##### 









FORM 10-Q


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, DC 20549


QUARTERLY REPORT PURSUANT TO


SECTION 13 OR 15(d) OF


THE SECURITIES EXCHANGE ACT OF 1934





|                                                  |  |                                    
|------------------------------------------------- |  | -----------------------------------
|For The Quarterly Period
    Ended March 31, 2005 |  | 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) 331-1112





x o


x o












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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, 2005 (unaudited)
    and
    December 31, 2004                                |    | 1 
|                              |                                                                                                   | Consolidated Statement of Operations (unaudited)  For
    the Three Months Ended March 31, 2005 and 2004                |    | 2 
|                              |                                                                                                   | Consolidated Statement of Changes in Net Assets
    (unaudited)  For the Three Months Ended
    March 31, 2005 and 2004 |    | 3 
|                              |                                                                                                   | Consolidated Statement of Cash Flows (unaudited)  For
    the Three Months Ended March 31, 2005 and 2004                |    | 4 
|                              |                                                                                                   | Consolidated Statement of Investments as of March 31, 2005
    (unaudited)                                               |    | 5 
|                              |                                                                                                   | Notes to Consolidated Financial Statements                                                                               |    | 15
|                              |                                                                                                   | Report of Independent Registered Public Accounting Firm                                                                  |    | 38
|                              | Item 2. Managements Discussion and Analysis of
    Financial Condition and Results of Operations |                                                                                                                          | 39
|                              | Item 3. Quantitative and Qualitative Disclosures About
    Market Risk                            |                                                                                                                          | 74
|                              | Item 4. Controls and Procedures                                                                   |                                                                                                                          | 74
|                             
|PART II. OTHER INFORMATION    |                                                                                                   |                                                                                                                         
|                              | Item 1. Legal Proceedings                                                                         |                                                                                                                          | 75
|                              | Item 2. Unregistered Sales of Equity Securities and
    Use of Proceeds                           |                                                                                                                          | 75
|                              | Item 3. Defaults Upon Senior Securities                                                           |                                                                                                                          | 76
|                              | Item 4. Submission of Matters to a Vote of Security
    Holders                                   |                                                                                                                          | 76
|                              | Item 5. Other Information                                                                         |                                                                                                                          | 76
|                              | Item 6. Exhibits                                                                                  |                                                                                                                          | 77
|                              | Signatures                                                                                        |                                                                                                                          | 80





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##### 



PART I: FINANCIAL INFORMATION


Item 1.  Financial Statements


ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEET


|                                                                |                                                                                                                                                                                          |                                                                            |                                                                   |           |              |           |        |           |           |           | 
|--------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------- | ----------------------------------------------------------------- | --------- | ------------ | --------- | ------ | --------- | --------- | --------- | 
|                                                                |                                                                                                                                                                                          | March 31,                                                                  |                                                                   |           | December 31, |          
|                                                                |                                                                                                                                                                                          | 2005                                                                       |                                                                   |           | 2004         |          
|                                                                |                                                                                                                                                                                          |                                                                            |                                                                   |           |              |          
|(in thousands, except share and per share amounts)              |                                                                                                                                                                                          | (unaudited)                                                                |                                                                   |           |             
|ASSETS                                                         
|Portfolio at value:                                             |                                                                                                                                                                                          |                                                                            |                                                                   |           |              |           |        |          
|                                                                | Private finance                                                                                                                                                                          |                                                                            |                                                                   |           |              |           |        |           |          
|                                                                |                                                                                                                                                                                          | Companies more than 25% owned (cost: 2005-$1,426,861;
    2004-$1,389,342) |                                                                   | $         | 1,437,474    |           |        | $         | 1,359,641 |          
|                                                                |                                                                                                                                                                                          | Companies 5% to 25% owned (cost: 2005-$196,842; 2004-$194,750)             |                                                                   |           | 187,459      |           |        |           | 188,902   |          
|                                                                |                                                                                                                                                                                          | Companies less than 5% owned (cost: 2005-$786,607; 2004-$800,828)          |                                                                   |           | 753,537      |           |        |           | 753,543   |          
|                                                                |                                                                                                                                                                                          |                                                                            |                                                                   |           |              |          
|                                                                |                                                                                                                                                                                          |                                                                            | Total private finance (cost: 2005-$2,410,310; 2004-$2,384,920)    |           |              | 2,378,470 |        |           |           | 2,302,086 | 
|                                                                | Commercial real estate finance (cost: 2005-$809,613;
    2004-$722,612)                                                                                                                  |                                                                            |                                                                   | 816,536   |              |           |        | 711,325   |          
|                                                                |                                                                                                                                                                                          |                                                                            |                                                                   |           |              |          
|                                                                |                                                                                                                                                                                          |                                                                            | Total portfolio at value (cost: 2005-$3,219,923; 2004-$3,107,532) |           |              | 3,195,006 |        |           |           | 3,013,411 | 
|                                                                |                                                                                                                                                                                          |                                                                            |                                                                   |           |              |          
|Deposits of proceeds from sales of borrowed Treasury securities |                                                                                                                                                                                          |                                                                            | 98,741                                                            |           |              |           | 38,226 |          
|Accrued interest and dividends receivable                       |                                                                                                                                                                                          |                                                                            | 81,937                                                            |           |              |           | 79,489 |          
|Other assets                                                    |                                                                                                                                                                                          |                                                                            | 77,783                                                            |           |              |           | 72,712 |          
|Cash and cash equivalents                                       |                                                                                                                                                                                          |                                                                            | 51,087                                                            |           |              |           | 57,160 |          
|                                                                |                                                                                                                                                                                          |                                                                            |                                                                   |           |              |          
|                                                                |                                                                                                                                                                                          |                                                                            | Total assets                                                      |           | $            | 3,504,554 |        |           | $         | 3,260,998 | 
|                                                                |                                                                                                                                                                                          |                                                                            |                                                                   |           |              |          
|LIABILITIES AND SHAREHOLDERS EQUITY                           
|Liabilities:                                                    |                                                                                                                                                                                          |                                                                            |                                                                   |           |              |           |        |          
|                                                                | Notes payable and debentures (maturing within one year:
    2005-$165,000; 2004-$169,000)                                                                                                |                                                                            | $                                                                 | 1,033,135 |              |           | $      | 1,064,568 |          
|                                                                | Revolving line of credit                                                                                                                                                                 |                                                                            |                                                                   | 263,250   |              |           |        | 112,000   |          
|                                                                | Obligations to replenish borrowed Treasury securities                                                                                                                                    |                                                                            |                                                                   | 98,741    |              |           |        | 38,226    |          
|                                                                | Accounts payable and other liabilities                                                                                                                                                   |                                                                            |                                                                   | 76,280    |              |           |        | 66,426    |          
|                                                                |                                                                                                                                                                                          |                                                                            |                                                                   |           |              |          
|                                                                |                                                                                                                                                                                          |                                                                            | Total liabilities                                                 |           |              | 1,471,406 |        |           |           | 1,281,220 | 
|                                                                |                                                                                                                                                                                          |                                                                            |                                                                   |           |              |          
|Commitments and contingencies                                   |                                                                                                                                                                                          |                                                                            |                                                                   |           |              |           |        |          
|Shareholders equity:                                           |                                                                                                                                                                                          |                                                                            |                                                                   |           |              |           |        |          
|                                                                | Common stock, $0.0001 par value, 200,000,000 shares authorized;
    133,562,534 and 133,098,807 shares issued and outstanding at
    March 31, 2005, and December 31, 2004, respectively |                                                                            |                                                                   | 13        |              |           |        | 13        |          
|                                                                | Additional paid-in capital                                                                                                                                                               |                                                                            |                                                                   | 2,106,106 |              |           |        | 2,094,421 |          
|                                                                | Common stock held in deferred compensation trust                                                                                                                                         |                                                                            |                                                                   | (15,389   | )            |           |        | (13,503   | )        
|                                                                | Notes receivable from sale of common stock                                                                                                                                               |                                                                            |                                                                   | (5,420    | )            |           |        | (5,470    | )        
|                                                                | Net unrealized appreciation (depreciation) on portfolio                                                                                                                                  |                                                                            |                                                                   | (37,183   | )            |           |        | (107,767  | )        
|                                                                | Undistributed (distributions in excess of) earnings                                                                                                                                      |                                                                            |                                                                   | (14,979   | )            |           |        | 12,084    |          
|                                                                |                                                                                                                                                                                          |                                                                            |                                                                   |           |              |          
|                                                                |                                                                                                                                                                                          |                                                                            | Total shareholders equity                                        |           |              | 2,033,148 |        |           |           | 1,979,778 | 
|                                                                |                                                                                                                                                                                          |                                                                            |                                                                   |           |              |          
|                                                                |                                                                                                                                                                                          |                                                                            | Total liabilities and shareholders equity                        |           | $            | 3,504,554 |        |           | $         | 3,260,998 | 
|                                                                |                                                                                                                                                                                          |                                                                            |                                                                   |           |              |          
|Net asset value per common share                                |                                                                                                                                                                                          | $                                                                          | 15.22                                                             |           |              | $         | 14.87  |          
|                                                                |                                                                                                                                                                                          |                                                                            |                                                                   |           |              |          



1



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF OPERATIONS


|                                                     |                                                       |                               |                                             |        |        |        |         |          |         |         |  
|---------------------------------------------------- | ----------------------------------------------------- | ----------------------------- | ------------------------------------------- | ------ | ------ | ------ | ------- | -------- | ------- | ------- | -
|                                                     |                                                       | For the Three Months          |                                            
|                                                     |                                                       | Ended March 31,               |                                            
|                                                     |                                                       |                               |                                            
|                                                     |                                                       | 2005                          |                                             |        | 2004   |       
|(in thousands, except per share amounts)             |                                                       |                               |                                             |        |        |       
|                                                     |                                                       | (unaudited)                   |                                            
|Interest and Related Portfolio Income:               |                                                       |                               |                                             |        |        |        |         |         
|                                                     | Interest and dividends                                |                               |                                             |        |        |        |         |          |        
|                                                     |                                                       | Companies more than 25% owned |                                             | $      | 28,251 |        |         | $        | 15,952  |        
|                                                     |                                                       | Companies 5% to 25% owned     |                                             |        | 5,921  |        |         |          | 5,986   |        
|                                                     |                                                       | Companies less than 5% owned  |                                             |        | 50,773 |        |         |          | 51,601  |        
|                                                     |                                                       |                               |                                             |        |        |       
|                                                     |                                                       |                               | Total interest and dividends                |        |        | 84,945 |         |          |         | 73,539  |  
|                                                     |                                                       |                               |                                             |        |        |       
|                                                     | Loan prepayment premiums                              |                               |                                             |        |        |        |         |          |        
|                                                     |                                                       | Companies more than 25% owned |                                             |        |       |        |         |          |        |        
|                                                     |                                                       | Companies 5% to 25% owned     |                                             |        |       |        |         |          |        |        
|                                                     |                                                       | Companies less than 5% owned  |                                             |        | 1,677  |        |         |          | 950     |        
|                                                     |                                                       |                               |                                             |        |        |       
|                                                     |                                                       |                               | Total loan prepayment premiums              |        |        | 1,677  |         |          |         | 950     |  
|                                                     |                                                       |                               |                                             |        |        |       
|                                                     | Fees and other income                                 |                               |                                             |        |        |        |         |          |        
|                                                     |                                                       | Companies more than 25% owned |                                             |        | 4,881  |        |         |          | 4,489   |        
|                                                     |                                                       | Companies 5% to 25% owned     |                                             |        | 70     |        |         |          | 347     |        
|                                                     |                                                       | Companies less than 5% owned  |                                             |        | 3,346  |        |         |          | 2,440   |        
|                                                     |                                                       |                               |                                             |        |        |       
|                                                     |                                                       |                               | Total fees and other income                 |        |        | 8,297  |         |          |         | 7,276   |  
|                                                     |                                                       |                               |                                             |        |        |       
|                                                     |                                                       |                               | Total interest and related portfolio income |        |        | 94,919 |         |          |         | 81,765  |  
|                                                     |                                                       |                               |                                             |        |        |       
|Expenses:                                            |                                                       |                               |                                             |        |        |        |         |         
|                                                     | Interest                                              |                               |                                             | 20,225 |        |        |         | 19,113   |        
|                                                     | Employee                                              |                               |                                             | 15,456 |        |        |         | 12,355   |        
|                                                     | Administrative                                        |                               |                                             | 20,754 |        |        |         | 5,827    |        
|                                                     |                                                       |                               |                                             |        |        |       
|                                                     |                                                       |                               | Total operating expenses                    |        |        | 56,435 |         |          |         | 37,295  |  
|                                                     |                                                       |                               |                                             |        |        |       
|Net investment income before income taxes            |                                                       |                               | 38,484                                      |        |        |        | 44,470  |         
|Income tax expense (benefit)                         |                                                       |                               | (268                                        | )      |        |        | (75     | )       
|                                                     |                                                       |                               |                                             |        |        |       
|Net investment income                                |                                                       |                               | 38,752                                      |        |        |        | 44,545  |         
|                                                     |                                                       |                               |                                             |        |        |       
|Net Realized and Unrealized Gains (Losses):          |                                                       |                               |                                             |        |        |        |         |         
|                                                     | Net realized gains (losses)                           |                               |                                             |        |        |        |         |          |        
|                                                     |                                                       | Companies more than 25% owned |                                             |        | 399    |        |         |          | 146,683 |        
|                                                     |                                                       | Companies 5% to 25% owned     |                                             |        | (3     | )      |         |          | 4,628   |        
|                                                     |                                                       | Companies less than 5% owned  |                                             |        | 9,889  |        |         |          | (3,461  | )      
|                                                     |                                                       |                               |                                             |        |        |       
|                                                     |                                                       |                               | Total net realized gains                    |        |        | 10,285 |         |          |         | 147,850 |  
|                                                     | Net change in unrealized appreciation or depreciation |                               |                                             | 70,584 |        |        |         | (172,087 | )      
|                                                     |                                                       |                               |                                             |        |        |       
|                                                     |                                                       |                               | Total net gains (losses)                    |        |        | 80,869 |         |          |         | (24,237 | )
|                                                     |                                                       |                               |                                             |        |        |       
|Net increase in net assets resulting from operations |                                                       | $                             | 119,621                                     |        |        | $      | 20,308  |         
|                                                     |                                                       |                               |                                             |        |        |       
|Basic earnings per common share                      |                                                       | $                             | 0.90                                        |        |        | $      | 0.16    |         
|                                                     |                                                       |                               |                                             |        |        |       
|Diluted earnings per common share                    |                                                       | $                             | 0.88                                        |        |        | $      | 0.15    |         
|                                                     |                                                       |                               |                                             |        |        |       
|Weighted average common shares outstanding  basic   |                                                       |                               | 133,283                                     |        |        |        | 128,314 |         
|                                                     |                                                       |                               |                                             |        |        |       
|Weighted average common shares outstanding  diluted |                                                       |                               | 135,579                                     |        |        |        | 131,968 |         
|                                                     |                                                       |                               |                                             |        |        |       



2



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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS


|                                           |                                                              |                                                                          |           |         |         |   |           |          |         |  
|------------------------------------------ | ------------------------------------------------------------ | ------------------------------------------------------------------------ | --------- | ------- | ------- | - | --------- | -------- | ------- | -
|                                           |                                                              | For the Three Months                                                     |          
|                                           |                                                              | Ended March 31,                                                          |          
|                                           |                                                              |                                                                          |          
|                                           |                                                              | 2005                                                                     |           |         | 2004    |  
|(in thousands, except per share amounts)   |                                                              |                                                                          |           |         |         |  
|                                           |                                                              | (unaudited)                                                              |          
|Operations:                                |                                                              |                                                                          |           |         |         |   |           |         
|                                           | Net investment income                                        |                                                                          | $         | 38,752  |         |   | $         | 44,545   |        
|                                           | Net realized gains                                           |                                                                          |           | 10,285  |         |   |           | 147,850  |        
|                                           | Net change in unrealized appreciation or depreciation        |                                                                          |           | 70,584  |         |   |           | (172,087 | )      
|                                           |                                                              |                                                                          |           |         |         |  
|                                           |                                                              | Net increase in net assets resulting from operations                     |           |         | 119,621 |   |           |          | 20,308  |  
|                                           |                                                              |                                                                          |           |         |         |  
|Shareholder distributions:                 |                                                              |                                                                          |           |         |         |   |           |         
|                                           | Common stock dividends                                       |                                                                          |           | (76,100 | )       |   |           | (73,357  | )      
|                                           | Preferred stock dividends                                    |                                                                          |           |        |         |   |           | (45      | )      
|                                           |                                                              |                                                                          |           |         |         |  
|                                           |                                                              | Net decrease in net assets resulting from shareholder
    distributions  |           |         | (76,100 | ) |           |          | (73,402 | )
|                                           |                                                              |                                                                          |           |         |         |  
|Capital share transactions:                |                                                              |                                                                          |           |         |         |   |           |         
|                                           | Issuance of common stock for portfolio investments           |                                                                          |           | 7,200   |         |   |           |         |        
|                                           | Issuance of common stock upon the exercise of stock options  |                                                                          |           | 2,618   |         |   |           | 11,782   |        
|                                           | Issuance of common stock in lieu of cash distributions       |                                                                          |           | 1,418   |         |   |           | 1,484    |        
|                                           | Net decrease in notes receivable from sale of common stock   |                                                                          |           | 50      |         |   |           | 5,192    |        
|                                           | Purchase of common stock held in deferred compensation trust |                                                                          |           | (1,886  | )       |   |           |         |        
|                                           | Other                                                        |                                                                          |           | 449     |         |   |           | 29       |        
|                                           |                                                              |                                                                          |           |         |         |  
|                                           |                                                              | Net increase in net assets resulting from capital share
    transactions |           |         | 9,849   |   |           |          | 18,487  |  
|                                           |                                                              |                                                                          |           |         |         |  
|                                           |                                                              | Total increase (decrease) in net assets                                  |           |         | 53,370  |   |           |          | (34,607 | )
|Net assets at beginning of period          |                                                              |                                                                          | 1,979,778 |         |         |   | 1,914,577 |         
|                                           |                                                              |                                                                          |           |         |         |  
|Net assets at end of period                |                                                              | $                                                                        | 2,033,148 |         |         | $ | 1,879,970 |         
|                                           |                                                              |                                                                          |           |         |         |  
|Net asset value per common share           |                                                              | $                                                                        | 15.22     |         |         | $ | 14.60     |         
|                                           |                                                              |                                                                          |           |         |         |  
|Common shares outstanding at end of period |                                                              |                                                                          | 133,563   |         |         |   | 128,761   |         
|                                           |                                                              |                                                                          |           |         |         |  



3



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF CASH FLOWS


|                                                     |                                                               |                                                                                                                                 |                                                     |         |          |         |         |         |          |         |  
|---------------------------------------------------- | ------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------- | ------- | -------- | ------- | ------- | ------- | -------- | ------- | -
|                                                     |                                                               | For the Three Months                                                                                                            |                                                    
|                                                     |                                                               | Ended March 31,                                                                                                                 |                                                    
|                                                     |                                                               |                                                                                                                                 |                                                    
|                                                     |                                                               | 2005                                                                                                                            |                                                     |         | 2004     |        
|(in thousands)                                       |                                                               |                                                                                                                                 |                                                     |         |          |        
|                                                     |                                                               | (unaudited)                                                                                                                     |                                                    
|Cash flows from operating activities:                |                                                               |                                                                                                                                 |                                                     |         |          |         |         |        
|                                                     | Net increase in net assets resulting from operations          |                                                                                                                                 | $                                                   | 119,621 |          |         | $       | 20,308  |         
|                                                     | Adjustments                                                   |                                                                                                                                 |                                                     |         |          |         |         |         |         
|                                                     |                                                               | Portfolio investments                                                                                                           |                                                     |         | (257,957 | )       |         |         | (170,597 | )      
|                                                     |                                                               | Principal collections related to investment repayments or sales                                                                 |                                                     |         | 158,262  |         |         |         | 237,161  |        
|                                                     |                                                               | Change in accrued or reinvested interest and dividends                                                                          |                                                     |         | (10,534  | )       |         |         | (13,098  | )      
|                                                     |                                                               | Amortization of discounts and fees                                                                                              |                                                     |         | (1,772   | )       |         |         | (1,573   | )      
|                                                     |                                                               | Changes in other assets and liabilities                                                                                         |                                                     |         | 8,158    |         |         |         | 3,376    |        
|                                                     |                                                               | Depreciation and amortization                                                                                                   |                                                     |         | 486      |         |         |         | 409      |        
|                                                     |                                                               | Realized gains from the receipt of notes and other securities as
    consideration from sale of investments, net of collections |                                                     |         | 152      |         |         |         | (48,318  | )      
|                                                     |                                                               | Realized losses                                                                                                                 |                                                     |         | 4,418    |         |         |         | 8,152    |        
|                                                     |                                                               | Net change in unrealized (appreciation) or depreciation                                                                         |                                                     |         | (70,584  | )       |         |         | 172,087  |        
|                                                     |                                                               |                                                                                                                                 |                                                     |         |          |        
|                                                     |                                                               |                                                                                                                                 | Net cash provided by (used in) operating activities |         |          | (49,750 | )       |         |          | 207,907 |  
|                                                     |                                                               |                                                                                                                                 |                                                     |         |          |        
|Cash flows from financing activities:                |                                                               |                                                                                                                                 |                                                     |         |          |         |         |        
|                                                     | Sale of common stock upon the exercise of stock options       |                                                                                                                                 |                                                     | 2,618   |          |         |         | 11,782  |         
|                                                     | Collections of notes receivable from sale of common stock     |                                                                                                                                 |                                                     | 50      |          |         |         | 5,192   |         
|                                                     | Borrowings under notes payable and debentures                 |                                                                                                                                 |                                                     |        |          |         |         | 15,212  |         
|                                                     | Repayments on notes payable and debentures                    |                                                                                                                                 |                                                     | (31,000 | )        |         |         | (7,000  | )       
|                                                     | Net borrowings under (repayments on) revolving line of credit |                                                                                                                                 |                                                     | 151,250 |          |         |         |        |         
|                                                     | Purchase of common stock held in deferred compensation trust  |                                                                                                                                 |                                                     | (1,886  | )        |         |         |        |         
|                                                     | Other financing activities                                    |                                                                                                                                 |                                                     | (12     | )        |         |         | (110    | )       
|                                                     | Common stock dividends and distributions paid                 |                                                                                                                                 |                                                     | (77,343 | )        |         |         | (71,873 | )       
|                                                     |                                                               |                                                                                                                                 |                                                     |         |          |        
|                                                     |                                                               |                                                                                                                                 | Net cash provided by (used in) financing activities |         |          | 43,677  |         |         |          | (46,797 | )
|                                                     |                                                               |                                                                                                                                 |                                                     |         |          |        
|Net increase (decrease) in cash and cash equivalents |                                                               |                                                                                                                                 | (6,073                                              | )       |          |         | 161,110 |        
|Cash and cash equivalents at beginning of period     |                                                               |                                                                                                                                 | 57,160                                              |         |          |         | 214,167 |        
|                                                     |                                                               |                                                                                                                                 |                                                     |         |          |        
|Cash and cash equivalents at end of period           |                                                               | $                                                                                                                               | 51,087                                              |         |          | $       | 375,277 |        
|                                                     |                                                               |                                                                                                                                 |                                                     |         |          |        



4



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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF INVESTMENTS


|                                                                                                                                                                                                                                                                        |                       |                                                       |                                    |                |        |         |      |   |         |         |  |   |         |         | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------- | ----------------------------------------------------- | ---------------------------------- | -------------- | ------ | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                                                                                                                                                                                                                                                                        |                       |                                                       |                                    | March 31, 2005 |       
|                                                                                                                                                                                                                                                                        |                       |                                                       |                                    |                |       
|Private Finance                                                                                                                                                                                                                                                         |                       |                                                       |                                    |               
|Portfolio Company                                                                                                                                                                                                                                                       |                       |                                                       |                                    | (unaudited)    |       
|(in thousands, except number of shares)                                                                                                                                                                                                                                 |                       | Investment(1)(2)                                      |                                    | Principal      |        |         | Cost |   |         | Value   | 
|                                                                                                                                                                                                                                                                        |                       |                                                       |                                    |                |        |         |      |   |         |         | 
|Companies More Than 25% Owned                                                                                                                                                                                                                                           |                       |                                                       |                                    |                |        |         |      |   |         |         |  |  
|                                                                                                                                                                                                                                                                       
|Acme Paging,
    L.P.(4)                                                                                                                                                                                                                                                |                       | Loan (6.8%, Due 12/07 
    1/08)(6)                  |                                    | $              | 4,631  |         |      | $ | 4,631   |         |  | $ |        |        
|                                                                                                                                                                                                                                                                        | (Telecommunications)  |                                                       | Equity Interests                   |                |        |         |      |   |         | 13,274  |  |   |         |        | 
|                                                                                                                                                                                                                                                                        |                       | Common Stock (4,656 shares)                           |                                    |                |        |         |      |   | 27      |         |  |   |        |        
|                                                                                                                                                                                                                                                                       
|Advantage Sales & Marketing, Inc.                                                                                                                                                                                                                                       |                       | Loan (12.0%, Due 9/09)                                |                                    |                | 60,000 |         |      |   | 59,743  |         |  |   | 59,743  |        
|                                                                                                                                                                                                                                                                        | (Business Services)   |                                                       | Debt Securities (18.5%, Due 12/09) |                |        | 126,621 |      |   |         | 126,621 |  |   |         | 126,621 | 
|                                                                                                                                                                                                                                                                        |                       | Common Stock (18,957,011 shares)                      |                                    |                |        |         |      |   | 73,932  |         |  |   | 167,044 |        
|                                                                                                                                                                                                                                                                       
|Alaris Consulting, LLC                                                                                                                                                                                                                                                  |                       | Loan (16.3%, Due 12/05 
    12/07)(6)                |                                    |                | 24,025 |         |      |   | 24,068  |         |  |   | 4,719   |        
|                                                                                                                                                                                                                                                                        | (Business Services)   |                                                       | Equity Interests                   |                |        |         |      |   |         | 5,165   |  |   |         |        | 
|                                                                                                                                                                                                                                                                        |                       | Guaranty ($1,100)                                     |                                    |                |        |         |      |   |         |         |  |   |         |        
|                                                                                                                                                                                                                                                                       
|American Healthcare Services, Inc.                                                                                                                                                                                                                                      |                       | Loan (1.0%, Due 12/04 
    12/05)(6)                 |                                    |                | 5,200  |         |      |   | 4,801   |         |  |   | 4,212   |        
|                                                                                                                                                                                                                                                                        | and Affiliates        |                                                       |                                    |                |        |         |      |   |         |         |  |   |         |         | 
|                                                                                                                                                                                                                                                                        | (Healthcare Services) |                                                       |                                    |                |        |         |      |   |         |         |  |   |         |         | 
|                                                                                                                                                                                                                                                                       
|Avborne,
    Inc.(7)                                                                                                                                                                                                                                                    |                       | Preferred Stock (12,500 shares)                       |                                    |                |        |         |      |   | 7,014   |         |  |   | 881     |        
|                                                                                                                                                                                                                                                                        | (Business Services)   |                                                       | Common Stock (27,500 shares)       |                |        |         |      |   |         |        |  |   |         |        | 
|                                                                                                                                                                                                                                                                       
|Avborne Heavy Maintenance,
    Inc.(7)                                                                                                                                                                                                                                  |                       | Preferred Stock (1,568 shares)                        |                                    |                |        |         |      |   |        |         |  |   |        |        
|                                                                                                                                                                                                                                                                        | (Business Services)   |                                                       | Common Stock (2,750 shares)        |                |        |         |      |   |         |        |  |   |         |        | 
|                                                                                                                                                                                                                                                                       
|Business Loan Express, LLC                                                                                                                                                                                                                                              |                       | Class A Equity Interests                              |                                    |                | 55,494 |         |      |   | 55,494  |         |  |   | 55,494  |        
|                                                                                                                                                                                                                                                                        | (Financial Services)  |                                                       | Class B Equity Interests           |                |        |         |      |   |         | 117,436 |  |   |         | 140,523 | 
|                                                                                                                                                                                                                                                                        |                       | Class C Equity Interests                              |                                    |                |        |         |      |   | 109,301 |         |  |   | 134,696 |        
|                                                                                                                                                                                                                                                                        |                       | Guaranty ($104,574  See Note 3)                      |                                    |                |        |         |      |   |         |         |  |   |         |        
|                                                                                                                                                                                                                                                                        |                       | Standby Letters of Credit
    ($35,550   See Note 3) |                                    |                |        |         |      |   |         |         |  |   |         |        
|                                                                                                                                                                                                                                                                       
|Callidus Capital Corporation                                                                                                                                                                                                                                            |                       | Loan (5.2%, Due 12/05)                                |                                    |                | 54,854 |         |      |   | 54,854  |         |  |   | 54,854  |        
|                                                                                                                                                                                                                                                                        | (Financial Services)  |                                                       | Loan (12.0%, Due 12/06)            |                |        | 1,300   |      |   |         | 1,300   |  |   |         | 1,300   | 
|                                                                                                                                                                                                                                                                        |                       |                                                       | Debt Securities (18.0%, Due 10/08) |                |        | 4,234   |      |   |         | 4,234   |  |   |         | 4,234   | 
|                                                                                                                                                                                                                                                                        |                       | Common Stock (10 shares)                              |                                    |                |        |         |      |   | 1,867   |         |  |   | 4,100   |        
|                                                                                                                                                                                                                                                                       
|Fairchild Industrial Products                                                                                                                                                                                                                                           |                       | Loan (8.5%, Due 7/09)                                 |                                    |                | 6,668  |         |      |   | 6,668   |         |  |   | 6,668   |        
|                                                                                                                                                                                                                                                                        | Company               |                                                       | Debt Securities (12.1%, Due 7/09)  |                |        | 3,729   |      |   |         | 3,729   |  |   |         | 3,729   | 
|                                                                                                                                                                                                                                                                        | (Industrial Products) |                                                       | Common Stock (1,000 shares)        |                |        |         |      |   |         | 2,841   |  |   |         | 6,233   | 
|                                                                                                                                                                                                                                                                       
|(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



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##### 



|                                                                                                                                                                                                                                                                        |                        |                                        |                                          |                |        |        |      |   |        |        |  |   |        |        | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------- | -------------------------------------- | ---------------------------------------- | -------------- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                                                                                                                                                                                                                                                        |                        |                                        |                                          | March 31, 2005 |       
|                                                                                                                                                                                                                                                                        |                        |                                        |                                          |                |       
|Private Finance                                                                                                                                                                                                                                                         |                        |                                        |                                          |               
|Portfolio Company                                                                                                                                                                                                                                                       |                        |                                        |                                          | (unaudited)    |       
|(in thousands, except number of shares)                                                                                                                                                                                                                                 |                        | Investment(1)(2)                       |                                          | Principal      |        |        | Cost |   |        | Value  | 
|                                                                                                                                                                                                                                                                        |                        |                                        |                                          |                |        |        |      |   |        |        | 
|Financial Pacific Company                                                                                                                                                                                                                                               |                        | Loan (17.4%, Due 2/12  8/12)          |                                          | $              | 69,132 |        |      | $ | 68,828 |        |  | $ | 68,828 |       
|                                                                                                                                                                                                                                                                        | (Financial Services)   |                                        | Preferred Stock (9,950 shares)           |                |        |        |      |   |        | 9,950  |  |   |        | 10,945 | 
|                                                                                                                                                                                                                                                                        |                        |                                        | Common Stock (14,735 shares)             |                |        |        |      |   |        | 14,819 |  |   |        | 36,250 | 
|                                                                                                                                                                                                                                                                       
|ForeSite Towers, LLC                                                                                                                                                                                                                                                    |                        | Equity Interests                       |                                          |                |        |        |      |   | 18,703 |        |  |   | 20,802 |       
|                                                                                                                                                                                                                                                                        | (Tower Leasing)        |                                        |                                          |                |        |        |      |   |        |        |  |   |        |        | 
|                                                                                                                                                                                                                                                                       
|GAC Investments, Inc.                                                                                                                                                                                                                                                   |                        | Common Stock (107 shares)              |                                          |                |        |        |      |   | 57,350 |        |  |   | 7,049  |       
|                                                                                                                                                                                                                                                                        | (Broadcasting & Cable) |                                        | Guaranty ($800)                          |                |        |        |      |   |        |        |  |   |        |        | 
|                                                                                                                                                                                                                                                                        |                        | Standby Letter of Credit ($200)        |                                          |                |        |        |      |   |        |        |  |   |        |       
|                                                                                                                                                                                                                                                                       
|Global Communications, LLC                                                                                                                                                                                                                                              |                        | Loan (14.5%, Due 12/03  12/06)        |                                          |                | 6,393  |        |      |   | 6,393  |        |  |   | 6,393  |       
|                                                                                                                                                                                                                                                                        | (Business Services)    |                                        | Debt Securities (13.0%, Due 9/02  9/05) |                |        | 18,321 |      |   |        | 18,318 |  |   |        | 18,318 | 
|                                                                                                                                                                                                                                                                        |                        | Preferred Equity Interest              |                                          |                |        |        |      |   | 14,067 |        |  |   | 14,723 |       
|                                                                                                                                                                                                                                                                        |                        | Options                                |                                          |                |        |        |      |   | 1,639  |        |  |   |       |       
|                                                                                                                                                                                                                                                                       
|Gordian Group, Inc.                                                                                                                                                                                                                                                     |                        | Loan (10.0%, Due 12/05 
    12/08)(6) |                                          |                | 11,392 |        |      |   | 11,434 |        |  |   | 5,698  |       
|                                                                                                                                                                                                                                                                        | (Business Services)    |                                        | Common Stock (1,000 shares)              |                |        |        |      |   |        | 5,820  |  |   |        |       | 
|                                                                                                                                                                                                                                                                       
|HealthASPex, Inc.                                                                                                                                                                                                                                                       |                        | Preferred Stock (1,000,000 shares)     |                                          |                |        |        |      |   | 700    |        |  |   | 700    |       
|                                                                                                                                                                                                                                                                        | (Business Services)    |                                        | Preferred Stock (1,451,380 shares)       |                |        |        |      |   |        | 4,900  |  |   |        | 1,507  | 
|                                                                                                                                                                                                                                                                        |                        | Common Stock (1,451,380 shares)        |                                          |                |        |        |      |   | 4      |        |  |   |       |       
|                                                                                                                                                                                                                                                                       
|HMT, Inc.                                                                                                                                                                                                                                                               |                        | Debt Securities (13.3%, Due 12/08)     |                                          |                | 10,000 |        |      |   | 9,349  |        |  |   | 9,349  |       
|                                                                                                                                                                                                                                                                        | (Energy Services)      |                                        | Preferred Stock (554,052 shares)         |                |        |        |      |   |        | 2,637  |  |   |        | 2,637  | 
|                                                                                                                                                                                                                                                                        |                        | Common Stock (300,000 shares)          |                                          |                |        |        |      |   | 3,000  |        |  |   | 4,260  |       
|                                                                                                                                                                                                                                                                        |                        | Warrants                               |                                          |                |        |        |      |   | 1,155  |        |  |   | 1,640  |       
|                                                                                                                                                                                                                                                                       
|Housecall Medical Resources, Inc.                                                                                                                                                                                                                                       |                        | Loan (16.8%, Due 11/07  11/09)        |                                          |                | 15,757 |        |      |   | 15,704 |        |  |   | 15,704 |       
|                                                                                                                                                                                                                                                                        | (Healthcare Services)  |                                        | Common Stock (864,000 shares)            |                |        |        |      |   |        | 86     |  |   |        | 34,032 | 
|                                                                                                                                                                                                                                                                       
|Impact Innovations Group, LLC
    (Business Services)                                                                                                                                                                                                                   |                        | Equity Interests in Affiliate          |                                          |                |        |        |      |   |       |        |  |   | 772    |       
|                                                                                                                                                                                                                                                                       
|Insight Pharmaceuticals Corporation                                                                                                                                                                                                                                     |                        | Senior Loan (8.3%, Due 12/07)          |                                          |                | 66,470 |        |      |   | 66,146 |        |  |   | 66,146 |       
|                                                                                                                                                                                                                                                                        | (Consumer Products)    |                                        | Loan (15.0%, Due 12/09)                  |                |        | 57,500 |      |   |        | 57,237 |  |   |        | 57,237 | 
|                                                                                                                                                                                                                                                                        |                        |                                        | Preferred Stock (25,000 shares)          |                |        |        |      |   |        | 25,000 |  |   |        | 25,500 | 
|                                                                                                                                                                                                                                                                        |                        | Common Stock (6,200 shares)            |                                          |                |        |        |      |   | 6,325  |        |  |   | 6,325  |       
|                                                                                                                                                                                                                                                                       
|Jakel, Inc.                                                                                                                                                                                                                                                             |                        | Loan (15.5%, Due
    3/08)(6)          |                                          |                | 5,412  |        |      |   | 5,412  |        |  |   |       |       
|                                                                                                                                                                                                                                                                        | (Industrial Products)  |                                        | Debt Securities (15.5%, Due
    3/08)(6) |                |        | 8,330  |      |   |        | 8,330  |  |   |        |       | 
|                                                                                                                                                                                                                                                                        |                        |                                        | Preferred Stock (6,460 shares)           |                |        |        |      |   |        | 6,460  |  |   |        |       | 
|                                                                                                                                                                                                                                                                        |                        |                                        | Common Stock (158,061 shares)            |                |        |        |      |   |        | 9,347  |  |   |        |       | 
|                                                                                                                                                                                                                                                                       
|Legacy Partners Group, LLC                                                                                                                                                                                                                                              |                        | Loan (14.0%, Due
    5/09)(6)          |                                          |                | 7,147  |        |      |   | 7,147  |        |  |   | 6,047  |       
|                                                                                                                                                                                                                                                                        | (Financial Services)   |                                        | Debt Securities (18.0%, Due
    5/09)(6) |                |        | 2,952  |      |   |        | 2,952  |  |   |        |       | 
|                                                                                                                                                                                                                                                                        |                        | Equity Interests                       |                                          |                |        |        |      |   | 2,729  |        |  |   |       |       
|                                                                                                                                                                                                                                                                       
|(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



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##### 



|                                            |                       |                                    |                                                  |                |        |        |           |   |        |        |           |   |        |        | 
|------------------------------------------- | --------------------- | ---------------------------------- | ------------------------------------------------ | -------------- | ------ | ------ | --------- | - | ------ | ------ | --------- | - | ------ | ------ | 
|                                            |                       |                                    |                                                  | March 31, 2005 |       
|                                            |                       |                                    |                                                  |                |       
|Private Finance                             |                       |                                    |                                                  |               
|Portfolio Company                           |                       |                                    |                                                  | (unaudited)    |       
|(in thousands, except number of shares)     |                       | Investment(1)(2)                   |                                                  | Principal      |        |        | Cost      |   |        | Value  |          
|                                            |                       |                                    |                                                  |                |        |        |           |   |        |        |          
|Litterer
    Beteiligungs-GmbH(4)           |                       | Debt Securities (8.0%, Due 3/07)   |                                                  | $              | 677    |        |           | $ | 677    |        |           | $ | 677    |       
|                                            | (Business Services)   |                                    | Equity Interest                                  |                |        |        |           |   |        | 1,756  |           |   |        | 3,431  | 
|                                           
|Maui Body Works, Inc.                       |                       | Common Stock (100 shares)          |                                                  |                |        |        |           |   | 2,500  |        |           |   |       |       
|                                            | (Healthcare Services) |                                    |                                                  |                |        |        |           |   |        |        |           |   |        |        | 
|                                           
|Mercury Air Centers, Inc.                   |                       | Senior Loan (10.0%, Due 4/09)      |                                                  |                | 23,500 |        |           |   | 23,500 |        |           |   | 23,500 |       
|                                            | (Business Services)   |                                    | Loan (16.0%, Due 4/09)                           |                |        | 38,540 |           |   |        | 38,356 |           |   |        | 38,356 | 
|                                            |                       |                                    | Common Stock (57,068 shares)                     |                |        |        |           |   |        | 33,723 |           |   |        | 33,723 | 
|                                            |                       |                                    | Standby Letters of Credit ($1,322)               |                |        |        |           |   |        |        |           |   |        |        | 
|                                           
|MVL Group, Inc.                             |                       | Loan (12.3%, Due 10/07  7/09)     |                                                  |                | 15,030 |        |           |   | 14,618 |        |           |   | 14,618 |       
|                                            | (Business Services)   |                                    | Debt Securities (14.4%, Due 7/09)                |                |        | 18,153 |           |   |        | 17,661 |           |   |        | 17,661 | 
|                                            |                       | Common Stock (648,661 shares)      |                                                  |                |        |        |           |   | 643    |        |           |   | 6,082  |       
|                                           
|Norstan Apparel Shops, Inc.                 |                       | Loan (16.0%, Due
    12/07)(6)     |                                                  |                | 500    |        |           |   | 500    |        |           |   |       |       
|                                            | (Retail)              |                                    | Debt Securities (17.8%, Due 12/07 
    9/08)(6) |                |        | 13,588 |           |   |        | 12,960 |           |   |        |       | 
|                                            |                       |                                    | Common Stock (29,663 shares)                     |                |        |        |           |   |        | 4,790  |           |   |        |       | 
|                                            |                       | Warrants                           |                                                  |                |        |        |           |   | 655    |        |           |   |       |       
|                                           
|Pennsylvania Avenue Investors, L.P.
    (5) |                       | Equity Interests                   |                                                  |                |        |        |           |   | 1,289  |        |           |   | 880    |       
|                                            | (Private Equity Fund) |                                    |                                                  |                |        |        |           |   |        |        |           |   |        |        | 
|                                           
|Powell Plant Farms, Inc.                    |                       | Loan (15.0%, Due 12/05)            |                                                  |                | 37,790 |        |           |   | 28,942 |        |           |   | 28,942 |       
|                                            | (Consumer Products)   |                                    | Debt Securities (20.0%, Due
    6/03)(6)         |                |        | 19,291 |           |   |        | 19,224 |           |   |        | 11,571 | 
|                                            |                       | Preferred Stock (1,483 shares)     |                                                  |                |        |        |           |   |       |        |           |   |       |       
|                                            |                       | Warrants                           |                                                  |                |        |        |           |   |       |        |           |   |       |       
|                                           
|Redox Brands, Inc.                          |                       | Preferred Stock (2,726,444 shares) |                                                  |                |        |        |           |   | 7,903  |        |           |   | 11,655 |       
|                                            | (Consumer Products)   |                                    | Warrants                                         |                |        |        |           |   |        | 584    |           |   |        | 481    | 
|                                            |                       | Guaranty ($125)                    |                                                  |                |        |        |           |   |        |        |           |   |        |       
|                                           
|Staffing Partners Holding                   |                       | Loan (13.5%, Due
    10/06)(6)     |                                                  |                | 974    |        |           |   | 974    |        |           |   | 974    |       
|                                            | Company, Inc.         |                                    | Debt Securities (13.5%, Due
    10/06)(6)        |                |        | 5,906  |           |   |        | 5,906  |           |   |        | 5,906  | 
|                                            | (Business Services)   |                                    | Preferred Stock (439,600 shares)                 |                |        |        |           |   |        | 4,968  |           |   |        | 187    | 
|                                            |                       | Common Stock (69,773 shares)       |                                                  |                |        |        |           |   | 50     |        |           |   |       |       
|                                            |                       | Warrants                           |                                                  |                |        |        |           |   | 10     |        |           |   |       |       
|                                           
|Startec Global Communications               |                       | Loan (10.0%, Due 5/07  5/09)      |                                                  |                | 16,518 |        |           |   | 16,518 |        |           |   | 16,518 |       
|                                            | Corporation           |                                    | Common Stock (19,180,000 shares)                 |                |        |        |           |   |        | 37,255 |           |   |        | 5,015  | 
|                                            | (Telecommunications)  |                                    |                                                  |                |        |        |           |   |        |        |           |   |        |        | 
|                                           
|STS Operating, Inc.                         |                       | Loan (15.3%, Due 3/12)             |                                                  |                | 8,436  |        |           |   | 8,436  |        |           |   | 8,436  |       
|                                            | (Industrial Products) |                                    | Common Stock (3,000,000 shares)                  |                |        |        |           |   |        | 3,522  |           |   |        | 12,948 | 
|                                            |                       |                                    | Options                                          |                |        |        |           |   |        |       |           |   |        |       | 
|                                           
|Total
    companies more than 25% owned     |                       |                                    |                                                  |                |        | $      | 1,426,861 |   |        | $      | 1,437,474 |  
|                                           
|Companies 5% to 25% Owned                   |                       |                                    |                                                  |               
|                                           
|Air Evac Lifeteam                           |                       | Debt Securities (12.9%, Due 7/10)  |                                                  | $              | 41,493 |        |           | $ | 41,322 |        |           | $ | 41,322 |       
|                                            | (Healthcare Services) |                                    | Equity Interests                                 |                |        |        |           |   |        | 3,000  |           |   |        | 1,654  | 
|                                           

|                                                                                                                                                                                                                                                                        |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|(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



---



##### 



|                                        |                       |                                   |                                                |                |        |        |         |   |        |       |         |   |        |       | 
|--------------------------------------- | --------------------- | --------------------------------- | ---------------------------------------------- | -------------- | ------ | ------ | ------- | - | ------ | ----- | ------- | - | ------ | ----- | 
|                                        |                       |                                   |                                                | March 31, 2005 |       
|                                        |                       |                                   |                                                |                |       
|Private Finance                         |                       |                                   |                                                |               
|Portfolio Company                       |                       |                                   |                                                | (unaudited)    |       
|(in thousands, except number of shares) |                       | Investment(1)(2)                  |                                                | Principal      |        |        | Cost    |   |        | Value |        
|                                        |                       |                                   |                                                |                |        |        |         |   |        |       |        
|Aspen Pet Products, Inc.                |                       | Loans (19.0%, Due 6/08)           |                                                | $              | 19,165 |        |         | $ | 19,073 |       |         | $ | 19,073 |      
|                                        | (Consumer Products)   |                                   | Preferred Stock (2,763 shares)                 |                |        |        |         |   |        | 2,154 |         |   |        | 917   | 
|                                        |                       | Common Stock (1,400 shares)       |                                                |                |        |        |         |   | 140    |       |         |   |       |      
|                                        |                       | Warrants                          |                                                |                |        |        |         |   |       |       |         |   |       |      
|                                       
|Becker Underwood, Inc.                  |                       | Loan (14.5%, Due 8/12)            |                                                |                | 23,197 |        |         |   | 23,090 |       |         |   | 23,090 |      
|                                        | (Industrial Products) |                                   | Common Stock (4,364 shares)                    |                |        |        |         |   |        | 5,000 |         |   |        | 3,400 | 
|                                       
|Border Foods, Inc.                      |                       | Loan (13.0%, Due 12/10)           |                                                |                | 3,000  |        |         |   | 3,000  |       |         |   | 3,000  |      
|                                        | (Consumer Products)   |                                   | Debt Securities (13.0%, Due 12/10)             |                |        | 10,000 |         |   |        | 9,525 |         |   |        | 9,525 | 
|                                        |                       | Preferred Stock (50,919 shares)   |                                                |                |        |        |         |   | 2,000  |       |         |   | 982    |      
|                                        |                       | Common Stock (1,810 shares)       |                                                |                |        |        |         |   | 45     |       |         |   |       |      
|                                        |                       | Warrants                          |                                                |                |        |        |         |   | 665    |       |         |   |       |      
|                                       
|The Debt Exchange Inc.                  |                       | Preferred Stock (921,875 shares)  |                                                |                |        |        |         |   | 1,250  |       |         |   | 1,839  |      
|                                        | (Business Services)   |                                   |                                                |                |        |        |         |   |        |       |         |   |        |       | 
|                                       
|MasterPlan, Inc.                        |                       | Loan (12.0%, Due on demand)       |                                                |                | 959    |        |         |   | 959    |       |         |   | 1,204  |      
|                                        | (Business Services)   |                                   | Common Stock (1,350 shares)                    |                |        |        |         |   |        | 42    |         |   |        | 3,300 | 
|                                       
|MedBridge Healthcare, LLC               |                       | Loan (5.1%, Due 8/09  8/14)      |                                                |                | 11,447 |        |         |   | 11,447 |       |         |   | 11,447 |      
|                                        | (Healthcare Services) |                                   | Convertible Debenture (2.0%, Due 8/14)
    (6) |                |        | 3,000  |         |   |        | 1,015 |         |   |        |      | 
|                                       
|MortgageRamp, Inc.                      |                       | Common Stock (772,000 shares)     |                                                |                |        |        |         |   | 3,860  |       |         |   | 306    |      
|                                        | (Business Services)   |                                   |                                                |                |        |        |         |   |        |       |         |   |        |       | 
|                                       
|Nexcel Synthetics, LLC                  |                       | Loan (14.5%, Due 6/09)            |                                                |                | 10,340 |        |         |   | 10,305 |       |         |   | 10,305 |      
|                                        | (Consumer Products)   |                                   | Equity Interests                               |                |        |        |         |   |        | 1,690 |         |   |        | 559   | 
|                                       
|Packaging Advantage Corporation         |                       | Debt Securities (18.5%, Due 4/08) |                                                |                | 15,439 |        |         |   | 14,731 |       |         |   | 14,731 |      
|                                        | (Business Services)   |                                   | Common Stock (232,168 shares)                  |                |        |        |         |   |        | 2,386 |         |   |        | 1,384 | 
|                                        |                       | Warrants                          |                                                |                |        |        |         |   | 963    |       |         |   | 559    |      
|                                       
|Pres Air Trol LLC                       |                       | Debt Securities (12.0%, Due 4/10) |                                                |                | 6,307  |        |         |   | 5,988  |       |         |   | 5,988  |      
|                                        | (Industrial Products) |                                   | Equity Interests                               |                |        |        |         |   |        | 1,323 |         |   |        | 371   | 
|                                       
|Progressive International               |                       | Loan (16.0%, Due 12/09)           |                                                |                | 7,290  |        |         |   | 7,260  |       |         |   | 7,260  |      
|                                        | Corporation           |                                   | Preferred Stock (500 shares)                   |                |        |        |         |   |        | 500   |         |   |        | 832   | 
|                                        | (Consumer Products)   |                                   | Common Stock (197 shares)                      |                |        |        |         |   |        | 13    |         |   |        | 182   | 
|                                        |                       | Warrants                          |                                                |                |        |        |         |   |       |       |         |   |       |      
|                                       
|Soteria Imaging Services, LLC           |                       | Loan (12.5%, Due 11/10)           |                                                |                | 9,500  |        |         |   | 8,380  |       |         |   | 8,380  |      
|                                        | (Healthcare Services) |                                   | Equity Interests                               |                |        |        |         |   |        | 2,114 |         |   |        | 2,114 | 
|                                       
|Universal Environmental Services,       |                       | Loan (13.5%, Due 2/09)            |                                                |                | 12,150 |        |         |   | 12,102 |       |         |   | 12,102 |      
|                                        | LLC                   |                                   | Equity Interests                               |                |        |        |         |   |        | 1,500 |         |   |        | 1,633 | 
|                                        | (Business Services)   |                                   |                                                |                |        |        |         |   |        |       |         |   |        |       | 
|                                       
|Total
    companies 5% to 25% owned     |                       |                                   |                                                |                |        | $      | 196,842 |   |        | $     | 187,459 |  
|                                       
|Companies Less Than 5% Owned            |                       |                                   |                                                |               
|                                       
|Anthony, Inc.                           |                       | Loan (11.4%, Due 9/11  9/12)     |                                                | $              | 14,561 |        |         | $ | 14,494 |       |         | $ | 14,494 |      
|                                        | (Industrial Products) |                                   |                                                |                |        |        |         |   |        |       |         |   |        |       | 
|                                       

|                                                                                                                                                                                                                                                                        |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|(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



---



##### 



|                                               |                           |                                      |                                  |                |        |  |      |   |        |       |  |   |        |       | 
|---------------------------------------------- | ------------------------- | ------------------------------------ | -------------------------------- | -------------- | ------ |  | ---- | - | ------ | ----- |  | - | ------ | ----- | 
|                                               |                           |                                      |                                  | March 31, 2005 |       
|                                               |                           |                                      |                                  |                |       
|Private Finance                                |                           |                                      |                                  |               
|Portfolio Company                              |                           |                                      |                                  | (unaudited)    |       
|(in thousands, except number of shares)        |                           | Investment(1)(2)                     |                                  | Principal      |        |  | Cost |   |        | Value | 
|                                               |                           |                                      |                                  |                |        |  |      |   |        |       | 
|Apogen Technologies, Inc.                      |                           | Debt Securities (13.0%, Due 1/10)    |                                  | $              | 5,000  |  |      | $ | 4,983  |       |  | $ | 4,983  |      
|                                               | (Business Services)       |                                      | Preferred Stock (270,008 shares) |                |        |  |      |   |        | 2,700 |  |   |        | 3,252 | 
|                                               |                           | Common Stock (1,256,452 shares)      |                                  |                |        |  |      |   | 50     |       |  |   | 2,295  |      
|                                               |                           | Warrants                             |                                  |                |        |  |      |   |       |       |  |   | 462    |      
|                                              
|Aviation Technologies, Inc.                    |                           | Loan (17.0%, Due 5/11)               |                                  |                | 21,341 |  |      |   | 21,264 |       |  |   | 21,264 |      
|                                               | (Industrial Products)     |                                      |                                  |                |        |  |      |   |        |       |  |   |        |       | 
|                                              
|Benchmark Medical, Inc.                        |                           | Debt Securities (14.0%, Due 12/08)   |                                  |                | 13,752 |  |      |   | 13,695 |       |  |   | 13,695 |      
|                                               | (Healthcare Services)     |                                      | Warrants                         |                |        |  |      |   |        | 18    |  |   |        | 18    | 
|                                              
|BI Incorporated                                |                           | Loan (14.0%, due 2/12)               |                                  |                | 16,000 |  |      |   | 15,921 |       |  |   | 15,921 |      
|                                               | (Business Services)       |                                      |                                  |                |        |  |      |   |        |       |  |   |        |       | 
|                                              
|C&K Market, Inc.                               |                           | Loan (13.0%, due 12/08)              |                                  |                | 14,444 |  |      |   | 14,372 |       |  |   | 14,372 |      
|                                               | (Retail)                  |                                      |                                  |                |        |  |      |   |        |       |  |   |        |       | 
|                                              
|Callidus Debt Partners                         |                           | Preferred Shares (23,600,000 shares) |                                  |                |        |  |      |   | 24,392 |       |  |   | 24,392 |      
|                                               | CLO Fund III, LTD
    (4) |                                      |                                  |                |        |  |      |   |        |       |  |   |        |       | 
|                                               | (Senior Debt CLO Fund)    |                                      |                                  |                |        |  |      |   |        |       |  |   |        |       | 
|                                              
|Camden Partners Strategic Fund II,
    L.P.(5) |                           | Limited Partnership Interest         |                                  |                |        |  |      |   | 2,142  |       |  |   | 2,871  |      
|                                               | (Private Equity Fund)     |                                      |                                  |                |        |  |      |   |        |       |  |   |        |       | 
|                                              
|Catterton Partners V,
    L.P.(5)              |                           | Limited Partnership Interest         |                                  |                |        |  |      |   | 2,340  |       |  |   | 2,109  |      
|                                               | (Private Equity Fund)     |                                      |                                  |                |        |  |      |   |        |       |  |   |        |       | 
|                                              
|CBS Personnel Holdings, Inc.                   |                           | Loan (15.5%, Due 12/09)              |                                  |                | 20,181 |  |      |   | 20,090 |       |  |   | 20,090 |      
|                                               | (Business Services)       |                                      |                                  |                |        |  |      |   |        |       |  |   |        |       | 
|                                              
|Colibri Holding Corporation                    |                           | Debt Securities (12.5%, Due 9/08)    |                                  |                | 3,750  |  |      |   | 3,513  |       |  |   | 3,513  |      
|                                               | (Consumer Products)       |                                      | Preferred Stock (459 shares)     |                |        |  |      |   |        | 523   |  |   |        | 826   | 
|                                               |                           | Common Stock (3,362 shares)          |                                  |                |        |  |      |   | 1,250  |       |  |   | 584    |      
|                                               |                           | Warrants                             |                                  |                |        |  |      |   | 290    |       |  |   | 136    |      
|                                              
|Community Education
    Centers, Inc.          |                           | Loan (15.0%, Due 12/10)              |                                  |                | 23,813 |  |      |   | 23,718 |       |  |   | 23,718 |      
|                                               | (Education Services)      |                                      |                                  |                |        |  |      |   |        |       |  |   |        |       | 
|                                              
|Component Hardware Group, Inc.                 |                           | Preferred Stock (18,000 shares)      |                                  |                |        |  |      |   | 2,605  |       |  |   | 2,709  |      
|                                               | (Industrial Products)     |                                      | Common Stock (2,000 shares)      |                |        |  |      |   |        | 200   |  |   |        | 600   | 
|                                              
|Cooper Natural Resources, Inc.                 |                           | Debt Securities (0%, Due 11/07)      |                                  |                | 1,335  |  |      |   | 1,335  |       |  |   | 1,300  |      
|                                               | (Industrial Products)     |                                      | Preferred Stock (6,316 shares)   |                |        |  |      |   |        | 1,424 |  |   |        |      | 
|                                               |                           | Warrants                             |                                  |                |        |  |      |   | 830    |       |  |   |       |      
|                                              
|Coverall North America, Inc.                   |                           | Loan (14.6%, Due 2/11)               |                                  |                | 26,899 |  |      |   | 26,844 |       |  |   | 26,844 |      
|                                               | (Business Services)       |                                      | Preferred Stock (6,500 shares)   |                |        |  |      |   |        | 6,500 |  |   |        | 6,561 | 
|                                               |                           | Warrants                             |                                  |                |        |  |      |   | 2,950  |       |  |   | 2,950  |      
|                                              

|                                                                                                                                                                                                                                                                        |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|(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



---



##### 



|                                            |                        |                                                   |                                          |                |        |       |      |   |        |       |  |   |        |     | 
|------------------------------------------- | ---------------------- | ------------------------------------------------- | ---------------------------------------- | -------------- | ------ | ----- | ---- | - | ------ | ----- |  | - | ------ | --- | 
|                                            |                        |                                                   |                                          | March 31, 2005 |       
|                                            |                        |                                                   |                                          |                |       
|Private Finance                             |                        |                                                   |                                          |               
|Portfolio Company                           |                        |                                                   |                                          | (unaudited)    |       
|(in thousands, except number of shares)     |                        | Investment(1)(2)                                  |                                          | Principal      |        |       | Cost |   |        | Value | 
|                                            |                        |                                                   |                                          |                |        |       |      |   |        |       | 
|CTT Holdings                                |                        | Loan (0%, Due
    3/10)(6)                        |                                          | $              | 1,125  |       |      | $ | 1,125  |       |  | $ | 563    |    
|                                            | (Consumer Products)    |                                                   |                                          |                |        |       |      |   |        |       |  |   |        |     | 
|                                           
|DCS Business Services, Inc.                 |                        | Common Stock (478,816 shares)                     |                                          |                |        |       |      |   | 734    |       |  |   | 2,000  |    
|                                            | (Business Services)    |                                                   |                                          |                |        |       |      |   |        |       |  |   |        |     | 
|                                           
|Drilltec Patents & Technologies             |                        | Loan (10.0%, Due
    8/06)(6)                     |                                          |                | 10,994 |       |      |   | 10,918 |       |  |   |       |    
|                                            | Company, Inc.          |                                                   | Debt Securities (15.5%, Due
    8/06)(6) |                |        | 1,500 |      |   |        | 1,500 |  |   |        |    | 
|                                            | (Energy Services)      |                                                   |                                          |                |        |       |      |   |        |       |  |   |        |     | 
|                                           
|eCentury Capital Partners,
    L.P.(5)      |                        | Limited Partnership Interest                      |                                          |                |        |       |      |   | 5,024  |       |  |   | 424    |    
|                                            | (Private Equity Fund)  |                                                   |                                          |                |        |       |      |   |        |       |  |   |        |     | 
|                                           
|EDM Consulting, LLC                         |                        | Loan (5.8%, Due 12/06)                            |                                          |                | 100    |       |      |   | 100    |       |  |   | 100    |    
|                                            | (Business Services)    |                                                   |                                          |                |        |       |      |   |        |       |  |   |        |     | 
|                                           
|Elexis Beta
    GmbH(4)                     |                        | Options                                           |                                          |                |        |       |      |   | 426    |       |  |   | 50     |    
|                                            | (Industrial Products)  |                                                   |                                          |                |        |       |      |   |        |       |  |   |        |     | 
|                                           
|E-Talk Corporation                          |                        | Preferred Stock (133 shares)                      |                                          |                |        |       |      |   | 10,009 |       |  |   | 1,468  |    
|                                            | (Business Services)    |                                                   | Common Stock (8,656 shares)              |                |        |       |      |   |        |      |  |   |        | 500 | 
|                                           
|Frozen Specialties, Inc.                    |                        | Warrants                                          |                                          |                |        |       |      |   | 435    |       |  |   | 435    |    
|                                            | (Consumer Products)    |                                                   |                                          |                |        |       |      |   |        |       |  |   |        |     | 
|                                           
|Garden Ridge Corporation
    (Retail)       |                        | Debt Securities (12.9%, Due 12/05 
    12/07)(6) |                                          |                | 27,271 |       |      |   | 27,271 |       |  |   | 12,722 |    
|                                            |                        |                                                   | Preferred Stock (1,130 shares)           |                |        |       |      |   |        | 1,130 |  |   |        |    | 
|                                            |                        | Common Stock (847,800 shares)                     |                                          |                |        |       |      |   | 613    |       |  |   |       |    
|                                           
|Geotrace Technologies, Inc.                 |                        | Debt Securities (12.0%, Due 6/09)                 |                                          |                | 18,400 |       |      |   | 16,380 |       |  |   | 16,380 |    
|(Energy Services)                           |                        | Warrants                                          |                                          |                |        |       |      |   | 2,350  |       |  |   | 2,350  |    
|                                           
|Ginsey Industries, Inc.                     |                        | Loans (12.5%, Due 3/06)                           |                                          |                | 4,307  |       |      |   | 4,307  |       |  |   | 4,307  |    
|                                            | (Consumer Products)    |                                                   | Convertible Debentures (12.5%, Due 3/06) |                |        | 500   |      |   |        | 500   |  |   |        | 697 | 
|                                            |                        | Warrants                                          |                                          |                |        |       |      |   |       |       |  |   | 2,103  |    
|                                           
|Grant Broadcasting Systems II               |                        | Loan (5.0%, Due 6/09)                             |                                          |                | 2,756  |       |      |   | 2,756  |       |  |   | 2,756  |    
|                                            | (Broadcasting & Cable) |                                                   |                                          |                |        |       |      |   |        |       |  |   |        |     | 
|                                           
|Grotech Partners, VI,
    L.P.(5)           |                        | Limited Partnership Interest                      |                                          |                |        |       |      |   | 6,329  |       |  |   | 4,115  |    
|                                            | (Private Equity Fund)  |                                                   |                                          |                |        |       |      |   |        |       |  |   |        |     | 
|                                           
|Haven Eldercare of New England, LLC
    (8) |                        | Loans (9.3%, Due 10/05)                           |                                          |                | 46,671 |       |      |   | 46,669 |       |  |   | 46,669 |    
|                                            | (Healthcare Services)  |                                                   |                                          |                |        |       |      |   |        |       |  |   |        |     | 
|                                           
|Haven Healthcare Management,
    LLC(8)     |                        | Loan (18.0% Due 8/06)                             |                                          |                | 6,000  |       |      |   | 6,000  |       |  |   | 6,000  |    
|                                            | (Healthcare Services)  |                                                   |                                          |                |        |       |      |   |        |       |  |   |        |     | 
|                                           
|The Hillman Companies,
    Inc.(3)          |                        | Loan (13.5%, Due 9/11)                            |                                          |                | 43,265 |       |      |   | 43,057 |       |  |   | 43,057 |    
|                                            | (Consumer Products)    |                                                   |                                          |                |        |       |      |   |        |       |  |   |        |     | 
|                                           

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





10



---



##### 



|                                               |                        |                                         |                                 |                |        |  |      |   |        |       |  |   |        |       | 
|---------------------------------------------- | ---------------------- | --------------------------------------- | ------------------------------- | -------------- | ------ |  | ---- | - | ------ | ----- |  | - | ------ | ----- | 
|                                               |                        |                                         |                                 | March 31, 2005 |       
|                                               |                        |                                         |                                 |                |       
|Private Finance                                |                        |                                         |                                 |               
|Portfolio Company                              |                        |                                         |                                 | (unaudited)    |       
|(in thousands, except number of shares)        |                        | Investment(1)(2)                        |                                 | Principal      |        |  | Cost |   |        | Value | 
|                                               |                        |                                         |                                 |                |        |  |      |   |        |       | 
|Homax Holdings, Inc.                           |                        | Debt (12.0%, Due 8/11)                  |                                 | $              | 14,000 |  |      | $ | 12,958 |       |  | $ | 12,958 |      
|                                               | (Consumer Products)    |                                         | Preferred Stock (89 shares)     |                |        |  |      |   |        | 89    |  |   |        | 85    | 
|                                               |                        |                                         | Common Stock (28 shares)        |                |        |  |      |   |        | 6     |  |   |        | 6     | 
|                                               |                        |                                         | Warrants                        |                |        |  |      |   |        | 1,106 |  |   |        | 1,377 | 
|                                              
|Icon International, Inc.                       |                        | Common Stock (25,707 shares)            |                                 |                |        |  |      |   | 76     |       |  |   |       |      
|                                               | (Business Services)    |                                         |                                 |                |        |  |      |   |        |       |  |   |        |       | 
|                                              
|Interline Brands,
    Inc.(3)                  |                        | Common Stock (152,371 shares)           |                                 |                |        |  |      |   | 2,294  |       |  |   | 2,850  |      
|                                               | (Business Services)    |                                         |                                 |                |        |  |      |   |        |       |  |   |        |       | 
|                                              
|International Fiber Corporation                |                        | Debt Securities (14.0%, Due 6/12)       |                                 |                | 21,222 |  |      |   | 21,127 |       |  |   | 21,127 |      
|                                               | (Industrial Products)  |                                         | Preferred Stock (25,000 shares) |                |        |  |      |   |        | 2,500 |  |   |        | 2,500 | 
|                                              
|MedAssets, Inc.                                |                        | Preferred Stock (227,865 shares)        |                                 |                |        |  |      |   | 2,049  |       |  |   | 2,765  |      
|                                               | (Business Services)    |                                         | Warrants                        |                |        |  |      |   |        | 136   |  |   |        | 45    | 
|                                              
|Mid-Atlantic Venture Fund IV, L.P.
    (5)     |                        | Limited Partnership Interest            |                                 |                |        |  |      |   | 6,600  |       |  |   | 3,012  |      
|                                               | (Private Equity Fund)  |                                         |                                 |                |        |  |      |   |        |       |  |   |        |       | 
|                                              
|Mogas Energy, LLC
    (Energy Services)        |                        | Debt Securities (9.5%, Due 3/12  4/12) |                                 |                | 17,476 |  |      |   | 15,988 |       |  |   | 15,988 |      
|                                               |                        |                                         | Warrants                        |                |        |  |      |   |        | 1,774 |  |   |        | 2,800 | 
|                                              
|Nobel Learning Communities,                    |                        | Preferred Stock (1,214,356 shares)      |                                 |                |        |  |      |   | 2,764  |       |  |   | 2,764  |      
|                                               | Inc.(3)                |                                         | Warrants                        |                |        |  |      |   |        | 575   |  |   |        | 861   | 
|                                               | (Education)            |                                         |                                 |                |        |  |      |   |        |       |  |   |        |       | 
|                                              
|Norwesco, Inc.                                 |                        | Loan (14.0%, Due 12/11)                 |                                 |                | 15,000 |  |      |   | 14,928 |       |  |   | 14,928 |      
|                                               | (Industrial Products)  |                                         |                                 |                |        |  |      |   |        |       |  |   |        |       | 
|                                              
|Novak Biddle Venture Partners III,
    L.P.(5) |                        | Limited Partnership Interest            |                                 |                |        |  |      |   | 1,189  |       |  |   | 1,299  |      
|                                               | (Private Equity Fund)  |                                         |                                 |                |        |  |      |   |        |       |  |   |        |       | 
|                                              
|Oahu Waste Services, Inc.                      |                        | Stock Appreciation Rights               |                                 |                |        |  |      |   | 239    |       |  |   | 400    |      
|                                               | (Business Services)    |                                         |                                 |                |        |  |      |   |        |       |  |   |        |       | 
|                                              
|Onyx Television GmbH
    (4)                   |                        | Preferred Units                         |                                 |                |        |  |      |   | 201    |       |  |   |       |      
|                                               | (Broadcasting & Cable) |                                         |                                 |                |        |  |      |   |        |       |  |   |        |       | 
|                                              
|Opinion Research
    Corporation(3)            |                        | Warrants                                |                                 |                |        |  |      |   | 996    |       |  |   | 600    |      
|                                               | (Business Services)    |                                         |                                 |                |        |  |      |   |        |       |  |   |        |       | 
|                                              
|Oriental Trading Company, Inc.                 |                        | Common Stock (13,820 shares)            |                                 |                |        |  |      |   |       |       |  |   | 5,900  |      
|                                               | (Consumer Products)    |                                         |                                 |                |        |  |      |   |        |       |  |   |        |       | 
|                                              
|Pro Mach, Inc.                                 |                        | Loan (13.8%, Due 6/12)                  |                                 |                | 19,000 |  |      |   | 18,909 |       |  |   | 18,909 |      
|                                               | (Industrial Products)  |                                         | Equity Interests                |                |        |  |      |   |        | 1,500 |  |   |        | 1,500 | 
|                                              
|RadioVisa Corporation                          |                        | Loan (15.5%, Due 12/08)                 |                                 |                | 26,189 |  |      |   | 26,080 |       |  |   | 26,080 |      
|                                               | (Broadcasting & Cable) |                                         |                                 |                |        |  |      |   |        |       |  |   |        |       | 
|                                              
|Resun Leasing, Inc.                            |                        | Loan (15.5%, Due 11/07)                 |                                 |                | 30,000 |  |      |   | 30,000 |       |  |   | 30,000 |      
|                                               | (Business Services)    |                                         |                                 |                |        |  |      |   |        |       |  |   |        |       | 
|                                              
|S.B. Restaurant Company                        |                        | Debt Securities (15.0%, Due 11/08)      |                                 |                | 17,796 |  |      |   | 17,271 |       |  |   | 17,271 |      
|                                               | (Retail)               |                                         | Preferred Stock (54,125 shares) |                |        |  |      |   |        | 135   |  |   |        | 135   | 
|                                               |                        | Warrants                                |                                 |                |        |  |      |   | 619    |       |  |   | 525    |      
|                                              

|                                                                                                                                                                                                                                                                        |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|(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



---



##### 



|                                                    |                        |                                          |                               |                |        |   |           |   |        |       |           |   |        |       | 
|--------------------------------------------------- | ---------------------- | ---------------------------------------- | ----------------------------- | -------------- | ------ | - | --------- | - | ------ | ----- | --------- | - | ------ | ----- | 
|                                                    |                        |                                          |                               | March 31, 2005 |       
|                                                    |                        |                                          |                               |                |       
|Private Finance                                     |                        |                                          |                               |               
|Portfolio Company                                   |                        |                                          |                               | (unaudited)    |       
|(in thousands, except number of shares)             |                        | Investment(1)(2)                         |                               | Principal      |        |   | Cost      |   |        | Value |          
|                                                    |                        |                                          |                               |                |        |   |           |   |        |       |          
|SBBUT, LLC                                          |                        | Equity Interests                         |                               |                |        |   |           | $ | 85     |       |           | $ | 85     |      
|                                                    | (Consumer Products)    |                                          |                               |                |        |   |           |   |        |       |           |   |        |       | 
|                                                   
|Soff-Cut Holdings, Inc.                             |                        | Preferred Stock (300 shares)             |                               |                |        |   |           |   | 300    |       |           |   |       |      
|                                                    | (Industrial Products)  |                                          | Common Stock (2,000 shares)   |                |        |   |           |   |        | 200   |           |   |        |      | 
|                                                   
|SPP Mezzanine Fund,
    L.P.(5)                     |                        | Limited Partnership Interest             |                               |                |        |   |           |   | 1,663  |       |           |   | 1,553  |      
|                                                    | (Private Equity Fund)  |                                          |                               |                |        |   |           |   |        |       |           |   |        |       | 
|                                                   
|SunStates Refrigerated Services,                    |                        | Loan (8.3%, Due
    1/05)(6)             |                               | $              | 30     |   |           |   | 30     |       |           |   | 25     |      
|                                                    | Inc.                   |                                          |                               |                |        |   |           |   |        |       |           |   |        |       | 
|                                                    | (Warehouse Facilities) |                                          |                               |                |        |   |           |   |        |       |           |   |        |       | 
|                                                   
|Tradesmen International, Inc.                       |                        | Debt Securities (12.0%, Due 12/09)       |                               |                | 15,000 |   |           |   | 14,226 |       |           |   | 14,226 |      
|                                                    | (Business Services)    |                                          | Warrants                      |                |        |   |           |   |        | 710   |           |   |        | 710   | 
|                                                   
|United Site Services, Inc.                          |                        | Loan (12.7%, Due 6/10  12/10)           |                               |                | 53,918 |   |           |   | 53,649 |       |           |   | 53,649 |      
|                                                    | (Business Services)    |                                          | Common Stock (160,588 shares) |                |        |   |           |   |        | 1,000 |           |   |        | 1,000 | 
|                                                   
|Universal Tax Systems, Inc.                         |                        | Loan (14.5%, Due 7/11)                   |                               |                | 18,711 |   |           |   | 18,628 |       |           |   | 18,628 |      
|                                                    | (Business Services)    |                                          |                               |                |        |   |           |   |        |       |           |   |        |       | 
|                                                   
|Updata Venture Partners II,
    L.P.(5)             |                        | Limited Partnership Interest             |                               |                |        |   |           |   | 4,375  |       |           |   | 4,233  |      
|                                                    | (Private Equity Fund)  |                                          |                               |                |        |   |           |   |        |       |           |   |        |       | 
|                                                   
|Venturehouse-Cibernet Investors, LLC                |                        | Equity Interest                          |                               |                |        |   |           |   | 34     |       |           |   | 34     |      
|                                                    | (Business Services)    |                                          |                               |                |        |   |           |   |        |       |           |   |        |       | 
|                                                   
|Venturehouse Group,
    LLC(5)                      |                        | Equity Interest                          |                               |                |        |   |           |   | 598    |       |           |   | 403    |      
|                                                    | (Private Equity Fund)  |                                          |                               |                |        |   |           |   |        |       |           |   |        |       | 
|                                                   
|VICORP Restaurants,
    Inc.(3)                     |                        | Warrants                                 |                               |                |        |   |           |   | 33     |       |           |   | 742    |      
|                                                    | (Retail)               |                                          |                               |                |        |   |           |   |        |       |           |   |        |       | 
|                                                   
|Walker Investment Fund II,
    LLLP(5)              |                        | Limited Partnership Interest             |                               |                |        |   |           |   | 1,330  |       |           |   | 728    |      
|                                                    | (Private Equity Fund)  |                                          |                               |                |        |   |           |   |        |       |           |   |        |       | 
|                                                   
|Wear Me Apparel Corporation                         |                        | Debt Securities (17.0%, Due 12/10)       |                               |                | 45,000 |   |           |   | 44,056 |       |           |   | 44,056 |      
|                                                    | (Consumer Products)    |                                          | Warrants                      |                |        |   |           |   |        | 1,219 |           |   |        | 700   | 
|                                                   
|Weston Solutions, Inc.                              |                        | Loan (17.3%, Due 6/10)                   |                               |                | 7,350  |   |           |   | 7,323  |       |           |   | 7,323  |      
|                                                    | (Business Services)    |                                          |                               |                |        |   |           |   |        |       |           |   |        |       | 
|                                                   
|Wilshire Restaurant Group, Inc.                     |                        | Debt Securities (20.0%, Due
    6/07)(6) |                               |                | 19,107 |   |           |   | 18,566 |       |           |   | 18,884 |      
|                                                    | (Retail)               |                                          | Warrants                      |                |        |   |           |   |        | 735   |           |   |        | 735   | 
|                                                   
|Wilton Industries, Inc.                             |                        | Loan (19.3%, Due 6/08)                   |                               |                | 7,200  |   |           |   | 7,200  |       |           |   | 7,200  |      
|                                                    | (Consumer Products)    |                                          |                               |                |        |   |           |   |        |       |           |   |        |       | 
|                                                   
|Woodstream Corporation                              |                        | Loan (12.6%, Due 8/12  2/13)            |                               |                | 30,970 |   |           |   | 30,919 |       |           |   | 30,919 |      
|                                                    | (Consumer Products)    |                                          | Common Stock (180 shares)     |                |        |   |           |   |        | 673   |           |   |        | 3,500 | 
|                                                   
|Other companies                                     |                        | Other investments                        |                               |                | 862    |   |           |   | 870    |       |           |   | 864    |      
|                                                    |                        | Guaranty ($226)                          |                               |                |        |   |           |   |        |       |           |   |        |      
|                                                   
|Total
    companies less than 5% owned              |                        |                                          |                               |                |        | $ | 786,607   |   |        | $     | 753,537   |  
|                                                   
|Total
    private finance (116 portfolio companies) |                        |                                          |                               |                |        | $ | 2,410,310 |   |        | $     | 2,378,470 |  
|                                                   

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





12



---



##### 



|                                           |                                                                             |                                                            |  |                |          |  |   |          |           |  |       |        |         |  |   |        |         | 
|------------------------------------------ | --------------------------------------------------------------------------- | ---------------------------------------------------------- |  | -------------- | -------- |  | - | -------- | --------- |  | ----- | ------ | ------- |  | - | ------ | ------- | 
|                                           |                                                                             |                                                            |  | March 31, 2005 |         
|                                           |                                                                             |                                                            |  |                |         
|                                           |                                                                             | Stated                                                     |  |                |         
|                                           |                                                                             | Interest                                                   |  |                | Face (un |  |   | audited) |           |  | Value |       
|                                           |                                                                             |                                                            |  |                |          |  |   |          |           |  |       |       
|Commercial Real Estate Finance             |                                                                             |                                                            |  |                |          |  |   |          |           |  |       |        |         |  |   |       
|(in thousands, except number of issuances) |                                                                             |                                                            |  |                |          |  |   |          |           |  |       |        |         |  |   |       
|Commercial Mortgage-Backed Securities      |                                                                             |                                                            |  |                |          |  |   |          |           |  |       |        |         |  |   |       
|                                           | Mortgage Capital Funding, Series 1998-MC3                                   |                                                            |  | 5.5            | %        |  | $ | 51,105   |           |  | $     | 35,925 |         |  | $ | 31,436 |        
|                                           | Morgan Stanley Capital I, Series 1999-RM1                                   |                                                            |  | 6.4            | %        |  |   | 27,936   |           |  |       | 9,138  |         |  |   | 9,138  |        
|                                           | COMM 1999-1                                                                 |                                                            |  | 5.7            | %        |  |   | 50,032   |           |  |       | 28,525 |         |  |   | 27,677 |        
|                                           | Morgan Stanley Capital I, Series 1999-FNV1                                  |                                                            |  | 6.1            | %        |  |   | 20,168   |           |  |       | 10,060 |         |  |   | 7,575  |        
|                                           | DLJ Commercial Mortgage Trust 1999-CG2                                      |                                                            |  | 6.1            | %        |  |   | 39,165   |           |  |       | 13,333 |         |  |   | 14,176 |        
|                                           | Commercial Mortgage Acceptance Corp., Series 1999-C1                        |                                                            |  | 6.8            | %        |  |   | 18,173   |           |  |       | 4,582  |         |  |   | 4,844  |        
|                                           | LB Commercial Mortgage Trust, Series 1999-C2                                |                                                            |  | 6.7            | %        |  |   | 11,151   |           |  |       | 1,520  |         |  |   | 1,733  |        
|                                           | Chase Commercial Mortgage Securities Corp., Series 1999-2                   |                                                            |  | 6.5            | %        |  |   | 20,576   |           |  |       | 5,027  |         |  |   | 9,254  |        
|                                           | FUNB CMT, Series 1999-C4                                                    |                                                            |  | 6.5            | %        |  |   | 18,587   |           |  |       | 7,688  |         |  |   | 6,876  |        
|                                           | Heller Financial, HFCMC Series 2000 PH-1                                    |                                                            |  | 6.6            | %        |  |   | 23,536   |           |  |       | 8,440  |         |  |   | 8,500  |        
|                                           | SBMS VII, Inc., Series 2000-NL1                                             |                                                            |  | 7.2            | %        |  |   | 7,924    |           |  |       | 4,323  |         |  |   | 3,464  |        
|                                           | DLJ Commercial Mortgage Trust, Series 2000-CF1                              |                                                            |  | 7.0            | %        |  |   | 24,793   |           |  |       | 11,370 |         |  |   | 8,953  |        
|                                           | Deutsche Bank Alex. Brown, Series Comm 2000-C1                              |                                                            |  | 6.9            | %        |  |   | 12,290   |           |  |       | 3,286  |         |  |   | 2,441  |        
|                                           | LB-UBS Commercial Mortgage Trust, Series 2000-C4                            |                                                            |  | 6.9            | %        |  |   | 13,841   |           |  |       | 2,575  |         |  |   | 1,092  |        
|                                           | Credit Suisse First Boston Mortgage Securities Corp.,
    Series 2001-CK1   |                                                            |  | 5.9            | %        |  |   | 16,861   |           |  |       | 4,123  |         |  |   | 5,074  |        
|                                           | JP Morgan-CIBC-Deutsche 2001                                                |                                                            |  | 5.8            | %        |  |   | 20,528   |           |  |       | 6,872  |         |  |   | 3,384  |        
|                                           | Lehman Brothers-UBS Warburg 2001-C2                                         |                                                            |  | 6.4            | %        |  |   | 22,203   |           |  |       | 6,426  |         |  |   | 8,977  |        
|                                           | SBMS VII, Inc., Series 2001-C1                                              |                                                            |  | 6.1            | %        |  |   | 10,637   |           |  |       | 2,148  |         |  |   | 1,576  |        
|                                           | GE Capital Commercial Mortgage Securities Corp.,
    Series 2001-2          |                                                            |  | 6.1            | %        |  |   | 18,446   |           |  |       | 6,867  |         |  |   | 6,867  |        
|                                           | Credit Suisse First Boston Mortgage Securities Corp.,
    Series 2001-CKN5  |                                                            |  | 5.2            | %        |  |   | 16,881   |           |  |       | 5,098  |         |  |   | 3,486  |        
|                                           | JP Morgan Chase Commercial Mortgage Securities Corp.,
    Series 2001-C1    |                                                            |  | 5.6            | %        |  |   | 21,141   |           |  |       | 5,791  |         |  |   | 5,791  |        
|                                           | SBMS VII, Inc., Series 2001-C2                                              |                                                            |  | 6.2            | %        |  |   | 21,735   |           |  |       | 5,703  |         |  |   | 5,703  |        
|                                           | FUNB CMT, Series 2002-C1                                                    |                                                            |  | 6.0            | %        |  |   | 17,181   |           |  |       | 7,305  |         |  |   | 6,517  |        
|                                           | GE Capital Commercial Mortgage Corp., Series 2002-1                         |                                                            |  | 6.2            | %        |  |   | 25,965   |           |  |       | 7,127  |         |  |   | 8,393  |        
|                                           | GMAC Commercial Mortgage Securities, Inc., Series 2002-C2                   |                                                            |  | 5.8            | %        |  |   | 23,053   |           |  |       | 7,614  |         |  |   | 7,614  |        
|                                           | GE Capital Commercial Mortgage Corp., Series 2002-3                         |                                                            |  | 5.1            | %        |  |   | 27,796   |           |  |       | 6,298  |         |  |   | 6,298  |        
|                                           | Morgan Stanley Dean Witter Capital I Trust 2002-IQ3                         |                                                            |  | 6.0            | %        |  |   | 12,508   |           |  |       | 1,775  |         |  |   | 1,775  |        
|                                           | LB-UBS Commercial Mortgage Trust 2003-C1                                    |                                                            |  | 4.6            | %        |  |   | 23,999   |           |  |       | 3,944  |         |  |   | 3,944  |        
|                                           | GS Mortgage Securities Corporation II Series 2003-C1                        |                                                            |  | 4.7            | %        |  |   | 20,147   |           |  |       | 5,592  |         |  |   | 5,592  |        
|                                           | Credit Suisse First Boston Mortgage Securities Corp.,
    Series 2003-CK2   |                                                            |  | 4.9            | %        |  |   | 32,170   |           |  |       | 12,502 |         |  |   | 12,862 |        
|                                           | COMM 2003-LNB1                                                              |                                                            |  | 4.4            | %        |  |   | 20,094   |           |  |       | 3,216  |         |  |   | 3,216  |        
|                                           | Wachovia Bank Commercial Mortgage Trust, Series 2003-C5                     |                                                            |  | 4.3            | %        |  |   | 34,527   |           |  |       | 8,098  |         |  |   | 8,098  |        
|                                           | GMAC Commercial Mortgage Securities, Inc., Series 2003-C2                   |                                                            |  | 5.5            | %        |  |   | 30,654   |           |  |       | 6,670  |         |  |   | 6,670  |        
|                                           | Wachovia Bank Commercial Mortgage Trust, Series 2003-C9                     |                                                            |  | 5.3            | %        |  |   | 28,737   |           |  |       | 8,981  |         |  |   | 8,981  |        
|                                           | GE Commercial Mortgage Corporation, Series 2004-C1                          |                                                            |  | 5.0            | %        |  |   | 27,083   |           |  |       | 7,168  |         |  |   | 7,168  |        
|                                           | LB-UBS Commercial Mortgage Trust 2004-C1                                    |                                                            |  | 4.9            | %        |  |   | 21,365   |           |  |       | 5,832  |         |  |   | 5,832  |        
|                                           | MezzCapp Commercial Mortgage Trust, Series 2004-C1                          |                                                            |  | 10.0           | %        |  |   | 1,990    |           |  |       | 813    |         |  |   | 813    |        
|                                           | COMM 2004-LNB3                                                              |                                                            |  | 5.3            | %        |  |   | 26,708   |           |  |       | 9,670  |         |  |   | 9,670  |        
|                                           | GMAC Commercial Mortgage Securities, Inc. Series 2004-C1                    |                                                            |  | 5.3            | %        |  |   | 23,035   |           |  |       | 10,608 |         |  |   | 10,507 |        
|                                           | GS Mortgage Securities Corporation II, Series 2004-C1                       |                                                            |  | 4.6            | %        |  |   | 20,076   |           |  |       | 8,294  |         |  |   | 8,294  |        
|                                           | J.P. Morgan Chase Commercial Mortgage Securities Corp.,
    Series 2004-LN2 |                                                            |  | 5.3            | %        |  |   | 29,590   |           |  |       | 9,345  |         |  |   | 9,345  |        
|                                           | Wachovia Bank Commercial Mortgage Trust, Series 2004-C14                    |                                                            |  | 5.3            | %        |  |   | 21,947   |           |  |       | 5,299  |         |  |   | 5,299  |        
|                                           | COMM 2004-LNB4                                                              |                                                            |  | 4.7            | %        |  |   | 43,033   |           |  |       | 20,963 |         |  |   | 21,168 |        
|                                           | Credit Suisse First Boston Mortgage Security Corp., Series
    2004-C5      |                                                            |  | 4.7            | %        |  |   | 12,125   |           |  |       | 9,491  |         |  |   | 9,411  |        
|                                           | ACGS, 2004-1                                                                |                                                            |  | 5.4            | %        |  |   | 9,292    |           |  |       | 9,224  |         |  |   | 9,086  |        
|                                           | ACGS, 2004-1, LLC Interests                                                 |                                                            |  |                |          |  |   | 21,700   |           |  |       | 17,188 |         |  |   | 17,188 |        
|                                           | GE Capital Commercial Mortgage Corp., Series 2005-C1                        |                                                            |  | 4.7            | %        |  |   | 11,279   |           |  |       | 8,758  |         |  |   | 8,789  |        
|                                           | LB-UBS Commercial Mortgage Trust, Series 2005-C1                            |                                                            |  | 4.7            | %        |  |   | 50,737   |           |  |       | 28,368 |         |  |   | 28,243 |        
|                                           | Wachovia Bank Commercial Mortgage Trust, Series 2005-C17                    |                                                            |  | 5.1            | %        |  |   | 98,520   |           |  |       | 56,564 |         |  |   | 57,270 |        
|                                          
|                                           |                                                                             | Total commercial mortgage-backed securities (48 issuances) |  |                |          |  |   | $        | 1,203,020 |  |       | $      | 475,527 |  |   | $      | 466,060 | 
|                                          





13



---



##### 



|                                       |                                               |                                                          |   |        |         |  |   |         |         | 
|-------------------------------------- | --------------------------------------------- | -------------------------------------------------------- | - | ------ | ------- |  | - | ------- | ------- | 
|                                       |                                               | March 31, 2005                                           |  
|                                       |                                               |                                                          |  
|                                       |                                               | (unaudited)                                              |  
|                                       |                                               | Cost                                                     |   |        | Value   | 
|                                       |                                               |                                                          |   |        |         | 
|Commercial Real Estate Finance         |                                               |                                                          |   |        |         |  |   |        
|(in thousands, except number of loans) |                                               |                                                          |   |        |         |  |   |        
|Collateralized Debt Obligations        |                                               |                                                          |   |        |         |  |   |        
|                                       | Crest 2001-1,
    Ltd.(4)                     |                                                          | $ | 21,853 |         |  | $ | 23,190  |        
|                                       | Crest 2002-1,
    Ltd.(4)                     |                                                          |   | 24,807 |         |  |   | 28,076  |        
|                                       | Crest 2002-IG,
    Ltd.(4)                    |                                                          |   | 3,997  |         |  |   | 4,949   |        
|                                       | Crest Clarendon Street 2002-1,
    Ltd.(4)    |                                                          |   | 914    |         |  |   | 1,053   |        
|                                       | Crest 2003-1,
    Ltd.(4)                     |                                                          |   | 94,731 |         |  |   | 101,171 |        
|                                       | Crest 2003-2,
    Ltd.(4)                     |                                                          |   | 26,560 |         |  |   | 27,894  |        
|                                       | TIAA Real Estate CDO 2003-1,
    Ltd.(4)      |                                                          |   | 937    |         |  |   | 1,050   |        
|                                       | Crest Exeter Street Solar 2004-1,
    Ltd.(4) |                                                          |   | 1,636  |         |  |   | 1,770   |        
|                                       | Fairfield Street Solar 2004-1,
    Ltd.(4)    |                                                          |   | 5,957  |         |  |   | 5,964   |        
|                                       | Crest 2004-1,
    Ltd.(4)                     |                                                          |   | 32,096 |         |  |   | 32,035  |        
|                                      
|                                       |                                               | Total
    collateralized debt obligations (10 issuances) |   | $      | 213,488 |  |   | $       | 227,152 | 
|                                      

|                                                    |                              |                                        |               |  |           |   |        |  |       |   |           |   |         |   |           |       |         | 
|--------------------------------------------------- | ---------------------------- | -------------------------------------- | ------------- |  | --------- | - | ------ |  | ----- | - | --------- | - | ------- | - | --------- | ----- | ------- | 
|                                                    |                              | Interest                               |               |  | Number of |   |        |  |       |  
|                                                    |                              | Rate Ranges                            |               |  | Loans     |   |        |  |       |  
|                                                    |                              |                                        |               |  |           |   |        |  |       |  
|Commercial Mortgage Loans                           |                              |                                        |               |  |           |   |        |  |       |   |           |   |         |   |           |      
|                                                    |                              |                                        | Up to 6.99%   |  |           |   | 10     |  |       | $ | 27,555    |   |         | $ | 25,663    |      
|                                                    |                              |                                        | 7.00%8.99%   |  |           |   | 16     |  |       |   | 31,035    |   |         |   | 30,590    |      
|                                                    |                              |                                        | 9.00%10.99%  |  |           |   | 4      |  |       |   | 19,093    |   |         |   | 18,784    |      
|                                                    |                              |                                        | 11.00%12.99% |  |           |   | 3      |  |       |   | 8,497     |   |         |   | 8,054     |      
|                                                    |                              |                                        | 13.00%14.99% |  |           |   | 2      |  |       |   | 2,617     |   |         |   | 2,617     |      
|                                                    |                              | 15.00% and above                       |               |  | 2         |   |        |  | 3,970 |   |           |   | 3,970   |  
|                                                   
|                                                    |                              | Total commercial mortgage
    loans(9) |               |  |           |   |        |  | 37    |   |           | $ | 92,767  |   |           | $     | 89,678  | 
|                                                   
|Real Estate Owned                                   |                              |                                        |               |  |           |   |        |  |       | $ | 15,369    |   |         | $ | 18,443    |      
|                                                   
|Equity
    Interests(2)                             |                              |                                        |               |  |           |   |        |  |       |   |           |   |         |   |           |      
|Companies more than 25% owned (Guarantees  $2,681) |                              |                                        |               |  |           | $ | 12,462 |  |       | $ | 12,655    |  
|                                                    | Companies less than 5% owned |                                        |               |  |           |   |        |  |       |   |           |  |         |   |           | 2,548 |        
|                                                   
|                                                    |                              | Total equity interests                 |               |  |           |   |        |  |       |   |           | $ | 12,462  |   |           | $     | 15,203  | 
|                                                   
|                                                    |                              | Total commercial real estate finance   |               |  |           |   |        |  |       |   |           | $ | 809,613 |   |           | $     | 816,536 | 
|                                                   
|Total portfolio                                     |                              |                                        |               |  |           |   |        |  |       | $ | 3,219,923 |   |         | $ | 3,195,006 |      
|                                                   

|                                                                                                                                                                                                                                                                        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|(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.                                                                                                                                                                                                                             
|(9) Commercial
    mortgage loans totaling $22.9 million were on non-accrual
    status and therefore were considered non-income producing.                                                                                                                            





14



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(Information at and for the three months ended March 31,
2005 and 2004 is unaudited)


Note 1. Organization










Note 2. Summary of Significant Accounting Policies


Basis of Presentation






15



---



##### 



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



16



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Note 2. Summary of Significant Accounting Policies,
continued










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







17



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 2. Summary of Significant Accounting Policies,
continued




| |                                                                                               
| | ----------------------------------------------------------------------------------------------
| | Commercial Mortgage-Backed Securities (CMBS)
    and Collateralized Debt Obligations (CDO)







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





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





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

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


18



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 2. Summary of Significant Accounting Policies,
continued






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





| |                          
| | -------------------------
| | Cash and Cash Equivalents





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





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

Accounting
for Stock Issued to Employees


19



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 2. Summary of Significant Accounting Policies,
continued


Accounting for Stock-Based
Compensation


|                                                                                                                                                 |             |               |         |      |      |   |        |      | 
|------------------------------------------------------------------------------------------------------------------------------------------------ | ----------- | ------------- | ------- | ---- | ---- | - | ------ | ---- | 
|                                                                                                                                                 |             | For the Three |        
|                                                                                                                                                 |             | Months Ended  |        
|                                                                                                                                                 |             | March 31,     |        
|                                                                                                                                                 |             |               |        
|                                                                                                                                                 |             | 2005          |         |      | 2004 |  
|(in thousands, except per share amounts)                                                                                                         |             |               |         |      |      |  
|Net increase in net assets resulting from operations as reported                                                                                 |             | $             | 119,621 |      |      | $ | 20,308 |     
|Less total stock-based employee compensation expense determined
    under fair value based method for all awards, net of related tax
    effects |             |               | (2,856  | )    |      |   | (3,052 | )   
|                                                                                                                                                 |             |               |         |      |      |  
|Pro forma net increase in net assets resulting from operations                                                                                   |             |               | 116,765 |      |      |   | 17,256 |     
|Less preferred stock dividends                                                                                                                   |             |               |        |      |      |   | (45    | )   
|                                                                                                                                                 |             |               |         |      |      |  
|Pro forma net income available to common shareholders                                                                                            |             | $             | 116,765 |      |      | $ | 17,211 |     
|                                                                                                                                                 |             |               |         |      |      |  
|Basic earnings per common share:                                                                                                                 |             |               |         |      |      |   |        |     
|                                                                                                                                                 | As reported |               | $       | 0.90 |      |   | $      | 0.16 | 
|                                                                                                                                                 | Pro forma   |               | $       | 0.88 |      |   | $      | 0.13 | 
|Diluted earnings per common share:                                                                                                               |             |               |         |      |      |   |        |     
|                                                                                                                                                 | As reported |               | $       | 0.88 |      |   | $      | 0.15 | 
|                                                                                                                                                 | Pro forma   |               | $       | 0.86 |      |   | $      | 0.13 | 



|                                       |  |               |   |   |      |   |      |  
|-------------------------------------- |  | ------------- | - | - | ---- | - | ---- | -
|                                       |  | For the Three |  
|                                       |  | Months Ended  |  
|                                       |  | March 31,     |  
|                                       |  |               |  
|                                       |  | 2005(1)       |   |   | 2004 |  
|                                       |  |               |   |   |      |  
|Risk-free interest rate                |  |               |  | % |      |   | 2.7  | %
|Expected life                          |  |               |  |   |      |   | 5.0  |  
|Expected volatility                    |  |               |  | % |      |   | 37.0 | %
|Dividend yield                         |  |               |  | % |      |   | 8.7  | %
|Weighted average fair value per option |  | $             |  |   |      | $ | 4.25 |  




|    |                                                                                        
|--- | ---------------------------------------------------------------------------------------
|(1) | The Company did not grant any options during the three months
    ended March 31, 2005.



| |                               
| | ------------------------------
| | Federal and State Income Taxes



20



---



##### 



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

Share-Based Payment Accounting for Stock-Based
Compensation Accounting for Stock Issued to Employees


21



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Note 3. Portfolio




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



|                                  |       |      |           |           |       |   |           |           |  |  |      |   |  |       |           |           |          |   |           |           |  |  |      |   | 
|--------------------------------- | ----- | ---- | --------- | --------- | ----- | - | --------- | --------- |  |  | ---- | - |  | ----- | --------- | --------- | -------- | - | --------- | --------- |  |  | ---- | - | 
|                                  |       | 2005 |           |           | 2004  |  
|                                  |       |      |           |           |       |  
|                                  |       | Cost |           |           | Value |   |           | Yield(1)  |  |  | Cost |   |  | Value |           |           | Yield(1) |  
|($ in thousands)                  |       |      |           |           |       |   |           |           |  |  |      |   |  |       |           |           |          |  
|Loans and debt securities
    (2) |       | $    | 1,653,393 |           |       | $ | 1,556,359 |           |  |  | 13.8 | % |  | $     | 1,679,855 |           |          | $ | 1,602,869 |           |  |  | 13.9 | %
|Equity interests                  |       |      | 756,917   |           |       |   | 822,111   |           |  |  |      |   |  |       | 705,065   |           |          |   | 699,217   |           |  |  |      |  
|                                  |       |      |           |           |       |   |           |           |  |  |      |   |  |       |           |           |          |  
|                                  | Total |      | $         | 2,410,310 |       |   | $         | 2,378,470 |  |  |      |   |  |       | $         | 2,384,920 |          |   | $         | 2,302,086 |  |  |      |   | 
|                                  |       |      |           |           |       |   |           |           |  |  |      |   |  |       |           |           |          |  




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The weighted average yield on loans and debt securities is
    computed as the (a) annual stated interest 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, 2005, and December 31, 2004, the cost and
    value of loans and debt securities include the Class A
    equity interests in BLX and the guaranteed dividend yield on
    these equity interests is included in interest income. The
    weighted average yield is computed as of the balance sheet date.
|   
|(2) | The principal balance outstanding on loans and debt securities
    was $1.7 billion and $1.7 billion at March 31,
    2005, and December 31, 2004, respectively. The difference
    between principal and cost is represented by unamortized loan
    origination fees and costs, original issue discounts, and market
    discounts totaling $27.2 million and $29.8 million at
    March 31, 2005, and December 31, 2004, respectively.                                                                                                                                                                                                                                                                      







22



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Note 3. Portfolio, continued


















23



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Note 3. Portfolio, continued














| |   |                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a partial repayment of $8.2 million of the Companys
    investment in Avborne, Inc. (Avborne) as a result of the sale of
    Avbornes assets during the first quarter of 2005;

24



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Note 3. Portfolio, continued




| |   |                                                                                                                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | additional fundings of $41.8 million on Callidus Capital
    Corporations revolving line of credit related to its
    middle market underwriting and syndication facility. Callidus
    repaid borrowings under this facility totaling
    $27.9 million during the quarter, for net additional
    borrowings under the facility during the quarter of
    $13.9 million;



| |   |                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the contribution of existing debt securities of GAC Investments,
    Inc. with a cost basis of $11.0 million to capital,
    resulting in an increase in the Companys common stock cost
    basis;                            
|
| |  | an additional loan of $2.0 million to Gordian Group, Inc.;                                                                                                                                                                     
|
| |  | an additional $9.5 million debt and equity investment in
    Mercury Air Centers, Inc. to finance its acquisition of
    Corporate Wings;                                                                                      
|
| |  | additional fundings of $5.8 million on Powell Plant Farms,
    Inc.s revolving credit facility for working capital;                                                                                                           
|
| |  | the repayment of the Companys debt investment of
    $14.0 million in Redox Brands, Inc.; and                                                                                                                                 
|
| |  | an additional debt investment of $8.4 million in STS
    Operating, Inc. (STS) to support the recapitalization of
    STS. In connection, with the recapitalization, STS redeemed the
    Companys preferred stock investment.





25



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Note 3. Portfolio, continued




|                                                                             |                               |       |   |        |        |  |   |        |        | 
|---------------------------------------------------------------------------- | ----------------------------- | ----- | - | ------ | ------ |  | - | ------ | ------ | 
|                                                                             |                               | 2005  |   |        | 2004   | 
|($ in thousands)                                                             |                               |       |   |        |        | 
|Loans and debt securities in workout status (classified as
    Grade 4 or 5) |                               |       |   |        |        |  |   |       
|                                                                             | Companies more than 25% owned |       | $ | 26,200 |        |  | $ | 34,374 |       
|                                                                             | Companies less than 5% owned  |       |   | 13,309 |        |  |   | 16,550 |       
|Loans and debt securities not in workout status                              |                               |       |   |        |        |  |   |       
|                                                                             | Companies more than 25% owned |       |   | 12,927 |        |  |   | 29,368 |       
|                                                                             | Companies 5% to 25% owned     |       |   |       |        |  |   | 678    |       
|                                                                             | Companies less than 5% owned  |       |   | 18,885 |        |  |   | 15,864 |       
|                                                                             |                               |       |   |        |        | 
|                                                                             |                               | Total |   | $      | 71,321 |  |   | $      | 96,834 | 
|                                                                             |                               |       |   |        |        | 



|                         |       |      |    |     |      |  |    |     |  
|------------------------ | ----- | ---- | -- | --- | ---- |  | -- | --- | -
|                         |       | 2005 |    |     | 2004 | 
|                         |       |      |    |     |      | 
|Industry                 |       |      |    |     |      |  |    |    
|Business services        |       |      | 34 | %   |      |  | 32 | %  
|Financial services       |       |      | 22 |     |      |  | 21 |    
|Consumer products        |       |      | 18 |     |      |  | 20 |    
|Healthcare services      |       |      | 8  |     |      |  | 8  |    
|Industrial products      |       |      | 7  |     |      |  | 8  |    
|Retail                   |       |      | 3  |     |      |  | 2  |    
|Energy services          |       |      | 2  |     |      |  | 2  |    
|Broadcasting and cable   |       |      | 1  |     |      |  | 2  |    
|Other                    |       |      | 5  |     |      |  | 5  |    
|                         |       |      |    |     |      | 
|                         | Total |      |    | 100 | %    |  |    | 100 | %
|                         |       |      |    |     |      | 
|Geographic
    Region(1) |       |      |    |     |      |  |    |    
|Mid-Atlantic             |       |      | 38 | %   |      |  | 40 | %  
|West                     |       |      | 32 |     |      |  | 30 |    
|Midwest                  |       |      | 15 |     |      |  | 16 |    
|Southeast                |       |      | 10 |     |      |  | 10 |    
|Northeast                |       |      | 5  |     |      |  | 4  |    
|                         |       |      |    |     |      | 
|                         | Total |      |    | 100 | %    |  |    | 100 | %
|                         |       |      |    |     |      | 
|                         |       |      |    |     |      | 




|    |                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | 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.

26



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Note 3. Portfolio, continued




| |                               
| | ------------------------------
| | Commercial Real Estate Finance



|                               |       |      |         |         |       |   |         |          |  |  |       |  |  |       |         |         |          |   |         |         |  |  |       |  | 
|------------------------------ | ----- | ---- | ------- | ------- | ----- | - | ------- | -------- |  |  | ----- |  |  | ----- | ------- | ------- | -------- | - | ------- | ------- |  |  | ----- |  | 
|                               |       | 2005 |         |         | 2004  |  
|                               |       |      |         |         |       |  
|                               |       | Cost |         |         | Value |   |         | Yield(1) |  |  | Cost  |  |  | Value |         |         | Yield(1) |  
|($ in thousands)               |       |      |         |         |       |   |         |          |  |  |       |  |  |       |         |         |          |  
|CMBS bonds                     |       | $    | 475,527 |         |       | $ | 466,060 |          |  |  | 13.0% |  |  | $     | 383,310 |         |          | $ | 373,805 |         |  |  | 14.6% | 
|CDO bonds and preferred shares |       |      | 213,488 |         |       |   | 227,152 |          |  |  | 15.8% |  |  |       | 212,590 |         |          |   | 212,573 |         |  |  | 16.8% | 
|Commercial mortgage loans      |       |      | 92,767  |         |       |   | 89,678  |          |  |  | 6.4%  |  |  |       | 99,373  |         |          |   | 95,056  |         |  |  | 6.8%  | 
|Real estate owned              |       |      | 15,369  |         |       |   | 18,443  |          |  |  |       |  |  |       | 16,170  |         |          |   | 16,871  |         |  |  |       | 
|Equity interests               |       |      | 12,462  |         |       |   | 15,203  |          |  |  |       |  |  |       | 11,169  |         |          |   | 13,020  |         |  |  |       | 
|                               |       |      |         |         |       |   |         |          |  |  |       |  |  |       |         |         |          |  
|                               | Total |      | $       | 809,613 |       |   | $       | 816,536  |  |  |       |  |  |       | $       | 722,612 |          |   | $       | 711,325 |  |  |       |  | 
|                               |       |      |         |         |       |   |         |          |  |  |       |  |  |       |         |         |          |  




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The weighted average yield on the interest-bearing investments
    is computed as the (a) annual stated interest 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.

CMBS Bonds and Collateralized Debt Obligation Bonds and
Preferred Shares (CDOs).


Commercial Mortgage Loans and Equity Interests.




27



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Note 3. Portfolio, continued




|                  |       |      |    |     |      |  |    |     |  
|----------------- | ----- | ---- | -- | --- | ---- |  | -- | --- | -
|                  |       | 2005 |    |     | 2004 | 
|                  |       |      |    |     |      | 
|Property Type     |       |      |    |     |      |  |    |    
|Hospitality       |       |      | 50 | %   |      |  | 49 | %  
|Retail            |       |      | 20 |     |      |  | 21 |    
|Office            |       |      | 17 |     |      |  | 17 |    
|Housing           |       |      | 6  |     |      |  | 5  |    
|Other             |       |      | 7  |     |      |  | 8  |    
|                  |       |      |    |     |      | 
|                  | Total |      |    | 100 | %    |  |    | 100 | %
|                  |       |      |    |     |      | 
|Geographic Region |       |      |    |     |      |  |    |    
|Mid-Atlantic      |       |      | 29 | %   |      |  | 20 | %  
|Midwest           |       |      | 27 |     |      |  | 30 |    
|Southeast         |       |      | 22 |     |      |  | 26 |    
|West              |       |      | 15 |     |      |  | 16 |    
|Northeast         |       |      | 7  |     |      |  | 8  |    
|                  |       |      |    |     |      | 
|                  | Total |      |    | 100 | %    |  |    | 100 | %
|                  |       |      |    |     |      | 

Note 4. Debt




|                              |                         |                                    |         |           |           |  |         |           |           |  |          |      |      |        |         |           |           |  |         |           |           |  |     |      |      |  
|----------------------------- | ----------------------- | ---------------------------------- | ------- | --------- | --------- |  | ------- | --------- | --------- |  | -------- | ---- | ---- | ------ | ------- | --------- | --------- |  | ------- | --------- | --------- |  | --- | ---- | ---- | -
|                              |                         | 2005                               |         |           | 2004      | 
|                              |                         |                                    |         |           |           | 
|                              |                         |                                    |         | Annual    |           |  |         |           | Annual    | 
|                              |                         | Facility                           |         |           | Amount    |  |         | Interest  |           |  | Facility |      |      | Amount |         |           | Interest  | 
|                              |                         | Amount                             |         |           | Drawn     |  |         | Cost(1)   |           |  | Amount   |      |      | Drawn  |         |           | Cost(1)   | 
|($ in thousands)              |                         |                                    |         |           |           |  |         |           |           |  |          |      |      |        |         |           |           | 
|Notes payable and debentures: |                         |                                    |         |           |           |  |         |           |           |  |          |      |      |        |         |           |           |  |         |           |           |  |     |     
|                              | Unsecured notes payable |                                    | $       | 980,935   |           |  | $       | 980,935   |           |  |          | 6.5  | %    |        | $       | 981,368   |           |  | $       | 981,368   |           |  |     | 6.5  | %   
|                              | SBA debentures          |                                    |         | 53,800    |           |  |         | 46,500    |           |  |          | 7.8  | %    |        |         | 84,800    |           |  |         | 77,500    |           |  |     | 8.2  | %   
|                              | OPIC loan               |                                    |         | 5,700     |           |  |         | 5,700     |           |  |          | 6.6  | %    |        |         | 5,700     |           |  |         | 5,700     |           |  |     | 6.6  | %   
|                              |                         |                                    |         |           |           |  |         |           |           |  |          |      |      |        |         |           |           | 
|                              |                         | Total notes payable and debentures |         |           | 1,040,435 |  |         |           | 1,033,135 |  |          |      | 6.6  | %      |         |           | 1,071,868 |  |         |           | 1,064,568 |  |     |      | 6.6  | %
|Revolving line of credit      |                         |                                    | 587,500 |           |           |  | 263,250 |           |           |  | 5.7      | %(2) |      |        | 552,500 |           |           |  | 112,000 |           |           |  | 6.3 | %(2)
|                              |                         |                                    |         |           |           |  |         |           |           |  |          |      |      |        |         |           |           | 
|                              | Total debt              |                                    | $       | 1,627,935 |           |  | $       | 1,296,385 |           |  |          | 6.4  | %(2) |        | $       | 1,624,368 |           |  | $       | 1,176,568 |           |  |     | 6.6  | %(2)
|                              |                         |                                    |         |           |           |  |         |           |           |  |          |      |      |        |         |           |           | 




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 and other facility fees that are recognized
    into interest expense over the contractual life of the
    respective borrowings, divided by (b) debt outstanding on the
    balance sheet date.                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(2) | The stated interest rate payable on the revolving line of credit
    was 4.4% and 4.7% at March 31, 2005, and December 31,
    2004, respectively, which excluded the annual cost of commitment
    fees and other facility fees of $3.3 million and
    $1.8 million, respectively. The annual cost of commitment
    fees and other facility fees of $3.3 million at
    March 31, 2005, includes the extension fee of
    $1.8 million that the Company paid on April 18, 2005,
    as discussed below. The annual interest cost for total debt
    includes the annual cost of commitment fees and other facility
    fees on the revolving line of credit regardless of the amount
    drawn on the facility as of the balance sheet date.

28



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 4. Debt, continued


Notes Payable and Debentures


Unsecured Notes Payable.




SBA Debentures.




Scheduled Maturities.


|           |       |                  |         |           | 
|---------- | ----- | ---------------- | ------- | --------- | 
|Year       |       | Amount Maturing  |        
|           |       |                  |        
|           |       | ($ in thousands) |        
|2005       |       | $                | 165,000 |          
|2006       |       |                  | 180,700 |          
|2007       |       |                  |        |          
|2008       |       |                  | 153,000 |          
|2009       |       |                  | 268,435 |          
|Thereafter |       |                  | 266,000 |          
|           |       |                  |        
|          
|           | Total |                  | $       | 1,033,135 | 
|           |       |                  |        



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



29



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 4. Debt, continued










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



Note 5. Guarantees




30



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 5. Guarantees, continued




|                                 |       |       |       |       |      |   |     |      |  |   |      |      |  |      |       |       |      |   |     |            |  |   |     |     |  |   |     |     | 
|-------------------------------- | ----- | ----- | ----- | ----- | ---- | - | --- | ---- |  | - | ---- | ---- |  | ---- | ----- | ----- | ---- | - | --- | ---------- |  | - | --- | --- |  | - | --- | --- | 
|                                 |       | Total |       |       | 2005 |   |     | 2006 |  |   | 2007 |      |  | 2008 |       |       | 2009 |   |     | After 2009 | 
|(in millions)                    |       |       |       |       |      |   |     |      |  |   |      |      |  |      |       |       |      |   |     |            | 
|Guarantees                       |       | $     | 109.5 |       |      | $ | 0.3 |      |  | $ | 0.9  |      |  | $    | 104.6 |       |      | $ | 0.1 |            |  | $ | 2.5 |     |  | $ | 1.1 |    
|Standby letters of
    credit(1) |       |       | 37.1  |       |      |   |    |      |  |   | 37.1 |      |  |      |      |       |      |   |    |            |  |   |    |     |  |   |    |    
|                                 |       |       |       |       |      |   |     |      |  |   |      |      |  |      |       |       |      |   |     |            | 
|                                 | Total |       | $     | 146.6 |      |   | $   | 0.3  |  |   | $    | 38.0 |  |      | $     | 104.6 |      |   | $   | 0.1        |  |   | $   | 2.5 |  |   | $   | 1.1 | 
|                                 |       |       |       |       |      |   |     |      |  |   |      |      |  |      |       |       |      |   |     |            | 




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Standby letters of credit are issued under the Companys
    revolving line of credit that was set to expire in April 2005
    and has been extended under substantially similar terms for one
    additional year at the Companys option, for an assumed
    maturity of April 2006. Therefore, unless a standby letter of
    credit is set to expire at an earlier date, it is assumed that
    the standby letters of credit will expire contemporaneously with
    the expiration of the Companys line of credit in April
    2006.





Note 6. Shareholders Equity








|                                         |  |                 |       |  |      |   |       | 
|---------------------------------------- |  | --------------- | ----- |  | ---- | - | ----- | 
|                                         |  | For the Three   |      
|                                         |  | Months          |      
|                                         |  | Ended March 31, |      
|                                         |  |                 |      
|                                         |  | 2005            |       |  | 2004 |  
|(in thousands, except per share amounts) |  |                 |       |  |      |  
|Shares issued                            |  |                 | 55    |  |      |   | 50    | 
|Average price per share                  |  | $               | 25.65 |  |      | $ | 29.65 | 

31



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Note 7. Earnings Per Common Share




|                                                         |  |                      |         |  |      |   |         |  
|-------------------------------------------------------- |  | -------------------- | ------- |  | ---- | - | ------- | -
|                                                         |  | For the Three Months |        
|                                                         |  | Ended March 31,      |        
|                                                         |  |                      |        
|                                                         |  | 2005                 |         |  | 2004 |  
|(in thousands, except per share amounts)                 |  |                      |         |  |      |  
|Net increase in net assets resulting from operations     |  | $                    | 119,621 |  |      | $ | 20,308  |  
|Less preferred stock dividends                           |  |                      |        |  |      |   | (45     | )
|                                                         |  |                      |         |  |      |  
|Income available to common shareholders                  |  | $                    | 119,621 |  |      | $ | 20,263  |  
|                                                         |  |                      |         |  |      |  
|Weighted average common shares outstanding  basic       |  |                      | 133,283 |  |      |   | 128,314 |  
|Dilutive options outstanding to officers                 |  |                      | 2,296   |  |      |   | 3,654   |  
|                                                         |  |                      |         |  |      |  
|Weighted average common shares
    outstanding  diluted |  |                      | 135,579 |  |      |   | 131,968 |  
|                                                         |  |                      |         |  |      |  
|Basic earnings per common share                          |  | $                    | 0.90    |  |      | $ | 0.16    |  
|                                                         |  |                      |         |  |      |  
|Diluted earnings per common share                        |  | $                    | 0.88    |  |      | $ | 0.15    |  
|                                                         |  |                      |         |  |      |  

Note 8. Employee Compensation Plans










32



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 8. Employee Compensation Plans, continued










33



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Note 9. Stock Option Plan










Note 10. Dividends and Distributions






Note 11. Supplemental Disclosure of Cash Flow
Information








34



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 11. Supplemental Disclosure of Cash Flow
Information, continued








Note 12. Hedging Activities




|                                               |       |      |        |        |      |   |        |        | 
|---------------------------------------------- | ----- | ---- | ------ | ------ | ---- | - | ------ | ------ | 
|($ in thousands)                               |       |      |        |       
|Description of Issue                           |       | 2005 |        |        | 2004 |  
|                                               |       |      |        |        |      |  
|5-year Treasury securities, due December 2009  |       | $    |       |        |      | $ | 533    |       
|10-year Treasury securities, due February 2013 |       |      | 3,776  |        |      |   | 3,908  |       
|10-year Treasury securities, due February 2014 |       |      | 4,550  |        |      |   | 4,709  |       
|10-year Treasury securities, due August 2014   |       |      | 14,235 |        |      |   | 14,743 |       
|10-year Treasury securities, due November 2014 |       |      | 42,120 |        |      |   | 14,333 |       
|10-year Treasury securities, due February 2015 |       |      | 34,060 |        |      |   |       |       
|                                               |       |      |        |        |      |  
|                                               | Total |      | $      | 98,741 |      |   | $      | 38,226 | 
|                                               |       |      |        |        |      |  





35



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 12. Hedging Activities, continued








Note 13. Financial Highlights


|                                                           |                                                               |                    |       |      |                |   |       |       |   |   |       |       |  
|---------------------------------------------------------- | ------------------------------------------------------------- | ------------------ | ----- | ---- | -------------- | - | ----- | ----- | - | - | ----- | ----- | -
|                                                           |                                                               | At and for the     |       |      |               
|                                                           |                                                               | Three Months Ended |       |      | At and for the |  
|                                                           |                                                               | March 31,          |       |      | Year Ended     |  
|                                                           |                                                               |                    |       |      | December 31,   |  
|                                                           |                                                               | 2005(1)            |       |      | 2004           |   |       | 2004  |  
|                                                           |                                                               |                    |       |      |                |   |       |       |  
|Per Common Share
    Data(2)                               |                                                               |                    |       |      |                |   |       |       |   |   |       |      
|Net asset value, beginning of period                       |                                                               | $                  | 14.87 |      |                | $ | 14.94 |       |   | $ | 14.94 |      
|                                                           |                                                               |                    |       |      |                |   |       |       |  
|                                                           | Net investment income                                         |                    |       | 0.29 |                |   |       | 0.34  |   |   |       | 1.52  |  
|                                                           | Net realized
    gains(3)                                     |                    |       | 0.07 |                |   |       | 1.12  |   |   |       | 0.88  |  
|                                                           |                                                               |                    |       |      |                |   |       |       |  
|                                                           | Net investment income plus net realized gains                 |                    |       | 0.36 |                |   |       | 1.46  |   |   |       | 2.40  |  
|                                                           | Net change in unrealized appreciation or depreciation
    (3) |                    |       | 0.52 |                |   |       | (1.31 | ) |   |       | (0.52 | )
|                                                           |                                                               |                    |       |      |                |   |       |       |  
|Net increase in net assets resulting from operations       |                                                               |                    | 0.88  |      |                |   | 0.15  |       |   |   | 1.88  |      
|                                                           |                                                               |                    |       |      |                |   |       |       |  
|Net decrease in net assets from shareholder distributions  |                                                               |                    | (0.57 | )    |                |   | (0.57 | )     |   |   | (2.30 | )    
|Net increase in net assets from capital share transactions |                                                               |                    | 0.04  |      |                |   | 0.08  |       |   |   | 0.35  |      
|                                                           |                                                               |                    |       |      |                |   |       |       |  
|Net asset value, end of period                             |                                                               | $                  | 15.22 |      |                | $ | 14.60 |       |   | $ | 14.87 |      
|                                                           |                                                               |                    |       |      |                |   |       |       |  
|Market value, end of period                                |                                                               | $                  | 26.10 |      |                | $ | 30.29 |       |   | $ | 25.84 |      
|Total
    return(4)                                        |                                                               |                    | 3     | %    |                |   | 11    | %     |   |   | 1     | %    

36



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Note 13. Financial Highlights, continued


|                                                                                      |  |                    |           |   |                |   |           |      |  |   |           |  
|------------------------------------------------------------------------------------- |  | ------------------ | --------- | - | -------------- | - | --------- | ---- |  | - | --------- | -
|                                                                                      |  | At and for the     |           |   |               
|                                                                                      |  | Three Months Ended |           |   | At and for the |  
|                                                                                      |  | March 31,          |           |   | Year Ended     |  
|                                                                                      |  |                    |           |   | December 31,   |  
|                                                                                      |  | 2005(1)            |           |   | 2004           |   |           | 2004 | 
|                                                                                      |  |                    |           |   |                |   |           |      | 
|Ratios and Supplemental Data($ and shares in thousands, except per
    share amounts) |  |                    |           |   |                |   |           |      |  |   |           |  
|Ending net assets                                                                     |  | $                  | 2,033,148 |   |                | $ | 1,879,970 |      |  | $ | 1,979,778 |  
|Common shares outstanding at end of period                                            |  |                    | 133,563   |   |                |   | 128,761   |      |  |   | 133,099   |  
|Diluted weighted average common shares outstanding                                    |  |                    | 135,579   |   |                |   | 131,968   |      |  |   | 132,458   |  
|Employee and administrative expenses/average net assets                               |  |                    | 1.80      | % |                |   | 0.96      | %    |  |   | 4.65      | %
|Total expenses/average net assets                                                     |  |                    | 2.81      | % |                |   | 1.97      | %    |  |   | 8.58      | %
|Net investment income/average net assets                                              |  |                    | 1.93      | % |                |   | 2.35      | %    |  |   | 10.45     | %
|Net increase in net assets resulting from operations/ average
    net assets          |  |                    | 5.96      | % |                |   | 1.07      | %    |  |   | 12.97     | %
|Portfolio turnover rate                                                               |  |                    | 5.10      | % |                |   | 6.83      | %    |  |   | 32.97     | %
|Average debt outstanding                                                              |  | $                  | 1,125,007 |   |                | $ | 952,986   |      |  | $ | 985,616   |  
|Average debt per
    share(2)                                                         |  | $                  | 8.30      |   |                | $ | 7.22      |      |  | $ | 7.44      |  




|    |                                                                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The results for the three months ended March 31, 2005, 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.                                                                                                       

Note 14. Litigation




Note 15. Subsequent Event






37



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Note 15. Subsequent Event








38



---



##### 



Report of Independent Registered Public Accounting Firm














KPMG LLP






39



---



##### 





|         |                                                                                          
|-------- | -----------------------------------------------------------------------------------------
|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,
2004. 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;                                                                                            
|
| |  | 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




40



---



##### 





|                               |  |      |    |   |      |  |    |  
|------------------------------ |  | ---- | -- | - | ---- |  | -- | -
|                               |  | 2005 |    |   | 2004 | 
|                               |  |      |    |   |      | 
|Private finance                |  |      | 74 | % |      |  | 76 | %
|Commercial real estate finance |  |      | 26 | % |      |  | 24 | %







PORTFOLIO AND INVESTMENT ACTIVITY




|                                                                |  |                    |         |   |                |   |         |      |  |   |         |  
|--------------------------------------------------------------- |  | ------------------ | ------- | - | -------------- | - | ------- | ---- |  | - | ------- | -
|                                                                |  | At and for the     |         |   |               
|                                                                |  | Three Months Ended |         |   | At and for the |  
|                                                                |  | March 31,          |         |   | Year Ended     |  
|                                                                |  |                    |         |   | December 31,   |  
|                                                                |  | 2005               |         |   | 2004           |   |         | 2004 | 
|($ in millions)                                                 |  |                    |         |   |                |   |         |      | 
|                                                                |  | (unaudited)        |         |   |               
|Portfolio at value                                              |  | $                  | 3,195.0 |   |                | $ | 2,399.6 |      |  | $ | 3,013.4 |  
|Investments funded                                              |  | $                  | 265.6   |   |                | $ | 217.8   |      |  | $ | 1,524.5 |  
|Change in accrued or reinvested interest and dividends          |  | $                  | 10.5    |   |                | $ | 13.1    |      |  | $ | 52.2    |  
|Principal collections related to investment repayments or sales |  | $                  | 158.3   |   |                | $ | 237.1   |      |  | $ | 909.2   |  
|Yield on interest-bearing
    investments(1)                    |  |                    | 13.6    | % |                |   | 14.3    | %    |  |   | 14.0    | %




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The weighted average yield on interest-bearing investments is
    computed as the (a) annual stated interest plus the annual
    amortization of loan origination fees, original issue discount,
    and market discount on accruing interest-bearing investments
    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.

41



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##### 



Private Finance




|                                                                |                           |                    |         |         |                |   |         |         |  |   |         |         | 
|--------------------------------------------------------------- | ------------------------- | ------------------ | ------- | ------- | -------------- | - | ------- | ------- |  | - | ------- | ------- | 
|                                                                |                           | At and for the     |         |         |               
|                                                                |                           | Three Months Ended |         |         | At and for the |  
|                                                                |                           | March 31,          |         |         | Year Ended     |  
|                                                                |                           |                    |         |         | December 31,   |  
|                                                                |                           | 2005               |         |         | 2004           |   |         | 2004    | 
|($ in millions)                                                 |                           |                    |         |         |                |   |         |         | 
|                                                                |                           | (unaudited)        |         |         |               
|Portfolio at value:                                             |                           |                    |         |         |                |   |         |         |  |   |         |        
|                                                                | Loans and debt securities |                    | $       | 1,556.4 |                |   | $       | 1,182.6 |  |   | $       | 1,602.9 | 
|                                                                | Equity interests          |                    |         | 822.1   |                |   |         | 503.0   |  |   |         | 699.2   | 
|                                                                |                           |                    |         |         |                |   |         |         | 
|Total portfolio                                                 |                           | $                  | 2,378.5 |         |                | $ | 1,685.6 |         |  | $ | 2,302.1 |        
|                                                                |                           |                    |         |         |                |   |         |         | 
|Investments
    funded(1)                                       |                           | $                  | 168.2   |         |                | $ | 157.7   |         |  | $ | 1,140.8 |        
|Change in accrued or reinvested interest and dividends          |                           | $                  | 7.9     |         |                | $ | 11.1    |         |  | $ | 45.6    |        
|Principal collections related to investment repayments or sales |                           | $                  | 151.2   |         |                | $ | 204.8   |         |  | $ | 551.9   |        
|Yield on interest-bearing
    investments(2)                    |                           |                    | 13.8    | %       |                |   | 14.4    | %       |  |   | 13.9    | %      






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Investments funded for the three months ended March 31,
    2004, include a $47.5 million subordinated debt investment
    in The Hillman Companies, Inc. received in conjunction with the
    sale of Hillman as discussed below.                                                                                                                                                                                                                           
|   
|(2) | The weighted average yield on loans and debt securities is
    computed as the (a) annual stated interest 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.





|                                          |                               |            |   |       |           |  |   |       |      |  |   |       |       | 
|----------------------------------------- | ----------------------------- | ---------- | - | ----- | --------- |  | - | ----- | ---- |  | - | ----- | ----- | 
|                                          |                               | Loans and  |   |       |           |  |  
|                                          |                               | Debt       |   |       | Equity    |  |   |      
|                                          |                               | Securities |   |       | Interests |  |   | Total |     
|($ in millions)                           |                               |            |   |       |           |  |   |       |     
|For the Three Months Ended March 31, 2005 |                               |            |   |       |           |  |   |       |      |  |   |      
|                                          | Companies more than 25% owned |            | $ | 65.8  |           |  | $ | 6.3   |      |  | $ | 72.1  |      
|                                          | Companies 5% to 25% owned     |            |   |      |           |  |   |      |      |  |   |      |      
|                                          | Companies less than 5% owned  |            |   | 87.9  |           |  |   | 8.2   |      |  |   | 96.1  |      
|                                          |                               |            |   |       |           |  |   |       |     
|                                          |                               | Total      |   | $     | 153.7     |  |   | $     | 14.5 |  |   | $     | 168.2 | 
|                                          |                               |            |   |       |           |  |   |       |     
|For the Three Months Ended March 31, 2004 |                               |            |   |       |           |  |   |       |      |  |   |      
|                                          | Companies more than 25% owned |            | $ | 16.1  |           |  | $ | 1.4   |      |  | $ | 17.5  |      
|                                          | Companies 5% to 25% owned     |            |   | 10.8  |           |  |   | 15.4  |      |  |   | 26.2  |      
|                                          | Companies less than 5% owned  |            |   | 108.9 |           |  |   | 5.1   |      |  |   | 114.0 |      
|                                          |                               |            |   |       |           |  |   |       |     
|                                          |                               | Total      |   | $     | 135.8     |  |   | $     | 21.9 |  |   | $     | 157.7 | 
|                                          |                               |            |   |       |           |  |   |       |     

42



---



##### 



|                                     |                               |            |   |       |           |  |   |       |       |  |   |       |         | 
|------------------------------------ | ----------------------------- | ---------- | - | ----- | --------- |  | - | ----- | ----- |  | - | ----- | ------- | 
|                                     |                               | Loans and  |   |       |           |  |  
|                                     |                               | Debt       |   |       | Equity    |  |   |      
|                                     |                               | Securities |   |       | Interests |  |   | Total |      
|($ in millions)                      |                               |            |   |       |           |  |   |       |      
|For the Year Ended December 31, 2004 |                               |            |   |       |           |  |   |       |       |  |   |      
|                                     | Companies more than 25% owned |            | $ | 445.4 |           |  | $ | 171.2 |       |  | $ | 616.6 |        
|                                     | Companies 5% to 25% owned     |            |   | 112.0 |           |  |   | 14.4  |       |  |   | 126.4 |        
|                                     | Companies less than 5% owned  |            |   | 351.5 |           |  |   | 46.3  |       |  |   | 397.8 |        
|                                     |                               |            |   |       |           |  |   |       |      
|                                     |                               | Total      |   | $     | 908.9     |  |   | $     | 231.9 |  |   | $     | 1,140.8 | 
|                                     |                               |            |   |       |           |  |   |       |      









| |   |                                                                                                                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We have various commitments to Callidus Capital Corporation
    (Callidus), an asset management company that structures and
    manages collateralized debt obligations (CDOs), collateralized
    loan obligations (CLOs), and other related investments. We own
    80% of the equity of the management company. Our commitment to
    Callidus consists of the following:



|                                                                                         |       |           |       |       |        |        |      |             |  |   |      |       | 
|---------------------------------------------------------------------------------------- | ----- | --------- | ----- | ----- | ------ | ------ | ---- | ----------- |  | - | ---- | ----- | 
|                                                                                         |       |           |       |       |        | Amount |     
|                                                                                         |       | Committed |       |       | Amount |        |      | Available   | 
|                                                                                         |       | Amount    |       |       | Drawn  |        |      | to be Drawn | 
|($ in millions)                                                                          |       |           |       |       |        |        |      |             | 
|Subordinated debt to support warehouse facilities &
    warehousing
    activities(1)    |       | $         | 50.0  | (2)   |        | $      |     |             |  | $ | 50.0 |      
|Revolving line of credit for working capital                                             |       |           | 2.0   |       |        |        | 1.3  |             |  |   | 0.7  |      
|Revolving line of credit facility to support underwriting and
    syndication activities |       |           | 150.0 |       |        |        | 54.9 |             |  |   | 95.1 |      
|                                                                                         |       |           |       |       |        |        |      |             | 
|                                                                                         | Total |           | $     | 202.0 |        |        | $    | 56.2        |  |   | $    | 145.8 | 
|                                                                                         |       |           |       |       |        |        |      |             | 

| | 
| | 
| | 

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Callidus has a secured warehouse credit facility with a third
    party for up to $300 million, primarily to finance the
    acquisition of loans pending securitization through a CDO or
    CLO. In conjunction with this warehouse credit facility, we have
    agreed to designate up to $45 million of our $50 million
    subordinated debt commitment for Callidus to draw upon to
    provide first loss capital as needed to support the warehouse
    facility.                                                                                                                                                                                                
|
| | (2) | Subsequent to March 31, 2005, Callidus obtained an additional
    secured warehouse credit facility with a third party for up to
    $400 million to finance the acquisition of loans pending
    securitization through a CDO or CLO. In conjunction with this
    warehouse credit facility, we increased our $50 million
    subordinated debt commitment to $85 million to provide
    Callidus with first loss capital to support outstanding
    warehouse facilities. We have agreed to designate this
    $85 million subordinated debt commitment for Callidus to
    draw upon to provide first loss capital as needed to support its
    warehouse facilities.

43



---



##### 





| |                                                                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In addition, we had a commitment to Callidus to purchase
    preferred equity in future CDO or CLO transactions of
    $44.4 million at March 31, 2005. Subsequent to March
    31, 2005, we increased our commitment to purchase preferred
    equity securities in Callidus future CDO or CLO
    transactions to $76.8 million.



| |   |                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $20.0 million in the form of a revolving credit facility to
    Business Loan Express, LLC (BLX) to provide working capital to
    the company. At March 31, 2005, BLX had no outstanding
    borrowings on the facility.
|
| |  | $15.0 million in the form of debt of financing commitments
    to S.B. Restaurant Company.                                                                                                                               
|
| |  | $17.1 million in the form of equity to eight private
    venture capital funds.                                                                                                                                          
|
| |  | $8.8 million in the form of equity to Pennsylvania Avenue
    Investors, L.P., a limited partnership controlled by us that
    invests in private buyout equity funds.                                                   









Advantage Sales and Marketing,
Inc.




44



---



##### 





Business Loan Express,
LLC.












45



---



##### 





46



---



##### 



Commercial Real Estate Finance




|                                                                |                                |                              |       |       |                |              |  |       |  |   |          |       |  |       |  |       |          |   |       |       |  |  |  |       | 
|--------------------------------------------------------------- | ------------------------------ | ---------------------------- | ----- | ----- | -------------- | ------------ |  | ----- |  | - | -------- | ----- |  | ----- |  | ----- | -------- | - | ----- | ----- |  |  |  | ----- | 
|                                                                |                                | At and for the               |       |       |               
|                                                                |                                | Three Months Ended March 31, |       |       | At and for     |             
|                                                                |                                |                              |       |       | the Year Ended |             
|                                                                |                                |                              |       |       |                | December 31, | 
|                                                                |                                | 2005                         |       |       | 2004           |              |  | 2004  | 
|                                                                |                                |                              |       |       |                |              |  |       | 
|                                                                |                                | (unaudited)                  |       |       |               
|                                                                |                                | Value                        |       |       | Yield(1)       |              |  | Value |  |   | Yield(1) |       |  | Value |  |       | Yield(1) |  
|($ in millions)                                                 |                                |                              |       |       |                |              |  |       |  |   |          |       |  |       |  |       |          |  
|Portfolio at value:                                             |                                |                              |       |       |                |              |  |       |  |   |          |       |  |       |  |       |          |   |       |       |  |  |  |      
|                                                                | CMBS bonds                     |                              | $     | 466.1 |                |              |  | 13.0% |  |   | $        | 448.9 |  |       |  | 13.7% |          |   | $     | 373.8 |  |  |  | 14.6% | 
|                                                                | CDO bonds and preferred shares |                              |       | 227.1 |                |              |  | 15.8% |  |   |          | 171.4 |  |       |  | 17.6% |          |   |       | 212.6 |  |  |  | 16.8% | 
|                                                                | Commercial mortgage loans      |                              |       | 89.7  |                |              |  | 6.4%  |  |   |          | 74.8  |  |       |  | 7.8%  |          |   |       | 95.0  |  |  |  | 6.8%  | 
|                                                                | Real estate owned              |                              |       | 18.4  |                |              |  |       |  |   |          | 14.3  |  |       |  |       |          |   |       | 16.9  |  |  |  |       | 
|                                                                | Equity interests               |                              |       | 15.2  |                |              |  |       |  |   |          | 4.6   |  |       |  |       |          |   |       | 13.0  |  |  |  |       | 
|                                                                |                                |                              |       |       |                |              |  |       |  |   |          |       |  |       |  |       |          |  
|Total portfolio                                                 |                                | $                            | 816.5 |       |                |              |  |       |  | $ | 714.0    |       |  |       |  |       |          | $ | 711.3 |       |  |  |  |      
|                                                                |                                |                              |       |       |                |              |  |       |  |   |          |       |  |       |  |       |          |  
|Investments funded                                              |                                | $                            | 97.4  |       |                |              |  |       |  | $ | 60.1     |       |  |       |  |       |          | $ | 383.7 |       |  |  |  |      
|Change in accrued or reinvested interest                        |                                | $                            | 2.6   |       |                |              |  |       |  | $ | 2.0      |       |  |       |  |       |          | $ | 6.6   |       |  |  |  |      
|Principal collections related to investment repayments or sales |                                | $                            | 7.1   |       |                |              |  |       |  | $ | 32.3     |       |  |       |  |       |          | $ | 357.3 |       |  |  |  |      




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The weighted average yield on the interest-bearing investments
    is computed as the (a) annual stated interest rate 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.



|                                          |       |        |       |       |          |   |        |        |   |   |      |      | 
|----------------------------------------- | ----- | ------ | ----- | ----- | -------- | - | ------ | ------ | - | - | ---- | ---- | 
|                                          |       | Face   |       |       |          |   | Amount |       
|                                          |       | Amount |       |       | Discount |   |        | Funded |  
|($ in millions)                           |       |        |       |       |          |   |        |        |  
|For the Three Months Ended March 31, 2005 |       |        |       |       |          |   |        |        |   |   |      |     
|CMBS bonds (3 new issuances)              |       | $      | 160.6 |       |          | $ | (67.4  | )      |   | $ | 93.2 |     
|Commercial mortgage loans                 |       |        | 4.1   |       |          |   | (0.7   | )      |   |   | 3.4  |     
|Equity interests                          |       |        | 0.8   |       |          |   |       |        |   |   | 0.8  |     
|                                          |       |        |       |       |          |   |        |        |  
|                                          | Total |        | $     | 165.5 |          |   | $      | (68.1  | ) |   | $    | 97.4 | 
|                                          |       |        |       |       |          |   |        |        |  
|For the Three Months Ended March 31, 2004 |       |        |       |       |          |   |        |        |   |   |      |     
|CMBS bonds (4 new
    issuances(1))       |       | $      | 114.3 |       |          | $ | (54.9  | )      |   | $ | 59.4 |     
|Commercial mortgage loans                 |       |        | 0.6   |       |          |   |       |        |   |   | 0.6  |     
|Equity interests                          |       |        | 0.1   |       |          |   |       |        |   |   | 0.1  |     
|                                          |       |        |       |       |          |   |        |        |  
|                                          | Total |        | $     | 115.0 |          |   | $      | (54.9  | ) |   | $    | 60.1 | 
|                                          |       |        |       |       |          |   |        |        |  

47



---



##### 



|                                             |       |        |       |       |          |   |        |        |   |   |       |       | 
|-------------------------------------------- | ----- | ------ | ----- | ----- | -------- | - | ------ | ------ | - | - | ----- | ----- | 
|                                             |       | Face   |       |       |          |   | Amount |       
|                                             |       | Amount |       |       | Discount |   |        | Funded |  
|($ in millions)                              |       |        |       |       |          |   |        |        |  
|For the Year Ended December 31, 2004         |       |        |       |       |          |   |        |        |   |   |       |      
|CMBS bonds (13 new
    issuances(1))         |       | $      | 419.1 |       |          | $ | (183.7 | )      |   | $ | 235.4 |      
|CDO bonds and preferred shares (3 issuances) |       |        | 40.5  |       |          |   | (0.1   | )      |   |   | 40.4  |      
|Commercial mortgage loans                    |       |        | 112.1 |       |          |   | (8.2   | )      |   |   | 103.9 |      
|Equity interests                             |       |        | 4.0   |       |          |   |       |        |   |   | 4.0   |      
|                                             |       |        |       |       |          |   |        |        |  
|                                             | Total |        | $     | 575.7 |          |   | $      | (192.0 | ) |   | $     | 383.7 | 
|                                             |       |        |       |       |          |   |        |        |  




|    |                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------
|(1) | CMBS investments also include investments in issuances in which
    we have previously purchased CMBS bonds.



CMBS Bonds and Collateralized Debt Obligation Bonds and
Preferred Shares.


Hedging Activities








Portfolio Asset Quality


Portfolio by Grade.


48



---



##### 







|                |  |                   |         |  |                      |  |       |           |  |   |                 |  |  |  |       |  
|--------------- |  | ----------------- | ------- |  | -------------------- |  | ----- | --------- |  | - | --------------- |  |  |  | ----- | -
|                |  | At March 31, 2005 |         |  | At December 31, 2004 | 
|                |  |                   |         |  |                      | 
|                |  | Portfolio         |         |  | Percentage of        |  |       | Portfolio |  |   | Percentage of   | 
|Grade           |  | at Value          |         |  | Total Portfolio      |  |       | at Value  |  |   | Total Portfolio | 
|                |  |                   |         |  |                      |  |       |           |  |   |                 | 
|($ in millions) |  |                   |         |  |                      |  |       |          
|1               |  | $                 | 1,073.8 |  |                      |  | 33.6  | %         |  | $ | 952.5           |  |  |  | 31.6  | %
|2               |  |                   | 1,939.5 |  |                      |  | 60.7  |           |  |   | 1,850.5         |  |  |  | 61.4  |  
|3               |  |                   | 94.0    |  |                      |  | 3.0   |           |  |   | 121.2           |  |  |  | 4.0   |  
|4               |  |                   | 7.7     |  |                      |  | 0.2   |           |  |   | 11.7            |  |  |  | 0.4   |  
|5               |  |                   | 80.0    |  |                      |  | 2.5   |           |  |   | 77.5            |  |  |  | 2.6   |  
|                |  |                   |         |  |                      |  |       |           |  |   |                 | 
|                |  | $                 | 3,195.0 |  |                      |  | 100.0 | %         |  | $ | 3,013.4         |  |  |  | 100.0 | %
|                |  |                   |         |  |                      |  |       |           |  |   |                 | 







Loans and Debt Securities on Non-Accrual Status.


|                                                                                    |                                |                               |  |      |      |  |  |      |       | 
|----------------------------------------------------------------------------------- | ------------------------------ | ----------------------------- |  | ---- | ---- |  |  | ---- | ----- | 
|                                                                                    |                                | 2005                          |  |      | 2004 | 
|($ in millions)                                                                     |                                |                               |  |      |      | 
|Loans and debt securities in workout status (classified as
    Grade 4
    or 5)(1)
|                                                                                    | Private finance                |                               |  |      |      |  |  |      |      
|                                                                                    |                                | Companies more than 25% owned |  | $    | 26.2 |  |  | $    | 34.4  | 
|                                                                                    |                                | Companies less than 5% owned  |  |      | 13.3 |  |  |      | 16.5  | 
|                                                                                    | Commercial real estate finance |                               |  | 15.3 |      |  |  | 5.6  |      
|Loans and debt securities not in workout status                                     |                                |                               |  |      |      |  |  |     
|                                                                                    | Private finance                |                               |  |      |      |  |  |      |      
|                                                                                    |                                | Companies more than 25% owned |  |      | 12.9 |  |  |      | 29.4  | 
|                                                                                    |                                | Companies 5% to 25% owned     |  |      |     |  |  |      | 0.7   | 
|                                                                                    |                                | Companies less than 5% owned  |  |      | 18.9 |  |  |      | 15.8  | 
|                                                                                    | Commercial real estate finance |                               |  | 7.7  |      |  |  | 12.5 |      
|                                                                                    |                                |                               |  |      |      | 
|                                                                                    |                                | Total                         |  | $    | 94.3 |  |  | $    | 114.9 | 
|                                                                                    |                                |                               |  |      |      | 
|                                                                                    |                                | Percentage of total portfolio |  |      | 3.0% |  |  |      | 3.8%  | 




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

49



---



##### 



Loans and Debt Securities Over 90 Days Delinquent.


|                               |                           |                               |      |      |       |   |      |      |       | 
|------------------------------ | ------------------------- | ----------------------------- | ---- | ---- | ----- | - | ---- | ---- | ----- | 
|                               |                           | 2005                          |      |      | 2004  |  
|                               |                           |                               |      |      |       |  
|($ in millions)                |                           |                               |      |     
|Private finance                |                           | $                             | 85.8 |      |       | $ | 73.5 |     
|Commercial real estate finance |                           |                               |      |      |       |   |      |     
|                               | CMBS bonds                |                               |      | 55.3 |       |   |      | 49.0 |      
|                               | Commercial mortgage loans |                               |      | 13.7 |       |   |      | 10.1 |      
|                               |                           |                               |      |      |       |  
|                               |                           | Total                         |      | $    | 154.8 |   |      | $    | 132.6 | 
|                               |                           |                               |      |      |       |  
|                               |                           | Percentage of total portfolio |      |      | 4.8%  |   |      |      | 4.4%  | 

and








Accrued Interest and Dividends Receivable




|                               |                                     |       |      |      |      |   |      |      |      | 
|------------------------------ | ----------------------------------- | ----- | ---- | ---- | ---- | - | ---- | ---- | ---- | 
|                               |                                     | 2005  |      |      | 2004 |  
|($ in millions)                |                                     |       |      |      |      |  
|Private finance                |                                     | $     | 59.6 |      |      | $ | 59.8 |     
|Commercial real estate finance |                                     |       |      |      |      |   |      |     
|                               | CMBS and CDO bonds                  |       |      | 21.3 |      |   |      | 18.9 |     
|                               | Commercial mortgage loans and other |       |      | 1.0  |      |   |      | 0.8  |     
|                               |                                     |       |      |      |      |  
|                               |                                     | Total |      | $    | 81.9 |   |      | $    | 79.5 | 
|                               |                                     |       |      |      |      |  

50



---



##### 



Recent Developments
















51



---



##### 









52



---



##### 



RESULTS OF OPERATIONS


Comparison of Three Months Ended March 31, 2005 and
2004




|                                                     |                                                       |                                             |         |        |        |   |            |          |         |   |        |          |         |  |     |     |    |  
|---------------------------------------------------- | ----------------------------------------------------- | ------------------------------------------- | ------- | ------ | ------ | - | ---------- | -------- | ------- | - | ------ | -------- | ------- |  | --- | --- | -- | -
|                                                     |                                                       | For the Three                               |         |        |        |   |           
|                                                     |                                                       | Months Ended                                |         |        |        |   |           
|                                                     |                                                       | March 31,                                   |         |        |        |   |           
|                                                     |                                                       |                                             |         |        |        |   | Percentage |         
|                                                     |                                                       | 2005                                        |         |        | 2004   |   |            | Change   |         |   | Change |         
|($ in thousands, except per share amounts)           |                                                       |                                             |         |        |        |   |            |          |         |   |        |         
|                                                     |                                                       | (unaudited)                                 |         |        |        |   |           
|Interest and Related Portfolio Income                |                                                       |                                             |         |        |        |   |            |          |         |   |        |          |         |  |     |    
|                                                     | Interest and dividends                                |                                             | $       | 84,945 |        |   | $          | 73,539   |         |   | $      | 11,406   |         |  |     | 16  | % 
|                                                     | Loan prepayment premiums                              |                                             |         | 1,677  |        |   |            | 950      |         |   |        | 727      |         |  |     | 77  | % 
|                                                     | Fees and other income                                 |                                             |         | 8,297  |        |   |            | 7,276    |         |   |        | 1,021    |         |  |     | 14  | % 
|                                                     |                                                       |                                             |         |        |        |   |            |          |         |   |        |         
|                                                     |                                                       | Total interest and related portfolio income |         |        | 94,919 |   |            |          | 81,765  |   |        |          | 13,154  |  |     |     | 16 | %
|                                                     |                                                       |                                             |         |        |        |   |            |          |         |   |        |         
|Expenses                                             |                                                       |                                             |         |        |        |   |            |          |         |   |        |          |         |  |     |    
|                                                     | Interest                                              |                                             |         | 20,225 |        |   |            | 19,113   |         |   |        | 1,112    |         |  |     | 6   | % 
|                                                     | Employee                                              |                                             |         | 15,456 |        |   |            | 12,355   |         |   |        | 3,101    |         |  |     | 25  | % 
|                                                     | Administrative                                        |                                             |         | 20,754 |        |   |            | 5,827    |         |   |        | 14,927   |         |  |     | 256 | % 
|                                                     |                                                       |                                             |         |        |        |   |            |          |         |   |        |         
|                                                     |                                                       | Total operating expenses                    |         |        | 56,435 |   |            |          | 37,295  |   |        |          | 19,140  |  |     |     | 51 | %
|                                                     |                                                       |                                             |         |        |        |   |            |          |         |   |        |         
|Net investment income before income taxes            |                                                       |                                             | 38,484  |        |        |   | 44,470     |          |         |   | (5,986 | )        |         |  | (13 | )% 
|Income tax expense (benefit)                         |                                                       |                                             | (268    | )      |        |   | (75        | )        |         |   | (193   | )        |         |  | **  |    
|                                                     |                                                       |                                             |         |        |        |   |            |          |         |   |        |         
|Net investment income                                |                                                       |                                             | 38,752  |        |        |   | 44,545     |          |         |   | (5,793 | )        |         |  | (13 | )% 
|                                                     |                                                       |                                             |         |        |        |   |            |          |         |   |        |         
|Net Realized and Unrealized Gains (Losses)           |                                                       |                                             |         |        |        |   |            |          |         |   |        |          |         |  |     |    
|                                                     | Net realized gains (losses)                           |                                             |         | 10,285 |        |   |            | 147,850  |         |   |        | (137,565 | )       |  |     | *   |   
|                                                     | Net change in unrealized appreciation or depreciation |                                             |         | 70,584 |        |   |            | (172,087 | )       |   |        | 242,671  |         |  |     | *   |   
|                                                     |                                                       |                                             |         |        |        |   |            |          |         |   |        |         
|                                                     |                                                       | Total net gains                             |         |        | 80,869 |   |            |          | (24,237 | ) |        |          | 105,106 |  |     |     | *  |  
|                                                     |                                                       |                                             |         |        |        |   |            |          |         |   |        |         
|Net income                                           |                                                       | $                                           | 119,621 |        |        | $ | 20,308     |          |         | $ | 99,313 |          |         |  | 489 | %  
|                                                     |                                                       |                                             |         |        |        |   |            |          |         |   |        |         
|Diluted earnings per common share                    |                                                       | $                                           | 0.88    |        |        | $ | 0.15       |          |         | $ | 0.73   |          |         |  | 487 | %  
|                                                     |                                                       |                                             |         |        |        |   |            |          |         |   |        |         
|Weighted average common shares outstanding  diluted |                                                       |                                             | 135,579 |        |        |   | 131,968    |          |         |   | 3,611  |          |         |  | 3   | %  




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

Total Interest and Related Portfolio Income.




|                |       |      |      |      |      |   |      |      | 
|--------------- | ----- | ---- | ---- | ---- | ---- | - | ---- | ---- | 
|                |       | 2005 |      |      | 2004 |  
|($ in millions) |       |      |      |      |      |  
|Interest        |       | $    | 80.8 |      |      | $ | 69.9 |     
|Dividends       |       |      | 4.1  |      |      |   | 3.6  |     
|                |       |      |      |      |      |  
|                | Total |      | $    | 84.9 |      |   | $    | 73.5 | 
|                |       |      |      |      |      |  



53



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|                           |  |      |         |   |      |   |         |  
|-------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                           |  | 2005 |         |   | 2004 |  
|($ in millions)            |  |      |         |   |      |  
|Interest-bearing portfolio |  | $    | 2,357.7 |   |      | $ | 1,892.0 |  
|Portfolio yield            |  |      | 13.6    | % |      |   | 14.3    | %









|                                                                                                   |       |      |     |     |      |   |     |     | 
|-------------------------------------------------------------------------------------------------- | ----- | ---- | --- | --- | ---- | - | --- | --- | 
|                                                                                                   |       | 2005 |     |     | 2004 |  
|($ in millions)                                                                                    |       |      |     |     |      |  
|Structuring and diligence                                                                          |       | $    | 1.3 |     |      | $ | 1.8 |    
|Transaction and other services provided to portfolio companies                                     |       |      | 1.2 |     |      |   | 0.8 |    
|Management services provided to portfolio companies, other
    advisory services and guaranty fees |       |      | 4.8 |     |      |   | 4.4 |    
|Other income                                                                                       |       |      | 1.0 |     |      |   | 0.3 |    
|                                                                                                   |       |      |     |     |      |  
|                                                                                                   | Total |      | $   | 8.3 |      |   | $   | 7.3 | 
|                                                                                                   |       |      |     |     |      |  





54



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Operating Expenses.


|                             |  |                |         |   |      |   |       |  
|---------------------------- |  | -------------- | ------- | - | ---- | - | ----- | -
|                             |  | At and for the |        
|                             |  | Three Months   |        
|                             |  | Ended          |        
|                             |  | March 31,      |        
|                             |  |                |        
|                             |  | 2005           |         |   | 2004 |  
|($ in millions)              |  |                |         |   |      |  
|Total outstanding debt       |  | $              | 1,296.4 |   |      | $ | 962.4 |  
|Average outstanding debt     |  | $              | 1,125.0 |   |      | $ | 953.0 |  
|Weighted average
    cost(1) |  |                | 6.4     | % |      |   | 7.5   | %




|    |                                                                                                                                                                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 and other facility fees that are
    recognized into interest expense over the contractual life of
    the respective borrowings, divided by (b) debt outstanding
    on the balance sheet date.













55



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Realized Gains and Losses.


56



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##### 





|                   |  |              |      |   |      |   |       |  
|------------------ |  | ------------ | ---- | - | ---- | - | ----- | -
|                   |  | For the      |     
|                   |  | Three Months |     
|                   |  | Ended        |     
|                   |  | March 31,    |     
|                   |  |              |     
|                   |  | 2005         |      |   | 2004 |  
|($ in millions)    |  |              |      |   |      |  
|Realized gains     |  | $            | 14.7 |   |      | $ | 156.0 |  
|Realized losses    |  |              | (4.4 | ) |      |   | (8.1  | )
|                   |  |              |      |   |      |  
|Net realized gains |  | $            | 10.3 |   |      | $ | 147.9 |  
|                   |  |              |      |   |      |  



|                                                                                            |                |               |      |      |      |   |        |        |  
|------------------------------------------------------------------------------------------- | -------------- | ------------- | ---- | ---- | ---- | - | ------ | ------ | -
|                                                                                            |                | For the Three |     
|                                                                                            |                | Months Ended  |     
|                                                                                            |                | March 31,     |     
|                                                                                            |                |               |     
|($ in millions)                                                                             |                | 2005          |      |      | 2004 |  
|                                                                                            |                |               |      |      |      |  
|Reversal of previously recorded unrealized appreciation
    associated with realized gains  |                | $             | (9.9 | )    |      | $ | (142.8 | )     
|Reversal of previously recorded unrealized depreciation
    associated with realized losses |                |               | 4.8  |      |      |   | 7.7    |       
|                                                                                            |                |               |      |      |      |  
|                                                                                            | Total reversal |               | $    | (5.1 | )    |   | $      | (135.1 | )
|                                                                                            |                |               |      |      |      |  











Change in Unrealized Appreciation or Depreciation.


57



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##### 









Valuation Methodology  Private Finance.




58



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##### 















59



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##### 





Valuation Methodology  CMBS Bonds and CDO Bonds
and Preferred Shares.


Net Change in Unrealized Appreciation or Depreciation.


|                                                                                            |  |         |      |   |         |   |        |  
|------------------------------------------------------------------------------------------- |  | ------- | ---- | - | ------- | - | ------ | -
|                                                                                            |  | 2005(1) |      |   | 2004(1) |  
|($ in millions)                                                                             |  |         |      |   |         |  
|Net unrealized appreciation or depreciation                                                 |  | $       | 75.7 |   |         | $ | (37.0  | )
|Reversal of previously recorded unrealized appreciation
    associated with realized gains  |  |         | (9.9 | ) |         |   | (142.8 | )
|Reversal of previously recorded unrealized depreciation
    associated with realized losses |  |         | 4.8  |   |         |   | 7.7    |  
|                                                                                            |  |         |      |   |         |  
|Net change in unrealized appreciation or depreciation                                       |  | $       | 70.6 |   |         | $ | (172.1 | )
|                                                                                            |  |         |      |   |         |  




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



Advantage Sales & Marketing, Inc.


60



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##### 



Business Loan Express, LLC.






OTHER MATTERS


Per Share Amounts.


Regulated Investment Company Status.






61



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##### 





Legal Proceedings.






FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES




|                                                    |                                                                        |      |       |       |      |   |       |       | 
|--------------------------------------------------- | ---------------------------------------------------------------------- | ---- | ----- | ----- | ---- | - | ----- | ----- | 
|($ in millions)                                     |                                                                        | 2005 |       |       | 2004 |  
|                                                    |                                                                        |      |       |       |      |  
|Net cash provided by (used in) operating activities |                                                                        | $    | (49.8 | )     |      | $ | 207.9 |      
|Add: portfolio investments funded                   |                                                                        |      | 258.0 |       |      |   | 170.6 |      
|                                                    |                                                                        |      |       |       |      |  
|                                                    | Total cash provided by operating activities before new
    investments |      | $     | 208.2 |      |   | $     | 378.5 | 
|                                                    |                                                                        |      |       |       |      |  







62



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|                            |  |      |         |   |      |   |         |  
|--------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|($ in millions)             |  | 2005 |         |   | 2004 |  
|                            |  |      |         |   |      |  
|Total assets                |  | $    | 3,504.6 |   |      | $ | 3,261.0 |  
|Total debt outstanding      |  | $    | 1,296.4 |   |      | $ | 1,176.6 |  
|Total shareholders equity  |  | $    | 2,033.1 |   |      | $ | 1,979.8 |  
|Debt to equity ratio        |  |      | 0.64    |   |      |   | 0.59    |  
|Asset coverage
    ratio(1) |  |      | 263     | % |      |   | 280     | %




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





63



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|                              |                         |                                    |       |       |             |        |       |          |         |  |     |       |     |     
|----------------------------- | ----------------------- | ---------------------------------- | ----- | ----- | ----------- | ------ | ----- | -------- | ------- |  | --- | ----- | --- | ----
|                              |                         |                                    |       |       |             | Annual |      
|                              |                         | Facility                           |       |       | Amount      |        |       | Interest |        
|                              |                         | Amount                             |       |       | Outstanding |        |       | Cost(1)  |        
|($ in millions)               |                         |                                    |       |       |             |        |       |          |        
|Notes payable and debentures: |                         |                                    |       |       |             |        |       |          |         |  |     |      
|                              | Unsecured notes payable |                                    | $     | 980.9 |             |        | $     | 980.9    |         |  |     | 6.5   | %  
|                              | SBA debentures          |                                    |       | 53.8  |             |        |       | 46.5     |         |  |     | 7.8   | %  
|                              | OPIC loan               |                                    |       | 5.7   |             |        |       | 5.7      |         |  |     | 6.6   | %  
|                              |                         |                                    |       |       |             |        |       |          |        
|                              |                         | Total notes payable and debentures |       |       | 1,040.4     |        |       |          | 1,033.1 |  |     |       | 6.6 | %   
|Revolving line of credit      |                         |                                    | 587.5 |       |             |        | 263.3 |          |         |  | 5.7 | % (2)
|                              |                         |                                    |       |       |             |        |       |          |        
|                              |                         | Total debt                         |       | $     | 1,627.9     |        |       | $        | 1,296.4 |  |     |       | 6.4 | %(2)
|                              |                         |                                    |       |       |             |        |       |          |        




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 and other facility fees that are
    recognized into interest expense over the contractual life of
    the respective borrowings, divided by (b) debt outstanding
    on the balance sheet date.                                                                                                                                                                                                                                                                                               
|   
|(2) | The current interest rate payable on the revolving line of
    credit was 4.4% at March 31, 2005, which excluded the
    annual cost of commitment fees and other facility fees of
    $3.3 million. The annual cost of commitment fees and other
    facility fees of $3.3 million at March 31, 2005,
    include the extension fee of $1.8 million that we paid on
    April 18, 2005, as discussed below. The annual interest
    cost for total debt includes the annual cost of commitment fees
    and other facility fees on the revolving line of credit
    regardless of the amount outstanding on the facility as of the
    balance sheet date.

Unsecured Notes Payable.




Small Business Administration Debentures.


Revolving Line of Credit.




64



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##### 











|                                |                                   |                               |       |                      |         |       |     |       |       |  |       |       |       |      |     |   |      |  |     |       |       |  |     |       |       |  |      |       |       | 
|------------------------------- | --------------------------------- | ----------------------------- | ----- | -------------------- | ------- | ----- | --- | ----- | ----- |  | ----- | ----- | ----- | ---- | --- | - | ---- |  | --- | ----- | ----- |  | --- | ----- | ----- |  | ---- | ----- | ----- | 
|                                |                                   |                               |       | Payments Due By Year |        
|                                |                                   |                               |       |                      |        
|                                |                                   |                               |       |                      |         | After |    
|                                |                                   | Total                         |       |                      | 2005    |       |     | 2006  |       |  | 2007  |       |       | 2008 |     |   | 2009 |  |     | 2009  |      
|($ in millions)                 |                                   |                               |       |                      |         |       |     |       |       |  |       |       |       |      |     |   |      |  |     |       |      
|Notes payable and debentures:   |                                   |                               |       |                      |         |       |     |       |       |  |       |       |       |      |     |   |      |  |     |       |       |  |     |       |       |  |      |      
|                                | Unsecured long-term notes payable |                               | $     | 980.9                |         |       | $   | 165.0 |       |  | $     | 175.0 |       |      | $   |  |      |  | $   | 153.0 |       |  | $   | 268.4 |       |  | $    | 219.5 |      
|                                | SBA debentures                    |                               |       | 46.5                 |         |       |     |      |       |  |       |      |       |      |     |  |      |  |     |      |       |  |     |      |       |  |      | 46.5  |      
|                                | OPIC loan                         |                               |       | 5.7                  |         |       |     |      |       |  |       | 5.7   |       |      |     |  |      |  |     |      |       |  |     |      |       |  |      |      |      
|Revolving line of
    credit(1) |                                   |                               | 263.3 |                      |         |       |    |       |       |  | 263.3 |       |       |      |    |   |      |  |    |       |       |  |    |       |       |  |     |      
|Operating leases                |                                   |                               | 33.5  |                      |         |       | 4.6 |       |       |  | 4.5   |       |       |      | 4.4 |   |      |  | 4.4 |       |       |  | 4.6 |       |       |  | 11.0 |      
|                                |                                   |                               |       |                      |         |       |     |       |       |  |       |       |       |      |     |   |      |  |     |       |      
|                                |                                   | Total contractual obligations |       | $                    | 1,329.9 |       |     | $     | 169.6 |  |       | $     | 448.5 |      |     | $ | 4.4  |  |     | $     | 157.4 |  |     | $     | 273.0 |  |      | $     | 277.0 | 
|                                |                                   |                               |       |                      |         |       |     |       |       |  |       |       |       |      |     |   |      |  |     |       |      




|    |                                                                                                                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | As discussed above, we exercised our option to extend the
    maturity of the revolving line of credit to April 2006. At
    March 31, 2005, $287.2 million remained unused and
    available, net of amounts committed for standby letters of
    credit of $37.1 million issued under the credit facility.



|                                 |                   |       |       |                                          |      |       |     |      |  |   |      |      |  |      |       |       |      |   |     |      |  |   |     |     |  |   |     |     | 
|-------------------------------- | ----------------- | ----- | ----- | ---------------------------------------- | ---- | ----- | --- | ---- |  | - | ---- | ---- |  | ---- | ----- | ----- | ---- | - | --- | ---- |  | - | --- | --- |  | - | --- | --- | 
|                                 |                   |       |       | Amount of Commitment Expiration Per Year |     
|                                 |                   |       |       |                                          |     
|                                 |                   |       |       |                                          |      | After |    
|                                 |                   | Total |       |                                          | 2005 |       |     | 2006 |  |   | 2007 |      |  | 2008 |       |       | 2009 |   |     | 2009 | 
|($ in millions)                  |                   |       |       |                                          |      |       |     |      |  |   |      |      |  |      |       |       |      |   |     |      | 
|Guarantees                       |                   | $     | 109.5 |                                          |      | $     | 0.3 |      |  | $ | 0.9  |      |  | $    | 104.6 |       |      | $ | 0.1 |      |  | $ | 2.5 |     |  | $ | 1.1 |    
|Standby letters of
    credit(1) |                   |       | 37.1  |                                          |      |       |    |      |  |   | 37.1 |      |  |      |      |       |      |   |    |      |  |   |    |     |  |   |    |    
|                                 |                   |       |       |                                          |      |       |     |      |  |   |      |      |  |      |       |       |      |   |     |      | 
|                                 | Total commitments |       | $     | 146.6                                    |      |       | $   | 0.3  |  |   | $    | 38.0 |  |      | $     | 104.6 |      |   | $   | 0.1  |  |   | $   | 2.5 |  |   | $   | 1.1 | 
|                                 |                   |       |       |                                          |      |       |     |      |  |   |      |      |  |      |       |       |      |   |     |      | 




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Standby letters of credit are issued under our revolving line of
    credit. As discussed above, we exercised our option to extend
    the maturity of the revolving line of credit to April 2006.
    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 April 2006.



65



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##### 



CRITICAL ACCOUNTING POLICIES




Valuation of Portfolio Investments.


Loans and Debt Securities.






Equity Securities.


66



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##### 









Commercial Mortgage-Backed Securities (CMBS) and
Collateralized Debt Obligations (CDO).




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


Fee Income.


67



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##### 



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.




68



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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.


Our financial results could be negatively affected if
Business Loan Express fails to perform as expected.


69



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##### 





Investments in non-investment grade commercial
mortgage-backed securities and collateralized debt obligations
may be illiquid, may have a higher risk of default, and may not
produce current returns.


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.


70



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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
dividends.


There is a risk that you may not receive dividends or
distributions.


71



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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.


Our ability to invest in private companies may be limited in
certain circumstances.






72



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##### 







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


Our common stock price may be volatile.




| |   |                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | price and volume fluctuations in the overall stock market from
    time to time;                                                                                                                         
|
| |  | significant volatility in the market price and trading volume of
    securities of business development companies or other financial
    services companies;                                             
|
| |  | volatility resulting from trading in derivative securities
    related to our common stock including puts, calls, long-term
    equity anticipation securities, or LEAPs, or short trading
    positions;
|
| |  | changes in 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.                                                                                                                                                                             

Item 3.  Quantitative and Qualitative
Disclosures About Market Risk




Item 4.  Controls and Procedures




73



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##### 







74



---



##### 



PART II. OTHER INFORMATION


Item 1.     Legal
Proceedings












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






75



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##### 







|              |                       |              |        |        |                |   |       |       | 
|------------- | --------------------- | ------------ | ------ | ------ | -------------- | - | ----- | ----- | 
|              |                       | Total Number |        |        |               
|              |                       | of Shares    |        |        | Average Price  |  
|              |                       | Purchased    |        |        | Paid Per Share |  
|              |                       |              |        |        |                |  
|DCP
    I(1)  |                       |              |        |        |                |   |       |      
|              | 1/1/2005 to 1/31/2005 |              |        | 1      |                |   | $     | 26.97 | 
|              | 2/1/2005 to 2/28/2005 |              |        |       |                |   |       |      | 
|              | 3/1/2005 to 3/31/2005 |              |        | 1,045  |                |   | $     | 26.60 | 
|DCP
    II(2) |                       |              |        |        |                |   |       |      
|              | 1/1/2005 to 1/31/2005 |              |        | 375    |                |   | $     | 26.43 | 
|              | 2/1/2005 to 2/28/2005 |              |        |       |                |   |       |      | 
|              | 3/1/2005 to 3/31/2005 |              |        | 69,398 |                |   | $     | 26.63 | 
|              |                       |              |        |        |                |  
|Total         |                       |              | 70,819 |        |                | $ | 26.63 |      
|              |                       |              |        |        |                |  






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The 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. 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 DCP I is administered through a
    trust by an independent third-party trustee, and we fund this
    plan through cash contributions. Directors may choose to defer
    directors fees through the 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 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. In conjunction with the program, we instituted the
    DCP II, which is an unfunded plan (as defined by the
    Internal Revenue Code of 1986) that is administered through a
    trust by an independent third-party trustee. The individual
    performance awards will be deposited in the trust in four equal
    installments, generally on a quarterly basis in the form of cash
    and the DCP II requires the trustee to use the cash
    exclusively to purchase shares of our common stock in the market.                                                                                                                                                

Item 3.  Defaults Upon Senior
Securities




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




Item 5.  Other Information




76



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##### 



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 December 15, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|        | 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  | .2     |             | Form of debenture between certain subsidiaries of Allied Capital
    and the U.S. Small Business Administration. (Incorporated by
    reference to Exhibit 4.2 filed by a predecessor entity to
    Allied Capital on Form 10-K for the year ended
    December 31, 1996).                                                                                                                                                                                                                                                                                                                                                                              
|        | 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     |             | Third Amended and Restated Credit Agreement, dated
    April 18, 2003. (Incorporated by reference to
    Exhibit 10.2 filed with Allied Capitals
    Form 10-Q for the period ended March 31, 2003).                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|        | 10 | .2(a)  |             | First Amendment to Credit Agreement, dated as of October 6,
    2003.(Incorporated by reference to Exhibit 10.2(a) filed
    with Allied Capitals Form 10-Q for the period ended
    September 30, 2003).                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        | 10 | .2(b)  |             | Second Amendment to Credit Agreement, dated as of
    December 17, 2003. (Incorporated by reference to
    Exhibit 10.2(b) filed with Allied Capitals
    Form 10-K for the year ended December 31, 2003).                                                                                                                                                                                                                                                                                                                                                                                                                                             
|        | 10 | .2(c)  |             | Third Amendment to Credit Agreement, dated May 28, 2004.
    (Incorporated by reference to Exhibit 10.2(c) filed with
    Allied Capitals Form 10-Q for the period ended
    June 30, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        | 10 | .2(d)  |             | Fourth Amendment to Credit Agreement, dated March 29, 2005.
    (Incorporated by reference to Exhibit f.2(d) filed with
    Allied Capitals registration statement on Form N-2
    filed on April 7, 2005).                                                                                                                                                                                                                                                                                                                                                                                                                                            
|        | 10 | .2(e)* |             | Fifth Amendment to Credit Agreement, dated April 15,
    2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        | 10 | .3     |             | Note Agreement, dated as of April 30, 1998.
    (Incorporated by reference to Exhibit 10.2 filed with
    Allied Capitals Form 10-Q for the period ended
    June 30, 1998).                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        | 10 | .4     |             | Loan Agreement between a predecessor entity to Allied Capital
    and Overseas Private Investment Corporation, dated
    April 10, 1995. (Incorporated by reference to
    Exhibit f.7 filed by a predecessor entity to Allied Capital
    to Pre-Effective Amendment No. 2 to registration statement
    on Form N-2 (File No. 333-64629) filed on
    January 24, 1996). Letter, dated December 11,
    1997, evidencing assignment of Loan Agreement from the
    predecessor entity of Allied Capital to Allied Capital.
    (Incorporated by reference to Exhibit 10.3 to Allied
    Capitals Form 10-K for the year ended
    December 31, 1997).
|        | 10 | .5     |             | Note Agreement, dated as of May 1, 1999. (Incorporated
    by reference to Exhibit 10.5 filed with Allied Capital
    Form 10-Q for the period ended June 30, 1999).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | 10 | .12    |             | Note Agreement, dated as of October 15, 2000.
    (Incorporated by reference to Exhibit 10.4b filed with
    Allied Capitals Form 10-Q for the period ended
    September 30, 2000).                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

77



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##### 



|        |    |        |             |                                                                                                                                                                                                                                                                                                                                                                 
|------- | -- | ------ | ----------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |        |            
|Number  |    |        | Description
|        |    |        |            
|        | 10 | .13    |             | Note Agreement, dated as of October 15, 2001.
    (Incorporated by reference to Exhibit f.10 filed with
    Allied Capitals Post-Effective Amendment No. 1 to
    registration statement on Form N-2 (File
    No. 333-67336) filed on November 14, 2001).                                                                                                     
|        | 10 | .15    |             | Control Investor Guaranty Agreement, dated as of March 28,
    2001, between Allied Capital and Fleet National Bank and
    Business Loan Express, Inc. (Incorporated by reference to
    Exhibit f.14 filed with Allied Capitals
    Post-Effective Amendment No. 3 to registration statement on
    Form N-2 (File No. 333-43534) filed on May 15,
    2001).
|        | 10 | .17    |             | Non-Qualified Deferred Compensation Plan II.
    (Incorporated by reference to Exhibit A filed with
    Allied Capitals Proxy Statement filed on March 30,
    2004).                                                                                                                                                                                          
|        | 10 | .18    |             | Amended and Restated Deferred Compensation Plan, dated
    January 30, 2004. (Incorporated by reference to
    Exhibit 10.16 filed with Allied Capitals
    Form 10-K for the year ended December 31, 2003).                                                                                                                                                   
|        | 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 | .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 | .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 | .23    |             | Retention Agreement, dated March 21, 2005, between Allied
    Capital and John M. Scheurer. (Incorporated by reference
    to Exhibit 99.1 filed with Allied Capitals current
    report on Form 8-K filed on March 24, 2005).                                                                                                                                 
|        | 10 | .25    |             | Form of Custody Agreement with Riggs Bank N.A. (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    |             | Form of Custody Agreement with LaSalle National Bank.
    (Incorporated by reference to Exhibit j.2 filed with Allied
    Capitals registration statement on Form N-2 (File No. 333-
    51899) filed on May 6, 1998).                                                                                                                                         
|        | 10 | .27    |             | Custodian Agreement with LaSalle National Bank Association dated
    July 9, 2001. (Incorporated by reference to Exhibit j.3 filed
    with Allied Capitals registration statement on Form N-2
    (File No. 333-67336) filed on August 10, 2001).                                                                                                             
|        | 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, 2003.)                                                                                                                                                                                                                
|        | 10 | .30    |             | Agreement and Plan of Merger by and among Allied Capital, Allied
    Capital Lock Acquisition Corporation, and Sunsource, Inc dated
    June 18, 2001. (Incorporated by reference to Exhibit k.1
    filed with Allied Capitals registration statement on Form
    N-2 (File No. 333-67336) filed on August 10, 2001).                                         
|        | 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 period ended
    March 31, 2003).                                                                                                                                                                                   

78



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##### 



|        |    |     |             |                                                                                                                                                                                                                                      
|------- | -- | --- | ----------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     |            
|Number  |    |     | Description
|        |    |     |            
|        | 10 | .32 |             | Amendment, dated as of April 30, 2003, to Note Agreement,
    dated as of April 30, 1998. (Incorporated by reference
    to Exhibit 10.32 filed with Allied Capitals
    Form 10-Q for the period ended March 31, 2003).            
|        | 10 | .33 |             | Amendment, dated as of April 30, 2003, to Note Agreement,
    dated as of May 1, 1999. (Incorporated by reference to
    Exhibit 10.33 filed with Allied Capitals
    Form 10-Q for the period ended March 31, 2003).               
|        | 10 | .35 |             | Amendment, dated as of April 30, 2003, to Note Agreement,
    dated as of October 15, 2000. (Incorporated by reference
    to Exhibit 10.35 filed with Allied Capitals
    Form 10-Q for the period ended March 31, 2003).          
|        | 10 | .36 |             | Amendment, dated as of April 30, 2003, to Note Agreement,
    dated as of October 15, 2001. (Incorporated by reference
    to Exhibit 10.36 filed with Allied Capitals
    Form 10-Q for the period 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.)                                                                                    
|        | 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.)                                                                                        
|        | 15 | .*  |             | Letter regarding Unaudited Interim Financial Information                                                                                                                                                                             
|        | 31 | .1* |             | Certification of Chief Executive Officer Pursuant to
    Rule 13a-14 of the Securities Exchange Act of 1934.                                                                                                                         
|        | 31 | .2* |             | Certification of Chief Financial Officer Pursuant
    Rule 13a-14 of the Securities Exchange Act of 1934.                                                                                                                            
|        | 32 | .1* |             | Certification of Chief Executive Officer Pursuant to Section 906
    of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
    Section 1350.                                                                                                  
|        | 32 | .2* |             | Certification of Chief Financial Officer Pursuant to Section 906
    of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
    Section 1350.                                                                                                  






79



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##### 



SIGNATURES






|                   |  |                                                           
|------------------ |  | ----------------------------------------------------------
|                   |  | ALLIED CAPITAL CORPORATION                                
|                   |  | (Registrant)                                              
|                  
|                   |  |                                                           
|Dated: May 9, 2005 |  | /s/ William L. Walton                                     
|                   |  |                                                           
|                   |  | William L. Walton
    Chairman and Chief Executive Officer
|                  
|                   |  | /s/ Penni F. Roll                                         
|                   |  |                                                           
|                   |  | Penni F. Roll
    Chief Financial Officer                 

80



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##### 



EXHIBIT INDEX


|        |    |        |             |                                                                                                                                    
|------- | -- | ------ | ----------- | -----------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |        |            
|Number  |    |        | Description
|        |    |        |            
|        | 10 | .2(e)* |             | Fifth Amendment to Credit Agreement, dated April 15, 2005.                                                                         
|        | 15 | .*     |             | Letter regarding Unaudited Interim Financial Information                                                                           
|        | 31 | .1*    |             | Certification of Chief Executive Officer Pursuant to
    Rule 13a-14 of the Securities Exchange Act of 1934.                       
|        | 31 | .2*    |             | Certification of Chief Financial Officer Pursuant to
    Rule 13a-14 of the Securities Exchange Act of 1934.                       
|        | 32 | .1*    |             | Certification of Chief Executive Officer Pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
    Section 1350.
|        | 32 | .2*    |             | Certification of Chief Financial Officer Pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
    Section 1350.