##### 









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 September 30, 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


o x












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ALLIED CAPITAL CORPORATION


FORM 10-Q TABLE OF CONTENTS


|                              |                                                                                                   |                                                                                                                             |    |   
|----------------------------- | ------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------- | -- | --
|PART I. FINANCIAL INFORMATION |                                                                                                   |                                                                                                                            
|                              | Item 1. Financial Statements                                                                      |                                                                                                                             |   
|                              |                                                                                                   | Consolidated Balance Sheet as of September 30, 2005
    (unaudited) and
    December 31, 2004                               |    | 1 
|                              |                                                                                                   | Consolidated Statement of Operations (unaudited)  For
    the Three and Nine Months Ended September 30, 2005 and 2004      |    | 2 
|                              |                                                                                                   | Consolidated Statement of Changes in Net Assets
    (unaudited)  For the Nine Months Ended
    September 30, 2005 and 2004 |    | 3 
|                              |                                                                                                   | Consolidated Statement of Cash Flows (unaudited)  For
    the Nine Months Ended September 30, 2005 and 2004                |    | 4 
|                              |                                                                                                   | Consolidated Statement of Investments as of September 30,
    2005 (unaudited)                                              |    | 5 
|                              |                                                                                                   | Notes to Consolidated Financial Statements                                                                                  |    | 14
|                              |                                                                                                   | Report of Independent Registered Public Accounting Firm                                                                     |    | 41
|                              | Item 2. Managements Discussion and Analysis of
    Financial Condition and Results of Operations |                                                                                                                             | 42
|                              | Item 3. Quantitative and Qualitative Disclosures About
    Market Risk                            |                                                                                                                             | 78
|                              | Item 4. Controls and Procedures                                                                   |                                                                                                                             | 79
|                             
|PART II. OTHER INFORMATION    |                                                                                                   |                                                                                                                            
|                              | Item 1. Legal Proceedings                                                                         |                                                                                                                             | 80
|                              | Item 2. Unregistered Sales of Equity Securities and
    Use of Proceeds                           |                                                                                                                             | 81
|                              | Item 3. Defaults Upon Senior Securities                                                           |                                                                                                                             | 81
|                              | Item 4. Submission of Matters to a Vote of Security
    Holders                                   |                                                                                                                             | 81
|                              | Item 5. Other Information                                                                         |                                                                                                                             | 81
|                              | Item 6. Exhibits                                                                                  |                                                                                                                             | 82
|                              | Signatures                                                                                        |                                                                                                                             | 85





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##### 



PART I: FINANCIAL INFORMATION


Item 1.  Financial Statements


ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEET


|                                                                |                                                                                                                                                                                  |                                                                            |                                                                   |           |              |           |        |           |           |           | 
|--------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------- | ----------------------------------------------------------------- | --------- | ------------ | --------- | ------ | --------- | --------- | --------- | 
|                                                                |                                                                                                                                                                                  | September 30,                                                              |                                                                   |           | December 31, |          
|                                                                |                                                                                                                                                                                  | 2005                                                                       |                                                                   |           | 2004         |          
|                                                                |                                                                                                                                                                                  |                                                                            |                                                                   |           |              |          
|(in thousands, except per share amounts)                        |                                                                                                                                                                                  | (unaudited)                                                                |                                                                   |           |             
|ASSETS                                                         
|Portfolio at value:                                             |                                                                                                                                                                                  |                                                                            |                                                                   |           |              |           |        |          
|                                                                | Private finance                                                                                                                                                                  |                                                                            |                                                                   |           |              |           |        |           |          
|                                                                |                                                                                                                                                                                  | Companies more than 25% owned (cost: 2005-$1,510,082;
    2004-$1,389,342) |                                                                   | $         | 1,612,914    |           |        | $         | 1,359,641 |          
|                                                                |                                                                                                                                                                                  | Companies 5% to 25% owned (cost: 2005-$164,007; 2004-$194,750)             |                                                                   |           | 156,840      |           |        |           | 188,902   |          
|                                                                |                                                                                                                                                                                  | Companies less than 5% owned (cost: 2005-$1,338,370;
    2004-$800,828)    |                                                                   |           | 1,311,231    |           |        |           | 753,543   |          
|                                                                |                                                                                                                                                                                  |                                                                            |                                                                   |           |              |          
|                                                                |                                                                                                                                                                                  |                                                                            | Total private finance (cost: 2005-$3,012,459; 2004-$2,384,920)    |           |              | 3,080,985 |        |           |           | 2,302,086 | 
|                                                                | Commercial real estate finance (cost: 2005-$148,623;
    2004-$722,612)                                                                                                          |                                                                            |                                                                   | 142,765   |              |           |        | 711,325   |          
|                                                                |                                                                                                                                                                                  |                                                                            |                                                                   |           |              |          
|                                                                |                                                                                                                                                                                  |                                                                            | Total portfolio at value (cost: 2005-$3,161,082; 2004-$3,107,532) |           |              | 3,223,750 |        |           |           | 3,013,411 | 
|                                                                |                                                                                                                                                                                  |                                                                            |                                                                   |           |              |          
|Deposits of proceeds from sales of borrowed Treasury securities |                                                                                                                                                                                  |                                                                            | 17,933                                                            |           |              |           | 38,226 |          
|Accrued interest and dividends receivable                       |                                                                                                                                                                                  |                                                                            | 65,147                                                            |           |              |           | 79,489 |          
|Other assets                                                    |                                                                                                                                                                                  |                                                                            | 81,565                                                            |           |              |           | 72,712 |          
|Cash and cash equivalents                                       |                                                                                                                                                                                  |                                                                            | 58,081                                                            |           |              |           | 57,160 |          
|                                                                |                                                                                                                                                                                  |                                                                            |                                                                   |           |              |          
|                                                                |                                                                                                                                                                                  |                                                                            | Total assets                                                      |           | $            | 3,446,476 |        |           | $         | 3,260,998 | 
|                                                                |                                                                                                                                                                                  |                                                                            |                                                                   |           |              |          
|LIABILITIES AND SHAREHOLDERS EQUITY                           
|Liabilities:                                                    |                                                                                                                                                                                  |                                                                            |                                                                   |           |              |           |        |          
|                                                                | Notes payable and debentures (maturing within one year:
    2005-$150,000; 2004-$169,000)                                                                                        |                                                                            | $                                                                 | 968,335   |              |           | $      | 1,064,568 |          
|                                                                | Revolving line of credit                                                                                                                                                         |                                                                            |                                                                   |          |              |           |        | 112,000   |          
|                                                                | Obligations to replenish borrowed Treasury securities                                                                                                                            |                                                                            |                                                                   | 17,933    |              |           |        | 38,226    |          
|                                                                | Accounts payable and other liabilities                                                                                                                                           |                                                                            |                                                                   | 93,222    |              |           |        | 66,426    |          
|                                                                |                                                                                                                                                                                  |                                                                            |                                                                   |           |              |          
|                                                                |                                                                                                                                                                                  |                                                                            | Total liabilities                                                 |           |              | 1,079,490 |        |           |           | 1,281,220 | 
|                                                                |                                                                                                                                                                                  |                                                                            |                                                                   |           |              |          
|Commitments and contingencies                                   |                                                                                                                                                                                  |                                                                            |                                                                   |           |              |           |        |          
|Shareholders equity:                                           |                                                                                                                                                                                  |                                                                            |                                                                   |           |              |           |        |          
|                                                                | Common stock, $0.0001 par value, 200,000 shares authorized;
    136,289 and 133,099 shares issued and outstanding at
    September 30, 2005, and December 31, 2004, respectively |                                                                            |                                                                   | 14        |              |           |        | 13        |          
|                                                                | Additional paid-in capital                                                                                                                                                       |                                                                            |                                                                   | 2,171,063 |              |           |        | 2,094,421 |          
|                                                                | Common stock held in deferred compensation trust                                                                                                                                 |                                                                            |                                                                   | (17,781   | )            |           |        | (13,503   | )        
|                                                                | Notes receivable from sale of common stock                                                                                                                                       |                                                                            |                                                                   | (4,138    | )            |           |        | (5,470    | )        
|                                                                | Net unrealized appreciation (depreciation) on portfolio                                                                                                                          |                                                                            |                                                                   | 48,259    |              |           |        | (107,767  | )        
|                                                                | Undistributed (distributions in excess of) earnings                                                                                                                              |                                                                            |                                                                   | 169,569   |              |           |        | 12,084    |          
|                                                                |                                                                                                                                                                                  |                                                                            |                                                                   |           |              |          
|                                                                |                                                                                                                                                                                  |                                                                            | Total shareholders equity                                        |           |              | 2,366,986 |        |           |           | 1,979,778 | 
|                                                                |                                                                                                                                                                                  |                                                                            |                                                                   |           |              |          
|                                                                |                                                                                                                                                                                  |                                                                            | Total liabilities and shareholders equity                        |           | $            | 3,446,476 |        |           | $         | 3,260,998 | 
|                                                                |                                                                                                                                                                                  |                                                                            |                                                                   |           |              |          
|Net asset value per common share                                |                                                                                                                                                                                  | $                                                                          | 17.37                                                             |           |              | $         | 14.87  |          
|                                                                |                                                                                                                                                                                  |                                                                            |                                                                   |           |              |          



1



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF OPERATIONS


|                                                     |                                                       |                               |                                             |        |                     |        |         |        |         |        |         |         |         |         |         |          |         |         | 
|---------------------------------------------------- | ----------------------------------------------------- | ----------------------------- | ------------------------------------------- | ------ | ------------------- | ------ | ------- | ------ | ------- | ------ | ------- | ------- | ------- | ------- | ------- | -------- | ------- | ------- | 
|                                                     |                                                       | For the Three Months          |                                             |        | For the Nine Months |       
|                                                     |                                                       | Ended September 30,           |                                             |        | Ended September 30, |       
|                                                     |                                                       |                               |                                             |        |                     |       
|                                                     |                                                       | 2005                          |                                             |        | 2004                |        |         | 2005   |         |        | 2004    |        
|(in thousands, except per share amounts)             |                                                       |                               |                                             |        |                     |        |         |        |         |        |         |        
|                                                     |                                                       | (unaudited)                   |                                             |        | (unaudited)         |       
|Interest and Related Portfolio Income:               |                                                       |                               |                                             |        |                     |        |         |        |         |        |         |         |         |         |         |         
|                                                     | Interest and dividends                                |                               |                                             |        |                     |        |         |        |         |        |         |         |         |         |         |          |        
|                                                     |                                                       | Companies more than 25% owned |                                             | $      | 31,137              |        |         | $      | 27,242  |        |         | $       | 89,587  |         |         | $        | 59,112  |        
|                                                     |                                                       | Companies 5% to 25% owned     |                                             |        | 5,205               |        |         |        | 7,582   |        |         |         | 16,723  |         |         |          | 19,827  |        
|                                                     |                                                       | Companies less than 5% owned  |                                             |        | 40,011              |        |         |        | 51,004  |        |         |         | 126,318 |         |         |          | 154,601 |        
|                                                     |                                                       |                               |                                             |        |                     |        |         |        |         |        |         |        
|                                                     |                                                       |                               | Total interest and dividends                |        |                     | 76,353 |         |        |         | 85,828 |         |         |         | 232,628 |         |          |         | 233,540 | 
|                                                     |                                                       |                               |                                             |        |                     |        |         |        |         |        |         |        
|                                                     | Loan prepayment premiums                              |                               |                                             |        |                     |        |         |        |         |        |         |         |         |         |         |          |        
|                                                     |                                                       | Companies more than 25% owned |                                             |        |                    |        |         |        |        |        |         |         |        |         |         |          |        |        
|                                                     |                                                       | Companies 5% to 25% owned     |                                             |        | 691                 |        |         |        | 53      |        |         |         | 691     |         |         |          | 765     |        
|                                                     |                                                       | Companies less than 5% owned  |                                             |        | 1,414               |        |         |        | 140     |        |         |         | 3,944   |         |         |          | 3,445   |        
|                                                     |                                                       |                               |                                             |        |                     |        |         |        |         |        |         |        
|                                                     |                                                       |                               | Total loan prepayment premiums              |        |                     | 2,105  |         |        |         | 193    |         |         |         | 4,635   |         |          |         | 4,210   | 
|                                                     |                                                       |                               |                                             |        |                     |        |         |        |         |        |         |        
|                                                     | Fees and other income                                 |                               |                                             |        |                     |        |         |        |         |        |         |         |         |         |         |          |        
|                                                     |                                                       | Companies more than 25% owned |                                             |        | 9,019               |        |         |        | 7,611   |        |         |         | 21,777  |         |         |          | 20,406  |        
|                                                     |                                                       | Companies 5% to 25% owned     |                                             |        | (14                 | )      |         |        | 934     |        |         |         | 111     |         |         |          | 1,404   |        
|                                                     |                                                       | Companies less than 5% owned  |                                             |        | 7,394               |        |         |        | 2,297   |        |         |         | 16,832  |         |         |          | 6,568   |        
|                                                     |                                                       |                               |                                             |        |                     |        |         |        |         |        |         |        
|                                                     |                                                       |                               | Total fees and other income                 |        |                     | 16,399 |         |        |         | 10,842 |         |         |         | 38,720  |         |          |         | 28,378  | 
|                                                     |                                                       |                               |                                             |        |                     |        |         |        |         |        |         |        
|                                                     |                                                       |                               | Total interest and related portfolio income |        |                     | 94,857 |         |        |         | 96,863 |         |         |         | 275,983 |         |          |         | 266,128 | 
|                                                     |                                                       |                               |                                             |        |                     |        |         |        |         |        |         |        
|Expenses:                                            |                                                       |                               |                                             |        |                     |        |         |        |         |        |         |         |         |         |         |         
|                                                     | Interest                                              |                               |                                             | 17,735 |                     |        |         | 20,253 |         |        |         | 57,114  |         |         |         | 57,349   |        
|                                                     | Employee                                              |                               |                                             | 13,969 |                     |        |         | 13,896 |         |        |         | 52,302  |         |         |         | 38,171   |        
|                                                     | Administrative                                        |                               |                                             | 15,130 |                     |        |         | 10,169 |         |        |         | 58,932  |         |         |         | 25,072   |        
|                                                     |                                                       |                               |                                             |        |                     |        |         |        |         |        |         |        
|                                                     |                                                       |                               | Total operating expenses                    |        |                     | 46,834 |         |        |         | 44,318 |         |         |         | 168,348 |         |          |         | 120,592 | 
|                                                     |                                                       |                               |                                             |        |                     |        |         |        |         |        |         |        
|Net investment income before income taxes            |                                                       |                               | 48,023                                      |        |                     |        | 52,545  |        |         |        | 107,635 |         |         |         | 145,536 |         
|Income tax expense (benefit), including excise tax   |                                                       |                               | 1,889                                       |        |                     |        | (200    | )      |         |        | 7,482   |         |         |         | (744    | )       
|                                                     |                                                       |                               |                                             |        |                     |        |         |        |         |        |         |        
|Net investment income                                |                                                       |                               | 46,134                                      |        |                     |        | 52,745  |        |         |        | 100,153 |         |         |         | 146,280 |         
|                                                     |                                                       |                               |                                             |        |                     |        |         |        |         |        |         |        
|Net Realized and Unrealized Gains (Losses):          |                                                       |                               |                                             |        |                     |        |         |        |         |        |         |         |         |         |         |         
|                                                     | Net realized gains (losses)                           |                               |                                             |        |                     |        |         |        |         |        |         |         |         |         |         |          |        
|                                                     |                                                       | Companies more than 25% owned |                                             |        | 64,677              |        |         |        | (12,483 | )      |         |         | 47,192  |         |         |          | 139,016 |        
|                                                     |                                                       | Companies 5% to 25% owned     |                                             |        | (6                  | )      |         |        | 13,269  |        |         |         | 4,702   |         |         |          | 48,965  |        
|                                                     |                                                       | Companies less than 5% owned  |                                             |        | 6,043               |        |         |        | 514     |        |         |         | 236,601 |         |         |          | (12,228 | )      
|                                                     |                                                       |                               |                                             |        |                     |        |         |        |         |        |         |        
|                                                     |                                                       |                               | Total net realized gains                    |        |                     | 70,714 |         |        |         | 1,300  |         |         |         | 288,495 |         |          |         | 175,753 | 
|                                                     | Net change in unrealized appreciation or depreciation |                               |                                             | (3,680 | )                   |        |         | 31,954 |         |        |         | 156,026 |         |         |         | (120,384 | )      
|                                                     |                                                       |                               |                                             |        |                     |        |         |        |         |        |         |        
|                                                     |                                                       |                               | Total net gains                             |        |                     | 67,034 |         |        |         | 33,254 |         |         |         | 444,521 |         |          |         | 55,369  | 
|                                                     |                                                       |                               |                                             |        |                     |        |         |        |         |        |         |        
|Net increase in net assets resulting from operations |                                                       | $                             | 113,168                                     |        |                     | $      | 85,999  |        |         | $      | 544,674 |         |         | $       | 201,649 |         
|                                                     |                                                       |                               |                                             |        |                     |        |         |        |         |        |         |        
|Basic earnings per common share                      |                                                       | $                             | 0.84                                        |        |                     | $      | 0.67    |        |         | $      | 4.06    |         |         | $       | 1.57    |         
|                                                     |                                                       |                               |                                             |        |                     |        |         |        |         |        |         |        
|Diluted earnings per common share                    |                                                       | $                             | 0.82                                        |        |                     | $      | 0.66    |        |         | $      | 3.99    |         |         | $       | 1.53    |         
|                                                     |                                                       |                               |                                             |        |                     |        |         |        |         |        |         |        
|Weighted average common shares outstanding  basic   |                                                       |                               | 135,322                                     |        |                     |        | 129,304 |        |         |        | 134,110 |         |         |         | 128,812 |         
|                                                     |                                                       |                               |                                             |        |                     |        |         |        |         |        |         |        
|Weighted average common shares outstanding  diluted |                                                       |                               | 138,058                                     |        |                     |        | 131,192 |        |         |        | 136,669 |         |         |         | 131,487 |         
|                                                     |                                                       |                               |                                             |        |                     |        |         |        |         |        |         |        



2



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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS


|                                           |                                                                  |                                                                          |           |          |          |   |           |          |          |  
|------------------------------------------ | ---------------------------------------------------------------- | ------------------------------------------------------------------------ | --------- | -------- | -------- | - | --------- | -------- | -------- | -
|                                           |                                                                  | For the Nine Months                                                      |          
|                                           |                                                                  | Ended September 30,                                                      |          
|                                           |                                                                  |                                                                          |          
|                                           |                                                                  | 2005                                                                     |           |          | 2004     |  
|(in thousands, except per share amounts)   |                                                                  |                                                                          |           |          |          |  
|                                           |                                                                  | (unaudited)                                                              |          
|Operations:                                |                                                                  |                                                                          |           |          |          |   |           |         
|                                           | Net investment income                                            |                                                                          | $         | 100,153  |          |   | $         | 146,280  |         
|                                           | Net realized gains                                               |                                                                          |           | 288,495  |          |   |           | 175,753  |         
|                                           | Net change in unrealized appreciation or depreciation            |                                                                          |           | 156,026  |          |   |           | (120,384 | )       
|                                           |                                                                  |                                                                          |           |          |          |  
|                                           |                                                                  | Net increase in net assets resulting from operations                     |           |          | 544,674  |   |           |          | 201,649  |  
|                                           |                                                                  |                                                                          |           |          |          |  
|Shareholder distributions:                 |                                                                  |                                                                          |           |          |          |   |           |         
|                                           | Common stock dividends                                           |                                                                          |           | (231,163 | )        |   |           | (220,832 | )       
|                                           | Preferred stock dividends                                        |                                                                          |           |         |          |   |           | (52      | )       
|                                           |                                                                  |                                                                          |           |          |          |  
|                                           |                                                                  | Net decrease in net assets resulting from shareholder
    distributions  |           |          | (231,163 | ) |           |          | (220,884 | )
|                                           |                                                                  |                                                                          |           |          |          |  
|Capital share transactions:                |                                                                  |                                                                          |           |          |          |   |           |         
|                                           | Issuance of common stock for portfolio investments               |                                                                          |           | 7,200    |          |   |           | 3,227    |         
|                                           | Issuance of common stock upon the exercise of stock options      |                                                                          |           | 57,805   |          |   |           | 29,673   |         
|                                           | Issuance of common stock in lieu of cash distributions           |                                                                          |           | 7,456    |          |   |           | 4,399    |         
|                                           | Net decrease in notes receivable from sale of common stock       |                                                                          |           | 1,332    |          |   |           | 13,040   |         
|                                           | Purchase of common stock held in deferred compensation trust     |                                                                          |           | (6,034   | )        |   |           | (10,152  | )       
|                                           | Distribution of common stock held in deferred compensation trust |                                                                          |           | 1,756    |          |   |           | 183      |         
|                                           | Other                                                            |                                                                          |           | 4,182    |          |   |           | 28       |         
|                                           |                                                                  |                                                                          |           |          |          |  
|                                           |                                                                  | Net increase in net assets resulting from capital share
    transactions |           |          | 73,697   |   |           |          | 40,398   |  
|                                           |                                                                  |                                                                          |           |          |          |  
|                                           |                                                                  | Total increase in net assets                                             |           |          | 387,208  |   |           |          | 21,163   |  
|Net assets at beginning of period          |                                                                  |                                                                          | 1,979,778 |          |          |   | 1,914,577 |         
|                                           |                                                                  |                                                                          |           |          |          |  
|Net assets at end of period                |                                                                  | $                                                                        | 2,366,986 |          |          | $ | 1,935,740 |         
|                                           |                                                                  |                                                                          |           |          |          |  
|Net asset value per common share           |                                                                  | $                                                                        | 17.37     |          |          | $ | 14.90     |         
|                                           |                                                                  |                                                                          |           |          |          |  
|Common shares outstanding at end of period |                                                                  |                                                                          | 136,289   |          |          |   | 129,898   |         
|                                           |                                                                  |                                                                          |           |          |          |  



3



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF CASH FLOWS


|                                                     |                                                               |                                                                                                                                 |                                                     |          |            |          |          |          |            |          |  
|---------------------------------------------------- | ------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------- | -------- | ---------- | -------- | -------- | -------- | ---------- | -------- | -
|                                                     |                                                               | For the Nine Months Ended                                                                                                       |                                                    
|                                                     |                                                               | September 30,                                                                                                                   |                                                    
|                                                     |                                                               |                                                                                                                                 |                                                    
|                                                     |                                                               | 2005                                                                                                                            |                                                     |          | 2004       |         
|(in thousands)                                       |                                                               |                                                                                                                                 |                                                     |          |            |         
|                                                     |                                                               | (unaudited)                                                                                                                     |                                                    
|Cash flows from operating activities:                |                                                               |                                                                                                                                 |                                                     |          |            |          |          |         
|                                                     | Net increase in net assets resulting from operations          |                                                                                                                                 | $                                                   | 544,674  |            |          | $        | 201,649  |           
|                                                     | Adjustments                                                   |                                                                                                                                 |                                                     |          |            |          |          |          |           
|                                                     |                                                               | Portfolio investments                                                                                                           |                                                     |          | (1,320,611 | )        |          |          | (1,057,136 | )       
|                                                     |                                                               | Principal collections related to investment repayments or sales                                                                 |                                                     |          | 1,241,827  |          |          |          | 543,314    |         
|                                                     |                                                               | Change in accrued or reinvested interest and dividends                                                                          |                                                     |          | (1,905     | )        |          |          | (31,652    | )       
|                                                     |                                                               | Amortization of discounts and fees                                                                                              |                                                     |          | (3,339     | )        |          |          | (4,736     | )       
|                                                     |                                                               | Changes in other assets and liabilities                                                                                         |                                                     |          | 33,399     |          |          |          | 16,501     |         
|                                                     |                                                               | Depreciation and amortization                                                                                                   |                                                     |          | 1,404      |          |          |          | 1,266      |         
|                                                     |                                                               | Realized gains from the receipt of notes and other securities as
    consideration from sale of investments, net of collections |                                                     |          | (4,605     | )        |          |          | (44,515    | )       
|                                                     |                                                               | Realized losses                                                                                                                 |                                                     |          | 50,661     |          |          |          | 65,828     |         
|                                                     |                                                               | Net change in unrealized (appreciation) or depreciation                                                                         |                                                     |          | (156,026   | )        |          |          | 120,384    |         
|                                                     |                                                               |                                                                                                                                 |                                                     |          |            |         
|                                                     |                                                               |                                                                                                                                 | Net cash provided by (used in) operating activities |          |            | 385,479  |          |          |            | (189,097 | )
|                                                     |                                                               |                                                                                                                                 |                                                     |          |            |         
|Cash flows from financing activities:                |                                                               |                                                                                                                                 |                                                     |          |            |          |          |         
|                                                     | Sale of common stock upon the exercise of stock options       |                                                                                                                                 |                                                     | 57,805   |            |          |          | 29,673   |           
|                                                     | Collections of notes receivable from sale of common stock     |                                                                                                                                 |                                                     | 1,332    |            |          |          | 13,040   |           
|                                                     | Borrowings under notes payable and debentures                 |                                                                                                                                 |                                                     |         |            |          |          | 15,212   |           
|                                                     | Repayments on notes payable and debentures                    |                                                                                                                                 |                                                     | (94,700  | )          |          |          | (129,000 | )         
|                                                     | Net borrowings under (repayments on) revolving line of credit |                                                                                                                                 |                                                     | (112,000 | )          |          |          | 327,250  |           
|                                                     | Redemption of preferred stock                                 |                                                                                                                                 |                                                     |         |            |          |          | (7,000   | )         
|                                                     | Purchase of common stock held in deferred compensation trust  |                                                                                                                                 |                                                     | (6,034   | )          |          |          | (10,152  | )         
|                                                     | Other financing activities                                    |                                                                                                                                 |                                                     | (4,594   | )          |          |          | (901     | )         
|                                                     | Common stock dividends and distributions paid                 |                                                                                                                                 |                                                     | (226,367 | )          |          |          | (216,433 | )         
|                                                     | Preferred stock dividends paid                                |                                                                                                                                 |                                                     |         |            |          |          | (52      | )         
|                                                     |                                                               |                                                                                                                                 |                                                     |          |            |         
|                                                     |                                                               |                                                                                                                                 | Net cash provided by (used in) financing activities |          |            | (384,558 | )        |          |            | 21,637   |  
|                                                     |                                                               |                                                                                                                                 |                                                     |          |            |         
|Net increase (decrease) in cash and cash equivalents |                                                               |                                                                                                                                 | 921                                                 |          |            |          | (167,460 | )       
|Cash and cash equivalents at beginning of period     |                                                               |                                                                                                                                 | 57,160                                              |          |            |          | 214,167  |         
|                                                     |                                                               |                                                                                                                                 |                                                     |          |            |         
|Cash and cash equivalents at end of period           |                                                               | $                                                                                                                               | 58,081                                              |          |            | $        | 46,707   |         
|                                                     |                                                               |                                                                                                                                 |                                                     |          |            |         



4



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF INVESTMENTS


|                                        |                       |                                                       |                                    |                    |        |         |      |   |         |         |  |   |         |         | 
|--------------------------------------- | --------------------- | ----------------------------------------------------- | ---------------------------------- | ------------------ | ------ | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                                        |                       |                                                       |                                    | September 30, 2005 |       
|                                        |                       |                                                       |                                    |                    |       
|                                        |                       |                                                       |                                    | (unaudited)        |       
|Private Finance                         |                       |                                                       |                                    |                   
|Portfolio Company                       |                       |                                                       |                                    |                   
|(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 |         |      |   | 59,773  |         |  |   | 59,773  |        
|                                        | (Business Services)   |                                                       | Debt Securities (18.5%, Due 12/09) |                    |        | 124,000 |      |   |         | 124,000 |  |   |         | 124,000 | 
|                                        |                       | Common Stock (18,957,011 shares)                      |                                    |                    |        |         |      |   | 73,932  |         |  |   | 251,659 |        
|                                       
|Alaris Consulting, LLC                  |                       | Loan (16.0%, Due 12/05 
    12/07)(6)                |                                    |                    | 25,835 |         |      |   | 25,846  |         |  |   | 2,065   |        
|                                        | (Business Services)   |                                                       | Equity Interests                   |                    |        |         |      |   |         | 5,305   |  |   |         |        | 
|                                        |                       | Guaranty ($1,100)                                     |                                    |                    |        |         |      |   |         |         |  |   |         |        
|                                       
|American Healthcare Services, Inc.      |                       | Loan (0.7%, Due 12/04 
    12/05)(6)                 |                                    |                    | 4,999  |         |      |   | 4,600   |         |  |   | 4,097   |        
|                                        | and Affiliates        |                                                       |                                    |                    |        |         |      |   |         |         |  |   |         |         | 
|                                        | (Healthcare Services) |                                                       |                                    |                    |        |         |      |   |         |         |  |   |         |         | 
|                                       
|Avborne,
    Inc.(7)                    |                       | Preferred Stock (12,500 shares)                       |                                    |                    |        |         |      |   | 6,969   |         |  |   | 4,807   |        
|                                        | (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                              |                                    |                    | 58,908 |         |      |   | 58,908  |         |  |   | 58,908  |        
|                                        | (Financial Services)  |                                                       | Class B Equity Interests           |                    |        |         |      |   |         | 117,436 |  |   |         | 151,090 | 
|                                        |                       | Class C Equity Interests                              |                                    |                    |        |         |      |   | 109,301 |         |  |   | 146,319 |        
|                                        |                       | Guaranty ($136,173  See Note 3)                      |                                    |                    |        |         |      |   |         |         |  |   |         |        
|                                        |                       | Standby Letters of Credit
    ($35,550   See Note 3) |                                    |                    |        |         |      |   |         |         |  |   |         |        
|                                       
|Callidus Capital Corporation            |                       | Loan (7.9%, Due 12/05)                                |                                    |                    | 52,456 |         |      |   | 52,456  |         |  |   | 52,456  |        
|                                        | (Financial Services)  |                                                       | Debt Securities (18.0%, Due 10/08) |                    |        | 4,623   |      |   |         | 4,623   |  |   |         | 4,623   | 
|                                        |                       | Common Stock (10 shares)                              |                                    |                    |        |         |      |   | 2,049   |         |  |   | 7,504   |        
|                                       
|Diversified Group Administrators, Inc.  |                       | Preferred Stock (1,000,000 shares)                    |                                    |                    |        |         |      |   | 700     |         |  |   | 657     |        
|                                        | (Business Services)   |                                                       | Preferred Stock (1,451,380 shares) |                    |        |         |      |   |         | 841     |  |   |         | 790     | 
|                                        |                       |                                                       | Common Stock (1,451,380 shares)    |                    |        |         |      |   |         |        |  |   |         |        | 
|                                       
|Financial Pacific Company               |                       | Loan (17.4%, Due 2/12  8/12)                         |                                    |                    | 69,825 |         |      |   | 69,544  |         |  |   | 69,544  |        
|                                        | (Financial Services)  |                                                       | Preferred Stock (10,964 shares)    |                    |        |         |      |   |         | 10,276  |  |   |         | 12,491  | 
|                                        |                       |                                                       | Common Stock (14,735 shares)       |                    |        |         |      |   |         | 14,819  |  |   |         | 43,925  | 
|                                       
|ForeSite Towers, LLC                    |                       | Equity Interests                                      |                                    |                    |        |         |      |   | 7,620   |         |  |   | 8,878   |        
|                                        | (Tower Leasing)       |                                                       |                                    |                    |        |         |      |   |         |         |  |   |         |         | 
|                                       

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



---



##### 



|                                                      |                       |                                        |                                                 |                    |        |        |      |   |        |        |  |   |        |        | 
|----------------------------------------------------- | --------------------- | -------------------------------------- | ----------------------------------------------- | ------------------ | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                                      |                       |                                        |                                                 | September 30, 2005 |       
|                                                      |                       |                                        |                                                 |                    |       
|                                                      |                       |                                        |                                                 | (unaudited)        |       
|Private Finance                                       |                       |                                        |                                                 |                   
|Portfolio Company                                     |                       |                                        |                                                 |                   
|(in thousands, except number of shares)               |                       | Investment(1)(2)                       |                                                 | Principal          |        |        | Cost |   |        | Value  | 
|                                                      |                       |                                        |                                                 |                    |        |        |      |   |        |        | 
|Global Communications, LLC                            |                       | Loan (14.5%, Due 12/03 
    12/06)(6) |                                                 | $                  | 6,393  |        |      | $ | 6,393  |        |  | $ | 6,393  |       
|                                                      | (Business Services)   |                                        | Debt Securities (13.0%, Due
    9/02  9/05)(6) |                    |        | 18,446 |      |   |        | 18,443 |  |   |        | 18,443 | 
|                                                      |                       | Preferred Equity Interest              |                                                 |                    |        |        |      |   | 14,067 |        |  |   | 13,582 |       
|                                                      |                       | Options                                |                                                 |                    |        |        |      |   | 1,639  |        |  |   |       |       
|                                                     
|Gordian Group, Inc.                                   |                       | Loan (10.0%, Due 12/05 
    12/08)(6) |                                                 |                    | 11,392 |        |      |   | 11,425 |        |  |   | 4,622  |       
|                                                      | (Business Services)   |                                        | Common Stock (1,000 shares)                     |                    |        |        |      |   |        | 6,542  |  |   |        |       | 
|                                                     
|Healthy Pet Corp.                                     |                       | Loans (14.6%, Due 8/10)                |                                                 |                    | 42,249 |        |      |   | 42,059 |        |  |   | 42,059 |       
|                                                      | (Consumer Services)   |                                        | Common Stock (25,766 shares)                    |                    |        |        |      |   |        | 25,766 |  |   |        | 25,766 | 
|                                                     
|HMT, Inc.                                             |                       | Preferred Stock (554,052 shares)       |                                                 |                    |        |        |      |   | 2,637  |        |  |   | 2,637  |       
|                                                      | (Energy Services)     |                                        | Common Stock (300,000 shares)                   |                    |        |        |      |   |        | 3,000  |  |   |        | 6,498  | 
|                                                      |                       | Warrants                               |                                                 |                    |        |        |      |   | 1,155  |        |  |   | 2,502  |       
|                                                     
|Impact Innovations Group, LLC
    (Business Services) |                       | Equity Interests in Affiliate          |                                                 |                    |        |        |      |   |       |        |  |   | 841    |       
|                                                     
|Insight Pharmaceuticals Corporation                   |                       | Loan (16.0%, Due 9/12)                 |                                                 |                    | 58,159 |        |      |   | 57,914 |        |  |   | 57,914 |       
|                                                      | (Consumer Products)   |                                        | Preferred Stock (25,000 shares)                 |                    |        |        |      |   |        | 25,000 |  |   |        | 25,433 | 
|                                                      |                       | Common Stock (6,200 shares)            |                                                 |                    |        |        |      |   | 6,325  |        |  |   | 245    |       
|                                                     
|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)          |                                                 |                    | 7,646  |        |      |   | 7,646  |        |  |   | 4,982  |       
|                                                      | (Financial Services)  |                                        | Debt Securities (18.0%, Due
    5/09)(6)        |                    |        | 2,952  |      |   |        | 2,952  |  |   |        |       | 
|                                                      |                       | Equity Interests                       |                                                 |                    |        |        |      |   | 2,729  |        |  |   |       |       
|                                                     
|Litterer
    Beteiligungs-GmbH(4)                     |                       | Debt Securities (8.0%, Due 3/07)       |                                                 |                    | 632    |        |      |   | 632    |        |  |   | 632    |       
|                                                      | (Business Services)   |                                        | Equity Interest                                 |                    |        |        |      |   |        | 1,756  |  |   |        | 1,958  | 
|                                                     
|Maui Body Works, Inc.                                 |                       | Common Stock (100 shares)              |                                                 |                    |        |        |      |   | 2,655  |        |  |   |       |       
|                                                      | (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)                          |                    |        | 39,301 |      |   |        | 39,140 |  |   |        | 39,140 | 
|                                                      |                       |                                        | Common Stock (57,068 shares)                    |                    |        |        |      |   |        | 33,723 |  |   |        | 32,013 | 
|                                                      |                       |                                        | Standby Letters of Credit ($1,397)              |                    |        |        |      |   |        |        |  |   |        |        | 
|                                                     
|MVL Group, Inc.                                       |                       | Loan (12.9%, Due 7/09)                 |                                                 |                    | 41,829 |        |      |   | 41,403 |        |  |   | 41,403 |       
|                                                      | (Business Services)   |                                        | Debt Securities (14.4%, Due 7/09)               |                    |        | 18,380 |      |   |        | 17,929 |  |   |        | 17,929 | 
|                                                      |                       | Common Stock (648,661 shares)          |                                                 |                    |        |        |      |   | 643    |        |  |   | 3,401  |       
|                                                     
|Pennsylvania Avenue Investors, L.P.
    (5)           |                       | Equity Interests                       |                                                 |                    |        |        |      |   | 2,477  |        |  |   | 2,065  |       
|                                                      | (Private Equity Fund) |                                        |                                                 |                    |        |        |      |   |        |        |  |   |        |        | 
|                                                     

|    |  |                                                                                                                                                                                                                                                                
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) |  | Interest rates represent the weighted average annual stated
    interest rate on loans and debt securities, which are presented
    by nature of indebtedness for a single issuer. The maturity
    dates represent the earliest and the latest maturity dates.
|(2) |  | Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.                                                                                                                                  
|(3) |  | Public company.                                                                                                                                                                                                                                                
|(4) |  | Non-U.S. company or principal place of business outside the
    U.S.                                                                                                                                                                                           
|(5) |  | Non-registered investment company.                                                                                                                                                                                                                             
|(6) |  | Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.                                                                                                                                                           





6



---



##### 



|                                        |                        |                                    |                                           |                    |        |        |           |   |        |        |           |   |        |        | 
|--------------------------------------- | ---------------------- | ---------------------------------- | ----------------------------------------- | ------------------ | ------ | ------ | --------- | - | ------ | ------ | --------- | - | ------ | ------ | 
|                                        |                        |                                    |                                           | September 30, 2005 |       
|                                        |                        |                                    |                                           |                    |       
|                                        |                        |                                    |                                           | (unaudited)        |       
|Private Finance                         |                        |                                    |                                           |                   
|Portfolio Company                       |                        |                                    |                                           |                   
|(in thousands, except number of shares) |                        | Investment(1)(2)                   |                                           | Principal          |        |        | Cost      |   |        | Value  |          
|                                        |                        |                                    |                                           |                    |        |        |           |   |        |        |          
|Powell Plant Farms, Inc.                |                        | Loan (15.0%, Due 12/05)            |                                           | $                  | 31,840 |        |           | $ | 22,992 |        |           | $ | 22,992 |       
|                                        | (Consumer Products)    |                                    | Debt Securities (20.0%, Due
    6/03)(6)  |                    |        | 19,291 |           |   |        | 19,224 |           |   |        | 8,242  | 
|                                        |                        | Preferred Stock (1,483 shares)     |                                           |                    |        |        |           |   |       |        |           |   |       |       
|                                        |                        | Warrants                           |                                           |                    |        |        |           |   |       |        |           |   |       |       
|                                       
|Redox Brands, Inc.                      |                        | Preferred Stock (2,726,444 shares) |                                           |                    |        |        |           |   | 7,903  |        |           |   | 8,885  |       
|                                        | (Consumer Products)    |                                    | Warrants                                  |                    |        |        |           |   |        | 584    |           |   |        | 350    | 
|                                       
|Service Champ, Inc.                     |                        | Loan (15.5%, Due 4/12)             |                                           |                    | 26,869 |        |           |   | 26,729 |        |           |   | 26,729 |       
|                                        | (Business Services)    |                                    | Common Stock (63,888 Shares)              |                    |        |        |           |   |        | 13,662 |           |   |        | 13,662 | 
|                                       
|Staffing Partners Holding               |                        | Loan (13.5%, Due
    10/06)(6)     |                                           |                    | 917    |        |           |   | 917    |        |           |   | 917    |       
|                                        | Company, Inc.          |                                    | Debt Securities (13.5%, Due
    10/06)(6) |                    |        | 5,517  |           |   |        | 5,517  |           |   |        | 5,517  | 
|                                        | (Business Services)    |                                    | Preferred Stock (439,600 shares)          |                    |        |        |           |   |        | 4,968  |           |   |        | 1,264  | 
|                                        |                        | Common Stock (69,773 shares)       |                                           |                    |        |        |           |   | 50     |        |           |   |       |       
|                                        |                        | Warrants                           |                                           |                    |        |        |           |   | 10     |        |           |   |       |       
|                                       
|Startec Global Communications           |                        | Loan (10.0%, Due 5/07  5/09)      |                                           |                    | 25,226 |        |           |   | 25,226 |        |           |   | 25,226 |       
|                                        | Corporation            |                                    | Common Stock (19,180,000 shares)          |                    |        |        |           |   |        | 37,255 |           |   |        | 694    | 
|                                        | (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  |           |   |        | 39,575 | 
|                                        |                        |                                    | Options                                   |                    |        |        |           |   |        |       |           |   |        | 493    | 
|                                       
|Triview Investments,
    Inc.(8)        |                        | Loan (15.0%, Due 7/12)             |                                           |                    | 31,000 |        |           |   | 30,845 |        |           |   | 30,845 |       
|                                        | (Broadcasting & Cable/ |                                    | Loans (16.8%, Due 7/08 
    7/12)(6)     |                    |        | 19,600 |           |   |        | 19,520 |           |   |        | 19,520 | 
|                                        | Consumer Products)     |                                    | Common Stock (182 shares)                 |                    |        |        |           |   |        | 86,693 |           |   |        | 22,023 | 
|                                        |                        | Guaranty ($800)                    |                                           |                    |        |        |           |   |        |        |           |   |        |       
|                                        |                        | Standby Letter of Credit ($200)    |                                           |                    |        |        |           |   |        |        |           |   |        |       
|                                       
|Total
    companies more than 25% owned |                        |                                    |                                           |                    |        | $      | 1,510,082 |   |        | $      | 1,612,914 |  
|                                       
|Companies 5% to 25% Owned               |                        |                                    |                                           |                   
|                                       
|Air Evac Lifeteam                       |                        | Debt Securities (13.6%, Due 7/10)  |                                           | $                  | 42,197 |        |           | $ | 42,041 |        |           | $ | 42,041 |       
|                                        | (Healthcare Services)  |                                    | Equity Interests                          |                    |        |        |           |   |        | 3,941  |           |   |        | 3,866  | 
|                                       
|Aspen Pet Products, Inc.                |                        | Loan (19.0%, Due 6/08)             |                                           |                    | 19,748 |        |           |   | 19,656 |        |           |   | 19,656 |       
|                                        | (Consumer Products)    |                                    | Preferred Stock (2,877 shares)            |                    |        |        |           |   |        | 2,154  |           |   |        | 1,542  | 
|                                        |                        | Common Stock (1,400 shares)        |                                           |                    |        |        |           |   | 140    |        |           |   |       |       
|                                        |                        | Warrants                           |                                           |                    |        |        |           |   |       |        |           |   |       |       
|                                       
|Becker Underwood, Inc.                  |                        | Loan (14.5%, Due 8/12)             |                                           |                    | 23,489 |        |           |   | 23,390 |        |           |   | 23,390 |       
|                                        | (Industrial Products)  |                                    | Common Stock (5,073 shares)               |                    |        |        |           |   |        | 5,813  |           |   |        | 3,600  | 
|                                       
|The Debt Exchange Inc.                  |                        | Preferred Stock (921,875 shares)   |                                           |                    |        |        |           |   | 1,250  |        |           |   | 2,139  |       
|                                        | (Business Services)    |                                    |                                           |                    |        |        |           |   |        |        |           |   |        |        | 
|                                       

|    |  |                                                                                                                                                                                                                                                                                                                                                                                                        
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) |  | Interest rates represent the weighted average annual stated
    interest rate on loans and debt securities, which are presented
    by nature of indebtedness for a single issuer. The maturity
    dates represent the earliest and the latest maturity dates.                                                                                                                                        
|(2) |  | Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.                                                                                                                                                                                                                                                                          
|(3) |  | Public company.                                                                                                                                                                                                                                                                                                                                                                                        
|(4) |  | Non-U.S. company or principal place of business outside the
    U.S.                                                                                                                                                                                                                                                                                                                                   
|(5) |  | Non-registered investment company.                                                                                                                                                                                                                                                                                                                                                                     
|(6) |  | Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.                                                                                                                                                                                                                                                                                                   
|(8) |  | Triview Investments, Inc. (formerly GAC Investments, Inc.) holds
    investments in Longview Cable & Data, LLC (Broadcasting
    & Cable) with a cost of $59.1 million and value of
    $9.0 million and Triax Holdings, LLC (Consumer Products)
    with a cost of $78.0 million and a value of
    $63.4 million. The guaranty and standby letter of credit
    relate to Longview Cable & Data, LLC.





7



---



##### 



|                                               |                            |                                                   |                                           |                    |        |        |         |   |        |       |         |   |        |       | 
|---------------------------------------------- | -------------------------- | ------------------------------------------------- | ----------------------------------------- | ------------------ | ------ | ------ | ------- | - | ------ | ----- | ------- | - | ------ | ----- | 
|                                               |                            |                                                   |                                           | September 30, 2005 |       
|                                               |                            |                                                   |                                           |                    |       
|                                               |                            |                                                   |                                           | (unaudited)        |       
|Private Finance                                |                            |                                                   |                                           |                   
|Portfolio Company                              |                            |                                                   |                                           |                   
|(in thousands, except number of shares)        |                            | Investment(1)(2)                                  |                                           | Principal          |        |        | Cost    |   |        | Value |        
|                                               |                            |                                                   |                                           |                    |        |        |         |   |        |       |        
|MedBridge Healthcare, LLC                      |                            | Loan (4.0%, Due 8/09)                             |                                           | $                  | 7,035  |        |         | $ | 7,035  |       |         | $ | 7,035  |      
|                                               | (Healthcare Services)      |                                                   | Loan (10.0%, Due
    8/14)(6)             |                    |        | 4,412  |         |   |        | 4,412 |         |   |        | 2,268 | 
|                                               |                            | Convertible Debenture (2.0%,
    Due
    8/14)(6) |                                           |                    | 2,970  |        |         |   | 984    |       |         |   |       |      
|                                              
|Nexcel Synthetics, LLC                         |                            | Loan (14.5%, Due 6/09)                            |                                           |                    | 10,522 |        |         |   | 10,492 |       |         |   | 10,492 |      
|                                               | (Consumer Products)        |                                                   | Equity Interests                          |                    |        |        |         |   |        | 1,708 |         |   |        | 953   | 
|                                              
|Pres Air Trol LLC                              |                            | Debt Securities (12.0%, Due 4/10)                 |                                           |                    | 6,180  |        |         |   | 5,863  |       |         |   | 5,863  |      
|                                               | (Industrial Products)      |                                                   | Equity Interests                          |                    |        |        |         |   |        | 1,356 |         |   |        | 318   | 
|                                              
|Progressive International                      |                            | Loan (16.0%, Due 12/09)                           |                                           |                    | 7,364  |        |         |   | 7,336  |       |         |   | 7,336  |      
|                                               | Corporation                |                                                   | Preferred Stock (500 shares)              |                    |        |        |         |   |        | 500   |         |   |        | 867   | 
|                                               | (Consumer Products)        |                                                   | Common Stock (197 shares)                 |                    |        |        |         |   |        | 13    |         |   |        | 42    | 
|                                               |                            | Warrants                                          |                                           |                    |        |        |         |   |       |       |         |   |       |      
|                                              
|Soteria Imaging Services, LLC                  |                            | Loans (12.1%, Due 11/10)                          |                                           |                    | 11,906 |        |         |   | 10,834 |       |         |   | 10,834 |      
|                                               | (Healthcare Services)      |                                                   | Equity Interests                          |                    |        |        |         |   |        | 2,153 |         |   |        | 2,264 | 
|                                              
|Universal Environmental Services, LLC          |                            | Loan (15.5%, Due 2/09)                            |                                           |                    | 11,150 |        |         |   | 11,108 |       |         |   | 11,108 |      
|                                               | (Business Services)        |                                                   | Equity Interests                          |                    |        |        |         |   |        | 1,828 |         |   |        | 1,226 | 
|                                              
|Total
    companies 5% to 25% owned            |                            |                                                   |                                           |                    |        | $      | 164,007 |   |        | $     | 156,840 |  
|                                              
|Companies Less Than 5% Owned                   |                            |                                                   |                                           |                   
|                                              
|Advanced Circuits, Inc.                        |                            | Loans (11.3%, Due 9/11  3/12)                    |                                           | $                  | 19,000 |        |         | $ | 18,906 |       |         | $ | 18,906 |      
|                                               | (Industrial Products)      |                                                   | Common Stock (40,000 shares)              |                    |        |        |         |   |        | 1,000 |         |   |        | 1,000 | 
|                                              
|Anthony, Inc.                                  |                            | Loans (12.7%, Due 9/11  9/12)                    |                                           |                    | 14,633 |        |         |   | 14,571 |       |         |   | 14,571 |      
|                                               | (Industrial Products)      |                                                   |                                           |                    |        |        |         |   |        |       |         |   |        |       | 
|                                              
|Benchmark Medical, Inc.                        |                            | Debt Securities (14.0%, Due 12/08)                |                                           |                    | 13,823 |        |         |   | 13,773 |       |         |   | 13,773 |      
|                                               | (Healthcare Services)      |                                                   | Warrants                                  |                    |        |        |         |   |        | 18    |         |   |        | 18    | 
|                                              
|BI Incorporated                                |                            | Loan (14.0%, due 2/12)                            |                                           |                    | 16,121 |        |         |   | 16,048 |       |         |   | 16,048 |      
|                                               | (Business Services)        |                                                   |                                           |                    |        |        |         |   |        |       |         |   |        |       | 
|                                              
|Border Foods, Inc.                             |                            | Loan (13.0%, Due
    12/10)(6)                    |                                           |                    | 3,100  |        |         |   | 3,043  |       |         |   | 2,239  |      
|                                               | (Consumer Products)        |                                                   | Debt Securities (13.0%, Due
    12/10)(6) |                    |        | 10,329 |         |   |        | 9,681 |         |   |        | 7,121 | 
|                                               |                            | Preferred Stock (140,214 shares)                  |                                           |                    |        |        |         |   | 2,893  |       |         |   |       |      
|                                               |                            | Common Stock (1,810 shares)                       |                                           |                    |        |        |         |   | 45     |       |         |   |       |      
|                                               |                            | Warrants                                          |                                           |                    |        |        |         |   | 910    |       |         |   |       |      
|                                              
|C&K Market, Inc.                               |                            | Loan (13.0%, due 12/08)                           |                                           |                    | 14,582 |        |         |   | 14,521 |       |         |   | 14,521 |      
|                                               | (Retail)                   |                                                   |                                           |                    |        |        |         |   |        |       |         |   |        |       | 
|                                              
|Callidus Debt Partners                         |                            | Class C Notes (12.9%, Due 12/13)                  |                                           |                    | 18,800 |        |         |   | 18,979 |       |         |   | 18,979 |      
|                                               | CDO Fund I,
    Ltd.(4)    |                                                   | Class D Notes (17.0%, Due 12/13)          |                    |        | 9,400  |         |   |        | 9,489 |         |   |        | 9,489 | 
|                                               | (Senior Debt CDO Fund)     |                                                   |                                           |                    |        |        |         |   |        |       |         |   |        |       | 
|                                              
|Callidus Debt Partners                         |                            | Preferred Shares (23,600,000 shares)              |                                           |                    |        |        |         |   | 24,271 |       |         |   | 24,271 |      
|                                               | CLO Fund III, Ltd.
    (4) |                                                   |                                           |                    |        |        |         |   |        |       |         |   |        |       | 
|                                               | (Senior Debt CLO Fund)     |                                                   |                                           |                    |        |        |         |   |        |       |         |   |        |       | 
|                                              
|Camden Partners Strategic Fund II,
    L.P.(5) |                            | Limited Partnership Interest                      |                                           |                    |        |        |         |   | 2,142  |       |         |   | 2,674  |      
|                                               | (Private Equity Fund)      |                                                   |                                           |                    |        |        |         |   |        |       |         |   |        |       | 
|                                              

|    |  |                                                                                                                                                                                                                                                                
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) |  | Interest rates represent the weighted average annual stated
    interest rate on loans and debt securities, which are presented
    by nature of indebtedness for a single issuer. The maturity
    dates represent the earliest and the latest maturity dates.
|(2) |  | Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.                                                                                                                                  
|(3) |  | Public company.                                                                                                                                                                                                                                                
|(4) |  | Non-U.S. company or principal place of business outside the
    U.S.                                                                                                                                                                                           
|(5) |  | Non-registered investment company.                                                                                                                                                                                                                             
|(6) |  | Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.                                                                                                                                                           





8



---



##### 



|                                           |                        |                                   |                                          |                    |        |       |      |   |        |       |  |   |        |       | 
|------------------------------------------ | ---------------------- | --------------------------------- | ---------------------------------------- | ------------------ | ------ | ----- | ---- | - | ------ | ----- |  | - | ------ | ----- | 
|                                           |                        |                                   |                                          | September 30, 2005 |       
|                                           |                        |                                   |                                          |                    |       
|                                           |                        |                                   |                                          | (unaudited)        |       
|Private Finance                            |                        |                                   |                                          |                   
|Portfolio Company                          |                        |                                   |                                          |                   
|(in thousands, except number of shares)    |                        | Investment(1)(2)                  |                                          | Principal          |        |       | Cost |   |        | Value | 
|                                           |                        |                                   |                                          |                    |        |       |      |   |        |       | 
|Catterton Partners V,
    L.P.(5)          |                        | Limited Partnership Interest      |                                          |                    |        |       |      | $ | 2,871  |       |  | $ | 2,767  |      
|                                           | (Private Equity Fund)  |                                   |                                          |                    |        |       |      |   |        |       |  |   |        |       | 
|                                          
|CBS Personnel Holdings, Inc.               |                        | Loan (14.5%, Due 12/09)           |                                          | $                  | 20,486 |       |      |   | 20,405 |       |  |   | 20,405 |      
|                                           | (Business Services)    |                                   |                                          |                    |        |       |      |   |        |       |  |   |        |       | 
|                                          
|Community Education
    Centers, Inc.      |                        | Loan (15.0%, Due 12/10)           |                                          |                    | 32,275 |       |      |   | 32,154 |       |  |   | 32,154 |      
|                                           | (Education Services)   |                                   |                                          |                    |        |       |      |   |        |       |  |   |        |       | 
|                                          
|Component Hardware Group, Inc.             |                        | Preferred Stock (18,000 shares)   |                                          |                    |        |       |      |   | 2,605  |       |  |   | 2,775  |      
|                                           | (Industrial Products)  |                                   | Common Stock (2,000 shares)              |                    |        |       |      |   |        | 200   |  |   |        | 500   | 
|                                          
|Cooper Natural Resources, Inc.             |                        | Debt Securities (0%, Due 11/07)   |                                          |                    | 1,005  |       |      |   | 1,005  |       |  |   | 1,005  |      
|                                           | (Industrial Products)  |                                   | Preferred Stock (6,316 shares)           |                    |        |       |      |   |        | 1,424 |  |   |        | 20    | 
|                                           |                        | Warrants                          |                                          |                    |        |       |      |   | 830    |       |  |   |       |      
|                                          
|Coverall North America, Inc.               |                        | Loans (14.6%, Due 2/11)           |                                          |                    | 27,132 |       |      |   | 27,082 |       |  |   | 27,082 |      
|                                           | (Business Services)    |                                   | Preferred Stock (6,500 shares)           |                    |        |       |      |   |        | 6,500 |  |   |        | 6,758 | 
|                                           |                        | Warrants                          |                                          |                    |        |       |      |   | 2,950  |       |  |   | 3,500  |      
|                                          
|Drilltec Patents & Technologies            |                        | Loan (10.0%, Due
    8/06)(6)     |                                          |                    | 10,994 |       |      |   | 10,918 |       |  |   |       |      
|                                           | Company, Inc.          |                                   | Debt Securities (16.5%, Due
    8/06)(6) |                    |        | 1,500 |      |   |        | 1,500 |  |   |        | 277   | 
|                                           | (Energy Services)      |                                   |                                          |                    |        |       |      |   |        |       |  |   |        |       | 
|                                          
|eCentury Capital Partners,
    L.P.(5)     |                        | Limited Partnership Interest      |                                          |                    |        |       |      |   | 5,649  |       |  |   | 795    |      
|                                           | (Private Equity Fund)  |                                   |                                          |                    |        |       |      |   |        |       |  |   |        |       | 
|                                          
|Elexis Beta
    GmbH(4)                    |                        | Options                           |                                          |                    |        |       |      |   | 426    |       |  |   | 50     |      
|                                           | (Industrial Products)  |                                   |                                          |                    |        |       |      |   |        |       |  |   |        |       | 
|                                          
|Frozen Specialties, Inc.                   |                        | Warrants                          |                                          |                    |        |       |      |   | 435    |       |  |   | 530    |      
|                                           | (Consumer Products)    |                                   |                                          |                    |        |       |      |   |        |       |  |   |        |       | 
|                                          
|Garden Ridge Corporation
    (Retail)      |                        | Loan (7.0%, Due
    5/12)(6)      |                                          |                    | 22,500 |       |      |   | 22,500 |       |  |   | 16,935 |      
|                                          
|Geotrace Technologies, Inc.                |                        | Debt Securities (12.0%, Due 6/09) |                                          |                    | 18,400 |       |      |   | 16,561 |       |  |   | 16,561 |      
|(Energy Services)                          |                        | Warrants                          |                                          |                    |        |       |      |   | 2,350  |       |  |   | 2,500  |      
|                                          
|Ginsey Industries, Inc.                    |                        | Loans (12.5%, Due 3/06)           |                                          |                    | 3,896  |       |      |   | 3,896  |       |  |   | 3,896  |      
|                                           | (Consumer Products)    |                                   |                                          |                    |        |       |      |   |        |       |  |   |        |       | 
|                                          
|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      |                                          |                    |        |       |      |   | 6,573  |       |  |   | 4,167  |      
|                                           | (Private Equity Fund)  |                                   |                                          |                    |        |       |      |   |        |       |  |   |        |       | 
|                                          
|Havco Wood Products LLC                    |                        | Loans (10.7%, Due 8/11)           |                                          |                    | 39,000 |       |      |   | 37,755 |       |  |   | 37,755 |      
|                                           | (Industrial Products)  |                                   | Equity Interests                         |                    |        |       |      |   |        | 1,048 |  |   |        | 1,048 | 
|                                          
|Haven Eldercare of New England,
    LLC(9) |                        | Loans (9.3%, Due
    10/05)(6)    |                                          |                    | 46,671 |       |      |   | 46,670 |       |  |   | 47,465 |      
|                                           | (Healthcare Services)  |                                   |                                          |                    |        |       |      |   |        |       |  |   |        |       | 
|                                          
|Haven Healthcare Management,
    LLC(9)    |                        | Loan (18.0% Due
    8/06)(6)      |                                          |                    | 5,541  |       |      |   | 5,541  |       |  |   | 2,000  |      
|                                           | (Healthcare Services)  |                                   |                                          |                    |        |       |      |   |        |       |  |   |        |       | 
|                                          
|HealthASPex Services Inc.                  |                        | Loans (4.0%, Due 7/08)            |                                          |                    | 500    |       |      |   | 500    |       |  |   | 500    |      
|                                           | (Business Services)    |                                   |                                          |                    |        |       |      |   |        |       |  |   |        |       | 
|                                          

|    |  |                                                                                                                                                                                                                                                                
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) |  | Interest rates represent the weighted average annual stated
    interest rate on loans and debt securities, which are presented
    by nature of indebtedness for a single issuer. The maturity
    dates represent the earliest and the latest maturity dates.
|(2) |  | Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.                                                                                                                                  
|(3) |  | Public company.                                                                                                                                                                                                                                                
|(4) |  | Non-U.S. company or principal place of business outside the
    U.S.                                                                                                                                                                                           
|(5) |  | Non-registered investment company.                                                                                                                                                                                                                             
|(6) |  | Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.                                                                                                                                                           
|(9) |  | Haven Eldercare of New England, LLC and Haven Healthcare
    Management, LLC are affiliated companies.                                                                                                                                                         





9



---



##### 



|                                               |                       |                                         |                                          |                    |        |        |      |   |        |        |  |   |        |        | 
|---------------------------------------------- | --------------------- | --------------------------------------- | ---------------------------------------- | ------------------ | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                               |                       |                                         |                                          | September 30, 2005 |       
|                                               |                       |                                         |                                          |                    |       
|                                               |                       |                                         |                                          | (unaudited)        |       
|Private Finance                                |                       |                                         |                                          |                   
|Portfolio Company                              |                       |                                         |                                          |                   
|(in thousands, except number of shares)        |                       | Investment(1)(2)                        |                                          | Principal          |        |        | Cost |   |        | Value  | 
|                                               |                       |                                         |                                          |                    |        |        |      |   |        |        | 
|The Hillman Companies,
    Inc.(3)             |                       | Loan (13.5%, Due 9/11)                  |                                          | $                  | 43,754 |        |      | $ | 43,561 |        |  | $ | 43,561 |       
|                                               | (Consumer Products)   |                                         |                                          |                    |        |        |      |   |        |        |  |   |        |        | 
|                                              
|Homax Holdings, Inc.                           |                       | Debt Securities (12.0%, Due 8/11)       |                                          |                    | 14,000 |        |      |   | 13,006 |        |  |   | 13,006 |       
|                                               | (Consumer Products)   |                                         | Preferred Stock (89 shares)              |                    |        |        |      |   |        | 89     |  |   |        | 88     | 
|                                               |                       |                                         | Common Stock (28 shares)                 |                    |        |        |      |   |        | 6      |  |   |        | 6      | 
|                                               |                       |                                         | Warrants                                 |                    |        |        |      |   |        | 1,106  |  |   |        | 1,428  | 
|                                              
|Icon International, Inc.                       |                       | Common Stock (25,707 shares)            |                                          |                    |        |        |      |   | 76     |        |  |   |       |       
|                                               | (Business Services)   |                                         |                                          |                    |        |        |      |   |        |        |  |   |        |        | 
|                                              
|Interline Brands, Inc.
    (3)                 |                       | Common Stock (10,122 shares)            |                                          |                    |        |        |      |   | 152    |        |  |   | 210    |       
|                                               | (Business Services)   |                                         |                                          |                    |        |        |      |   |        |        |  |   |        |        | 
|                                              
|International Fiber Corporation                |                       | Loans (14.0%, Due 6/12)                 |                                          |                    | 21,436 |        |      |   | 21,348 |        |  |   | 21,348 |       
|                                               | (Industrial Products) |                                         | Preferred Stock (25,000 shares)          |                    |        |        |      |   |        | 2,500  |  |   |        | 1,900  | 
|                                              
|Line-X, Inc.                                   |                       | Loans (9.9% Due 8/11)                   |                                          |                    | 53,234 |        |      |   | 52,953 |        |  |   | 52,953 |       
|                                               | (Consumer Products)   |                                         | Standby Letter of Credit ($1,500)        |                    |        |        |      |   |        |        |  |   |        |        | 
|                                              
|MedAssets, Inc.                                |                       | Preferred Stock (227,865 shares)        |                                          |                    |        |        |      |   | 2,049  |        |  |   | 2,850  |       
|                                               | (Business Services)   |                                         | Warrants                                 |                    |        |        |      |   |        | 136    |  |   |        | 136    | 
|                                              
|Meineke Car Care Centers, Inc.                 |                       | Senior Loan (7.4%, Due 6/11)            |                                          |                    | 28,000 |        |      |   | 27,858 |        |  |   | 27,858 |       
|                                               | (Business Services)   |                                         | Loans (11.9%, Due 6/12  6/13)           |                    |        | 72,000 |      |   |        | 71,660 |  |   |        | 71,660 | 
|                                               |                       |                                         | Common Stock (10,696,308
    shares)(10) |                    |        |        |      |   |        | 26,985 |  |   |        | 26,985 | 
|                                               |                       |                                         | Warrants                                 |                    |        |        |      |   |        |       |  |   |        |       | 
|                                              
|MHF Logistical Solutions, Inc.                 |                       | Loan (10.0%, Due 5/11)                  |                                          |                    | 22,653 |        |      |   | 22,544 |        |  |   | 22,544 |       
|                                               | (Business Services)   |                                         | Preferred Stock (431 shares)             |                    |        |        |      |   |        | 431    |  |   |        | 431    | 
|                                               |                       |                                         | Common Stock (1,438 shares)              |                    |        |        |      |   |        | 144    |  |   |        | 144    | 
|                                              
|Mid-Atlantic Venture Fund IV,
    L.P.(5)      |                       | Limited Partnership Interest            |                                          |                    |        |        |      |   | 6,600  |        |  |   | 3,477  |       
|                                               | (Private Equity Fund) |                                         |                                          |                    |        |        |      |   |        |        |  |   |        |        | 
|                                              
|Mogas Energy, LLC                              |                       | Debt Securities (9.5%, Due 3/12  4/12) |                                          |                    | 17,005 |        |      |   | 15,587 |        |  |   | 15,587 |       
|                                               | (Energy Services)     |                                         | Warrants                                 |                    |        |        |      |   |        | 1,774  |  |   |        | 2,800  | 
|                                              
|N.E.W. Customer Service Companies, Inc.        |                       | Loans (11.0%, Due 7/12)                 |                                          |                    | 40,000 |        |      |   | 40,018 |        |  |   | 40,018 |       
|                                               | (Business Services)   |                                         |                                          |                    |        |        |      |   |        |        |  |   |        |        | 
|                                              
|Nobel Learning Communities,                    |                       | Preferred Stock (1,214,356 shares)      |                                          |                    |        |        |      |   | 2,764  |        |  |   | 2,564  |       
|                                               | Inc.(3)               |                                         | Warrants                                 |                    |        |        |      |   |        | 575    |  |   |        | 1,323  | 
|                                               | (Education)           |                                         |                                          |                    |        |        |      |   |        |        |  |   |        |        | 
|                                              
|Norwesco, Inc.                                 |                       | Loan (12.6%, Due 1/12  7/12)           |                                          |                    | 84,005 |        |      |   | 83,601 |        |  |   | 83,601 |       
|                                               | (Industrial Products) |                                         | Common Stock (573,561
    shares)(10)    |                    |        |        |      |   |        | 39,268 |  |   |        | 39,268 | 
|                                               |                       | Warrants                                |                                          |                    |        |        |      |   |       |        |  |   |       |       
|                                              
|Novak Biddle Venture Partners III,
    L.P.(5) |                       | Limited Partnership Interest            |                                          |                    |        |        |      |   | 1,519  |        |  |   | 1,678  |       
|                                               | (Private Equity Fund) |                                         |                                          |                    |        |        |      |   |        |        |  |   |        |        | 
|                                              
|Oahu Waste Services, Inc.                      |                       | Stock Appreciation Rights               |                                          |                    |        |        |      |   | 239    |        |  |   | 780    |       
|                                               | (Business Services)   |                                         |                                          |                    |        |        |      |   |        |        |  |   |        |        | 
|                                              

| |      |  |  |                                                                                                                                                                                                                                                                
| | ---- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1)  |  |  | Interest rates represent the weighted average annual stated
    interest rate on loans and debt securities, which are presented
    by nature of indebtedness for a single issuer. The maturity
    dates represent the earliest and the latest maturity dates.
| | (2)  |  |  | Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.                                                                                                                                  
| | (3)  |  |  | Public company.                                                                                                                                                                                                                                                
| | (4)  |  |  | Non-U.S. company or principal place of business outside the
    U.S.                                                                                                                                                                                           
| | (5)  |  |  | Non-registered investment company.                                                                                                                                                                                                                             
| | (6)  |  |  | Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.                                                                                                                                                           
| | (10) |  |  | Common stock is non-voting. In addition to non-voting stock
    ownership, the Company has an option to acquire a majority of
    the voting securities of the portfolio company at fair market
    value.                                                     





10



---



##### 



|                                        |                        |                                    |                                      |                    |        |        |      |   |        |        |  |   |        |        | 
|--------------------------------------- | ---------------------- | ---------------------------------- | ------------------------------------ | ------------------ | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                        |                        |                                    |                                      | September 30, 2005 |       
|                                        |                        |                                    |                                      |                    |       
|                                        |                        |                                    |                                      | (unaudited)        |       
|Private Finance                         |                        |                                    |                                      |                   
|Portfolio Company                       |                        |                                    |                                      |                   
|(in thousands, except number of shares) |                        | Investment(1)(2)                   |                                      | Principal          |        |        | Cost |   |        | Value  | 
|                                        |                        |                                    |                                      |                    |        |        |      |   |        |        | 
|Onyx Television
    GmbH(4)             |                        | Preferred Units                    |                                      |                    |        |        |      | $ | 201    |        |  | $ |       |       
|                                        | (Broadcasting & Cable) |                                    |                                      |                    |        |        |      |   |        |        |  |   |        |        | 
|                                       
|Opinion Research
    Corporation(3)     |                        | Warrants                           |                                      |                    |        |        |      |   | 996    |        |  |   | 450    |       
|                                        | (Business Services)    |                                    |                                      |                    |        |        |      |   |        |        |  |   |        |        | 
|                                       
|Oriental Trading Company, Inc.          |                        | Common Stock (13,820 shares)       |                                      |                    |        |        |      |   |       |        |  |   | 5,200  |       
|                                        | (Consumer Products)    |                                    |                                      |                    |        |        |      |   |        |        |  |   |        |        | 
|                                       
|Packaging Advantage Corporation         |                        | Debt Securities (18.5%, Due 7/06)  |                                      | $                  | 17,039 |        |      |   | 16,521 |        |  |   | 16,521 |       
|                                        | (Business Services)    |                                    | Common Stock (232,168 shares)        |                    |        |        |      |   |        | 2,386  |  |   |        | 1,003  | 
|                                        |                        | Warrants                           |                                      |                    |        |        |      |   | 963    |        |  |   | 405    |       
|                                       
|Palm Coast Data, LLC                    |                        | Senior Loan (7.3%, Due 8/10)       |                                      |                    | 16,100 |        |      |   | 16,020 |        |  |   | 16,020 |       
|                                        | (Business Services)    |                                    | Loan (15.5%, Due 8/12  8/15)        |                    |        | 29,600 |      |   |        | 29,455 |  |   |        | 29,455 | 
|                                        |                        |                                    | Common Stock (21,743
    shares)(10) |                    |        |        |      |   |        | 21,743 |  |   |        | 21,743 | 
|                                        |                        |                                    | Warrants                             |                    |        |        |      |   |        |       |  |   |        |       | 
|                                       
|Performant Financial Corporation        |                        | Common Stock (478,816 shares)      |                                      |                    |        |        |      |   | 734    |        |  |   | 2,500  |       
|                                        | (Business Services)    |                                    |                                      |                    |        |        |      |   |        |        |  |   |        |        | 
|                                       
|Pro Mach, Inc.                          |                        | Loan (13.8%, Due 6/12)             |                                      |                    | 19,191 |        |      |   | 19,106 |        |  |   | 19,106 |       
|                                        | (Industrial Products)  |                                    | Equity Interests                     |                    |        |        |      |   |        | 1,500  |  |   |        | 1,200  | 
|                                       
|RadioVisa Corporation                   |                        | Loan (15.5%, Due 12/08)            |                                      |                    | 26,785 |        |      |   | 26,682 |        |  |   | 26,682 |       
|                                        | (Broadcasting & Cable) |                                    |                                      |                    |        |        |      |   |        |        |  |   |        |        | 
|                                       
|Red Hawk Industries, LLC                |                        | Loan (11.0%, Due 4/11)             |                                      |                    | 41,624 |        |      |   | 41,407 |        |  |   | 41,407 |       
|                                        | (Business Services)    |                                    |                                      |                    |        |        |      |   |        |        |  |   |        |        | 
|                                       
|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) |                                      |                    | 20,483 |        |      |   | 20,017 |        |  |   | 20,017 |       
|                                        | (Retail)               |                                    | Preferred Stock (54,125 shares)      |                    |        |        |      |   |        | 135    |  |   |        | 135    | 
|                                        |                        | Warrants                           |                                      |                    |        |        |      |   | 619    |        |  |   | 619    |       
|                                       
|SBBUT, LLC                              |                        | Equity Interests                   |                                      |                    |        |        |      |   | 52     |        |  |   | 52     |       
|                                        | (Consumer Products)    |                                    |                                      |                    |        |        |      |   |        |        |  |   |        |        | 
|                                       
|Soff-Cut Holdings, Inc.                 |                        | Preferred Stock (300 shares)       |                                      |                    |        |        |      |   | 300    |        |  |   | 300    |       
|                                        | (Industrial Products)  |                                    | Common Stock (2,000 shares)          |                    |        |        |      |   |        | 200    |  |   |        |       | 
|                                       
|SPP Mezzanine Fund,
    L.P.(5)         |                        | Limited Partnership Interest       |                                      |                    |        |        |      |   | 2,470  |        |  |   | 2,373  |       
|                                        | (Private Equity Fund)  |                                    |                                      |                    |        |        |      |   |        |        |  |   |        |        | 
|                                       
|Tradesmen International, Inc.           |                        | Debt Securities (12.0%, Due 12/09) |                                      |                    | 15,000 |        |      |   | 14,290 |        |  |   | 14,290 |       
|                                        | (Business Services)    |                                    | Warrants                             |                    |        |        |      |   |        | 710    |  |   |        | 1,270  | 
|                                       
|United Site Services, Inc.              |                        | Loan (11.9%, Due 8/11)             |                                      |                    | 49,712 |        |      |   | 49,492 |        |  |   | 49,492 |       
|                                        | (Business Services)    |                                    | Common Stock (160,588 shares)        |                    |        |        |      |   |        | 1,000  |  |   |        | 1,000  | 
|                                       
|Universal Tax Systems, Inc.             |                        | Loan (14.5%, Due 7/11)             |                                      |                    | 18,947 |        |      |   | 18,870 |        |  |   | 18,870 |       
|                                        | (Business Services)    |                                    |                                      |                    |        |        |      |   |        |        |  |   |        |        | 
|                                       
|Updata Venture Partners II,
    L.P.(5) |                        | Limited Partnership Interest       |                                      |                    |        |        |      |   | 5,471  |        |  |   | 5,223  |       
|                                        | (Private Equity Fund)  |                                    |                                      |                    |        |        |      |   |        |        |  |   |        |        | 
|                                       
|Venturehouse-Cibernet Investors, LLC    |                        | Equity Interest                    |                                      |                    |        |        |      |   | 34     |        |  |   | 34     |       
|                                        | (Business Services)    |                                    |                                      |                    |        |        |      |   |        |        |  |   |        |        | 
|                                       

| |      |  |  |                                                                                                                                                                                                                                                                
| | ---- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1)  |  |  | Interest rates represent the weighted average annual stated
    interest rate on loans and debt securities, which are presented
    by nature of indebtedness for a single issuer. The maturity
    dates represent the earliest and the latest maturity dates.
| | (2)  |  |  | Common stock, preferred stock, warrants, options, and equity
    interests are generally non-income producing and restricted.                                                                                                                                  
| | (3)  |  |  | Public company.                                                                                                                                                                                                                                                
| | (4)  |  |  | Non-U.S. company or principal place of business outside the
    U.S.                                                                                                                                                                                           
| | (5)  |  |  | Non-registered investment company.                                                                                                                                                                                                                             
| | (6)  |  |  | Loan or debt security is on non-accrual status and therefore is
    considered non-income producing.                                                                                                                                                           
| | (10) |  |  | Common stock is non-voting. In addition to non-voting stock
    ownership, the Company has an option to acquire a majority of
    the voting securities of the portfolio company at fair market
    value.                                                     





11



---



##### 



|                                                    |                       |                                          |                           |                    |        |   |           |   |        |       |           |   |        |       |  | 
|--------------------------------------------------- | --------------------- | ---------------------------------------- | ------------------------- | ------------------ | ------ | - | --------- | - | ------ | ----- | --------- | - | ------ | ----- |  | 
|                                                    |                       |                                          |                           | September 30, 2005 |       
|                                                    |                       |                                          |                           |                    |       
|                                                    |                       |                                          |                           | (unaudited)        |       
|Private Finance                                     |                       |                                          |                           |                   
|Portfolio Company                                   |                       |                                          |                           |                   
|(in thousands, except number of shares)             |                       | Investment(1)(2)                         |                           | Principal          |        |   | Cost      |   |        | Value |          
|                                                    |                       |                                          |                           |                    |        |   |           |   |        |       |          
|Venturehouse Group,
    LLC(5)                      |                       | Equity Interest                          |                           |                    |        |   |           | $ | 598    |       |           | $ | 395    |      
|                                                    | (Private Equity Fund) |                                          |                           |                    |        |   |           |   |        |       |           |   |        |       | 
|                                                   
|VICORP Restaurants,
    Inc.(3)                     |                       | Warrants                                 |                           |                    |        |   |           |   | 33     |       |           |   | 758    |      
|                                                    | (Retail)              |                                          |                           |                    |        |   |           |   |        |       |           |   |        |       | 
|                                                   
|Walker Investment Fund II,
    LLLP(5)              |                       | Limited Partnership Interest             |                           |                    |        |   |           |   | 1,330  |       |           |   | 695    |      
|                                                    | (Private Equity Fund) |                                          |                           |                    |        |   |           |   |        |       |           |   |        |       | 
|                                                   
|Wear Me Apparel Corporation                         |                       | Debt Securities (15.0%, Due 12/10)       |                           | $                  | 45,000 |   |           |   | 43,878 |       |           |   | 43,878 |      
|                                                    | (Consumer Products)   |                                          | Warrants                  |                    |        |   |           |   |        | 1,219 |           |   |        | 1,520 | 
|                                                   
|Wilshire Restaurant Group, Inc.                     |                       | Debt Securities (20.0%, Due
    6/07)(6) |                           |                    | 19,107 |   |           |   | 18,566 |       |           |   | 18,566 |      
|                                                    | (Retail)              |                                          | Warrants                  |                    |        |   |           |   |        | 735   |           |   |        | 660   | 
|                                                   
|Wilton Industries, Inc.                             |                       | Loan (19.3%, Due 6/08)                   |                           |                    | 4,800  |   |           |   | 4,800  |       |           |   | 4,800  |      
|                                                    | (Consumer Products)   |                                          |                           |                    |        |   |           |   |        |       |           |   |        |       | 
|                                                   
|Woodstream Corporation                              |                       | Loans (13.0%, Due 11/12  5/13)          |                           |                    | 52,188 |   |           |   | 52,037 |       |           |   | 52,037 |      
|                                                    | (Consumer Products)   |                                          | Common Stock (180 shares) |                    |        |   |           |   |        | 673   |           |   |        | 3,231 | 
|                                                    |                       |                                          | Warrants                  |                    |        |   |           |   |        |      |           |   |        | 2,269 | 
|                                                   
|Other companies                                     |                       | Other debt investments                   |                           |                    | 651    |   |           |   | 651    |       |           |   | 651    |      
|                                                    |                       | Other debt
    investments(6)            |                           |                    | 474    |   |           |   | 474    |       |           |   | 349    |      
|                                                    |                       | Other equity
    investments(3)          |                           |                    |        |   |           |   | 59     |       |           |   | 40     |      
|                                                    |                       | Guaranty ($118)                          |                           |                    |        |   |           |   |        |       |           |   |        |      
|                                                   
|                                                    |                       |                                          |                           |                    |        |   |           |   |        |       |           |   |        |       |  | 
|Total
    companies less than 5% owned              |                       |                                          |                           |                    |        | $ | 1,338,370 |   |        | $     | 1,311,231 |  
|                                                   
|Total
    private finance (118 portfolio companies) |                       |                                          |                           |                    |        | $ | 3,012,459 |   |        | $     | 3,080,985 |  
|                                                   

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



---



##### 



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

|                                                                                      |                                         |                  |               |  |           |                    |        |             |       |   |           |         |       |   |           |         | 
|------------------------------------------------------------------------------------- | --------------------------------------- | ---------------- | ------------- |  | --------- | ------------------ | ------ | ----------- | ----- | - | --------- | ------- | ----- | - | --------- | ------- | 
|                                                                                      |                                         |                  |               |  |           | September 30, 2005 |       
|                                                                                      |                                         |                  |               |  |           |                    |       
|                                                                                      |                                         | Interest         |               |  | Number of |                    |        | (unaudited) |      
|                                                                                      |                                         | Rate Ranges      |               |  | Loans     |                    |        | Cost        |       |   | Value     |        
|                                                                                      |                                         |                  |               |  |           |                    |        |             |       |   |           |        
|Commercial Mortgage Loans                                                             |                                         |                  |               |  |           |                    |        |             |       |   |           |         |       |   |           |        
|                                                                                      |                                         |                  | Up to 6.99%   |  |           |                    | 5      |             |       | $ | 47,056    |         |       | $ | 46,575    |        
|                                                                                      |                                         |                  | 7.00%8.99%   |  |           |                    | 25     |             |       |   | 50,448    |         |       |   | 49,469    |        
|                                                                                      |                                         |                  | 9.00%10.99%  |  |           |                    | 4      |             |       |   | 11,094    |         |       |   | 11,036    |        
|                                                                                      |                                         |                  | 11.00%12.99% |  |           |                    | 2      |             |       |   | 8,159     |         |       |   | 7,820     |        
|                                                                                      |                                         |                  | 13.00%14.99% |  |           |                    | 1      |             |       |   | 2,296     |         |       |   | 2,296     |        
|                                                                                      |                                         | 15.00% and above |               |  | 2         |                    |        |             | 3,970 |   |           |         | 3,970 |  
|                                                                                     
|                                                                                      | Total commercial mortgage
    loans(11) |                  |               |  |           |                    |        | 39          |       |   | $         | 123,023 |       |   | $         | 121,166 | 
|                                                                                     
|Real Estate Owned                                                                     |                                         |                  |               |  |           |                    |        |             |       | $ | 14,147    |         |       | $ | 15,088    |        
|                                                                                     
|Equity
    Interests(2) 
    Companies more than 25% owned
    (Guarantees  $7,054) |                                         |                  |               |  |           | $                  | 11,453 |             |       | $ | 6,511     |        
|                                                                                     
|                                                                                      | Total commercial real estate finance    |                  |               |  |           |                    |        |             |       |   | $         | 148,623 |       |   | $         | 142,765 | 
|                                                                                     
|Total portfolio                                                                       |                                         |                  |               |  |           |                    |        |             |       | $ | 3,161,082 |         |       | $ | 3,223,750 |        
|                                                                                     

|                                                                                                                                                                                                                                                                                                 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|(1)       Interest
    rates represent the weighted average annual stated interest rate
    on loans and debt securities, which are presented by nature of
    indebtedness
    for            a
    single issuer. The maturity dates represent the earliest and the
    latest maturity dates.
|(2)       Common
    stock, preferred stock, warrants, options, and equity interests
    are generally non-income producing and restricted.                                                                                                                                                     
|(3)       Public
    company.                                                                                                                                                                                                                                                                   
|(4)       Non-U.S. company
    or principal place of business outside the U.S.                                                                                                                                                                                                                  
|(5)       Non-registered
    investment company.                                                                                                                                                                                                                                                
|(11)       Commercial
    mortgage loans totaling $20.7 million at value were on
    non-accrual status and therefore were considered non-income
    producing.                                                                                                                                 





13



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(Information at and for the three and nine months ended
September 30, 2005 and 2004 is unaudited)


Note 1. Organization










Note 2. Summary of Significant Accounting Policies


Basis of Presentation






14



---



##### 



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



15



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Note 2. Summary of Significant Accounting Policies,
continued










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







16



---



##### 



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



17



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 2. Summary of Significant Accounting Policies,
continued




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

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




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





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





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





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

Accounting
for Stock Issued to Employees


18



---



##### 



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 |         |      | For the Nine  |  
|                                                                                                                                                 |             | Months Ended  |         |      | Months Ended  |  
|                                                                                                                                                 |             | September 30, |         |      | September 30, |  
|                                                                                                                                                 |             |               |         |      |               |  
|                                                                                                                                                 |             | 2005          |         |      | 2004          |   |        | 2005 |  |   | 2004    |     
|(in thousands, except per share amounts)                                                                                                         |             |               |         |      |               |   |        |      |  |   |         |     
|Net increase in net assets resulting from operations as reported                                                                                 |             | $             | 113,168 |      |               | $ | 85,999 |      |  | $ | 544,674 |      |  | $ | 201,649 |     
|Less total stock-based employee compensation expense determined
    under fair value based method for all awards, net of related tax
    effects |             |               | (2,546  | )    |               |   | (3,226 | )    |  |   | (9,511  | )    |  |   | (13,822 | )   
|                                                                                                                                                 |             |               |         |      |               |   |        |      |  |   |         |     
|Pro forma net increase in net assets resulting from operations                                                                                   |             |               | 110,622 |      |               |   | 82,773 |      |  |   | 535,163 |      |  |   | 187,827 |     
|Less preferred stock dividends                                                                                                                   |             |               |        |      |               |   |       |      |  |   |        |      |  |   | (52     | )   
|                                                                                                                                                 |             |               |         |      |               |   |        |      |  |   |         |     
|Pro forma net income available to common shareholders                                                                                            |             | $             | 110,622 |      |               | $ | 82,773 |      |  | $ | 535,163 |      |  | $ | 187,775 |     
|                                                                                                                                                 |             |               |         |      |               |   |        |      |  |   |         |     
|Basic earnings per common share:                                                                                                                 |             |               |         |      |               |   |        |      |  |   |         |      |  |   |         |     
|                                                                                                                                                 | As reported |               | $       | 0.84 |               |   | $      | 0.67 |  |   | $       | 4.06 |  |   | $       | 1.57 | 
|                                                                                                                                                 | Pro forma   |               | $       | 0.82 |               |   | $      | 0.64 |  |   | $       | 3.99 |  |   | $       | 1.46 | 
|Diluted earnings per common share:                                                                                                               |             |               |         |      |               |   |        |      |  |   |         |      |  |   |         |     
|                                                                                                                                                 | As reported |               | $       | 0.82 |               |   | $      | 0.66 |  |   | $       | 3.99 |  |   | $       | 1.53 | 
|                                                                                                                                                 | Pro forma   |               | $       | 0.80 |               |   | $      | 0.63 |  |   | $       | 3.92 |  |   | $       | 1.43 | 



|                                       |  |               |      |   |               |  |   |      |  |   |      |   |  |   |      |  
|-------------------------------------- |  | ------------- | ---- | - | ------------- |  | - | ---- |  | - | ---- | - |  | - | ---- | -
|                                       |  | For the Three |      |   | For the Nine  | 
|                                       |  | Months Ended  |      |   | Months Ended  | 
|                                       |  | September 30, |      |   | September 30, | 
|                                       |  |               |      |   |               | 
|                                       |  | 2005          |      |   | 2004(1)       |  |   | 2005 |  |   | 2004 |  
|                                       |  |               |      |   |               |  |   |      |  |   |      |  
|Risk-free interest rate                |  |               | 4.1  | % |               |  |  |      |  |   | 4.1  | % |  |   | 2.9  | %
|Expected life in years                 |  |               | 5.0  |   |               |  |  |      |  |   | 5.0  |   |  |   | 5.0  |  
|Expected volatility                    |  |               | 35.0 | % |               |  |  |      |  |   | 35.1 | % |  |   | 37.0 | %
|Dividend yield                         |  |               | 9.0  | % |               |  |  |      |  |   | 9.0  | % |  |   | 8.8  | %
|Weighted average fair value per option |  | $             | 3.96 |   |               |  |  |      |  | $ | 3.94 |   |  | $ | 4.19 |  




|    |                                                                                          
|--- | -----------------------------------------------------------------------------------------
|(1) | There were no stock options granted during the three months
    ended September 30, 2004.



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



19



---



##### 



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


20



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 2. Summary of Significant Accounting Policies,
continued


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


Note 3. Portfolio




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



|                                  |       |      |           |           |       |   |           |           |  |  |      |   |  |       |           |           |          |   |           |           |  |  |      |   | 
|--------------------------------- | ----- | ---- | --------- | --------- | ----- | - | --------- | --------- |  |  | ---- | - |  | ----- | --------- | --------- | -------- | - | --------- | --------- |  |  | ---- | - | 
|                                  |       | 2005 |           |           | 2004  |  
|                                  |       |      |           |           |       |  
|                                  |       | Cost |           |           | Value |   |           | Yield(1)  |  |  | Cost |   |  | Value |           |           | Yield(1) |  
|($ in thousands)                  |       |      |           |           |       |   |           |           |  |  |      |   |  |       |           |           |          |  
|Loans and debt securities
    (2) |       | $    | 2,132,770 |           |       | $ | 2,039,642 |           |  |  | 13.0 | % |  | $     | 1,679,855 |           |          | $ | 1,602,869 |           |  |  | 13.9 | %
|Equity securities                 |       |      | 879,689   |           |       |   | 1,041,343 |           |  |  |      |   |  |       | 705,065   |           |          |   | 699,217   |           |  |  |      |  
|                                  |       |      |           |           |       |   |           |           |  |  |      |   |  |       |           |           |          |  
|                                  | Total |      | $         | 3,012,459 |       |   | $         | 3,080,985 |  |  |      |   |  |       | $         | 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
    September 30, 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 $2.2 billion and $1.7 billion at
    September 30, 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
    $28.0 million and $29.8 million at September 30,
    2005, and December 31, 2004, respectively.                                                                                                                                                                                                                                                              





21



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 3. Portfolio, continued












|                      |                                             |               |     |     |               |   |     |      |  |   |      |      |  |   |     |      | 
|--------------------- | ------------------------------------------- | ------------- | --- | --- | ------------- | - | --- | ---- |  | - | ---- | ---- |  | - | --- | ---- | 
|                      |                                             | For the Three |     |     | For the Nine  |  
|                      |                                             | Months Ended  |     |     | Months Ended  |  
|                      |                                             | September 30, |     |     | September 30, |  
|                      |                                             |               |     |     |               |  
|                      |                                             | 2005          |     |     | 2004          |   |     | 2005 |  |   | 2004 |     
|($ in millions)       |                                             |               |     |     |               |   |     |      |  |   |      |     
|Interest income       |                                             | $             | 7.8 |     |               | $ | 5.9 |      |  | $ | 23.3 |      |  | $ | 6.0 |     
|Fees and other income |                                             |               | 1.8 |     |               |   | 1.5 |      |  |   | 4.9  |      |  |   | 4.4 |     
|                      |                                             |               |     |     |               |   |     |      |  |   |      |     
|                      | Total interest and related portfolio income |               | $   | 9.6 |               |   | $   | 7.4  |  |   | $    | 28.2 |  |   | $   | 10.4 | 
|                      |                                             |               |     |     |               |   |     |      |  |   |      |     





22



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 3. Portfolio, continued






|                                                                      |                                             |               |     |     |               |   |     |      |  |   |      |      |  |   |      |      | 
|--------------------------------------------------------------------- | ------------------------------------------- | ------------- | --- | --- | ------------- | - | --- | ---- |  | - | ---- | ---- |  | - | ---- | ---- | 
|                                                                      |                                             | For the Three |     |     | For the Nine  |  
|                                                                      |                                             | Months Ended  |     |     | Months Ended  |  
|                                                                      |                                             | September 30, |     |     | September 30, |  
|                                                                      |                                             |               |     |     |               |  
|                                                                      |                                             | 2005          |     |     | 2004          |   |     | 2005 |  |   | 2004 |     
|($ in millions)                                                       |                                             |               |     |     |               |   |     |      |  |   |      |     
|Interest income on subordinated debt and Class A equity
    interests |                                             | $             | 3.6 |     |               | $ | 5.9 |      |  | $ | 10.5 |      |  | $ | 17.2 |     
|Dividend income on Class B equity interests                           |                                             |               | 4.0 |     |               |   | 3.5 |      |  |   | 9.0  |      |  |   | 8.2  |     
|Fees and other income                                                 |                                             |               | 2.3 |     |               |   | 2.8 |      |  |   | 7.0  |      |  |   | 9.7  |     
|                                                                      |                                             |               |     |     |               |   |     |      |  |   |      |     
|                                                                      | Total interest and related portfolio income |               | $   | 9.9 |               |   | $   | 12.2 |  |   | $    | 26.5 |  |   | $    | 35.1 | 
|                                                                      |                                             |               |     |     |               |   |     |      |  |   |      |     











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 certain 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




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | fundings of $94.3 million on Callidus Capital
    Corporations (Callidus) revolving line of
    credit related to its middle market underwriting and syndication
    facility, including $52.5 million to fund a senior loan to
    Triax Holdings, LLC (see below). Callidus repaid borrowings
    under this facility totaling $84.0 million during the nine
    months ended September 30, 2005, for a net increase in
    borrowings under the facility during the nine months ended
    September 30, 2005, of $10.3 million. Outstanding
    borrowings under this facility were $52.5 million and $42.2
    million at September 30, 2005, and December 31, 2004,
    respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | the repayment of the Companys debt and equity investment
    of $12.8 million in Fairchild Industrial Products Company;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | a partial repayment of $14.6 million of the Companys
    investment in ForeSite Towers, LLC (ForeSite) as a
    result of the sale of a portion of ForeSites assets during
    the second quarter of 2005 and an additional investment of
    $3.5 million during the third quarter of 2005;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | the contribution to capital of existing debt securities of GAC
    Investments, Inc. (GAC)with a cost basis of
    $11.0 million, resulting in a decrease in the
    Companys debt cost basis and an increase in the
    Companys common stock cost basis in GAC during the first
    quarter of 2005. In addition, during the third quarter of 2005,
    the Company made an investment of $27.6 million in the
    common stock of GAC to fund the purchase of Triax Holdings, LLC
    (Triax), a new subsidiary of GAC, and also made
    subordinated loans of $50.4 million to Triax. Triax used
    the proceeds of the financing to acquire Tretinoin, the generic
    equivalent of a leading topical prescription acne medication,
    and other related assets, as well as to pay certain closing
    costs. Subsequent to September 30, 2005, Triax negotiated a
    purchase price adjustment of $45 million that reduced
    Triaxs purchase price. The proceeds from the
    $45 million purchase price adjustment were used to repay a
    portion of the senior loan made by Callidus. Following
    GACs investment in Triax, GAC changed its name to Triview
    Investments, Inc. (Triview);
|
| |  | an additional loan of $2.0 million to Gordian Group, Inc.;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | the distribution of Diversified Group Administrators, Inc. from
    HealthASPex, Inc. (HealthASPex) to its shareholders
    (including the Company) and the redemption of the Companys
    equity interest in HealthASPex;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | a debt and equity investment of $67.8 million in Healthy
    Pet Corp.;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | the repayment of the Companys debt and equity investment
    of $15.9 million in Housecall Medical Resources, Inc.;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | the repayment of the Companys debt investment of
    $9.3 million in HMT, Inc.;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | the repayment of the Companys $66.1 million senior
    loan investment in Insight Pharmaceuticals Corporation
    (Insight) as a result of Insights senior debt
    refinancing;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | an additional $9.5 million debt and equity investment in
    Mercury Air Centers, Inc. to finance an acquisition;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | an additional $27.4 million debt investment in MVL Group, Inc.
    to finance an acquisition;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | fundings of $7.7 million on Powell Plant Farms, Inc.s
    (Powell) revolving credit facility for working
    capital. Powell repaid borrowings under this facility totaling
    $7.9 million, for net repayments under the facility during
    the nine months ended September 30, 2005, of
    $0.2 million;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

25



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 3. Portfolio, continued




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the sale of the assets out of bankruptcy of Norstan Apparel
    Shops, Inc. (Norstan), which resulted in a realized
    loss during the second quarter of 2005. During the first quarter
    of 2005, the Company appointed three members to Norstans
    board of directors and had control of the board. Accordingly,
    the realized loss was included in the portfolio companies more
    than 25% owned category;
|
| |  | the repayment of the Companys debt investment of
    $14.0 million in Redox Brands, Inc.;                                                                                                                                                                                                                                                                                                                                
|
| |  | a debt and equity investment of $40.4 million in Service
    Champ Inc.;                                                                                                                                                                                                                                                                                                                                                  
|
| |  | an additional investment of $8.8 million in Startec Global
    Communications Corporation to finance an acquisition; 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.                                                                                                                                                                                      





26



---



##### 



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 |       | $ | 19,026 |         |  | $ | 34,374 |       
|                                                                             | Companies less than 5% owned  |       |   | 17,337 |         |  |   | 16,550 |       
|Loans and debt securities not in workout status                              |                               |       |   |        |         |  |   |       
|                                                                             | Companies more than 25% owned |       |   | 55,771 |         |  |   | 29,368 |       
|                                                                             | Companies 5% to 25% owned     |       |   | 2,267  |         |  |   | 678    |       
|                                                                             | Companies less than 5% owned  |       |   | 77,615 |         |  |   | 15,864 |       
|                                                                             |                               |       |   |        |         | 
|                                                                             |                               | Total |   | $      | 172,016 |  |   | $      | 96,834 | 
|                                                                             |                               |       |   |        |         | 



|                         |       |      |    |     |      |  |    |     |  
|------------------------ | ----- | ---- | -- | --- | ---- |  | -- | --- | -
|                         |       | 2005 |    |     | 2004 | 
|                         |       |      |    |     |      | 
|Industry                 |       |      |    |     |      |  |    |    
|Business services        |       |      | 40 | %   |      |  | 32 | %  
|Financial services       |       |      | 18 |     |      |  | 21 |    
|Consumer products        |       |      | 13 |     |      |  | 20 |    
|Industrial products      |       |      | 11 |     |      |  | 8  |    
|Healthcare services      |       |      | 6  |     |      |  | 8  |    
|Retail                   |       |      | 2  |     |      |  | 2  |    
|Energy services          |       |      | 2  |     |      |  | 2  |    
|Broadcasting and cable   |       |      | 1  |     |      |  | 2  |    
|Other                    |       |      | 7  |     |      |  | 5  |    
|                         |       |      |    |     |      | 
|                         | Total |      |    | 100 | %    |  |    | 100 | %
|                         |       |      |    |     |      | 
|Geographic
    Region(1) |       |      |    |     |      |  |    |    
|Mid-Atlantic             |       |      | 33 | %   |      |  | 40 | %  
|West                     |       |      | 28 |     |      |  | 27 |    
|Midwest                  |       |      | 19 |     |      |  | 15 |    
|Southeast                |       |      | 14 |     |      |  | 14 |    
|Northeast                |       |      | 6  |     |      |  | 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.

27



---



##### 



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                     |       | $    |        |         |       | $ |        |          |  |  |      |  |  | $     | 383,310 |         |          | $ | 373,805 |         |  |  | 14.6% | 
|CDO bonds and preferred shares |       |      |        |         |       |   |        |          |  |  |      |  |  |       | 212,590 |         |          |   | 212,573 |         |  |  | 16.8% | 
|Commercial mortgage loans      |       |      | 123,023 |         |       |   | 121,166 |          |  |  | 6.6% |  |  |       | 99,373  |         |          |   | 95,056  |         |  |  | 6.8%  | 
|Real estate owned              |       |      | 14,147  |         |       |   | 15,088  |          |  |  |      |  |  |       | 16,170  |         |          |   | 16,871  |         |  |  |       | 
|Equity interests               |       |      | 11,453  |         |       |   | 6,511   |          |  |  |      |  |  |       | 11,169  |         |          |   | 13,020  |         |  |  |       | 
|                               |       |      |         |         |       |   |         |          |  |  |      |  |  |       |         |         |          |  
|                               | Total |      | $       | 148,623 |       |   | $       | 142,765  |  |  |      |  |  |       | $       | 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).








28



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 3. Portfolio, continued




Commercial Mortgage Loans and Equity Interests.






|              |       |      |    |     |      |  |    |     |  
|------------- | ----- | ---- | -- | --- | ---- |  | -- | --- | -
|              |       | 2005 |    |     | 2004 | 
|              |       |      |    |     |      | 
|Property Type |       |      |    |     |      |  |    |    
|Hospitality   |       |      | 32 | %   |      |  | 49 | %  
|Housing       |       |      | 17 |     |      |  | 5  |    
|Office        |       |      | 15 |     |      |  | 17 |    
|Retail        |       |      | 14 |     |      |  | 21 |    
|Other(1)      |       |      | 22 |     |      |  | 8  |    
|              |       |      |    |     |      | 
|              | Total |      |    | 100 | %    |  |    | 100 | %
|              |       |      |    |     |      | 

| | 
| | 
| | 

| |     |                                                                                           
| | --- | ------------------------------------------------------------------------------------------
| | (1) | Other includes the Companys investment in an originator of
    commercial mortgage loans.

|                  |       |      |    |     |      |  |    |     |  
|----------------- | ----- | ---- | -- | --- | ---- |  | -- | --- | -
|                  |       | 2005 |    |     | 2004 | 
|                  |       |      |    |     |      | 
|Geographic Region |       |      |    |     |      |  |    |    
|Midwest           |       |      | 35 | %   |      |  | 30 | %  
|Mid-Atlantic      |       |      | 27 |     |      |  | 20 |    
|West              |       |      | 21 |     |      |  | 16 |    
|Southeast         |       |      | 12 |     |      |  | 26 |    
|Northeast         |       |      | 5  |     |      |  | 8  |    
|                  |       |      |    |     |      | 
|                  | Total |      |    | 100 | %    |  |    | 100 | %
|                  |       |      |    |     |      | 

29



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


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 |                                    | $       | 939,835   |         |  | $ | 939,835  |         |  |          | 6.5 | %    |        | $       | 981,368   |           |  | $       | 981,368   |           |  |     | 6.5  | %   
|                              | SBA debentures          |                                    |         | 28,500    |         |  |   | 28,500   |         |  |          | 7.5 | %    |        |         | 84,800    |           |  |         | 77,500    |           |  |     | 8.2  | %   
|                              | OPIC loan               |                                    |         |          |         |  |   |         |         |  |          |     |      |        |         | 5,700     |           |  |         | 5,700     |           |  |     | 6.6  | %   
|                              |                         |                                    |         |           |         |  |   |          |         |  |          |     |      |        |         |           |           | 
|                              |                         | Total notes payable and debentures |         |           | 968,335 |  |   |          | 968,335 |  |          |     | 6.5  | %      |         |           | 1,071,868 |  |         |           | 1,064,568 |  |     |      | 6.6  | %
|Revolving line of credit      |                         |                                    | 722,500 |           |         |  |  |          |         |  |         | (2) |      |        | 552,500 |           |           |  | 112,000 |           |           |  | 6.3 | %(2)
|                              |                         |                                    |         |           |         |  |   |          |         |  |          |     |      |        |         |           |           | 
|                              | Total debt              |                                    | $       | 1,690,835 |         |  | $ | 968,335  |         |  |          | 6.8 | %(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) | There were no amounts drawn on the revolving line of credit at
    September 30, 2005. 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. The annual
    cost of commitment fees and other facility fees was
    $2.6 million at September 30, 2005. The stated
    interest rate payable on the revolving line of credit was 4.7%
    at December 31, 2004, which excluded the annual cost of
    commitment fees and other facility fees of $1.8 million.

Notes Payable and Debentures


Unsecured Notes Payable.






SBA Debentures.


30



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Note 4. Debt, continued






Scheduled Maturities.


|           |       |                  |         |         | 
|---------- | ----- | ---------------- | ------- | ------- | 
|Year       |       | Amount Maturing  |        
|           |       |                  |        
|           |       | ($ in thousands) |        
|2005       |       | $                | 125,000 |        
|2006       |       |                  | 175,000 |        
|2007       |       |                  |        |        
|2008       |       |                  | 153,000 |        
|2009       |       |                  | 267,335 |        
|Thereafter |       |                  | 248,000 |        
|           |       |                  |        
|          
|           | Total |                  | $       | 968,335 | 
|           |       |                  |        



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





31



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 4. Debt, continued










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



Note 5. Guarantees




32



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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                       |       | $     | 145.3 |       |      | $ | 0.1 |      |  | $ | 1.0  |     |  | $    | 136.2 |       |      | $ |     |            |  | $ | 2.5 |     |  | $ | 5.5 |    
|Standby letters of
    credit(1) |       |       | 38.6  |       |      |   |    |      |  |   |     |     |  |      |      |       |      |   | 38.6 |            |  |   |    |     |  |   |    |    
|                                 |       |       |       |       |      |   |     |      |  |   |      |     |  |      |       |       |      |   |      |            | 
|                                 | Total |       | $     | 183.9 |      |   | $   | 0.1  |  |   | $    | 1.0 |  |      | $     | 136.2 |      |   | $    | 38.6       |  |   | $   | 2.5 |  |   | $   | 5.5 | 
|                                 |       |       |       |       |      |   |     |      |  |   |      |     |  |      |       |       |      |   |      |            | 




|    |                                                                                                                                                                                                                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Standby letters of credit are issued under the Companys
    revolving line of credit that expires in September 2008.
    Therefore, unless a standby letter of credit is set to expire at
    an earlier date, it is assumed that the standby letters of
    credit will expire contemporaneously with the expiration of the
    Companys line of credit in September 2008.





Note 6. Shareholders Equity








33



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 6. Shareholders Equity, continued




|                                         |  |                     |       |  |      |   |       | 
|---------------------------------------- |  | ------------------- | ----- |  | ---- | - | ----- | 
|                                         |  | For the Nine Months |      
|                                         |  | Ended September 30, |      
|                                         |  |                     |      
|                                         |  | 2005                |       |  | 2004 |  
|(in thousands, except per share amounts) |  |                     |       |  |      |  
|Shares issued                            |  |                     | 268   |  |      |   | 167   | 
|Average price per share                  |  | $                   | 27.82 |  |      | $ | 26.34 | 

Note 7. Earnings Per Common Share




|                                                         |  |                      |         |  |                     |   |         |      |  |   |         |  |  |   |         |  
|-------------------------------------------------------- |  | -------------------- | ------- |  | ------------------- | - | ------- | ---- |  | - | ------- |  |  | - | ------- | -
|                                                         |  | For the Three Months |         |  | For the Nine Months |  
|                                                         |  | Ended September 30,  |         |  | Ended September 30, |  
|                                                         |  |                      |         |  |                     |  
|                                                         |  | 2005                 |         |  | 2004                |   |         | 2005 |  |   | 2004    | 
|(in thousands, except per share amounts)                 |  |                      |         |  |                     |   |         |      |  |   |         | 
|Net increase in net assets resulting from operations     |  | $                    | 113,168 |  |                     | $ | 85,999  |      |  | $ | 544,674 |  |  | $ | 201,649 |  
|Less preferred stock dividends                           |  |                      |        |  |                     |   |        |      |  |   |        |  |  |   | (52     | )
|                                                         |  |                      |         |  |                     |   |         |      |  |   |         | 
|Income available to common shareholders                  |  | $                    | 113,168 |  |                     | $ | 85,999  |      |  | $ | 544,674 |  |  | $ | 201,597 |  
|                                                         |  |                      |         |  |                     |   |         |      |  |   |         | 
|Weighted average common shares outstanding  basic       |  |                      | 135,322 |  |                     |   | 129,304 |      |  |   | 134,110 |  |  |   | 128,812 |  
|Dilutive options outstanding to officers                 |  |                      | 2,736   |  |                     |   | 1,888   |      |  |   | 2,559   |  |  |   | 2,675   |  
|                                                         |  |                      |         |  |                     |   |         |      |  |   |         | 
|Weighted average common shares
    outstanding  diluted |  |                      | 138,058 |  |                     |   | 131,192 |      |  |   | 136,669 |  |  |   | 131,487 |  
|                                                         |  |                      |         |  |                     |   |         |      |  |   |         | 
|Basic earnings per common share                          |  | $                    | 0.84    |  |                     | $ | 0.67    |      |  | $ | 4.06    |  |  | $ | 1.57    |  
|                                                         |  |                      |         |  |                     |   |         |      |  |   |         | 
|Diluted earnings per common share                        |  | $                    | 0.82    |  |                     | $ | 0.66    |      |  | $ | 3.99    |  |  | $ | 1.53    |  
|                                                         |  |                      |         |  |                     |   |         |      |  |   |         | 

Note 8. Employee Compensation Plans






34



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Note 8. Employee Compensation Plans, continued














35



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 8. Employee Compensation Plans, continued


|                                                 |                   |               |      |     |               |   |      |      |  |   |      |     |  |   |      |     | 
|------------------------------------------------ | ----------------- | ------------- | ---- | --- | ------------- | - | ---- | ---- |  | - | ---- | --- |  | - | ---- | --- | 
|                                                 |                   | For the Three |      |     | For the Nine  |  
|                                                 |                   | Months Ended  |      |     | Months Ended  |  
|                                                 |                   | September 30, |      |     | September 30, |  
|                                                 |                   |               |      |     |               |  
|                                                 |                   | 2005          |      |     | 2004          |   |      | 2005 |  |   | 2004 |    
|($ in millions)                                  |                   |               |      |     |               |   |      |      |  |   |      |    
|Individual performance award (IPA) contributions |                   | $             | 1.7  |     |               | $ | 3.2  |      |  | $ | 5.5  |     |  | $ | 10.2 |    
|IPA mark to market expense (benefit)             |                   |               | (0.4 | )   |               |   | (0.1 | )    |  |   | 1.5  |     |  |   | (0.7 | )  
|                                                 |                   |               |      |     |               |   |      |      |  |   |      |    
|                                                 | Total IPA expense |               | $    | 1.3 |               |   | $    | 3.1  |  |   | $    | 7.0 |  |   | $    | 9.5 | 
|                                                 |                   |               |      |     |               |   |      |      |  |   |      |    



Note 9. Stock Option Plan










Note 10. Dividends and Distributions and Excise Taxes




36



---



##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Note 10. Dividends and Distributions and Excise Taxes,
continued








Note 11. Supplemental Disclosure of Cash Flow
Information










37



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##### 



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    |       
|5-year Treasury securities, due April 2010     |       |      | 17,933 |        |      |   |       |       
|10-year Treasury securities, due February 2013 |       |      |       |        |      |   | 3,908  |       
|10-year Treasury securities, due February 2014 |       |      |       |        |      |   | 4,709  |       
|10-year Treasury securities, due August 2014   |       |      |       |        |      |   | 14,743 |       
|10-year Treasury securities, due November 2014 |       |      |       |        |      |   | 14,333 |       
|                                               |       |      |        |        |      |  
|                                               | Total |      | $      | 17,933 |      |   | $      | 38,226 | 
|                                               |       |      |        |        |      |  







38



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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    |           |      |               
|                                                                                  |                                                                  | Nine Months Ended |           |      | At and for the |  
|                                                                                  |                                                                  | September 30,     |           |      | Year Ended     |  
|                                                                                  |                                                                  |                   |           |      | December 31,   |  
|                                                                                  |                                                                  | 2005(1)           |           |      | 2004           |   |           | 2004  |  
|                                                                                  |                                                                  |                   |           |      |                |   |           |       |  
|Per Common Share Data                                                             |                                                                  |                   |           |      |                |   |           |       |   |   |           |      
|Net asset value, beginning of period                                              |                                                                  | $                 | 14.87     |      |                | $ | 14.94     |       |   | $ | 14.94     |      
|                                                                                  |                                                                  |                   |           |      |                |   |           |       |  
|                                                                                  | Net investment
    income(2)                                     |                   |           | 0.73 |                |   |           | 1.11  |   |   |           | 1.52  |  
|                                                                                  | Net realized
    gains(2)(3)                                     |                   |           | 2.11 |                |   |           | 1.34  |   |   |           | 0.88  |  
|                                                                                  |                                                                  |                   |           |      |                |   |           |       |  
|                                                                                  | Net investment income plus net realized
    gains(2)             |                   |           | 2.84 |                |   |           | 2.45  |   |   |           | 2.40  |  
|                                                                                  | Net change in unrealized appreciation or depreciation
    (2)(3) |                   |           | 1.15 |                |   |           | (0.92 | ) |   |           | (0.52 | )
|                                                                                  |                                                                  |                   |           |      |                |   |           |       |  
|Net increase in net assets resulting from operations
    (2)                      |                                                                  |                   | 3.99      |      |                |   | 1.53      |       |   |   | 1.88      |      
|                                                                                  |                                                                  |                   |           |      |                |   |           |       |  
|Net decrease in net assets from shareholder distributions                         |                                                                  |                   | (1.72     | )    |                |   | (1.71     | )     |   |   | (2.30     | )    
|Net increase in net assets from capital share
    transactions(2)                 |                                                                  |                   | 0.23      |      |                |   | 0.14      |       |   |   | 0.35      |      
|                                                                                  |                                                                  |                   |           |      |                |   |           |       |  
|Net asset value, end of period                                                    |                                                                  | $                 | 17.37     |      |                | $ | 14.90     |       |   | $ | 14.87     |      
|                                                                                  |                                                                  |                   |           |      |                |   |           |       |  
|Market value, end of period                                                       |                                                                  | $                 | 28.63     |      |                | $ | 24.39     |       |   | $ | 25.84     |      
|Total
    return(4)                                                               |                                                                  |                   | 18        | %    |                |   | (7        | )%    |   |   | 1         | %    
|Ratios and Supplemental Data($ and shares in thousands, except per share amounts) |                                                                  |                   |           |      |                |   |           |       |   |   |           |      
|Ending net assets                                                                 |                                                                  | $                 | 2,366,986 |      |                | $ | 1,935,740 |       |   | $ | 1,979,778 |      
|Common shares outstanding at end of period                                        |                                                                  |                   | 136,289   |      |                |   | 129,898   |       |   |   | 133,099   |      
|Diluted weighted average common shares outstanding                                |                                                                  |                   | 136,669   |      |                |   | 131,487   |       |   |   | 132,458   |      
|Employee and administrative expenses/average net assets                           |                                                                  |                   | 5.14      | %    |                |   | 3.31      | %     |   |   | 4.65      | %    
|Total operating expenses/average net assets                                       |                                                                  |                   | 7.77      | %    |                |   | 6.32      | %     |   |   | 8.53      | %    
|Net investment income/average net assets                                          |                                                                  |                   | 4.63      | %    |                |   | 7.66      | %     |   |   | 10.45     | %    
|Net increase in net assets resulting from operations/ average
    net assets      |                                                                  |                   | 25.15     | %    |                |   | 10.56     | %     |   |   | 12.97     | %    
|Portfolio turnover rate                                                           |                                                                  |                   | 40.89     | %    |                |   | 20.19     | %     |   |   | 32.97     | %    
|Average debt outstanding                                                          |                                                                  | $                 | 1,058,420 |      |                | $ | 973,528   |       |   | $ | 985,616   |      
|Average debt per
    share(2)                                                     |                                                                  | $                 | 7.74      |      |                | $ | 7.40      |       |   | $ | 7.44      |      




|    |                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The results for the nine months ended September 30, 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, comparisons may not be meaningful.
|   
|(4) | Total return assumes the reinvestment of all dividends paid for
    the periods presented.                                                                                             

39



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##### 



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Note 14. Litigation








40



---



##### 



Report of Independent Registered Public Accounting Firm














KPMG LLP






41



---



##### 





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

The following analysis of our financial condition and results
of operations should be read in conjunction with our
Consolidated Financial Statements and the Notes thereto included
herein and in our 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 this 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






42



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##### 





|                               |  |      |    |   |      |  |    |  
|------------------------------ |  | ---- | -- | - | ---- |  | -- | -
|                               |  | 2005 |    |   | 2004 | 
|                               |  |      |    |   |      | 
|Private finance                |  |      | 96 | % |      |  | 76 | %
|Commercial real estate finance |  |      | 4  | % |      |  | 24 | %





PORTFOLIO AND INVESTMENT ACTIVITY




|                                                                |  |                    |         |   |                   |   |         |                |  |   |         |   |  |      |         |   |  |   |         |  
|--------------------------------------------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------- | -------------- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                                |  | At and for the     |         |   | At and for the    |   |         |               
|                                                                |  | Three Months Ended |         |   | Nine Months Ended |   |         | At and for the | 
|                                                                |  | September 30,      |         |   | September 30,     |   |         | Year Ended     | 
|                                                                |  |                    |         |   |                   |   |         | December 31,   | 
|                                                                |  | 2005               |         |   | 2004              |   |         | 2005           |  |   | 2004    |   |  | 2004 |        
|($ in millions)                                                 |  |                    |         |   |                   |   |         |                |  |   |         |   |  |      |        
|                                                                |  | (unaudited)        |         |   | (unaudited)       |   |         |               
|Portfolio at value                                              |  | $                  | 3,223.8 |   |                   | $ | 2,980.0 |                |  | $ | 3,223.8 |   |  | $    | 2,980.0 |   |  | $ | 3,013.4 |  
|Investments funded                                              |  | $                  | 673.4   |   |                   | $ | 311.9   |                |  | $ | 1,328.2 |   |  | $    | 1,106.9 |   |  | $ | 1,524.5 |  
|Change in accrued or reinvested interest and dividends          |  | $                  | 5.5     |   |                   | $ | 5.5     |                |  | $ | 1.9     |   |  | $    | 31.7    |   |  | $ | 52.2    |  
|Principal collections related to investment repayments or sales |  | $                  | 151.0   |   |                   | $ | 112.4   |                |  | $ | 1,241.8 |   |  | $    | 543.3   |   |  | $ | 909.2   |  
|Yield on interest-bearing investments
    (1)                   |  |                    | 12.6    | % |                   |   | 14.2    | %              |  |   | 12.6    | % |  |      | 14.2    | % |  |   | 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.

43



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##### 



Private Finance




|                                                                |                           |                    |         |         |                   |   |         |                |  |   |         |         |  |      |         |         |  |   |         |         | 
|--------------------------------------------------------------- | ------------------------- | ------------------ | ------- | ------- | ----------------- | - | ------- | -------------- |  | - | ------- | ------- |  | ---- | ------- | ------- |  | - | ------- | ------- | 
|                                                                |                           | At and for the     |         |         | At and for the    |   |         |               
|                                                                |                           | Three Months Ended |         |         | Nine Months Ended |   |         | At and for the | 
|                                                                |                           | September 30,      |         |         | September 30,     |   |         | Year Ended     | 
|                                                                |                           |                    |         |         |                   |   |         | December 31,   | 
|                                                                |                           | 2005               |         |         | 2004              |   |         | 2005           |  |   | 2004    |         |  | 2004 |        
|($ in millions)                                                 |                           |                    |         |         |                   |   |         |                |  |   |         |         |  |      |        
|                                                                |                           | (unaudited)        |         |         | (unaudited)       |   |         |               
|Portfolio at value:                                             |                           |                    |         |         |                   |   |         |                |  |   |         |         |  |      |         |         |  |   |         |        
|                                                                | Loans and debt securities |                    | $       | 2,039.6 |                   |   | $       | 1,401.1        |  |   | $       | 2,039.6 |  |      | $       | 1,401.1 |  |   | $       | 1,602.9 | 
|                                                                | Equity securities         |                    |         | 1,041.4 |                   |   |         | 629.9          |  |   |         | 1,041.4 |  |      |         | 629.9   |  |   |         | 699.2   | 
|                                                                |                           |                    |         |         |                   |   |         |                |  |   |         |         |  |      |        
|Total portfolio                                                 |                           | $                  | 3,081.0 |         |                   | $ | 2,031.0 |                |  | $ | 3,081.0 |         |  | $    | 2,031.0 |         |  | $ | 2,302.1 |        
|                                                                |                           |                    |         |         |                   |   |         |                |  |   |         |         |  |      |        
|Investments
    funded(1)                                       |                           | $                  | 665.7   |         |                   | $ | 244.0   |                |  | $ | 1,131.9 |         |  | $    | 806.4   |         |  | $ | 1,140.8 |        
|Change in accrued or reinvested interest and dividends          |                           | $                  | 5.9     |         |                   | $ | 3.9     |                |  | $ | 20.4    |         |  | $    | 25.4    |         |  | $ | 45.6    |        
|Principal collections related to investment repayments or sales |                           | $                  | 146.5   |         |                   | $ | 99.5    |                |  | $ | 476.5   |         |  | $    | 494.0   |         |  | $ | 551.9   |        
|Yield on interest-bearing
    investments(2)                    |                           |                    | 13.0    | %       |                   |   | 15.2    | %              |  |   | 13.0    | %       |  |      | 15.2    | %       |  |   | 13.9    | %      






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Investments funded for the nine months ended September 30,
    2004, included 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.





44



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##### 











|                                             |                               |            |   |       |           |  |   |       |       |  |   |       |         | 
|-------------------------------------------- | ----------------------------- | ---------- | - | ----- | --------- |  | - | ----- | ----- |  | - | ----- | ------- | 
|                                             |                               | Loans and  |   |       |           |  |  
|                                             |                               | Debt       |   |       | Equity    |  |   |      
|                                             |                               | Securities |   |       | Interests |  |   | Total |      
|($ in millions)                              |                               |            |   |       |           |  |   |       |      
|For the Nine Months Ended September 30, 2005 |                               |            |   |       |           |  |   |       |       |  |   |      
|                                             | Companies more than 25% owned |            | $ | 280.5 |           |  | $ | 80.0  |       |  | $ | 360.5 |        
|                                             | Companies 5% to 25% owned     |            |   | 2.4   |           |  |   | 2.2   |       |  |   | 4.6   |        
|                                             | Companies less than 5% owned  |            |   | 663.1 |           |  |   | 103.7 |       |  |   | 766.8 |        
|                                             |                               |            |   |       |           |  |   |       |      
|                                             |                               | Total      |   | $     | 946.0     |  |   | $     | 185.9 |  |   | $     | 1,131.9 | 
|                                             |                               |            |   |       |           |  |   |       |      
|For the Nine Months Ended September 30, 2004 |                               |            |   |       |           |  |   |       |       |  |   |      
|                                             | Companies more than 25% owned |            | $ | 267.1 |           |  | $ | 135.4 |       |  | $ | 402.5 |        
|                                             | Companies 5% to 25% owned     |            |   | 89.4  |           |  |   | 24.4  |       |  |   | 113.8 |        
|                                             | Companies less than 5% owned  |            |   | 276.5 |           |  |   | 13.6  |       |  |   | 290.1 |        
|                                             |                               |            |   |       |           |  |   |       |      
|                                             |                               | Total      |   | $     | 633.0     |  |   | $     | 173.4 |  |   | $     | 806.4   | 
|                                             |                               |            |   |       |           |  |   |       |      
|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 | 
|                                             |                               |            |   |       |           |  |   |       |      



45



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##### 



Outstanding Investment Commitments.




| |   |                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We have various commitments to Callidus Capital Corporation
    (Callidus) which owns 80% of Callidus Capital Management, LLC,
    an asset management company that structures and manages
    collateralized debt obligations (CDOs), collateralized loan
    obligations (CLOs), and other related investments. Our
    commitment to Callidus consisted of the following at
    September 30, 2005:

|                                                                                                |       |           |       |       |        |        |      |             |  |   |       |       | 
|----------------------------------------------------------------------------------------------- | ----- | --------- | ----- | ----- | ------ | ------ | ---- | ----------- |  | - | ----- | ----- | 
|                                                                                                |       |           |       |       |        | Amount |     
|                                                                                                |       | Committed |       |       | Amount |        |      | Available   | 
|                                                                                                |       | Amount    |       |       | Drawn  |        |      | to be Drawn | 
|($ in millions)                                                                                 |       |           |       |       |        |        |      |             | 
|Subordinated debt to support warehouse facilities &
    warehousing
    activities(1)           |       | $         | 100.0 |       |        | $      |     |             |  | $ | 100.0 |      
|Revolving line of credit for working capital                                                    |       |           | 4.0   |       |        |        |     |             |  |   | 4.0   |      
|Revolving line of credit facility to support underwriting and
    syndication
    activities(2) |       |           | 150.0 |       |        |        | 52.5 |             |  |   | 97.5  |      
|                                                                                                |       |           |       |       |        |        |      |             | 
|                                                                                                | Total |           | $     | 254.0 |        |        | $    | 52.5        |  |   | $     | 201.5 | 
|                                                                                                |       |           |       |       |        |        |      |             | 

| | 
| | 
| | 

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Callidus has two secured warehouse credit facilities with third
    parties for up to $400 million each. These facilities are
    used primarily to finance the acquisition of loans pending
    securitization through a CDO or CLO. In conjunction with these
    warehouse credit facilities, we have agreed to designate our
    $100 million subordinated debt commitment for Callidus to
    draw upon to provide first loss capital as needed to support the
    warehouse facilities.
|
| | (2) | Draws under this facility may include amounts used to fund
    senior loans originated by Callidus to portfolio companies
    included in our portfolio. The amount drawn at
    September 30, 2005, was used by Callidus to fund a senior
    loan to our portfolio company, Triax Holdings, LLC.                                                                                                                                                                                           



| |                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| | In addition, we had a commitment to Callidus to purchase
    preferred equity in future CDO or CLO transactions of
    $76.8 million at September 30, 2005.



| |   |                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $13.8 million in the form of equity to eight private
    venture capital funds.                                                                                       
|
| |  | $12.5 million of financing commitments in the form of debt
    to S.B. Restaurant Company.                                                                            
|
| |  | $7.8 million in the form of debt to Mercury Air Centers,
    Inc.                                                                                                     
|
| |  | $7.6 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.





46



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##### 







Advantage Sales & Marketing,
Inc.








Business Loan Express,
LLC.








47



---



##### 













48



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##### 



Commercial Real Estate Finance




|                                                                |                                |                    |       |       |                   |  |  |                |  |              |          |       |  |       |  |       |          |   |       |       |  |  |          |      |  |       |       |       |          |  |  |       |  |   |       |       |  |  |  |       | 
|--------------------------------------------------------------- | ------------------------------ | ------------------ | ----- | ----- | ----------------- |  |  | -------------- |  | ------------ | -------- | ----- |  | ----- |  | ----- | -------- | - | ----- | ----- |  |  | -------- | ---- |  | ----- | ----- | ----- | -------- |  |  | ----- |  | - | ----- | ----- |  |  |  | ----- | 
|                                                                |                                | At and for the     |       |       | At and for the    |  |  |                |  |             
|                                                                |                                | Three Months Ended |       |       | Nine Months Ended |  |  |               
|                                                                |                                | September 30,      |       |       | September 30,     |  |  | At and for     | 
|                                                                |                                |                    |       |       |                   |  |  | the Year Ended | 
|                                                                |                                |                    |       |       |                   |  |  |                |  | December 31, |         
|                                                                |                                | 2005               |       |       | 2004              |  |  | 2005           |  |              | 2004     |       |  | 2004  | 
|                                                                |                                |                    |       |       |                   |  |  |                |  |              |          |       |  |       | 
|                                                                |                                | (unaudited)        |       |       | (unaudited)       |  |  |               
|                                                                |                                | Value              |       |       | Yield(1)          |  |  | Value          |  |              | Yield(1) |       |  | Value |  |       | Yield(1) |   |       | Value |  |  | Yield(1) |      |  | Value |       |       | Yield(1) | 
|($ in millions)                                                 |                                |                    |       |       |                   |  |  |                |  |              |          |       |  |       |  |       |          |   |       |       |  |  |          |      |  |       |       |       |          | 
|Portfolio at value:                                             |                                |                    |       |       |                   |  |  |                |  |              |          |       |  |       |  |       |          |   |       |       |  |  |          |      |  |       |       |       |          |  |  |       |  |   |       |       |  |  |  |      
|                                                                | CMBS bonds                     |                    | $     |      |                   |  |  |                |  |              | $        | 604.5 |  |       |  | 12.4% |          |   | $     |      |  |  |          |      |  |       | $     | 604.5 |          |  |  | 12.4% |  |   | $     | 373.8 |  |  |  | 14.6% | 
|                                                                | CDO bonds and preferred shares |                    |       |      |                   |  |  |                |  |              |          | 177.8 |  |       |  | 17.4% |          |   |       |      |  |  |          |      |  |       |       | 177.8 |          |  |  | 17.4% |  |   |       | 212.6 |  |  |  | 16.8% | 
|                                                                | Commercial mortgage loans      |                    |       | 121.2 |                   |  |  | 6.6%           |  |              |          | 143.2 |  |       |  | 8.1%  |          |   |       | 121.2 |  |  |          | 6.6% |  |       |       | 143.2 |          |  |  | 8.1%  |  |   |       | 95.0  |  |  |  | 6.8%  | 
|                                                                | Real estate owned              |                    |       | 15.1  |                   |  |  |                |  |              |          | 14.6  |  |       |  |       |          |   |       | 15.1  |  |  |          |      |  |       |       | 14.6  |          |  |  |       |  |   |       | 16.9  |  |  |  |       | 
|                                                                | Equity interests               |                    |       | 6.5   |                   |  |  |                |  |              |          | 8.9   |  |       |  |       |          |   |       | 6.5   |  |  |          |      |  |       |       | 8.9   |          |  |  |       |  |   |       | 13.0  |  |  |  |       | 
|                                                                |                                |                    |       |       |                   |  |  |                |  |              |          |       |  |       |  |       |          |   |       |       |  |  |          |      |  |       |       |       |          | 
|Total portfolio                                                 |                                | $                  | 142.8 |       |                   |  |  |                |  | $            | 949.0    |       |  |       |  |       |          | $ | 142.8 |       |  |  |          |      |  | $     | 949.0 |       |          |  |  |       |  | $ | 711.3 |       |  |  |  |      
|                                                                |                                |                    |       |       |                   |  |  |                |  |              |          |       |  |       |  |       |          |   |       |       |  |  |          |      |  |       |       |       |          | 
|Investments funded                                              |                                | $                  | 7.7   |       |                   |  |  |                |  | $            | 67.9     |       |  |       |  |       |          | $ | 196.3 |       |  |  |          |      |  | $     | 300.5 |       |          |  |  |       |  | $ | 383.7 |       |  |  |  |      
|Change in accrued or reinvested interest                        |                                | $                  | (0.4  | )     |                   |  |  |                |  | $            | 1.6      |       |  |       |  |       |          | $ | (18.5 | )     |  |  |          |      |  | $     | 6.3   |       |          |  |  |       |  | $ | 6.6   |       |  |  |  |      
|Principal collections related to investment repayments or sales |                                | $                  | 4.5   |       |                   |  |  |                |  | $            | 12.9     |       |  |       |  |       |          | $ | 765.3 |       |  |  |          |      |  | $     | 49.3  |       |          |  |  |       |  | $ | 357.3 |       |  |  |  |      




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



|                                             |       |        |       |       |          |   |        |        |   |   |       |       | 
|-------------------------------------------- | ----- | ------ | ----- | ----- | -------- | - | ------ | ------ | - | - | ----- | ----- | 
|                                             |       | Face   |       |       |          |   | Amount |       
|                                             |       | Amount |       |       | Discount |   |        | Funded |  
|($ in millions)                              |       |        |       |       |          |   |        |        |  
|For the Nine Months Ended September 30, 2005 |       |        |       |       |          |   |        |        |   |   |       |      
|CMBS bonds (4 new
    issuances)(2)          |       | $      | 211.5 |       |          | $ | (90.5  | )      |   | $ | 121.0 |      
|Commercial mortgage loans                    |       |        | 73.5  |       |          |   | (0.9   | )      |   |   | 72.6  |      
|Equity interests                             |       |        | 2.7   |       |          |   |       |        |   |   | 2.7   |      
|                                             |       |        |       |       |          |   |        |        |  
|                                             | Total |        | $     | 287.7 |          |   | $      | (91.4  | ) |   | $     | 196.3 | 
|                                             |       |        |       |       |          |   |        |        |  
|For the Nine Months Ended September 30, 2004 |       |        |       |       |          |   |        |        |   |   |       |      
|CMBS bonds (11 new
    issuances(1))         |       | $      | 363.9 |       |          | $ | (158.6 | )      |   | $ | 205.3 |      
|CDO bonds and preferred shares (1 issuance)  |       |        | 4.0   |       |          |   | (0.3   | )      |   |   | 3.7   |      
|Commercial mortgage loans                    |       |        | 99.7  |       |          |   | (8.3   | )      |   |   | 91.4  |      
|Equity interests                             |       |        | 0.1   |       |          |   |       |        |   |   | 0.1   |      
|                                             |       |        |       |       |          |   |        |        |  
|                                             | Total |        | $     | 467.7 |          |   | $      | (167.2 | ) |   | $     | 300.5 | 
|                                             |       |        |       |       |          |   |        |        |  
|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.
|(2) | The CMBS bonds invested in during the nine months ended
    September 30, 2005, were sold on May 3, 2005.   



49



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##### 





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










Hedging Activities




50



---



##### 







Accrued Interest and Dividends Receivable




|                               |                                     |       |      |     |      |   |      |      |      | 
|------------------------------ | ----------------------------------- | ----- | ---- | --- | ---- | - | ---- | ---- | ---- | 
|                               |                                     | 2005  |      |     | 2004 |  
|($ in millions)                |                                     |       |      |     |      |  
|Private finance                |                                     | $     | 63.9 |     |      | $ | 59.8 |     
|Commercial real estate finance |                                     |       |      |     |      |   |      |     
|                               | CMBS and CDO bonds                  |       |      |    |      |   |      | 18.9 |     
|                               | Commercial mortgage loans and other |       |      | 1.2 |      |   |      | 0.8  |     
|                               |                                     |       |      |     |      |  
|                               |                                     | Total |      | $   | 65.1 |   |      | $    | 79.5 | 
|                               |                                     |       |      |     |      |  



Portfolio Asset Quality


Portfolio by Grade.


51



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##### 





|                |  |                       |         |  |                      |  |       |             |  |   |                 |  |  |  |       |  
|--------------- |  | --------------------- | ------- |  | -------------------- |  | ----- | ----------- |  | - | --------------- |  |  |  | ----- | -
|                |  | At September 30, 2005 |         |  | At December 31, 2004 | 
|                |  |                       |         |  |                      | 
|                |  | Portfolio             |         |  | Percentage of        |  |       | Portfolio   |  |   | Percentage of   | 
|Grade           |  | at Value              |         |  | Total Portfolio      |  |       | at Value(1) |  |   | Total Portfolio | 
|                |  |                       |         |  |                      |  |       |             |  |   |                 | 
|($ in millions) |  |                       |         |  |                      |  |       |            
|1               |  | $                     | 1,151.0 |  |                      |  | 35.7  | %           |  | $ | 952.5           |  |  |  | 31.6  | %
|2               |  |                       | 1,805.3 |  |                      |  | 56.0  |             |  |   | 1,850.5         |  |  |  | 61.4  |  
|3               |  |                       | 183.2   |  |                      |  | 5.7   |             |  |   | 121.2           |  |  |  | 4.0   |  
|4               |  |                       | 10.0    |  |                      |  | 0.3   |             |  |   | 11.7            |  |  |  | 0.4   |  
|5               |  |                       | 74.3    |  |                      |  | 2.3   |             |  |   | 77.5            |  |  |  | 2.6   |  
|                |  |                       |         |  |                      |  |       |             |  |   |                 | 
|                |  | $                     | 3,223.8 |  |                      |  | 100.0 | %           |  | $ | 3,013.4         |  |  |  | 100.0 | %
|                |  |                       |         |  |                      |  |       |             |  |   |                 | 

| | 
| | 
| | 

| |     |                                                                                                                                                                                                           | 
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | (1) | The value of the CMBS and CDO assets sold on May 3, 2005,
    was $586.4 million at December 31, 2004, and this
    value was included in Grade 2 assets. See Commercial Real
    Estate Finance above. | 







52



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##### 



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 |  | $    | 19.0  |  |  | $    | 34.4  | 
|                                                                                    |                                | Companies less than 5% owned  |  |      | 17.3  |  |  |      | 16.5  | 
|                                                                                    | Commercial real estate finance |                               |  | 12.7 |       |  |  | 5.6  |      
|Loans and debt securities not in workout status                                     |                                |                               |  |      |       |  |  |     
|                                                                                    | Private finance                |                               |  |      |       |  |  |      |      
|                                                                                    |                                | Companies more than 25% owned |  |      | 55.8  |  |  |      | 29.4  | 
|                                                                                    |                                | Companies 5% to 25% owned     |  |      | 2.3   |  |  |      | 0.7   | 
|                                                                                    |                                | Companies less than 5% owned  |  |      | 77.6  |  |  |      | 15.8  | 
|                                                                                    | Commercial real estate finance |                               |  | 8.0  |       |  |  | 12.5 |      
|                                                                                    |                                |                               |  |      |       | 
|                                                                                    |                                | Total                         |  | $    | 192.7 |  |  | $    | 114.9 | 
|                                                                                    |                                |                               |  |      |       | 
|                                                                                    |                                | Percentage of total portfolio |  |      | 6.0%  |  |  |      | 3.8%  | 




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

Loans and Debt Securities Over 90 Days Delinquent.


|                               |                           |                               |      |      |      |   |      |      |       | 
|------------------------------ | ------------------------- | ----------------------------- | ---- | ---- | ---- | - | ---- | ---- | ----- | 
|                               |                           | 2005                          |      |      | 2004 |  
|                               |                           |                               |      |      |      |  
|($ in millions)                |                           |                               |      |     
|Private finance                |                           | $                             | 73.9 |      |      | $ | 73.5 |     
|Commercial real estate finance |                           |                               |      |      |      |   |      |     
|                               | CMBS bonds                |                               |      |     |      |   |      | 49.0 |      
|                               | Commercial mortgage loans |                               |      | 13.2 |      |   |      | 10.1 |      
|                               |                           |                               |      |      |      |  
|                               |                           | Total                         |      | $    | 87.1 |   |      | $    | 132.6 | 
|                               |                           |                               |      |      |      |  
|                               |                           | Percentage of total portfolio |      |      | 2.7% |   |      |      | 4.4%  | 

and


53



---



##### 



RESULTS OF OPERATIONS  COMPARISON OF THREE AND
NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004




|                                                     |                                                       |                                             |         |        |        |   |            |        |               |   |        |         |        |      |            |     |      |    |         |         |         |   |         |          |         |   |         |         |         |  |     |     |    |  
|---------------------------------------------------- | ----------------------------------------------------- | ------------------------------------------- | ------- | ------ | ------ | - | ---------- | ------ | ------------- | - | ------ | ------- | ------ | ---- | ---------- | --- | ---- | -- | ------- | ------- | ------- | - | ------- | -------- | ------- | - | ------- | ------- | ------- |  | --- | --- | -- | -
|                                                     |                                                       | For the Three                               |         |        |        |   |            |        | For the Nine  |   |        |         |        |     
|                                                     |                                                       | Months Ended                                |         |        |        |   |            |        | Months Ended  |   |        |         |        |     
|                                                     |                                                       | September 30,                               |         |        |        |   |            |        | September 30, |   |        |         |        |     
|                                                     |                                                       |                                             |         |        |        |   | Percentage |        |               |   |        |         |        |      | Percentage |    
|                                                     |                                                       | 2005                                        |         |        | 2004   |   |            | Change |               |   | Change |         |        | 2005 |            |     | 2004 |    |         | Change  |         |   | Change  |         
|($ in thousands, except per share amounts)           |                                                       |                                             |         |        |        |   |            |        |               |   |        |         |        |      |            |     |      |    |         |         |         |   |         |         
|                                                     |                                                       | (unaudited)                                 |         |        |        |   |            |        | (unaudited)   |   |        |         |        |     
|Interest and Related Portfolio Income                |                                                       |                                             |         |        |        |   |            |        |               |   |        |         |        |      |            |     |      |    |         |         |         |   |         |          |         |   |         |         |         |  |     |    
|                                                     | Interest and dividends                                |                                             | $       | 76,353 |        |   | $          | 85,828 |               |   | $      | (9,475  | )      |      |            | (11 | )%   |    | $       | 232,628 |         |   | $       | 233,540  |         |   | $       | (912    | )       |  |     |    | % 
|                                                     | Loan prepayment premiums                              |                                             |         | 2,105  |        |   |            | 193    |               |   |        | 1,912   |        |      |            | 991 | %    |    |         | 4,635   |         |   |         | 4,210    |         |   |         | 425     |         |  |     | 10  | % 
|                                                     | Fees and other income                                 |                                             |         | 16,399 |        |   |            | 10,842 |               |   |        | 5,557   |        |      |            | 51  | %    |    |         | 38,720  |         |   |         | 28,378   |         |   |         | 10,342  |         |  |     | 36  | % 
|                                                     |                                                       |                                             |         |        |        |   |            |        |               |   |        |         |        |      |            |     |      |    |         |         |         |   |         |         
|                                                     |                                                       | Total interest and related portfolio income |         |        | 94,857 |   |            |        | 96,863        |   |        |         | (2,006 | )    |            |     | (2   | )% |         |         | 275,983 |   |         |          | 266,128 |   |         |         | 9,855   |  |     |     | 4  | %
|                                                     |                                                       |                                             |         |        |        |   |            |        |               |   |        |         |        |      |            |     |      |    |         |         |         |   |         |         
|Expenses                                             |                                                       |                                             |         |        |        |   |            |        |               |   |        |         |        |      |            |     |      |    |         |         |         |   |         |          |         |   |         |         |         |  |     |    
|                                                     | Interest                                              |                                             |         | 17,735 |        |   |            | 20,253 |               |   |        | (2,518  | )      |      |            | (12 | )%   |    |         | 57,114  |         |   |         | 57,349   |         |   |         | (235    | )       |  |     |    | % 
|                                                     | Employee                                              |                                             |         | 13,969 |        |   |            | 13,896 |               |   |        | 73      |        |      |            | 1   | %    |    |         | 52,302  |         |   |         | 38,171   |         |   |         | 14,131  |         |  |     | 37  | % 
|                                                     | Administrative                                        |                                             |         | 15,130 |        |   |            | 10,169 |               |   |        | 4,961   |        |      |            | 49  | %    |    |         | 58,932  |         |   |         | 25,072   |         |   |         | 33,860  |         |  |     | 135 | % 
|                                                     |                                                       |                                             |         |        |        |   |            |        |               |   |        |         |        |      |            |     |      |    |         |         |         |   |         |         
|                                                     |                                                       | Total operating expenses                    |         |        | 46,834 |   |            |        | 44,318        |   |        |         | 2,516  |      |            |     | 6    | %  |         |         | 168,348 |   |         |          | 120,592 |   |         |         | 47,756  |  |     |     | 40 | %
|                                                     |                                                       |                                             |         |        |        |   |            |        |               |   |        |         |        |      |            |     |      |    |         |         |         |   |         |         
|Net investment income before income taxes            |                                                       |                                             | 48,023  |        |        |   | 52,545     |        |               |   | (4,522 | )       |        |      | (9         | )%  |      |    | 107,635 |         |         |   | 145,536 |          |         |   | (37,901 | )       |         |  | (26 | )% 
|Income tax expense (benefit), including excise tax   |                                                       |                                             | 1,889   |        |        |   | (200       | )      |               |   | 2,089  |         |        |      | **         |     |      |    | 7,482   |         |         |   | (744    | )        |         |   | 8,226   |         |         |  | **  |    
|                                                     |                                                       |                                             |         |        |        |   |            |        |               |   |        |         |        |      |            |     |      |    |         |         |         |   |         |         
|Net investment income                                |                                                       |                                             | 46,134  |        |        |   | 52,745     |        |               |   | (6,611 | )       |        |      | (13        | )%  |      |    | 100,153 |         |         |   | 146,280 |          |         |   | (46,127 | )       |         |  | (32 | )% 
|                                                     |                                                       |                                             |         |        |        |   |            |        |               |   |        |         |        |      |            |     |      |    |         |         |         |   |         |         
|Net Realized and Unrealized Gains (Losses)           |                                                       |                                             |         |        |        |   |            |        |               |   |        |         |        |      |            |     |      |    |         |         |         |   |         |          |         |   |         |         |         |  |     |    
|                                                     | Net realized gains (losses)                           |                                             |         | 70,714 |        |   |            | 1,300  |               |   |        | 69,414  |        |      |            | *   |      |    |         | 288,495 |         |   |         | 175,753  |         |   |         | 112,742 |         |  |     | *   |   
|                                                     | Net change in unrealized appreciation or depreciation |                                             |         | (3,680 | )      |   |            | 31,954 |               |   |        | (35,634 | )      |      |            | *   |      |    |         | 156,026 |         |   |         | (120,384 | )       |   |         | 276,410 |         |  |     | *   |   
|                                                     |                                                       |                                             |         |        |        |   |            |        |               |   |        |         |        |      |            |     |      |    |         |         |         |   |         |         
|                                                     |                                                       | Total net gains                             |         |        | 67,034 |   |            |        | 33,254        |   |        |         | 33,780 |      |            |     | *    |    |         |         | 444,521 |   |         |          | 55,369  |   |         |         | 389,152 |  |     |     | *  |  
|                                                     |                                                       |                                             |         |        |        |   |            |        |               |   |        |         |        |      |            |     |      |    |         |         |         |   |         |         
|Net income                                           |                                                       | $                                           | 113,168 |        |        | $ | 85,999     |        |               | $ | 27,169 |         |        |      | 32         | %   |      | $  | 544,674 |         |         | $ | 201,649 |          |         | $ | 343,025 |         |         |  | 170 | %  
|                                                     |                                                       |                                             |         |        |        |   |            |        |               |   |        |         |        |      |            |     |      |    |         |         |         |   |         |         
|Diluted earnings per common share                    |                                                       | $                                           | 0.82    |        |        | $ | 0.66       |        |               | $ | 0.16   |         |        |      | 24         | %   |      | $  | 3.99    |         |         | $ | 1.53    |          |         | $ | 2.46    |         |         |  | 161 | %  
|                                                     |                                                       |                                             |         |        |        |   |            |        |               |   |        |         |        |      |            |     |      |    |         |         |         |   |         |         
|Weighted average common shares outstanding  diluted |                                                       |                                             | 138,058 |        |        |   | 131,192    |        |               |   | 6,866  |         |        |      | 5          | %   |      |    | 136,669 |         |         |   | 131,487 |          |         |   | 5,182   |         |         |  | 4   | %  




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

Total Interest and Related Portfolio Income.


54



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##### 





|                |                                           |                              |     |      |               |  |     |      |      |  |      |       |       |  |      |       |       | 
|--------------- | ----------------------------------------- | ---------------------------- | --- | ---- | ------------- |  | --- | ---- | ---- |  | ---- | ----- | ----- |  | ---- | ----- | ----- | 
|                |                                           | For the Three                |     |      | For the Nine  | 
|                |                                           | Months Ended                 |     |      | Months Ended  | 
|                |                                           | September 30,                |     |      | September 30, | 
|                |                                           |                              |     |      |               | 
|                |                                           | 2005                         |     |      | 2004          |  |     | 2005 |      |  | 2004 |      
|($ in millions) |                                           |                              |     |      |               |  |     |      |      |  |      |      
|Interest        |                                           |                              |     |      |               |  |     |      |      |  |      |       |       |  |      |      
|                | Private finance loans and debt securities |                              | $   | 67.4 |               |  | $   | 52.7 |      |  | $    | 177.2 |       |  | $    | 141.7 |      
|                | CMBS and CDO portfolio                    |                              |     |     |               |  |     | 25.2 |      |  |      | 29.4  |       |  |      | 70.4  |      
|                | Commercial mortgage loans                 |                              |     | 1.7  |               |  |     | 2.7  |      |  |      | 5.2   |       |  |      | 7.1   |      
|                | Cash and cash equivalents and other       |                              |     | 2.0  |               |  |     | 0.8  |      |  |      | 6.1   |       |  |      | 2.1   |      
|                |                                           |                              |     |      |               |  |     |      |      |  |      |      
|                |                                           | Total interest               |     |      | 71.1          |  |     |      | 81.4 |  |      |       | 217.9 |  |      |       | 221.3 | 
|Dividends       |                                           |                              | 5.3 |      |               |  | 4.4 |      |      |  | 14.7 |       |       |  | 12.2 |      
|                |                                           |                              |     |      |               |  |     |      |      |  |      |      
|                |                                           | Total interest and dividends |     | $    | 76.4          |  |     | $    | 85.8 |  |      | $     | 232.6 |  |      | $     | 233.5 | 
|                |                                           |                              |     |      |               |  |     |      |      |  |      |      



|                                    |  |      |         |   |      |   |         |  
|----------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                    |  | 2005 |         |   | 2004 |  
|($ in millions)                     |  |      |         |   |      |  
|Interest-bearing portfolio at value |  | $    | 2,175.9 |   |      | $ | 2,341.2 |  
|Portfolio yield                     |  |      | 12.6    | % |      |   | 14.2    | %







55



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##### 









|                                                                                                |                             |               |      |      |               |   |     |      |  |   |      |      |  |   |      |      | 
|----------------------------------------------------------------------------------------------- | --------------------------- | ------------- | ---- | ---- | ------------- | - | --- | ---- |  | - | ---- | ---- |  | - | ---- | ---- | 
|                                                                                                |                             | For the Three |      |      | For the Nine  |  
|                                                                                                |                             | Months Ended  |      |      | Months Ended  |  
|                                                                                                |                             | September 30, |      |      | September 30, |  
|                                                                                                |                             |               |      |      |               |  
|                                                                                                |                             | 2005          |      |      | 2004          |   |     | 2005 |  |   | 2004 |     
|($ in millions)                                                                                 |                             |               |      |      |               |   |     |      |  |   |      |     
|Structuring and diligence                                                                       |                             | $             | 10.2 |      |               | $ | 4.3 |      |  | $ | 19.1 |      |  | $ | 11.5 |     
|Transaction and other services provided to portfolio companies                                  |                             |               | 0.1  |      |               |   | 0.8 |      |  |   | 1.7  |      |  |   | 2.2  |     
|Management, consulting and other services provided to portfolio
    companies and guaranty fees |                             |               | 5.6  |      |               |   | 5.1 |      |  |   | 15.5 |      |  |   | 13.1 |     
|Other income                                                                                    |                             |               | 0.5  |      |               |   | 0.6 |      |  |   | 2.4  |      |  |   | 1.6  |     
|                                                                                                |                             |               |      |      |               |   |     |      |  |   |      |     
|                                                                                                | Total fees and other income |               | $    | 16.4 |               |   | $   | 10.8 |  |   | $    | 38.7 |  |   | $    | 28.4 | 
|                                                                                                |                             |               |      |      |               |   |     |      |  |   |      |     









56



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##### 





Operating Expenses.


|                             |  |                |       |   |                |   |         |      |  |   |         |   |  |   |         |  
|---------------------------- |  | -------------- | ----- | - | -------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                             |  | At and for the |       |   | At and for the |  
|                             |  | Three Months   |       |   | Nine Months    |  
|                             |  | Ended          |       |   | Ended          |  
|                             |  | September 30,  |       |   | September 30,  |  
|                             |  |                |       |   |                |  
|                             |  | 2005           |       |   | 2004           |   |         | 2005 |  |   | 2004    |  
|($ in millions)              |  |                |       |   |                |   |         |      |  |   |         |  
|Total outstanding debt       |  | $              | 968.3 |   |                | $ | 1,167.7 |      |  | $ | 968.3   |   |  | $ | 1,167.7 |  
|Average outstanding debt     |  | $              | 980.8 |   |                | $ | 1,075.3 |      |  | $ | 1,058.4 |   |  | $ | 973.5   |  
|Weighted average
    cost(1) |  |                | 6.8   | % |                |   | 6.3     | %    |  |   | 6.8     | % |  |   | 6.3     | %




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





|                                     |                        |               |      |      |               |   |      |      |  |   |      |      |  |   |      |      | 
|------------------------------------ | ---------------------- | ------------- | ---- | ---- | ------------- | - | ---- | ---- |  | - | ---- | ---- |  | - | ---- | ---- | 
|                                     |                        | For the Three |      |      | For the Nine  |  
|                                     |                        | Months Ended  |      |      | Months Ended  |  
|                                     |                        | September 30, |      |      | September 30, |  
|                                     |                        |               |      |      |               |  
|                                     |                        | 2005          |      |      | 2004          |   |      | 2005 |  |   | 2004 |     
|($ in millions)                      |                        |               |      |      |               |   |      |      |  |   |      |     
|Salaries and employee benefits       |                        | $             | 11.0 |      |               | $ | 10.8 |      |  | $ | 34.5 |      |  | $ | 28.7 |     
|Transition compensation, net         |                        |               | (0.1 | )    |               |   |     |      |  |   | 5.4  |      |  |   |     |     
|Individual performance award (IPA)   |                        |               | 1.7  |      |               |   | 3.2  |      |  |   | 5.5  |      |  |   | 10.2 |     
|IPA mark to market expense (benefit) |                        |               | (0.4 | )    |               |   | (0.1 | )    |  |   | 1.5  |      |  |   | (0.7 | )   
|Individual performance bonus (IPB)   |                        |               | 1.8  |      |               |   |     |      |  |   | 5.4  |      |  |   |     |     
|                                     |                        |               |      |      |               |   |      |      |  |   |      |     
|                                     | Total employee expense |               | $    | 14.0 |               |   | $    | 13.9 |  |   | $    | 52.3 |  |   | $    | 38.2 | 
|                                     |                        |               |      |      |               |   |      |      |  |   |      |     
|Number of employees at end of period |                        |               | 127  |      |               |   | 159  |      |  |   | 127  |      |  |   | 159  |     





57



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##### 















|                                                               |                               |               |     |      |               |   |     |      |  |   |      |      |  |   |      |      | 
|-------------------------------------------------------------- | ----------------------------- | ------------- | --- | ---- | ------------- | - | --- | ---- |  | - | ---- | ---- |  | - | ---- | ---- | 
|                                                               |                               | For the Three |     |      | For the Nine  |  
|                                                               |                               | Months Ended  |     |      | Months Ended  |  
|                                                               |                               | September 30, |     |      | September 30, |  
|                                                               |                               |               |     |      |               |  
|                                                               |                               | 2005          |     |      | 2004          |   |     | 2005 |  |   | 2004 |     
|($ in millions)                                                |                               |               |     |      |               |   |     |      |  |   |      |     
|Administrative expenses, excluding investigation related costs |                               | $             | 8.2 |      |               | $ | 8.2 |      |  | $ | 26.2 |      |  | $ | 23.1 |     
|Investigation related costs                                    |                               |               | 6.9 |      |               |   | 2.0 |      |  |   | 32.7 |      |  |   | 2.0  |     
|                                                               |                               |               |     |      |               |   |     |      |  |   |      |     
|                                                               | Total administrative expenses |               | $   | 15.1 |               |   | $   | 10.2 |  |   | $    | 58.9 |  |   | $    | 25.1 | 
|                                                               |                               |               |     |      |               |   |     |      |  |   |      |     



58



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##### 





Income Tax Expense (Benefit), Including Excise
Tax.


|                             |                                                    |               |     |     |               |   |      |      |   |   |      |     |  |   |      |      |  
|---------------------------- | -------------------------------------------------- | ------------- | --- | --- | ------------- | - | ---- | ---- | - | - | ---- | --- |  | - | ---- | ---- | -
|                             |                                                    | For the Three |     |     | For the Nine  |  
|                             |                                                    | Months Ended  |     |     | Months Ended  |  
|                             |                                                    | September 30, |     |     | September 30, |  
|                             |                                                    |               |     |     |               |  
|                             |                                                    | 2005          |     |     | 2004          |   |      | 2005 |   |   | 2004 |    
|($ in millions)              |                                                    |               |     |     |               |   |      |      |   |   |      |    
|Income tax expense (benefit) |                                                    | $             | 0.6 |     |               | $ | (0.2 | )    |   | $ | 2.2  |     |  | $ | (0.7 | )   
|Excise tax expense           |                                                    |               | 1.3 |     |               |   |     |      |   |   | 5.3  |     |  |   |     |     
|                             |                                                    |               |     |     |               |   |      |      |   |   |      |    
|                             | Income tax expense (benefit), including excise tax |               | $   | 1.9 |               |   | $    | (0.2 | ) |   | $    | 7.5 |  |   | $    | (0.7 | )
|                             |                                                    |               |     |     |               |   |      |      |   |   |      |    



Realized Gains and Losses.


|                   |  |               |      |   |               |   |       |      |  |   |       |   |  |   |       |  
|------------------ |  | ------------- | ---- | - | ------------- | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                   |  | For the Three |      |   | For the Nine  |  
|                   |  | Months Ended  |      |   | Months Ended  |  
|                   |  | September 30, |      |   | September 30, |  
|                   |  |               |      |   |               |  
|                   |  | 2005          |      |   | 2004          |   |       | 2005 |  |   | 2004  |  
|($ in millions)    |  |               |      |   |               |   |       |      |  |   |       |  
|Realized gains     |  | $             | 79.8 |   |               | $ | 37.6  |      |  | $ | 339.2 |   |  | $ | 241.6 |  
|Realized losses    |  |               | (9.1 | ) |               |   | (36.3 | )    |  |   | (50.7 | ) |  |   | (65.8 | )
|                   |  |               |      |   |               |   |       |      |  |   |       |  
|Net realized gains |  | $             | 70.7 |   |               | $ | 1.3   |      |  | $ | 288.5 |   |  | $ | 175.8 |  
|                   |  |               |      |   |               |   |       |      |  |   |       |  



59



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|                                                                                                |                |               |       |       |               |   |       |         |  |   |        |       |   |   |        |        |  
|----------------------------------------------------------------------------------------------- | -------------- | ------------- | ----- | ----- | ------------- | - | ----- | ------- |  | - | ------ | ----- | - | - | ------ | ------ | -
|                                                                                                |                | For the Three |       |       | For the Nine  |  
|                                                                                                |                | Months Ended  |       |       | Months Ended  |  
|                                                                                                |                | September 30, |       |       | September 30, |  
|                                                                                                |                |               |       |       |               |  
|($ in millions)                                                                                 |                | 2005          |       |       | 2004          |   |       | 2005(1) |  |   | 2004   |      
|                                                                                                |                |               |       |       |               |   |       |         |  |   |        |      
|Reversal of previously recorded net unrealized appreciation
    associated with realized gains  |                | $             | (80.5 | )     |               | $ | (20.6 | )       |  | $ | (107.0 | )     |   | $ | (189.0 | )     
|Reversal of previously recorded net unrealized depreciation
    associated with realized losses |                |               | 7.4   |       |               |   | 37.6  |         |  |   | 49.3   |       |   |   | 67.2   |       
|                                                                                                |                |               |       |       |               |   |       |         |  |   |        |      
|                                                                                                | Total reversal |               | $     | (73.1 | )             |   | $     | 17.0    |  |   | $      | (57.7 | ) |   | $      | (121.8 | )
|                                                                                                |                |               |       |       |               |   |       |         |  |   |        |      

| |  | 
| |  | 
| |  | 

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                     | 
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | (1) | Includes the reversal of net unrealized appreciation of
    $6.5 million on the CMBS and CDO assets sold and the
    related hedges. The net unrealized appreciation recorded on
    these assets prior to their sale was determined on an individual
    security-by-security basis. The net gain realized upon the sale
    of $227.7 million reflects the total value received for the
    portfolio as a whole. | 









60



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Change in Unrealized Appreciation or Depreciation.




61



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##### 





Valuation Methodology.








62



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##### 











63



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##### 



Net Change in Unrealized Appreciation or Depreciation.


|                                                                                            |  |               |       |   |               |   |       |         |  |   |         |   |  |   |        |  
|------------------------------------------------------------------------------------------- |  | ------------- | ----- | - | ------------- | - | ----- | ------- |  | - | ------- | - |  | - | ------ | -
|                                                                                            |  | For the Three |       |   | For the Nine  |  
|                                                                                            |  | Months Ended  |       |   | Months Ended  |  
|                                                                                            |  | September 30, |       |   | September 30, |  
|                                                                                            |  |               |       |   |               |  
|                                                                                            |  | 2005(1)       |       |   | 2004(1)       |   |       | 2005(1) |  |   | 2004(1) |  
|($ in millions)                                                                             |  |               |       |   |               |   |       |         |  |   |         |  
|Net unrealized appreciation or depreciation                                                 |  | $             | 69.4  |   |               | $ | 15.0  |         |  | $ | 213.7   |   |  | $ | 1.4    |  
|Reversal of previously recorded unrealized appreciation
    associated with realized gains  |  |               | (80.5 | ) |               |   | (20.6 | )       |  |   | (107.0  | ) |  |   | (189.0 | )
|Reversal of previously recorded unrealized depreciation
    associated with realized losses |  |               | 7.4   |   |               |   | 37.6  |         |  |   | 49.3    |   |  |   | 67.2   |  
|                                                                                            |  |               |       |   |               |   |       |         |  |   |         |  
|Net change in unrealized appreciation or depreciation                                       |  | $             | (3.7  | ) |               | $ | 32.0  |         |  | $ | 156.0   |   |  | $ | (120.4 | )
|                                                                                            |  |               |       |   |               |   |       |         |  |   |         |  




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



Advantage Sales & Marketing, Inc.


Business Loan Express, LLC.




64



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##### 





Per Share Amounts.


OTHER MATTERS


Regulated Investment Company Status.








65



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##### 





Legal Proceedings.






FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES




|                                                    |                                                                        |      |         |         |      |   |         |       | 
|--------------------------------------------------- | ---------------------------------------------------------------------- | ---- | ------- | ------- | ---- | - | ------- | ----- | 
|($ in millions)                                     |                                                                        | 2005 |         |         | 2004 |  
|                                                    |                                                                        |      |         |         |      |  
|Net cash provided by (used in) operating activities |                                                                        | $    | 385.5   |         |      | $ | (189.1  | )    
|Add: portfolio investments funded                   |                                                                        |      | 1,320.6 |         |      |   | 1,057.1 |      
|                                                    |                                                                        |      |         |         |      |  
|                                                    | Total cash provided by operating activities before new
    investments |      | $       | 1,706.1 |      |   | $       | 868.0 | 
|                                                    |                                                                        |      |         |         |      |  









66



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|                                |  |      |         |   |      |   |         |  
|------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|($ in millions)                 |  | 2005 |         |   | 2004 |  
|                                |  |      |         |   |      |  
|Total cash and cash equivalents |  | $    | 58.1    |   |      | $ | 57.2    |  
|Total assets                    |  | $    | 3,446.5 |   |      | $ | 3,261.0 |  
|Total debt outstanding          |  | $    | 968.3   |   |      | $ | 1,176.6 |  
|Total shareholders equity      |  | $    | 2,367.0 |   |      | $ | 1,979.8 |  
|Debt to equity ratio            |  |      | 0.41    |   |      |   | 0.59    |  
|Asset coverage
    ratio(1)     |  |      | 352     | % |      |   | 280     | %




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

67



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|                              |                         |                                    |       |       |             |        |   |          |       |  |   |     |     |     
|----------------------------- | ----------------------- | ---------------------------------- | ----- | ----- | ----------- | ------ | - | -------- | ----- |  | - | --- | --- | ----
|                              |                         |                                    |       |       |             | Annual |  
|                              |                         | Facility                           |       |       | Amount      |        |   | Interest |      
|                              |                         | Amount                             |       |       | Outstanding |        |   | Cost(1)  |      
|($ in millions)               |                         |                                    |       |       |             |        |   |          |      
|Notes payable and debentures: |                         |                                    |       |       |             |        |   |          |       |  |   |    
|                              | Unsecured notes payable |                                    | $     | 939.8 |             |        | $ | 939.8    |       |  |   | 6.5 | %  
|                              | SBA debentures          |                                    |       | 28.5  |             |        |   | 28.5     |       |  |   | 7.5 | %  
|                              |                         |                                    |       |       |             |        |   |          |      
|                              |                         | Total notes payable and debentures |       |       | 968.3       |        |   |          | 968.3 |  |   |     | 6.5 | %   
|Revolving line of credit      |                         |                                    | 722.5 |       |             |        |  |          |       |  |  | (2)
|                              |                         |                                    |       |       |             |        |   |          |      
|                              |                         | Total debt                         |       | $     | 1,690.8     |        |   | $        | 968.3 |  |   |     | 6.8 | %(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) | There were no amounts drawn on the revolving line of credit at
    September 30, 2005. 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. The
    annual cost of commitment fees and other facility fees was
    $2.6 million at September 30, 2005.

Unsecured Notes Payable.




68



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##### 





Small Business Administration Debentures.


Revolving Line of Credit.






69



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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 |                               | $    | 939.8                |       |       | $   | 125.0 |       |  | $    | 175.0 |       |      | $   |  |      |  | $   | 153.0 |       |  | $   | 267.3 |       |  | $    | 219.5 |      
|                                | SBA debentures                    |                               |      | 28.5                 |       |       |     |      |       |  |      |      |       |      |     |  |      |  |     |      |       |  |     |      |       |  |      | 28.5  |      
|Revolving line of
    credit(1) |                                   |                               |     |                      |       |       |    |       |       |  |     |       |       |      |    |   |      |  |    |       |       |  |    |       |       |  |     |      
|Operating leases                |                                   |                               | 30.2 |                      |       |       | 1.2 |       |       |  | 4.5  |       |       |      | 4.4 |   |      |  | 4.5 |       |       |  | 4.6 |       |       |  | 11.0 |      
|                                |                                   |                               |      |                      |       |       |     |       |       |  |      |       |       |      |     |   |      |  |     |       |      
|                                |                                   | Total contractual obligations |      | $                    | 998.5 |       |     | $     | 126.2 |  |      | $     | 179.5 |      |     | $ | 4.4  |  |     | $     | 157.5 |  |     | $     | 271.9 |  |      | $     | 259.0 | 
|                                |                                   |                               |      |                      |       |       |     |       |       |  |      |       |       |      |     |   |      |  |     |       |      




|    |                                                                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | At September 30, 2005, $683.9 million remained unused
    and available, net of amounts committed for standby letters of
    credit of $38.6 million issued under the credit facility.



|                                 |                   |       |       |                                          |      |       |     |      |  |   |      |     |  |      |       |       |      |   |      |      |  |   |     |     |  |   |     |     | 
|-------------------------------- | ----------------- | ----- | ----- | ---------------------------------------- | ---- | ----- | --- | ---- |  | - | ---- | --- |  | ---- | ----- | ----- | ---- | - | ---- | ---- |  | - | --- | --- |  | - | --- | --- | 
|                                 |                   |       |       | Amount of Commitment Expiration Per Year |     
|                                 |                   |       |       |                                          |     
|                                 |                   |       |       |                                          |      | After |    
|                                 |                   | Total |       |                                          | 2005 |       |     | 2006 |  |   | 2007 |     |  | 2008 |       |       | 2009 |   |      | 2009 | 
|($ in millions)                  |                   |       |       |                                          |      |       |     |      |  |   |      |     |  |      |       |       |      |   |      |      | 
|Guarantees                       |                   | $     | 145.3 |                                          |      | $     | 0.1 |      |  | $ | 1.0  |     |  | $    | 136.2 |       |      | $ |     |      |  | $ | 2.5 |     |  | $ | 5.5 |    
|Standby letters of
    credit(1) |                   |       | 38.6  |                                          |      |       |    |      |  |   |     |     |  |      |      |       |      |   | 38.6 |      |  |   |    |     |  |   |    |    
|                                 |                   |       |       |                                          |      |       |     |      |  |   |      |     |  |      |       |       |      |   |      |      | 
|                                 | Total commitments |       | $     | 183.9                                    |      |       | $   | 0.1  |  |   | $    | 1.0 |  |      | $     | 136.2 |      |   | $    | 38.6 |  |   | $   | 2.5 |  |   | $   | 5.5 | 
|                                 |                   |       |       |                                          |      |       |     |      |  |   |      |     |  |      |       |       |      |   |      |      | 




|    |                                                                                                                                                                                                                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Standby letters of credit are issued under our revolving line of
    credit that expires in September 2008. Therefore, unless a
    standby letter of credit is set to expire at an earlier date, we
    have assumed that the standby letters of credit will expire
    contemporaneously with the expiration of our line of credit in
    September 2008.



CRITICAL ACCOUNTING POLICIES




Valuation of Portfolio Investments.


70



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Loans and Debt Securities.






Equity Securities.






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


71



---



##### 





Fee Income.


72



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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.




73



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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.


74



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##### 



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.


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.


75



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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.


76



---



##### 





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.




77



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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 laws or regulatory policies or tax guidelines with
    respect to business development companies or regulated
    investment companies;                                                       
|
| |  | actual or anticipated changes in our earnings or fluctuations in
    our operating results or changes in the expectations of
    securities analysts;                                                    
|
| |  | general economic conditions and trends;                                                                                                                                                                  
|
| |  | loss of a major funding source; or                                                                                                                                                                       
|
| |  | departures of key personnel.                                                                                                                                                                             

Item 3.  Quantitative and Qualitative
Disclosures About Market Risk




78



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##### 



Item 4.  Controls and Procedures






79



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##### 



PART II. OTHER INFORMATION


Item 1.     Legal
Proceedings












80



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##### 



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






|              |                       |              |        |        |                |   |       |       | 
|------------- | --------------------- | ------------ | ------ | ------ | -------------- | - | ----- | ----- | 
|              |                       | Total Number |        |        |               
|              |                       | of Shares    |        |        | Average Price  |  
|              |                       | Purchased    |        |        | Paid Per Share |  
|              |                       |              |        |        |                |  
|DCP
    I(1)  |                       |              |        |        |                |   |       |      
|              | 7/1/2005 to 7/31/2005 |              |        | 49     |                |   | $     | 28.70 | 
|              | 8/1/2005 to 8/31/2005 |              |        |       |                |   |       |      | 
|              | 9/1/2005 to 9/30/2005 |              |        |       |                |   |       |      | 
|DCP
    II(2) |                       |              |        |        |                |   |       |      
|              | 7/1/2005 to 7/31/2005 |              |        | 11,564 |                |   | $     | 28.70 | 
|              | 8/1/2005 to 8/31/2005 |              |        |       |                |   |       |      | 
|              | 9/1/2005 to 9/30/2005 |              |        | 57,750 |                |   | $     | 28.62 | 
|              |                       |              |        |        |                |  
|Total         |                       |              | 69,363 |        |                | $ | 28.63 |      
|              |                       |              |        |        |                |  






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




81



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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 August 18, 2005).                                                                                                                                                                                                                       
|        | 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     |             | Credit Agreement, dated September 30, 2005.
    (Incorporated by reference to Exhibit 10.1 filed with
    Allied Capitals Form 8-K on October 3, 2005).                                                                                                                                                                                                        
|        | 10 | .2(a)* |             | First Amendment to Credit Agreement, dated November 4, 2005.                                                                                                                                                                                                                                                                                                    
|        | 10 | .3     |             | Note Agreement, dated October 13, 2005. (Incorporated by
    reference to Exhibit 10.1 filed with Allied Capitals
    Form 8-K on October 14, 2005).                                                                                                                                                                                                           
|        | 10 | .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).                                                                                                                                                                           
|        | 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).                                                                                                                                                

82



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|        |    |         |             |                                                                                                                                                                                                                                                                                                                        
|------- | -- | ------- | ----------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |         |            
|Number  |    |         | Description
|        |    |         |            
|        | 10 | .20(a)  |             | Allied Capital Corporation 401(k) Plan, dated September 1,
    1999. (Incorporated by reference to Exhibit 4.4 filed
    with Allied Capitals registration statement on
    Form S-8 (File No. 333-88681) filed on October 8,
    1999).                                                                              
|        | 10 | .20(b)  |             | Amendment to Allied Capital Corporation 401(k) Plan, dated
    April 15, 2004. (Incorporated by reference to
    Exhibit 10.20(b) filed with Allied Capitals
    Form 10-Q for the period ended June 30, 2004).                                                                                                       
|        | 10 | .20(c)* |             | Amendment to Allied Capital Corporation 401(k) Plan, dated
    November 1, 2005.                                                                                                                                                                                                                                       
|        | 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     |             | Recission of Retention Agreement, dated October 27, 2005,
    between Allied Capital and John M. Scheurer.
    (Incorporated by reference to Exhibit 10.1 filed with
    Allied Capitals current report on Form 8-K filed on
    November 1, 2005).                                                                   
|        | 10 | .25     |             | Form of Custody Agreement with Riggs Bank N.A., which was
    assumed by PNC Bank through merger (Incorporated by reference
    to Exhibit j.1 filed with Allied Capitals registration
    statement on Form N-2 (File No. 333-51899) filed on May 6,
    1998).                                                      
|        | 10 | .26     |             | 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).                                                                                                                                          
|        | 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).                                                                                            

83



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|        |    |     |             |                                                                                                                                                                                                                                      
|------- | -- | --- | ----------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     |            
|Number  |    |     | Description
|        |    |     |            
|        | 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.                                                                                                  






84



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##### 



SIGNATURES






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

|                        |  |                                                                                                                                        
|----------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------
|                       
|Dated: November 8, 2005 |  | /s/ William L. Walton---------------------------------------------------
    William L. Walton
    Chairman and Chief Executive Officer
|                       
|                        |  | /s/ Penni F. Roll---------------------------------------------------
    Penni F. Roll
    Chief Financial Officer                     

85



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##### 



EXHIBIT INDEX


|        |     |         |             |                                                                                                                                    
|------- | --- | ------- | ----------- | -----------------------------------------------------------------------------------------------------------------------------------
|Exhibit |     |         |            
|Number  |     |         | Description
|        |     |         |            
|        | 10  | .2(a)*  |             | First Amendment to Credit Agreement, dated November 4, 2005.                                                                       
|        | 10  | .20(c)* |             | Amendment to Allied Capital Corporation 401(k) Plan, dated
    November 1, 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.