##### 









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, 2007




|  |                                                                                             
|- | --------------------------------------------------------------------------------------------
|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


12b-2 x o Non-Accelerated o


o x












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##### 










ALLIED CAPITAL CORPORATION


FORM 10-Q TABLE OF CONTENTS


|                              |                                                                                                       |                                                                                                                          |     |   
|----------------------------- | ----------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------ | --- | --
|PART I. FINANCIAL INFORMATION |                                                                                                       |                                                                                                                         
|                              | Item 1. Financial Statements                                                                          |                                                                                                                          |    
|                              |                                                                                                       | Consolidated Balance Sheet as of
    March 31, 2007 (unaudited) and
    December 31, 2006                                |     | 1 
|                              |                                                                                                       | Consolidated Statement of Operations
    (unaudited)  For the Three Months Ended
    March 31, 2007 and 2006            |     | 2 
|                              |                                                                                                       | Consolidated Statement of Changes in Net
    Assets (unaudited)  For the Three Months Ended
    March 31, 2007 and 2006 |     | 3 
|                              |                                                                                                       | Consolidated Statement of Cash Flows
    (unaudited)  For the Three Months Ended
    March 31, 2007 and 2006            |     | 4 
|                              |                                                                                                       | Consolidated Statement of Investments as of
    March 31, 2007
    (unaudited)                                           |     | 5 
|                              |                                                                                                       | Consolidated Statement of Investments as of
    December 31, 2006                                                        |     | 16
|                              |                                                                                                       | Notes to Consolidated Financial
    Statements                                                                           |     | 27
|                              |                                                                                                       | Report of Independent Registered Public
    Accounting Firm                                                              |     | 56
|                              | Item 2. Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations |                                                                                                                          | 60 
|                              | Item 3. Quantitative and
    Qualitative Disclosures About Market Risk                                |                                                                                                                          | 94 
|                              | Item 4. Controls and
    Procedures                                                                   |                                                                                                                          | 94 
|                             
|PART II. OTHER INFORMATION    |                                                                                                       |                                                                                                                         
|                              | Item 1. Legal Proceedings                                                                             |                                                                                                                          | 95 
|                              | Item 1A. Risk Factors                                                                                 |                                                                                                                          | 96 
|                              | Item 2. Unregistered Sales of
    Equity Securities and Use of Proceeds                               |                                                                                                                          | 102
|                              | Item 3. Defaults Upon Senior
    Securities                                                           |                                                                                                                          | 102
|                              | Item 4. Submission of Matters to
    a Vote of Security Holders                                       |                                                                                                                          | 103
|                              | Item 5. Other Information                                                                             |                                                                                                                          | 103
|                              | Item 6. Exhibits                                                                                      |                                                                                                                          | 103
|                              | Signatures                                                                                            |                                                                                                                          | 107







---



##### 






PART I: FINANCIAL INFORMATION





Item 1.  Financial Statements


ALLIED CAPITAL CORPORATION AND SUBSIDIARIES





CONSOLIDATED BALANCE SHEET


|                                                 |                                                                                                                                                                              |                                                                            |                                                                   |           |              |           |         |           |           |           | 
|------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------- | ----------------------------------------------------------------- | --------- | ------------ | --------- | ------- | --------- | --------- | --------- | 
|                                                 |                                                                                                                                                                              | March 31,                                                                  |                                                                   |           | December 31, |          
|                                                 |                                                                                                                                                                              | 2007                                                                       |                                                                   |           | 2006         |          
|                                                 |                                                                                                                                                                              |                                                                            |                                                                   |           |              |          
|(in thousands, except per share amounts)         |                                                                                                                                                                              | (unaudited)                                                                |                                                                   |           |             
|ASSETS                                          
|Portfolio at value:                              |                                                                                                                                                                              |                                                                            |                                                                   |           |              |           |         |          
|                                                 | Private finance                                                                                                                                                              |                                                                            |                                                                   |           |              |           |         |           |          
|                                                 |                                                                                                                                                                              | Companies more than 25% owned (cost: 2007-$1,836,724;
    2006-$1,578,822) |                                                                   | $         | 1,773,164    |           |         | $         | 1,490,180 |          
|                                                 |                                                                                                                                                                              | Companies 5% to 25% owned (cost: 2007-$438,374; 2006-$438,560)             |                                                                   |           | 457,871      |           |         |           | 449,813   |          
|                                                 |                                                                                                                                                                              | Companies less than 5% owned (cost: 2007-$2,159,014;
    2006-$2,479,981)  |                                                                   |           | 2,145,284    |           |         |           | 2,437,908 |          
|                                                 |                                                                                                                                                                              |                                                                            |                                                                   |           |              |          
|                                                 |                                                                                                                                                                              |                                                                            | Total private finance (cost: 2007-$4,434,112; 2006-$4,497,363)    |           |              | 4,376,319 |         |           |           | 4,377,901 | 
|                                                 | Commercial real estate finance (cost: 2007-$103,384;
    2006-$103,546)                                                                                                      |                                                                            |                                                                   | 122,529   |              |           |         | 118,183   |          
|                                                 |                                                                                                                                                                              |                                                                            |                                                                   |           |              |          
|                                                 |                                                                                                                                                                              |                                                                            | Total portfolio at value (cost: 2007-$4,537,496; 2006-$4,600,909) |           |              | 4,498,848 |         |           |           | 4,496,084 | 
|Investments in money market and other securities |                                                                                                                                                                              |                                                                            | 271,170                                                           |           |              |           | 202,210 |          
|Accrued interest and dividends receivable        |                                                                                                                                                                              |                                                                            | 67,690                                                            |           |              |           | 64,566  |          
|Other assets                                     |                                                                                                                                                                              |                                                                            | 148,041                                                           |           |              |           | 122,958 |          
|Cash                                             |                                                                                                                                                                              |                                                                            | 327                                                               |           |              |           | 1,687   |          
|                                                 |                                                                                                                                                                              |                                                                            |                                                                   |           |              |          
|                                                 |                                                                                                                                                                              |                                                                            | Total assets                                                      |           | $            | 4,986,076 |         |           | $         | 4,887,505 | 
|                                                 |                                                                                                                                                                              |                                                                            |                                                                   |           |              |          
|LIABILITIES AND SHAREHOLDERS EQUITY            
|Liabilities:                                     |                                                                                                                                                                              |                                                                            |                                                                   |           |              |           |         |          
|                                                 | Notes payable and debentures (maturing within one year:
    2007-$; 2006-$)                                                                                                |                                                                            | $                                                                 | 1,891,516 |              |           | $       | 1,691,394 |          
|                                                 | Revolving line of credit                                                                                                                                                     |                                                                            |                                                                   |          |              |           |         | 207,750   |          
|                                                 | Accounts payable and other liabilities                                                                                                                                       |                                                                            |                                                                   | 116,283   |              |           |         | 147,117   |          
|                                                 |                                                                                                                                                                              |                                                                            |                                                                   |           |              |          
|                                                 |                                                                                                                                                                              |                                                                            | Total liabilities                                                 |           |              | 2,007,799 |         |           |           | 2,046,261 | 
|                                                 |                                                                                                                                                                              |                                                                            |                                                                   |           |              |          
|Commitments and contingencies                    |                                                                                                                                                                              |                                                                            |                                                                   |           |              |           |         |          
|Shareholders equity:                            |                                                                                                                                                                              |                                                                            |                                                                   |           |              |           |         |          
|                                                 | Common stock, $0.0001 par value, 200,000 shares authorized;
    152,124 and 148,575 shares issued and outstanding at
    March 31, 2007, and December 31, 2006, respectively |                                                                            |                                                                   | 15        |              |           |         | 15        |          
|                                                 | Additional paid-in capital                                                                                                                                                   |                                                                            |                                                                   | 2,595,936 |              |           |         | 2,493,335 |          
|                                                 | Common stock held in deferred compensation trust                                                                                                                             |                                                                            |                                                                   | (31,371   | )            |           |         | (28,335   | )        
|                                                 | Notes receivable from sale of common stock                                                                                                                                   |                                                                            |                                                                   | (2,715    | )            |           |         | (2,850    | )        
|                                                 | Net unrealized appreciation (depreciation)                                                                                                                                   |                                                                            |                                                                   | (57,164   | )            |           |         | (123,084  | )        
|                                                 | Undistributed earnings                                                                                                                                                       |                                                                            |                                                                   | 473,576   |              |           |         | 502,163   |          
|                                                 |                                                                                                                                                                              |                                                                            |                                                                   |           |              |          
|                                                 |                                                                                                                                                                              |                                                                            | Total shareholders equity                                        |           |              | 2,978,277 |         |           |           | 2,841,244 | 
|                                                 |                                                                                                                                                                              |                                                                            |                                                                   |           |              |          
|                                                 |                                                                                                                                                                              |                                                                            | Total liabilities and shareholders equity                        |           | $            | 4,986,076 |         |           | $         | 4,887,505 | 
|                                                 |                                                                                                                                                                              |                                                                            |                                                                   |           |              |          
|Net asset value per common share                 |                                                                                                                                                                              | $                                                                          | 19.58                                                             |           |              | $         | 19.12   |          
|                                                 |                                                                                                                                                                              |                                                                            |                                                                   |           |              |          



1



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES





CONSOLIDATED STATEMENT OF OPERATIONS


|                                                     |                                                       |                               |                                             |        |        |         |         |          |         |         | 
|---------------------------------------------------- | ----------------------------------------------------- | ----------------------------- | ------------------------------------------- | ------ | ------ | ------- | ------- | -------- | ------- | ------- | 
|                                                     |                                                       | For the Three                 |                                            
|                                                     |                                                       | Months Ended                  |                                            
|                                                     |                                                       | March 31,                     |                                            
|                                                     |                                                       |                               |                                            
|                                                     |                                                       | 2007                          |                                             |        | 2006   |        
|(in thousands, except per share amounts)             |                                                       |                               |                                             |        |        |        
|                                                     |                                                       | (unaudited)                   |                                            
|Interest and Related Portfolio Income:               |                                                       |                               |                                             |        |        |         |         |         
|                                                     | Interest and dividends                                |                               |                                             |        |        |         |         |          |        
|                                                     |                                                       | Companies more than 25% owned |                                             | $      | 27,157 |         |         | $        | 30,146  |        
|                                                     |                                                       | Companies 5% to 25% owned     |                                             |        | 11,861 |         |         |          | 5,650   |        
|                                                     |                                                       | Companies less than 5% owned  |                                             |        | 62,965 |         |         |          | 53,085  |        
|                                                     |                                                       |                               |                                             |        |        |        
|                                                     |                                                       |                               | Total interest and dividends                |        |        | 101,983 |         |          |         | 88,881  | 
|                                                     |                                                       |                               |                                             |        |        |        
|                                                     | Fees and other income                                 |                               |                                             |        |        |         |         |          |        
|                                                     |                                                       | Companies more than 25% owned |                                             |        | 3,989  |         |         |          | 12,087  |        
|                                                     |                                                       | Companies 5% to 25% owned     |                                             |        | 28     |         |         |          | 2,716   |        
|                                                     |                                                       | Companies less than 5% owned  |                                             |        | 1,952  |         |         |          | 7,327   |        
|                                                     |                                                       |                               |                                             |        |        |        
|                                                     |                                                       |                               | Total fees and other income                 |        |        | 5,969   |         |          |         | 22,130  | 
|                                                     |                                                       |                               |                                             |        |        |        
|                                                     |                                                       |                               | Total interest and related portfolio income |        |        | 107,952 |         |          |         | 111,011 | 
|                                                     |                                                       |                               |                                             |        |        |        
|Expenses:                                            |                                                       |                               |                                             |        |        |         |         |         
|                                                     | Interest                                              |                               |                                             | 30,288 |        |         |         | 24,485   |        
|                                                     | Employee                                              |                               |                                             | 21,928 |        |         |         | 21,428   |        
|                                                     | Employee stock options                                |                               |                                             | 3,661  |        |         |         | 3,606    |        
|                                                     | Administrative                                        |                               |                                             | 13,224 |        |         |         | 11,334   |        
|                                                     |                                                       |                               |                                             |        |        |        
|                                                     |                                                       |                               | Total operating expenses                    |        |        | 69,101  |         |          |         | 60,853  | 
|                                                     |                                                       |                               |                                             |        |        |        
|Net investment income before income taxes            |                                                       |                               | 38,851                                      |        |        |         | 50,158  |         
|Income tax expense (benefit), including excise tax   |                                                       |                               | (649                                        | )      |        |         | 8,858   |         
|                                                     |                                                       |                               |                                             |        |        |        
|Net investment income                                |                                                       |                               | 39,500                                      |        |        |         | 41,300  |         
|                                                     |                                                       |                               |                                             |        |        |        
|Net Realized and Unrealized Gains (Losses):          |                                                       |                               |                                             |        |        |         |         |         
|                                                     | Net realized gains (losses)                           |                               |                                             |        |        |         |         |          |        
|                                                     |                                                       | Companies more than 25% owned |                                             |        | (1,350 | )       |         |          | 433,187 |        
|                                                     |                                                       | Companies 5% to 25% owned     |                                             |        | 166    |         |         |          | (343    | )      
|                                                     |                                                       | Companies less than 5% owned  |                                             |        | 28,850 |         |         |          | (9      | )      
|                                                     |                                                       |                               |                                             |        |        |        
|                                                     |                                                       |                               | Total net realized gains                    |        |        | 27,666  |         |          |         | 432,835 | 
|                                                     | Net change in unrealized appreciation or depreciation |                               |                                             | 65,920 |        |         |         | (374,548 | )      
|                                                     |                                                       |                               |                                             |        |        |        
|                                                     |                                                       |                               | Total net gains                             |        |        | 93,586  |         |          |         | 58,287  | 
|                                                     |                                                       |                               |                                             |        |        |        
|Net increase in net assets resulting from operations |                                                       | $                             | 133,086                                     |        |        | $       | 99,587  |         
|                                                     |                                                       |                               |                                             |        |        |        
|Basic earnings per common share                      |                                                       | $                             | 0.89                                        |        |        | $       | 0.72    |         
|                                                     |                                                       |                               |                                             |        |        |        
|Diluted earnings per common share                    |                                                       | $                             | 0.87                                        |        |        | $       | 0.70    |         
|                                                     |                                                       |                               |                                             |        |        |        
|Weighted average common shares outstanding  basic   |                                                       |                               | 149,503                                     |        |        |         | 138,759 |         
|                                                     |                                                       |                               |                                             |        |        |        
|Weighted average common shares outstanding  diluted |                                                       |                               | 152,827                                     |        |        |         | 141,738 |         
|                                                     |                                                       |                               |                                             |        |        |        



2



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES





CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS


|                                           |                                                                  |                                                                          |           |         |         |   |           |          |         |  
|------------------------------------------ | ---------------------------------------------------------------- | ------------------------------------------------------------------------ | --------- | ------- | ------- | - | --------- | -------- | ------- | -
|                                           |                                                                  | For the Three Months                                                     |          
|                                           |                                                                  | Ended March 31,                                                          |          
|                                           |                                                                  |                                                                          |          
|                                           |                                                                  | 2007                                                                     |           |         | 2006    |  
|(in thousands, except per share amounts)   |                                                                  |                                                                          |           |         |         |  
|                                           |                                                                  | (unaudited)                                                              |          
|Operations:                                |                                                                  |                                                                          |           |         |         |   |           |         
|                                           | Net investment income                                            |                                                                          | $         | 39,500  |         |   | $         | 41,300   |        
|                                           | Net realized gains                                               |                                                                          |           | 27,666  |         |   |           | 432,835  |        
|                                           | Net change in unrealized appreciation or depreciation            |                                                                          |           | 65,920  |         |   |           | (374,548 | )      
|                                           |                                                                  |                                                                          |           |         |         |  
|                                           |                                                                  | Net increase in net assets resulting from operations                     |           |         | 133,086 |   |           |          | 99,587  |  
|                                           |                                                                  |                                                                          |           |         |         |  
|Shareholder distributions:                 |                                                                  |                                                                          |           |         |         |   |           |         
|                                           | Common stock dividends                                           |                                                                          |           | (95,753 | )       |   |           | (82,518  | )      
|                                           |                                                                  |                                                                          |           |         |         |  
|                                           |                                                                  | Net decrease in net assets resulting from shareholder
    distributions  |           |         | (95,753 | ) |           |          | (82,518 | )
|                                           |                                                                  |                                                                          |           |         |         |  
|Capital share transactions:                |                                                                  |                                                                          |           |         |         |   |           |         
|                                           | Sale of common stock                                             |                                                                          |           | 93,784  |         |   |           | 82,970   |        
|                                           | Issuance of common stock in lieu of cash distributions           |                                                                          |           | 4,266   |         |   |           | 3,640    |        
|                                           | Issuance of common stock upon the exercise of stock options      |                                                                          |           | 1,366   |         |   |           | 3,935    |        
|                                           | Stock option expense                                             |                                                                          |           | 3,661   |         |   |           | 3,606    |        
|                                           | Net decrease in notes receivable from sale of common stock       |                                                                          |           | 135     |         |   |           | 130      |        
|                                           | Purchase of common stock held in deferred compensation trust     |                                                                          |           | (3,089  | )       |   |           | (2,121   | )      
|                                           | Distribution of common stock held in deferred compensation trust |                                                                          |           | 53      |         |   |           | 38       |        
|                                           | Other                                                            |                                                                          |           | (476    | )       |   |           |         |        
|                                           |                                                                  |                                                                          |           |         |         |  
|                                           |                                                                  | Net increase in net assets resulting from capital share
    transactions |           |         | 99,700  |   |           |          | 92,198  |  
|                                           |                                                                  |                                                                          |           |         |         |  
|                                           |                                                                  | Total increase in net assets                                             |           |         | 137,033 |   |           |          | 109,267 |  
|Net assets at beginning of period          |                                                                  |                                                                          | 2,841,244 |         |         |   | 2,620,546 |         
|                                           |                                                                  |                                                                          |           |         |         |  
|Net assets at end of period                |                                                                  | $                                                                        | 2,978,277 |         |         | $ | 2,729,813 |         
|                                           |                                                                  |                                                                          |           |         |         |  
|Net asset value per common share           |                                                                  | $                                                                        | 19.58     |         |         | $ | 19.50     |         
|                                           |                                                                  |                                                                          |           |         |         |  
|Common shares outstanding at end of period |                                                                  |                                                                          | 152,124   |         |         |   | 139,984   |         
|                                           |                                                                  |                                                                          |           |         |         |  



3



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES





CONSOLIDATED STATEMENT OF CASH FLOWS


|                                      |                                                               |                                                                                                                   |                                                     |          |          |         |         |         |          |         |  
|------------------------------------- | ------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------- | --------------------------------------------------- | -------- | -------- | ------- | ------- | ------- | -------- | ------- | -
|                                      |                                                               | For the Three Months Ended                                                                                        |                                                    
|                                      |                                                               | March 31,                                                                                                         |                                                    
|                                      |                                                               |                                                                                                                   |                                                    
|                                      |                                                               | 2007                                                                                                              |                                                     |          | 2006     |        
|(in thousands)                        |                                                               |                                                                                                                   |                                                     |          |          |        
|                                      |                                                               | (unaudited)                                                                                                       |                                                    
|Cash flows from operating activities: |                                                               |                                                                                                                   |                                                     |          |          |         |         |        
|                                      | Net increase in net assets resulting from operations          |                                                                                                                   | $                                                   | 133,086  |          |         | $       | 99,587  |         
|                                      | Adjustments:                                                  |                                                                                                                   |                                                     |          |          |         |         |         |         
|                                      |                                                               | Portfolio investments                                                                                             |                                                     |          | (170,216 | )       |         |         | (647,851 | )      
|                                      |                                                               | Principal collections related to investment repayments or sales                                                   |                                                     |          | 235,509  |         |         |         | 340,410  |        
|                                      |                                                               | Change in accrued or reinvested interest and dividends                                                            |                                                     |          | (11,267  | )       |         |         | 2,061    |        
|                                      |                                                               | Net collection (amortization) of discounts and fees                                                               |                                                     |          | (1,844   | )       |         |         | (277     | )      
|                                      |                                                               | Redemption of (investments in) money market securities                                                            |                                                     |          | (66,335  | )       |         |         | (16,726  | )      
|                                      |                                                               | Stock option expense                                                                                              |                                                     |          | 3,661    |         |         |         | 3,606    |        
|                                      |                                                               | Changes in other assets and liabilities                                                                           |                                                     |          | (40,453  | )       |         |         | 2,797    |        
|                                      |                                                               | Depreciation and amortization                                                                                     |                                                     |          | 507      |         |         |         | 433      |        
|                                      |                                                               | Realized gains from the receipt of notes and other consideration
    from sale of investments, net of collections |                                                     |          | (2,814   | )       |         |         | (179,987 | )      
|                                      |                                                               | Realized losses                                                                                                   |                                                     |          | 5,515    |         |         |         | 3,651    |        
|                                      |                                                               | Net change in unrealized (appreciation) or depreciation                                                           |                                                     |          | (65,920  | )       |         |         | 374,548  |        
|                                      |                                                               |                                                                                                                   |                                                     |          |          |        
|                                      |                                                               |                                                                                                                   | Net cash provided by (used in) operating activities |          |          | 19,429  |         |         |          | (17,748 | )
|                                      |                                                               |                                                                                                                   |                                                     |          |          |        
|Cash flows from financing activities: |                                                               |                                                                                                                   |                                                     |          |          |         |         |        
|                                      | Sale of common stock                                          |                                                                                                                   |                                                     | 93,784   |          |         |         | 82,970  |         
|                                      | Sale of common stock upon the exercise of stock options       |                                                                                                                   |                                                     | 1,366    |          |         |         | 3,935   |         
|                                      | Collections of notes receivable from sale of common stock     |                                                                                                                   |                                                     | 135      |          |         |         | 130     |         
|                                      | Borrowings under notes payable                                |                                                                                                                   |                                                     | 200,000  |          |         |         |        |         
|                                      | Repayments on notes payable and debentures                    |                                                                                                                   |                                                     |         |          |         |         | (12,000 | )       
|                                      | Net borrowings under (repayments on) revolving line of credit |                                                                                                                   |                                                     | (207,750 | )        |         |         | 1,250   |         
|                                      | Purchase of common stock held in deferred compensation trust  |                                                                                                                   |                                                     | (3,089   | )        |         |         | (2,121  | )       
|                                      | Other financing activities                                    |                                                                                                                   |                                                     | (6,325   | )        |         |         | 53      |         
|                                      | Common stock dividends and distributions paid                 |                                                                                                                   |                                                     | (98,910  | )        |         |         | (82,976 | )       
|                                      |                                                               |                                                                                                                   |                                                     |          |          |        
|                                      |                                                               |                                                                                                                   | Net cash provided by (used in) financing activities |          |          | (20,789 | )       |         |          | (8,759  | )
|                                      |                                                               |                                                                                                                   |                                                     |          |          |        
|Net decrease in cash                  |                                                               |                                                                                                                   | (1,360                                              | )        |          |         | (26,507 | )      
|Cash at beginning of period           |                                                               |                                                                                                                   | 1,687                                               |          |          |         | 31,363  |        
|                                      |                                                               |                                                                                                                   |                                                     |          |          |        
|Cash at end of period                 |                                                               | $                                                                                                                 | 327                                                 |          |          | $       | 4,856   |        
|                                      |                                                               |                                                                                                                   |                                                     |          |          |        



4



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES





CONSOLIDATED STATEMENT OF INVESTMENTS


|                                                    |                      |                                                       |                                                    |                |        |        |      |   |         |         |  |   |        |        | 
|--------------------------------------------------- | -------------------- | ----------------------------------------------------- | -------------------------------------------------- | -------------- | ------ | ------ | ---- | - | ------- | ------- |  | - | ------ | ------ | 
|                                                    |                      |                                                       |                                                    | March 31, 2007 |       
|                                                    |                      |                                                       |                                                    |                |       
|Private Finance                                     |                      |                                                       |                                                    |               
|Portfolio Company                                   |                      |                                                       |                                                    | (unaudited)    |       
|(in thousands, except number of shares)             |                      | Investment(1)(2)                                      |                                                    | Principal      |        |        | Cost |   |         | Value   | 
|                                                    |                      |                                                       |                                                    |                |        |        |      |   |         |         | 
|Companies More Than 25% Owned                       |                      |                                                       |                                                    |                |        |        |      |   |         |         |  |  
|                                                   
|Alaris Consulting, LLC                              |                      | Senior Loan (16.5%, Due 12/05 
    12/07)(6)         |                                                    | $              | 27,055 |        |      | $ | 26,987  |         |  | $ |       |       
|                                                    | (Business Services)  |                                                       | Equity Interests                                   |                |        |        |      |   |         | 5,877   |  |   |        |       | 
|                                                    |                      | Guaranty ($1,100)                                     |                                                    |                |        |        |      |   |         |         |  |   |        |       
|                                                   
|Avborne,
    Inc.(7)                                |                      | Preferred Stock (12,500 shares)                       |                                                    |                |        |        |      |   | 611     |         |  |   | 873    |       
|                                                    | (Business Services)  |                                                       | Common Stock (27,500 shares)                       |                |        |        |      |   |         |        |  |   |        |       | 
|                                                   
|Avborne Heavy Maintenance,
    Inc.(7)              |                      | Preferred Stock (1,568 shares)                        |                                                    |                |        |        |      |   | 2,401   |         |  |   |       |       
|                                                    | (Business Services)  |                                                       | Common Stock (2,750 shares)                        |                |        |        |      |   |         |        |  |   |        |       | 
|                                                    |                      | Guaranty ($2,401)                                     |                                                    |                |        |        |      |   |         |         |  |   |        |       
|                                                   
|Border Foods, Inc.                                  |                      | Preferred Stock (100,000 shares)                      |                                                    |                |        |        |      |   | 12,721  |         |  |   |       |       
|                                                    | (Consumer Products)  |                                                       | Common Stock (148,838 shares)                      |                |        |        |      |   |         | 3,847   |  |   |        |       | 
|                                                   
|Business Loan Express, LLC
    (Financial Services) |                      | Class A Equity Interests(25.0%  See
    Note 3)(6)   |                                                    |                | 85,822 |        |      |   | 85,822  |         |  |   | 85,822 |       
|                                                    |                      |                                                       | Class B Equity Interests                           |                |        |        |      |   |         | 119,436 |  |   |        | 79,139 | 
|                                                    |                      | Class C Equity Interests                              |                                                    |                |        |        |      |   | 109,301 |         |  |   | 64,976 |       
|                                                    |                      | Guaranty ($182,392  See Note 3)                      |                                                    |                |        |        |      |   |         |         |  |   |        |       
|                                                    |                      | Standby Letters of Credit
    ($20,000   See Note 3) |                                                    |                |        |        |      |   |         |         |  |   |        |       
|                                                   
|Calder Capital Partners,
    LLC(5)                 |                      | Senior Loan (8.0%, Due
    5/09)(6)                   |                                                    |                | 1,326  |        |      |   | 1,326   |         |  |   | 1,326  |       
|                                                    | (Financial Services) |                                                       | Equity Interests                                   |                |        |        |      |   |         | 2,154   |  |   |        | 2,154  | 
|                                                   
|Callidus Capital Corporation                        |                      | Senior Loan (12.0%, Due 12/08)                        |                                                    |                | 1,150  |        |      |   | 1,150   |         |  |   | 1,150  |       
|                                                    | (Financial Services) |                                                       | Subordinated Debt (18.0%, Due 10/08)               |                |        | 6,021  |      |   |         | 6,021   |  |   |        | 6,021  | 
|                                                    |                      |                                                       | Common Stock (100 shares)                          |                |        |        |      |   |         | 2,067   |  |   |        | 24,493 | 
|                                                   
|Coverall North America, Inc.                        |                      | Unitranche Debt (12.0%, Due 7/11)                     |                                                    |                | 35,054 |        |      |   | 34,896  |         |  |   | 34,896 |       
|                                                    | (Business Services)  |                                                       | Subordinated Debt (15.0%, Due 7/11)                |                |        | 6,000  |      |   |         | 5,974   |  |   |        | 5,974  | 
|                                                    |                      |                                                       | Common Stock (884,880 shares)                      |                |        |        |      |   |         | 16,648  |  |   |        | 21,475 | 
|                                                   
|CR Holding, Inc.                                    |                      | Subordinated Debt (16.6%, Due 2/13)                   |                                                    |                | 39,917 |        |      |   | 39,752  |         |  |   | 39,752 |       
|                                                    | (Consumer Products)  |                                                       | Common Stock (37,200,551 shares)                   |                |        |        |      |   |         | 33,321  |  |   |        | 30,880 | 
|                                                   
|Direct Capital Corporation                          |                      | Subordinated Debt (16.0%, Due 3/13)                   |                                                    |                | 35,750 |        |      |   | 35,574  |         |  |   | 35,574 |       
|                                                    | (Financial Services) |                                                       | Common Stock (2,097,234 shares)                    |                |        |        |      |   |         | 19,250  |  |   |        | 19,250 | 
|                                                   
|Financial Pacific Company                           |                      | Subordinated Debt (17.4%, Due 2/12  8/12)            |                                                    |                | 71,947 |        |      |   | 71,732  |         |  |   | 71,732 |       
|                                                    | (Financial Services) |                                                       | Preferred Stock (10,964 shares)                    |                |        |        |      |   |         | 10,276  |  |   |        | 16,739 | 
|                                                    |                      |                                                       | Common Stock (14,735 shares)                       |                |        |        |      |   |         | 14,819  |  |   |        | 67,540 | 
|                                                   
|ForeSite Towers, LLC                                |                      | Equity Interests                                      |                                                    |                |        |        |      |   |        |         |  |   | 557    |       
|                                                    | (Tower Leasing)      |                                                       |                                                    |                |        |        |      |   |         |         |  |   |        |        | 
|                                                   
|Global Communications, LLC                          |                      | Senior Loan (10.7%, Due 9/02 
    11/07)(6)          |                                                    |                | 15,957 |        |      |   | 15,957  |         |  |   | 15,957 |       
|                                                    | (Business Services)  |                                                       | Subordinated Debt (17.0%, Due
    12/03  9/05)(6) |                |        | 11,339 |      |   |         | 11,336  |  |   |        | 4,930  | 
|                                                    |                      | Preferred Equity Interest                             |                                                    |                |        |        |      |   | 14,067  |         |  |   |       |       
|                                                    |                      | Options                                               |                                                    |                |        |        |      |   | 1,639   |         |  |   |       |       
|                                                   
|Gordian Group, Inc.                                 |                      | Senior Loan (10.0%, Due 6/06 
    12/08)(6)          |                                                    |                | 11,792 |        |      |   | 11,798  |         |  |   |       |       
|                                                    | (Business Services)  |                                                       | Common Stock (1,000 shares)                        |                |        |        |      |   |         | 6,942   |  |   |        |       | 
|                                                   

|    |  |                                                                                                                                                                                                                                                                
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.                                                                                                                                                                                                                             
|(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.                                                                                                                                                                                





5



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF
INVESTMENTS  (Continued)


|                                        |                       |                                            |                                            |                |        |        |      |   |        |        |  |   |        |         | 
|--------------------------------------- | --------------------- | ------------------------------------------ | ------------------------------------------ | -------------- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------- | 
|                                        |                       |                                            |                                            | March 31, 2007 |       
|                                        |                       |                                            |                                            |                |       
|Private Finance                         |                       |                                            |                                            |               
|Portfolio Company                       |                       |                                            |                                            | (unaudited)    |       
|(in thousands, except number of shares) |                       | Investment(1)(2)                           |                                            | Principal      |        |        | Cost |   |        | Value  | 
|                                        |                       |                                            |                                            |                |        |        |      |   |        |        | 
|Healthy Pet Corp.                       |                       | Senior Loan (9.9%, Due 8/10)               |                                            | $              | 32,338 |        |      | $ | 32,338 |        |  | $ | 32,338 |        
|                                        | (Consumer Services)   |                                            | Subordinated Debt (15.0%, Due 8/10)        |                |        | 43,939 |      |   |        | 43,807 |  |   |        | 43,807  | 
|                                        |                       |                                            | Common Stock (30,142 shares)               |                |        |        |      |   |        | 30,142 |  |   |        | 43,818  | 
|                                       
|HMT, Inc.                               |                       | Preferred Stock (554,052 shares)           |                                            |                |        |        |      |   | 2,637  |        |  |   | 2,637  |        
|                                        | (Energy Services)     |                                            | Common Stock (300,000 shares)              |                |        |        |      |   |        | 3,000  |  |   |        | 30,173  | 
|                                        |                       | Warrants                                   |                                            |                |        |        |      |   | 1,155  |        |  |   | 11,617 |        
|                                       
|Hot Stuff Foods, LLC                    |                       | Senior Loan (8.8%, Due 2/11-2/12)          |                                            |                | 49,770 |        |      |   | 49,549 |        |  |   | 49,549 |        
|                                        | (Consumer Products)   |                                            | Subordinated Debt (13.7%, Due 8/12  2/13) |                |        | 60,606 |      |   |        | 60,361 |  |   |        | 57,254  | 
|                                        |                       |                                            | Subordinated Debt (16.0%, Due
    2/13)(6) |                |        | 20,841 |      |   |        | 20,749 |  |   |        |        | 
|                                        |                       |                                            | Common Stock (1,147,453 shares)            |                |        |        |      |   |        | 56,187 |  |   |        |        | 
|                                       
|Huddle House, Inc.                      |                       | Subordinated Debt (15.0%, Due 12/12)       |                                            |                | 58,515 |        |      |   | 58,239 |        |  |   | 58,239 |        
|(Retail)                                |                       | Common Stock (415,328 shares)              |                                            |                |        |        |      |   | 41,533 |        |  |   | 43,078 |        
|                                       
|Impact Innovations Group, LLC           |                       | Equity Interests in Affiliate              |                                            |                |        |        |      |   |       |        |  |   | 319    |        
|                                        | (Business Services)   |                                            |                                            |                |        |        |      |   |        |        |  |   |        |         | 
|                                       
|Insight Pharmaceuticals Corporation     |                       | Subordinated Debt (15.0%, Due 9/12)        |                                            |                | 44,257 |        |      |   | 44,116 |        |  |   | 44,116 |        
|                                        | (Consumer Products)   |                                            | Subordinated Debt (19.0%, Due
    9/12)(6) |                |        | 16,181 |      |   |        | 16,130 |  |   |        | 14,510  | 
|                                        |                       | Preferred Stock (25,000 shares)            |                                            |                |        |        |      |   | 25,000 |        |  |   |       |        
|                                        |                       | Common Stock (620,000 shares)              |                                            |                |        |        |      |   | 6,325  |        |  |   |       |        
|                                       
|Jakel, Inc.                             |                       | Subordinated Debt (15.5%, Due
    3/08)(6) |                                            |                | 15,692 |        |      |   | 15,692 |        |  |   |       |        
|                                        | (Industrial Products) |                                            | Preferred Stock (6,460 shares)             |                |        |        |      |   |        | 6,460  |  |   |        |        | 
|                                        |                       |                                            | Common Stock (158,061 shares)              |                |        |        |      |   |        | 9,347  |  |   |        |        | 
|                                       
|Legacy Partners Group, Inc.             |                       | Senior Loan (14.0%, Due
    5/09)(6)       |                                            |                | 4,843  |        |      |   | 4,843  |        |  |   | 4,843  |        
|                                        | (Financial Services)  |                                            | Equity Interests                           |                |        |        |      |   |        | 4,261  |  |   |        | 613     | 
|                                       
|Litterer
    Beteiligungs-GmbH(4)       |                       | Subordinated Debt (8.0%, Due 3/07)         |                                            |                | 698    |        |      |   | 698    |        |  |   | 698    |        
|                                        | (Business Services)   |                                            | Equity Interest                            |                |        |        |      |   |        | 1,809  |  |   |        | 1,980   | 
|                                       
|Mercury Air Centers, Inc.               |                       | Subordinated Debt (16.0%, Due 4/09        |                                            |                |        |        |      |   |        |        |  |   |        |        
|                                        | (Business Services)   |                                            | 11/12)                                     |                |        | 49,862 |      |   |        | 49,737 |  |   |        | 49,737  | 
|                                        |                       |                                            | Common Stock (57,970 shares)               |                |        |        |      |   |        | 35,053 |  |   |        | 251,709 | 
|                                        |                       |                                            | Standby Letters of Credit ($75)            |                |        |        |      |   |        |        |  |   |        |         | 
|                                       
|MVL Group, Inc.                         |                       | Senior Loan (12.0%, Due 6/09  7/09)       |                                            |                | 30,674 |        |      |   | 30,613 |        |  |   | 30,613 |        
|                                        | (Business Services)   |                                            | Subordinated Debt (14.5%, Due 6/09  7/09) |                |        | 39,449 |      |   |        | 39,092 |  |   |        | 39,092  | 
|                                        |                       | Common Stock (648,661 shares)              |                                            |                |        |        |      |   | 643    |        |  |   | 1,333  |        
|                                       
|Penn Detroit Diesel Allison, LLC        |                       | Subordinated Debt (15.5%, Due 8/13)        |                                            |                | 38,459 |        |      |   | 38,287 |        |  |   | 38,287 |        
|                                        | (Business Services)   |                                            | Equity Interests                           |                |        |        |      |   |        | 21,128 |  |   |        | 23,965  | 
|                                       
|Powell Plant Farms, Inc.                |                       | Senior Loan (15.0%, Due
    12/07)(6)      |                                            |                | 38,990 |        |      |   | 30,142 |        |  |   | 30,142 |        
|                                        | (Consumer Products)   |                                            | Subordinated Debt (20.0%, Due
    6/03)(6) |                |        | 19,291 |      |   |        | 19,223 |  |   |        | 3,837   | 
|                                        |                       |                                            | Preferred Stock (1,483 shares)             |                |        |        |      |   |        |       |  |   |        |        | 
|                                        |                       |                                            | Warrants                                   |                |        |        |      |   |        |       |  |   |        |        | 
|                                       
|Service Champ, Inc.                     |                       | Subordinated Debt (15.5%, Due 4/12)        |                                            |                | 27,910 |        |      |   | 27,802 |        |  |   | 27,802 |        
|                                        | (Business Services)   |                                            | Common Stock (63,888 shares)               |                |        |        |      |   |        | 13,662 |  |   |        | 16,488  | 
|                                       

|    |  |                                                                                                                                                                                                                                                                
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.                                                                                                                                                                                                                             
|(6) |  | Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.                                                                                                                                                           





6



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF
INVESTMENTS  (Continued)


|                                        |                                |                                      |                                                   |                |         |        |           |   |         |         |           |   |         |        | 
|--------------------------------------- | ------------------------------ | ------------------------------------ | ------------------------------------------------- | -------------- | ------- | ------ | --------- | - | ------- | ------- | --------- | - | ------- | ------ | 
|                                        |                                |                                      |                                                   | March 31, 2007 |        
|                                        |                                |                                      |                                                   |                |        
|Private Finance                         |                                |                                      |                                                   | (unaudited)    |        
|Portfolio Company                       |                                |                                      |                                                   |                |         |       
|(in thousands, except number of shares) |                                | Investment(1)(2)                     |                                                   | Principal      |         |        | Cost      |   |         | Value   |          
|                                        |                                |                                      |                                                   |                |         |        |           |   |         |         |          
|Staffing Partners Holding               |                                |                                      |                                                   |                |         |        |           |   |         |         |           |   |         |       
|                                        | Company, Inc.                  |                                      | Subordinated Debt (13.5%,
    Due 1/07)(6)        |                | $       | 541    |           |   | $       | 541     |           |   | $       | 540    | 
|                                        | (Business Services)            |                                      |                                                   |                |         |        |           |   |         |         |           |   |         |        | 
|                                       
|Startec Global Communications           |                                |                                      |                                                   |                |         |        |           |   |         |         |           |   |         |       
|                                        | Corporation                    |                                      | Senior Loan (10.0%, Due 5/07  5/09)              |                |         | 13,583 |           |   |         | 13,583  |           |   |         | 13,583 | 
|                                        | (Telecommunications)           |                                      | Common Stock (19,180,000 shares)                  |                |         |        |           |   |         | 37,255  |           |   |         | 17,085 | 
|                                       
|Sweet Traditions, Inc.                  |                                | Senior Loan (9.0%, Due 8/11)         |                                                   |                | 39,022  |        |           |   | 35,382  |         |           |   | 35,382  |       
|                                        | (Retail)                       |                                      | Preferred Stock (961 Shares)                      |                |         |        |           |   |         | 950     |           |   |         | 950    | 
|                                        |                                | Common Stock (10,000 Shares)         |                                                   |                |         |        |           |   | 50      |         |           |   | 50      |       
|                                        |                                |                                      | Standby Letter of Credit ($120)                   |                |         |        |           |   |         |         |           |   |         |        | 
|                                       
|Triview Investments,
    Inc.(8)        |                                | Senior Loan (9.6%, Due 6/07  12/07) |                                                   |                | 14,758  |        |           |   | 14,754  |         |           |   | 14,754  |       
|                                        | (Broadcasting & Cable/Business |                                      | Subordinated Debt (15.4%, Due 1/10  7/12)        |                |         | 63,455 |           |   |         | 63,142  |           |   |         | 63,142 | 
|                                        | Services/Consumer Products)    |                                      | Subordinated Debt (8.4%, Due 11/07 
    7/08)(6) |                |         | 4,850  |           |   |         | 4,850   |           |   |         | 4,850  | 
|                                        |                                |                                      | Common Stock (202 shares)                         |                |         |        |           |   |         | 102,755 |           |   |         | 39,024 | 
|                                        |                                | Guaranty ($800)                      |                                                   |                |         |        |           |   |         |         |           |   |         |       
|                                        |                                | Standby Letter of Credit ($200)      |                                                   |                |         |        |           |   |         |         |           |   |         |       
|                                       
|Total
    companies more than 25% owned |                                |                                      |                                                   |                |         | $      | 1,836,724 |   |         | $       | 1,773,164 |  
|                                       
|Companies 5% to 25% Owned               |                                |                                      |                                                   |               
|                                       
|Advantage Sales & Marketing, Inc.       |                                | Subordinated Debt (12.0%, Due 3/14)  |                                                   | $              | 153,082 |        |           | $ | 152,433 |         |           | $ | 152,433 |       
|                                        | (Business Services)            |                                      | Equity Interests                                  |                |         |        |           |   |         |        |           |   |         | 11,000 | 
|                                       
|Air Medical Group Holdings LLC          |                                | Senior Loan (9.0%, Due 3/11)         |                                                   |                | 2,557   |        |           |   | 2,495   |         |           |   | 2,495   |       
|                                        | (Healthcare Services)          |                                      | Subordinated Debt (14.0%, Due 11/12)              |                |         | 35,183 |           |   |         | 35,133  |           |   |         | 35,133 | 
|                                        |                                | Equity Interests                     |                                                   |                |         |        |           |   | 3,470   |         |           |   | 6,900   |       
|                                       
|Alpine ESP Holdings, Inc.               |                                | Preferred Stock (622 shares)         |                                                   |                |         |        |           |   | 622     |         |           |   | 543     |       
|                                        | (Business Services)            |                                      | Common Stock (13,513 shares)                      |                |         |        |           |   |         | 14      |           |   |         |       | 
|                                       
|Amerex Group, LLC                       |                                | Subordinated Debt (12.0%, Due 1/13)  |                                                   |                | 8,400   |        |           |   | 8,400   |         |           |   | 8,400   |       
|                                        | (Consumer Products)            |                                      | Equity Interests                                  |                |         |        |           |   |         | 3,527   |           |   |         | 20,235 | 
|                                       
|BB&T Capital Partners/Windsor           |                                |                                      |                                                   |                |         |        |           |   |         |         |           |   |         |       
|                                        | Mezzanine Fund, LLC
    (5)    |                                      | Equity Interests                                  |                |         |        |           |   |         | 5,873   |           |   |         | 5,554  | 
|                                        | (Private Equity Fund)          |                                      |                                                   |                |         |        |           |   |         |         |           |   |         |        | 
|                                       
|Becker Underwood, Inc.                  |                                | Subordinated Debt (14.5%, Due 8/12)  |                                                   |                | 24,399  |        |           |   | 24,321  |         |           |   | 24,321  |       
|                                        | (Industrial Products)          |                                      | Common Stock(5,073 shares)                        |                |         |        |           |   |         | 5,813   |           |   |         | 3,300  | 
|                                       
|BI Incorporated                         |                                | Subordinated Debt (13.5%, Due 2/14)  |                                                   |                | 30,385  |        |           |   | 30,256  |         |           |   | 30,256  |       
|                                        | (Business Services)            |                                      | Common Stock (40,000 shares)                      |                |         |        |           |   |         | 4,000   |           |   |         | 6,000  | 
|                                       

|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.                                                                                                                                                                                                                                                                                                                                                                                        
|(6) |  | Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.                                                                                                                                                                                                                                                                                                                      
|(8) |  | Triview Investments, Inc. holds investments in Longview Cable
    & Data, LLC (Broadcasting & Cable) with a cost of
    $67.8 million and a value of $7.8 million, Triax
    Holdings, LLC (Consumer Products) with a cost of
    $98.9 million and a value of $93.4 million, and
    Crescent Hotels & Resorts, LLC and affiliates (Business
    Services) with a cost of $18.8 million and a value of
    $20.6 million.





7



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF
INVESTMENTS  (Continued)


|                                                                          |                       |                                                           |                                            |                |        |        |         |   |        |        |         |   |        |        | 
|------------------------------------------------------------------------- | --------------------- | --------------------------------------------------------- | ------------------------------------------ | -------------- | ------ | ------ | ------- | - | ------ | ------ | ------- | - | ------ | ------ | 
|                                                                          |                       |                                                           |                                            | March 31, 2007 |       
|                                                                          |                       |                                                           |                                            |                |       
|Private Finance                                                           |                       |                                                           |                                            |               
|Portfolio Company                                                         |                       |                                                           |                                            | (unaudited)    |       
|(in thousands, except number of shares)                                   |                       | Investment(1)(2)                                          |                                            | Principal      |        |        | Cost    |   |        | Value  |        
|                                                                          |                       |                                                           |                                            |                |        |        |         |   |        |        |        
|CitiPostal, Inc. and Affiliates                                           |                       | Senior Loan (11.1%, Due 8/13-11/14)                       |                                            | $              | 20,423 |        |         | $ | 20,326 |        |         | $ | 20,326 |       
|                                                                          | (Business Services)   |                                                           | Equity Interests                           |                |        |        |         |   |        | 4,415  |         |   |        | 5,350  | 
|                                                                         
|Creative Group, Inc.                                                      |                       | Subordinated Debt (12.0%, Due 9/13)                       |                                            |                | 15,000 |        |         |   | 13,686 |        |         |   | 13,686 |       
|                                                                          | (Business Services)   |                                                           | Warrant                                    |                |        |        |         |   |        | 1,387  |         |   |        | 865    | 
|                                                                         
|Drew Foam Companies, Inc.                                                 |                       | Preferred Stock (722 shares)                              |                                            |                |        |        |         |   | 722    |        |         |   | 688    |       
|                                                                          | (Business Services)   |                                                           | Common Stock (7,287 shares)                |                |        |        |         |   |        | 7      |         |   |        |       | 
|                                                                         
|MedBridge Healthcare, LLC                                                 |                       | Senior Loan (6.0%, Due
    8/09)(6)                       |                                            |                | 7,164  |        |         |   | 7,164  |        |         |   | 7,164  |       
|                                                                          | (Healthcare Services) |                                                           | Subordinated Debt (10.0%, Due
    8/14)(6) |                |        | 5,184  |         |   |        | 5,184  |         |   |        | 2,408  | 
|                                                                          |                       | Convertible Subordinated Debt (2.0%,
    Due
    8/14)(6) |                                            |                | 2,970  |        |         |   | 984    |        |         |   |       |       
|                                                                          |                       | Equity Interests                                          |                                            |                |        |        |         |   | 1,416  |        |         |   |       |       
|                                                                         
|Multi-Ad Services, Inc.                                                   |                       | Unitranche Debt (11.3%, Due 11/11)                        |                                            |                | 19,900 |        |         |   | 19,785 |        |         |   | 19,785 |       
|                                                                          | (Business Services)   |                                                           | Equity Interests                           |                |        |        |         |   |        | 2,000  |         |   |        | 1,777  | 
|                                                                         
|Nexcel Synthetics, LLC                                                    |                       | Subordinated Debt (14.5%, Due 6/09)                       |                                            |                | 8,000  |        |         |   | 7,982  |        |         |   | 7,982  |       
|                                                                          | (Consumer Products)   |                                                           | Equity Interests                           |                |        |        |         |   |        | 1,755  |         |   |        | 759    | 
|                                                                         
|PresAir LLC                                                               |                       | Senior Loan (7.5%, Due
    12/10)(6)                      |                                            |                | 5,810  |        |         |   | 5,492  |        |         |   | 2,462  |       
|                                                                          | (Industrial Products) |                                                           | Equity Interests                           |                |        |        |         |   |        | 1,341  |         |   |        |       | 
|                                                                         
|Progressive International                                                 |                       |                                                           |                                            |                |        |        |         |   |        |        |         |   |        |       
|                                                                          | Corporation           |                                                           | Subordinated Debt (16.0%, Due 12/09)       |                |        | 7,591  |         |   |        | 7,574  |         |   |        | 7,574  | 
|                                                                          | (Consumer Products)   |                                                           | Preferred Stock (500 shares)               |                |        |        |         |   |        | 500    |         |   |        | 1,046  | 
|                                                                          |                       | Common Stock (197 shares)                                 |                                            |                |        |        |         |   | 13     |        |         |   | 2,800  |       
|                                                                          |                       | Warrants                                                  |                                            |                |        |        |         |   |       |        |         |   |       |       
|                                                                         
|Regency Healthcare Group, LLC                                             |                       | Senior Loan (11.1%, Due 6/12)                             |                                            |                | 1,250  |        |         |   | 1,232  |        |         |   | 1,232  |       
|                                                                          | (Healthcare Services) |                                                           | Unitranche Debt (11.1%, Due 6/12)          |                |        | 20,000 |         |   |        | 19,913 |         |   |        | 19,913 | 
|                                                                          |                       |                                                           | Equity Interests                           |                |        |        |         |   |        | 1,500  |         |   |        | 1,640  | 
|                                                                         
|SGT India Private
    Limited(4)                                          |                       | Common Stock (109,524 shares)                             |                                            |                |        |        |         |   | 4,093  |        |         |   | 3,040  |       
|                                                                          | (Business Services)   |                                                           |                                            |                |        |        |         |   |        |        |         |   |        |        | 
|                                                                         
|Soteria Imaging Services, LLC                                             |                       | Subordinated Debt (11.6%, Due 11/10)                      |                                            |                | 19,500 |        |         |   | 18,603 |        |         |   | 18,603 |       
|                                                                          | (Healthcare Services) |                                                           | Equity Interests                           |                |        |        |         |   |        | 2,170  |         |   |        | 2,542  | 
|                                                                         
|Universal Environmental Services, LLC                                     |                       | Unitranche Debt (15.5%, Due 2/09)                         |                                            |                | 10,989 |        |         |   | 10,963 |        |         |   | 9,659  |       
|                                                                          | (Business Services)   |                                                           | Equity Interests                           |                |        |        |         |   |        | 1,810  |         |   |        |       | 
|                                                                         
|Total
    companies 5% to 25% owned                                       |                       |                                                           |                                            |                |        | $      | 438,374 |   |        | $      | 457,871 |  
|                                                                         
|Companies Less Than 5% Owned                                              |                       |                                                           |                                            |                |        |        |         |   |        |        |         |   |        |       
|                                                                         
|3SI Security Systems, Inc.                                                |                       | Subordinated Debt (14.5%, Due 8/13)                       |                                            | $              | 27,111 |        |         | $ | 26,999 |        |         | $ | 26,999 |       
|                                                                          | (Consumer Products)   |                                                           |                                            |                |        |        |         |   |        |        |         |   |        |        | 
|                                                                         
|AgData, L.P.                                                              |                       | Unitranche Debt (10.3%, Due 7/12)                         |                                            |                | 11,330 |        |         |   | 11,272 |        |         |   | 11,272 |       
|                                                                          | (Consumer Services)   |                                                           |                                            |                |        |        |         |   |        |        |         |   |        |        | 
|                                                                         
|Axium Healthcare Pharmacy, Inc.                                           |                       | Unitranche Debt (12.0%, Due 12/12)                        |                                            |                | 9,000  |        |         |   | 8,920  |        |         |   | 8,920  |       
|                                                                          | (Healthcare Services) |                                                           | Common Stock (26,500 shares)               |                |        |        |         |   |        | 2,650  |         |   |        | 1,800  | 
|                                                                         
|Baird Capital Partners IV Limited
    Partnership(5)(Private Equity Fund) |                       | Limited Partnership Interest                              |                                            |                |        |        |         |   | 1,183  |        |         |   | 962    |       
|                                                                         

|    |  |                                                                                                                                                                                                                                                                
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.                                                                                                                                                                                                                             
|(6) |  | Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.                                                                                                                                                           





8



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF
INVESTMENTS  (Continued)


|                                        |                                                 |                                   |                                                     |                |         |        |      |   |         |        |  |   |         |        | 
|--------------------------------------- | ----------------------------------------------- | --------------------------------- | --------------------------------------------------- | -------------- | ------- | ------ | ---- | - | ------- | ------ |  | - | ------- | ------ | 
|                                        |                                                 |                                   |                                                     | March 31, 2007 |        
|                                        |                                                 |                                   |                                                     |                |        
|Private Finance                         |                                                 |                                   |                                                     |               
|Portfolio Company                       |                                                 |                                   |                                                     | (unaudited)    |        
|(in thousands, except number of shares) |                                                 | Investment(1)(2)                  |                                                     | Principal      |         |        | Cost |   |         | Value  | 
|                                        |                                                 |                                   |                                                     |                |         |        |      |   |         |        | 
|Benchmark Medical, Inc.                 |                                                 | Warrants                          |                                                     |                |         |        |      | $ | 18      |        |  | $ |        |       
|                                        | (Healthcare Services)                           |                                   |                                                     |                |         |        |      |   |         |        |  |   |         |        | 
|                                       
|BenefitMall, Inc.                       |                                                 | Unitranche Debt (13.3%, Due 8/12) |                                                     | $              | 110,030 |        |      |   | 109,665 |        |  |   | 109,665 |       
|                                        | (Business Services)                             |                                   | Common Stock (45,528,000
    shares)(11)            |                |         |        |      |   |         | 45,528 |  |   |         | 46,755 | 
|                                        |                                                 |                                   | Warrants(11)                                        |                |         |        |      |   |         |       |  |   |         |       | 
|                                        |                                                 |                                   | Standby Letters of Credit ($9,981)                  |                |         |        |      |   |         |        |  |   |         |        | 
|                                       
|Breeze-Eastern
    Corporation(3)       |                                                 | Senior Loan (10.1%, Due 5/11)     |                                                     |                | 9,975   |        |      |   | 9,975   |        |  |   | 9,975   |       
|                                        | (Industrial Products)                           |                                   |                                                     |                |         |        |      |   |         |        |  |   |         |        | 
|                                       
|Broadcast Electronics, Inc.             |                                                 | Senior Loan (9.1%, Due 7/12)      |                                                     |                | 4,950   |        |      |   | 4,919   |        |  |   | 4,919   |       
|                                        | (Business Services)                             |                                   |                                                     |                |         |        |      |   |         |        |  |   |         |        | 
|                                       
|Callidus Debt Partners                  |                                                 |                                   |                                                     |                |         |        |      |   |         |        |  |   |         |       
|                                        | CDO Fund I,
    Ltd.(4)(9)                      |                                   | Class C Notes (12.9%, Due 12/13)                    |                |         | 18,800 |      |   |         | 18,946 |  |   |         | 18,988 | 
|                                        | (Senior Debt Fund)                              |                                   | Class D Notes (17.0%, Due 12/13)                    |                |         | 9,400  |      |   |         | 9,473  |  |   |         | 9,494  | 
|                                       
|Callidus Debt Partners                  |                                                 |                                   |                                                     |                |         |        |      |   |         |        |  |   |         |       
|                                        | CLO Fund III, Ltd.
    (4)(9)(Senior Debt Fund) |                                   | Preferred Shares (23,600,000 shares, 9.9%)
    (10) |                |         |        |      |   |         | 22,702 |  |   |         | 22,514 | 
|                                       
|Callidus Debt Partners                  |                                                 |                                   |                                                     |                |         |        |      |   |         |        |  |   |         |       
|                                        | CLO Fund IV,
    Ltd.(4)(9)                     |                                   | Income Notes
    (13.1%)(10)                        |                |         |        |      |   |         | 12,795 |  |   |         | 12,795 | 
|                                        | (Senior Debt Fund)                              |                                   |                                                     |                |         |        |      |   |         |        |  |   |         |        | 
|                                       
|Callidus Debt Partners                  |                                                 |                                   |                                                     |                |         |        |      |   |         |        |  |   |         |       
|                                        | CLO Fund V, Ltd.
    (4)(9)                     |                                   | Income Notes
    (15.8%)(10)                        |                |         |        |      |   |         | 14,320 |  |   |         | 14,320 | 
|                                        | (Senior Debt Fund)                              |                                   |                                                     |                |         |        |      |   |         |        |  |   |         |        | 
|                                       
|Callidus MAPS CLO Fund I
    LLC(9)     |                                                 | Class E Notes (10.9%, Due 12/17)  |                                                     |                | 17,000  |        |      |   | 17,000  |        |  |   | 17,145  |       
|                                        | (Senior Debt Fund)                              |                                   | Income Notes
    (13.3%)(10)                        |                |         |        |      |   |         | 50,963 |  |   |         | 46,463 | 
|                                       
|Camden Partners Strategic Fund II,      |                                                 |                                   |                                                     |                |         |        |      |   |         |        |  |   |         |       
|                                        | L.P.(5)                                         |                                   | Limited Partnership Interest                        |                |         |        |      |   |         | 997    |  |   |         | 2,215  | 
|                                        | (Private Equity Fund)                           |                                   |                                                     |                |         |        |      |   |         |        |  |   |         |        | 
|                                       
|Carlisle Wide Plank Floors, Inc.        |                                                 | Unitranche Debt (10.5%, Due 6/11) |                                                     |                | 14,000  |        |      |   | 13,906  |        |  |   | 13,906  |       
|                                        | (Consumer Products)                             |                                   | Preferred Stock (400,000 Shares)                    |                |         |        |      |   |         | 400    |  |   |         | 400    | 
|                                       
|Catterton Partners V,
    L.P.(5)       |                                                 | Limited Partnership Interest      |                                                     |                |         |        |      |   | 3,760   |        |  |   | 4,016   |       
|                                        | (Private Equity Fund)                           |                                   |                                                     |                |         |        |      |   |         |        |  |   |         |        | 
|                                       
|Catterton Partners VI,
    L.P.(5)      |                                                 | Limited Partnership Interest      |                                                     |                |         |        |      |   | 1,072   |        |  |   | 987     |       
|                                        | (Private Equity Fund)                           |                                   |                                                     |                |         |        |      |   |         |        |  |   |         |        | 
|                                       
|Centre Capital Investors IV,
    LP(5)  |                                                 | Limited Partnership Interest      |                                                     |                |         |        |      |   | 1,801   |        |  |   | 1,501   |       
|                                        | (Private Equity Fund)                           |                                   |                                                     |                |         |        |      |   |         |        |  |   |         |        | 
|                                       

|     |  |                                                                                                                                                                                                                                                                
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.                                                                                                                                                                                                                             
|(6)  |  | Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.                                                                                                                                                           
|(9)  |  | The fund is managed by Callidus Capital, a portfolio company of
    Allied Capital.                                                                                                                                                                            
|(11) |  | 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.                                                     
|(10) |  | Represents the effective yield earned on these preferred equity
    investments. The yield is included in interest income from
    companies less than 5% owned in the consolidated statement of
    operations.                                               





9



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF
INVESTMENTS  (Continued)


|                                          |                              |                                      |                                            |                |         |        |      |   |         |        |  |   |         |        | 
|----------------------------------------- | ---------------------------- | ------------------------------------ | ------------------------------------------ | -------------- | ------- | ------ | ---- | - | ------- | ------ |  | - | ------- | ------ | 
|                                          |                              |                                      |                                            | March 31, 2007 |        
|                                          |                              |                                      |                                            |                |        
|Private Finance                           |                              |                                      |                                            |               
|Portfolio Company                         |                              |                                      |                                            | (unaudited)    |        
|(in thousands, except number of shares)   |                              | Investment(1)(2)                     |                                            | Principal      |         |        | Cost |   |         | Value  | 
|                                          |                              |                                      |                                            |                |         |        |      |   |         |        | 
|Commercial Credit Group, Inc.             |                              | Subordinated Debt (14.8%, Due 2/11)  |                                            | $              | 10,000  |        |      | $ | 9,962   |        |  | $ | 9,962   |       
|                                          | (Financial Services)         |                                      | Preferred Stock (32,500 shares)            |                |         |        |      |   |         | 3,900  |  |   |         | 3,900  | 
|                                          |                              |                                      | Warrants                                   |                |         |        |      |   |         |       |  |   |         |       | 
|                                         
|Community Education Centers, Inc.         |                              | Subordinated Debt (16.0%, Due 12/10) |                                            |                | 34,420  |        |      |   | 34,334  |        |  |   | 34,334  |       
|                                          | (Education Services)         |                                      |                                            |                |         |        |      |   |         |        |  |   |         |        | 
|                                         
|Compass Group Diversified                 |                              |                                      |                                            |                |         |        |      |   |         |        |  |   |         |       
|                                          | Holdings
    LLC(3)          |                                      | Senior Loan (8.4%, Due 11/11)              |                |         | 9,069  |      |   |         | 8,952  |  |   |         | 8,952  | 
|                                          | (Financial Services)         |                                      |                                            |                |         |        |      |   |         |        |  |   |         |        | 
|                                         
|Component Hardware Group, Inc.            |                              | Subordinated Debt (13.5%, Due 1/13)  |                                            |                | 18,226  |        |      |   | 18,146  |        |  |   | 18,146  |       
|                                          | (Industrial Products)        |                                      |                                            |                |         |        |      |   |         |        |  |   |         |        | 
|                                         
|Cook Inlet Alternative Risk, LLC          |                              | Unitranche Debt (10.0%, Due 4/12)    |                                            |                | 60,000  |        |      |   | 59,663  |        |  |   | 59,663  |       
|                                          | (Business Services)          |                                      | Equity Interests                           |                |         |        |      |   |         | 2,000  |  |   |         | 2,700  | 
|                                         
|Cortec Group Fund IV,
    L.P.(5)         |                              | Limited Partnership Interest         |                                            |                |         |        |      |   | 1,712   |        |  |   | 1,226   |       
|                                          | (Private Equity)             |                                      |                                            |                |         |        |      |   |         |        |  |   |         |        | 
|                                         
|CSAV, Inc.                                |                              | Subordinated Debt (11.8%, Due 6/13)  |                                            |                | 37,500  |        |      |   | 37,500  |        |  |   | 37,500  |       
|                                          | (Business Services)          |                                      |                                            |                |         |        |      |   |         |        |  |   |         |        | 
|                                         
|DCWV Acquisition Corporation              |                              | Senior Loan (8.8%, Due 7/12)         |                                            |                | 3,700   |        |      |   | 3,687   |        |  |   | 3,687   |       
|                                          | (Consumer Products)          |                                      | Unitranche Debt (11.0%, Due 7/12)          |                |         | 16,575 |      |   |         | 16,485 |  |   |         | 16,485 | 
|                                         
|Deluxe Entertainment Services Group, Inc. |                              | Subordinated Debt (13.6%, Due 7/11)  |                                            |                | 30,000  |        |      |   | 30,000  |        |  |   | 30,000  |       
|                                          | (Business Services)          |                                      |                                            |                |         |        |      |   |         |        |  |   |         |        | 
|                                         
|Distant Lands Trading Co.                 |                              | Senior Loan (10.1%, Due 11/11)       |                                            |                | 5,450   |        |      |   | 5,408   |        |  |   | 5,408   |       
|                                          | (Consumer Products)          |                                      | Unitranche Debt (11.0%, Due 11/11)         |                |         | 54,375 |      |   |         | 54,144 |  |   |         | 54,144 | 
|                                          |                              |                                      | Common Stock (4,000 shares)                |                |         |        |      |   |         | 4,000  |  |   |         | 3,194  | 
|                                         
|Drilltec Patents & Technologies           |                              |                                      |                                            |                |         |        |      |   |         |        |  |   |         |       
|                                          | Company, Inc.                |                                      | Subordinated Debt (18.0%, Due 8/06)        |                |         | 4,119  |      |   |         | 4,119  |  |   |         | 4,119  | 
|                                          | (Energy Services)            |                                      | Subordinated Debt (16.5%, Due
    8/06)(6) |                |         | 10,994 |      |   |         | 10,918 |  |   |         | 10,994 | 
|                                         
|Driven Brands, Inc.                       |                              | Senior Loan (8.9%, Due 6/11)         |                                            |                | 37,070  |        |      |   | 36,926  |        |  |   | 36,926  |       
|                                          | d/b/a Meineke and Econo Lube |                                      | Subordinated Debt (12.1%, Due 6/12  6/13) |                |         | 83,000 |      |   |         | 82,701 |  |   |         | 82,701 | 
|                                          | (Consumer Services)          |                                      | Common Stock (11,675,331
    shares)(11)   |                |         |        |      |   |         | 29,455 |  |   |         | 19,935 | 
|                                          |                              |                                      | Warrants(11)                               |                |         |        |      |   |         |       |  |   |         |       | 
|                                         
|Digital VideoStream, LLC                  |                              | Unitranche Debt (11.0%, Due 2/12)    |                                            |                | 17,838  |        |      |   | 17,737  |        |  |   | 17,737  |       
|                                          | (Business Services)          |                                      | Convertible Subordinated Debt              |                |         |        |      |   |         |        |  |   |         |        | 
|                                          |                              |                                      | (10.0%, Due 2/16)                          |                |         | 3,824  |      |   |         | 3,808  |  |   |         | 3,808  | 
|                                         
|Dynamic India Fund
    IV(4)(5)           |                              | Equity Interests                     |                                            |                |         |        |      |   | 3,850   |        |  |   | 3,850   |       
|                                          | (Private Equity Fund)        |                                      |                                            |                |         |        |      |   |         |        |  |   |         |        | 
|                                         
|EarthColor, Inc.                          |                              | Subordinated Debt (15.0%, Due 11/13) |                                            |                | 107,000 |        |      |   | 106,497 |        |  |   | 106,497 |       
|                                          | (Business Services)          |                                      | Common Stock
    (53,540 shares)(11)       |                |         |        |      |   |         | 53,540 |  |   |         | 51,796 | 
|                                          |                              | Warrants(11)                         |                                            |                |         |        |      |   |        |        |  |   |        |       
|                                         
|eCentury Capital Partners,
    L.P.(5)    |                              | Limited Partnership Interest         |                                            |                |         |        |      |   | 6,274   |        |  |   | 2,738   |       
|                                          | (Private Equity Fund)        |                                      |                                            |                |         |        |      |   |         |        |  |   |         |        | 
|                                         

| |      |  |  |                                                                                                                                                                                                                                                                
| | ---- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (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.                                                                                                                                                                                                                             
| | (6)  |  |  | Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.                                                                                                                                                           
| | (11) |  |  | 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.                                                     





10



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF
INVESTMENTS  (Continued)


|                                        |                        |                                           |                                     |                |        |        |      |   |        |        |  |   |        |        | 
|--------------------------------------- | ---------------------- | ----------------------------------------- | ----------------------------------- | -------------- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                        |                        |                                           |                                     | March 31, 2007 |       
|                                        |                        |                                           |                                     |                |       
|Private Finance                         |                        |                                           |                                     |               
|Portfolio Company                       |                        |                                           |                                     | (unaudited)    |       
|(in thousands, except number of shares) |                        | Investment(1)(2)                          |                                     | Principal      |        |        | Cost |   |        | Value  | 
|                                        |                        |                                           |                                     |                |        |        |      |   |        |        | 
|Elexis Beta
    GmbH(4)                 |                        | Options                                   |                                     |                |        |        |      | $ | 426    |        |  | $ | 50     |       
|                                        | (Industrial Products)  |                                           |                                     |                |        |        |      |   |        |        |  |   |        |        | 
|                                       
|Farleys & Sathers Candy Company, Inc.  |                        | Subordinated Debt (11.4%, Due 3/11)       |                                     | $              | 20,000 |        |      |   | 19,935 |        |  |   | 19,935 |       
|                                        | (Consumer Products)    |                                           |                                     |                |        |        |      |   |        |        |  |   |        |        | 
|                                       
|Frozen Specialties, Inc.                |                        | Warrants                                  |                                     |                |        |        |      |   | 435    |        |  |   | 270    |       
|                                        | (Consumer Products)    |                                           |                                     |                |        |        |      |   |        |        |  |   |        |        | 
|                                       
|Garden Ridge Corporation
    (Retail)   |                        | Subordinated Debt (7.0%, Due
    5/12)(6) |                                     |                | 22,500 |        |      |   | 22,500 |        |  |   | 22,500 |       
|                                       
|Geotrace Technologies, Inc.             |                        | Subordinated Debt (10.0%, Due 6/09)       |                                     |                | 23,495 |        |      |   | 22,105 |        |  |   | 22,105 |       
|                                        | (Energy Services)      |                                           | Warrants                            |                |        |        |      |   |        | 2,350  |  |   |        | 2,100  | 
|                                       
|Ginsey Industries, Inc.                 |                        | Subordinated Debt (12.5%, Due 5/07)       |                                     |                | 2,489  |        |      |   | 2,489  |        |  |   | 2,489  |       
|                                        | (Consumer Products)    |                                           |                                     |                |        |        |      |   |        |        |  |   |        |        | 
|                                       
|Grant Broadcasting Systems II           |                        | Subordinated Debt (5.0%, Due 6/11)        |                                     |                | 3,005  |        |      |   | 3,005  |        |  |   | 3,005  |       
|                                        | (Broadcasting & Cable) |                                           |                                     |                |        |        |      |   |        |        |  |   |        |        | 
|                                       
|Grotech Partners, VI,
    L.P.(5)       |                        | Limited Partnership Interest              |                                     |                |        |        |      |   | 8,223  |        |  |   | 6,139  |       
|                                        | (Private Equity Fund)  |                                           |                                     |                |        |        |      |   |        |        |  |   |        |        | 
|                                       
|Havco Wood Products LLC                 |                        | Senior Debt (9.9%, Due 8/11)              |                                     |                | 2,000  |        |      |   | 1,982  |        |  |   | 1,982  |       
|                                        | (Industrial Products)  |                                           | Unitranche Debt (11.5%, Due 8/11)   |                |        | 13,600 |      |   |        | 12,707 |  |   |        | 12,707 | 
|                                        |                        |                                           | Equity Interests                    |                |        |        |      |   |        | 1,055  |  |   |        | 3,000  | 
|                                       
|Haven Eldercare of New England, LLC     |                        | Subordinated Debt (12.0%, Due 8/09)       |                                     |                | 2,527  |        |      |   | 2,527  |        |  |   | 2,527  |       
|                                        | (Healthcare Services)  |                                           |                                     |                |        |        |      |   |        |        |  |   |        |        | 
|                                       
|HealthASPex Services Inc.               |                        | Senior Loan (4.0%, Due 7/08)              |                                     |                | 500    |        |      |   | 500    |        |  |   | 500    |       
|                                        | (Business Services)    |                                           |                                     |                |        |        |      |   |        |        |  |   |        |        | 
|                                       
|The Hillman Companies,
    Inc.(3)      |                        | Subordinated Debt (10.0%, Due 9/11)       |                                     |                | 44,580 |        |      |   | 44,434 |        |  |   | 44,434 |       
|                                        | (Consumer Products)    |                                           |                                     |                |        |        |      |   |        |        |  |   |        |        | 
|                                       
|The Homax Group, Inc.                   |                        | Senior Loan (9.2%, Due 10/12)             |                                     |                | 12,550 |        |      |   | 12,550 |        |  |   | 12,550 |       
|                                        | (Consumer Products)    |                                           | Subordinated Debt (12.0%, Due 4/14) |                |        | 14,000 |      |   |        | 13,189 |  |   |        | 13,189 | 
|                                        |                        |                                           | Preferred Stock (89 shares)         |                |        |        |      |   |        | 89     |  |   |        | 80     | 
|                                        |                        |                                           | Common Stock (28 shares)            |                |        |        |      |   |        | 6      |  |   |        |       | 
|                                        |                        |                                           | Warrants                            |                |        |        |      |   |        | 1,106  |  |   |        | 993    | 
|                                       
|Ideal Snacks Corporation                |                        | Senior Loan (9.0%, Due 6/10)              |                                     |                | 5,850  |        |      |   | 5,818  |        |  |   | 5,818  |       
|                                        | (Consumer Products)    |                                           |                                     |                |        |        |      |   |        |        |  |   |        |        | 
|                                       
|Integrity Interactive Corporation       |                        | Unitranche Debt (10.5%, Due 2/12)         |                                     |                | 29,000 |        |      |   | 28,823 |        |  |   | 28,823 |       
|                                        | (Business Services)    |                                           |                                     |                |        |        |      |   |        |        |  |   |        |        | 
|                                       
|International Fiber Corporation         |                        | Subordinated Debt (14.0%, Due 6/12)       |                                     |                | 22,098 |        |      |   | 22,029 |        |  |   | 22,029 |       
|                                        | (Industrial Products)  |                                           | Preferred Stock (25,000 shares)     |                |        |        |      |   |        | 2,500  |  |   |        | 2,200  | 
|                                       

| |      |  |  |                                                                                                                                                                                                                                                                
| | ---- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (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.                                                                                                                                  
| | (3)  |  |  | Public company.                                                                                                                                                                                                                                                
| | (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) |  |  | 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.                                                     





11



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF
INVESTMENTS  (Continued)


|                                               |                       |                                            |                                                 |                |        |        |      |   |        |        |  |   |        |        | 
|---------------------------------------------- | --------------------- | ------------------------------------------ | ----------------------------------------------- | -------------- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                               |                       |                                            |                                                 | March 31, 2007 |       
|                                               |                       |                                            |                                                 |                |       
|Private Finance                                |                       |                                            |                                                 |               
|Portfolio Company                              |                       |                                            |                                                 | (unaudited)    |       
|(in thousands, except number of shares)        |                       | Investment(1)(2)                           |                                                 | Principal      |        |        | Cost |   |        | Value  | 
|                                               |                       |                                            |                                                 |                |        |        |      |   |        |        | 
|Kodiak Fund
    LP(5)                          |                       | Equity Interests                           |                                                 |                |        |        |      | $ | 9,513  |        |  | $ | 9,460  |       
|                                               | (Private Equity Fund) |                                            |                                                 |                |        |        |      |   |        |        |  |   |        |        | 
|                                              
|Line-X, Inc.                                   |                       | Senior Loan (12.0%, Due 8/11)              |                                                 | $              | 2,200  |        |      |   | 2,182  |        |  |   | 2,182  |       
|                                               | (Consumer Products)   |                                            | Unitranche Debt (12.0% Due 8/11)                |                |        | 47,884 |      |   |        | 47,692 |  |   |        | 46,224 | 
|                                               |                       |                                            | Standby Letter of Credit ($1,500)               |                |        |        |      |   |        |        |  |   |        |        | 
|                                              
|MedAssets, Inc.                                |                       | Preferred Stock (227,865 shares)           |                                                 |                |        |        |      |   | 2,049  |        |  |   | 3,670  |       
|                                               | (Business Services)   |                                            | Common Stock (50,000 shares)                    |                |        |        |      |   |        |       |  |   |        | 150    | 
|                                              
|MHF Logistical Solutions, Inc.                 |                       | Subordinated Debt (11.5%, Due
    6/12)(6) |                                                 |                | 33,600 |        |      |   | 33,448 |        |  |   | 27,518 |       
|(Business Services)                            |                       | Subordinated Debt (18.0%, Due
    6/13)(6) |                                                 |                | 11,211 |        |      |   | 11,154 |        |  |   |       |       
|                                               |                       |                                            | Common Stock (20,934
    shares)(11)            |                |        |        |      |   |        | 20,942 |  |   |        |       | 
|                                               |                       |                                            | Warrants(11)                                    |                |        |        |      |   |        |       |  |   |        |       | 
|                                              
|Mid-Atlantic Venture Fund IV,
    L.P.(5)      |                       | Limited Partnership Interest               |                                                 |                |        |        |      |   | 6,975  |        |  |   | 3,037  |       
|                                               | (Private Equity Fund) |                                            |                                                 |                |        |        |      |   |        |        |  |   |        |        | 
|                                              
|Mogas Energy, LLC                              |                       | Subordinated Debt (9.5%, Due 8/08)         |                                                 |                | 16,285 |        |      |   | 15,086 |        |  |   | 15,086 |       
|                                               | (Energy Services)     |                                            |                                                 |                |        |        |      |   |        |        |  |   |        |        | 
|                                              
|NetShape Technologies, Inc.                    |                       | Senior Debt (8.6%, Due 2/13)               |                                                 |                | 8,991  |        |      |   | 8,957  |        |  |   | 8,957  |       
|                                               | (Industrial Products) |                                            |                                                 |                |        |        |      |   |        |        |  |   |        |        | 
|                                              
|Network Hardware Resale, Inc.                  |                       | Unitranche Debt (10.5%, Due 12/11)         |                                                 |                | 36,701 |        |      |   | 36,893 |        |  |   | 36,893 |       
|                                               | (Business Services)   |                                            | Convertible Subordinated Debt (9.8%, Due 12/15) |                |        | 13,242 |      |   |        | 13,307 |  |   |        | 13,599 | 
|                                              
|Norwesco, Inc.                                 |                       | Subordinated Debt (12.6%, Due 1/12  7/12) |                                                 |                | 82,595 |        |      |   | 82,297 |        |  |   | 82,297 |       
|                                               | (Industrial Products) |                                            | Common Stock (559,603
    shares)(11)           |                |        |        |      |   |        | 38,313 |  |   |        | 81,086 | 
|                                               |                       | Warrants(11)                               |                                                 |                |        |        |      |   |       |        |  |   |       |       
|                                              
|Novak Biddle Venture Partners III,
    L.P.(5) |                       | Limited Partnership Interest               |                                                 |                |        |        |      |   | 1,835  |        |  |   | 1,883  |       
|                                               | (Private Equity Fund) |                                            |                                                 |                |        |        |      |   |        |        |  |   |        |        | 
|                                              
|Oahu Waste Services, Inc.                      |                       | Stock Appreciation Rights                  |                                                 |                |        |        |      |   | 239    |        |  |   | 800    |       
|                                               | (Business Services)   |                                            |                                                 |                |        |        |      |   |        |        |  |   |        |        | 
|                                              
|Odyssey Investment Partners Fund III,          |                       |                                            |                                                 |                |        |        |      |   |        |        |  |   |        |       
|                                               | LP(5)                 |                                            | Limited Partnership Interest                    |                |        |        |      |   |        | 2,462  |  |   |        | 2,310  | 
|                                               | (Private Equity Fund) |                                            |                                                 |                |        |        |      |   |        |        |  |   |        |        | 
|                                              
|Passport Health                                |                       |                                            |                                                 |                |        |        |      |   |        |        |  |   |        |       
|                                               | Communications, Inc.  |                                            | Subordinated Debt (14.0%, Due 4/12)             |                |        | 10,222 |      |   |        | 10,181 |  |   |        | 10,181 | 
|                                               | (Healthcare Services) |                                            | Preferred Stock (651,381 shares)                |                |        |        |      |   |        | 2,000  |  |   |        | 2,255  | 
|                                              
|Pendum, Inc.                                   |                       | Subordinated Debt (17.0%, Due
    1/11)(6) |                                                 |                | 34,028 |        |      |   | 34,028 |        |  |   | 26,676 |       
|                                               | (Business Services)   |                                            | Preferred Stock (82,715 shares)                 |                |        |        |      |   |        |       |  |   |        |       | 
|                                               |                       |                                            | Warrants                                        |                |        |        |      |   |        |       |  |   |        |       | 
|                                              
|Performant Financial Corporation               |                       | Common Stock (478,816 shares)              |                                                 |                |        |        |      |   | 734    |        |  |   |       |       
|                                               | (Business Services)   |                                            |                                                 |                |        |        |      |   |        |        |  |   |        |        | 
|                                              

| |      |  |  |                                                                                                                                                                                                                                                                
| | ---- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (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.                                                                                                                                                                                                                             
| | (6)  |  |  | Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.                                                                                                                                                           
| | (11) |  |  | 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.                                                     





12



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF
INVESTMENTS  (Continued)


|                                        |                       |                                      |                                 |                |        |  |      |   |        |       |  |   |        |       | 
|--------------------------------------- | --------------------- | ------------------------------------ | ------------------------------- | -------------- | ------ |  | ---- | - | ------ | ----- |  | - | ------ | ----- | 
|                                        |                       |                                      |                                 | March 31, 2007 |       
|                                        |                       |                                      |                                 |                |       
|Private Finance                         |                       |                                      |                                 |               
|Portfolio Company                       |                       |                                      |                                 | (unaudited)    |       
|(in thousands, except number of shares) |                       | Investment(1)(2)                     |                                 | Principal      |        |  | Cost |   |        | Value | 
|                                        |                       |                                      |                                 |                |        |  |      |   |        |       | 
|Postle Aluminum Company, LLC            |                       | Unitranche Debt (11.0%, Due 10/12)   |                                 | $              | 62,250 |  |      | $ | 61,927 |       |  | $ | 61,927 |      
|                                        | (Industrial Products) |                                      | Equity Interests                |                |        |  |      |   |        | 2,500 |  |   |        | 2,600 | 
|                                       
|Pro Mach, Inc.                          |                       | Subordinated Debt (12.5%, Due 6/12)  |                                 |                | 14,471 |  |      |   | 14,406 |       |  |   | 14,406 |      
|                                        | (Industrial Products) |                                      | Equity Interests                |                |        |  |      |   |        | 1,500 |  |   |        | 2,200 | 
|                                       
|Promo Works, LLC                        |                       | Unitranche Debt (10.3%, Due 12/11)   |                                 |                | 31,000 |  |      |   | 30,739 |       |  |   | 30,739 |      
|                                        | (Business Services)   |                                      | Guaranty ($900)                 |                |        |  |      |   |        |       |  |   |        |       | 
|                                       
|S.B. Restaurant Company                 |                       | Unitranche Debt (9.8%, Due 4/11)     |                                 |                | 41,501 |  |      |   | 41,118 |       |  |   | 41,118 |      
|                                        | (Retail)              |                                      | Preferred Stock (54,125 shares) |                |        |  |      |   |        | 135   |  |   |        | 135   | 
|                                        |                       | Warrants                             |                                 |                |        |  |      |   | 619    |       |  |   | 1,600  |      
|                                        |                       | Standby Letters of Credit ($2,611)   |                                 |                |        |  |      |   |        |       |  |   |        |      
|                                       
|SBBUT, LLC                              |                       | Equity Interests                     |                                 |                |        |  |      |   |       |       |  |   |       |      
|                                        | (Consumer Products)   |                                      |                                 |                |        |  |      |   |        |       |  |   |        |       | 
|                                       
|Service Center Metals, LLC              |                       | Subordinated Debt (15.5%, Due 9/11)  |                                 |                | 5,000  |  |      |   | 4,978  |       |  |   | 4,978  |      
|                                        | (Industrial Products) |                                      | Equity Interests                |                |        |  |      |   |        | 313   |  |   |        | 325   | 
|                                       
|Soff-Cut Holdings, Inc.                 |                       | Preferred Stock (300 shares)         |                                 |                |        |  |      |   | 300    |       |  |   | 300    |      
|                                        | (Industrial Products) |                                      | Common Stock (2,000 shares)     |                |        |  |      |   |        | 200   |  |   |        | 200   | 
|                                       
|SPP Mezzanine Funding,
    L.P.(5)      |                       | Limited Partnership Interest         |                                 |                |        |  |      |   | 2,825  |       |  |   | 3,159  |      
|                                        | (Private Equity Fund) |                                      |                                 |                |        |  |      |   |        |       |  |   |        |       | 
|                                       
|SPP Mezzanine Funding II,
    L.P.(5)   |                       | Limited Partnership Interest         |                                 |                |        |  |      |   | 1,105  |       |  |   | 846    |      
|                                        | (Private Equity Fund) |                                      |                                 |                |        |  |      |   |        |       |  |   |        |       | 
|                                       
|Stag-Parkway, Inc.                      |                       | Unitranche Debt (10.8%, Due 7/12)    |                                 |                | 63,000 |  |      |   | 62,724 |       |  |   | 62,724 |      
|                                        | (Business Services)   |                                      |                                 |                |        |  |      |   |        |       |  |   |        |       | 
|                                       
|STS Operating, Inc.                     |                       | Subordinated Debt (11.0%, Due 1/13)  |                                 |                | 30,386 |  |      |   | 30,256 |       |  |   | 30,256 |      
|                                        | (Industrial Products) |                                      |                                 |                |        |  |      |   |        |       |  |   |        |       | 
|                                       
|The Step2 Company, LLC                  |                       | Unitranche Debt (10.5%, Due 4/12)    |                                 |                | 64,348 |  |      |   | 64,064 |       |  |   | 64,064 |      
|                                        | (Consumer Products)   |                                      | Equity Interests                |                |        |  |      |   |        | 2,000 |  |   |        | 1,991 | 
|                                       
|Tradesmen International, Inc.           |                       | Subordinated Debt (12.0%, Due 12/09) |                                 |                | 9,136  |  |      |   | 8,629  |       |  |   | 8,629  |      
|                                        | (Business Services)   |                                      |                                 |                |        |  |      |   |        |       |  |   |        |       | 
|                                       
|TransAmerican Auto Parts, LLC           |                       | Subordinated Debt (14.0%, Due 11/12) |                                 |                | 13,011 |  |      |   | 12,960 |       |  |   | 12,960 |      
|                                        | (Consumer Products)   |                                      | Equity Interests                |                |        |  |      |   |        | 1,198 |  |   |        | 845   | 
|                                       
|Universal Air Filter Company            |                       | Unitranche Debt (11.0%, Due 11/11)   |                                 |                | 18,867 |  |      |   | 18,781 |       |  |   | 18,781 |      
|                                        | (Industrial Products) |                                      |                                 |                |        |  |      |   |        |       |  |   |        |       | 
|                                       
|Updata Venture Partners II,
    L.P.(5) |                       | Limited Partnership Interest         |                                 |                |        |  |      |   | 4,627  |       |  |   | 5,047  |      
|                                        | (Private Equity Fund) |                                      |                                 |                |        |  |      |   |        |       |  |   |        |       | 
|                                       
|Venturehouse-Cibernet Investors, LLC    |                       | Equity Interest                      |                                 |                |        |  |      |   | 42     |       |  |   | 42     |      
|                                        | (Business Services)   |                                      |                                 |                |        |  |      |   |        |       |  |   |        |       | 
|                                       
|Venturehouse Group,
    LLC(5)          |                       | Equity Interest                      |                                 |                |        |  |      |   | 598    |       |  |   | 901    |      
|                                        | (Private Equity Fund) |                                      |                                 |                |        |  |      |   |        |       |  |   |        |       | 
|                                       
|VICORP Restaurants, Inc.                |                       | Warrants                             |                                 |                |        |  |      |   | 33     |       |  |   |       |      
|                                        | (Retail)              |                                      |                                 |                |        |  |      |   |        |       |  |   |        |       | 
|                                       

| |     |  |  |                                                                                                                                                                                                                                                                
| | --- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (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.                                                                                                                                                                                                                             
| | (6) |  |  | Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.                                                                                                                                                           





13



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF
INVESTMENTS  (Continued)


|                                                    |                       |                                             |                              |                |        |   |           |   |        |       |           |   |        |       | 
|--------------------------------------------------- | --------------------- | ------------------------------------------- | ---------------------------- | -------------- | ------ | - | --------- | - | ------ | ----- | --------- | - | ------ | ----- | 
|                                                    |                       |                                             |                              | March 31, 2007 |       
|                                                    |                       |                                             |                              |                |       
|Private Finance                                     |                       |                                             |                              |               
|Portfolio Company                                   |                       |                                             |                              | (unaudited)    |       
|(in thousands, except number of shares)             |                       | Investment(1)(2)                            |                              | Principal      |        |   | Cost      |   |        | Value |          
|                                                    |                       |                                             |                              |                |        |   |           |   |        |       |          
|Walker Investment Fund II,
    LLLP(5)              |                       | Limited Partnership Interest                |                              |                |        |   |           | $ | 1,330  |       |           | $ | 458    |      
|                                                    | (Private Equity Fund) |                                             |                              |                |        |   |           |   |        |       |           |   |        |       | 
|                                                   
|Wear Me Apparel Corporation                         |                       | Subordinated Debt (15.0%, Due 12/10)        |                              | $              | 39,990 |   |           |   | 39,509 |       |           |   | 39,990 |      
|                                                    | (Consumer Products)   |                                             | Warrants                     |                |        |   |           |   |        | 1,219 |           |   |        | 5,120 | 
|                                                   
|Webster Capital II,
    L.P.(5)                     |                       | Limited Partnership Interest                |                              |                |        |   |           |   | 75     |       |           |   | 75     |      
|                                                    | (Private Equity Fund) |                                             |                              |                |        |   |           |   |        |       |           |   |        |       | 
|                                                   
|Wilton Industries, Inc.                             |                       | Subordinated Debt (16.0%, Due 6/08)         |                              |                | 2,400  |   |           |   | 2,400  |       |           |   | 2,400  |      
|                                                    | (Consumer Products)   |                                             |                              |                |        |   |           |   |        |       |           |   |        |       | 
|                                                   
|Woodstream Corporation                              |                       | Subordinated Debt (13.5%, Due 11/12  5/13) |                              |                | 53,293 |   |           |   | 53,174 |       |           |   | 53,174 |      
|                                                    | (Consumer Products)   |                                             | Common Stock (180 shares)    |                |        |   |           |   |        | 673   |           |   |        | 3,885 | 
|                                                    |                       |                                             | Warrants                     |                |        |   |           |   |        |      |           |   |        | 2,815 | 
|                                                   
|York Insurance Services Group, Inc.                 |                       | Subordinated Debt (14.5%, Due 1/14)         |                              |                | 44,471 |   |           |   | 44,274 |       |           |   | 44,274 |      
|                                                    | (Business Services)   |                                             | Common Stock (15,000 shares) |                |        |   |           |   |        | 1,500 |           |   |        | 2,000 | 
|                                                   
|Other companies                                     |                       | Other debt
    investments(6)               |                              |                | 223    |   |           |   | 223    |       |           |   | 218    |      
|                                                    |                       | Other equity investments                    |                              |                |        |   |           |   | 8      |       |           |   |       |      
|                                                   
|Total
    companies less than 5% owned              |                       |                                             |                              |                |        | $ | 2,159,014 |   |        | $     | 2,145,284 |  
|                                                   
|Total
    private finance (144 portfolio companies) |                       |                                             |                              |                |        | $ | 4,434,112 |   |        | $     | 4,376,319 |  
|                                                   

| |     |  |  |                                                                                                                                                                                                                                                                
| | --- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (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.                                                                                                                                                                                                                             
| | (6) |  |  | Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.                                                                                                                                                           





14



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF
INVESTMENTS  (Continued)


|                                       |  |  |  |  |  |  |  | 
|-------------------------------------- |  |  |  |  |  |  |  | 
|Commercial Real Estate Finance         |  |  |  |  |  |  |  | 
|(in thousands, except number of loans) |  |  |  |  |  |  |  | 




|                                                                                      |                                         |                  |              |  |           |                |        |             |       |   |           |         |       |   |           |         | 
|------------------------------------------------------------------------------------- | --------------------------------------- | ---------------- | ------------ |  | --------- | -------------- | ------ | ----------- | ----- | - | --------- | ------- | ----- | - | --------- | ------- | 
|                                                                                      |                                         |                  |              |  |           | March 31, 2007 |       
|                                                                                      |                                         |                  |              |  |           |                |       
|                                                                                      |                                         | Interest         |              |  | Number of |                |        | (unaudited) |      
|                                                                                      |                                         | Rate Ranges      |              |  | Loans     |                |        | Cost        |       |   | Value     |        
|                                                                                      |                                         |                  |              |  |           |                |        |             |       |   |           |        
|Commercial Mortgage Loans                                                             |                                         |                  |              |  |           |                |        |             |       |   |           |         |       |   |           |        
|                                                                                      |                                         |                  | Up to 6.99%  |  |           |                | 3      |             |       | $ | 20,443    |         |       | $ | 19,693    |        
|                                                                                      |                                         |                  | 7.00%8.99%  |  |           |                | 9      |             |       |   | 24,034    |         |       |   | 24,269    |        
|                                                                                      |                                         |                  | 9.00%10.99% |  |           |                | 4      |             |       |   | 24,316    |         |       |   | 24,316    |        
|                                                                                      |                                         | 15.00% and above |              |  | 2         |                |        |             | 3,970 |   |           |         | 3,970 |  
|                                                                                     
|                                                                                      | Total commercial mortgage
    loans(13) |                  |              |  |           |                |        | 18          |       |   | $         | 72,763  |       |   | $         | 72,248  | 
|                                                                                     
|Real Estate Owned                                                                     |                                         |                  |              |  |           |                |        |             |       | $ | 15,657    |         |       | $ | 20,969    |        
|                                                                                     
|Equity
    Interests(2) 
    Companies more than 25% owned
    (Guarantees  $6,871) |                                         |                  |              |  |           | $              | 14,964 |             |       | $ | 29,312    |        
|                                                                                     
|                                                                                      | Total commercial real estate finance    |                  |              |  |           |                |        |             |       |   | $         | 103,384 |       |   | $         | 122,529 | 
|                                                                                     
|Total portfolio                                                                       |                                         |                  |              |  |           |                |        |             |       | $ | 4,537,496 |         |       | $ | 4,498,848 |        
|                                                                                     

| |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 

|                                                     |                                              |                           |  |      |      |  |   |        |         |  |   |        |         | 
|---------------------------------------------------- | -------------------------------------------- | ------------------------- |  | ---- | ---- |  | - | ------ | ------- |  | - | ------ | ------- | 
|                                                     |                                              | Yield                     |  |      | Cost |  |   | Value  |        
|                                                     |                                              |                           |  |      |      |  |   |        |        
|Liquidity
    Portfolio(14)                          |                                              |                           |  |      |      |  |   |        |         |  |   |       
|                                                     | American Beacon Money Market Select FD Fund  |                           |  | 5.3% |      |  | $ | 87,789 |         |  | $ | 87,789 |        
|                                                     | Certificate of Deposit (Due June 2007)       |                           |  | 5.5% |      |  |   | 41,143 |         |  |   | 41,143 |        
|                                                     | American Beacon Money Market Fund            |                           |  | 5.2% |      |  |   | 40,904 |         |  |   | 40,904 |        
|                                                     | SEI Daily Income Tr Prime Obligation Fund    |                           |  | 5.2% |      |  |   | 35,113 |         |  |   | 35,113 |        
|                                                     | Blackrock Liquidity Funds                    |                           |  | 5.2% |      |  |   | 10     |         |  |   | 10     |        
|                                                    
|                                                     |                                              | Total liquidity portfolio |  |      |      |  |   | $      | 204,959 |  |   | $      | 204,959 | 
|                                                    
|Other Investments in Money Market
    Securities(14) |                                              |                           |  |      |      |  |   |        |         |  |   |       
|                                                     | Columbia Treasury Reserves Money Market Fund |                           |  | 5.2% |      |  | $ | 64,998 |         |  | $ | 64,998 |        
|                                                     | Blackrock Liquidity Funds                    |                           |  | 5.2% |      |  | $ | 1,213  |         |  | $ | 1,213  |        
|                                                    

|                                                                                                                                                                                                                                                                                                 |  |  |  |  |  |  |  |  |  |  |  | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  |  |  |  |  |  |  |  |  |  |  | 
|(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.                                                                                                                                                                                                                                                
|(13)       Commercial
    mortgage loans totaling $19.2 million at value were on
    non-accrual status and therefore were considered non-income
    producing.                                                                                                                                 
|(14)       Included
    in investments in money market and other securities on the
    accompanying Consolidated Balance Sheet.                                                                                                                                                                 





15



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF INVESTMENTS


|                                        |                      |                                                       |                                                    |                   |        |        |      |   |         |         |  |   |        |        | 
|--------------------------------------- | -------------------- | ----------------------------------------------------- | -------------------------------------------------- | ----------------- | ------ | ------ | ---- | - | ------- | ------- |  | - | ------ | ------ | 
|                                        |                      |                                                       |                                                    | December 31, 2006 |       
|Private Finance                         |                      |                                                       |                                                    |                   |       
|Portfolio Company                       |                      |                                                       |                                                    |                  
|(in thousands, except number of shares) |                      | Investment(1)(2)                                      |                                                    | Principal         |        |        | Cost |   |         | Value   | 
|                                        |                      |                                                       |                                                    |                   |        |        |      |   |         |         | 
|Companies More Than 25% Owned           |                      |                                                       |                                                    |                   |        |        |      |   |         |         |  |  
|                                       
|Alaris Consulting, LLC                  |                      | Senior Loan (16.5%, Due 12/05 
    12/07)(6)         |                                                    | $                 | 27,055 |        |      | $ | 26,987  |         |  | $ |       |       
|                                        | (Business Services)  |                                                       | Equity Interests                                   |                   |        |        |      |   |         | 5,305   |  |   |        |       | 
|                                        |                      | Guaranty ($1,100)                                     |                                                    |                   |        |        |      |   |         |         |  |   |        |       
|                                       
|Avborne,
    Inc.(7)                    |                      | Preferred Stock (12,500 shares)                       |                                                    |                   |        |        |      |   | 610     |         |  |   | 918    |       
|                                        | (Business Services)  |                                                       | Common Stock (27,500 shares)                       |                   |        |        |      |   |         |        |  |   |        |       | 
|                                       
|Avborne Heavy Maintenance,
    Inc.(7)  |                      | Preferred Stock (1,568 shares)                        |                                                    |                   |        |        |      |   | 2,401   |         |  |   |       |       
|                                        | (Business Services)  |                                                       | Common Stock (2,750 shares)                        |                   |        |        |      |   |         |        |  |   |        |       | 
|                                        |                      | Guaranty ($2,401)                                     |                                                    |                   |        |        |      |   |         |         |  |   |        |       
|                                       
|Border Foods, Inc.                      |                      | Preferred Stock (100,000 shares)                      |                                                    |                   |        |        |      |   | 12,721  |         |  |   |       |       
|                                        | (Consumer Products)  |                                                       | Common Stock (148,838 shares)                      |                   |        |        |      |   |         | 3,848   |  |   |        |       | 
|                                       
|Business Loan Express, LLC              |                      | Class A Equity
    Interests(25.0%)(6)                |                                                    |                   | 66,622 |        |      |   | 66,622  |         |  |   | 66,622 |       
|                                        | (Financial Services) |                                                       | Class B Equity Interests                           |                   |        |        |      |   |         | 119,436 |  |   |        | 79,139 | 
|                                        |                      | Class C Equity Interests                              |                                                    |                   |        |        |      |   | 109,301 |         |  |   | 64,976 |       
|                                        |                      | Guaranty ($189,706  See Note 3)                      |                                                    |                   |        |        |      |   |         |         |  |   |        |       
|                                        |                      | Standby Letters of Credit
    ($25,000   See Note 3) |                                                    |                   |        |        |      |   |         |         |  |   |        |       
|                                       
|Calder Capital Partners,
    LLC(5)     |                      | Senior Loan (8.0%, Due
    5/09)(6)                   |                                                    |                   | 975    |        |      |   | 975     |         |  |   | 975    |       
|                                        | (Financial Services) |                                                       | Equity Interests                                   |                   |        |        |      |   |         | 2,076   |  |   |        | 2,076  | 
|                                       
|Callidus Capital Corporation            |                      | Subordinated Debt (18.0%, Due 10/08)                  |                                                    |                   | 5,762  |        |      |   | 5,762   |         |  |   | 5,762  |       
|                                        | (Financial Services) |                                                       | Common Stock (100 shares)                          |                   |        |        |      |   |         | 2,058   |  |   |        | 22,550 | 
|                                       
|Coverall North America, Inc.            |                      | Unitranche Debt (12.0%, Due 7/11)                     |                                                    |                   | 36,500 |        |      |   | 36,333  |         |  |   | 36,333 |       
|                                        | (Business Services)  |                                                       | Subordinated Debt (15.0%, Due 7/11)                |                   |        | 6,000  |      |   |         | 5,972   |  |   |        | 5,972  | 
|                                        |                      |                                                       | Common Stock (884,880 shares)                      |                   |        |        |      |   |         | 16,649  |  |   |        | 19,619 | 
|                                       
|CR Brands, Inc.                         |                      | Subordinated Debt (16.6%, Due 2/13)                   |                                                    |                   | 39,573 |        |      |   | 39,401  |         |  |   | 39,401 |       
|                                        | (Consumer Products)  |                                                       | Common Stock (37,200,551 shares)                   |                   |        |        |      |   |         | 33,321  |  |   |        | 25,738 | 
|                                       
|Financial Pacific Company               |                      | Subordinated Debt (17.4%, Due 2/12  8/12)            |                                                    |                   | 71,589 |        |      |   | 71,362  |         |  |   | 71,362 |       
|                                        | (Financial Services) |                                                       | Preferred Stock (10,964 shares)                    |                   |        |        |      |   |         | 10,276  |  |   |        | 15,942 | 
|                                        |                      |                                                       | Common Stock (14,735 shares)                       |                   |        |        |      |   |         | 14,819  |  |   |        | 65,186 | 
|                                       
|ForeSite Towers, LLC                    |                      | Equity Interests                                      |                                                    |                   |        |        |      |   | 7,620   |         |  |   | 12,290 |       
|                                        | (Tower Leasing)      |                                                       |                                                    |                   |        |        |      |   |         |         |  |   |        |        | 
|                                       
|Global Communications, LLC              |                      | Senior Loan (10.7%, Due 9/02 
    11/07)(6)          |                                                    |                   | 15,957 |        |      |   | 15,957  |         |  |   | 15,957 |       
|                                        | (Business Services)  |                                                       | Subordinated Debt (17.0%, Due
    12/03  9/05)(6) |                   |        | 11,339 |      |   |         | 11,336  |  |   |        | 11,237 | 
|                                        |                      | Preferred Equity Interest                             |                                                    |                   |        |        |      |   | 14,067  |         |  |   |       |       
|                                        |                      | Options                                               |                                                    |                   |        |        |      |   | 1,639   |         |  |   |       |       
|                                       
|Gordian Group, Inc.                     |                      | Senior Loan (10.0%, Due 6/06 
    12/08)(6)          |                                                    |                   | 11,792 |        |      |   | 11,803  |         |  |   |       |       
|                                        | (Business Services)  |                                                       | Common Stock (1,000 shares)                        |                   |        |        |      |   |         | 6,762   |  |   |        |       | 
|                                       

|    |  |                                                                                                                                                                                                                                                                
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.                                                                                                                                                                                                                             
|(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.                                                                                                                                                                                





16



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF
INVESTMENTS  (Continued)


|                                        |                       |                                            |                                            |                   |        |        |      |   |        |        |  |   |        |         | 
|--------------------------------------- | --------------------- | ------------------------------------------ | ------------------------------------------ | ----------------- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------- | 
|                                        |                       |                                            |                                            | December 31, 2006 |       
|Private Finance                         |                       |                                            |                                            |                   |       
|Portfolio Company                       |                       |                                            |                                            |                  
|(in thousands, except number of shares) |                       | Investment(1)(2)                           |                                            | Principal         |        |        | Cost |   |        | Value  | 
|                                        |                       |                                            |                                            |                   |        |        |      |   |        |        | 
|Healthy Pet Corp.                       |                       | Senior Loan (9.9%, Due 8/10)               |                                            | $                 | 27,038 |        |      | $ | 27,038 |        |  | $ | 27,038 |        
|                                        | (Consumer Services)   |                                            | Subordinated Debt (15.0%, Due 8/10)        |                   |        | 43,720 |      |   |        | 43,579 |  |   |        | 43,579  | 
|                                        |                       |                                            | Common Stock (30,142 shares)               |                   |        |        |      |   |        | 30,142 |  |   |        | 28,921  | 
|                                       
|HMT, Inc.                               |                       | Preferred Stock (554,052 shares)           |                                            |                   |        |        |      |   | 2,637  |        |  |   | 2,637  |        
|                                        | (Energy Services)     |                                            | Common Stock (300,000 shares)              |                   |        |        |      |   |        | 3,000  |  |   |        | 8,664   | 
|                                        |                       | Warrants                                   |                                            |                   |        |        |      |   | 1,155  |        |  |   | 3,336  |        
|                                       
|Huddle House, Inc.                      |                       | Senior Loan (8.9%, Due 12/11)              |                                            |                   | 19,950 |        |      |   | 19,950 |        |  |   | 19,950 |        
|                                        | (Retail)              |                                            | Subordinated Debt (15.0%, Due 12/12)       |                   |        | 58,484 |      |   |        | 58,196 |  |   |        | 58,196  | 
|                                        |                       | Common Stock (415,328 shares)              |                                            |                   |        |        |      |   | 41,662 |        |  |   | 41,662 |        
|                                       
|Impact Innovations Group, LLC           |                       | Equity Interests in Affiliate              |                                            |                   |        |        |      |   |       |        |  |   | 873    |        
|                                        | (Business Services)   |                                            |                                            |                   |        |        |      |   |        |        |  |   |        |         | 
|                                       
|Insight Pharmaceuticals Corporation     |                       | Subordinated Debt (16.1%, Due 9/12)        |                                            |                   | 60,049 |        |      |   | 59,850 |        |  |   | 59,850 |        
|                                        | (Consumer Products)   |                                            | Preferred Stock (25,000 shares)            |                   |        |        |      |   |        | 25,000 |  |   |        | 7,845   | 
|                                        |                       | Common Stock (620,000 shares)              |                                            |                   |        |        |      |   | 6,325  |        |  |   |       |        
|                                       
|Jakel, Inc.                             |                       | Subordinated Debt (15.5%, Due
    3/08)(6) |                                            |                   | 15,192 |        |      |   | 15,192 |        |  |   | 6,655  |        
|                                        | (Industrial Products) |                                            | Preferred Stock (6,460 shares)             |                   |        |        |      |   |        | 6,460  |  |   |        |        | 
|                                        |                       |                                            | Common Stock (158,061 shares)              |                   |        |        |      |   |        | 9,347  |  |   |        |        | 
|                                       
|Legacy Partners Group, LLC              |                       | Senior Loan (14.0%, Due
    5/09)(6)       |                                            |                   | 7,646  |        |      |   | 7,646  |        |  |   | 4,843  |        
|                                        | (Financial Services)  |                                            | Subordinated Debt (18.0%, Due
    5/09)(6) |                   |        | 2,952  |      |   |        | 2,952  |  |   |        |        | 
|                                        |                       | Equity Interests                           |                                            |                   |        |        |      |   | 4,248  |        |  |   |       |        
|                                       
|Litterer
    Beteiligungs-GmbH(4)       |                       | Subordinated Debt (8.0%, Due 3/07)         |                                            |                   | 692    |        |      |   | 692    |        |  |   | 692    |        
|                                        | (Business Services)   |                                            | Equity Interest                            |                   |        |        |      |   |        | 1,809  |  |   |        | 1,199   | 
|                                       
|Mercury Air Centers, Inc.               |                       | Subordinated Debt (16.0%, Due 4/09        |                                            |                   |        |        |      |   |        |        |  |   |        |        
|                                        | (Business Services)   |                                            | 11/12)                                     |                   |        | 49,358 |      |   |        | 49,217 |  |   |        | 49,217  | 
|                                        |                       |                                            | Common Stock (57,970 shares)               |                   |        |        |      |   |        | 35,053 |  |   |        | 195,019 | 
|                                        |                       |                                            | Standby Letters of Credit ($1,581)         |                   |        |        |      |   |        |        |  |   |        |         | 
|                                       
|MVL Group, Inc.                         |                       | Senior Loan (12.0%, Due 6/09  7/09)       |                                            |                   | 27,299 |        |      |   | 27,245 |        |  |   | 27,245 |        
|                                        | (Business Services)   |                                            | Subordinated Debt (14.5%, Due 6/09)        |                   |        | 35,846 |      |   |        | 35,478 |  |   |        | 35,478  | 
|                                        |                       | Common Stock (648,661 shares)              |                                            |                   |        |        |      |   | 643    |        |  |   |       |        
|                                       
|Penn Detroit Diesel Allison, LLC        |                       | Subordinated Debt (15.5%, Due 8/13)        |                                            |                   | 38,173 |        |      |   | 37,994 |        |  |   | 37,994 |        
|                                        | (Business Services)   |                                            | Equity Interests                           |                   |        |        |      |   |        | 21,128 |  |   |        | 25,949  | 
|                                       
|Powell Plant Farms, Inc.                |                       | Senior Loan (15.0%, Due
    12/07)(6)      |                                            |                   | 35,040 |        |      |   | 26,192 |        |  |   | 26,192 |        
|                                        | (Consumer Products)   |                                            | Subordinated Debt (20.0%, Due
    6/03)(6) |                   |        | 19,291 |      |   |        | 19,223 |  |   |        | 962     | 
|                                        |                       |                                            | Preferred Stock (1,483 shares)             |                   |        |        |      |   |        |       |  |   |        |        | 
|                                        |                       |                                            | Warrants                                   |                   |        |        |      |   |        |       |  |   |        |        | 
|                                       
|Service Champ, Inc.                     |                       | Subordinated Debt (15.5%, Due 4/12)        |                                            |                   | 27,733 |        |      |   | 27,619 |        |  |   | 27,619 |        
|                                        | (Business Services)   |                                            | Common Stock (63,888 shares)               |                   |        |        |      |   |        | 13,662 |  |   |        | 16,786  | 
|                                       

|    |  |                                                                                                                                                                                                                                                                
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.                                                                                                                                                                                                                             
|(6) |  | Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.                                                                                                                                                           





17



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF
INVESTMENTS  (Continued)


|                                        |                                |                                      |                                                   |                   |         |        |           |   |         |        |           |   |         |        | 
|--------------------------------------- | ------------------------------ | ------------------------------------ | ------------------------------------------------- | ----------------- | ------- | ------ | --------- | - | ------- | ------ | --------- | - | ------- | ------ | 
|                                        |                                |                                      |                                                   | December 31, 2006 |        
|Private Finance                         |                                |                                      |                                                   |                   |        
|Portfolio Company                       |                                |                                      |                                                   |                   |         |       
|(in thousands, except number of shares) |                                | Investment(1)(2)                     |                                                   | Principal         |         |        | Cost      |   |         | Value  |          
|                                        |                                |                                      |                                                   |                   |         |        |           |   |         |        |          
|Staffing Partners Holding               |                                |                                      |                                                   |                   |         |        |           |   |         |        |           |   |         |       
|                                        | Company, Inc.                  |                                      | Subordinated Debt (13.5%,
    Due 1/07)(6)        |                   | $       | 540    |           |   | $       | 540    |           |   | $       | 486    | 
|                                        | (Business Services)            |                                      |                                                   |                   |         |        |           |   |         |        |           |   |         |        | 
|                                       
|Startec Global Communications           |                                |                                      |                                                   |                   |         |        |           |   |         |        |           |   |         |       
|                                        | Corporation                    |                                      | Senior Loan (10.0%, Due 5/07  5/09)              |                   |         | 15,965 |           |   |         | 15,965 |           |   |         | 15,965 | 
|                                        | (Telecommunications)           |                                      | Common Stock (19,180,000 shares)                  |                   |         |        |           |   |         | 37,256 |           |   |         | 11,232 | 
|                                       
|Sweet Traditions, LLC                   |                                | Senior Loan (9.0%, Due 8/11)         |                                                   |                   | 39,022  |        |           |   | 35,172  |        |           |   | 35,172  |       
|                                        | (Retail)                       |                                      | Equity Interests                                  |                   |         |        |           |   |         | 450    |           |   |         | 450    | 
|                                        |                                |                                      | Standby Letter of Credit ($120)                   |                   |         |        |           |   |         |        |           |   |         |        | 
|                                       
|Triview Investments,
    Inc.(8)        |                                | Senior Loan (9.6%, Due 6/07  12/07) |                                                   |                   | 14,758  |        |           |   | 14,747  |        |           |   | 14,747  |       
|                                        | (Broadcasting & Cable/Business |                                      | Subordinated Debt (16.0%, Due 9/11  7/12)        |                   |         | 56,288 |           |   |         | 56,008 |           |   |         | 56,008 | 
|                                        | Services/Consumer Products)    |                                      | Subordinated Debt (7.9%, Due 11/07 
    7/08)(6) |                   |         | 4,327  |           |   |         | 4,327  |           |   |         | 4,342  | 
|                                        |                                |                                      | Common Stock (202 shares)                         |                   |         |        |           |   |         | 98,604 |           |   |         | 31,322 | 
|                                        |                                | Guaranty ($800)                      |                                                   |                   |         |        |           |   |         |        |           |   |         |       
|                                        |                                | Standby Letter of Credit ($200)      |                                                   |                   |         |        |           |   |         |        |           |   |         |       
|                                       
|Total
    companies more than 25% owned |                                |                                      |                                                   |                   |         | $      | 1,578,822 |   |         | $      | 1,490,180 |  
|                                       
|Companies 5% to 25% Owned               |                                |                                      |                                                   |                  
|                                       
|Advantage Sales & Marketing, Inc.       |                                | Subordinated Debt (12.0%, Due 3/14)  |                                                   | $                 | 152,320 |        |           | $ | 151,648 |        |           | $ | 151,648 |       
|                                        | (Business Services)            |                                      | Equity Interests                                  |                   |         |        |           |   |         |       |           |   |         | 11,000 | 
|                                       
|Air Medical Group Holdings LLC          |                                | Senior Loan (9.9%, Due 3/11)         |                                                   |                   | 1,828   |        |           |   | 1,763   |        |           |   | 1,763   |       
|                                        | (Healthcare Services)          |                                      | Subordinated Debt (14.0%, Due 11/12)              |                   |         | 35,180 |           |   |         | 35,128 |           |   |         | 35,128 | 
|                                        |                                | Equity Interests                     |                                                   |                   |         |        |           |   | 3,470   |        |           |   | 5,950   |       
|                                       
|Alpine ESP Holdings, Inc.               |                                | Preferred Stock (622 shares)         |                                                   |                   |         |        |           |   | 622     |        |           |   | 602     |       
|                                        | (Business Services)            |                                      | Common Stock (13,513 shares)                      |                   |         |        |           |   |         | 14     |           |   |         |       | 
|                                       
|Amerex Group, LLC                       |                                | Subordinated Debt (12.0%, Due 1/13)  |                                                   |                   | 8,400   |        |           |   | 8,400   |        |           |   | 8,400   |       
|                                        | (Consumer Products)            |                                      | Equity Interests                                  |                   |         |        |           |   |         | 3,546  |           |   |         | 13,823 | 
|                                       
|BB&T Capital Partners/Windsor           |                                |                                      |                                                   |                   |         |        |           |   |         |        |           |   |         |       
|                                        | Mezzanine Fund, LLC
    (5)    |                                      | Equity Interests                                  |                   |         |        |           |   |         | 5,873  |           |   |         | 5,554  | 
|                                        | (Private Equity Fund)          |                                      |                                                   |                   |         |        |           |   |         |        |           |   |         |        | 
|                                       
|Becker Underwood, Inc.                  |                                | Subordinated Debt (14.5%, Due 8/12)  |                                                   |                   | 24,244  |        |           |   | 24,163  |        |           |   | 24,163  |       
|                                        | (Industrial Products)          |                                      | Common Stock (5,073 shares)                       |                   |         |        |           |   |         | 5,813  |           |   |         | 3,700  | 
|                                       
|BI Incorporated                         |                                | Subordinated Debt (13.5%, Due 2/14)  |                                                   |                   | 30,269  |        |           |   | 30,135  |        |           |   | 30,135  |       
|                                        | (Business Services)            |                                      | Common Stock (40,000 shares)                      |                   |         |        |           |   |         | 4,000  |           |   |         | 4,100  | 
|                                        |                                |                                      |                                                   |                   |         |        |           |   |         |        |           |   |         |       
|                                       

|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.                                                                                                                                                                                                                                                                                                                                                                                      
|(6) |  | Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.                                                                                                                                                                                                                                                                                                                    
|(8) |  | Triview Investments, Inc. holds investments in Longview Cable
    & Data, LLC (Broadcasting & Cable) with a cost of
    $67.3 million and a value of $7.5 million, Triax
    Holdings, LLC (Consumer Products) with a cost of
    $98.9 million and a value of $91.5 million, and
    Crescent Hotels & Resorts, LLC and affiliates (Business
    Services) with a cost of $7.5 million and a value of
    $7.3 million.





18



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF
INVESTMENTS  (Continued)


|                                                                          |                       |                                                           |                                            |                   |        |        |         |   |        |        |         |   |        |        | 
|------------------------------------------------------------------------- | --------------------- | --------------------------------------------------------- | ------------------------------------------ | ----------------- | ------ | ------ | ------- | - | ------ | ------ | ------- | - | ------ | ------ | 
|                                                                          |                       |                                                           |                                            | December 31, 2006 |       
|Private Finance                                                           |                       |                                                           |                                            |                   |       
|Portfolio Company                                                         |                       |                                                           |                                            |                  
|(in thousands, except number of shares)                                   |                       | Investment(1)(2)                                          |                                            | Principal         |        |        | Cost    |   |        | Value  |        
|                                                                          |                       |                                                           |                                            |                   |        |        |         |   |        |        |        
|CitiPostal, Inc. and Affiliates                                           |                       | Senior Loan (11.1%, Due 8/13-11/14)                       |                                            | $                 | 20,670 |        |         | $ | 20,569 |        |         | $ | 20,569 |       
|                                                                          | (Business Services)   |                                                           | Equity Interests                           |                   |        |        |         |   |        | 4,447  |         |   |        | 4,700  | 
|                                                                         
|Creative Group, Inc.                                                      |                       | Subordinated Debt (12.0%, Due 9/13)                       |                                            |                   | 15,000 |        |         |   | 13,656 |        |         |   | 13,656 |       
|                                                                          | (Business Services)   |                                                           | Warrant                                    |                   |        |        |         |   |        | 1,387  |         |   |        | 1,387  | 
|                                                                         
|Drew Foam Companies, Inc.                                                 |                       | Preferred Stock (722 shares)                              |                                            |                   |        |        |         |   | 722    |        |         |   | 722    |       
|                                                                          | (Business Services)   |                                                           | Common Stock (7,287 shares)                |                   |        |        |         |   |        | 7      |         |   |        | 7      | 
|                                                                         
|MedBridge Healthcare, LLC                                                 |                       | Senior Loan (6.0%, Due
    8/09)(6)                       |                                            |                   | 7,164  |        |         |   | 7,164  |        |         |   | 7,164  |       
|                                                                          | (Healthcare Services) |                                                           | Subordinated Debt (10.0%, Due
    8/14)(6) |                   |        | 5,184  |         |   |        | 5,184  |         |   |        | 1,813  | 
|                                                                          |                       | Convertible Subordinated Debt (2.0%,
    Due
    8/14)(6) |                                            |                   | 2,970  |        |         |   | 984    |        |         |   |       |       
|                                                                          |                       | Equity Interests                                          |                                            |                   |        |        |         |   | 1,306  |        |         |   |       |       
|                                                                         
|Multi-Ad Services, Inc.                                                   |                       | Unitranche Debt (11.3%, Due 11/11)                        |                                            |                   | 20,000 |        |         |   | 19,879 |        |         |   | 19,879 |       
|                                                                          | (Business Services)   |                                                           | Equity Interests                           |                   |        |        |         |   |        | 2,000  |         |   |        | 2,000  | 
|                                                                         
|Nexcel Synthetics, LLC                                                    |                       | Subordinated Debt (14.5%, Due 6/09)                       |                                            |                   | 10,998 |        |         |   | 10,978 |        |         |   | 10,978 |       
|                                                                          | (Consumer Products)   |                                                           | Equity Interests                           |                   |        |        |         |   |        | 1,755  |         |   |        | 1,486  | 
|                                                                         
|PresAir LLC                                                               |                       | Senior Loan (7.5%, Due
    12/10)(6)                      |                                            |                   | 5,810  |        |         |   | 5,492  |        |         |   | 2,206  |       
|                                                                          | (Industrial Products) |                                                           | Equity Interests                           |                   |        |        |         |   |        | 1,336  |         |   |        |       | 
|                                                                         
|Progressive International                                                 |                       |                                                           |                                            |                   |        |        |         |   |        |        |         |   |        |       
|                                                                          | Corporation           |                                                           | Subordinated Debt (16.0%, Due 12/09)       |                   |        | 7,553  |         |   |        | 7,533  |         |   |        | 7,533  | 
|                                                                          | (Consumer Products)   |                                                           | Preferred Stock (500 shares)               |                   |        |        |         |   |        | 500    |         |   |        | 1,024  | 
|                                                                          |                       | Common Stock (197 shares)                                 |                                            |                   |        |        |         |   | 13     |        |         |   | 2,300  |       
|                                                                          |                       | Warrants                                                  |                                            |                   |        |        |         |   |       |        |         |   |       |       
|                                                                         
|Regency Healthcare Group, LLC                                             |                       | Senior Loan (11.1%, Due 6/12)                             |                                            |                   | 1,250  |        |         |   | 1,232  |        |         |   | 1,232  |       
|                                                                          | (Healthcare Services) |                                                           | Unitranche Debt (11.1%, Due 6/12)          |                   |        | 20,000 |         |   |        | 19,908 |         |   |        | 19,908 | 
|                                                                          |                       |                                                           | Equity Interests                           |                   |        |        |         |   |        | 1,500  |         |   |        | 1,616  | 
|                                                                         
|SGT India Private
    Limited(4)                                          |                       | Common Stock (109,524 shares)                             |                                            |                   |        |        |         |   | 3,944  |        |         |   | 3,346  |       
|                                                                          | (Business Services)   |                                                           |                                            |                   |        |        |         |   |        |        |         |   |        |        | 
|                                                                         
|Soteria Imaging Services, LLC                                             |                       | Subordinated Debt (11.6%, Due 11/10)                      |                                            |                   | 18,500 |        |         |   | 17,569 |        |         |   | 17,569 |       
|                                                                          | (Healthcare Services) |                                                           | Equity Interests                           |                   |        |        |         |   |        | 2,163  |         |   |        | 2,541  | 
|                                                                         
|Universal Environmental Services, LLC                                     |                       | Unitranche Debt (14.5%, Due 2/09)                         |                                            |                   | 10,989 |        |         |   | 10,962 |        |         |   | 10,211 |       
|                                                                          | (Business Services)   |                                                           | Equity Interests                           |                   |        |        |         |   |        | 1,795  |         |   |        |       | 
|                                                                         
|Total
    companies 5% to 25% owned                                       |                       |                                                           |                                            |                   |        | $      | 438,560 |   |        | $      | 449,813 |  
|                                                                         
|Companies Less Than 5% Owned                                              |                       |                                                           |                                            |                   |        |        |         |   |        |        |         |   |        |       
|                                                                         
|3SI Security Systems, Inc.                                                |                       | Subordinated Debt (14.5%, Due 8/13)                       |                                            | $                 | 26,857 |        |         | $ | 26,740 |        |         | $ | 26,740 |       
|                                                                          | (Consumer Products)   |                                                           |                                            |                   |        |        |         |   |        |        |         |   |        |        | 
|                                                                         
|AgData, L.P.                                                              |                       | Unitranche Debt (10.3%, Due 7/12)                         |                                            |                   | 11,330 |        |         |   | 11,269 |        |         |   | 11,269 |       
|                                                                          | (Consumer Services)   |                                                           |                                            |                   |        |        |         |   |        |        |         |   |        |        | 
|                                                                         
|Anthony, Inc.                                                             |                       | Subordinated Debt (13.3%, Due 8/11                       |                                            |                   |        |        |         |   |        |        |         |   |        |       
|                                                                          | (Industrial Products) |                                                           | 9/12)                                      |                   |        | 14,818 |         |   |        | 14,768 |         |   |        | 14,768 | 
|                                                                         
|Axium Healthcare Pharmacy, Inc.                                           |                       | Senior Loan (12.0%, Due 12/12)                            |                                            |                   | 200    |        |         |   | 161    |        |         |   | 161    |       
|                                                                          | (Healthcare Services) |                                                           | Unitranche Debt (12.0%, Due 12/12)         |                   |        | 9,000  |         |   |        | 8,956  |         |   |        | 8,956  | 
|                                                                          |                       |                                                           | Common Stock (26,500 shares)               |                   |        |        |         |   |        | 2,650  |         |   |        | 2,650  | 
|                                                                         
|Baird Capital Partners IV Limited
    Partnership(5)(Private Equity Fund) |                       | Limited Partnership Interest                              |                                            |                   |        |        |         |   | 876    |        |         |   | 876    |       
|                                                                         

|    |  |                                                                                                                                                                                                                                                                
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.                                                                                                                                                                                                                             
|(6) |  | Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.                                                                                                                                                           





19



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF
INVESTMENTS  (Continued)


|                                        |                                                 |                                            |                                                      |                   |         |        |      |   |         |        |  |   |         |        | 
|--------------------------------------- | ----------------------------------------------- | ------------------------------------------ | ---------------------------------------------------- | ----------------- | ------- | ------ | ---- | - | ------- | ------ |  | - | ------- | ------ | 
|                                        |                                                 |                                            |                                                      | December 31, 2006 |        
|Private Finance                         |                                                 |                                            |                                                      |                   |        
|Portfolio Company                       |                                                 |                                            |                                                      |                  
|(in thousands, except number of shares) |                                                 | Investment(1)(2)                           |                                                      | Principal         |         |        | Cost |   |         | Value  | 
|                                        |                                                 |                                            |                                                      |                   |         |        |      |   |         |        | 
|Bantek West, Inc.                       |                                                 | Subordinated Debt (11.6%, Due
    1/11)(6) |                                                      | $                 | 30,000  |        |      | $ | 30,000  |        |  | $ | 21,463  |       
|                                        | (Business Services)                             |                                            |                                                      |                   |         |        |      |   |         |        |  |   |         |        | 
|                                       
|Benchmark Medical, Inc.                 |                                                 | Warrants                                   |                                                      |                   |         |        |      |   | 18      |        |  |   |        |       
|                                        | (Healthcare Services)                           |                                            |                                                      |                   |         |        |      |   |         |        |  |   |         |        | 
|                                       
|BenefitMall, Inc.                       |                                                 | Unitranche Debt (13.3%, Due 8/12)          |                                                      |                   | 110,030 |        |      |   | 109,648 |        |  |   | 109,648 |       
|                                        | (Business Services)                             |                                            | Common Stock (45,528,000
    shares)(11)             |                   |         |        |      |   |         | 45,528 |  |   |         | 43,578 | 
|                                        |                                                 |                                            | Warrants(11)                                         |                   |         |        |      |   |         |       |  |   |         |       | 
|                                        |                                                 |                                            | Standby Letters of Credit ($9,981)                   |                   |         |        |      |   |         |        |  |   |         |        | 
|                                       
|Breeze-Eastern
    Corporation(3)       |                                                 | Senior Loan (10.1%, Due 5/11)              |                                                      |                   | 10,000  |        |      |   | 10,000  |        |  |   | 10,000  |       
|                                        | (Industrial Products)                           |                                            |                                                      |                   |         |        |      |   |         |        |  |   |         |        | 
|                                       
|Broadcast Electronics, Inc.             |                                                 | Senior Loan (9.1%, Due 7/12)               |                                                      |                   | 4,963   |        |      |   | 4,930   |        |  |   | 4,930   |       
|                                        | (Business Services)                             |                                            |                                                      |                   |         |        |      |   |         |        |  |   |         |        | 
|                                       
|C&K Market, Inc.                        |                                                 | Subordinated Debt (14.0%, Due 12/08)       |                                                      |                   | 27,819  |        |      |   | 27,738  |        |  |   | 27,738  |       
|                                        | (Retail)                                        |                                            |                                                      |                   |         |        |      |   |         |        |  |   |         |        | 
|                                       
|Callidus Debt Partners                  |                                                 |                                            |                                                      |                   |         |        |      |   |         |        |  |   |         |       
|                                        | CDO Fund I,
    Ltd.(4)(9)                      |                                            | Class C Notes (12.9%, Due 12/13)                     |                   |         | 18,800 |      |   |         | 18,951 |  |   |         | 18,951 | 
|                                        | (Senior Debt Fund)                              |                                            | Class D Notes (17.0%, Due 12/13)                     |                   |         | 9,400  |      |   |         | 9,476  |  |   |         | 9,476  | 
|                                       
|Callidus Debt Partners                  |                                                 |                                            |                                                      |                   |         |        |      |   |         |        |  |   |         |       
|                                        | CLO Fund III, Ltd.
    (4)(9)(Senior Debt Fund) |                                            | Preferred Shares (23,600,000 shares, 12.7%)
    (12) |                   |         |        |      |   |         | 23,285 |  |   |         | 23,010 | 
|                                       
|Callidus Debt Partners                  |                                                 |                                            |                                                      |                   |         |        |      |   |         |        |  |   |         |       
|                                        | CLO Fund IV,
    Ltd.(4)(9)                     |                                            | Income Notes
    (13.8%)(12)                         |                   |         |        |      |   |         | 12,986 |  |   |         | 12,986 | 
|                                        | (Senior Debt Fund)                              |                                            |                                                      |                   |         |        |      |   |         |        |  |   |         |        | 
|                                       
|Callidus Debt Partners                  |                                                 |                                            |                                                      |                   |         |        |      |   |         |        |  |   |         |       
|                                        | CLO Fund V, Ltd.
    (4)(9)                     |                                            | Income Notes
    (15.8%)(12)                         |                   |         |        |      |   |         | 13,769 |  |   |         | 13,769 | 
|                                        | (Senior Debt Fund)                              |                                            |                                                      |                   |         |        |      |   |         |        |  |   |         |        | 
|                                       
|Callidus MAPS CLO Fund I
    LLC(9)     |                                                 | Class E Notes (10.9%, Due 12/17)           |                                                      |                   | 17,000  |        |      |   | 17,000  |        |  |   | 17,155  |       
|                                        | (Senior Debt Fund)                              |                                            | Income Notes
    (15.9%)(12)                         |                   |         |        |      |   |         | 50,960 |  |   |         | 47,421 | 
|                                       
|Camden Partners Strategic Fund II,      |                                                 |                                            |                                                      |                   |         |        |      |   |         |        |  |   |         |       
|                                        | L.P.(5)                                         |                                            | Limited Partnership Interest                         |                   |         |        |      |   |         | 2,141  |  |   |         | 2,873  | 
|                                        | (Private Equity Fund)                           |                                            |                                                      |                   |         |        |      |   |         |        |  |   |         |        | 
|                                       
|Carlisle Wide Plank Floors, Inc.        |                                                 | Unitranche Debt (10.5%, Due 6/11)          |                                                      |                   | 14,000  |        |      |   | 13,900  |        |  |   | 13,900  |       
|                                        | (Consumer Products)                             |                                            | Preferred Stock (400,000 Shares)                     |                   |         |        |      |   |         | 400    |  |   |         | 400    | 
|                                       
|Catterton Partners V,
    L.P.(5)       |                                                 | Limited Partnership Interest               |                                                      |                   |         |        |      |   | 3,306   |        |  |   | 3,412   |       
|                                        | (Private Equity Fund)                           |                                            |                                                      |                   |         |        |      |   |         |        |  |   |         |        | 
|                                       
|Catterton Partners VI,
    L.P.(5)      |                                                 | Limited Partnership Interest               |                                                      |                   |         |        |      |   | 531     |        |  |   | 531     |       
|                                        | (Private Equity Fund)                           |                                            |                                                      |                   |         |        |      |   |         |        |  |   |         |        | 
|                                       
|Centre Capital Investors IV,
    LP(5)  |                                                 | Limited Partnership Interest               |                                                      |                   |         |        |      |   | 1,991   |        |  |   | 1,889   |       
|                                        | (Private Equity Fund)                           |                                            |                                                      |                   |         |        |      |   |         |        |  |   |         |        | 
|                                       

|     |  |                                                                                                                                                                                                                                                                
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.                                                                                                                                                                                                                             
|(6)  |  | Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.                                                                                                                                                           
|(9)  |  | The fund is managed by Callidus Capital, a portfolio company of
    Allied Capital.                                                                                                                                                                            
|(11) |  | 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.                                                     
|(12) |  | Represents the effective yield earned on these preferred equity
    investments. The yield is included in interest income from
    companies less than 5% owned in the consolidated statement of
    operations.                                               





20



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF
INVESTMENTS  (Continued)


|                                          |                              |                                      |                                                     |                   |        |         |      |   |        |         |  |   |        |         | 
|----------------------------------------- | ---------------------------- | ------------------------------------ | --------------------------------------------------- | ----------------- | ------ | ------- | ---- | - | ------ | ------- |  | - | ------ | ------- | 
|                                          |                              |                                      |                                                     | December 31, 2006 |       
|Private Finance                           |                              |                                      |                                                     |                   |       
|Portfolio Company                         |                              |                                      |                                                     |                  
|(in thousands, except number of shares)   |                              | Investment(1)(2)                     |                                                     | Principal         |        |         | Cost |   |        | Value   | 
|                                          |                              |                                      |                                                     |                   |        |         |      |   |        |         | 
|Commercial Credit Group, Inc.             |                              | Subordinated Debt (14.8%, Due 2/11)  |                                                     | $                 | 5,000  |         |      | $ | 4,959  |         |  | $ | 4,959  |        
|                                          | (Financial Services)         |                                      | Preferred Stock (32,500 shares)                     |                   |        |         |      |   |        | 3,900   |  |   |        | 3,900   | 
|                                          |                              |                                      | Warrants                                            |                   |        |         |      |   |        |        |  |   |        |        | 
|                                         
|Community Education Centers, Inc.         |                              | Subordinated Debt (16.0%, Due 12/10) |                                                     |                   | 34,158 |         |      |   | 34,067 |         |  |   | 34,067 |        
|                                          | (Education Services)         |                                      |                                                     |                   |        |         |      |   |        |         |  |   |        |         | 
|                                         
|Compass Group Diversified                 |                              |                                      |                                                     |                   |        |         |      |   |        |         |  |   |        |        
|                                          | Holdings
    LLC(3)          |                                      | Senior Loan (8.4%, Due 11/11)                       |                   |        | 8,500   |      |   |        | 8,375   |  |   |        | 8,375   | 
|                                          | (Financial Services)         |                                      |                                                     |                   |        |         |      |   |        |         |  |   |        |         | 
|                                         
|Component Hardware Group, Inc.            |                              | Subordinated Debt (13.5%, Due 1/13)  |                                                     |                   | 18,158 |         |      |   | 18,075 |         |  |   | 18,075 |        
|                                          | (Industrial Products)        |                                      |                                                     |                   |        |         |      |   |        |         |  |   |        |         | 
|                                         
|Cook Inlet Alternative Risk, LLC          |                              | Unitranche Debt (10.0%, Due 4/12)    |                                                     |                   | 67,500 |         |      |   | 67,146 |         |  |   | 67,146 |        
|                                          | (Business Services)          |                                      | Equity Interests                                    |                   |        |         |      |   |        | 2,000   |  |   |        | 2,300   | 
|                                         
|Cortec Group Fund IV,
    L.P.(5)         |                              | Limited Partnership Interest         |                                                     |                   |        |         |      |   | 1,137  |         |  |   | 1,137  |        
|                                          | (Private Equity)             |                                      |                                                     |                   |        |         |      |   |        |         |  |   |        |         | 
|                                         
|CSAV, Inc.                                |                              | Subordinated Debt (11.9%, Due 6/13)  |                                                     |                   | 37,500 |         |      |   | 37,500 |         |  |   | 37,500 |        
|                                          | (Business Services)          |                                      |                                                     |                   |        |         |      |   |        |         |  |   |        |         | 
|                                         
|DCWV Acquisition Corporation              |                              | Senior Loan (8.9%, Due 7/12)         |                                                     |                   | 2,074  |         |      |   | 2,060  |         |  |   | 2,060  |        
|                                          | (Consumer Products)          |                                      | Unitranche Debt (11.0%, Due 7/12)                   |                   |        | 16,788  |      |   |        | 16,694  |  |   |        | 16,694  | 
|                                         
|Deluxe Entertainment Services Group, Inc. |                              | Subordinated Debt (13.6%, Due 7/11)  |                                                     |                   | 30,000 |         |      |   | 30,000 |         |  |   | 30,000 |        
|                                          | (Business Services)          |                                      |                                                     |                   |        |         |      |   |        |         |  |   |        |         | 
|                                         
|Distant Lands Trading Co.                 |                              | Senior Loan (10.6%, Due 11/11)       |                                                     |                   | 2,700  |         |      |   | 2,656  |         |  |   | 2,656  |        
|                                          | (Consumer Products)          |                                      | Unitranche Debt (11.0%, Due 11/11)                  |                   |        | 54,375  |      |   |        | 54,130  |  |   |        | 54,130  | 
|                                          |                              |                                      | Common Stock (4,000 shares)                         |                   |        |         |      |   |        | 4,000   |  |   |        | 2,975   | 
|                                         
|Drilltec Patents & Technologies           |                              |                                      |                                                     |                   |        |         |      |   |        |         |  |   |        |        
|                                          | Company, Inc.                |                                      | Subordinated Debt (18.0%, Due 8/06)                 |                   |        | 4,119   |      |   |        | 4,119   |  |   |        | 4,119   | 
|                                          | (Energy Services)            |                                      | Subordinated Debt (16.5%, Due
    8/06)(6)          |                   |        | 10,994  |      |   |        | 10,918  |  |   |        | 9,121   | 
|                                         
|Driven Brands, Inc.                       |                              | Senior Loan (8.9%, Due 6/11)         |                                                     |                   | 37,070 |         |      |   | 36,918 |         |  |   | 36,918 |        
|                                          | d/b/a Meineke and Econo Lube |                                      | Subordinated Debt (12.1%, Due 6/12  6/13)          |                   |        | 83,000  |      |   |        | 82,684  |  |   |        | 82,684  | 
|                                          | (Consumer Services)          |                                      | Common Stock (11,675,331
    shares)(11)            |                   |        |         |      |   |        | 29,455  |  |   |        | 19,702  | 
|                                          |                              |                                      | Warrants(11)                                        |                   |        |         |      |   |        |        |  |   |        |        | 
|                                         
|Digital VideoStream, LLC                  |                              | Unitranche Debt (11.0%, Due 2/12)    |                                                     |                   | 19,127 |         |      |   | 19,021 |         |  |   | 19,021 |        
|                                          | (Business Services)          |                                      | Convertible Subordinated Debt
    (10.0%, Due 2/16) |                   |        | 3,730   |      |   |        | 3,714   |  |   |        | 3,714   | 
|                                         
|Dynamic India Fund
    IV(4)(5)           |                              | Equity Interests                     |                                                     |                   |        |         |      |   | 3,850  |         |  |   | 3,850  |        
|                                          | (Private Equity Fund)        |                                      |                                                     |                   |        |         |      |   |        |         |  |   |        |         | 
|                                         
|EarthColor, Inc.                          |                              | Senior Loan (7.4%, Due 11/11)        |                                                     |                   | 35,000 |         |      |   | 35,000 |         |  |   | 35,000 |        
|                                          | (Business Services)          |                                      | Subordinated Debt (15.0%, Due 11/13)                |                   |        | 107,000 |      |   |        | 106,478 |  |   |        | 106,478 | 
|                                          |                              | Common Stock
    (53,540 shares)(11) |                                                     |                   |        |         |      |   | 53,540 |         |  |   | 53,540 |        
|                                          |                              | Warrants(11)                         |                                                     |                   |        |         |      |   |       |         |  |   |       |        
|                                         
|eCentury Capital Partners,
    L.P.(5)    |                              | Limited Partnership Interest         |                                                     |                   |        |         |      |   | 6,274  |         |  |   | 2,090  |        
|                                          | (Private Equity Fund)        |                                      |                                                     |                   |        |         |      |   |        |         |  |   |        |         | 
|                                         

| |      |  |  |                                                                                                                                                                                                                                                                
| | ---- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (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.                                                                                                                                                                                                                             
| | (6)  |  |  | Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.                                                                                                                                                           
| | (11) |  |  | 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.                                                     





21



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF
INVESTMENTS  (Continued)


|                                            |                        |                                           |                                            |                   |        |        |      |   |        |        |  |   |        |        | 
|------------------------------------------- | ---------------------- | ----------------------------------------- | ------------------------------------------ | ----------------- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                            |                        |                                           |                                            | December 31, 2006 |       
|Private Finance                             |                        |                                           |                                            |                   |       
|Portfolio Company                           |                        |                                           |                                            |                  
|(in thousands, except number of shares)     |                        | Investment(1)(2)                          |                                            | Principal         |        |        | Cost |   |        | Value  | 
|                                            |                        |                                           |                                            |                   |        |        |      |   |        |        | 
|Elexis Beta
    GmbH(4)                     |                        | Options                                   |                                            |                   |        |        |      | $ | 426    |        |  | $ | 50     |       
|                                            | (Industrial Products)  |                                           |                                            |                   |        |        |      |   |        |        |  |   |        |        | 
|                                           
|Farleys & Sathers Candy Company, Inc.      |                        | Subordinated Debt (11.4%, Due 3/11)       |                                            | $                 | 20,000 |        |      |   | 19,931 |        |  |   | 19,931 |       
|                                            | (Consumer Products)    |                                           |                                            |                   |        |        |      |   |        |        |  |   |        |        | 
|                                           
|Frozen Specialties, Inc.                    |                        | Warrants                                  |                                            |                   |        |        |      |   | 435    |        |  |   | 320    |       
|                                            | (Consumer Products)    |                                           |                                            |                   |        |        |      |   |        |        |  |   |        |        | 
|                                           
|Garden Ridge Corporation
    (Retail)       |                        | Subordinated Debt (7.0%, Due
    5/12)(6) |                                            |                   | 22,500 |        |      |   | 22,500 |        |  |   | 22,500 |       
|                                           
|Geotrace Technologies, Inc.                 |                        | Subordinated Debt (10.0%, Due 6/09)       |                                            |                   | 23,945 |        |      |   | 22,481 |        |  |   | 22,481 |       
|                                            | (Energy Services)      |                                           | Warrants                                   |                   |        |        |      |   |        | 2,350  |  |   |        | 1,900  | 
|                                           
|Ginsey Industries, Inc.                     |                        | Subordinated Debt (12.5%, Due 3/07)       |                                            |                   | 2,743  |        |      |   | 2,743  |        |  |   | 2,743  |       
|                                            | (Consumer Products)    |                                           |                                            |                   |        |        |      |   |        |        |  |   |        |        | 
|                                           
|Grant Broadcasting Systems II               |                        | Subordinated Debt (5.0%, Due 6/11)        |                                            |                   | 3,005  |        |      |   | 3,005  |        |  |   | 3,005  |       
|                                            | (Broadcasting & Cable) |                                           |                                            |                   |        |        |      |   |        |        |  |   |        |        | 
|                                           
|Grotech Partners, VI,
    L.P.(5)           |                        | Limited Partnership Interest              |                                            |                   |        |        |      |   | 8,223  |        |  |   | 6,088  |       
|                                            | (Private Equity Fund)  |                                           |                                            |                   |        |        |      |   |        |        |  |   |        |        | 
|                                           
|Havco Wood Products LLC                     |                        | Unitranche Debt (11.1%, Due 8/11)         |                                            |                   | 19,654 |        |      |   | 18,615 |        |  |   | 18,615 |       
|                                            | (Industrial Products)  |                                           | Equity Interests                           |                   |        |        |      |   |        | 1,049  |  |   |        | 3,000  | 
|                                           
|Haven Eldercare of New England,
    LLC(10) |                        | Subordinated Debt (12.0%, Due 8/09)       |                                            |                   | 2,827  |        |      |   | 2,827  |        |  |   | 2,827  |       
|                                            | (Healthcare Services)  |                                           |                                            |                   |        |        |      |   |        |        |  |   |        |        | 
|                                           
|Haven Healthcare Management,
    LLC(10)    |                        | Subordinated Debt (18.0%, Due 4/07)       |                                            |                   | 140    |        |      |   | 140    |        |  |   | 140    |       
|                                            | (Healthcare Services)  |                                           |                                            |                   |        |        |      |   |        |        |  |   |        |        | 
|                                           
|HealthASPex Services Inc.                   |                        | Senior Loan (4.0%, Due 7/08)              |                                            |                   | 500    |        |      |   | 500    |        |  |   | 500    |       
|                                            | (Business Services)    |                                           |                                            |                   |        |        |      |   |        |        |  |   |        |        | 
|                                           
|The Hillman Companies,
    Inc.(3)          |                        | Subordinated Debt (10.0%, Due 9/11)       |                                            |                   | 44,580 |        |      |   | 44,427 |        |  |   | 44,427 |       
|                                            | (Consumer Products)    |                                           |                                            |                   |        |        |      |   |        |        |  |   |        |        | 
|                                           
|The Homax Group, Inc.                       |                        | Senior Loan (9.2%, Due 10/12)             |                                            |                   | 12,485 |        |      |   | 12,485 |        |  |   | 12,485 |       
|                                            | (Consumer Products)    |                                           | Subordinated Debt (12.0%, Due 4/14)        |                   |        | 14,000 |      |   |        | 13,171 |  |   |        | 13,171 | 
|                                            |                        |                                           | Preferred Stock (89 shares)                |                   |        |        |      |   |        | 89     |  |   |        | 89     | 
|                                            |                        |                                           | Common Stock (28 shares)                   |                   |        |        |      |   |        | 6      |  |   |        | 6      | 
|                                            |                        |                                           | Warrants                                   |                   |        |        |      |   |        | 1,106  |  |   |        | 1,106  | 
|                                           
|Hot Stuff Foods, LLC                        |                        | Senior Loan (8.9%, Due 2/11-2/12)         |                                            |                   | 48,580 |        |      |   | 48,351 |        |  |   | 48,351 |       
|                                            | (Consumer Products)    |                                           | Subordinated Debt (13.7%, Due 8/12  2/13) |                   |        | 60,606 |      |   |        | 60,353 |  |   |        | 60,353 | 
|                                            |                        |                                           | Subordinated Debt (16.0%, Due
    2/13)(6) |                   |        | 20,841 |      |   |        | 20,749 |  |   |        | 8,460  | 
|                                            |                        |                                           | Common Stock
    (1,122,452 shares)(11)    |                   |        |        |      |   |        | 56,186 |  |   |        |       | 
|                                            |                        |                                           | Warrants(11)                               |                   |        |        |      |   |        |       |  |   |        |       | 
|                                           
|Ideal Snacks Corporation                    |                        | Senior Loan (9.0%, Due 6/10)              |                                            |                   | 5,850  |        |      |   | 5,815  |        |  |   | 5,815  |       
|                                            | (Consumer Products)    |                                           |                                            |                   |        |        |      |   |        |        |  |   |        |        | 
|                                           
|Integrity Interactive Corporation           |                        | Unitranche Debt (10.5%, Due 2/12)         |                                            |                   | 29,500 |        |      |   | 29,314 |        |  |   | 29,314 |       
|                                            | (Business Services)    |                                           |                                            |                   |        |        |      |   |        |        |  |   |        |        | 
|                                           
|International Fiber Corporation             |                        | Subordinated Debt (14.0%, Due 6/12)       |                                            |                   | 21,986 |        |      |   | 21,914 |        |  |   | 21,914 |       
|                                            | (Industrial Products)  |                                           | Preferred Stock (25,000 shares)            |                   |        |        |      |   |        | 2,500  |  |   |        | 2,200  | 
|                                           

| |      |  |  |                                                                                                                                                                                                                                                                
| | ---- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (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.                                                                                                                                  
| | (3)  |  |  | Public company.                                                                                                                                                                                                                                                
| | (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) |  |  | Haven Eldercare of New England, LLC and Haven Healthcare
    Management, LLC are affiliated companies.                                                                                                                                                         
| | (11) |  |  | 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.                                                     





22



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF
INVESTMENTS  (Continued)


|                                               |                       |                                            |                                                 |                   |        |        |      |   |        |        |  |   |        |        | 
|---------------------------------------------- | --------------------- | ------------------------------------------ | ----------------------------------------------- | ----------------- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                               |                       |                                            |                                                 | December 31, 2006 |       
|Private Finance                                |                       |                                            |                                                 |                   |       
|Portfolio Company                              |                       |                                            |                                                 |                  
|(in thousands, except number of shares)        |                       | Investment(1)(2)                           |                                                 | Principal         |        |        | Cost |   |        | Value  | 
|                                               |                       |                                            |                                                 |                   |        |        |      |   |        |        | 
|Kodiak Fund
    LP(5)                          |                       | Equity Interests                           |                                                 |                   |        |        |      | $ | 4,700  |        |  | $ | 4,656  |       
|                                               | (Private Equity Fund) |                                            |                                                 |                   |        |        |      |   |        |        |  |   |        |        | 
|                                              
|Line-X, Inc.                                   |                       | Senior Loan (9.1%, Due 8/11)               |                                                 | $                 | 2,000  |        |      |   | 1,981  |        |  |   | 1,981  |       
|                                               | (Consumer Products)   |                                            | Unitranche Debt (10.0% Due 8/11)                |                   |        | 48,509 |      |   |        | 48,306 |  |   |        | 48,306 | 
|                                               |                       |                                            | Standby Letter of Credit ($1,500)               |                   |        |        |      |   |        |        |  |   |        |        | 
|                                              
|MedAssets, Inc.                                |                       | Preferred Stock (227,865 shares)           |                                                 |                   |        |        |      |   | 2,049  |        |  |   | 3,623  |       
|                                               | (Business Services)   |                                            | Common Stock (50,000 shares)                    |                   |        |        |      |   |        |       |  |   |        | 250    | 
|                                              
|MHF Logistical Solutions, Inc.                 |                       | Subordinated Debt (11.5%, Due 6/12)        |                                                 |                   | 33,600 |        |      |   | 33,448 |        |  |   | 33,448 |       
|                                               | (Business Services)   |                                            | Subordinated Debt (18.0%, Due
    6/13)(6)      |                   |        | 11,211 |      |   |        | 11,155 |  |   |        | 8,719  | 
|                                               |                       |                                            | Common Stock (20,934
    shares)(11)            |                   |        |        |      |   |        | 20,942 |  |   |        |       | 
|                                               |                       |                                            | Warrants(11)                                    |                   |        |        |      |   |        |       |  |   |        |       | 
|                                              
|Mid-Atlantic Venture Fund IV,
    L.P.(5)      |                       | Limited Partnership Interest               |                                                 |                   |        |        |      |   | 6,974  |        |  |   | 3,221  |       
|                                               | (Private Equity Fund) |                                            |                                                 |                   |        |        |      |   |        |        |  |   |        |        | 
|                                              
|Mogas Energy, LLC                              |                       | Subordinated Debt (9.5%, Due 3/12  4/12)  |                                                 |                   | 16,336 |        |      |   | 15,100 |        |  |   | 16,318 |       
|                                               | (Energy Services)     |                                            | Warrants                                        |                   |        |        |      |   |        | 1,774  |  |   |        | 6,250  | 
|                                              
|Network Hardware Resale, Inc.                  |                       | Unitranche Debt (10.5%, Due 12/11)         |                                                 |                   | 37,154 |        |      |   | 37,357 |        |  |   | 37,357 |       
|                                               | (Business Services)   |                                            | Convertible Subordinated Debt (9.8%, Due 12/15) |                   |        | 12,000 |      |   |        | 12,068 |  |   |        | 12,559 | 
|                                              
|Norwesco, Inc.                                 |                       | Subordinated Debt (12.6%, Due 1/12  7/12) |                                                 |                   | 82,486 |        |      |   | 82,172 |        |  |   | 82,172 |       
|                                               | (Industrial Products) |                                            | Common Stock (559,603
    shares)(11)           |                   |        |        |      |   |        | 38,313 |  |   |        | 83,329 | 
|                                               |                       | Warrants(11)                               |                                                 |                   |        |        |      |   |       |        |  |   |       |       
|                                              
|Novak Biddle Venture Partners III,
    L.P.(5) |                       | Limited Partnership Interest               |                                                 |                   |        |        |      |   | 1,834  |        |  |   | 1,947  |       
|                                               | (Private Equity Fund) |                                            |                                                 |                   |        |        |      |   |        |        |  |   |        |        | 
|                                              
|Oahu Waste Services, Inc.                      |                       | Stock Appreciation Rights                  |                                                 |                   |        |        |      |   | 239    |        |  |   | 800    |       
|                                               | (Business Services)   |                                            |                                                 |                   |        |        |      |   |        |        |  |   |        |        | 
|                                              
|Odyssey Investment Partners Fund III,          |                       |                                            |                                                 |                   |        |        |      |   |        |        |  |   |        |       
|                                               | LP(5)                 |                                            | Limited Partnership Interest                    |                   |        |        |      |   |        | 1,883  |  |   |        | 1,744  | 
|                                               | (Private Equity Fund) |                                            |                                                 |                   |        |        |      |   |        |        |  |   |        |        | 
|                                              
|Palm Coast Data, LLC                           |                       | Senior Loan (8.9%, Due 8/10)               |                                                 |                   | 15,306 |        |      |   | 15,243 |        |  |   | 15,243 |       
|                                               | (Business Services)   |                                            | Subordinated Debt (15.5%, Due 8/12  8/15)      |                   |        | 30,396 |      |   |        | 30,277 |  |   |        | 30,277 | 
|                                               |                       |                                            | Common Stock (21,743
    shares)(11)            |                   |        |        |      |   |        | 21,743 |  |   |        | 41,707 | 
|                                               |                       |                                            | Warrants(11)                                    |                   |        |        |      |   |        |       |  |   |        |       | 
|                                              
|Passport Health                                |                       |                                            |                                                 |                   |        |        |      |   |        |        |  |   |        |       
|                                               | Communications, Inc.  |                                            | Subordinated Debt (14.0%, Due 4/12)             |                   |        | 10,145 |      |   |        | 10,101 |  |   |        | 10,101 | 
|                                               | (Healthcare Services) |                                            | Preferred Stock (651,381 shares)                |                   |        |        |      |   |        | 2,000  |  |   |        | 2,189  | 
|                                              
|Performant Financial Corporation               |                       | Common Stock (478,816 shares)              |                                                 |                   |        |        |      |   | 734    |        |  |   |       |       
|                                               | (Business Services)   |                                            |                                                 |                   |        |        |      |   |        |        |  |   |        |        | 
|                                              

| |      |  |  |                                                                                                                                                                                                                                                                
| | ---- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (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.                                                                                                                                                                                                                             
| | (6)  |  |  | Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.                                                                                                                                                           
| | (11) |  |  | 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.                                                     





23



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF
INVESTMENTS  (Continued)


|                                        |                       |                                      |                                 |                   |        |  |      |   |        |       |  |   |        |       | 
|--------------------------------------- | --------------------- | ------------------------------------ | ------------------------------- | ----------------- | ------ |  | ---- | - | ------ | ----- |  | - | ------ | ----- | 
|                                        |                       |                                      |                                 | December 31, 2006 |       
|Private Finance                         |                       |                                      |                                 |                   |       
|Portfolio Company                       |                       |                                      |                                 |                  
|(in thousands, except number of shares) |                       | Investment(1)(2)                     |                                 | Principal         |        |  | Cost |   |        | Value | 
|                                        |                       |                                      |                                 |                   |        |  |      |   |        |       | 
|Postle Aluminum Company, LLC            |                       | Unitranche Debt (11.0%, Due 10/12)   |                                 | $                 | 57,500 |  |      | $ | 57,189 |       |  | $ | 57,189 |      
|                                        | (Industrial Products) |                                      | Equity Interests                |                   |        |  |      |   |        | 2,500 |  |   |        | 2,500 | 
|                                       
|Pro Mach, Inc.                          |                       | Subordinated Debt (12.5%, Due 6/12)  |                                 |                   | 14,471 |  |      |   | 14,402 |       |  |   | 14,402 |      
|                                        | (Industrial Products) |                                      | Equity Interests                |                   |        |  |      |   |        | 1,500 |  |   |        | 2,200 | 
|                                       
|Promo Works, LLC                        |                       | Unitranche Debt (10.3%, Due 12/11)   |                                 |                   | 31,000 |  |      |   | 30,727 |       |  |   | 30,727 |      
|                                        | (Business Services)   |                                      | Guaranty ($1,200)               |                   |        |  |      |   |        |       |  |   |        |       | 
|                                       
|S.B. Restaurant Company                 |                       | Unitranche Debt (9.8%, Due 4/11)     |                                 |                   | 41,501 |  |      |   | 41,094 |       |  |   | 41,094 |      
|                                        | (Retail)              |                                      | Preferred Stock (54,125 shares) |                   |        |  |      |   |        | 135   |  |   |        | 135   | 
|                                        |                       | Warrants                             |                                 |                   |        |  |      |   | 619    |       |  |   | 1,200  |      
|                                        |                       | Standby Letters of Credit ($2,611)   |                                 |                   |        |  |      |   |        |       |  |   |        |      
|                                       
|SBBUT, LLC                              |                       | Equity Interests                     |                                 |                   |        |  |      |   |       |       |  |   |       |      
|                                        | (Consumer Products)   |                                      |                                 |                   |        |  |      |   |        |       |  |   |        |       | 
|                                       
|Service Center Metals, LLC              |                       | Subordinated Debt (15.5%, Due 9/11)  |                                 |                   | 5,000  |  |      |   | 4,976  |       |  |   | 4,976  |      
|                                        | (Industrial Products) |                                      | Equity Interests                |                   |        |  |      |   |        | 312   |  |   |        | 318   | 
|                                       
|Soff-Cut Holdings, Inc.                 |                       | Preferred Stock (300 shares)         |                                 |                   |        |  |      |   | 300    |       |  |   | 300    |      
|                                        | (Industrial Products) |                                      | Common Stock (2,000 shares)     |                   |        |  |      |   |        | 200   |  |   |        | 180   | 
|                                       
|SPP Mezzanine Funding,
    L.P.(5)      |                       | Limited Partnership Interest         |                                 |                   |        |  |      |   | 2,551  |       |  |   | 2,825  |      
|                                        | (Private Equity Fund) |                                      |                                 |                   |        |  |      |   |        |       |  |   |        |       | 
|                                       
|SPP Mezzanine Funding II,
    L.P.(5)   |                       | Limited Partnership Interest         |                                 |                   |        |  |      |   | 326    |       |  |   | 326    |      
|                                        | (Private Equity Fund) |                                      |                                 |                   |        |  |      |   |        |       |  |   |        |       | 
|                                       
|Stag-Parkway, Inc.                      |                       | Unitranche Debt (10.8%, Due 7/12)    |                                 |                   | 63,000 |  |      |   | 62,711 |       |  |   | 62,711 |      
|                                        | (Business Services)   |                                      |                                 |                   |        |  |      |   |        |       |  |   |        |       | 
|                                       
|STS Operating, Inc.                     |                       | Subordinated Debt (15.0%, Due 1/13)  |                                 |                   | 30,156 |  |      |   | 30,021 |       |  |   | 30,021 |      
|                                        | (Industrial Products) |                                      |                                 |                   |        |  |      |   |        |       |  |   |        |       | 
|                                       
|The Step2 Company, LLC                  |                       | Unitranche Debt (10.5%, Due 4/12)    |                                 |                   | 67,898 |  |      |   | 67,457 |       |  |   | 67,457 |      
|                                        | (Consumer Products)   |                                      | Equity Interests                |                   |        |  |      |   |        | 2,000 |  |   |        | 1,763 | 
|                                       
|Tradesmen International, Inc.           |                       | Subordinated Debt (12.0%, Due 12/09) |                                 |                   | 15,000 |  |      |   | 14,468 |       |  |   | 14,468 |      
|                                        | (Business Services)   |                                      | Warrants                        |                   |        |  |      |   |        | 710   |  |   |        | 3,300 | 
|                                       
|TransAmerican Auto Parts, LLC           |                       | Subordinated Debt (14.0%, Due 11/12) |                                 |                   | 12,947 |  |      |   | 12,892 |       |  |   | 12,892 |      
|                                        | (Consumer Products)   |                                      | Equity Interests                |                   |        |  |      |   |        | 1,190 |  |   |        | 747   | 
|                                       
|Universal Air Filter Company            |                       | Unitranche Debt (11.0%, Due 11/11)   |                                 |                   | 19,117 |  |      |   | 19,026 |       |  |   | 19,026 |      
|                                        | (Industrial Products) |                                      |                                 |                   |        |  |      |   |        |       |  |   |        |       | 
|                                       
|Updata Venture Partners II,
    L.P.(5) |                       | Limited Partnership Interest         |                                 |                   |        |  |      |   | 5,477  |       |  |   | 5,158  |      
|                                        | (Private Equity Fund) |                                      |                                 |                   |        |  |      |   |        |       |  |   |        |       | 
|                                       
|Venturehouse-Cibernet Investors, LLC    |                       | Equity Interest                      |                                 |                   |        |  |      |   | 42     |       |  |   | 42     |      
|                                        | (Business Services)   |                                      |                                 |                   |        |  |      |   |        |       |  |   |        |       | 
|                                       
|Venturehouse Group,
    LLC(5)          |                       | Equity Interest                      |                                 |                   |        |  |      |   | 598    |       |  |   | 365    |      
|                                        | (Private Equity Fund) |                                      |                                 |                   |        |  |      |   |        |       |  |   |        |       | 
|                                       
|VICORP Restaurants, Inc.                |                       | Warrants                             |                                 |                   |        |  |      |   | 33     |       |  |   |       |      
|                                        | (Retail)              |                                      |                                 |                   |        |  |      |   |        |       |  |   |        |       | 
|                                       

| |     |  |  |                                                                                                                                                                                                                                                                
| | --- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (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.                                                                                                                                                                                                                             
| | (6) |  |  | Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.                                                                                                                                                           





24



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF
INVESTMENTS  (Continued)


|                                                    |                       |                                             |                              |                   |        |   |           |   |        |       |           |   |        |       | 
|--------------------------------------------------- | --------------------- | ------------------------------------------- | ---------------------------- | ----------------- | ------ | - | --------- | - | ------ | ----- | --------- | - | ------ | ----- | 
|                                                    |                       |                                             |                              | December 31, 2006 |       
|Private Finance                                     |                       |                                             |                              |                   |       
|Portfolio Company                                   |                       |                                             |                              |                  
|(in thousands, except number of shares)             |                       | Investment(1)(2)                            |                              | Principal         |        |   | Cost      |   |        | Value |          
|                                                    |                       |                                             |                              |                   |        |   |           |   |        |       |          
|Walker Investment Fund II,
    LLLP(5)              |                       | Limited Partnership Interest                |                              |                   |        |   |           | $ | 1,329  |       |           | $ | 458    |      
|                                                    | (Private Equity Fund) |                                             |                              |                   |        |   |           |   |        |       |           |   |        |       | 
|                                                   
|Wear Me Apparel Corporation                         |                       | Subordinated Debt (15.0%, Due 12/10)        |                              | $                 | 40,000 |   |           |   | 39,407 |       |           |   | 39,407 |      
|                                                    | (Consumer Products)   |                                             | Warrants                     |                   |        |   |           |   |        | 1,219 |           |   |        | 5,120 | 
|                                                   
|Wilton Industries, Inc.                             |                       | Subordinated Debt (16.0%, Due 6/08)         |                              |                   | 2,400  |   |           |   | 2,400  |       |           |   | 2,400  |      
|                                                    | (Consumer Products)   |                                             |                              |                   |        |   |           |   |        |       |           |   |        |       | 
|                                                   
|Woodstream Corporation                              |                       | Subordinated Debt (13.5%, Due 11/12  5/13) |                              |                   | 53,114 |   |           |   | 52,989 |       |           |   | 52,989 |      
|                                                    | (Consumer Products)   |                                             | Common Stock (180 shares)    |                   |        |   |           |   |        | 673   |           |   |        | 3,885 | 
|                                                    |                       |                                             | Warrants                     |                   |        |   |           |   |        |      |           |   |        | 2,815 | 
|                                                   
|York Insurance Services Group, Inc.                 |                       | Subordinated Debt (14.5%, Due 1/14)         |                              |                   | 44,249 |   |           |   | 44,045 |       |           |   | 44,045 |      
|                                                    | (Business Services)   |                                             | Common Stock (15,000 shares) |                   |        |   |           |   |        | 1,500 |           |   |        | 1,500 | 
|                                                   
|Other companies                                     |                       | Other debt
    investments(6)               |                              |                   | 223    |   |           |   | 223    |       |           |   | 218    |      
|                                                    |                       | Other equity investments                    |                              |                   |        |   |           |   | 8      |       |           |   |       |      
|                                                   
|Total
    companies less than 5% owned              |                       |                                             |                              |                   |        | $ | 2,479,981 |   |        | $     | 2,437,908 |  
|                                                   
|Total
    private finance (145 portfolio companies) |                       |                                             |                              |                   |        | $ | 4,497,363 |   |        | $     | 4,377,901 |  
|                                                   

| |     |  |  |                                                                                                                                                                                                                                                                
| | --- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (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.                                                                                                                                                                                                                             
| | (6) |  |  | Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.                                                                                                                                                           





25



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF
INVESTMENTS  (Continued)


|                                       |  |  |  |  |  |  |  | 
|-------------------------------------- |  |  |  |  |  |  |  | 
|Commercial Real Estate Finance         |  |  |  |  |  |  |  | 
|(in thousands, except number of loans) |  |  |  |  |  |  |  | 

|                                                                                      |                                         |                  |              |  |           |                   |        |      |       |   |           |         |       |   |           |         | 
|------------------------------------------------------------------------------------- | --------------------------------------- | ---------------- | ------------ |  | --------- | ----------------- | ------ | ---- | ----- | - | --------- | ------- | ----- | - | --------- | ------- | 
|                                                                                      |                                         |                  |              |  |           | December 31, 2006 |       
|                                                                                      |                                         | Interest         |              |  | Number of |                   |        |      |      
|                                                                                      |                                         | Rate Ranges      |              |  | Loans     |                   |        | Cost |       |   | Value     |        
|                                                                                      |                                         |                  |              |  |           |                   |        |      |       |   |           |        
|Commercial Mortgage Loans                                                             |                                         |                  |              |  |           |                   |        |      |       |   |           |         |       |   |           |        
|                                                                                      |                                         |                  | Up to 6.99%  |  |           |                   | 3      |      |       | $ | 20,470    |         |       | $ | 19,692    |        
|                                                                                      |                                         |                  | 7.00%8.99%  |  |           |                   | 9      |      |       |   | 24,092    |         |       |   | 24,073    |        
|                                                                                      |                                         |                  | 9.00%10.99% |  |           |                   | 4      |      |       |   | 24,117    |         |       |   | 24,117    |        
|                                                                                      |                                         | 15.00% and above |              |  | 2         |                   |        |      | 3,970 |   |           |         | 3,970 |  
|                                                                                     
|                                                                                      | Total commercial mortgage
    loans(13) |                  |              |  |           |                   |        | 18   |       |   | $         | 72,649  |       |   | $         | 71,852  | 
|                                                                                     
|Real Estate Owned                                                                     |                                         |                  |              |  |           |                   |        |      |       | $ | 15,708    |         |       | $ | 19,660    |        
|                                                                                     
|Equity
    Interests(2) 
    Companies more than 25% owned
    (Guarantees  $6,871) |                                         |                  |              |  |           | $                 | 15,189 |      |       | $ | 26,671    |        
|                                                                                     
|                                                                                      | Total commercial real estate finance    |                  |              |  |           |                   |        |      |       |   | $         | 103,546 |       |   | $         | 118,183 | 
|                                                                                     
|Total portfolio                                                                       |                                         |                  |              |  |           |                   |        |      |       | $ | 4,600,909 |         |       | $ | 4,496,084 |        
|                                                                                     

| |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 

|                                                     |                                                     |                           |  |      |      |  |   |        |         |  |   |        |         | 
|---------------------------------------------------- | --------------------------------------------------- | ------------------------- |  | ---- | ---- |  | - | ------ | ------- |  | - | ------ | ------- | 
|                                                     |                                                     | Yield                     |  |      | Cost |  |   | Value  |        
|                                                     |                                                     |                           |  |      |      |  |   |        |        
|Liquidity Portfolio                                  |                                                     |                           |  |      |      |  |   |        |         |  |   |       
|                                                     | American Beacon Money Market Select FD
    Fund(14) |                           |  | 5.3% |      |  | $ | 85,672 |         |  | $ | 85,672 |        
|                                                     | Certificate of Deposit (Due March
    2007)(14)     |                           |  | 5.6% |      |  |   | 40,565 |         |  |   | 40,565 |        
|                                                     | American Beacon Money Market
    Fund(14)           |                           |  | 5.2% |      |  |   | 40,384 |         |  |   | 40,384 |        
|                                                     | SEI Daily Income Tr Prime Obligation
    Fund(14)   |                           |  | 5.2% |      |  |   | 34,671 |         |  |   | 34,671 |        
|                                                     | Blackrock Liquidity
    Funds(14)                   |                           |  | 5.2% |      |  |   | 476    |         |  |   | 476    |        
|                                                    
|                                                     |                                                     | Total liquidity portfolio |  |      |      |  |   | $      | 201,768 |  |   | $      | 201,768 | 
|                                                    
|Other Investments in Money Market
    Securities(14) |                                                     |                           |  |      |      |  |   |        |         |  |   |       
|                                                     | Columbia Treasury Reserves Money Market Fund        |                           |  | 5.2% |      |  | $ | 441    |         |  | $ | 441    |        
|                                                     | Columbia Money Market Reserves                      |                           |  | 5.2% |      |  | $ | 1      |         |  | $ | 1      |        
|                                                    

|                                                                                                                                                                                                                                                                                                 |  |  |  |  |  |  |  |  |  |  |  | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  |  |  |  |  |  |  |  |  |  |  | 
|(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.                                                                                                                                                                                                                                                
|(13)       Commercial
    mortgage loans totaling $18.9 million at value were on
    non-accrual status and therefore were considered non-income
    producing.                                                                                                                                 
|(14)       Included
    in investments in money market and other securities on the
    accompanying Consolidated Balance Sheet.                                                                                                                                                                 





26



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(Information at and for the three months ended March 31,
2007 and 2006 is unaudited)


Note 1. Organization






S-X,




Note 2. Summary of Significant Accounting Policies


Basis of Presentation








27



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 2. Summary of Significant Accounting Policies,
continued








| |                                   
| | ----------------------------------
| | Valuation of Portfolio Investments





| |                          
| | -------------------------
| | Loans and Debt Securities





28



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 2. Summary of Significant Accounting Policies,
continued








| |                  
| | -----------------
| | Equity Securities







29



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 2. Summary of Significant Accounting Policies,
continued


Collateralized Debt
Obligations (CDO) and Collateralized Loan
Obligations (CLO)








| |                                                                                           
| | ------------------------------------------------------------------------------------------
| | Net Realized Gains or Losses and Net Change in Unrealized
    Appreciation or Depreciation





| |           
| | ----------
| | Fee Income



30



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 2. Summary of Significant Accounting Policies,
continued




| |           
| | ----------
| | Guarantees

Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others




| |                
| | ---------------
| | Financing Costs





| |                          
| | -------------------------
| | Dividends to Shareholders





| |                         
| | ------------------------
| | Stock Compensation Plans

Share-Based Payment


|                                          |                                                            |                                     |   |     |      |  |   |     |      | 
|----------------------------------------- | ---------------------------------------------------------- | ----------------------------------- | - | --- | ---- |  | - | --- | ---- | 
|                                          |                                                            | 2007                                |   |     | 2006 | 
|($ in millions, except per share amounts) |                                                            |                                     |   |     |      | 
|Employee Stock Option Expense:            |                                                            |                                     |   |     |      |  |   |    
|                                          | Previously awarded, unvested options as of January 1, 2006 |                                     | $ | 3.2 |      |  | $ | 3.4 |     
|                                          | Options granted on or after January 1, 2006                |                                     |   | 0.5 |      |  |   | 0.2 |     
|                                          |                                                            |                                     |   |     |      | 
|                                          |                                                            | Total employee stock option expense |   | $   | 3.7  |  |   | $   | 3.6  | 
|                                          |                                                            |                                     |   |     |      | 
|                                          |                                                            | Per basic share                     |   | $   | 0.02 |  |   | $   | 0.03 | 
|                                          |                                                            | Per diluted share                   |   | $   | 0.02 |  |   | $   | 0.03 | 

31



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 2. Summary of Significant Accounting Policies,
continued




|                                       |  |         |   |   |      |   |      |  
|-------------------------------------- |  | ------- | - | - | ---- | - | ---- | -
|                                       |  | 2007(1) |   |   | 2006 |  
|                                       |  |         |   |   |      |  
|Expected term (in years)               |  |         |  |   |      |   | 5.0  |  
|Risk-free interest rate                |  |         |  | % |      |   | 4.3  | %
|Expected volatility                    |  |         |  | % |      |   | 29.6 | %
|Dividend yield                         |  |         |  | % |      |   | 9.0  | %
|Weighted average fair value per option |  | $       |  |   |      | $ | 3.35 |  




| |     |                                                                                        
| | --- | ---------------------------------------------------------------------------------------
| | (1) | The Company did not grant any options during the three months
    ended March 31, 2007.







| |                                              
| | ---------------------------------------------
| | Federal and State Income Taxes and Excise Tax



32



---



##### 



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

Accounting for Uncertainty in Income Taxes Accounting for
Income Taxes.


33



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 2. Summary of Significant Accounting Policies,
continued


Fair Value Measurements.


The
Fair Value Option for Financial Assets and Financial
Liabilities  Including an Amendment of FASB Statement
No. 115.


Note 3. Portfolio




| |                
| | ---------------
| | Private Finance



|                           |                        |                                         |         |         |         |  |         |          |         |  |      |      |      |       |         |         |          |  |         |         |         |  |  |      |      |  
|-------------------------- | ---------------------- | --------------------------------------- | ------- | ------- | ------- |  | ------- | -------- | ------- |  | ---- | ---- | ---- | ----- | ------- | ------- | -------- |  | ------- | ------- | ------- |  |  | ---- | ---- | -
|                           |                        | 2007                                    |         |         | 2006    | 
|                           |                        |                                         |         |         |         | 
|                           |                        | Cost                                    |         |         | Value   |  |         | Yield(1) |         |  | Cost |      |      | Value |         |         | Yield(1) | 
|($ in millions)            |                        |                                         |         |         |         |  |         |          |         |  |      |      |      |       |         |         |          | 
|Loans and debt securities: |                        |                                         |         |         |         |  |         |          |         |  |      |      |      |       |         |         |          |  |         |         |         |  |  |     
|                           | Senior loans           |                                         | $       | 406.8   |         |  | $       | 365.0    |         |  |      | 8.4  | %    |       | $       | 450.0   |          |  | $       | 405.2   |         |  |  | 8.4  | %   
|                           | Unitranche
    debt(2) |                                         |         | 783.0   |         |  |         | 780.2    |         |  |      | 11.4 | %    |       |         | 800.0   |          |  |         | 799.2   |         |  |  | 11.2 | %   
|                           | Subordinated debt      |                                         |         | 2,036.2 |         |  |         | 1,946.1  |         |  |      | 12.5 | %    |       |         | 2,038.3 |          |  |         | 1,980.8 |         |  |  | 12.9 | %   
|                           |                        |                                         |         |         |         |  |         |          |         |  |      |      |      |       |         |         |          | 
|                           |                        | Total loans and debt securities
    (3) |         |         | 3,226.0 |  |         |          | 3,091.3 |  |      |      | 11.7 | %     |         |         | 3,288.3  |  |         |         | 3,185.2 |  |  |      | 11.9 | %
|Equity securities          |                        |                                         | 1,208.1 |         |         |  | 1,285.0 |          |         |  |      |      |      |       | 1,209.1 |         |          |  | 1,192.7 |         |         |  |  |     
|                           |                        |                                         |         |         |         |  |         |          |         |  |      |      |      |       |         |         |          | 
|                           |                        | Total                                   |         | $       | 4,434.1 |  |         | $        | 4,376.3 |  |      |      |      |       |         | $       | 4,497.4  |  |         | $       | 4,377.9 |  |  |      |      |  
|                           |                        |                                         |         |         |         |  |         |          |         |  |      |      |      |       |         |         |          | 




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The weighted average yield on loans and debt securities is
    computed as the (a) annual stated interest on accruing
    loans and debt securities plus the annual amortization of loan
    origination fees, original issue discount, and market discount
    on accruing loans and debt securities less the annual
    amortization of loan origination costs, divided by
    (b) total loans and debt securities at value. At
    March 31, 2007, and December 31, 2006, the cost and
    value of subordinated debt included the Class A equity
    interests in BLX and the guaranteed dividend yield on these
    equity interests was included in interest income. During the
    fourth quarter of 2006, the Class A equity interests were
    placed on non-accrual status. The weighted average yield is
    computed as of the balance sheet date.
|   
|(2) | Unitranche debt is a single debt investment that is a blend of
    senior and subordinated debt terms.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(3) | The total principal balance outstanding on loans and debt
    securities was $3,258.7 million and $3,322.3 million
    at March 31, 2007, and December 31, 2006,
    respectively. The difference between principal and cost is
    represented by unamortized loan origination fees and costs,
    original issue discounts, and market discounts totaling
    $32.7 million and $34.0 million at March 31,
    2007, and December 31, 2006, respectively.                                                                                                                                                                                                                                                                                                                                                                                                   

34



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 3. Portfolio, continued










Mercury Air Centers, Inc.


35



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 3. Portfolio, continued








|                      |                                             |               |     |     |      |   |     |     | 
|--------------------- | ------------------------------------------- | ------------- | --- | --- | ---- | - | --- | --- | 
|                      |                                             | For the Three |    
|                      |                                             | Months Ended  |    
|                      |                                             | March 31,     |    
|                      |                                             |               |    
|                      |                                             | 2007          |     |     | 2006 |  
|($ in millions)       |                                             |               |     |     |      |  
|Interest income       |                                             | $             | 2.0 |     |      | $ | 2.9 |    
|Fees and other income |                                             |               | 0.1 |     |      |   | 0.2 |    
|                      |                                             |               |     |     |      |  
|                      | Total interest and related portfolio income |               | $   | 2.1 |      |   | $   | 3.1 | 
|                      |                                             |               |     |     |      |  





pre-


Business Loan Express, LLC.




36



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 3. Portfolio, continued






|                                                                      |                                             |               |     |     |      |   |     |     | 
|--------------------------------------------------------------------- | ------------------------------------------- | ------------- | --- | --- | ---- | - | --- | --- | 
|                                                                      |                                             | For the Three |    
|                                                                      |                                             | Months Ended  |    
|                                                                      |                                             | March 31,     |    
|                                                                      |                                             |               |    
|                                                                      |                                             | 2007          |     |     | 2006 |  
|($ in millions)                                                       |                                             |               |     |     |      |  
|Interest income on subordinated debt and Class A equity
    interests |                                             | $             |    |     |      | $ | 3.9 |    
|Fees and other income                                                 |                                             |               | 1.4 |     |      |   | 2.2 |    
|                                                                      |                                             |               |     |     |      |  
|                                                                      | Total interest and related portfolio income |               | $   | 1.4 |      |   | $   | 6.1 | 
|                                                                      |                                             |               |     |     |      |  







2:06-CR-20662


37



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 3. Portfolio, continued










built-in


38



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 3. Portfolio, continued


10-year 10-year 10-year








39



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 3. Portfolio, continued






Advantage Sales and Marketing, Inc.












40



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 3. Portfolio, continued






Collateralized Loan Obligations (CLOs) and
Collateralized Debt Obligations (CDOs).


|                                          |                                      |       |      |       |       |   |      |          |       |  |       |       |  |       |      |       |          |   |      |      |       |  |       |       |  | 
|----------------------------------------- | ------------------------------------ | ----- | ---- | ----- | ----- | - | ---- | -------- | ----- |  | ----- | ----- |  | ----- | ---- | ----- | -------- | - | ---- | ---- | ----- |  | ----- | ----- |  | 
|                                          |                                      | 2007  |      |       | 2006  |  
|                                          |                                      |       |      |       |       |  
|                                          |                                      | Cost  |      |       | Value |   |      | Yield(1) |       |  | Cost  |       |  | Value |      |       | Yield(1) |  
|($ in millions)                           |                                      |       |      |       |       |   |      |          |       |  |       |       |  |       |      |       |          |  
|Bonds(2):                                 |                                      |       |      |       |       |   |      |          |       |  |       |       |  |       |      |       |          |   |      |      |       |  |       |      
|Callidus Debt Partners CDO Fund I, Ltd.   |                                      | $     | 28.4 |       |       | $ | 28.5 |          |       |  | 14.3% |       |  | $     | 28.4 |       |          | $ | 28.4 |      |       |  | 14.3% |      
|Callidus MAPS CLO Fund I LLC              |                                      |       | 17.0 |       |       |   | 17.1 |          |       |  | 10.9% |       |  |       | 17.0 |       |          |   | 17.2 |      |       |  | 10.9% |      
|                                          |                                      |       |      |       |       |   |      |          |       |  |       |       |  |       |      |       |          |  
|                                          | Total bonds                          |       |      | 45.4  |       |   |      | 45.6     |       |  |       | 13.0% |  |       |      | 45.4  |          |   |      | 45.6 |       |  |       | 13.0% | 
|Preferred Shares/ Income
    Notes(3):    |                                      |       |      |       |       |   |      |          |       |  |       |       |  |       |      |       |          |   |      |      |       |  |       |      
|Callidus Debt Partners CLO Fund III, Ltd. |                                      |       | 22.7 |       |       |   | 22.5 |          |       |  | 9.9%  |       |  |       | 23.3 |       |          |   | 23.0 |      |       |  | 12.7% |      
|Callidus Debt Partners CLO Fund IV, Ltd.  |                                      |       | 12.8 |       |       |   | 12.8 |          |       |  | 13.1% |       |  |       | 13.0 |       |          |   | 13.0 |      |       |  | 13.8% |      
|Callidus Debt Partners CLO Fund V, Ltd.   |                                      |       | 14.3 |       |       |   | 14.3 |          |       |  | 15.8% |       |  |       | 13.8 |       |          |   | 13.8 |      |       |  | 15.8% |      
|Callidus MAPS CLO Fund I LLC              |                                      |       | 51.0 |       |       |   | 46.5 |          |       |  | 13.3% |       |  |       | 51.0 |       |          |   | 47.4 |      |       |  | 15.9% |      
|                                          |                                      |       |      |       |       |   |      |          |       |  |       |       |  |       |      |       |          |  
|                                          | Total preferred shares/ income notes |       |      | 100.8 |       |   |      | 96.1     |       |  |       | 12.8% |  |       |      | 101.1 |          |   |      | 97.2 |       |  |       | 14.8% | 
|                                          |                                      |       |      |       |       |   |      |          |       |  |       |       |  |       |      |       |          |  
|                                          |                                      | Total |      | $     | 146.2 |   |      | $        | 141.7 |  |       |       |  |       |      | $     | 146.5    |   |      | $    | 142.8 |  |       |       |  | 
|                                          |                                      |       |      |       |       |   |      |          |       |  |       |       |  |       |      |       |          |  




|    |                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------
|(1) | The yield on these securities is included in interest and
    dividend income in the accompanying statement of operations.
|   
|(2) | These securities are included in private finance subordinated
    debt.                                                   
|   
|(3) | These securities are included in private finance equity
    securities.                                                   





41



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 3. Portfolio, continued




|                 |                                    |      |         |         |      |   |         |         | 
|---------------- | ---------------------------------- | ---- | ------- | ------- | ---- | - | ------- | ------- | 
|                 |                                    | 2007 |         |         | 2006 |  
|($ in millions)  |                                    |      |         |         |      |  
|Bonds            |                                    | $    | 272.9   |         |      | $ | 245.4   |        
|Syndicated loans |                                    |      | 1,758.7 |         |      |   | 1,769.9 |        
|Cash(1)          |                                    |      | 16.2    |         |      |   | 59.5    |        
|                 |                                    |      |         |         |      |  
|                 | Total underlying collateral assets |      | $       | 2,047.8 |      |   | $       | 2,074.8 | 
|                 |                                    |      |         |         |      |  




|    |                                    
|--- | -----------------------------------
|(1) | Includes undrawn liability amounts.





Loans and Debt Securities on Non-Accrual Status.


|                                                |                               |       |   |       |       |  |   |      |       | 
|----------------------------------------------- | ----------------------------- | ----- | - | ----- | ----- |  | - | ---- | ----- | 
|                                                |                               | 2007  |   |       | 2006  | 
|($ in millions)                                 |                               |       |   |       |       | 
|Loans and debt securities in workout status     |                               |       |   |       |       |  |   |     
|                                                | Companies more than 25% owned |       | $ | 45.5  |       |  | $ | 51.1 |      
|                                                | Companies 5% to 25% owned     |       |   | 4.9   |       |  |   | 4.0  |      
|                                                | Companies less than 5% owned  |       |   | 61.0  |       |  |   | 31.6 |      
|Loans and debt securities not in workout status |                               |       |   |       |       |  |   |     
|                                                | Companies more than 25% owned |       |   | 121.2 |       |  |   | 87.1 |      
|                                                | Companies 5% to 25% owned     |       |   | 7.2   |       |  |   | 7.2  |      
|                                                | Companies less than 5% owned  |       |   | 26.9  |       |  |   | 38.9 |      
|                                                |                               |       |   |       |       | 
|                                                |                               | Total |   | $     | 266.7 |  |   | $    | 219.9 | 
|                                                |                               |       |   |       |       | 

42



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 3. Portfolio, continued


Industry and Geographic Compositions.


|                         |       |      |    |     |      |  |    |     |  
|------------------------ | ----- | ---- | -- | --- | ---- |  | -- | --- | -
|                         |       | 2007 |    |     | 2006 | 
|                         |       |      |    |     |      | 
|Industry                 |       |      |    |     |      |  |    |    
|Business services        |       |      | 37 | %   |      |  | 39 | %  
|Consumer products        |       |      | 20 |     |      |  | 20 |    
|Financial services       |       |      | 12 |     |      |  | 9  |    
|Industrial products      |       |      | 9  |     |      |  | 9  |    
|Consumer services        |       |      | 6  |     |      |  | 6  |    
|Retail                   |       |      | 5  |     |      |  | 6  |    
|Healthcare services      |       |      | 3  |     |      |  | 3  |    
|Energy services          |       |      | 2  |     |      |  | 2  |    
|Other(1)                 |       |      | 6  |     |      |  | 6  |    
|                         |       |      |    |     |      | 
|                         | Total |      |    | 100 | %    |  |    | 100 | %
|                         |       |      |    |     |      | 
|Geographic
    Region(2) |       |      |    |     |      |  |    |    
|Mid-Atlantic             |       |      | 31 | %   |      |  | 31 | %  
|Midwest                  |       |      | 32 |     |      |  | 30 |    
|Southeast                |       |      | 15 |     |      |  | 18 |    
|West                     |       |      | 16 |     |      |  | 17 |    
|Northeast                |       |      | 6  |     |      |  | 4  |    
|                         |       |      |    |     |      | 
|                         | Total |      |    | 100 | %    |  |    | 100 | %
|                         |       |      |    |     |      | 




|    |                                                                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes investments in senior debt CDO and CLO funds which
    represented 3% of the private finance portfolio at both
    March 31, 2007, and December 31, 2006. These funds
    invest in senior debt representing a variety of industries.
|   
|(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



|                          |       |      |      |       |       |   |      |          |  |  |      |  |  |       |      |       |          |   |      |       |  |  |      |  | 
|------------------------- | ----- | ---- | ---- | ----- | ----- | - | ---- | -------- |  |  | ---- |  |  | ----- | ---- | ----- | -------- | - | ---- | ----- |  |  | ---- |  | 
|                          |       | 2007 |      |       | 2006  |  
|                          |       |      |      |       |       |  
|                          |       | Cost |      |       | Value |   |      | Yield(1) |  |  | Cost |  |  | Value |      |       | Yield(1) |  
|($ in millions)           |       |      |      |       |       |   |      |          |  |  |      |  |  |       |      |       |          |  
|Commercial mortgage loans |       | $    | 72.8 |       |       | $ | 72.2 |          |  |  | 7.5% |  |  | $     | 72.6 |       |          | $ | 71.9 |       |  |  | 7.5% | 
|Real estate owned         |       |      | 15.6 |       |       |   | 21.0 |          |  |  |      |  |  |       | 15.7 |       |          |   | 19.6 |       |  |  |      | 
|Equity interests          |       |      | 15.0 |       |       |   | 29.3 |          |  |  |      |  |  |       | 15.2 |       |          |   | 26.7 |       |  |  |      | 
|                          |       |      |      |       |       |   |      |          |  |  |      |  |  |       |      |       |          |  
|                          | Total |      | $    | 103.4 |       |   | $    | 122.5    |  |  |      |  |  |       | $    | 103.5 |          |   | $    | 118.2 |  |  |      |  | 
|                          |       |      |      |       |       |   |      |          |  |  |      |  |  |       |      |       |          |  




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

43



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 3. Portfolio, continued


Commercial Mortgage Loans and Equity Interests.






|                  |       |      |    |     |      |  |    |     |  
|----------------- | ----- | ---- | -- | --- | ---- |  | -- | --- | -
|                  |       | 2007 |    |     | 2006 | 
|                  |       |      |    |     |      | 
|Property Type     |       |      |    |     |      |  |    |    
|Hospitality       |       |      | 45 | %   |      |  | 45 | %  
|Office            |       |      | 20 |     |      |  | 20 |    
|Retail            |       |      | 19 |     |      |  | 19 |    
|Housing           |       |      | 13 |     |      |  | 13 |    
|Other             |       |      | 3  |     |      |  | 3  |    
|                  |       |      |    |     |      | 
|                  | Total |      |    | 100 | %    |  |    | 100 | %
|                  |       |      |    |     |      | 
|Geographic Region |       |      |    |     |      |  |    |    
|Southeast         |       |      | 36 | %   |      |  | 36 | %  
|Mid-Atlantic      |       |      | 34 |     |      |  | 35 |    
|Midwest           |       |      | 23 |     |      |  | 21 |    
|Northeast         |       |      | 7  |     |      |  | 8  |    
|West              |       |      |   |     |      |  |   |    
|                  |       |      |    |     |      | 
|                  | Total |      |    | 100 | %    |  |    | 100 | %
|                  |       |      |    |     |      | 

44



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Note 4. Debt




|                                |                                          |                                    |       |          |         |          |   |          |         |        |    |          |      |  |       |          |         |  |       |          |         |  |      |      |      | 
|------------------------------- | ---------------------------------------- | ---------------------------------- | ----- | -------- | ------- | -------- | - | -------- | ------- | ------ | -- | -------- | ---- |  | ----- | -------- | ------- |  | ----- | -------- | ------- |  | ---- | ---- | ---- | 
|                                |                                          | 2007                               |       | 2006    
|                                |                                          |                                    |       |         
|                                |                                          |                                    |       | Annual   |         |          |   | Annual  
|                                |                                          | Facility                           |       | Amount   |         | Interest |   | Facility |         | Amount |    | Interest
|                                |                                          | Amount                             |       | Drawn    |         | Cost(1)  |   | Amount   |         | Drawn  |    | Cost(1) 
|($ in millions)                 |                                          |                                    |       |          |         |          |   |          |         |        |    |         
|Notes payable and debentures:   |                                          |                                    |       |          |         |          |   |          |         |        |    |          |      |  |       |          |         |  |       |          |         |  |      |     
|                                | Privately issued unsecured notes payable |                                    |       | $1,041.5 |         |          |   | $1,041.5 |         |        |    | 6.1%     |      |  |       | $1,041.4 |         |  |       | $1,041.4 |         |  |      | 6.1% |     
|                                | Publicly issued unsecured notes payable  |                                    |       | 850.0    |         |          |   | 850.0    |         |        |    | 6.7%     |      |  |       | 650.0    |         |  |       | 650.0    |         |  |      | 6.6% |     
|                                |                                          |                                    |       |          |         |          |   |          |         |        |    |          |      |  |       |          |         |  |       |          |         |  |      |     
|                                |                                          | Total notes payable and debentures |       |          | 1,891.5 |          |   |          | 1,891.5 |        |    |          | 6.3% |  |       |          | 1,691.4 |  |       |          | 1,691.4 |  |      |      | 6.3% | 
|Revolving line of
    credit(4) |                                          |                                    | 922.5 |          |         |          |  |          |         |        | % | (2)      |      |  | 922.5 |          |         |  | 207.7 |          |         |  | 6.4% | (2) 
|                                |                                          |                                    |       |          |         |          |   |          |         |        |    |          |      |  |       |          |         |  |       |          |         |  |      |     
|                                | Total debt                               |                                    |       | $2,814.0 |         |          |   | $1,891.5 |         |        |    | 6.5%     | (3)  |  |       | $2,613.9 |         |  |       | $1,899.1 |         |  |      | 6.5% | (3) 
|                                |                                          |                                    |       |          |         |          |   |          |         |        |    |          |      |  |       |          |         |  |       |          |         |  |      |     




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The weighted average annual interest cost is computed as the (a)
    annual stated interest on the debt plus the annual amortization
    of commitment fees, other facility fees and amortization of debt
    financing costs that are recognized into interest expense over
    the contractual life of the respective borrowings, divided by
    (b) debt outstanding on the balance sheet date.                                                                                            
|   
|(2) | There were no amounts drawn on the revolving line of credit at
    March 31, 2007. The annual interest cost at
    December 31, 2006, reflects the interest rate payable for
    borrowings under the revolving line of credit. In addition to
    the current interest payable, there were annual costs of
    commitment fees, other facility fees and amortization of debt
    financing costs of $3.8 million and $3.9 million at
    March 31, 2007, and December 31, 2006, respectively.
|   
|(3) | The annual interest cost for total debt includes the annual cost
    of commitment fees, other facility fees and amortization of debt
    financing costs on the revolving line of credit regardless of
    the amount outstanding on the facility as of the balance sheet
    date.                                                                                                                                                                                                          
|   
|(4) | At March 31, 2007, $888.0 million remained unused and
    available on the revolving line of credit, net of amounts
    committed for standby letters of credit of $34.5 million
    issued under the credit facility.                                                                                                                                                                                                                                                                        

Notes Payable and Debentures


Privately Issued Unsecured Notes Payable.




Publicly Issued Unsecured Notes Payable.


|                      |       |        |       |       |               |  |                |  | 
|--------------------- | ----- | ------ | ----- | ----- | ------------- |  | -------------- |  | 
|                      |       | Amount |       |       | Maturity Date | 
|($ in millions)       |       |        |       |       |               | 
|6.625% Notes due 2011 |       | $      | 400.0 |       |               |  | July 15, 2011  | 
|6.000% Notes due 2012 |       |        | 250.0 |       |               |  | April 1, 2012  | 
|6.875% Notes due 2047 |       |        | 200.0 |       |               |  | April 15, 2047 | 
|                      |       |        |       |       |               | 
|                      | Total |        | $     | 850.0 |               |  |                |  | 
|                      |       |        |       |       |               | 

45



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 4. Debt, continued








Scheduled Maturities.


|           |       |                 |       |         | 
|---------- | ----- | --------------- | ----- | ------- | 
|Year       |       | Amount Maturing |      
|           |       |                 |      
|           |       | ($ in millions) |      
|2007       |       | $               |      |        
|2008       |       |                 | 153.0 |        
|2009       |       |                 | 269.0 |        
|2010       |       |                 | 408.0 |        
|2011       |       |                 | 472.5 |        
|Thereafter |       |                 | 589.0 |        
|           |       |                 |      
|          
|           | Total |                 | $     | 1,891.5 | 
|           |       |                 |      



| |                         
| | ------------------------
| | Revolving Line of Credit







46



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 4. Debt, continued






| |                    
| | -------------------
| | Covenant Compliance





Note 5. Guarantees and Commitments




47



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 5. Guarantees and Commitments, continued




|                                 |          |       |       |       |      |   |     |      |  |   |      |      |  |      |       |       |  |   |            |   |  |   |     |     |  |   |     |     | 
|-------------------------------- | -------- | ----- | ----- | ----- | ---- | - | --- | ---- |  | - | ---- | ---- |  | ---- | ----- | ----- |  | - | ---------- | - |  | - | --- | --- |  | - | --- | --- | 
|                                 |          | Total |       |       | 2007 |   |     | 2008 |  |   | 2009 |      |  | 2010 |       | 2011  |  |   | After 2011 |  
|(in millions)                    |          |       |       |       |      |   |     |      |  |   |      |      |  |      |       |       |  |   |            |  
|Guarantees                       |          | $     | 194.5 |       |      | $ | 0.3 |      |  | $ | 3.0  |      |  | $    | 184.9 |       |  | $ |           |   |  | $ | 4.4 |     |  | $ | 1.9 |    
|Standby letters of
    credit(1) |          |       | 34.5  |       |      |   | 4.0 |      |  |   | 30.5 |      |  |      |      |       |  |   |           |   |  |   |    |     |  |   |    |    
|                                 |          |       |       |       |      |   |     |      |  |   |      |      |  |      |       |       |  |   |            |   | 
|                                 | Total(2) |       | $     | 229.0 |      |   | $   | 4.3  |  |   | $    | 33.5 |  |      | $     | 184.9 |  |   | $          |  |  |   | $   | 4.4 |  |   | $   | 1.9 | 
|                                 |          |       |       |       |      |   |     |      |  |   |      |      |  |      |       |       |  |   |            |   | 




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Standby letters of credit are issued under the Companys
    revolving line of credit that expires in September 2008.
    Therefore, unless a standby letter of credit is set to expire at
    an earlier date, it is assumed that the standby letters of
    credit will expire contemporaneously with the expiration of the
    Companys line of credit in September 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(2) | The Companys most significant commitments relate to its
    investment in Business Loan Express, LLC (BLX), which
    commitments totaled $202.4 million at March 31, 2007.
    At March 31, 2007, the Company guaranteed 50% of the
    outstanding total obligations on BLXs revolving line of
    credit for a total guaranteed amount of $179.4 million and
    had also provided four standby letters of credit totaling
    $20.0 million in connection with four term securitizations
    completed by BLX. In addition, the Company has agreed to
    purchase the $3.0 million of Class A equity interests
    purchased by the chief executive officer of BLX at fair value in
    the event that BLX amends or otherwise restructures its existing
    senior credit facility or he is terminated for any reason. See
    Note 3.





Note 6. Shareholders Equity




|                                        |              |      |        |        |      |   |        |        | 
|--------------------------------------- | ------------ | ---- | ------ | ------ | ---- | - | ------ | ------ | 
|                                        |              | 2007 |        |        | 2006 |  
|(in millions)                           |              |      |        |        |      |  
|Number of common shares                 |              |      | 3,325  |        |      |   | 3,000  |       
|                                        |              |      |        |        |      |  
|Gross proceeds                          |              | $    | 97,256 |        |      | $ | 87,750 |       
|Less costs, including underwriting fees |              |      | 3,472  |        |      |   | 4,780  |       
|                                        |              |      |        |        |      |  
|                                        | Net proceeds |      | $      | 93,784 |      |   | $      | 82,970 | 
|                                        |              |      |        |        |      |  



48



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 6. Shareholders Equity, continued




|                                        |  |               |       |  |      |   |       | 
|--------------------------------------- |  | ------------- | ----- |  | ---- | - | ----- | 
|                                        |  | For the Three |      
|                                        |  | Months Ended  |      
|                                        |  | March 31,     |      
|                                        |  |               |      
|                                        |  | 2007          |       |  | 2006 |  
|(in millions, except per share amounts) |  |               |       |  |      |  
|Shares issued                           |  |               | 0.1   |  |      |   | 0.1   | 
|Average price per share                 |  | $             | 29.23 |  |      | $ | 30.29 | 

Note 7. Earnings Per Common Share




|                                                         |  |               |       |  |      |   |       | 
|-------------------------------------------------------- |  | ------------- | ----- |  | ---- | - | ----- | 
|                                                         |  | For the Three |      
|                                                         |  | Months Ended  |      
|                                                         |  | March 31,     |      
|                                                         |  |               |      
|                                                         |  | 2007          |       |  | 2006 |  
|(in millions, except per share amounts)                  |  |               |       |  |      |  
|Net increase in net assets resulting from operations     |  | $             | 133.1 |  |      | $ | 99.6  | 
|                                                         |  |               |       |  |      |  
|Weighted average common shares
    outstanding  basic   |  |               | 149.5 |  |      |   | 138.7 | 
|Dilutive options outstanding                             |  |               | 3.3   |  |      |   | 3.0   | 
|                                                         |  |               |       |  |      |  
|Weighted average common shares
    outstanding  diluted |  |               | 152.8 |  |      |   | 141.7 | 
|                                                         |  |               |       |  |      |  
|Basic earnings per common share                          |  | $             | 0.89  |  |      | $ | 0.72  | 
|                                                         |  |               |       |  |      |  
|Diluted earnings per common share                        |  | $             | 0.87  |  |      | $ | 0.70  | 
|                                                         |  |               |       |  |      |  

Note 8. Employee Compensation Plans






49



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 8. Employee Compensation Plans, continued












50



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 8. Employee Compensation Plans, continued




|                                     |                             |      |      |      |      |   |     |     | 
|------------------------------------ | --------------------------- | ---- | ---- | ---- | ---- | - | --- | --- | 
|                                     |                             | 2007 |      |      | 2006 |  
|($ in millions)                      |                             |      |      |      |      |  
|IPA contributions                    |                             | $    | 2.5  |      |      | $ | 1.7 |    
|IPA mark to market expense (benefit) |                             |      | (4.0 | )    |      |   | 1.0 |    
|                                     |                             |      |      |      |      |  
|                                     | Total IPA expense (benefit) |      | $    | (1.5 | )    |   | $   | 2.7 | 
|                                     |                             |      |      |      |      |  



Note 9. Stock Option Plan








51



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 9. Stock Option Plan, continued




|                                                                    |  |        |      |           |       |   |             |              |  |           |                   |  |  |   |      | 
|------------------------------------------------------------------- |  | ------ | ---- | --------- | ----- | - | ----------- | ------------ |  | --------- | ----------------- |  |  | - | ---- | 
|                                                                    |  |        |      | Weighted  |       |   | Weighted    |              |  |          
|                                                                    |  |        |      | Average   |       |   | Average     |              |  | Aggregate |                  
|                                                                    |  |        |      | Exercise  |       |   | Contractual |              |  | Intrinsic |                  
|                                                                    |  |        |      | Price Per |       |   | Remaining   |              |  | Value at  |                  
|                                                                    |  | Shares |      |           | Share |   |             | Term (Years) |  |           | March 31, 2007(1) | 
|                                                                    |  |        |      |           |       |   |             |              |  |           |                   | 
|(in millions, except per share amounts)                             |  |        |      |           |       |   |             |              |  |           |                   |  |  |   |      | 
|Options outstanding at January 1, 2007                              |  |        | 23.2 |           |       | $ | 24.92       |              |  |           |                   |  |  |   |      | 
|Granted                                                             |  |        |     |           |       | $ |            |              |  |           |                   |  |  |   |      | 
|Exercised                                                           |  |        | (0.1 | )         |       | $ | 17.46       |              |  |           |                   |  |  |   |      | 
|Forfeited                                                           |  |        | (0.3 | )         |       | $ | 29.08       |              |  |           |                   |  |  |   |      | 
|                                                                    |  |        |      |           |       |   |             |              |  |           |                   | 
|Options outstanding at March 31, 2007                               |  |        | 22.8 |           |       | $ | 24.89       |              |  |           | 6.01              |  |  | $ | 92.0 | 
|                                                                    |  |        |      |           |       |   |             |              |  |           |                   | 
|Exercisable at March 31, 2007                                       |  |        | 16.6 |           |       | $ | 23.73       |              |  |           | 5.36              |  |  | $ | 85.6 | 
|                                                                    |  |        |      |           |       |   |             |              |  |           |                   | 
|Exercisable and expected to be exercisable at March 31,
    2007(2) |  |        | 22.5 |           |       | $ | 24.85       |              |  |           | 5.98              |  |  | $ | 91.7 | 
|                                                                    |  |        |      |           |       |   |             |              |  |           |                   | 




|    |                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents the difference between the market value of the
    options at March 31, 2007, and the cost for the option
    holders to exercise the options.
|   
|(2) | The amount of options expected to be exercisable at
    March 31, 2007, is calculated based on an estimate of
    expected forfeitures.                  





Note 10. Dividends and Distributions and Taxes








52



---



##### 



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










53



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Note 12. Financial Highlights


|                                                                                          |                              |                                                                 |         |      |                |   |         |      |       |   |         |      |       |  
|----------------------------------------------------------------------------------------- | ---------------------------- | --------------------------------------------------------------- | ------- | ---- | -------------- | - | ------- | ---- | ----- | - | ------- | ---- | ----- | -
|                                                                                          |                              | At and for the                                                  |         |      | At and for the |  
|                                                                                          |                              | Three Months Ended                                              |         |      | Year Ended     |  
|                                                                                          |                              | March 31,                                                       |         |      | December 31,   |  
|                                                                                          |                              |                                                                 |         |      |                |  
|                                                                                          |                              | 2007(1)                                                         |         |      | 2006           |   |         | 2006 |      
|                                                                                          |                              |                                                                 |         |      |                |   |         |      |      
|Per Common Share Data                                                                     |                              |                                                                 |         |      |                |   |         |      |       |   |         |     
|Net asset value, beginning of period                                                      |                              | $                                                               | 19.12   |      |                | $ | 19.17   |      |       | $ | 19.17   |     
|                                                                                          |                              |                                                                 |         |      |                |   |         |      |      
|                                                                                          | Net investment
    income(2) |                                                                 |         | 0.26 |                |   |         | 0.29 |       |   |         | 1.30 |      
|                                                                                          | Net realized
    gains(2)(3) |                                                                 |         | 0.18 |                |   |         | 3.05 |       |   |         | 3.66 |      
|                                                                                          |                              |                                                                 |         |      |                |   |         |      |      
|                                                                                          |                              | Net investment income plus net realized
    gains(2)            |         |      | 0.44           |   |         |      | 3.34  |   |         |      | 4.96  |  
|                                                                                          |                              | Net change in unrealized appreciation or
    depreciation(2)(3) |         |      | 0.43           |   |         |      | (2.64 | ) |         |      | (3.28 | )
|                                                                                          |                              |                                                                 |         |      |                |   |         |      |      
|Net increase in net assets resulting from operations
    (2)                              |                              |                                                                 | 0.87    |      |                |   | 0.70    |      |       |   | 1.68    |     
|                                                                                          |                              |                                                                 |         |      |                |   |         |      |      
|Net decrease in net assets from shareholder distributions                                 |                              |                                                                 | (0.63   | )    |                |   | (0.59   | )    |       |   | (2.47   | )   
|Net increase in net assets from capital share
    transactions(2)                         |                              |                                                                 | 0.22    |      |                |   | 0.22    |      |       |   | 0.74    |     
|                                                                                          |                              |                                                                 |         |      |                |   |         |      |      
|Net asset value, end of period                                                            |                              | $                                                               | 19.58   |      |                | $ | 19.50   |      |       | $ | 19.12   |     
|                                                                                          |                              |                                                                 |         |      |                |   |         |      |      
|Market value, end of period                                                               |                              | $                                                               | 28.81   |      |                | $ | 30.60   |      |       | $ | 32.68   |     
|Total
    return(4)                                                                       |                              |                                                                 | (9.9    | )%   |                |   | 6.2     | %    |       |   | 20.6    | %   
|Ratios and Supplemental Data($ and shares in thousands, except per share amounts)         |                              |                                                                 |         |      |                |   |         |      |       |   |         |     
|Ending net assets                                                                         |                              | $                                                               | 2,978.3 |      |                | $ | 2,729.8 |      |       | $ | 2,841.2 |     
|Common shares outstanding at end of period                                                |                              |                                                                 | 152.1   |      |                |   | 140.0   |      |       |   | 148.6   |     
|Diluted weighted average common shares outstanding                                        |                              |                                                                 | 152.8   |      |                |   | 141.7   |      |       |   | 145.6   |     
|Employee, employee stock option and administrative
    expenses/average net
    assets(5) |                              |                                                                 | 1.33    | %    |                |   | 1.36    | %    |       |   | 5.38    | %   
|Total operating expenses/average net
    assets(5)                                        |                              |                                                                 | 2.37    | %    |                |   | 2.27    | %    |       |   | 9.05    | %   
|Net investment income/average net
    assets(5)                                           |                              |                                                                 | 1.36    | %    |                |   | 1.54    | %    |       |   | 6.90    | %   
|Net increase in net assets resulting from operations/average net
    assets(5)            |                              |                                                                 | 4.57    | %    |                |   | 3.72    | %    |       |   | 8.94    | %   
|Portfolio turnover
    rate(5)                                                            |                              |                                                                 | 3.78    | %    |                |   | 9.33    | %    |       |   | 27.05   | %   
|Average debt outstanding                                                                  |                              | $                                                               | 1,841.2 |      |                | $ | 1,491.5 |      |       | $ | 1,491.0 |     
|Average debt per
    share(2)                                                             |                              | $                                                               | 12.05   |      |                | $ | 10.52   |      |       | $ | 10.24   |     




|    |                                                                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The results for the three months ended March 31, 2007, are
    not necessarily indicative of the operating results to be
    expected for the full year.                                         
|   
|(2) | Based on diluted weighted average number of common shares
    outstanding for the period.                                                                                                        
|   
|(3) | Net realized gains and net change in unrealized appreciation or
    depreciation can fluctuate significantly from period to period.
    As a result, quarterly comparisons may not be meaningful.
|   
|(4) | Total return assumes the reinvestment of all dividends paid for
    the periods presented.                                                                                                       
|   
|(5) | The ratios for the three months ended March 31, 2007 and
    2006, do not represent annualized results.                                                                                          

Note 13. Litigation




54



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 13. Litigation, continued








10b-5






55



---



##### 






Report of Independent Registered Public Accounting Firm





















56



---



##### 



Schedule 12-14


ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


SCHEDULE OF INVESTMENTS IN AND ADVANCES TO AFFILIATES


|                                 |                      |                          |                           |                       |       |              |  |       |    |              |  |               |        |                |  |   |        |        |  |   |         |        |   |   |        |        | 
|-------------------------------- | -------------------- | ------------------------ | ------------------------- | --------------------- | ----- | ------------ |  | ----- | -- | ------------ |  | ------------- | ------ | -------------- |  | - | ------ | ------ |  | - | ------- | ------ | - | - | ------ | ------ | 
|                                 |                      |                          |                           | Amount of Interest or |       |              |  |       |    |              |  |              
|                                 |                      |                          |                           | Dividends             |       |              |  |       |    |              |  |              
|PRIVATE FINANCE                  |                      |                          |                           |                       |       | December 31, |  |       |    |              |  |              
|Portfolio Company                |                      |                          |                           | Credited              |       |              |  | 2006  |    | Gross        |  | Gross         |        | March 31, 2007
|(in thousands)                   |                      | Investment(1)            |                           | to Income(6)          |       | Other(2)     |  | Value |    | Additions(3) |  | Reductions(4) |        | Value         
|                                
|Companies More Than 25% Owned   
|                                
|Alaris Consulting, LLC           |                      | Senior
    Loan(5)       |                           |                       |       |              |  |       |    |              |  | $             |       |                |  | $ | 572    |        |  | $ | (572    | )      |   | $ |       |       
|                                 | (Business Services)  |                          | Equity Interests          |                       |       |              |  |       |    |              |  |               |        |               |  |   |        |       |  |   |         |       |   |   |        |       | 
|                                
|Avborne, Inc.                    |                      | Preferred Stock          |                           |                       |       |              |  |       |    |              |  |               | 918    |                |  |   |       |        |  |   | (45     | )      |   |   | 873    |       
|                                 | (Business Services)  |                          | Common Stock              |                       |       |              |  |       |    |              |  |               |        |               |  |   |        |       |  |   |         |       |   |   |        |       | 
|                                
|Avborne Heavy Maintenance,  Inc. |                      | Preferred Stock          |                           |                       |       |              |  |       |    |              |  |               |       |                |  |   |       |        |  |   |        |        |   |   |       |       
|                                 | (Business Services)  |                          | Common Stock              |                       |       |              |  |       |    |              |  |               |        |               |  |   |        |       |  |   |         |       |   |   |        |       | 
|                                
|Border Foods, Inc.               |                      | Preferred Stock          |                           |                       |       |              |  |       |    |              |  |               |       |                |  |   |       |        |  |   |        |        |   |   |       |       
|                                 | (Consumer Products)  |                          | Common Stock              |                       |       |              |  |       |    |              |  |               |        |               |  |   |        |       |  |   |         |       |   |   |        |       | 
|                                
|Business Loan Express, LLC       |                      | Class A Equity           |                           |                       |       |              |  |       |    |              |  |               |        |                |  |   |        |        |  |   |         |        |   |   |        |       
|                                 | (Financial Services) |                          | Interests(5)              |                       |       |              |  |       |    |              |  |               |        | 66,622         |  |   |        | 19,200 |  |   |         |       |   |   |        | 85,822 | 
|                                 |                      | Class B Equity Interests |                           |                       |       |              |  |       |    |              |  |               | 79,139 |                |  |   |       |        |  |   |        |        |   |   | 79,139 |       
|                                 |                      | Class C Equity Interests |                           |                       |       |              |  |       |    |              |  |               | 64,976 |                |  |   |       |        |  |   |        |        |   |   | 64,976 |       
|                                
|Calder Capital Partners, LLC     |                      | Senior
    Loan(5)       |                           |                       |       |              |  | $     | 49 |              |  |               | 975    |                |  |   | 400    |        |  |   | (49     | )      |   |   | 1,326  |       
|                                 | (Financial Services) |                          | Equity Interests          |                       |       |              |  |       |    |              |  |               |        | 2,076          |  |   |        | 78     |  |   |         |       |   |   |        | 2,154  | 
|                                
|Callidus Capital Corporation     |                      | Senior Loan              |                           | $                     | 17    |              |  |       |    |              |  |               |       |                |  |   | 2,100  |        |  |   | (950    | )      |   |   | 1,150  |       
|                                 | (Financial Services) |                          | Subordinated Debt         |                       |       | 271          |  |       |    |              |  |               |        | 5,762          |  |   |        | 259    |  |   |         |       |   |   |        | 6,021  | 
|                                 |                      | Common Stock             |                           |                       |       |              |  |       |    |              |  |               | 22,550 |                |  |   | 1,943  |        |  |   |        |        |   |   | 24,493 |       
|                                
|Coverall North America, Inc.     |                      | Unitranche Debt          |                           |                       | 1,084 |              |  |       |    |              |  |               | 36,333 |                |  |   | 9      |        |  |   | (1,446  | )      |   |   | 34,896 |       
|                                 | (Business Services)  |                          | Subordinated Debt         |                       |       | 227          |  |       |    |              |  |               |        | 5,972          |  |   |        | 2      |  |   |         |       |   |   |        | 5,974  | 
|                                 |                      | Common Stock             |                           |                       |       |              |  |       |    |              |  |               | 19,619 |                |  |   | 1,856  |        |  |   |        |        |   |   | 21,475 |       
|                                
|CR Holding, Inc.                 |                      | Subordinated Debt        |                           |                       | 1,664 |              |  |       |    |              |  |               | 39,401 |                |  |   | 351    |        |  |   |        |        |   |   | 39,752 |       
|                                 | (Consumer Products)  |                          | Common Stock              |                       |       |              |  |       |    |              |  |               |        | 25,738         |  |   |        | 5,142  |  |   |         |       |   |   |        | 30,880 | 
|                                
|Direct Capital Corporation       |                      | Subordinated Debt        |                           |                       | 479   |              |  |       |    |              |  |               |       |                |  |   | 35,574 |        |  |   |        |        |   |   | 35,574 |       
|                                 | (Financial Services) |                          | Common Stock              |                       |       |              |  |       |    |              |  |               |        |               |  |   |        | 19,250 |  |   |         |       |   |   |        | 19,250 | 
|                                
|Financial Pacific Company        |                      | Subordinated Debt        |                           |                       | 3,142 |              |  |       |    |              |  |               | 71,362 |                |  |   | 370    |        |  |   |        |        |   |   | 71,732 |       
|                                 | (Financial Services) |                          | Preferred Stock           |                       |       |              |  |       |    |              |  |               |        | 15,942         |  |   |        | 797    |  |   |         |       |   |   |        | 16,739 | 
|                                 |                      | Common Stock             |                           |                       |       |              |  |       |    |              |  |               | 65,186 |                |  |   | 2,354  |        |  |   |        |        |   |   | 67,540 |       
|                                
|ForeSite Towers, LLC             |                      | Equity Interests         |                           |                       | 1,269 |              |  |       |    |              |  |               | 12,290 |                |  |   |       |        |  |   | (11,733 | )      |   |   | 557    |       
|                                 | (Tower Leasing)      |                          |                           |                       |       |              |  |       |    |              |  |               |        |                |  |   |        |        |  |   |         |        |   |   |        |        | 
|                                
|Global Communications, LLC       |                      | Senior
    Loan(5)       |                           |                       |       |              |  |       |    |              |  |               | 15,957 |                |  |   |       |        |  |   |        |        |   |   | 15,957 |       
|                                 | (Business Services)  |                          | Subordinated Debt
    (5) |                       |       |              |  |       |    |              |  |               |        | 11,237         |  |   |        |       |  |   |         | (6,307 | ) |   |        | 4,930  | 
|                                 |                      | Preferred Equity         |                           |                       |       |              |  |       |    |              |  |               |        |                |  |   |        |        |  |   |         |        |   |   |        |       
|                                 |                      | Interest                 |                           |                       |       |              |  |       |    |              |  |               |       |                |  |   |       |        |  |   |        |        |   |   |       |       
|                                 |                      | Options                  |                           |                       |       |              |  |       |    |              |  |               |       |                |  |   |       |        |  |   |        |        |   |   |       |       
|                                
|Gordian Group, Inc.              |                      | Senior
    Loan(5)       |                           |                       | (4    | )            |  |       |    |              |  |               |       |                |  |   | 176    |        |  |   | (176    | )      |   |   |       |       
|                                 | (Business Services)  |                          | Common Stock              |                       |       |              |  |       |    |              |  |               |        |               |  |   |        |       |  |   |         |       |   |   |        |       | 
|                                
|Healthy Pet Corp.                |                      | Senior Loan              |                           |                       | 764   |              |  |       |    |              |  |               | 27,038 |                |  |   | 5,350  |        |  |   | (50     | )      |   |   | 32,338 |       
|                                 | (Consumer Services)  |                          | Subordinated Debt         |                       |       | 1,657        |  |       |    |              |  |               |        | 43,579         |  |   |        | 228    |  |   |         |       |   |   |        | 43,807 | 
|                                 |                      | Common Stock             |                           |                       |       |              |  |       |    |              |  |               | 28,921 |                |  |   | 14,897 |        |  |   |        |        |   |   | 43,818 |       
|                                
|HMT, Inc.                        |                      | Preferred Stock          |                           |                       |       |              |  |       |    |              |  |               | 2,637  |                |  |   |       |        |  |   |        |        |   |   | 2,637  |       
|                                 | (Energy Services)    |                          | Common Stock              |                       |       |              |  |       |    |              |  |               |        | 8,664          |  |   |        | 21,509 |  |   |         |       |   |   |        | 30,173 | 
|                                 |                      | Warrants                 |                           |                       |       |              |  |       |    |              |  |               | 3,336  |                |  |   | 8,281  |        |  |   |        |        |   |   | 11,617 |       
|                                
|Hot Stuff Foods,
    LLC(7)      |                      | Senior Loan              |                           |                       | 848   |              |  |       |    |              |  |               |       |                |  |   | 49,659 |        |  |   | (110    | )      |   |   | 49,549 |       
|                                 | (Consumer Products)  |                          | Subordinated Debt         |                       |       | 804          |  |       |    |              |  |               |        |               |  |   |        | 60,361 |  |   |         | (3,107 | ) |   |        | 57,254 | 
|                                 |                      |                          | Subordinated Debt
    (5) |                       |       |              |  |       |    |              |  |               |        |               |  |   |        | 8,460  |  |   |         | (8,460 | ) |   |        |       | 
|                                 |                      |                          | Common Stock              |                       |       |              |  |       |    |              |  |               |        |               |  |   |        |       |  |   |         |       |   |   |        |       | 
|                                
|Huddle House, Inc.               |                      | Senior Loan              |                           |                       | 426   |              |  |       |    |              |  |               | 19,950 |                |  |   |       |        |  |   | (19,950 | )      |   |   |       |       
|                                 | (Retail)             |                          | Subordinated Debt         |                       |       | 2,205        |  |       |    |              |  |               |        | 58,196         |  |   |        | 221    |  |   |         | (178   | ) |   |        | 58,239 | 
|                                 |                      | Common Stock             |                           |                       |       |              |  |       |    |              |  |               | 41,662 |                |  |   | 1,545  |        |  |   | (129    | )      |   |   | 43,078 |       
|                                
|Impact Innovations Group, LLC    |                      | Equity Interests in      |                           |                       |       |              |  |       |    |              |  |               |        |                |  |   |        |        |  |   |         |        |   |   |        |       
|                                 | (Business Services)  |                          | Affiliate                 |                       |       |              |  |       |    |              |  |               |        | 873            |  |   |        |       |  |   |         | (554   | ) |   |        | 319    | 
|                                





57



---



##### 



|                                    |                        |                           |                           |                       |       |              |  |       |  |              |           |               |        |                |  |   |       |        |  |   |        |        |           |   |        |         | 
|----------------------------------- | ---------------------- | ------------------------- | ------------------------- | --------------------- | ----- | ------------ |  | ----- |  | ------------ | --------- | ------------- | ------ | -------------- |  | - | ----- | ------ |  | - | ------ | ------ | --------- | - | ------ | ------- | 
|                                    |                        |                           |                           | Amount of Interest or |       |              |  |       |  |              |           |              
|                                    |                        |                           |                           | Dividends             |       |              |  |       |  |              |           |              
|PRIVATE FINANCE                     |                        |                           |                           |                       |       | December 31, |  |       |  |              |           |              
|Portfolio Company                   |                        |                           |                           | Credited              |       |              |  | 2006  |  | Gross        |           | Gross         |        | March 31, 2007
|(in thousands)                      |                        | Investment(1)             |                           | to Income(6)          |       | Other(2)     |  | Value |  | Additions(3) |           | Reductions(4) |        | Value         
|                                   
|Insight Pharmaceuticals             |                        | Subordinated Debt         |                           | $                     | 1,445 |              |  |       |  |              |           | $             | 43,884 |                |  | $ | 232   |        |  | $ |       |        |           | $ | 44,116 |        
|                                    | Corporation            |                           | Subordinated Debt
    (5) |                       |       |              |  |       |  |              |           |               |        | 15,966         |  |   |       | 164    |  |   |        | (1,620 | )         |   |        | 14,510  | 
|                                    | (Consumer Products)    |                           | Preferred Stock           |                       |       |              |  |       |  |              |           |               |        | 7,845          |  |   |       |       |  |   |        | (7,845 | )         |   |        |        | 
|                                    |                        | Common Stock              |                           |                       |       |              |  |       |  |              |           |               |       |                |  |   |      |        |  |   |       |        |           |   |       |        
|                                   
|Jakel, Inc.                         |                        | Subordinated Debt
    (5) |                           |                       |       |              |  |       |  |              |           |               | 6,655  |                |  |   | 500   |        |  |   | (7,155 | )      |           |   |       |        
|                                    | (Industrial Products)  |                           | Preferred Stock           |                       |       |              |  |       |  |              |           |               |        |               |  |   |       |       |  |   |        |       |           |   |        |        | 
|                                    |                        | Common Stock              |                           |                       |       |              |  |       |  |              |           |               |       |                |  |   |      |        |  |   |       |        |           |   |       |        
|                                   
|Legacy Partners Group, Inc.         |                        | Senior Loan
    (5)       |                           |                       |       |              |  |       |  |              |           |               | 4,843  |                |  |   |      |        |  |   |       |        |           |   | 4,843  |        
|                                    | (Financial Services)   |                           | Subordinated Debt         |                       |       |              |  |       |  |              |           |               |        |               |  |   |       |       |  |   |        |       |           |   |        |        | 
|                                    |                        | Equity Interests          |                           |                       |       |              |  |       |  |              |           |               |       |                |  |   | 613   |        |  |   |       |        |           |   | 613    |        
|                                   
|Litterer Beteiligungs-GmbH          |                        | Subordinated Debt         |                           |                       | 10    |              |  |       |  |              |           |               | 692    |                |  |   | 6     |        |  |   |       |        |           |   | 698    |        
|                                    | (Business Services)    |                           | Equity Interest           |                       |       |              |  |       |  |              |           |               |        | 1,199          |  |   |       | 781    |  |   |        |       |           |   |        | 1,980   | 
|                                   
|Mercury Air Centers, Inc.           |                        | Subordinated Debt         |                           |                       | 2,010 |              |  |       |  |              |           |               | 49,217 |                |  |   | 520   |        |  |   |       |        |           |   | 49,737 |        
|                                    | (Business Services)    |                           | Common Stock              |                       |       |              |  |       |  |              |           |               |        | 195,019        |  |   |       | 56,690 |  |   |        |       |           |   |        | 251,709 | 
|                                   
|MVL Group, Inc.                     |                        | Senior Loan               |                           |                       | 1,410 |              |  |       |  |              |           |               | 27,245 |                |  |   | 3,368 |        |  |   |       |        |           |   | 30,613 |        
|                                    | (Business Services)    |                           | Subordinated Debt         |                       |       | 877          |  |       |  |              |           |               |        | 35,478         |  |   |       | 3,614  |  |   |        |       |           |   |        | 39,092  | 
|                                    |                        | Common Stock              |                           |                       |       |              |  |       |  |              |           |               |       |                |  |   | 1,333 |        |  |   |       |        |           |   | 1,333  |        
|                                   
|Penn Detroit Diesel Allison, LLC    |                        | Subordinated Debt         |                           |                       | 1,497 |              |  |       |  |              |           |               | 37,994 |                |  |   | 293   |        |  |   |       |        |           |   | 38,287 |        
|                                    | (Business Services)    |                           | Equity Interests          |                       |       |              |  |       |  |              |           |               |        | 25,949         |  |   |       |       |  |   |        | (1,984 | )         |   |        | 23,965  | 
|                                   
|Powell Plant Farms, Inc.            |                        | Senior
    Loan(5)        |                           |                       |       |              |  |       |  |              |           |               | 26,192 |                |  |   | 3,950 |        |  |   |       |        |           |   | 30,142 |        
|                                    | (Consumer Products)    |                           | Subordinated Debt
    (5) |                       |       |              |  |       |  |              |           |               |        | 962            |  |   |       | 2,875  |  |   |        |       |           |   |        | 3,837   | 
|                                    |                        | Preferred Stock           |                           |                       |       |              |  |       |  |              |           |               |       |                |  |   |      |        |  |   |       |        |           |   |       |        
|                                    |                        | Warrants                  |                           |                       |       |              |  |       |  |              |           |               |       |                |  |   |      |        |  |   |       |        |           |   |       |        
|                                   
|Service Champ, Inc.                 |                        | Subordinated Debt         |                           |                       | 1,087 |              |  |       |  |              |           |               | 27,619 |                |  |   | 183   |        |  |   |       |        |           |   | 27,802 |        
|                                    | (Business Services)    |                           | Common Stock              |                       |       |              |  |       |  |              |           |               |        | 16,786         |  |   |       |       |  |   |        | (298   | )         |   |        | 16,488  | 
|                                   
|Staffing Partners Holding           |                        |                           |                           |                       |       |              |  |       |  |              |           |               |        |                |  |   |       |        |  |   |        |        |           |   |        |        
|                                    | Company, Inc.          |                           | Subordinated Debt
    (5) |                       |       |              |  |       |  |              |           |               |        | 486            |  |   |       | 54     |  |   |        |       |           |   |        | 540     | 
|                                    | (Business Services)    |                           |                           |                       |       |              |  |       |  |              |           |               |        |                |  |   |       |        |  |   |        |        |           |   |        |         | 
|                                   
|Startec Global Communications       |                        |                           |                           |                       |       |              |  |       |  |              |           |               |        |                |  |   |       |        |  |   |        |        |           |   |        |        
|                                    | Corporation            |                           | Senior Loan               |                       |       | 367          |  |       |  |              |           |               |        | 15,965         |  |   |       |       |  |   |        | (2,382 | )         |   |        | 13,583  | 
|                                    | (Telecommunications)   |                           | Common Stock              |                       |       |              |  |       |  |              |           |               |        | 11,232         |  |   |       | 5,853  |  |   |        |       |           |   |        | 17,085  | 
|                                   
|Sweet Traditions, Inc.              |                        | Senior Loan               |                           |                       | 1,088 |              |  |       |  |              |           |               | 35,172 |                |  |   | 210   |        |  |   |       |        |           |   | 35,382 |        
|                                    | (Retail)               |                           | Preferred Stock           |                       |       |              |  |       |  |              |           |               |        | 400            |  |   |       | 550    |  |   |        |       |           |   |        | 950     | 
|                                    |                        |                           | Common Stock              |                       |       |              |  |       |  |              |           |               |        | 50             |  |   |       |       |  |   |        |       |           |   |        | 50      | 
|                                   
|Triview Investments, Inc.           |                        | Senior Loan               |                           |                       | 455   |              |  |       |  |              |           |               | 14,747 |                |  |   | 7     |        |  |   |       |        |           |   | 14,754 |        
|                                    | (Broadcasting & Cable/ |                           | Subordinated Debt         |                       |       | 1,414        |  |       |  |              |           |               |        | 56,008         |  |   |       | 7,134  |  |   |        |       |           |   |        | 63,142  | 
|                                    | Business Services/     |                           | Subordinated Debt
    (5) |                       |       | 637          |  |       |  |              |           |               |        | 4,342          |  |   |       | 508    |  |   |        |       |           |   |        | 4,850   | 
|                                    | Consumer Products)     |                           | Common Stock              |                       |       | 7            |  |       |  |              |           |               |        | 31,322         |  |   |       | 7,983  |  |   |        | (281   | )         |   |        | 39,024  | 
|                                   
|Total companies more than 25% owned |                        | $                         | 27,157                    |                       |       |              |  |       |  | $            | 1,490,180 |               |        |                |  |   |       |        |  |   |        | $      | 1,773,164 |  
|                                   
|Companies 5% to 25% Owned           |                        |                           |                           |                       |       |              |  |       |  |              |           |               |        |                |  |   |       |        |  |   |        |        |           |   |        |        
|                                   
|Advantage Sales &                   |                        |                           |                           |                       |       |              |  |       |  |              |           |               |        |                |  |   |       |        |  |   |        |        |           |   |        |        
|                                    | Marketing, Inc.        |                           | Subordinated Debt         |                       | $     | 4,593        |  |       |  |              |           |               | $      | 151,648        |  |   | $     | 785    |  |   | $      |       |           |   | $      | 152,433 | 
|                                    | (Business Services)    |                           | Equity Interests          |                       |       |              |  |       |  |              |           |               |        | 11,000         |  |   |       |       |  |   |        |       |           |   |        | 11,000  | 
|                                   
|Air Medical Group Holdings LLC      |                        | Senior Loan               |                           |                       | 61    |              |  |       |  |              |           |               | 1,763  |                |  |   | 1,782 |        |  |   | (1,050 | )      |           |   | 2,495  |        
|                                    | (Healthcare Services)  |                           | Subordinated Debt         |                       |       | 1,234        |  |       |  |              |           |               |        | 35,128         |  |   |       | 5      |  |   |        |       |           |   |        | 35,133  | 
|                                    |                        |                           | Equity Interests          |                       |       |              |  |       |  |              |           |               |        | 5,950          |  |   |       | 950    |  |   |        |       |           |   |        | 6,900   | 
|                                   
|Alpine ESP Holdings, Inc.           |                        | Preferred Stock           |                           |                       |       |              |  |       |  |              |           |               | 602    |                |  |   |      |        |  |   | (59    | )      |           |   | 543    |        
|                                    | (Business Services)    |                           | Common Stock              |                       |       |              |  |       |  |              |           |               |        |               |  |   |       |       |  |   |        |       |           |   |        |        | 
|                                   
|Amerex Group, LLC                   |                        | Subordinated Debt         |                           |                       | 252   |              |  |       |  |              |           |               | 8,400  |                |  |   |      |        |  |   |       |        |           |   | 8,400  |        
|                                    | (Consumer Products)    |                           | Equity Interests          |                       |       |              |  |       |  |              |           |               |        | 13,823         |  |   |       | 6,431  |  |   |        | (19    | )         |   |        | 20,235  | 
|                                   
|BB&T Capital                        |                        |                           |                           |                       |       |              |  |       |  |              |           |               |        |                |  |   |       |        |  |   |        |        |           |   |        |        
|                                    | Partners/Windsor       |                           |                           |                       |       |              |  |       |  |              |           |               |        |                |  |   |       |        |  |   |        |        |           |   |        |         | 
|                                    | Mezzanine Fund, LLC    |                           | Equity Interests          |                       |       |              |  |       |  |              |           |               |        | 5,554          |  |   |       |       |  |   |        |       |           |   |        | 5,554   | 
|                                    | (Private Equity Fund)  |                           |                           |                       |       |              |  |       |  |              |           |               |        |                |  |   |       |        |  |   |        |        |           |   |        |         | 
|                                   
|Becker Underwood, Inc.              |                        | Subordinated Debt         |                           |                       | 889   |              |  |       |  |              |           |               | 24,163 |                |  |   | 158   |        |  |   |       |        |           |   | 24,321 |        
|                                    | (Industrial Products)  |                           | Common Stock              |                       |       |              |  |       |  |              |           |               |        | 3,700          |  |   |       |       |  |   |        | (400   | )         |   |        | 3,300   | 
|                                   
|BI Incorporated                     |                        | Subordinated Debt         |                           |                       | 1,030 |              |  |       |  |              |           |               | 30,135 |                |  |   | 121   |        |  |   |       |        |           |   | 30,256 |        
|                                    | (Business Services)    |                           | Common Stock              |                       |       |              |  |       |  |              |           |               |        | 4,100          |  |   |       | 1,900  |  |   |        |       |           |   |        | 6,000   | 
|                                   
|CitiPostal, Inc. and Affiliates     |                        | Senior Loan               |                           |                       | 571   |              |  |       |  |              |           |               | 20,569 |                |  |   | 4     |        |  |   | (247   | )      |           |   | 20,326 |        
|                                    | (Business Services)    |                           | Common Stock              |                       |       |              |  |       |  |              |           |               |        | 4,700          |  |   |       | 682    |  |   |        | (32    | )         |   |        | 5,350   | 
|                                   
|Creative Group, Inc.                |                        | Subordinated Debt         |                           |                       | 480   |              |  |       |  |              |           |               | 13,656 |                |  |   | 30    |        |  |   |       |        |           |   | 13,686 |        
|                                    | (Business Services)    |                           | Warrants                  |                       |       |              |  |       |  |              |           |               |        | 1,387          |  |   |       |       |  |   |        | (522   | )         |   |        | 865     | 
|                                   





58



---



##### 



|                                |                       |                           |                           |                       |     |              |  |       |  |              |         |               |        |                |  |   |       |     |  |   |        |      |         |   |        |        | 
|------------------------------- | --------------------- | ------------------------- | ------------------------- | --------------------- | --- | ------------ |  | ----- |  | ------------ | ------- | ------------- | ------ | -------------- |  | - | ----- | --- |  | - | ------ | ---- | ------- | - | ------ | ------ | 
|                                |                       |                           |                           | Amount of Interest or |     |              |  |       |  |              |         |              
|                                |                       |                           |                           | Dividends             |     |              |  |       |  |              |         |              
|PRIVATE FINANCE                 |                       |                           |                           |                       |     | December 31, |  |       |  |              |         |              
|Portfolio Company               |                       |                           |                           | Credited              |     |              |  | 2006  |  | Gross        |         | Gross         |        | March 31, 2007
|(in thousands)                  |                       | Investment(1)             |                           | to Income(6)          |     | Other(2)     |  | Value |  | Additions(3) |         | Reductions(4) |        | Value         
|                               
|Drew Foam Companies, Inc.       |                       | Preferred Stock           |                           |                       |     |              |  |       |  |              |         | $             | 722    |                |  | $ |      |     |  | $ | (34    | )    |         | $ | 688    |       
|                                | (Business Services)   |                           | Common Stock              |                       |     |              |  |       |  |              |         |               |        | 7              |  |   |       |    |  |   |        | (7   | )       |   |        |       | 
|                               
|MedBridge Healthcare, LLC       |                       | Senior
    Loan(5)        |                           |                       |     |              |  |       |  |              |         |               | 7,164  |                |  |   |      |     |  |   |       |      |         |   | 7,164  |       
|                                | (Healthcare Services) |                           | Subordinated Debt
    (5) |                       |     |              |  |       |  |              |         |               |        | 1,813          |  |   |       | 595 |  |   |        |     |         |   |        | 2,408  | 
|                                |                       | Convertible               |                           |                       |     |              |  |       |  |              |         |               |        |                |  |   |       |     |  |   |        |      |         |   |        |       
|                                |                       | Subordinated Debt
    (5) |                           |                       |     |              |  |       |  |              |         |               |       |                |  |   |      |     |  |   |       |      |         |   |       |       
|                                |                       | Equity Interests          |                           |                       |     |              |  |       |  |              |         |               |       |                |  |   | 110   |     |  |   | (110   | )    |         |   |       |       
|                               
|Multi-Ad Services, Inc.         |                       | Unitranche Debt           |                           | $                     | 567 |              |  |       |  |              |         |               | 19,879 |                |  |   | 6     |     |  |   | (100   | )    |         |   | 19,785 |       
|                                | (Business Services)   |                           | Equity Interests          |                       |     |              |  |       |  |              |         |               |        | 2,000          |  |   |       |    |  |   |        | (223 | )       |   |        | 1,777  | 
|                               
|Nexcel Synthetics, LLC          |                       | Subordinated Debt         |                           |                       | 332 |              |  |       |  |              |         |               | 10,978 |                |  |   | 101   |     |  |   | (3,097 | )    |         |   | 7,982  |       
|                                | (Consumer Products)   |                           | Equity Interests          |                       |     |              |  |       |  |              |         |               |        | 1,486          |  |   |       |    |  |   |        | (727 | )       |   |        | 759    | 
|                               
|PresAir LLC                     |                       | Senior
    Loan(5)        |                           |                       |     |              |  |       |  |              |         |               | 2,206  |                |  |   | 256   |     |  |   |       |      |         |   | 2,462  |       
|                                | (Industrial Products) |                           | Equity Interests          |                       |     |              |  |       |  |              |         |               |        |               |  |   |       | 5   |  |   |        | (5   | )       |   |        |       | 
|                               
|Progressive International       |                       |                           |                           |                       |     |              |  |       |  |              |         |               |        |                |  |   |       |     |  |   |        |      |         |   |        |       
|                                | Corporation           |                           | Subordinated Debt         |                       |     | 305          |  |       |  |              |         |               |        | 7,533          |  |   |       | 41  |  |   |        |     |         |   |        | 7,574  | 
|                                | (Consumer Products)   |                           | Preferred Stock           |                       |     |              |  |       |  |              |         |               |        | 1,024          |  |   |       | 22  |  |   |        |     |         |   |        | 1,046  | 
|                                |                       | Common Stock              |                           |                       |     |              |  |       |  |              |         |               | 2,300  |                |  |   | 500   |     |  |   |       |      |         |   | 2,800  |       
|                                |                       | Warrants                  |                           |                       |     |              |  |       |  |              |         |               |       |                |  |   |      |     |  |   |       |      |         |   |       |       
|                               
|Regency Healthcare Group, LLC   |                       | Senior Loan               |                           |                       | 36  |              |  |       |  |              |         |               | 1,232  |                |  |   |      |     |  |   |       |      |         |   | 1,232  |       
|                                | (Healthcare Services) |                           | Unitranche Debt           |                       |     | 560          |  |       |  |              |         |               |        | 19,908         |  |   |       | 5   |  |   |        |     |         |   |        | 19,913 | 
|                                |                       |                           | Equity Interests          |                       |     |              |  |       |  |              |         |               |        | 1,616          |  |   |       | 24  |  |   |        |     |         |   |        | 1,640  | 
|                               
|SGT India Private Limited       |                       | Common Stock              |                           |                       |     |              |  |       |  |              |         |               | 3,346  |                |  |   | 149   |     |  |   | (455   | )    |         |   | 3,040  |       
|                                | (Business Services)   |                           |                           |                       |     |              |  |       |  |              |         |               |        |                |  |   |       |     |  |   |        |      |         |   |        |        | 
|                               
|Soteria Imaging Services, LLC   |                       | Subordinated Debt         |                           |                       | 580 |              |  |       |  |              |         |               | 17,569 |                |  |   | 1,034 |     |  |   |       |      |         |   | 18,603 |       
|                                | (Healthcare Services) |                           | Equity Interests          |                       |     |              |  |       |  |              |         |               |        | 2,541          |  |   |       | 7   |  |   |        | (6   | )       |   |        | 2,542  | 
|                               
|Universal Environmental         |                       |                           |                           |                       |     |              |  |       |  |              |         |               |        |                |  |   |       |     |  |   |        |      |         |   |        |       
|                                | Services, LLC         |                           | Unitranche Debt           |                       |     | 371          |  |       |  |              |         |               |        | 10,211         |  |   |       |    |  |   |        | (552 | )       |   |        | 9,659  | 
|                                | (Business Services)   |                           | Equity Interests          |                       |     |              |  |       |  |              |         |               |        |               |  |   |       | 15  |  |   |        | (15  | )       |   |        |       | 
|                               
|Total companies 5% to 25% owned |                       | $                         | 11,861                    |                       |     |              |  |       |  | $            | 449,813 |               |        |                |  |   |       |     |  |   |        | $    | 457,871 |  
|                               





|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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, 2007.                                                                                                                                                                                             
|   
|(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,
    2007, and is therefore considered non-income producing. Loans or
    debt securities on non-accrual status at the end of the period
    may or may not have been on non-accrual status for the full
    period.                                                                                                                                                                                                                                                   
|   
|(6) | Represents the total amount of interest or dividends credited to
    income for the portion of the year an investment was included in
    the companies more than 25% owned or companies 5% to 25% owned
    categories, respectively.                                                                                                                                                                                                                                                                                            
|   
|(7) | In the first quarter of 2007, the Company exercised its option
    to acquire a majority of the voting securities of Hot Stuff
    Foods, LLC at fair market value. Therefore, Hot Stuff Foods, LLC
    was reclassified to companies more than 25% owned.                                                                                                                                                                                                                                                                        

59



---



##### 








|         |                                                                                          
|-------- | -----------------------------------------------------------------------------------------
|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, 2006. 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 and general economic conditions;                                                            
|
| |  | risks associated with possible disruption in our operations
    due to terrorism;                                  
|
| |  | future changes in laws or regulations and conditions in our
    operating areas; 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, | 
|                               |  |           |     |  |              | 
|                               |  | 2007      |     |  | 2006         |  |     | 2006 | 
|                               |  |           |     |  |              |  |     |      | 
|Private finance                |  |           | 97% |  |              |  | 96% |      |  |  | 97% | 
|Commercial real estate finance |  |           | 3%  |  |              |  | 4%  |      |  |  | 3%  | 



60



---



##### 







PORTFOLIO AND INVESTMENT ACTIVITY




|                                                                    |  |                    |         |   |                |   |         |      |  |   |         |  
|------------------------------------------------------------------- |  | ------------------ | ------- | - | -------------- | - | ------- | ---- |  | - | ------- | -
|                                                                    |  | At and for the     |         |   |               
|                                                                    |  | Three Months Ended |         |   | At and for the |  
|                                                                    |  | March 31,          |         |   | Year Ended     |  
|                                                                    |  |                    |         |   | December 31,   |  
|                                                                    |  | 2007               |         |   | 2006           |   |         | 2006 | 
|($ in millions)                                                     |  |                    |         |   |                |   |         |      | 
|Portfolio at value                                                  |  | $                  | 4,498.8 |   |                | $ | 3,691.0 |      |  | $ | 4,496.1 |  
|Investments funded                                                  |  | $                  | 170.2   |   |                | $ | 797.9   |      |  | $ | 2,437.8 |  
|Change in accrued or reinvested interest and dividends
    (1)      |  | $                  | 11.3    |   |                | $ | (2.1    | )    |  | $ | 11.3    |  
|Principal collections related to investment repayments
    or sales |  | $                  | 235.5   |   |                | $ | 340.4   |      |  | $ | 1,055.3 |  
|Yield on interest-bearing portfolio
    investments(2)              |  |                    | 11.6    | % |                |   | 12.3    | %    |  |   | 11.8    | %




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes changes in accrued or reinvested interest related to
    our investments in money market securities of $2.6 million,
    $1.1 million, and $3.1 million, respectively, for the
    three months ended March 31, 2007 and 2006, and for the
    year ended December 31, 2006.                                                                                                                                                                                                                        
|   
|(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, divided by
    (b) total interest-bearing investments at value. The
    weighted average yield is computed as of the balance sheet date.

61



---



##### 



Private Finance




|                                                                       |                            |                         |                                 |         |                     |                    |  |       |      |      |          |         |         |         |  |  |          |      |         |         |         |         |  |  |      |      |  
|---------------------------------------------------------------------- | -------------------------- | ----------------------- | ------------------------------- | ------- | ------------------- | ------------------ |  | ----- | ---- | ---- | -------- | ------- | ------- | ------- |  |  | -------- | ---- | ------- | ------- | ------- | ------- |  |  | ---- | ---- | -
|                                                                       |                            | At and for Three Months |                                 |         |                     |                    | 
|                                                                       |                            | Ended March 31,         |                                 |         |                    
|                                                                       |                            |                         |                                 |         | At and for the Year |                   
|                                                                       |                            |                         |                                 |         |                     | Ended December 31, | 
|                                                                       |                            | 2007                    |                                 |         | 2006                |                    |  | 2006  |     
|                                                                       |                            |                         |                                 |         |                     |                    |  |       |     
|                                                                       |                            | Value                   |                                 |         | Yield(2)            |                    |  | Value |      |      | Yield(2) |         |         | Value   |  |  | Yield(2) |     
|($ in millions)                                                        |                            |                         |                                 |         |                     |                    |  |       |      |      |          |         |         |         |  |  |          |     
|Portfolio at value:                                                    |                            |                         |                                 |         |                     |                    |  |       |      |      |          |         |         |         |  |  |          |      |         |         |         |         |  | 
|                                                                       | Loans and debt securities: |                         |                                 |         |                     |                    |  |       |      |      |          |         |         |         |  |  |          |      |         |         |         |         |  |  |     
|                                                                       |                            | Senior loans            |                                 | $       | 365.0               |                    |  |       | 8.4  | %    |          | $       | 420.1   |         |  |  | 9.3      | %    |         | $       | 405.2   |         |  |  | 8.4  | %   
|                                                                       |                            | Unitranche debt         |                                 |         | 780.2               |                    |  |       | 11.4 | %    |          |         | 362.7   |         |  |  | 11.1     | %    |         |         | 799.2   |         |  |  | 11.2 | %   
|                                                                       |                            | Subordinated debt       |                                 |         | 1,946.1             |                    |  |       | 12.5 | %    |          |         | 1,747.2 |         |  |  | 13.6     | %    |         |         | 1,980.8 |         |  |  | 12.9 | %   
|                                                                       |                            |                         |                                 |         |                     |                    |  |       |      |      |          |         |         |         |  |  |          |     
|                                                                       |                            |                         | Total loans and debt securities |         |                     | 3,091.3            |  |       |      | 11.7 | %        |         |         | 2,530.0 |  |  |          | 12.5 | %       |         |         | 3,185.2 |  |  |      | 11.9 | %
|                                                                       | Equity securities          |                         |                                 | 1,285.0 |                     |                    |  |       |      |      |          | 1,031.6 |         |         |  |  |          |      |         | 1,192.7 |         |         |  |  |     
|                                                                       |                            |                         |                                 |         |                     |                    |  |       |      |      |          |         |         |         |  |  |          |     
|Total portfolio                                                        |                            | $                       | 4,376.3                         |         |                     |                    |  |       |      | $    | 3,561.6  |         |         |         |  |  |          | $    | 4,377.9 |         |         |         |  | 
|                                                                       |                            |                         |                                 |         |                     |                    |  |       |      |      |          |         |         |         |  |  |          |     
|Investments
    funded(1)                                              |                            | $                       | 170.2                           |         |                     |                    |  |       |      | $    | 795.9    |         |         |         |  |  |          | $    | 2,423.4 |         |         |         |  | 
|Change in accrued or reinvested interest and dividends                 |                            | $                       | 9.1                             |         |                     |                    |  |       |      | $    | (4.2     | )       |         |         |  |  |          | $    | 7.2     |         |         |         |  | 
|Principal collections related to investment repayments or
    sales(3) |                            | $                       | 235.1                           |         |                     |                    |  |       |      | $    | 336.6    |         |         |         |  |  |          | $    | 1,015.4 |         |         |         |  | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Investments funded for the three months ended March 31,
    2006, and for the year ended December 31, 2006, included
    debt investments in certain portfolio companies received in
    conjunction with the sale of such companies. See 
    Private Finance, Investments Funded below.                                                                                                                                                                                                           
|   
|(2) | 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 is computed as of the balance sheet date.
|   
|(3) | Includes collections from the sale or repayment of senior loans
    totaling $94.7 million, $13.2 million, and
    $322.7 million for the three months ended March 31,
    2007 and 2006, and for the year ended December 31, 2006,
    respectively.                                                                                                                                                                                                                                                  





62



---



##### 







63



---



##### 



Investments Funded.


|                                |                        |                                           |      |      |                    |  |     |        |   |  |          |      |  |        |      |      |          |  |       |       |  |  |     |      |  
|------------------------------- | ---------------------- | ----------------------------------------- | ---- | ---- | ------------------ |  | --- | ------ | - |  | -------- | ---- |  | ------ | ---- | ---- | -------- |  | ----- | ----- |  |  | --- | ---- | -
|                                |                        | For the Three Months Ended March 31, 2007 |     
|                                |                        |                                           |     
|                                |                        | Debt Investments                          |      |      | Buyout Investments |  |     | Total  |  
|                                |                        |                                           |      |      |                    |  |     |        |  
|                                |                        | Amount                                    |      |      | Yield(1)           |  |     | Amount |   |  | Yield(1) |      |  | Amount |      |      | Yield(1) | 
|($ in millions)                 |                        |                                           |      |      |                    |  |     |        |   |  |          |      |  |        |      |      |          | 
|Loans and debt securities:      |                        |                                           |      |      |                    |  |     |        |   |  |          |      |  |        |      |      |          |  |       |       |  |  |     |     
|                                | Senior loans           |                                           | $    | 41.2 |                    |  |     | 8.8    | % |  | $        | 12.7 |  |        |      | 10.4 | %        |  | $     | 53.9  |  |  |     | 9.2  | %
|                                | Unitranche
    debt(2) |                                           |      | 5.3  |                    |  |     | 11.0   | % |  |          |     |  |        |      |     |          |  |       | 5.3   |  |  |     | 11.0 | %
|                                | Subordinated debt      |                                           |      | 14.4 |                    |  |     | 9.3    | % |  |          | 62.1 |  |        |      | 10.5 | %        |  |       | 76.5  |  |  |     | 10.3 | %
|                                |                        |                                           |      |      |                    |  |     |        |   |  |          |      |  |        |      |      |          | 
|Total loans and debt securities |                        |                                           | 60.9 |      |                    |  | 9.1 | %      |   |  | 74.8     |      |  |        | 10.5 | %    |          |  | 135.7 |       |  |  | 9.9 | %   
|Equity                          |                        |                                           | 9.7  |      |                    |  |     |        |   |  | 24.8     |      |  |        |      |      |          |  | 34.5  |       |  |  |     |     
|                                |                        |                                           |      |      |                    |  |     |        |   |  |          |      |  |        |      |      |          | 
|                                | Total                  |                                           | $    | 70.6 |                    |  |     |        |   |  | $        | 99.6 |  |        |      |      |          |  | $     | 170.2 |  |  |     |      |  
|                                |                        |                                           |      |      |                    |  |     |        |   |  |          |      |  |        |      |      |          | 

|                                |                          |                                           |       |       |                    |  |      |        |   |  |          |       |  |        |      |      |          |  |       |       |  |  |      |      |  
|------------------------------- | ------------------------ | ----------------------------------------- | ----- | ----- | ------------------ |  | ---- | ------ | - |  | -------- | ----- |  | ------ | ---- | ---- | -------- |  | ----- | ----- |  |  | ---- | ---- | -
|                                |                          | For the Three Months Ended March 31, 2006 |      
|                                |                          |                                           |      
|                                |                          | Debt Investments                          |       |       | Buyout Investments |  |      | Total  |  
|                                |                          |                                           |       |       |                    |  |      |        |  
|                                |                          | Amount                                    |       |       | Yield(1)           |  |      | Amount |   |  | Yield(1) |       |  | Amount |      |      | Yield(1) | 
|($ in millions)                 |                          |                                           |       |       |                    |  |      |        |   |  |          |       |  |        |      |      |          | 
|Loans and debt securities:      |                          |                                           |       |       |                    |  |      |        |   |  |          |       |  |        |      |      |          |  |       |       |  |  |      |     
|                                | Senior loans             |                                           | $     | 85.0  |                    |  |      | 9.1    | % |  | $        | 117.8 |  |        |      | 8.9  | %        |  | $     | 202.8 |  |  |      | 9.0  | %
|                                | Unitranche
    debt(2)   |                                           |       | 75.0  |                    |  |      | 10.6   | % |  |          |      |  |        |      |     |          |  |       | 75.0  |  |  |      | 10.6 | %
|                                | Subordinated
    debt(3) |                                           |       | 279.3 |                    |  |      | 12.5   | % |  |          | 145.4 |  |        |      | 13.9 | %        |  |       | 424.7 |  |  |      | 13.0 | %
|                                |                          |                                           |       |       |                    |  |      |        |   |  |          |       |  |        |      |      |          | 
|Total loans and debt securities |                          |                                           | 439.3 |       |                    |  | 11.5 | %      |   |  | 263.2    |       |  |        | 11.6 | %    |          |  | 702.5 |       |  |  | 11.6 | %   
|Equity                          |                          |                                           | 24.6  |       |                    |  |      |        |   |  | 68.8     |       |  |        |      |      |          |  | 93.4  |       |  |  |      |     
|                                |                          |                                           |       |       |                    |  |      |        |   |  |          |       |  |        |      |      |          | 
|                                | Total                    |                                           | $     | 463.9 |                    |  |      |        |   |  | $        | 332.0 |  |        |      |      |          |  | $     | 795.9 |  |  |      |      |  
|                                |                          |                                           |       |       |                    |  |      |        |   |  |          |       |  |        |      |      |          | 

|                                |                          |                                      |         |         |                    |  |      |        |   |  |          |         |  |        |      |      |          |  |         |         |  |  |      |      |  
|------------------------------- | ------------------------ | ------------------------------------ | ------- | ------- | ------------------ |  | ---- | ------ | - |  | -------- | ------- |  | ------ | ---- | ---- | -------- |  | ------- | ------- |  |  | ---- | ---- | -
|                                |                          | For the Year Ended December 31, 2006 |        
|                                |                          |                                      |        
|                                |                          | Debt Investments                     |         |         | Buyout Investments |  |      | Total  |  
|                                |                          |                                      |         |         |                    |  |      |        |  
|                                |                          | Amount                               |         |         | Yield(1)           |  |      | Amount |   |  | Yield(1) |         |  | Amount |      |      | Yield(1) | 
|($ in millions)                 |                          |                                      |         |         |                    |  |      |        |   |  |          |         |  |        |      |      |          | 
|Loans and debt securities:      |                          |                                      |         |         |                    |  |      |        |   |  |          |         |  |        |      |      |          |  |         |         |  |  |      |     
|                                | Senior loans             |                                      | $       | 245.4   |                    |  |      | 9.4    | % |  | $        | 239.8   |  |        |      | 8.9  | %        |  | $       | 485.2   |  |  |      | 9.2  | %
|                                | Unitranche
    debt(2)   |                                      |         | 471.7   |                    |  |      | 10.7   | % |  |          | 146.5   |  |        |      | 12.9 | %        |  |         | 618.2   |  |  |      | 11.3 | %
|                                | Subordinated
    debt(3) |                                      |         | 510.7   |                    |  |      | 13.0   | % |  |          | 423.8   |  |        |      | 14.4 | %        |  |         | 934.5   |  |  |      | 13.6 | %
|                                |                          |                                      |         |         |                    |  |      |        |   |  |          |         |  |        |      |      |          | 
|Total loans and debt securities |                          |                                      | 1,227.8 |         |                    |  | 11.4 | %      |   |  | 810.1    |         |  |        | 12.5 | %    |          |  | 2,037.9 |         |  |  | 11.9 | %   
|Equity                          |                          |                                      | 91.4    | (4)     |                    |  |      |        |   |  | 294.1    |         |  |        |      |      |          |  | 385.5   |         |  |  |      |     
|                                |                          |                                      |         |         |                    |  |      |        |   |  |          |         |  |        |      |      |          | 
|                                | Total                    |                                      | $       | 1,319.2 |                    |  |      |        |   |  | $        | 1,104.2 |  |        |      |      |          |  | $       | 2,423.4 |  |  |      |      |  
|                                |                          |                                      |         |         |                    |  |      |        |   |  |          |         |  |        |      |      |          | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.                                                                                                                                                                                                                                                     
|   
|(2) | Unitranche debt is a single debt investment that is a blend of
    senior and subordinated debt terms. The yield on a unitranche
    investment reflects the blended yield of senior and subordinated
    debt combined.                                                                                                                                                                                                                                                     
|   
|(3) | Debt investments funded for the three months ended
    March 31, 2006, and for the year ended December 31,
    2006, included a $150 million subordinated debt investment
    in Advantage Sales & Marketing, Inc. received in conjunction
    with the sale of Advantage. Debt investments funded for the year
    ended December 31, 2006, included a $30 million
    subordinated debt investment in STS Operating, Inc. received in
    conjunction with the sale of STS.
|   
|(4) | Equity investments for the year ended December 31, 2006,
    included $26.1 million in investments in the preferred
    shares/income notes of collateralized loan obligations (CLOs)
    that are managed by Callidus Capital Corporation, a portfolio
    company controlled by us. These CLOs primarily invest in senior
    debt.                                                                                                                                        

64



---



##### 









Yield.




65



---



##### 



Outstanding Investment Commitments.


|                  |                                 |              |      |       |           |   |      |           |  |   |       |       |  |   |       |       | 
|----------------- | ------------------------------- | ------------ | ---- | ----- | --------- | - | ---- | --------- |  | - | ----- | ----- |  | - | ----- | ----- | 
|                  |                                 | Companies    |      |       | Companies |   |      | Companies |  |   |      
|                  |                                 | More Than    |      |       | 5% to 25% |   |      | Less Than |  |   |      
|                  |                                 | 25% Owned(1) |      |       | Owned     |   |      | 5% Owned  |  |   | Total |      
|                  |                                 |              |      |       |           |   |      |           |  |   |       |      
|($ in millions)   |                                 |              |      |       |           |   |      |          
|Senior loans      |                                 | $            | 18.7 |       |           | $ | 15.7 |           |  | $ | 90.3  |       |  | $ | 124.7 | (2)  
|Unitranche        |                                 |              |     |       |           |   |     |           |  |   | 60.2  |       |  |   | 60.2  |      
|Subordinated debt |                                 |              | 44.2 |       |           |   | 0.1  |           |  |   |      |       |  |   | 44.3  |      
|                  |                                 |              |      |       |           |   |      |           |  |   |       |      
|                  | Total loans and debt securities |              |      | 62.9  |           |   |      | 15.8      |  |   |       | 150.5 |  |   |       | 229.2 | 
|Equity securities |                                 |              | 83.0 |       |           |   | 16.0 |           |  |   | 73.7  |       |  |   | 172.7 | (3)  
|                  |                                 |              |      |       |           |   |      |           |  |   |       |      
|                  | Total                           |              | $    | 145.9 |           |   | $    | 31.8      |  |   | $     | 224.2 |  |   | $     | 401.9 | 
|                  |                                 |              |      |       |           |   |      |           |  |   |       |      

| | 
| | 
| | 

| |     |                                                                                                                                                                                                                                                                                                                                                                                                
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Includes various commitments to Callidus Capital Corporation
    (Callidus), a portfolio company controlled by us, which owns 80%
    (subject to dilution) of Callidus Capital Management, LLC, an
    asset management company that structures and manages
    collateralized debt obligations (CDOs), collateralized loan
    obligations (CLOs), and other related investments, as follows:

|                                                                                      |       |           |      |       |        |        |      |             |   |   |      |       | 
|------------------------------------------------------------------------------------- | ----- | --------- | ---- | ----- | ------ | ------ | ---- | ----------- | - | - | ---- | ----- | 
|                                                                                      |       |           |      |       |        | Amount |     
|                                                                                      |       | Committed |      |       | Amount |        |      | Available   |  
|                                                                                      |       | Amount    |      |       | Drawn  |        |      | to be Drawn |  
|                                                                                      |       |           |      |       |        |        |      |             |  
|($ in millions)                                                                       |       |           |      |       |        |       
|Revolving line of credit for working capital                                          |       | $         | 4.0  |       |        | $      | (1.1 | )           |   | $ | 2.9  |      
|Subordinated debt to support warehouse facilities &
    warehousing
    activities(*) |       |           | 44.0 |       |        |        |     |             |   |   | 44.0 |      
|Purchase of preferred equity in future CLO transactions                               |       |           | 73.2 |       |        |        |     |             |   |   | 73.2 |      
|                                                                                      |       |           |      |       |        |        |      |             |  
|                                                                                      | Total |           | $    | 121.2 |        |        | $    | (1.1        | ) |   | $    | 120.1 | 
|                                                                                      |       |           |      |       |        |        |      |             |  

| | 
| | 
| | 

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (*) | Callidus has a secured warehouse credit facility with a third
    party for up to $360 million. The facility is used
    primarily to finance the acquisition of loans pending
    securitization through a CDO or CLO. In addition, Callidus has a
    synthetic credit facility with a third party for up to
    $50 million. In conjunction with these facilities, we have
    agreed to designate our subordinated debt commitment for
    Callidus to draw upon to provide first loss capital as needed to
    support the facilities.



| |     |                                                                                                                                                                   
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) | Includes $105.6 million in the form of revolving senior
    debt facilities to 29 companies.                                                                      
|
| | (3) | Includes $89.8 million to 19 private equity and
    venture capital funds, including $4.3 million in
    co-investment
    commitments to one private equity fund.



Mercury Air Centers, Inc.




66



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##### 





|                      |                                             |      |     |     |      |   |     |     | 
|--------------------- | ------------------------------------------- | ---- | --- | --- | ---- | - | --- | --- | 
|                      |                                             | 2007 |     |     | 2006 |  
|($ in millions)       |                                             |      |     |     |      |  
|Interest income       |                                             | $    | 2.0 |     |      | $ | 2.9 |    
|Fees and other income |                                             |      | 0.1 |     |      |   | 0.2 |    
|                      |                                             |      |     |     |      |  
|                      | Total interest and related portfolio income |      | $   | 2.1 |      |   | $   | 3.1 | 
|                      |                                             |      |     |     |      |  







Business Loan Express,
LLC.






|                                                                      |                                             |      |     |     |      |   |     |     | 
|--------------------------------------------------------------------- | ------------------------------------------- | ---- | --- | --- | ---- | - | --- | --- | 
|                                                                      |                                             | 2007 |     |     | 2006 |  
|($ in millions)                                                       |                                             |      |     |     |      |  
|Interest income on subordinated debt and Class A equity
    interests |                                             | $    |    |     |      | $ | 3.9 |    
|Fees and other income                                                 |                                             |      | 1.4 |     |      |   | 2.2 |    
|                                                                      |                                             |      |     |     |      |  
|                                                                      | Total interest and related portfolio income |      | $   | 1.4 |      |   | $   | 6.1 | 
|                                                                      |                                             |      |     |     |      |  



67



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##### 







2:06-CR-20662






68



---



##### 













Advantage Sales & Marketing,
Inc.




69



---



##### 















70



---



##### 



Commercial Real Estate Finance




|                                                                |                           |                              |       |      |                |              |  |       |  |   |          |       |  |       |  |      |          |   |       |      |  |  |  |      | 
|--------------------------------------------------------------- | ------------------------- | ---------------------------- | ----- | ---- | -------------- | ------------ |  | ----- |  | - | -------- | ----- |  | ----- |  | ---- | -------- | - | ----- | ---- |  |  |  | ---- | 
|                                                                |                           | At and for the               |       |      |               
|                                                                |                           | Three Months Ended March 31, |       |      | At and for the |             
|                                                                |                           |                              |       |      | Year Ended     |             
|                                                                |                           |                              |       |      |                | December 31, | 
|                                                                |                           | 2007                         |       |      | 2006           |              |  | 2006  | 
|                                                                |                           |                              |       |      |                |              |  |       | 
|                                                                |                           | Value                        |       |      | Yield(1)       |              |  | Value |  |   | Yield(1) |       |  | Value |  |      | Yield(1) |  
|($ in millions)                                                 |                           |                              |       |      |                |              |  |       |  |   |          |       |  |       |  |      |          |  
|Portfolio at value:                                             |                           |                              |       |      |                |              |  |       |  |   |          |       |  |       |  |      |          |   |       |      |  |  |  |     
|                                                                | Commercial mortgage loans |                              | $     | 72.2 |                |              |  | 7.5%  |  |   | $        | 102.7 |  |       |  | 7.6% |          |   | $     | 71.9 |  |  |  | 7.5% | 
|                                                                | Real estate owned         |                              |       | 21.0 |                |              |  |       |  |   |          | 15.0  |  |       |  |      |          |   |       | 19.6 |  |  |  |      | 
|                                                                | Equity interests          |                              |       | 29.3 |                |              |  |       |  |   |          | 11.7  |  |       |  |      |          |   |       | 26.7 |  |  |  |      | 
|                                                                |                           |                              |       |      |                |              |  |       |  |   |          |       |  |       |  |      |          |  
|Total portfolio                                                 |                           | $                            | 122.5 |      |                |              |  |       |  | $ | 129.4    |       |  |       |  |      |          | $ | 118.2 |      |  |  |  |     
|                                                                |                           |                              |       |      |                |              |  |       |  |   |          |       |  |       |  |      |          |  
|Investments funded                                              |                           | $                            |      |      |                |              |  |       |  | $ | 2.0      |       |  |       |  |      |          | $ | 14.4  |      |  |  |  |     
|Change in accrued or reinvested interest                        |                           | $                            | (0.4  | )    |                |              |  |       |  | $ | 1.0      |       |  |       |  |      |          | $ | 1.0   |      |  |  |  |     
|Principal collections related to investment repayments or sales |                           | $                            | 0.4   |      |                |              |  |       |  | $ | 3.8      |       |  |       |  |      |          | $ | 39.9  |      |  |  |  |     






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.



Sale of CMBS Bonds and Collateralized Debt Obligation
Bonds and Preferred Shares.


71



---



##### 



PORTFOLIO ASSET QUALITY


Portfolio by Grade.




|                |  |           |         |  |                 |  |       |           |  |   |                 |  |  |  |       |  
|--------------- |  | --------- | ------- |  | --------------- |  | ----- | --------- |  | - | --------------- |  |  |  | ----- | -
|                |  | 2007      |         |  | 2006            | 
|                |  |           |         |  |                 | 
|                |  | Portfolio |         |  | Percentage of   |  |       | Portfolio |  |   | Percentage of   | 
|Grade           |  | at Value  |         |  | Total Portfolio |  |       | at Value  |  |   | Total Portfolio | 
|                |  |           |         |  |                 |  |       |           |  |   |                 | 
|($ in millions) |  |           |         |  |                 |  |       |          
|1               |  | $         | 1,468.8 |  |                 |  | 32.6  | %         |  | $ | 1,307.3         |  |  |  | 29.1  | %
|2               |  |           | 2,457.6 |  |                 |  | 54.6  |           |  |   | 2,672.3         |  |  |  | 59.4  |  
|3               |  |           | 339.7   |  |                 |  | 7.6   |           |  |   | 308.1           |  |  |  | 6.9   |  
|4               |  |           | 99.3    |  |                 |  | 2.2   |           |  |   | 84.2            |  |  |  | 1.9   |  
|5               |  |           | 133.4   |  |                 |  | 3.0   |           |  |   | 124.2           |  |  |  | 2.7   |  
|                |  |           |         |  |                 |  |       |           |  |   |                 | 
|                |  | $         | 4,498.8 |  |                 |  | 100.0 | %         |  | $ | 4,496.1         |  |  |  | 100.0 | %
|                |  |           |         |  |                 |  |       |           |  |   |                 | 







72



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##### 



Loans and Debt Securities on Non-Accrual Status.


|                                                                                    |                                |                               |  |      |       |   |  |      |       |  
|----------------------------------------------------------------------------------- | ------------------------------ | ----------------------------- |  | ---- | ----- | - |  | ---- | ----- | -
|                                                                                    |                                | 2007                          |  |      | 2006  |  
|($ in millions)                                                                     |                                |                               |  |      |       |  
|Loans and debt securities in workout status (classified as
    Grade 4 or
    5)(1) |                                |                               |  |      |       |   |  |     
|                                                                                    | Private finance                |                               |  |      |       |   |  |      |      
|                                                                                    |                                | Companies more than 25% owned |  | $    | 45.5  |   |  | $    | 51.1  |  
|                                                                                    |                                | Companies 5% to 25% owned     |  |      | 4.9   |   |  |      | 4.0   |  
|                                                                                    |                                | Companies less than 5% owned  |  |      | 61.0  |   |  |      | 31.6  |  
|                                                                                    | Commercial real estate finance |                               |  | 4.9  |       |   |  | 12.2 |      
|Loans and debt securities not in workout status                                     |                                |                               |  |      |       |   |  |     
|                                                                                    | Private finance                |                               |  |      |       |   |  |      |      
|                                                                                    |                                | Companies more than 25% owned |  |      | 121.2 |   |  |      | 87.1  |  
|                                                                                    |                                | Companies 5% to 25% owned     |  |      | 7.2   |   |  |      | 7.2   |  
|                                                                                    |                                | Companies less than 5% owned  |  |      | 26.9  |   |  |      | 38.9  |  
|                                                                                    | Commercial real estate finance |                               |  | 14.3 |       |   |  | 6.7  |      
|                                                                                    |                                |                               |  |      |       |  
|                                                                                    |                                | Total                         |  | $    | 285.9 |   |  | $    | 238.8 |  
|                                                                                    |                                |                               |  |      |       |  
|                                                                                    |                                | Percentage of total portfolio |  |      | 6.4   | % |  |      | 5.3   | %






|    |                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------
|(1) | Workout loans and debt securities exclude equity securities that
    are included in the total Grade 4 and 5 assets above.

non-accruals.


Loans and Debt Securities Over 90 Days Delinquent.


|                          |                               |      |       |       |      |   |      |      |  
|------------------------- | ----------------------------- | ---- | ----- | ----- | ---- | - | ---- | ---- | -
|                          |                               | 2007 |       |       | 2006 |  
|                          |                               |      |       |       |      |  
|($ in millions)           |                               |      |       |      
|Private finance           |                               | $    | 161.4 |       |      | $ | 46.5 |     
|Commercial mortgage loans |                               |      | 17.9  |       |      |   | 1.9  |     
|                          |                               |      |       |       |      |  
|                          | Total                         |      | $     | 179.3 |      |   | $    | 48.4 |  
|                          |                               |      |       |       |      |  
|                          | Percentage of total portfolio |      |       | 4.0   | %    |   |      | 1.1  | %

non-accrual


and


73



---



##### 



PORTFOLIO RETURNS




OTHER ASSETS AND OTHER LIABILITIES






74



---



##### 



RESULTS OF OPERATIONS


Comparison of the Three Months Ended March 31, 2007 and
2006




|                                                     |                                                       |                                             |         |         |         |   |         |          |         |   |        |          |         |   |    |      |     |   
|---------------------------------------------------- | ----------------------------------------------------- | ------------------------------------------- | ------- | ------- | ------- | - | ------- | -------- | ------- | - | ------ | -------- | ------- | - | -- | ---- | --- | --
|                                                     |                                                       | For the Three Months                        |         |         |         |   |        
|                                                     |                                                       | Ended March 31,                             |         |         |         |   |        
|                                                     |                                                       |                                             |         |         |         |   | Percent |         
|                                                     |                                                       | 2007                                        |         |         | 2006    |   |         | Change   |         |   | Change |         
|(in thousands, except per share amounts)             |                                                       |                                             |         |         |         |   |         |          |         |   |        |         
|                                                     |                                                       | (unaudited)                                 |         |         |         |   |        
|Interest and Related Portfolio Income                |                                                       |                                             |         |         |         |   |         |          |         |   |        |          |         |   |    |     
|                                                     | Interest and dividends                                |                                             | $       | 101,983 |         |   | $       | 88,881   |         |   | $      | 13,102   |         |   |    | 15   | %  
|                                                     | Fees and other income                                 |                                             |         | 5,969   |         |   |         | 22,130   |         |   |        | (16,161  | )       |   |    | (73  | )% 
|                                                     |                                                       |                                             |         |         |         |   |         |          |         |   |        |         
|                                                     |                                                       | Total interest and related portfolio income |         |         | 107,952 |   |         |          | 111,011 |   |        |          | (3,059  | ) |    |      | (3  | )%
|                                                     |                                                       |                                             |         |         |         |   |         |          |         |   |        |         
|Expenses                                             |                                                       |                                             |         |         |         |   |         |          |         |   |        |          |         |   |    |     
|                                                     | Interest                                              |                                             |         | 30,288  |         |   |         | 24,485   |         |   |        | 5,803    |         |   |    | 24   | %  
|                                                     | Employee                                              |                                             |         | 21,928  |         |   |         | 21,428   |         |   |        | 500      |         |   |    | 2    | %  
|                                                     | Employee stock options                                |                                             |         | 3,661   |         |   |         | 3,606    |         |   |        | 55       |         |   |    | 2    | %  
|                                                     | Administrative                                        |                                             |         | 13,224  |         |   |         | 11,334   |         |   |        | 1,890    |         |   |    | 17   | %  
|                                                     |                                                       |                                             |         |         |         |   |         |          |         |   |        |         
|                                                     |                                                       | Total operating expenses                    |         |         | 69,101  |   |         |          | 60,853  |   |        |          | 8,248   |   |    |      | 14  | % 
|                                                     |                                                       |                                             |         |         |         |   |         |          |         |   |        |         
|                                                     |                                                       | Net investment income before income taxes   |         |         | 38,851  |   |         |          | 50,158  |   |        |          | (11,307 | ) |    |      | (23 | )%
|                                                     | Income tax expense (benefit), including excise tax    |                                             |         | (649    | )       |   |         | 8,858    |         |   |        | (9,507   | )       |   |    | (107 | )% 
|                                                     |                                                       |                                             |         |         |         |   |         |          |         |   |        |         
|                                                     |                                                       | Net investment income                       |         |         | 39,500  |   |         |          | 41,300  |   |        |          | (1,800  | ) |    |      | (4  | )%
|                                                     |                                                       |                                             |         |         |         |   |         |          |         |   |        |         
|Net Realized and Unrealized Gains (Losses)           |                                                       |                                             |         |         |         |   |         |          |         |   |        |          |         |   |    |     
|                                                     | Net realized gains                                    |                                             |         | 27,666  |         |   |         | 432,835  |         |   |        | (405,169 | )       |   |    | *    |    
|                                                     | Net change in unrealized appreciation or depreciation |                                             |         | 65,920  |         |   |         | (374,548 | )       |   |        | 440,468  |         |   |    | *    |    
|                                                     |                                                       |                                             |         |         |         |   |         |          |         |   |        |         
|                                                     | Total net gains (losses)                              |                                             |         | 93,586  |         |   |         | 58,287   |         |   |        | 35,299   |         |   |    | *    |    
|                                                     |                                                       |                                             |         |         |         |   |         |          |         |   |        |         
|                                                     |                                                       | Net income                                  |         | $       | 133,086 |   |         | $        | 99,587  |   |        | $        | 33,499  |   |    |      | 34  | % 
|                                                     |                                                       |                                             |         |         |         |   |         |          |         |   |        |         
|Diluted earnings per common share                    |                                                       | $                                           | 0.87    |         |         | $ | 0.70    |          |         | $ | 0.17   |          |         |   | 24 | %   
|                                                     |                                                       |                                             |         |         |         |   |         |          |         |   |        |         
|Weighted average common shares outstanding  diluted |                                                       |                                             | 152,827 |         |         |   | 141,738 |          |         |   | 11,089 |          |         |   | 8  | %   






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

75



---



##### 



Total Interest and Related Portfolio Income.


Interest and Dividends.


|                |                                                              |                              |     |      |       |  |     |      |      | 
|--------------- | ------------------------------------------------------------ | ---------------------------- | --- | ---- | ----- |  | --- | ---- | ---- | 
|                |                                                              | 2007                         |     |      | 2006  | 
|($ in millions) |                                                              |                              |     |      |       | 
|Interest        |                                                              |                              |     |      |       |  |     |     
|                | Private finance loans and debt securities                    |                              | $   | 96.6 |       |  | $   | 82.6 |     
|                | Commercial mortgage loans                                    |                              |     | 1.3  |       |  |     | 2.8  |     
|                | Cash, U.S. Treasury bills, money market and other securities |                              |     | 2.8  |       |  |     | 2.9  |     
|                |                                                              |                              |     |      |       | 
|                |                                                              | Total interest               |     |      | 100.7 |  |     |      | 88.3 | 
|Dividends       |                                                              |                              | 1.3 |      |       |  | 0.6 |     
|                |                                                              |                              |     |      |       | 
|                |                                                              | Total interest and dividends |     | $    | 102.0 |  |     | $    | 88.9 | 
|                |                                                              |                              |     |      |       | 



|                                          |       |       |         |         |          |  |      |       |   |   |          |         |  |  |      |      |  
|----------------------------------------- | ----- | ----- | ------- | ------- | -------- |  | ---- | ----- | - | - | -------- | ------- |  |  | ---- | ---- | -
|                                          |       | 2007  |         |         | 2006     | 
|                                          |       |       |         |         |          | 
|($ in millions)                           |       | Value |         |         | Yield(1) |  |      | Value |   |   | Yield(1) |        
|                                          |       |       |         |         |          |  |      |       |   |   |          |        
|Private finance loans and debt securities |       | $     | 3,091.3 |         |          |  | 11.7 | %     |   | $ | 2,530.0  |         |  |  | 12.5 | %   
|Commercial mortgage loans                 |       |       | 72.2    |         |          |  | 7.5  | %     |   |   | 102.7    |         |  |  | 7.6  | %   
|                                          |       |       |         |         |          |  |      |       |   |   |          |        
|                                          | Total |       | $       | 3,163.5 |          |  |      | 11.6  | % |   | $        | 2,632.7 |  |  |      | 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 loans and debt securities at value. The weighted
    average yield is computed as of the balance sheet date.







Fees and Other Income.


76



---



##### 







|                                                                                 |                             |      |     |     |      |   |      |      | 
|-------------------------------------------------------------------------------- | --------------------------- | ---- | --- | --- | ---- | - | ---- | ---- | 
|                                                                                 |                             | 2007 |     |     | 2006 |  
|($ in millions)                                                                  |                             |      |     |     |      |  
|Structuring and diligence                                                        |                             | $    | 1.8 |     |      | $ | 11.0 |     
|Management, consulting and other services provided to portfolio
    companies(1) |                             |      | 1.8 |     |      |   | 4.1  |     
|Commitment, guaranty and other fees from portfolio
    companies(2)              |                             |      | 2.0 |     |      |   | 1.7  |     
|Loan prepayment premiums                                                         |                             |      | 0.3 |     |      |   | 5.3  |     
|Other income                                                                     |                             |      | 0.1 |     |      |   |     |     
|                                                                                 |                             |      |     |     |      |  
|                                                                                 | Total fees and other income |      | $   | 6.0 |      |   | $    | 22.1 | 
|                                                                                 |                             |      |     |     |      |  






|    |                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | 2006 includes $1.8 million in management fees from
    Advantage prior to its sale on March 29, 2006. See
     Portfolio and Investment Activity above
    for further discussion.
|   
|(2) | Includes guaranty and other fees from BLX of $1.4 million
    and $1.6 million for 2007 and 2006, respectively. See
     Private Finance, Business Loan Express, LLC
    above.   







Mercury and BLX.




|                |  |      |     |  |      |   |     | 
|--------------- |  | ---- | --- |  | ---- | - | --- | 
|                |  | 2007 |     |  | 2006 |  
|($ in millions) |  |      |     |  |      |  
|Mercury         |  | $    | 2.1 |  |      | $ | 3.1 | 
|BLX             |  | $    | 1.4 |  |      | $ | 6.1 | 



Operating Expenses.


77



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##### 



Interest Expense.


|                             |  |      |         |   |      |   |         |  
|---------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                             |  | 2007 |         |   | 2006 |  
|($ in millions)              |  |      |         |   |      |  
|Total outstanding debt       |  | $    | 1,891.5 |   |      | $ | 1,274.2 |  
|Average outstanding debt     |  | $    | 1,841.2 |   |      | $ | 1,491.5 |  
|Weighted average
    cost(1) |  |      | 6.5     | % |      |   | 6.5     | %




|    |                                                                                                                                                                                                                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.


|                                     |                        |      |      |      |      |   |      |      | 
|------------------------------------ | ---------------------- | ---- | ---- | ---- | ---- | - | ---- | ---- | 
|                                     |                        | 2007 |      |      | 2006 |  
|($ in millions)                      |                        |      |      |      |      |  
|Salaries and employee benefits       |                        | $    | 21.4 |      |      | $ | 17.3 |     
|Individual performance award (IPA)   |                        |      | 2.5  |      |      |   | 1.7  |     
|IPA mark to market expense (benefit) |                        |      | (4.0 | )    |      |   | 1.0  |     
|Individual performance bonus (IPB)   |                        |      | 2.0  |      |      |   | 1.4  |     
|                                     |                        |      |      |      |      |  
|                                     | Total employee expense |      | $    | 21.9 |      |   | $    | 21.4 | 
|                                     |                        |      |      |      |      |  
|Number of employees at end of period |                        |      | 170  |      |      |   | 155  |     







78



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##### 









Stock Options Expense.


|                               |                                                            |                                     |   |     |      |  |   |     |     | 
|------------------------------ | ---------------------------------------------------------- | ----------------------------------- | - | --- | ---- |  | - | --- | --- | 
|                               |                                                            | 2007                                |   |     | 2006 | 
|($ in millions)                |                                                            |                                     |   |     |      | 
|Employee Stock Option Expense: |                                                            |                                     |   |     |      |  |   |    
|                               | Previously awarded, unvested options as of January 1, 2006 |                                     | $ | 3.2 |      |  | $ | 3.4 |    
|                               | Options granted on or after January 1, 2006                |                                     |   | 0.5 |      |  |   | 0.2 |    
|                               |                                                            |                                     |   |     |      | 
|                               |                                                            | Total employee stock option expense |   | $   | 3.7  |  |   | $   | 3.6 | 
|                               |                                                            |                                     |   |     |      | 

79



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##### 





Administrative Expense.


|                            |                               |      |     |      |      |   |     |      | 
|--------------------------- | ----------------------------- | ---- | --- | ---- | ---- | - | --- | ---- | 
|                            |                               | 2007 |     |      | 2006 |  
|($ in millions)             |                               |      |     |      |      |  
|Administrative expenses     |                               | $    | 9.9 |      |      | $ | 8.4 |     
|Investigation related costs |                               |      | 3.3 |      |      |   | 2.9 |     
|                            |                               |      |     |      |      |  
|                            | Total administrative expenses |      | $   | 13.2 |      |   | $   | 11.3 | 
|                            |                               |      |     |      |      |  





Income Tax Expense (Benefit), Including Excise
Tax.


|                             |                                                    |      |      |      |      |   |     |     | 
|---------------------------- | -------------------------------------------------- | ---- | ---- | ---- | ---- | - | --- | --- | 
|                             |                                                    | 2007 |      |      | 2006 |  
|($ in millions)              |                                                    |      |      |      |      |  
|Income tax expense (benefit) |                                                    | $    | (4.2 | )    |      | $ | 0.5 |    
|Excise tax expense           |                                                    |      | 3.6  |      |      |   | 8.4 |    
|                             |                                                    |      |      |      |      |  
|                             | Income tax expense (benefit), including excise tax |      | $    | (0.6 | )    |   | $   | 8.9 | 
|                             |                                                    |      |      |      |      |  





80



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##### 



Accounting for Uncertainty in Income Taxes Accounting for
Income Taxes.


Realized Gains and Losses.


|                   |  |      |      |   |      |   |       |  
|------------------ |  | ---- | ---- | - | ---- | - | ----- | -
|                   |  | 2007 |      |   | 2006 |  
|($ in millions)    |  |      |      |   |      |  
|Realized gains     |  | $    | 33.2 |   |      | $ | 436.5 |  
|Realized losses    |  |      | (5.5 | ) |      |   | (3.7  | )
|                   |  |      |      |   |      |  
|Net realized gains |  | $    | 27.7 |   |      | $ | 432.8 |  
|                   |  |      |      |   |      |  



|                                                                                                |                |      |       |       |      |   |        |        |  
|----------------------------------------------------------------------------------------------- | -------------- | ---- | ----- | ----- | ---- | - | ------ | ------ | -
|($ in millions)                                                                                 |                | 2007 |       |       | 2006 |  
|                                                                                                |                |      |       |       |      |  
|Reversal of previously recorded net unrealized appreciation
    associated with realized gains  |                | $    | (32.1 | )     |      | $ | (393.6 | )     
|Reversal of previously recorded net unrealized depreciation
    associated with realized losses |                |      | 5.8   |       |      |   | 2.7    |       
|                                                                                                |                |      |       |       |      |  
|                                                                                                | Total reversal |      | $     | (26.3 | )    |   | $      | (390.9 | )
|                                                                                                |                |      |       |       |      |  



($ in millions)


|                              |  |        |      | 
|----------------------------- |  | ------ | ---- | 
|2007                          | 
|                              | 
|Portfolio Company             |  | Amount |     
|                              |  |        |     
|Private Finance:              |  |        |      | 
|Palm Coast Data, LLC          |  | $      | 20.0 | 
|Mogas Energy, LLC             |  |        | 4.5  | 
|Tradesmen International, Inc. |  |        | 3.8  | 
|ForeSite Towers, LLC          |  |        | 3.8  | 
|Other                         |  |        | 1.1  | 
|                              |  |        |     
|Total realized gains          |  | $      | 33.2 | 
|                              |  |        |     

|                                    |                              |        |       |       | 
|----------------------------------- | ---------------------------- | ------ | ----- | ----- | 
|2006                                |                             
|                                    |                             
|Portfolio Company                   |                              | Amount |      
|                                    |                              |        |      
|Private Finance:                    |                              |        |       |      
|Advantage Sales & Marketing, Inc.   |                              | $      | 433.1 |      
|Nobel Learning Communications, Inc. |                              |        | 1.5   |      
|The Debt Exchange, Inc.             |                              |        | 1.1   |      
|Other                               |                              |        | 0.2   |      
|                                    |                              |        |      
|                                    | Total private finance        |        |       | 435.9 | 
|                                    |                              |        |      
|Commercial Real Estate:             |                              |        |       |      
|Other                               |                              |        | 0.6   |      
|                                    |                              |        |      
|                                    | Total commercial real estate |        |       | 0.6   | 
|                                    |                              |        |      
|Total realized gains                |                              | $      | 436.5 |      
|                                    |                              |        |      

81



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($ in millions)


|                           |  |        |      |  
|-------------------------- |  | ------ | ---- | -
|2007                       | 
|                           | 
|Portfolio Company          |  | Amount |     
|                           |  |        |     
|Private Finance:           |  |        |      |  
|Legacy Partners Group, LLC |  | $      | 5.8  |  
|Other                      |  |        | (0.3 | )
|                           |  |        |     
|Total realized losses      |  | $      | 5.5  |  
|                           |  |        |     

|                                 |                              |        |     |     | 
|-------------------------------- | ---------------------------- | ------ | --- | --- | 
|2006                             |                             
|                                 |                             
|Portfolio Company                |                              | Amount |    
|                                 |                              |        |    
|Private Finance:                 |                              |        |     |    
|Aspen Pet Products, Inc.         |                              | $      | 1.5 |    
|Nobel Learning Communities, Inc. |                              |        | 1.4 |    
|Other                            |                              |        | 0.5 |    
|                                 |                              |        |    
|                                 | Total private finance        |        |     | 3.4 | 
|                                 |                              |        |    
|Commercial Real Estate:          |                              |        |     |    
|Other                            |                              |        | 0.3 |    
|                                 |                              |        |    
|                                 | Total commercial real estate |        |     | 0.3 | 
|                                 |                              |        |    
|Total realized losses            |                              | $      | 3.7 |    
|                                 |                              |        |    

Change in Unrealized Appreciation or Depreciation.






82



---



##### 



Valuation Methodology  Private Finance.










83



---



##### 











|                                                          |  |      |      |   |      |  |      |  
|--------------------------------------------------------- |  | ---- | ---- | - | ---- |  | ---- | -
|                                                          |  | 2007 |      |   | 2006 | 
|                                                          |  |      |      |   |      | 
|                                                          |  | Q1   |      |   | Q1   | 
|                                                          |  |      |      |   |      | 
|Number of private finance portfolio companies reviewed    |  |      | 88   |   |      |  | 78   |  
|Percentage of private finance portfolio reviewed at value |  |      | 91.8 | % |      |  | 87.0 | %



Net Change in Unrealized Appreciation or Depreciation.


|                                                                                            |                                                       |         |       |      |         |   |        |        |  
|------------------------------------------------------------------------------------------- | ----------------------------------------------------- | ------- | ----- | ---- | ------- | - | ------ | ------ | -
|                                                                                            |                                                       | 2007(1) |       |      | 2006(1) |  
|($ in millions)                                                                             |                                                       |         |       |      |         |  
|Net unrealized appreciation (depreciation)                                                  |                                                       | $       | 92.2  |      |         | $ | 16.4   |       
|Reversal of previously recorded unrealized appreciation
    associated with realized gains  |                                                       |         | (32.1 | )    |         |   | (393.6 | )     
|Reversal of previously recorded unrealized depreciation
    associated with realized losses |                                                       |         | 5.8   |      |         |   | 2.7    |       
|                                                                                            |                                                       |         |       |      |         |  
|                                                                                            | Net change in unrealized appreciation or depreciation |         | $     | 65.9 |         |   | $      | (374.5 | )
|                                                                                            |                                                       |         |       |      |         |  




|    |                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The net change in unrealized appreciation or depreciation can
    fluctuate significantly from period to period. As a result,
    quarterly comparisons may not be meaningful.

Valuation of Mercury Air Centers, Inc.


84



---



##### 





Valuation of Business Loan Express, LLC.






Per Share Amounts.


OTHER MATTERS


Regulated Investment Company Status.




85



---



##### 









DIVIDENDS AND DISTRIBUTIONS










86



---



##### 













87



---



##### 



FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES




|                                                                                                                         |  |      |         |   |      |   |         |  
|------------------------------------------------------------------------------------------------------------------------ |  | ---- | ------- | - | ---- | - | ------- | -
|($ in millions)                                                                                                          |  | 2007 |         |   | 2006 |  
|                                                                                                                         |  |      |         |   |      |  
|Liquidity portfolio (includes money market and other securities)                                                         |  | $    | 205.0   |   |      | $ | 201.8   |  
|Cash and investments in money market securities (including money
    market and other securities: 2007-$66.2; 2006-$0.4) |  | $    | 66.5    |   |      | $ | 2.1     |  
|Total assets                                                                                                             |  | $    | 4,986.1 |   |      | $ | 4,887.5 |  
|Total debt outstanding                                                                                                   |  | $    | 1,891.5 |   |      | $ | 1,899.1 |  
|Total shareholders equity                                                                                               |  | $    | 2,978.3 |   |      | $ | 2,841.2 |  
|Debt to equity
    ratio(1)                                                                                              |  |      | 0.64    |   |      |   | 0.67    |  
|Asset coverage
    ratio(2)                                                                                              |  |      | 257     | % |      |   | 250     | %






|    |                                                                                                                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The debt to equity ratio adjusted for the liquidity portfolio
    was 0.57 and 0.60 at March 31, 2007, and December 31,
    2006, respectively, which is calculated as (a) total debt
    less the value of the liquidity portfolio divided by
    (b) total shareholders equity.
|   
|(2) | As a business development company, we are generally required to
    maintain a minimum ratio of 200% of total assets to total
    borrowings.                                                                                                                                     



|                                                    |                                                                        |      |       |       |      |   |       |       | 
|--------------------------------------------------- | ---------------------------------------------------------------------- | ---- | ----- | ----- | ---- | - | ----- | ----- | 
|                                                    |                                                                        | 2007 |       |       | 2006 |  
|($ in millions)                                     |                                                                        |      |       |       |      |  
|Net cash provided by (used in) operating activities |                                                                        | $    | 19.4  |       |      | $ | (17.7 | )    
|Add: portfolio investments funded                   |                                                                        |      | 170.2 |       |      |   | 647.9 |      
|                                                    |                                                                        |      |       |       |      |  
|                                                    | Total cash provided by operating activities before new
    investments |      | $     | 189.6 |      |   | $     | 630.2 | 
|                                                    |                                                                        |      |       |       |      |  





|                              |       |       |       |       |       |  |     |       |   |   |       |       |  |  |     |     |  
|----------------------------- | ----- | ----- | ----- | ----- | ----- |  | --- | ----- | - | - | ----- | ----- |  |  | --- | --- | -
|                              |       | 2007  |       |       | 2006  | 
|                              |       |       |       |       |       | 
|                              |       | Value |       |       | Yield |  |     | Value |   |   | Yield |      
|($ in millions)               |       |       |       |       |       |  |     |       |   |   |       |      
|Money market securities       |       | $     | 163.8 |       |       |  | 5.3 | %     |   | $ | 161.2 |       |  |  | 5.3 | %  
|Certificate of
    Deposit(1) |       |       | 41.2  |       |       |  | 5.5 | %     |   |   | 40.6  |       |  |  | 5.6 | %  
|                              |       |       |       |       |       |  |     |       |   |   |       |      
|                              | Total |       | $     | 205.0 |       |  |     | 5.3   | % |   | $     | 201.8 |  |  |     | 5.3 | %
|                              |       |       |       |       |       |  |     |       |   |   |       |      






|    |                                                 
|--- | ------------------------------------------------
|(1) | The certificate of deposit matures in June 2007.





88



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##### 











|                                |                                          |                                    |       |         |             |  |   |          |         |  |          |      |     |             |       |         |          |  |       |         |         |  |     |      |     |      
|------------------------------- | ---------------------------------------- | ---------------------------------- | ----- | ------- | ----------- |  | - | -------- | ------- |  | -------- | ---- | --- | ----------- | ----- | ------- | -------- |  | ----- | ------- | ------- |  | --- | ---- | --- | -----
|                                |                                          | 2007                               |       |         | 2006        | 
|                                |                                          |                                    |       |         |             | 
|                                |                                          |                                    |       | Annual  |             |  |   |          | Annual  | 
|                                |                                          | Facility                           |       |         | Amount      |  |   | Interest |         |  | Facility |      |     | Amount      |       |         | Interest | 
|                                |                                          | Amount                             |       |         | Outstanding |  |   | Cost(1)  |         |  | Amount   |      |     | Outstanding |       |         | Cost(1)  | 
|($ in millions)                 |                                          |                                    |       |         |             |  |   |          |         |  |          |      |     |             |       |         |          | 
|Notes payable and debentures:   |                                          |                                    |       |         |             |  |   |          |         |  |          |      |     |             |       |         |          |  |       |         |         |  |     |     
|                                | Privately issued unsecured notes payable |                                    | $     | 1,041.5 |             |  | $ | 1,041.5  |         |  |          | 6.1  | %   |             | $     | 1,041.4 |          |  | $     | 1,041.4 |         |  |     | 6.1  | %  
|                                | Publicly issued unsecured notes payable  |                                    |       | 850.0   |             |  |   | 850.0    |         |  |          | 6.7  | %   |             |       | 650.0   |          |  |       | 650.0   |         |  |     | 6.6  | %  
|                                |                                          |                                    |       |         |             |  |   |          |         |  |          |      |     |             |       |         |          | 
|                                |                                          | Total notes payable and debentures |       |         | 1,891.5     |  |   |          | 1,891.5 |  |          |      | 6.3 | %           |       |         | 1,691.4  |  |       |         | 1,691.4 |  |     |      | 6.3 | %    
|Revolving line of
    credit(4) |                                          |                                    | 922.5 |         |             |  |  |          |         |  |         | %(2) |     |             | 922.5 |         |          |  | 207.7 |         |         |  | 6.4 | %(2)
|                                |                                          |                                    |       |         |             |  |   |          |         |  |          |      |     |             |       |         |          | 
|                                |                                          | Total debt                         |       | $       | 2,814.0     |  |   | $        | 1,891.5 |  |          |      | 6.5 | %(3)        |       | $       | 2,613.9  |  |       | $       | 1,899.1 |  |     |      | 6.5 | % (3)
|                                |                                          |                                    |       |         |             |  |   |          |         |  |          |      |     |             |       |         |          | 




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The weighted average annual interest cost is computed as the
    (a) annual stated interest on the debt plus the annual
    amortization of commitment fees, other facility fees and the
    amortization of debt financing costs that are recognized into
    interest expense over the contractual life of the respective
    borrowings, divided by (b) debt outstanding on the balance
    sheet date.                                                                                         
|   
|(2) | There were no amounts drawn on the revolving line of credit at
    March 31, 2007. The annual interest cost at
    December 31, 2006, reflects the interest rate payable for
    borrowings under the revolving line of credit. In addition to
    the current interest rate payable, there were annual costs of
    commitment fees, other facility fees and amortization of debt
    financing costs of $3.8 million and $3.9 million at
    March 31, 2007, and December 31, 2006, respectively.
|   
|(3) | The annual interest cost for total debt includes the annual cost
    of commitment fees and the amortization of debt financing costs
    on the revolving line of credit and other facility fees
    regardless of the amount outstanding on the facility as of the
    balance sheet date.                                                                                                                                                                                                        
|   
|(4) | At March 31, 2007, $888.0 million remained unused and
    available on the revolving line of credit, net of amounts
    committed for standby letters of credit of $34.5 million
    issued under the credit facility.                                                                                                                                                                                                                                                                             

Privately Issued Unsecured Notes Payable.




89



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##### 





Publicly Issued Unsecured Notes Payable.


|                      |       |        |       |       |               |  |                |  | 
|--------------------- | ----- | ------ | ----- | ----- | ------------- |  | -------------- |  | 
|                      |       | Amount |       |       | Maturity Date | 
|($ in millions)       |       |        |       |       |               | 
|6.625% Notes due 2011 |       | $      | 400.0 |       |               |  | July 15, 2011  | 
|6.000% Notes due 2012 |       |        | 250.0 |       |               |  | April 1, 2012  | 
|6.875% Notes due 2047 |       |        | 200.0 |       |               |  | April 15, 2047 | 
|                      |       |        |       |       |               | 
|                      | Total |        | $     | 850.0 |               |  |                |  | 
|                      |       |        |       |       |               | 







Revolving Line of Credit.








90



---



##### 





|                                |                               |       |         |                      |      |       |     |      |  |   |       |       |  |      |       |       |      |   |       |       |  |   |       |       |  |   |       |       | 
|------------------------------- | ----------------------------- | ----- | ------- | -------------------- | ---- | ----- | --- | ---- |  | - | ----- | ----- |  | ---- | ----- | ----- | ---- | - | ----- | ----- |  | - | ----- | ----- |  | - | ----- | ----- | 
|                                |                               |       |         | Payments Due By Year |     
|                                |                               |       |         |                      |     
|                                |                               |       |         |                      |      | After |    
|                                |                               | Total |         |                      | 2007 |       |     | 2008 |  |   | 2009  |       |  | 2010 |       |       | 2011 |   |       | 2011  | 
|($ in millions)                 |                               |       |         |                      |      |       |     |      |  |   |       |       |  |      |       |       |      |   |       |       | 
|Unsecured notes payable         |                               | $     | 1,891.5 |                      |      | $     |    |      |  | $ | 153.0 |       |  | $    | 269.0 |       |      | $ | 408.0 |       |  | $ | 472.5 |       |  | $ | 589.0 |      
|Revolving line of
    credit(1) |                               |       |        |                      |      |       |    |      |  |   |      |       |  |      |      |       |      |   |      |       |  |   |      |       |  |   |      |      
|Operating leases                |                               |       | 23.5    |                      |      |       | 3.3 |      |  |   | 4.5   |       |  |      | 4.6   |       |      |   | 4.5   |       |  |   | 1.8   |       |  |   | 4.8   |      
|                                |                               |       |         |                      |      |       |     |      |  |   |       |       |  |      |       |       |      |   |       |       | 
|                                | Total contractual obligations |       | $       | 1,915.0              |      |       | $   | 3.3  |  |   | $     | 157.5 |  |      | $     | 273.6 |      |   | $     | 412.5 |  |   | $     | 474.3 |  |   | $     | 593.8 | 
|                                |                               |       |         |                      |      |       |     |      |  |   |       |       |  |      |       |       |      |   |       |       | 




|    |                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | At March 31, 2007, $888.0 million remained unused and
    available on the revolving line of credit, net of amounts
    committed for standby letters of credit of $34.5 million
    issued under the credit facility.

Off-Balance Sheet Arrangements




|                                 |                          |       |       |                                          |      |       |     |      |  |   |      |      |  |      |       |       |  |   |      |   |  |   |     |     |  |   |     |     | 
|-------------------------------- | ------------------------ | ----- | ----- | ---------------------------------------- | ---- | ----- | --- | ---- |  | - | ---- | ---- |  | ---- | ----- | ----- |  | - | ---- | - |  | - | --- | --- |  | - | --- | --- | 
|                                 |                          |       |       | Amount of Commitment Expiration Per Year |     
|                                 |                          |       |       |                                          |     
|                                 |                          |       |       |                                          |      | After |    
|                                 |                          | Total |       |                                          | 2007 |       |     | 2008 |  |   | 2009 |      |  | 2010 |       | 2011  |  |   | 2011 |  
|($ in millions)                  |                          |       |       |                                          |      |       |     |      |  |   |      |      |  |      |       |       |  |   |      |  
|Guarantees                       |                          | $     | 194.5 |                                          |      | $     | 0.3 |      |  | $ | 3.0  |      |  | $    | 184.9 |       |  | $ |     |   |  | $ | 4.4 |     |  | $ | 1.9 |    
|Standby letters of
    credit(1) |                          |       | 34.5  |                                          |      |       | 4.0 |      |  |   | 30.5 |      |  |      |      |       |  |   |     |   |  |   |    |     |  |   |    |    
|                                 |                          |       |       |                                          |      |       |     |      |  |   |      |      |  |      |       |       |  |   |      |   | 
|                                 | Total
    commitments(2) |       | $     | 229.0                                    |      |       | $   | 4.3  |  |   | $    | 33.5 |  |      | $     | 184.9 |  |   | $    |  |  |   | $   | 4.4 |  |   | $   | 1.9 | 
|                                 |                          |       |       |                                          |      |       |     |      |  |   |      |      |  |      |       |       |  |   |      |   | 




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Standby letters of credit are issued under our revolving line of
    credit that expires in September 2008. Therefore, unless a
    standby letter of credit is set to expire at an earlier date, we
    have assumed that the standby letters of credit will expire
    contemporaneously with the expiration of our line of credit in
    September 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(2) | Our most significant commitments relate to our investment in
    Business Loan Express, LLC (BLX), which commitments totaled
    $202.4 million at March 31, 2007. At March 31,
    2007, we guaranteed 50% of the outstanding total obligations on
    BLXs revolving line of credit for a total guaranteed
    amount of $179.4 million and we had also provided four
    standby letters of credit totaling $20.0 million in
    connection with four term securitizations completed by BLX. In
    addition, we have agreed to purchase the $3.0 million of
    Class A equity interests purchased by the chief executive
    officer of BLX at fair value in the event that BLX amends or
    otherwise restructures its existing senior credit facility or he
    is terminated for any reason. See  Private
    Finance, Business Loan Express, LLC above for further
    discussion.



CRITICAL ACCOUNTING POLICIES




91



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Valuation of Portfolio Investments.




Loans and Debt Securities.






Equity Securities.


92



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Collateralized Debt Obligations (CDO) and Collateralized
Loan Obligations (CLO).




Net Realized Gains or Losses and Net Change in Unrealized
Appreciation or Depreciation.


Fee Income.


Federal and State Income Taxes and Excise Tax.


93



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Item 3.  Quantitative and Qualitative
Disclosures About Market Risk







Item 4.  Controls and Procedures


10-Q, 13a-15 15d-15




94



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PART II. OTHER INFORMATION





Item 1.     Legal
Proceedings








10b-5






95



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Item 1A. Risk Factors.


Investing in Allied Capital involves a number of significant
risks relating to our business and investment objective. As a
result, there can be no assurance that we will achieve our
investment objective.


Our portfolio of investments is illiquid.


Investing in private companies involves a high degree of
risk.


Substantially all of our portfolio investments 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.




96



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##### 







Economic recessions or downturns could impair our portfolio
companies and harm our operating results.




Our borrowers may default on their payments, which may have a
negative effect on our financial performance.


Our private finance investments may not produce current
returns or capital gains.


Our financial results could be negatively affected if a
significant portfolio investment fails to perform as
expected.


97



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##### 







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




We may not borrow money unless we maintain asset coverage for
indebtedness of at least 200%, which may affect returns to
shareholders.


Changes in interest rates may affect our cost of capital and
net investment income.


98



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##### 







We will continue to need additional capital to grow because
we must distribute our income.


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


There is a risk that our common stockholders may not receive
dividends or distributions.


99



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##### 





We operate in a competitive market for investment
opportunities.


Our business depends on our key personnel.


Changes in the law or regulations that govern us could have a
material impact on us or our operations.


Failure to invest a sufficient portion of our assets in
qualifying assets could preclude us from investing in accordance
with our current business strategy.


Results may fluctuate and may not be indicative of future
performance.


100



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Our common stock price may be volatile.




| |   |                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | price and volume fluctuations in the overall stock market from
    time to time;                                                                                                                         
|
| |  | significant volatility in the market price and trading volume of
    securities of business development companies or other financial
    services companies;                                             
|
| |  | volatility resulting from trading in derivative securities
    related to our common stock including puts, calls, long-term
    equity anticipation securities, or LEAPs, or short trading
    positions;
|
| |  | changes in laws or regulatory policies or tax guidelines with
    respect to business development companies or regulated
    investment companies;                                                       
|
| |  | actual or anticipated changes in our earnings or fluctuations in
    our operating results or changes in the expectations of
    securities analysts;                                                    
|
| |  | general economic conditions and trends;                                                                                                                                                                  
|
| |  | loss of a major funding source; or                                                                                                                                                                       
|
| |  | departures of key personnel.                                                                                                                                                                             

The trading market or market value of our publicly issued
debt securities may be volatile.




| |   |                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------
| |  | the time remaining to the maturity of these debt securities;                                          
|
| |  | the outstanding principal amount of debt securities with terms
    identical to these debt securities;
|
| |  | the supply of debt securities trading in the secondary market,
    if any;                            
|
| |  | the redemption or repayment features, if any, of these debt
    securities;                           
|
| |  | the level, direction and volatility of market interest rates
    generally; and                       
|
| |  | market rates of interest higher or lower than rates borne by the
    debt securities.                 



Our credit ratings may not reflect all risks of an investment
in the debt securities.


Terms relating to redemption may materially adversely affect
your return on the debt securities.


101



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




Issuer Purchases of Equity Securities




|                   |                       |              |         |        |                |   |       |       | 
|------------------ | --------------------- | ------------ | ------- | ------ | -------------- | - | ----- | ----- | 
|                   |                       | Total Number |         |        |               
|                   |                       | of Shares    |         |        | Average Price  |  
|                   |                       | Purchased    |         |        | Paid Per Share |  
|                   |                       |              |         |        |                |  
|2005 DCP
    I(1)  |                       |              |         |        |                |   |       |      
|                   | 1/1/2007 to 1/31/2007 |              |         | 87     |                |   | $     | 32.31 | 
|                   | 2/1/2007 to 2/28/2007 |              |         | 705    |                |   | $     | 28.32 | 
|                   | 3/1/2007 to 3/31/2007 |              |         |       |                |   | $     |      | 
|2005 DCP
    II(2) |                       |              |         |        |                |   |       |      
|                   | 1/1/2007 to 1/31/2007 |              |         | 19,526 |                |   | $     | 32.26 | 
|                   | 2/1/2007 to 2/28/2007 |              |         |       |                |   | $     |      | 
|                   | 3/1/2007 to 3/31/2007 |              |         | 84,325 |                |   | $     | 28.90 | 
|                   |                       |              |         |        |                |  
|Total              |                       |              | 104,643 |        |                | $ | 29.52 |      
|                   |                       |              |         |        |                |  






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The 2005 DCP I is an unfunded plan, as defined by the
    Internal Revenue Code of 1986, that provides for the deferral of
    compensation by our directors, employees, and consultants. In
    addition, we may make contributions to 2005 DCP I on
    compensation deemed ineligible for a 401(k) contribution. Our
    directors, employees, or consultants are eligible to participate
    in the plan at such time and for such period as designated by
    the Board of Directors. The 2005 DCP I is managed through a
    trust by a third-party trustee, and we fund this plan through
    cash contributions. Directors may choose to defer
    directors fees through the 2005 DCP I, and may choose
    to invest such deferred income in shares of our common stock. To
    the extent a director elects to invest in our common stock, the
    trustee of the 2005 DCP I will be required to use such
    deferred directors fees to purchase shares of our common
    stock in the market.
|   
|(2) | We have established a long-term incentive compensation program
    whereby we will generally determine an individual performance
    award for certain officers annually at the beginning of each
    year. The Compensation Committee may adjust the individual
    performance awards as needed, or make new awards as new officers
    are hired. In conjunction with the program, we instituted the
    2005 DCP II, which is an unfunded plan as defined by the
    Internal Revenue Code of 1986 that is managed through a trust by
    a third-party trustee. The individual performance awards are
    deposited in the trust in four equal installments, generally on
    a quarterly basis in the form of cash and the 2005 DCP II
    requires the trustee to use the cash exclusively to purchase
    shares of our common stock in the market. In addition, dividends
    received on the Allied Capital shares held in the trust are
    reinvested in our common stock.                      




Item 3.  Defaults Upon Senior
Securities




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







Item 5.  Other Information







Item 6.  Exhibits




|        |   |     |             |                                                                                                                                                                                                                                                                                                                                                                   
|------- | - | --- | ----------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |   |     |            
|Number  |   |     | Description
|        |   |     |            
|        | 3 | .1  |             | Restated Articles of Incorporation. (Incorporated by
    reference to Exhibit a.1 filed with Allied Capitals
    Post-Effective Amendment No. 2 to registration statement on
    Form N-2 (File No. 333-67336) filed on March 22,
    2002).                                                                                                                     
|        | 3 | .2  |             | Amended and Restated Bylaws. (Incorporated by reference to
    Exhibit 3.1. filed with Allied Capitals Form 8-K
    on January 24, 2006).                                                                                                                                                                                                                        
|        | 4 | .1  |             | Specimen Certificate of Allied Capitals Common Stock, par
    value $0.0001 per share. (Incorporated by reference to
    Exhibit d. filed with Allied Capitals registration
    statement on Form N-2 (File No. 333-51899) filed on
    May 6, 1998).                                                                                                           
|        | 4 | .3  |             | Form of Note under the Indenture relating to the issuance of
    debt securities. (Contained in Exhibit 4.4).
    (Incorporated by reference to Exhibit d.1 filed with Allied
    Capitals registration statement on Form N-2/ A (File
    No. 333-133755) filed on June 21, 2006).                                                                              
|        | 4 | .4  |             | Indenture by and between Allied Capital Corporation and The Bank
    of New York, dated June 16, 2006. (Incorporated by
    reference to Exhibit d.2 filed with Allied Capitals
    registration statement on Form N-2/ A (File
    No. 333-133755) filed on June 21, 2006).                                                                                     
|        | 4 | .5  |             | Statement of Eligibility of Trustee on Form T-1.
    (Incorporated by reference to Exhibit d.3 filed with
    Allied Capitals registration statement on Form N-2
    (File No. 333-133755) filed on May 3, 2006).                                                                                                                                                
|        | 4 | .6  |             | Form of First Supplemental Indenture by and between Allied
    Capital Corporation and the Bank of New York, dated as of
    July 25, 2006.(Incorporated by reference to
    Exhibit d.4 filed with Allied Capitals Post-Effective
    Amendment No. 1 to the registration statement on
    Form N-2/A (File No. 333-133755) filed on July 25,
    2006).        
|        | 4 | .7  |             | Form of 6.625% Note due 2011. (Incorporated by reference to
    Exhibit d.5 filed with Allied Capitals Post-Effective
    Amendment No. 1 to the registration statement on
    Form N-2/A (File No. 333-133755) filed on July 25,
    2006).                                                                                                                     
|        | 4 | .8  |             | Form of Second Supplemental Indenture by and between Allied
    Capital Corporation and The Bank of New York, dated as of
    December 8, 2006. (Incorporated by reference to
    Exhibit d.6 filed with Allied Capitals Post-Effective
    Amendment No. 2 to the registration statement on
    Form N-2/A (File No. 333-133755) filed on
    December 8, 2006).
|        | 4 | .9  |             | Form of 6.000% Notes due 2012. (Incorporated by reference to
    Exhibit d.7 filed with Allied Capitals Post-Effective
    Amendment No. 2 to the registration statement on
    Form N-2/A (File No. 333-133755) filed on
    December 8, 2006).                                                                                                                 
|        | 4 | .10 |             | Form of Third Supplemental Indenture by and between Allied
    Capital Corporation and The Bank of New York, dated as of
    March 28, 2007.(Incorporated by reference to
    Exhibit d.8 filed with Allied Capitals Post-Effective
    Amendment No. 3 to the registration statement on
    Form N-2/A (File No. 333-133755) filed on
    March 28, 2007).      
|        | 4 | .11 |             | Form of 6.875% Notes due 2047. (Incorporated by
    reference to Exhibit d.9 filed with Allied Capitals
    Post-Effective Amendment No. 3 to the registration
    statement on Form N-2/A (File No. 333-133755) filed on
    March 28, 2007).                                                                                                                   

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|        |    |        |             |                                                                                                                                                                                                                                                                    
|------- | -- | ------ | ----------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |        |            
|Number  |    |        | Description
|        |    |        |            
|        | 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 September 30, 2005.
    (Incorporated by reference to Exhibit 10.1 filed with
    Allied Capitals Form 8-K on October 3, 2005).                                                                                                           
|        | 10 | .2(a)  |             | First Amendment to Credit Agreement, dated November 4,
    2005. (Incorporated by reference to Exhibit 10.2(a)
    filed with Allied Capitals Form 10-Q for the period
    ended September 30, 2005).                                                             
|        | 10 | .2(b)  |             | Second Amendment to Credit Agreement, dated May 11,
    2006.(Incorporated by reference to Exhibit 10.1 filed
    with Allied Capitals Form 8-K filed on May 12,
    2006).                                                                                       
|        | 10 | .2(c)  |             | Third Amendment to Credit Agreement, dated May 19, 2006.
    (Incorporated by reference to Exhibit 10.1 filed with
    Allied Capitals Form 8-K filed on May 23,
    2006).                                                                                       
|        | 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 | .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 | .15    |             | Control Investor Guaranty Agreement, dated as of March 17,
    2006, between Allied Capital and CitiBank, N.A. and Business
    Loan Express, LLC (Incorporated by reference to Exhibit 10.1
    filed with Allied Capitals Form 8-K filed on
    March 23, 2006).
|        | 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 | .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 | .19    |             | Amended Stock Option Plan. (Incorporated by reference to
    Exhibit B of Allied Capitals definitive proxy
    statement for Allied Capitals 2004 Annual Meeting of
    Stockholders filed on March 30, 2004).                                                   
|        | 10 | .20(a) |             | Allied Capital Corporation 401(k) Plan, dated September 1,
    1999. (Incorporated by reference to Exhibit 4.4 filed
    with Allied Capitals registration statement on
    Form S-8 (File No. 333-88681) filed on October 8,
    1999).                          
|        | 10 | .20(b) |             | Amendment to Allied Capital Corporation 401(k) Plan, dated
    April 15, 2004. (Incorporated by reference to
    Exhibit 10.20(b) filed with Allied Capitals
    Form 10-Q for the period ended June 30, 2004).                                                   
|        | 10 | .20(c) |             | Amendment to Allied Capital Corporation 401(k) plan, dated
    November 1, 2005. (Incorporated by reference to Exhibit
    10.20(c) filed with Allied Capitals Form 10-Q for the
    quarter ended September 30, 2005).                                           
|        | 10 | .20(d) |             | Amendment to Allied Capital Corporation 401(k) plan, dated
    April 21, 2006. (Incorporated by reference to
    Exhibit i.4(c) filed with Allied Capitals
    Form N-2 (File No. 333-133755) filed on May 3,
    2006).                                          

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|        |    |        |             |                                                                                                                                                                                                                                                                   
|------- | -- | ------ | ----------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |        |            
|Number  |    |        | Description
|        |    |        |            
|        | 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 | .21    |             | Employment Agreement, dated January 1, 2004, between Allied
    Capital and William L. Walton. (Incorporated by
    reference to Exhibit 10.21 filed with Allied Capitals
    Form 10-K for the year ended December 31, 2003).                                   
|        | 10 | .21(a) |             | Amendment to Employment Agreement, dated March 29, 2007,
    between Allied Capital and William L. Walton.
    (Incorporated by reference to Exhibit 10.1 filed with
    Allied Capitals Form 8-K filed on April 3,
    2007).                                   
|        | 10 | .22    |             | Employment Agreement, dated January 1, 2004, between Allied
    Capital and Joan M. Sweeney. (Incorporated by reference
    to Exhibit 10.22 filed with Allied Capitals
    Form 10-K for the year ended December 31, 2003).                                     
|        | 10 | .22(a) |             | Amendment to Employment Agreement, dated March 29, 2007,
    between Allied Capital and Joan M. Sweeney. (Incorporated by
    reference to Exhibit 10.2 filed with Allied Capitals
    Form 8-K filed on April 3, 2007).                                         
|        | 10 | .23    |             | Employment Agreement, dated January 1, 2004, between Allied
    Capital and Penelope F. Roll. (Incorporated by reference to
    Exhibit 10.23 filed with Allied Capitals
    Form 10-K for the year ended December 31, 2006).                                    
|        | 10 | .23(a) |             | Amendment to Employment Agreement, dated March 29, 2007,
    between Allied Capital and Penelope F. Roll. (Incorporated by
    reference to Exhibit 10.3 filed with Allied Capitals
    Form 8-K filed on April 3, 2007).                                        
|        | 10 | .25    |             | Form of Custody Agreement with Riggs Bank N.A., which was
    assumed by PNC Bank through merger. (Incorporated by
    reference to Exhibit j.1 filed with Allied Capitals
    registration statement on Form N-2 (File
    No. 333-51899) filed on May 6, 1998).
|        | 10 | .26    |             | Custodian Agreement with Chevy Chase Trust. (Incorporated by
    reference to Exhibit 10.26 filed with Allied Capitals
    Form 10-K for the year ended December 31, 2005).                                                                                      
|        | 10 | .27    |             | Custodian Agreement with Bank of America. (Incorporated by
    reference to Exhibit 10.27 filed with Allied Capitals
    Form 10-K for the year ended December 31, 2005).                                                                                        
|        | 10 | .28    |             | Code of Ethics. (Incorporated by reference to
    Exhibit 10.28 filed with Allied Capitals
    Form 10-K for the year ended December 31, 2006).                                                                                                                  
|        | 10 | .29    |             | Custodian Agreement with Union Bank of California.
    (Incorporated by reference to Exhibit 10.29 filed with
    Allied Capitals Form 10-Q for the quarter ended
    June 30, 2006).                                                                            
|        | 10 | .30    |             | Custodian Agreement with M&T Bank. (Incorporated by
    reference to Exhibit 10.30 filed with Allied Capitals
    Form 10-Q for the quarter ended June 30, 2006).                                                                                                
|        | 10 | .31    |             | Note Agreement, dated as of May 14, 2003. (Incorporated
    by reference to Exhibit 10.31 filed with Allied
    Capitals Form 10-Q for the quarter ended
    March 31, 2003).                                                                                    
|        | 10 | .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 | .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 | .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.)                                                                                                                 

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|        |    |     |             |                                                                                                                                                        
|------- | -- | --- | ----------- | -------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     |            
|Number  |    |     | Description
|        |    |     |            
|        | 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.)          
|        | 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.                                                                                              
|        | 31 | .1* |             | Certification of the Chief Executive Officer pursuant to Rule
    13a-14 of the Securities Exchange Act of 1934.                                       
|        | 31 | .2* |             | Certification of the Chief Financial Officer pursuant to Rule
    13a-14 of the Securities Exchange Act of 1934.                                       
|        | 32 | .1* |             | Certification of the Chief Executive Officer pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
    Section 1350.                
|        | 32 | .2* |             | Certification of the Chief Financial Officer pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
    Section 1350.                






|  |                
|- | ---------------
|* | Filed herewith.

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SIGNATURES






| |                           
| | --------------------------
| | ALLIED CAPITAL CORPORATION
| | (Registrant)              

|                   |  |                                                                                    
|------------------ |  | -----------------------------------------------------------------------------------
|                  
|Dated: May 8, 2007 |  | /s/ William L. WaltonWilliam
    L. Walton
    Chairman and Chief Executive Officer
|                  
|                   |  | /s/ Penni F. RollPenni
    F. Roll
    Chief Financial Officer                     

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EXHIBIT INDEX


|        |    |    |             |                                                                                                                                        
|------- | -- | -- | ----------- | ---------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |    |            
|Number  |    |    | Description
|        |    |    |            
|        | 15 |    |             | Letter regarding Unaudited Interim Financial Information.                                                                              
|        | 31 | .1 |             | Certification of the Chief Executive Officer pursuant to Rule
    13a-14 of the Securities Exchange Act of 1934.                       
|        | 31 | .2 |             | Certification of the Chief Financial Officer pursuant to Rule
    13a-14 of the Securities Exchange Act of 1934.                       
|        | 32 | .1 |             | Certification of the Chief Executive Officer pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
    Section 1350.
|        | 32 | .2 |             | Certification of the Chief Financial Officer pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
    Section 1350.

108