
    Other
    Risks
  Our business depends on our key personnel.
  Results may fluctuate and may not be indicative of future
    performance.
  Our common stock price may be volatile.
  
    price and volume fluctuations in the overall stock market from
    time to time; 111




---



##### 




    significant volatility in the market price and trading volume of
    securities of business development companies or other financial
    services companies;
    volatility resulting from trading in derivative securities
    related to our common stock including puts, calls, long-term
    equity anticipation securities, or LEAPs, or short trading
    positions;
    the financial performance of the specific industries in which we
    invest on a recurring basis;
    changes in laws or regulatory policies or tax guidelines with
    respect to business development companies or regulated
    investment companies;
    actual or anticipated changes in our earnings or fluctuations in
    our operating results or changes in the expectations of
    securities analysts;
    general economic conditions and trends;
    loss of a major funding source; or
    departures of key personnel.  The trading market or market value of our publicly issued
    debt securities may be volatile.
  
    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 ratings assigned by national statistical ratings agencies;
    the general economic environment;
    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 common stock could be delisted from the New York Stock
    Exchange if we trade below $1.00 or if we fail to meet other
    listing criteria. 30-day
 112




---



##### 



Item 2.  Unregistered
    Sales of Equity Securities and Use of Proceeds    Issuer
    Purchases of Equity Securities
     Item 3.  Defaults
    Upon Senior Securities   Item 4.  Submission
    of Matters to a Vote of Security Holders   Item 5.  Other
    Information         113




---



##### 



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 3.2 filed with Allied Capitals
    Form 10-K
    on March 2, 2009).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). 114




---



##### 



ExhibitNumber

Description4.11

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).10.2(a)

First Amendment to Credit Agreement, dated December 30,
    2008. (Incorporated by reference to Exhibit 10.2 filed
    with Allied Capitals
    Form 8-K
    on December 31, 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).10.3(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). 115




---



##### 



ExhibitNumber

Description10.20(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).10.20(i)

Amendment to Allied Capital Corporation 401(k) Plan.10.21

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

Amendment to Employment Agreement, dated March 29, 2007,
    between Allied Capital and William L. Walton.
    (Incorporated by reference to Exhibit 10.1 filed with
    Allied Capitals
    Form 8-K
    filed on April 3, 2007).10.21(b)

Second Amendment to Employment Agreement, dated
    December 15, 2008, between Allied Capital and William L.
    Walton. (Incorporated by reference to Exhibit 10.21(b)
    filed with Allied Capitals
    Form 10-K
    for the year ended December 31, 2008.)10.21(c)

Third Amendment to Employment Agreement, dated February 26,
    2009, between Allied Capital and William L. Walton.
    (Incorporated by reference to Exhibit 10.21(c) filed
    with Allied Capitals
    Form 10-K
    for the year ended December 31, 2008.)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).10.22(b)

Second Amendment to Employment Agreement, dated
    December 15, 2008, between Allied Capital and Joan M.
    Sweeney. (Incorporated by reference to Exhibit 10.22(b)
    filed with Allied Capitals
    Form 10-K
    for the year ended December 31, 2008.)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).10.23(b)

Second Amendment to Employment Agreement, dated
    December 15, 2008, between Allied Capital and Penelope F.
    Roll. (Incorporated by reference to Exhibit 10.23(b)
    filed with Allied Capitals
    Form 10-K
    for the year ended December 31, 2008.)10.23(c)*

Third Amendment to Employment Agreement, dated May 5, 2009,
    between Allied Capital and Penelope F. Roll.10.24*

Employment Agreement, dated May 5, 2009, between Allied
    Capital and John M. Scheurer.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). 116




---



##### 



ExhibitNumber

Description10.26

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.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.
    (Incorporated by reference to Exhibit 10.38(b) filed
    with Allied Capitals
    Form 10-Q
    for the period ended June 30, 2008).10.39

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

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

Real Estate Securities Purchase Agreement. (Incorporated by
    reference to Exhibit 2.1 filed with Allied Capitals
    Form 8-K filed on May 4, 2005.)10.41

Platform Assets Purchase Agreement. (Incorporated by
    reference to Exhibit 2.2 filed with Allied Capitals
    Form 8-K filed on May 4, 2005.)10.42

Transition Services Agreement. (Incorporated by reference to
    Exhibit 10.1 filed with Allied Capitals Form 8-K
    filed on May 4, 2005.)10.43

First Omnibus Waiver and Amendment to the Note Agreements, dated
    as of July 25, 2008. (Incorporated by reference to
    Exhibit 10.40 filed with Allied Capitals
    Form 10-Q
    for the period ended June 30, 2008).10.43(a)

Second Omnibus Amendment to the Note Agreements, dated as of
    December 30, 2008. (Incorporated by reference to
    Exhibit 10.1 filed with Allied Capitals
    Form 8-K
    December 31, 2008).10.44*

Custodian Agreement, dated as of April 3, 2009 by and
    between Allied Capital Corporation and U.S. Bank National
    Association.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

Delaware 117




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##### 



ExhibitNumber

DescriptionAllied Capital REIT, Inc.

MarylandAllied Capital Holdings, LLC

DelawareAllied Capital Beteiligungsberatung GmbH (inactive)

Germany31.1*

Certification of the Chairman of the Board pursuant to
    Rule 13a-14
    of the Securities Exchange Act of 1934.31.2*

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

Certification of the Chief Financial Officer pursuant to Rule
    13a-14 of the Securities Exchange Act of 1934.31.4*

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

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

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

Certification of the Chief Financial Officer pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
    Section 1350.32.4*

Certification of the Chief Accounting Officer pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002,
    18 U.S.C. Section 1350.     *
    Filed herewith. 118




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##### 



SIGNATURES       Dated: May 11, 2009

/s/  William
    L. WaltonWilliam
    L. Walton
    Chairman of the Board/s/  John
    M. ScheurerJohn
    M. Scheurer
    Chief Executive Officer and President/s/  Penni
    F. RollPenni
    F. Roll
    Chief Financial Officer/s/  John
    C. WellonsJohn
    C. Wellons
    Chief Accounting Officer  119




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##### 



EXHIBIT
    INDEX
  ExhibitNumber

Description10
.20(i)

Amendment to Allied Capital Corporation 401(k) Plan.10
.23(c)

Third Amendment to Employment Agreement, dated May 5, 2009,
    between Allied Capital and Penelope F. Roll.10
.24

Employment Agreement, dated May 5, 2009, between Allied
    Capital and John M. Scheurer.10
.44

Custodian Agreement, dated as of April 3, 2009 between
    Allied Capital Corporation and U.S. Bank National
    Association.15


Letter regarding Unaudited Interim Financial Information.31
.1

Certification of the Chairman of the Board pursuant to
    Rule 13a-14
    of the Securities Exchange Act of 1934.31
.2

Certification of the Chief Executive Officer pursuant to Rule
    13a-14 of the Securities Exchange Act of 1934.31
.3

Certification of the Chief Financial Officer pursuant to Rule
    13a-14 of the Securities Exchange Act of 1934.31
.4

Certification of the Chief Accounting Officer pursuant to
    Rule 13a-14
    of the Securities Exchange Act of 1934.32
.1

Certification of the Chairman of the Board pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002,
    18 U.S.C. Section 1350.32
.2

Certification of the Chief Executive Officer pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
    Section 1350.32
.3

Certification of the Chief Financial Officer pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
    Section 1350.32
.4

Certification of the Chief Accounting Officer pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002,
    18 U.S.C. Section 1350.  120